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Federal Reserve System 
Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority.)

The central banking system of the United States, created by the FEDERAL RESERVE ACT, approved December 23, 1913.  It subsequently developed into one of the world's strongest banking systems, combining eclectically the leading features of the principal European central banking systems adapted to American requirements and with American innovations.

The basic system includes the 12 Federal Reserve banks and their 25 branches, 37 automated clearinghouses, 46 regional check processing centers, and the Culpeper Communications and Records Center; national banks, which are required to be stockholding members of the Federal Reserve bank of their district; state-chartered banks and trust companies which elected to become members of the system by meeting the qualifications and requirements for membership; and all other depository institutions - other commercial banks, savings banks, savings and loan associations, and credit unions - brought under the jurisdiction of the Board of governors of the Federal Reserve System for reporting and reserve maintenance purposes against transaction deposits and commercial or nonpersonal savings accounts pursuant to the DEPOSITORY INSTITUTIONS DEREGULATION AND MONETARY CONTROL ACT OF 1980.  As of the close of 1979 (the Monetary Control Act of 1980 was enacted March 31, 1980), the proportion of all commercial banks that were members of the Federal Reserve System had declined to a new low of 38% of all commercial banks.  Steady erosion had occurred in Federal Reserve membership over the years; at the end of 1941, for example, member commercial banks accounted for 46% of all commercial banks and 87% of all commercial bank deposits.  An outline of the Federal Reserve System is structure is appended.

Before passage of the Federal Reserve Act, the banking system of the United States was an atomistic structure, pyramided in reserves toward the money centers, particularly New York.  National banks were instituted by the NATIONAL BANK ACT of 1863 and its subsequent amendments, while state-chartered banks and trust companies, numerically again in the majority after a period of decline following passage of the National Bank Act, organized and operated under state laws and regulation of varying degree, dating from early American history.  The Federal Reserve Act was enacted as a result of the realization of the glaring instabilities of the atomistic system, dramatically illustrated by the Money Panic of 1907.

Development.  The Federal Reserve Act grew out of the defects and insufficiencies of the former decentralized national-state system, especially in the following particulars:

  1. There was no provision for directly elastic currency.  National bank notes were perversely elastic in behavior because of the operation of circulation accounts by national banks for profit.  Circulation would be expanded shortly after business activity turned downward, when government bonds bearing the circulation privilege were still selling at discounts and could be pledged at par to secure circulation; at such time of decline in the cycle, increased circulation was not needed.  Subsequently, shortly after the cycle turned upward, when bond prices were still at premiums, circulation would be reduced and profits taken on the government bonds thus released from circulation pledge, at a time when increased business activity needed additional circulation.  National bank notes (state bank notes were nonexistent by such time because of a 10% federal tax) were rigid in amount, based upon the bonded debt of the United States, rather than flexible in amount, contracting and expanding directly with the needs of business.  This currency system was a panic breeder.  At various critical times in the preceding century and into the twentieth century, the banking system had broken down because it was unable to furnish an adequate supply of flexible and sound circulation meriting public confidence.

  2. There was no provision for rediscount facilities as a means of furnishing elastic credit, i.e., there was no assured source for the REDISCOUNT of sound business paper held by banks.

  3. Reserves were not centralized.  Instead, the partial redeposit of reserves by country and reserve city banks at interest in central reserve city banks (particularly in New York City) made the RESERVE structure pyramided and unreliable.  Reserves of interior banks were not available when needed in times of stress, when money market banks suspended or became tight because of financial stringency.

  4. The system of collection of out-of-town checks was circuitous, inefficient, and uneconomical.

  5. There was no rational control over the money market.

Steps toward removing these defects were actively begun as an aftermath of the panic of 1907, when public attention was again centered on the problem of banking reform.  Accordingly, in 1908 the Congress created the NATIONAL MONETARY COMMISSION to determine what modifications might be necessary to remove the weaknesses in the prevailing banking system.  After four years of investigation, this body reported its recommendations to Congress in full in a plan which later became known as the Aldrich plan.  After undergoing numerous modifications and revisions, this scheme was finally submitted for the approval of Congress but defeated in 1912.  It provided for a National Reserve Association, capitalized at $300 million subscribed to by member banks and having a branch in each of 15 districts in the country, holding deposits of members (at no interest), issuing notes against gold and commercial paper cover, engaging in open market operations in government bonds, and generally serving as fiscal agent for the government.  When the Wilson administration took office in 1913, one of its first major pieces of legislation was the Federal Reserve Act, passed December 23, 1913, "as a Christmas present" to the nation.

Ownership and Earnings. 

