How does the
Federal Reserve fit into
the U.S. banking system?
Although the Federal Reserve is often in the news, not everyone understands what it is and
what it does. Perhaps the best way to clear things up is to have a Federal Reserve “Q & A” to
cover some of the most common questions that people ask.
What is the Federal Reserve?
It is the central banking system of the United States.
What does it do?
The short answer is that the Federal Reserve is:
• a bank for other banks,
• a bank for the U.S. government, and
• responsible for U.S. monetary policy, which influences
how much money and credit will be available to the U.S. economy.
It also helps to:
• supervise and regulate banking institutions to ensure the safety
and soundness of the nation’s banking and financial system
• protect the credit rights of consumers, and
• maintain the stability of the financial system by helping to
contain risks that may arise in financial markets.
36
Wednesday, 11 August 2010
Do you lose money if your bank is robbed?
Do you lose money
if your bank is robbed?
No. Nearly all banks have private insurance that covers them if they are robbed. (It is not the
same as federal deposit insurance.)
In addition, most banks take elaborate measures to safeguard the cash and other valuable items
left in their care. Bank vaults have long been protected by reinforced concrete walls, time locks,
and metal alloy doors that resist drilling and explosions.
At one time, armed security guards stood watch over banks, but today most banks seem to
have decided (wisely) that they would rather not expose their customers and employees to
gunplay. Shotguns and revolvers have been replaced by closed-circuit television cameras that
maintain a constant watch over everyone who enters or exits the bank.
Another innovation is the exploding dye pack. In certain cases, bank employees are able to
place a package of red dye in with the robber’s stash of stolen cash. Later, when the crook
opens the stash, the concealed dye pack explodes, covering the robber and the ill-gotten
money with dye that won’t wash off.
Most banks take elaborate
measures to safeguard
valuables. Shotguns and
revolvers have been
replaced by closed-circuit
television cameras that
maintain a constant watch
over everyone who enters
or exits a bank.
35
if your bank is robbed?
No. Nearly all banks have private insurance that covers them if they are robbed. (It is not the
same as federal deposit insurance.)
In addition, most banks take elaborate measures to safeguard the cash and other valuable items
left in their care. Bank vaults have long been protected by reinforced concrete walls, time locks,
and metal alloy doors that resist drilling and explosions.
At one time, armed security guards stood watch over banks, but today most banks seem to
have decided (wisely) that they would rather not expose their customers and employees to
gunplay. Shotguns and revolvers have been replaced by closed-circuit television cameras that
maintain a constant watch over everyone who enters or exits the bank.
Another innovation is the exploding dye pack. In certain cases, bank employees are able to
place a package of red dye in with the robber’s stash of stolen cash. Later, when the crook
opens the stash, the concealed dye pack explodes, covering the robber and the ill-gotten
money with dye that won’t wash off.
Most banks take elaborate
measures to safeguard
valuables. Shotguns and
revolvers have been
replaced by closed-circuit
television cameras that
maintain a constant watch
over everyone who enters
or exits a bank.
35
Do you lose money if your bank fails?
Do you lose money
if your bank fails?
The Federal Deposit Insurance Corporation (FDIC) has protected bank deposits since 1934. In
all that time, no one has lost money that was FDIC-insured. Federal deposit insurance covers
most types of deposits, including savings deposits, checking deposits, and certificates of deposit.
The basic insured amount is $100,000.
In the days before federal deposit insurance, the U.S. banking system was plagued by bank
“runs” or “panics.” At the slightest hint of trouble, depositors would run to the bank and line
up to withdraw their money. All too often, only the first few people in line had any hope of
ever seeing their money again; others lost everything. Even healthy banks sometimes failed after
rumors caused depositors to panic and withdraw their money.
For many years, the public seemed willing to accept the losses. But then came the Great
Depression of the 1930s, and financial pressures forced thousands of banks to close their
doors forever. Losses ran into the hundreds of millions of dollars, and many people lost their
life savings.
