453 - reading notes Flashcards
structure of fed reserve system
1913 established Fed
- -composed of 3 branches
1. 12 regional fed. reserve banks throughout US
2. ccentral gov. agency called board of governors of Fed (in DC)
3. Fed open market committee (FMOC)
all national banks are chartered by the fed - req. to belong to fed system
–reserve banks - chartered banks, private nonprtofit organizations. - owned by commercial banks in their districts
9 members of board of governors
- -6 elected by commercial bank members of reserve bank and other 3 are appointed by board of governors
- -each reserve bank has a president - responsibility to oversee FOMC - 5 year term
brief list of bank’s functions
- Banks of US gov.
- —Issue new currency (Fed reserve notes) and destroy old worn currency
- —Maintain US treasury bank account and process electronic payments
- –Manage US treasury’s borrowings - issuing, transferring and redeeming US treasury bonds, bills and notes - As bankers’ bank
- —Hold deposits for banks in their districts
- –Operate and ensure the integrity of pts. Network for transferring funds
- —Make funds available to commercial banks within the district through DISCOUNT LOANS on which they charge at the DISCOUNT RATE
- — Supervise and regulate fin. Institutions in district to ensure safety and soundness - evaluate mergers and operations
- –Collect and make available data on business conditions - Fed of NYC
- –Provides services to foreign central banks and international organizations hold accounts there
- —Is system point of contact with fin. Markets
- –Where treasury securities are auctioned, where foreign currency is bought and sold, and where Fed Reserve’s own portfolio is managed through OPEN MKT. OPERATIONS - Formulate monetary policy
- –Do it through representation on federal open mkt. committee (FOMC) - makes int. rate decisions and determines size of fed’s balance sheet - through setting the DISCOUNT RATE (rate charged on loans to commercial banks)
the board of governors
HQ in DC - close to white house
- -7 members of board are governors, appointed by president and confirmed by senate to serve 14 year terms
- -terms are staggered with one beg. every 2 years
- -no 2 gov. can come from same district
DUTIES
1. Set reserve requirement - determines level of reserves banks are req. to hold 2. Approves/disapproves discount rate recommendations by fed reserve banks 3. Approves changes in int. rate paid on excess reserves consistent with changes in the rate for target fed. funds rate set by FOMC 4. Acts as rule-writing agency for consumer credit protection laws 5. Approves bank merger applications 6. Supervises and regulates reserve banks (budgets and salaries) 7. Along with Fed banks, supervises banking system - examining indiv. Banks, SIFIs, and fin. Mkt. utilities (FMUs) for safety and soundness and compliance with law 8. Invokes EMERGENCY POWERS to lend to nonbanks when circumstances are unusual and exigent - provided authority during crisis 9. Analyzes fin. And economic conditions (domestic and international) 10. Collects and publishes detailed stats about system's activities and economy at large (FRED - fed. Reserve economic database) - info. About US and other economies
FOMC
group that sets interest rates and adjusts Fed’s balance sheet to control availability of money and credit to economy
1936 - 12 voting members - 7 governors and Pres. of Fed of NYC and rotating selection of 4 of remaining 11 reserve bank presidents
FOMC controls the FED. FUNDS RATE
- –controls nominal int. rate - controls real int. rate acually bc inflation expectations don’t change qucikly when credible bank aims at price stability
- —higher int rate = inc. cost of borrowing = ess likely to invest in projects for growth and expansions
meet 8 times a year for 6 weeks in DC
2 imp. documents from meetings
- BEIGE BOOK - compilation of anecdotal info. about current business activity - published 2 weeks before meeting and info. colected by stage
- –only Fed doc. released to public before meeting - TEALBOOK - 2 parts: board staff’s economic forecast for next 2 years (used to be called green book til 2010)
- –and discussion of fin. mkts. and current policy options (used to be called bluebook)
- -distributed electronically during week before meeting
Fed’s reserve system structure
Effective central bank is one where policy makers are largely independent of political influence, make decisions by committee, are accountable and transparent, and state objectives clearly
- Independence of political influence
- —-Budget independence, irreversible decisions, long terms in office
- —Fed’s rev. from int. on gov. securities and fees it charges banks for pmt. System services
- -FOMC controlled by board of gov. and ECB controlled by NCBs - Decision by a committee
- –FOMC is committee - chair of board of Governors dominates policy decisions but there are 12 voting members - no one person can be dictator - Accountability and transparency
- — FOMC releases huge amts. Of public info. - beige book prior to meeting and after meeting releases posts on website of brief policy stmt. Of decisions and reasons - Policy framework
- –Inflation targeting framework - utilized by most leading banks around the world - established by FOMC in 2012 on special stmt. Of longer-run goals and monetary policy strategy
- -FOMC has the dual mandate of price stability and full employment - make decisions with those tradeoffs
- -Governing council has pricate stability as the main goal - all others are secondary
European central bank
1992 agreement to form Euro. monetary union formalized in treay of Maastricht
–led to creating of Euro. system of central banks (ESCB) —> the euro. central bank (ECB) in Frankfurt Germany and national central banks in 28 countries
- member executive board of ECB (like board of gov.)
