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THE STRUCTURE OF THE FEDERAL RESERVE
Board of Governors
Federal Reserve
Bank
Member Banks
Federal Open Market
Committee (FOMO)
Advisory Councils
The Federal reserve system
Created in 1913Board of Governors
Appointed by the President for one 14-yr term
Must be approved by the Senate One members term expires every 2
years Chairman Ben Bernanke
The Federal reserve system
Do all banks have to belong to the Federal Reserve?
NO To join, banks must purchase STOCK in
its Federal Reserve district bank This stock cannot be bought or sold in
the open market.
How does the Federal reserve system operate?
It’s main function is to control the money supply through monetary policy
The power of the Fed has grown to the point where its decisions have enormous impact on the economy.
The Reserve Requirement: The Fed’s most powerful tool A fraction of the bank’s deposits that
must be kept in reserve by the bank to control the amount the bank can lend
Usually vary between 3% & 14% of total deposits.
CONTROLLING THE MONEY SUPPLY:Increase supply = LOWERS RRDecrease supply = RAISES RR
The Discount Rate: The Fed acts as a lender to banks Interest the Fed charges when it
lends money to banks When the prime rate or discount rate
changes, all INTEREST rates will change. CONTROLLING THE MONEY SUPPLY:
Increase supply = LOWERS DRDecrease supply = RAISES DR
The Federal Open Market Operations: The Fed’s most important & most frequently used tool
to adjust the money supply The Fed is the nation’s owner of
SECURITIES (bonds, Treasury bills, Treasury notes)
CONTROLLING THE MONEY SUPPLY:Increase supply = BUYS securitiesDecrease supply = SELLS securities
The Federal reserve constantly monitors
the money supply It will increase or decrease the money
supply by increasing or decreasing interest rates.
The ECONOMY reacts to decisions by the FEDERAL RESERVE
Modern banking
Modern banking
Banks also allow customers to borrow money through the practice of FRACTIONAL RESERVE BANKING.
The percent of deposits that banks must keep in reserve is set by the Fed.
Common loans banks make
Mortgage Real estate Lender & borrower Monthly Lender
Credit cards
Issued by banks to users Pays; lends Repaying
Banking deregulation
Bank Mergers Larger banks acquired smaller ones Smaller ones joined forces to enter
different geographic markets
BENEFITS
Increased competition which keeps interest rates low
Increase in the number of bank branches
CONS
Fewer banks to choose from Big banks show less interest in smaller customers
Banking Services
Financial Services Act of 1999 Allowed banks to sell stocks, bonds, and
insurance
Technology & Banking
ATM’s – allow customers to bank without seeing a bank officer
Debit Cards – Can be used to withdraw cash to make a purchase
Stored – value cards – Represent money that the holder has a deposit with the issuer (gift cards)