Question

What is the relationship between the Fed and other banks?

The Fed sets the salaries for employees at every bank in the nation.
The Fed decides who is eligible for loans and who is not at various banks.
The Fed monitors all deposits and loans at local banks to be sure they’re making a profit.
The Fed makes sure that banks follow rules, and it loans money to banks that are in a crisis.

Answer 1

Best answer: the fourth statement is closest to correct — with some important caveats.

Quick corrections to each item:
- The Fed sets the salaries for employees at every bank in the nation. — False. Individual banks set pay for their employees.
- The Fed decides who is eligible for loans and who is not at various banks. — False. Banks make lending decisions. The Fed issues rules and guidance that affect lending behavior (capital, reserve requirements, fair-lending rules) but it does not pick individual borrowers for private bank loans.
- The Fed monitors all deposits and loans at local banks to be sure they’re making a profit. — False. The Fed supervises and examines many banks for safety, soundness and compliance, and it collects data on deposits/loans — but it is not concerned with making banks profitable. Profitability is a private matter; the Fed’s focus is on financial stability and compliance. Other regulators (FDIC, OCC, state agencies) also supervise banks and insure deposits (FDIC).
- The Fed makes sure that banks follow rules, and it loans money to banks that are in a crisis. — Mostly true. The Fed is a bank regulator/supervisor for many institutions and enforces rules that promote safety and stability. It also acts as a lender of last resort (discount window and emergency programs) to provide liquidity to solvent institutions in distress. Note: deposit insurance is provided by the FDIC, and emergency lending is provided under specific rules and collateral requirements.

Short summary: The Federal Reserve is the U.S. central bank. Its main roles are conducting monetary policy, supervising and regulating banks to promote safety and financial stability, providing payment and settlement services, and supplying liquidity in crises. It does not run private banks or make routine personnel or individual lending decisions for them.