Definition of Federal Reserve System

Federal Reserve System

The central bank of the U.S., established in 1913, and governed by the federal
reserve Board located in Washington, D.C. The system includes 12 federal reserve Banks and is authorized
to regulate monetary policy in the U.S. as well as to supervise federal reserve member banks, bank holding
companies, international operations of U.S.banks, and U.S.operations of foreign banks.

Federal Reserve System

The central banking authority responsible for monetary policy in the United States.

Bank for International Settlements (BIS)

An international bank headquartered in Basel, Switzerland, which
serves as a forum for monetary cooperation among several European central banks, the Bank of Japan, and the
U.S. federal reserve system. Founded in 1930 to handle the German payment of World War I reparations, it
now monitors and collects data on international banking activity and promulgates rules concerning
international bank regulation.

Fedwire

A wire transfer system for high-value payments operated by the federal reserve system.

Monetary policy

Actions taken by the Board of Governors of the federal reserve system to influence the
money supply or interest rates.

Fed

See federal reserve system.

Federal Reserve Banks

The twelve district banks in the federal reserve system.

Federal Reserve Board

Board of Governors of the federal reserve system.

Accelerated cost recovery system (ACRS)

Schedule of depreciation rates allowed for tax purposes.

Clearing House Automated Payments System (CHAPS)

A computerized clearing system for sterling funds
that began operations in 1984. It includes 14 member banks, nearly 450 participating banks, and is one of the
clearing companies within the structure of the Association for Payment Clearing Services (APACS).

Clearing House Interbank Payments System (CHIPS)

An international wire transfer system for high-value
payments operated by a group of major banks.

Dupont system of financial control

Highlights the fact that return on assets (ROA) can be expressed in terms
of the profit margin and asset turnover.

European Monetary System (EMS)

An exchange arrangement formed in 1979 that involves the currencies
of European Union member countries.

Excess reserves

Any excess of actual reserves above required reserves.

Federal agency securities

Securities issued by corporations and agencies created by the U.S. government,
such as the federal Home Loan Bank Board and Ginnie Mae.

Federal credit agencies

Agencies of the federal government set up to supply credit to various classes of
institutions and individuals, e.g. S&Ls, small business firms, students, farmers, and exporters.

Federal Deposit Insurance Corporation (FDIC)

A federal institution that insures bank deposits.

Federal Financing Bank

A federal institution that lends to a wide array of federal credit agencies funds it
obtains by borrowing from the U.S. Treasury.

Federal funds

Non-interest bearing deposits held in reserve for depository institutions at their district federal
reserve Bank. Also, excess reserves lent by banks to each other.

Federal funds market

The market where banks can borrow or lend reserves, allowing banks temporarily
short of their required reserves to borrow reserves from banks that have excess reserves.

Federal funds rate

This is the interest rate that banks with excess reserves at a federal reserve district bank
charge other banks that need overnight loans. The Fed Funds rate, as it is called, often points to the direction
of U.S. interest rates.

Federal Home Loan Banks

The institutions that regulate and lend to savings and loan associations. The
federal Home Loan Banks play a role analogous to that played by the federal reserve Banks vis-Ă -vis
member commercial banks.

Federally related institutions

Arms of the federal government that are exempt from SEC registration and
whose securities are backed by the full faith and credit of the U.S. government (with the exception of the
Tennessee Valley Authority).

Freddie Mac (Federal Home Loan Mortgage Corporation)

A Congressionally chartered corporation that
purchases residential mortgages in the secondary market from S&Ls, banks, and mortgage bankers and
securitizes these mortgages for sale into the capital markets.

Free reserves

Excess reserves minus member bank borrowings at the Fed.

Imputation tax system

Arrangement by which investors who receive a dividend also receive a tax credit for
corporate taxes that the firm has paid.

Just-in-time inventory systems

systems that schedule materials/inventory to arrive exactly as they are
needed in the production process.

Multirule system

A technical trading strategy that combines mechanical rules, such as the CRISMA
(cumulative volume, relative strength, moving average) Trading system of Pruitt and White.

Nonsystematic risk

Nonmarket or firm-specific risk factors that can be eliminated by diversification. Also
called unique risk or diversifiable risk. systematic risk refers to risk factors common to the entire economy.

Official reserves

Holdings of gold and foreign currencies by official monetary institutions.

Progressive tax system

A tax system wherein the average tax rate increases for some increases in income but
never decreases with an increase in income.

