III.

Structure

At the base of the Federal Reserve System are the member commercial banks. All national, or federally chartered, banks are required to join the system; membership of state-chartered institutions is voluntary. Members have to purchase capital stock in their district Federal Reserve bank in the amount of 6 percent of their capital, excluding retained earnings, and get the right to vote for six of the nine directors of that district bank. Stock ownership does not convey control or the financial interest normally attached to stock in a corporation. The stock may not be sold or used as collateral and must be returned to the district reserve bank if the commercial bank ceases to be a member.

The Monetary Control Act of 1980 imposed a reserve requirement on all depository institutions, including nonmembers of the Federal Reserve, but it also permits them to borrow from the Federal Reserve and to use services provided by the Fed, such as check clearing, electronic funds transfer, and securities safekeeping. By enabling banks to borrow reserves from the Fed, the liquidity of the entire banking system is increased.

The 12 district reserve banks are located in the following cities: Boston, Massachusetts; New York City; Philadelphia, Pennsylvania; Cleveland, Ohio; Richmond, Virginia; Atlanta, Georgia; Chicago; St. Louis; Minneapolis, Minnesota; Kansas City, Missouri; Dallas, Texas; and San Francisco, California. Each bank is formally responsible to a nine-member board of directors, which is divided into three classes. Class A and B directors are elected by the member banks; class C directors are appointed by the Board of Governors. The board of directors is responsible for the administration of its bank and for appointing the bank's president and vice president (subject to the approval of the Board of Governors). The directors also set the discount rate—that is, the interest rate charged to banks for borrowing from the Reserve banks—again, subject to review by the Board of Governors.

Reserve banks implement the decisions made by the Fed's Board of Governors and by their own officers. Their staffs examine state member banks (national banks are examined by the staff of the Office of the Comptroller of the Currency; insured nonmember banks are subject to FDIC examination), decide on granting loans to members, and carry out the routine banking functions for the federal government. Decisions on whether to allow a bank to open branches, to merge with another bank, or to form a holding company (company that offers a broad range of financial services) are often handled by reserve bank officers. Sales and purchases of securities for the Federal Reserve System's own account are conducted by the Federal Reserve Bank of New York, which is also the operating arm for international financial activities.

At the top of the Federal Reserve System is the Board of Governors, which over the years has undergone significant change both in its responsibilities and its structure. The 1913 act established a seven-member Federal Reserve Board, consisting of five presidential appointees, each from a different Federal Reserve district, plus the secretary of the treasury and the Comptroller of the Currency. Terms of office for the appointees were initially set at ten years and were staggered, so that no two would end at the same time; board members could not be removed from office except for cause. These provisions were meant to help insulate the presidential appointees from day-to-day politics. The board's powers, nevertheless, were confined to supervising the reserve banks, with limited power over the discount rate and little discretion over the structure of the banking industry.

The Banking Act of 1935, which also finalized the creation of deposit insurance and the FDIC, centralized power in a Board of Governors, and made all seven members presidential appointees with the advice and consent of the U.S. Senate; the president also appoints a governor to serve as Fed chairman for a four-year term. Alan Greenspan was the Fed chairman from 1987 until 2006, when he was replaced by Ben S. Bernanke. The governors' terms were expanded to 14 years by the 1935 act, and their powers were also expanded. For example, discount rates now had to be approved periodically by the board. Sales and purchases of government securities—the open-market operation that previously had been managed solely at the discretion of the presidents of the reserve banks—were centralized in the Federal Open Market Committee (FOMC), consisting of the seven governors, the president of the Federal Reserve Bank of New York, and four other reserve bank presidents serving on a rotating basis. Since 1935, Congress has given additional powers to the Board of Governors. These powers include control over mergers, bank holding companies, U.S. offices of international banks, and the reserves of all depository institutions.