Financial Institutions

The Federal Reserve System
The Federal Reserve System is the central banking system of the United States created in 1913 by the enactment of the Federal Reserve Act.

The Fed is a quasi-public and quasi-private banking system that comprises

  • The presidentially appointed Board of Governors of the Federal Reserve System in Washington, D.C.
  • The Federal Open Market Committee
  • 12 Regional Federal Reserve Banks located in major cities throughout the nation acting as fiscal agents for the U.S. Treasury, each with its own nine-member board of directors
  • Private U.S. member banks, which subscribe to required amounts of non-transferable stock in their regional Federal Reserve Banks; advisory councils
Legal status of Federal Reserve Act established the Fed in the form of a special financial institution, combining the features of an independent legal entity and a public state agency.

The independence of the emission center from the Government is explained by:

  • A desire to provide a balance between taxpayers and the government
  • The U.S. banking system
  • Prevent the possibility of using the money in the short-term interest of the U.S. Government

Current functions of the Federal Reserve System include:
  • To address the problem of banking panics
  • To serve as the central bank for the United States
  • To strike a balance between private interests of banks and the centralized responsibility of government
    • To supervise and regulate banking institutions
    • To protect the credit rights of consumers
  • To manage the nation's money supply through monetary policy to achieve the sometimes conflicting goals of
    • Maximum employment
    • Stable prices, including prevention of either inflation or deflation
    • Moderate long-term interest rates
  • To maintain the stability of the financial system and contain systemic risk in financial markets
  • To provide financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system
    • To facilitate the exchange of payments among regions
    • To respond to local liquidity needs
  • To strengthen U.S. standing in the world economy

Organization of the Federal Reserve System
Board of Governors

The seven-member Board of Governors is the main governing body of the Federal Reserve System. It is charged with overseeing the 12 District Reserve Banks and with helping implement national monetary policy. Governors are appointed by the President of the United States and confirmed by the Senate one on Jan. 31 of every even-numbered year, for staggered, 14-year terms.

The current members of the Board of Governors are:
  • Ben Bernanke, Chairman
  • Donald Kohn, Vice-Chairman
  • Kevin Warsh
  • Elizabeth A. Duke
  • Daniel Tarullo
Functions of the Board:
  • Oversee system operations
  • Make regulatory decisions
  • Set reserve requirements
Federal Reserve Banks

There are 12 regional Federal Reserve Banks with 25 branches, which serve as the operating arms of the system. Each Federal Reserve Bank is subject to oversight by a Board of Governors. The nine member board of directors of each district is made up of 3 classes, designated as classes A, B, and C. The directors serve a term of 3 years.

Class A Member banks are divided into 3 groups based on size-large, medium, and small banks. Each group elects one member of Class A.

Class B Member banks are divided into 3 groups based on size-large, medium, and small banks. Each group elects one member of Class B.

Class C Designated by the Board of Governors of the Federal Reserve System. They shall be elected to represent the public, and with due but not exclusive consideration to the interests of agriculture, commerce, industry, services, labor, and consumers.

Functions of the regional branches of the Fed:
  • Set interest rates with the permission of the Board of Governors of the Fed
  • Monitor the status of local economic and financial institutions
  • Provide financial services to the U.S. Government and other depositaries
Federal Open Market Committee.

The Federal Open Market Committee (FOMC) comprises the seven members of the board of governors and five representatives selected from the regional Federal Reserve Banks. The FOMC is charged under law with overseeing open market operations, the principal tool of national monetary policy. These operations affect the amount of Federal Reserve balances available to depository institutions, thereby influencing overall monetary and credit conditions. The FOMC also directs operations undertaken by the Federal Reserve in foreign exchange markets. The representative from the Second District, New York, is a permanent member, while the rest of the banks rotate at two- and three-year intervals. All the presidents participate in FOMC discussions, contributing to the committee's assessment of the economy and of policy options, but only the five presidents who are committee members vote on policy decisions.

Primary Dealers

A primary dealer is a bank or securities broker-dealer that may trade directly with the Federal Reserve System of the United States. They are required to make bids or offers when the Fed conducts open market operations, provide information to the Fed's open market trading desk, and to participate actively in U.S. Treasury securities auctions. They consult with both the U.S. Treasury and the Fed about funding the budget deficit and implementing monetary policy.

Any commercial bank meeting the requirements of the Fed may become the owner (shareholder) of the local regional office. Currently (2009) in the structure of the Fed there are 38% of all banks and credit unions in the United States (nearly 5.6 thousand juridical entities).