Required reserves

The dollar amounts based on reserve ratios that banks are required to keep on deposit at a federal reserve Bank.

Reserve

An accounting entry that properly reflects the contingent liabilities.

Reserve currency

A foreign currency held by a central bank or monetary authority for the purposes of
exchange intervention and the settlement of inter-governmental claims.

Reserve ratios

Specified percentages of deposits, established by the federal reserve Board, that banks must
keep in a non-interest-bearing account at one of the twelve federal reserve Banks.

Reserve requirements

The percentage of different types of deposits that member banks are required to hold
on deposit at the Fed.

Split-rate tax system

A tax system that taxes retained earnings at a higher rate than earnings that are
distributed as dividends.

Systematic

Common to all businesses.

Systematic risk

Also called undiversifiable risk or market risk, the minimum level of risk that can be
obtained for a portfolio by means of diversification across a large number of randomly chosen assets. Related:
unsystematic risk.

Systematic risk principle

Only the systematic portion of risk matters in large, well-diversified portfolios.
The, expected returns must be related only to systematic risks.

Two-tier tax system

A method of taxation in which the income going to shareholders is taxed twice.

Unsystematic risk

Also called the diversifiable risk or residual risk. The risk that is unique to a company
such as a strike, the outcome of unfavorable litigation, or a natural catastrophe that can be eliminated through diversification.
Related: systematic risk

MACRS (Modified Accelerated Cost Recovery System)

A depreciation method created by the IRS under the Tax Reform Act of 1986. Companies must use it to depreciate all plant and equipment assets installed after December 31, 1986 (for tax purposes).

Accounting system

A set of accounts that summarize the transactions of a business that have been recorded on source documents.

Planning, programming and budgeting system (PPBS)

A method of budgeting in which budgets are allocated to projects or programmes rather than to responsibility centres.

Periodic inventory system

An inventory system in which the balance in the Inventory account is adjusted for the units sold only at the end of the period.

Perpetual inventory system

An inventory system in which the balance in the Inventory account is adjusted for the units sold each time a sale is made.

Systematic Risk

The amount of total risk that cannot be eliminated by portfolio
diversification. The risk inherent in the general economy as a
whole. Also known as market risk.

Unsystematic Risk

The amount of total risk that can be eliminated by diversification by
creating a portfolio. Also known as asset-specific risk or
company-specific risk.

actual cost system

a valuation method that uses actual direct
material, direct labor, and overhead charges in determining
the cost of Work in Process Inventory

business intelligence (BI) system

a formal process for gathering and analyzing information and producing intelligence to meet decision making needs; requires information about
internal processes as well as knowledge, technologies, and competitors

charge-back system

a system using transfer prices; see transfer
price

cost control system

a logical structure of formal and/or informal
activities designed to analyze and evaluate how well
expenditures are managed during a period

cost management system (CMS)

a set of formal methods
developed for planning and controlling an organization’s
cost-generating activities relative to its goals and objectives
cost object anything to which costs attach or are related

enterprise resource planning (ERP) system

a packaged software program that allows a company to
(1) automate and integrate the majority of its business processes,
(2) share common data and practices across the entire enterprise, and
(3) produce and access information in a realtime environment

flexible manufacturing system (FMS)

a production system in which a single factory manufactures numerous variations
of products through the use of computer-controlled
robots
focused factory arrangement
an arrangement in which a
vendor (which may be an external party or an internal corporate
division) agrees to provide a limited number of
products according to specifications or to perform a limited
number of unique services to a company that is typically
operating on a just-in-time system

hybrid costing system

a costing system combining characteristics
of both job order and process costing systems

job order costing system

a system of product costing used
by an entity that provides limited quantities of products or
services unique to a customer’s needs; focus of recordkeeping
is on individual jobs

just-in-time manufacturing system

a production system that attempts to acquire components and produce inventory only as needed, to minimize product defects, and to
reduce lead/setup times for acquisition and production

management control system (MCS)

an information system that helps managers gather information about actual organizational occurrences, make comparisons against plans,
effect changes when they are necessary, and communicate
among appropriate parties; it should serve to guide organizations
in designing and implementing strategies so that
organizational goals and objectives are achieved

management information system (MIS)

a structure of interrelated elements that collects, organizes, and communicates
data to managers so they may plan, control, evaluate
performance, and make decisions; the emphasis of the
MIS is on internal demands for information rather than external
demands; some or all of the MIS may be computerized
for ease of access to information, reliability of input
and processing, and ability to simulate outcomes of
alternative situations

