Sample Research Paper On Central Banking System In United States

Central banking system is a major part of any economy. Central banking systems in the economy have important roles that they play in driving a country’s economy. They regulate money supply; they are responsible for controlling the interest rates as well as looking after the banking system within the country. Today, central banks are acting as agencies of monetary policy. Central banks play important roles in creating financial stability functions in a country. In United States, the central banking system is called Federal Reserve Bank (Fed). The importance of central banking in U.S. is emphasized in the roles played by Federal Reserve. Central banking system in United States is important. To illustrate the importance and necessity of central banking system in United States, this paper will consider various roles and objectives of Federal Reserve Bank in the economy of U.S.
Federal Reserve Bank is responsible for keeping the financial structure of United States in stable and sound state. The Federal Reserve Bank makes many banking decisions that affect the economy of United States. Federal Reserve Bank has its responsibilities falling into four major areas. First role is conducting monetary policy in form of influencing money and credit conditions to achieve full employment and stable prices in the economy. Second role is overall supervision and regulation of banks as well as other financial institutions. This ensures consumers of sound and safe banking and financial system. Thirdly, Federal Reserve Bank maintains stable financial system to be able to handle risks arising in financial markets. Finally, it provides the government, financial institutions and foreign official institutions with certain financial services as well as supervising U.S. payment systems (Federal Reserve Bank, 2014).
Since its creation, Federal Reserve Bank has been in control of the creation of money in United States. Although the Bank has made decisions that might have, hurt United States, the bank has made decisions that has caused humanity in the world have a massive progress. There have been increased technological as well as sociological leaps that have significantly changed the world that could not have been realized without such system as Fed. For instance, taking example of inventor who has invented a machine that can turn water into usable energy but this inventor has no money for mass production. By use of barter trading, it is not possible for the inventor to raise enough money to build a plant and start mass production of machines.
However, with proper banking system, the inventor is able to go to a bank and present his idea. After the bank evaluates the idea, it may grant the inventor the money to build a manufacturing plant, start mass production of the machines and get them to the people. At the same time, other investors with money may approach the inventor and offer to invest in his idea. This offers the inventor with more capital to manufacture machines without having to pay interest to banks. With this money from investors and the bank, the inventor is able to have money to create a factory, employ other people, purchase the raw materials and then transport the machines to the market. This form of business may not be possible with barter trading systems but is possible with proper banking system in place.
Fed is responsible for setting U.S. monetary policy. Through this, it promotes maximum employment, bring stability in prices as well as moderate the long-term interest rates. Central banking in United States is important in that it helps in implementation of the monetary policy. With stable prices that are likely to remain stable for a long time, the market prices of goods and services, raw materials and labor cannot be changed by inflation. This leads to the efficient allocation of resources thus raising the standards of living in United States. Stable prices also foster people to save more and form capital. This is because; when people are sure that, there is less risk of erosion of asset values, households will save more and businesses are set to invest more. This may not be possible without proper banking system in place.
Through its supervisory function, Fed is able to exercise control over the demand as well as supply of balances that Reserve Bank hold for depository institutions. Therefore, Fed influences federal funds rate, thus employment in the country, output and eventually prices. It is not possible for United States to affect market conditions with regard to depository institutions balances. The Federal Reserve Bank conducts open market operations, imposes the reserve requirements, permits the depository institutions to hold contractual clearing balances and extend credit. This helps Fed to have control over the demand and supply of Fed balances as well as federal funds rate.
For effective financial and banking system in United States, it is important to supervise financial institutions. Supervision of financial institutions and financial activities guarantee the country safe and sound institutions, stable financial markets including fair treatment of financial service consumers. Federal Reserve establishes extensive relationship with other central banks from other countries to be able to coordinate the supervisory activities with other countries. The function of supervision indicates well the importance of central banking system in United States. Banking industry must be supervised to ensure safe banking practices as well as compliance the laws provided in banking law. Supervision of banks involves monitoring the banks, inspecting them and examining these banks to ensure that they comply with banking laws and regulations. Any bank that may not comply with banking laws may face formal or informal action from Fed. Regulating banks may involve issuance of specific regulation or the guidelines that governs the bank operations, activities as well as acquiring banking organizations ((Board of Governors of the Federal Reserve System, 29).
