Chap. 4 - Finance

What was the "Perfect Financial Storm"?

The combination of the 2007-08 Financial Crisis and the 2008-09 Great Recession.

What three entities were created to support home mortgage markets?

Fannie Mae (FNMA), Ginnie Mae (GNMA), and Freddie Mac (FHLMC).

What happened to mortgage-backed securities during the financial crisis?

Their value declined as mortgage defaults increased.

Why did Fannie Mae and Freddie Mac require assistance during the financial crisis?

They suffered cash and liquidity crises.

What is quantitative easing (QE)?

A nontraditional monetary policy where the Fed purchases financial assets with newly created money to increase reserves and liquidity.

What was QE1?

A program begun in late 2008 where the Fed purchased large amounts of mortgage-backed and Treasury securities.

When were QE2 and QE3 initiated?

QE2 in 2010 and QE3 in 2012.

What was the National Banking System?

A banking system established by the National Banking Acts of 1863 and 1864.

What were the three major weaknesses of the National Banking System?

Inefficient payments system, inflexible money supply, and liquidity problems.

What is a central bank?

A government agency that facilitates the financial system and regulates money supply growth.

What is the Federal Reserve System (Fed)?

The U.S. central bank that sets monetary policy and regulates the banking system.

What act created the Federal Reserve System?

The Federal Reserve Act of 1913.

What are the five components of the Federal Reserve System?

Member Banks, Federal Reserve District Banks, Board of Governors, Federal Open Market Committee (FOMC), and Advisory Committees.

Which banks must be members of the Fed?

All national banks.

Which banks may choose to join the Fed?

State-chartered banks.

How much Reserve Bank stock must member banks purchase?

Up to 6% of their capital.

Approximately what percentage of commercial banks are Fed members?

About one-third.

What percentage of commercial bank deposits are held by member banks?

About three-fourths.

How many Federal Reserve District Banks exist?

Twelve.

How many Reserve Bank branch banks exist?

Twenty-five.

What are four major functions of Federal Reserve District Banks?

Hold reserves, lend to banks, issue/withdraw currency, and clear checks.

How many directors serve on each Federal Reserve District Bank board?

Nine directors.

How long is a Reserve Bank director's term?

Three years.

What are Class A directors?

Directors who represent member banks.

What are Class B directors?

Directors who represent commerce, agriculture, and industry.

What are Class C directors?

Directors appointed by the Board of Governors who may not be bankers.

What are the major responsibilities of the Board of Governors?

Set reserve requirements, approve discount rates, supervise banks, regulate consumer finance, and oversee Reserve Banks.

What is the Federal Open Market Committee (FOMC)?

A committee that directs open-market operations.

Who makes up the FOMC?

The Board of Governors and five Reserve Bank presidents.

What is the Fed's primary monetary policy tool?

Open-market operations.

What is the Federal Advisory Council?

A committee that advises the Board of Governors on banking issues.

What is the Consumer Advisory Council?

A committee that advises on consumer matters.

What is the Thrift Institutions Advisory Council?

A committee that advises on issues affecting thrift institutions.

Who was Fed Chair from 1979 to 1987?

Paul Volcker.

What was Paul Volcker known for?

Reducing double-digit inflation through restrictive monetary policy.

Who was Fed Chair from 1987 to 2006?

Alan Greenspan.

What was Alan Greenspan known for?

Low inflation, economic growth, low interest rates, and relatively high stock prices.

Who became Fed Chair in 2006?

Ben Bernanke.

What major events occurred during Ben Bernanke's chairmanship?

The financial crisis and Great Recession.

What are dynamic actions of the Fed?

Actions that stimulate or repress prices and economic activity.

What are defensive activities of the Fed?

Actions that offset unexpected monetary developments.

What is the accommodative function of the Fed?

Meeting credit needs, clearing checks, and supporting depository institutions.

What is monetary policy?

Fed actions used to regulate money supply growth, availability, and cost of money.

What are the three basic monetary policy instruments?

Reserve requirements, discount rate policy, and open-market operations.

What are reserve requirements?

The amount of reserves banks must hold against deposits.

What is discount rate policy?

The Fed's setting of the interest rate charged to banks borrowing from Reserve Banks.

What are open-market operations?

The buying and selling of government securities by the Fed.

What is a fractional reserve system?

A banking system where reserves equal only a percentage of deposits.

What are bank reserves?

Vault cash plus deposits held at Federal Reserve Banks.

What are required reserves?

The minimum reserves a bank must hold.

What is the required reserve ratio?

The percentage of deposits that must be held as reserves.

What are excess reserves?

Reserves above the required minimum.

What is the discount rate?

The interest rate banks pay when borrowing from a Federal Reserve Bank.

What are the two forms of borrowing from the Fed?

Advances (loans) and discounting eligible paper.

What are open-market operations used for?

To change bank reserves and influence the money supply.

What securities primarily make up the Fed's assets?

U.S. government and government agency securities.

What effect does quantitative easing have on bank reserves?

It increases excess reserves.

What effect does quantitative easing have on the money supply?

It increases the money supply and liquidity.

What are the two major approaches to implementing monetary policy?

Controlling money supply growth or targeting interest rates.

What is the federal funds rate?

The rate on overnight loans between banks.

What supervisory responsibilities does the Fed have?

Examining commercial banks and regulating banking activities.

Which agencies share commercial bank supervision with the Fed?

OCC, FDIC, and state regulatory agencies.

What agency regulates credit unions?

The National Credit Union Administration (NCUA).

What agency regulates savings and loan institutions?

The Office of Thrift Supervision (OTS).

What is the Consumer Credit Protection Act of 1968?

A law requiring clear disclosure of credit costs and preventing abusive lending practices.

What is Regulation Z?

The Truth in Lending regulation that helps consumers compare credit costs.

What is the payments mechanism?

The system used to transfer money within the economy.

What are the Fed's service functions?

Currency regulation, check clearing, check routing, credit transfers, and electronic funds transfers.

What is check clearance?

The process of collecting and settling checks between banks.

What central bank serves the United Kingdom?

The Bank of England (BOE).

What central bank serves Japan?

The Bank of Japan (BOJ).

What central bank serves countries using the euro?

The European Central Bank (ECB).

When was the European Central Bank created?

1999.

What is the ECB responsible for?

Conducting monetary policy for countries that use the euro.

Who must join the Federal Reserve System?

National banks.

What is the Fed's most important committee for monetary policy?

The Federal Open Market Committee (FOMC).

Which monetary policy tool is considered the Fed's primary tool?

Open-market operations.

What happens when the Fed buys securities in the open market?

Bank reserves increase.

What happens when the Fed sells securities in the open market?

Bank reserves decrease.

What happens when reserve requirements increase?

Banks have less money available to lend.

What happens when reserve requirements decrease?

Banks have more money available to lend.

What happens when the discount rate increases?

Borrowing from the Fed becomes more expensive.

What happens when the discount rate decreases?

Borrowing from the Fed becomes cheaper.