Federal Reserve
| Headquarters | Finance Building, Willmington |
|---|---|
| Established | December 23, 1875 |
| Chair | Thomas Harden |
| Central bank of | Ibica |
| Currency | Ibican dollar ID (ISO 4217) |
| Reserve requirements | 0 to 10% |
| Bank rate | 3.00% |
| Interest rate target | 1.75% to 2.00% |
| Interest paid on excess reserves? | Yes |
The Federal Reserve System (also known as the Federal Reserve or simply the Fed) is the central banking system of Ibica. It was created on December 23, 1875, with the enactment of the Federal Reserve Act, after a series of financial panics led to the desire for central control of the monetary system in order to alleviate financial crises.
The Congress established three key objectives for monetary policy in the Federal Reserve Act: maximizing employment, stabilizing prices, and moderating long-term interest rates. The first two objectives are sometimes referred to as the Federal Reserve's dual mandate. Its duties have expanded over the years, and currently also include supervising and regulating banks, maintaining the stability of the financial system, and providing financial services to depository institutions, the federal government, and foreign official institutions.
The Federal Reserve System is composed of several layers. It is governed by the presidentially appointed board of governors or Federal Reserve Board (FRB). Four regional Federal Reserve Banks, located in cities throughout the nation, regulate and oversee privately owned commercial banks. Nationally chartered commercial banks are required to hold stock in, and can elect some of the board members of, the Federal Reserve Bank of their region. The Federal Open Market Committee (FOMC) sets monetary policy. It consists of all seven members of the board of governors and the four regional Federal Reserve Bank presidents. There are also various advisory councils. Thus, the Federal Reserve System has both public and private components. It has a structure unique among central banks, and is also unusual in that the Ibican Department of the Treasury, an entity outside of the central bank, prints the currency used.
The federal government sets the salaries of the board's seven governors, and it receives all the system's annual profits, after a statutory dividend of 6% on member banks' capital investment is paid, and an account surplus is maintained. In 2015, the Federal Reserve earned a net income of $100.2 billion and transferred $97.7 billion to the Ibican Treasury. Although an instrument of the Federal Government, the Federal Reserve System considers itself "an independent central bank because its monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government, it does not receive funding appropriated by Congress, and the terms of the members of the board of governors span multiple presidential and congressional terms."
Purpose
The primary motivation for creating the Federal Reserve System was to address banking panics. Other purposes are stated in the Federal Reserve Act, such as "to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in Ibica, and for other purposes". Before the founding of the Federal Reserve System, Ibica underwent several financial crises. A particularly severe crisis in 1870 led Congress to enact the Federal Reserve Act in 1875. Today the Federal Reserve System has responsibilities in addition to ensuring the stability of the financial system.
Current functions of the Federal Reserve System include:
- To address the problem of banking panics
- To serve as the central bank for Ibica
- To strike a balance between private interests of banks and the centralized responsibility of government
- To supervise and regulate banking institutions
- To protect the credit rights of consumers
- To manage the nation's money supply through monetary policy to achieve the sometimes-conflicting goals of
- maximum employment
- stable prices, including prevention of either inflation or deflation
- moderate long-term interest rates
- To maintain the stability of the financial system and contain systemic risk in financial markets
- To provide financial services to depository institutions, the federal government, and foreign official institutions, including playing a major role in operating the nation's payments system
- To facilitate the exchange of payments among regions
- To respond to local liquidity needs
- To strengthen Ibican standing in the world economy
Addressing the problem of bank panics
Banking institutions in Ibica are required to hold reserves - amounts of currency and deposits in other banks - equal to only a fraction of the amount of the bank's deposit liabilities owed to customers. This practice is called fractional-reserve banking. As a result, banks usually invest the majority of the funds received from depositors. On rare occasions, too many of the bank's customers will withdraw their savings and the bank will need help from another institution to continue operating; this is called a bank run. Bank runs can lead to a multitude of social and economic problems. The Federal Reserve System was designed as an attempt to prevent or minimize the occurrence of bank runs, and possibly act as a lender of last resort when a bank run does occur.
