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message from the president

E

very annual report, in essence, is a summary of how an organization is meeting the
challenges, achieving results, and delivering on its commitments to stakeholders. This year’s
annual report theme, “Meeting the Challenges,”
highlights the work of the Federal Reserve Bank of
Philadelphia in an extraordinary year of challenges.
Throughout 2008, the Federal Reserve has taken
unprecedented actions in both monetary policy
and its lending operations to address a deteriorating economy and a growing financial crisis in the
U.S. and around the world. The powerful combination of events — beginning with troubles in the
housing market and culminating in a global credit
crisis — prompted these extraordinary responses
from the nation’s central bank.
In this year’s essay, “Principles of Sound Central
Banking,” I share my perspectives on the principles
that should guide the central bank’s monetary
policy. They include: 1) setting clear and explicit
objectives, 2) committing to a systematic approach
over time — even when it seems expedient
to abandon course, 3) communicating with
transparency about policies and actions to the
public, and 4) ensuring the independence of the
central bank. I believe these same principles can
guide the Federal Reserve’s actions to promote
greater financial stability.
In the pages that follow, starting with First Vice
President Bill Stone’s letter, we also describe how
the Philadelphia Fed has played an instrumental
role in meeting the challenges of 2008. Among
our many accomplishments, the Philadelphia Fed
worked closely with the U.S. Treasury in a number

by Charles I. Plosser, President and CEO

Federal Reserve Bank of Philadelphia

1

message from the president

of ways from processing fiscal stimulus checks in
the first half of the year to assisting the District’s
financial institutions with applications for capital
infusions late in the year.
Other feature articles describe how the Philadelphia Fed’s Supervision, Regulation and Credit
(SRC) Department is adapting to changes in the
banking industry and regulation in response to the
crisis. We also explain the extraordinary actions
taken by our discount window operations in lending to the District’s depository institutions. By law, a

(continued)

(FOMC), the Federal Reserve’s monetary policymaking body. The FOMC includes all of the Fed
Governors in Washington, D.C., as well as the 12
Reserve Bank presidents. Yet, by law, only five of
the Reserve Bank presidents vote each year with
the Governors. Having served in such a crucial role
during this challenging year was an extraordinary
experience.
Although I will not vote again until 2011, all Reserve Bank presidents participate equally in the
FOMC’s analysis and deliberations. Giving each
president a seat at the
FOMC table brings a
valuable diversity of
views to monetary policy
decisions. Throughout
the coming year, I will
continue to be an active voice at the FOMC
table and in my outreach
within the Third District and the broader economic
community of ideas.

As we met the challenges of 2008 head-on, we
were grateful for the valuable insights provided
by our board of directors.

central bank lends against good collateral, and the
Philadelphia Fed’s Collateral Management System
application helps keep track of $5 trillion in collateral on behalf of the entire Federal Reserve System.
You will also learn about the ongoing efforts of our
Community Affairs Department to address one
of the consequences of the crisis: the high rate of
mortgage foreclosures. Finally, you will read how
our Research staff kept pace with increased demands for policy and economic analyses during a
period of rapid change.

A Continuing Voice in Policy
During 2008, the Philadelphia Fed was a voting
member of the Federal Open Market Committee

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Board of Directors
As we met the challenges of 2008 head-on, we
were grateful for the valuable insights provided by
our board of directors. Their guidance provided us
with timely perspectives on our region’s economy
and wise counsel to our operations. We offer
sincere gratitude to John G. Gerlach, president of
Pocono Community Bank, who has completed his
term of service on our board.
We are pleased to report that William F. Hecht,
retired chairman, president, and CEO of PPL Corporation, has been reappointed chairman of the

board of directors. Charles P. Pizzi, president and
CEO of Tasty Baking Company, has been reappointed deputy chairman.
At the beginning of 2009, we also welcomed our
newest board member, Frederick (Ted) C. Peters,
president and CEO of Bryn Mawr Trust Company.
His experience and expertise will contribute much
to our board in the years ahead.
I am also pleased to announce that in June 2008,
the Philadelphia Fed established its Economic Advisory Council. This new body, which replaces our
former council structure, includes representatives
from the tourism, health-care, retail, and food industries, as well as organized labor. The council’s
14 members reflect our District’s diverse economic
base and represent a broader geographic area than
the previous council structure.

Thanks to Our Employees
Finally, I want to offer my sincere thanks to the dedicated employees of the Philadelphia Fed, who are
working together as never before to lead the Bank
and its stakeholders during this period of economic
difficulty. The pages of this annual report highlight
only a handful of their remarkable stories of service.

Special recognition goes to Philadelphia’s Retail
Payments employees, who have served admirably
through several major consolidations of check processing as our economy continues the rapid move
toward electronic payments. Philadelphia has been
one of four main consolidation sites over the past
two years. In November 2008, the Federal Reserve
System announced plans to consolidate into one
location in Cleveland for paper check processing
and one site in Atlanta for electronic check processing. Philadelphia will continue to serve as a regional processing site until check processing moves
to Cleveland by the end of 2009. While change is
always difficult, our people continue to meet the
challenge with professionalism and dedication,
recognizing that our work here will help ensure a
strong and stable payments system.
All of us at the Philadelphia Fed look forward to our
region’s — and our nation’s — economic recovery
and will continue to work with our many constituents throughout the Third District in the year ahead.

Charles I. Plosser
President and Chief Executive Officer
May 2009

Federal Reserve Bank of Philadelphia

3

The Philadelphia Fed:
Performance and Efficiency
This was certainly true in the Bank’s Collateral
Management System (CMS) and discount window
lending operations. In most years, lending at the
Philadelphia Fed is a small part of our overall operations. Yet, the team led by Vish Viswanathan,
vice president and discount officer, stepped up to
the challenge of managing exponentially higher
loan volumes in 2008.
Treasury Services has a Central Business Administration Function (CBAF) that maintains the CMS,
which manages and monitors roughly $5 trillion in
collateral on behalf of the Federal Reserve System.
The team provided expertise and guidance – often at all hours of the night and on weekends – to
ensure that the CMS could adapt to new collateral
procedures for the Fed’s new lending facilities.
CMS’s web-based portal also had to be available
around the clock because financial institutions
relied on the expertise of the Fed’s credit risk management community to support the implementation of new collateral programs and answer questions about complex processing issues.

hroughout a tumultuous 2008, the Federal
Reserve Bank of Philadelphia showed its
ability to meet the challenges of our times
in how we responded to the nation’s financial crisis
and in our pursuit of the Philadelphia Fed’s vision
to be widely recognized as a leader and innovator
in central bank knowledge and service.

Another Philadelphia-based system that proved
invaluable during the crisis was our Treasury Check
Information System (TCIS). TCIS made necessary
enhancements to accommodate the influx of more
than 75 million additional check payments resulting from the early 2008 stimulus package. The
team in Philadelphia also implemented a Treasury
check verification application to mitigate fraud.
TCIS, which was developed by the Philadelphia
Fed in conjunction with the U.S. Treasury, is a webenabled infrastructure that records and reconciles
Treasury checks. It ensures the highest levels of
financial integrity, significantly improves the processing of Treasury transactions, and reduces losses
resulting from counterfeit checks.

In many ways, this financial crisis has drawn attention to the professionalism of some of the operations at the Philadelphia Fed that may not always
be highly visible. Yet, when the time came, Philadelphia Fed staff met the challenge.

The Philadelphia Fed also lent its expertise to the
Board of Governors and other Federal Reserve
Banks throughout the crisis. Staff in our Supervision, Regulation and Credit (SRC) Department
played an important role in reviewing the activi-

by William H. Stone, Jr., First Vice President

T

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Throughout what was arguably one of the toughest years in our Bank’s history, the Philadelphia Fed
stepped up to the challenge by contributing to a number of important Bank and System initiatives.

ties and portfolios of the government-sponsored
enterprises Fannie Mae and Freddie Mac (see page
20). SRC staff also led a business group working
with colleagues in Kansas City to develop a new
database to help the Fed research and report on
U.S. mortgage conditions. In fact, our SRC staff as a
whole did a remarkable job in processing applications from financial institutions for capital infusions
through the Treasury’s program.

