Introduction to Finance

FIGURE 4.1
 Organization of 
the Federal Reserve System
Commercial Banks as Providers 
of Small Business Credit
The 1980s and 1990s were diffi
cult for the banking industry in the 
United States. Many savings and loan associations (S&Ls) failed, 
and there were many mergers involving S&Ls and commercial 
banks. Furthermore, many of the consolidations involved small 
commercial banks that traditionally tended to specialize in small 
business lending. As a result, concern has been expressed about 
where, or even whether, small businesses are able to obtain loans 
and other forms of business credit.
In contrast, the fi rst part of the decade of the 2000s was char-
acterized by Fed monetary policy that emphasized liquidity and low 
interest rates in an eff ort to stimulate economic recovery after the 
dot-com and the tech bubbles burst at the beginning of the decade 
and in reaction to the September 11, 2001, terrorist attack. Even after 
the U.S. economy began recovering, the Fed maintained an easy 
monetary policy. Then came the real estate price bubble burst, fol-
lowed by the 2007–08 fi nancial crisis and 2008–09 Great Recession. 
During the crisis, the availability of bank loans for small businesses 
virtually dried up. There now is an ongoing eff ort to encourage 
banks to increase the availability of loan funds to small businesses.
Small Business Practice

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C H A PT E R 4 Federal Reserve System
Approximately 3,500, or about one-third, of the nation’s commercial banks are members of 
the Fed. This includes all commercial banks with national charters plus, roughly, one-fi fth of the 
state-chartered banks. These member banks hold approximately three-fourths of the deposits of 
all commercial banks. National banks control about three-fi fths of the total assets of all FDIC-
insured commercial banks, and the state-chartered banks that belong to the Fed control another 
one-fourth of total assets. Even these fi gures understate the importance of the Federal Reserve in 
the nation’s fi nancial system. As indicated in Chapter 3, the Monetary Control Act of 1980 gen-
erally eliminated distinctions between banks that are members of the Fed and other depository 
institutions by applying comparable reserve and reporting requirements to all these institutions.
Federal Reserve District Banks
The Federal Reserve Act of 1913 provided for the establishment of 12 Federal Reserve dis-
tricts. Each district is served by a Federal Reserve Bank. Figure 4.1 indicates that district 
banks have a wide range of responsibilities, including holding reserve balances for depository 
institutions and lending to them at the prevailing discount (interest) rate. The district banks 
also issue new currency and withdraw damaged currency from circulation, as well as collect 
and clear checks and transfer funds for depository institutions. The boundaries of the districts 
and the cities where district banks are located are shown in