world economy

Depository Institution Services

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Currency and Coin — The Federal Reserve Banks distribute currency (paper money) and coin to depository institutions to meet the public’s need for cash. During periods of heavy cash demand, such as the Christmas season, institutions obtain larger amounts of cash from the Federal Reserve Banks. When public demand for cash is light, institutions deposit excess cash with the Reserve Banks, for credit to their reserve accounts. Currency and coin received at the Federal Reserve Banks are sorted and counted. Unfit currency and coin are destroyed and replaced with new currency and coin obtained from the Treasury Department’s Bureau of Engraving and Printing and Bureau of the Mint.

Check Processing — The Federal Reserve serves as a central check-clearing system, handling approximately 18 billion checks a year. Using high-speed sorting machines, the Federal Reserve Banks process these checks, route them to the depository institutions on which they are written, and transfer payment for the checks through accounts that depository institutions maintain with the Federal Reserve Banks.

Wire Transfers — The Federal Reserve Banks and about 7,800 depository institutions are linked electronically through the Federal Reserve Communications System, a network through which depository institutions can transfer funds and securities nationwide in a matter of minutes.

Automated Clearinghouses — Federal Reserve Banks and their Branches operate automated clearinghouses, computerized facilities that allow for the electronic exchange of payments among participating depository institutions. Automated clearinghouses are used primarily to effect recurring transactions, such as direct deposit of payrolls and payment of mortgages, and serve as a replacement for checks. The Treasury Department uses automated clearinghouses extensively to make social security, payroll, and vendor payments.

Government Services

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The Federal Reserve System, through the Reserve Banks, performs various services for the U.S. Treasury and other government, quasigovernment, and international agencies. Each year, billions of dollars are deposited to and withdrawn by various government agencies from operating_accounts in the U.S. Treasury held by the Federal Reserve Banks.

The Federal Reserve Banks hold, in their vaults, collateral for government agencies to secure public funds that are on deposit with private depository institutions. In addition, Reserve Banks receive for deposit to the Treasury’s accounts such items as federal unemployment taxes, individual income taxes withheld by payroll deduction, corporate income taxes, and certain federal excise taxes.

The Federal Reserve Banks also issue and redeem instruments of the public_debt, such as savings bonds and Treasury securities. They have certain responsibilities for allotment and delivery of government securities and for wire transfer of securities. In addition, the Reserve Banks make periodic payments of interest on outstanding obligations of the U.S Treasury, federal agencies,» and government-sponsored corporations.

Monetary Policy Role

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The primary responsibility of the central bank is to influence the flow of money and credit in the nation’s economy. The Federal Reserve Banks are involved in this function in several ways. First, five of the twelve presidents of the Federal Reserve Banks serve, along with the seven members of the Board of Governors, as members of the Federal Open Market Committee (FOMC). The president of the Federal Reserve Bank of New York serves on a continuous basis; the other presidents serve one-year terms on a rotating basis. The FOMC meets periodically in Washington, D.C., and determines policy with respect to purchases and sales of government securities in the open market, actions that in turn affect of the availability of money and credit in the economy.

Second, the boards of directors of the Federal Reserve Banks initiate changes in the discount rate, the rate of interest on loans made by Reserve Banks to depository institutions at the «discount window.» Discount-rate changes must be approved by the Board of Governors. All depository institutions that are subject to reserve requirements set by the Federal Reserve-including commercial banks, mutual savings banks, savings and loan associations, and credit unions—have access to the discount window.

Each Federal Reserve Bank has a research staff to gather and analyze a wide range of economic data and to interpret conditions and developments in the economy. This research assists the FOMC in the formulation and implementation of monetary policy. It also contributes to informed decision making by the Federal Reserve Banks in bank supervisory matters and other areas. Most Reserve Banks publish a monthly or quarterly journal devoted to basic research and analysis of current economic issues in their District.

