Federal Reserve Districts

The 12 Federal Reserve Banks form a major part of the Federal Reserve System, the central banking system of the United States. The 12 federal reserve banks together divide the nation into 12 Federal Reserve Districts, the 12 banking districts created by the Federal Reserve Act of 1913.[1] The twelve Federal Reserve Banks are jointly responsible for implementing the monetary policy set by the Federal Open Market Committee. Each federal reserve bank is also responsible for the regulation of the commercial banks within its own particular district.

History

Alexander Hamilton, the first Secretary of Treasury, started a movement advocating the creation of a central bank. The Bank Bill created by Alexander Hamilton was a proposal to institute a National Bank, in order to improve the economic stability of the nation after its independence from Britain. Although the national bank was to be used as a tool for the government, it was to be privately owned. Hamilton wrote several articles providing information regarding his national bank idea. The articles expressed the validity and "would be" success of the national bank based upon: incentives for the rich to invest, ownerships of bonds and shares, rooted in fiscal management, and stable monetary system.

In response to this, the First Bank of the United States was established in 1791, its charter signed by George Washington. The First Bank of the United States was headquartered in Philadelphia, but had branches in other major cities. The Bank performed the basic banking functions of accepting deposits, issuing bank notes, making loans and purchasing securities.

When its charter expired 20 years later, the United States was without a central bank for a few years, during which it suffered an unusual inflation. In 1816, James Madison signed the Second Bank of the United States into existence. When, in 1833, before that bank's charter expired, president Jackson removed the government funds as part of the Bank War, the United States went without a central bank for 40 years.

Then, in 1873, Congress nationalized money for the first time, imposing what was effectively a gold standard, in the place of the and led to calls for a Federal agency to do the same thing.

In response to this, the Federal Reserve System was created by the Federal Reserve Act of December 23, 1913, establishing a new central bank intended to serve as a formal "lender of last resort" to banks in times of liquidity crisis—panics where depositors tried to withdraw their money faster than a normal fractional-reserve-based bank could pay it out.

The legislation provided for a system that included a number of regional Federal Reserve Banks and a seven-member governing board. All national banks were required to join the system and other banks could join. The Federal Reserve Banks opened for business in November 1914. Congress created Federal Reserve notes to provide the nation with a flexible supply of currency. The notes were to be issued to Federal Reserve Banks for subsequent transmittal to banking institutions in accordance with the needs of the public.

The U.S. Federal Reserve System or the “Fed” (of which the twelve regional Federal Reserve banks are a part) was created by an Act of Congress in 1913 in a response to a series of economic crises at the turn of the early 20th century. The Fed is an independent financial institution formed within the United States, that works separately from the executive or judicial branches of government. The Federal Reserve System is considered to be an independent agency that exists outside of the cabinet of the executive[3] and its powers are derived directly from Congress. Over the past century, the Fed’s power has expanded from its original roles such as a private response to problems in banking systems[4] and to establishing a more effective supervisory role of banking systems in the United States,[4] to its now current position of being a lender of last resort to banking institutions that require additional credit to stay afloat.

Legal status

The twelve regional Federal Reserve Banks were established as the operating arms of the nation's central banking system. They are organized much like private corporations—possibly leading to some confusion about ownership.

The Federal Reserve Banks have an intermediate legal status, with some features of private corporations and some features of public federal agencies. The United States has an interest in the Federal Reserve Banks as tax-exempt federally created instrumentalities whose profits belong to the federal government, but this interest is not proprietary.[5] In Lewis v. United States,[6] the United States Court of Appeals for the Ninth Circuit stated that: "The Reserve Banks are not federal instrumentalities for purposes of the FTCA [the Federal Tort Claims Act], but are independent, privately owned and locally controlled corporations." The opinion went on to say, however, that: "The Reserve Banks have properly been held to be federal instrumentalities for some purposes." Another relevant decision is Scott v. Federal Reserve Bank of Kansas City,[5] in which the distinction is made between Federal Reserve Banks, which are federally created instrumentalities, and the Board of Governors, which is a federal agency.

