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The Banking System of the United State of America
Commercial Banking and the Development of the Fed
The Federal Reserve and Monetary Policy
Depository Institutions: Commercials Banks and Banking Structure
The Banking System of Ukraine
Banking System in Transition
Role of the National Bank of Ukraine
The modern world system of the central bank was created relative recently.Until to middle 18 century commercial and central banks did not differ. With the development of credit system there is a process of centralization banknote issues in some of commercial banks. Thus the monopoly rights on issues of banknotes gradually fixed only to one bank. Such bank in differen time called differently. First – national , and then central , that answered its managing role in credit system of the certain country.
The first central bank was created in Sweden (Rixbank) in1668.Later ,1694 was founded the Bank of England. But on that time central banks had not rights on banknotes issues .Their functions differ from functions of modern central banks. For example , the main role of the Bank of England was financing the trade and industry ,the first role of the Bank of Holland – domestic and international trade .The central banks as a modern types appeared only in 19 century. Now , in many countries of the world has a central bank : the Federal Reserve System in the USA , the Bank of Japan,etc. But all of them differ from each other , because there are political and financial differs between the countries.
In 20 century allocation in banking system central level in many advanced countries of the world is not only natural phenomenon , but also an obligatory condition of achievement of high economic development.
The legal status of central banks , their status in the advanced countries is determined by the legislation.In many countries the basic act which regulates activity of the centralbanks , the act of the supreme validity is the law. In law about the banks their structure, the basic tasks , function and the competence, the order of relations with bodies of legislative and executive authority , the state controls is determined.In legal acts which determine the status of central banks , their dutiesin spheres of management of monetary circulation, currency transaction , functioning of credit system will be worn out.
On a pattern of ownership central banks can be state or join-stock. For example , in France, UK, German , Spain the capital completely belongs to the state. In some countries the state owns a part of the capital (Belgium , Japan) .In the USA shareholders of the central bank (Federal reserves banks) are only commercial banks. Therefor , in any case the state plays a leading role in formation of controls of central bank.
There are two models of mutual relation between cental banks and ixisting branches of authority. The first – central bank is the agent of the government and a conductor of its credit policy. The second – central bank is independent of the government that provides independence in realization of a monetary and credit policy without influence from the side of governmental bodies. But in practice these models in "a pure kind " do not function.In most countries there are intermediate models.
The legislation only 5 countries – USA , Germany , Sweden , Holland , Suice – provides submission of central banks to the government. In most countries of the world the central banks submit to exchecuer or to the ministry of finance.
In legislation of UK, France, Italy, Japan and some others countries is provided, that ministry of finance has the right to give out the instruction to the central banks. But such cases are very rare.
In the countries where legislation acts submission of central banks directly to parlaments is stipulared , with the help of the certain procedures are possible acceptance of decisions with wich regulatory authorities undertake to promote central banks in the decision of the certain problems , in fulfilment of a monetary and credit policy. Except for it , the legislation of some counties provides the reporting central banks before parlaments. For example , Federal Reserve System gives to the Congress of USA the report about the activity two times per one year . Central bank of Germany and Japan give report in the parlament annually.
Central banks in the majorityof the countries of the world constantly are supported support of the state . Central banks are capable to register all payment operations , qualitatively to carry out tranxfer mutual duties of bank. Central bank makes macroeconomic supervision , the control of functioning of all bank system , and also of activity of each bank separately.
The role of central bank is different countries is not identical. In particular , the big value plays a skill level of participants of payment attitudes , wich will carry out depository operations. There are differences both in legal base and in approaches of the different states to fulfilment by subjects of the market financial activity.
What about federal Reserve System of the USA you can read in the next chapter.
I. The Banking System of the United State of America
1) Central Banking
The banking system of the United States of America consists of the Federal Reserve System,commercial banks,savings and loans associatios,mutual savings banks,and credit unions.
The Federal Reserve System (the Fed) is the central bank of the United States.It was established in 1913 to promote a healthy economic climate that banks in financial difficulties by providing limited crsdit facilities. A central bank is often thought of a bankers’ bank,overseeing the banking system.The central bank also is usually the goverment ’s bank and conducts monetary policy in major developed countries .The Fed has a number of responsibilities,many involving the commercial banking system directly.These include regulating a major portion of the system and leading funds as required to all commercial banks and many other depository financial intermediaries.The Fed ’s influense on commercial banking in particular and on the whole financial system.The Federal Reserve System also provides federal insurance to commercial bank-members of insurance scheme.If these banks go bankrupt,their depositors will receive a compensation of up to 100,000 dollars for each account they had.
Commercial banks can be thought of as the hub of the financial system.They are difined by federal statutes as an entity that accept demand deposits and makes commercial loans.They account more than 60 percent of all deposits in the United States.Commercial banks’ lending activity is also substantial.For example,the banks had almost $650 billion in commercial and industrial loans and $756 billion in mortgage loans outstanding at the end of 1989.They were by far the lagest lenders to bussiness and the second largest mortgage lenders after savings institutions.In recent years , they have surpassed savings institutions in mortgage lending in many periods.
