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Many Moving Parts
A Loo k In sid e th e U.S. La bor M ar ket

A n n u a l

R e p o r t

2 0 1 0

Eighth District Highlights for 2010
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F e d e ra l R e s e r v e B a n k o f S t . L o u i s

Annual Report
f o r t h e y e ar 2 0 1 0

P u b l i s h ed A p r i l 2 0 1 1

Table of Contents

President’s Message............................................................................................................................... 3
.
Many Moving Parts: A Look Inside the U.S. Labor Market.................................................. 4
.
Boards of Directors, Advisory Councils, Bank Officers.......................................................16
.
Chairman’s Message..............................................................................................................................17
.
Financial Statements............................................................................................................................27
.

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The Fed’s Dual Mandate:
Lessons of the 1970s

President’s Message

W

hen the U.S. Congress amended
the Federal Reserve Act in 1977,
it essentially gave the Fed a dual mandate: to promote maximum sustainable
employment and price stability. Price
stability is usually interpreted as low
and stable inflation, and the impetus
for this explicit objective was the highly
volatile inflation of the 1970s.
The Fed’s dual mandate stands
in contrast to the European Central
Bank’s (ECB’s) single mandate. In 1992,
the Maastricht Treaty, which laid the
groundwork for the establishment of
the ECB later in the decade, designated
price stability as the primary objective of monetary policy. In the 1990s,
European governments and policymakers operated with more knowledge than
when the U.S. Congress gave the Fed
its dual mandate in 1977. The ECB’s
single mandate, therefore, was partly
the result of the global experience and
lessons learned in previous decades.
What were those lessons? The 1970s
are often cited as a time when U.S. monetary policy became misaligned with its
objectives. From the late 1960s through
the early 1980s, inflation rates were high
and variable; for example, over roughly
four years, Consumer Price Index (CPI)
inflation rose from about 3 percent to 12
percent and then fell to 5 percent. Many
were surprised that, along with the swings
in inflation, real output was quite volatile
and the unemployment rate generally was
high, peaking at 10.8 percent in 1982. The
U.S. suffered through four recessions in
the 13 years from 1970 to 1982. The economy fluctuated from boom to bust. Each
cycle ushered in both higher inflation and
higher unemployment. In retrospect,
the Federal Open Market Committee

(FOMC) placed too much emphasis on
real output and unemployment during
this decade and ended up with the worst
of both worlds, a volatile real economy
with high and variable inflation.
The Volcker disinflation—named
after then-Chairman Paul Volcker—lowered the CPI inflation rate from more
than 14 percent in early 1980 to less than
3 percent by mid-1983. At this point, the
FOMC tried a new policy—keep inflation low and stable. The result was a long
expansion during the 1980s and another
long expansion during the 1990s. During these expansions, inflation remained
low and, in fact, declined, while the
unemployment rate declined to as low
as 3.8 percent in 2000. The boom-bust
cycle was eliminated.
The FOMC learned a valuable lesson
on how to pursue the dual mandate from
the 1970s experience—namely, the Committee should aim for policies that keep
inflation low and stable for the sake of
both price stability and the real economy.
This lesson was not lost on other central
banks around the globe, which helps
explain why, in the 1990s, the Maastricht
Treaty gave the ECB the single objective
of price stability.

Still, one would not have to go all
the way to a single mandate in order to
obtain the good experience of the 1980s
and 1990s. Another way to achieve the
same outcome is to simply internalize the message from the 1970s, thus
understanding that the optimal way to
deliver on the dual mandate is to pursue
low and stable inflation, which in turn
helps the real economy. In other words,
monetary policy can achieve the same
desired outcomes with a single mandate
as it can with an appropriately interpreted dual mandate.
Today, it may be tempting to lose
sight of the lessons of the 1970s, but I
believe they remain as relevant as ever.
As both the U.S. and Europe continue to
recover from the severe financial crisis
and subsequent recession of 2007-2009,
many policy changes are in the air. But
the fundamental importance of low and
stable inflation for the performance of the
real economy remains a bedrock principle
of central banking.

James Bullard
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Many Moving Parts
A Look I n s id e t h e U. S. Labor M ar ket

By David Andolfatto and Marcela M. Williams

T

he U.S. economy lost almost 8 million jobs in the latest recession, and the
unemployment rate rose to over 9 percent. Roughly 1 million jobs have been

added to the economy since early 2010, but the unemployment rate remains
persistently high. Some policymakers are concerned about the prospect of a
prolonged “jobless recovery,” a period of rising average income (GDP) with little
or no employment growth. There is considerable debate over what, if anything,
monetary and fiscal policy can or should do to help the labor market adjust in
the wake of one of the worst recessions since the Great Depression.

David Andolfatto is an economist at the
Federal Reserve Bank of St. Louis. His
areas of expertise are money, banking
and labor markets.

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s t l o u i s f e d . o rg

Marcela M. Williams is an officer at the Federal Reserve
Bank of St. Louis. She oversees the external communications function in Public Affairs.

Since the end of the latest recession, for example, job openings
in the U.S. appear to have increased—yet unemployment remains
persistently high. Some economists interpret this as evidence that
the latest recession has led to “structural” change, which will take
some time to work through.

Disagreements over what should be done to
stimulate the labor market stem, in part, from
its complicated nature. The labor market has
many moving parts, and policies frequently
have unintended consequences. The purpose
of this essay is to describe a few of these moving parts and to explain why it is sometimes
difficult to interpret the ups and downs we
experience in the labor market. One theme that
emerges is that the big picture, as seen in the
aggregated data, is not always representative of
what is happening up close, as seen in the data
that have been dissected.
We begin by looking at the timeline of U.S.
employment since World War II. Employment,
measured as a ratio of population size, remains
relatively stable over time. This overall behavior, however, masks several underlying trends.
For example, employment rates have generally
been rising for women and falling for men. We
look next at the share of employment across
different sectors of the economy. Again, we see
sharp differences in the evolution of employment over even relatively short periods of time.
These different behaviors suggest, among other
things, a degree of caution in the use of a “one
size fits all” policy affecting the labor market.
We will then turn to the issue of unemployment. Contrary to common belief, unemployment is not technically a measure of joblessness.
It is, instead, a measure of job search activity
among the jobless. Millions of unemployed
people find jobs every month, even in a deep
recession. Millions of workers either lose or
leave their jobs every month, too, even in a
robust expansion. The large and simultaneous

flow of workers into and out of employment
suggests that the labor market plays an important role in reallocating human resources to
their most productive uses through good times
and bad.
The job search activity of unemployed workers is mirrored on the other side of the labor
market with the recruiting efforts of firms that
have unfilled job openings. It is a property of
the labor market that job vacancies coexist with
unemployed workers, a fact that suggests the
presence of “frictions” in the process of matching workers to jobs.
Vacancy and unemployment rates tend to
move in opposite directions over the business
cycle. Normally, good times induce firms to
create job openings, and those additional openings then make it easier for unemployed workers to find jobs. However, the usual relationship
between unemployment and vacancies sometimes breaks down. Since the end of the latest
recession, for example, job openings in the U.S.
appear to have increased—yet unemployment
remains persistently high. Some economists
interpret this as evidence that the latest recession has led to “structural” change, which will
take some time to work through.
Indeed, history shows that the unemployment
rate frequently does take a long time to decline
following a recession. Given the severity of the
most recent recession and given recent experience,
it is likely to take years before the unemployment
rate falls back to its pre-recession levels.

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1

	Population is civilian
noninstitutional ages 16+.

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Figure 1

U.S. Employment–Population Ratio
1948:Q1 - 2010:Q4
90
Males

80
70
60

Total

50
40

Females

30
20

2008

2004

2000

1992

1996

1988

1984

1980

1972

1976

1968

1964

1960

0

1952

10
1956

E

1948

In the postwar
era, the U.S.
employment rate
has averaged about
60 percent and
has remained,
for the most part,
within three
percentage points
of this average.

veryone has a common-sense notion of
what it means to be employed. But to measure employment, the concept has to be defined
precisely. Doing this is not as straightforward as
one might imagine.
We are all given a gift of time: 24 hours a
day, 7 days a week, 52 weeks a year and so on.
We generally have many competing uses for our
time. Deciding how to spend a fixed amount
of time across competing uses is a problem
familiar to most of us. Some time is devoted
to the office, some to the gym, some to household chores and so on. The time “employed” in
many of these different activities could rightfully be described as “work.” A stay-at-home
parent may legitimately be said to have a “job”
(and an important one, at that). Going down
this path, however, soon leads to the conclusion that almost everyone could be classified as
“employed” in the sense of engaging in some
productive activity. There may very well be
some merit to this point of view.
In everyday language, however, a “job” or
“employment” is commonly associated with an
activity that generates a monetary reward. This
is essentially the way statistical agencies measure
employment. Standard labor force surveys record
a person as employed in a given month if he or she
reports having performed any paid work in the
previous four weeks. The term “paid” should be
understood here as direct monetary compensation
by another party (an employer or, in the case of
the self-employed, a customer).
Understanding how employment is defined
and measured is important for how its level
is interpreted. An increase in employment is
usually thought to be a good thing, and, indeed,
it frequently is. But employment may also
increase when, for example, a student cannot

Percent

Employment

afford to remain in school or when a stay-at-home
parent is forced to find a paying job. Clearly, it
is not in the interest of society to have everyone
employed. But if this is the case, then how is “full
employment” to be defined and measured?
The idea that the economy is at full employment when everyone who wants a job has a job is
not very helpful. Almost anybody can get some
sort of job in relatively short order. The problem
for most people is in finding a high-paying job
that they enjoy doing. Everybody wants this
type of job even if he or she is currently engaged
in other productive activities, such as going to
school or minding the household. Conceptual difficulties such as these have led some
economists to look to the data for guidance. In
particular, might it be possible to identify full
employment by appealing to some long-run
historical average level of employment?

SOURCE: Bureau of Labor Statistics/Haver Analytics.

Figure 1 plots the evolution of employment
in the United States from 1948 to the present.
Because employment will grow naturally along
with the population, it is sometimes more illuminating to examine the behavior of employment
relative to population size. The employmentpopulation ratio recorded in Figure 1 represents
employment divided by the relevant population.1
In the postwar era, the U.S. employment
rate has averaged about 60 percent and has
remained, for the most part, within three percentage points of this average over the sample
period. Because the population base is large,
a small change in the employment rate can
translate into millions of jobs. For example, in
the most recent recession, the employment rate
declined by more than three percentage points,

Manufacturing sector employment is in long-run decline, while
employment in the education and health services sector is steadily
on the rise—even through the most recent recession.

Figure 2

Evolution of Sectoral Employment
2000:Q1 - 2010:Q4
120

Index, 2000:Q1 = 100

110
100
90
80
70

Construction, Mining, Logging
Manufacturing

Education, Health Services
Trade, Transportation, Utilities

Information, Financial, Other Services
Professional, Business Services

60

Leisure, Hospitality Services
Government
2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

50

all of the lines in Figure 2 could be expected to
fluctuate around the normalized value of 100.
But there appear to be clear trends in at least
two sectors: Manufacturing sector employment is in long-run decline, while employment
in the education and health services sector is
steadily on the rise—even through the most
recent recession. In terms of cyclicality, there
is no surprise. To take two extremes, construction sector employment is highly cyclical, while
government sector employment is not.

SOURCE: Bureau of Labor Statistics/Haver Analytics.

which corresponds to a decline of almost
8 million jobs.
Figure 1 also reveals an interesting
difference in how male and female employment rates have evolved over time. First, while
employment rates are lower for females relative to males, this gap has closed significantly
over the past 60 years. Male employment rates
show a persistent decline in the first half of the
sample, while female employment rates are generally on the rise. While these long-run adjustments appear to have stabilized over the past
20 years or so, it remains unclear whether some
notion of “full employment” can be identified
in this data. If it can, then it would appear to
differ across the sexes and fluctuate over time.
Employment rates in different sectors of the
economy are also evolving. Figure 2 shows the
employment-population ratios for eight sectors;
these ratios have been normalized at 100 in the
first quarter of 2000. The subsequent points
on each curve can then be interpreted as the
percentage change in that sector’s employmentpopulation ratio since the beginning of 2000.
If an economy were to grow along what
economists call a “balanced growth path,” then

Unemployment

A

ccording to Figure 1, about 40 percent
of the U.S. adult population is “jobless”
at any point in time. Joblessness (nonemployment), however, is not the same thing as
unemployment, at least according to standard
labor force survey definitions. To be classified
as unemployed, a nonemployed person must
report being available for paid work and having
engaged in some job search activity in the previous four weeks.2 Nonemployed persons who
are not actively looking for jobs are classified as
nonparticipants.
Conceptually, the distinction between
unemployment and nonparticipation is clear
enough; it involves some notion of active job
search. The standard labor force survey asks
nonemployed people what they have done
to find work (in the previous four weeks). If
the respondents answer “nothing,” then they
are classified as nonparticipants. Almost any
evidence of active job seeking warrants classification as unemployed.3 It is important
to understand that these classifications are

2

	The only exception to this
rule is for those on temporary
layoff. Only a small fraction
of the unemployed fall into
this category.

3

	 If respondents say they have
only “looked at want ads,”
they are also classified as
nonparticipants.

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Annual Report 2010

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Figure 3

U.S. Unemployment Rate
1976:Q1 - 2010:Q4
12

10

Percent

8

6

4

2

SOURCE: Bureau of Labor Statistics/Haver Analytics.

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s t l o u i s f e d . o rg

2010

2008

2006

2002

2004

1998

2000

1996

1992

1994

1988

1990

1986

1982

1984

1978

1980

1976

0

and demographic characteristics, such as
income, age, sex and education.
Figure 4

U.S. Unemployment Rates
across Education Groups (Ages 25+)
2000:Q1 - 2010:Q4
18
No High School Diploma
16
High School
14
Some College
12
College
10
8
6
4
2

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

0
2000

determined by the surveyor. The people being
surveyed are never asked directly whether they
are unemployed or not.
From an economic perspective, then, a
nonemployed person who had one job interview
in four weeks may not look that much different
from a nonparticipant. Indeed, our clean
conceptual distinctions are clouded further by
the fact that in any given month, the number of
nonparticipants who find jobs is as large as the
number of unemployed who do.
On the other hand, the data show that an
unemployed person is more likely to find a job
than a nonparticipant. This difference in the
probability of finding a job suggests that the
unemployed are in some sense “more attached”
to the labor market than nonparticipants are. It
is for this reason that the labor force is defined
to be the sum of employment and unemployment. The implication is that nonparticipants
are “not in the labor force.”
When a recession hits, the unemployment
rate typically spikes very quickly and sharply.
Over the course of the subsequent recovery,
however, the unemployment rate typically
declines much more gradually. Figure 3 shows
this pattern quite clearly for the United States.
It evidently takes a lot of time to rebuild the
job-worker relationships that are destroyed in a
severe recession. If history is any guide, then,
one should not expect the U.S. unemployment
rate to fall back to pre-recession levels for many
years to come.
One should keep in mind that unemployment rates, like most measures of labor market
activity, often vary significantly across economic

Percent

The incidence
of unemployment falls more
heavily on the
less-educated. A
high school dropout, for example,
is roughly three
times more likely
to be unemployed
than a college
graduate.

SOURCE: Bureau of Labor Statistics/Haver Analytics.

Figure 4 depicts the unemployment rates for
four educational attainment categories in the
U.S. since the year 2000. As one might expect,
the incidence of unemployment falls more
heavily on the less-educated. A high school
dropout, for example, is roughly three times
more likely to be unemployed than a college
graduate. It is interesting to note, however,
that the unemployment rates across all education categories increased at roughly the same
proportion during the past recession.

Labor Market Transitions

T

he categories of employment, unemployment and nonparticipation represent
snapshots of labor market activity at a point in
time. But workers belonging to a given category
will not necessarily remain in that category for
long. Over a given interval of time, a number
of workers will make transitions from one labor
market category to another. These transitions
are called “worker flows.”
An analogy may be of some use here. Imagine a bathtub of water, with its drain unstopped,
and the faucet turned on. The level of water at a
point in time corresponds to the level of employment. The water draining from the tub corresponds to the flow of workers losing or leaving
their jobs. The water pouring in from the faucet
corresponds to the flow of workers finding jobs.

Several other interesting facts are evident from Figure 5. Although
about 4.4 million workers left employment every month, fewer
than half of these workers became unemployed—most left the labor
force. Similarly, about 3.2 million workers left unemployment every
month. But only 1.8 million of these workers found jobs; the rest left
the labor force.

Figure 5

Average Worker Flows 1996-2003
mpm = millions per month

3.0 mpm

Employment
122.0 million

Nonparticipation
59.3 million

m

pm

pm

m

1.8

m

1.4

pm

2.8 mpm

1.4

m

pm

1.4

Whether the water level rises or falls depends on
the relative size of the inflow and outflow. And
so it is with the level of employment, unemployment and nonparticipation.
It is of some interest to measure worker
flows because their magnitude reveals something about the fluidity of the labor market.
Do labor market categories such as unemployment, for example, represent stagnant pools of
workers who exhibit little mobility? Or is there
a flurry of economic activity hidden below the
surface? As it turns out, data from the Current
Population Survey (CPS) can be used to answer
this question.
Figure 5 examines CPS data over the period
1996-2003.4 The figure divides the adult U.S.
population into three familiar categories. The
average level of employment was 122 million
workers, and the average level of unemployment
was 6.2 million workers. The average number
of adults out of the labor force was 59.3 million.
The numbers associated with the arrows
in Figure 5 represent average worker flows per
month. These monthly flows are huge in relation to population size. For example, 9 million
workers moved into and out of employment
every month on average from 1996-2003. That’s
over 100 million transitions into and out of
employment over the course of a year, a number
that is almost as large as the average number of
people employed at any given time.
Several other interesting facts are evident
from Figure 5. Although about 4.4 million
workers left employment every month, fewer
than half of these workers became unemployed—most left the labor force. Similarly,
about 3.2 million workers left unemployment
every month. But only 1.8 million of these
workers found jobs; the rest left the labor force.