In addition to its money and credit responsibilities, the Federal Reserve has broad supervisory and regulatory authority over the activities of state-chartered member banks and bank holding companies, including their foreign activities and Edge corporations, and foreign banks operating in the United States. It is also charged with writing regulations for the major federal consumer credit laws.

Some of these supervisory responsibilities are delegated to the Reserve Banks by the Board of Governors. These responsibilities include the conduct of field examinations and inspections of state-chartered member banks, bank holding companies, and foreign bank offices in this country and the authority to approve certain types of bank and bank holding company applications.

FEDERAL RESERVE BANKS

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Federal Reserve Banks were established by Congress as the operating arms of the nation’s central banking system. Many of the services provided by this network to depository institutions and the government are similar to services provided by banks and thrift institutions to business customers and individuals. Reserve Banks hold the cash reserves of depository institutions and make loans to them They move currency and coin into and out of circulation/ and collect and process millions of checks each day. They provide checking accounts or the Treasury, issue and redeem government securities, and act in other ways as fiscal agent for the U.S. government. They supervise and examine member banks for safety and soundness. The Reserve participate in the activity that is the primary responsibility

Federal Reserve System, the setting of monetary policy

For the purpose of carrying out these day-to-day operations of the Federal Reserve System, the nation has been divided into twelve Federal Reserve Districts, with Banks in Boston, New York, Philadelphia, Cleveland Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. Twenty-five Branches of these Banks serve particular areas within each District. The map shows locations of the Reserve Banks and their Branches, along with District boundaries and assigned District numbers.

Federal Reserve Bank city:

Boston New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St.Louis, Minneapolis, Kansas City, Dallas, San Francisco. ingtonD С Governors of the Federal Reserve System, Wash-

Federal Reserve Banks operate under the general supervision of the Board of Governors in Washington, D.C. Each Bank has a nine- member Board of Directors that oversees its operations.

Federal Reserve Banks generate their own income, primarily from interest earned on government securities that are acquired in the course of Federal Reserve monetary policy actions. A secondary source of income is derived from the provision of priced services to depository institutions, as required by the Monetary Control Act of 1980. Federal Reserve Banks are not, however, operated for a profit, and each year they return to the US Treasury all earnings in excess of Federal Reserve operating and other expenses.

DOCUMENTARY CREDITS

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A bill of exchange might not be honoured, or the order might be cancelled. But a letter of credit is a more binding method of payment.

Letters of credit (L/C) have been used for centuries in one form or another to enable travellers to obtain money from overseas banks. The process begins with the traveller asking his bank to open a letter of credit in his favour, i.e. for him, for a specific amount which is debited to his account. The bank then drafts a letter which will allow him to draw money on overseas banks with whom the home bank has an agreement. The foreign banks will then draw on the home bank to recover their payments.

This method of obtaining money has now generally been replaced by Euro cheques, traveller’s cheques, and credit cards. But documentary credits — letters of credit accompanied by documents -are widely used in the import/export trade.

There are two types of documentary credit: revocable, i.e. those that can be cancelled, and irrevocable, i.e. those that cannot be cancelled. The second type is more common in overseas business transactions.

The stages in an irrevocable documentary credit transaction are as follows:

1. The importer agrees to pay by documentary credit, and tells his bank that he will do so by completing an application form which names the exporter and states: the amount to be paid; the documents concerned; what the consignment consists of; whether the shipment is c.i.f., f.o.b., etc.; details of dispatch and any other documents involved, e.g. certificate of origin, consular invoice, certificate of quality; and the length of time the credit will be available. The availability of the credit should take account of how much time it will take to prepare and ship the goods.

2. The importer’s bank will then select a bank in the exporter’s country to act as its agent, and will notify them that the credit has been opened.

3. The agent bank will notify the exporter that a credit has been opened, and they may add their own confirmation, i.e. they will promise to see that the conditions of payment against the documents will be fulfilled. If they confirm the letter, the L/C is known as a confirmed credit and the agent bank as the confirming bank.

