ORGANIZATIONAL STRUCTURE OF THE FEDERAL RESERVE SYSTEM

No discussion of banks and their regulators would be complete without a discussion of the policy decisions and activities of the Federal Reserve System (the Fed) – the central bank of the United States. All central banks around the world perform similar functions. The central bank of a country: (a) controls the volume of money in circulation, (b) performs the government’s banking functions, (c) regulates banks and other financial institutions, and (d) serves as a “banker’s bank” – holding deposits from commercial banks and making deposits from commercial banks and making loans to them as needed.

The Federal Reserve’s primary job is to carry out monetary policy, which involves making sure that the banking and financial system functions smoothly and that the supply of money and credit from that system contributes to the nation’s economic goals. By controlling the growth of money and credit (including the loans and security investments made by banks), the Fed tries to ensure that the economy grows at an adequate rate, unemployment is kept as low as possible, inflation is held down, and the value of the dollar in international markets is protected. The Fed is relatively free to pursue these goals because it does not depend on Congress or the President for funding. Instead, the Fed raises its own funds from sales of its services and from securities trading, and it passes along most of its earnings (after making small additions to capital) to the US Treasury.

To carry out these important objectives, the Fed has evolved into a large and complex quasi-governmental bureaucracy with many divisions and responsibilities. The center of authority and decision making within the Federal Reserve System is theBoard of Governorsin Washington, D.C. By law, this governing body must contain no more than seven persons, each selected by the president of the United States and confirmed by the U.S. Senate for a term not exceeding 14 years. The Board chairman and vice-chairman are appointed by the president from among the seven Board members, each for four-year terms. The Board regulates and supervises the activities of the 12 district Reserve banks and their branch offices. It also regulates all bank holding companies, all foreign banks with offices in the United States, and the overseas operations of American banks. It sets reserve requirements on deposits held by banks and other depository institutions, approves all changes in the discount rates posted by the 12 Reserve banks, and takes the lead within the System in determining open market policy to affect interest rates and the growth of money and bank credit.

The Federal Reserve Board members make up a majority of the voting members of theFederal Open Market Committee (FOMC). The other voting members are 5 of the 12 Federal Reserve bank presidents, who each serve one year in filling the five official voting seats on the FOMC (except for the president of the New York Federal Reserve Bank, who is a permanent voting member). While the FOMC's specific task is to set policies that guide the conduct of open market operations—the buying and selling of securities by the Federal Reserve banks—this body actually looks at the whole range of Fed policies and actions to influence the economy and banking system.

The Federal Reserve System is divided into 12 districts, with a Reserve bank chartered in each district to supervise and serve member banks. Among the key services offered by the Federal Reserve banks to de­pository institutions in their district are (1) wire transfers of funds be­tween banks and other depository institutions; (2) safekeeping of se­curities owned by banks and their customers; (3) issuing new securities from the U.S. Treasury and selected other federal agencies, redeeming maturing securities of these governmental units, and making interest payments to holders of these securities as they come due; (4) making short-term loans to banks and other depository institutions through the "Discount Window" in each Federal Reserve bank; (5) maintaining and dispensing supplies of currency and coin; (6) clearing and collecting checks and other cash items moving between cities; and (7) providing information and special research studies to keep bankers and the public informed about regulatory changes and other developments affecting the welfare of their institutions.

All banks chartered by the Comptroller of the Currency (national banks) and those few state banks willing to conform to the Fed's supervision and regulation are designated member banks. Member institutions must purchase stock (up to a maximum of 6 percent of their paid-in capital and surplus) in the district Reserve bank and submit to comprehensive examinations by Fed staff of their lending policies, capital, services, and operations. There are few unique privileges stemming from being a mem­ber of the Federal Reserve System because Fed services are also available on the same terms to other depository institutions keeping reserve de­posits at the Fed. Many bankers believe, however, that belonging to the System carries prestige and the aura of added safety, which helps member banks attract and hold large deposits from corporations and wealthy individuals.

1. Sum up the text in 10-12 sentences and present your summary in class.

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