1. 1 The Fed Ch 13

2. 2 The Federal Reserve and the Banking System The Fed was est. by Congress in 1913 and holds power over the money and banking system

3. 3 Board of Governors 12 Federal Reserve Banks Commercial Banks Public (Households and Businesses) Thrift Institutes (Savings and loan, mutual savings banks, credit unions)

4. 4 The Federal Reserve and the Banking System Central controlling authority for the system is the Board of Governors and has seven members appointed by the President for staggered 14 year terms. Its power means the system operates like a central bank

5. 5 The Federal Reserve and the Banking System Assistance and Advice –Federal Open Market Committee includes seven governors plus five regional Federal Reserve Bank presidents whose terms alternate. They set policy on buying and selling of government bonds, the most important type of monetary policy, and meet several times each year

6. 6 The Federal Reserve and the Banking System –Three advisory councils Federal Advisory Council includes 12 prominent commercial bankers, one from each Fed district, who act as advisors to the Board Thrift Institutions Advisory Council advises on thrift institutions Consumer Advisory Council advises on more general issues

7. 7 The Federal Reserve and the Banking System The system has 12 districts, each with its own district bank and two or three branch banks. The help implement Fed policy and are advisory –Each is quasi-public: it is owned by member banks but controlled by the Government’s Fed, and any profits go to the U.S. Treasury –They act as bankers’ banks by accepting reserve deposits and making loans to banks and other financial institutions

8. 8 Functions of the Fed and Money Supply Functions –The Fed issues “Federal Reserve Notes” Paper money used in our econ –Fed sets reserve requirements and holds the reserves of banks and thrifts not held as vault cash –Fed may lend money to banks and thrifts, charging them an interest rate called the discount rate –Fed provides a check collection service for banks (checks are also cleared locally or by private clearing firms)

9. 9 Functions of the Fed and Money Supply –Federal Reserve System acts as the fiscal agent of the federal govt –Federal Reserve System supervises member banks –Monetary policy and control of the money supply is the major function of Fed

10. 10 Fed Independence Fed independence is important but is also controversial at times. Advocates of independence fear that more political ties would cause Fed to follow expansionary policies and create too much inflation, leading to an unstable currency such as in other countries

11. 11 Recent Developments in Money and Banking Relative decline of banks and thrifts: Several other types of firms offer financial services Consolidation among banks and thrifts: Because of failures and mergers, there are fewer banks and thrifts today. Decline of about 50000 banks since 1991 Convergence of services provided has made financial institutions more similar

12. 12 Recent Developments in Money and Banking Globalization of financial markets: Significant integration of world financial markets is occurring and recent advances in computer and communications technology suggest the trend likely to accelerate Electronic transactions: Internet buying and selling, electronic cash, smart cards –In future, almost all payments could be made on personal computer or smart card –E-cash is issued by private firms, not govt. to control money supply, Fed needs way to control e-cash