The Federal Reserve banks are primarily banks for banks.  Except as to open market operations, and direct loans to individuals, partnerships, or corporations secured by government securities (Sec. 13) in "unusual and exigent circumstances," their dealings are restricted to banks and the government. There are no individual stockholders.  The stock is all owned by member banks, which are required to subscribe to the stock of the Federal Reserve bank of their district in an amount equal to 6% of the member bank's capital and surplus.  Only one-half of this subscription, i.e., 3%, is called and paid in.  The stock has a par value of $100, is of one class, cannot be transferred or hypothecated, and pays a fixed cumulative dividend at the rate of 6%.  So long as it is a member of the system, a member bank may retain the stock, and its holdings are increased or decreased to correspond with changes in its capital stock and surplus (any member bank which holds capital stock of a Federal Reserve bank in excess of the amount required on the basis of 6% of its paid-up capital stock and surplus shall surrender such excess stock).

After payment of all necessary expenses and the fixed 6% dividends on the paid-in capital stock, the residual earnings, after surplus is built up to 100% of subscribed capital, are paid into the U.S. Treasury.  Prior to 1933, the Federal Reserve Act required payment of a franchise tax to the Treasury of 90% of earnings after each Federal Reserve bank has accumulated a surplus equal to subscribed capital.  Such franchise tax was eliminated by the Banking Act of 1933.

The Board of Governors of the Federal Reserve System on April 23, 1947, reinstituted payments to the government by invoking, under the authority of Section 16 of the act, such rates of interest on outstanding Federal Reserve notes not covered by gold certificates collateral as would transfer about 90% of residual earnings, after expenses and dividends and maintenance of surplus at 100% of subscribed capital, to the Treasury.  In 1959, the board of governors instituted payments to the Treasury "as interest on Federal Reserve notes" of all net earnings after dividends and after maintenance of surplus at 100% of subscribed capital.  In addition, there was paid in 1959 to the Treasury the amounts by which surplus at any Federal Reserve banks exceeded subscribed capital.

Federal Reserve banks, including the capital stock and surplus therein and the income derived therefrom, are exempt from federal, state, and local taxation, except taxes on real estate.

Components of the Federal Reserve System.

The system consists of four organizational layers:  (1) the board of governors, the Federal Open Market Committee, and the Federal Advisory Council, the top echelon for determination of policy and achievement of coordination; (2) the 12 Federal Reserve Banks; (3) the member banks; and (4) all other depository institutions, brought under Federal Reserve jurisdiction by the Monetary Control Act of 1980.

Board of Governors of the Federal Reserve System:  for organizational details.  The board's functions are to determine monetary policy, exercise supervision over the system, and perform certain operations.

The board considers the mission of monetary policy to seek in the public interest to facilitate sustained high levels of employment, relative stability of average prices, and balanced economic growth.  In the opinion of retired Chairman Martin, monetary policy had to assume too much of the burden of economic stabilization in recent years.  Both fiscal policy and credit and monetary policy are necessary to influence the level of effective demand.  Fiscal policy acts through the relationship between government receipts and expenditures and thus affects directly the after-tax incomes of business and consumers.  Initial impact of credit and monetary policy is on expenditures with borrowed funds, particularly those obtained directly or indirectly from commercial banks.  Monetary policy also has an effect on expenditures other than with borrowed funds, as liquidity, capitalized values, and profit expectations respond.  Both fiscal policy and credit and monetary policy have additional derived effects as higher or lower money incomes lead to increased or reduced expenditures and as changes in consumption demand lead to changes in investment.

The tools of monetary policy of the general type are open market operations (the board participating as members of the Federal Open Market Committee in the establishment of policy and issuance of specific directives), which affect the volume of bank reserves and deposits; review and determination of discount rates of Federal Reserve banks; and prescription of specific legal reserve requirements against deposits of member banks and other depository institutions, within the ranges of variation specified in the Federal Reserve Act as amended by the Monetary Control Act of 1980, which affects level of excess reserves.  In applying these tools, guides or indicators have included "feel of the market" (judgment based on such factors as the federal funds rate, Treasury bill rates, current trends in money markets and capital markets, etc); level of interest rates; intensity of demand for credit; net borrowed reserves, free reserves, etc; and money supply.

Supervisory powers of the board include prescribing rules and regulations governing advances and discounts by Federal Reserve banks to member banks; open market purchases of bills of exchange, trade acceptances, and bankers acceptances by Federal Reserve banks; acceptance by member banks of drafts or bills of exchange; legal reserve requirements of member and nonmember banks and other depository institutions;  purchase of warrants by Federal Reserve banks; accounting and disclosure requirements for equity securities of state member banks; extension of securities credit by lenders other than banks, brokers, or dealers; eligibility requirements and conditions for membership in the Federal Reserve System by state-chartered banking institutions; issuance and cancellation of stock of Federal Reserve banks; collection of checks and other items by Federal Reserve banks; regulation of interlocking bank relationships under the Clayton Act; regulation of foreign banks and bankers; loans to executive officers of member banks; prescription of minimum security devices and procedures for Federal Reserve banks and state member banks; regulation of interest on time and savings deposits; relationships with dealers in securities; bank service arrangements; extension of securities credit by brokers and dealers and by banks for the purpose of purchasing or carrying securities on margin; loan guarantees for defense production; regulation of bank holding companies; and prescription of disclosure and computational requirements on consumer credit charges (the Truth-in-Lending Act), as well as a variety of other functions under other consumer-orientated legislation.

