Regulation of the Banking Industry
July 26, 2009 – 1:19 amTraditionally, depository institutions performed an intermediation function, acting as a link between those with funds to invest and those with a need to borrow. Much of the legislation in the 1900s was enacted to protect that role and prevent conflicts of interest. It was only toward the end of the century that deregulation began to free up the industry and, as a result, change the structure and nature of banks and banking in the United States.
Functions of the Federal Reserve System
The Banking Panic of 1907 proved to be the most severe of four in the previous 34 years. The banking system was prone to bank failures and the U.S. dollar was not responsive to changes in demand. Major bank reform was needed but it took until 1913 before the Federal Reserve Act established a central bank for the United States. Acting as an independent agency of the U.S. government, the Federal Reserve (the Fed) undertook five principal roles:
Conduct the nation’s monetary policy, by expanding and contracting the money supply through open market activities involving the buying and selling of U.S. government securities.
Supervise and regulate banking institutions and protect the credit rights of consumers. The Fed has jurisdiction over all bank holding companies, all state member banks, their nonbank subsidiaries, their foreign subsidiaries, and Edge Act banks (corporations through which banks conduct nondomestic business).
Maintain the stability of the financial system by assuring the smooth functioning and continued development of the nation’s payment system. The Fed plays a key role in the following:
Fedwire. The Fed operates the domestic real-time gross settlement electronic transfer system.
Automated Clearing House (ACH) system. The Fed is the principal operator of the ACH net settlement system, which processes and clears low-value batch payments.
Check clearing. The Fed clears checks through its network back to the drawee bank.
Provide certain financial services to the U.S. government. The Fed acts as fiscal agent for the U.S. treasury by maintaining checking accounts at the Reserve banks, paying bills, collecting taxes, and making transfers such as paying Social Security benefits. The Reserve banks also handle the operations involved in selling, servicing, and redeeming marketable treasury securities.
Develop and administer regulations that implement major federal laws.
When the Fed was originally established in 1913, the primary vehicle for central bank operations was expected to be lending reserve funds through the discount window. Today, open market operations have superceded the discount window as the principal instrument for implementing monetary policy. The discount window still plays an important secondary role by extending credit to relieve liquidity strains in the banking system, acting as a safety valve by alleviating pressure in reserve markets.
Taken From : Essentials of Managing Corporate Cash
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