The Federal Reserve can, under 12 U.S.C. § 1818(e), remove bankers from office if they violate the law, engage in unsafe or unsound practices, or breach their fiduciary duties. Yet the Fed has used this power so rarely that few people even realize it exists. In the past 20 years, America’s largest banks have settled hundreds of major lawsuits and paid an unprecedented $195 billion in fines and penalties. They have admitted to fraud, bribery, money laundering, price fixing, bid rigging, illegal kickbacks, discriminatory lending, and a host of other consumer protection violations. In 2019, the U.S. Department of Justice labeled one trading desk at J.P. Morgan Chase, the country’s biggest bank, a “criminal enterprise.” During this period, however, the Fed did not remove a single senior executive of a major U.S. bank.
The mystery deepens when one considers how the Fed has used its removal power in recent years: mostly to exclude rogue low-level employees from the banking business for isolated instances of misconduct. For example, in the early 2000s, SunTrust Bank fired Roslyn Terry for stealing $21,200 while working as a teller. Following her termination, the Fed banned Terry from working at a bank ever again. The Fed’s ban had no impact on SunTrust, its management, or its practices, nor was it intended to. Primarily, it signaled Terry’s lack of fitness to other banks and potential employers.
What explains this pattern of enforcement? Is the Fed’s practice consistent with the intended legislative design? Should removal play a more robust role in improving bank governance? In a new paper forthcoming in the Virginia Law Review, we examine these questions and offer the first sustained account of the banker removal power.
Our article makes four contributions. First, it reconstructs the evolution of the banker removal power using a range of primary sources. It highlights the power’s animating conception of bank executives as public fiduciaries. Removal is the statutory foundation for modern bank supervision, a distinctive form of government oversight that proceeds through continuous, confidential engagement between bankers and government officials. Congress granted the Fed the removal power in 1933, aiming to preserve an institutional arrangement for expanding the money supply that relies on privately run banks. Congress hoped that if the Fed had the power to remove untrustworthy bank leaders, banks would heed informal supervisory directives and serve public as well as private interests.
Congress revisited the removal law after major banking crises in 1966, 1978, and 1989, changing whom the Fed may remove, the consequences of removal, and the extent of the Fed’s discretion. Today, the power exists at its broadest scope. Any institution-affiliated party is subject to sanction; a removal may result in a lifetime prohibition from banking; and willful or continuing “unsafe or unsound” conduct, even in the absence of fraud, suffices to justify enforcement.
The paper’s second contribution is analytic, picking up the story after 1989 and bringing it to the present. Using a novel dataset obtained through Freedom of Information Act requests, we map the actual practice of banker removal. The data reveal that the Fed uses its removal power sparingly, averaging 7.2 actions per year between 1980 and 2019. The Fed rarely removes sitting bank employees; 91 percent of orders ban people who are no longer working at banks, blocking them from returning in the future. More notably, since the late 1990s, the Fed has deployed its power primarily against rank-and-file workers for activities already subject to criminal penalties. For example, the most common reason for removal was embezzlement or misuse of funds. The Fed has used its removal power to address poor oversight and reckless management in only three instances (two of which involved employees of the same bank who jointly supervised a rogue trader). Its other 187 actions involved direct participation in unlawful activities.
Third, harnessing corporate law theory, we argue that a credible threat of removal against senior bank executives for unsound management practices is a crucial component of contemporary bank supervision. In doing so, we join a growing number of scholars in recognizing that traditional corporate governance reforms and prudential regulatory rules have limited capacity to curb socially harmful or unsafe bank behavior. But contrary to the emerging view, we do not conclude from this diagnosis that new regulatory tools are needed. Instead, we contend that the Fed already has the ability — through removal — to reorient bank managers’ incentives toward the public interest. A credible threat of removal permits the Fed to keep senior executives and directors in line and to prioritize its judgment over that of private shareholders. Removal also bolsters government supervision by ensuring that the Fed does not need to rely on bank managers whom it no longer trusts.
The paper’s final contribution is prescriptive. The removal power has failed to achieve its full potential to reform bank behavior because the Fed rarely removes senior bankers. We examine how the current statutory design enables this trend and recommend changes. In particular, we show that the removal power was last updated before the emergence of large financial conglomerates and thus is out of sync with the reality of modern banking. Bank executives now serve in oversight, rather than operational, roles. Because the removal power relies on a single culpability standard that applies to all bankers in the corporate hierarchy, regardless of their varied roles and responsibilities, it substantially raises the difficulty of removing bank leadership relative to lower-level subordinates. Accordingly, we argue that Congress should expressly recognize oversight failure as a removal ground. In addition, the Fed should revise its practice of imposing uniform removal terms for all cases, instead varying the scope and duration of removal according to the type of wrongdoing at issue.
This post comes to us from Professor Da Lin at the University of Richmond School of Law and Lev Menand, a fellow and lecturer at Columbia Law School. It is based on their recent article, “The Banker Removal Power,” forthcoming in the Virginia Law Review and available here.