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By the end of this section, you will be able to:

  • Discuss the relationship between bank regulation and monetary policy
  • Explain bank supervision
  • Explain how deposit insurance and lender of last resort are two strategies to protect against bank runs

A safe and stable national financial system is a critical concern of the Federal Reserve . The goal is not only to protect individuals’ savings, but to protect the integrity of the financial system itself. This esoteric task is usually behind the scenes, but came into view during the 2008–2009 financial crisis, when for a brief period of time, critical parts of the financial system failed and firms became unable to obtain financing for ordinary parts of their business. Imagine if suddenly you were unable to access the money in your bank accounts because your checks were not accepted for payment and your debit cards were declined. This gives an idea of what a failure of the payments/financial system is like.

Bank regulation is intended to maintain the solvency of banks by avoiding excessive risk. Regulation falls into a number of categories, including reserve requirements, capital requirements, and restrictions on the types of investments banks may make. In Money and Banking , we learned that banks are required to hold a minimum percentage of their deposits on hand as reserves    . “On hand” is a bit of a misnomer because, while a portion of bank reserves are held as cash in the bank, the majority are held in the bank’s account at the Federal Reserve, and their purpose is to cover desired withdrawals by depositors. Another part of bank regulation is restrictions on the types of investments banks are allowed to make. Banks are allowed to make loans to businesses, individuals, and other banks. They are allowed to purchase U.S. Treasury securities but, to protect depositors, they are not permitted to invest in the stock market or other assets that are perceived as too risky.

Bank capital is the difference between a bank’s assets and its liabilities. In other words, it is a bank’s net worth    . A bank must have positive net worth; otherwise it is insolvent or bankrupt, meaning it would not have enough assets to pay back its liabilities. Regulation requires that banks maintain a minimum net worth, usually expressed as a percent of their assets, to protect their depositors and other creditors.

Visit this website to read the brief article, “Stop Confusing Monetary Policy and Bank Regulation.”

Bank supervision

Several government agencies monitor the balance sheets of banks to make sure they have positive net worth and are not taking too high a level of risk. Within the U.S. Department of the Treasury, the Office of the Comptroller of the Currency has a national staff of bank examiners who conduct on-site reviews of the 1,500 or so of the largest national banks. The bank examiners also review any foreign banks that have branches in the United States. The Office of the Comptroller of the Currency also monitors and regulates about 800 savings and loan institutions.

Questions & Answers

Being unemployed is a person who is able to work but not finding a job Being out of labor force is a person who isn't able to work
Elie Reply
Explain the differences between aggregate demand shocks and aggregate supply shocks
Swagger Reply
what are the measures being taken to reduce inflation in LDCs
Athumam Reply
increase level of production,reduce rates of tax charged
mashauri
What is economic growth!
Doris Reply
Microeconomics can simply be refers to as the study of a unit economy while macroeconomics can be regarded as a study of economy as a whole or aggregate economy of a country.
Hamzat Reply
Full employment price stability economic growth
Hamzat
using geometry, discuss the four interrelated flows in the circular flows of income
Ahmed Reply
who is there?
SHAHRUKH Reply
Demand refers to the quantity of a commodity that one can buy supported by the willingness and the ability to buy
Noor Reply
Which of the following are assets of the Federal Reserve? a. Treasury bills held by the Federal Reserve b. cash in circulation c. Loans made by commercial banks d. the reserves of commercial banks at the Federal Reserve
Julya Reply
D
Neeha
a
Sushovan
d
Roger
what are the four functions served by money
Michele Reply
It serves as a medium of exchange
Zaharaddeen
It serves as a store of value
Zaharaddeen
It serves as a unit of account
Umar
It also serves as a standard for Differed Payment.
Umar
Acts as a measure of value.
Humphrey
acceptability
GGPS
hi
Shaxboz
hello
Md
welcome
Shaxboz
Hey, I am a new member.
Abdul
Store of value
Bokwe
Hello i want your help if there is someone online
Athumam
hello
Prem
how are you doing
Athumam
what is balance of payment deficit
Athumam
A nation or region, which is deficit in exports, and Imports more goods and services and for the payment for imports, it must be borrowed from other states or Nations. mostly, between countries.
Prem
Pls Wat ar D Factors to Consedered To Saving
IBRAHIM
savings
BENJAMIN
Yah
IBRAHIM
Yes
IBRAHIM
Hello guys how are you doing
Tantoh
I will say a balance of payment deficit is when a country import more goods,services and capital than it export.The country most borrowed from other countries to pay for it imports.
Tantoh
income
Vivek
can anyone tell me that why in the income and consumption curve the income is on x axis?
bechar Reply
why inflation in double digit is not good for economy
Obaid Reply
what is mean by zero inflation
Obaid
some time it is good but some time it is not...
bechar
the condition of that economy tell you. is it good are bad?
bechar
the definition of the law of demand
Aley Reply
law of damand states all else remains constant or what we can say is ceteris peribus,quantity demanded for a commodity extends with fall in price and vice versa. law of demand explains inverse relationship between price and qua ntity demanded
Gaurav
What is demand and supply
Antwi Reply
Demand refers to how much of that product, item, commodity, or service consumers are willing and able to purchase at a particular price. In other words, supply refers to how much the producers of a product or service are willing to produce and can provide to the market with limited amount of resou
Husna
Hello dear
habibrahman
what is gdp per capital and why it is used for?
Era Reply
gross domestic product
prince
gdp per capita is the gross domestic product per person (GDP/population) and is a better indicator of economic health and living standards than GDP alone.
Gina
thank you so much 😘
Era
please explain shift in production possibility curve
Kobby
advances in technology can cause a shift in the ppf because output can increase with use of the same amount of resources (laborers can produce more efficiently, and suppliers are willing to sell more)
Gina
but equally natural shocks ie earthquakes or war can move the ppf inward so reducing production capicity
jax

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Source:  OpenStax, Macroeconomics. OpenStax CNX. Jun 16, 2014 Download for free at http://legacy.cnx.org/content/col11626/1.10
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