1. Regulation University
The Federal Reserve System
Lawrence H. White
Professor of Economics, GMU
Senior Scholar, Mercatus Center

2. Sixty-third Congress of the United States of
America;
At the Second Session
Begun and held at the City of Washington on Monday, the first day of
December, one thousand nine hundred and thirteen
AN ACT
To provide for the establishment of Federal reserve banks, to furnish
an elastic currency, to afford means of rediscounting commercial
paper, to establish a more effective supervision of banking in the
United States, and for other purposes.
Be it enacted by the Senate and House of Representatives of the United
States of America in Congress assembled, That the short title of this
Act shall be the "Federal Reserve Act.”

3. The
original
system:
the
12
regional
Federal
Reserve
Banks
“na:onalized”
3
clearinghouse
roles
• bankers’
bank
– check
clearing
and
se0lement
• lender
of
last
resort
– seasonal
and
emergency
elas6city
to
currency,
reserves
• supervision
of
member
banks
– capital
standards
Federal
Reserve
Bank
of
Richmond,
1928

4. The
original
system:
the
Fed
was
not
assigned
the
tasks
of
– conduc6ng
an
ac6ve
monetary
policy
• gold
standard
expected
to
con6nue
to
prevail
• But
in
WWI
,
Europe
leF
the
gold
standard,
giving
the
Fed
discre6on
– Being
sole
issue
of
currency
notes
• Na6onal
Banks
con6nued
to
issue
notes
un6l
the
mid-­‐1930s
1929
notes

5. What
does
the
Federal
Reserve
today
do?
• Five
key
roles
:
1.
bankers’
bank
(clearinghouse)
2.
lender
of
last
resort
3.
financial
supervision
and
regula6on
4.
currency
issuer
5.
monetary
policy

6. The
Fed
as
a
Supervisor
and
Regulator
In some countries, financial services regulation is outside the
central bank (e.g. UK’s Financial Services Authority)
The Fed’s authority over banks overlaps with
• FDIC
• Comptroller of the Currency
• State government banking authorities
The Fed’s authority over other financial firms overlaps with
• SEC
• CFTC
• FINCEN
Dodd-Frank expanded the Fed’s role as a financial regulator

7. The
Fed
as
Supervisor
Supervision
=
solvency
examina6ons
(audits),
on-­‐
and
off-­‐site
inspec6ons
•
with:
pre-­‐examina6on
visits,
review
of
documents,
reports
•
conducted
by
the
12
Reserve
Banks
Who
is
supervised
by
the
Fed?
1. Bank
Holding
Companies,
incl.
Financial
Holding
Cos.
and
Savings
and
Loan
Holding
Cos.
(SLHCs
new
with
Dodd-­‐Frank)
2. State-­‐chartered
Member
Banks
3. Foreign
Branches
of
Member
Banks
4. Designated
“Systemically
Important”
Non-­‐Bank
Financial
Companies
(new
with
Dodd-­‐Frank)
5. Designated
“Systemically
Important”
Financial
Market
U6li6es
(new
with
Dodd-­‐Frank)

8. The
Fed
as
Regulator
The Fed promulgates and enforces Regs. A – YY, specifying
requirements and restrictions on, e.g.,
B.
Demographic
credit
decision
repor6ng*
C.
Home
mortgage
data
disclosures
(HMDA)*
D.
Reserve
ra6os
E.
EFT
disclosures,
fees,
record-­‐keeping*
G.
Geographic
credit
decision
repor6ng
(CRA)*
H.
Investment
and
loan
ac6vi6es,
capital
ra6os,
real
estate
lending,
appraisal
standards,
suspicious-­‐ac6vity
reports;
mortgage
licensing*
M.
Leasing
terms
disclosures*
P.
Customer
privacy*
Q.
Capital
adequacy
S.
Wire
transfer
record-­‐keeping
T.
Credit
by
securi6es
brokers
and
dealers
(margin
requirements)
V.
Credit
informa6on-­‐sharing*
Y.
Bank
holding
company
acquisi6ons
*now
enforced
by
CFPB