Other supervisory tasks are to pass upon mergers, consolidations, or acquisitions of stock or assets by state member banks in coordination with Comptroller of the Currency; the Federal Deposit Insurance Corporation, and the attorney general; to fix, upon affirmative vote of not less than six of its members, for each Federal Reserve district the percentage of individual bank capital and surplus which may be represented by security loans; to direct any member bank to refrain from further increases in loans secured by stock and bond collateral for any period up to one year, under penalty of suspension of all rediscount privileges; to suspend, at its discretion, but after reasonable notice and hearing, any member bank from use of Federal Reserve credit facilities when in the board's judgment such member bank is making undue use of such credit; to declare immediately due and payable any advance by Federal Reserve banks to member banks when such member banks, after official warning from the board or Federal Reserve bank, increases its loans on stocks and bonds or investments other than U.S. government securities; to remove any officer or director of a member bank who continues to violate any law relating to such bank or continues unsafe and unsound practices in conducting the bank's business, after warning by the Comptroller of the Currency (national and D.C. banks) or Federal Reserve agent (state member banks); to suspend or remove any officer, director, or employee of Federal Reserve banks for cause; to suspend (for violation of any section of the Federal Reserve Act) any Federal Reserve bank, to operate it, and, if necessary, to reorganize it.

Still further supervisory responsibilities are to establish and oversee the implementation of the international credit guidelines under the Voluntary Credit Restraint Program; to permit, or on affirmative vote of five members to require, Federal Reserve banks to rediscount paper for one another at rates approved by the board; to permit Federal Reserve banks to make four-month advances to member banks "secured to the satisfaction of such Federal Reserve Bank"; upon affirmative vote of five members, to permit Federal Reserve banks to make loans to groups of five or more member banks which have inadequate amounts of assets eligible or acceptable under conventional borrowing; and to require the writing off of worthless assets from the books of Federal Reserve banks.

Operational or semioperational powers of the board include operating the Interdistrict Settlement Fund; examining Federal Reserve banks and member banks; reporting the condition of the Federal Reserve banks weekly; adding to or reclassifying RESERVE CITIES (P.L. 860114, July 28, 1959, terminated the central reserve city classification three years from the date of enactment; and the board suspended its triennial review of reserve city classifications on February 10, 1960); suspending reserve requirements for periods of 15 days (subject to renewal) and imposing graduated taxes as penalties for deficiencies in legal reserves of member banks; supervising through the Comptroller of the Currency the issuance and retirement of Federal Reserve notes and regulating such issuance and retirement; and appointing the three Class C directors of each Federal Reserve bank, as well as designating the chairman of the board (who is also Federal Reserve agent) and vice-chairman from such directors.

In summary, the board of governors now has a diversification of powers, both policy-making and operational, that provide it with more effective means for achieving a unified and coordinated Federal Reserve System.  Most of these increased powers and controls were created by the Banking Act of 1933 and 1935.  The Monetary Control Act of 1980 added universal and uniform reserve requirements power over all depository institutions.  See appended exhibit on the Federal Reserve System:  Relationship to Credit Policy Instruments.

Federal Open Market Committee:  See FEDERAL OPEN MARKET COMMITTEE for organization details.  This committee has centralized direction and control of open market operations, generally considered the most flexible tool of monetary policy.

The committee was statutorily organized, pursuant to the BANKING ACT OF 1935, on March 1, 1936.  Each Federal Reserve bank is required to participate in the committee's operations and may not engage in open market operations for itself without the committee's approval.  The BANKING ACT OF 1933 made a start toward such unified direction and control of open market operations by providing that individual Federal Reserve bank open market operations for own account would have to be approved by the Federal Reserve Board except in the case of emergencies.  Prior thereto, open market operations were in the hands of committees of Federal Reserve banks which, although nominally under the Federal Reserve Board, could not compel any Federal Reserve bank to participate in unified system operations.

Policy directives of the Federal Open Market Committee, reflecting current monetary policy, are issued to the Federal Reserve Bank of New York as the bank selected by the committee to execute transactions for the system open market account.  In the area of domestic open market operations, the Federal Reserve Bank of New York operates under two separate directives from the Open Market Committee; a continuing authority directive, and a current economic policy directive.  The committee follows the practice of reviewing all of its continuing authorizations and directives at the first meeting of the committee following the election of new members from the Federal Reserve banks to serve for the year beginning March 1.