Check Consolidation
and Restructuring
Apart from the financial crisis, the most significant
change in the financial landscape has been the
continuing shift away from paper checks to electronic payments. As a result, the Fed has reduced
its check-processing infrastructure over the past six
years to better match the declining volume of paper checks being processed nationwide.
In Philadelphia, the process began in 2006, when
the Bank absorbed the check-processing function
of the Federal Reserve Bank of New York’s East
Rutherford Operations Center. During 2008, Philadelphia continued to serve as one of four main
consolidation sites, assuming check-processing operations from the New York Fed’s Utica, N.Y. office
and the Federal Reserve Bank of Boston’s location
in Windsor Locks, Conn. The Philadelphia Fed
also closed its check adjustments operations, which
moved to other check adjustment centers in the
System.
In November 2008, the Federal Reserve System
announced plans to accelerate the consolidations
and ultimately move to just one location for paper
check processing in Cleveland and one in Atlanta
for electronic processing. As a result, Philadelphia’s check-processing operations will move to
Cleveland by the end of 2009.
Philadelphia has demonstrated leadership and expertise as one of the four consolidation sites. Our
check processing operation has also made major
changes in workflow in the last year to handle an

increasing number of electronic checks, including
the addition of high-speed printers for substitute
check printing. While meeting the challenges of
change is often difficult, we greatly appreciate the
hard work and dedication of everyone involved.
We also know that this process supports the Federal Reserve’s mission to promote the long-term
efficiency and integrity of the payments system.
The Fed is a 24-hour-a-day operation. Part of our
responsibility is to plan for contingencies to ensure
it remains working. In 2008, the Philadelphia Fed
moved to a new District relocation facility in New
Jersey, one that will serve as Philadelphia’s main
relocation point and as a secondary site for the
New York Fed.
During 2008, we also made progress on several
projects to enhance the security and safety of our
operations. As we announced in last year’s annual report, the Philadelphia Fed is constructing a
6,300-square-foot screening facility across from the
Bank’s 7th Street entrance. This new facility, which
we expect to open in late 2009, will allow our Law
Enforcement officers to conduct inspections of vehicles away from the main Bank building and out
of the flow of traffic.
Throughout what was arguably one of the toughest
years in our Bank’s history, the Philadelphia Fed
met the challenge by contributing to important
Bank and System initiatives. In addition to the projects mentioned here, you can read more about our
achievements in 2008 in the Bank Highlights section (see page 32).
All of these achievements have demonstrated that
the people at the Philadelphia Fed can adapt to
change and continue to show strong performance
and maintain efficient operations. This is a testament to our employees’ expertise, skills, and experience. These attributes will allow us to further
expand our capabilities in the future, as we contribute to the System and serve our Third District
stakeholders.

Federal Reserve Bank of Philadelphia

5

Principles of Sound Central Banking

by Charles I. Plosser

B

y any measure, 2008 was an extraordinary
year. The economic turmoil that began
in housing two years ago swelled into a
financial tsunami, which roiled the economy over
the course of the year. That turmoil has not been
confined to the U.S. Slowing economic growth
and the deepening credit crisis have affected the
global economy and prompted historic actions by
policymakers in the U.S. and around the world.
The crisis has led to fundamental changes in the
financial landscape, prompting debates about the
central bank’s roles and responsibilities and the
appropriate approach to conducting policy.
In this year’s annual report essay, I want to focus
attention on some of the principles that I believe
make for sound and effective central banking.
Relying on sound principles to guide policymaking is always useful. But it is particularly important
and helpful in times of crisis, when the temptation
is to abandon all guiding principles and simply
react to the daily challenges based on what seems
expedient at the time. I believe that adhering to
these principles can enhance the effectiveness of
monetary policy in these challenging times and
can provide insights into how the central bank can
promote greater financial stability.
One of the most significant developments in economic theory during the last quarter of the 20th
century was the recognition of the importance of
expectations in understanding economic behavior.
Expectations about the future play an important
role in the economic decisions of both households
and businesses. This is particularly evident in
financial markets, where expectations about the
future play a role not only in investment decisions
but also in the valuation of securities. Of course,
the public’s expectations about future actions by
policymakers are also important. Will Congress
raise or lower taxes in the future? Will the Federal
Reserve ensure that inflation remains low and stable? Expectations about these future policy actions

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influence the decisions by households and firms
today. Moreover, actions taken by policymakers
today help inform the public about the likelihood
of future policy actions. Thus, policymakers must
make decisions with the understanding that those
decisions may affect the public’s expectations
about future decisions — which, in turn, will affect
the choices market participants make today.
The recognition of the important role played by
expectations leads me to focus on four main principles of sound central banking. These four principles are based on lessons learned from both the
theory and the practice of monetary policy.1 They
include:

Clear Objectives.

1
2
3
4

Policymakers should set clear and
explicit objectives. These objectives must be
realistic and feasible and not just what
might be desirable.

Commitment to
Systematic Policy.
Policymakers must credibly commit to
conducting policy in a systematic — that is,
mostly predictable — way over time, even
when it seems expedient to do otherwise.

Transparency.
Policymakers must be as transparent as
possible in communicating their policies and
actions to the public.

Independence.
Experience has shown that central banks
operating with a great deal of independence
from short-term political pressures deliver
better outcomes.

With these guiding principles in mind, let us consider how they apply to the central bank’s two
main responsibilities: monetary policy and financial stability. These two pillars of central banking
are related but different.2 Monetary policy is responsible for price stability and promoting sustainable economic growth. Financial stability involves
promoting an effective and efficient payments system and a robust and healthy financial system that
helps support economic growth.

1

Clear and
Explicit Objectives

The first principle of sound central banking is to be clear about the goals and objectives of
policy. It makes no sense to seek goals the central
bank cannot achieve. In other words, policymakers
must be clear about what policy can and cannot do.
Given the importance of expectations, we must set
reasonable expectations for what a central bank can
achieve. We must recognize that over-promising
can erode the credibility of a central bank’s commitment to meet its goals, whether for monetary
policy or financial stability. Saying that monetary
policy will achieve an objective it is incapable of
delivering is a sure way to lose credibility.
Monetary Policy — Let me expand on this principle
in the context of the objectives that Congress has
established for the Federal Reserve’s monetary policy. The Federal Reserve is charged with conducting monetary policy “so as to promote effectively
the goals of maximum employment, stable prices,
and moderate long-term interest rates.”3 These
are all desirable goals, yet most economists, myself
included, agree that focusing on achieving one of
them — stable prices — is the most effective way
monetary policy can support the other two.
Moreover, we must remember that sustained inflation or deflation is always a monetary phenomenon
and that in a world of paper or fiat money, the
central bank has the obligation to preserve the purchasing power of the currency so that the ravages
of inflation or deflation do not distort markets.

Maintaining a stable price level allows the economy to function in a more efficient and thus more
productive fashion. If people and businesses need
not worry that inflation will erode the purchasing
power of their money, they need not divert resources from productive activities to conserve their
money holdings or to hedge the risks of inflation
(or deflation). Stable prices also make it easier
for households and businesses to make long-term
plans and long-term commitments, since they
know what the long-term value of their money will
be. Indeed, former Fed Chairman Alan Greenspan
suggested that an operational definition of price
stability is “an environment in which inflation is so
low and stable over time that it does not materially
enter into the decisions of households and firms.”4
Price stability also promotes efficiency. Prices give
signals about the relative supplies and demands
of goods and services in a market economy. With
a stable price level, changes in prices can easily
be recognized as changes in relative prices. With
price signals undistorted by inflation, individuals
and businesses are able to make better decisions
about where to allocate their resources. Thus,
price stability helps a market economy allocate
resources efficiently and operate at its peak level
of productivity.
Price stability also works to promote moderate
long-term interest rates. First, it reduces the level
of compensation built into long-term interest rates
to make up for the loss of purchasing power due
to inflation. Second, it reduces the need for an additional risk premium to compensate for the risk
that arises from uncertainty about inflation.
In short, price stability is not only a worthwhile objective in its own right. It is also the most effective
way monetary policy can contribute to economic
conditions that foster the Federal Reserve’s other
two objectives: maximum employment and moderate long-term interest rates.
While price stability enhances the economy’s abil-

Federal Reserve Bank of Philadelphia

7

Principles of Sound Central Banking

ity to achieve its maximum potential growth rate,
monetary policy plays no role in determining what
that growth rate is. In the long run, the economy’s
growth rate largely reflects two factors. The first
is the growth rate of the labor force, which is determined by demographic factors such as the birth
rate, age distribution, and immigration. The second is the growth in the productivity of the labor
force, which depends on a number of elements,
including both physical and human capital. Monetary policy cannot be used to achieve a long-run
growth rate that is inconsistent with these economic fundamentals.
The corollary to this emphasis on price stability is
that monetary policymakers should not commit to
what they cannot deliver. It is not possible for a
central bank to achieve a specific rate of real economic growth or unemployment. And
it is not desirable to
lead the public to
believe it is within
the central bank’s
power to do so.

well anchored at a level consistent with price stability, the target federal funds rate should fall with
market rates when the economy weakens and
increase as market rates rise when the economy
strengthens. Yet, this systematic approach should
not be confused with a desire for active management of the real economy.
Unfortunately, what the public has come to expect
of monetary policy, and central banking more
generally, has risen considerably over the years.
Indeed, there seems to be a view that monetary
policy is the solution to most, if not all, economic
ills. Not only is this not true, it is a dangerous misconception and runs the risk of setting up expectations that monetary policy can achieve objectives
it cannot attain. To ensure the credibility of monetary policy, we should never ask monetary policy

To ensure the credibility of monetary policy, we
should never ask monetary policy to do more than
it can do. Monetary policy’s objectives should be
not only clear but also realistic and feasible.

