Banks Elect Their Own Regulators: The Fed's Built-In Conflict

Federal law gives the largest commercial banks a direct vote in selecting the regional Federal Reserve presidents who set interest rates — and public records show they used it while receiving...

The single most damning documented fact in the public record about Federal Reserve governance is not hidden in a leaked memo or a whistleblower complaint. It is written into the Federal Reserve Act of 1913, codified at 12 U.S.C. § 301, and confirmed by a 2011 Government Accountability Office audit that Congress itself ordered: the largest commercial banks in the United States hold formal voting rights to elect the directors who select regional Federal Reserve Bank presidents — the same officials who rotate onto the Federal Open Market Committee and vote on the interest rates that govern every mortgage, car loan, and savings account in America.

The mechanics are straightforward, and the public record is unambiguous. Each of the twelve regional Federal Reserve Banks maintains a nine-member board of directors divided into three classes. Class A directors — three seats — are elected directly by member commercial banks to represent commercial bank interests. Class B directors — three more seats — are also elected by those same member commercial banks, nominally to represent the public. Only Class C directors, the remaining three seats, are appointed by the Board of Governors in Washington rather than chosen by the banks themselves. The regional bank president, who wields a rotating vote on monetary policy, is then selected by that board. Six of nine seats on the selecting body answer, through election, to the commercial banking sector. This is not a lobbying arrangement or an informal influence network. It is the statute.

The conflict this structure creates was not merely theoretical. GAO Report GAO-11-696, published in July 2011 and mandated by Section 1109 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111-203), documented it with specificity. Jamie Dimon, chief executive of JPMorgan Chase, sat on the board of directors of the Federal Reserve Bank of New York from 2007 to 2012. During that period, in March 2008, the New York Fed extended a $29 billion loan facility to enable JPMorgan Chase's acquisition of Bear Stearns — a transaction in which Dimon's institution was the direct financial beneficiary. The same GAO report documented that Stephen Friedman, then-chairman of the New York Fed's board, held a seat on Goldman Sachs's board of directors and owned Goldman Sachs stock while the New York Fed was processing Goldman's application to convert to a bank holding company — a conversion Goldman needed in order to access Federal Reserve emergency lending facilities. Friedman purchased additional Goldman shares during this period and resigned in May 2009 after the conflict became public.

These were not isolated lapses. They were the predictable output of a governance structure that places regulated institutions in the position of selecting their own supervisors. The financial industry's parallel investment in the broader political ecosystem compounds the structural problem. OpenSecrets data drawn from Senate Office of Public Records filings under the Lobbying Disclosure Act shows that JPMorgan Chase spent approximately $11.5 million on federal lobbying in 2023 alone. The American Bankers Association spent approximately $10.9 million. Wells Fargo spent approximately $7.1 million. Goldman Sachs spent approximately $4.7 million. The finance, insurance, and real estate sector as a whole spends between $500 million and $700 million annually on federal lobbying — consistently the largest or second-largest sector by total expenditure in any given year. In the 2020 election cycle, OpenSecrets reported the sector contributed approximately $2.9 billion to federal candidates, parties, and outside groups, making it the single largest contributor to federal campaigns that cycle.

Senate Banking Committee members — who hold confirmation authority over Federal Reserve Board of Governors nominees and who therefore constitute a direct bottleneck in the appointment of the Fed's Washington-based leadership — receive financial sector campaign contributions at rates OpenSecrets documents as two to four times higher than the average Senate member, a pattern consistent across both parties and across multiple election cycles. The Board of Governors appointment process thus involves a presidential nomination stage shaped by Treasury Department and National Economic Council advisors whose own career networks intersect heavily with the financial industry, followed by a Senate confirmation stage in which the committee gatekeepers are among the most heavily finance-funded members of Congress. The revolving door reinforces both stages: former Fed officials move to major banks and lobbying organizations; former bank executives and lobbyists move into advisory and regulatory roles. The personnel pipeline is a parallel influence channel that operates independently of direct financial transfers and is therefore not captured in lobbying or campaign finance disclosures.

The Dodd-Frank Act, signed July 21, 2010, was the legislative response to the 2008 financial crisis — a crisis rooted in the deregulation and inadequate supervision of the very institutions whose directors were simultaneously sitting on Federal Reserve bank boards. Dodd-Frank expanded the Federal Reserve's supervisory authority over systemically important financial institutions and created the Financial Stability Oversight Council. It also, in Section 1109, mandated the GAO audit that documented the conflicts described above. What the public record also shows, through LDA filings aggregated by OpenSecrets, is that financial industry lobbying expenditure increased in direct proportion to the regulatory threat Dodd-Frank represented — a pattern consistent with what academic literature terms retaliatory lobbying. The Bank Policy Institute, successor to the Financial Services Roundtable, reported approximately $5.2 million in federal lobbying expenditure in 2023, much of it directed at rolling back or modifying Dodd-Frank's stress testing and capital requirements for large banks — the same requirements the Federal Reserve is responsible for enforcing.

What remains hidden is substantial, and the instruments that would reveal it are identifiable. The actual balloting records for Class A and Class B director elections at regional Federal Reserve Banks — which commercial banks cast which votes, by what margin, to place which directors in position to select which regional presidents — are not disclosed in any standardized public format. The internal deliberations of regional bank boards regarding specific transactions benefiting their own member institutions are shielded from GAO audit by current statute. The donors behind 501(c)(4) dark money organizations that spent on Senate campaigns bearing on Federal Reserve-relevant confirmations are not disclosed in IRS Form 990 filings. The specific content of lobbying communications directed at Senate Banking Committee members regarding Federal Reserve nominees is not required to be disclosed under the Lobbying Disclosure Act. Three instruments would close the most critical gaps: mandatory public disclosure of regional Federal Reserve Bank director election balloting by institution; extension of GAO audit authority to regional Federal Reserve Bank board deliberations involving transactions with member institutions; and a beneficial ownership disclosure requirement for 501(c)(4) organizations spending above a defined threshold on federal election-adjacent activity. None of these instruments currently exists.