Topic 38 — The Federal Reserve System

Fed — the Federal Reserve System, created  December 23, 1913.  (12 districts)
Comptroller of the Currency — supervises national banks, or banks with national
charters,
		 even though  these banks belong to the Fed.
Member banks — banks that belong to the Federal Reserve System
There is private ownership in the Fed.
	1.)  each bank receives stock in the Federal Reserve System.
	2.)  the banks in each district determine board of directors and presidents
		 of the 12 districts.
	Board of Governors (BOG) — chosen for 14 year terms in two year cycles
		 by the president.
		- sets general policies
		- regulates operations of state-chartered commercial banks, 
		-  conducts aspects of monetary policy.
Federal Open Market Committee (FOMC) — makes decisions on money supply
	 and interest rates.
	- includes 7 members of the Board of Governors
	-  5 district Reserve bank presidents who serve 1-year rotating terms.
Federal Advisory Council (FAC) — 12 reps from each district who provide feedback
	about local economy
Responsibilities of the Federal Reserve System (8)
	1.  State Member Bank Supervision — all depository places must keep 
		reserves against deposits
	2.  Regulate Holding Companies — a form of corporation that owns one
		or more banks.
		  (Used to get around Great Depression bank laws.
	3.  International Operations — regulates and supervises foreign banks
	4.  Mergers — 
		- if the surviving bank is state chartered the Fed approves;
		- if 2 national banks it is the Comptroller of the Currency;
		two nonmembers, FDIC.)
	5.  Check Clearing — this makes use of the reserves in the banking system.
	6.  Consumer Legislation
		-truth-in-lending laws — requires sellers make complete disclosure 
		to credit buyers
		-Regulation Z — truth-in-lending disclosures are extended to millions
		of individuals via corporations, retail stores, etc.
	7.  Issue and Regulate Currency and Coins
		- Currency — the paper component of the money supply
		- Coins — metallic forms of money ( pennies, nickels, etc.)
	8.  Margin Requirements — minimum deposits left with a stockbroker to be 
		used as down payments to buy other securities.

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		Chapter 12

		Topic 39 — Monetary Policy

Monetary Policy — controlling the expansion and/or contraction of the money supply 
	Influences the cost and availability of credit.
Fractional Reserve System — requires banks and other depository institutions to keep 
	a fraction of their deposits in the form of reserves.
Reserve Requirement — formula used to compute the reserves an institution must have.
Legal Reserves — the coins, currency, and deposits used to fulfill reserve requirement.
Member Bank Reserves (MBRs) — the portion of the legal reserves the member 
	banks keep at the Fed district bank
How Banks Operate
	Liabilities — a banks debts and obligations to others
	Assets — the properties, possessions, and claims on others.
	Balance sheet — a condensed statement showing all assets and liabilities 
		at a given time.
	Net Worth — the excess of assets over liabilities, which is a measure of the 
		value of a business. (Assets minus Liabilities = Net Worth)
1.  Organize a bank
2.  Accept Deposits
3.  Making Loans
	Excess reserves — the cash and currency not needed to fulfill the 
		reserve requirement.
Banks attract additional funds in many ways
	-Certificate of Deposit — receipt showing  investor made an interest-bearing loan
	-Time Deposits — Savings & interest-bearing deposits not withdrawn by check.
	- Demand Deposits — Checking accounts (NOW accounts can be paid interest).
Money Policy
	Easy  —  Fed allows the money supply to grow and interest rates to fall,
		stimulates economy.
	Tight  — Fed restricts the growth of money supply,  interest rates go up,
		 retards economic growth.
Tools of Monetary Policy (three major, two minor)
	1.  Reserve Requirement — Fed controls the money supply.
	2.  Open Market Operations — OMC buying and selling of government securities.
	3.  Discount Rate — interest rate the Fed charges on loans to financial institutions.
	4.  Moral Suasion — persuasion such as announcements, press releases, etc.
	5.  Selective Credit Controls — rules on loans for specific commodities/purposes.

Discount Window — teller’s window at the Fed where banks borrow other
	 member bank excess reserves.
Collateral — property or other security used to guarantee payment of a loan.

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		Chapter 12

		Topic 40 — Monetary Policy, Banking, and the Economy

Short run affects — interest rate and availability of credit.
Long run affects — inflation
Prime Rate — the best or lowest interest rate commercial bankers charge their customers
Quantity Theory of Money — changes in the supply of money affect the general level 
		of prices.
Monetize the debt — create enough money to offset the deficit 
Raise the interest rates to tame inflation.
Two factors when using monetary policy
	-timing
	-burden

M1 — represents the transactional components of the money supply, or the 
	components of the supply that most closely match money’s role as a
	medium of exchange. ( includes traveler’s checks, coins, currency, etc.)

M2 — is a measure of money that includes those components most closely 
	conforming to money’s role as a store of value.

Problems of Bank Failures (4)
	-Owners lose whatever investment they might have in a bank.
	-Publicity surrounding a bank failure strains the credibility of the banking
		system as a whole.
	-Depositors of a failed bank may lose money.
	-FDIC recovers losses by charging banks higher interest rates for 
		deposit insurance.
Problem Bank List — a list by the FDIC of banks in jeopardy.
FDIC takes over a bank, shareholders never know of it.
Creditor — a person or institution to whom money is owed.
Reasons for Bank Failure
	-poor management
	-too many loans are concentrated in a weak industry
	-natural disasters
Agricultural Banks — banks with more than 25 % of loans in agriculture
Energy Banks — banks with more than 25 % of  loans in gas, oil or other energy areas.