The Federal Reserve Act of 1913 requires each of the 12 Reserve Banks to be "conducted under the supervision and control of a board of directors." Under the Act, each Reserve Bank has nine directors, who represent the interests of their Reserve District for terms of three years. The Reserve Banks’ 25 branches also have boards, each with seven or five directors, who represent the interests of their branch territory. In addition, branch directors serve as advisors to their Reserve Bank’s head office.
- Each Federal Reserve Bank has nine directors, who serve three-year terms and are divided into three groups. Class A directors represent member banks, whereas both Class B and Class C directors represent borrowers from such areas as agriculture, commerce, industry, services, labor, and consumers.
- Directors influence monetary policy by setting their District’s discount rate and by appointing the Bank’s president, who, in turn, sits on the Federal Open Market Committee.
- Other responsibilities of the directors include approving the Bank’s budget, overseeing operations, and appointing the Bank’s officers.
- Each Reserve District’s member banks elect both Class A and Class B directors, while the Board of Governors of the Federal Reserve System appoints Class C directors.
The Federal Reserve Act of 1913 requires each of the 12 Reserve Banks to be "conducted under the supervision and control of a board of directors." Under the Act, each Reserve Bank has nine directors, who represent the interests of their Reserve District for terms of three years. The Reserve Banks’ 25 branches also have boards, each with seven or five directors, who represent the interests of their branch territory. In addition, branch directors serve as advisors to their Reserve Bank’s head office.
The nine directors of each Reserve Bank are divided evenly by classification: Class A directors represent the member banks in the District and are usually bankers themselves; Class B directors and Class C directors represent the credit-using public. The interests and backgrounds of Class B and Class C directors are diverse. In combination with Class A, they ensure board representation from both providers and users of banking services in each District. The Act purposely calls for the majority of each Board to be from the borrowing public, reflecting a concern that lenders should not dominate this oversight of Reserve Banks.
Diversity is ensured by the selection process. Class A and Class B directors are elected on a rotating basis by District member banks, which are categorized by the size of their capitalization as small, medium, or large. The largest banks elect one Class A and one Class B director the first year; the medium-size banks elect one Class A and one Class B director the second year; and the smallest banks elect one Class A and one Class B director the third year.
Class C directors are appointed by the System’s Board of Governors (Board), also for terms of three years. When considering potential Class C directors, the Board has a preference for candidates who can be identified with an organization—business or nonprofit—or with an activity in an economic sector that will add depth to the composition of Reserve Bank boards.
Each year, one Class C director at each Reserve Bank is designated by the Board as Chairperson and Federal Reserve Agent. A second Class C director is designated Deputy Chairperson. All Class C directors must be District residents for at least two years before beginning their terms.
At the branches of Reserve Banks, the selection of directors is by appointment. The Reserve Bank’s head-office directors appoint the majority of branch directors, leaving the remainder of appointments to the Board. The Reserve Bank’s directors also designate the branch Chairperson from the branch directors appointed by the Board.
While no provision of the Federal Reserve Act makes directors ineligible for indefinite re-election or re-appointment for additional terms, the Board follows a policy of rotation that generally limits tenures to two full terms. The purpose of the policy is to broaden the range of representation on the boards.
Although they are part-time and, effectively, outsiders to the Federal Reserve, Reserve Bank directors have important responsibilities—assigned by the Federal Reserve Act—that include contributing to the formulation of monetary policy, commenting on major organizational changes, appraising management performance, and reviewing officers’ salaries. Key among these responsibilities is appointing both the Bank’s president, who is the chief executive officer, and the first vice president, who is the chief administrative officer. These appointments, subject to Board approval, are for five-year terms.
At the New York Fed, the president is a permanent member of the Federal Open Market Committee (FOMC)—the top monetary-policy-making unit of the Reserve System—and the first vice president is a permanent alternate member. By custom, the president of the New York Fed also serves as vice chairman of the FOMC.
A more explicit role specified by the Federal Reserve Act calls for Reserve Bank directors to establish their District’s discount rate at least once every 14 days. Directors establish this rate at each regularly scheduled board meeting every two weeks. At the New York Fed, they do so in person on the third Thursday each month; they meet by conference call on the first Thursday and, should there be one, the fifth Thursday.
The discount rate the directors designate, subject to Board approval, is what financial institutions pay when borrowing from the Federal Reserve. These borrowings, called "adjustment credit," help banks meet temporary liquidity needs arising from short-term fluctuations in their balance sheets.
In addition, Reserve Bank directors must approve all Bank officers and select their District’s representative each year to the Federal Advisory Council, which periodically confers with the Board on conditions affecting the banking, economic, and financial systems. Directors also are responsible for their Reserve Bank’s budget and expenditures, including reviewing the internal audit program of the Bank, which is supplemented by a Board-conducted audit. The Board, in turn, is audited by a private accounting firm, which submits its findings to Congress.
Reserve Bank directors cannot be members of Congress, and their relationships with banks are prescribed legally. Class C directors are prohibited from owning bank stocks, for example, while only those in Class A can serve as bank directors, employees, or officers.
As a Reserve Bank directorship is a form of public service, directors also must limit their participation in partisan politics. Specifically, directors should not engage in any political activity or serve in any public office where such activity or service might:
- associate the Reserve Bank with any political party or partisan political activity;
- raise questions as to the director’s independence and ability to perform the duties of his or her position with the System; or
- bring embarrassment to the Reserve Bank or the Federal Reserve System.
Reserve Bank directors bring to their posts years of experience in management, private enterprise, public policy, and technology. This experience provides the Reserve Banks with a wider range of expertise from outside the Federal Reserve System that helps the System fulfill its policy and operational responsibilities.
June 2003
This article has been reprinted with the authorization of the Federal Reserve
