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Financial Institutions

Financial Institutions are the main players on the Forex market. Financial institutions include insurance, investment and pension funds, commercial and state banks, company-brokers. The most significant financial institutions are the Federal Reserve System of the USA, Bank of England, European Central bank, and Bank of Japan. They determine the financial and monetary policy not only in their own countries, but also in the countries from all over the world.

Federal Reserve System of the USA


The Federal Reserve System (FRS) is a central banking system of the United States established under the Federal Reserve Act dated 23 December 1913.

FRS consists of

  • 12 regional Federal Reserve Banks;
  • the Board of Governors;
  • private banks;
  • the Federal Open Market Committee;
  • Advisory Councils.

According to the Federal Reserve Act, the FRS has a special legal status of the financial institution combining the properties of a public government agency and an independent legal entity. Federal Reserve gives loans to many financial institutions of the United States.

The independence of the emission center from the Government is explained by

  • Balancing the interests of taxpayers and the Government;
  • Precluding the possibility of using the money emission in short-term interests of the Government of the United States.

FRS is responsible for

  • balancing the national interests and those of the commercial banks;
  • performing duties as the Central Bank of the United States;
  • managing banking institution activities;
  • managing monetary supplies;
  • protecting the creditors;
  • providing the financial institutions with stable conditions to minimize risks on the financial markets;
  • cooperating with the Government of the United States and official international organizations;
  • providing inward and outward payments;
  • strengthening the economy of the United States.

FRS structure

The main governing body of the FRS is the Board of Governors. The Board of Governors consists of 7 members appointed by the President of the United States and confirmed by the Senate. The members are appointed for 14 years; however, their appointment can be extended. The Chairman is at the head of the Board of Governors. At present, the Chairman of the Board of Governors is Ben Bernanke and the Vice Chairman is Donald Kohn.

The Board of Governors is responsible for

  • setting the reserve requirements;
  • overseeing the stable FRS functioning;
  • managing regulation.

Federal Reserve Banks

The FRS includes 12 regional Federal Reserve Banks. Regional Federal Reserve Banks are state financial institutions. Each regional branch has its own Board of Governors. All members of the Board of Governors fall into one of three classes with 3 members in each class: Class A, B, and C. Members of Class A are elected by the representatives of the FRS stockholding banks. Member banks are divided into 3 groups based on their size: large, medium, and small. Each group elects one member of Class A. Directors of Class A are representatives of stockholding member banks. Members of Class B are also elected by the representatives of FRS stockholding banks in compliance with the same scheme as members of Class A: one member is elected from a large bank, one member is elected from a medium bank, and one member is elected from a small bank. However, unlike directors of Class A, directors of Class B are not officers, directors, or employees of any bank. Members of Class C are appointed by the Board of Governors of the FRS.

The list of the Federal Reserve Banks - Federal Reserve Bank of New York – Federal Reserve Bank of Boston – Federal Reserve Bank of Philadelphia – Federal Reserve Bank of Richmond – Federal Reserve Bank of Cleveland – Federal Reserve Bank of Atlanta – Federal Reserve Bank of St. Louis – Federal Reserve Bank of Chicago - Federal Reserve Bank of Minneapolis - Federal Reserve Bank of Dallas - Federal Reserve Bank of Kansas City – Federal Reserve Bank of San Francisco

Regional Branches of the FRS are responsible for

  • setting the interest rates with consent of the Board of Governors of the FRS;
  • collaborating with the depositaries and the Government of the United States;
  • monitoring the efficiency of activities of regional state financial institutions and economic institutions.

Federal Open Market Committee

Federal Open Market Committee (FOMC) is the most important monetary policymaking body. Structurally, it is located somewhere in the middle, between the Board of Governors and Federal Reserve Banks. The main task of FOMC is to stimulate economic growth and preserve the price and monetary stability. The voting right in FOMC belongs to 7 members of the Federal Reserve Board and 5 representatives of the Federal Reserve Banks that are delegated in compliance with the principle of staff turnover.

Stockholding Banks

FRS stockholding Banks are banks holding FRS shares. Stockholding Banks are banks of the lower level of FRS structure. Stockholding Banks exchange the reserve capital on FRS shares. FRS shares have several restrictions: it is impossible to sell or exchange FRS shares, FRS shares have fixed dividend of 6% per annum regardless of FRS profit. Any commercial bank, meeting FRS requirements, may become a shareholder of the Federal Reserve Bank. Currently, the FRS includes 38% of all the banks of the United States, approximately 5.7 thousand legal entities.

FRS stockholding banks

  • receive 6% dividend annually on the FRS shares;
  • elect six of nine Governors of the local Federal Reserve Bank.

About 70% of all deposits of the American credit system account for the aforementioned financial institutions, therefore, these financial institutions, justly, are considered to be the largest private financial banks. They are shareholders of the Federal Reserve Banks and receive a 6 percent dividend annually. Moreover, bank members of the FRS are clients of one of the Federal Reserve Banks and can take out a loan from this bank. When such a bank applies for a loan to the Federal Reserve Bank, there are not any restrictions on a loan, because the Federal Reserve Bank uses resources of the FRS. Banks that are not FRS members have to use the correspondent’s services.

The main task of the FRS is to develop and maintain the positive economic conditions that allow financial institutions of the United States to grow and prosper. The FRS determines currency circulation and bank lending policy to fulfill this task. The FRS also defines the level of bank reserves. Federal Reserve Banks hold deposits of FRS bank members. These deposits are the most significant part of all reserves of bank members. Implementing monetary policy, the FRS decreases or increases bank reserves depending on whether the FRS restrains or stimulates the economy or whether the FRS pursues the policy of credit restriction or credit expansion.

The FRS has its own budget. The FRS activities are financed with the profit received from transactions and money issuing, therefore, financially, the FRS is an independent body. Congress transferred the right for money issuing to FRS Department, FOMC. FOMC was established in 1936 under the Board of Governors. At present, FOMC has become one of the main FRS bodies. Annually the FRS contributes 15-20 billion dollars in profits to the Treasury Department. The FRS is an independent institution, even the President of the United States does not have a right to give orders or dismiss Governors.

According to the law of the United States, each FRS bank member should hold a certain share of attracted funds as unprofitable reserves partly in a form of deposit in the regional Federal Reserve Bank and partly in a form of cash.

Non-FRS banks should also hold their reserves partly in a form of deposit and partly in a form of cash, however, their reserves are subject to the local laws and, therefore, these banks can hold profitable reserves such as investments in short-term government securities, investments in other banks, etc. For this reason, banks of the United States very often leave the FRS or do not want to join it. Such a situation indicates the absence of the unified State policy in managing banking activities.

The policy decisions of the FRS do not have to be approved by the President or anyone else in the in the executive or legislative branches of the Government. The FRS is required to submit a report about its activities to the US House of Representatives once a year and to the Banking Committee responsible for audit twice a year.

Bank of England


It is impossible to imagine financial Institutions of the United Kingdom without the Bank of England. The Bank of England is the central bank of the United Kingdom. The Monetary Policy Committee is a committee of the Bank of England determining official interest rates. The Bank of England was founded in 1694 to act as the Government’s banker.

According to the Law, the Bank of England is governed by the Court of Directors consisting of one Governor, two Deputies and sixteen members. The members of the Bank of England are appointed by the Crown.

The Governor and the Deputy Governors are appointed for five years, and the Directors are appointed for three years. All the members can be appointed for the second term.

Members of the Court of Directors meet monthly to discuss issues referring to the bank management policies. Monetary Policy Committee is responsible for monetary policy.

Bank of England Responsibilities

The Bank of England performs duties of the main financial institution of the United Kingdom. The Bank of England is responsible for

  • ensuring stable currency and purchasing power of GBP. The currency is considered to be stable if people trust the national currency and if prices are stable. Confidence is growing when price increases meet the Government's inflation target. The Bank aims to meet this target by adjusting interest rates determined by the Monetary Policy Committee.
  • maintaining national and global financial stability. It means that the Bank of England should identify, remove or reduce risks that threaten the resilience of the UK or global financial system. Risks and threats to the financial system are analyzed by Analytical Departments and Oversight Committees. Financial and other transactions are conducted on internal and external markets to eliminate risks and threats to the financial system.
  • ensuring efficiency of the UK financial sector. The Bank of England cooperates with the Financial Services Authority, Exchequer Chamber, other Central Banks and international organizations to provide financial stability.