Unemployment
6.2 million
SOURCE: Adapted from Davis, Faberman and Haltiwanger (2006) Figure 1.

Economists Steven Davis, R. Jason Faberman and John Haltiwanger suggested in a
2006 paper that the economic forces behind
these worker flows can be grouped into “supply” side and “demand” side. On the demand
side, employers continuously create new jobs
and destroy old ones, a process that evidently
accounts for much of the observed job mobility
and many of the jobless spells experienced by
workers. On the supply side, workers frequently
switch jobs and change their labor market
status for any number of reasons, including
retirement, family relocation, schooling and so
on. Also on the supply side, new workers are
entering the labor force.
As one might expect, there is considerable
cyclical (as well as seasonal) variation in these
flows. Figure 6 plots the average monthly flow

4

	 Fallick and Fleischman
(2004), cited in Davis, Faberman and Haltiwanger (2006).

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Annual Report 2010

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Figure 6

U.S. Labor Market Flows
2006:Q1 - 2010:Q4

Employment–Nonemployment Flows

Employment–Unemployment Flows
2.8

6.6

2.6

6.2

6.0

Nonemployment
to Employment

5.8

Employment to
Nonemployment

5.6

Millions per month

Unemployment
to Employment

2.0

Employment to
Unemployment

1.8

2010

2009

2008

2006

2010

2009

2008

2007

2006

1.4

Employment–Nonparticipation Flows

Unemployment–Nonparticipation Flows

4.4

3.5

Nonparticipation
to Employment
Employment to
Nonparticipation

4.0
3.8
3.6
3.4

Unemployment
to Nonparticipation

3.0
Millions per month

4.2
Millions per month

2.2

1.6

5.4

Nonparticipation to
Unemployment

2.5

2.0

1.5
3.2
3.0

2010

2009

2008

2007

2006

2010

2009

2008

2007

1.0
2006

If unemployment durations
are short, at
least the pain of
unemployment is
short-lived. But
long-duration
unemployment is
more of a concern.

2.4

2007

Millions per month

6.4

SOURCE: Current Population Survey, Bureau of Labor Statistics/Haver Analytics.
NOTE: Shaded areas represent recessions as determined by the National Bureau of Economic Research.

10 | F e d e r a l R e s e r v e B a n k o f S t . L o u i s

of workers for the United States from 2006:Q1
to 2010:Q4 . The shaded region represents the
most recent recession (officially dated by the
National Bureau of Economic Research).
The top-left panel plots the flow of workers
into and out of employment (nonemployment is
the sum of unemployment and nonparticipation).
Not surprisingly, there is a sharp spike in the
flow of workers leaving employment during the
recession. There is also a moderate decline in the
flow of workers into employment. It is interesting
to note that an average of 5.6 million workers per
month found jobs even in the depths of the recession. The flow of workers losing or leaving their
jobs, however, was much higher. The difference
in these two flows accounts for the sharp recent
decline in employment recorded in Figure 1.
The top-right panel shows a large increase in
the flow of workers moving from employment to
unemployment during the recession. This is what
one would expect when the economy sours. But
there is also a significant, though less pronounced,
increase in the number of unemployed workers
|

s t l o u i s f e d . o rg

finding jobs. This latter increase is due, in part,
to the fact that there are now more unemployed
workers. But as unemployed workers have the
option of leaving the labor force, the fact that
more unemployed workers are finding jobs must
to some extent also reflect a growing availability of
job opportunities.
The bottom-left panel depicts the flow of workers between employment and nonparticipation.
Both of these flows are declining throughout the
recent recession. It is evidently not as easy to find
a job while out of the labor force. And likewise,
workers appear less inclined to leave the labor
force as the economy worsens.
The bottom-right panel depicts the flow of
workers between unemployment and nonparticipation. The unemployment to nonparticipation flow is rising throughout the recession; this
might, in large part, be due to a “discouraged
worker” effect, whereby unemployed workers facing bleak prospects stop looking for
jobs. There also appears to be an “encouraged
worker” effect; at least, this is one interpretation

One interpretation of this recent pattern is that matching jobs with
workers has become more difficult in the wake of an exceptionally
severe recession. If this is the case, then it is not immediately clear
how monetary or fiscal policies might alleviate the problem.

for the corresponding rise in the flow of nonparticipants choosing to enter the workforce.
Taken together, the data exhibited in Figure
6 reveal that the pattern of labor market activity over the course of booms and recessions is
considerably more complicated than is generally recognized. As more and better data have
become available, economists have been led to
reassess existing labor market theories. In conventional theory, for example, unemployment is
frequently portrayed as a stagnant pool of idle
workers, waiting on the sidelines until market
conditions improve.
In fact, the microdata show that for most
workers, the length of their unemployment spells
is relatively short; see the left-hand panel in Figure 7.
This panel shows a fairly typical pattern: 83 percent of all unemployed workers in May 2007 had
been unemployed for 26 weeks or less. However,
while most unemployment spells are short, most
of the time spent in unemployment is accounted
for by a relatively small fraction of workers—the
“long-term unemployed.”
The right-hand panel in Figure 7 depicts the
distribution of unemployment spells in August
2010. It still remains true that the majority of
unemployment spells are of short duration, but
the fraction is now much lower than it was prior
to the recession. The fraction of unemployed
workers who have been out of work longer than
26 weeks has risen to 42 percent. For policymakers, this post-recessionary increase in the
fraction of long-term unemployment is disconcerting. If unemployment durations are short,
at least the pain of unemployment is short-lived.
But long-duration unemployment is more of a
concern. This will certainly be the case if, as
some fear, long unemployment spells lead to a

Figure 7

Unemployment Duration
May
May 2007 2007

August
August 2010 2010

27
27 weeks weeks
and over
and over

17%

17%
27
5-26
5-26 weeks weeks 27 weeks weeks
and over
and over

39%

5-26
5-26 weeks weeks

47%

47%

39%

42% 42%

Less than
Less than
5 weeks 5 weeks

36%

36%

Less than
Less than
5 weeks 5 weeks

19%

19%

SOURCE: Bureau of Labor Statistics/Haver Analytics.

deterioration of skills, rendering workers unemployable when the job market recovers.

Vacancies
and Unemployment

A

job vacancy corresponds to an “unemployed job” from the perspective of a
firm. Unemployed workers are looking for
unemployed jobs, and many unemployed jobs
are looking for unemployed workers.5 On the
surface, it seems puzzling that job vacancies
should coexist with unemployment. Why do
firms with job openings simply not hire available workers until the unemployment rate drops
to zero or until the available supply of vacant
jobs is exhausted?
One answer to this question is that resource
allocation in the labor market is complicated by
“search frictions.” The basic idea is as follows:
First, jobs and workers each possess idiosyncratic
characteristics that make some job-worker pair-

5

	Of course, many job openings are also targeted at
employed workers; likewise,
many employed workers are
also looking for better jobs.
The flow of employment to
employment transitions is
also very large.

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Some people argue that higher productivity is responsible for the
lack of hiring. But productivity has been rising for centuries, and
with no obvious detriment to employment opportunities.

Figure 8

U.S. Beveridge Curve
December 2000 - December 2010
4.5

Job Openings Rate (percent)

4.0
3.5
3.0

December 2010

2.5
2.0

July 2009

1.5

December 2000 – June 2009
July 2009 – December 2010
Beveridge curve from December 2000 – June 2009

1.0
0.5
0.0
0.0

2.0

4.0

6.0

8.0

10.0

12.0

Unemployment Rate (percent)

SOURCE: Job Opening and Labor Turnover Survey,
Bureau of Labor Statistics/Haver Analytics.

ings more productive than others. Second, jobs
and workers do not necessarily know beforehand
where the best pairing is located. If this is true,
then it follows that jobs and workers should
expend time and resources to search out the best
matches. A firm will generally not want to hire
the first worker who comes through the door.
Likewise, an unemployed worker may not want
to accept the first available job offer. The same
principles are at work in most matching markets,
including, for example, the marriage market.
Like unemployment, vacancies vary over
the business cycle. In fact, unemployment and
job vacancy rates tend to vary in a systematic
way: The unemployment rate tends to be high
when the vacancy rate is low, and vice versa.
The relationship between these two variables
is referred to as the Beveridge curve. Figure 8
uses data from the Job Openings and Labor
Turnover Survey to depict the Beveridge curve
for the United States from December 2000 to
December 2010.
From Figure 8, it seems that the Beveridge
curve maintains its classic negative slope through
most of the decade and, indeed, throughout the
recent recession. The common interpretation
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of this pattern is that depressed business conditions lead firms to demand less labor and post
fewer job openings, making it more difficult
for unemployed workers to find jobs (that is,
jobs well-matched with their personal characteristics). Because jobs are harder to find, the
unemployment rate rises.
The red dots in Figure 8 depict the Beveridge
curve since the U.S. recession was formally
declared ended in June 2009. One would
normally expect the unemployment rate to
decline as economic growth resumes. But here,
we see evidence of increased recruiting activity on the part of the business sector together
with no apparent decline in the unemployment
rate. One interpretation of this recent pattern
is that matching jobs with workers has become
more difficult in the wake of an exceptionally
severe recession. If this is the case, then it is not
immediately clear how monetary or fiscal policies might alleviate the problem.

Implications for Policy

W

ith the U.S. unemployment rate still
very high, many are asking what might
be done about it. It is not immediately clear
what can be done in the short term. The Federal Reserve has lowered its policy rate as far
as it can go. The economy is flush with liquidity. Many firms, however, remain reluctant to
spend on investment and additional labor. For
better or worse, political and fiscal constraints
are holding back large expenditures on public
works projects.
A key question, as far as policy is concerned,
relates to why many firms appear reluctant to
go “full speed ahead” in their investment and
employment plans as the economy improves.

References

Davis, Steven J.; Faberman, R. Jason; and Haltiwanger,
John. “The Flow Approach to Labor Markets: New Data
Sources and Micro-Macro Links,” Journal of Economic
Perspectives, Summer 2006, Vol. 20, No. 3, pp. 3-26.
Fallick, Bruce; and Fleischman, Charles A. “Employer-toEmployer Flows in the U.S. Labor Market: The Complete
Picture of Gross Worker Flows,” Finance and Economics
Discussion Series No. 2004-34, Board of Governors of
the Federal Reserve System, May 2004.

A Closer Look
at G-7 Labor Patterns
during the 2007-2009
Recession

I

n the two decades prior to the 2007-09 recession, the U.S. had one of
the lowest unemployment rates among the world’s major industrialized
countries. As of the first quarter of 2007, for example, the U.S. unemployment rate stood at 4.5 percent, roughly half that of France and Germany.
Only Japan’s unemployment rate was lower among the Group of 7 (G-7)
countries.1 See Figure 1.
During the Great Recession, the U.S. went from having one of the lowest unemployment rates to one of the highest. By the end of the recession,
the U.S. unemployment rate stood close to 10 percent, roughly on par with
France—a country whose unemployment rate stood at 9 percent prior to
the recession! Even more shocking to seasoned observers of world labor
markets, the unemployment rate in Germany actually declined through
most of the recession.
Figure 1

GER

ITA

JAP

2010:Q1

FRA

2009:Q4

CAN

2009:Q2

2007:Q1 - 2010:Q3

2009:Q1

Unemployment Rate in G-7 Countries
UK

US

11
10
9
Percent

8
7
6
5
4

2010:Q3

2010:Q2

2009:Q3

2008:Q4

2008:Q3

2008:Q2

2008:Q1

2007:Q4

2007:Q3

2007:Q2

3
2007:Q1

This is where much of the disagreement lies.
Some argue that private sector spending remains
restrained by psychological factors—a simple
lack of confidence. Others think that there
are legitimate reasons for the apparent lack of
confidence—including the policy uncertainty
generated by the political machinations of the
public sector. Where one falls between these
two perspectives naturally influences one’s view
on what constitutes desirable policy.
On a brighter note, the U.S. economy is
clearly in recovery mode, even if the recovery is
not very robust. Real per capita GDP is growing, even if employment per capita is not. A
growing GDP combined with zero employment
growth necessarily means higher labor productivity (more output is being produced with the
same amount of labor). Some people argue that
higher productivity is responsible for the lack
of hiring. But productivity has been rising for
centuries, and with no obvious detriment to
employment opportunities.
The recovery in GDP, however, has done
little to diminish the belief among some that
“more should be done” to help the labor market. It is easy to understand what motivates
this sentiment. GDP is a measure of average
income—it sheds no light on how this income
is distributed across the population. Moreover,
the incidence of unemployment is concentrated
among the poor and less-educated. In short,
there is a concern that the prosperity associated with the recovery will not be shared by
all. Determining the best way to ensure shared
prosperity without crippling the machine that
creates it is always a challenge for policymakers—and it is likely to remain so in the foreseeable future.

SOURCES: Statistics Canada, OECD, Bureau of Labor Statistics/Haver Analytics.

Why has the unemployment response to the recession been so different
among G-7 countries? One explanation may simply be that the strength
of recessionary forces varied across each country. If true, then one might
expect a strong relationship between the change in the unemployment rate
and the change in GDP across countries. If a country experienced only a
small decline in GDP, then one would expect the change in unemployment
to be correspondingly small in that country, and vice versa. In fact, this
appears not to be the case at all.
	The G-7 countries are Canada, France, Germany, Italy, Japan, the United Kingdom
and the United States.

1

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The U.S. appears to be the outlier here, shedding a significantly
larger percentage of employees than the rest of the G-7 countries.

Figure 2

The 2007-09 Recession: Impact on Real GDP
and Unemployment in G-7 Countries
Decline in Real GDP (percentage points)

8
7
6

GER

JAP

ITA

UK

5
4

US
FRA

3

CAN
2
1
0
0

1

2
3
Increase in the Unemployment Rate (percentage points)

4

5

SOURCES: Data come from OECD/Haver Analytics. Peak and trough dates for each
country are from the National Bureau of Economic Research (for the U.S.) or from
the Organisation for Economic Co-operation and Development (for the remaining
G-7 countries).
Figure 3

CAN

FRA

2009:Q3

2007:Q1 - 2010:Q4

2009:Q2

Civilian Employment in G-7 Countries
GER

ITA

JAP

UK

US

104
103

Index, 2007:Q1 = 100

102
101
100
99
98
97
96
95

2010:Q4

2010:Q3

2010:Q2

2010:Q1

2009:Q4

2009:Q1

2008:Q4

2008:Q3

2008:Q2

2008:Q1

2007:Q4

2007:Q3

2007:Q2

2007:Q1

94

SOURCES: Statistics Canada, OECD, Bureau of Labor Statistics/Haver Analytics.

Consider Figure 2, which plots the decline in
GDP from peak to trough against the increase
in the unemployment rate for each G-7 country. There appears to be little, if any, correlation
between changes in GDP and unemployment.
Compared with other G-7 countries, the U.S.
experienced a relatively small decline in GDP
during this recession—the third smallest decline
in GDP after France and Canada. Of all G-7
countries, however, the U.S. experienced the
largest increase in its unemployment rate.
The level of employment in six of the seven
G-7 countries over the course of the recession
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followed a broadly similar pattern. Figure 3
shows quarterly civilian employment for G-7
countries, with the series normalized to 100 in
the first quarter of 2007. As the picture shows,
the U.S. appears to be the outlier here, shedding
a significantly larger percentage of employees
than the rest of the G-7 countries. Canada, Germany and France actually saw their employment
levels rise during the recession compared with
the first quarter of 2007.
Employment normally contracts during a
recession. Moreover, real GDP usually declines
proportionately more than employment. The
implication is that labor productivity—measured as output per worker—tends to decline
during a recession. This commonly observed
behavior was evident among all the G-7 economies during the past recession, with the notable
exception of the U.S.; see Figure 4.
Figure 4 plots labor productivity (GDP per
employed worker), normalized to 100 in the
first quarter of 2007. As the figure illustrates,
U.S. labor productivity rose throughout the
recession and continues to rise rapidly. Countries for which the impact of the recession on
the unemployment rate was relatively small,
such as Germany and Japan, saw output per
worker decline significantly. As of the third
quarter of 2010, only Canada, France and Japan
had essentially returned to pre-recession productivity levels.
As usual, there are several ways to interpret
the data. First, it may be possible that the productivity of labor rose in the U.S. and that this
event allowed U.S. firms to economize on labor.
It is hard, however, to imagine a recession being
the consequence of some random force that
increased economy-wide labor productivity.
An alternative explanation is that lowskilled workers are affected disproportionately
during a typical recession: They are the first
ones to be let go. If this is the case, then the
average quality of employed workers tends to
rise during a recession. Perhaps this accounts

Employment protection varies quite a bit among G-7 countries,
with the U.S. having the least-strict employment protection.

	 For more details on the OECD indicators of employment protection, see OECD (2011) and Venn.

2

References

DiCecio, Riccardo. “Cross-Country Productivity Growth.” Federal Reserve Bank of St. Louis International Economic Trends,
November 2005. See http:/
/research.stlouisfed.org/publications/iet/20051101/cover.pdf

Figure 4

CAN

FRA

GER

ITA

JAP

2010:Q1

2007:Q1 - 2010:Q3

2009:Q4

Labor Productivity (GDP per Worker) for G-7 Countries
UK

US

108
106

Index, 2007:Q1 = 100

104
102
100
98
96
94
92

2010:Q3

2010:Q2

2009:Q3

2009:Q2

2009:Q1

2008:Q4

2008:Q3

2008:Q2

2008:Q1

2007:Q4

2007:Q3

2007:Q2

2007:Q1

90

SOURCE: G10+ Database/Haver Select.
Figure 5

Overall Strictness of Employment Protection
OECD Index, 2008
6

5
Index (0-6)

for the increase in measured average labor
productivity in the U.S. If this hypothesis is correct, then to explain the data, one must be willing
to entertain the idea that business managers are
somehow more willing or able to lay off lowerskilled workers (or workers in general) in the U.S.
relative to other G-7 economies.
In fact, there is some evidence to suggest that
cross-country differences in regulatory environments permit varying degrees of labor market
flexibility. Figure 5, for example, compares the
strictness of employment protection for G-7
countries according to a measure constructed by
the Organisation for Economic Co-operation and
Development (OECD).2 The index is a weighted
sum of a set of employment protection indicators
that measure the rules and costs regarding the
firing of workers (individuals and groups) and the
use of temporary contracts. As can be seen in the
figure, employment protection varies quite a bit
among G-7 countries, with the U.S. having the
least-strict employment protection.
For most of the past 30 years, the U.S. labor
market has outperformed most others, especially
in terms of low unemployment rates. This relative
success has been attributed, at least in part, to the
alleged flexibility in the U.S. labor market. In particular, high unemployment in European countries
is frequently linked to laws that make it difficult to
shed workers and/or hire temporary workers. Less
flexibility means less profitability for firms and,
hence, less incentive to hire workers.
It is perfectly natural, then, to expect employment and unemployment to react more violently
to cyclical forces in a flexible labor market. And,
indeed, this appears to have been the case during
the recent recession.