Functions of Primary Dealers:
  • Receive a fixed dividend on shares of the Fed
  • Participate in elections of 6 among 9 governors of local and regional offices (Class A and B)

Each member bank is a private bank that holds stock in one of the twelve regional Federal Reserve banks. All of the commercial banks in the United States can be divided into three types according to which governmental body charters them and whether or not they are members of the Federal Reserve. All nationally chartered banks hold stock in one of the Federal Reserve banks. State-chartered banks may choose to be members (and hold stock in a regional Federal Reserve bank), upon meeting certain standards. Holding stock in a Federal Reserve Bank is not, however, like owning publicly traded stock. The stock cannot be sold or traded. Member banks receive a fixed, 6 percent dividend annually on their stock, and they do not directly control the applicable Federal Reserve Bank as a result of owning this stock. They do, however, elect six of the nine members of Reserve banks' boards of directors. Every national bank in any State shall, upon commencing business or within ninety days after admission into the Union of the State in which it is located, become a member bank of the Federal Reserve System by subscribing and paying for stock in the Federal Reserve bank of its district in accordance with the provisions of this chapter and shall thereupon be an insured bank under the Federal Deposit Insurance Act. Other banks may elect to become member banks. Any state-chartered bank may become a member of the Federal Reserve System. The twelve regional Reserve Banks supervise state member banks as part of the Federal Reserve System's mandate to assure strength and stability in the nation's domestic markets and banking system. Reserve Bank supervision is carried out in partnership with the state regulators, assuring a consistent and unified regulatory environment. Regional and community banking organizations constitute the largest number of banking organizations supervised by the Federal Reserve System.

The Federal Reserve System is an independent government institution that has private aspects. As an independent institution, the Federal Reserve System has the authority to act on its own without prior approval from Congress or the President. The members of its Board of Governors are appointed for long, staggered terms, limiting the influence of day-to-day political considerations. The Federal Reserve System's unique structure also provides internal checks and balances, ensuring that its decisions and operations are not dominated by any one part of the system. It also generates revenue independently without need for Congressional funding. Congressional oversight and statutes, which can alter the Fed's responsibilities and control, allow the government to keep the Federal Reserve System in check. Since the System was designed to be independent whilst also remaining within the government of the United States, it is often said to be "independent within the government."

The 12 Federal Reserve banks provide the financial means to operate the Federal Reserve System. Each reserve bank is organized much like a private corporation so that it can provide the necessary revenue to cover operational expenses and implement the demands of the board. Member banks are privately owned banks that must buy a certain amount of stock in the Reserve Bank within its region to be a member of the Federal Reserve System. This stock "may not be sold, traded, or pledged as security for a loan" and all member banks receive a 6% annual dividend. No stock in any Federal Reserve Bank has ever been sold to the public, to foreigners, or to any non-bank U.S. firm. These member banks must maintain fractional reserves either as vault currency or on account at its Reserve Bank; member banks earn no interest on either of these. The dividends paid by the Federal Reserve Banks to member banks are considered partial compensation for the lack of interest paid on the required reserves. All profit after expenses is returned to the U.S. Treasury or contributed to the surplus capital of the Federal Reserve Banks.

Bank of England

The Bank of England is the central bank of the United Kingdom and is the model on which most modern, large central banks have been based. Since 1946 it has been a state-owned institution. It was established in 1694 to act as the English Government's banker, and to this day it still acts as the banker for the UK Government. The Bank has a monopoly on the issue of banknotes in England and Wales, although not in Scotland or Northern Ireland. The current governance and accountability framework is set by the 1998 Bank of England Act, which provides for a Court of Directors, a Committee of Non-executive Directors within Court, and a Monetary Policy Committee.

The Court of Directors
Court consists of the Governor, two Deputy Governors and 16 Directors. The Directors are all non-executive. The Governors are appointed by the Crown for five years and the Directors for three years.

Under the Act, the responsibilities of Court are to manage the Bank's affairs, other than the formulation of monetary policy, which is the responsibility of the Monetary Policy Committee. Court's responsibilities include determining the Bank's objectives and strategy, and ensuring the effective discharge of the Bank's functions and the most efficient use of the Bank's resources.

Members of Court have been indemnified by the Bank against personal civil liability arising out of the carrying out or purported carrying out of their functions, provided they have acted honestly and in good faith and have not acted recklessly. These indemnities were granted in 2000 and approved by HM Treasury in accordance with the practice of the Government in relation to board members of Non-Departmental Public Bodies.

The Monetary Policy Committee (MPC)
The Bank of England Act establishes the MPC as a Committee of the Bank, subject to the oversight of NedCo, and sets a framework for its operations. Under the Act, the Bank's objectives in relation to monetary policy are to maintain price stability and, subject to that, to support the Government's economic policies, including its objectives for growth and employment. At least once a year, the Government specifies the price stability target and its growth and employment objectives. The MPC must meet at least monthly; its members comprise the Governor and Deputy Governors, two of the Bank's Executive Directors and four members appointed by the Chancellor. In June 2008 the Chancellor of the Exchequer announced that the Government will advertise future vacancies for the Governor and Deputy Governors of the Bank of England and also for external members of the MPC. At the same time the Bank of England announced that it intends to advertise externally the executive appointments to the MPC that are its responsibility - Executive Director for Monetary Analysis and Statistics and Executive Director, Markets - when they become vacant in future.

