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THE FEDERAL RESERVE SYSTEM

Explore the organization of the Federal Reserve System, its influence on banks and the economy, proposed reorganization, and its role in determining financial health. Also learn about monetary and fiscal policy, consumer protection, and international banking.

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THE FEDERAL RESERVE SYSTEM

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  1. THE FEDERAL RESERVE SYSTEM 3 3.1 Structure of the Federal Reserve System 3.2Monetary and Fiscal Policy 3.3Consumer Protection 3.4Role in Determining Banks’ Financial Health 3.5International Banking and the Federal Reserve System

  2. 3.1STRUCTURE OF THE FEDERAL RESERVE SYSTEM GOALS Identify the organization of the Federal Reserve System. Explain how the Federal Reserve influences banks and the economy. Describe proposed reorganization of the Fed.

  3. TERMS • Member bank • District Reserve Bank

  4. STRUCTURE OF THE FED

  5. MEMBER BANKS • Member bank • Any bank that is part of the Federal Reserve System • All national banks are required to be members • State-chartered banks may choose to be members

  6. DISTRICT RESERVE BANKS • District Reserve Banks • Carry out banking functions for government offices in their area • Examine member banks in the district • Decide whether to loan banks funds • Recommend interest rates • Implement policy decisions of the Board of Governors

  7. BOARD OF GOVERNORS • Seven governors • A 14-year term • The policy-making arm of the Fed • Decisions control monetary policy

  8. THE CHAIR • The chair and the vice-chair • Four-year term • May serve multiple terms • Ben Bernanke has been the chair since February 2006.

  9. checkpoint What are the four structural elements of the Federal Reserve?

  10. FUNCTIONS OF THE FED • Serves as the government’s bank • Ensures that the financial system remains stable through judicious use of monetary policy • Supervises and regulates bank operations • Protects consumers’ credit rights • Serves as a bank for other banks

  11. THE GOVERNMENT’S BANK • IRS tax payments go into accounts at Federal Reserve banks. • Money from these accounts is used to pay various government expenses. • Federal Reserve banks sell and redeem government securities.

  12. THE BANKS’ BANK • A reserve bank for other banks • Processes payments between banks • Electronic funds transfers

  13. BANK SUPERVISION • The Federal Reserve supervises and regulates all member banks. • Other agencies also supervise banks. • The Fed works to promote consistent policies for international banks that operate in the U.S.

  14. PROTECTING CONSUMERS • The Federal Reserve monitors banks to ensure customers are treated fairly in terms of • Fees • Prices • Penalties • Advertising

  15. checkpoint What are the primary functions of the Federal Reserve?

  16. PROPOSED REORGANIZATION OF THE FED • The recent financial crisis spurred discussion about reorganizing the banking regulation system. • President’s Working Group on Financial Markets (PWG) • Mortgage Origination Commission (MOC) • Payment and settlement systems oversight • Insurance • Futures and securities

  17. checkpoint Why is consideration of reorganizing the Fed such a complicated task?

  18. 3.2MONETARY AND FISCAL POLICY GOALS Explain how the Fed impacts monetary policy. Identify how fiscal policy affects the economy. Explore criticisms of monetary and fiscal policy.

  19. TERMS • Federal Open Market Committee (FOMC) • Taylor rule • Adverse feedback loop

  20. MONETARY POLICY • The goals of the Federal Reserve’s monetary policy are to • Maintain economic growth • Stabilize prices • Keep international payments flowing smoothly

  21. OPEN MARKET OPERATIONS • Open market operations • The Fed buys and sells securities issued by the Treasury Department or other government agencies. • Federal funds rate • The rate at which banks borrow from each other

  22. Primary dealers • Setting reserve requirements • Adjusting the discount interest rate • Discount rate • The rate of interest that the Federal Reserve charges banks for short-term loans

  23. Federal Open Market Committee (FOMC) • Makes discount rate decisions • The committee consists of • The seven-member Board of Governors (including the Chairman) • The Chairman of the New York District Reserve Bank • Presidents of four other District Reserve Banks who serve on a rotating basis

  24. ADJUSTING MONETARY POLICY • Tinkering with monetary policy does not occur in a vacuum. • Even experts do not always agree on the most effective course of action. • Adjusting interest rates is one of the many components of monetary policy. • Predicting the impact of these adjustments is not straightforward.

