Banks are crucial in the current society as they operate payment systems and provide financial intermediation. As business corporations, they lend or invest the money people deposit to create profit. Consequently, banks finance entrepreneurs and business people that drive the economy. The US has a complex banking system that has been improving for centuries. In 1913, it founded the Federal Reserve System and proceeded to open twelve regional reserve banks that were to be coordinated from Washington. It is crucial to understand the American banking system. Therefore, explaining aspects of the Federal Reserve and the functioning of the US banking system is central to the research paper.
Aspects of the Fed
The Federal Reserve is the central banking system of the US since its founding in 1913 (Ionescu, 2012). It is commonly referred to as the Fed. It performs five main functions. Firstly, the bank moderates rates of interest, evens out prices and maximizes employment. Secondly, it endeavors to contain and minimize systemic risks to enhance the stability of the US financial system. It performs this function through active monitoring of the financial operations in the homeland and abroad. Its third function is to promote the safety and soundness of smaller financial institutions and to monitor their impacts on the US financial system (DeYoung, 2010). Besides, it promotes the safety and effectiveness of the US payment and settlement system. Finally, it conducts consumer-focused research and analysis intending to protect the consumer and promote community development.
The System creators purposely rejected the formation of a central bank. Alternatively, it suggests establishing a decentralized banking system, a central governing board, and twelve regional Reserve Banks. Hence, the Fed is comprised of the Federal Open Market Committee (FOMC), a Board of Governors, and Reserve Banks (The Federal Reserve Board, 2016). The Reserve System has seven Board of Governors members located in the US capital. The President nominates the governors, and the US Senate confirms their positions. They are mandated to control the operations of the Reserve System to fulfill the responsibilities placed in the Federal Reserve Act. They serve a 14-year term, after which they cannot be reappointed (The Federal Reserve Board, 2016).
The governors serve on the FOMC. The body decides how to conduct open market operations. It comprises twelve members, including the seven Federal Reserve governors, head of the Federal Reserve Bank of New York, and 4 of the remaining Reserve Bank heads. In managing open market operations, the FOMC oversees the principal tool that the Fed employs to control the nation’s financial policy. Two other groups carry out crucial roles in the operations of the Reserve System. They include depository institutions such as banks, credit unions, thrifts, and advisory committees (The Federal Reserve Board, 2016). The advisory committees make suggestions to the governors and Reserve Banks concerning the responsibilities of the System.
The twelve Reserve Banks and their branches are the third entity of the Reserve System. They are the opening arms of the System. The Reserve Banks operate in the twelve geographical regions, dividing the US. Each of the banks collects information concerning the businesses and the needs of the communities under its jurisdiction (DeYoung, 2010). They channel the information to the FOMC or the governors that use it to make monetary policy decisions. Each Reserve Bank has a board of directors mandated to manage its operations. The board of directors oversees the administration of the reserve banks. Also, the board reviews the overall performance of the banks and develops goals that the banks should meet. However, rather than meeting the interests of shareholders as in private corporations, the board of directors endeavors to meet the interests of the public.
The Reserve Banks are mandated to carry out the core functions of the Federal Reserve. Among their most prominent role is to supervise the state-chartered banks, nonbank financial institutions, and thrift holding companies. Reserve Banks lend to depository organizations to maintain liquidity in the system (The Federal Reserve Board, 2016). Besides, they offer key financial services such as operating the ACH systems, clearing checks, and dispensing the dollar to repository institutions. Finally, they examine financial organizations to ensure that these institutions comply with federal laws on fair lending and the promotion of local community development.
The state-chartered banks elect six of the directors of a Reserve Bank. The Board of Governors elects the remaining three directors. The Reserve Banks have branches, each with a board of directors. Directors connect the Reserve System and the private sector. Since they are experienced in the operations of the private sector, they give precious insight into the economic condition of their respective regions (The Federal Reserve Board, 2016). This link enhances a clear understanding of the country’s economy.