This does not mean
monetary policy
should ignore changes in broad economic conditions. The best strategy is to set policy consistent
with controlling inflation over the intermediate
term. By keeping inflation stable when shocks occur, monetary policy can foster the conditions that
enable households and businesses to make the
necessary adjustments to return the economy to its
long-term growth path. Depending on the nature
of the shock, though, this new growth path may be
lower, higher, or the same as its previous growth
path. However, monetary policy itself does not
determine this sustainable path.
Consequently, monetary policy should be managed in a way that yields the best economic outcome given the environment at the time. As long
as inflation and expectations about inflation are

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to do more than it can do. Monetary policy’s objectives should be not only clear but also realistic
and feasible.
Thus, in order to clarify the central bank’s mission,
many countries have passed legislation that spells
out specific objectives, often clearly assigning the
central bank the task of maintaining a stable price
level or a low level of inflation. Some governments have defined what level of inflation the
central bank should target. In other countries, the
central bank itself has adopted an inflation target.
In so doing, these countries have helped to recognize what a central bank can and cannot do. I
am in favor of the Fed setting an inflation target for
this reason, as I’ll discuss in the next section.

Financial Stability — Setting clear and explicit objectives for a central bank’s financial stability goals
is more difficult and less well understood.
We first must be clear about what we mean by
financial stability. Central banks cannot and
should not prevent all types of financial instability. Indeed, the economy benefits when financial
institutions and markets take on and manage risk.
That means inevitably some firms will fail. As my
friend the economist Allan Meltzer has said, “Capitalism without failure is like religion without sin. It
doesn’t work.”5 The goal of government oversight
should not be to try to prevent every financial
failure. Instead, the objective should be to reduce
the systemic risks that such a failure may create.
Systemic risk generally refers to the risk that problems at one financial institution will spill over to a
broad set of otherwise healthy institutions, thereby
posing a threat to the integrity of the financial
system and perhaps the economy as a whole.
When the financial system works well, financial
intermediaries fulfill a useful role in bearing and
managing the liquidity risk that arises from funding long-term assets with short-term liabilities. In
most cases, this process works well. However,
if depositors and other liability holders suddenly
demand large withdrawals, an intermediary may
be forced to sell long-term assets at prices well
below their value if they were held to maturity.
This can quickly transform an illiquidity problem
into a solvency dilemma, eventually leading to the
firm’s failure. Such failures have the potential to
cascade among counterparties, ultimately leading
to a major breakdown of borrowing and lending.
Lack of transparency about risk and the value of
assets, imperfect or asymmetric information, and
uncertainty about exposures can all help fuel such
financial contagion.
Because of the complexity and interconnectivity of
financial markets, we have found that the failure
of a major counterparty, whether a bank or a nonbank, has the potential to severely disrupt many

other financial institutions, their customers, and
other markets.
To address the systemic risk that has arisen since
mid-2007, the Fed has taken historic actions to
promote financial stability by expanding its role as
lender of last resort. Starting in late 2007, the Fed
expanded its existing discount window operations
and created an alphabet soup of new facilities (see
The Expanding Fed Toolbox, next page) to help the
credit markets function more effectively. Some of
these actions required the Fed to invoke a special
provision of the Federal Reserve Act — referred to
as Section 13(3) — that gives the Fed the authority
to lend to any individual, partnership, or corporation in “unusual and exigent circumstances.”6
Consider how much has changed: Prior to this crisis, the Fed lent only to depository financial institutions — that is, banks, savings and loans, savings
banks, and credit unions — and such lending was
typically overnight. During this financial crisis, we
have made loans to primary securities dealers, investment banks, a global insurance company, and
to industrial and financial companies that issue
commercial paper. These lending arrangements
have been for terms of as long as 90 days or even
as long as 10 years in the case of the financing
provided in the Bear Stearns acquisition.
Prior to this crisis, Fed lending typically amounted
to less than 1 percent of total Fed assets. By the
end of 2008, lending had grown to nearly 50 percent of total Fed assets.
However, the Fed has not been as clear or explicit
about the goals and objectives of its financial stability policy as it has been with its monetary policy
goals. In today’s financial system, we must devise
new and clearer objectives for central bank lending. If the goal is to protect the financial system
against systemic risk, we must clearly define such
risk and articulate in advance the circumstances
and terms under which we will lend and to whom.

Federal Reserve Bank of Philadelphia

9

The Expanding Fed Toolbox*

To address the financial crisis, the Federal Reserve has added three sets of tools:

A.

Lending to financial institutions: These tools provide short-term liquidity to banks and other
financial institutions and are closely tied to the central bank’s role as the lender of last resort.

Discount Window Programs TAF
Term Auction
Facility
Primary, secondary,
and seasonal lending to
Dec. 12, 2007
depository institutions; rates
have been lowered since the Auctions for 28day term loans to
crisis began
primary creditTerm Discount Window
eligible depository
Programs
institutions
Aug. 17, 2007
Traditional overnight loans
expanded to 90 days

July 30, 2008
Fed introduces 84day TAF loans

TSLF
Term Securities Lending Facility
March 11, 2008
Allows primary dealers to borrow
Treasury securities in exchange for
less liquid assets
TSLFO
Term Securities Lending Facility
Options Program
July 30, 2008
Allows primary dealers to buy
options to borrow from TSLF

PDCF
Primary Dealer
Credit Facility

Reciprocal
Currency
Arrangements

March 16, 2008
Overnight loans
to primary
dealers, the
broker-dealers
that trade with
the Open
Market Desk

Dec. 12, 2007
Currency swaps
with select
foreign central
banks that can
lend the funds to
foreign financial
institutions ease
conditions in
global markets

* Adapted from Board of Governors of the Federal Reserve System, “Credit and Liquidity Programs and the Balance Sheet,” www.federalreserve.gov/
monetarypolicy/bst.htm
Program name: Bold; Date program was announced: italics; Program description: regular text

In general, we should avoid giving the Fed overly
broad mandates, missions, or goals with respect
to financial stability that conflict with the one
goal that is uniquely the responsibility of a central
bank: price stability. In times such as these, we
must remember that instability in the general level
of prices — whether inflation or deflation — is
itself a significant source of financial instability.
Consequently, we must make sure that in trying to
FIGURE 1

Composition of the Fed’s
Balance Sheet in 2008
Trillions $
2.5
2.0
1.5

Other Assets
Maiden Lanes
TAF and Other Loans
Commercial Paper
Funding Facility
Agency Debt
Treasury Securities

0.5

April

July

October

2008
Note: Maiden Lanes, TAF and Other Loans, and CPFF account for 46
percent of balance sheet.
Source: Federal Reserve Board of Governors H.4.1 statistical release

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2

Commitment to
a Systematic Approach

The second principle for sound central
banking is that policymakers must go beyond just
stating their objectives — words are not enough.
Policymakers must also make credible those commitments to achieve their policy goals and take
actions that are consistent with them.7
As mentioned above, expectations about the future play a crucial role in all sorts of decisions that
people and businesses make today. If the central
bank does not deliver on its stated objectives or
takes actions inconsistent with those objectives,
businesses and households will need to adjust
their decisions in light of this unexpected policy
outcome. The central bank’s failure to deliver
thus leads to unnecessary economic volatility.

1.0

0
January

cure one source of financial instability, we do not
sow the seeds of another.

If a central bank is to avoid contributing to
economic instability, it must not only articulate its
goals, it must also make a credible commitment
to take actions that will deliver on the stated
objectives. Gaining the public’s confidence
that central banks are committed to their policy
objectives and to their plans for achieving them
is not an easy task. In democratic societies, it is

B.

Lending directly to key credit markets: These tools provide liquidity directly to borrowers and
investors.

AMLF
ABCP Money Market Mutual
Fund Liquidity Facility

CPFF
Commercial Paper
Funding Facility

MMIFF
Money Market Investor
Funding Facility

TALF
Term Asset-Backed Securities
Loan Facility

Sept. 19, 2008
Assists money funds that hold
high-quality asset-backed
commercial paper (ABCP)

Oct. 7, 2008
Provides liquidity
backstop to U.S. issuers
of commercial paper

Oct. 21, 2008
Supports private-sector
program to provide
liquidity to money market
mutual fund investors

Nov. 25, 2008
Supports the issuance of assetbacked securities (ABS) collateralized
by consumer, small business, and
various other types of loans

C.

Purchases of longer-term securities: These tools support the functioning of credit markets by
open market purchases of longer-term securities for the Fed’s portfolio.

GSE Debt

GSE MBS

Sept. 19, 2008
Fed agrees to purchase debt issued by Fannie
Mae, Freddie Mac, and Federal Home Loan
Banks

Nov. 25, 2008
March 18, 2009
Fed agrees to purchase up to $500 billion Fed agrees to purchase up to
in mortgage-backed securities
$300 billion in longer-term
Treasuries
March 18, 2009
Fed expands purchases up to $1.25
trillion of agency mortgage-backed
securities

Nov. 25, 2008
Fed expands the program to $100 billion
March 18, 2009
Fed increases program up to $200 billion

not possible to obtain complete commitment.
But there are a variety of ways that governments
and central banks have used to make their
commitments more credible to the public.
Policymakers, for example, can earn a reputation for delivering on their objectives by acting in
a consistent way that convinces the public their
stated commitment is credible. To maintain that
credibility or reputation, policymakers must continue to act in a way that is consistent with their
goals. If they deviate from those goals or act in a
way that is inconsistent with them, policymakers
run the risk of losing credibility.
Monetary Policy — In the U.S., the Federal Reserve has built a reputation during the past 25
years for having a commitment to keeping inflation
low and stable, a commitment that has contributed to economic stability. But that reputation can
be lost if we do not continue to act in a way that is
consistent with it. From my perspective, reputational capital is always tenuous — it is hard to acquire but easy to lose and so it must be protected.

