Other liabilities and accrued dividends item 11

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OTHER LIABILITIES AND ACCRUED DIVIDENDS(item 11) consist of un-earned discounts, discounts on securities, and miscellaneous accountspayable.Capital AccountsA bank that is a member of the Federal Reserve System must, under theFederal Reserve Act, subscribe to the capital stock of the Reserve Bankof its District. The total amount of a member bank’s subscription isequal to 6 percent of its current capital stock and surplus. Of thisamount, one-half is CAPITAL PAID IN(item 12) and one-half is subject tocall by the Board of Governors. These shares, unlike ordinary stock inprivate banks or corporations, do not carry voting power to control thepolicies of the Reserve Banks. Member institutions are entitled by stat-ute to a cumulative dividend of 6 percent per year on the value of theirpaid-in stock. Holdings of Reserve Bank stock may not be transferred,nor may the shares be used as collateral for loans.The SURPLUS ACCOUNT(item 13) represents retained net earnings ofthe Reserve Banks, and the OTHER CAPITAL ACCOUNTS(item 14) reflectthe unallocated net earnings for the current year to the date of the state-ment. The Reserve Banks may draw on their surplus to meet deficitsand to pay dividends in years when operations result in loss, but theymay not otherwise distribute it to the stockholding member banks. TheFederal Reserve for some years has retained sufficient earnings toequate its surplus to capital paid in; the balance of net Federal Reserveearnings is turned over to the Treasury.
118PURPOSES&FUNCTIONSTHE RESERVE EQUATIONShown in table A.2, the “reserve equation” specifies all the factors thatcan influence the supply of reserves. Thus, it provides a useful frame-work for analyzing how the quantity of reserves is determined. Factors1 through 7 in the equation determine reserve balances of depositoryinstitutions that are held at Reserve Banks during the current reservemaintenance period. Factors 1 through 3 are the sources of funds thatcould end up as reserve balances with the Federal Reserve Banks. Fac-tors 4 through 7 are the uses other than reserve balances that could ab-sorb reserve funds. Factor 8, reserve balances, is the remaining use forsuch reserve funds. Indeed, the amount of reserve balances is deter-mined here as the difference between total supply of such reserve fundsand total uses, other than reserve balances, absorbing such reserve funds.Most of the factors in the equation appear on the consolidated balancesheet of the Federal Reserve Banks. In the reserve equation, reserve bal-ances are separated from service-related balances and adjustments(factor 6c), rather than combined in deposits of depository institutions(item 9a on the balance sheet). Similarly, Federal Reserve float (factor 1cin the reserve equation) is defined as cash items in process of collection(item 6 in the balance sheet) less deferred availability cash items (item10) plus minor technical adjustments. A convenient rule of thumb isthat items from the asset side of the Reserve Bank balance sheet enter

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