Chapter 4 Flashcards
Banks that determine, implement, and control the monetary policy in their home countries.
central banks
The major monetary policy-making body of the Federal Reserve System.
- 12 members:
– 7 members of board of governors
– President of the NY district bank
– 4 other district presidents (rotating)
federal open market committee (FOMC)
Purchases and sales of U.S. government and federal agency securities by the Federal Reserve.
open market operations
Federal reserve bank president serve on the federal open market committee (FOMC), FRBs set and change discount rates
assistance in the conduct of monetary policy
FRBs have ___ & ___ authority over the activities of banks and other large financial institutions located in their district
supervision and regulation
FRBs write regulations to implement many of the major consumer protection laws and establish programs to promote community development and fair and impartial access to credit
consumer protection and community affairs
FRBs serve as the commercial bank for the ____ ____
US treasury
FRBs are responsible for the collection and replacement of ___ ___ from circulation
damaged currency
The interest rate on loans made by Federal Reserve Banks to financial institutions.
discount rate
Depository institutions’ vault cash plus reserves deposited at Federal Reserve Banks.
reserves
Currency in circulation and reserves (depository institution reserves and vault cash of commercial banks) held by the Federal Reserve.
monetary base
(Also referred to as money base)
Depository institutions’ vault cash plus reserves deposited at Federal Reserve Banks.
reserves
total reserves can be classified into two categories:
(1) required reserves
(2) excess reserves
The interest rate on short-term funds transferred between financial institutions, usually for a period of one day.
fed funds rate
Statement sent to the Federal Reserve Board Trading Desk from the FOMC that specifies the daily amount of open market purchases or sales to transact.
policy directive
provides payment and financial services to the US gov, the public, financial institutions, and foreign institutions
- clears checks, increasingly electronic
Federal reserve system
4 entities of the Fed:
- board of governors
- federal reserve district banks
- member banks
- federal open market committee
- 7 member board
- president appoints with senate approval
- members: nonrenewable 14 year term
- chairman & vice-chairman: renewable 4 year terms
board of governors
- setting broad monetary policy
- supervising and regulating banks
board of governors are in charge of: (2 things)
in charge of:
- official banks of the US treasury
- execute monetary policy
- supervise and regulate member banks
- supervise & regulate non-member banks
- clear checks
- wire transfers
federal reserve district banks
- set discount rate for their district
- make discount window loans to member banks
–discount loans: fereral reserve lends money to banks
execute monetary policy
wire transfers: (3)
- federal reserve wire (fedwire) DIRECT
- automated clearing house (ACH) INDIRECT
- fednow (near-instant transfer, 24/7) DIRECT
- Provides payment and financial services to the US government, the public, financial institutions, and foreign institutions
-Politically independent, providing long term safety and stability to the US financial system
The Fed
- Formulation & conduct of monetary policy and the supervision and regulation of banks
- Set money supply & interest rate targets
- Sets bank reserve requirements and reviews and approves the discount rates set by the 12 federal reserve banks
Board of governors Primary responsibilities
- 12 regional branches
- Supervised by board of governors
- 9 directors for each.. (responsible for appointing the president of the FRB)
district banks
- Execute monetary policy
- Supervise and regulate member banks
- Supervise and regulate non-member banks
- Official banks of the Us treasury
- Issue and circulate currency
- Clear checks
- Wire transfers
- Conduct economic research
district banks responsibilities
- Banks which hold stock in their district banks (required, non-transferable)
member banks
- Sets Fed Funds rate target
- Uses open market operations to influence fed funds rate
- Formulate policies to promote full employment, economic growth, price stability, and a sustainable pattern of international trade
FOMC responsibilities
Monetary Policy:
Tools to increase or decrease the economy (3)
- discount rate
- open market operations
- reserve requirements
3 lending programs are offered through the Fed’s discount window:
- primary credit
- secondary credit
- seasonal credit
available to generally sound depository institutions on a very short-term basis (typically overnight) at a rate above the FOMC’s target rate for federal funds
Primary credit
available to depository institutions that are not eligible for a primary credit
Secondary credit
available to depository institutions that can demonstrate a clear pattern of recurring intra-yearly swings in funding needs
Seasonal credit
- The interest rate on loans made by Federal Reserve Banks to financial institutions.
