Overview of Federal Reserve System
The Federal Reserve System--the nation's central bank--consists of the Board of Governors in Washington, D.C., the 12 Federal Reserve Banks with their 24 branches distributed throughout the nation, the Federal Open Market Committee (FOMC), and three advisory councils--the Federal Advisory Council, the Consumer Advisory Council, and the Thrift Institutions Advisory Council. The System was created in 1913 by the Congress to establish a safe and flexible monetary and banking system. Over the years, the Congress has given the Federal Reserve more authority and responsibility for achieving broad national economic and financial objectives.
The duties of the Federal Reserve fall into four general areas:
(1) conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in the pursuit of maximum employment, stable prices, and moderate longterm interest rates;
(2) supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers;
(3) maintaining the stability of the financial system and containing systemic risk that may arise in financial markets; and
(4) providing financial services to depository institutions, the U.S. government, and foreign official institutions.
The Federal Reserve System plays a major role in the nation's payment system. The Reserve Banks issue currency and distribute coin; process Fedwire, automated clearinghouse, and securities transfers; and collect checks. In addition, the Reserve Banks serve as the fiscal agents of the United States and provide a variety of financial services for the Treasury, other government agencies, and other fiscal principals. For a fuller discussion of the Federal Reserve's responsibilities, see the Board publication The Federal Reserve System: Purposes & Functions.
Summary of 2008 Income and Expenditures
In carrying out its responsibilities in 2008, the Federal Reserve System incurred $2.5 billion in net expenses.1 Total spending of $3.9 billion was offset by $1.4 billion in revenue from priced services, claims for reimbursement, and other income. Total 2008 expenses were $149.3 million, or 3.7 percent, less than the amount budgeted for 2008 (table I.1).2
The major source of Reserve Bank income is earnings from the portfolio of U.S. government securities in the System Open Market Account, totaling $27.5 billion in 2008. Earnings in excess of expenses, dividends, and surplus are transferred to the U.S.
|Total System expenses||4,021.7||3,872.4||-149.3||-3.7|
Note: Components may not sum to totals and may not yield percentages shown because of rounding.
1. Restated. Return to table
Treasury--in 2008, a total of $31.7 billion.3 (These net earnings are treated as receipts in the U.S. budget accounting system and as anticipated earnings projected by the Office of Management and Budget in the U.S. budget.)
In 2008, the Federal Reserve System accounted for costs using the following categories: monetary and economic policy, supervision and regulation of financial institutions, services to financial institutions and the public, services to the U.S. Treasury and other government agencies, and System policy direction and oversight.
Monetary and Economic PolicyThe monetary and economic policy operational area encompasses Federal Reserve actions to influence the availability and cost of money and credit in the nation's economy. In 2008, the Federal Open Market Committee held eight regularly scheduled meetings and adjusted the federal funds rate seven times.
A vast amount of banking and financial data flows through the Reserve Banks to the Board, where the data are compiled and made available to the public. The research staffs at the Board and the Banks use the data, along with information collected by other public and private institutions, to assess the state of the economy and the relationships between the financial markets and economic activity. Staff members provide background information to the Board of Governors and at each meeting of the FOMC by preparing detailed economic and financial analyses and projections for the domestic economy and international markets. The Board and the FOMC use these analyses and projections in setting reserve requirements, setting the discount rate (which affects the cost of borrowing), and conducting open market operations. Staff members also conduct longer-run economic studies on regional, national, and international issues.
Supervision and Regulation of Financial InstitutionsThe Federal Reserve plays a major role in the supervision and regulation of banks and bank holding companies. The Board of Governors adopts regulations to carry out statutory directives and establishes System supervisory and regulatory policies. The Reserve Banks conduct on-site examinations and inspections of state member banks and bank holding companies; review applications for mergers, acquisitions, and changes in control from banks and bank holding companies; and take formal supervisory actions. In 2008, the Federal Reserve conducted 486 examinations of state member banks (some of them jointly with state agencies), 500 examinations of large bank holding companies, and 3,048 inspections of small, noncomplex bank holding companies; it acted on 1,057 proposals, representing 1,910 individual applications involving bank holding company formations and acquisitions, bank mergers, and other transactions.
The Board also enforces compliance by state member banks and certain foreign banking organizations with federal laws protecting consumers in their use of credit and deposit accounts. Between July 1, 2007, and June 30, 2008, the System conducted 268 consumer compliance examinations: 263 covering state member banks and five covering foreign banking organizations. Also during that period, the System conducted 243 Community Reinvestment Act examinations.
The Board's supervisory responsibilities also extend to the foreign operations of U.S. banks and, under the International Banking Act, to the U.S. operations of foreign banks. Beyond these activities, the Federal Reserve System maintains continuous oversight of the banking industry to ensure the overall safety and soundness of the financial system. This broader responsibility is reflected in the System's presence in financial markets, through open market operations, and in its role as lender of last resort.
