Title: United States Banking System
1United States Banking System
2What is A Banking System?
- A network of commercial, savings, and specialized
banks that provide financial services, including
accepting deposits and providing loans and
credit, money transmission, and investment
facilities.
3Origins of the Federal Reserve System
- The United States Banking System is also known as
the Federal Reserve System. - Before 1863, banks issued notes that functioned
like our present day currency, except they were
the duty of individual banks. - The money that was in circulation fluctuated with
the business cycle, possibly exaggerating them.
4Origins of the Federal Reserve System (Continued)
- Banks were subject to liquidity problems and the
economy suffered several crashes which led to the
crash of 1907. - It was then that the Federal Reserve Act was
created in 1913.
5The Feds Initial Purposes
- Serve as a leader of last resort
- Provide an elastic currency (money supply
control). - Provide for a sounder banking system
- Improving how transactions were processed (check
clearing and promoting payments system
technology).
6The Purpose of the Federal Reserve System In
Present Day
- Conducting the Nations monetary policy by
influencing monetary and conditions in the
economy, in pursuit of employment, stable prices,
and moderate long-term interest rates. - Supervising and regulating banking institutions
to ensure the safety of the banking system and to
protect credit rights of consumers. - Providing financial services to depository
institutions, the U.S government and other
foreign institutions. - They also make loans to commercial banks, and are
authorized to issue Federal Reserve Notes.
7Non-Monetary Functions of the Federal Reserve
System
- Regulation Q They establish the maximum rate
that depository institutions could pay on deposit
accounts. - Securities Credit Regulation Establishes
borrowing limit for buyers on securities margins. - Supervision Examination of State Member Banks by
Feds.
8Non-Monetary Powers of the Federal Reserve System
(Cont.)
- Regulation of Bank and Financial holding
companies. - Regulation of payment system.
- Control of International Banking actions.
- Consumer Credit Regulation
- Being a Fiscal Agent for the U.S Treasury
9Cracking the Federal Reserve System
- Seven Members make up the Board of Governors.
- 12 Regional Federal Reserve Banks.
- Thousands of Member Commercial Banks
- Federal Open Market Committee( FOTC)
- The FOTC consists of the Board of Governors and
the 5 Presidents from the district banks.
10Cracking the Federal Reserve (Cont)
11The Feds Balance SheetEx. From 2000
12The Federal Reserve Systems Balance Sheet
- The Assets of the Federal Reserve System include
- U.S Government and Agency Securities (Primary).
- Net loan of reserves of extended.
- Treasury coin.
- Loans to member banks.
- Gold Certificates and SDRs.
13Three Tools of the Federal Reserve Monetary Policy
1. Establishing reserve requirements, the minimum
proportion (percentage) of bank deposits they
must keep on deposit at the Fed. Increasing
reserve requirements () increases the percentage
of bank deposits kept in noninterest bearing
deposits at the Fed and limits bank lending.
Decreasing reserve requirements () reduces the
percentage of bank deposits kept in the Fed and
provides the banking system with excess reserves.
14Three Tools of Federal Reserve Monetary Policy
(cont.)
- Bank deposits (reserves) in the Fed are needed
to clear checks and to satisfy reserve
requirements. - Actual reserves (AR) are balances needed to
meet check clearing and legal reserve
requirements including - -vault cash.
- -noninterest bearing bank deposits in Federal
Reserve banks.
15Three Tools of Federal Reserve Monetary Policy
(cont.)
- Excess Reserves equals actual minus the required
reserves. - Excess Reserves may loaned to customers or sold
to other banks (federal funds market) by an
individual bank. - If the level of the banking system's Federal
Reserve borrowed reserves (BR) (Fed loan credited
to reserve accounts) exceeds the level of excess
reserves in a period, the banking system is in a
net borrowed reserve position, is less likely to
promote lending activities, and interest rates
are most likely to be increasing. -
16Three Tools of Federal Reserve Monetary Policy
(continued)
- If the level of level of excess reserves exceeds
Fed borrowing, the banking system is in a
net-free reserve position, credit is easier and
interest rates are generally lower. - Many analysts prefer to examine banks net-free
reserves (Excess Reserves - Borrowed Reserves).
17Three Tools of Federal Reserve Monetary Policy
(continued)
- 2. Open market operations affect the level of
member bank reserves and the monetary base. - Buying government securities from the private
sector, the Fed eventually credits member bank
deposits, thus increasing the level of bank
reserves and the banks' ability to make loans and
expand the money supply. - Selling securities (could be any asset) to
private security dealers or banks, the Fed is
paid with a bank check which reduces the level of
member bank actual reserves.
18Three Tools of Federal Reserve Monetary Policy
(continued)
- The Federal Reserve usually expands or contracts
its liabilities by engaging in Open Market
Operations. - When they buy securities, they write a check on
themselves. - The Federal Reserve increases the monetary base
via the banks reserve accounts whenever it
acquires more assets
19Three Tools of Federal Reserve Monetary Policy
(concluded)
- Discount Rate Policy -- The rate of interest
depository institutions pay for borrowing from
the Fed. - Raising the discount rate increases the cost of
borrowing for needed reserve balances. - Lowering the discount rate lowers the cost of
bank liquidity and encourages lending and money
supply expansion - Rarely used as a tool of monetary policy now.
20Monetary Base
- Changes in the assets and liabilities of the
Federal Reserve System largely determine the
nations Monetary Base - The Monetary Base equals currency in circulation
plus financial institution deposits at the
Federal Reserve. - The Federal Reserve increases the monetary base
via the banks reserve account whenever it
acquires more assets. It decreases the monetary
base when it sells assets.
21Impacts of FederalReserve Policy
- Expansionary monetary policy
- Open market operations -- purchase securities --
increase bank excess reserves and the monetary
base. - Reserve requirements -- reduce reserve
requirements -- increase excess reserves and
increase the deposit expansion multiplier. - Discount rate -- reduce the rate -- reduce the
cost of borrowing reserves. - Expands the money supply reduces interest rates.
22Impacts of FederalReserve Policy (cont.)
- Restrictive monetary policy
- Open market operations -- sell securities, reduce
bank reserves and the monetary base. - Reserve requirements -- increase reserve
requirements, reduces excess reserves and the
deposit expansion multiplier. - Discount rate -- increase the discount rate and
the cost of borrowing reserve deficiencies. - Reduce the money supply or its growth rate
increase interest rates.
23Other Tools of Federal Reserve Monetary Policy
- Moral Suasion - Chairman of the Federal Reserve
System makes a speech or testifies before
Congress - Regulation of Banks
- International Activities arising from acting as
the Agent of the United States Government in
International Finance
24The Federal Reserve System and Interest Rates
- The Federal Reserve has ultimate power in
influencing interest rates. - During a period of time when interest rates are
low, capital is easy to acquire and this spurs
development because the more cash a consumer has,
the more items they buy. - In contrast, if interest rates are too high, the
result can be a recession and in extreme cases
even deflation.
25The Federal Reserve System and Interest Rates
(Cont.)
- There are two ways that the Federal Reserve can
influence the interest rates. - 1- The Federal Reserve can either increase or
decrease the discount rate. - 2- By indirectly influencing direction of the
Federal Funds Rate.