May 29, 2012 1:09PM # Dimon on NY Fed Board a Distraction, Solution Is to Remove the Fed from Bank Regulation By [Mark A. Calabria](https://www.cato.org/people/mark-calabria) --- SHARE It is not surprising that the recent losses at JP Morgan have resulted in [calls](http://www.politico.com/news/stories/0512/76630.html) by current and would-be politicians to remove bankers from the boards of the regional Federal Reserve banks, as JP Morgan CEO Jamie Dimon currently sits on the board of the New York Federal Reserve. There’s even a [petition](http://www.change.org/petitions/jamie-dimon-must-resign-or-be-removed-from-the-new-york-federal-reserve-board-of-directors) for the “public” to demand Dimon’s resignation. Setting aside the irony of having senators call for keeping bankers off the regional Fed boards just days after they [voted](http://money.cnn.com/2012/05/17/news/economy/federal-reserve-board/index.htm) to place a former investment banker on the Federal Reserve board, the real question we should be debating is: Should the the Federal Reserve even be involved in banking regulation? As I’ve noted [elsewhere](https://www.cato.org/should-the-federal-reserve-supervise-banks/), a recent[paper](http://www.nber.org/papers/w17401)by economists Barry Eichengreen and Nergiz Dincer suggests that separating monetary policy from banking supervision would yield superior outcomes, both for banking stability and the economy more generally. While there is a very real conflict-of-interest when bankers sit on the boards of their regulators, there is an even bigger conflict-of-interest when those setting monetary policy are also responsible for bank safety. Rather than let institutions they supervise fail, and face public criticism, there exists a strong incentive for the monetary authority to mask bank insolvency by labeling such a liquidity crisis and then injecting easy and cheap credit. The result is that the rest of us are left paying for the mistakes of both the bank and regulator. A far better alignment of incentives would be to separate the conduct of monetary policy from bank supervision. Like anything, such a separation would not be without its costs. I am the last to go around claiming a “free lunch” when it comes to banking and monetary policy. The current Boston Fed President made a strong [case](http://www.google.com/url?sa=t&rct=j&q=is%20bank%20supervision%20central%20to%20central%20banking%3F&source=web&cd=1&ved=0CFMQFjAA&url=http%3A%2F%2Fciteseerx.ist.psu.edu%2Fviewdoc%2Fdownload%3Fdoi%3D10.1.1.201.9515%26rep%3Drep1%26type%3Dpdf&ei=2_bET-v5BqXq0gHx3JmZCg&usg=AFQjCNGzNdZdOitQE-chDVsrmzl6yWzPEA) over a decade ago for keeping the two combined. The Richmond Fed has also offered a useful [discussion](http://www.richmondfed.org/publications/research/economic_quarterly/2009/spring/walter.cfm) of the pros and cons of such consolidation, as well as consolidating regulators more generally. These costs aside, I believe having the Fed focus solely on monetary policy would improve both. [![Creative Commons License](/build/cato_2020/images/creative-commons.svg)](http://creativecommons.org/licenses/by-nc-sa/4.0/) This work is licensed under a [Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License](https://creativecommons.org/licenses/by-nc-sa/4.0/).