The Federal Reserve Bank System (The Fed)

By: EconomyWatch   Date: 9 September 2010

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The Federal Reserve Bank System (FRBS), or the Fed, was founded in 1930 under the National Banking Act of 1863. The Fed is the central bank of the United States and takes important policy decisions related to the banking sector as a whole. Established to maintain financial stability in the country, this autonomous body derives authority from the US Congress.

 

Composition of the Fed

The Federal Reserve Bank consists of:

  • The Board of Governors: are nominated by the President and confirmed by the Senate.

 

  • The Federal Open Market Committee (FOMC): consists of seven members from the Board of Governors of the Federal Reserve System and five Federal Reserve presidents.

 

  • Regional Federal Reserve Banks: are the 12 subsidiaries of the central bank.

 

  • Member banks

 

Responsibilities of the Federal Reserve Bank

The primary responsibility of the Fed includes:

  • Conducting a national economic policy that supports employment generation and price stability by establishing suitable credit and money conditions.

  • Regulating banks in the US to ensure security of the country’s financial system and credit rights of customers.

  • Keeping a check on systemic risk in the US financial market.

  • Delivering economic services to the government, citizens and financial institutions of USA.

 

Member Banks of the Federal Reserve

Membership of the Federal Reserve Bank System has the following implications for a bank:

  • It must buy stocks to an extent that the stocks it owns equal 6% of the surplus and capital it records.
     
  • Possessing stocks in a Federal Reserve bank is a legal requirement for becoming a member of the Federal Reserve Bank System. However, members can not sell these shares. Moreover, they can not pledge them as a guarantee to get loans.

All member banks of the Fed receive a 6% annual dividend on the shares they own.

 

The Federal Reserve Bank: Ownership Issues

There has been confusion surrounding the ownership of the Federal Reserve Bank. Unlike a private profit-making financial institution, the Fed is an autonomous organization that serves public purposes, while taking care of its private matters. It is governed by the guidelines set by the federal government of the United States.

The following provisions ensure that the autonomy of the Federal Reserve Bank remains intact:

  • Resolutions of the Fed need not be sanctioned by the President or the federal government.

  • It is only supervised by the federal government and any kind of change in its responsibilities can be done only via a proper legislative act.

  • Ownership of stocks in federal banks does not provide any decision making power to the stockholders. The Fed is not liable to generate profits for them.

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