Download BANKING SYSTEMS 2e

3
3.1
3.2
3.3
3.4
3.5
Slide 1
THE FEDERAL
RESERVE SYSTEM
Structure of the Federal Reserve System
Monetary and Fiscal Policy
Consumer Protection
Role in Determining Banks’ Financial Health
International Banking and the Federal Reserve
System
Banking Systems, 2e
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3.1
STRUCTURE OF THE
FEDERAL RESERVE SYSTEM
GOALS
Identify the organization of the Federal
Reserve System.
Explain how the Federal Reserve
influences banks and the economy.
Describe proposed reorganization of the
Fed.
Slide 2
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TERMS
Member bank
District Reserve Bank
Slide 3
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STRUCTURE OF THE FED
Slide 4
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MEMBER BANKS
Member bank
Any bank that is part of the Federal Reserve
System
All national banks are required to be members
State-chartered banks may choose to be members
Slide 5
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DISTRICT RESERVE BANKS
District Reserve Banks
Carry out banking functions for government
offices in their area
Examine member banks in the district
Decide whether to loan banks funds
Recommend interest rates
Implement policy decisions of the Board of
Governors
Slide 6
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Slide 7
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BOARD OF GOVERNORS
Seven governors
A 14-year term
The policy-making arm of the Fed
Decisions control monetary policy
Slide 8
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THE CHAIR
The chair and the vice-chair
Four-year term
May serve multiple terms
Janet Yellen has been the chair since
February 2014.
Slide 9
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 checkpoint
What are the four structural elements of the
Federal Reserve?
Slide 10
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FUNCTIONS OF THE FED
Serves as the government’s bank
Ensures that the financial system remains
stable through judicious use of monetary
policy
Supervises and regulates bank operations
Protects consumers’ credit rights
Serves as a bank for other banks
Slide 11
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THE GOVERNMENT’S BANK
IRS tax payments go into accounts at Federal
Reserve banks.
Money from these accounts is used to pay
various government expenses.
Federal Reserve banks sell and redeem
government securities.
Slide 12
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THE BANKS’ BANK
A reserve bank for other banks
Processes payments between banks
Electronic funds transfers
Slide 13
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BANK SUPERVISION
The Federal Reserve supervises and
regulates all member banks.
Other agencies also supervise banks.
The Fed works to promote consistent policies
for international banks that operate in the U.S.
Slide 14
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PROTECTING CONSUMERS
The Federal Reserve monitors banks to
ensure customers are treated fairly in terms of
Fees
Prices
Penalties
Advertising
Slide 15
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 checkpoint
What are the primary functions of the
Federal Reserve?
Slide 16
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PROPOSED REORGANIZATION OF
THE FED
The recent financial crisis spurred discussion
about reorganizing the banking regulation
system.
President’s Working Group on Financial Markets
(PWG)
Mortgage Origination Commission (MOC)
Payment and settlement systems oversight
Insurance
Futures and securities
Slide 17
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 checkpoint
Why is consideration of reorganizing the Fed
such a complicated task?
Slide 18
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3.2
MONETARY AND
FISCAL POLICY
GOALS
Explain how the Fed impacts monetary
policy.
Identify how fiscal policy affects the
economy.
Explore criticisms of monetary and fiscal
policy.
Slide 19
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TERMS
Federal Open Market Committee (FOMC)
Taylor rule
Adverse feedback loop
Slide 20
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MONETARY POLICY
The goals of the Federal Reserve’s monetary
policy are to
Maintain economic growth
Stabilize prices
Keep international payments flowing smoothly
Slide 21
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OPEN MARKET OPERATIONS
Open market operations
The Fed buys and sells securities issued by the
Treasury Department or other government
agencies.
Federal funds rate
The rate at which banks borrow from each other
Slide 22
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Primary dealers
Setting reserve requirements
Adjusting the discount interest rate
Discount rate
The rate of interest that the Federal Reserve charges
banks for short-term loans
Slide 23
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Federal Open Market Committee (FOMC)
Makes discount rate decisions
The committee consists of
The seven-member Board of Governors (including the
Chairman)
The Chairman of the New York District Reserve Bank
Presidents of four other District Reserve Banks who
serve on a rotating basis
Slide 24
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ADJUSTING MONETARY POLICY
Tinkering with monetary policy does not occur
in a vacuum.
Even experts do not always agree on the most
effective course of action.
Adjusting interest rates is one of the many
components of monetary policy.
Predicting the impact of these adjustments is
not straightforward.
Slide 25
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DEVELOPING MONETARY POLICY
Taylor rule
Provides ideas for how to use short-term interest
rates to achieve the goals of a central bank.
