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Federal Reserve System Structure and Governance: A Balance of Power

The Board of Governors of the Federal Reserve

Board Building Governance
  • Seven Governors are appointed by the President and confirmed by the Senate, and so are directly connected to the political process.
  • The Governors represent the public sector.
  • They serve 14-year terms to insulate them from short-term political pressures and to encourage a long-term perspective on the economy and the financial system.a
  • The Chairman and Vice Chairman of the Board of Governors are appointed by the President and confirmed by the Senate to four-year terms.
  • Oversees the 12 Federal Reserve Banks and their budgets.
  • Sets depository reserve requirements and approves requests for discount rate changes made by the Reserve Banks.
  • Issues regulations on financial safety and soundness and consumer protection.
  • Leads the Fed's supervision and regulation of bank holding companies, domestic and foreign operations of financial holding companies, and statechartered banks that are members of the Federal Reserve System. (Staffs at the 12 Reserve Banks responsible for supervising financial institutions in their District operate under delegated authority from the Board of Governors.)

12 Federal Reserve Banks

Governance Duties
  • Each Reserve Bank's stockholders are the member banks in its District.
  • Member banks pay in capital, but unlike traditional stock, these shares may not be sold or traded and cannot be pledged as collateral.
  • Each Reserve Bank has a nine-member board of directors selected from its District's banks, businesses, and the public, in a nonpolitical process.
    • Three directors are elected to represent member banks.
    • Three are elected by member banks to represent businesses and the public. By law, they cannot be directors or officers of a bank or bank holding company.
    • Three more nonbankers are appointed by the Board of Governors, including the chair and deputy chair.
  • The Reserve Banks distribute currency, act as bankers' banks, and generally perform the functions of a central bank, including serving as the federal government's fiscal agent.
  • Each Reserve Bank operates in the public interest, rather than for a profit motive. In fact, after paying its expenses, the Federal Reserve System's earnings are turned over to the U.S. Treasury.
  • The directors of each Reserve Bank:
    • Vote to recommend discount window rates to the Board of Governors.
    • Provide insight into regional economic business conditions.
    • Approve the Reserve Bank's budgets, strategies, and plans; provide oversight to the Bank's operations; and directly supervise the Bank's internal audit function, as do most corporate boards.b
    • Select the Reserve Bank president, subject to the approval of the Board of Governors.

The Federal Open Market Committee

Board Seal
  • Congress reaffirmed the decentralized structure of the Federal Reserve in the Banking Act of 1935, as it restructured the Federal Open Market Committee, the Fed's main body for making monetary policy decisions.
  • Congress gave votes on the FOMC to the seven Governors in Washington, along with five of the 12 presidents of the regional Reserve Banks.
  • The president of the New York Fed always votes, along with four presidents from among the rest whose votes rotate, so that voting members always come from different parts of the country.
  • With seven Governors, the Board retains the majority of votes on the FOMC, even though all 12 Reserve Bank presidents always participate in the discussions at FOMC meetings.c
  • a A Governor can finish out a previous appointee's term prior to serving his or her own full term.
  • b Since the Board of Governors oversees bank supervision and regulation, the Reserve Bank directors have no direct input or responsibility for supervision or regulatory decisions.
  • c At year-end 2009, there were two open seats on the Board of Governors. On March 1, 2010, Vice Chairman Donald L. Kohn announced plans to retire, which would create a third open seat.