The Fed - NIU - College of Business

Report
The Federal Reserve
“The Fed Today” video
Copyright 2014 by Diane Scott Docking
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Learning Objectives
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Understand the history of the Federal
Reserve System (FRS)
Understand the major functions of the
FRS
Identify the structure of the FRS
Copyright 2014 by Diane Scott Docking
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History of Federal Reserve System

First Bank of the United States (1791–
1811)
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Disbanded in 1811
Originally each bank printed its own money
(bank notes)
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Varied size, amount, looks, etc.
Next slide
Copyright 2014 by Diane Scott Docking
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Copyright 2014 by Diane Scott Docking
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History of Federal Reserve System (cont.)
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No central bank for 4 years.
Second Bank of the United States
(1816–1836)
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Disbanded in 1836 when President Andrew
Jackson vetoed its renewal.
Copyright 2014 by Diane Scott Docking
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History of Federal Reserve System (cont.)
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No central bank from 1836 – 1913
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“Free banking era” 1837 – 1863
National Banks: 1863 - 1913
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National Bank Act of 1863
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Allowed only selected nationally chartered banks to issue
currency
Standardized denomination, size, looks, etc.
Collateralized by T-Bonds and silver
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“Silver Certificates”
No lender of last resort
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Silver Certificate
Copyright 2014 by Diane Scott Docking
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History of Federal Reserve System (cont.)
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No central bank from 1836 – 1913
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No lender of last resort
Banking panics became regular events
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Panics of 1837, 1893, and 1907
Thousands of banks failed during this time.
Copyright 2014 by Diane Scott Docking
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Banking Panic of 1907
A swarm gathers on Wall Street
during the bank panic in October
1907.
1.
Stock market decline of over
50% led by Augustus Heinz
and his company United
Copper Company attempting to
corner the copper market.
Financed by Knickerbocker
Trust.
2.
Contagion spread and other
large banks failed.
3.
J.P. Morgan to the rescue.
Copyright 2014 by Diane Scott Docking
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Federal Reserve System:
Third U. S. Central Bank
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Third U.S. Central Bank - The Fed (1913 –
present)
Created by the Federal Reserve Act of 1913
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President Woodrow Wilson passed to allay public
concern over the soundness of the US banking system.
Copyright 2014 by Diane Scott Docking
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Federal Reserve Act of 1913
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Created the Federal Reserve System as the central bank
and guarantor of the banking system’s liquidity
The Federal Reserve is responsible for:
 Providing an “elastic currency” which means the Fed can
adjust the money supply to support a dynamic economy

FRS was lender of last resort to banks with liquidity and
capital problems
Copyright 2014 by Diane Scott Docking
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Federal Reserve Act of 1913

