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As noted in the Growth Theory chapter, a healthy financial system, with trusted banks, fosters healthy economic growth. We end this chapter with a quick overview of the banking system in the United States.
In the United States, the banking system is rather complex, yet highly effective. It includes:
- the Federal Reserve System (“the Fed”), consisting of 12 regional banks under the direction of a board of governors located in Washington, D.C.
- various additional regulatory agencies and government-owned corporations
- all of the non-governmental banks, savings and loans, and credit unions where the public does its banking
The Fed and the other governmental bodies together exercise four functions with respect to the private banking institutions:
- The Fed and the other governmental bodies exercise oversight, including regular audits, to ensure that the private institutions are complying with all applicable regulations and that prudent banking practices are being followed.
- The Fed facilitates loans between banks. Banks borrow and lend money between them as a way of maintaining their reserves at desired levels.
- Banks can place deposits on reserve with the Fed and earn interest. This is one way that the Fed acts as a “bank for banks.”
- Also in its capacity as a bank for banks, the Fed acts as a “lender of last resort” for banks that for whatever reason cannot secure a loan from another bank.
- Two of the other governmental bodies, the Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Administration (NCUA), provide insurance that protects banking customers when a lending institution fails. Every customer’s deposits are insured up to $250,000 per account type ($250,000 savings and $250,000 for checking, roughly speaking).
The Fed is responsible for one other important function: the governors, together with a subset of the heads of the regional banks, make up the Federal Open Market Committee that conducts monetary policy. That function is covered in detail in another chapter.
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