Right now there are three economists and two lawyers on the Federal Reserve Board of Governors, and two empty seats. President Barack Obama has faced pressure from politicians to mix it up; add someone with experience in the small, local banks.
In appointing Allan Landon, former CEO of the Bank of Hawaii, the President has done so—Although with $14.5 billion in assets, the Bank of Hawaii is hardly tiny.
“It’s helpful to have somebody who has experience as an on the ground banker,” says Elizabeth Duke, the last Fed Governor with community banking experience. Duke served from 2008 to 2013.
The Fed has more regulatory powers than ever before, and small banks experience regulation differently than large banks.
“The fewer people you have, the harder it is,” she says. “If you go way back to the last crisis—savings and loan crisis—there were 63 implementing regulations and at the time my bank only had 62 employees.”
Orienting regulations to make them easier to follow for small banks is important. “Even on monetary policy it’s good to have a ground level view of how things are going,” she says. “Monetary policy is implemented through the banking system, through lending, and having the experience dealing with small businesses helps to understand how will this work as it moves through the banking system.”
But the idea of the community banker on the Fed board has become somewhat politicized in recent years. For some conservatives, a local banker would be a bulwark against onerous legislation. For some liberals, a community banker would be a protector of Main Street against the interests of Wall Street.
Lawmakers including Democratic Senator Heidi Heitkamp and Republican Senator David Vitter want to require the President to appoint at least one community banker to the Fed Board. Former Fed Governor Elizabeth Duke, as well as current Fed Chair Janet Yellen, oppose this.
“There are only seven seats and a lot of different profiles that need to be filled,” says Duke.
The Federal Reserve has long been fiercely protective of its independence.
Frederic Mishkin served on the Federal Reserve Board of Governors from 2006 to 2008. He says, “When we’ve had community bankers on the Federal Reserve Board, they have played a positive role. But we should not have a litmus test saying because a person’s a community banker, they’re qualified, or because a person’s an economist, that person is qualified.”
It’s going to be a big year for anyone sitting on the Fed Board—The Fed is expected to raise interest rates for the first time in nine years.
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