Question

Banks operate by using "your" money (a.k.a. deposits). In your opinion, what function of the Federal Reserve, gives you the confidence to trust a bank with "your" money? Discuss.

Answer 1

Federal reserve system was created by congress in 1913 to ensure that public retained their confidence in its money and the financial institutions where it is held.

The federal redmserve system also know as the Fed is actually a network of 12 Federal Reserve Banks located in major cities across the country. The Fed is administered by a board of Governors . Its7 members ate appointed by the president of US , but as the Fed is supposed to remain an independent instituition , each member serves a 14 year term and is not eligible for reappiontment.The board of Governors is assisted by the Federal Advisory Council whise members are selected by the Directors of the 12 Federal Banks , and the Federal Open Market Committee , which consists of the Board of Governors and representatives from the five Federal Banks.

The Federal system serves several functions. It operates as the Frderal government bank, it recieves Treasury deposits andextends short term loans to the government is necessary. But its most critical responsibility is to oversee the bank and nations money supply and make sure that the public retains confidence in both.

Functions of federal reserve that gives us confidence to trust the bank with iur miney are discussed ;

1)The fed serves as a centralised clearing house for checks. We have already seen that checks ate a critical part of our money supply, what would happen if bank refuses to honor a checque? The Federal system facilitates the transfer of funds from obe bank to another by serving as an intermediatery bank. Since banks are required to deposit a certainportion of their fund in Federal Reserve bank , fund's from one's bank reserves can simply be transferred to the reserve of other.

2) The Federal system sets reserve requirements. It determines the percentage of a bank's deposit that it must keep on hand or place in the district Federal Reserve Bank and consequently what percentage the bank is allowed to lend out.

3) The Fed serves as the Bankers Bank. Thenation's bank are required to keep a potion of their reserves in the District Ferderal Bank extended loans to local banks when they do not have enough cas on hand to handle daily transactions and or more commonly to meet their reserve requirements. When the Fed loans money to a privatebank it charges them interest known asdisciunt rate.When they do, the interest rate charged for these short term loans by the oending bank is known as the Federal fund rate.

4) It hels to maintain the stability of the financial system and contain systematic risk in financial market.

5)it facilitates the exchange of payments among regions

6) it responds the local liquidity needs

7) it helps to manage nations money supply through monetary policy to achieve the sometimes conflicting goals og a) maximum employment b) stable prices, including prevention

It supervises and regulates banking institutions.

Above functions of Federal bank helps to retain the confidence of general public to withold money with banks.