4

3

2

1

0
United States

Canada

United Kingdom

Japan

Italy

Germany

France

SOURCE: OECD Indicators of Employment Protection.
NOTE: The index ranges from 0 to 6, with 0 representing the least-strict and
6 representing the most-strict employment protection.
Organisation for Economic Co-operation and Development. “OECD Indicators of Employment Protection.”
Accessed on March 9, 2011. See www.oecd.org/employment/protection
Organisation for Economic Co-operation and Development. OECD Employment Outlook 2010: Moving
Beyond the Jobs Crisis. Paris: OECD Publishing, 2010.
Organisation for Economic Co-operation and Development. OECD Employment Outlook 2009: Tackling
the Jobs Crisis. Paris: OECD Publishing, 2009.
Organisation for Economic Co-operation and Development. “Employment Protection: The Costs and Benefits
of Greater Job Security.” OECD Policy Brief, September
2004. See www.oecd.org/dataoecd/6/32/33736760.pdf
Venn, Danielle. “Legislation, Collective Bargaining and
Enforcement: Updating the OECD Employment Protection Indicators.” Working Paper No. 89, OECD Social,
Employment and Migration, 2009. See www.oecd.org/
dataoecd/36/9/43116624.pdf
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Boards of Directors
Advisory Councils
Bank Officers
We bid farewell and express our gratitude to
those members of the boards of directors and
of our advisory councils who retired recently.

F r o m t h e B o ar d s
o f Dir e c t o r s

From the Industry
C o u n ci l s

St. Louis

Ray C. Dillon

Little Rock

Health Care

Sharon Priest

Gary D. Henley

Louisville

Real Estate

John A. Hillerich IV
and Steven E. Trager

H. Collins Haynes

Memphis

Robert L. Lekites
Donald H. Sanders
Kirk Thompson
Philip H. Trenary

F r o m t h e F e d e ra l
A d v i s o r y C o u n ci l

Tim Bolding
David Jackson
Leslie Lane
W. Thomas Reeves
Ben Steinberg
Stephanie Streett
Marita W. Willis
John J. Wuest

Lewis F. Mallory Jr.

Agriculture

Paul T. Combs

From the Community
D e velo pm ent
A d v i s o r y C o u n ci l

Transportation

Nick Clark
and Thomas G. Miller

All those listed on the following pages are current officeholders.

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Chairman’s Message

I

t’s an honor to serve on the board of directors
for the Federal Reserve Bank of St. Louis. Our
role is similar to a corporate board, but with
some additional responsibilities that make
it a particularly interesting and challenging
opportunity.
Our charge is unique—to help keep our
nation’s banking system running smoothly and
our economy moving ahead. As you might
expect, we review the Bank’s strategic direction, performance metrics and budget. As
business leaders, we also share our knowledge
of economic trends in our own industries
and communities.
Our board members come from industries
throughout the Eighth District, which includes
Arkansas and parts of Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee.
The current board is comprised of leaders in
the fields of legal services, health care, energy,
retail and manufacturing—as well as banking. Each of the St. Louis Fed’s three regional
branches—in Little Rock, Louisville and Memphis—also has an advisory board, broadening
our industry representation to also include
education, natural resources, real estate,
plastics, maintenance and shipping.

Together, we bring to the table our knowledge of local credit needs, plans to expand or
contract businesses, status of the workforce,
condition of public works, upcoming capital
investment and other factors that influence the
economy. We advise James Bullard, president
of the Federal Reserve Bank of St. Louis, so
that he can accurately represent our region in
Washington, D.C. It’s an honor to be part of
the Federal Reserve System that ensures all
of America is considered as part of national
monetary policy decisions.
We are the representatives who have the
responsibility to share our communities’
concerns with policymakers and who have the
opportunity to bring economic information back
to our neighbors. I hope that you’ll take some
time to get to know us in the following pages and
that you’ll reach out to us to help us better represent you and the rest of the Eighth District.

Steven H. Lipstein

On the following pages,
representatives of each
board share a few words
about their service to
the Fed. Snapshots that
they submitted of their
businesses and employees reflect the variety of
industries and interests
of board members.

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St. Louis Board

Deputy Chairman

William E. Chappel

Gregory M. Duckett

Sharon D. Fiehler

Steven H. Lipstein

Ward M. Klein

President and CEO
BJC HealthCare
St. Louis

CEO
Energizer Holdings Inc.
St. Louis

President and CEO
The First National Bank
Vandalia, Ill.

Senior Vice President
and Corporate Counsel
Baptist Memorial Health
Care Corp.
Memphis, Tenn.

Executive Vice President
and Chief Administrative
Officer
Peabody Energy
St. Louis

Chairman

Sharon D. Fiehler, Executive Vice President and Chief
Administrative Officer of Peabody Energy

“Our global operations create enormous economic
value, with whole communities rising around our
mines. Peabody also is a regional economic engine.
The payroll in our downtown St. Louis headquarters
alone exceeds $70 million annually. Within the district, our Midwest operations contribute more than
$3 billion in direct and implied economic benefits
every year.
“Economies are converging, and individuals are
connecting around the world. What happens on
one continent now more dramatically affects what
happens in our backyard and vice versa.”
“Ten percent of U.S. electricity and 2 percent of global power come
from Peabody Energy coal. … One fact that always amazes me is
that the state of Illinois has more energy in the form of coal than
Saudi Arabia has oil.”

Robert G. Jones, President and CEO of
Old National Bancorp

“Without a doubt, being a director has broadened
my perspective and increased my understanding of
the many facets of our regional economy, especially
the drivers of economic growth in the Eighth District.
I’ve also had the privilege to meet and learn from my
fellow board members, who are some of the most
innovative and intelligent people I’ve come across in
my 30-plus years in the financial industry.”

Donut Bank has been a staple in Evansville, Ind., since 1967. Co-owners of
the family-owned franchise (from left) Chris, Ben and Joe Kempf meet
with their Old National financial partner, Matt Merkel.

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Sonja Yates Hubbard

Robert G. Jones

J. Thomas May

Cal McCastlain

CEO
E-Z Mart Stores Inc.
Texarkana, Texas

President and CEO
Old National Bancorp
Evansville, Ind.

Chairman and CEO
Simmons First
National Corp.
Pine Bluff, Ark.

Partner
Dover Dixon Horne PLLC
Little Rock, Ark.

Sonja Yates Hubbard, CEO of E-Z Mart Stores Inc.

On why it’s important for the St. Louis Fed to
remain visible in the community during these tough
economic times: “The information received from
the markets as to emerging trends and the results of
performance from businesses allow the Fed to more
accurately predict changes and swings that should
be acted upon. Additionally, without continued
contact and reliable relationships with the financial
institutions, we could not make proper decisions
to ensure their soundness.”

Within the St. Louis Fed’s District, E-Z Mart operates 103 stores, all in Arkansas, making it one of the largest chains of convenience
retailers in that state. Those stores generate $275 million in revenue a year. The family-owned company operates an additional
201 stores in adjacent states, which generate an additional $516 million in annual revenue.

Ward M. Klein, CEO of Energizer Holdings

“In terms of truly understanding what is impacting the economy,
what is impacting St. Louis, what is impacting my business, there
is no better seat than at the board table of the Federal Reserve.
“Energizer Holdings serves globally. But I have really gotten to appreciate the interconnectedness of the world economy more from my Fed
position than from working in just my company. For example, the
impacts of the U.S. crisis on Europe and on the emerging markets have
been fascinating to watch, to deal with, to figure out. Again, the Federal
Reserve is in the middle of understanding this interconnectedness.

Energizer Holdings has more than 16,000
employees worldwide. About 400 work at its
headquarters in a St. Louis suburb. While best
known for its batteries and other consumer
products (and its bunny hot-air balloon), it is
also known in the St. Louis area for employee
involvement in charities and such organizations
as Civic Progress, for which Mr. Klein is the
president-elect.

“I have been proud to be part of this organization, particularly of late.
When there have been disputes and politics and partisan bickering
over the causes and effects of the Great Recession, the Fed has been
the adult in the room. It has stepped in with a mature, professional
and thoughtful reflection and response to what has been a trying
time for this country.”

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Little Rock Board

Chairman

Phillip N. Baldwin

Michael A. Cook

Ray C. Dillon

William C. Scholl

Kaleybra Mitchell
Morehead

President and CEO
Southern Bancorp
Arkadelphia, Ark.

Vice President and
Assistant Treasurer
Wal-Mart Stores Inc.
Bentonville, Ark.

President and CEO
Deltic Timber Corp.
El Dorado, Ark.

President
First Security Bancorp
Searcy, Ark.

C. Sam Walls

Robert A. Young III

CEO
Arkansas Capital Corp.
Little Rock, Ark.

Chairman
Arkansas Best Corp.
Fort Smith, Ark.

Vice President for College
Affairs/Advancement
Southeast Arkansas
College
Pine Bluff, Ark.

Kaleybra Mitchell Morehead, Vice President for College Affairs/Advancement
of Southeast Arkansas College

“My primary focus was that of understanding financial issues as they relate
to the college and not that of trying to tie the college into the economy as
a whole. However, since being appointed to the St. Louis Fed’s Little Rock
board, I have gathered a profound understanding of how the numerous facets
of our economy are linked. In other words, I was looking more at the ‘little’
picture, where now I see, with clarity, the ‘big’ picture.
“Southeast Arkansas College and other institutions of higher education in
Arkansas have a significant impact on Arkansas’ economy. The institutions prepare students for the work world, thereby injecting money into
the economy. It is noteworthy that, compared with high school graduates,
graduates of institutions of higher learning are going to be higher wage
earners and contribute larger sums of money to the economy.”

With an average student age of 29, Southeast Arkansas College (SEARK)
provides comprehensive community college education and services to traditional
and nontraditional students, with an emphasis on academic transfer, technical
education and workforce development. Last fall, enrollment was 2,192. The
college’s Technology Center (right) was completed in the 2009 spring semester.
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Louisville Board

Chairman

Gary A. Ransdell
President
Western Kentucky
University
Bowling Green, Ky.

David P. Heintzman

Jon A. Lawson

Gerald R. Martin

Barbara Ann Popp

Chairman and CEO
Stock Yards Bank
& Trust Co.
Louisville, Ky.

President, CEO
and Chairman
Bank of Ohio County
Beaver Dam, Ky.

Managing Member
River Hill Capital LLC
Louisville, Ky.

CEO
Schuler Bauer
Real Estate Services
New Albany, Ind.

John C. Schroeder

Kevin Shurn

President
Wabash Plastics Inc.
Evansville, Ind.

President and Owner
Superior Maintenance Co.
Elizabethtown, Ky.

John C. Schroeder, President of Wabash Plastics

“In our local community of over 150,000 people, one could say that the
400 people we employ are not a significant number. However, when
you consider that we have been an Evansville employer for over 60
years, the families benefiting from our companies become more
important in the community.
“Our company’s economic role in the community reaches beyond the
number of paychecks, though. Our philosophy has been to give back
to the community. Our employees have served as presidents or chairmen of most civic boards in the area.
“Prior to serving on the Federal Reserve board, my main concerns
were with the economy and how it was affecting my business. Regulatory reform, increased federal debt, the independence of the Federal
Reserve, banking regulations and other responsibilities of the Federal
Reserve were not my concerns. I know now that these areas are vital to
the entire system. I also realize how a breakdown in any one area will
eventually affect my business.
Wabash Plastics employee Kris Saunders clears
flash after welding two injection-molded plastic
parts. Wabash and its two sister companies
operate three plants in the Evansville, Ind.,
area and six elsewhere.

“I also realize how vital it is for the Federal Reserve to know what is happening on Main Street in small communities. What we know and see
each day is important to the entire economic system. I am continually
impressed by the fact that top Federal Reserve officials are open to my
comments and value my input.”
s t l o u i s f e d . o rg

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Annual Report 2010

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Memphis Board

Chairman

Charles S. Blatteis

Allegra C. Brigham

Mark P. Fowler

Clyde Warren Nunn

Lawrence C. Long

Managing Member
Blatteis Law Firm PLLC
Memphis, Tenn.

Interim President
Mississippi University
for Women
Columbus, Miss.

Vice Chairman
Liberty Bank of Arkansas
Jonesboro, Ark.

Chairman and President
Security Bancorp
of Tennessee Inc.
Halls, Tenn.

Susan S. Stephenson

Charlie E. Thomas III

Co-Chairman
and President
Independent Bank
Memphis, Tenn.

Regional Director of
External and Legislative
Affairs
AT&T Tennessee
Memphis, Tenn.

Partner
St. Rest Planting Co.
Indianola, Miss.

Susan S. Stephenson, Co-Chairman and President of Independent Bank

“The St. Louis Fed has done a wonderful job of being active
and visible throughout the entire District. This visibility is particularly important in the current environment, since factual
information and feedback have a calming influence and
provide an important counterpoint to misinformation and
market confusion.
“My view that the U.S. economy is strong, creative and resilient
has been reinforced by seeing strong, capable and creative
leadership at work in the Federal Reserve System.
“The opportunity to interact with Fed officials strengthens
ties to business and political leaders in various communities,
enhances the ability to collect market data, and supports
economic development efforts in the region. On a national
level, President Bullard’s visibility provides a positive lift to the
Eighth District, reminding national companies and industries
that the mid-America region is a great place to live, work and
do business.”

22 | F e d e r a l R e s e r v e B a n k o f S t . L o u i s

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s t l o u i s f e d . o rg

Independent Bank serves the financial needs of middle
market companies, small businesses and individuals. One
customer, Memphis-based retailer Oak Hall, has opened
two additional stores in the past three years with financing from Independent Bank. Shown at a recent trunk
show are Bob Levy (left) and Paul Kauerz of the store,
along with the bank’s Susan S. Stephenson.

Industry Councils
Council members represent a wide range of Eighth District industries and businesses.
The members’ periodic reports on economic conditions are considered in monetary policy deliberations.

A grib u s i n e s s
Based in Little Rock, Ark.

H e a l t h C ar e
Based in Louisville, Ky.

R e a l E s tat e
Based in St. Louis

Tra n s p o r t a t i o n
Based In Memphis, Tenn.

Sam J. Fiorello

Calvin Anderson

Joseph D. Hegger

Bob Blocker

Chief Operating Officer
and Senior Vice President
Donald Danforth Plant
Science Center
St. Louis

Vice President of Corporate
and Government Affairs
Blue Cross Blue Shield
of Tennessee
Memphis, Tenn.

Director
Jeffrey E. Smith Institute
of Real Estate,
University of Missouri-Columbia
Columbia, Mo.

Director of Planning
and Business Development
AEP River Operations LLC
Chesterfield, Mo.

Timothy J. Gallagher

Steven J. Bares

J. Scott Jagoe

Executive Vice President
Bunge North America Inc.
St. Louis

President and Executive Director
Memphis Bioworks Foundation
Memphis, Tenn.

Owner
Jagoe Homes Inc.
Owensboro, Ky.

President
Ewing Moving Service
and Storage Inc.
Memphis, Tenn.

Keith Glover

Kevin Bramer

Larry K. Jensen

Gene Huang

President and CEO
Producers Rice Mill Inc.
Stuttgart, Ark.

President and CEO
MedVenture Technology Corp.
Jeffersonville, Ind.

President and CEO
Commercial Advisors LLC
Memphis, Tenn.

Chief Economist
FedEx Corp.
Memphis, Tenn.

Bert Greenwalt

Jeffrey B. Bringardner

Gregory J. Kozicz

Richard McClure

Professor of Agricultural
Economics
Arkansas State University
State University, Ark.

President of Kentucky Market
Humana-Kentucky Inc.
Louisville, Ky.

President and CEO
Alberici Corp.
St. Louis

President
Uni Group Inc.
St. Louis

Robert S. Gordon

Steven P. Lane

Dennis B. Oakley

Leonard J. Guarraia
Chairman and CEO
World Agricultural Forum
St. Louis

Executive Vice President and
Chief Administration Officer
Baptist Memorial Health Care
Memphis, Tenn.

Principal
Colliers International
Bentonville, Ark.

President
Bruce Oakley Inc.
North Little Rock, Ark.

Jack McCray

John F. Pickering

Ted C. Huber

Paul Halverson, M.D.

Owner
Huber’s Orchard & Winery
Starlight, Ind.

Director, State Health Officer
Arkansas Department of Health
Little Rock, Ark.

Chief Operations Officer
Cass Information Systems Inc.
Bridgeton, Mo.

Richard M. Jameson

Russell D. Harrington Jr.

Executive Vice President
of Real Estate Acquisition
and Development
Bank of the Ozarks
Little Rock, Ark.

Owner
Jameson Family
Farms Partnership
Brownsville, Tenn.

President and CEO
Baptist Health
Little Rock, Ark.

John C. King III

Vice Chancellor
for Clinical Programs
University of Arkansas
for Medical Sciences
Little Rock, Ark.

Owner
King Farms
Helena, Ark.

Steven M. Turner
CEO
Turner Dairies LLC
Memphis, Tenn.

Lyle B. Waller II
Owner
L.B. Waller and Co.
Morganfield, Ky.

David Williams
Founder and Co-owner
Burkmann Feeds
Danville, Ky.

