When the U.S. created a central bank in 1913, a hotly debated compromise left power divided among Washington, New York and the other district Fed banks. Washington’s authority later grew, but the district banks have continued to play a major role, especially in regulation. The Fed board of governors in Washington has given the district banks many day-to-day duties in overseeing 800 small state-chartered banks and more than 5,000 bank holding companies. Some 17,000 of the Fed’s 20,000 employees work at the regional Fed banks.
Five years ago, one Fed governor sought to centralize supervision of the biggest banks in Washington. “I felt we were not being as effective as we could be,” says Susan Bies, who has since left the board. “We didn’t have a strong enough overall view of what was going on throughout the system.” According to several people involved in the discussions, her effort was beaten back by Timothy Geithner, then president of the Fed bank in New York, which oversees some of the largest banks. Mr. Geithner, now Treasury secretary, declined to comment.
The district banks straddle an odd public-private divide. The board of each has three directors representing local commercial banks, three nonbankers chosen by banks, and three directors picked by the Fed in Washington. The boards select the district banks’ presidents, in consultation with Fed headquarters. The bank influence on boards has spurred charges of a structural conflict of interest.