The wave of bank failures shattered public confidence in the banking system, and Americans
looked to the federal government for help. Congress responded by establishing the FDIC,
which provided deposit insurance coverage of up to $2,500 per depositor. Public confidence
rebounded, and bank failures declined from approximately 4,000 in 1933 to 62 in 1934.
Over the years, the federal deposit insurance limit has increased, and federal deposit insurance
has helped to maintain public confidence in the U.S. banking system. Bank failures have not been
eliminated, but long lines of panic-stricken depositors have become an uncommon sight.
if your bank fails?
The Federal Deposit Insurance Corporation (FDIC) has protected bank deposits since 1934. In
all that time, no one has lost money that was FDIC-insured. Federal deposit insurance covers
most types of deposits, including savings deposits, checking deposits, and certificates of deposit.
The basic insured amount is $100,000.
In the days before federal deposit insurance, the U.S. banking system was plagued by bank
“runs” or “panics.” At the slightest hint of trouble, depositors would run to the bank and line
up to withdraw their money. All too often, only the first few people in line had any hope of
ever seeing their money again; others lost everything. Even healthy banks sometimes failed after
rumors caused depositors to panic and withdraw their money.
For many years, the public seemed willing to accept the losses. But then came the Great
Depression of the 1930s, and financial pressures forced thousands of banks to close their
doors forever. Losses ran into the hundreds of millions of dollars, and many people lost their
life savings.
The wave of bank failures shattered public confidence in the banking system, and Americans
looked to the federal government for help. Congress responded by establishing the FDIC,
which provided deposit insurance coverage of up to $2,500 per depositor. Public confidence
rebounded, and bank failures declined from approximately 4,000 in 1933 to 62 in 1934.
Over the years, the federal deposit insurance limit has increased, and federal deposit insurance
has helped to maintain public confidence in the U.S. banking system. Bank failures have not been
eliminated, but long lines of panic-stricken depositors have become an uncommon sight.
Or take the case of Bedrock Bank . . .
Or take the case of Bedrock Bank . . .
Bedrock Bank Gets Too Big Too Fast
Bedrock Bank’s new president was determined to turn his bank into the region’s biggest
lender. Bedrock’s loan officers got the message and started making as many loans as they could
for condominium developments, shopping centers, office buildings, and high-priced suburban
housing developments. Loan applications were not always checked as closely as they had been
in the past, and some of the loans were approved more quickly than they had been in the old
days. But nobody seemed concerned because the local economy was strong and real estate
values were rising rapidly.
Everything seemed fine; everyone was making money. But then the economy slowed down, and
things took a turn for the worse. The weak economy forced many businesses to close, leaving
lots of vacant office space. Real estate values plummeted, and many developers fell behind on
their loan payments.
In the end, Bedrock Bank was losing so much money on bad real estate loans that government
regulators were forced to step in and close it. The regulators tried to find a buyer for Bedrock,
but no other bank wanted to get stuck with all the loans that had gone bad. Eventually,
another bank agreed to buy Bedrock if the federal government would agree to keep many of
the problem loans.
33
Bedrock Bank Gets Too Big Too Fast
Bedrock Bank’s new president was determined to turn his bank into the region’s biggest
lender. Bedrock’s loan officers got the message and started making as many loans as they could
for condominium developments, shopping centers, office buildings, and high-priced suburban
housing developments. Loan applications were not always checked as closely as they had been
in the past, and some of the loans were approved more quickly than they had been in the old
days. But nobody seemed concerned because the local economy was strong and real estate
values were rising rapidly.
Everything seemed fine; everyone was making money. But then the economy slowed down, and
things took a turn for the worse. The weak economy forced many businesses to close, leaving
lots of vacant office space. Real estate values plummeted, and many developers fell behind on
their loan payments.
In the end, Bedrock Bank was losing so much money on bad real estate loans that government
regulators were forced to step in and close it. The regulators tried to find a buyer for Bedrock,
but no other bank wanted to get stuck with all the loans that had gone bad. Eventually,
another bank agreed to buy Bedrock if the federal government would agree to keep many of
the problem loans.
33
Why do banks fail?
Why do banks fail?
