- Key insight: Federal Reserve Vice Chair for Supervision Michelle Bowman's reforms will see supervision join other central bank functions — like payments processing — in being consolidated at the federal level.
- Expert quote: "Probably what she's trying to do is consolidate the reporting mechanism to the board head of supervision and to the board's vice chairman to accomplish improved supervision. That's a matter of opinion and a matter of time as to whether that will be effective." — Thomas Hoenig, former president of the Federal Reserve Bank of Kansas City
- Forward Look: The changes are expected to make supervision more efficient and more consistent across the country, but they raise questions about the roles and input of reserve bank leaders.
Recently announced changes to the Federal Reserve's supervisory structure would make the central bank's governing board more accountable for ground-level bank supervision. But the question is, how much authority — and input — will be left to the system's reserve banks?
In a
"Probably what she's trying to do is consolidate the reporting mechanism to the board head of supervision and to the board's vice chairman [of supervision] to accomplish improved supervision," said Thomas Hoenig, former president of the Federal Reserve Bank of Kansas City and former vice chair of the Federal Deposit Insurance Corp., adding that it would be "a matter of opinion and a matter of time as to whether that will be effective."
According to an internal Fed email viewed by American Banker, each director "will be employed by one of the Reserve Banks in the region but report directly to the Board's Deputy Director for Supervision." Each will be the "single accountable leader" for supervision in their district.
This represents a significant departure from the way the Fed has run bank supervision up to this point and, potentially, a change in authority within the Fed system.
Sean Vanatta, senior lecturer in financial history and policy at the University of Glasgow and regulatory historian, said the proposal raises "fundamental questions" about the structure of the Federal Reserve system going forward.
"Why do we still have twelve regional Reserve Banks, apart from path dependence and historical precedent?" Vanatta said. "Do twelve regional banks continue to serve a compelling purpose? Would nine, five, or some other number make more sense? Or should the system ultimately evolve into a more centralized institution with regional branches rather than semi-autonomous Reserve Banks?"
At its inception in 1913, the system's various functions were distributed through 12 regional reserves — led by locally appointed chief executives now known as presidents — which in turn were overseen by a Washington, D.C.-based board. Subsequent legislation and internal reforms have consolidated powers and authorities within the Board of Governors.
Oversight of systemically large banks became a shared exercise between the board and the reserve banks after the creation of the Large Institution Supervision Coordinating Committee, or LISCC, following the 2008 global financial crisis. The vice chair for supervision oversees that group along with an operating committee consisting of various reserve bank officials. But the front-line supervisory work remained within the purview of the reserve banks.
Under the new structure, supervisory staff will remain employed by their current reserve banks and each reserve bank will have a supervisory leader to communicate with the regional director, according to the email, which noted that the structural changes are expected to have "limited impact on day-to-day work" of examiners.
Along with expanding jurisdictions, Bowman said the new approach prevents states from being split between multiple reserve districts.
"The regional structure creates scale in our operations. It simplifies our leadership structure while preserving local supervision by examiners," Bowman said during her speech announcing the reforms. "This approach clarifies accountability and decisionmaking and enables a consistent application of supervision."
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During her speech, Bowman said the regions would be "informed" by the Conference on State Banking Supervision's regional structure. The email detailing the specifics of the reform confirmed the Fed's districts would "generally be aligned" with those of CSBS, with northeast, southeast, midwest, central and western regions.
The Federal Reserve System's structure has long been called into question for many reasons, not least because the system was created at a time when the U.S. economy looked and operated much differently than it does today. The fact that Missouri, for example, has two reserve banks while the entire West Coast has only one is an oft-cited example of how the system's regional bank distribution has aged.
"The original Federal Reserve System was conceived as a decentralized central bank, one that would conduct monetary policy through regional institutions responsive to local economic conditions," Vanatta said. "Whatever logic the district boundaries may have had in 1913, however, it is far from obvious that they still correspond to coherent economic regions today."
Bowman framed the changes as a response to the structural and cultural shortcomings in supervision identified in a
While questions remain about the specific changes being implemented, the merits of a fresh approach to supervision are broadly understood.
Cliff Stanford, chair of the financial services group at the law firm Alston & Bird and a former attorney for the Federal Reserve Bank of Atlanta, said the Fed has been consolidating various functions — with the blessing of the reserve banks — for decades with positive results. He pointed to the centralization of payments processing in the wake of the terrorist attacks of Sept. 11, 2001 as a prime example of the system improving itself over time.
"By analogy, perhaps there has been a similar tipping point or precipitating event, in the form of the 2023 failures, and the lessons of the recent report that Vice Chair Bowman commissioned," Stanford said. "In other words, an opportunity to move away from 12 hierarchies to better accomplish the supervisory mission of the Fed."
Vanatta noted that redrawing the Fed's supervisory jurisdiction to sync up with state lines would align the central bank with the Federal Deposit Insurance Corp., which divides the country into seven regions. He said this new alignment could reduce unnecessary frictions in the supervisory process. If nothing else, he said the new structure likely improves consistency and accountability in the Fed's banking oversight.
Still, Vanatta noted that the Fed's federated structure is a positive attribute for the system, and one that the Fed should not relinquish lightly.
"Having independent reserve banks is a major strength, especially because it connects monetary policy more closely with its constituents, generates a diversity of research and institutional cultures, and ensures some independence from national political fluctuations," he said. "You just may not want these factors in bank supervision."
Hoenig, now a senior fellow at the Mercatus Center, also believes the Fed's current structure provides avenues for achieving the goals of accountability and consistency without undermining the reserve banks' unique perspective. He argued that the easiest way to fix a lack of accountability would be to demand it from the current structure.
"Strengthen the reserve bank role, make it more accountable, make the president more accountable, and make the director of supervision at the board more accountable to the vice chairman for supervision," he said. "That's how it worked, in substance, in the past."
