4.02 A The Fed

							4.0 Understand the Role of
Finance in Business
      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?

   How is it organized?
        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.
    * Prior to the Federal Reserve Act anyone could issue currency or coin
           money
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
                                                          Richmond
                                                          District.
                   The Federal Reserve

   What are the two arms of “The Fed”?
       Board of Governors
           Represents the government (public) sector
       District Federal Reserve Banks
           Represents the business (private) sector
    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

                 The Board Room at the Federal Reserve in Washington, DC
Members of the Board
of Governors
   Ben S. Bernanke, Current Chairman

   Alan Greenspan, Retired Chairman

   Chairman is appointed by President and
    confirmed by Senate
       Similar to procedure for Supreme Court Justices
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
    5.   State banks have the option of joining the 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
8.   Supplies currency
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
    protect depositor’s money
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
  audited by the IRS to review the accuracy of
  a tax return.
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
      Bank of America bought Merrill Lynch Bank of America for $50 Billion
      Wells Fargo bought Wachovia for $15.1 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
              using federal deposit coupon into a national
              bank
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
        lower interest rates, increases (stimulates) economy
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
      (only member banks) HOWEVER, rates the Fed charges member banks
      “trickle down” and affect the interest rates for consumers
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
                   Interdistrict Settlement Fund
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
    - cannot be easily transferred and are non-negotiable
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
      in 7 years at maturity for $50
                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 $1000
       Treasury bond - maturity at 10 + years
Open 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 (FOMC)-
 A committee within the Federal Reserve
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 for land/acreage
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
            Treasury, US Mint
St. Louis Federal Reserve

   http://www.stlouisfed.org/education_resource
    s/