Tuesday, July 14, 2015

Chicago: Federal Reserve Bank

This series of posts describes a study abroad course in which students visited several central banks and talked with central bankers about how they responded to—and sometimes failed to respond to—the global financial crisis, and how they are adjusting to their new roles.

by Joseph Song

May 18th… The day we’ve all been eagerly anticipating since the conclusion of finals. Naturally I saved all of my packing for the night before we left so I was a little short on sleep during the initial stop of our trip, but it was still very enjoyable nonetheless. As for introductions my name is Joseph Song and I’m a rising senior majoring in finance. Allow me to kick things off by giving you guys a brief window into the first leg of our trip on this inaugural blog post:

Today we had the wonderful opportunity of visiting the Chicago Federal Reserve Bank. I’ve been somewhat aware of the Federal Reserve and its functions for quite some time now due to taking a variety of finance and economics classes but it was an entirely different experience to see it all in person. The building itself was very impressive and right from the get go one could tell that security was no joke. During this visit we had the opportunity to tour the facility and our tour guide—who was an absolute riot by the way—made this fact abundantly clear by pointing out numerous spots within the bank that used to house machine gun turrets. Before this trip, I’d never thought about the sheer magnitude of the amounts of money processed by the Reserve Banks on a daily basis; it was certainly a sight to behold. Jerry, our tour guide, casually tossed out figures left and right denoting exactly how much cash we were in the presence of.

In addition to receiving a tour, we also had the pleasure of listening to two speakers, David Marshall and Robert Stiegerwald. David Marshall spoke to us about the various roles the Fed fulfilled and its considerable influence on our nation’s economic and financial systems. It was very interesting to hear about the history behind the creation of the Fed—I had no idea that the original reasoning that led to us having 12 different reserve banks was due to mistrust of the East coast. Mr. Marshall also took the time to compare the balance sheets of a typical bank versus that of an industrial company, GM. This comparison served to convey the fact that banks are relatively fragile and illustrated where exactly the Fed fit into this equation. At the end of the day, the role of the Fed is to ensure that our financial system and growth of our economy is healthy.  Another point that I found interesting was that most of the marvelous financial innovations of today were born out of regulatory arbitrage. In other words, they were created due to financial engineers who had discovered loopholes within financial regulation.

Mr. Stiegerwald led us in a discussion about the various recent changes in banking regulation. The topics we covered ranged from specific titles with Dodd Frank, the overall complexity of the Fed, and systemically important financial institutions. One question that was raised as a direct result of this dialogue was whether or not tighter regulation of large banks actually resulted in a safer financial environment when taking into account the tradeoff which is increased shadow banking activity. Shadow banking can be defined as inherently non-financial institutions participating in activities such as making loans that we would commonly see only banks operating in. Additionally, it was fascinating to learn about how the Fed has evolved since the financial crisis in 2007.

All in all, our first stop at the Chicago Federal Reserve Bank was a fantastic way to kick off our tour of the European Central Banks. Moving forward, it will be intriguing to hear about how differently the banks operate throughout the different regions we’ll be visiting as we go on to the next steps within our trip. 

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