Unit17. The Federal Reserve System

I. Functions of The Central Bank

The basic function of central bank is to control and regulate the money supply, maintain order in financial markets, promote favorable economic conditions and/or act as a lender of last resort for other financial

institutions.

For instance,

Central bank of China - People’s Bank of China

Central bank of Europe - European Central Bank

Central bank of Britain - Bank of England

Central bank of Japan - Bank of Japan

Central bank of US - Federal Reserve

II. Features & Structure of the Federal Reserve System(the Fed)

A. Features of the Fed The Fed sprawls across the US with a head office in Washington and 12 district banks. Central banks in other countries are part of the government, while the Fed is an independent agency, which solely responsible/report to the congress, other than the government. (That is to avoid the influence to monetary policy by governments for short-term

economic problems.)

Alan Greenspan• Born March 6, 1926, New York,

New York, U.S.

• American economist and chairman of the Board of Governors of the Federal Reserve System whose chairmanship, beginning in 1987, continued through the administrations of four American

presidents.

Ben Bernanke

• Benjamin Shalom Bernanke was born on Dec. 13, 1953, in Augusta, Ga., and grew up in

Dillon, S.C.

• On Oct. 24, 2005, the day that Ben Bernanke was named to replace Alan Greenspan as chairman of the U.S. Federal

Reserve Board (Fed)

B. Structure of the Fed Systema. Board of Governors

( 联邦储备理事会）b. 12 District Federal Reserve Banks

(12 个地区联邦储备银行）c. Federal Advisory Council

( 联邦咨询委员会）d. Federal Open Market Committee

( 联邦公开市场委员会）e. Member banks ( 成员银行）

a. Board of Governors of the Fed

The board consists of 7 persons appointed by the president of the US and confirmed by the

Senate for maximum 14 years.

The Fed supports itself from revenue generated by selling its services (such as clearing checks), making loans through discount window, and earning interests on government securities the Fed holds. Hence, the Fed is economically independent

and free of influence of the government.

Functions of the Board a) Set up reserve requirements on deposits held by depository

institutions;

b) Review & determine the discount rate charged on loans to

depository institutions;

c) Set margin requirements ( 保证金要求 )on purchases of securities and provides leadership in the conduct of open market

operations through the Federal Open Market Committee;

d) Supervises the activities of the 12 district reserve banks and has

supervisory and regulatory control over member banks of the system;

e) Regulates all bank holding companies, foreign banks located in

US, and overseas activity of US banks.

Note: Function a, b and c are monetary functions, while function d and e are supervisory functions.

b. Federal Open Market Committee

FOMC consists of 7 members of the board and 5 presidents or first vice presidents from the

12 district reserve banks.

FOMC’s sole concern is with the conduct of federal reserve open market operations in securities, that is, buy securities (such as T/B) to increase monetary supply or sell securities to decrease monetary supply, to comply with Fed’s

targets for money supply and interest rates.

c. Federal Advisory Council

The council confers with the Board on general business conditions, it also makes recommendations on banking and credit

practice.

The role of FAC is to serve as another link between the Board and the banking

community of each federal reserve district.

d. Federal Reserve Banks

When the Federal Reserve System was created in 1913, the nation was divided into 12 districts, with one federal reserve bank in each district responsible for supervising and providing services to the member banks located there. Reserve banks are established in the cities of Atlanta, Boston, Chicago, Cleveland, Dallas, Kansas City, Minneapolis, New York, Philadelphia, Richmond, San

Francisco, and St Louis.

Boston

nyNew York

philadelphiaPhiladelphia

Cleveland

Richmond

Atlanta

Chicago

St. Luis

Minneapolis

Kansas

Dallas

San Francisco

Functions of Federal Reserve Banks

a) The reserve banks serve as the federal government’s fiscal agent. This involves keeping the financial accounts of US Treasury and delivering and redeeming US government securities. The reserve banks also accept deposits for federal income and

unemployment taxes.

b) The reserve banks play a significant role in the conduct of monetary and credit policy. Each reserve banks carries out the study on regional economic and financial developments and conveys this information to the Board and FOMC. The reserve banks also administer the discount window where loans are made to

financial institutions in their district.

e. Member Banks of the Federal Reserve System

Member banks of the Fed consist of national banks, which are required to join the system, and state-chartered banks that agree to conform to the Fed’s rules. Today, there are 3,200 national banks and under 1,000 state-chartered banks registered as members of the Fed,

compared to approximately 6,500 non-member banks.

Member banks must subscribe to the stock of the Reserve bank in their district in an amount equal to 6 percent of their paid-in capital （实缴资本） . However, only half of this amount must actually be paid with the

rest payable on call （随时要求） .

Member banks are bound by Fed’s rules regarding capital, deposits, loans, branch operations, and board of

directors.

Benefits of being a member of the Fed System:a) They are owners of the Fed because they hold the stock of these institutions and elect 6 of their 9 directors of each district reserve bank. A 6% annual dividend is paid to member banks on their holdings of Federal Reserve bank

stock.

b) Members may borrow reserves through the discount window of the reserve bank in their district and use the Fed’s Check-clearing system to process checks from

distant cities.

c) An intangible benefits of membership is the privilege from belonging to the Fed. It attracts large business

deposits and correspondent accounts smaller banks.