THE FEDERAL RESERVE SYSTEM 1913

Two Ways the Economy is Influenced Fiscal Policy Government’s ability to tax and spend; Fed. Gov't regulating taxes & expenditures Tax more and spend less = economy slowed Tax less and spend more = economy stimulated Monetary Policy The Federal Reserve Bank (the FED) affecting the economy through controlling the money supply. Private control since Fed, not Gov’t, controls the amount of $ in circulation

STRUCTURE OF THE FED Owned by its member banks -all national banks -some state banks Twelve Districts with Directors/ Presidents -but supervised by Fed in DC Janet Yellen - Chairperson Board of Governors – 7 members -appointed by P & approved by Senate -14 year terms, staggered, can’t be reappointed Member banks are commercial banks that are members of and hold stock in the Fed What institutions are members of the Federal Reserve System, and what does membership entail? National banks--those chartered by the federal government (through the Office of the Comptroller of the Currency in the Department of the Treasury)--by law are members of the Federal Reserve System. State-chartered banks and trust companies may apply for membership. To be accepted as a member, an applicant must meet requirements set by the Board of Governors. Member banks must subscribe to stock in their regional Federal Reserve Bank in an amount equal to 6 percent of their capital and surplus, of which 3 percent must be paid in; the remaining 3 percent is subject to call by the Board of Governors. The holding of stock in a Federal Reserve Bank does not carry with it the control and financial interest conveyed to holders of common stock in for-profit organizations. It is merely a legal obligation that goes along with membership, and the stock may not be sold or pledged as collateral for loans. Member banks annually receive a 6 percent dividend on their stock, as specified by law, and vote for some of the directors (so-called class A and class B directors) of their Reserve Bank. Issued shares of stock in 1913 just like any other corporation National banks (chartered by fed. Gov’t) HAVE to be members – those chartered by state gov’ts don’t have to. Board of Governors appointments are staggered – every two years / always experienced people on Board Fed is the bank for bankers --- does all the same functions for banks as local banks do for people FAC – reps from each of the 12 district banks that provide advice to the Fed. Reserve on economy’s overall health. Federal Open Market Committee -money supply & interest rates -12 voting members meet 8 x year Federal Advisory Council -gives advice on overall economic health

The Federal Reserve System

The Federal Reserve System Monetary policy- It’s all about: Manipulating Interest rates Setting Reserve requirements Manipulating the Money supply: Increase it by buying bonds and decrease by selling bonds

Responsibilities of the Fed State member bank supervision Fed Must monitor the reserves held by state member banks ($ on hand to clear checks) Banks can fail….particularly in past days like 30s with bank runs….”It’s A Wonderful Life” Today though banks insured by FDIC Electronic failure much more likely than a bank run Example: 1984 Continental IL bank, 8th largest in nation, had a modern day run billions loaned out to oil companies – family – loans not getting repaid Many small regional banks had $ in Continental IL but these large deposits by banks not insured by FDIC Businesses with deposits at Continental worried & withdraw $ via computer, telephone….a modern bank run FED steps in and loans $ to Continental IL…who will have to pay back the fed at the “discount rate” one of Fed’s basic functions Continental was finally returned to private sector 7 years later FED does annual inspections of member banks to insure overall banking safety. If bank deemed unsound, will be monitored constantly & could be shut down. A main role of the FED is to keep up consumer confidence in the banking system.

Responsibilities of the Fed State member bank supervision Bank holding companies Fed BHC – are corporations that own one or more banks – don’t accept deposits or make loans

Responsibilities of the Fed State member bank supervision Bank holding companies Fed International bank supervision Supervise foreign banks in U.S. – they control about 20% of banking assets in U.S.

Responsibilities of the Fed State member bank supervision Bank holding companies Fed International bank supervision Mergers

Responsibilities of the Fed State member bank supervision Bank holding companies Fed International bank supervision Moving funds around to clear checks Used to sort 75 million or more checks per day….. not now with debits Mergers Check clearing

Responsibilities of the Fed State member bank supervision Bank holding companies Fed International bank supervision Requires sellers to make complete and accurate disclosures to people who buy on credit. Regulation Z gives Fed authority to extend these disclosures to people who purchase & borrow from corps., retail stores, auto dealers, banks, etc. For ex., they have to explain size of down payment, amt of monthly payment, amt of interest, etc. Truth-in- lending laws Mergers Check clearing

Responsibilities of the Fed State member bank supervision Bank holding companies Issuing Currency & Storing Cash Fed International bank supervision Fiat money – federal reserve notes Robots move cash into vaults and sorting areas 80,000 bills an hour are counted counterfeit bills sent to the FBI worn out bills are shredded, trashed into “bricks” Truth-in- lending laws Mergers Check clearing

Responsibilities of the Fed Margin – 50% State member bank supervision Margin & reserve requirements Bank holding companies Reserve – 3-10% Fed Issuing Currency & Storing Cash International bank supervision A depository institution's reserve requirements vary by the dollar amount of net transaction accounts held at that institution. Effective December 30, 2010, institutions with net transactions accounts: Of less than $10.7 million have no minimum reserve requirement; Between $10.7 million and $58.8 million must have a liquidity ratio of 3%; Exceeding $58.8 million must have a liquidity ratio of 10%.[4] Truth-in- lending laws Mergers Check clearing

Gold reserves in the Federal Reserve Bank of New York Federal Reserve vaults in Dallas

Federal Open Market Committee & Money Supply Government sells bonds - Money flows to the treasury - reduces the money supply Government redeems (buys back) bonds - Money flows out of the treasury - increases the money supply

Fractional Reserve System & Money Supply Allows the Fed to control the growth of the money supply. A percentage of each deposit into a bank account must be kept in the bank. The remainder can be loaned out. The Fed determines the percentage – called the reserve requirement A lower reserve fraction results in more monetary expansion A higher reserve fraction results in less monetary expansion

HOW BANKS INCREASE THE SUPPLY OF MONEY

Formula: Divide D by RR and multiply x 100 = increased money supply

How Fractional Reserves Work Money supply (MS) growth: D=deposit RR= reserve requirement R=excess reserve MS = D (1+R+R2+R3 +R4 +R5…. +Rn) = D/RR If D= $1000 RR=.1 MS=1000/.1=$10,000 If D= $1000 RR=.4 MS=1000/.4=$2,500