  25. DEVELOPING MONETARY POLICY • Taylor rule • Provides ideas for how to use short-term interest rates to achieve the goals of a central bank. • Keeping the economy stable • Controlling inflation • Three targeted indicators • Inflation • Full employment • Short-term interest rates

  26. NEW TOOLS TO MANAGE MONETARY POLICY • Term Auction Facility (TAF) • Term Securities Lending Facility (TSLF) • Primary Dealer Credit Facility (PDCF)

  27. checkpoint Why is it hard to predict the impact of monetary policy adjustments?

  28. FISCAL POLICY • Fiscal policy involves adjusting budgetary deficits or surpluses to achieve desired economic goals. • Fiscal policy is controlled by • Congress • The President

  29. PRIMING THE PUMP • Cutting taxes • Gives businesses and individuals more money to spend • Expanded demand causes industries to • Manufacture more products • Hire additional employees • Invest in new buildings and equipment • The economy expands • Keynesian economics

  30. SLOWING THE BOOM ECONOMY • When demand exceeds supply • Prices increase • Inflation • When rising prices decrease the value of money • The government may • Cut spending • Raise taxes • Do a combination of both

  31. checkpoint Explain Keynesian economics.

  32. CRITICISM OF MONETARY AND FISCAL POLICY • Monetary policy is relatively more agile than fiscal policy. • The Fed can change bank reserve requirements fairly easily. • Changing tax levels is relatively more cumbersome.

  33. Adverse feedback loop • When a lack of available cash causes a decline in spending • Product demand drops • Manufacturing slows • Jobs are lost • Less cash is available • The downward cycle continues

  34. checkpoint What is an adverse feedback loop?

  35. 3.3CONSUMER PROTECTION GOALS Explain the various acts that protect consumer rights. Understand how enforcement responsibilities are shared across agencies.

  36. TERMS • Truth in Lending Act (TILA) • Equal Credit Opportunity Act (ECOA) • Fair Credit Reporting Act (FCRA) • Fair Debt Collection Practices Act (FDCPA) • Government Accountability Office (GAO)

  37. CREDIT TRANSACTION PROTECTION • Truth in Lending Act (TILA) • Guarantees that all information about the costs of a loan is provided in writing to consumers • Provides for a right of rescission • A consumer can change his or her mind about a loan until midnight of the third business day following the signing of the papers

  38. EQUAL CREDIT OPPORTUNITY ACT • Equal Credit Opportunity Act (ECOA) • Prohibits the use of any type of discrimination as a factor in determining creditworthiness • Requires that the lender provide the reasons for denial of credit upon request

  39. FAIR CREDIT REPORTING ACT • Fair Credit Reporting Act (FCRA) • Aims to protect the information that credit bureaus, medical information companies, and tenant screening services may collect • Risk-based pricing • When a business offers less favorable credit terms to a consumer with a relatively weaker credit score

  40. FAIR DEBT COLLECTION PRACTICES ACT • Fair Debt Collection Practices Act (FDCPA) • Protects consumers from unfair collection techniques

  41. checkpoint Name four important pieces of consumer protection legislation.

  42. OTHER LEGISLATION • Fair Credit Billing Act • Fair Credit and Charge Card Disclosure Act • Home Equity Loan Consumer Protection Act • Credit Repair Organization Act • Gramm-Leach-Bliley Act

  43. HOUSING AND REAL ESTATE • Various acts provide protections for • Requiring flood insurance for designated areas • Mandating that real estate settlement costs be disclosed to consumers • Protecting against exploitative real estate lending practices

  44. EDUCATING THE PUBLIC ON THEIR RIGHTS • The Fed offers a variety of brochures on its website aimed at educating consumers about their rights.

  45. checkpoint Name three other pieces of lending legislation.

  46. ENFORCEMENT OF POLICIES OUTLINED IN ACTS • Shared responsibilities • Agencies share enforcement responsibilities. • Audits are conducted to test compliance at financial institutions. • Government Accounting Office (GAO) • The auditing arm of Congress that helps ensure that federal laws and policies are implemented properly

  47. checkpoint Why are so many agencies involved in enforcing consumer protection?

  48. 3.4ROLE IN DETERMINING BANKS’ FINANCIAL HEALTH GOALS Explain the regulatory process and how it works. Review how regulations affect the banking business.

  49. TERMS • Charter • Call report • System to Estimate Examinations Ratings (SEER) • CAMELS

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