September 18, 2020

Understanding The Federal Reserve Banks


KEY TAKEAWAYS

  • The 12 Federal Reserve banks conduct day-to-day operations for the Federal Reserve System and provide important regional perspectives on the country’s economic conditions.
  • The presidents of these banks rotate terms on the Federal Open Market Committee, a group that meets regularly to make decisions on U.S. monetary policy.
  • The banks have helped implement the Fed’s emergency programs in response to the coronavirus pandemics and taken other steps to support the economy.

The 12 regional Federal Reserve banks spread across the country are a key part of the Federal Reserve System. In general, these banks carry out policies set by the Fed’s board of governors in Washington, D.C., and do many of the system’s day-to-day activities. The bank presidents rotate terms on the Federal Open Market Committee, which helps set U.S. monetary policy such as changing the “federal funds rate” target range. During the coronavirus pandemic, the banks have produced critical information on the country’s economic conditions. They have helped the Fed implement emergency programs to ensure financial stability and help the economy recover.

12 Reserve Banks Serve Regions of the Country

Understanding The Federal Reserve Banks

the reserve banks’ design

Under the Federal Reserve Act of 1913, an organization committee set the boundaries for 12 Fed districts and chose where to put the reserve banks. The law required each reserve bank to have at least $4 million in capitalization and to be funded by the commercial banks that were Fed members in the district. National banks must become Fed member banks; state-chartered banks may become members but are not required to. In general, a member bank must buy capital stock in its district’s Federal Reserve bank that equals 6% of its capital and surplus. It pays half the amount, and the other half is on call. The original committee chose the districts and their headquarters cities based on their commercial and financial activity at the time; their transportation and communication systems; and a survey of bankers’ preferences. The districts do not always follow state boundaries, so several states are split between two districts. The New York Fed serves Puerto Rico and the U.S. Virgin Islands, and the San Francisco Fed serves American Samoa, the Northern Mariana Islands, and Guam.

Structure of the Federal Reserve System

Understanding The Federal Reserve Banks

In addition to the 12 reserve banks, the Fed includes the board of governors and the Federal Open Market Committee. This committee meets eight times a year in Washington, D.C., and sometimes on an emergency basis, to set monetary policy in support of the Fed’s goals of maximum employment and stable prices for goods and services. The Fed governors and the New York Fed president have permanent voting seats on the committee. The other 11 regional bank presidents rotate to fill the remaining four voting seats on the committee, but all the bank presidents attend meetings and contribute to the discussions. They offer their region’s perspective on the economy and expectations for the future.

Unlike the Fed’s board of governors, the heads of the reserve banks are not appointed by the president or confirmed by the Senate. Each reserve bank has a nine-member board of directors that oversees its operations. Directors serve staggered terms lasting three years, and they are divided evenly into three groups: Fed member banks select three class A directors to represent themselves; member banks also choose three class B directors, who represent the public; and the Fed governors select three class C directors, who also represent the public, including two to be the board chair and deputy chair of each reserve bank. By law, the class B and C directors must be chosen with consideration to the interests of agriculture, commerce, industry, services, labor, and consumers.” The six directors representing the public choose their reserve bank’s president, subject to approval by the Fed governors.

functions of the reserve banks

The reserve banks generally implement policies set by the board of governors and conduct daily operations for the Fed. Similar to how commercial banks serve their customers, the reserve banks provide services to depository institutions. These include distributing paper currency and coins; taking deteriorated or counterfeit dollars out of circulation; and processing automated clearinghouse electronic payments, such as those used for paycheck direct deposits. Reserve banks maintain accounts for the U.S. Treasury and hold the auctions at which Treasury sells securities in order to borrow money. The banks also monitor and examine commercial banks to make sure they comply with regulations and follow sound banking practices.

Through the reserve bank’s direct connections to organizations and businesses in their districts, they can provide the Fed with information on economic conditions in every part of the country. Prior to each regular FOMC meeting, the reserve banks release a report called the Beige Book that draws on interviews with businesses and economists to describe each district’s economic situation. This kind of local research and analysis has helped inform the Fed board, FOMC, policymakers, and the public about the rapidly changing economic conditions caused by the coronavirus.

In response to the pandemic, the Fed has taken significant actions in setting up additional emergency lending facilities using its authority under Section 13(3) of the Federal Reserve Act to ensure financial stability and market liquidity. In the Coronavirus Aid, Relief, and Economic Security Act, Congress provided at least $454 billion for Treasury to use to support the Fed’s emergency programs. While the New York Fed is managing most of the programs, the Boston Fed is overseeing the Main Street Lending Program for small and mid-size businesses and nonprofit groups. Some policymakers are examining ways to expand access to the Main Street program and increase its usage. The Boston Fed also is managing the Money Market Mutual Fund Liquidity Facility. The Minneapolis Fed is managing the facility through which the Fed buys Paycheck Protection Program loans to give banks more capacity to issue these loans. Fed officials have noted that certain programs, soon after being announced, helped financial markets to stabilize.

Issue Tag: Banking