The U.S. Treasury, through its Exchange Stabilization Fund and with the Federal Reserve Bank of New York acting as agent, had been conducting operations in foreign exchange since March, 1961, as part of a cooperative effort by treasuries and central banks to create a first line of defense against speculation in foreign exchange markets.  On January 23, 1962, the Federal Open Market Committee (with two dissenting governors) approved the initiation of a program of open market operations in foreign currencies.  Until June 7, 1966, the Federal Reserve Bank of New York operated for the committee under three directives:  (1) an authorization regarding open market transactions in foreign currencies, (2) a statement of guidelines for system foreign currency operations, and (3) a continuing authority directive on system foreign currency operations.  These were replaced on June 7, 1966, with two new directives:  (1) an authorization for system foreign currency operations, and (2) a foreign currency directive, which contained the substantive change authorizing the special manager of the system open market account for foreign currency operations to engage in operations on his own initiative to meet a threat of disorderly conditions in the foreign exchange markets, with the requirement that he consult as soon as practicable with the committee or in an emergency with members of a designated subcommittee.

The Federal Reserve banks are authorized under existing law to engage in open market transactions in foreign exchange, subject to the direction and regulation of the Federal Open Market Committee, and for this purpose to open and maintain accounts with foreign banks subject to the consent and regulations (Regulation N, as amended) of the Board of Governors of the Federal Reserve System.

Federal Advisory Council:  This body, statutorily provided for in the Federal Reserve Act, has purely advisory and consultative functions.  It is composed of 12 members, one from each of the Federal Reserve districts, elected annually by the board of directors of each Federal Reserve bank.  The council is required to meet at least four times a year, in Washington, D.C.  Being composed entirely of private bankers, the council assists the Board of Governors of the Federal Reserve System by conferring and advising and making recommendations with regard to matters pertaining to business and financial conditions in the respective Federal Reserve districts.

Twelve Federal Reserve Banks:  Each Federal Reserve bank has its own distinct organization and serves its own district, so it is sometimes known as a regional bank.  The minimum capital for each bank is $4 million (subscribed capital), but the majority of them have capital considerably in excess of this amount.

Each Federal Reserve bank is under the direction of its own board of directors, consisting of nine directors divided into three classes of three directors each.  These classes are known as Class A, Class B, and Class C.  Class A band B directors are elected by the member banks of the district, and Class C directors are appointed by the Federal Reserve Board of Governors.  The three Class A directors are representative of the member commercial banks in the district and are usually bankers; the three Class B directors and three Class C directors are selected to represent the public, with particular consideration being given to the interests of agriculture, commerce, industry, services, labor, and consumers.  Thus both the providers and users of banking services in the district are represented on the bank's board.  Directors cannot be members of Congress; Class B and C directors cannot be officers, directors, or employees of any bank; and Class C directors cannot own stock in any bank.  Additionally, since a Reserve bank directorship is considered to be a form of public service, directors are asked to limit other activities.  All directors are expected to avoid participation in partisan political activities.

One of the Class C directors, who shall be a person of tested banking experience, is designated by the board of governors as chairman of the board of directors of the Federal Reserve bank and as Federal reserve agent.  Another of the Class C directors shall be appointed by the board of governors as vice-chairman, the third Class C director shall preside at meetings of the bank's board of directors.  Subject to the approval of the board of governors, the Federal Reserve agent may appoint one or more assistants, who shall be persons of tested banking experience, to assist the Federal agent in the performance of his duties and to act in his name and stead during the latter's absence or disability.

All directors of a Federal Reserve bank are elected for three-year terms, on a staggered basis (three places on the board to be filled each year).  The president and first vice-president the board appoints must be approved by the board of governors.

Class A and B directors are elected by mail by the member banks of the district.  For this purpose, the member banks of the district are divided by the board of governors into three groups, each group consisting as nearly as possible of banks of similar capitalization.  Within each such size group, each member bank may nominate to the Federal Reserve bank chairman of the board Class A candidates and Class B candidates as first, second, or other choices.  Any candidate having a majority of all votes cast as first choice shall be declared elected; recourse is had to addition of the second or other choices to the number of first choices, if necessary, in order to establish the candidates having a majority of all choice votes.

Although member banks are sole stockholders and elect two-thirds of the directors of each Federal Reserve bank, it is apparent that control of policy rests with the board of governors:  (1) no Federal Reserve bank may refuse to participate in open market operations pursuant to directives of the Federal Open Market Committee, which consists of all seven board of governors and five senior officers (who vote) from Federal Reserve banks; (2) discount rates set by each bank's directors are subject to review and determination by the board of governors; (3) the board of governors still has the power to change legal reserve requirements within the narrower range of variation prescribed by the Monetary Control Act of 1980, as well as to impose supplemental reserve requirements; and (4) the board of governors controls a variety of operational subjects by its regulations (see FEDERAL RESERVE BOARD REGULATIONS).