- A member bank borrows directly from the Fed
- Little Monetary impact day-to-day
- Generally only used during recessions/ crises
Discount lending
(rate)
Interest rate banks charge each other for overnight loans
Fed Funds rate targeting
- FOMC directs the FRB Trading Desk at the NY District Bank to trade
- The Trading Desk buys or sells US Treasury Securities until the Fed Funds rate is near its target
Open market operations
When the fed sells securities in the open market, it ____ banks deposits at the Fed
decreases
When the fed purchases securities in the open market, it ___ reserve accounts deposits at the Fed
increases
Determine the minimum amount of reserve assets (vault cash + bank deposits at fed banks) that depository institutions must maintain by law to back transaction deposit account held as liabilities on their balance sheet
Reserve requirements
Money Supply =
Currency * (1/Reserve Requirement)
Change in bank deposits =
(1/(New Reserve Requirement + c)*Change in Reserves
- Fed Funds target set to zero
- Purchasing of ‘toxic’ assets
- Guaranteeing of debt and lines of credit (to non-banks)
- Quantitative Easing (purchasing Treasuries and MBSs)
2008 Financial Crisis
Established FDIC, separated commercial and investment banking
Glass-steagall act (1933)
- Treasuries
- Agency securities
- Gold & Foreign Currency
- Mortgage-backed securities
- Miscellaneous
Federal Reserve Balance Sheet: Assets
- reserves
- money (monetary) base
Federal Reserve Balance Sheet: liability
Depository institutions reserve balances at the Fed plus vault cash
Reserves
Through FRBs Implement federal laws intended to protect consumers in credit and other financial transactions.
Consumer Protection
- Banks use this to make deposit and loan payments, to transfer book entry securities among themselves, and to act as a payment agents on behalf of large corporate customers
- Large dollar payments
fedwire
Developed jointly by the private sector and the federal reserve system in 1970s and has evolved as a nationwide method to electronically process credit and debit transfer of funds
Automated clearinghouse (ACH)
Represent the Fed’s holding of securities (Largest asset)
Treasuries
(issued by the US treasury)
- Monetary policy is generally only targeted at short term interest rates (OMO only utilize treasury bills)
- Fed printed money and directly bought assets from banks (goal was to force cash into the economy)
Quantitative Easing
Federal Reserve payment settlements (4)
- government services
- currency issuance
- check clearing
- wire transfer
The Fed operates a central check clearing system for the US banks, routing interbank checks to depository institutions on which they are written and transferring the appropriate funds from one bank to another.
Check clearing
An increase in the RR ratio means that depository institutions must hold ____ ____ against the transaction accounts (deposits) on their balance sheet.
more reserves
when the RR ratio increases:
They are able to lend out a smaller percentage of their deposits than before → thus ___ credit availability and lending → leading to a multiple contraction in deposits and a ____ in the money supply.
decreasing; decrease
Expansionary Activities:
Open market purchases of securities → reserve accounts of banks ____
increase
Expansionary Activities:
Reserve requirement ratio decreases → increase in ___ ___
bank reserves
Expansionary Activities:
Discount rate decreases → lowering of ___ ___ in the economy
interest rates
Contractionary activities:
Open market sales of securities → reserve accounts of banks ___
decrease
Contractionary activities:
Discount rate increase → interest rates increase in the ___ ___, making borrowing more ___
open market; expensive
Contractionary activities:
Reserve requirement ratio increases → decrease in ___ ___ for all banks and limits the ____ of funds for additional loans
excess reserves; availability
