Presentation on theme: "Competency 4.02 Understand the Banking System"— Presentation transcript:
1 Competency 4.02 Understand the Banking System 4.0 Understand the Role of Finance in BusinessCompetency 4.02 Understand the Banking SystemObjective 4.02-AAnalyze the roles/responsibilities of the Federal Reserve.go to website, learn more about Fed, visit Richmond, visit the bank, tour virtual money museum.
2 The Federal Reserve System What is the Federal Reserve System?Why does it exist?Who participates?How is it organized?
3 The Federal Reserve (The Fed) A Centralized Banking System Federal Reserve Act signed into law by President Woodrow WilsonOrganized by the Federal Government in 1913Why have “ The Fed” ? Purpose:To establish and maintain confidence in the US monetary systemTo ensure and safe, healthy and stable economyTo supervise and regulate member banks and help serve the public efficiently.* Prior to the Federal Reserve Act anyone could issue currency or coin money
4 Who Participates in Federal Reserve? All National Banks are required to be part of the FedOptional for state banksDivisions are called DISTRICTSThere are 12 DISTRICTS in the United StatesEvery state comes under a districtEach Federal Reserve Bank is a corporation, owned by its member banksNC is in District 5, the Richmond District. Charlotte has a regional office.
5 The Federal Reserve What are the two arms of “The Fed”? Board of GovernorsRepresents the government (public) sectorDistrict Federal Reserve BanksRepresents the business (private) sector
6 Board of GovernorsUsually meet about twice a week, ordinarily on Mondays and WednesdaysPublic is invited to look into the meetings of the Board of GovernorsUsually discuss monetary policy such as lowering and raising interest ratesThe Board Room at the Federal Reserve in Washington, DC
7 Members of the Board of Governors Ben S. Bernanke, Current ChairmanAlan Greenspan, Retired Chairman Chairman is appointed by President and confirmed by SenateSimilar to procedure for Supreme Court Justices
8 Purpose of Federal Reserve Established to supervise and regulate banksKnown as the “Bank’s bank”The central bank of the United StatesAssists banks with serving the public more efficientlyAll national banks are required to join the Federal Reserve SystemState banks have the option of joining the system
9 The Federal Reserve System Services Supervision of banksAgent for the federal governmentRegulates monetary policyLends money to member banksActing as a clearinghouseParticipation in open market activitiesSets loan limits & standardsSupplies currency
10 1. Fed Supervision: Set Reserve Requirements Member banks are required to keep a certain percentage (10% for many years) of all deposits in the bank’s vault or on deposit with the district federal reserve bankReserves: funds set aside for emergenciesExample: a rush of withdrawals by customersPurpose: to reduce risk of bank panics and protect depositor’s money
11 1. Fed Supervision: Audits Member Banks Inspects banks by auditing financial recordsAudit -an inspection of records to verify the:1. accuracy of books (records) of the bank2. bank is complying with banking lawsSimilar to Individuals/corporations who are audited by the IRS to review the accuracy of a tax return.
12 1. FED Supervision: Approves Bank Mergers Q: Why do banks merge?To be more competitive-to offer customers more locations (local, regional, national, international)-to offer a variety of services more efficiently-to compete with a growing array of other financial service companies such as:*money market and other mutual funds*mortgage companies*credit unions and*credit arms of industrial firms (General Electric and Ford Motor)Here are some recent bank mergers approved by “The Fed” inBank of New York bought Mellon Financial Corporation for $18.3 BillionJPMorgan Chase bought Bear Stearns for $1.1 BillionBank of America bought Merrill Lynch Bank of America for $50 BillionWells Fargo bought Wachovia for $15.1 Billion
13 2. Fed Acts as Agent for Federal Government The Fed holds a checking account for the US TreasuryDisburses social security benefits and other transfer payments using the direct deposit systemAccepts some types of federal tax moneyExample: Federal tax depositoriesPayroll taxes - federal income tax, FUTA, and social security taxes are deposited using federal deposit coupon into a national bank
14 3. FED Regulates Monetary Policy What is Monetary Policy? When the Federal Reserve influences money and credit conditions in the economy to achieve economic goalsHow? The Fed determines amount of money in circulation and available for loans, then either increases or decreases to stabilize/stimulate the economyTight money- policy when less money is available at higher interest rates, slows (stabilizes) economyLoose money- policy when more money is available at lower interest rates, increases (stimulates) economy
15 4. FED Lends Money to Member Banks Monitors the discount rate of interest - rate used by the Fed to loan money to member banksCompare banks to intermediaries (go-betweens) trading in money at “wholesale” pricesThe Fed changing interest rates affect borrowers (member banks) who pass rates to consumersRaising rate - discourages borrowingReducing rate - encourages borrowingNote: the Federal Reserve does not loan money to individuals or businesses (only member banks) HOWEVER, rates the Fed charges member banks “trickle down” and affect the interest rates for consumers
16 5. FED Acts as Clearing House Clears/Processes/Settles checks for member banksFederal Reserve uses the Automated Clearing House (ACH) to electronically complete fund transfers (check settlements) between banksInterdistrict Settlement Fund in Washington, DC used for between district transfersChecks/deposit slips have MICR codingMagnetic Ink Character RecognitionScanners read MICR on checks to electronically process data accurately and rapidly through the ACH and Interdistrict Settlement Fund
17 6. FED Participates in Open Market Participates in open market operations by buying and selling government securitiesQ: What are government securities?A: Treasury bills and bonds – loans to government in various denominations (amounts) and for various time periodsAdvantages and Disadvantages+ offer a fixed rate of interest over a fixed period of time+ attractive because not subject to income taxes- cannot be easily transferred and are non-negotiable
18 Open Market Operations Government securities are sold at a discount (from face value), but are redeemed (cashed in) for face value on the maturity (due) dateExamples:Purchase treasury note for $7500 (discount price), redeem at maturity date for $10,000 (face value)Purchase Series EE savings bond for $25, redeem in 7 years at maturity for $50
19 Government Securities Savings bonds - Example Series EE-Denomination minimum $25Payable after 6 monthsEarns interest up to 30 yearsShort-term obligation of the U.S. Treasury Treasury bill – maturity in one year or lessIssued to mature in 13 weeks, 26 weeks, 52 weeksLong-term obligation of the U.S. TreasuryTreasury note – maturity at 1 to 10 years, minimum $1000Treasury bond - maturity at 10 + years
20 Open Market Operations Bank discount rates encourages borrowing by member banks, and therefore encourages borrowing by consumersPurpose of open market operationsRegulate money supplyMost frequent method of controlling the economyWho controls open market operations?Federal Open Market Committee (FOMC)-A committee within the Federal Reserve
21 7. The FED Sets Lending Standards Sets standards for consumer legislation dealing with lending and creditSets limits for loans and investments by member banksNews: Federal Reserve revised bank lending rules since banking crisisEx: Lower % of total loans for land/acreage
22 8. The Fed Supplies Currency Money defined:a medium of exchange for valueUS money = currency and coinsFederal Reserve supplies paper currencyLegal Tender for all debts, public and privatePaper currency supplied is “Federal Reserve Notes”Printing currency (paper money, bills)Bureau of Printing and EngravingCounterfeiting - federal crimeCoinageMinting supplied and regulated by the Department of Treasury, US Mint