Smart DirectionsEmmet O’Neal LibraryMountain Brook, AL

The Banking System and the Federal Reserve

Disclaimer• Andreas Rauterkus is not a registered

investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes. Andreas Rauterkus does not purport to tell or suggest which investment securities attendants should buy or sell for themselves. You should always conduct your own research and due diligence and obtain professional advice before making any investment decision.

Topics Covered• What is a bank?• Different kinds of banks• The Role of regulators/regulation

– What is the FDIC? – What does the FDIC do?

• The Federal Reserve System– Role of a central bank– Organization– Monetary policy– Quantitative Easing

Banking Basics• A bank (credit union, or thrift) is an institution that

accepts deposits and makes loans• Money-center banks

– Industry leaders– Cover whole regions, nations, and continents– Offer the widest possible menu of financial services

• Community banks– Much smaller– Service local communities and towns– Offer a narrower, but often more personalized, menu of

financial services

Types of banks

• Checking account– For every day transactions

• Savings account– Pays interest on balance– Limited withdrawals

• Source: Rose/Hudgins, Bank Management & Financial Services, 9th edition, McGraw-Hill

Largest U.S. BanksINSURED U.S.-CHARTERED COMMERCIAL BANKS THAT HAVE CONSOLIDATED ASSETSof $300 MILLION or MORE, RANKED by CONSOLIDATED ASSETSAs of March 31, 2015

Bank Name / Holding Co Name Nat'l Rank Consol Assets (Mil $) Pct Domestic AssetsJPMORGAN CHASE BK NA/JPMORGAN CHASE & CO 1 2,096,114 73BANK OF AMER NA/BANK OF AMER CORP 2 1,599,746 95WELLS FARGO BK NA/WELLS FARGO & CO 3 1,571,389 98CITIBANK NA/CITIGROUP 4 1,335,871 56U S BK NA/U S BC 5 405,363 100PNC BK NA/PNC FNCL SVC GROUP 6 340,231 99BANK OF NY MELLON/BANK OF NY MELLON CORP 7 316,699 67STATE STREET B&TC/STATE STREET CORP 8 274,919 77CAPITAL ONE NA/CAPITAL ONE FC 9 253,202 100T D BK NA/TD US P & C HOLD ULC 10 234,389 100HSBC BK USA NA/HSBC NORTH AMER HOLDS 11 194,569 98SUNTRUST BK/SUNTRUST BK 12 185,316 100BRANCH BKG&TC/BB&T CORP 13 184,405 100CHASE BK USA NA/JPMORGAN CHASE & CO 14 139,341 100FIFTH THIRD BK/FIFTH THIRD BC 15 138,030 99GOLDMAN SACHS BK USA/GOLDMAN SACHS GROUP THE 16 127,771 100MORGAN STANLEY BK NA/MORGAN STANLEY 17 126,857 100REGIONS BK/REGIONS FC 18 121,435 100

Money Creation

Roles of Banking

• Source: Rose/Hudgins, Bank Management & Financial Services, 9th edition, McGraw-Hill

Bank Regulation• Why are banks closely regulated?

– Banks are among the leading repositories of the public’s savings

– Banks are closely watched because of their power to create money in the form of readily spendable deposits by making loans and investments

– Banks have a long history of involvement with federal, state, and local governments

• In the United States, banks are regulated through a dual banking system– Both federal and state authorities have significant

regulatory powers

Main Regulators• The Federal Reserve System

– Supervises and examines all member banks– Imposes reserve requirements– Must approve all mergers and acquisitions

• The Office of the Comptroller of the Currency– Issues charters for new national banks– Supervises and examines all national banks

• The Federal Deposit Insurance Corporation (FDIC)– Insures deposits of depository institutions– Requires members to submit quarterly reports on their

financial condition

The FDIC

The FDIC• The FDIC was created in 1933 in response to the thousands of bank

failures that occurred in the 1920s and early 1930s• The standard insurance amount is $250,000 per depositor, per

insured bank, for each account ownership category.• The FDIC insures deposits only. It does not insure securities, mutual

funds or similar types of investments that banks and thrift institutions may offer.

• To protect insured depositors, the FDIC responds immediately when a bank or thrift institution fails

• The FDIC has several options for resolving institution failures, but the one most used is to sell deposits and loans of the failed institution to another institution.

• http://www.cbsnews.com/news/your-bank-has-failed-what-happens-next/

What is the Federal Reserve?

• The Federal Reserve is the central bank of the United States.

• A central bank is the government agency that oversees the banking system and is responsible for the amount of money and credit in the economy.

What are the Federal Reserve’s responsibilities?

• To regulate bank holding companies and state chartered banks.

• To supply money and credit to the economy to maintain stable prices and full employment.

• To ensure the smooth functioning of the payments system.

• To act as the government’s bank.

The Federal Reserve System

F. Mishkin, THE ECONOMICS OF MONEY AND THE ECONOMIC POLICY REVIEW. (c) 1998 Frederic S. Mishkin. Reproduced by Addison Wesley Longman. All rights reserved.

Structure of the Federal Reserve

F. Mishkin, THE ECONOMICS OF MONEY AND THE ECONOMIC POLICY REVIEW. (c) 1998 Frederic S. Mishkin. Reproduced by Addison Wesley Longman. All rights reserved.

The Fed’s Objectives

• “Stable prices”

• “Maximum employment”

• Moderate long-term interest rates

The Fed’s Monetary Policy Tools

• The federal funds rate– An interbank overnight interest

rate

• The discount rate– Lender of last resort

• Reserve requirements– Bank deposits held in cash

What is Quantitative Easing?• Purchases of government securities or other

securities from the market in order to lower interest rates and increase the money supply.

• Quantitative easing is considered when short-term interest rates are at or approaching zero, and does not involve the printing of new banknotes.

• Asset holdings of the federal reserve rose from about 1 trillion in September 2008 to almost 4.5 trillion in October 2015

Any Questions?