The Structure and Organization of The System

The Federal Reserve System was created by the Federal Reserve Act in 1913 and began operating in 1914. The Fed is an unusual mixture of public and private elements. The Board of Governors, located in Washington, D.C., provides the leadership for the System. Twelve regional Federal Reserve Banks and their branch offices carry out many of the System’s day-to-day activities. The banks are legally private but functionally public corporations. This means that they are owned by member commercial banks in their region (that is, member banks hold stock in their Federal Reserve Bank) but they serve public goals.

The Federal Open Market Committee (FOMC) is another important part of the Federal Reserve System. The FOMC is the System’s most important policymaking body. In addition, the Board of Governors and the Reserve Banks have a number of advisory councils and committees that provide regional and private sector participation in the System’s activities.

The Member Banks. Approximately 38 percent of the 8,039 commercial banks in the United States are members of the Federal Reserve System. National banks must be members; state chartered banks may join if they meet certain requirements.The member banks are stockholders of the Reserve Bank in their District and as such are required to hold 3 percent of their capital as stock in their Reserve Bank.

Other Depository Institutions. In addition to the approximately 3,000 member banks, about 17,000 other depository institutions provide the American people checkable deposits and other banking services. These depository institutions include nonmember commercial banks, savings banks, savings and loan associations, and credit unions. Although not formally part of the Federal Reserve System, these institutions are subject to System regulations, including reserve requirements, and have access to System payments services.

The Reserve Banks. Each of the 12 Reserve Banks serves its region of the country, and all but one have other offices within their Districts to help provide services to depository institutions and the public. The Banks are named after the locations of their headquarters — Atlanta, Boston, Chicago, Cleveland, Dallas, Kansas City, Minneapolis, New York, Philadelphia, Richmond, San Francisco, and St. Louis.

The corporate structure of the Reserve Banks resembles that of commercial banks, but there are major differences:

• The Reserve Banks are not profit motivated. Instead, policy is based on the needs of the economy. While the Banks do charge depository institutions for payments services, the charges are imposed to recover the costs of providing these services and to promote efficiency. Reserve Banks earn substantial revenues on the System’s large portfolio of income-producing government securities acquired in the process of implementing monetary policy. Almost all of these revenues are turned over to the U.S. Treasury. During 2002, for example, the combined revenues of Reserve Banks totaled approximately $29.8 billion, of which approximately $27.1 billion, or 91 percent, went to the Treasury.
  
  
• The member bank stockholders do not share many of the usual rights of stockholders. For example, the law fixes their dividends at 6 percent of their invested capital and they elect only six of the nine directors of each Reserve Bank. In the theoretical event that a Reserve Bank is liquidated, the member bank stockholders would share in the Reserve Bank assets only to the extent of the value of their stock.
  
  
• The Board of Governors exercises general supervisory powers customarily held by directors of private corporations. Reserve Bank directors have several important duties in addition to their regular responsibilities of overseeing Bank operations. First, they establish the discount rates the Reserve Banks charge on loans to depository institutions. Second, they elect the Reserve Bank presidents, five of whom serve, at any one time, as members of the Federal Open Market Committee. Both of these actions are subject to approval by the Board of Governors. Third, Reserve Bank directors provide System officials with considerable "grass roots" information on business, agricultural, and financial conditions.

Board of Governors. The seven members of the Board, each representing a different Federal Reserve District, are appointed for 14-year terms by the President of the United States, with the advice and consent of the U.S. Senate. Board members who have served a full term may not be reappointed.

The President also appoints, from among the seven Board members, the chairman and vice chairman of the Board for four-year terms. These two governors may be reappointed to their positions.

The duties of the Board of Governors include supervising the activities of the Reserve Banks, writing banking regulations, ruling on applications for mergers, approving changes in the discount rate, setting reserve requirements, and establishing margin requirements. In addition, the seven governors serve as members of the Federal Open Market Committee.

The Federal Open Market Committee. The Federal Open Market Committee (FOMC) is the System’s most important monetary policymaking body because it exercises broad control over the growth of the nation’s money supply. It also oversees the System’s operations in the domestic securities markets and foreign exchange markets. The New York Reserve Bank serves as agent for the FOMC, implementing its actions in securities and foreign exchange markets. FOMC members include the seven members of the Board of Governors and five Federal Reserve Bank presidents. The president of the New York Reserve Bank always serves on the FOMC, and four other Reserve Bank presidents serve one-year terms on a rotating basis.

Advisory Councils. Three statutory advisory councils — the Federal Advisory Council, the Consumer Advisory Council, and the Thrift Institutions Advisory Council — advise the Board on matters of current interest. These councils, whose members are drawn from each of the 12 Federal Reserve Districts,meet two to four times a year.

The individual Reserve Banks have advisory committees as well, including thrift institutions advisory committees, small business and agriculture advisory committees, and operations advisory committees. Moreover, officials from all Reserve Banks meet periodically in various committees.