A bank is a business, and like other businesses, they can fail. Sometimes they fail because the
people who run them make poor business decisions such as expanding too quickly or putting
too much money into one type of loan.
Sometimes they fail because of fraud. Maybe the president makes questionable loans to friends
or hires unqualified relatives and pays them huge salaries. But banks also go out of business
because changing economic conditions make it difficult or impossible for borrowers to repay
their loans. Here’s an example.
Gusher National Bank Slips on Falling Oil Prices
Falling energy prices mean cheaper gasoline and lower home heating bills. So, falling oil prices
must be good, right?
Not for everyone! Take the case of Gusher National Bank. Gusher was very aggressive in
making loans to oil and natural gas companies that had no problem repaying their loans when
energy prices were high. The loans spelled big profits for Gusher, and everyone agreed that
Gusher’s executives were smart business people who really knew how to make money.
Then the economy slowed down, and the demand for energy fell. Factories burned less oil and
natural gas. Truck drivers, commuters, and vacationers drove fewer miles and burned less fuel.
As a result, energy prices dropped sharply, and many energy companies fell behind on their loan
payments. Some even stopped making payments altogether.
Months passed, oil prices remained low, and more energy companies fell
behind on their payments. Finally, Gusher lost so much money to bad loans
that government regulators had to step in and close the bank. Gusher had
fallen victim to changing economic conditions—falling energy prices and a
high concentration of loans to energy companies.
A bank is a
business, and
like other
businesses,
they can fail.
31
A bank is a business, and like other businesses, they can fail. Sometimes they fail because the
people who run them make poor business decisions such as expanding too quickly or putting
too much money into one type of loan.
Sometimes they fail because of fraud. Maybe the president makes questionable loans to friends
or hires unqualified relatives and pays them huge salaries. But banks also go out of business
because changing economic conditions make it difficult or impossible for borrowers to repay
their loans. Here’s an example.
Gusher National Bank Slips on Falling Oil Prices
Falling energy prices mean cheaper gasoline and lower home heating bills. So, falling oil prices
must be good, right?
Not for everyone! Take the case of Gusher National Bank. Gusher was very aggressive in
making loans to oil and natural gas companies that had no problem repaying their loans when
energy prices were high. The loans spelled big profits for Gusher, and everyone agreed that
Gusher’s executives were smart business people who really knew how to make money.
Then the economy slowed down, and the demand for energy fell. Factories burned less oil and
natural gas. Truck drivers, commuters, and vacationers drove fewer miles and burned less fuel.
As a result, energy prices dropped sharply, and many energy companies fell behind on their loan
payments. Some even stopped making payments altogether.
Months passed, oil prices remained low, and more energy companies fell
behind on their payments. Finally, Gusher lost so much money to bad loans
that government regulators had to step in and close the bank. Gusher had
fallen victim to changing economic conditions—falling energy prices and a
high concentration of loans to energy companies.
A bank is a
business, and
like other
businesses,
they can fail.
31
Why do banks fail?
Why do banks fail?
A bank is a business, and like other businesses, they can fail. Sometimes they fail because the
people who run them make poor business decisions such as expanding too quickly or putting
too much money into one type of loan.
Sometimes they fail because of fraud. Maybe the president makes questionable loans to friends
or hires unqualified relatives and pays them huge salaries. But banks also go out of business
because changing economic conditions make it difficult or impossible for borrowers to repay
their loans. Here’s an example.
Gusher National Bank Slips on Falling Oil Prices
Falling energy prices mean cheaper gasoline and lower home heating bills. So, falling oil prices
must be good, right?
Not for everyone! Take the case of Gusher National Bank. Gusher was very aggressive in
making loans to oil and natural gas companies that had no problem repaying their loans when
energy prices were high. The loans spelled big profits for Gusher, and everyone agreed that
Gusher’s executives were smart business people who really knew how to make money.
Then the economy slowed down, and the demand for energy fell. Factories burned less oil and
natural gas. Truck drivers, commuters, and vacationers drove fewer miles and burned less fuel.