Dick Pierson

Sister Mary Jean Ryan
Chair and CEO
SSM Health Care
St. Louis

Jan C. Vest
CEO
Signature Health Services Inc.
St. Louis

Stephen A. Williams
President and CEO
Norton Healthcare
Louisville, Ky.

John J. Miranda
Partner
Pinnacle Properties
of Louisville LLC
Louisville, Ky.

William M. Mitchell
Vice President
and Principal Broker
Crye-Leike Realtors
Memphis, Tenn.

David W. Price
Vice President and
General Manager
Whittaker Builders Inc.
St. Louis

Charles L. Ewing Sr.

Roger Reynolds
President
Reynolds Group LLC
Louisville, Ky.

Michael P. Ryan
President and CEO
American Commercial
Lines Inc.
Jeffersonville, Ind.

David L. Summitt
President
Summitt Trucking LLC
Clarksville, Ind.

Paul Wellhausen
President
Lewis and Clark Marine
Granite City, Ill.

E. Phillip Scherer III
President
Commercial Kentucky Inc.
Louisville, Ky.

Mary R. Singer
President
CresaPartners Commercial
Realty Group
Memphis, Tenn.

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Annual Report 2010

| 23

Community Development
Advisory Council

Community Depository
Institutions Advisory Council

The council keeps the Bank’s president and staff informed
about community development issues in the District and
suggests ways for the Bank to support local development efforts.

The members of this council, formed in 2011, meet twice a
year to advise the Bank’s president on the credit, banking
and economic conditions facing their institutions and communities. The council’s chairman also meets twice a year
in Washington, D.C., with his counterparts from the 11 other
Fed districts and with the Federal Reserve chairman.

Joe W. Barker

Sara Oliver

Executive Director
Southwest Tennessee
Development District
Jackson, Tenn.

Vice President of Housing
Arkansas Development
Finance Authority
Little Rock, Ark.

CDIAC Chairman

William J. Rissel

Dennis M. Terry

The Rev. Adrian Brooks

Ines Polonius

President and CEO
Fort Knox Federal Credit Union
Radcliff, Ky.

Pastor
Memorial Baptist Church
Founder, Memorial Community
Development Corp.
Evansville, Ind.

Executive Director
alt.Consulting Inc.
Pine Bluff, Ark.

President and CEO
First Clover Leaf Bank FSB
Edwardsville, Ill.

Brian Dabson
President and CEO
Rural Policy Research Institute
University of Missouri
Columbia, Mo.

George Hartsfield
Community Volunteer
Jefferson City, Mo.

Trinita Logue

Kevin Smith
President and CEO
Community Ventures Corp.
Lexington, Ky.

Royce A. Sutton
Vice President and Community
Development Manager
Fifth Third Bank
St. Louis, Mo.

Emily Trenholm

President
IFF
Chicago, Ill.

Executive Director
Community Development
Council of Greater Memphis
Memphis, Tenn.

Edgardo Mansilla

Sherece Y. West

Executive Director
Americana Community Center
Louisville, Ky.

President and CEO
The Winthrop Rockefeller
Foundation
Little Rock, Ark.

Paulette Meikle

Kirk P. Bailey
Chairman, President and CEO
Magna Bank
Memphis, Tenn.

Glenn D. Barks
President and CEO
First Community Credit Union
Chesterfield, Mo.

H. David Hale
Chairman, President and CEO
First Capital Bank of Kentucky
Louisville, Ky.

D. Keith Hefner
President and CEO
Citizens Bank & Trust Co.
Van Buren, Ark.

Gary E. Metzger
Chairman, President and CEO
Liberty Bank
Springfield, Mo.

Mark A. Schroeder
Chairman and CEO
German American Bancorp
Jasper, Ind.

Gordon Waller
President and CEO
First State Bank & Trust
Caruthersville, Mo.

Larry T. Wilson
Chairman, President and CEO
First Arkansas Bank & Trust
Jacksonville, Ark.

Vance Witt
Chairman and CEO
BNA Bank
New Albany, Miss.

Larry Ziglar
President and CEO
First National Bank in Staunton
Staunton, Ill.

Assistant Professor
Sociology and Community
Development
Delta State University
Cleveland, Miss.

Federal Advisory
Council Member
The council is comprised of one representative from each
of the 12 Federal Reserve districts. Members confer with
the Fed’s Board of Governors at least four times a year on
economic and banking developments and make recommendations on Fed System activities.

Bryan Jordan
President and CEO
First Horizon National Corp.
Memphis, Tenn.

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s t l o u i s f e d . o rg

Management Committee

James Bullard

David A. Sapenaro

Robert H. Rasche

Karl W. Ashman

Karen L. Branding

President and CEO

First Vice President
and COO

Executive Vice President
and Senior Policy Adviser

Senior Vice President

Senior Vice President

Mary H. Karr

Kathleen O’Neill Paese

Julie L. Stackhouse

Christopher J. Waller

Senior Vice President,
General Counsel
and Secretary

Senior Vice President

Senior Vice President

Senior Vice President
and Director of Research

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Annual Report 2010

| 25

Bank Officers
Vicki L. Kosydor

Christopher J. Neely

Vice President

Assistant Vice President

Jean M. Lovati

Glen M. Owens

Vice President

Assistant Vice President

Michael J. Mueller

Kathy A. Schildknecht

Vice President

Assistant Vice President

Executive Vice President
and Senior Policy Adviser

Kim D. Nelson

Philip G. Schlueter

Vice President

Assistant Vice President

Karl W. Ashman

Arthur A. North II

Harriet Siering

Senior Vice President

Vice President

Assistant Vice President

Karen L. Branding

James A. Price

Scott B. Smith

Memphis

Senior Vice President

Vice President

Assistant Vice President

Martha L. Perine Beard

Mary H. Karr

Daniel L. Thornton

Katrina L. Stierholz

Senior Branch Executive

Senior Vice President,
General Counsel and Secretary

Vice President

Assistant Vice President

Ranada Y. Williams

Kristina L.C. Stierholz

Assistant Vice President

Kathleen O’Neill Paese

Matthew W. Torbett
Vice President

Assistant Vice President

David C. Wheelock

Scott M. Trilling

Vice President

Assistant Vice President

Jonathan C. Basden

Yi Wen

Assistant Vice President

Assistant Vice President

Jane Anne Batjer

Carl D. White II

Assistant Vice President

Assistant Vice President

Senior Vice President
and Director of Research

Dennis W. Blase

Glenda Joyce Wilson

Assistant Vice President

Assistant Vice President

David Andolfatto

Winchell S. Carroll

Subhayu Bandyopadhyay

Vice President

Assistant Vice President

Research Officer

Richard G. Anderson

Hillary B. Debenport

Diane E. Berry

Vice President

Assistant Vice President

Assistant Counsel

John P. Baumgartner

William R. Emmons

Heidi Lynne Beyer-Powe

Vice President

Assistant Vice President

Research Officer

Timothy A. Bosch

William M. Francis

Mary C. Francone

Vice President

Assistant Vice President

Learning Technology Officer

Timothy C. Brown

Kathy A. Freeman

Carlos Garriga

Vice President

Assistant Vice President

Research Officer

Fontaine LaMare Chapman

Thomas A. Garrett

Michael W. McCracken

Vice President

Assistant Vice President

Research Officer

Marilyn K. Corona

Paul M. Helmich

Michael Thomas Owyang

Vice President

Assistant Vice President

Research Officer

Cletus C. Coughlin

Cathryn L. Hohl

Marcela M. Williams

Vice President

Assistant Vice President

Public Affairs Officer

Susan K. Curry

Joel H. James

Vice President

Assistant Vice President

William T. Gavin

Debra E. Johnson

Vice President

Assistant Vice President

Susan F. Gerker

Visweswara R. Kaza

Vice President

Assistant Vice President

Anna M. Helmering Hart

Catherine A. Kusmer

Vice President

Assistant Vice President

Roy A. Hendin

Raymond McIntyre

Vice President

Assistant Vice President

James L. Huang

John W. Mitchell

Vice President

Assistant Vice President

St. Lo u i s

James Bullard
President and CEO

David A. Sapenaro
First Vice President and COO

Robert H. Rasche

Senior Vice President

Michael D. Renfro
Senior Vice President
and General Auditor

Julie L. Stackhouse
Senior Vice President

Christopher J. Waller

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s t l o u i s f e d . o rg

Li t t l e R o c k

Robert A. Hopkins
Senior Branch Executive
Louisville

Maria G. Hampton
Senior Branch Executive

Ronald L. Byrne
Vice President

Financial Statements
For the years ended December 31, 2010 and 2009

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Annual Report 2010

| 27

In 2010, the Board of Governors engaged Deloitte & Touche LLP (D&T) for the audits of the individual and combined financial statements of the Reserve Banks and the consolidated financial statements of the limited liability companies (LLCs) that are associated with
Federal Reserve actions to address the financial crisis and are consolidated in the financial statements of the Federal Reserve Bank of
New York. Fees for D&T’s services are estimated to be $8.0 million, of which approximately $1.6 million were for the audits of the LLCs.
Each LLC will reimburse the Board of Governors for the fees related to the audit of its financial statements from the entity’s available net
assets. To ensure auditor independence, the Board of Governors requires that D&T be independent in all matters relating to the audit.
Specifically, D&T may not perform services for the Reserve Banks or others that would place it in a position of auditing its own work,
making management decisions on behalf of Reserve Banks, or in any other way impairing its audit independence. In 2010, the Bank
did not engage D&T for any non-audit services.

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Management’s Report on Internal Control Over Financial Reporting

March 22, 2011
To the Board of Directors:

The management of the Federal Reserve Bank of St. Louis (FRB St. Louis) is responsible for the preparation and fair presentation of the
Statements of Condition, Statements of Income and Comprehensive Income, and Statements of Changes in Capital as of December 31,
2010 (the Financial Statements). The Financial Statements have been prepared in conformity with the accounting principles, policies,
and practices established by the Board of Governors of the Federal Reserve System as set forth in the Financial Accounting Manual for
Federal Reserve Banks (FAM), and, as such, include some amounts that are based on management judgments and estimates. To our
knowledge, the Financial Statements are, in all material respects, fairly presented in conformity with the accounting principles, policies
and practices documented in the FAM and include all disclosures necessary for such fair presentation.
The management of the FRB St. Louis is responsible for establishing and maintaining effective internal control over financial reporting
as it relates to the Financial Statements. Such internal control is designed to provide reasonable assurance to management and to the
Board of Directors regarding the preparation of the Financial Statements in accordance with the FAM. Internal control contains selfmonitoring mechanisms, including, but not limited to, divisions of responsibility and a code of conduct. Once identified, any material
deficiencies in internal control are reported to management and appropriate corrective measures are implemented.
Even effective internal control, no matter how well designed, has inherent limitations, including the possibility of human error, and
therefore can provide only reasonable assurance with respect to the preparation of reliable financial statements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The management of the FRB St. Louis assessed its internal control over financial reporting reflected in the Financial Statements, based
upon the criteria established in the “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Based on this assessment, we believe that the FRB St. Louis maintained effective internal control over
financial reporting as it relates to the Financial Statements.

Federal Reserve Bank of St. Louis

James Bullard, President and Chief Executive Officer

David A. Sapenaro, First Vice President and Chief Operating Officer

Marilyn K. Corona, Vice President, Chief Financial Officer

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Annual Report 2010

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Independent Auditors’ Report

To the Board of Governors of the Federal Reserve System
and the Board of Directors of the Federal Reserve Bank of St. Louis:

We have audited the accompanying Statements of Condition of the Federal Reserve Bank of St. Louis (“FRB St. Louis”) as of December 31, 2010 and 2009 and the related Statements of Income and Comprehensive Income, and of Changes in Capital for the years
then ended, which have been prepared in conformity with accounting principles established by the Board of Governors of the Federal
Reserve System. We also have audited the internal control over financial reporting of the FRB St. Louis as of December 31, 2010,
based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.  The FRB St. Louis’ management is responsible for these Financial Statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control Over Financial Reporting.  Our responsibility is to express an opinion on these
Financial Statements and an opinion on the FRB St. Louis’ internal control over financial reporting based on our audits.
We conducted our audits in accordance with generally accepted auditing standards as established by the Auditing Standards Board
(United States) and in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). 
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Financial Statements
are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. 
Our audits of the Financial Statements included examining, on a test basis, evidence supporting the amounts and disclosures in the Financial Statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation.  Our audit of internal control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances.  We believe that our audits provide a reasonable basis for our opinions.
The FRB St. Louis’ internal control over financial reporting is a process designed by, or under the supervision of, the FRB St. Louis’ principal executive and principal financial officers, or persons performing similar functions, and effected by the FRB St. Louis’ board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of Financial Statements for external purposes in accordance with the accounting principles established by the Board of Governors
of the Federal Reserve System.  The FRB St. Louis’ internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the FRB St. Louis; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of Financial
Statements in accordance with the accounting principles established by the Board of Governors of the Federal Reserve System, and that
receipts and expenditures of the FRB St. Louis are being made only in accordance with authorizations of management and directors of
the FRB St. Louis; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the FRB St. Louis’ assets that could have a material effect on the Financial Statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also,
projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the
risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
As described in Note 4 to the Financial Statements, the FRB St. Louis has prepared these Financial Statements in conformity with accounting principles established by the Board of Governors of the Federal Reserve System, as set forth in the Financial Accounting Manual for Federal Reserve Banks, which is a comprehensive basis of accounting other than accounting principles generally accepted in the
United States of America. The effects on such Financial Statements of the differences between the accounting principles established by
the Board of Governors of the Federal Reserve System and accounting principles generally accepted in the United States of America are
also described in Note 4.
In our opinion, such Financial Statements present fairly, in all material respects, the financial position of the FRB St. Louis as of December 31, 2010 and 2009, and the results of its operations for the years then ended, on the basis of accounting described in Note 4.
Also, in our opinion, the FRB St. Louis maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.

St. Louis, Missouri
March 22, 2011
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FEDERAL RESERVE BANK OF ST. LOUIS

Abbreviations

ACH

Automated clearinghouse

AMLF

Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility

ASC

Accounting Standards Codification

BEP

Benefit Equalization Retirement Plan

Bureau

Bureau of Consumer Financial Protection

Dodd-Frank Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

FAM

Financial Accounting Manual for Federal Reserve Banks

FASB

Financial Accounting Standards Board

Fannie Mae

Federal National Mortgage Association

Freddie Mac

Federal Home Loan Mortgage Corporation

FOMC

Federal Open Market Committee

FRBA

Federal Reserve Bank of Atlanta

FRBNY

Federal Reserve Bank of New York

GAAP

Accounting principles generally accepted in the United States of America

GSE

Government-sponsored enterprise

IMF

International Monetary Fund

MBS

Mortgage-backed securities

OEB

Office of Employee Benefits of the Federal Reserve System

OFR

Office of Financial Research

SDR

Special drawing rights

SERP

Supplemental Retirement Plan for Select Officers of the Federal Reserve Banks

SOMA

System Open Market Account

TAF

Term Auction Facility

TBA

To be announced

TDF

Term Deposit Facility

TSLF

Term Securities Lending Facility

TOP

Term Securities Lending Facility Options Program

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FEDERAL RESERVE BANK OF ST. LOUIS

STATEMENTS OF CONDITION
(in millions)

As of December 31,
	2010	

2009

Assets

Gold certificates	
$	
324 	
$	
329
Special drawing rights certificates		
150 		
150
Coin		35 		32
Items in process of collection	
	
12 		
19
Loans:			
	 Depository institutions	
	
2 		
619
System Open Market Account:			
	 Treasury securities, net		 27,483 		 31,575
	 Government-sponsored enterprise debt securities, net	
	 3,940 		
6,557
	 Federal agency and government-sponsored enterprise
		 mortgage-backed securities, net	
	 25,879 		 36,000
	 Foreign currency denominated assets, net	
	
244 		
251
	 Central bank liquidity swaps	
	
1 		
102
Accrued interest receivable	
	
367 		
495
Bank premises and equipment, net		
153 		
151
Other assets		
31 		
30
	 Total assets	

$	 58,621 	

$	 76,310

			
LIABILITIES AND CAPITAL			

Federal Reserve notes outstanding, net	
$	 27,858 	
$	 26,948
System Open Market Account:			
	 Securities sold under agreements to repurchase	
	 1,538 		
3,045
	Other liabilities	
	
- 		
24
Deposits:			
	 Depository institutions		 10,492 		 10,315
	Other deposits		
56 		
3
Interest payable to depository institutions		
1 		
1
Accrued benefit costs	
	
88 		
85
Deferred credit items	
	
67 		
67
Accrued interest on Federal Reserve notes 	
	
69 		
59
Interdistrict settlement account	
	 18,011 		 35,273
Other liabilities		
9 		
10
	 Total liabilities	

	 58,189 		

75,830

			
Capital paid-in	
	
216 		
Surplus (including accumulated other comprehensive loss of $10 million			
	 and $11 million at December 31, 2010 and 2009, respectively)	
	
216 		

240

	 Total capital	

	

480

		 Total liabilities and capital	

$	 58,621 	

The accompanying notes are an integral part of these financial statements.

