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CHAPTER 15 Central Banks and the Bank of Canada 391 of Canada to reconsider its analysis of inflation and its costs In addition, economic comprehension about interest rates, developments about targets and inflation, and greater openness in the government also contributed to the accountability and transparency of the Bank of Canada.12 STRU CT UR E AN D IN DE P EN DE NCE OF F ORE I GN CE NT RAL BA NKS In contrast to the Bank of Canada, which is a centralized unit owned by the government, central banks in other industrialized countries have a more decentralized structure Here we examine the structure and degree of independence of four of the most important foreign central banks: the Federal Reserve System of the United States, the European Central Bank, the Bank of England, and the Bank of Japan Federal Reserve System Of all the central banks in the world, the Federal Reserve System of the United States (also called simply the Fed) probably has the most unusual structure It includes the following entities: the Board of Governors of the Federal Reserve System, the Federal Reserve Banks, the Federal Open Market Committee (FOMC), the Federal Advisory Council, and around 2900 member commercial banks Figure 15-1 outlines the relationships of these entities to one another and to the three policy tools of the Fed open market operations, the discount rate (the U.S equivalent of the bank rate in Canada), and reserve requirements At the head of the Federal Reserve System is the seven-member Board of Governors, headquartered in Washington, D.C Each governor is appointed by the president of the United States and confirmed by the Senate To limit the president s control over the Fed and insulate the Fed from other political pressures, the governors can serve one nonrenewable fourteen-year term plus part of another term, with one governor s term expiring every other January The chairman of the Board of Governors is chosen from among the seven governors and serves a four-year term It is expected that once a new chairman is chosen, the old chairman resigns from the Board of Governors, even if there are many years left to his or her term as a governor BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Each of the twelve Federal Reserve districts has one main Federal Reserve bank, which may have branches in other cities in the district The locations of these districts, the Federal Reserve banks, and their branches are shown in Figure 15-2 The three largest Federal Reserve banks in terms of assets are those of New York, Chicago, and San Francisco combined they hold more than 50% of the assets (discount loans, securities, and other holdings) of the Federal Reserve System The New York bank, with around one-quarter of the assets, is the most important of the Federal Reserve banks (see the Inside the Central Bank box, The Special Role of the Federal Reserve Bank of New York on page 394) FEDERAL RESERVE BANKS 12 For more details regarding the Bank s recent move towards openness and accountability, see John Chant, The Bank of Canada: Moving Towards Transparency, Bank of Canada Review (Spring 2003): 13 Also, regarding Canada s experience with central banking, see Michael D Bordo and Angela Redish, 70 Years of Central Banking: The Bank of Canada in an International Context, 1935 2005, Bank of Canada Review (Winter 2005 2006): 14, and David Laidler, Free Banking and the Bank of Canada, Bank of Canada Review (Winter 2005 2006): 15 24