Terrorism Insurance Bill Tagged with Community Bank Provision

By | December 16, 2014

When the U.S. House of Representatives approved a terrorism insurance bill last week, it contained a little-noticed provision that would require at least one member of the Federal Reserve’s board to have community banking experience.

That provision appears destined to become law in what would mark a rare change to the composition of the U.S. central bank’s governing structure.

The U.S. Senate plans to vote on the House bill later this week. An earlier version of the legislation that cleared the Senate also contained the provision, suggesting it will sail through once again as lawmakers wrap up business for the year.

Several members of Congress, including the provision’s initial sponsor, Republican Senator David Vitter, have called on President Barack Obama to tap a community banker for one of the two vacant spots on the normally seven-person Fed board.

These lawmakers, as well as community bankers themselves, have complained that a tightening of bank regulation since the financial crisis has put an unnecessary, heavy burden on smaller lenders and should be targeted more carefully at big banks.

Many lawmakers worry that big Wall Street firms hold undue sway at the U.S. central bank and see adding a community banker as a way to temper that. The bill would require that at least one member of the Fed’s board have experience working at or supervising banks with $10 billion of assets or less.

While the Fed board is supposed to have representatives from different parts of the country, the central bank has never had to reserve a specific seat for a particular business sector.

“The claim that community banks should have a Fed board seat is no stronger than the claim that trade unions should, or mid-sized banks or (JPMorgan CEO) Jamie Dimon,” said Justin Wolfers, a University of Michigan economics professor.

“It’s a bad practice and not consistent with central bank practices around the world.”

Fed board members are appointed by the president, subject to Senate confirmation.

Asked to comment, a White House spokeswoman referred to a statement the Obama administration issued last week objecting to regulatory provisions not related directly to the main purpose of the bill. The statement, however, did not mention the provision on the composition of the Fed board.

A Fed spokeswoman declined to comment.

(Reporting by Michael Flaherty; Editing by Tim Ahmann, Cynthia Osterman and Ken Wills)

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