As a result, energy prices dropped sharply, and many energy companies fell behind on their loan
payments. Some even stopped making payments altogether.
Months passed, oil prices remained low, and more energy companies fell
behind on their payments. Finally, Gusher lost so much money to bad loans
that government regulators had to step in and close the bank. Gusher had
fallen victim to changing economic conditions—falling energy prices and a
high concentration of loans to energy companies.
A bank is a
business, and
like other
businesses,
they can fail.
31
A bank is a business, and like other businesses, they can fail. Sometimes they fail because the
people who run them make poor business decisions such as expanding too quickly or putting
too much money into one type of loan.
Sometimes they fail because of fraud. Maybe the president makes questionable loans to friends
or hires unqualified relatives and pays them huge salaries. But banks also go out of business
because changing economic conditions make it difficult or impossible for borrowers to repay
their loans. Here’s an example.
Gusher National Bank Slips on Falling Oil Prices
Falling energy prices mean cheaper gasoline and lower home heating bills. So, falling oil prices
must be good, right?
Not for everyone! Take the case of Gusher National Bank. Gusher was very aggressive in
making loans to oil and natural gas companies that had no problem repaying their loans when
energy prices were high. The loans spelled big profits for Gusher, and everyone agreed that
Gusher’s executives were smart business people who really knew how to make money.
Then the economy slowed down, and the demand for energy fell. Factories burned less oil and
natural gas. Truck drivers, commuters, and vacationers drove fewer miles and burned less fuel.
As a result, energy prices dropped sharply, and many energy companies fell behind on their loan
payments. Some even stopped making payments altogether.
Months passed, oil prices remained low, and more energy companies fell
behind on their payments. Finally, Gusher lost so much money to bad loans
that government regulators had to step in and close the bank. Gusher had
fallen victim to changing economic conditions—falling energy prices and a
high concentration of loans to energy companies.
A bank is a
business, and
like other
businesses,
they can fail.
31
Do banks keep large amounts of gold and silver in their vaults?
Do banks keep large
amounts of gold and
silver in their vaults?
Today, banks rarely keep gold or silver in their vaults. That’s because our paper money is no
longer backed by gold or silver, and our coins don’t contain precious metal.
The U.S. government still holds millions of ounces of gold and silver, but citizens and foreign
governments can no longer exchange their U.S. paper money for it. The government’s gold
and silver are considered valuable assets rather than forms of money. Today’s coins and paper
money are backed by the “full faith and credit” of the U.S. government.
If that makes you a little uneasy, try the following exercise. Put a ten-dollar bill and a blank piece of
paper on a tabletop, and ask people to choose between the two. Chances are everyone will choose
the ten-dollar bill. Why? After all, neither the ten-dollar bill nor the blank piece of paper is backed
by gold or silver.
The difference is that people all over the United States will accept the ten-dollar bill as payment
if you want to buy something. But you would have a hard time finding someone willing to accept
the blank piece of paper. That’s because the ten-dollar bill is backed by the promise of the
United States government, and to most people, that promise is as good as gold.
amounts of gold and
silver in their vaults?
Today, banks rarely keep gold or silver in their vaults. That’s because our paper money is no
longer backed by gold or silver, and our coins don’t contain precious metal.
The U.S. government still holds millions of ounces of gold and silver, but citizens and foreign
governments can no longer exchange their U.S. paper money for it. The government’s gold
and silver are considered valuable assets rather than forms of money. Today’s coins and paper
money are backed by the “full faith and credit” of the U.S. government.
If that makes you a little uneasy, try the following exercise. Put a ten-dollar bill and a blank piece of
paper on a tabletop, and ask people to choose between the two. Chances are everyone will choose
the ten-dollar bill. Why? After all, neither the ten-dollar bill nor the blank piece of paper is backed
by gold or silver.
The difference is that people all over the United States will accept the ten-dollar bill as payment
if you want to buy something. But you would have a hard time finding someone willing to accept
the blank piece of paper. That’s because the ten-dollar bill is backed by the promise of the
United States government, and to most people, that promise is as good as gold.
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