Federal Reserve Plays a Number Thesis

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In addition to managing the value of the U.S. dollar through interest rate policy, the Fed also engages in foreign currency operations. This involves the buying and selling of U.S. dollars on global currency markets. Doing so can expand or contract demand for the dollar, thereby increasing or lowering its value. The Fed does this in order to create demand for U.S. products, or to help fight inflation.

In the Fed's role as one of the supervisors and regulators of the banking system, it has been gifted with certain enforcement mechanisms. The Fed can use both formal and informal actions to control the behavior of banks. The first step in enforcement is that the Fed will present to the managers of the bank in question all of its findings and demand that the issues be addressed.

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If the bank does not comply, the Fed will then request that the bank adopt a board resolution or memorandum of understanding. It is hoped that this action will compel the bank's board into action.

If that fails, the Fed begins its formal process. The Fed has the power to levy fines, to remove officers and directors, to issue cease-and-desist orders and to bar individuals from the banking industry. Along with this comes public humiliation, as the Fed posts these punishments publicly. This escalating series of enforcement measures gives the Fed broad powers to control and ultimately curtail the activities of non-compliant banking institutions. The Fed's authority with regard to unwinding banks is limited, as that role falls to the FDIC.

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