Banking Supervision Introduction The Federal Reserve System supervises and regulates a wide range of financial institutions and activities.
A particularly severe crisis in led Congress to enact the Federal Reserve Act in Today the Federal Reserve System has responsibilities in addition to ensuring the stability of the financial system. This practice is called fractional-reserve banking.
As a result, banks usually invest the majority of the funds received from depositors. On rare occasions, too many of the bank's customers will withdraw their savings and the bank will need help from another institution to continue operating; this is called a bank run.
Bank runs can lead to a multitude of social and economic problems. The Federal Reserve System was designed as an attempt to prevent or minimize the occurrence of bank runs, and possibly act as a lender of last resort when a bank run does occur.
Many economists, following Nobel laureate Milton Friedmanbelieve that the Federal Reserve inappropriately refused to lend money to small banks during the bank runs of ; Friedman argued that this contributed to the Great Depression. During that episode, payments were disrupted throughout the country because many banks and clearinghouses refused to clear checks drawn on certain other banks, a practice that contributed to the failure of otherwise solvent banks.
To address these problems, Congress gave the Federal Reserve System the authority to establish a nationwide check-clearing system. Lender of last resort[ edit ] In the United States, the Federal Reserve serves as the lender of last resort to those institutions that cannot obtain credit elsewhere and the collapse of which would have serious implications for the economy.
It took over this role from the private sector "clearing houses" which operated during the Free Banking Era; whether public or private, the availability of liquidity was intended to prevent bank runs.
Longer term liquidity may also be provided in exceptional circumstances. The rate the Fed charges banks for these loans is called the discount rate officially the primary credit rate.
By making these loans, the Fed serves as a buffer against unexpected day-to-day fluctuations in reserve demand and supply. This contributes to the effective functioning of the banking system, alleviates pressure in the reserves market and reduces the extent of unexpected movements in the interest rates.
As the banker's bank, it helps to assure the safety and efficiency of the payments system. As the government's bank or fiscal agent, the Fed processes a variety of financial transactions involving trillions of dollars.
Just as an individual might keep an account at a bank, the U. Treasury keeps a checking account with the Federal Reserve, through which incoming federal tax deposits and outgoing government payments are handled.
As part of this service relationship, the Fed sells and redeems U. It also issues the nation's coin and paper currency.Testimony to the House Financial Services Committee, Subcommittee on Trade and Monetary Policy Titled “A Further Examination of Federal Reserve Reform Proposals”.
Overview Following on the heels of 20 years of macroeconomic stability, the financial crisis that began in , the ensuing steep decline in economic activity, and the perceived limitations of monetary policy once interest rates hit zero have forced a re-examination of the .
Nov 16, · Following remarks by Mr. Quarles, a panel of economic scholars and financial regulatory attorneys analyzed the Federal Reserve's monetary policies and the state of financial regulation. The discussion was moderated by Brookings Institution Economic Studies Fellow Aaron Klein.
Hearing entitled “A Further Examination of Federal Reserve Reform Proposals” Wednesday, January 10, PM in Rayburn HOB Monetary Policy and Trade. Click here for the Committee Memorandum.. Witness List. Monetary policy - refers to what the Federal Reserve, the nation 's central bank, does to influence the amount of money and credit in the U.S.
or other countries economy.
The main idea behind monetary policy is that the quantity of money, or the money supply, is the major contributing factors of price levels. The monetary policy goals of the Federal Reserve are to foster economic conditions that achieve both stable prices and maximum sustainable employment.