Part VIII: The Federal Reserve System

Published 7:00 am Saturday, May 30, 2015

With the last Column, Part VII, of the Fed, we left while discussing the structure and responsibilities of the 12 Reserve Banks and their 25 branches.  Reserve Banks conduct research on regional, national, and international economic issues.  Research plays a critical role in bringing broad economic perspectives to the national policy making arena and supports Reserve Bank Presidents who all attend meetings of the Federal Open Market Committee (FOMC).

Each of the 12 district Reserve Banks’ board of directors oversees the management and activities of the  District bank.  Reflecting the diverse interests of each District, these directors contribute local business experience, community involvement and leadership.  Each board appoints the president and first vice president of the Reserve bank, subject to the approval of the Board of Governors.

Approximately 38 percent of the over 8,000 commercial banks in America are members of the Federal Reserve System.  Banks are formed as either national or state banks.  National bank charters are granted by the U.S. Department of Treasury  under the supervision of the Office  of Comptroller of Currency(OCC).  State bank charters are granted by the individual states under the supervision of either the Federal Reserve System’s appropriate District Reserve Bank, or the Federal Deposit Insurance Corporation(FDIC).

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National banks are mandated to Fed membership, whereas state banks’ Fed membership is optional; however, banks choosing membership must meet certain requirements.  Those state banks holding membership in the Fed are regulated by the Fed.  Those state chartered banks not members of the Fed are regulated by the FDIC.  All Fed member banks must purchase stock in their District Reserve Bank amounting to 3 percent of the bank’s capital.

Bank capital accounts serve as a cushion against operational losses, and are based on a percentage of the bank’s total assets.  Unlike owning stock in a public company, banks can neither trade nor sell its Fed stock.

Approximately 3,000 Fed member banks and about 17,000 other depository institutions provide the American people checkable deposits and other banking services.  These include Fed nonmember banks, savings banks, savings & loan associations, and credit unions.  Although not formally part of the Federal Reserve System, these institutions are subject to Fed regulations, including reserve requirements, and have access to the Fed’s payment system services.

The Fed’s FOMC is the monetary policy making body.  It is responsible for formulation of a policy designed to promote stable prices and economic growth.  Simply put, the FOMC manages the nation’s money supply.

The voting members of the FOMC  are the Board of Governors (7), the president of the Federal Reserve Bank of New York and presidents of four other Reserve Banks, who serve on a rotating basis.  All Reserve Bank presidents participate in FOMC policy discussions.  The chairperson of the Board of Governors chairs the FOMC.  Typically, the FOMC meets eight times a year in Washington, D.C. to discuss the outlook for the U.S. economy and monetary options.

The Fed has three statutory advisory councils:  the Federal Advisory Council, the Consumer Advisory Council, and the Thrift Institutions Advisory Council to advise the Board of Governors on matters of current interest.  These Councils, whose members are drawn from each of the 12 Federal Reserve Districts, meet two to four times per year.  Take heed of 2 Chronicles 7:14.

By Aaron Russell.