Question

1. Define or discuss briefly:

a.Federal Reserve branch banks

b.Central banks

c.Open market operations

d.Reserve requirements

Class of Finance

Please answer by type-in text

Answer 1

a.Federal Reserve branch banks

Federal Reserve Bank refers to any of the 12 branches of the Federal Reserve System overseeing the implementation of U.S. monetary policy.

As the country's central banking authority, the Federal Reserve System operates in 12 designated regions (or districts) throughout the United States. Each district is overseen by a Federal Reserve branch bank in a centrally-located major city. These banks are identified by the city in which they are located (e.g. Federal Reserve Bank of New York or Federal Reserve Bank of Boston). These cities are: Atlanta, Boston, Chicago, Cleveland, Dallas, Kansas City, Minneapolis, New York, Philadelphia, Richmond, San Francisco, and St. Louis.

Each Federal Reserve Bank is responsible for lending money and providing financial services to member banks within its district, overseeing the implementation of the Federal Reserve's monetary policy, and monitoring economic activity by collecting and analyzing data for use by the Federal Reserve Board (FRB) as well as the Federal Open Market Committee (FOMC).

b.Central banks

A central bank is a financial institution given privileged control over the production and distribution of money and credit for a nation or a group of nations. In modern economies, the central bank is usually responsible for the formulation of monetary policy and the regulation of member banks.

Central banks are inherently non-market-based or even anti-competitive institutions. Although some are nationalized, many central banks are not government agencies, and so are often touted as being politically independent. However, even if a central bank is not legally owned by the government, its privileges are established and protected by law.

The critical feature of a central bank—distinguishing it from other banks—is its legal monopoly status, which gives it the privilege to issue banknotes and cash. Private commercial banks are only permitted to issue demand liabilities, such as checking deposits.

c.Open market operations

Open market operations (OMO) refers to when the Federal Reserve purchases and sells U.S. Treasury securities on the open market in order to regulate the supply of money that is on reserve in U.S. banks, and therefore available to loan out to businesses and consumers. It purchases Treasury securities to increase the supply of money and sells them to reduce the supply of money.

By using this system of open market purchasing, the Federal Reserve can produce the target federal funds rate it has set by prociding or else taking liquidity to commercial banks by buying or selling government bonds with them. The objective of OMOs is to manipulate the short-term interest rate and the supply of base money in an economy.

d.Reserve requirements

Reserve requirements are the amount of cash that banks must have, in their vaults or at the closest Federal Reserve bank, in line with deposits made by their customers. Set by the Fed's board of governors, reserve requirements are one of the three main tools of monetary policy — the other two tools are open market operations and the discount rate.

Banks loan funds to customers based on a fraction of the cash they have on hand. The government makes one requirement of them in exchange for this ability: keep a certain amount of deposits on hand to cover possible withdrawals. This amount is called the reserve requirement, and it is the rate that banks must keep in reserve and are not allowed to lend.

The Federal Reserve's Board of Governors sets the requirement as well as the interest rate banks get paid on excess reserves. The Financial Services Regulatory Relief Act of 2006 gave the Federal Reserve the right to pay interest on excess reserves. The effective date on which banks started getting paid interest was Oct. 1, 2008. This rate of interest is referred to as the interest rate on excess reserves and serves as a proxy for the federal funds rate.