Federal Reserve banks perform a variety of central banking functions, which may be summarized as follows:

  1. To serve as a depository for reserve and clearing balances of depository institutions.  The following reserve requirements applied effective November 13, 1980 (but for existing nonmember banks and thrift institutions the phase-in period would end September 3, 1987; for existing member banks the phase-in period was about three years, depending on whether their new reserve requirements were greater or less than the old requirements; and for existing agencies and branches of foreign banks, the phase-in period ended August 12, 1982):

on net transaction accounts, in amounts from zero to $25 million, 3%; in amounts over $25 million, 12%;

on nonpersonal time deposits, with maturities of less than four years, 3%; but with maturities of four years or more, zero; on eurocurrency liabilities of all types, 3%.

These required reserves must be held in the form of deposits with Federal Reserve banks or vault cash of the institutions concerned.  Since implementation of the Monetary Control Act of 1980, nonmembers of the Federal Reserve System may maintain reserves on a passthrough basis with certain approved institutions.

Reserve accounts of depository institutions constitute most of the deposits of the district Federal Reserve banks.  In addition, however, deposits of the district Federal Reserve banks include deposits of the U.S. Treasury (general account - U.S. Treasurer, one at each of the 12 district Federal Reserve banks); deposits of foreign central banks and governments, maintained for international settlement and foreign monetary reserve purposes; and other deposits (clearing balances of depository institutions and balances of certain government agencies and international organizations).  P.L. 89-3, approved March 3, 1965, eliminated the requirement for maintenance of reserves in gold certificates of not less than 25% against Federal Reserve bank deposits.

  1. To furnish an elastic currency and credit.  A depository institution requiring additional reserves may obtain them from the district Federal Reserve bank by offering ELIGIBLE PAPER for rediscount or by borrowing therefrom on its own notes payable secured by eligible paper or by government securities.  The depository institution may elect to receive the proceeds in FEDERAL RESERVE NOTES or other forms of currency, if needed to meet deposit withdrawals, or as a credit to its reserve account, on which excess reserves (in excess of legal reserve requirements) it may draw or on the basis of which it may expand its loans and investments and thus its deposits.  Similarly, a depository institution may return redundant currency, including Federal Reserve notes, to its Federal Reserve bank for credit to its reserve account, and pay off its advances from the Federal Reserve bank affords interconvertibility of excess reserves and currency to its depository institutions.

In turn, each Federal Reserve bank has to meet its collateral requirements for Federal Reserve notes.  These notes must be fully secured by gold certificates, special drawing rights, eligible paper, and/or U.S. government direct obligations, tendered to the Federal Reserve agent in the particular issuing district Federal Reserve bank.  P.L. 90-269, approved March 18, 1968, eliminated the provision of Section 16 of the Federal Reserve Act under which the Federal Reserve banks were required to maintain reserves in gold certificates (which were included also as part of the gold certificates cover) of not less than 25% against Federal Reserve notes.

  1. To provide an efficient system of collecting out-of-town cash items.  The Federal Reserve Act empowers each Federal Reserve bank to exercise the functions of a regional clearinghouse for the depository institutions of its district.  In turn, through management of the INTERDISTRICT SETTLEMENT ACCOUNT, the board of governors itself serves as national manager for clearing debit and credit balances arising among the various Federal Reserve banks as the result of their clearing operations for depository institutions and transfers for the Treasury and for account of depository institutions.
  1. To engage in open market operations; to deal in gold; and to establish foreign correspondents and agencies.  Statutory powers of each Federal Reserve bank include the purchase and sale in the open market, at home or abroad, either from or to domestic or foreign banks, firms, corporations, or individuals, of cable transfers and bankers acceptances and bills of exchange eligible for rediscount; the purchase from depository institutions of bills of exchange arising out of commercial transactions and sale thereof, with or without endorsement of the Federal Reserve bank; the purchase and sale of obligations of the United States and of federal agencies, six-month tax anticipation obligations of states and their subdivisions, and acceptances of Federal Intermediate Credit banks (whenever the board of governors shall declare the public interest so requires).

These powers are subject, however, to rules and regulations of the board of governors, which exercises special supervision over all relationships and transactions of any kind of a Federal Reserve bank with any foreign banks or bankers.  Freedom of action in open market operations is restricted further by direction of and regulations adopted by the Federal Open Market Committee.