4. The exporter ships the goods before the credit expires and sends the shipping documents (bill of lading, insurance certificate, invoice, etc.) to the agent bank who check the documents against the conditions and pay him; or they may have asked him to draw a bill of exchange on them, and will discount the bill for him so that he can get his money immediately.

5. The agent bank will then send the documents and debit the importer’s bank with the cost and charges, which are calculated as a percentage of the total amount of the invoice, plus an extra charge if the letter is confirmed.

6. The importer’s bank then checks the documents, pays the agent bank, and sends the documents to the importer so that he can claim the goods.

DEPOSITS

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In May versus April, deposits from residents reduced considerably; their year on year growth rates accelerated. Deposits from HHs (especially, national currency ones) continued to go up. Balances of demand deposits from NFCs (in particular, national currency ones) reduced, which was attributable to production cycle and scheduled transference of tax payments.

In May, total new deposits grew as compared to the previous month and by the 12-month cumulative data as well. Unlike in April, volumes of agreements concluded with HHs went up.

In May, deposits from residents reduced by UAH 2.5 billion or by 0.5% to UAH 507.5 billion. But, their year on year growth rates accelerated to 12.2%. Both national and foreign currency deposits declined (by UAH 1.2 billion or by 0.4%, and by UAH 13 billion or by 0.6%, correspondingly). At the same time, the year on year growth rates of national currency deposits accelerated to 11.9% (versus 11.2% in April), whereas those of foreign currency deposits slowed down to 12.6% (as compared to 13.5%, correspondingly). During the month, deposits with original maturity over 2 years grew by UAH 0.3 billion or by 0.8%, which improved the breakdown of deposits by original maturity. At the same time, demand deposits went down by UAH 2.6 billion or by 1.5%.

In May, balances of deposits from HHs increased by UAH 0.3 billion or by 0.1% to UAH 337.0 billion; their portion grew by 0.4 p.p. to 66.4%. Such dynamics were formed against the background of an increase in real wages and the stable UAH/USD exchange rate. The year on year growth rates of deposits from HHs totaled 14.1%.

In May, deposits from HHs grew exclusively at the expense of an augmentation in balances of national currency deposits (by 0.4 billion or by 0.2%). Balances of foreign currency deposits declined; especially, balances of deposits in euros went down, in particular, due to a decline in EUR/USD exchange rate. Withinforeign currency deposits, only balances of US dollar deposits increased. The year on year growth rates of national and foreign currency deposits from HHs made up 16.6% and 11.4%, correspondingly.

In May, balances of deposits from HHs with original maturity over 1 year and up to 2 years grew considerably (by UAH 1.1 billion or by 0.9%), which improved the breakdown of deposits by original maturity. At the same time, during the month, demand deposits reduced the most (by UAH 0.6 billion or by 0.8%). Versus the previous month, deposits from NFCs went down by UAH 2.3 billion or by 1.6% to UAH 140.7 billion, which was a main reason of the May decline in deposits. But, the year on year growth rates of deposits from NFCs accelerated to 10.7% (as compared to 9.8% in April).

Deposits from NFCs declined chiefly at the expense of a reduction in national currency deposits (by UAH 1.6 billion or by 1.7%), in particular, due to income tax repayment. Foreign currency deposits from NFCs went down by UAH 0.8 billion or by 1.5%. At the same time, the year on year growth rates of national currency deposits from NFCs accelerated to 7.9% (as against 55% in April); the year on year growth rates of foreign currency ones decelerated to 16.4% (versus 19.3%, correspondingly). Versus the previous month, by all maturities, balances of deposits from NFCs reduced, except for deposits with original maturity over 2 years, which grew UAH 0.2 billion or by 2.3%. During May, balances of demand deposits declined by UAH 1.8 billion or by 2.1%; the reduction was observed chiefly in national currency ones. Within short-term deposits from NFCs, observed were a reduction in balances of deposits in US dollars along with a simultaneous increase in hryvnia deposits.

