Essay Sample on Banking Industry

Introduction and Background

According to (Mehra, 2016), "The central bank of the United States is also known as the "Federal Reserve System," and it was founded in 1913 after the Federal Reserve Act was passed. (Mehra, 2016). The Congress passed other auxiliary laws which gave the Fed more power and duties, and some of these laws included "Glass-Steagall Act, the Bank Holding Company Act, the Federal Reserve Reform Act and the Dodd-Frank Act.

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Federal Reserves has so many functions to pay apart from improving the steadiness of the financial system and the economy. Currently, the US can conduct its monetary policy through the Central bank which is tasked to regulate the functions of other banks. (Warburg, 2010).Currently, there are "twelve regional Federal Reserve banks" that help in controlling the flow of money through demand and supply and also by executing the Fed policy. The Federal Reserve Act or the Central Bank plays the depositors role for Fed money, and they facilitate the payment of government expenses and other transaction. They also play a role of distributing currency to other banks in different regions in the United States, promote or provide loan and mortgages to smaller banks and its customers and above all it plays a role of controlling of other commercial banks in other regions.

Fed Operations

According to (Willis, 2013), "the Fed can change the supply of money occurring through open market processes," they usually do so by monitoring the buying and selling government securities. For instance, when they intend on increasing the supply of money, it will venture into the market and buy bonds or securities from other commercial banks.

The other operation the central bank is involved in is they can be able to alter the reserve needs of the bank and since the supply of money is hell bent to the percentage of deposits, hence if the Fed rate is increased the amount of money by other commercial banks will decrease and vice verser.

According to (Willis, 2013), the final thing is the Fed can affect the supply of money through interest rates, the Fed, however, does not decide the amount an individual will pay for mortgage or car loans but they can have an impact through the interest rates they will charge the individual who has been given the credit Hence if Fed increases the interest rates are high there will be lesser lending activity as individuals will fear to pay high interest rates, when repaying their loan and the vice verser will happen if the Fed reduces or lowers the interest rates.

References

Mehra, A. (2016). Resource and market based determinants of performance in the US banking industry. Strategic Management Journal, 17(4), 307-322.

Warburg, P. M. (2010). The Federal Reserve System. Its Origin and Growth, 2.

Willis, H. P. (2013). The Federal Reserve System, Legislation, organization and operation. Ronald Press.