This act established the Federal Reserve
System.
Headed by 7 Board of Governors/Directors
 12 Federal Reserve Banks
 Nationally chartered banks required to
join; state chartered optional
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Gave FRS power to supervise and
examine banks
Copyright 2014 by Diane Scott Docking
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Federal Reserve System
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Federal Reserve System (1913–)
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Only 12 federal reserve Banks to issue Federal
Reserve Notes
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http://www.federalreserve.gov/
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Copyright 2014 by Diane Scott Docking
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Formal
Structure
of the Fed
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Organization of the Federal Reserve:
The Board of Governors
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Board of Governors
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__ individuals appointed by the U.S. president and
confirmed by the Senate
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Serve nonrenewable ____-year terms
U.S. president appoints one of the 7 as chair whose
___-year term is renewable
Offices in Washington, D.C.
Independence of Federal Reserve
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Staggered terms of Governors
Budget separate from Congress
Copyright 2014 by Diane Scott Docking
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Who is this?
Copyright 2014 by Diane Scott Docking
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Organization of the Federal Reserve:
The Board of Governors
Board of Governors has two main functions:
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Regulate commercial
banks
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Supervise and regulate
member banks and bank
holding companies
Oversight of 12 Fed
district banks
Establish consumer
finance regulations after
Congressional legislation
Establish and effect
monetary policy
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Direct control over two
tools of monetary policy
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Indirect control in a third
area
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Copyright 2014 by Diane Scott Docking
Set reserve
requirements
Approve discount rate
set by district banks
Governors are members
of the Federal Open
Market Committee
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Organization of the Federal Reserve:
The Federal Reserve District Banks
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Federal Reserve District Banks
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___ districts
District bank size related to economic wealth of
district
District banks owned by private member banks
___ Board of Directors of district banks
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Three appointed by Board of Governors
Three professional bankers
Three business persons in district
Copyright 2014 by Diane Scott Docking
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Copyright 2014 by Diane Scott Docking
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The FRB of New York
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Responsible for oversight of some of the largest financial
institutions headquartered in Manhattan and the surrounding
area.
Houses the open market desk.
 All of the Feds open market operations are directed through
this trading desk.
Only member of the Bank for International Settlements, providing
close contact with other foreign central bankers.
Chairman of New York Fed is the only permanent member of the
FOMC, serving as the vice-chairman of the committee.
Copyright 2014 by Diane Scott Docking
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Organization of the Federal Reserve:
Advisory Committees & Member Banks
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Advisory committees from private sector also are a
part of overall structure of the Fed
Member Banks
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Must meet requirements of the Federal Reserve Board of
Governors to be a member bank
Nationally chartered banks must be member banks
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State chartered banks may be member banks
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Chartered by Office of the Comptroller of the Currency
Own Federal Reserve Stock
25% of banks controlling 80% of all deposits are members
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Currently 37% of the commercial banks in U.S. are members
Copyright 2014 by Diane Scott Docking
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Organization of the Federal Reserve:
The Federal Open Market Committee
The FOMC meets about every 6 weeks (approx. 8 times/year):
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12 members
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7 Board of Governors
President of the New
York Fed
4 other district bank
presidents appointed on
a rotating basis
Other presidents
participate but do not
vote on monetary policy
matters
Monetary policy goals
of:
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Copyright 2014 by Diane Scott Docking
high employment
price stability
economic growth
Make monetary policy
decisions to achieve
goals
Forward decisions to N.Y.
Fed open market desk
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Changing the
Discount Rate
Copyright 2014 by Diane Scott Docking
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Borrowing From the Federal Reserve Bank –
Discount Loans
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A Bank With Immediate Reserve Needs Can
Borrow From the Federal Reserve.
There Are _______ Types of Loans for
Different Needs, Each With Its Own Interest
Rate.
There are no longer restrictions on the
___________ of borrowing at the Federal
Reserve.
Copyright 2014 by Diane Scott Docking
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Borrowing From the Federal Reserve Bank
1.
FRB Discount Window.html
_________ Credit (neé:Adjustment credit)
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2.
Only for a few days
Can be used for anything, but usually to provide immediate aid in
meeting reserve requirements. May be used to fund sales of Fed
Funds.
Available to generally sound financial institutions
“No questions asked” loan
Rate = Discount rate
________ Credit
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Only for a few days
Usually to provide immediate aid in meeting reserve requirements.
Cannot be used to fund an expansion of bank’s assets.
Available to banks not eligible for primary credit
Bank will have to provide more info to Fed.
Rate = Primary rate + 50 bp.
Copyright 2014 by Diane Scott Docking
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Borrowing From the Federal Reserve Bank
3.
FRB Discount Window.html
________ Credit
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4.
Designed to assist small banks with seasonal
swings in deposits and loans.
Longer maturity
Rate = market rate (floating)
________ Credit
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For longer-term liquidity problems of problem
banks, individuals, partnerships, and
corporations.
Expensive
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Copyright 2014 by Diane Scott Docking
Inside the Fed: the books
Several research documents are by the Fed, and have
been given official, colorful names:
Green book: national forecasts for the next two years
Blue book: projections of monetary aggregates
Beige book: districts’ “state of the economy”
Copyright 2014 by Diane Scott Docking
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In Summary: Functions of the Federal Reserve System
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Effect Monetary Policy
U.S. Central Bank In International Area
Fiscal Agent of U.S. Treasury
Facilitate Efficient Payments System
Regulate Banks and Bank Holding Co.
Enforce Consumer Credit Laws
Copyright 2014 by Diane Scott Docking
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Video: The Fed – Drawing Board – from the FRB of Cleveland
Click on Black Screen on next slide
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http://www.youtube.com/watch?v=Kj9-kRv0e6s&feature=player_embedded
Copyright 2014 by Diane Scott Docking
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