2) Commercial Banking and the Development of the Federal Reserve System
Commercial banks in the United States include money centres,regional,local and foreign banks.Their operations are generally similar to those of banks in other countries.
One of the specific characteristics of American banks is that they cannot own securities for their own account exept in the case of foreclosure on a defaulted loan.Another particular requirement to the activities of commercial banks is that they must distinguish their commercial activities from their trust activities,i.e. information obtained by one bank department cannot be transmitted to the another one.
When funds deposited into a demand deposit or checkable deposit account at a commercial bank,they are immediately available on demand.Checks can be written on the account and are honored by the bank on presentation.However,the bank does not hold the funds on deposit until the check is written.Banks are business and the goal of their operations is to make a profit.Therefore, they must make use of the funds deposited with them , primarily by making loans and purchasing securities.How funds on deposit can be used for lending and at the same time be available on demand requires an understanding of fractional reserv banking.
Fractional Reserve Banking
Banks in some form have existed since ancient times.Modern banking traces its origins to Italy during the Renaissance,and to London,where the first fully operationl commercial bank was established in 1684.About 100 years later, in 1782, the first commercial bank was founded un the United States.
Like many other early commercial banks, the London bank was once a goldsmith shop.Sincr gold left for safekeeping generally stayed in storage (on deposit) for long periods of time, goldsmith found that they could meet withdrawal demands from new deposits of gold without touching the earlier deposits.The amount of gold on deposit continued to grow, due in part to the fact that the receipts issued by goldsmith to depositors were circulating as money therefore, depositors did not require physical possession of their gold for transaction.The next step was that goldsmith found that they could profitably loan out much of the gold on deposit, or claims to to it in theform of receipts, without endangering their solvency.The issuance of several claims on a given amount of reserves (in this case gold) was the beginning of fractional reserve banking.
Fractional reserve banking means that banks do not keep 100 percent of deposit on hand as reserves.Rather only a fraction is held ,with the remainder used to acquire income-earning assets.The acceptability of bank notes (the goldsmiths’ receipts ) as money developed rapidly and led to the use of deposits as money throught written orders of payment (checks) that transferred ownership of gold or bak notes on deposit.
The principle of fractional reserve banking is still valid today.Most withdrawal demands from commercial banks are met from funds the banks receive the same day.Furthermore,since deposits have grown over the years , more funds have flowed into than out of banks on average.Only a small percentage of funds is kept on hand to meet contingencies , and banks can use the remainder to make loans and buy securities.
Commercial banks once decided throught trial and error on the proportion of deposits they should kssp in reserve , but not longer.In most Western countries this decision is make by the central bankor the goverment.In the United States,the Federal Reserve determines the reserve requirement withinlimits set by thr Congress.
Formation of the Federal Reserve System
The Fed was founded in 1913 as a direct outgrowth of the financial panic of 1907,which was the last in a series of such crieses that had occurred in 1873,1893,and 1903.After the 1907 panic,the Aldrich Commission,named for its chairman,was established to recommend a solution to these recurrent difficulties.The Commission recommendations were implemented in the Federal Reserve Act of 1913,creating the Fed as the central bank.The Federal Reserve System began operations in 1914.A central bank had not existed in the United States since President Andrew Jackson Refused to renew the charter of the Second Bank of the United States in 1836. Jackson believed that too much financial power was being concentrated in the northeastern United States.Although some of the traditional functions of a central bank were performed by the Treasury between 1836 and 1914,the financial panics and other problems clearly demonstrated that Treasury activities were no substitute for a fully functioning central bank.
The Federal Reserve Act charget the Fed with "providing an elastic currency" and acting as a "lender of last resort" to thr banking system.Essentially , it became a bankers’ bank;banks could borrow from the Fed when necessary to meet depositors’ increased demands for funds.It was hoped that the creation of the Fed would eliminate financial panics and lead to a more smoothly functioning financial system.The importence of providing an elastic currency can be appreciated by analyzing certain aspect of the demand ror money and credit in the economy.
Many times each year the economy has an increased need (demand) for money and credit.When this takes place om a regular basis, it is called a seasonal increase in demand.Typically , it occurs at Christmas,tax payment dates , and spring agricultural planting time (because farmers need money to buy seed and fertilizer).Nonregular , temporary increases in demand can occur at any time of year.Prior to creation of the Fed , these increased needs for money and credit occasionally could not be met by banks from their own reserves , and no central bank was available to which the commercial banks could turn.In severe cases financial panics ensued.
By standing ready to lend reserves to the banking system , the Fed ensures that banks can accomodate the needs of commerce under borth normal and abnormal conditions.As a result,the money supply can expand when pressure is applied and return to normal when it subsides.Providing such an elastic currency was at first the Fed’s main mission , its role has expanded enormously.