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432 		

240

$	 76,310

FEDERAL RESERVE BANK OF ST. LOUIS

statements of Income and Comprehensive Income
(in millions)

For the year ended December 31,
	2010	

2009

INTEREST INCOME			

Loans:			
	 Depository institutions	
$	
–	
$	
System Open Market Account:			
	 Treasury securities, net	
	
780 		
	 Government-sponsored enterprise debt securities, net	
	
105 		
	 Federal agency and government-sponsored enterprise
		 mortgage-backed securities, net	
	 1,329 		
	 Foreign currency denominated assets, net	
	
2 		
	 Central bank liquidity swaps 	
	
- 		
		 Total interest income	

	

2,216 		

8
874
79
793
3
22
1,779

			
INTEREST EXPENSE			

System Open Market Account:			
	 Securities sold under agreements to repurchase	
	
2 		
Deposits:			
	 Depository institutions	
	
28 		

17

		 Total interest expense	

	

30 		

21

		 Net interest income	

	

2,186 		

1,758

System Open Market Account:			
	 Federal agency and government-sponsored enterprise
		 mortgage-backed securities gains, net	
	
25 		
	 Foreign currency gains, net		
5 		
Compensation received for service costs provided		
4 		
Reimbursable services to government agencies		
105 		
Other income	
	
1 		

36
2
7
105
5

	 Total non-interest income	

140 		

155

Salaries and benefits	
	
111 		
Occupancy 	
	
13 		
Equipment 	
	
6 		
Assessments:			
	 Board of Governors operating expenses and currency costs	
	
25 		
Other 	
	
87 		

107
13
5

	 Total operating expenses	

	

242 		

233

			
Net income prior to distribution	

	

2,084 		

1,680

			
Change in funded status of benefit plans	

	

1 		

9

	 Comprehensive income prior to distribution	

$	 2,085 	

4

			
NON-INTEREST INCOME			

	

			
OPERATING EXPENSES			

21
87

$	

1,689

			
Distribution of comprehensive income:			
	 Dividends paid to member banks	
$	
14	
$	
	 Transferred (from) to surplus and change in accumulated other comprehensive loss	
	
(24)		
	 Payments to Treasury as interest on Federal Reserve notes	
	 2,095		

14
30
1,645

		 Total distribution	

1,689

$	 2,085 	

$	

The accompanying notes are an integral part of these financial statements.

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FEDERAL RESERVE BANK OF ST. LOUIS

STATEMENTS OF CHANGES IN CAPITAL
for the years ended December 31, 2010, and December 31, 2009
(in millions except share data)

				

Surplus

				
Accumulated Other
				
Net Income	Comprehensive
			
Capital Paid-In	
Retained	
Loss	

Total Surplus	

Total Capital

Balance at January 1, 2009
(4,193,727 shares)	
$	210 	
$	230 	
$	(20)	
$	210 	
$	420
	 Net change in capital stock issued
		 (611,886 shares)	
	 30 		
- 		
- 		
- 		 30
	 Transferred to surplus 
		 and change in accumulated
		 other comprehensive loss		
- 		 21 		 9 		 30 		 30
Balance at December 31, 2009
(4,805,613 shares)	
$	240 	
$	251 	
$	(11)	
$	240 	
$	480
	 Net change in capital
		stock redeemed
		 (482,293 shares)	
	 (24)		
- 		
- 		
- 		 (24)
	 Transferred from surplus 
		 and change in accumulated
		 other comprehensive loss		
- 		 (25)		 1 		 (24)		 (24)
Balance at December 31, 2010
(4,323,320 shares)	

$	216 	

$	226 	

$	(10)	

$	216 	

$	432

The accompanying notes are an integral part of these financial statements.

FEDERAL RESERVE BANK OF ST. LOUIS

notes to Financial statements

1. Structure
The Federal Reserve Bank of St. Louis (Bank) is part of the
Federal Reserve System (System) and is one of the 12 Federal Reserve Banks (Reserve Banks) created by Congress under the Federal Reserve Act of 1913 (Federal Reserve Act), which established
the central bank of the United States. The Reserve Banks are
chartered by the federal government and possess a unique set of
governmental, corporate, and central bank characteristics. The
Bank serves the Eighth Federal Reserve District, which includes
Arkansas, and portions of Illinois, Indiana, Kentucky, Mississippi,
Missouri and Tennessee.
In accordance with the Federal Reserve Act, supervision and
control of the Bank is exercised by a board of directors. The
Federal Reserve Act specifies the composition of the board of
directors for each of the Reserve Banks. Each board is composed
of nine members serving three-year terms: three directors, including those designated as chairman and deputy chairman, are appointed by the Board of Governors of the Federal Reserve System
(Board of Governors) to represent the public, and six directors
are elected by member banks. Banks that are members of the
System include all national banks and any state-chartered banks
that apply and are approved for membership. Member banks
are divided into three classes according to size. Member banks in
each class elect one director representing member banks and one
representing the public. In any election of directors, each member bank receives one vote, regardless of the number of shares of
Reserve Bank stock it holds.
In addition to the 12 Reserve Banks, the System also consists,
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in part, of the Board of Governors and the Federal Open Market
Committee (FOMC). The Board of Governors, an independent
federal agency, is charged by the Federal Reserve Act with a
number of specific duties, including general supervision over the
Reserve Banks. The FOMC is composed of members of the Board
of Governors, the president of the Federal Reserve Bank of New
York (FRBNY), and, on a rotating basis, four other Reserve Bank
presidents.
2. Operations and Services
The Reserve Banks perform a variety of services and operations. These functions include participating in formulating and
conducting monetary policy; participating in the payment system,
including large-dollar transfers of funds, automated clearinghouse (ACH) operations, and check collection; distributing coin
and currency; performing fiscal agency functions for the U.S.
Department of the Treasury (Treasury), certain Federal agencies,
and other entities; serving as the federal government’s bank;
providing short-term loans to depository institutions; providing
loans to individuals, partnerships, and corporations in unusual
and exigent circumstances; serving consumers and communities
by providing educational materials and information regarding
financial consumer protection rights and laws and information on
community development programs and activities; and supervising
bank holding companies, state member banks, and U.S. offices
of foreign banking organizations. Certain services are provided
to foreign and international monetary authorities, primarily by
the FRBNY.

FEDERAL RESERVE BANK OF ST. LOUIS

notes to Financial statements

The Dodd-Frank Wall Street Reform and Consumer Protection
Act of 2010 (Dodd-Frank Act), which was signed into law and
became effective on July 21, 2010, changed the scope of some
services performed by the Reserve Banks. Among other things,
the Dodd-Frank Act establishes a Bureau of Consumer Financial
Protection (Bureau) as an independent bureau within the Federal
Reserve System that will have supervisory authority over some
institutions previously supervised by the Reserve Banks under delegated authority from the Board of Governors in connection with
those institutions’ compliance with consumer protection statutes;
limits the Reserve Banks’ authority to provide loans in unusual
and exigent circumstances to lending programs or facilities with
broad-based eligibility; and vests the Board of Governors with all
supervisory and rule-writing authority for savings and loan holding companies.
The FOMC, in conducting monetary policy, establishes policy
regarding domestic open market operations, oversees these
operations, and issues authorizations and directives to the FRBNY
to execute transactions. The FOMC authorizes and directs the
FRBNY to conduct operations in domestic markets, including the
direct purchase and sale of Treasury securities, Federal agency
and government-sponsored enterprise (GSE) debt securities,
Federal agency and GSE mortgage-backed securities (MBS), the
purchase of these securities under agreements to resell, and the
sale of these securities under agreements to repurchase. The
FRBNY holds the resulting securities and agreements in a portfolio known as the System Open Market Account (SOMA). The
FRBNY is authorized to lend the Treasury securities and Federal
agency and GSE debt securities that are held in the SOMA.
In addition to authorizing and directing operations in the
domestic securities market, the FOMC authorizes the FRBNY to
conduct operations in foreign markets in order to counter disorderly
conditions in exchange markets or to meet other needs specified
by the FOMC to carry out the System’s central bank responsibilities.
Specifically, the FOMC authorizes and directs the FRBNY to hold
balances of, and to execute spot and forward foreign exchange
and securities contracts for, 14 foreign currencies and to invest such
foreign currency holdings, while maintaining adequate liquidity. The
FRBNY is authorized and directed by the FOMC to maintain reciprocal currency arrangements with the Bank of Canada and the Bank of
Mexico and to “warehouse” foreign currencies for the Treasury and
the Exchange Stabilization Fund.
Although the Reserve Banks are separate legal entities, they
collaborate in the delivery of certain services to achieve greater
efficiency and effectiveness. This collaboration takes the form of
centralized operations and product or function offices that have
responsibility for the delivery of certain services on behalf of the
Reserve Banks. Various operational and management models
are used and are supported by service agreements between the
Reserve Banks. In some cases, costs incurred by a Reserve Bank
for services provided to other Reserve Banks are not shared; in
other cases, the Reserve Banks are reimbursed for costs incurred
in providing services to other Reserve Banks. Major services
provided by the Bank on behalf of the System and for which the
costs were not reimbursed by the other Reserve Banks include
operation of the Treasury Relations and Support Office and the
Treasury Relations and Systems Support Department, which provide services to the Treasury. These services include: relationship
management, strategic consulting, and oversight for fiscal payments related projects for the Federal Reserve System and operational support for the Treasury’s tax collection, cash management,
accounting and collateral monitoring functions.

3. Financial Stability Activities
The Reserve Banks have implemented the following programs
that support the liquidity of financial institutions and foster improved conditions in financial markets.
Large-Scale Asset Purchase Programs

The FOMC authorized and directed the FRBNY to purchase
$300 billion of longer-term Treasury securities to help improve
conditions in private credit markets. The FRBNY began the
purchases of these Treasury securities in March 2009 and completed them in October 2009. On August 10, 2010, the FOMC
announced that the Federal Reserve will maintain the level of
domestic securities holdings in the SOMA portfolio by reinvesting
principal payments from GSE debt securities and Federal agency
and GSE MBS in longer-term Treasury securities. On November 3,
2010, the FOMC announced its intention to expand the SOMA
portfolio holdings of longer-term Treasury securities by an additional $600 billion by June 2011. The FOMC will regularly review
the pace of these securities purchases and the overall size of the
asset purchase program and will adjust the program as needed to
best foster maximum employment and price stability.
The FOMC authorized and directed the FRBNY to purchase
GSE debt securities and Federal agency and GSE MBS, with a
goal to provide support to mortgage and housing markets and
to foster improved conditions in financial markets more generally. The FRBNY was authorized to purchase up to $175 billion in
fixed-rate, non-callable GSE debt securities and $1.25 trillion in
fixed-rate Federal agency and GSE MBS. Purchases of GSE debt
securities began in November 2008, and purchases of Federal
agency and GSE MBS began in January 2009. The FRBNY completed the purchases of GSE debt securities and Federal agency
and GSE MBS in March 2010. The settlement of all Federal agency and GSE MBS transactions was completed by August 2010.
Central Bank Liquidity Swaps

The FOMC authorized and directed the FRBNY to establish
central bank liquidity swap arrangements, which could be structured as either U.S. dollar liquidity or foreign currency liquidity
swap arrangements. U.S. dollar liquidity swap arrangements
were authorized with 14 foreign central banks to provide liquidity
in U.S. dollars to overseas markets. The authorization for these
swap arrangements expired on February 1, 2010. In May 2010,
U.S. dollar liquidity swap arrangements were reestablished with
the Bank of Canada, the Bank of England, the European Central
Bank, the Bank of Japan, and the Swiss National Bank; these arrangements will expire on August 1, 2011.
Foreign currency liquidity swap arrangements provided the
Reserve Banks with the capacity to offer foreign currency liquidity
to U.S. depository institutions. The authorization for these swap
arrangements expired on February 1, 2010.
Lending to Depository Institutions

The Term Auction Facility (TAF) promoted the efficient dissemination of liquidity by providing term funds to depository
institutions. The last TAF auction was conducted on March 8,
2010, and the related loans matured on April 8, 2010.
Lending to Primary Dealers

The Term Securities Lending Facility (TSLF) promoted liquidity
in the financing markets for Treasury securities. Under the TSLF,
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FEDERAL RESERVE BANK OF ST. LOUIS

notes to Financial statements

the FRBNY could lend up to an aggregate amount of $200 billion
of Treasury securities held in the SOMA to primary dealers on a
secured basis for a term of 28 days. The authorization for the
TSLF expired on February 1, 2010.
The Term Securities Lending Facility Options Program (TOP)
offered primary dealers the opportunity to purchase an option
to draw upon short-term, fixed-rate TSLF loans in exchange for
eligible collateral. The program was suspended effective with the
maturity of the June 2009 TOP options, and authorization for the
program expired on February 1, 2010.
Other Lending Facilities

The Asset-Backed Commercial Paper Money Market Mutual
Fund Liquidity Facility (AMLF) provided funding to depository institutions and bank holding companies to finance the purchase of
eligible high-quality asset-backed commercial paper from money
market mutual funds. The Federal Reserve Bank of Boston
administered the AMLF and was authorized to extend these loans
to eligible borrowers on behalf of the other Reserve Banks. The
authorization for the AMLF expired on February 1, 2010.
4. Significant Accounting Policies
Accounting principles for entities with the unique powers
and responsibilities of a nation’s central bank have not been
formulated by accounting standard-setting bodies. The Board
of Governors has developed specialized accounting principles
and practices that it considers to be appropriate for the nature
and function of a central bank. These accounting principles and
practices are documented in the Financial Accounting Manual
for Federal Reserve Banks (FAM), which is issued by the Board of
Governors. The Reserve Banks are required to adopt and apply
accounting policies and practices that are consistent with the
FAM and the financial statements have been prepared in accordance with the FAM.
Limited differences exist between the accounting principles
and practices in the FAM and accounting principles generally
accepted in the United States (GAAP), due to the unique nature
of the Bank’s powers and responsibilities as part of the nation’s
central bank and given the System’s unique responsibility to
conduct monetary policy. The primary differences are the presentation of all SOMA securities holdings at amortized cost and
the recording of such securities on a settlement-date basis. The
cost basis of Treasury securities, GSE debt securities, and foreign
government debt instruments is adjusted for amortization of
premiums or accretion of discounts on a straight-line basis, rather
than using the interest method required by GAAP. Amortized
cost, rather than the fair value presentation, more appropriately
reflects the Bank’s securities holdings given the System’s unique
responsibility to conduct monetary policy. Accounting for these
securities on a settlement-date basis, rather than the trade-date
basis required by GAAP, more appropriately reflects the timing of
the transaction’s effect on the quantity of reserves in the banking
system. Although the application of fair value measurements to
the securities holdings may result in values substantially greater
or less than their carrying values, these unrealized changes in
value have no direct effect on the quantity of reserves available to
the banking system or on the prospects for future Bank earnings
or capital. Both the domestic and foreign components of the
SOMA portfolio may involve transactions that result in gains or
losses when holdings are sold before maturity. Decisions regarding securities and foreign currency transactions, including their
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purchase and sale, are motivated by monetary policy objectives
rather than profit. Accordingly, fair values, earnings, and gains or
losses resulting from the sale of such securities and currencies are
incidental to open market operations and do not motivate decisions related to policy or open market activities.
In addition, the Bank does not present a Statement of Cash
Flows as required by GAAP because the liquidity and cash position of the Bank are not a primary concern given the Reserve
Banks’ unique powers and responsibilities. Other information
regarding the Bank’s activities is provided in, or may be derived
from, the Statements of Condition, Income and Comprehensive
Income, and Changes in Capital. There are no other significant
differences between the policies outlined in the FAM and GAAP.
Preparing the financial statements in conformity with the FAM
requires management to make certain estimates and assumptions
that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of income and
expenses during the reporting period. Actual results could differ
from those estimates. Unique accounts and significant accounting policies are explained below.
a. Consolidation

The Dodd-Frank Act established the Bureau as an independent bureau within the Federal Reserve System, and section 1017
of the Dodd-Frank Act provides that the financial statements of
the Bureau are not to be consolidated with those of the Board
of Governors or the Federal Reserve System. Section 152 of the
Dodd-Frank Act established the Office of Financial Research (OFR)
within the Treasury. The Board of Governors funds the Bureau
and OFR through assessments on the Reserve Banks as required
by the Dodd-Frank Act. The Reserve Banks reviewed the law and
evaluated the design of and their relationships to the Bureau and
the OFR and determined that neither should be consolidated in
the Reserve Banks’ combined financial statements.
b. Gold and Special Drawing Rights Certificates

The Secretary of the Treasury is authorized to issue gold and
special drawing rights (SDR) certificates to the Reserve Banks.
Upon authorization, the Reserve Banks acquire gold certificates
by crediting equivalent amounts in dollars to the account established for the Treasury. The gold certificates held by the Reserve
Banks are required to be backed by the gold owned by the
Treasury. The Treasury may reacquire the gold certificates at any
time and the Reserve Banks must deliver them to the Treasury.
At such time, the Treasury’s account is charged, and the Reserve
Banks’ gold certificate accounts are reduced. The value of gold
for purposes of backing the gold certificates is set by law at $42
2/9 per fine troy ounce. The Board of Governors allocates the
gold certificates among the Reserve Banks once a year based on
the average Federal Reserve notes outstanding at each Reserve
Bank.
SDR certificates are issued by the International Monetary Fund
(IMF) to its members in proportion to each member’s quota in the
IMF at the time of issuance. SDR certificates serve as a supplement to international monetary reserves and may be transferred
from one national monetary authority to another. Under the
law providing for U.S. participation in the SDR system, the
Secretary of the Treasury is authorized to issue SDR certificates
to the Reserve Banks. When SDR certificates are issued to the
Reserve Banks, equivalent amounts in U.S. dollars are credited
to the account established for the Treasury and the Reserve

FEDERAL RESERVE BANK OF ST. LOUIS

notes to Financial statements

Banks’ SDR certificate accounts are increased. The Reserve
Banks are required to purchase SDR certificates, at the direction
of the Treasury, for the purpose of financing SDR acquisitions
or for financing exchange stabilization operations. At the time
SDR transactions occur, the Board of Governors allocates SDR
certificate transactions among the Reserve Banks based upon
each Reserve Bank’s Federal Reserve notes outstanding at the end
of the preceding year. SDRs are recorded by the Bank at original
cost. In 2009, the Treasury issued $3 billion in SDR certificates
to the Reserve Banks, of which $79 million was allocated to the
Bank. There were no SDR transactions in 2010.
c. Coin

The amount reported as coin in the Statements of Condition
represents the face value of all United States coin held by the
Bank. The Bank buys coin at face value from the U.S. Mint in
order to fill depository institution orders.
d. Loans

