Banking system

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FEDERAL RESERVE BANK

The Federal Reserve, the Central Bank of the United States, was founded by Congress in 11 to provide the nation with a safer, more flexible, and more stable monetary and financial system. The Federal Reserve System is divided into 1 districts, collectively serving as the nations Central Bank. The Federal Reserve is considered to be an independent central bank. It is so only in the sense that its decisions do not have to be ratified by the President or anyone else in the executive branch of government. The entire system is subject to oversight by the U.S. Congress because the Constitution gives to Congress the power to coin money and set its value, a power that in the 11 act, Congress itself delegated to the Federal Reserve. The Federal Reserve must work within the framework of the overall objectives of economic financial policy established by the government, and thus the description of the system as "independent within the government."

Today, the Federal Reserves duties fall into four categories

1.Conducting the nations monetary policyOrder College Papers on Banking system

.Supervising and regulating banking institutions and protecting the credit rights of consumers.

.Maintaining the stability of the financial system

4.Providing certain financial services to the U.S. government, the public, financial institutions, and foreign official institutions.

Monetary Policy

The Federal Reserve System conducts monetary policy using major tools

1.Open Market Operations- the buying and selling of U.S. government (mainly Treasury) Securities in the open market to influence the level of reserves in the depository system.

.Reserve Requirements- requirements regarding the amount of funds commercial banks and other depository institutions must hold in reserve against deposits.

.The Discount Rate- the interest rate charged commercial banks and other depository institutions when they borrow reserves from a regional Federal Reserve Bank.

The Federal Reserve Act lays out the goals of monetary policy. It specifies that in conducting monetary policy, the Federal Reserve System and the Federal Open Market committee should seek "to promote effectively the goals of maximum employment, stabilize prices, and moderate long-term interest rates." Many analysts believe that the central bank should focus primarily on achieving price stability. A stable level of prices appears to be the condition most conducive to maximum sustained output and employment and to moderate long-term interest rates. Experience has shown that the economy performs well when inflation is low. When inflation is low and is expected to remain low, interest rates are usually low as well. Such an environment fosters low unemployment and allows the economy to achieve its growth potential. The ability to maintain a low inflation rate is a long-term measure of the Feds success. To achieve this, the Feds set a variety of intermediate targets including monetary aggregates, reserve aggregates, and interest rates to gauge the impact of its policies on the economy. The actions that the Feds take today influence the economy and the inflation rate over a long time. For that reason, policymakers must consider the long-and short-term effects of achieving any one goal. Beyond influencing the level of prices and the level of output in the near term, the Federal Reserve can contribute to financial stability and better economic performance by limiting the scope of financial disruptions and preventing their spread outside the financial sector.

Supervisory and Regulating

Although the terms bank supervision and bank regulation are often used interchangeably, they actually refer to distinct, but complementary activities. The Federal Reserve has supervisory and regulatory authority over a wide range of financial institutions and activities. It works with other Federal and State authorities to ensure safety and soundness in the operations of financial institutions, stability in the financial markets, and fair and equitable treatment of consumers in their financial transactions.

Bank supervision involves the monitoring, inspecting, and examining of banking organizations to assess their condition and their compliance with relevant laws and regulation. When an institution is found to be in noncompliance or to have other problems, the Federal Reserve may use its supervisory authority to take formal or informal action to have the institution correct the problems. Bank, regulations, entails making and issuing specific regulations and guidelines governing the structure and conduct of banking, under the authority of legislation.

The Federal Reserve shares supervisory and regulatory responsibilities with the office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the Office of Thrift Supervision (OTS) at the federal level, with the banking authorities for the international operations of U.S. banks and the operations of foreign banks in the United States. This structure has evolved partly out of the complexity of the U.S. financial system with its many kinds of depository institutions and numerous chartering authorities. It has also resulted from a wide variety of federal and state laws and regulations designed to remedy problems that the U.S. commercial banking system has faced over its history.

Maintaining the Stability of the Financial System

The Federal Reserves system of operation is such that it in itself maintains the stability of the Financial System. The body and function of the system allow for the integrity and stability of the U.S. money supply and maintains a system of checks and balances. The policies in which the Federal Reserve operate under, function to serve as a tool for stability. These policies some of which include the Banking System, Monetary Policy, Fiscal Policy, Payment System, Taxes, and the Rules and Regulations set forth for banking, all play a role in maintaining a stable financial system.

The Employment Act of 146 is a landmark in American economic legislation. It commits the Federal Government to take action through monetary and fiscal policy in order to maintain economic stability.

The Council of Economic Advisers (CEA) and The Joint Economic Committee (JEC) are the executive branches set up to regulate this act. Their job is to advise and assist the president on economic matters of national interest. The president is then required to submit an annual report to Congress that describes the state of the economy and recommend policies to stabilize it.

The Fiscal Policy is discretionary, meaning that changes in government spending and taxes are at the option of the Federal Government. Taxes, serve as stabilizers. They can be inflated or reduced to help stabilize the economy.

Provision of Financial Services

The Reserve bank serves primarily audiences- Bankers, the U.S. Treasury, and the Public. As banks for the U.S. government, Reserve banks process the Treasurys payments, sell its securities, and assist with its cash management and investment activities. The Fed also distributes currency, and coins, process checks, and offer electronic forms of payment. Finally, Reserve banks conduct research and the National and Regional economies, prepare Reserve bank Presidents for their participation in the Federal Open Market Committee (FOMC) and dissemination information about the economy through publications, speeches, educational workshops and websites.

Reserve banks are often called the "bankers bank" because they store commercial banks excess, and serve as the lender of last resort for these same banks. Through its discount window, the Fed lends money to banks so that a shortage of funds at one institution does not disrupt the flow of money and credit in the entire banking system. The Fed typically makes loan to satisfy a banks unanticipated needs for short-term funds; but the Fed also make longer-term loans to help banks manage seasonal fluctuations in their customers deposit or credit demands.

The Feds also compete with the private sector in its financial services to foster competition in the marketplace and promote innovation and efficiency in the payments system. It does not seek to make a profit from its participation; it sets prices only to recover costs.

The Regional Reserve Banks are responsible for meeting public demand for currency and coins within their districts. The Reserve banks primary responsibility in providing this service is to ensure that fluctuations in the demand for currency and coin do not disrupt the banking industry.

To improve the payment systems, regional Reserve banks introduce new services and enhance old ones.

Federal Reserve banks maintains accounts for the U.S. Treasury, process government checks, postal money orders and U.S. savings bond, and collects Federal tax deposits. Certain Reserve banks also sell new Treasury securities service, outstanding issues, and redeem maturing issues. When the Treasury offers new issues of marketable securities to the public, certain Reserve banks disseminate information about the issues, process orders from customers, collect payments, credit the Treasurys account for the proceeds and deliver the securities. In recent years, the Fed and the U.S. Treasury have introduced electronic processing and delivery in many of these services.

In summarizing, the Federal Reserves ability to conduct monetary policies, supervise banks and provide financial services illustrates the complex yet effective function of the system. What becomes apparent, are not only how important these functions are, but also how effective they are in maintaining the goals of the Central Banking System. It was financial crises, which lead to the creation of the Federal Reserve, and it is a financial crisis that it is now best prepared to handle.

Through the combined efforts of the Board of Governors, Reserve Bank, and FOMC, the Federal Reserve is in a strong position to make monetary policy, provide a safe banking system, and contribute to an effective banking and payment system, all of which help to maintain a healthy economy.

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