Regarding the structural relationship between the twelve Federal Reserve banks and the various commercial (member) banks, political science professor Michael D. Reagan has written that:[7]

... the "ownership" of the Reserve Banks by the commercial banks is symbolic; they do not exercise the proprietary control associated with the concept of ownership nor share, beyond the statutory dividend, in Reserve Bank "profits." ... Bank ownership and election at the base are therefore devoid of substantive significance, despite the superficial appearance of private bank control that the formal arrangement creates.

Function

The Federal Reserve System provides the government with a ready source of loans and serves as the safe depository for federal monies. The Federal Reserve is also a low-cost mechanism for transferring funds and is an inexpensive agent for meeting payments on the national debt and government salaries. The Federal Reserve Banks were created as instrumentalities to carry out the policies of the Federal Reserve System.

The Federal Reserve Banks issue shares of stock to member banks. However, owning Federal Reserve Bank stock is quite different from owning stock in a private company. The Federal Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the system. The stock may not be sold or traded or pledged as security for a loan; dividends are, by law, limited to 6% per year.[8]

The dividends paid to member banks are considered partial compensation for the lack of interest paid on member banks' required reserves held at the Federal Reserve. By law, banks in the United States must maintain fractional reserves, most of which are kept on account at the Federal Reserve. Historically, the Federal Reserve did not pay interest on these funds. The Federal Reserve now has authority, granted by Congress in the Emergency Economic Stabilization Act (EESA) of 2008, to pay interest on these funds.

A major responsibility of The Federal Reserve is to oversee their banking and financial systems. Overseeing the banking and financial systems of a bank is crucial in a society.[9]

Confidence in the soundness of the banking and financial systems is what mobilizes a society's savings, allows the savings to be channeled into productive investments, and encourages economic growth.

Finances

Each Federal Reserve Bank funds its own operations, primarily from interest on its loans and on the securities it holds. Expenses and dividends paid are typically a small fraction of a Federal Reserve Bank's revenue each year.[10] By law the remainder must be transferred to the Board of Governors, which then deposits the full amount to the Treasury as interest on outstanding Federal Reserve Notes.[11]

The Federal Reserve Banks conduct ongoing internal audits of their operations to ensure that their accounts are accurate and comply with the Federal Reserve System's accounting principles. The banks are also subject to two types of external auditing. Since 1978 the Government Accountability Office (GAO) has conducted regular audits of the banks' operations. The GAO audits are reported to the public, but they may not review a bank's monetary policy decisions or disclose them to the public.[12] Since 1999 each bank has also been required to submit to an annual audit by an external accounting firm,[13] which produces a confidential report to the bank and a summary statement for the bank's annual report. Some members of Congress continue to advocate a more public and intrusive GAO audit of the Federal Reserve System,[14] but Federal Reserve representatives support the existing restrictions to prevent political influence over long-range economic decisions.[15]

Banks

The Federal Reserve officially identifies Districts by number and Reserve Bank city.[16]

The New York Federal Reserve district is the largest by asset value. San Francisco, followed by Kansas City and Minneapolis, represent the largest geographical districts. Missouri is the only state to have two Federal Reserve Banks (Kansas City and St. Louis). California, Florida, Missouri, Ohio, Pennsylvania, Tennessee, and Texas are the only states which have two or more Federal Reserve Bank branches seated within their states, with Missouri, Pennsylvania, and Tennessee having branches of two different districts within the same state. In the 12th District, the Seattle Branch serves Alaska, and the San Francisco Bank serves Hawaii. New York, Richmond, and San Francisco are the only banks that oversee non-U.S. state territories. The System serves these territories as follows: the New York Bank serves the Commonwealth of Puerto Rico and the U.S. Virgin Islands; the Richmond Bank serves the District of Columbia; the San Francisco Bank serves American Samoa, Guam, and the Commonwealth of the Northern Mariana Islands. The Board of Governors last revised the branch boundaries of the System in February 1996.[16]

Assets

Federal Reserve Bank Total assets (02/20/2013)[17]
All banks $3.097T
New York $1.750Trillion
San Francisco $327B
Atlanta $206B
Richmond $166B
Chicago $156B
Dallas $110B
Philadelphia $90B
Cleveland $76B
Boston $81B
Kansas City $55B
St. Louis $48B
Minneapolis $29B

See also

Business and economics portal

References

Sources

External links

  • The Twelve Federal Reserve Districts
  • Federal Reserve Board Annual Reports
de:Federal Reserve Bank
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