Glossary of Key Terms

Automated Clearinghouse (ACH): The : Principal monetary authority Fed’s electronic and settlement of a nation, which performs several key system for exchanging electronic functions, including issuing and transactions among participating banks. regulating the supply of and credit These transactions are usually substitutes for in the economy. The is the recurring payments, such as payroll or loan central bank of the United States. payments. Check clearing: The movement of a Bankers’ bank: The Fed is often called the check from the institution at which it was bankers’ bank because it provides banks deposited back to the institution on which with financial services, such as check it was written, and the corresponding credit processing, electronic payments, and new and debit to the accounts involved. currency and . Currency: Any form of money in actual use Bank examination: A periodic review as a , including paper where regulators visit a bank to check its currency or . compliance with regulations and review the safety and soundness of the bank. Depository institution: Financial institution that obtains its funds mainly Bank holding company: A corporation that through deposits from the public; this owns one or more banks. includes commercial banks, savings and loan associations, savings banks, and credit Bank regulation: Actions to make, issue, unions. and enforce specific rules and regulations governing the structure and conduct of Discount rate: Interest rate at which an banking under the authority of legislation. eligible depository institution may borrow funds, typically overnight or for a short Bank runs: Occasions when banks’ period, directly from a Federal Reserve depositors would literally “run” to the Bank. The law requires that the board of bank to withdraw their money when they directors of each Reserve Bank establish the thought their bank might close or fail. discount rate every fourteen days subject to the approval of the Board of Governors of Bank supervision : Oversight of individual the Federal Reserve. banks to ensure that they are operated prudently and in accordance with applicable Discount window: Figurative expression statutes. for Federal Reserve facility for extending credit or loans directly to eligible depository Board of Governors of the Federal Reserve institutions. System: Central, governing agency of the Federal Reserve System, located in Electronic payments: Payments completed Washington, DC, and composed of seven by the transfer of funds electronically rather members, who are appointed by the than by check or cash. President and confirmed by the U.S. Senate.

3030 Open & Operating: The Federal Reserve Responds to September 11 Glossary of Key Terms

European Central Bank (ECB): The central Federal Reserve Bank: One of the 12 bank for Europe’s single currency, the euro. operating arms of the Federal Reserve The ECB’s main task is to maintain its System, located throughout the nation, purchasing power and thus price stability that together with their branches carry in the euro area. The euro area comprises out various System functions, including the 12 European Union countries that have operating a nationwide payments system, introduced the euro since 1999. distributing the nation’s currency and coin, supervising and regulating banks, analyzing Excess reserves: Amount of reserves held economic conditions, and serving as by an institution in excess of its reserve for the U.S. Treasury. requirement and required clearing balance. Federal Reserve System: The central bank Federal Insurance Corporation of the United States, created by Congress (FDIC) Insurance: Deposit accounts such and made up of a seven-member Board as checking, savings accounts, money of Governors in Washington, D.C., 12 market deposit accounts, and certificates of regional Federal Reserve Banks, and their 25 deposit (CDs) are insured up to $100,000 Branches. per depositor per insured bank. FDIC insurance does not cover money invested in Fedwire: Electronic funds transfer network stocks, bonds, mutual funds, life insurance operated by the Federal Reserve. Fedwire policies, annuities, or municipal securities, is usually used to transfer large amounts of even if they were purchased from an insured funds and U.S. government securities from bank. (If someone has deposits at one one bank’s account at the Federal Reserve to insured bank totaling more than $100,000, another bank’s account. different ownership categories of accounts are separately insured up to $100,000.) Financial shock: Events in financial markets that impact the economy. Shocks are Federal funds rate: Interest rate charged by unexpected and unpredictable (e.g., 1987 a bank on an overnight sale of federal funds Stock Market Crash, 1997 Asian Financial to another bank. Crisis).

Federal Open Market Committee Float: Money that appears simultaneously (FOMC): Twelve-member committee in the Federal Reserve accounts of two made up of the seven members of the depository institutions. These institutions Board of Governors; the president of the include commercial banks, savings and Federal Reserve Bank of New York; and, loans, savings banks, and credit unions. on a rotating basis, the presidents of four When check clearing is delayed, funds other Reserve Banks. The FOMC meets in the process of collection appear in the eight times a year to set Federal Reserve accounts of both the institutions that receive guidelines regarding the purchase and sale the checks for deposit and the institutions of government securities in the open market upon which the checks are drawn or as a means of influencing the volume of written. Thus, float inflates, for a brief bank credit and money in the economy. The time, the amount of money in the banking other seven Federal Reserve Bank presidents system. also participate at FOMC meetings but do not vote on policy decisions.

Open & Operating: The Federal Reserve Responds to September 11 3131 Glossary of Key Terms

Government securities: Securities, such as Open market operations: Purchases and bills, notes, and bonds issued by the U.S. sales of government and certain other Treasury or federal agencies. securities in the open market through the Domestic Trading Desk at the Federal Interest: The money a borrower pays (a Reserve Bank of New York, with the lender charges) for the use of money over a purpose of influencing the volume of period of time. money and credit in the economy.

Interest rates: Rates of interest paid on Payments system: Collective term for deposits and other investments, determined mechanisms (both paper-backed and by the interaction of the supply of and electronic) for moving funds, payments, demand for funds in the money and capital and money among banks throughout the markets. nation. The Federal Reserve plays a major role in the nation’s payments system Liquidity : The ability of a bank or business through distribution of the currency and to meet its current obligations or the quality coin, the processing of checks, and the that makes an asset quickly and readily electronic transfer of funds. convertible into cash with relatively little loss of value in the conversion process. Reserve requirements: Percentage of deposits that depository institutions must Long-term interest rates or bond rates : keep on reserve in their cash vaults or on Interest rates on loan contracts or debt deposit at a Federal Reserve Bank. instruments such as Treasury bonds, agency securities, municipal bonds—having Short-term interest rates: Interest rates maturities greater than one year. Often on loan contracts—or debt instruments called capital market rates. such as Treasury bills, bank certificates of deposit, or commercial paper—with Member bank : Depository institution maturities of one year or less. Often called that is a member of the Federal Reserve money market rates. System. All federally chartered banks are automatically members of the System; State-chartered member banks: A bank state-chartered banks may elect to join the that is chartered by a state and has elected System. to join the Federal Reserve System.

Monetary policy: A central bank’s actions Swap lines: Short-term exchanges of credit to influence the availability and cost of between central banks. For the Federal money and credit, as a means of helping to Reserve, swap lines or swap arrangements promote national economic goals. Tools provide a way of supplying temporary of monetary policy include open market dollar reserve balances to the international operations, discount policy, and reserve banking system. requirements. U.S. Treasury securities: Interest-bearing Money: Anything that serves as a generally obligations of the U.S. government issued accepted medium of exchange, unit of by the U.S. Department of the Treasury measure, and . as a means of borrowing money. There are three types of marketable Treasury Mortgage interest rates : The interest rate securities—bills, notes, and bonds. charged on mortgages.

3232 Open & Operating: The Federal Reserve Responds to September 11