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Federal Reserve System


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Federal Reserve System

  1. 1. Regulation University The Federal Reserve System Lawrence H. White Professor of Economics, GMU Senior Scholar, Mercatus Center
  2. 2.  Sixty-third Congress of the United States of America; At the Second Session Begun and held at the City of Washington on Monday, the first day of December, one thousand nine hundred and thirteen AN ACTTo provide for the establishment of Federal reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes.Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That the short title of this Act shall be the "Federal Reserve Act.”
  3. 3. The  original  system:    the  12  regional  Federal  Reserve  Banks  “na:onalized”  3  clearinghouse  roles  •  bankers’  bank   –  check  clearing  and  se0lement  •  lender  of  last  resort   –  seasonal  and  emergency   elas6city  to  currency,  reserves  •  supervision  of  member  banks   –  capital  standards   Federal  Reserve  Bank  of  Richmond,  1928  
  4. 4. The  original  system:    the  Fed  was  not  assigned  the  tasks  of   –  conduc6ng  an  ac6ve  monetary  policy     •  gold  standard  expected  to  con6nue  to  prevail   •  But  in  WWI  ,  Europe  leF  the  gold  standard,  giving  the  Fed  discre6on   –  Being  sole  issue  of  currency  notes   •  Na6onal  Banks  con6nued  to  issue  notes  un6l  the  mid-­‐1930s     1929  notes  
  5. 5. What  does  the  Federal  Reserve  today  do?   •  Five  key  roles  :   1.  bankers’  bank  (clearinghouse)   2.  lender  of  last  resort   3.  financial  supervision  and  regula6on   4.  currency  issuer   5.  monetary  policy      
  6. 6. The  Fed  as  a  Supervisor  and  Regulator   In some countries, financial services regulation is outside the central bank (e.g. UK’s Financial Services Authority) The Fed’s authority over banks overlaps with •  FDIC •  Comptroller of the Currency •  State government banking authorities The Fed’s authority over other financial firms overlaps with •  SEC •  CFTC •  FINCEN Dodd-Frank expanded the Fed’s role as a financial regulator
  7. 7. The  Fed  as  Supervisor   Supervision  =  solvency  examina6ons  (audits),  on-­‐  and  off-­‐site  inspec6ons     •    with:  pre-­‐examina6on  visits,  review  of  documents,  reports       •         conducted  by  the  12  Reserve  Banks Who  is  supervised  by  the  Fed?     1.  Bank  Holding  Companies,  incl.  Financial  Holding  Cos.  and  Savings  and   Loan  Holding  Cos.  (SLHCs  new  with  Dodd-­‐Frank)   2.  State-­‐chartered  Member  Banks   3.  Foreign  Branches  of  Member  Banks   4.  Designated  “Systemically  Important”  Non-­‐Bank  Financial  Companies   (new  with  Dodd-­‐Frank)   5.  Designated  “Systemically  Important”  Financial  Market  U6li6es  (new   with  Dodd-­‐Frank)  
  8. 8. The  Fed  as  Regulator   The Fed promulgates and enforces Regs. A – YY, specifying requirements and restrictions on, e.g., B.  Demographic  credit  decision  repor6ng*   C.  Home  mortgage  data  disclosures  (HMDA)*   D.  Reserve  ra6os   E.  EFT  disclosures,  fees,  record-­‐keeping*   G.  Geographic  credit  decision  repor6ng  (CRA)*   H.  Investment  and  loan  ac6vi6es,  capital  ra6os,  real  estate  lending,  appraisal  standards,    suspicious-­‐ac6vity  reports;  mortgage  licensing*   M.  Leasing  terms  disclosures*   P.    Customer  privacy*   Q.  Capital  adequacy   S.    Wire  transfer  record-­‐keeping   T.    Credit  by  securi6es  brokers  and  dealers  (margin  requirements)   V.    Credit  informa6on-­‐sharing*   Y.      Bank  holding  company  acquisi6ons   *now  enforced  by  CFPB      
