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Unformatted text preview: Answers to Chapter 4 Questions 1. As part of the Federal Reserve System, Federal Reserve Banks perform multiple functions. These include assistance in the conduct of monetary policy, supervision and regulation of member banks, and the provision of services, such as new currency issue, check clearing, wire transfer services, and research services to either the federal government or member banks. We summarize each function as follows. Assistance in the Conduct of Monetary Policy: Federal Reserve Bank (FRB) presidents serve on the Federal Open Market Committee (FOMC). FRBs set and change discount rates. Supervision and Regulation: FRBs have supervisory and regulatory authority over the activities of banks located in their district. Government Services: FRBs serve as the commercial bank for the U.S. Treasury. New Currency Issue: FRBs are responsible for the collection and replacement of damaged currency from circulation. Check Clearing: FRBs process, route, and transfer funds from one bank to another as checks clear through the Federal Reserve System. Wire Transfer Services: FRBs and their member banks are linked electronically through the Federal Reserve Communications System. Research Services: Each FRB has a staff of professional economists who gather, analyze, and interpret economic data and developments in the banking sector in their district and economy wide. 2. The discount rate (the interest rate on “lender of last resort” loans made by Federal Reserve Banks to depository institutions). These loans are transacted through each Federal Reserve Bank’s discount window and involves the discounting of eligible short term securities in return for cash loans. 3. The Federal Reserve System is divided into 12 Federal Reserve districts as shown in Figure 4- 1. Each district has one main Federal Reserve Bank, some of which also have branches in other cities within the district. In terms of total assets, the three largest Federal Reserve Banks are the New York, Chicago, and San Francisco banks. Together these three banks hold over 50 percent of the total assets (discussed later) of the Federal Reserve System. The New York Federal Reserve Bank is generally considered the most important of the Federal Reserve Banks because so many of the largest U.S. and international banks are located in the New York district (the so-called money center banks). Federal Reserve Banks operate under the general supervision of the Board of Governors of the Federal Reserve based in Washington D.C. Each Federal Reserve Bank has its own nine- member Board of Directors that oversee its operations: six are elected by member banks in the district (three are professional bankers and three are business people) and three are appointed by the Federal Reserve Board of Governors (directors in this group are prohibited from being employees, officers, or stockholders of a member bank). These nine directors are responsible for appointing the president of their Federal Reserve Bank....
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This note was uploaded on 03/22/2012 for the course FINA 210 taught by Professor Dakroub during the Spring '12 term at American University in Cairo.
- Spring '12