Keynote Remarks for Symposium on The Changing Business Landscape Sponsored by the Business Law Brief American University Washington College of Law, March 15, 2010

• Author: Michael F. Silva
• Pages: 6-9

B u s i n e s s L a w B r i e f | S p r i n g / S u m m e r 2 0 1 06

Good morning. It is a pleasure to be here today and I

would like to thank the Business Law Brief and Profes-

sor Anna Gelpern for the opportunity to participate in

such an interesting and timely symposium. It has been said that

the only constant in life is change. That has probably never been

more true for the financial system and financial regulators than

it is today. In the aftermath of one of the worst financial crisis

in our history – or at least what we hope is the aftermath of one

of the worst financial crisis in our history – many aspects of the

financial system and regulatory structure are being rethought. At

the Federal Reserve, one of the many things we are rethinking is

our traditional preference for a low profile.

Central banking dates back to the founding of the Bank of

England in 1694 and conventional wisdom since then has been

that central banking is most effective when it is conducted with a

low profile. But one of the many things the Fed has learned as a

result of the financial crisis is that our profile going into the crisis

was so low that some of our actions during the crisis were not as

well understood by the Congress and the general public as they

could have been. In response, we are recalibrating our traditional

aversion to the spotlight. Consistent with that recalibration, I

would like to use this opportunity to present some background

information about the Federal Reserve. With that background as

context, I will then discuss some of the Fed’s actions during the

financial crisis, and conclude with some comments on pending

financial reform.

Before I do any of that, I must emphasize that the views I

express today are my own and do not necessarily represent those

of the Federal Reserve Bank of New York or the Federal Reserve

System.

The Federal Reserve System is the central bank of the

United States. The Fed’s primary missions include: establish-

ing monetary policy that achieves a dual mandate of maximum

employment and price stability; supervising all bank holding

companies and certain commercial banks to maintain the safety

and soundness of the banking system; acting as the lender of last

resort, especially when necessary to protect financial stability;

and providing financial services such as electronic funds transfer,

distribution of physical currency, check clearing, and acting as

banker for the government.

The Federal Reserve System has three components which the

Congressional creators of the Fed designed to bring together the

significant political, financial, industrial, agricultural, regional,

labor, and class interests necessary to establish an effective and

credible central bank in a large democracy. The primary com-

ponent of the Federal Reserve System is the Board of Governors

located in Washington DC. The Board of Governors is a govern-

ment agency that is headed by Chairman Bernanke and consists

of seven Governors and a staff of approximately 1,900. The

Governors are all appointed by the President and confirmed by

the Senate. The Board Staff are all government employees. The

Board of Governors is the policy arm of the Federal Reserve and

it makes all of the Fed’s most important policy decisions, includ-

ing those with respect to supervisory matters and emergency

lending. The second component of the Federal Reserve System

is the twelve regional Reserve Banks. These are the operational

arm of the Fed. The Reserve Banks are not government agencies;

they are corporations with Boards of Directors and at will private

sector employees. It is the Reserve Banks that actually supervise

banks, distribute physical cash, make loans, operate the payment

system, implement monetary policy, act as banker for the U.S.

Government, and perform all of the other operational activities

of the Federal Reserve. Every 45 days or so, the Board of Gov-

ernors and the Reserve Banks come together to create the third

component of the Federal Reserve System, the Federal Open

Market Committee – or FOMC. The FOMC sets monetary

policy and consists of the seven Governors of the Federal Reserve

and 5 of the 12 Reserve Bank presidents. One of those 5 is always

the President of the New York Fed, who by tradition serves as the

Vice Chair of the FOMC. The next meeting of the FOMC hap-

pens to begin tomorrow.

Of the twelve Reserve Banks, the largest by far in terms of

responsibilities and balance sheet is the Federal Reserve Bank of

New York. If this is a typical day at the Federal Reserve Bank of

New York, our trading desk will execute $15 to $20 billion in

repurchase agreements in the government securities markets in

order to hold interest rates at the FOMC directed target. This is

accomplished by adding lendable cash to the banking system or

by draining such cash from the banking system.

If this is a typical day at the N.Y. Fed, the electronic pay-

ment system we operate—which is called Fedwire and is the

jugular vein of our financial system—will transfer over $3 trillion

worth of funds and securities. During such a typical day at the

N.Y. Fed, we will have about 250 bank examiners in the field

Keynote Remarks for Symposium on

The Changing Business Landscape

Sponsored by the Business Law Brief

American University Washington College of Law

March 15, 2010

By: Michael F. Silva