Congressional appropriations do not finance the Federal Reserve. Instead, the interests it earns from its securities fund its operations. It gains these securities from its open market operations (The Federal Reserve Board, 2016). Besides, it makes income from the fees it receives from automated clearinghouse operations, fund transfers, and check clearing. After the Reserve System pays its expenses, the Reserve Banks channel their net earnings to the US Treasury.
How the US Banking System Functions
The US has a complex banking system. However, the system is carefully controlled. The Federal Deposit Insurance Corporation (FDIC) ensures that all banks are insured (DeYoung, 2010). There are various types of banks in the US. Retail Banks, to begin with, deal exclusively with retail customers. They serve the general public; hence are also called general or personal banking institutions (Ayadi et al., 2017). They offer services such as short-term loans, mortgage services, savings, and checking accounts. Larger retail banks could provide credit card services and private banking services to their clients.
Commercial banks are the other types of banks in the US. These banks are either state or federally chartered and mainly offer services to businesses and corporations. Besides, commercial banks provide clients with trade finance, real estate services, cash management, and credit services. Bank of America is an example of commercial banks in the US (DeYoung, 2010). On the other hand, investment banks provide corporate clients with sophisticated services such as merger and acquisition (M&A) activities. These types of banks are mainly seen as financial intermediaries whose clients could be large corporations. Federal saving institutions, also referred to as federal thrifts, are the other financial institutions in the country. They offer traditional banking systems and are still placed under the supervision of the Office of the Comptroller of the Currency (OCC) (Ayadi et al., 2017). Related to the federal thrifts are the state savings associations that operate within the states.
Among the functions of the Federal Reserve Board is to oversee the American commercial banking sector. Most national banks are members of the Fed under the regulation of the OCC (Ayadi et al., 2017). OCC is among the oldest federal agencies. It is mandated to control the national banks and the agencies of foreign banks. It can deny or approve applications for new branches or charters to enhance the dependability of the US banking system. It is this supervision that maintains competition among banks and efficiency in the banking system. Hence, the OCC is responsible for ensuring that federal savings associations and national banks offer fair access to services, and customers are treated fairly.
Related to the OCC are State Bank Regulators. However, rather than controlling national banks, the latter oversees the state-chartered banks in conjunction with the FDIC and the Federal Reserve (Ayadi et al., 2017). The Federal Deposit Insurance Corporation (FDIC) is the other agency that regulates banking in the US. DeYoung (2010) confirms that the department of treasury mandates the FDIC to insure the deposits of state and national banks. It insures up to $250,000 of deposits (DeYoung, 2010). It also covers money market accounts, savings accounts, and checking accounts.
Hence, it is evident that the Federal Reserve is mandated to control the financial operations in the whole nation. The constitution grants other institutions, including the OCC, FDIC, and State Bank Regulators, the mandate to regulate the financial institutions at the national or regional level. This organization ensures a smooth flow of financial operations. Besides, the FDIC offers insuring services, enhancing the confidence of depositors.
Conclusively, the US has a decentralized Reserve System. The Federal Reserve oversees the financial operations in the whole country, but the System ensured that every region in the country is represented through the twelve Reserve Banks. The Board of Governors and the FOMC and are among other entities of the Federal Reserve. Aside from the Fed, the national banks, state-chartered banks, investment banks, and federal and state saving institutions ensure that financial operations run smoothly. Besides, several regulatory institutions ensure that banks conduct fair operations.
Ayadi, R., Keoula, M., Pieter De Groen, W., Mathlouthi, W., & Sassi, I. (2017). Bank and Credit Union Business Models in the United States. Bank and Credit Union Business Models in the United States.
DeYoung, R. (2010). Banking in the United States. The Oxford handbook of banking.
Federal Reserve Board (2016). The Federal Reserve System Purposes & Functions. Federal Reserve System Publication. 20th Street and Constitution Avenue NW Washington, DC https://www.federalreserve.gov/aboutthefed/files/pf_complete.pdf
Ionescu, I. G. (2012). Categories and Types of Banking Institutions. Annals of the University of Petroşani. Economics, 12.
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