normal cost system

a valuation method that uses actual
costs of direct material and direct labor in conjunction with
a predetermined overhead rate or rates in determining the
cost of Work in Process Inventory

performance management system

a system reflecting the entire package of decisions regarding performance measurement and evaluation

process costing system

a method of accumulating and assigning costs to units of production in companies producing large quantities of homogeneous products;
it accumulates costs by cost component in each production department and assigns costs to units using equivalent units of production

pull system

a production system dictated by product sales
and demand; a system in which parts are delivered or produced
only as they are needed by the work center for which
they are intended; it requires only minimal storage facilities

push system

the traditional production system in which
work centers may produce inventory that is not currently
needed because of lead time or economic production/
order requirements; it requires that excess inventory be
stored until needed

red-line system

an inventory ordering system in which a red
line is painted on the inventory container at a point deemed
to be the reorder point

responsibility accounting system

an accounting information system for successively higher-level managers about the performance of segments or subunits under the control
of each specific manager

standard cost system

a valuation method that uses predetermined
norms for direct material, direct labor, and overhead
to assign costs to the various inventory accounts and
Cost of Goods Sold

two-bin system

an inventory ordering system in which two
containers (or stacks) of raw materials or parts are available
for use; when one container is depleted, the removal
of materials from the second container begins and a purchase
order is placed to refill the first container

Du Pont system

A breakdown of ROE and ROA into component ratios.

Federal Reserve (the Fed)

The central bank in the United States, responsible for setting interest rates.

lock-box system

system whereby customers send payments to a post office box and a local bank collects and processes checks.

Modified Accelerated Cost Recovery System (MACRS)

Depreciation method that allows higher tax deductions in early years and lower deductions later.

Excess Reserves

reserves of commercial banks in excess of those they are legally required to hold.

Federal Funds Rate

The interest rate at which banks lend deposits at the federal reserve to one another overnight.

Federal Open Market Committee (FOMC)

Fed committee that makes decisions about open-market operations.

Foreign Exchange Reserves

A fund containing the central bank's holdings of foreign currency or claims thereon.

Fractional Reserve Banking

A banking system in which banks hold only a fraction of their outstanding deposits in cash or on deposit with the central bank.

International Reserves

See foreign exchange reserves.

Legal Reserve Requirement

See reserve requirement.

Price System

See market mechanism.

Required Reserves

reserves that the central bank requires commercial banks to hold.

Reserve Currency

A currency, frequently the U.S. dollar, that is used by other countries to denominate the assets they hold as international reserves.

Reserve Ratio

See reserve requirement.

Reserve Requirement

Fraction of total deposits that a commercial bank is required by the central bank to hold in the form of reserves.

Reserves

Commercial banks' reserves consist of their holdings of cash and their balances in deposits with the central bank. See also foreign exchange reserves, excess reserves, required reserves, reserve requirement.

Electronic Federal Tax Payment Systems (EFTPS)

An electronic funds transfer system used by businesses to remit taxes to the government.

Federal Employer Identification Number

A unique identification number issued
by the federal government used for payroll purposes to identify the company
when it deals with the Internal Revenue Service.

Federal Insurance Contributions Act of 1935 (FICA)

A federal Act authorizing the government to collect Social Security and Medicare payroll taxes.

Federal Unemployment Tax Act (FUTA)

A federal Act requiring employers to pay a tax on the wages paid to their employees, which is then used to create a
pool of funds to be used for unemployment benefits.

Reserve Ratio

This calculation is used by states to determine the unemployment contribution rate to charge employers. The ongoing balance of a firm’s unclaimed
contributions from previous years is reduced by unemployment claims for the past year and then divided by the average annual payroll, resulting in a "reserve ratio".

Cookie Jar Reserves

An overly aggressive accrual of operating expenses and the creation of
liability accounts done in an effort to reduce future-year operating expenses.

Automated storage/retrieval system

A racking system using automated systems
to load and unload the racks.

Enterprise resource planning system

A computer system used to manage all company
resources in the receipt, completion, and delivery of customer orders.

Pull system

A materials flow concept in which parts are only withdrawn after a
request is made by the using operation for more parts.

Push system

A materials flow concept in which parts are issued based on planned
material requirements.

Reserved material

Material that has been reserved for a specific purpose.

Two-bin system

A system in which parts are reordered when their supply in one
storage bin is exhausted, requiring usage from a backup bin until the replenishment
arrives.

Visual review system

Inventory reordering based on a visual inspection of on-hand
quantities.

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