The most considerable decline in balances of demand deposits was observed in corporations of transport and communication, extractive industry, production and distribution of electric power, gas, and water (in hryvnias and US dollars), and in corporations engaged in real estate, leasing, engineering, and rendering services to entrepreneurs, manufacturing and trade (in hryvnias). At the same time, balances of US dollar deposits from manufacturing grew by UAH 1.1 billion at the expense of export proceeds. There was observed an increase in hryvnia deposits with original maturity up to 1 year from trade and manufacturing corporations along with a reduction in US dollar deposits with the same maturity. Balances of national currency short-term deposits from corporations engaged in agriculture and real estate, leasing, engineering, and rendering services to entrepreneurs increased. National currency deposits from trading corporations with original maturity over 2 years grew the most.

Deposit-taking corporations survey

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Monetary aggregate M3

In May 2012, the money supply reduced due to a decrease in national currency transferable deposits and foreign currency other deposits. At the same time, national currency other deposits and foreign currency transferable deposits showed an increase. The year on year growth rates of the monetary aggregate M3 remained at the level of the previous month. Internal credit reduced chiefly owing to a reduction in claims on NFCs.

As of the end of May 2012, balances of the monetary aggregate M3 declined by 0.4% to UAH 701.1 billion. Within the month, the money supply dropped by UAH 2.6 billion chiefly due to a reduction in national currency transferable deposits and foreign currency other deposits. The year on year growth rates of the money supply remained at the level of the previous month, making up 10.2%. In May, the increase in cash in circulation outside deposit-taking corporations (M0) continued; nevertheless, it slowed down as compared to April. Within the month, its balance went up by UAH 0.3 billion to UAH 194.8 billion. Within the total money supply, the portion of the monetary aggregate M0 grew by 0.2 p.p. to 27.8%.

In May, the year on year growth rates of the money supply grew to 5.5% versus 5.0% in May. Within May, the monetary aggregate M1 went down by 0.7% against its 2.3% increase in the previous month. Its dynamics were caused by a decrease in national currency transferable deposits (by 2.1% or by UAH 2.5 billion). The year on year growth rates of the monetary aggregate M1 speeded up to 4.3% versus 3.5% in April.

In May, the monetary aggregate M2 went down by 0.3% or by UAH 2.0 billion to UAH 694.9 billion at the expense of both changes in the monetary aggregate M1 and the UAH 1.1 billion decrease in foreign currency other deposits. Within the month, foreign currency transferable deposits grew by 0.4% or by UAH 0.2 billion. In May, the year on year growth rates of the monetary aggregate M2 made up 9.8% versus 9.7% in April.

At the end of May 2012, the monetary base totaled UAH 237.0 billion. Its increment made up 0.1% or UAH 0.2 billion at the expense of an increase in cash issued in circulation (by 0.4% or by UAH 0.8 billion).

At the end of the reporting month, balances of cash issued in circulation came to UAH 213.0 billion. At the same time, NBU liabilities to other deposit-taking corporations not included in the monetary aggregate M3 reduced by 2.6%. The year on year growth rates of the money supply speeded up from 3.2% in April to 4.0% in May.

In May, funds in banks' correspondent accounts reduced by 5.5% to UAH 16.2 billion. Compulsory reserves formed in May by banks came to UAH 15.7 billion; out of them, UAH 6.7 billion were transferred to the separate account with the NBU. In May, the National Bank of Ukraine continued to carry out operations on banks refinancing. In the reporting month, they totaled UAH 3.7 billion. Within the month, the average weighted interest rate on refinancing operations totaled 8.0% p.a. (in April, 8.6% p.a.).