Loans to depository institutions are reported at their outstanding principal balances, and interest income is recognized on
an accrual basis.
Loans are impaired when current information and events indicate that it is probable that the Bank will not receive the principal
and interest that is due in accordance with the contractual terms
of the loan agreement. Impaired loans are evaluated to determine whether an allowance for loan loss is required. The Bank
has developed procedures for assessing the adequacy of any allowance for loan losses using all available information to identify
incurred losses. This assessment includes monitoring information
obtained from banking supervisors, borrowers, and other sources
to assess the credit condition of the borrowers and, as appropriate, evaluating collateral values. Generally, the Bank would
discontinue recognizing interest income on impaired loans until
the borrower’s repayment performance demonstrates principal
and interest would be received in accordance with the terms of
the loan agreement. If the Bank discontinues recording interest
on an impaired loan, cash payments are first applied to principal
until the loan balance is reduced to zero; subsequent payments
are applied as recoveries of amounts previously deemed uncollectible, if any, and then as interest income.
e. Securities Purchased Under Agreements to Resell, Securities
Sold Under Agreements to Repurchase, and Securities Lending

The FRBNY may engage in purchases of securities with
primary dealers under agreements to resell (repurchase transactions). These repurchase transactions are settled through a
tri-party arrangement. In a tri-party arrangement, two commercial custodial banks manage the collateral clearing, settlement,
pricing, and pledging, and provide cash and securities custodial
services for and on behalf of the Bank and counterparty. The
collateral pledged must exceed the principal amount of the
transaction by a margin determined by the FRBNY for each class
and maturity of acceptable collateral. Collateral designated by
the FRBNY as acceptable under repurchase transactions primarily
includes Treasury securities (including Treasury Inflation-Protected
Securities and Separate Trading of Registered Interest and Principal of Securities); direct obligations of several Federal agency and
GSE-related agencies, including Fannie Mae and Freddie Mac;
and pass-through MBS of Fannie Mae, Freddie Mac, and Ginnie
Mae. The repurchase transactions are accounted for as financing
transactions with the associated interest income recognized over

the life of the transaction. Repurchase transactions are reported
at their contractual amount as “System Open Market Account:
Securities purchased under agreements to resell,” and the related
accrued interest receivable is reported as a component of “Accrued interest receivable” in the Statements of Condition.
The FRBNY may engage in sales of securities under agreements to repurchase (reverse repurchase transactions) with primary dealers and, beginning August 2010, with selected money
market funds, as an open market operation. These reverse
repurchase transactions may be executed through a tri-party arrangement, similar to repurchase transactions. Reverse repurchase transactions may also be executed with foreign official
and international account holders as part of a service offering.
Reverse repurchase agreements are collateralized by a pledge of
an amount of Treasury securities, GSE debt securities, and Federal
agency and GSE MBS that are held in the SOMA. Reverse repurchase transactions are accounted for as financing transactions,
and the associated interest expense is recognized over the life of
the transaction. These transactions are reported at their contractual amounts as “System Open Market Account: Securities
sold under agreements to repurchase” and the related accrued
interest payable is reported as a component of “Other liabilities”
in the Statements of Condition.
Treasury securities and GSE debt securities held in the SOMA
may be lent to primary dealers to facilitate the effective functioning of the domestic securities markets. Overnight securities
lending transactions are fully collateralized by Treasury securities
that have fair values in excess of the securities lent. The FRBNY
charges the primary dealer a fee for borrowing securities, and
these fees are reported as a component of “Other income” in
the Statements of Income and Comprehensive Income.
Activity related to securities purchased under agreements
to resell, securities sold under agreements to repurchase, and
securities lending is allocated to each of the Reserve Banks on a
percentage basis derived from an annual settlement of the interdistrict settlement account that occurs in April each year.
F. Treasury Securities; Government-Sponsored Enterprise Debt
Securities; Federal Agency and Government-Sponsored Enterprise
Mortgage-Backed Securities; Foreign Currency Denominated Assets; and Warehousing Agreements

Interest income on Treasury securities, GSE debt securities,
and foreign currency denominated assets comprising the SOMA
is accrued on a straight-line basis. Interest income on Federal
agency and GSE MBS is accrued using the interest method and
includes amortization of premiums, accretion of discounts, and
gains or losses associated with principal paydowns. Premiums and discounts related to Federal agency and GSE MBS are
amortized over the term of the security to stated maturity, and
the amortization of premiums and accretion of discounts are
accelerated when principal payments are received. Paydown
gains and losses represent the difference between the principal
amount paid and the amortized cost basis of the related security.
Gains and losses resulting from sales of securities are determined
by specific issue based on average cost. Treasury securities, GSE
debt securities, and Federal agency and GSE MBS are reported
net of premiums and discounts on the Statements of Condition and interest income on those securities is reported net of
the amortization of premiums and accretion of discounts on the
Statements of Income and Comprehensive Income.
In addition to outright purchases of Federal agency and GSE
MBS that are held in the SOMA, the FRBNY entered into dollar
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FEDERAL RESERVE BANK OF ST. LOUIS

notes to Financial statements

roll transactions (dollar rolls), which primarily involve an initial
transaction to purchase or sell “to be announced” (TBA) MBS
for delivery in the current month combined with a simultaneous
agreement to sell or purchase TBA MBS on a specified future
date. The FRBNY also executed a limited number of TBA MBS
coupon swap transactions, which involve a simultaneous sale of
a TBA MBS and purchase of another TBA MBS of a different coupon rate. The FRBNY’s participation in the dollar roll and coupon
swap markets furthers the MBS purchase program goal of providing support to the mortgage and housing markets and fostering
improved conditions in financial markets more generally. The
FRBNY accounts for outstanding commitments under dollar roll
and coupon swaps on a settlement-date basis. Based on the
terms of the FRBNY dollar roll and coupon swap transactions,
transfers of MBS upon settlement of the initial TBA MBS transactions are accounted for as purchases or sales in accordance with
FASB ASC Topic 860 (ASC 860), Transfers and Servicing, and the
related outstanding commitments are accounted for as sales or
purchases upon settlement. Net gains resulting from dollar roll
and coupon swap transactions are reported as “Non-interest
income: System Open Market Account: Federal agency and government-sponsored enterprise mortgage-backed securities gains,
net” in the Statements of Income and Comprehensive Income.
Foreign currency denominated assets are revalued daily at
current foreign currency market exchange rates in order to report
these assets in U.S. dollars. Realized and unrealized gains and
losses on foreign currency denominated assets are reported as
“Non-interest income: System Open Market Account: Foreign
currency gains, net” in the Statements of Income and Comprehensive Income.
Activity related to Treasury securities, GSE debt securities, and
Federal agency and GSE MBS, including the premiums, discounts,
and realized gains and losses, is allocated to each Reserve Bank
on a percentage basis derived from an annual settlement of the
interdistrict settlement account that occurs in April of each year.
Activity related to foreign currency denominated assets, including
the premiums, discounts, and realized and unrealized gains and
losses, is allocated to each Reserve Bank based on the ratio of
each Reserve Bank’s capital and surplus to aggregate capital and
surplus at the preceding December 31.
Warehousing is an arrangement under which the FOMC has
approved the exchange, at the request of the Treasury, of U.S.
dollars for foreign currencies held by the Treasury over a limited
period of time. The purpose of the warehousing facility is to
supplement the U.S. dollar resources of the Treasury for financing purchases of foreign currencies and related international
operations. Warehousing agreements are designated as held-fortrading purposes and are valued daily at current market exchange
rates. Activity related to these agreements is allocated to each
Reserve Bank based on the ratio of each Reserve Bank’s capital
and surplus to aggregate capital and surplus at the preceding
December 31.
G. Central Bank Liquidity Swaps

Central bank liquidity swaps, which are transacted between the
FRBNY and a foreign central bank, can be structured as either U.S.
dollar liquidity or foreign currency liquidity swap arrangements.
Central bank liquidity swaps activity, including the related
income and expense, is allocated to each Reserve Bank based on
the ratio of each Reserve Bank’s capital and surplus to aggregate
capital and surplus at the preceding December 31. The foreign
currency amounts associated with these central bank liquidity swap
38 | F e d e r a l R e s e r v e B a n k o f S t . L o u i s

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s t l o u i s f e d . o rg

arrangements are revalued at current foreign currency market
exchange rates.
U.S. dollar liquidity swaps

At the initiation of each U.S. dollar liquidity swap transaction,
the foreign central bank transfers a specified amount of its currency to a restricted account for the FRBNY in exchange for U.S.
dollars at the prevailing market exchange rate. Concurrent with
this transaction, the FRBNY and the foreign central bank agree
to a second transaction that obligates the foreign central bank
to return the U.S. dollars and the FRBNY to return the foreign
currency on a specified future date at the same exchange rate
as the initial transaction. The Bank’s allocated portion of the
foreign currency amounts that the FRBNY acquires is reported as
“System Open Market Account: Central bank liquidity swaps”
on the Statements of Condition. Because the swap transaction
will be unwound at the same U.S. dollar amount and exchange
rate that were used in the initial transaction, the recorded value
of the foreign currency amounts is not affected by changes in the
market exchange rate.
The foreign central bank compensates the FRBNY based on
the foreign currency amounts it holds for the FRBNY. The FRBNY
recognizes compensation during the term of the swap transaction and reports it as “Interest income: System Open Market Account: Central bank liquidity swaps” in the Statements of Income
and Comprehensive Income.
Foreign currency liquidity swaps

The structure of foreign currency liquidity swap transactions
involves the transfer by the FRBNY, at the prevailing market exchange rate, of a specified amount of U.S. dollars to an account
for the foreign central bank in exchange for its currency. The
foreign currency amount received would be reported as a liability
by the Bank.
H. Interdistrict Settlement Account

At the close of business each day, each Reserve Bank aggregates
the payments due to or from other Reserve Banks. These payments
result from transactions between the Reserve Banks and transactions
that involve depository institution accounts held by other Reserve
Banks, such as Fedwire funds and securities transfers and check and
ACH transactions. The cumulative net amount due to or from the
other Reserve Banks is reflected in the “Interdistrict settlement account” in the Statements of Condition.
I. Bank Premises, Equipment, and Software

Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis
over the estimated useful lives of the assets, which range from 2
to 50 years. Major alterations, renovations, and improvements are
capitalized at cost as additions to the asset accounts and are depreciated over the remaining useful life of the asset or, if appropriate,
over the unique useful life of the alteration, renovation, or improvement. Maintenance, repairs, and minor replacements are charged
to operating expense in the year incurred.
Costs incurred for software during the application development stage, whether developed internally or acquired for internal
use, are capitalized based on the purchase cost and the cost of
direct services and materials associated with designing, coding,
installing, and testing the software. Capitalized software costs
are amortized on a straight-line basis over the estimated useful
lives of the software applications, which generally range from

FEDERAL RESERVE BANK OF ST. LOUIS

notes to Financial statements

two to five years. Maintenance costs related to software are
charged to expense in the year incurred.
Capitalized assets, including software, buildings, leasehold
improvements, furniture, and equipment, are impaired and an
adjustment is recorded when events or changes in circumstances
indicate that the carrying amount of assets or asset groups is not
recoverable and significantly exceeds the assets’ fair value.
J. Federal Reserve Notes

Federal Reserve notes are the circulating currency of the
United States. These notes, which are identified as issued to
a specific Reserve Bank, must be fully collateralized. All of the
Bank’s assets are eligible to be pledged as collateral. The collateral value is equal to the book value of the collateral tendered
with the exception of securities, for which the collateral value is
equal to the par value of the securities tendered. The par value
of securities sold under agreements to repurchase is deducted
from the eligible collateral value.
The Board of Governors may, at any time, call upon a Reserve
Bank for additional security to adequately collateralize outstanding Federal Reserve notes. To satisfy the obligation to provide
sufficient collateral for outstanding Federal Reserve notes, the
Reserve Banks have entered into an agreement that provides for
certain assets of the Reserve Banks to be jointly pledged as collateral for the Federal Reserve notes issued to all Reserve Banks.
In the event that this collateral is insufficient, the Federal Reserve
Act provides that Federal Reserve notes become a first and paramount lien on all the assets of the Reserve Banks. Finally, Federal
Reserve notes are obligations of the United States government.
“Federal Reserve notes outstanding, net” in the Statements of
Condition represents the Bank’s Federal Reserve notes outstanding, reduced by the Bank’s currency holdings of $4,381 million and
$4,106 million at December 31, 2010 and 2009, respectively.
At December 31, 2010 and 2009, all Federal Reserve notes
issued to the Reserve Banks were fully collateralized. At December
31, 2010, all gold certificates, all special drawing right certificates,
and $925 billion of domestic securities held in the SOMA were
pledged as collateral. At December 31, 2010, no investments
denominated in foreign currencies were pledged as collateral.
K. Deposits
Depository Institutions

Depository institutions deposits represent the reserve and service-related balances in the accounts that depository institutions
hold at the Bank. The interest rates paid on required reserve
balances and excess balances are determined by the Board of
Governors, based on an FOMC-established target range for the
federal funds rate. Interest payable is reported as “Interest payable to depository institutions” on the Statements of Condition.
The Term Deposit Facility (TDF) consists of deposits with specific maturities held by eligible institutions at the Reserve Banks.
The Reserve Banks pay interest on these deposits at interest rates
determined by auction. Interest payable is reported as “Interest
payable to depository institutions” on the Statements of Condition. There were no deposits held by the Bank under the TDF at
December 31, 2010.
Other

Other deposits include foreign central bank and foreign
government deposits held at the FRBNY that are allocated
to the Bank.

L. Items in Process of Collection and Deferred Credit Items

“Items in process of collection” primarily represents amounts
attributable to checks that have been deposited for collection
and that, as of the balance sheet date, have not yet been presented to the paying bank. “Deferred credit items” are the counterpart liability to items in process of collection. The amounts in
this account arise from deferring credit for deposited items until
the amounts are collected. The balances in both accounts can
vary significantly.
M. Capital Paid-in

The Federal Reserve Act requires that each member bank
subscribe to the capital stock of the Reserve Bank in an amount
equal to 6 percent of the capital and surplus of the member bank.
These shares are nonvoting with a par value of $100 and may
not be transferred or hypothecated. As a member bank’s capital
and surplus changes, its holdings of Reserve Bank stock must be
adjusted. Currently, only one-half of the subscription is paid in and
the remainder is subject to call. A member bank is liable for Reserve
Bank liabilities up to twice the par value of stock subscribed by it.
By law, each Reserve Bank is required to pay each member bank
an annual dividend of 6 percent on the paid-in capital stock. This
cumulative dividend is paid semiannually. To meet the Federal Reserve Act requirement that annual dividends be deducted from net
earnings, dividends are presented as a distribution of comprehensive
income in the Statements of Income and Comprehensive Income.
N. Surplus

The Board of Governors requires the Reserve Banks to
maintain a surplus equal to the amount of capital paid-in as of
December 31 of each year. Accumulated other comprehensive
income is reported as a component of “Surplus” in the Statements of Condition and the Statements of Changes in Capital.
Additional information regarding the classifications of accumulated other comprehensive income is provided in Notes 12 and 13.
O. Interest on Federal Reserve Notes

The Board of Governors requires the Reserve Banks to transfer
excess earnings to the Treasury as interest on Federal Reserve
notes after providing for the costs of operations, payment of dividends, and reservation of an amount necessary to equate surplus
with capital paid-in. This amount is reported as “Payments to
Treasury as interest on Federal Reserve notes” in the Statements
of Income and Comprehensive Income. The amount due to
the Treasury is reported as “Accrued interest on Federal Reserve
notes” in the Statements of Condition.
If earnings during the year are not sufficient to provide for the
costs of operations, payment of dividends, and equating surplus and
capital paid-in, payments to the Treasury are suspended. A deferred asset is recorded that represents the amount of net earnings
a Reserve Bank will need to realize before remittances to Treasury
resume. This deferred asset is periodically reviewed for impairment.
In the event of a decrease in capital paid-in, the excess surplus, after equating capital paid-in and surplus at December 31,
is distributed to the Treasury in the following year.
P. Income and Costs Related to Treasury Services

When directed by the Secretary of the Treasury, the Bank is
required by the Federal Reserve Act to serve as fiscal agent and
depositary of the United States Government. By statute, the
Treasury has appropriations to pay for these services. During the
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Annual Report 2010

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FEDERAL RESERVE BANK OF ST. LOUIS

notes to Financial statements

years ended December 31, 2010 and 2009, the Bank was reimbursed for all services provided to the Treasury as its fiscal agent.
Q. Compensation Received for Service Costs Provided

The Federal Reserve Bank of Atlanta (FRBA) has overall responsibility for managing the Reserve Banks’ provision of check
and ACH services to depository institutions and, as a result, recognizes total System revenue for these services on its Statements
of Income and Comprehensive Income. Similarly, the FRBNY
manages the Reserve Banks’ provision of Fedwire funds and
securities services and recognizes total System revenue for these
services on its Consolidated Statements of Income and Comprehensive Income. The FRBA and the FRBNY compensate the
applicable Reserve Banks for the costs incurred to provide these
services. The Bank reports this compensation as “Compensation
received for service costs provided” in the Statements of Income
and Comprehensive Income.
R. Assessments

The Board of Governors assesses the Reserve Banks to fund its
operations and the operations of the Bureau and, for a two-year
period, the OFR. These assessments are allocated to each Reserve
Bank based on each Reserve Bank’s capital and surplus balances
as of December 31 of the prior year for the Board of Governor’s
operations and as of the most recent quarter for the Bureau and
OFR operations. The Board of Governors also assesses each Reserve Bank for the expenses incurred by the Treasury to produce
and retire Federal Reserve notes based on each Reserve Bank’s
share of the number of notes comprising the System’s net liability
for Federal Reserve notes on December 31 of the prior year.
During the period prior to the Bureau transfer date of July
21, 2011, there is no fixed limit on the funding that can be
provided to the Bureau and that is assessed to the Reserve Banks;
the Board of Governors must provide the amount estimated by
the Secretary of the Treasury needed to carry out the authorities granted to the Bureau under the Dodd-Frank Act and other
federal law. After the transfer date, the Dodd-Frank Act requires
the Board of Governors to fund the Bureau in an amount not to
exceed a fixed percentage of the total operating expenses of the
Federal Reserve System as reported in the Board of Governors’
2009 annual report. The fixed percentage of total operating expenses of the System is 10% for 2011, 11% for 2012, and 12%
for 2013. After 2013, the amount will be adjusted in accordance
with the provisions of the Dodd-Frank Act.
The Board of Governors assesses the Reserve Banks to fund
the operations of the OFR for the two-year period following
enactment of the Dodd-Frank Act; thereafter, the OFR will be
funded by fees assessed on certain bank holding companies.
S. Taxes

