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According to Corinne (2010), the Federal System has remained as the central banking system of the nation. It was majorly created to solve a series of financial panics within the relevant institutions. He notes that the United State banking system consists of twelve Federal Reserve banks, with each one serving member banks in its own district. In totality, this system is made up of the Board of Governors, 25 braches, Its Open Market Policy, financial institutions members, 12 Federal Reserve Banks and the advisory committees. This system has power to regulate the money supply and the credit structure in the nation. It is however supervised by the Federal Reserve Board.
Alphonso, Kovener & Antoinette (2011) also note that as the central bank of the US, Federal bank is purely a bank to other banks and thus does not involve itself in commercial banking activities. They note that the system majorly aims at attaining a stable growth of the economy in the US and therefore takes actions which aim at influencing how money and credit do flow within the nation. It is therefore mandatory that any “Finance Major” student should know how Federal Reserve System works in United State.
The Responsibilities of Federal Reserve System
Corinne (2010) identifies a number of the specific duties carried out by the Federal Reserve System, as including the formulation of monetary policies, the provision of guidelines on how checks are collected and cleared, as well as the lending the banks and other institutions dealing with deposits as their last resort. Additionally, they note that it regulates and supervises all the banks and other financial institutions operating within the United States as well as providing the roles of fiscal agency to the treasury of the United States. Furthermore, it distributes both the coin and the currency to the citizens by availing them to the depository institutions. Finally, it implements regulations guarding the legislations of the consumer credit.
Federal Reserve’s Supervising and Regulating Role
Asani (2009) notes that in its regulatory role, the Federal Reserve System is involved in the making of rules while that of supervisory is majorly concerned with monitoring and enforcing various responsibilities as given to the banks and other financial institutions. In specific, the federal government supervises all the bank holding companies. This is inclusive of both the mergers and acquisitions of such banks. Second, the Federal Reserve System performs an oversight role to the 900 state chartered banks in the membership of its system. Moreover, it also supervises and regulates all the operations as regarding foreign banking in the US. Finally, it regulates all the commercial banking activities of the nation being conducted in any foreign country (Asani, 2009).
Corinne (2010) notes that apart from the above supervisory function, the Federal Reserve System in its supervisory role also directly monitors and inspects all the registered institutions to keep them on tore, especially as far as the observation of legal and sound practices are concerned. He also points out that in its regulatory role the system also has other agencies like the Federal Deposit Insurance Corporation (FDIC), The Comptroller of the Currency’s Office, the Examination Council to the Federal Financial Institutions and finally, the Comptroller of the Currency’s Office which helps in the allocation of its members from various federal agencies into different ranks. The state agencies also regulate various state charted banks existing in different states. The Federal Reserve System therefore ensures that every action taken by various banks is in the best interest of the public. This has been possible through its mandate in coming up with the federal laws that govern the consumer credit. Some of the developed laws in this regard are Truth in Lending Act and the Truth in Saving Act (Corinne, 2010).
How Federal Reserve System Maintains Stability of the Financial System
Alphonso, Kovener & Antoinette (2011) noted that the Federal Reserve System maintains stability of the financial system through its monetary policy. The policy includes actions aimed at influencing how much reserves are made available to the depository institutions, their costs, and when they are to be released. These actions have the effects of either reducing or increasing the amount of money in the circulation enabling it to control inflation. The three scholars point out that as its tools for monetary policy, the Federal Reserve uses the following.
Alphonso, Kovener & Antoinette (2011) describe the discount rate basically as an indication of the interest on each Federal Reserve Banks’ loan granted to any financial institution. The three note that whenever the rate is increased, the number of the financial institutions borrowing and the amounts they borrow greatly reduces. On the other hand, whenever the interest rates charged on the loans decreases, there is normally an increase in borrowing though this may also be partly determined by the amount of reserve that each individual institution holds at that very time.
On the other hand, Alphonso, Kovener & Antoinette (2011) describe open market operations basically as securities sales or purchases. In most cases they include the US note and its treasury bills traded in the bond market as well as in the open money. This role is carried out by the Federal Open Market Committee which gives directions guiding the functioning of the Federal Reserve Banks in the New York. Buying of securities from the open market by the Federal Reserve Bank obviously leads to the increase in the amount of bank reserves. This is directly opposite to occasions when it sells, which in turn increases the amount of bank reserves. This forces banks to either invest in something in case of increase in reserves or to look for ways to get some income in case of decrease in reserves in a bid to maintain the required reserve level. These scholars note that such actions tighten or loosen the money supply respectively and thus determine how much credit is available. It also influences commodities’ prices and the interest rates.
Finally, reserve requirement is a policy that forces every depository institution operating in the US to hold reserves of the accounts of some their customers. Corinne (2010) notes that variations in requirements of the reserves have strong impacts on money supply of the economy. The increase in the level of reserves required of the depository institutions leads to the decrease of the amount of reserves that can be held and vise versa. This means that the ability of various banks in expanding deposits is normally limited whenever the reserve requirement is raised.
How Federal Reserve System Provides Financial Service to Depository Institutions
Corinne (2010) observes that the Federal Reserve System acts as the last resort to the financial institutions in terms of the issuance of loans during financial crisis. It helps to ease panics among these financial institutions and further works to stabilize the financial stability of the entire nation. In addition, they note that every Federal Reserve Bank is the major exchanger of checks in their regions of operations. They also facilitate the settling of checks by carrying out a transaction involving funds being moved from one institution to another. Banks also allow such services as money transfer.
In conclusion, it is clear that the Federal Reserve System has a great financial influence compared to any other body of the US. It helps to ensure that the payment system of the nation is safe and efficient. It is therefore in order for every decision it makes to be scrutinized by the congress to ensure that it operates within the best interest of the citizens.