Keeping the economy stable
Controlling inflation
Three targeted indicators
Inflation
Full employment
Short-term interest rates
Slide 26
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NEW TOOLS TO MANAGE
MONETARY POLICY
Term Auction Facility (TAF)
Term Securities Lending Facility (TSLF)
Primary Dealer Credit Facility (PDCF)
Slide 27
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 checkpoint
Why is it hard to predict the impact of
monetary policy adjustments?
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FISCAL POLICY
Fiscal policy involves adjusting budgetary
deficits or surpluses to achieve desired
economic goals.
Fiscal policy is controlled by
Congress
The President
Slide 29
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PRIMING THE PUMP
Cutting taxes
Gives businesses and individuals more money to
spend
Expanded demand causes industries to
Manufacture more products
Hire additional employees
Invest in new buildings and equipment
The economy expands
Keynesian economics
Slide 30
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SLOWING THE BOOM ECONOMY
When demand exceeds supply
Prices increase
Inflation
When rising prices decrease the value of money
The government may
Cut spending
Raise taxes
Do a combination of both
Slide 31
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 checkpoint
Explain Keynesian economics.
Slide 32
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CRITICISM OF MONETARY AND
FISCAL POLICY
Monetary policy is relatively more agile than
fiscal policy.
The Fed can change bank reserve
requirements fairly easily.
Changing tax levels is relatively more
cumbersome.
Slide 33
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Adverse feedback loop
When a lack of available cash causes a decline in
spending
Product demand drops
Manufacturing slows
Jobs are lost
Less cash is available
The downward cycle continues
Slide 34
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 checkpoint
What is an adverse feedback loop?
Slide 35
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3.3
CONSUMER
PROTECTION
GOALS
Explain the various acts that protect
consumer rights.
Understand how enforcement
responsibilities are shared across
agencies.
Slide 36
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TERMS
Truth in Lending Act (TILA)
Equal Credit Opportunity Act (ECOA)
Fair Credit Reporting Act (FCRA)
Fair Debt Collection Practices Act (FDCPA)
Government Accountability Office (GAO)
Slide 37
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CREDIT TRANSACTION
PROTECTION
Truth in Lending Act (TILA)
Guarantees that all information about the costs of
a loan is provided in writing to consumers
Provides for a right of rescission
A consumer can change his or her mind about a loan
until midnight of the third business day following the
signing of the papers
Slide 38
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EQUAL CREDIT OPPORTUNITY ACT
Equal Credit Opportunity Act (ECOA)
Prohibits the use of any type of discrimination as
a factor in determining creditworthiness
Requires that the lender provide the reasons for
denial of credit upon request
Slide 39
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FAIR CREDIT REPORTING ACT
Fair Credit Reporting Act (FCRA)
Aims to protect the information that credit
bureaus, medical information companies, and
tenant screening services may collect
Risk-based pricing
When a business offers less favorable credit
terms to a consumer with a relatively weaker
credit score
Slide 40
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FAIR DEBT COLLECTION
PRACTICES ACT
Fair Debt Collection Practices Act (FDCPA)
Protects consumers from unfair collection
techniques
Slide 41
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 checkpoint
Name four important pieces of consumer
protection legislation.
Slide 42
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OTHER LEGISLATION
Fair Credit Billing Act
Fair Credit and Charge Card Disclosure Act
Home Equity Loan Consumer Protection Act
Credit Repair Organization Act
Gramm-Leach-Bliley Act
Slide 43
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HOUSING AND REAL ESTATE
Various acts provide protections for
Requiring flood insurance for designated areas
Mandating that real estate settlement costs be
disclosed to consumers
Protecting against exploitative real estate lending
practices
Slide 44
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EDUCATING THE PUBLIC ON THEIR
RIGHTS
The Fed offers a variety of brochures on its
website aimed at educating consumers about
their rights.
Slide 45
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 checkpoint
Name three other pieces of lending
legislation.
Slide 46
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ENFORCEMENT OF POLICIES
OUTLINED IN ACTS
Shared responsibilities
Agencies share enforcement responsibilities.
Audits are conducted to test compliance at
financial institutions.
Government Accounting Office (GAO)
The auditing arm of Congress that helps ensure that
federal laws and policies are implemented properly
Slide 47
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 checkpoint
Why are so many agencies involved in
enforcing consumer protection?
Slide 48
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3.4
ROLE IN DETERMINING
BANKS’ FINANCIAL HEALTH
GOALS
Explain the regulatory process and how it
works.
Review how regulations affect the banking
business.
