THE FEDERAL RESERVE SYSTEM The United States has a central monetary authority known as the Fed-

THE FEDERAL RESERVE SYSTEM The United States has a central monetary authority known as the Fed-

eral Reserve System. The Federal Reserve System (often referred to as the “Fed”) acts as the U.S. central bank, much like the Bank of England and the Bank of France are central banks in their respective countries. The role of a central bank is to carry out monetary policy that serves the best interests of the country’s economic well-being. Monetary policy is the set of tools that a central bank can use to control the availability of loanable funds. These tools can be used to achieve goals for the nation’s economy. Along with the U.S. Treasury, the Fed determines policies that affect employment and prices.

FOUNDATIONS

EXHIBIT 3.1 The Federal Reserve System Board of Governors

◗ ◗ serve

supervise ◗

◗ Federal Open Market

Twelve Federal Reserve Committee

❙ serve ❙

District Banks ◗

supervise ◗

Member banks

The Federal Reserve System is comprised of 12 district banks, with the Federal Reserve Board of Governors overseeing the activities of the district banks. The members of the Board are appointed by the President of the United States and confirmed by the U.S. Senate, and each serves a term of 14 years, with terms staggered through time. The president also appoints the chairman of the board from among the members on the board. The chairman serves in this capacity for a term of four years. What’s the role of the Board? The Board creates rules and regulations that govern all depository institutions, as shown in Exhibit 3.1.

The Federal Reserve District Banks are not-for-profit institutions. Their responsibilities include (1) handling the vast majority of check- clearing in the United States, (2) issuing money, and (3) acting as the bankers’ bank, accepting deposits from other financial institutions

The Federal Reserve System consists of the Federal Reserve Banks and member commercial banks. All nationally chartered banks must join the system, but state-chartered banks may also join. A nationally char- tered bank is a bank that receives its charter of incorporation (its right to do business) from the federal government, granted by the Comptroller of the Currency; a state-chartered bank receives its charter from the state. The Comptroller of the Currency is a division of the U.S. Treasury and was established in 1863. The role of the Comptroller is to monitor peri- odically banks’ financial condition and compliance with regulations; states have similar agencies that monitor state-chartered banks. Because national banks represent the largest banking institutions in the United States, more than two-thirds of all bank assets are held by national banks.

The Federal Open Market Committee (FOMC) is a policy making group within the Federal Reserve System. The committee is comprised of

Financial Institutions and the Cost of Money

the seven members of the Federal Reserve Board, plus presidents or vice- presidents of five Reserve banks. The FOMC is charged with making decisions regarding the Federal Reserve’s open market operations, which consist of buying and selling of U.S. government securities. The open market operations of the Fed affect the cost and availability of credit in the economy.