Microsoft Word - Money, Banking, and Int Finance(scribd).docx

Money, Banking, and International Finance

banks and insurance companies during the 2008 Financial Crisis. The Fed held $202

billion in 2012 for other assets

The Fed’s Liabilities and Capital Accounts:

 Federal Reserve notes are U.S. paper money that the Federal Reserve issues. Currency

outstanding only includes cash held in bank vaults or cash circulating within the economy.

In 2012, $1.1 trillion of U.S. currency circulated outside the Federal Reserve.

 Deposits by depository institutions: Banks hold reserves in vault cash and deposits at the

Fed. Deposits are assets to the financial institutions, but liabilities to the Fed. The Federal

Reserve held $1.5 trillion in bank deposits in 2012.

 U.S. Treasury deposits: The U.S. Treasury deposits its money into commercial banks that

it collects from tax payments, fees, and U.S. government securities. When the U.S.

Treasury pays expenditures, it transfers funds from its commercial bank accounts to its

accounts at the Fed. Then the Treasury Department writes checks on its Fed account.

Consequently, the U.S. Treasury Deposits are an asset to the U.S. government, but a

liability to the Federal Reserve. The U.S. Treasury deposited $65.7 billion at the Fed.

 Foreign and other deposits: The Fed holds deposits from foreign governments, IMF,

World Bank, United Nations, and U.S. government agencies such as FDIC. The Fed held

$24.2 billion in 2012.

 Deferred Availability Cash Items (DACI) are liabilities that arise from the Fed’s role in

the check-clearing process, which was $779 million in 2012. We explain the check clearing

process in this chapter.

 Other liabilities include reverse repurchase agreements and dividends the Fed owes to the

national commercial banks. Other liabilities were $101.4 billion in 2012.

 Capital account equals the Federal Reserves' total assets minus total liabilities. This

category was substantial and equaled $54.7 billion in 2012. The Federal Reserve is a public

corporation and every U.S. commercial bank with a charter from the U.S. government must

buy stock into its Federal Reserve district bank. Subsequently, the Fed pays the

commercial banks 6% annual dividend on their Fed stock.

The Check Clearing Process.................................................................

The Fed has the authority to clear checks, and the check clearing process can cause bank
reserves and the money supply to fluctuate through the Federal Reserve float. The Federal
Reserve float is the difference between cash items in the process of collection (CIPC) and