Federal Reserve Banks play an important role in this U.S. economy and the banking system. These Fed Banks provide banking services to commercial banks, regulate commercial banking activity, process checks and other payments, provide banking services for government agencies, collect and analyze economic data, and undertake a host of other activities.

Federal Reserve Banks

The exhibit to the right, commonly termed the Federal Reserve pyramid, indicates the connection between Federal Reserve Banks and the rest of the Federal Reserve System. The 37 Federal Reserve Banks (12 District Banks and 25 Branch Banks) form the middle of the pyramid, essentially functioning as the go-between the Board of Governors and commercial banks. The Fed Banks are largely responsible for supervising, regulating, and interacting with commercial banks and carrying out the policies established by the Federal Reserve Board of Governors.

Fed Banks are "technically" owned by member commercial banks. National banks, those chartered by the Comptroller of the Currency, are automatically members of the Federal Reserve System. As part of their startup, national banks purchase shares in their local Federal Reserve Bank. State banks, those chartered by states, are not automatically members of the Fed, but can choose to join by purchasing shares in a Fed Bank. These member shares are reflected in deposits with the Fed Bank (termed Federal Reserve deposits), and while the Fed Banks pay dividends on these ownership shares, like that of private corporations, the shares cannot be traded like corporate stock.

Although they are non-profit government entities, Fed Banks are run much like commercial banks. They generate revenue from interest received on a rather extensive holding of U.S. Treasury securities, interest received on discount loans to commercial banks, and fees for services (such as check processing) provided to commercial banks. In addition to typical administrative expenses (salaries, electricity, office supplies), Fed Banks pay dividends to member commercial banks on ownership shares. An remaining "profit" generated is returned to the U.S. Treasury.

Federal Reserve Districts

• One, the guiding philosophy behind the formation of the Federal Reserve System in the early 1900s was a decentralized central bank. The creators did NOT want a central bank located exclusively in New York City or Washington, D.C. Hence the system was set up with not just one bank, but 12 somewhat autonomous banks (plus 25 branch banks).


• Two, when the Federal Reserve System was established in 1913 communication and transportation systems were slower and less efficient than today. To extend assistance to and control over ALL banks in the economy, the Federal Reserve System needed facilities dispersed throughout the country. A single, centralized regulatory bank simply was not a pragmatic option.

Federal Reserve Districts

A total of 37 Federal Reserve Banks are pinpointed. Each of the 12 color-coded Districts has its very own Federal Reserve District Bank. The 12 Districts are commonly designated by the District Bank city: Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. Several other cities marked on the map, 25 in total, are the homes of Federal Reserve Branch Banks. Some Districts have several Branch Banks, others have none. The original need for Branch Banks, (circa 1913), was to ensure regulatory oversight of ALL banks, including those in the middle of nowhere, like Wyoming or Oklahoma.

Districts and Branches

The 25 Federal Reserve Branch Banks exist to assist their parent District Banks in their assigned duties. Should a commercial bank need Federal Reserve services, it can contact its nearby Branch Bank rather than a more distant District Bank. Branch Banks generally do not provide the entire range of services of District Banks (much like the branch of a commercial bank provides scaled down services) and they are subservient to their District Banks.

Ten of the Federal Reserve Districts contain Branch Banks. Only the Boston and Philadelphia districts have no Branch Banks. Branch Banks tend to be more numerous in the less densely populated, larger Federal Reserve Districts in the west and South.

Cities containing the 25 Branch Banks, grouped according to their District Bank cities are: Boston (no Branch Banks); New York (Buffalo); Philadelphia (no Branch Banks); Cleveland (Cincinnati, Pittsburgh); Richmond (Baltimore, Charlotte); Atlanta (Birmingham, Jacksonville, Miami, Nashville, New Orleans); Chicago (Detroit); St. Louis (Little Rock, Louisville, Memphis); Minneapolis (Helena); Kansas City (Denver, Oklahoma City, Omaha); Dallas (El Paso, Houston, San Antonio); and San Francisco (Los Angeles, Portland, Salt Lake City).

Administrative Structure

Class A directors are commercial bank presidents. Class B and C directors are drawn from the ranks of the non-bank public and are not eligible to serve on the board if they employees of a commercial bank or bank holding company. Taking this a notch higher, Class C directors are not eligible for the board if they own stock in a commercial bank or bank holding company.

Class A directors are elected to the board by commercial banks within the district, specially by commercial banks that are members of the Federal Reserve System (not all commercial banks are members). Class B directors are also elected by member commercial banks. Class C directors are appointed by the Board of Governors of Federal Reserve System in Washington, D.C. The Board of Governors also selects a chairman and deputy chairman from among the Class C directors. Class A and B directors cannot serve as chairman or deputy chairman.

The board of directors then appoints the bank president and any vice presidents that undertake the day-to-day administration of the Federal Reserve Bank. One of the most important duties of the Fed Bank president is to serve on the Federal Open Market Committee (FOMC). The FOMC oversees monetary policy and is comprised of the 7 Board of Governors, together with the 12 Federal Reserve District Bank presidents (although only 5 being selected as voting members at any given time). This committee meets every six weeks (give or take), usually on a Tuesday, in Washington, D.C., to discuss the course of monetary policy.

Each of the 12 Federal Reserve District Bank presidents is responsible for reporting on economic conditions within their districts at FOMC meetings. These summary analyses and supporting data are released to the public in what is called the Beige Book a couple of weeks before the meetings.

Federal Reserve Branch Banks have a similar administrative structure to District Banks, with a few differences. Each Branch Bank is also supervised by a board of directors, which then appoint administrative officers. The Branch Bank boards contain from 5 or 7 members that are appointed either by the District Bank or the Board of Governors.

Functions

• First, as the bankers' bank, Federal Reserve Banks provide important banking services to commercial banks. Fed Banks process checks and other electronic payments, distribute paper currency and metal coins, maintain deposits for commercial banks, and extend reserve loans to commercial banks. While private companies also provide payment processing services, the vast majority of check and electronic payments for the economy are handled by the network of 37 Fed Banks.


• Second, Federal Reserve Banks provide regulatory oversight of commercial banks. They track the assets, liabilities, loans, deposits, and reserves of commercial banks to ensure that Federal Reserve regulations are followed. Fed Banks are responsible for inspecting the books of member banks through onsite, field examinations.


• Third, Federal Reserve Banks act as the fiscal agent for the U.S. Treasury and other government agencies. They maintain checking accounts which government agencies use to pay their bills. Fed Banks also handle the sale of U.S. Treasury securities and savings bonds for the Treasury Department. Commercial banks, institutional investors, brokers, dealers, even the general public can purchase newly issued Treasury securities through their nearby Federal Reserve Bank.


• Fourth, Federal Reserve Banks play an important role in monetary policy. All three tools--open market operations, discount rate, and reserve requirements--run through Fed Banks. In addition to Federal Open Market Committee participation by the Fed Bank presidents, the New York Federal Reserve Bank is responsible for carrying out open market operations. Moreover, each Fed Bank is responsible for setting the discount rate charged commercial banks for reserve loans from the Fed, subject to approval by the Board of Governors. Fed Banks also enforce reserve requirement that affect the commercial bank lending and money creation process. Lastly, Fed Banks, especially District Banks, undertake an extensive amount of research, data collection, and analysis of economic conditions that is used by the Board of Governors and FOMC when setting monetary policy.