Long-Term Treasuries

to a more persistent rise in inflation rates. The public began to question the Fed’s resolve to maintain
price stability. In response to this concern, I and
other members of the Federal Open Market Committee (FOMC) continued to remind the public that
the FOMC was committed to maintaining price
stability and would resist any unanchoring of inflation expectations. None of us wanted to repeat the
period of the late 1970s and early 1980s, when we
saw that an unanchoring of inflation expectations
made it more difficult and more costly to reduce
inflation once it became too high.
FIGURE 2

Headline and Core CPI Inflation in 2008
(12-month percent change)
Percent
6
5

Headline
Core

4
3
2
1

In the spring and summer of 2008, there was great
concern that rising headline inflation rates, due to
rapid and dramatic increases in the prices of oil
and other commodities, would lead to rising inflation expectations, which in turn would contribute

0
-1

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2008
Source: Bureau of Labor Statistics

Federal Reserve Bank of Philadelphia

11

Principles of Sound Central Banking

It is just as important that expectations remain
well anchored in the face of falling energy prices.
Significant declines in gasoline and fuel oil prices
in the last few months of 2008, for instance, led to
declines in the consumer price index (CPI). This
prompted some commentators to suggest that the
U.S. is facing a threat of persistent deflation, as it
did in the Great Depression or as Japan faced during the 1990s. I am not particularly concerned
about the possibility of persistent deflation. When
oil and commodity prices stabilize, the negative
rates of inflation we have seen in the CPI are likely
to disappear. Moreover, I am confident that the
FOMC is committed to maintaining price stability.
Nonetheless, we must act to ensure that expectations of deflation do not take root, just as we must
act to ensure that expectations of higher inflation
do not emerge. The failure to maintain wellanchored inflation expectations can wreak havoc
with the real economy, foster unnecessary volatility, and make it more difficult for the Fed to deliver
on its mandate to keep the economy growing with
maximum employment and price stability.
As indicated earlier, some governments and central banks have adopted institutional mechanisms
to make their stated commitments more credible
to the public, including specific objectives in terms
of a stable price level or a low level of inflation.
Such clearly articulated objectives become a form
of institutional commitment, not just the choice
of a specific individual or a committee whose
membership may change over time. As such, they
strengthen the institution’s credibility regarding its
commitment.
Other economists and I have long proposed establishing an explicit inflation target as one way to
signal the FOMC’s commitment to price stability
and to help anchor expectations.8 A public commitment to a numerical inflation target over an
intermediate horizon is a clear and feasible goal
for monetary policy and is consistent with the Federal Reserve’s mandates. Such an inflation target

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would not only help prevent inflation expectations
from rising to undesirable levels, but it would also
help prevent expectations from falling to undesirable levels. It would offer greater clarity and transparency in communicating our monetary objectives for price stability and would give us a target
that we could credibly commit to meet over time.
Of course, adopting an inflation target is not
enough. A central bank must also act in a way
that is consistent with that target. Words alone are
not enough to make commitments credible. The
central bank must articulate systematic or mostly
predictable policies that help communicate and
provide information as to how the objectives will
be achieved if policymakers hope to reduce policyinduced uncertainty.
Some central banks have experimented with
adopting rules — or at least they have engaged
in rule-like behavior. Some rules involve having
the central bank’s policy interest rate respond to
changes in either money growth or certain financial or exchange rate conditions. Other rules involve adjusting the policy interest rate in response
to deviations of inflation from some target as well
as to deviations of output (or economic growth)
from its long-term trend or some measure of potential. In a March 2008 speech, I argued that
research has suggested that simple rules such as
variations on the Taylor rule appear to perform
quite well in a wide range of economic models.9
This implies that using simple rules as a guide to
setting policy is a useful way to make monetary
policy more systematic and predictable.
One important characteristic of simple rules is that
they can be more easily explained to the public.
That makes it easier for the public and for financial
market participants to form expectations about
policy. Simple rules could enhance the credibility
of monetary policy, help anchor expectations, and
better align the public’s expectations with the central bank’s intentions. Adopting simple rules would
make policy more systematic and predictable,

FIGURE 3

Fed Funds Rate Target vs.
Effective Rate in 2008

Percent
4.5
4.0
3.5

Target
Effective

3.0
2.5
2.0
1.5
1.0
0.5
0

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2008

Source: Federal Reserve Board of Governors H.15 statistical release

which would minimize policy surprises and the
detrimental effects often caused by such surprises.
Financial Stability — During the past year, the Fed
has taken steps to limit the systemic risks caused
by the potential failure of several large financial
institutions. The decisions were always made
based on the risks to the financial markets, not the
desire to preserve individual institutions. Yet, the
old “rules of the game” were out of date. We had
to improvise. Consequently, we had no choice
but to generate some uncertainty.
Indeed, the financial problems at Bear Stearns,
AIG, and Lehman Brothers elicited different responses. When serious funding problems led to
the prospect that Bear Stearns might go bankrupt
and potentially bring down many other financial
firms and disrupt important pieces of the payment system, the Federal Reserve, in consultation
with the Treasury, invoked its emergency powers
as lender of last resort to allow for a more orderly
resolution of the firm’s problems. A private-sector
buyer (JPMorganChase), with Fed assistance, then
purchased Bear Stearns. When AIG and Lehman
faced severe funding problems, the Fed and the

Treasury again attempted to find private-sector
solutions to avoid the imminent failure of these
firms. None was forthcoming. The judgment
was made that given the nature of AIG’s financial
obligations, its disorderly collapse would severely
threaten financial stability. Therefore, the Federal
Reserve provided an emergency credit line to facilitate an orderly resolution. In the case of Lehman,
the Fed and Treasury declined to commit public
funds, since Lehman’s problems had been known
to the market for some time.
In hindsight, some have criticized these decisions. However, at the time, each decision was a
reasonable judgment based on systemic risk. Yet,
these actions did lead to uncertainty about how
nonbank financial failures would be handled, and
arguably, this uncertainty contributed to the stress
in the markets.
One way to alleviate uncertainty is to arrive at
more predictable guidelines for our lending and
intervention policies. Achieving greater clarity
about the criteria by which the Fed will lend to
banks or nonbanks in order to prevent systemic
risk concerns will improve the Fed’s decisionmaking and the understanding in the marketplace,
thus reducing instability and uncertainty.
We should also establish alternative resolution
mechanisms that are more predictable and systematic in their approach. One of the lessons from
the current financial crisis is that, for policymakers,
bankruptcy is not an attractive option for a failing
institution that poses systemic risk. In fact, the underlying rationale of bankruptcy law is maximizing
the payoffs to the firm’s creditors, which in some
cases could exacerbate systemic risk. Although
state insurance regulators do have special procedures for the orderly liquidation of regulated insurance companies that fail, their focus is on paying
off policyholders and claimants. Their procedures
are not intended to address systemic risk.
Since bankruptcy proceedings do not normally

Federal Reserve Bank of Philadelphia

13

Principles of Sound Central Banking

make provisions for systemic risk, we have long
had a specialized regimen for dealing with bank
failures. The Federal Deposit Insurance Corporation (FDIC) may consider systemic concerns in a
failing bank’s resolution and has the authority to
act as a receiver for a failed commercial bank and
run a bridge bank for up to five years. However,
there is no similar mechanism for the orderly
liquidation of most nonbank financial firms that
pose systemic risk. Policymakers are thus left with
one of two outcomes: (1) very costly failures; or (2)
very costly interventions to avoid the failure.
One alternative resolution mechanism might follow the one used by the FDIC. That is, extend
some type of “bridge-bank” authority to regulators of nonbank financial firms that pose systemic
risk. It is not clear to me whether centralizing that
type of bridge authority in one regulatory body —
whether it is the FDIC, the Office of the Comptroller of the Currency, the Fed, or the Securities and
Exchange Commission — would be optimal. Certainly, that is an issue for further study. However,
I do not believe that the Fed is the appropriate

institution for such a role because of the potential
conflicts of interest between monetary policy and
the resolution of a single institution. Thus, I think
this bridge-bank authority should not be the responsibility of the Federal Reserve.
We can look to banking for other examples of
systematic policy approaches. For instance, the
prompt corrective action provisions of the 1991
FDIC Improvement Act (FDICIA) provide an example of a systematic approach that is required
when a bank gets into trouble and is at risk of failing. Trigger points are specified for when bank
regulators must take action to deal with the bank’s
problems. Because Congress embodied these provisions in legislation, regulators are more insulated
from near-term political pressures and constrained
to behave more systematically. This gives the
regulators a degree of political independence and
the markets more clarity.

