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Regulation University The Federal Reserve System
Lawrence H. White
Professor of Economics, GMU Senior Scholar, Mercatus Center
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 ACT To 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.”
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
– 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
The original system: the Fed was not assigned the tasks of
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
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
The Fed as a Supervisor and Regulator
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)
The Fed as Supervisor
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
The Fed as Regulator
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)
The Consumer Financial Protec:on Bureau Created by Dodd-‐Frank, sets own budget, funded by the Fed 1,359 FTE est. for FY 2013
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
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
2013 Members of the FOMC
Board of Governors Ben Bernanke, Chairman Elizabeth A. Duke Jerome H. Powell Sarah Bloom Raskin Jeremy C. Stein Daniel K. Tarullo Janet L. Yellin
Vo:ng FRB Presidents William C. Dudley, New York James Bullard, St. Louis Charles L. Evans, Chicago Esther George, Kansas City Eric S. Rosengren, Boston
Non-‐vo:ng Jeffrey M. Lacker, Richmond Dennis P. Lockhart, Atlanta Sandra Pianalto, Cleveland Richard Fisher, Dallas Narayana Kocherlakota, Minneapolis Charles I. Plosser, Philadelphia John C. Williams, San Francisco
FOMC = 7 BOG + FRBNY Pres. + 4 other FRB Presidents (one-‐year terms, rota6ng; one each from Boston-‐Philadelphia-‐Richmond; Cleveland-‐Chicago; Atlanta-‐St. Louis-‐Dallas; Minneapolis-‐Kansas City-‐San Francisco
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
1. The Reserve Ratio (rare)
2. Open Market Operations (asset purchases and sales) Usual intermediate target: the Fed Funds rate
3. Interest rate on bank reserves (new since 2008)
The Tools of Monetary Policy
Greenspan Bernanke
The Fed’s balance-‐sheet hyperexpansion since 2008
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. It's not going to look very pre0y.” -‐-‐David Andolfa0o, FRB St. Louis (personal view)
Foreign exchange value of the US dollar