Tuesday, August 4, 2009

the Fed as custodian of the financial system

many economists contend that the Fed‘s lender-of-last-resort function is sufficient to protect the financial system from the effects of crashes or other reverses.Since its founding, though, the Fed has not been content to limit its role in this way. It also has taken on the task of financial system custodian. In this role, it monitors and supervises many of the activities of the nation‘s payments system.
In light of our discussion of large-dollar electronic payments systems, one area of Federal reserve direct involvement in the payments systems is its operation and regulation of the Fedwire network.this network, which actually began its oprerations in 1918,well before the computer age, connects all the federal reserve district banks, their branches, and other depository institutions. the Fed both operates this network and determines the rules by which depository institutions may use this service. the Fed also the fees that institutions must pay to use Fedwire.
The Fed performs a major function in the nation‘s check-clearing system. Roughly half of the checks written in the United States clear through the Fed‘S check-clearing operations, which connect banks of most medium-to-large cities in the nation. Depository institutions in smaller cities or rural areas obtain access to the Fed‘s check-clearing services (as well as to its other services, such as Fedwire)through their correspondent relationships with the banks that maintain direct access.
the Fed charges fees for its check-clearing services, and as mandated by the DIDMCA of 1980, it attempts to charge fees that would have arisen in a competitive market for these services. Congress mandated Fed fees for check-clearing services for two basic reasons. one was that Congress wanted the Fed to increase its earnings so that more of its excess earnings (net of the Fed‘s costs of operations) could be passed along to the Treasury; in days of federal budget deficits, the government wants to scrounge up every available source of revenue. A second reason was that private clearing houses process nearly half of all checks written in the United States, and these institutions felt that the Fed previously had charged below-market fees for its services. This, the private clearing houses argued, placed them at a competitive disadvantage, much as taxpayer-subsidized U.S. postal service rates can make the task of competing more difficult for the United parcel Service or Federal Express.

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