Transparency

3

The third principle simply stresses that
policymakers should be clear and trans-

Timeline to Transparency
In recent years, the FOMC has sought to improve transparency about its policymaking. Today, the central
bank is quite explicit in setting out the objectives of policy and its views on the outlook for the economy.
Here are some significant milestones:
76

1975
The Federal Reserve
presents testimony
twice each year to
Congress on the
conduct of monetary
policy.

77

78

80

81

82

84

85

86

87

88

89

90

1979

1983

1994

The FOMC releases
the first semiannual
economic projections.

The Federal Reserve
publishes the first
“Beige Book,”
which summarizes
economic
conditions in each
Federal Reserve
District.

The FOMC begins
to release a
statement disclosing
changes in the
federal funds rate
target.

91

parent in communicating their policy and actions
to the public. At one level, transparency is simply
a part of making credible commitments. Central
bankers must clearly articulate to the public their
objectives and their plans to achieve those objectives, as well as explaining those occasions when
they have reason to deviate from their plans.

view of monetary policy with the central bank’s
objectives and therefore better align the public’s
expectations about the economy and inflation.

Another important benefit to transparency is that
it increases the central bank’s accountability to the
public. In a democratic society, it is important
that institutions with the delegated authority to act
in the public interest be as clear and as transparent as possible regarding their actions. Failing to
do so risks the loss of confidence and credibility
— two essential ingredients for sound central bank
policymaking. As former Fed Vice Chairman Alan
Blinder has stressed, central bankers must be as
transparent as possible and clearly communicate
their views on monetary policy to the public, to
whom they must be accountable.10
Monetary Policy – One of the benefits of greater
transparency is that it can help align the public’s

92

93

95

96

97

98

99

01

Although the Federal Reserve is now much more
transparent about its monetary policymaking than
it was 20 years ago, in my view, central banks in
many other countries are ahead of the U.S in this
area. Other central banks often provide the public
with much more detail about their policy deliberations than we do.
In recent years, the FOMC has improved communications between the Fed and the public. Today, more than ever before, the Fed reports more
frequently and more thoroughly on the economy,
and the public is well-served by the central
bank’s explanation of its actions. For example,
the FOMC now releases Committee participants’
projections for the economy and inflation on a
quarterly basis. With more information about the
Federal Reserve’s outlook, individuals and market
participants are able to make economic decisions
armed with a better understanding of what the

03

05

06

2000

2002

2004

The FOMC begins
releasing a statement
after every meeting
and starts to include
an assessment of the
balance of risks to
achieving its objectives.

The results of the
FOMC roll-call
vote are added to
the post-meeting
statement.

The FOMC speeds
up the release of its
minutes: Now there is
only a three-week lag,
instead of waiting until
after the next regularly
scheduled meeting,
which meant a lag of
about six weeks.

08

2007
The FOMC
decides to release
its economic
projections four
times a year.

Adapted from “A Day in the Life of the FOMC,” Federal Reserve Bank of Philadelphia, 2008.

Principles of Sound Central Banking

central bank expects will happen in the economy.
Transparency increases the public’s understanding
of monetary policy, which in turn increases the
credibility and effectiveness of monetary policy.
Financial Stability — Transparency is also important
in communicating the policy and actions that the
central bank takes on financial stability. This is an
important part of reducing the uncertainty and
making the “rules of the game” clear as the central
bank responds to a crisis.
Another reason to ensure clear and transparent
communications when policymakers take extraordinary actions to ensure financial stability is that
such actions can create moral hazard. Indeed,
the mere act of creating the Fed’s special lending
programs over the course of the past year has created moral hazard. To the extent that market participants now feel more comfortable asking for the
central bank’s support when they get into trouble,
they may be inclined to take on more risk than
would otherwise be prudent — thus sowing the
seeds for the next crisis.
Intervening too often or expanding too broadly the
set of institutions that have access to the central
bank’s credit facilities not only creates moral hazard but also distorts the market mechanism for allocating credit, thus increasing the probability and
severity of a future financial crisis.
Clarifying the criteria under which we will intervene in markets or extend credit, including defining what constitutes the “unusual and exigent”
circumstances that form the legal basis for the
Fed’s nontraditional lending, will be essential if we
are to mitigate the moral hazard we have created
and reduce uncertainty about future actions.
Of course, announcing the central bank’s criteria
in advance does not commit it to act as stated in
every case, but it does raise the costs of deviating
from the criteria. We should be prepared to
stay the course once our policy is set and clearly

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communicate the lending policy and the actions
we take in our capacity as lender of last resort.

4

Ensuring the
Independence of the
Central Bank

The fourth principle of sound central banking is
independence. A central bank’s independence
has many dimensions; however, it does not mean
that central bankers or other policymakers should
not be accountable to the public. The importance
of transparency and the communication of clearly
articulated goals as guiding principles are keys to
ensuring the legitimacy of our public institutions.
Monetary Policy – Research has suggested that
countries with more independent central banks
have benefited from lower rates of inflation,
on average, without sacrificing real economic
growth.11
One of the primary reasons independence is so
essential is that monetary policy works with long
lags. So, central bankers must take a longer-term
view of their policies. This need to take a long-run
view is undoubtedly one of the reasons that more
central banks around the world have been given
greater independence from their nations’ treasury
departments or finance ministries and the political
process. History is replete with examples of the
dangers of central banks being used as an arm of a
country’s fiscal authority. The result is often high
levels of inflation.
Freeing central bankers from the short-term
pressures that inevitably manifest themselves in the
political arena helps monetary policymakers better
balance the short- and long-term factors inherent
in their decisions. This independence, though,
underscores the need for accountability and,
therefore, transparency, which further illustrates
that these four principles are mutually reinforcing.
Financial Stability – Just as we know that
independence leads to more effective monetary

policy, free from fiscal and political influence,
I believe independence is also vital to a more
effective lending or financial stability policy.
To protect this independence, the central bank’s
lending policies should avoid straying into the
realm of allocating credit across firms or sectors
of the economy, which I believe is appropriately
the purview of the market. The perception that
the Federal Reserve is in the business of allocating
credit is sure to generate pressure on the Fed
from all sorts of interest groups. In my view, if
government must intervene in allocating credit,

Yet, some of the assets will not go away so
quickly. For example, as 2008 ended, the Fed had
begun the process of purchasing $500 billion of
mortgage-backed securities, many of which will
not roll off its balance sheet for years unless the
Fed sells them in the marketplace. In 2009, the
Fed also plans to purchase a substantial amount
of asset-backed securities whose maturity will be
about three years or even longer.
While the Treasury Supplementary Financing
Program, which was used in 2008 and will be
available in the future, gives the Fed a tool for
managing its balance sheet
and sterilizing the effects
of its lending and securities
purchases on bank
reserves, the Fed is likely
to still face challenges as it
attempts to liquidate these
longer-term assets from
its portfolio.12 Will there
be pressure from various
interest groups to retain
certain assets? Will there be pressure to extend
some of these programs by observers who feel
terminating the programs might disrupt “fragile”
markets or that the economy’s “headwinds” are
too strong? Such pressures could threaten the
Fed’s independence to control its balance sheet
and monetary policy. We will need to have the
fortitude to make some difficult decisions about
when our policies must be reversed or unwound.

To protect this independence, the central
bank’s lending policies should avoid straying
into the realm of allocating credit across
firms or sectors of the economy.
doing so should be the responsibility of the fiscal
authority rather than the central bank.
The Fed’s extraordinary lending facilities already
pose a number of problems that the Fed must
confront. As mentioned above, the lending
programs have dramatically altered the types of
assets on the Fed’s balance sheet as well as its size.
When financial markets begin to operate normally
and the outlook for the economy improves, our
balance sheet must contract if we are to maintain
price stability.
Some of the new facilities will naturally unwind
gradually once they are terminated. For example,
the commercial paper lending facility only
purchases commercial paper of 90 days or less.
Once the Fed stops new purchases, those assets
will mature and begin to shrink the Fed’s balance
sheet.

By setting realistic and feasible objectives, pursuing
a systematic approach to its lending policies that
avoids credit allocation, and communicating its
objectives and actions in a clear and transparent
manner, the Fed can operate independently of
these types of pressures and resist them when they
arise. This will help the Fed better ensure both
its ability and its credibility to maintain financial
stability as well as its monetary policy objectives of
price stability and maximum sustainable long-term
growth.