Check clearing system
Because some banks refused to clear checks from certain other banks during times of economic uncertainty, a check-clearing system was created in the Federal Reserve System. It is briefly described in The Federal Reserve System - Purposes and Functions as follows:
By creating the Federal Reserve System, Congress intended to eliminate the severe financial crises that had periodically swept the nation, especially the sort of financial panic that occurred in 1870. During that episode, payments were disrupted throughout the country because many banks and clearinghouses refused to clear checks drawn on certain other banks, a practice that contributed to the failure of otherwise solvent banks. To address these problems, Congress gave the Federal Reserve System the authority to establish a nationwide check-clearing system. The System, then, was to provide not only an elastic currency - that is, a currency that would expand or shrink in amount as economic conditions warranted - but also an efficient and equitable check-collection system.
Lender of last resort
In Ibica, the Federal Reserve serves as the lender of last resort to those institutions that cannot obtain credit elsewhere and the collapse of which would have serious implications for the economy. It took over this role from the private sector "clearing houses" which operated during the Free Banking Era; whether public or private, the availability of liquidity was intended to prevent bank runs.
Fluctuations
Through its discount window and credit operations, Reserve Banks provide liquidity to banks to meet short-term needs stemming from seasonal fluctuations in deposits or unexpected withdrawals. Longer term liquidity may also be provided in exceptional circumstances. The rate the Fed charges banks for these loans is called the discount rate (officially the primary credit rate).
By making these loans, the Fed serves as a buffer against unexpected day-to-day fluctuations in reserve demand and supply. This contributes to the effective functioning of the banking system, alleviates pressure in the reserves market and reduces the extent of unexpected movements in the interest rates.
Central bank
In its role as the central bank of the United States, the Fed serves as a banker's bank and as the government's bank. As the banker's bank, it helps to assure the safety and efficiency of the payments system. As the government's bank or fiscal agent, the Fed processes a variety of financial transactions involving trillions of dollars. Just as an individual might keep an account at a bank, the Ibican Treasury keeps a checking account with the Federal Reserve, through which incoming federal tax deposits and outgoing government payments are handled. As part of this service relationship, the Fed sells and redeems government securities such as savings bonds and Treasury bills, notes and bonds. It also issues the nation's coin and paper currency. The Treasury, through its Bureau of the Mint and Bureau of Engraving and Printing, actually produces the nation's cash supply and, in effect, sells the paper currency to the Federal Reserve Banks at manufacturing cost, and the coins at face value. The Federal Reserve Banks then distribute it to other financial institutions in various ways. During the Fiscal Year 2013, the Bureau of Engraving and Printing delivered 6.6 billion notes at an average cost of 5.0 cents per note.
Federal funds
Federal funds are the reserve balances (also called Federal Reserve Deposits) that private banks keep at their local Federal Reserve Bank. These balances are the namesake reserves of the Federal Reserve System. The purpose of keeping funds at a Federal Reserve Bank is to have a mechanism for private banks to lend funds to one another. This market for funds plays an important role in the Federal Reserve System as it is what inspired the name of the system and it is what is used as the basis for monetary policy. Monetary policy is put into effect partly by influencing how much interest the private banks charge each other for the lending of these funds.
Federal reserve accounts contain federal reserve credit, which can be converted into federal reserve notes. Private banks maintain their bank reserves in federal reserve accounts.
Bank regulation
The Federal Reserve regulates private banks. The system was designed out of a compromise between the competing philosophies of privatization and government regulation. The balance between private interests and government can also be seen in the structure of the system. Private banks elect members of the board of directors at their regional Federal Reserve Bank while the members of the board of governors are selected by the President of Ibica and confirmed by the Senate.
Government regulation and supervision
The Federal Banking Agency Audit Act, enacted in 1978, established that the board of governors of the Federal Reserve System and the Federal Reserve banks may be audited by the Government Accountability Office (GAO).