The Reserve Banks are exempt from federal, state, and local
taxes, except for taxes on real property. The Bank’s real property
taxes were $1 million for each of the years ended December 31,
2010 and 2009, respectively, and are reported as a component of
“Operating expenses: Occupancy” in the Statements of Income
and Comprehensive Income.
T. Restructuring Charges

The Reserve Banks recognize restructuring charges for exit or
disposal costs incurred as part of the closure of business activities in a particular location, the relocation of business activities
40 | F e d e r a l R e s e r v e B a n k o f S t . L o u i s

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s t l o u i s f e d . o rg

from one location to another, or a fundamental reorganization
that affects the nature of operations. Restructuring charges may
include costs associated with employee separations, contract
terminations, and asset impairments. Expenses are recognized in
the period in which the Bank commits to a formalized restructuring plan or executes the specific actions contemplated in the plan
and all criteria for financial statement recognition have been met.
Note 14 describes the Bank’s restructuring initiatives and
provides information about the costs and liabilities associated
with employee separations and contract terminations. Costs and
liabilities associated with enhanced pension benefits in connection with the restructuring activities for all of the Reserve Banks
are recorded on the books of the FRBNY.
The Bank had no significant restructuring activities in 2010
and 2009.
U. Recently Issued Accounting Standards

In June 2009, FASB issued Statement of Financial Accounting
Standards 166, Accounting for Transfers of Financial Assets – an
amendment to FASB Statement No. 140, (codified in ASC 860).
The new standard revises the criteria for recognizing transfers
of financial assets as sales and clarifies that the transferor must
consider all arrangements when determining if the transferor has
surrendered control. The adoption of this accounting guidance
was effective for the Bank for the year beginning on January 1,
2010, and did not have a material effect on the Bank’s financial
statements.
In July 2010, the FASB issued Accounting Standards Update
2010-20, Receivables (Topic 310), which requires additional
disclosures about the allowance for credit losses and the credit
quality of loan portfolios. The additional disclosures include a
rollforward of the allowance for credit losses on a disaggregated
basis and more information, by type of receivable, on credit quality indicators, including the amount of certain past due receivables and troubled debt restructurings and significant purchases
and sales. The adoption of this accounting guidance is effective
for the Bank on December 31, 2011, and is not expected to have
a material effect on the Bank’s financial statements.
5. Loans
The remaining maturity distribution of loans outstanding at
December 31, 2010, and total loans outstanding at December
31, 2009, were as follows (in millions):
					
2010			
2009
			Within
			
15 days		Total		Total
Primary, secondary,
	 and seasonal credit	
$	 2 	
$	 2 	 $	 26
TAF	 		
- 		
- 		 593
Loans to depository
	 institutions	

$	 2 	

$	 2 	

$	619

Loans to Depository Institutions

The Bank offers primary, secondary, and seasonal credit to
eligible borrowers, and each program has its own interest rate.
Interest is accrued using the applicable interest rate established
at least every 14 days by the Bank’s board of directors, subject to
review and determination by the Board of Governors. Primary

FEDERAL RESERVE BANK OF ST. LOUIS

notes to Financial statements

and secondary credit is extended on a short-term basis, typically
overnight, whereas seasonal credit may be extended for a period
of up to nine months.
Primary, secondary, and seasonal credit lending is collateralized to the satisfaction of the Bank to reduce credit risk. Assets
eligible to collateralize these loans include consumer, business,
and real estate loans; Treasury securities; GSE debt securities;
foreign sovereign debt; municipal, corporate, and state and local government obligations; asset-backed securities; corporate
bonds; commercial paper; and bank-issued assets, such as certificates of deposit, bank notes, and deposit notes. Collateral is
assigned a lending value that is deemed appropriate by the Bank,
which is typically fair value reduced by a margin.
Depository institutions that are eligible to borrow under the
Bank’s primary credit program were eligible to participate in
the TAF program. Under the TAF program, the Reserve Banks
conducted auctions for a fixed amount of funds, with the interest
rate determined by the auction process, subject to a minimum
bid rate. TAF loans were extended on a short-term basis, with
terms ranging from 28 to 84 days. All advances under the TAF
program were collateralized to the satisfaction of the Bank.
All TAF loan principal and accrued interest was fully repaid.
Loans to depository institutions are monitored daily to ensure
that borrowers continue to meet eligibility requirements for these
programs. The financial condition of borrowers is monitored

by the Bank and, if a borrower no longer qualifies for these
programs, the Bank will generally request full repayment of the
outstanding loan or, for primary or seasonal credit lending, may
convert the loan to a secondary credit loan.
Collateral levels are reviewed daily against outstanding obligations and borrowers that no longer have sufficient collateral to
support outstanding loans are required to provide additional
collateral or to make partial or full repayment.
At December 31, 2010 and 2009, the Bank did not have any
impaired loans and no allowance for loan losses was required.
There were no impaired loans during the years ended December
31, 2010 and 2009.
6. Treasury Securities; Government-Sponsored Enterprise Debt Securities; Federal Agency and Government-Sponsored Enterprise Mortgage-Backed
Securities; Securities Purchased Under Agreements
to Resell; Securities Sold Under Agreements to
Repurchase; and Securities Lending
The FRBNY, on behalf of the Reserve Banks, holds securities bought outright in the SOMA. The Bank’s allocated share
of SOMA balances was approximately 2.576 percent and 3.918
percent at December 31, 2010 and 2009, respectively.

The Bank’s allocated share of Treasury securities, GSE debt securities, and Federal agency and GSE MBS, excluding accrued interest,
held in the SOMA at December 31 was as follows (in millions):
			2010
		Unamortized	Unaccreted	
	
Par	
premiums	
discounts	

Total	
amortized cost

Fair value

Bills	 	
$	
474 	
$	
-	
$	 - 	
$	 474 	
$	
474
Notes		 19,919 		 362 		 (20)		 20,261 		 20,728
Bonds		 5,919 		 843 		 (14)		 6,748 		 7,464
	 Total Treasury securities	

$	 26,312 	

$	1,205 	

$	(34)	

$	 27,483 	

$	 28,666

GSE debt securities	

$	 3,798 	

$	 143 	

$	 (1)	

$	 3,940 	

$	 4,038

Federal agency and GSE MBS	

$	 25,556 	

$	 363 	

$	(40)	

$	 25,879 	

$	 26,428

Total	
amortized cost

Fair value

									
			2009
		Unamortized	Unaccreted	
	
Par	
premiums	
discounts	

Bills	 	
$	 722 	
$	
-	
$	 - 	
$	 722 	
$	
722
Notes		 22,265 		 256 		 (39)		 22,482 		 22,841
Bonds		 7,437 		 958 		 (24)		 8,371 		 9,039
	 Total Treasury securities	

$	 30,424 	

$	1,214 	

$	(63)	

$	31,575 	

$	 32,602

GSE debt securities	

$	 6,264 	

$	 294 	

$	 (1)	

$	 6,557 	

$	 6,560

Federal agency and GSE MBS	

$	 35,587 	

$	 474 	

$	(61)	

$	36,000 	

$	 35,818

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Annual Report 2010

| 41

FEDERAL RESERVE BANK OF ST. LOUIS

notes to Financial statements

The total of the Treasury securities, GSE debt securities, and Federal agency and GSE MBS, net, excluding accrued interest, held in
the SOMA at December 31 was as follows (in millions):
	
					

2010	
2009		
Amortized cost		Fair value		
Amortized cost		Fair value

Bills	 			
$	
18,422 	
$	 18,422 	
$	 18,423 	
$	 18,423
Notes				
786,575 		 804,703 		 573,877 		 583,040
Bonds	
			
261,955 		 289,757 		 213,672 		 230,717
	 Total Treasury securities	

		

$	 1,066,952 	

$	 ,112,882 	
1

$	 805,972 	

$	 832,180

GSE debt securities	

		

$	 152,972 	

$	 156,780 	

$	 167,362 	

$	 167,444

Federal agency and GSE MBS	

		

$	 1,004,695 	

$	 ,026,003 	
1

$	 918,927 	

$	 914,290

The fair value amounts in the above tables are presented solely for informational purposes. Although the fair value of security
holdings can be substantially greater than or less than the recorded value at any point in time, these unrealized gains or losses have no
effect on the ability of the Reserve Banks, as the central bank, to meet their financial obligations and responsibilities. The fair value of
Federal agency and GSE MBS was determined using a model-based approach that considers observable inputs for similar securities; fair
value for all other SOMA security holdings was determined by reference to quoted prices for identical securities.
The fair value of the fixed-rate Treasury securities, GSE debt securities, and Federal agency and GSE MBS in the SOMA’s holdings is
subject to market risk, arising from movements in market variables, such as interest rates and securities prices. The fair value of Federal
agency and GSE MBS is also affected by the rate of prepayments of mortgage loans underlying the securities.
The following table provides additional information on the amortized cost and fair values of the Federal agency and GSE MBS
portfolio at December 31, 2010 and 2009 (in millions):
Distribution of MBS	
holdings by coupon rate	

2010	
Amortized cost	
Fair value	

2009		
Amortized cost	
Fair value

Allocated to the Bank:								

3.5%	
$	
4.0%		
4.5%		
5.0%		
5.5%		
6.0%		
6.5%		

9	
$	
4,319 		
12,819 		
5,961 		
2,398 		
333 		
40 		

9	
$	
14 	
$	
14
4,338 		
6,665 		
6,493
13,106 		 17,016 		 16,910
6,119 		
7,656 		
7,695
2,469 		
4,050 		
4,097
344 		
498 		
505
43 		
101 		
104

	 Total	

25,879 	

26,428 	

$	

$	

$	 36,000 	

$	 35,818

SOMA:								

3.5%	
$	
341	
$	
352 	
$	
363 	
$	
365
4.0%		 167,675 		 168,403 		 170,119 		 165,740
4.5%		 497,672 		 508,798 		 434,352 		 431,646
5.0%		 231,420 		 237,545 		 195,418 		 196,411
5.5%		
93,119 		
95,873 		 103,379 		 104,583
6.0%		
12,910 		
13,376 		 12,710 		 12,901
6.5%		
1,558 		
1,656 		
2,586 		
2,644
	 Total	

42 | F e d e r a l R e s e r v e B a n k o f S t . L o u i s

$	1,004,695 	

|

s t l o u i s f e d . o rg

$	1,026,003 	

$	 918,927 	

$	914,290

FEDERAL RESERVE BANK OF ST. LOUIS

notes to Financial statements

Financial information related to securities purchased under agreements to resell and securities sold under agreements to repurchase
for the years ended December 31, was as follows (in millions):
	
	

Securities purchased	
under agreements to resell	

						

2010		

Securities sold under
agreements to repurchase

2009		

2010		

2009

1,538	
$	
1,730 		
3,045 		
1,124 		

3,045
2,561
3,094
3,050

Allocated to the Bank:								

Contract amount outstanding, end of year	
	
$	
Average daily amount outstanding, during the year		
Maximum balance outstanding, during the year	
	
Securities pledged (par value), end of year			

- 	
$	
-	
$	
- 		
125		
- 		 2,765 		
-		
-		

SOMA:								

Contract amount outstanding, end of year	
	
$	
Average daily amount outstanding, during the year	
	
Maximum balance outstanding, during the year	
	
Securities pledged (par value), end of year			

- 	
$	
-	
$	 9,703	
5
$	 77,732
- 		 3,616		 58,476 		 67,837
- 		 80,000 		 77,732 		 89,525
-		
- 		 43,642 		 77,860

The contract amounts for securities purchased under agreements to resell and securities sold under agreements to repurchase approximate fair value. The FRBNY executes transactions for the purchase of securities under agreements to resell primarily to temporarily
add reserve balances to the banking system. Conversely, transactions to sell securities under agreements to repurchase are executed
primarily to temporarily drain reserve balances from the banking system.
The remaining maturity distribution of Treasury securities, GSE debt securities, Federal agency and GSE MBS bought outright, and
securities sold under agreements to repurchase that were allocated to the Bank at December 31, 2010 was as follows (in millions):
Within 15
days

16 days to
90 days

91 days to 1
year

Over 1 year
to 5 years

Over 5 years
to 10 years

Over 10 years

Total

Treasury securities
	 (par value)	
$	 252 	
$	 640 	
$	 1,398 	
$	11,323 	
$	8,602 	
$	 4,097 	
$	 26,312
GSE debt securities
	 (par value)		
29 		 356 		 734 		 1,830 		 788 		
61 		 3,798
Federal agency and GSE
	 MBS (par value)	
	
- 		
- 		
- 		
1 		
1 		 25,554 		 25,556
Securities sold under
	 agreements to repurchase
	 (contract amount)	
	1,538 		
- 		
- 		
- 		
- 		
- 		 1,538
Federal agency and GSE MBS are reported at stated maturity in the table above. The estimated weighted average life of these securities at December 31, 2010, which differs from the stated maturity primarily because the weighted average life factors in prepayment
assumptions, is approximately 4.2 years.
The par value of Treasury and GSE debt securities that were loaned from the SOMA at December 31, was as follows (in millions):
						
Treasury securities 	
GSE debt securities 	

2010		

2009		

2010		

2009

		
$	 569 	
$	 803 	
$	22,081	
$	 20,502
			 41 		 44 		 1,610 		 1,108

Other liabilities, which are related to purchases of Federal agency and GSE MBS, arise from the failure of a seller to deliver securities
to the FRBNY on the settlement date. Although the Bank has ownership of and records its investments in the MBS as of the contractual settlement date, it is not obligated to make payment until the securities are delivered, and the amount reported as other liabilities
represents the Bank’s obligation to pay for the securities when delivered. The amount of other liabilities allocated to the Bank and held
in the SOMA at December 31, was as follows (in millions):
						
Allocated to the Bank		
Total SOMA
						
2010		
2009		 2010		
2009
Other liabilities	

		

$	

-	

$	 24 	

$	

-	

$	 601

The FRBNY enters into commitments to buy Treasury and GSE debt securities and records the related securities on a settlement-date
basis. There were no commitments to buy Treasury and GSE debt securities as of December 31, 2010.

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Annual Report 2010

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FEDERAL RESERVE BANK OF ST. LOUIS

notes to Financial statements

The FRBNY enters into commitments to buy Federal agency and GSE MBS and records the related MBS on a settlement-date basis.
There were no commitments to buy or sell Federal agency or GSE MBS as of December 31, 2010. During the years ended December
31, 2010 and 2009, the Reserve Banks recorded net gains from dollar roll and coupon swap related transactions of $782 million and
$879 million, respectively, of which $25 million and $36 million, respectively, were allocated to the Bank. These net gains are reported
as “Non-interest income: System Open Market Account: Federal agency and government-sponsored enterprise mortgage-backed securities gains, net” in the Statements of Income and Comprehensive Income.
7. Foreign Currency Denominated Assets
The FRBNY holds foreign currency deposits with foreign central banks and the Bank for International Settlements and invests in
foreign government debt instruments. These foreign government debt instruments are guaranteed as to principal and interest by the
issuing foreign governments. In addition, the FRBNY enters into transactions to purchase Euro-denominated government debt securities under agreements to resell for which the accepted collateral is the debt instruments issued by the governments of Belgium, France,
Germany, Italy, the Netherlands, and Spain.
The Bank’s allocated share of foreign currency denominated assets was approximately .937 percent and .995 percent at December
31, 2010 and 2009, respectively.
The Bank’s allocated share of foreign currency denominated assets, including accrued interest, valued at amortized cost and foreign
currency market exchange rates at December 31, was as follows (in millions):
										

2010		

2009

Euro:				

Foreign currency deposits		
					
$	 66 	
$	 73
Securities purchased under agreements to resell		
				 23 		 26
Government debt instruments		
						 43 		 49
Japanese yen:				

Foreign currency deposits		
Government debt instruments		

						
						

Total allocated to the Bank 		

					

37 		
75 		

$	244 	

34
69

$	251

At December 31, 2010 and 2009, the fair value of foreign currency denominated assets, including accrued interest, allocated to the
Bank was $246 million and $254 million, respectively. The fair value of government debt instruments was determined by reference to
quoted prices for identical securities. The cost basis of foreign currency deposits and securities purchased under agreements to resell,
adjusted for accrued interest, approximates fair value. Similar to the Treasury securities, GSE debt securities, and Federal agency and
GSE MBS discussed in Note 6, unrealized gains or losses have no effect on the ability of a Reserve Bank, as the central bank, to meet its
financial obligations and responsibilities. The fair value is presented solely for informational purposes.
Total Reserve Bank foreign currency denominated assets were $26,049 million and $25,272 million at December 31, 2010 and
2009, respectively. At December 31, 2010 and 2009, the fair value of the total Reserve Bank foreign currency denominated assets,
including accrued interest, was $26,213 million and $25,480 million, respectively.
The remaining maturity distribution of foreign currency denominated assets that were allocated to the Bank at December 31, 2010,
was as follows (in millions):

Within 15 days

16 days to 90 days

91 days to 1 year

Over 1 year
to 5 years

Total
allocated to
the Bank

Euro		
$	50 	
$	 28 	
$	 19 	
$	 35 	
$	132
Japanese yen		 39 		
5 		 23 		 45 		 112
Total allocated to the Bank	

$	 89 	

$	 33 	

$	 42 	

$	 80 	

$	244

At December 31, 2010 and 2009, the authorized warehousing facility was $5 billion, with no balance outstanding.
There were no transactions related to the authorized reciprocal currency arrangements with the Bank of Canada and the Bank of
Mexico during the years ended December 31, 2010 and 2009.
There were no foreign exchange contracts outstanding as of December 31, 2010.
The FRBNY enters into commitments to buy foreign government debt instruments and records the related securities on a settlementdate basis. As of December 31, 2010, there were $209 million of outstanding commitments to purchase Euro-denominated government
debt instruments, of which $2 million was allocated to the Bank. These securities settled on January 4, 2011, and replaced Eurodenominated government debt instruments held in the SOMA that matured on that date.
In connection with its foreign currency activities, the FRBNY may enter into transactions that are subject to varying degrees of off-balancesheet market risk and counterparty credit risk that result from their future settlement. The FRBNY controls these risks by obtaining credit
approvals, establishing transaction limits, receiving collateral in some cases, and performing daily monitoring procedures.