  1. To serve as depository and fiscal agent for the Treasury and to carry on subtreasury operations.  Each Federal Reserve bank carries an account for the U.S. Treasurer and effects transfers of such Treasury balances without charge, handles issuance and redemption of U.S. government obligations, and performs other fiscal functions for the federal government.  With the abandonment of the subtreasury system in 1921, the Federal Reserve banks supply depository institutions with Treasury currency and issue new currency in exchange for worn and mutilated bills and coins.
  2. To develop and maintain the U.S. money market.  The Federal Reserve banks, subject to regulations of the board of governors and Federal Open Market Committee, assist in the activity of the money market by open market dealings in bankers acceptances and through the system account, in Treasury bills normally in the government securities market.  In addition, by their services to depository institutions in rediscounts and advances, they influence money market conditions, since depository institutions are major participants in the money market.

Major Changes.

The Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) constituted the third major legislation affecting the U.S. financial system to be enacted, following the Banking Acts of 1933 and 1935.  The two early acts were specifically aimed at changes in the Federal Reserve System affecting commercial banks, whereas the DIDMCA effected repository institutions in general.

Act of May 13, 1960 (12 U.S.C. 1828(c)) amended Section 18(c) of the Federal Deposit Insurance Act, which as far as the Board of Governors of the Federal Reserve System is concerned provides that the board must pass upon each merger, consolidation, purchase of assets, or assumption of liabilities in which the active or resulting bank is to be a state member bank.

The Community Reinvestment Act, Title VIII of P.L. 95-128, October 12, 1977, the Housing and Community Development Act, required federal financial supervisory agencies among other things:

  1. To require each appropriate federal financial supervisory agency to use its authority when examining financial institutions and to encourage such institutions to help meet the credit needs of the local communities in which they are chartered consistent with the safe and sound operations of such institutions.

  2. To assess, in examining federal insured financial institutions, each lending institution's record in meeting the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with safe and sound operations, and to take such records into account in its evaluation of an institution that applies for a federal charter, or to relocate a home office or a branch office, or for merger, or for approval of a holding company acquisition.

  3. To promulgate regulations implementing this act to take effect 390 days following its enactment.

  4. To report annually to the Congress on actions taken to carry out its responsibilities under this act.

P.L. 95-188, November 16, 1977, the Federal Reserve Reform Act, among other things:

  1. Extended the authority for flexible interest rate control (Regulation Q) for one year, until December 15, 1978.

  2. Required the board of governors and the Federal Open Market Committee to maintain long-run monetary and credit aggregates commensurate with the economy's long-run potential to increase production so as to promote effectively goals of maximum employment, stable prices, and moderate long-term interest rates.

  3. Required the board to appear quarterly, alternately before the House and Senate banking committees, and to testify concerning the ranges of monetary and credit aggregates for the upcoming 12 months.

  4. Prohibited discrimination on the basis of race, creed, color, sex, or national origin in the selection of Federal Reserve bank directors.

  5. Modified qualifications for selection of Class B and Class C Federal Reserve bank directors by providing that such directors shall represent the public and shall be chosen with due but not exclusive consideration given to the interests of agriculture, commerce, industry, services, labor, and consumers.

  6. Required Senate confirmation of the chairman and vice-chairman of the board of governors.

  7. Applied federal criminal conflict-of-interest provisions for federal employees to Federal Reserve bank directors, officers, and employees.

  8. Amended Sections 2(a)(5)(D), 3(a), and 4(c)(2) of the Bank Holding Company Act to authorize the board of governors to extend up to a maximum of five years the period for disposition of shares acquired by a bank or bank holding company in the course of securing or collecting a debt previously contracted in good faith, if such an extension of time would not be detrimental to the public interest.

  9. Amended Section 3(b) of the Bank Holding Company Act to provide for expedited board approval of bank and bank holding company acquisitions, consolidations, and mergers in emergency situations or when immediate action is necessary in order to prevent the probable failure of the bank or bank holding company involved in the transaction.

  10. Amended Section 11(b) of the Bank Holding Company Act to shorten the usual 30-day lag between the date of board approval of a transaction and the earliest date on which the approved transaction may be consummated, by providing for immediate consummation in the case of a failing bank or bank holding company, and by providing a 5-day lag between approval and consummation in emergency situations.  In all cases, the time periods set the outside limits within which suits may be brought to challenge the board's action as violative of the antitrust laws (except for violations alleged under Sec. 2 of the Sherman Antitrust Act, 15 U.S.C. 2).

P.L. 95-320, July 21, 1978, the Federal Banking Agency Audit Act, provided for General Accounting Office audit of the Federal Reserve Board, the Federal Reserve banks and their branches and facilities, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency.

P.L. 95-351, August 20, 1978, established the NATIONAL CONSUMER COOPERATIVE BANK.

P.L. 95-369, September 17, 1978, the INTERNATIONAL BANKING ACT OF 1978, contained the following provisions:

  1. Authorized the Comptroller of the Currency to waive the requirements that all of the directors of a national bank be U.S. citizens.