9. BoG
Division
of
Banking
Supervision
and
Regula:on
• Michael
S.
Gibson,
Director
• 2
Deputy
Directors
• 7
Senior
Associate
Directors
• 4
Associate
Directors
• 4
Deputy
Associate
Directors
• 11
Assistant
Directors
• 3
Senior
Advisers
• 2
Advisers
• 2
Program
Directors
• 9
Economists
• 3,109
professional
supervisory
staff
(per
2011
Annual
Report)

10. The
Consumer
Financial
Protec:on
Bureau
Created
by
Dodd-­‐Frank,
sets
own
budget,
funded
by
the
Fed
1,359
FTE
est.
for
FY
2013

11. Concerns
about
expanding
Fed
regulatory
responsibili:es
• “The
more
power
the
Fed
is
given
in
such
ma0ers,
the
greater
the
poli6cal
pressures
will
be
from
the
outside
to
sa6sfy
certain
cons6tuencies,
and
the
less
the
Federal
Reserve
will”
[be
able
to
act
in
the
public
interest].
–
James
Hamilton,
UCSD

12. The
Fed’s
monetary
policy
structure
• Once
decentralized
– With
reserve
banks
seong
own
policies
• Now
centrally
controlled
– Board
of
Governors
sets
FRB
budgets,
policies
• Monetary
policy
is
made
by
the
Federal
Open
Market
CommiPee

13. 2013
Members
of
the
FOMC
Vo:ng
FRB
Presidents
Board
of
Governors
William
C.
Dudley,
New
York
Ben
Bernanke,
Chairman
James
Bullard,
St.
Louis
Elizabeth
A.
Duke
Charles
L.
Evans,
Chicago
Jerome
H.
Powell
Esther
George,
Kansas
City
Sarah
Bloom
Raskin
Eric
S.
Rosengren,
Boston
Jeremy
C.
Stein
Daniel
K.
Tarullo
Janet
L.
Yellin
Non-­‐vo:ng
Jeffrey
M.
Lacker,
Richmond
Dennis
P.
Lockhart,
Atlanta
Sandra
Pianalto,
Cleveland
FOMC
=
7
BOG
+
FRBNY
Pres.
+
4
other
Richard
Fisher,
Dallas
FRB
Presidents
(one-­‐year
terms,
rota6ng;
Narayana
Kocherlakota,
Minneapolis
one
each
from
Boston-­‐Philadelphia-­‐
Charles
I.
Plosser,
Philadelphia
Richmond;
Cleveland-­‐Chicago;
Atlanta-­‐St.
John
C.
Williams,
San
Francisco
Louis-­‐Dallas;
Minneapolis-­‐Kansas
City-­‐
San
Francisco

14. The
Fed
and
Monetary
Policy
Why care about monetary policy? Fear the boom and bust
• When policy becomes too loose, asset price bubbles and
unsustainable booms
• When monetary remains too loose, inflation
• When policy tightens, recessions

15. The
Tools
of
Monetary
Policy
1. The Reserve Ratio (rare)
2. Open Market Operations (asset purchases and sales)
Usual intermediate target: the Fed Funds rate
3. Interest rate on bank reserves (new since 2008)

16. Greenspan
Bernanke

17. The
Fed’s
balance-­‐sheet
hyperexpansion
since
2008

18. Concerns
about
the
Fed’s
expanded
balance
sheet
“the
large
and
growing
balance
sheet
may
expose
the
Fed
to
a
certain
type
of
poli6cal
risk.
If
6ghtening
needs
to
happen
in
the
future,
the
Fed
will
have
to
raise
interest
rates
[on
reserves]
(IOR)
and/or
sell
off
its
assets.
[Higher]
IOR
may
be
made
to
look
like
Fed
Reserve
(instead
of
Treasury)
transfers
to
the
banking
sector,
at
taxpayer
expense.
Capital
losses
on
asset
sales
would
similarly
reduce
remi0ances
to
the
Treasury.
It's
not
going
to
look
very
pre0y.”
-­‐-­‐David
Andolfa0o,
FRB
St.
Louis
(personal
view)

19. Foreign
exchange
value
of
the
US
dollar