The Federal Reserve System Purposes & Functions - Section 4.docx

This preview shows page 1 - 3 out of 14 pages.

The Federal Reserve was created in 1913 to promote greater financial stability and help avoid banking panics like those that had plunged the country into deep economic contractions in the late nineteenth and early twentieth centuries.Over the past century, as the U.S. and global financial system have evolved, the Federal Reserve’s role in promoting financial stability has necessarily changed with it. The 2007–09 financial crisis and the sub-sequent deep recession revealed shortcomings in the financial system infrastructure and the framework for supervising and regulating it (see figure 4.1). Indeed, reforms enacted under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 assigned the Federal Reserve new responsibilities in the effort to promote financial system stability and keep pace with changing dynamics and innovation in the broader economy.Figure 4.1. The financial system: key participants and linkagesKey participants in the U.S. and global financial system include the lenders and savers who are matched up with borrowers and spenders through various markets and intermediaries. The Federal Reserve monitors the financial system to ensure the linkages among these three entities are well-functioning and adjusts its policymaking or engagement with other policymakers to address any emerging concerns.Indirect financeFinancial intermediariesSource: Adapted from Frederic S. Mishkin and Stanley G. Eakins, Financial Markets and Institutions, 7th Edition (Boston: Prentice Hall, 2012), 16.Investing/fundingInvesting/fundingFinancial marketsBusiness firmsGovernmentsHouseholdsForeignInvesting/fundingLender-saversHouseholds Business firms Governments Foreign entitiesInvesting/fundingBorrower-spenders
What Is Financial Stability?A financial system is considered stable when financial institutions— banks, savings and loans, and other financial product and service providers—and financial markets are able to provide households, communities, and businesses with the resources, services, and products they need to invest, grow, and participate in a well-functioning economy.These resources and services include·business lines of credit, mortgages, student loans, and the other critical offerings of a sophisticated financial system; and·savings accounts, brokerage services, and retirement accounts, among many others.Effective Linking of Savers and Investors with Borrowers and BusinessesA healthy and stable financial system links, at the lowest possible cost, savers and investors seeking to grow their money with borrowers and businesses in need of funds. If this critical role of intermediation between savers and borrowers is disrupted in times of stress, the adverse impact will be felt across the economy.

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture