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Federal Reserve Board is more than just interest rates

Denver Business JournalThe recent nomination of Ben Bernanke to succeed Alan Greenspan as chairman of the Federal Reserve has brought renewed attention to our banking system and monetary policy. Being chairman of the Federal Reserve is often described as the nation’s second most powerful job.

The chairman of the Federal Reserve Board has the responsibility to oversee the board’s implementation of the Federal Reserve Act. This Act came into being in 1913, and established the Federal Reserve System, and other laws pertaining to a wide range of banking and financial activities.

The most well-known activity of the Federal Reserve Board is adjustment to the Fed Funds Rate– the interest rate at which banks lend to each other overnight. This interest rate is considered to be the “rate-within-the-rate;” theoretically the risk-free rate upon which all other lending rates are based.

However, in addition to the widely visible adjustments to the Fed Funds Rate, the Federal Reserve Board (already being dubbed “Bernanke’s Board”), also has responsibility to oversee and manage 31 other components of the country’s banking and financial systems. The details of these areas can be found in Title 12, Chapter II, 201, et. seq., of the Code of Federal Regulations (“CFR”).

Here’s a look a some of the less visible, but just as significant activities of the Federal Reserve Board.

The first four areas of regulation directly affect fairness and seek to maintain integrity within the banking system.

Equal Credit Opportunity: Prohibits lenders from discriminating against credit applicants, establishes guidelines for gathering and evaluating credit information, and requires written notification when credit is denied. Civil rights (including fiscal rights), is an area requiring constant attention; especially in the area of gender and age.

Home Mortgage Disclosure: Requires certain mortgage lenders to disclose data regarding their lending patterns. This is a particularly critical area since historically low interest rates have fueled increased, sometimes unscrupulous, mortgage lending activities.

Truth in Lending: Prescribes uniform methods for computing the cost of credit, for disclosing credit terms, and for resolving errors on certain types of credit accounts.

Unfair or Deceptive Acts or Practices: Establishes consumer complaint procedures and defines unfair or deceptive practices in extending credit to consumers. Related to the disclosure requirements above and designed to ensure integrity in the lending process.

The next three components are exceptionally essential as we increasingly carry out business through electronic mechanisms. Transferring funds between entities is one thing. Ensuring the availability of those funds remains a problematic issue for banking intermediaries.

Electronic Fund Transfers: Establishes the rights, liabilities, and responsibilities of parties in electronic funds transfers and protects consumers when they use such systems.

Collection of Checks and Other Items: Establishes procedures, duties, and responsibilities among Federal Reserve Banks, the senders and payors of checks and other items, and the senders and recipients of Fed wire funds transfers.

Availability of Funds and Collection of Checks: Governs the availability of funds deposited in checking accounts and the collection and return of checks. This is frequently a controversial area since honest funds should be available immediately; however, banks must still protect themselves from fraud.

Loans to Executive Officers, Directors, and Principal Shareholders of Member Banks: Restricts credit that a member bank may extend to its executive officers, directors, and principal shareholders and their related interests. This is another example of enlarged corporate governance.

Credit by Banks for the Purpose of Purchasing or Carrying Margin Stocks: Governs extension of credit by banks or persons other than brokers or dealers to finance the purchase or the carrying of margin securities.

Bank Holding Companies and Change in Bank Control: Regulates the acquisition and control of banks, defines and regulates the non-banking activities that banks within the United States may engage in, and establishes the minimum ratios of capital to assets that bank holding companies must maintain. In addition to providing anti-trust and collusion protection, this regulation controls the relative aggressiveness of the lending market.

Obtaining and Using Medical Information in Connection with Credit: Interim rules creating exceptions to the statutory prohibition against obtaining or using medical information in connection with determining eligibility for credit. This new regulation will be effective March 7, 2006 and contains many complex civil, and inter-locking fiscal issues.

As shown above, the non-interest rate management activities of the Federal Reserve Board can also have considerable affect on individuals and business; from civil rights to protection from fraud.

For the most current activities of the Federal Reserve Board under its new chairman, and any other changes to the entire CFR, you may monitor the Electronic Code of Federal Regulations (e-CFR) through the website http://ecfr.gpoaccess.gov. The e-CFR prototype is a demonstration project. It is not an official legal edition of the CFR. The official code may be found at http://www.gpoaccess.gov/cfr/index.html.

© C. Stephen Guyer for American City Business Journals Inc. All rights reserved.