In May, the volume of operations on mobilization of banks' funds totaled UAH 6.3 billion. The average weighted interest rate on mobilization operations made up 3.0% (in April, 2.5% p.a.). Besides that, in May, the National Bank of Ukraine purchased government bonds of Ukraine to the amount of UAH 0.4 billion (at par value). Transactions on sale of government bonds from the NBU portfolio and sale/purchase of government bonds of Ukraine through the bilateral quoting mechanism were not carried out.

Review of the economy of Ukraine

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In May 2012, there was observed economic recovery in Ukraine by all economic activities. Like in previous months, high internal consumer demand was a key factor of the economic growth.

In January – May, the growth rates of production index of staple industries made up 2.2% against 1.8% in January – April. It resulted from the upward dynamics of industries oriented to domestic consumer demand viz. retail trade, construction, and food industry.

In May 2012, retail trade made the most considerable impact on the increase in the production index of staple industries. From the beginning of the year, the growth rates of its turnover made up 15.5%. A growth in the real wage of the population was one of factors causing the increase (during the 5 months of the reporting year, the real wage grew by 15.5%).

In May 2012, construction indicators considerably improved. The decrease in construction volumes being observed from February changed into their increase (in January – May, by 0.3%). It was caused by the enlargement of government financing (in January – May 2012 as compared to the respective period of 2011, capital expenditures of the Consolidated Budget grew by 55.4%) and favorable weather conditions for construction works.

In May, the growth rates of industrial production remained at the level of the previous month, making up 0.7% in January – May. The year on year growth rates of industrial production grew to 1.0%. Chemical and petrochemical industry production grew most of all; its year on year growth rates made up 14.9% chiefly owing to high external demand for mineral fertilizers.

Positive changes were also observed in food industry. The year on year growth rates of its production made up 3.0% (in April, the 2.1% fall). Indicators of production of food products, beverages, and tobacco goods improved at the expense of high consumer demand. The resumption of cheese deliveries to Russia also contributed to the growth of food industry production.

A sharp increase in export deliveries of electric power (within January – May 2012 against the respective period of 2011, by 66.1%) entailed a rise in the year on year growth rates of production of electric power, gas, and water to 5.8% (in April, they fell by 3.3%).

At the same time, weak external demand made a negative impact on the dynamics of export oriented industries; as compared to the respective period of the previous year, machine building production grew by only 0.5%, whereas metallurgy industry production reduced by 1.1%.

In January – May 2012 versus the respective period of 2011, the growth rates of agricultural output made up 1.5%. It was chiefly at the expense of crop industry, because substantial areas of frozen winter crops and permanent grasses were resowed. According to State Statistics Service of Ukraine data, as of 1 June 2012, the area sown to spring crops by agricultural enterprises of all categories totaled 19.3 million hectares, which was 10.8% as much as at the respective date of the previous year.

Review of the world economy

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In May 2012, the growth rates of the world economy slowed down. The state of economies of Euro area countries continued to deteriorate; the economic growth of the BRIC countries slowed down. The weak labor market continued to affect the inflation dynamics. Besides, there was observed a fall in energy resources prices on world goods markets.

In May 2012, the world economy continued to grow. A certain deceleration in the growth rates of industry was compensated by a faster increase in the growth rates of services sphere. In May, the global composite index JPMorgan PMI* made up 52.1 as compared to 52.3 in March. The speeding-up growth rates of the U.S. economy affected the development of the world economy. In May, production volumes of both industry and services showed an increase. The growth in economies of Russia, China, and India continued. At the same time, the world economy development was restrained by slowing down economic growth rates of Euro area countries and Brazil.

In May 2012, an increase in world industrial production was accompanied by a decrease in inflation pressure. The global employment rate increased in the countries whose economic dynamics were positive.

In May, the year on year growth rates of U.S. industrial production made up 4.7%, being 0.5 p.p. as little as in the previous month and 1.0 p.p. as much as the average increment of industrial production for the last 12 months. The increase was at the expense of a growth in production of industrial equipment (by 11.3%). In the reporting month, an increment of consumer goods production was almost 5 times as little, making up 2.3%.

