Federal reserve system and its impact on banking industry

The Federal Reserve System ( Fed ) is the cardinal bank of the United States. As a cardinal bank, the Fed is a bank for other Bankss and a bank for the federal authorities. It was created to supply the state with a safer, more flexible and more stable pecuniary and fiscal system. Over the old ages, its function in banking and the economic system has expanded. The Federal Reserve System is a web of 12 Federal Reserve Banks and a figure of subdivisions under the general inadvertence of the Board of Governors. The Reserve Banks are the operating weaponries of the cardinal bank

Federal Reserve System


During the 19th century and the early 20th century fiscal terrors lead to bank failures and concern bankruptcies that badly disrupted the economic system. This was largely due to unavailable short term recognition to troubled depositary establishments. To forestall such a ruin of the economic system, Congress passed the Federal Reserve Act on December 23, 1913 to supply an elastic currency and oversee the Banking Industry in the U.S. with the creative activity of the Federal Reserve System.


Federal Reserve System, besides known as Federal Reserve, or The Fed, is the cardinal bank of the United States, founded by Congress to supply the state with a safer, flexible, and stable fiscal system. Over the old ages, the Federal Reserve System has expanded its function in banking and the economic system.


The Federal Reserve ‘s function in banking and the economic system autumn into four general classs:

carry oning the state ‘s pecuniary policy by act uponing the pecuniary and recognition conditions in the economic system in chase of maximal employment, stable monetary values, and moderate long-run involvement rates ( Fed, 2009 )

oversing and modulating banking establishments to guarantee the safety and soundness of the state ‘s banking and fiscal system and to protect the recognition rights of consumers ( Fed, 2009 )

keeping the stableness of the fiscal system and incorporating systemic hazard that may originate in fiscal markets ( Fed, 2009 )

supplying fiscal services to depositary establishments, the U.S. authorities, and foreign official establishments, including playing a major function in runing the state ‘s payments system ( Fed, 2009 )


The Federal Reserve System plays a really of import function in the banking industry and the economic system. It sets the state ‘s pecuniary policy to advance the aims of maximal employment, stable monetary values, and moderate long-run involvement rates. It has supervisory and regulative authorization over the fiscal establishments and their activities to guarantee the soundness of the fiscal establishments, just intervention of their consumers and stableness in the fiscal markets. As the U.S. cardinal bank, it has well-established relationships with the cardinal Bankss, and can organize with them to when pull offing international fiscal crises and oversing establishments with a significant international presence. It besides conducts research on the U.S. and regional economic systems and distributes information about the economic system through addresss, publications, seminars and web sites.


The Federal Reserve System comprises of a cardinal, governmental agency-the Board of Governors-in Washington, D.C. , and twelve regional Federal Reserve Banks.

The Board of Governors is made up of seven members appointed by the President and confirmed by the Senate. The full term of a member is 14 old ages. The President besides appoints the Chairman of the board for a four twelvemonth term.

The 12 Federal Reserve Banks provide banking services to the authorities and the depositary establishments within their territory for payment processing, look into clearance and managing currency and securities.

The Federal Reserve System is considered to be an independent cardinal bank. Its determinations are independent of the President and the executive subdivision of the authorities, but capable to inadvertence by the Congress and must work within the policies established by the authorities.

Banking Industry

Banking is the concern of accepting sedimentations and imparting them out to gain an involvement. Banks earn net incomes by supplying fiscal services and working as fiscal mediators. The Bankss in the U.S. can be classified into three types based on which authorities organic structure has chartered them. Those chartered by the federal authorities are national Bankss, they are members of the Federal Reserve System. Banks chartered by provinces are either members of the Federal Reserve System one time they meet the criterions set by the Board of Governors and are called Member Bankss, or they are non members of the the Federal Reserve System and are called Nonmember Bankss.

Based on the bank ‘s activities they can be divided into retail banking, supplying services to persons and little concern ; concern banking, supplying services to mid-market concern ; corporate banking, supplying services to big corporations ; private banking, supplying wealth direction services to high net-worth persons ; and investing banking, associating to activities on the fiscal market. Most Bankss are for-profit private companies, some are authorities owned as mentioned above and or are non-profit organisations like the Credit Unions. Large Bankss that provide a broad scope of the above activities and include insurance and other services are termed as Cosmopolitan Bankss.

Impact of Federal Reserve System on Banking Industry

To run into its aims, the Federal Reserve requires the depositary establishments to keep balances and at a coveted monetary value which is the federal financess rate. The Federal Reserve balances has three constituents: required modesty balances, contractual glade balances, and extra modesty balances.

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Clearing house


Reserve Requirements

The Federal Reserve requires the depositary establishments to keep a fraction of certain liabilities in modesty. The Federal Reserve can set this modesty demands by altering the modesty ratio, the liabilities or both. By altering the modesty demands, Federal Reserve has a predictable demand for the Federal Reserve balances and provides a greater ability to command the federal financess rate and facilitates the behavior of unfastened market operations. However, the accommodations in the modesty demands are dearly-won to administrate, make non gain involvement and have a immense impact on the depositary establishments and hence are non adjusted often.

Contractual Clearing Balance


Performance and Effectiveness of Federal Reserve System