Custom «Federal Banking System vs European System» Essay Paper Sample

Federal Banking System vs European System

The Federal Reserve Banking System used in the United States is set on a decentralized system, constituting 12 Federal Banks spread throughout out the country. This is done in order to represent all regions in monitory policy making. The management of each federal bank has three categories of directors. The A category has 3 professional bankers, category B that have 3 prominent leaders from agriculture, industry, labor, and consumer sectors, and lastly category C that also have 3 appointed governors to represent the general public interests (Thomas 2006). The president of the federal bank is elected by the directors from among themselves and he constantly is in touch with the directors.

At the head of the federal banking system is the Board of Governors. These Governors are appointees of the President of United States and confirmed by the senate. The Governors should serve only once on a 14 year term that is non renewable. The Chairman of the Board of Governors serves for a 4 year term and is chosen among the seven Governors. The Federal Open Market Committee is composed of the seven Governors and the 12 Reserve Banks presidents (Thomas 2006).ÿ The European System of Central Banks began operation in February 1999 under the Maastricht Treaty. Its structure is comparable to that of Federal Reserve System with a system of country banks that have similar roles, headed by governors who have a minimum of five year term. The Executive Board is made up of a president, vice president, and other four members who have an eight year term of service. Monetary policy making body incorporates the six members and the central bank governors from each euro country ( Mishkin 2006).

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Both systems of banking enjoy both instrument and goal independence from political pressures that affect other government agencies. Although the Federal Reserve System is one of the most independent central banks in the world, political pressure and public support on its actions play a very important role. The great independence of the European System of Central Banks from the European Union and the National Governments is because its charter cannot be altered by legislation. It can only be changed by revision of the Maastricht Treaty which is a difficult process because all the signatories have to agree ( Mishkin 2006). The newly established European Central Bank is viewed to be far more independent than the Federal Reserve Banking. Both theory and experience indicate that more independent central banks produce better monetary policies than those directly dependent of the Central Government.

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