BANKING SYSTEM OF THE USA

In the US, the banking system is rather complex, yet highly effective. The Federal Reserve System was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded. Today, the Federal Reserve’s duties fall into four general areas:

(1)- conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates;

(2)- supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers;

(3)- maintaining the stability of the financial system and containing systemic risk that may arise in financial markets;

(4)- providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation’s payments system.

The current structure of the system has three major components established by the original act.

First, a seven-member Board of Governors that oversees the whole system, supervises the financial services industry, including approving bank presidents and setting requirements for the amount of cash banks must hold in reserve; and which main responsibility is to guide monetary policy by coordinating with the Federal Open Markets Committee (FOMC) that is responsible for the determination of Federal Reserve bank policy to encourage long-term objectives of price stability (i.e., controlling inflation through the adjustment of interest rates) and economic growth, and regional reserve banks.

Second, there are 12 regional Federal Reserve Banks that supervise commercial banks and implement monetary policy. The 12 Federal Reserve Banks carry out the day-to-day operations of the Federal Reserve System. The Federal Reserve Banks provide fiscal agency and depository services to the federal government. For example, as fiscal agents they issue, transfer, exchange and redeem government securities and savings bonds. As depositories, they provide transaction accounts for the Treasury and they collect and disburse funds on behalf of the federal government. The 12 Reserve Banks provide banking services to depository financial institutions, maintain reserve and clearing accounts for banks and thrifts. The Banks play a major role in the nation’s payment system. Reserve Banks move coin and currency into and out of circulation. They also participate in the collection and processing of millions of checks daily. The Banks are an integral part of electronic funds transfer systems, clearing and settling electronically originated credits and debits. Reserve banks have additional regulatory authority over the 38 percent of U.S. commercial banks (mainly larger banks, including all national banks) that are members of the Federal Reserve System.

The member banks, all federal chartered banks and all state-chartered banks that choose to be members of the system, make up the third component.

One more part of the US banking system comprises all of the other non-government financial institutions including:

Thrifts.Theseare(Savings and loan (S&Ls), mutual savings banks, and credit unions that offer checking and savings accounts and make loans. Historically, S&Ls made mortgage loans for houses while mutual savings banks and credit unions made small personal loans, such as automobile loans. Today, major thrifts offer the same range of banking services as commercial banks. The Federal Deposit Insurance Corporation and the National Credit Union Administration insure checking and savings deposits up $ 100,000.

Insurance companies.Theseare firms that offer policies (contracts) through which individuals pay premiums to insure against some loss, say, disability or death in some life insurance policies and annuities, the funds are invested for the client in stocks and bonds and paid back after a specified number of years. Thus, insurance sometimes has a saving or financial-investment element.

Mutual fund companies.These are firms that pool deposits by customers to purchase stocks or bonds (or both0. Customers thus own a part of a particular set of stocks or bonds, say, stocks in companies expected to grow rapidly (a growth fund) or bonds issued by state governments (a municipal bond fund).

Pension funds. These arefor-profit or nonprofit institutions that collect savings from workers (or from employers on their behalf) throughout their working years and then buy stocks and bonds with the proceeds and make monthly retirement payments.

Securities firms.These are firms that offer security advice and buy and sell stocks and bonds for clients. More generally known as stock brokerage firms.