Introduction to Finance

federal funds rate 
interest rate on 
overnight loans from banks with 
excess reserves to banks that have 
defi cit reserves

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4.5 Fed Supervisory and Regulatory Functions
93
the target and observed rates over the 2008–2015 time period. Eff ective December year-end 
federal funds rates ranged from 0.07 to 0.24 percent. The 0.24 percent occurred in Decem-
ber 2015 when the FOMC announced an increase in its target for the federal funds rate. 
As a result of the severity of the 2007–08 fi nancial crisis and the beginning of the Great 
Recession, the Fed took unusual steps to avoid a possible fi nancial collapse. In addition 
to setting target federal rates at near zero levels in December 2008, the Fed engaged in a 
nontraditional monetary activity called quantitative easing in late 2008. As discussed in 
the previous section, the Fed aggressively purchased U.S. Treasury, government agency, 
and mortgage-backed securities from banks and other fi nancial institutions so as to provide 
even more monetary liquidity in the fi nancial system. Round two of quantitative easing was 
implemented in 2010 and round three in 2012 in an eff ort to encourage economic growth 
through further monetary liquidity.
LEARNING ACTIVITY
Go to the St. Louis Federal Reserve Bank’s website, http://www.stlouisfed.org, and fi nd 
the current Fed discount rate (primary credit rate) charged by Federal Reserve Banks 
on loans to depository institutions. Describe recent changes or trends in the discount or 
primary credit rate.
4.5
Fed Supervisory and 
Regulatory Functions
A strong and stable banking system is vital to the growth and the stability of the entire eco-
nomy. The supervision of commercial banks and other depository institutions is primarily 
concerned with the safety and soundness of individual institutions. It involves oversight to 
ensure that depository institutions are operated carefully. Depository institution regulation 
relates to the issuance of specifi c rules or regulations that govern the structure and conduct 
of operations.
Specific Supervisory Responsibilities
On-site examination of commercial banks is one of the Fed’s most important responsib-
ilities. This function is shared with the federal Offi
ce of the Comptroller of the Currency 
(OCC), the Federal Deposit Insurance Corporation (FDIC), and state regulatory agencies. 
Although the Federal Reserve is authorized to examine all member banks, in practice it 
limits itself to state-chartered member banks and all bank holding companies. It cooperates 
with state examining agencies to avoid overlapping examining authority. The OCC directs 
its attention to nationally chartered banks, and the FDIC supervises insured nonmember 
commercial banks.
In addition to these three federal banking supervisory agencies, two federal agencies are 
primarily responsible for supervising and regulating depository institutions that are not commer-
cial banks. The National Credit Union Administration (NCUA) supervises and regulates credit 
unions, and the Offi
ce of Thrift Supervision (OTS) oversees S&Ls and other savings institutions. 
The examination generally entails (1) an appraisal of the soundness of the institution’s assets; 
(2) an evaluation of internal operations, policies, and management; (3) an analysis of key fi nan-
cial factors, such as capital and earnings; (4) a review for compliance with all banking laws and 
regulations; and (5) an overall determination of the institution’s fi nancial condition.
The Federal Reserve conducts on-site inspections of parent bank holding companies and 
their nonbank subsidiaries. These inspections include a review of nonbank assets and funding 
activities to ensure compliance with the Bank Holding Company Act.
The Federal Reserve has broad powers to regulate the overseas activities of member 
banks and bank holding companies. Its aim is to allow U.S. banks to be fully competitive 
with institutions of host countries in fi nancing U.S. trade and investment overseas. Along 
with the OCC and the FDIC, the Federal Reserve also has broad oversight authority to 

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94
C H A PT E R 4 Federal Reserve System
supervise all federal and state-licensed branches and agencies of foreign banks operating in 
the United States.
Specific Regulatory Responsibilities
The Federal Reserve has legal responsibility for the administration of the Bank Holding Com-
pany Act of 1956, the Bank Merger Act of 1960, and the Change in Bank Control Act of 
1978. Under these acts, the Fed approves or denies the acquisitions of banks and other closely 
related nonbanking activities by bank holding companies. Furthermore, it permits or rejects 
changes of control and mergers of banks and bank holding companies.
The Federal Reserve is responsible for writing rules or enforcing a number of major 
laws that off er consumers protection in their fi nancial dealings. In 1968 Congress passed the