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Banking in the USA
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At the centre of the U.S. banking system is the Federal Reserve System (FRS or “the Fed”, as it is usually called) which was established in 1913. The Federal Reserve System consists of 12 central banks that service banks and other financial institutions within each of the Federal Reserve districts. Each Federal Reserve bank serves as a central banker for the private banks in its region. The United States is the only nation in the world to have 12 separate regional banks instead of a single central bank. In addition, there are 25 Federal Reserve branch banks located throughout the country. The map in Exhibit 1 shows each of the 12 Federal Reserve districts.
The organization's main task is to set and implement monetary policy, which is a set of rules for handling the economy and the money supply. Following are brief descriptions of some of the principal functions of the Federal Reserve.
The Fed (1) regulates the money supply by four basic tools. It can set the discount rate and change the reserve requirements, that is the sum of money (called reserves) equal to a certain percentage of deposits that a bank must keep on hand. Another tool the Fed uses is its power to buy and sell government bonds on the open market. These are known as open-market operations, which are major instruments for controlling the money supply in the US. The last tool employed by the Fed involves selective credit controls, or the setting of credit terms on various kinds of loans.
Another function performed by the Fed includes (2) clearing checks. Banks can use the Federal Reserve's check-clearing service to clear checks drawn on banks outside their Federal Reserve districts.
One more important task of the Fed is (3) maintaining and circulating currency. Note that the FRS does not print currency – it maintains and circulates money. The Federal Reserve must be ready to ship extra money from its large vaults by armoured trucks.
The Fed also (4) supervises the activities of member banks abroad and regulates certain aspects of international finance.
Apart from that, the Fed (5) protects consumers by receiving and trying to resolve consumer complaints against banks. There are certain regulations, for example, that prohibit discrimination based on race, colour, sex, religion, or national origin in the extension of credit.
In addition, the (6) Fed maintains the federal government checking accounts and gold. The U.S. Treasury has the Fed handle its checking account. From this account, the federal government pays for such expenses as federal employees’ salaries, social security, tax funds, veterans’ benefits, defence, and highways. Gold, stored in the Fed belongs mainly to foreign governments and is one of the largest accumulations of this precious metal in the world.
Commercial banks accept deposits and use these funds to make loans. There are two types of commercial banks: national banks and state banks. National banks are chartered by the federal government, and state banks are chartered by state government. These banks are prime sources of capital for business and also provide loans as well as checking and saving accounts for consumers. Both savings banks and savings and loan associations perform many of the same functions as commercial banks (e.g., checking and savings accounts, loans) but use the majority of their assets for financing home mortgages.
Credit unions are non-profit, member-owned, financial cooperatives. They are operated entirely by and for their members. When you deposit money in a credit union, you become a member of the union because your deposit is considered partial ownership in the credit union.
Other financial institutions include finance companies (which provide short-term loans), large brokerage houses, insurance companies, pension funds, and investment banks (which help corporations raise capital). Most financial institutions operate on the principle of attracting deposits and then lending some of this money to other customers.
Ex. 1. Match the Russian word combinations with their English equivalents.
| A | B |
| 1) филиал федерального резервного банка | a) to implement monetary policy |
| 2) осуществлять кредитно-денежную политику | b) money supply |
| 3) предоставление кредита | c) a mortgage |
| 4) предоставлять ссуду | d) the Federal Reserve branch bank |
| 5) ипотечный кредит, закладная | e) make loan/ to lend |
| 6) денежная масса | f) selective credit controls |
| 7) выборочный кредитный контроль | g) an extension of credit |
| 8) иметь счет в банке | h) to raise capital |
| 9) увеличивать, добывать капитал | i) to maintain an account |
Ex. 2. Answer the questions:
1. What is the head of the U.S. banking system and when was it established?
2. What is the main task of the FRS?
3. What four basic tools does the Fed use to regulate the money supply and to expand economy? Which of them is the most powerful in America?
4. What are other functions performed by the Fed?
5. What are the most common types of financial institutions in the U.S.? How are they characterized?
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