Principles of
Bank Operation
BNKG 1303
Session 3 - Federal Reserve
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Have you ever wondered about the routing and transit number on the bottom of your checks? There is much significance in those numbers. The first two digits determine which of the 12 regional banks your financial institutions is a member. Since Dallas is the 11th bank - all routing numbers in the Dallas area start with either 11 (for banks) or 31 (for thrifts and credit unions). The next digit tells you which branch your financial institution is in. San Antonio based institutions have a 4 in the third position - so that "314" is a thrift (or credit union) from the San Antonio branch of the Dallas bank. The next digit is a '0'. The following four digits represents your particular financial institution. The final digit is known as a 'check' digit - which is used by the processing computer to validate the rest of the routing number - because the high speed processing equipment might sometime misread the number in magnetic ink. The Federal Reserve Banks are responsible for the issuance of new currency to replace old-worn out bills as well as the introduction of new style currency. Serving as the 'bankers bank' - the Fed takes deposits of currency from banks with excess and supply to banks needing additional currency to supply their customers needs. In this process - old, damaged and worn bills that no longer meet certain physical tests are sent to 'super' shredder that cuts the bills into micro size pieces. |
| Federal Reserve created in 1913 by an act of Congress to address three weakness of the system then in place. |
| The first of these was a centralized check collection system. Prior to this 'new' service of the Federal Reserve System, banks accepting checks drawn on other banks sent them directly to the other bank for payment - an extremely inefficient method. |
| The second was fixing the problems associated with an 'Inflexible Currency'. Individual 'national' banks could issue currency - in their own name - based on the amount of government bonds they owned. This act allowed Federal Reserve Notes - the currency we use today - which met the needs for additional currency to meet the needs of a growing country. |
| The third problem was the concentration of reserves being held in the New York Bank - compared to reserves being held in the rest of the country. |
| The Federal Reserve is organized into 12 regional banks. The New York bank holds the most power - because of the concentration of the largest banks in New York City. |
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Each regional bank has branches - one or more depending on the location. The Dallas bank has branches in San Antonio, Houston and El Paso. |
| Charts on pages 55 - 58 of the text explain, in graphic form, the relationship in changes to the discount rate, reserve requirements, open market operations, government spending and taxation policies to expansionary or contractionary times. |
| Bank chartering is done under the 'dual banking' system - where some banks are organized and chartered as National Banks and others chartered as State Banks. Regardless, all banks are insured by the Federal Deposit Insurance Corporation (FDIC). Credit Unions also have a dual chartering option, being either State chartered or Federal chartered - they are also all insured by the National Credit Union Administration (the NCUA). |
| All banks, savings and loans, savings banks and credit unions are examined by their appropriate regulators. This is done to insure that your deposits are safe and the financial institution is operating in a sound and secure manner. |
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For more of MY explanations concerning Fiscal Policy and Monetary Policy see also: Tools of Monetary Policy |
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Session Internet Resources
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| Federal Reserve Board |
| Alan Greenspan |
| Understanding the Fed |
| Fed Board of Governors |
| FOMC |
| Arthur F. Burns |
| Paul Volcker |
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There is NO specific assignment for this session. |
| For each session, you must answer completely ONE of the questions provided, and email your response to the instructor by midnight the Friday of the session week. While answers should be developed fully, it is anticipated that each answer should be approximately one page in length. |
| What is the significance of the dual banking system? |
| What are the major functions of the Federal Reserve System? |
| What is the role of bank examinations? |