  2. Removed the requirement in the Edge Act (Section 25(a) of the Federal Reserve Act) that all of the directors of an Edge Act corporation be U.S. citizens.  Similarly, the Edge Act was amended to permit one or more foreign banks to own 50% or more of the shares of an Edge Act corporation with the prior approval of the board of governors.  Previously, the Edge Act required, without exception, that a majority of the shares of an Edge Act corporation be owned by U.S. citizens.

  3. Required the board of governors to revise its regulation dealing with Edge Act corporations within 270 days of enactment of this act.  In doing so, the board of governors was required to implement several congressional purposes for Edge Act corporations, including affording Edge Act corporations powers sufficiently broad to enable them to compete in the United States and abroad with similar foreign-owned institutions.  Edge Act corporations are also to serve as a means of financing international trade, particularly exports.  The minimum of 10% reserve requirement on the U.S. deposits of Edge Act corporations was eliminated, and the board of governors was authorized to impose the same reserve requirements on the corporations as on member banks.  The act removed the statutory limitation on the issuance by Edge Act corporations of debentures, bonds, and promissory notes.  The board of governors was required to report to the Congress the effects of these amendments on the capitalization and activities of Edge Act corporations, banks, and the banking system.

(This report is contained in the 1978 Annual Report of the Board of Governors of the Federal Reserve System.)

  1. Authorized the Comptroller of the Currency to license and supervise one or more federal branches or agencies of a foreign bank in states that do not prohibit the establishment of branches or agencies by foreign banks.

  2. Prohibited a foreign bank from establishing and operating branches outside its "home" state unless the foreign bank enters into an agreement or undertaking with the board of governors that it will receive only such deposits at the out-of-state offices as are permissible for an Edge Act corporation.  Offices of foreign banks that were established, or for which an application had been filed prior to June 27, 1978, were exempt from this prohibition.

  3. Required federal deposit insurance for branches of foreign banks that receive deposits of less than $100,000.  Required federal deposit insurance for federal branches wherever located and for state branches in states that require deposit insurance for state-chartered banks.

  4. Authorized the federal banking agencies to examine U.S. offices of foreign banks and in appropriate circumstances to institute cease-and-desist proceedings against them.

  5. Imposed reserve requirements and interest rate limitations on federal branches and agencies of large foreign banks in the same manner and to the same extent as on member banks.  The board of governors was authorized to impose the same requirements and limitations on state branches and state agencies after consultation and in cooperation with state bank supervisory authorities.  Subject to regulations of the board of governors, branches and agencies that maintain reserves would have access to system facilities.

  6. Subjected a foreign bank that had a branch, agency, or commercial lending company in the United States to most provisions of the Bank Holding Company Act in the same manner and to the same extent as bank holding companies.  Nonbanking activities engaged in or applied for by July 26, 1978, were exempt under a grandfather clause.  Otherwise, a foreign bank may not engage directly or indirectly in nonbanking activities in the United States other than those permissible to bank holding companies.

  7. Required that joint studies and reports be undertaken by the President with respect to the PEPPER-MCFADDEN ACT, the secretary of the Treasury with respect to the treatment of U.S. banks abroad, and the board of governors with respect to Edge Act corporations becoming members of the Federal Reserve System.

P.L. 95-405, September 30, 1978, the Futures Trading Act, amended the Commodity Exchange Act to require the Commodity Futures Trading Commission to do the following, among other things:

  1. Keep the Treasury, the Board of Governors of the Federal Reserve System, and the Securities and Exchange Commission fully informed of commission activities relating to the responsibilities of those agencies, in order to seek their views on such activities, and to consider the relationships between the volume and nature of investment and trading in commodity futures and in securities and financial instruments under the jurisdiction of those agencies.

  2. Deliver to the Treasury and the board of governors a copy of any application by a board of trade to be designated as a contract market involving transactions for future delivery of any security issued or guaranteed by the United States or any of its agencies with a 45-day opportunity for comment; consider all comments it receives from the Treasury and the board of governors; and consider the effect that any such designation, suspension, revocation, or emergency action may have on the debt financing requirements of the U.S. government and the continued efficiency and integrity of the underlying market for government securities.

P.L. 96-592, December 24, 1980, revised and expanded the lending authority of the Farm Credit System, and included the following provisions:

  1. The governor of the Farm Credit Administration is to consult regularly with the Board of Governors of the Federal Reserve System in connection with the effect of the Farm Credit System's lending activities on national monetary policy.

  2. The Farm Credit Administration is to consult closely on a continuous basis with the board of governors to ensure that the regulations carrying out the export-and-import-loan and related authority of the Banks for Cooperatives conform to national banking policies, objectives, and limitations.  Any regulation that poses unresolved differences between the Farm Credit Administration and the board of governors about conformance must be submitted to Congress and is subject to a legislative veto by both houses of the Congress.

