Chapter 13 Structure of Central Banks PDF

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Warning: TT: undefined function: 32 Warning: TT: undefined function: 32Structure of the Federal Reserve System The Federal Reserve banks The Board of Governors of the Federal Reserve System The Federal Open Market Committee (FOMC) The Federal Advisory Council Around 2,900 member commercial banks The...

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Chapter 13: Structure of Central Banks Friday, October 25, 2019

9:20 AM

Structure of the Federal Reserve System • • • • •

The Federal Reserve banks The Board of Governors of the Federal Reserve System The Federal Open Market Committee (FOMC) The Federal Advisory Council Around 2,900 member commercial banks

1. The Federal Reserve Banks ○ Member banks elect 6 directors for each district, 3 more appointed by the Board of Governors § 3 directors are professional bankers § 3 directors are leaders from industry, labor, agriculture, or consumer sector § 3 directors are appointed by the Board of Governors ○ 9 directors appoint the president of the bank Functions of the Federal Reserve Banks • Clear checks • Issue new currency (open market operations) • Withdraw damaged currency from circulation • Administer and make discount loans to banks in their districts (loans from fed) • Evaluate proposed mergers and applications for banks to expand their activities (manage risk) • Act as liaisons between the business community and the Federal Reserve System • Examine bank holding companies and state-chartered member banks • Collect data on local business conditions • Use staffs of professional economists to conduct research and policy analysis

• Use staffs of professional economists to conduct research and policy analysis Monetary Policy • Directors "establish the discount rate: overnight loans to meet regulatory requirements • Decide which banks can obtain discount loans: sound banks with collateral • Directors select 1 commercial banker from each district to serve on the Federal Advisory Council Member Banks • All national banks are required to be members of the Federal Reserve System • Commercial banks charted by states are not required but may choose to be members 2. Board of Governors of the Federal Reserve System ○ Like the board of a company ○ 7 members headquarter in Washington D.C. ○ Appointed by the Pres and confirmed by the Senate ○ 14-year non renewable term: Pres gets to appoint 2-4 on average ○ Required to come from different districts ○ Chairman is chosen from the governors and serves four-year term Duties of the Board of Governors • Votes on conduct of open market operations • Sets reserve requirements • Controls the discount rate • Sets margin requirements (how much of a stock purchase can be bought with credit) • Sets salaries of president and officers of each Federal Reserve Bank and reviews each bank's budget • Approves bank mergers 3. Federal Open Market Committee (FOMC)

○ The most commonly discussed policy component of the Fed ○ Meet 8 times a year ○ 7 members of the Board of Governors, the president of the Federal Reserve Bank of NY, and the presidents of 4 other Reserve banks

Should the Fed by Independent? • The case for independence ○ Apolitical: no pressure to change monetary policy during election cycle ○ Political appointees: might create high inflation • The case against independence ○ Very powerful, not politically accountable ○ Some actions are opaque, not always clear whose interests they are serving...