Case Study

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Nueva Ecija University of Sciences and Technology
College of Arts and Sciences
San Isidro Campus

THE ROLE OF MEMBERS BANK IN THE FEDERAL RESERVE SYSTEM

A Case Study Presented to
The Faculty of College and Arts and Sciences

In Partial Fulfillment of the Requirement for the Subject
Finance I (Principles of Money, Banking and Credit)
During the First Semester of A.Y. 2011-2012

Proponents:

Licodine, Allan Christopher
Buenavidez, Cindy
Catriz, Getulio
Dela Cruz, Joseph
Encarnacion, Giovannie
Gatdula, Jenalyn
Hipolito, Jessica
Maniaul, Lea Marie
Naval, Shairah
Ramos, Lea Catrina
Silvino, Joana Rose

October 01, 2011
The Role of Members Banks in the Federal Reserve System

Although the member bank stockholders in each Federal Reserve Bank have little direct power in the Federal Reserve System, they do play an important role. Their six representatives on the board of directors of each bank have a major oversight function. Along with the three public interest directors, they oversee the audit process for the Federal Reserve Bank, making sure it is being run properly, and also share their management expertise with the senior management of the bank. Because they vote on recommendations by each bank to raise, lower, or maintain the discount rate at its current level, they engage in discussions about monetary policy and transmit their private sector views to the president and senior management of the Bank. They also get to understand the inner workings of the Federal Reserve banks and the system so that they can help explain the position of the Federal Reserve to their contacts in the private and political sectors. Advisory councils like the Federal Advisory Council and others that are often set up by the district banks-for example, the Small Business and Agriculture Advisory Council and the Thrift Advisory Council at the New York Fed- is a conduit for the private sector to express views on both the economy and the state banking system.

So even though the owners of the Reserve banks do not have the usual voting rights, they are important to the Federal Reserve System because they make sure it does not get out of touch with the needs and opinions of the private sector.

Introduction

To understand the role that members bank play in the Federal Reserve System and the overall economy, we need to understand first how these organization works.

The Federal Reserve System is considered to be an independent central bank of the United States. It is intended to serve as a “formal lenders of lasts resorts” to bank in times of liquidity crisis-panics where depositors tried to withdraw their money faster than a bank could play it out. It provides the government with a ready source of loans. It is also a safe depository for the federal monies. The Federal Reserve banks were created as instrumentalities to carry out the policy of the Federal Reserve System.

Each of the federal reserve banks is a quasi-public institution owned by the private commercial banks in the district that are members of the Federal Reserve System. All national banks are required to be a member of the Federal Reserve System and other commercial banks chartered by the states are not required to be members, but they can choose to join. The Federal Reserve Bank issues shares of stock to the member’s bank. However, owning stock in the Federal Reserve Bank is different from owning stock in private company. The Federal Reserve Banks are not operated for profit and ownership of certain amount of stock in, by law, a condition of membership in the system. The stock may not be sold, traded, or pledged as a security for loans; dividends are by law, limited to 6% per year.

The members’ banks elect six directors for each district bank having a major oversight functions, three more are appointed by the board of governors, they oversee the...
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