Recent Additional Responsibilities.

P.L. 95-630, the FINANCIAL INSTITUTIONS REGULATORY AND INTEREST RATE CONTROL ACT OF 1987, gave the federal bank supervisory agencies the authority to disapprove changes in control of insured banks and bank holding companies.  The act requires that the federal banking agency consider such factors as the financial condition, competence, experience, and integrity of the acquiring person or group of persons, and the effect of the transaction on competition.  The Federal Reserve's objectives in its administration of the act are to enhance and maintain public effects from anticompetitive combinations of interest, inadequate financial support, and unsuitable management.

The Federal reserve also has responsibilities for writing rules or enforcing a number of major laws that offer consumers protection in their financial dealing.  The more important of these laws are mentioned here.  The Truth in Lending Act requires disclosure of the "finance charge" and the "annual percentage rate" --an certain other costs and terms of credit - so that consumers can compare the price of credit from different sources.  This act also limits liability on lost or stolen credit cards.  The Fair Credit Billing Act sets up a procedure for the prompt correction of errors on a revolving credit account and prevents damage to credit ratings while a dispute is being settled.  The Equal Credit Opportunity act prohibits discrimination in the granting of credit on the basis of sex, marital status, race, color, religion, national origin, age, receipt of public assistance, or the exercise of rights made under the Consumer Credit Protection Act.  The Federal Reserve regulation provides for notice to applicants who have been denied credit of the reason for the denial.  It also gives married individuals with jointly held credit accounts the right to have credit histories maintained in the names of both spouses.

The Fair Credit Reporting Act sets up a procedure for correcting mistakes on credit records and requires that the records be used only for legitimate business purposes.

The Consumer Leasing Act requires disclosure of information to help consumers compare the cost and terms of one lease of consumer goods with another, and the cost of leasing with that of buying on credit or for cash.

The Real Estate Settlement Procedures Act requires disclosure of information about the services and costs involved at "settlement," when real property is transferred from seller to buyer.

The Electronic Fund Transfer Act provides a basic framework regarding the rights, liabilities, and responsibilities of consumers who sue electronic transfer services and of the financial institutions that offer the services.

The Federal Trade Commission Improvement Act authorizes the Board to identify unfair or deceptive acts or practices on the part of banks and to issue regulations to prohibit them.

The Home Mortgage Disclosure Act requires depository institutions to disclose the geographic distribution of their mortgage and home improvement loans.  The purpose of the act is to provide to informed decisions about whether institutions in metropolitan areas are meeting the housing credit needs of the communities.


  1. The following achievements may be ascribed to the Federal Reserve System:

  2. Effective concentration of reserves in 12 central bank reservoirs, thereby creating a base for central banking services for depository institutions

  3. Creation of central banking structure for the effective implementation of credit and monetary policy

  4. Enhancement of the ability of depository institutions to accommodate commerce and business with credit, consistent with prevailing credit and monetary policy

  5. Mitigation of business fluctuations by countercyclical credit and monetary policy

  6. Provision of elastic currency and credit, responsive to business needs and contraction

  7. More effective fiscal functions for the U.S. Treasury

  8. Creation of efficient regional and national check-clearing facilities for the banking system

  9. Further development of the money market

  10. Assistance in development of foreign banking and foreign banking relationships of U.S. banking

  11. Effective reconciliation of government regulation with financial interests and needs, so that the intensive and detailed former has come to be regarded with confidence as conventional in the interests of a sound financial system.

As indicated by the foregoing review of legislation pertaining directly or indirectly to the Federal Reserve System, the functions and responsibilities of the system have been broadened and expended in the financial field as well as in consumer protection.  The system's responsibilities in the financial field as the 1980s opened became the greatest ever as the Depository Institutions Deregulation and Monetary Control Act of 1980 ushered in a new era for the Federal Reserve.  Al so appended:  The Federal Reserve System Balance Sheet and Statement of Revenues and Expenses and Fund Balance.

The appended map indicates the boundaries of Federal Reserve districts and their branch territories.



BAGHESTANI, H., and MOTT, T.  "The Money Supply Process Under Alternative Federal Reserve Procedures:  An Empirical Examination."  Southern Economic Journal, October, 1988.

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM.  Federal Reserve Board Rules and Regulations.  Federal Reserve System, Washington, DC.

Annual Report.

Organization of the Federal Reserve System.

FEDERAL RESERVE BANK OF BOSTON.  Historical Beginnings:  The Federal Reserve System.  Reprinted periodically.

JONES, D.M.  Fed Watching and Interest Rate Projections.  New York Institute of Finance, New York, NY. 1986.

"U.S. Treasury and Fed Encourage Automated Funds Transfer," Business Credit, December, 1988.

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