You’re fired! Why it’s time to ditch the Fed’s community banker seat

The resignation of Daniel Tarullo earlier this year has left the seven-member Federal Reserve board with only four members. Being short-handed is nothing new for the U.S. central bank. Two seats were vacated more than three years ago, but at the time, Senate Banking Committee Chairman Richard Shelby (R-Ala.) refused to hold hearings for the replacements nominated by President Obama.

While current Senate Banking Committee Chairman Mike Crapo (R-Idaho) is likely to be more accommodating of the nominations made by President Trump, a third nomination ought to be refused until Congress repeals the requirement that one Fed member must be a community banker.

{mosads}The requirement was added to the Federal Reserve Act through an amendment put forward by Sen. David Vitter (R-La.) to the 2014 reauthorization of the Terrorism Risk Insurance Act. It states, “In selecting members of the board, the president shall appoint at least [one] member with demonstrated primary experience working in or supervising community banks having less than $10,000,000,000 in total assets.”

Community banks are an important and vital part of the U.S. banking system. Although they only hold only about 13 percent of insured bank assets, they constitute more than 92 percent of all insured banks in the country. Because their business is mostly local, they have their fingers on the pulse of — and money invested in — the local economy. However, the requirement to place a community banker on the Fed is misguided.

On logistical grounds, it has been difficult to find community bankers who have fully divested from the banking business, as required by ethics rules. Community banks are often family-owned organizations, so “leaving the business” may mean passing the reins to the next generation, while retaining an ownership stake. The divestiture requirement proved to be a sticking point for the Obama administration, which took some time to find a candidate for the seat. More recently, this requirement has derailed at least three of Trump’s potential nominees.

On philosophical grounds, it is hard to understand why a seat on the Federal Reserve board should be reserved for a community banker, any more than a seat on the Supreme Court bench ought to be reserved for a criminal defense lawyer, a tort lawyer, or an attorney representing any other subdivision of the law.

When questioned by Sen. Vitter, Federal Reserve Chairman Janet Yellen was clearly cool to the proposal, saying, “I think if we were to sit down and make a list of all of the kinds of expertise that are needed and are useful, there would be more than seven items on that list. And I would, you know, prefer to see appointments made in light of the priorities, including for a community banker, rather than for the indefinite future locking in and earmarking particular seats for particular purposes.”

It would be disingenuous to argue that community bankers do not have a seat at the table. They are represented on the Fed’s Community Depository Institutions Advisory Council, established as a way to provide input to the board. At least one community banker is currently on the 12-member Federal Advisory Council, a statutory body established to advise the central bank. More importantly, community bankers are represented in every congressional district and, because of their importance to the local economy, generally have the ear of their elected representatives.

It is reasonable for community banks to have input on the monetary and regulatory policies adopted by the Federal Reserve. In fact, they already do. Reserving a seat on the board for a community banker will not achieve this objective. What it will do, however, is ensure that the U.S. central bank remains below full strength for some time.

Richard S. Grossman is a professor of economics at Wesleyan University. He is the author of “Wrong: Nine Economic Policy Disasters and What We Can Learn from Them,” published by Oxford University Press in 2013.

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