Banking System and Central Bank
In the USA,
in every locality no matter how small it is, there is a church and a bank.
Americans who are considered to be rather religious people go to church to
maintain and accumulate their "spiritual wealth". And they go to the
bank to keep and accumulate their material wealth.
The modern banking system
includes three groups of financial institutions:
• the central bank;
« commercial banks;
• other specialized financial institutions
that include both banking and non-banking organizations.
The central
bank, which depending on the country may be called the State Bank or the
National bank (as in our country), bears the name of the Federal Reserve System
in the USA, the Bank of England in the UK, and the European Central Bank in
single-currency Europe. In a way it is the bank for all the other banks in a
country. It oversees the banking system.
The central bank may be owned and controlled
by the government or it may have considerable political independence. There are
three common duties that all central banks perform: holding reserves, assuring
stability of the banking and monetary systems, and lending money to commercial
banks and the government.
Holding Reserves Central
banks are sometimes called reserve banks. Commercial banks lend only a part of
their funds to individuals and businesses and keep the rest in reserve. The
central bank holds these reserves to influence the amount of loanable funds
banks have available. This allows the central bank to control the money supply.
Assuring Stability The central
bank also acts to assure stability in the national banking and monetary
systems. For example, it is one of the banking regulatory agencies that
regulate and supervise commercvial banks to make sure that they act in ways
that serve the interests of depositors and of the economy. Also, it controls
the way money is issued and circulated. Lending Money The final
duty of the central bank involves one of the primary functions of all the banks
- it lends money. Its lending practices are unlike those of other banks,
however. It does not seek to make a profit through lending, and it serves
private banks and the government rather than individual customers and
businesses. The interest rate that the Central Bank charges from the commercial
banks is called the discount rate.
In the USA the Federal
Reserve System (or simply "the Fed") is the
government agency responsible for regulating the United States banking
industry. It was created by Congress on December 23, 1913. Its mission is to
maintain an economically healthy and financially sound business enviromnent in
which banks can operate. The Federal Reserve System is controlled by the seven
members of its Board of Governors, who meet in Washington, D.C. Each governor
is appointed by the president and confirmed by the Senate for a fourteen-year
term. The president also selects the chairman and vice chairman of the board
from among the board members for four-year terms. These terms may be renewed. .
The Federal
Reserve System includes twelve Federal Reserve District Banks, which are
located throughout the United States, as well as twenty-five branch-territory
banks. Each Federal Reserve District Bank is actually owned—but not
controlled—by the commercial banks that are members of the Federal Reserve
System.
The Fed controls the money supply and
prevents the economy from crisis. Its most powerful tool in controlling the
money supply is the reserve requirement. It is the percentage of all deposits
that a bank must keep on hand at the bank or on deposit with the Fed. If the
Fed requires banks to keep 20% of all funds on deposit, then they can loan out
the other 80% to individuals and companies.
The Fed also sells and buys
government securities. When it buys them, it increases the money supply by
putting more money in circulation. By selling government securities, the Fed
decreases the money supply.
The Fed also insures deposits in
case of bank failure. The Federal Deposit Insurance Corporation (FDIC) requires
the banks to give customers information about their asset quality, capital and
earnings. This prevents people from doing business with banks that are in
trouble.
The name ^commercial"
appeared in the XVII century when banks generally served the
commerce. The first banks were founded in the Italian republics, then in
Amsterdam and
London. They appeared as simple
merchants that traded money. Nowadays the banks have a universal character.
Very often they are called financial „department stores" rendering
services to the industrial, agricultural, commercial and other enterprises.
A commercial bank is a privately owned
profit-making organization that accepts deposits, makes loans, and provides
related services to its customers. So, it is a financial middleman with a
government licence granted by the Central Bank that specializes in bringing
lenders and borrowers together. Like other businesses, the bank's primary
goal—its purpose—is to earn a profit. Its inputs are money in the form of
deposits, for which it pays interest. Its primary output is loans, for which it
charges interest. If the bank is successful, its income is greater than its
expenses, and it will show a profit. As banks deal with money belonging to
individuals and other firms, they must conform to state banking regulations and
are subject to unannounced inspections by Central Bank's auditors.
In the USA there are over 14,000 commercial banks,
this large number resulting from a law that prevents most banks from operating
in more than one state. Most of the banks are small, so that American banking
is dominated by the large "money centre" banks such as Chase
Manhattan and the Bank of America.
