1. Competency 4.02 Understand the Banking System
4.0 Understand the Role of Finance in Business
Competency 4.02 Understand the Banking System
Objective 4.02-A
Analyze 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 Wilson
Organized by the Federal Government in 1913
Why have “ The Fed” ? Purpose:
To establish and maintain confidence in the US monetary system
To ensure and safe, healthy and stable economy
To 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 Fed
Optional for state banks
Divisions are called DISTRICTS
There are 12 DISTRICTS in the United States
Every state comes under a district
Each Federal Reserve Bank is a corporation, owned by its member banks
NC 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 Governors
Represents the government (public) sector
District Federal Reserve Banks
Represents the business (private) sector

6. Board of Governors
Usually meet about twice a week, ordinarily on Mondays and Wednesdays
Public is invited to look into the meetings of the Board of Governors
Usually discuss monetary policy such as lowering and raising interest rates
The Board Room at the Federal Reserve in Washington, DC

7. Members of the Board of Governors
Ben S. Bernanke, Current Chairman
Alan Greenspan, Retired Chairman  
Chairman is appointed by President and confirmed by Senate
Similar to procedure for Supreme Court Justices

8. Purpose of Federal Reserve
Established to supervise and regulate banks
Known as the “Bank’s bank”
The central bank of the United States
Assists banks with serving the public more efficiently
All national banks are required to join the Federal Reserve System
State banks have the option of joining the system

9. The Federal Reserve System Services
Supervision of banks
Agent for the federal government
Regulates monetary policy
Lends money to member banks
Acting as a clearinghouse
Participation in open market activities
Sets loan limits & standards
Supplies 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 bank
Reserves: funds set aside for emergencies
Example: a rush of withdrawals by customers
Purpose: to reduce risk of bank panics and protect depositor’s money

11. 1. Fed Supervision: Audits Member Banks
Inspects banks by auditing financial records
Audit -an inspection of records to verify the:
1. accuracy of books (records) of the bank
2. bank is complying with banking laws
Similar 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” in
Bank of New York bought Mellon Financial Corporation for $18.3 Billion
JPMorgan Chase bought Bear Stearns for $1.1 Billion
Bank of America bought Merrill Lynch Bank of America for $50 Billion
Wells 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 Treasury
Disburses social security benefits and other transfer payments using the direct deposit system
Accepts some types of federal tax money
Example: Federal tax depositories
Payroll 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 goals
How? The Fed determines amount of money in circulation and available for loans, then either increases or decreases to stabilize/stimulate the economy
Tight money- policy when less money is available at higher interest rates, slows (stabilizes) economy
Loose 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 banks
Compare banks to intermediaries (go-betweens) trading in money at “wholesale” prices
The Fed changing interest rates affect borrowers (member banks) who pass rates to consumers
Raising rate - discourages borrowing
Reducing rate - encourages borrowing
Note: 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 banks
Federal Reserve uses the Automated Clearing House (ACH) to electronically complete fund transfers (check settlements) between banks
Interdistrict Settlement Fund in Washington, DC used for between district transfers
Checks/deposit slips have MICR coding
Magnetic Ink Character Recognition
Scanners 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 securities
Q: What are government securities?
A: Treasury bills and bonds – loans to government in various denominations (amounts) and for various time periods
Advantages 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) date
Examples:
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 $25
Payable after 6 months
Earns interest up to 30 years
Short-term obligation of the U.S. Treasury Treasury bill – maturity in one year or less
Issued to mature in 13 weeks, 26 weeks, 52 weeks
Long-term obligation of the U.S. Treasury
Treasury note – maturity at 1 to 10 years, minimum $1000
Treasury bond - maturity at 10 + years

20. Open Market Operations
Bank discount rates encourages borrowing by member banks, and therefore encourages borrowing by consumers
Purpose of open market operations
Regulate money supply
Most frequent method of controlling the economy
Who 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 credit
Sets limits for loans and investments by member banks
News: Federal Reserve revised bank lending rules since banking crisis
Ex: Lower % of total loans for land/acreage

22. 8. The Fed Supplies Currency
Money defined:
a medium of exchange for value
US money = currency and coins
Federal Reserve supplies paper currency
Legal Tender for all debts, public and private
Paper currency supplied is “Federal Reserve Notes”
Printing currency (paper money, bills)
Bureau of Printing and Engraving
Counterfeiting - federal crime
Coinage
Minting supplied and regulated by the Department of Treasury, US Mint