- -also governing council (like FOMC - who formulates monetary policy)
ECBs activity is control of money and credit in the Eurosystem
Chair of board of governors
most powerful person in Fed - also chair of FOMC - effectively controls FOMC meetings and monetary policy
–appointed by President to 4 year term
which federal reserve regional bank serves in Utah?
and which of regional banks in Fed system is point of contact with fin. markets
chair of board of gov. of Fed serves ___ year erm and may be reappointed to more than one term
SF
NY
4 year
the board of governers
FOMC controls ___
most imp. member of FOMC is
in ESCB what is most similar to FOMC
- sets the reserve requirement
- approves/disapproves of discount rate recommendations
- invokes emergency powers to lend to nonbanks when circumstances are deemed “unusual and exigent”
FOMC controls fed funds rate
most imp. is the chair of board of gov. of fed
in Euro - FOMC similar to governing council
which of following are goals that Congress established for Fed?
all of the above!!
- -max employment
- -stable prices
- -moderate LT int. rates
primary objective of Euro. system of central banks is to
maintain price stability
9/11 info.
2 in twin towers, one in Pentagon in DC, and one in field in Pennsylvania
- —On brink of collapse, but bc of quick moving Fed, the financial system held together
- –3 hours after crisis - the Fed announced they would be able to provide liquidity as needed - stop the spreading of panic and made sure there was enough money circulating in economy
- –Bought almost $100B worth in US treasuries - extended 10s of 1000s of loans
- —All done in backup sites - bc the main financial federal reserve bank was in NYC right by the side of the fallen towers
The financial system was one of the terrorists primary targets…bc of quick action of the Fed, it returned to normal in a couple weeks
During crisis of 2008-09
—Fed lent money to nonbanks and nonfinancial institutions for the first time
—They failed to recognize how their actions affected the supply of credit in economy - how changes in Fed balance sheet affected the growth rate of money
—Thought that if they supplied more and more money in economy, credit and money would be easily available - wrong bc the fin. System collapsed - bc Fed had failed to provide liquidity that sound banks needed to stay in business - so no one could borrow and amt. of credit and money circulating fell dramatically
central bank’s balance sheet
Many transactions bc it is the government’s banker and the bankers’ banker
—-Supplies currency, provides deposit accounts to gov. and commercial banks, makes loans, buys and sells securities and foreign currency –> all cause CHANGES IN FED’S BALANCE SHEET
BS published weekly
ASSETS
- –gov. banks = securities, foreign exchange reserves
- -bankers bank = loans
LIABILITIES
- -Gov. bank - currency, gov. account
- –Bankers bank - accounts of commercial banks (reserves)
during crisis -commercial bank deposits grew 100x!!!! triggered by Lehman bro. panic - Fed sought to calm banks desperately seeking liquiity by buying securities and boosting discount lending
–after crisis - banks began holding excess reserves in Fed
Assets of fed - securities
Three basic assets - securities, reserves and loans
- Securities - primary assets of most banks
- —Used to be exclusively treasuries (short maturity)
- —During crisis 08/09, fed took on riskier assets (including $1 T of MBS - look at pg. 53 - MBS became largest component of fed’s assets
- –Then started buying medium—> LT securities - put US more in debt
- —Quantity of securities controlled by OPEN MARKET OPERATIONS - independent central banks determine the quantity (not the fiscal authorities)
before crisis, Fed controlled fed funds rate by adjusting holdings of liquid securities (US ST Treasuries)
Assets of fed - foreign exchange reserves
- foreign exchange reserves
- —Central bank and gov.’s foreign currency - held in form of bonds issued by foreign gov.