Slide 49
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TERMS
Charter
Call report
System to Estimate Examinations Ratings
(SEER)
CAMELS
Slide 50
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OVERSIGHT RESPONSIBILITES OF
THE FED
Slide 51
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THE REVIEW PROCESS
Charter
A legal approval to operate a business as a bank
Federal Financial Institutions Examination
Council (FFIEC)
Fosters information sharing between state and
federal agencies with the common goal of
providing consistent methods for banking
supervision
Slide 52
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Slide 53
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Call report (Consolidated Reports of
Condition and Income)
A quarterly report that banks are required to
complete
Is the basis for the Uniform Bank Performance
Report
By comparing current financial ratios to past financial
ratios, the Uniform Bank Performance Report
highlights any changes in a bank’s performance.
Slide 54
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System to Estimate Examinations Ratings
(SEER)
An automated system that analyzes and
compares historical supervisory ratings of banks
with their Call report data
Slide 55
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 checkpoint
Why is the authority that issued a bank’s
charter important in the ongoing operations
of the bank?
Slide 56
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THE SCORE CARD
CAMELS
Capital adequacy
Asset adequacy
Management
Earnings
Liquidity
Sensitivity to risk
CAMELS ratings are not public information.
Slide 57
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MAINTAINING BALANCE IN THE
BANKING SYSTEM
Banks are required to get permission from the
Fed before they can
Acquire another bank
Introduce new products
Diversify
Slide 58
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TRUST GENERATES TRUST
Banking regulations make a code of conduct
explicit and mandatory.
Mutual trust encourages investment.
Investment keeps money flowing through the
economic system.
Slide 59
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REGULATIONS THAT ENCOURAGE PRIVATE
INVESTORS TO AID AILING BANKS
 Open access to a bank’s financial status allows investors to
thoroughly assess the financial standing of a bank prior to
investing in a bank.
 By being allowed to proactively assess risk, private investors
are more willing to invest in ailing banks.
Slide 60
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FUTURE REGULATIONS THAT MAY
FACILITATE PRIVATE INVESTMENT
Regulatory changes under consideration
include
Allowing private equity firms to invest in more
than 10 percent of shares
Allowing bad debt held by the acquiree to be
written off over time
Slide 61
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 checkpoint
Why is society interested in encouraging
banks to help other ailing banks?
Slide 62
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3.5
INTERNATIONAL BANKING
AND THE FEDERAL RESERVE
SYSTEM
GOALS
Explain the role of the Fed in international
banking.
Discuss how the Fed works to keep the
dollar strong.
Review how countries work together to
provide a stable international banking
economy.
Slide 63
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TERMS
 Strength of Support Assessment (SOSA)
 ROCA score
 Fixed exchange rate
 Flexible exchange rate
 Balance of payments
 Federal Reserve System Open Market Account (SOMA)
 U.S. Treasury Exchange Stabilization Fund (ESF)
Slide 64
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AN INTERDEPENDENT GLOBAL
ECONOMY
Globalization has led to increased
interdependency between nations.
A mutually acceptable method needs to be in
place so that nations that use different
currency can exchange funds across
international borders.
Slide 65
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SUPERVISION OF INTERNATIONAL
BANKS
International Banking Act of 1978 (IBA)
Foreign Bank Supervision Enhancement Act
of 1991 (FBSEA)
Slide 66
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Strength of Support Assessment (SOSA)
Reflects how well a foreign bank is able to
provide appropriate guidance, oversight, and
financial backing to its U.S. offices
ROCA score
A composite score of performance for
Risk management
Operational controls
Compliance
Asset quality
Slide 67
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STABILIZING CURRENCY VALUES
Promoting full employment, price stability, and
economic growth is the common goal of many
monetary authorities.
Fixed exchange rate
A monetary valuation of one country’s currency is
tied to the valuation of another country’s currency.
Flexible exchange rate
Enables currencies to fluctuate based on market
conditions
Slide 68
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BALANCE OF PAYMENTS
Balance of payments
A record of all the exchanges of goods and
services that occur between two countries for a
specified time period
Slide 69
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 checkpoint
How would a balance of payment deficit
affect Countries A and B?
Slide 70
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KEEPING THE DOLLAR STRONG
Sterilize
The process of minimizing the impact of a sale or
purchase of foreign currency by selling or
purchasing a corresponding amount of U.S.
currency
To maintain the federal funds rate set by the FOMC
Slide 71
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Federal Reserve System Open Market
Account (SOMA)
The account the Fed maintains international
reserves in
U.S. Treasury Exchange Stabilization Fund
(ESF)
The account the Treasury maintains international
reserves in
Slide 72
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 checkpoint
Why is the Fed interested in stabilizing the
value of the dollar?
Slide 73
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INTERNATIONAL COOPERATION
International Monetary Fund (IMF)
Bank for International Settlements (BIS)
Asia Pacific Economic Cooperation (APEC)
International Banking Seminars
Slide 74
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 checkpoint
How does bringing together policy makers
and researchers to examine a common topic
facilitate smooth transactions for
international banking?
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