European Central Bank


European Central Bank (ECB) is the main bank of the European Union established on 1 June, 1998.

ECB is responsible for

  • EUR issuing;
  • development and implementation of monetary policy of the European Union;
  • management and control of official currency reserves in the Euro Area;
  • interest rates control;
  • maintenance of price stability in the European Union to keep inflation rate below the two percent annual pace.

European Central Bank Structure:

The Executive Board

The Executive Board consists of six members including the ECB President and Vice-Presidents. The members of the Executive Board are appointed by the Governing Council and approved by the European Parliament or Heads of States of the European Union. The ECB President is appointed for eight years. Members of the Executive Board are

  • President: Jean-Claude Trichet;
  • Vice-President: Lucas Papademos;
  • Other members: José Manuel González-Páramo, Jürgen Stark, Gertrude Tumpel-Gugerell, Lorenzo Bini Smaghi.

Governing Council

The Governing Council consists of members of the Executive Board, Governors of national central banks and two or three representatives from the state financial institutions of four largest countries: Germany, France, Spain, and Italy.

Each member of the Governing Council has one vote. The right to vote shall be exercised in person. By way of derogation from this rule, members of the Governing Council may cast their vote by means of teleconferencing. A member of the Governing Council who is prevented from attending meetings of the Governing Council for a prolonged period may appoint an alternate as a member of the Governing Council.

Members of the Governing Council hold a vote when four of six members are present at the meeting. However, when an emergency meeting is called, the number of attendees does not matter, the voting takes place in any case. The decisions of the Governing Council are made by the majority of the members present. In the event of a tie, the President is entitled to a casting vote. Capital and profit distribution related-issues are decided by voting. Each vote is directly proportional to the national banks contribution to the ECB equity capital.

The European System of Central Banks (ESCB) unites the ECB and the national central banks of all 27 European Union Member States. The ESCB plays an important role in the development and maintenance of the European financial structures as well as implementing the monitory policy of the Euro Area. The ESCB structure resembles the structure of the FRS of the United States. The FRS consists of twelve Federal Reserve Banks with Chairmen who are members of different Government Agencies of the FRS, while in ESCB the major role is assigned to the central bank members of the European Union.

Financial Institutions of Denmark, Sweden, and the United Kingdom are also members the ECSB, but are not members of the Euro Area; therefore, they do not have the right to vote in the discussions concerning the single monetary policy of the Euro Area and implement decisions. All the Central Banks of the Euro Area are subordinated to the ECB.

The ESCB was established in accordance with the Statute of the ESCB and the ECB to provide price and currency stability in the Euro Area. To achieve the objective, the ESCB

  • defines and implements the monetary policy of the Community. The monetary policy is determined by the Governing Council of the ECB. The monetary policy of the Community shall be in accordance with such principles as equal rights to all market participants, observance of the market terms and conditions, simplicity, decentralization, continuity, maximum efficiency with low cost, following the ESCB decisions.
  • holds and manages the official foreign reserves of the member states. The ESCB is responsible for managing the official foreign reserves of the member states.

Bank of Japan


Bank of Japan is the Central Bank of Japan founded in 1882. The Bank of Japan issues banknotes, provides price and financial stability, implements monetary policy, and determines the stable economic growth.

Policy Board

The Board of Directors develops and implements the monetary policy of the Bank of Japan. The Board of Directors consists of seven members, Governor and two Deputy Governors. The Bank of Japan is responsible for

  • implementing the monetary policy;
  • issuing national banknotes;
  • providing stability of the financial system as well as accounting services;
  • overseeing financial institutions;
  • payment transactions between Japanese banks;
  • being a lender of last resort;
  • financial transactions between different states;
  • transactions with government and treasury securities;
  • currency interventions;
  • economic analysis, research and studies, publications and reviews;
  • international contacts.

The Bank of Japan should possess a good knowledge of economic and financial situation in the country to implement a certain monetary policy; therefore, the Bank of Japan analyzes statistics and publishes data referring to the Corporate Services Price Index and Wholesale Price Index as well as conducts Tankan survey of business activities.