The Bank of England performs all the functions of a central bank. The most important of these is supposed to be maintaining price stability and supporting the economic policies of the British Government, thus promoting economic growth. There are two main areas which are tackled by the Bank to ensure it carries out these functions efficiently:
Monetary stability
Stable prices and confidence in the currency are the two main criteria for monetary stability. Stable prices are maintained by making sure price increases meet the Government's inflation target. The Bank aims to meet this target by adjusting the base interest rate, which is decided by the Monetary Policy Committee, and through its communications strategy.

Financial stability
Maintaining financial stability involves protecting against threats to the whole financial system. Threats are detected by the Bank's surveillance and market intelligence functions. The threats are then dealt with through financial and other operations, both at home and abroad. In exceptional circumstances, the Bank may act as the lender of last resort by extending credit when no other institution will.

The Bank works together with several other institutions to secure both monetary and financial stability, including:
  • HM Treasury, the Government department responsible for financial and economic policy.
  • The Financial Services Authority, an independent body that regulates the financial services industry.
  • Other central banks and international organizations, with the aim of improving the international financial system.
European Central Bank
The European Central Bank is the central bank of the EU and the euro zone which was founded 1 June 1998.

The main functions of the bank:
  • Development and implementation of monetary policy of the euro area
  • Maintenance and management of official currency reserves of the euro zone
  • Emission of euro banknotes
  • Establishing the basic interest rates
  • Maintenance of price stability in the euro area
The Executive Board
The Board is composed of six persons including the ECB President and Vice-President of the ECB. Candidates are proposed by the Governing Council approved by the European Parliament and the Heads of States of the eurozone.
Director shall be appointed for eight years:
  • Jean-Claude Trichet, Chairman of the Board
  • Lucas D. Papademos, Vice-President of the ECB
  • José Manuel González-Páramo, Member of the ECB
  • Jürgen Stark, Member of the ECB
  • Gertrude Tumpel-Gugerell, Member of the ECB
  • Lorenzo Bini Smaghi, Member of the ECB
The Governing Council
The Governing Council is the supreme decision making body of the ECB. It is composed of the members of the executive board and the governors of the national central banks which have adopted the euro. The Council is responsible for taking decisions on monetary policy, interest rates and the reserves of the ESCB. It is also responsible in other matters, such as authorising of the issue of banknotes and advising other EU institutions on draft legislation. It meets twice a month and meetings can only be attended by members and the Council President and Commission President. Each member has one vote and decisions are taken by a simple majority. Governing Council members are not meant to represent their countries, but rather the interests of the Eurozone as a whole.

The European System of Central Banks (ESCB) comprises the European Central Bank (ECB) and the national central banks (NCBs) of all 27 EU Member States.

This means that the ESCB includes the national central banks of those EU Member States that have not yet adopted the euro, be it due to their special status (Denmark, United Kingdom) or because they have a derogation. The latter currently applies to Sweden as well as 8 of the 12 Member States that have joined the EU since May 2004. This means in consequence: these countries still have their own national currency, for which they still conduct their own monetary policy and their respective central banks keep for the time being their monetary sovereignty. This also means, of course, that they are not involved in the performance of the core activities of Monetary Union, such as the conduct of the monetary policy for the euro area.

The non-euro area NCBs are nevertheless committed to the principles of monetary policies which aim at price stability. Furthermore, ESCB membership implies at varying degrees active cooperation with the Eurosystem in several fields of activity, such as participation in the TARGET payment system and support in the collection of statistics. In addition, the European Exchange Rate Mechanism II (ERM II) provides a framework for monetary and exchange rate policy cooperation with the Eurosystem. The institutional forum for such cooperation is the General Council of the ECB.

The legal basis for the ESCB is the Treaty establishing the European Community (EC Treaty) and the Statute of the European System of Central Banks and of the European Central Bank (ESCB Statute). The Treaty entrusts the ESCB in general with the performance of the central banking functions for the euro. The ESCB Statute defines more specifically the relative roles and functions of the ECB and the NCBs, respectively.
Bank of Japan (Bank of Japan)
Bank of Japan is the central bank of Japan established in 1882. It issues banknotes, carries out the monetary policy, ensures price stability and stable financial system, provides sustainable economic development.

Governor and Deputy Governors develop a strategy of monetary policy of Bank of Japan and its implementation. It consists of nine members, including Chairman (Masaaki Shirakawa) and two of his Deputies (Hirohide Yamaguchi, Kiyohiko G. Nishimura).

The Bank performs the following activities:
  • Issuance and management of banknotes
  • Implementation of monetary policy
  • Providing settlement services and ensuring the stability of the financial system
  • Treasury and government securities-related operations
  • International activities
  • Compilation of data, economic analyses and research activities