Competency 4.02
Understand the Banking
System
Objective 4.02-A
Analyze the roles/responsibilities of the Federal Reserve.
The Federal Reserve System
What is the Federal Reserve System?
Why does it exist?
Who participates?
The Federal Reserve (The
Fed)
A Centralized Banking
System
Federal Reserve Act signed into law by President Woodrow Wilson
Organized by the Federal Government in 1913
Why have “ The Fed” ? Purpose:
To establish and maintain confidence in the US monetary system To ensure a safe, healthy and stable economy
To supervise and regulate member banks and help serve the public
efficiently.
Who Participates in Federal
Reserve?
1) All National Banks are required to be part of the Fed
1) Optional for state banks
2) Divisions are called DISTRICTS
3) There are 12 DISTRICTS in the United States 4) Every state comes under a district
5) Each Federal Reserve Bank is a corporation, owned by its member banks
NC is in
District 5,
the
The Federal Reserve
What are the two arms of “The Fed”?
Board of Governors
Represents the government (public) sector
District Federal Reserve Banks
Board of Governors
Usually meet about
twice a week, ordinarily
on Mondays and
Wednesdays
Public is invited to look
into the meetings of the
Board of Governors
Usually discuss
monetary policy such
as lowering and raising
interest rates
Members of the Board
of Governors
Janet L. Yellen,
Current Chairman
Chairman is appointed by President and
confirmed by Senate
Purpose of Federal Reserve
Established to supervise and regulate
banks
1.
Known as the “Bank’s bank”
2.
The central bank of the United States
3.
Assists banks with serving the public more
efficiently
4.
All
national banks
are required to join the Federal
Reserve System
The Federal Reserve System
Services
1.
Supervision of banks
2.
Agent for the federal government
3.
Regulates monetary policy
4.
Lends money to member banks
5.
Acting as a clearinghouse
6.
Participation in open market activities
7.
Sets loan limits & standards
1. Fed Supervision: Set
Reserve Requirements
Member banks are required to keep a
certain percentage (10% for many years) of
all deposits in the bank’s vault or on deposit
with the district federal reserve bank
Reserves:
funds set aside for emergencies
Example: a rush of withdrawals by customers
Purpose: to reduce risk of bank panics and
1. Fed Supervision: Audits
Member Banks
Inspects banks by
auditing
financial records
Audit
-an inspection of records to verify the:
1. accuracy of books (records) of the bank
2. bank is complying with banking laws
Similar to Individuals/corporations who are
1. FED Supervision: Approves
Bank Mergers
Q: Why do banks merge?
To be more competitive
-to offer customers more locations (local, regional, national, international) -to offer a variety of services more efficiently
-to compete with a growing array of other financial service companies such as:
*money market and other mutual funds *mortgage companies
*credit unions and
*credit arms of industrial firms (General Electric and Ford Motor)
Here are some recent bank mergers approved by “The Fed” in 2007-2008
Bank of New York bought Mellon Financial Corporation for $18.3 Billion JPMorgan Chase bought Bear Stearns for $1.1 Billion
2. Fed Acts as Agent for
Federal Government
The Fed holds a checking account for the
US Treasury
Disburses social security benefits and other
transfer payments using the direct deposit system
Accepts some types of federal tax money
Example: Federal tax depositories
Payroll taxes - federal income tax, FUTA, and social security taxes are deposited
3. FED Regulates
Monetary Policy
What is Monetary Policy?
When the Federal Reserve influences money and
credit conditions in the economy to achieve
economic goals
How?
The Fed determines amount of money in
circulation and available for loans, then either
increases or decreases to stabilize/stimulate the
economy
Tight money- policy when less money is available at
higher interest rates, slows (stabilizes) economy
Loose money- policy when more money is available at
4. FED Lends Money to
Member Banks
Monitors the discount rate of interest - rate used by the Fed to loan money to member banks
Compare banks to intermediaries (go-betweens) trading in
money at “wholesale” prices
The Fed changing interest rates affect borrowers (member banks) who pass rates to consumers
Raising rate - discourages borrowing
Reducing rate - encourages borrowing
Note: the Federal Reserve does not loan money to individuals or businesses
5. FED Acts as Clearing
House
Clears/Processes/Settles checks for member banks Federal Reserve uses the Automated
Clearing House (ACH) to electronically complete fund transfers (check
settlements) between banks
Interdistrict Settlement Fund in
Washington, DC used for between district transfers
Checks/deposit slips have MICR coding
Magnetic Ink Character Recognition
Scanners read MICR on checks to
electronically process data accurately and rapidly through the ACH and
6. FED Participates in Open
Market
Participates in open market operations by buying and
selling government securities
Q: What are government securities?
A: Treasury bills and bonds – loans to government in various denominations (amounts) and for various time periods
Advantages and Disadvantages
+ offer a fixed rate of interest over a fixed period of time + attractive because not subject to income taxes
Open Market Operations
Government securities are sold at a discount (from face
value), but are redeemed (cashed in) for face value on
the maturity (due) date
Examples:
Purchase treasury note for $7500 (discount price),
redeem at maturity date for $10,000 (face value)
Purchase Series EE savings bond for $25, redeem
Government Securities
Savings bonds - Example
Series EE-
Denomination minimum $25 Payable after 6 months
Earns interest up to 30 years
Short-term obligation of the U.S. Treasury
Treasury bill –
maturity in one year or less
Issued to mature in 13 weeks, 26 weeks, 52 weeks
Long-term obligation of the U.S. Treasury
Treasury note – maturity at 1 to 10 years, minimum $1000Open Market Operations
Bank discount rates encourages borrowing by
member banks, and therefore encourages
borrowing by consumers
Purpose of open market operations
1.
Regulate money supply
Most frequent method of controlling the economy
Who controls open market operations?
Federal Open Market Committee
7. The FED Sets Lending
Standards
Sets standards for
consumer legislation
dealing with lending and
credit
Sets limits for loans and
investments by member banks
News: Federal Reserve revised bank lending rules since banking crisis
Ex: Lower % of total loans
8. The Fed Supplies
Currency
Money defined:
a medium of exchange for value
US money = currency and coins
Federal Reserve supplies paper currency
Legal Tender for all debts, public and private
Paper currency supplied is “Federal Reserve Notes”
Printing currency (paper money, bills)
Bureau of Printing and Engraving
Counterfeiting - federal crime
Coinage
Minting supplied and regulated by the Department of
St. Louis Federal Reserve
http://www.stlouisfed.org/