44 | F e d e r a l R e s e r v e B a n k o f S t . L o u i s

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s t l o u i s f e d . o rg

FEDERAL RESERVE BANK OF ST. LOUIS

notes to Financial statements

8. Central Bank Liquidity Swaps
U.S. Dollar Liquidity Swaps

The Bank’s allocated share of U.S. dollar liquidity swaps was approximately .937 percent and .995 percent at December 31, 2010
and 2009, respectively.
The total foreign currency held under U.S. dollar liquidity swaps in the SOMA at December 31, 2010 and 2009, was $75 million
and $10,272 million, respectively, of which $1 million and $102 million, respectively, was allocated to the Bank. All of the U.S. dollar liquidity
swaps outstanding at December 31, 2010 were transacted with the European Central Bank and had remaining maturity distributions of
less than 15 days.
Foreign Currency Liquidity Swaps

There were no transactions related to the foreign currency liquidity swaps during the years ended December 31, 2010 and 2009.
9. Bank Premises, Equipment, and Software
Bank premises and equipment at December 31 were as follows (in millions):
										

2010		

2009

Bank premises and equipment:			

Land and land improvements	
Buildings	
Building machinery and equipment	
Construction in progress	
Furniture and equipment	

						
$	 12 	
$	 12
							 149 		 146
							 21 		 20
							
2 		
3
							 37 		 37

	 Subtotal	

							 221 		 218

Accumulated depreciation	

							 (68)		 (67)

Bank premises and equipment, net	

					

Depreciation expense, for the years ended December 31	

			

$	153 	

$	 151

$	 10 	

$	

9

The Bank leases space to outside tenants with remaining lease terms of less than one year. Rental income from such leases was not
material for the years ended December 31, 2010 and 2009. Future minimum lease payments that the Bank will receive under agreements in existence at December 31, 2010, were not material.
The Bank had capitalized software assets, net of amortization, of $2 million for each of the years ended December 31, 2010 and
2009. Amortization expense was $1 million and $2 million for the years ended December 31, 2010 and 2009, respectively. Capitalized
software assets are reported as a component of “Other assets” in the Statements of Condition and the related amortization is reported
as a component of “Operating expenses: Other” in the Statements of Income and Comprehensive Income.

10. Commitments and Contingencies
Conducting its operations, the Bank enters into contractual
commitments, normally with fixed expiration dates or termination
provisions, at specific rates and for specific purposes.
At December 31, 2010, the Bank was obligated under noncancelable leases for premises and equipment with remaining
terms ranging from one to approximately five years. These leases
provide for increased rental payments based upon increases in
real estate taxes, operating costs, or selected price indices.
Rental expense under operating leases for certain operating
facilities, warehouses, and data processing and office equipment
(including taxes, insurance, and maintenance when included
in rent), net of sublease rentals, was $1 million and $2 million
for the years ended December 31, 2010 and 2009, respectively.
Certain of the Bank’s leases have options to renew.
Future minimum rental payments under noncancelable operating leases, net of sublease rentals, with remaining terms of one
year or more, at December 31, 2010, are as follows
(in thousands):

			

Operating leases

2011		
2012		
2013		
2014		
2015		

	 $	
		
		
		
		

Future minimum rental payments		

	

381
390
402
414
56

$	1,643

At December 31, 2010, there were no material unrecorded
unconditional purchase commitments or obligations in excess of
one year.
Under the Insurance Agreement of the Federal Reserve Banks,
each of the Reserve Banks has agreed to bear, on a per incident
basis, a share of certain losses in excess of 1 percent of the capital paid-in of the claiming Reserve Bank, up to 50 percent of the
total capital paid-in of all Reserve Banks. Losses are borne in the
ratio of a Reserve Bank’s capital paid-in to the total capital paidin of all Reserve Banks at the beginning of the calendar year in

s t l o u i s f e d . o rg

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Annual Report 2010

| 45

FEDERAL RESERVE BANK OF ST. LOUIS

notes to Financial statements

which the loss is shared. No claims were outstanding under the
agreement at December 31, 2010 or 2009.
The Bank is involved in certain legal actions and claims arising
in the ordinary course of business. Although it is difficult to predict
the ultimate outcome of these actions, in management’s opinion,
based on discussions with counsel, the aforementioned litigation
and claims will be resolved without material adverse effect on the
financial position or results of operations of the Bank.
11. Retirement and Thrift Plans
Retirement Plans

The Bank currently offers three defined benefit retirement
plans to its employees, based on length of service and level of
compensation. Substantially all of the employees of the Reserve
Banks, Board of Governors, and Office of Employee Benefits of
the Federal Reserve System (OEB) participate in the Retirement
Plan for Employees of the Federal Reserve System (System Plan).
In addition, employees at certain compensation levels participate
in the Benefit Equalization Retirement Plan (BEP) and certain
Reserve Bank officers participate in the Supplemental Retirement
Plan for Select Officers of the Federal Reserve Bank (SERP). In
addition, under the Dodd-Frank Act, employees of the Bureau
can elect to participate in the System Plan. There were no Bureau
participants in the System Plan as of December 31, 2010.
The System Plan provides retirement benefits to employees of
the Federal Reserve Banks, Board of Governors, and OEB and in the
future will provide retirement benefits to certain employees of the
Bureau. The FRBNY, on behalf of the System, recognizes the net
asset or net liability and costs associated with the System Plan in its
consolidated financial statements. During the years ended December 31, 2010 and 2009, costs associated with the System Plan were
not reimbursed by other participating employers.
The Bank’s projected benefit obligation, funded status, and
net pension expenses for the BEP and the SERP at December 31,
2010 and 2009, and for the years then ended, were not material.
Thrift Plan

Employees of the Bank participate in the defined contribution
Thrift Plan for Employees of the Federal Reserve System (Thrift Plan).
The Bank matches employee contributions based on a specified
formula. Effective April 1, 2009, the Bank matches 100 percent of
the first 6 percent of employee contributions from the date of hire
and provides an automatic employer contribution of 1 percent of
eligible pay. For the first three months of the year ended December
31, 2009, the Bank matched 80 percent of the first 6 percent of
employee contributions for employees with less than five years of
service and 100 percent of the first 6 percent of employee contributions for employees with five or more years of service. The Bank’s
Thrift Plan contributions totaled $5 million and $4 million for the
years ended December 31, 2010 and 2009, respectively, and are
reported as a component of “Operating expenses: Salaries and benefits” in the Statements of Income and Comprehensive Income.
12. Postretirement Benefits Other Than Retirement
Plans and Postemployment Benefits
Postretirement Benefits Other Than Retirement Plans

In addition to the Bank’s retirement plans, employees who
have met certain age and length-of-service requirements are
eligible for both medical benefits and life insurance coverage
during retirement.
46 | F e d e r a l R e s e r v e B a n k o f S t . L o u i s

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s t l o u i s f e d . o rg

The Bank funds benefits payable under the medical and life
insurance plans as due and, accordingly, has no plan assets.
Following is a reconciliation of the beginning and ending
balances of the benefit obligation (in millions):
				
2010		
2009
Accumulated postretirement
	 benefit obligation at January 1	
$	75.5	
$	80.6
Service cost benefits earned
	 during the period		 2.6		 2.5
Interest cost on accumulated
	 benefit obligation		 4.3		 4.7
Net actuarial gain		 (3.2)		 (9.7)
Contributions by plan participants		 1.2 		 1.1
Benefits paid		 (4.4)		 (4.0)
Medicare Part D subsidies		 0.4 		 0.3
Accumulated postretirement
	 benefit obligation at December 31	

$	76.4 	

$	75.5

At December 31, 2010 and 2009, the weighted-average
discount rate assumptions used in developing the postretirement
benefit obligation were 5.25 percent and 5.75 percent, respectively.
Discount rates reflect yields available on high-quality corporate
bonds that would generate the cash flows necessary to pay the
plan’s benefits when due.
Following is a reconciliation of the beginning and ending balance
of the plan assets, the unfunded postretirement benefit obligation,
and the accrued postretirement benefit costs (in millions):
				

2010		 2009

Fair value of plan assets at January 1	
$	 -	
$	 Contributions by the employer		 2.8 		 2.6
Contributions by plan participants		 1.2		 1.1
Benefits paid		(4.4)		(4.0)
Medicare Part D subsidies		 0.4 		 0.3
			
Fair value of plan assets
	 at December 31	

$	 -	

$	

			
Unfunded obligation and accrued
	 postretirement benefit cost	

$	76.4 	

$	 75.5

-

			
Amounts included in accumulated
	 other comprehensive			
	 loss are shown below: 			
Prior service cost	
$	 1.4 	 $	 4.5
Net actuarial loss		 (11.7)		 (16.1)
Deferred curtailment gain		
-		 0.2
Total accumulated other
	 comprehensive loss	

$	(10.3)	

$	(11.4)

Accrued postretirement benefit costs are reported as a component of “Accrued benefit costs” in the Statements of Condition.

FEDERAL RESERVE BANK OF ST. LOUIS

notes to Financial statements

For measurement purposes, the assumed health care cost
trend rates at December 31 are as follows:
				
Health care cost trend rate
	 assumed for next year		
Rate to which the cost trend
	 rate is assumed to decline
	 (the ultimate trend rate)		
Year that the rate reaches
	 the ultimate trend rate		

2010		
2009
8.0%		 7.5%

5.0%		 5.0%
2017		 2015

Assumed health care cost trend rates have a significant effect
on the amounts reported for health care plans. A 1 percentage
point change in assumed health care cost trend rates would
have the following effects for the year ended December 31, 2010
(in millions):
			
			

1 percentage 	
1 percentage
point increase	 point decrease

Effect on aggregate of service
	 and interest cost components				
	 of net periodic postretirement
	 benefit costs	
$	 .2 	
1
$	(0.9)
Effect on accumulated
	 postretirement benefit obligation		 6.6 		 (6.5)
The following is a summary of the components of net periodic
postretirement benefit expense for the years ended December 31
(in millions):
				

2010		 2009

Service cost-benefits earned
	 during the period	
$	 2.6 	
$	 2.5
Interest cost on accumulated
	 benefit obligation		 4.3 		 4.7
Amortization of prior service cost		 (3.1)		 (3.1)
Amortization of net actuarial loss		 1.2 		 2.5
	 Total periodic expense		 5.0 		 6.6
Curtailment gain		 (0.2)		 (0.2)
	 Net periodic postretirement
		 benefit expense	

$	 4.8 	

$	 6.4

Estimated amounts that will be amortized from accumulated
other comprehensive loss into net periodic postretirement benefit
expense in 2011 are shown below:

Prior service cost			
Net actuarial loss			

				Without		With
				
subsidy		 subsidy
2011	
$	 4.0 	
$	 3.7
2012		 4.3 		 3.9
2013		 4.6 		 4.1
2014		 4.9 		 4.3
2015		 5.1 		 4.6
2016 - 2020		 29.1 		 25.2
	 Total	

$	 52.0 	

$	45.8

Postemployment Benefits

The Bank offers benefits to former or inactive employees.
Postemployment benefit costs are actuarially determined using a
December 31 measurement date and include the cost of medical
and dental insurance, survivor income, and disability benefits. The
accrued postemployment benefit costs recognized by the Bank at
December 31, 2010 and 2009, were $7 million for each year. This
cost is included as a component of “Accrued benefit costs” in the
Statements of Condition. Net periodic postemployment benefit expense included in 2010 and 2009 operating expenses were $1 million and $2 million, respectively, and are recorded as a component
of “Operating expenses: Salaries and benefits” in the Statements of
Income and Comprehensive Income.

$	 (1.0)
$	 0.5

Total			

Net periodic postretirement benefit expense is reported as a
component of “Operating expenses: Salaries and benefits” in the
Statements of Income and Comprehensive Income.
A deferred curtailment gain was recorded in 2007 as a
component of accumulated other comprehensive loss; the gain
is recognized in net income in 2009 and 2010 when the related
employees terminated employment.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 established a prescription drug benefit under
Medicare (Medicare Part D) and a federal subsidy to sponsors of
retiree health care benefit plans that provide benefits that are
at least actuarially equivalent to Medicare Part D. The benefits
provided under the Bank’s plan to certain participants are at least
actuarially equivalent to the Medicare Part D prescription drug
benefit. The estimated effects of the subsidy are reflected in
actuarial (gain)/loss in the accumulated postretirement benefit
obligation and net periodic postretirement benefit expense.
Federal Medicare Part D subsidy receipts were $.3 million and
$.4 million in the years ended December 31, 2010 and 2009,
respectively. Expected receipts in 2011, related to benefits paid
in the years ended December 31, 2010 and 2009, are $.2 million.
Following is a summary of expected postretirement benefit
payments (in millions):

$	 (0.5)

Net postretirement benefit costs are actuarially determined
using a January 1 measurement date. At January 1, 2010 and
2009, the weighted-average discount rate assumptions used to
determine net periodic postretirement benefit costs were 5.75
percent and 6.00 percent, respectively.

s t l o u i s f e d . o rg

|

Annual Report 2010

| 47

FEDERAL RESERVE BANK OF ST. LOUIS

notes to Financial statements

13. Accumulated Other Comprehensive Income And
Other Comprehensive Income

Following is a summary of financial information related to
the restructuring plans (in millions):

Following is a reconciliation of beginning and ending balances
of accumulated other comprehensive loss in (millions):

	
	

Amount related
to postretirement
benefits other than
retirement plans

	
	
	
	

Balance at January 1, 2009	
$	 (20.3)
Change in funded status of benefit plans:		
	 Net actuarial gain arising during the year		
9.7
	Amortization of prior service cost	
	 (3.1)
	Amortization of net actuarial loss	
	
2.5
	Amortization of deferred curtailment gain		
(0.2)
Change in funded status of
	 benefit plans - other comprehensive income		
Balance at December 31, 2009	

8.9
$	 (11.4)

Change in funded status of benefit plans:		
	 Net actuarial gain arising during the year		
	Amortization of prior service cost		
	Amortization of net actuarial loss		
	Amortization of deferred curtailment gain		

3.2
(3.1)
1.2
(0.2)

Change in funded status of benefit plans - other
	 comprehensive income		

1.1

Balance at December 31, 2010	

$	 (10.3)

Additional detail regarding the classification of accumulated
other comprehensive loss is included in Note 12.
14. Business Restructuring Charges
The Bank had no business restructuring charges in 2010
and 2009.
Before 2009, the Reserve Banks announced the acceleration
of their check restructuring initiatives to align the check processing
infrastructure and operations with declining check processing
volumes. The new infrastructure consolidated operations into
two regional Reserve Bank processing sites; one in Cleveland,
for paper check processing, and one in Atlanta, for electronic
check processing.
Additional announcements prior to 2009 included restructuring
plans associated with the U.S. Treasury’s Collections and Cash
Management Modernization initiative.

48 | F e d e r a l R e s e r v e B a n k o f S t . L o u i s

|

s t l o u i s f e d . o rg

2008 and prior
restructuring plans

Information related to restructuring plans as of 		
	
December 31, 2010:		
Total expected costs related
	
to restructuring activity	
$	3.9
Estimated future costs related
	
to restructuring activity		 0.1
Expected completion date		
2012
Reconciliation of liability balances:		
Balance at January 1, 2009		
$	 1.2
	Adjustments			 0.9
	
Payments			 (0.9)
Balance at December 31, 2009		
$	1.2
	Adjustments			 0.1
	
Payments			 (0.1)
Balance at December 31, 2010		

$	1.2

Employee separation costs are primarily severance costs for
identified staff reductions associated with the announced restructuring plans. Separation costs that are provided under terms
of ongoing benefit arrangements are recorded based on the
accumulated benefit earned by the employee. Separation costs
that are provided under the terms of one-time benefit arrangements are generally measured based on the expected benefit as
of the termination date and recorded ratably over the period to
termination. Restructuring costs related to employee separations
are reported as a component of “Operating expenses: Salaries
and benefits” in the Statements of Income and Comprehensive
Income.
Adjustments to the accrued liability are primarily due to
changes in the estimated restructuring costs and are shown as a
component of the appropriate expense category in the Statements of Income and Comprehensive Income.
Costs associated with enhanced pension benefits for all Reserve Banks are recorded on the books of the FRBNY as discussed
in Note 11.
15. Subsequent Events
There were no subsequent events that require adjustments to
or disclosures in the financial statements as of December 31, 2010.
Subsequent events were evaluated through March 22, 2011, which
is the date that the Bank issued the financial statements.

CREDITS

Al Stamborski
Editor and Project Manager

Brian Ebert
Designer

Barb Passiglia
Production Manager

Kristie M. Engemann
Charles S. Gascon
Constanza S. Liborio
Research Assistance

Steve Smith
Photographer

James Steinberg
Illustrator

For additional copies, contact:
Public Affairs
Federal Reserve Bank of St. Louis
Post Office Box 442
St. Louis, MO 63166
Or e-mail pubtracking@stls.frb.org.
This report is also available online at:
www.stlouisfed.org/publications/ar

The Federal Reserve Bank of St. Louis is one of 12 regional Reserve banks that, together
with the Board of Governors, make up the nation’s central bank. The St. Louis Fed serves
the Eighth Federal Reserve District, which includes all of Arkansas, eastern Missouri,
southern Illinois and Indiana, western Kentucky and Tennessee, and northern Mississippi.
The Eighth District offices are in Little Rock, Louisville, Memphis and St. Louis.

Federal Reserve Bank
of St. Louis

Little Rock Branch

Louisville Branch

Memphis Branch

Stephens Building

National City Tower

200 N. Main St.

One Federal Reserve Bank Plaza

111 Center St., Suite 1000

101 S. Fifth St., Suite 1920

Memphis, TN 38103

Broadway and Locust Street

Little Rock, AR 72201

Louisville, KY 40202

901-579-2404

St. Louis, MO 63102

501-324-8205

502-568-9200

314-444-8444

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