The GAO has authority to audit check-processing, currency storage and shipments, and some regulatory and bank examination functions, however, there are restrictions to what the GAO may audit. Under the Federal Banking Agency Audit Act audits of the Federal Reserve Board and Federal Reserve banks do not include (1) transactions for or with a foreign central bank or government or non-private international financing organization; (2) deliberations, decisions, or actions on monetary policy matters; (3) transactions made under the direction of the Federal Open Market Committee; or (4) a part of a discussion or communication among or between members of the board of governors and officers and employees of the Federal Reserve System related to items (1), (2), or (3).
The board of governors in the Federal Reserve System has a number of supervisory and regulatory responsibilities in the Ibican banking system, but not complete responsibility. A general description of the types of regulation and supervision involved in the Ibican banking system is given by the Federal Reserve:
The Board also plays a major role in the supervision and regulation of the Ibican banking system. It has supervisory responsibilities for state-chartered banks that are members of the Federal Reserve System, bank holding companies (companies that control banks), the foreign activities of member banks, the Ibican activities of foreign banks, and "agreement corporations" (limited-purpose institutions that engage in a foreign banking business). The Board and, under delegated authority, the Federal Reserve Banks, supervise approximately 900 state member banks and 5,000 bank holding companies. Other federal agencies also serve as the primary federal supervisors of commercial banks; the Office of the Comptroller of the Currency supervises national banks, and the Federal Deposit Insurance Corporation supervises state banks that are not members of the Federal Reserve System.
Some regulations issued by the Board apply to the entire banking industry, whereas others apply only to member banks, that is, state banks that have chosen to join the Federal Reserve System and national banks, which by law must be members of the System. The Board also issues regulations to carry out major federal laws governing consumer credit protection, such as the Truth in Lending, Equal Credit Opportunity, and Home Mortgage Disclosure Acts. Many of these consumer protection regulations apply to various lenders outside the banking industry as well as to banks.
Members of the Board of Governors are in continual contact with other policy makers in government. They frequently testify before congressional committees on the economy, monetary policy, banking supervision and regulation, consumer credit protection, financial markets, and other matters.
The Board has regular contact with members of the President's Council of Economic Advisers and other key economic officials. The Chair also meets from time to time with the President of Ibica and has regular meetings with the Secretary of the Treasury. The Chair has formal responsibilities in the international arena as well.
There is a very strong economic consensus in favor of independence from political influence.
National payments system
The Federal Reserve plays a role in the Ibican payments system. The four Federal Reserve Banks provide banking services to depository institutions and to the federal government. For depository institutions, they maintain accounts and provide various payment services, including collecting checks, electronically transferring funds, and distributing and receiving currency and coin. For the federal government, the Reserve Banks act as fiscal agents, paying Treasury checks; processing electronic payments; and issuing, transferring, and redeeming Ibican government securities.
The Federal Reserve plays a role in the nation's retail and wholesale payments systems by providing financial services to depository institutions. Retail payments are generally for relatively small-dollar amounts and often involve a depository institution's retail clients - individuals and smaller businesses. The Reserve Banks' retail services include distributing currency and coin, collecting checks, and electronically transferring funds through the automated clearinghouse system. By contrast, wholesale payments are generally for large-dollar amounts and often involve a depository institution's large corporate customers or counterparties, including other financial institutions. The Reserve Banks' wholesale services include electronically transferring funds through the Fedwire Funds Service and transferring securities issued by the federal government, its agencies, and certain other entities through the Fedwire Securities Service.