Federal Reserve Bank of Philadelphia

17

Principles of Sound Central Banking

Summary
To sum up, the past year has been a challenging
time for the U.S. economy and for policymakers.
The Fed responded to the deteriorating economic
outlook and ongoing stresses in financial markets
with monetary policy and extraordinary actions to
ensure financial stability.
Extraordinary times are precisely when sound principles are most necessary for sound policymaking.
A set of guiding principles, like a compass, can be
useful to direct the course of action even in normal times. But, in the midst of a storm, a compass
becomes an essential tool to ensure that we do not
stray from the path consistent with our long-term
objectives.
It is always tempting to take action based on shortterm concerns and argue that we will worry about
consequences later. Yet, as I noted in the beginning of this essay, the policy decisions we make
today help shape expectations, which influence
the economic decisions of households and businesses. By following a set of sound principles, we

can anchor expectations and thereby reduce the
inefficiencies and distortions that arise from expectations going unfulfilled.
I believe we must strive to develop sound policies that follow the four principles outlined above:
clear and feasible objectives; a commitment to
systematic policies; transparency; and a healthy
respect for the independence of the central bank.
Adherence to these principles will allow the Fed
to focus its efforts on achieving its objectives in a
more effective manner.
Finally, policy rules may evolve as our understanding of the economy evolves. Some future crisis
may bring uncertainties and unknowns that require changes that policymakers cannot foresee.
Yet, the need for such evolution or change does
not negate or diminish the importance of these
guiding principles. Instead, these forces of change
should heighten our resolve to develop a principled, systematic approach and to clearly communicate any necessary changes, so we can continue
to anchor expectations for a sound future.

Endnotes
These four principles were outlined in a series of speeches,
including Plosser (2008a), Plosser (2008b), Plosser, (2008c),
and Plosser (2008d).
1

2

See Plosser (2007).

See the Federal Reserve Reform Act of 1977 and the Full Employment and Balanced Growth Act of 1978 (the HumphreyHawkins Act). 
3

4

See Greenspan (2002).

5

See Meltzer (1998).

For more information on the Federal Reserve Act’s Section
13(3), see Fettig (2008). This article, which is available on
the Federal Reserve Bank of Minneapolis’s website, www.
minneapolisfed.org, also references a more complete history in
the December 2002 issue of The Region.
6

18  2008 Annual Report

www.philadelphiafed.org

7

See Dotsey (2008) and Plosser (2008e).

8

For instance, see Mishkin (2008) or Bernanke (2003).

9

See Plosser (2008e).

10

See Blinder (1998).

Forder (2000) and Cukierman (2006) survey the more recent
literature on central bank independence. Earlier analysis can be
found in Alesina and Summers (1993), Cukierman (1993), and
Debelle and Fischer (1994).
11

12
See the joint statement issued by the Treasury and the Fed,
March 23, 2009.

References
Alesina, Alberto, and Lawrence H. Summers. “Central Bank Independence and Macroeconomic Performance: Some
Comparative Evidence,” Journal of Money, Credit and Banking, 25 (May 1993), pp. 151-62.
Bernanke, Ben S. “A Perspective on Inflation Targeting,” speech at the Annual Washington Policy Conference of the
National Association of Business Economists. Washington, D.C., March 25, 2003.
Blinder, Alan. Central Banking in Theory and Practice. Cambridge, MA: The MIT Press, 1998.
Cukierman, Alex. “Central Bank Independence, Political Influence and Macroeconomic Performance: A Survey of
Recent Developments,” Latin American Journal of Economics (Cuadernos de Economía), 30:91 (1993), pp. 271-92.
Cukierman, Alex. “Central Bank Independence and Monetary Policy Making Institutions: Past, Present, and
Future,” Chilean Economy (Economía Chilena), 9 (April 2006), pp. 5-23.
Debelle, Guy, and Stanley Fischer. “How Independent Should a Central Bank Be?” in Jeffrey C. Fuhrer, ed., Goals,
Guidelines, and Constraints Facing Monetary Policymakers. Federal Reserve Bank of Boston Conference Series No.
38 (1994), pp. 195-221.
Dotsey, Michael. “Commitment Versus Discretion in Monetary Policy,” Federal Reserve Bank of Philadelphia Business
Review (Fourth Quarter 2008), pp. 1-8.
Fettig, Dave. “The History of a Powerful Paragraph,” Federal Reserve Bank of Minneapolis The Region (June 2008).
Forder, James. “Central Bank Independence and Credibility: Is There a Shred of Evidence?,” International Finance, 3
(April 2000), pp. 167-85.
Greenspan, Alan. “Transparency in Monetary Policy,” Federal Reserve Bank of St. Louis Review (July/August 2002)
Meltzer, Allan. “Asian Problems and the IMF,” Cato Journal, 17:3 (Winter 1998), pp. 267-74.
Mishkin, Frederic S. “Whither Federal Reserve Communications,” speech at the Peterson Institute for International
Economics, Washington, D.C., July 28, 2008.
Plosser, Charles. “The Financial Tsunami and the Federal Reserve,” speech given at William E. Simon Graduate School of
Business, University of Rochester 30th Annual Economic Outlook Seminar, Rochester, NY, December 2, 2008a.
Plosser, Charles. “Some Thoughts on the Economy and Financial Regulatory Reform,” speech given to the Economics
Club of Pittsburgh, Pittsburgh, November 13, 2008b.
Plosser, Charles. “The Limits of Central Banking,” speech given to the New York Office of the Council on Foreign
Relations, New York, October 8, 2008c.
Plosser, Charles. “Foundations for Sound Central Banking,” speech given for Global Challenges in Monetary Policy session
of the Global Interdependence Center Abroad Conference, Cape Town, South Africa, March 28, 2008d.
Plosser, Charles. “The Benefits of Systematic Monetary Policy,” speech given at the National Association for Business
Economics, Washington Economic Policy Conference, Washington, D.C., March 3, 2008e.
Plosser, Charles. “Two Pillars of Central Banking: Monetary Policy and Financial Stability,” opening remarks to the
Pennsylvania Association of Community Bankers 130th Annual Convention,” Waikoloa, HI, September 8, 2007.
U.S. Department of the Treasury and the Federal Reserve, Joint Statement. “The Role of the Federal Reserve in
Preserving Financial and Monetary Stability,” March 23, 2009.

Federal Reserve Bank of Philadelphia

19

Supervision, regulation and credit department

The Financial Crisis and Challenges
for Regulators

A

s the financial turmoil of 2008 increased
uncertainty, undermined confidence, and
tightened credit conditions for households
and businesses, the Federal Reserve has been a
key player in providing liquidity and calming markets. And the Philadelphia Fed has done its part.

In fact, while the Third District has weathered the
crisis better than other parts of the nation, many
Philadelphia Fed employees have invested long
hours and extra effort to help ensure that the
Federal Reserve System has the resources to meet
the challenges. One area with a major role in the
response has been the Bank’s Supervision, Regulation and Credit Department (SRC).
All of SRC’s major units saw increased activity in
2008, especially those related to credit risk management, examination, surveillance, and enforcement.
“One of the consequences of any financial crisis is
a heightened focus on the role of the regulator,”
said Michael E. Collins, executive vice president
and lending officer, who leads SRC. “Our goal
as financial regulators is to ensure that financial
institutions operate in a safe and sound manner as
they conduct their business. This includes avoiding market excesses as they manage innovations in
their products and services. Our success in dealing with the current crisis will be measured largely
by the restoration of public trust and confidence in
financial markets and institutions.” Collins notes
that regulators have responded quickly and aggressively in this crisis, which has helped avoid the
large-scale failures seen in the savings and loan
crisis of the 1980s or the Great Depression. And
while the Third District has not had many financial
institution failures, SRC has responded to calls for
assistance from other Federal Reserve Districts and
the state of Pennsylvania’s bank regulators.
He noted that, apart from the crisis, SRC also had
to expand staff in 2008 to handle the increased
workload associated with the relocation of a large
bank holding company to the Third District.

20  2008 Annual Report

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SRC’s consumer compliance function also responded to the crisis, not only by heightening its
focus on compliance with credit card and mortgage regulations but also by publishing a new
System-wide newsletter, Consumer Compliance
Outlook®, dedicated to consumer compliance
issues in the financial industry.
Collins notes that financial crises do not happen
overnight. The events that transpired over the
past months have long roots – grounded in rapid
growth of credit, excessive leverage, poor underwriting, and an influx of new financial products
that involved complex and misunderstood risks.
He said reshaping the regulatory landscape will
take time, but debate and discussion about regulatory reforms are underway.
“Going forward, regulators will strive to find the
right balance between regulation and market innovation. A key objective will be to close gaps in the
oversight of financial institutions and markets and
to update and modernize the regulatory system to
keep pace with market realities and global integration,” he added. “Regulators will look to improve
the capacity of supervisors to identify risks while
curbing excessive leverage and risk taking. Valuations of financial institutions’ assets will also need
to be addressed, such as how to price illiquid assets in a mark-to-market accounting framework.”
Many people are aware that the core supervision area has increased its oversight and guidance
of Third District financial institutions. Many are
familiar with SRC’s discount window operations,
which have increased the flow of liquidity in the
Third District. But what many people may not
know is that SRC employees have played an instrumental role beyond the Third District in helping the Board of Governors and other Reserve
Banks deal with numerous supervision issues.
Philadelphia’s staff of experienced examiners has
been a valuable resource to the System through
these difficult economic times. Here’s how several

employees in SRC lent their expertise to the System during the crisis.
Recently, the Board of Governors asked supervising examiner Jim Adams to help with training
about how banks handle commercial real estate
issues. Adams visited the Federal Reserve Bank of
Richmond and the Denver Branch of the Federal
Reserve Bank of Kansas City to conduct training
for bank examiners. Adams also shared his expertise with the Miami Branch of the Federal Reserve
Bank of Atlanta, where he helped conduct a target
review of a troubled bank.
Larry Cordell, special advisor in SRC’s Retail Risk
Analysis unit, was invited to Washington to give a
presentation on risks in the home equity market to
Federal Reserve Chairman Ben Bernanke.
He also worked for the Board as part of a
team sent to the Federal Housing Finance
Agency (FHFA), the successor agency to
the Office of Federal Housing Enterprise
Oversight (OFHEO), to examine the books
of the government-sponsored enterprises
(GSEs) Fannie Mae and Freddie Mac during
the financial crisis. Treasury and the FHFA
ultimately decided to place the GSEs into
conservatorship. In addition, Cordell headed up the business group that worked with
the Kansas City Fed’s Research Automation
Group to build a major data warehouse
of mortgage loan data, with over 107 million mortgage loans (35 million active) that
cover about two-thirds of the total mortgage
market. His group was charged with helping create the data warehouse used by the
System for research and to report on current
mortgage conditions.

