The Federal Reserve System: History and Structure Lesson 31 Sections 26,27

The Federal Reserve System The Federal Reserve (“The Fed”) is a Central Bank Bank of England, Bank of Japan, European Central Bank Created in 1913 as a response to repeated banking crises, including the panic of 1907. Trusts (less regulated banks that speculated with depositors money) Commercial Banks Investment Banks

Structure of the Fed The Federal Reserve (known as the Fed) is composed of 12 district reserve banks (by geographical area), and some 4000 private banks and 25,000 other depository institutions under some government control. The control comes from a board of governors appointed by the president with advise and consent of the senate. Members of the board serve for 14 years, and the chairman of the board is selected from among them to serve for 4 years.

Savings and Loan Crisis 1980’s Savings and Loans were designed to take savings and turn them into home loans. Deregulation led to serious abuses of the system, causing a collapse of the S&L’s and costing taxpayers $124 Billon.

The Financial Crisis of 2008 Long Term Capital Mismanagement Subprime Lending and the Housing Bubble Leverage Ratio of assets to borrowed money for reserve. De-Leverage Process of trying to sell assets to raise cash to pay debts causing reduction in asset values, which in turn reduces the assets in the reserve, forcing a liquidity crises Securities Packages of home loans, credit card debt, student loans, etc. Derivatives Bets on just about anything Crisis and Response AIG Mergers and Bailouts

Functions of the Federal Reserve System Provide Financial Services Supervise and Regulate Banking Institutions Maintain the Stability of the Financial System Conduct Monetary Policy

What the Fed Does Reserve Requirements The Discount Rate Federal Funds Market Financial Market that allows banks that fall short on the reserve requirement to borrow from banks that have an excess reserve Federal Funds Rate Interest rate set by the Fed The Discount Rate Banks in need of reserve can also borrow from the Fed itself (normally 1 % above the Fed Funds Rate) Open Market Operations Buying Federal Bonds