Federal Reserve Q&A
Q. How many Federal Reserve Banks are there?
A. The Federal Reserve System is made up of 12 regional Banks and 25 Branches. The Kansas City Fed represents the Tenth Federal Reserve District and covers a seven state area including: Colorado, Kansas, Nebraska, Oklahoma, Wyoming, western Missouri and northern New Mexico.
Q. What are the three primary functions of the Federal Reserve?
A. Conducting the nation’s monetary policy, supervising and regulating banking organizations, and providing financial services to financial institutions and the government.
Q. Is the Fed part of the government?
A. No. The Federal Reserve Banks are not government agencies. The Federal Reserve is a quasi-governmental institution. Each Reserve Bank is organized like a corporation. The capital stock of the 12 Banks is owned by the member banks in their districts, but the Board of Governors in Washington, D.C. has the power to regulate and control the Reserve Banks. The Federal Reserve Board of Governors is a government agency. Federal Reserve Banks have been described as “instrumentalities of the United States government, neither wholly nor partially owned by the government.” Reserve Bank employees are not civil service employees, and the Fed continues to operate when the government shuts down.
Q. Is the Federal Reserve funded by the government?
A. The Federal Reserve is self-supporting and uses no appropriated U.S. government funds (i.e. Congress does not give Reserve Banks any money). This financial arrangement is key to the traditional “independence within government” idea designed when Congress created the Federal Reserve. Congress intended for the Fed to be independent of the appropriations process so that it could operate independently of day-to-day partisan political pressures.
The Federal Reserve System’s primary source of income is the interest earned on U.S. government securities that it has acquired through open market operations. Other major sources of income are the interest on foreign currency investments held by the System; interest on loans to depository institutions; and fees received for financial services provided to depository institutions (i.e. check clearing, funds transfers, and ACH transactions).
Q. Who owns the Federal Reserve Banks?
A. Member bank must subscribe to stock in their regional Federal Reserve Bank in an amount equal to a certain percent of their capital and surplus. The holding of this stock, however, does not carry with it the same level of control and financial interest conveyed to holders of common stock for-profit organizations. Stock subscriptions are a legal obligation that goes along with membership, and the stock may not be sold or pledged as collateral for loans. Member banks receive an annual six percent dividend on their stock, as specified by law. Member banks also vote for Class A and B directors of the Reserve Banks. The stock is not available for purchase by individuals.
Q. To whom is the Federal Reserve Accountable?
A. Ultimately, the Federal Reserve is accountable to Congress, which can amend the Federal Reserve Act at any time. Passed in 1913, this act is the federal legislation that established the Federal Reserve System. Legislation requires the Federal Reserve to annually report its activities to the Speaker of the House of Representatives, and twice a year at the Banking Committees of Congress on its plans for monetary policy. The Federal Reserve also testifies before Congress when requested. Testimony is available from the Board of Governors. Also, the General Accounting Office (GAO) can audit certain Federal Reserve operations.
Q. Why does the money have to be shredded? Why can’t the Fed just print more money to pay off the nation’s debt and make everyone rich?
A. The money is shredded simply because it is worn out or defaced. Money like anything else derives its value from its scarcity. If the United States decided to print more money to pay off our bills, that would make each dollar less valuable because there would be more of them. That means prices would rise, and eventually, the dollar would not be worth much.
Q. Does every check written pass through the Federal Reserve?
A. Only about one-third of all checks written pass through the Federal Reserve. Other checks are cleared via “on us” banking transactions or through clearinghouse activity at other financial institutions.
Q. Why does the Fed charge banks for services?
A. In 1980, the Monetary Control Act (MCA) was passed. In addition to other changes, this Act required that Reserve Banks offer check processing to all financial institutions, and Reserve Banks can charge financial institutions for these services on a breakeven basis. All services are charged on a per item basis for each type of service provided. Large and small banks are charged the same rates regardless of check volume. (Prior to MCA, only member banks could use Fed services, and they were free.)