Services to Financial Institutions and the PublicThe Federal Reserve System plays a central role in the nation's payment systems by ensuring that enough currency and coin are in circulation to meet the public's demand. The Federal Reserve Board orders new currency from the Bureau of Engraving and Printing, and the Reserve Banks order new coin from the U.S. Mint. The Federal Reserve pays for the printing and transportation of currency. The Reserve Banks issue currency and distribute coin to the public through depository institutions to meet demand. The Reserve Banks also receive deposits of currency and coin from depository institutions; identify suspect counterfeit currency, which they forward to the U.S. Secret Service; and destroy currency that is unfit for circulation. In 2008, the Reserve Banks issued approximately $732.1 billion in currency, and they distributed $7.0 billion in coin to depository institutions. The Reserve Banks also received approximately $671.1 billion in currency and $6.3 billion in coin from depository institutions and destroyed $148.5 billion in unfit currency. In 2008, the cost of printing and transporting currency was $500.4 million.
The Reserve Banks also play a central role in the nation's payment systems by collecting checks and providing a variety of electronic services for depository institutions. In 2008, the Banks collected approximately 9.5 billion commercial checks, with a total value of about $15.2 trillion. The Banks' automated clearinghouse (ACH) service allows depository institutions to send or receive credit transfers, such as direct payroll payments and corporate payments to vendors, and debit payment transactions authorized by consumers, such as payments of insurance premiums, mortgages, loans, and other bills from their accounts. In 2008, the Reserve Banks processed approximately 11.2 billion ACH transactions, valued at about $19.7 trillion. Approximately 10 percent of the transactions were for the federal government; the rest were for commercial establishments.
The Reserve Banks' Fedwire Funds Service allows participants in the service to use their balances at the Reserve Banks to transfer funds to other participants. In 2008, the Banks processed approximately 131 million Fedwire funds transfers, valued at approximately $755 trillion.
The Reserve Banks' National Settlement Service allows participants in private clearing arrangements to settle transactions through their Federal Reserve accounts. Approximately 42 local and national private arrangements, primarily check clearinghouse associations, use the National Settlement Service. In 2008, the Banks processed more than 468,000 settlement entries for these arrangements, with a debit value of more than $20.9 trillion.
The Reserve Banks' Fedwire Securities Service provides securities services to participants, including the settlement of book-entry transfers of securities issued by the U.S. Treasury, federal government agencies, government-sponsored enterprises, and certain international organizations. In 2008, participants originated approximately 26 million transfers, valued at about $429 trillion.
Services to the U.S. Treasury and Other Government AgenciesPursuant to the Federal Reserve Act, the Reserve Banks provide fiscal agency and depository services to the U.S. government and other fiscal principals. These services relate to securities custody and transfer, payments, deposits, and customer support. The federal government and other fiscal principals reimburse the Banks for the cost of providing these services. In 2008, the Reserve Banks sought reimbursement of approximately $461.1 million. Reimbursement was received or is expected for all of the expenses incurred.4
The Reserve Banks issue, service, and redeem marketable Treasury securities and savings bonds, and they process secondary-market Fedwire securities transfers. In 2008, the Banks conducted 263 Treasury securities auctions and printed and mailed more than 22 million savings bonds. The Reserve Banks operate two book-entry (computer-based) securities systems for the custody of Treasury securities--the Fedwire Securities Service and a separate computer application designed for retail investors who plan to hold these securities until maturity. Almost all book-entry Treasury securities are maintained on Fedwire, which is also the nation's principal securities-transfer mechanism.
The Reserve Banks collect and disburse funds on behalf of the federal government. They maintain the Treasury's bank account, accept deposits, pay checks drawn on the Treasury's account, and make Fedwire and automated clearinghouse payments for the Treasury. In 2008, the Banks continued to assist the Treasury in its efforts to receive and make payments electronically. For example, they operate the Pay.gov Internet portal, which enables the public to make payments to the Treasury and other federal government agencies over the Internet.
The Reserve Banks also provide fiscal agency and depository services to other domestic and international entities. Depending on the authority under which the services are provided, the Banks may maintain book-entry accounts of securities; provide custody for the stock of unissued, definitive (physical) securities; maintain and update balances of outstanding book-entry and definitive securities for issuers; and maintain related funds accounts.
System Policy Direction and OversightThis operational area encompasses activities by the Board of Governors in supervising Board and Reserve Bank programs. At the Reserve Bank level, the expenses for these activities are considered support and are therefore allocated across the other operational areas.
- With this 2009 Annual Report: Budget Review, there has been a change in the way expenses are presented: the costs of printing and transporting currency, and related expenses, are now included in total System expenses, to align with the presentation in the 2008 Annual Report of the Board of Governors of the Federal Reserve System (940 KB PDF). In past reports, currency expenses were shown as a memo item. Return to text
- Beginning with the 1998-99 budget, the Board of Governors has operated on a two-year budget cycle and a four-year planning cycle. Given their business needs, the Federal Reserve Banks maintain an annual budget cycle. For more information on the budget processes, see appendix A. Return to text
- For more detailed information on the income and the distribution of income, refer to the Board's 2008 Annual Report. Return to text
- The Reserve Banks are required by the Federal Reserve Act to serve as fiscal agents and depositories of the United States. By statute, the Department of the Treasury has appropriations to pay for these services. Return to text