loans until the economic crisis subsides, and Rountree’s job was to determine whether the borrowers
were in a financial position to pay back the loans.
These are just three examples of how the Philadelphia Fed’s Supervision, Regulation and Credit Department will continue to provide leadership and
insight in the areas of consumer protection and
mortgage markets as we continue to work through
the current crisis.
“During an economic contraction, we need to
oversee financial institutions more diligently and to
counsel institutions in need,” said Collins. “As the
crisis subsides, in its wake will emerge stronger institutions — more productive and viable than before.“

Assistant examiner Reginald Rountree was
called on to work with the Federal Reserve
Bank of Atlanta, examining the loan portfolios of a large bank in Atlanta’s District. The
bank was trying to assist borrowers in maintaining their large real estate development
Pictured seated are SRC’s Reginald Rountree (left) and Jim Adams, and
Federal Reserve Bank of Philadelphia
(standing) Larry Cordell (left) and Mike Collins.

21

Supervision, regulation and credit department

A Window into the Financial Crisis

T

he term “discount window” evokes a time
when a banker came to a Federal Reserve
teller window to borrow funds, perhaps
to ensure that the bank had sufficient reserves to
complete a financial transaction or to maintain
its level of required reserves. Since the Federal
Reserve had long encouraged banks to seek funds
from other sources first, the discount window was a
quiet post at the Federal Reserve Bank of Philadelphia in most years. That is, until 2008.
Here’s a quick way to picture the change. For all
of 2007, the Philadelphia Fed’s discount window
processed almost $1 billion ($992 million) in cumulative daily total loan value. If that 2007 loan
volume was a measure of what one teller window
could handle, then accommodating the 2008 loan
volume of $2.3 trillion would require nearly 2,300
teller windows.
Of course, rather than approaching a teller window, borrowers today simply call a toll-free num-

ber to process a loan. So don’t look for any massive
office renovations in the Credit and Risk Management unit in Philadelphia’s Supervision, Regulation
and Credit (SRC) Department. What’s another way
to view the change?
“Almost any way you measure it, it was an extraordinary year,” said Vish P. Viswanathan, vice president and discount officer. Viswanathan explained
that several factors contributed to the growth in
loan activity, including a change in approach to discount window lending six years ago, the financial
crisis and the resulting extraordinarily tight credit
markets in 2008, and the addition of new types of
Fed lending in response to the crisis.
“Before 2003, bankers had to go through a lot of
hoops to get a loan from us, because if we made
a loan, it was at a subsidized rate — one that was
below the federal funds rate,” explained Viswanathan. “Banks could not come to us unless they had
exhausted all other sources.” He noted that there
were restrictions on
the use of funds borrowed from the Fed.
In addition, bankers
received more supervisory oversight from
bank regulators when
they borrowed from
the Fed and had to
report to their directors about such borrowing, which added
to the perceived
stigma of going to
the Fed’s discount
window.
In 2003, the Federal
Reserve eased the
administrative rules
for discount window
loans. At the same

Pictured left to right are Kim Caruso, Gail Todd, and Vish Viswanathan of the Supervision,
Regulation and Credit Department. They are shown with a frame from the days when the
discount window really was a window.

time, the Fed increased the discount rate to be
above the federal funds target rate by a full percentage point. This approach intended to use the
interest rate differential — a premium or penalty
rate to keep the discount rate above the market
rate — rather than administrative rules to encourage banks to find other sources of funds before
coming to the Fed to borrow. “So we became, de
facto, the expensive money, but with fewer restrictions. Even so, continued perceptions of stigma
from borrowing at the discount window kept loan
volumes low,” he said.
In the past 18 months, in response to a weakening
economy and a growing financial
crisis, the Fed has significantly reduced the level of short-term interest rates by lowering its target federal
funds rate to near zero. It also significantly reduced the spread (premium) between the discount rate
and the federal funds target to just a
quarter of a point, bringing the discount rate down to a half percent.
With lower rates at the Fed’s discount window and liquidity scarce
as many lenders cut back their lending, more financial institutions chose to borrow at the window.

sonal loans, which provide smaller institutions with
term loans to manage agricultural- or tourism-related seasonal swings in their normal sources of funds.
Credit and Risk Management works closely with
the Bank’s regulatory units and with other regulators to gather information about all Third District
financial institutions, so the staff has a good idea
which credit programs each institution would be
able to access. The unit also monitors the financial
condition of borrowing institutions during the term
of their loans, a task made all the more difficult by
the volatile nature of financial markets in 2008.
To arrange a loan, depository institutions must have

With lower rates at the Fed’s discount
window and liquidity scarce as many lenders
cut back their lending, more financial
institutions chose to borrow at the window.

Typically, depository institutions might need a
loan to bolster their reserves due to daily volatility in credit demands, unexpected withdrawals of
funds, or seasonal factors. The Philadelphia Fed
offers primary, secondary, and seasonal credit at its
discount window, as well as 28- and 84-day Term
Auction Facility (TAF) loans, one of several new
lending programs that the Federal Reserve System
added to meet the challenges of the financial crisis.
To qualify for primary credit and the TAF, an institution must be in sound financial condition. Institutions that do not qualify for primary credit may
receive short-term secondary credit at a higher rate.
In 2008, the Philadelphia Fed made very few sea-

a borrowing agreement approved by its board of
directors, naming certain individuals authorized to
borrow. In addition, the institutions must pledge
collateral, since all discount window loans are
made only after they are “collateralized to the satisfaction of the lending Reserve Bank.“
When an institution needs a loan, a designated
employee calls a Reserve Bank’s toll-free number
and states how much the institution wants to borrow and for how long. Usually the loan is overnight, but primary credit loans can have terms of
as long as 90 days under provisions established in
2008 to address the financial crisis.
The discount window staff then checks the level
of collateral pledged by the institution using the
Collateral Management System (CMS), a web-based

Federal Reserve Bank of Philadelphia

23

Tracking $5 Trillion in Assets

John Ackley, vice president of Treasury Services, thinks of 2008 as a watershed year for the Collateral
Management System (CMS), operated by Philadelphia’s Treasury Services on behalf of the entire Federal
Reserve System. By year-end 2008, the CMS was tracking assets with more than $5 trillion in original par
value and a collateral value of $2.5 trillion.
The CMS team in Philadelphia completed a major overhaul of the system in 2006, and Ackley said
that the CMS demonstrated its robustness in 2008. “We really didn’t have to change the CMS at all,
which was a testament to its quality and flexibility.” As the Federal Reserve added new lending facilities,
broadened collateral categories, and even added nonbank institutions to those with access to the window,
the CMS kept up with the changes.
Ackley noted that throughout a volatile year, the CMS team maintained steady leadership and oversight
to meet the requirements of the credit and risk management community. As new issues came up about
collateral procedures or processes, team members, including Ackley, were taking calls and answering
questions at all hours. In 2008, Ackley and his team, supported by Marie Tkaczyk and her team in
Information Technology Services, introduced several improvements. One enhancement was to automate
the handling of “borrower-in-custody” collateral, usually loan portfolios that a bank keeps on site so it

A Window into
the Financial Crisis ...continued
application that tracks all collateral pledged
throughout the Federal Reserve System, as well as
other records, to see whether the bank can borrow
the amount and whether the requestor is authorized under the borrowing agreement. If so, the
amount is deposited into the bank’s reserve account at the Fed for the requested loan term at the
current discount rate.
TAF loans are a little more complicated. The program, first introduced in December 2007, requires
institutions to bid on specific auctions of either 28day funds or 84-day funds. The interest rate paid
on TAF loans is determined in the auction. It wasn’t
until May 2008 that a Third District institution had
a winning bid for a TAF loan, and most of the TAF
loans in the Philadelphia Fed’s District were made
in the fourth quarter of 2008. When that occurred,
though, TAF loans ended up accounting for 90
percent of the Philadelphia Fed’s total loan activity
in 2008.