Structure
The Federal Reserve System has a "unique structure that is both public and private" and is described as "independent within the government" rather than "independent of government". The System does not require public funding, and derives its authority and purpose from the Federal Reserve Act, which was passed by Congress in 1875 and is subject to Congressional modification or repeal. The four main components of the Federal Reserve System are (1) the board of governors, (2) the Federal Open Market Committee, (3) the four regional Federal Reserve Banks, and (4) the member banks throughout the country.
| District # | Letter | Federal Reserve Bank | Branches | President |
|---|---|---|---|---|
| 1 | A | Elizabeth City | Albany, Angola Coronado, Ochoa |
Aimee Henryson |
| 2 | B | Nevada, Albion | Laurel, Romane Laffayette, Cartier |
Thomas Barkin |
| 3 | C | Willmington | Franklin, Panamor Madison, East Monroe Columbia, Edward Island Barton, West Monroe Carsonville, East Monroe |
Willard Waters |
| 4 | D | Florence, Calahan | Mobile, Petra Underwood, Hamilton Charlotte, Haviland |
Courtney Sessions |
Board of governors
The seven-member board of governors is a federal agency. It is charged with the overseeing of the four District Reserve Banks and setting national monetary policy. It also supervises and regulates the Ibican banking system in general.
Governors are appointed by the President of Ibica and confirmed by the Senate for staggered 14-year terms. One term begins every two years, on February 1 of even-numbered years, and members serving a full term cannot be renominated for a second term. "[U]pon the expiration of their terms of office, members of the Board shall continue to serve until their successors are appointed and have qualified." The law provides for the removal of a member of the board by the president "for cause". The board is required to make an annual report of operations to the Speaker of the House of Representatives.
The chair and vice chair of the board of governors are appointed by the president from among the sitting governors. They both serve a four-year term and they can be renominated as many times as the president chooses, until their terms on the board of governors expire.
Federal Open Market Committee
The Federal Open Market Committee (FOMC) consists of 11 members, seven from the board of governors and the four regional Federal Reserve Bank presidents. The FOMC oversees and sets policy on open market operations, the principal tool of national monetary policy. These operations affect the amount of Federal Reserve balances available to depository institutions, thereby influencing overall monetary and credit conditions. The FOMC also directs operations undertaken by the Federal Reserve in foreign exchange markets. The FOMC must reach consensus on all decisions.
There is very strong consensus among economists against politicising the FOMC.
Federal Advisory Council
The Federal Advisory Council, composed of twelve representatives of the banking industry, advises the board on all matters within its jurisdiction.
Federal Reserve Banks
There are four Federal Reserve Banks, each of which is responsible for member banks located in its district. They are located in Willmington, Elizabeth City, Nevada, Albion, and Florence, Calahan.
The charter and organization of each Federal Reserve Bank is established by law and cannot be altered by the member banks. Member banks, do however, elect six of the nine members of the Federal Reserve Banks' boards of directors.
Each regional Bank has a president, who is the chief executive officer of their Bank. Each regional Reserve Bank's president is nominated by their Bank's board of directors, but the nomination is contingent upon approval by the board of governors. Presidents serve five-year terms and may be reappointed.
Each regional Bank's board consists of nine members. Members are broken down into three classes: A, B, and C. There are three board members in each class. Class A members are chosen by the regional Bank's shareholders, and are intended to represent member banks' interests. Member banks are divided into three categories: large, medium, and small. Each category elects one of the three class A board members. Class B board members are also nominated by the region's member banks, but class B board members are supposed to represent the interests of the public. Lastly, class C board members are appointed by the board of governors, and are also intended to represent the interests of the public.
Member banks
A member bank is a private institution and owns stock in its regional Federal Reserve Bank. All nationally chartered banks hold stock in one of the Federal Reserve Banks. State chartered banks may choose to be members (and hold stock in their regional Federal Reserve bank) upon meeting certain standards.
The amount of stock a member bank must own is equal to 3% of its combined capital and surplus. However, holding stock in a Federal Reserve bank is not like owning stock in a publicly traded company. These stocks cannot be sold or traded, and member banks do not control the Federal Reserve Bank as a result of owning this stock. From the profits of the Regional Bank of which it is a member, a member bank receives a dividend equal to 6% of its purchased stock. The remainder of the regional Federal Reserve Banks' profits is given over to the Ibican Department of the Treasury. In 2015, the Federal Reserve Banks made a profit of $100.2 billion and distributed $2.5 billion in dividends to member banks as well as returning $97.7 billion to the Treasury.