- –Euro dominated bonds issued by German gov. and Yen bonds issued by Jap. Gov.
- —Reserves used in foreign exchange interventions - when officials attempt to change market values of various currencies
Assets of fed - loans
loans
- —Usually extended to commercial banks - but during crisis, Fed made loans to nonbanks to
- –Discount loans - loans that Fed makes when commercial banks need short-term cash
LIABILITIES - currency
- –Almost all central banks have monopoly on issuance of currency in everyday transactions
- –All bills have “federal reserve note”
- –Currency in the hands of “nonbank public” is the largest liability of most central banks
LIABILITIES - gov. account
—Place for gov. to deposit income (mostly tax revenue) and where they write checks and make electronic pmts. - acct. balance usually pretty constant
LIABILITIES - commercial bank account (Reserves)
§ Sum of 2 parts: deposits at central bank PLUS the cash in the bank’s own vault
1. Acts like the commercial bank’s checking account - can withdraw deposits at central bank - and can transfer funds to another bank’s account
® Vault cash - part of reserves - available to meet depositors’ withdrawal demands - serves as the insurance function for which reserves are designed
® Reserves are assets of commercial banking system and liabilities of the central bank
® Reserves are the LARGEST liability of the Fed and ECB as of 2016
msot imp. liability in central bank is reserves - determines amt. of money and credit in economy - plays central role in policy
—inc. lead to deposits and growth in availabilty of money - dec. is opposite
2 types of reserves
- req. reserves
- excess reserves
monetary base
Currency in hands of public and reserves in banking system (liabilities of central bank) make up the monetary base - or called high-powered money (high powered bc is a multiple of currency plus banking system reserves)
- —Bc when the monetary base increases by $1, the quantity of money usually rises by several dollars
- –Central bank controls the size of monetary base
changing size and composition of BS
Central bank controls the size of their balance sheet - policymakers enlarge or reduce assets and liabilities
- —Ex. When we spend $50 at grocery store, goes through pmt. System and the $50 is credited to the supermarket’s account and debited in our account (becomes $50 smaller)
- —But FED is diff. - Fed spends $1M on bonds - to pay for it, the central bank writes a check of $1M payable to the bond dealer who sells the bond - after check is deposited, the dealer’s commercial bank is credited $1M and commercial bank sends the check back to the central bank - this time the Fed credits the $1M reserve in the account of the bank presenting it
- —The central bank buys the $1M bond, then creates liabilities to pay for them (the $1M inc. in reserves in the banking system) - can inc. balance sheet when it wants to
4 types of transactions to do this - all affect SIZE of BS and CHANGE size of monetary base
Cash withdrawals by the public are diff. - shift components of monetary base bc change composition of balance sheet but do not change the size
—Remember that when value for an asset increases, another asset dec. by same value to make net change of 0 or a liability grows by same amt.
open mkt. operations, foreign exchange intervention, extension of a discount loan, decision of indiv. to withdraw cash from bank
4 types of transactions to do this - all affect SIZE of BS - open market operations
- Open market operations - Fed buys/sells a security in fin. Mkts.
—-Have a straight impact on Fed’s balance sheet
○ Common case - NYC Fed buys $1B in US treasury bonds from commercial bank - to pay for bonds, Fed transfers $1B into reserve account of the seller - exchange done electronically
Go back to 459 to look at balance sheet picture
- —Federal reserve’s balance sheet
- —Assets: securities inc. by $1B
- —Liabilities: reserves inc. by $1B
- —Banking system’s balance sheet - fed exchanged $1B in securities for $1B in reserves…both are assets to commercial banks
- —-Assets: so reserves go up by $1B, and securities down by $1B (no changes on liabilities)
- —Easy to remember if think of your own bank acct. - the balance on Wells Fargo is an asset to me but a liability to the bank
If Fed sells a US treasury bond it is called an OPEN MKT. SALE - impact on balance sheet is reversed - Fed’s balance sheet shrinks bc both sides fall by $1B and monetary base falls - on the banking system BS, the securities INC. and the reserves DEC.