Through the anti-money-laundering program and still on supervision, Federal Reserve is able to enhance domestic security. The fights international money laundering and therefore block terrorists to have access to the United States financial system. Example of anti-money-laundering activities that central banking system brings is reporting of large currency transactions. In this provision, the financial institution is required to retain certain records including information about persons making big deposits.
The central bank in United States (Fed) is also involved in business continuity. Through regulatory framework, the resilience of private-sector financial system is strengthened. For instance, in 2003, Federal Reserve Board through OCC and SEC released a paper called “Interagency Paper on Sound Practices to Strengthen the Resilience of the U.S. Financial System.” This paper brought practices to be adopted in financial institutions so that there is rapid recovery of United States financial system.
The U.S. banking organizations doing international business require to be supervised. This part can only be taken by the central bank (Fed). In this case, Fed is involved in authorizing expansion and development of branches of the state member banks or the national banks in other countries. This includes regulating these bank’s activities. Fed is also involved in authorizing the member banks foreign investments. State member banks are also regulated in their foreign lending activities (Board of Governors of the Federal Reserve System, 67).
In other countries such as Japan and United Kingdom, supervision of banks, other financial institutions and the financial markets is done by a financial supervisory agency instead of a central bank. Other areas such as the euro area, Central Banks have only assumed the responsibility for monetary policy. Some national authorities assume the supervisory powers. In United States, monetary policy can be said to have been successful for some time and it is true that the monetary-policy that have been made for some time now have not been distorted following the Fed supervisory role. The Federal Reserve Bank’s role of supervision calls for extensive engagement in both policymaking as well as operational level. Fed has the responsibility of offering technical support to the congress on all the legislations that may involve banking as well as financial markets ((Friedman and Schwartz, 1963).
Because of involvement of Federal Reserve in supervisory activities, the bank has a wide experience concerning the banking system. For instance, when Fed is examining the staff, it is involved in collecting as well as analyzing the information of the organizations such as management, their business, their financial condition, organization’s internal control and much other information. During the supervision activities, Fed is also able to gather information about the financial companies that do businesses with banks.
Central banking system in United States has helped in mitigating and preventing financial crises. The main reason for this is that the central bank in U.S. has powers of providing liquidity to financial system. This is through methods such as open-market purchases, discount-window loans as well as the intra-day overdrafts. Central banking system in United States is important because it is a major player in payment system. In this regard, it functions as an overseer of clearing-and-settlement systems in U.S. and as one of the provider of payment services. Some of the central features of United States financial crisis originate from problems in payments execution such as failure of payments infrastructure for institutions and uncertainties of institutions financial condition of their counterparts (Greenspan, 1994). Moreover, even where payment system has performed normally, the information that Federal Reserve has been able to obtain from the payment activities that happened, has been valuable in helping the country understand as well as manage financial stresses. Fed has created extensive relationships with other countries by working together with other central banks in its supervision activities across the border banking operations. Such relationships have been helpful in the past crises.
Fed has a responsibility for macroeconomic stability. This provides it with incentive and necessary knowledge to mitigate any financial disruptions. Fed has a wide scope of activities in the financial markets. These include bank supervision, payment activities and most importantly interacting with the primary dealers including capital markets supervision. This feature provides Federal Reserve Bank with expertise to evaluate as well as respond to any financial strain. Taking preventive steps and managing financial crises effectively strengthens financial stability of United States. Federal Reserve over the years has been collaborating with congress and other supervisors including financial market participants to structure the statutory and regulatory measures ((Mishkin, 2000).
With a wide focus of the role of Federal Reserve Bank, from conducting monetary policy, maintaining a stable financial system, providing the government and institutions with payment services to supervision and regulation of banking and financial institutions, one can be able the importance of central banking system in United States. For instance, the supervisory authority by the central bank has clear benefits in assisting the bank to perform its responsibility for the country’s financial stability.

Work Cited

Board of Governors of the Federal Reserve System. The Federal Reserve System: purposes & functions. June 2005. http://www.federalreserve.gov/pf/pdf/pf_complete.pdf. (Accessed February 15, 2015).
Federal Reserve Bank. What is the purpose of the Federal Reserve System? February 4, 2014. http://www.federalreserve.gov/faqs/about_12594.htm. (Accessed February 15, 2015).
Friedman, Milton and Anna Schwartz (1963). A Monetary History of the United States, 1867-1960: Princeton, NJ: Princeton University Press.
Greenspan, Alan (1994). Testimony before the Committee on Banking, Housing, and Urban Affairs, United States Senate, March 2. Available in Board of Governors, Federal Reserve Bulletin, vol. 80 (May), pp. 382-85.
Mishkin, Frederic (2000). "What Should Central Banks Do? (101 KB PDF)" Federal Reserve Bank of St. Louis Review, vol. 82 (November/December), pp. 1-14.