In comparison to May 2011, the consumer inflation rate continued to slow down (the deceleration was observed since October 2011). In May 2012, consumer prices grew by 1.7% versus May 2011 and by 2.3% on April 2012. A reduction of prices increment was caused by a 3.9% fall in energy carrier prices (in particular, prices for oil products declined by 3.7%). The decrease in prices for oil products was observed for the first time since October 2009. Core inflation (without changes in prices for energy carriers and food products) remained at the level of the previous month (2.3%).

The unemployment rate almost did not change, making up 8.2% (12.7 million unemployed). In May on the previous month, the number of new jobs made up 69 thousand (in April, 77 thousand). In the first quarter of 2012, the average number of new jobs made up 226 thousand. The number of employed increased in the private sector, particularly, in health protection establishments and at enterprises of transport and wholesale trade.

In May, the Federal Open Market Committee decided to remain prime interest rates ranging within 0 – 0.25% p.a.

The latest macroeconomic statistical data showed that business activity in Euro area countries decreased. The year on year decrease in industrial production speeded up. In April, industrial production fell by 2.3% (in March, by 2.2%). A trade balance surplus reduced to EUR 5.2 billion (in March, EUR 7.5 billion). Imports and exports declined by 3.0% and 1.3%, respectively.

In comparison to the previous month, the consumer inflation rate dropped by 0.2 p.p. to 2.4%. The difficult situation on the labor market entailed a downward inflation trend. The unemployment rate remained at a rather high level (11.0%, 17.4 million unemployed).

Taking into consideration the latest macroeconomic trends and certain deterioration of economic forecast, the Governing Council of the ECB remained prime interest rates unchanged.

In May, the year on year growth in industrial production of China grew to 9.6%. In particular, the growth rates of iron ore production and automobile industry were high, making up 23.9% and 16.4%, respectively. An inflow of investment remained sizable. Thus, within the fist five months of the year, investments in real estate totaled CNY 2.2 trillion, having increased by 18.5% on the respective month of the previous year; nevertheless, they were practically twice as little as in May 2011 (34.6%). Almost 70% of all investment in real estate was channeled to housing construction. Export remained one of components supporting an increase in China`s economy. In May, exports totaled 39.7% of GDP. A trade surplus came to USD 17.8 billion (the average surplus for the period from 1984 to 2012 equals USD 5.9 billion). In May, the consumer inflation rate reduced to its lowest level since July 2010, making up 3.0%. Foodstuff prices remained the movers of inflations processes.

Slowing down economic development against the backdrop of decreasing inflation rate allowed the People`s Bank of China to soften its monetary policy. From 18 May, the compulsory reserve ratio was decreased by 0.5 p.p., while from 7 June, prime interest rates on loans and deposits with original maturity up to 1 year were decreased by 0.25 p.p.

In May 2012, the dynamics of chief national measures showed that the dynamics of Russia`s economic development remained upward. As compared to the respective month of the previous year, industrial production grew by 3.6% (in April, by 1.7%). Manufacturing enterprises made the largest contribution to the increase. In Russia, for the first time since October 2011, production of mineral products reduced due to a fall in world oil prices. The year on year inflation continued to slow down: the growth rates of consumer prices declined to 3.7%, while core inflation decreased to 5.1%

Taking into account current macroeconomic trends, the Central Bank of Russia remained the refinancing rate and interest rates on operations of the Bank of Russia unchanged. At the same time, in the context of substantial pressure of negative factors on the exchange rate of Russian ruble, the Central bank of Russia announced that it was ready to sell foreign currencies from its international reserves to maintain the stability of the exchange rate of Russian ruble. In May, the international reserves of the Russian Federation declined by USD 13.9 billion, totaling USD 510.4 billion.