By Jonathan Spicer and Michael Flaherty
NEW YORK/WASHINGTON (Reuters) - Efforts to fill top positions at some U.S. Federal Reserve regional branches are casting a spotlight on a decades-old process that critics say is opaque, favors insiders, and is ripe for reform.
Patrick Harker took the reins as president of the Philadelphia Fed this week, in an appointment that attracted scrutiny because he served on the committee of directors that interviewed other prospective candidates for the job he ultimately took.
The Dallas Fed has been without a permanent president for more than three months as that search process stretches well into its eighth month. And the Fed's Minneapolis branch abruptly announced the departure of its leader, Narayana Kocherlakota, more than a year before he was due to go, with no replacement named to date.
The delays and reliance on Fed employees in picking regional Fed presidents can only embolden Republican Senator Richard Shelby to push harder for a makeover of the central bank's structure, which has changed little in its 101 years.
A bill passed in May by the Senate Banking Committee that Shelby chairs would strip the New York Fed's board of its power to appoint its presidents. And it could go further, given the bill would form a committee to consider a wholesale overhaul of the Fed's structure of 12 districts, which has not changed through the decades of shifting U.S. populations and an evolving economy.
The bill is part of a broader conservative effort to expose the central bank to more oversight, and some analysts saw the Philadelphia Fed's choice as reinforcing the view that the Fed needs to open up more to outsiders.
Nine of 11 current regional presidents came from within the Fed, a proportion that has edged up over time. Twenty years ago, seven of 12 were insiders.
"The process seems to create a diverse set of candidates in which the insider is almost always accepted," said Aaron Klein, director of a financial regulatory reform effort at the Bipartisan Policy Center.
Since it was created in 1913, the central bank's decentralized structure was meant to check the power of Washington, where seven Fed governors with permanent votes on policy are appointed by the White House and approved by the Senate.
The 12 Fed presidents who are picked by their regional boards usually vote on policy every two or three years, and they tend to hold more diverse views.
Former Richmond Fed President Alfred Broaddus told Reuters the regional Fed chiefs have more freedom "to do and say things that may not be politically popular" because they are not politically appointed. "On the other hand, there is the question of legitimacy since they are appointed by local boards who are not elected."
Two-thirds of regional Fed directors are selected by local bankers, while the rest are appointed by the Fed's Board of Governors in Washington.
Critics question how well those regional boards - mostly made of the heads of corporations and industry groups meant to represent the public - fulfill their mission.
Last year, a non-profit group representing labor unions and community leaders organized by the Center for Popular Democracy, urged the Fed's Philadelphia and Dallas branches to make the selection of their presidents more transparent and to include a member of the public in the effort.
Philadelphia's Fed in particular proved "tone deaf" in its head-hunting effort, said Lou Crandall, chief economist at Wrightson ICAP in Jersey City, New Jersey.
Harker was a Philadelphia Fed director when the board started looking to replace president Charles Plosser, who left on March 1, and he was among the six directors who interviewed more than a dozen short-listed candidates for the job, according to the Philadelphia Fed.
But on Feb. 18, Harker floated his own name, recused himself from the process and a week later his colleagues on the board unanimously appointed him as the new president.
While the selection follows Fed guidelines and was approved by its Board of Governors, it raised questions of transparency and fairness.
"The Philadelphia Fed's search process might have made perfect sense in a corporate environment, but is obviously problematic for an official institution," said Crandall.
The board's chair and vice chair, Swathmore Group founder James Nevels and Michael Angelakis of Comcast Corp, respectively, declined to comment, as did Harker.
Peter Conti-Brown, an academic fellow at Stanford Law School's Rock Center for Corporate Governance, and an expert witness at a Senate Banking Committee hearing this year, proposed to let the Fed Board appoint and fire regional Fed presidents or at least have a say in the selection process.
In the past, reform proposals for the 12 regional Fed banks have focused on decreasing or increasing their number and their governance.
Changes to the way the regional Fed bosses are chosen could strengthen the influence of lawmakers at the expense of regional interests.
For now, delays in appointments of new chiefs force regional banks to send relatively unknown deputies to debate monetary policy at meetings in Washington, as Dallas and Philadelphia did last month when the Fed considered raising interest rates for the first time in nearly a decade.
The Minneapolis Fed still has time to find a new president before Kocherlakota steps down at year end.
"For now the Fed criticism is just noise, mostly from Republicans," said Greg Valliere, chief political strategist at Potomac Research Group. "But once the Fed begins to raise interest rates ... then the left will weigh in as well."
(Additional reporting Ann Saphir in San Francisco; Editing by Tomasz Janowski)