Today, the federal reserve’s duties fall into four general areas:
Conducting the nation’s monetary policy by influencing the money and credit conditions in the economy in pursuit of full employment and stable prices;
Supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers;
Maintaining the stability of the financial system and containing systematis risk that may arise in financial marcets;
Providing certain financial services to the U.S. government, to the public, to financial institutions, and to foreign official institutions, including playing a major role in operating the nation’s payment system.
The Fed consists of 12 regional Federal Reserve Banks spread throughout the country (Figure 1) and a Board of Governors based in Washington,D.C.The Board of Governors is headed by a chairman who is appointed by the President of the United States and confirmed by the Senate for a four-year term.He or she is also one of seven members of the Board of the Governors.Board members are appointed by the President and confirmed by the Senate for 14-year term.Although unusual , a Fed chairman could remain on the board , even if not reappointed by the President as chairman , to serve out his or her regular term
The Board sets major policy for the Fed,either meeting as a Board or as the majority group on the Federal Open Market Committee (FOMC).The FOMC is composed of the seven members of the Board of Governors and five Federal Reserve Bank presidents.Each of the 12 Federal Reserve Bank has its own president , all of whom rotate on and off the FOMC.The exception is the President
Figure 1:The Federal Reserve System of the Federal Reserve Bank in New York , who is a permanent member of the FOMC.The major responsibility of the FOMC is to determine monetary policy.
Figure 2.Organization of the Federal Reserve System
Membership in the Federal Reserve System and the Dual Banking System
Commercial banks that belong to the Federal Reserve System are know as member banks.Not all commercial banks are members ,but those that are hold the majority of commercial banks deposits and assets.
Whether or not a commercial bank is member of the Fed depends on a number of factors.One important variable is whether the bank has a national or state charter to operate.Because a bank can secure a charter from a federal goverment agency or the goverment of the state in which it is headquartered , we say that a dual banking system exist in the United States.The majority of commercial banks are state chartered.Those chartered by the federal goverment are known as national banks and must be members of the Fed.State- chartered banks may or may not be members at their options.In fact , the large majority of commercial banks are not members.Since national banks tend to be larger than state-chartered banks and large state-chartered banks tend to be Federal Reserve members , however , the preponderance of bank assets and deposits are held by members banks .Large state-chartered banks that voluntarily hold membership in the Fed are usually motivated by the pestige that membership confers and their ability to take advantage of member services such as direct access to the check-clearing network.
The requirements to secure a bank charter differ somewhat at the state and federal levels, but they are all stringent , requiring among other things adequate start-up capital and background checks on its officers to ensure ethical conduct.The charte for a nationale bank is issued by the Comptroller of the Currency , a division of the United States Treasury.State charter are issued by the banking authority in the state in which the bank is to operate.National banks must have their deposits insured by the Federal Deposit Insurance Corporation (FDIC),as must state banks that are members may have their deposits insured by the FDIC , and virtually all have such insurance.
The FDIC was established in 1933 to insure commercial bank deposits and help restore confidence in a banking system heavily shaken by the Great Depression and help and the resulting financial collapse of the early 1930s.Currently commercial bank deposits are insured up to $100,000 per account by the Bank Insurance Fund (BIF) of the FDIC.A non-Federal Reserve member bank insured by the FDIC is subjects to periodic examination by the FDIC to ascertain whether it is meeting requirements,including minimum levels of capital, and following appropriate lending rules.Insured banks that are members are similarly examined by the federal Reserve System.In addition, state banks are subjects to examination by state banking officials.
The previos discussion indicates that a number of agencies can be involved in chartering, insuring, examining, and setting rules for commercial banks.Numerous proposals have been made for reducing or reorganizing the regulatory structure of commercial banking.These proposals have included vesting all examination responsibility in the FDIC because virtually all commercial banks have deposits insurance, one agency could provide uniform examinations standarts.These proposals tend to encounter considerable opposition from regulators and bankers, however, and have not been enacted.IN contrast to giving the FDIC more power, the U.S.Treasure proposed in February 1991 that many bank regulatory activities be combined in a new agency, removing much regulatory responsibility from the FDIC, thought retaining considerable regulatory responsibility for the Fed.Both the FDIC and the Fed have strongly opposed this proposal.
Bank Reserves and the Fed
The Federal Reserve detemines the percentage of deposits that mast be held as reserves by member banks, nonmember banks, and other financial intermediaries offering checkable deposits, subject to persentage limits set by Congress.Such percentage is called a reserve requirement. To meet the requirement, reserves must be held in one of two ways.The first is vault cash-currency and coin held banks to apply to daily business needs.The second is in depository institution deposits at the Fed.These deposits account for the majority of bank reseves and require some explanation.
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