  9. 9. BoG  Division  of  Banking  Supervision  and  Regula:on    •  Michael  S.  Gibson,  Director  •  2  Deputy  Directors  •  7  Senior  Associate  Directors  •  4  Associate  Directors  •  4  Deputy  Associate  Directors  •  11  Assistant  Directors  •  3  Senior  Advisers  •  2  Advisers  •  2  Program  Directors  •  9  Economists  •  3,109  professional  supervisory  staff    (per  2011  Annual  Report)    
  10. 10. The  Consumer  Financial  Protec:on  Bureau  Created  by  Dodd-­‐Frank,  sets  own  budget,  funded  by  the  Fed  1,359  FTE  est.  for  FY  2013  
  11. 11. Concerns  about  expanding  Fed  regulatory  responsibili:es  •  “The  more  power  the  Fed  is  given  in  such  ma0ers,  the   greater  the  poli6cal  pressures  will  be  from  the  outside   to  sa6sfy  certain  cons6tuencies,  and  the  less  the   Federal  Reserve  will”  [be  able  to  act  in  the  public   interest].      –  James  Hamilton,  UCSD  
  12. 12. The  Fed’s  monetary  policy  structure  •  Once  decentralized     –  With  reserve  banks  seong  own   policies  •  Now  centrally  controlled     –  Board  of  Governors  sets  FRB   budgets,  policies  •  Monetary  policy  is  made  by  the   Federal  Open  Market   CommiPee    
  13. 13. 2013  Members  of  the  FOMC   Vo:ng  FRB  Presidents  Board  of  Governors    William  C.  Dudley,  New  York    Ben  Bernanke,  Chairman      James  Bullard,  St.  Louis   Elizabeth  A.  Duke    Charles  L.  Evans,  Chicago      Jerome  H.  Powell      Esther  George,  Kansas  City    Sarah  Bloom  Raskin    Eric  S.  Rosengren,  Boston    Jeremy  C.  Stein    Daniel  K.  Tarullo          Janet  L.  Yellin   Non-­‐vo:ng       Jeffrey  M.  Lacker,  Richmond        Dennis  P.  Lockhart,  Atlanta      Sandra  Pianalto,  Cleveland  FOMC  =  7  BOG  +  FRBNY  Pres.  +  4  other    Richard  Fisher,  Dallas    FRB  Presidents  (one-­‐year  terms,  rota6ng;      Narayana  Kocherlakota,  Minneapolis  one  each  from  Boston-­‐Philadelphia-­‐  Charles  I.  Plosser,  Philadelphia    Richmond;  Cleveland-­‐Chicago;  Atlanta-­‐St.    John  C.  Williams,  San  Francisco  Louis-­‐Dallas;  Minneapolis-­‐Kansas  City-­‐  San  Francisco        
  14. 14. The  Fed  and  Monetary  Policy  Why care about monetary policy? Fear the boom and bust•  When policy becomes too loose, asset price bubbles and unsustainable booms•  When monetary remains too loose, inflation•  When policy tightens, recessions
  15. 15. The  Tools  of  Monetary  Policy  1.  The Reserve Ratio (rare)2.  Open Market Operations (asset purchases and sales) Usual intermediate target: the Fed Funds rate3.  Interest rate on bank reserves (new since 2008)
  16. 16. Greenspan   Bernanke  
  17. 17. The  Fed’s  balance-­‐sheet  hyperexpansion  since  2008  
  18. 18. Concerns  about  the  Fed’s  expanded  balance  sheet    “the  large  and  growing  balance  sheet  may  expose  the  Fed  to  a   certain  type  of  poli6cal  risk.  If  6ghtening  needs  to  happen  in   the  future,  the  Fed  will  have  to  raise  interest  rates  [on   reserves]  (IOR)  and/or  sell  off  its  assets.  [Higher]  IOR  may  be   made  to  look  like  Fed  Reserve  (instead  of  Treasury)  transfers   to  the  banking  sector,  at  taxpayer  expense.  Capital  losses  on   asset  sales  would  similarly  reduce  remi0ances  to  the   Treasury.  Its  not  going  to  look  very  pre0y.”    -­‐-­‐David  Andolfa0o,    FRB  St.  Louis  (personal  view)  
  19. 19. Foreign  exchange  value  of  the  US  dollar