BankingIntheUnitedStates.ppt

The Federal Reserve, Commercial Banking, and the Supply of Money Current US Coins The Federal Reserve The Federal Reserve System was created in 1913 by Woodrow Wilson. Regulate the banking industry “Lender of Last Resort” Regulate the money supply Provide banking services for the federal government Check Clearing Standard Definitions of Money Monetary Base (M0): Direct liabilities of the central bank Currency in circulation + Bank Reserves M1: Currency in circulation + Travelers Checks + Checking accounts M2: M1 + Savings accounts + Money Market Accounts + Small Time Deposits M3: M2 + Large Time Deposits + Eurodollars Money Supply in the US (in Billions) Money Supply in the US Discount Lending 0% Eurocurrencies 0% Time Deposits 10% More than $47.6M 3% $7M - $47.6M 0% $0 - $7M Transaction Account Reserve Requirement Type of Liability The Reserve Requirement has no impact on the monetary base, but it restricts the ability of banks to create loans – this influences the broader aggregates. The discount window was the primary policy tool of the federal reserve when it was first established in 1913. Discount window loans are collateralized by the assets of the bank (equal to around 90% of the loan) Assets Liabilities Assets Liabilities $45,000 (T-Bills) $80,000 (Deposits) $50,000 (Equity) Federal Reserve Acme National Bank $130,000(Loans) $ 2,500 (Cash) $ 2,500 (Reserves) $ 2,500 (Reserves) This bank would like to create $70,000 loan, but doesn’t have the reserves to back it up Res. Req. = 5% A $2,500 loan from the discount window would raise reserves to the required 5% $ 2,500 (Reserves) $ 2,500 (Reserves) $ 2,500 (Loan) $ 2,500 (Disc. Loan) Fed Funds + .2% (2.7%) Seasonal (Must demonstrate reoccurring seasonal liquidity needs, $500M in Deposits) Fed Funds + 1.5% (4.0%) Secondary (Additional Financial Information Required) Fed Funds + 1% (3.5%) Primary (No Questions Asked) Interest Rate Type of Credit By purchasing and/or s