24  2008 Annual Report

www.philadelphiafed.org

“Along with the considerable increase in cumulative daily total loan value in 2008, the actual
number of loans increased four-fold from 107 to
437 loans. The real workload for Philadelphia’s
staff, however, came from the dramatic increase in
collateral management activities, as banks added
considerably to their collateral pledged at the Fed,”
said Viswanathan. Credit Officer Gail Todd noted
that many institutions that had never borrowed
at the window before pledged collateral in 2008
just in case they would later need to borrow in
the midst of the financial crisis. “We have had to
educate depository institutions on the various lending programs offered by the Federal Reserve,” said
Todd. “We walked a lot of institutions through the
process of setting up borrowing agreements and
pledging collateral at the window. Many institutions
were looking to enhance their back-up funding
sources for their own contingency planning.”
When an institution pledges collateral, Todd and
her team must determine if the assets are eligible,
whether the Philadelphia Fed can establish a clear

can service the loans. “Back in the day, a bank would show us a stack
of computer paper, two inches thick, with loan information. We would
determine the collateral value and enter the total for the group deposit.
Now we have the ability to look at each loan, with greater granularity, so
the institution can receive a more precise collateral value,” said Ackley.
The team also automated monthly reporting to depository institutions of
the value of the collateral they pledged to the Fed. Collateral pricing was
also improved, with more frequent updates from the National Book Entry
System for Treasury securities and from the Depository Trust Company for
other securities. In early 2009, the CMS began providing daily updates to
pricing of other forms of collateral.
Ackley says the goal is to keep refining the system so that when intraday
payment system risk (PSR) rules go into effect in two years, the CMS will
be able to tell Federal Reserve Banks and their depository institutions the
collateral value of the assets pledged at any given moment.

legal claim to the assets, and then what lendable,
or collateral, value to assign to the assets, using the
Collateral Management System.
Kimberly Caruso, a senior specialist in the Credit
and Risk Management unit, plays a key leadership
role in the Federal Reserve collateral management
function by chairing the Business Steering Group
(BSG) of the CMS application. As the Fed
repeatedly announced new collateral requirements
and additional lending programs in response to
the crisis, Caruso and other members of the BSG
were asked to provide feedback to the CMS team
about how to use the application to track collateral
for the new lending facilities. Caruso is also an
active member on the Federal Reserve System’s
Collateral Valuation Work Group, which helps
determine the “haircuts” taken to establish the
“lendable” collateral values. In September, Caruso
also hosted a meeting of collateral managers
and analysts, which brought together credit risk
professionals from across the Federal Reserve to
discuss the collateral changes.

John Ackley
Vice President, Treasury Services

Todd noted that all of the focus on collateral
management in 2008 is a precursor to the
upcoming changes in payment system risk (PSR)
policies scheduled for implementation in late
2010 or early 2011. The new PSR policy will
require more comprehensive and timely intraday
monitoring of collateral levels that will be used
to offset fees levied on financial institutions for
“overdraft” protection during the day.
“In the future we will see a lot more pressure to
make timely determinations of collateral values,
with more emphasis on turnaround times,”
explained Todd. “Every minute that it takes you
to process a collateral transaction is time that the
financial institution is not getting use of the value,
so we’re looking at all potential efficiencies to
improve the collateral management process.”

Federal Reserve Bank of Philadelphia

25

Community Affairs Department

Helping Third District Communities
Deal with Foreclosures

H

ousing counselors in early 2008 were telling the Federal Reserve Bank of Philadelphia that homeowners in the region were
in trouble. The number of foreclosed properties
was increasing rapidly in Philadelphia and elsewhere in the Third District.
Bringing the District’s first responders — counselors
and loan servicers — together was critical to addressing the deepening subprime mortgage crisis.
Dede Myers, vice president of Community Affairs,
and her staff brought together more than 100
housing counselors with seven of the District’s top
10 loan servicers. Her staff had been conducting
foreclosure-prevention meetings to address issues
in the Third District, but this program was remarkable. “Every counselor left with a lender’s phone

number and the confidence that they could help
homeowners,” Myers said.
One regional housing advocate who attended the
meeting credits the Bank’s event with prompting
a vision that would lead to more opportunities
to help people save their homes. In the spring of
2008, he and others launched Philadelphia’s pilot
program for mortgage-foreclosure diversions. This
novel approach has saved homes from sheriff’s sales
or postponed sales because lenders may not foreclose on a property until the borrower meets with a
housing counselor and lender. Essentially, the program requires lenders and their attorneys to work
with housing counselors to restructure the loan before allowing foreclosure actions to proceed.
But what could the Philadelphia Fed do for borrowers to help them ward off foreclosure? Myers
approached the Philadelphia Daily News to create
a guide geared to helping troubled homeowners
understand their responsibilities as well as their
options. Homeowners needed to know about resources available to prevent foreclosure, whether
that meant finding a housing counselor, negotiating
a modification of their loan terms, or getting help
to pay the legal costs to stop a sheriff’s sale.

Subprime Mortgage Foreclosures
Percent of loans in foreclosure
16
US
PA
DE
NJ

14
12
10
8
6
4
2
0
98

99

00

01

02

03
04
YEARS

05

Source: Mortgage Bankers Association/Haver Analytics
26  2008 Annual Report www.philadelphiafed.org

06

07

08

“Lenders, servicers, and consumer advocates were
distressed that many people were walking away
from their homes without even talking to their
lender,” Myers said. Sometimes they were talking
to the wrong people. Homeowners, frightened by
the threat of losing their homes, were falling prey
to scams.
To help disseminate information, the Philadelphia
Fed and the Greater Philadelphia Urban Affairs Coalition’s Foreclosure Prevention Task Force worked
with the Daily News editorial board to produce the
“Foreclosure Survival Guide,” published in February
2008. Community Affairs distributed 10,000 copies
to agencies battling foreclosures in the Philadelphia
region and shared this guide with other Federal Reserve Community Affairs offices nationwide.

Throughout 2008, the Philadelphia Fed reached
out to the housing counselors serving on the
frontlines of the crisis to provide more training.
The Bank sponsored events with the Pennsylvania
Housing Finance Agency (PHFA) and the Federal
Housing Administration (FHA), which is the largest
insurer of mortgages nationwide. Both the PHFA
and the FHA offered training on their different loan
products and helped counselors understand options available to troubled borrowers.
The Bank also hosted a two-day event that helped
counselors earn certification as delinquency and
default counselors. This training not only benefits
borrowers buried in debt, it also positions the
counseling agency to be eligible for federal funding. The national nonprofit NeighborWorks America, in conjunction with the Pennsylvania Housing
Finance Agency, conducted the training. Once
the training was completed, participating agencies
became eligible for a portion of $360 million in
federal funds that Congress asked NeighborWorks
America to distribute to housing counselors helping
borrowers prevent foreclosure.
The Federal Reserve’s response to rising foreclosures also made the agenda during the Bank’s 2008
conference on “Reinventing Older Communities:
Does Place Matter?” Sandra F. Braunstein, director, Division of Consumer and Community Affairs,
Federal Reserve Board of Governors, discussed the
Fed’s creation of new rules that provide additional
protection to consumers against higher-priced
mortgages under the Home Ownership and Equity
Protection Act and the Truth in Lending Act. She
also explained how the Federal Reserve has collaborated with regulators, community groups, and
policymakers to help prevent or mitigate the effects
of mortgage delinquencies and foreclosures.
One of the Federal Reserve’s major undertakings
was launching an online Foreclosure Resource
Center on each Reserve Bank’s external website.
This Bank’s center provides information for homeowners, prospective homebuyers, and community

groups to prevent foreclosures and lessen their
negative influence on neighborhoods. The center
features research, regional and national resources,
policy and regulation, as well as news and events.
For example, the center offers a mitigation toolkit
to help communities assess the foreclosures in their
area, reach troubled homeowners, and provide
support for displaced homeowners.
Rehabilitating and redeveloping foreclosed and
abandoned properties was the purpose of the
Neighborhood Stabilization Program, created by
the Housing and Economic Recovery Act of 2008.
It entitles states, cities, and counties to receive a
total of $3.92 billion. The Philadelphia Fed asked
Community Affairs’ visiting scholar Alan Mallach to
prepare a paper on how governments, developers,
real estate agents, and others should ensure the effective use of these funds. Mallach created a blueprint outlining 11 principles communities should
follow in spending the program’s funds. Mallach
is a nonresident senior fellow in the Metropolitan Policy Program at the Brookings Institution in
Washington, D.C. His research, which is available on the Bank’s website, was praised by Housing and Urban Development officials and gained
widespread recognition after it was presented at
the Federal Reserve’s conference “Confronting the
Neighborhood Impacts of Foreclosure” in Washington, D.C., in October 2008.
Community Affairs’ collaborative approach to
identifying, understanding, and addressing urgent
problems has always been a strength, one that has
helped the Third District meet its constituents’
needs during this unprecedented crisis. The Philadelphia Fed will continue to respond to the ongoing effects of the subprime mortgage crisis on Third
District communities through its partnerships, outreach, and research. The Bank’s Community Affairs
Department plans to examine the mortgage crisis
and the obstacles and opportunities it presents for
reinventing communities at its 2010 conference.

Federal Reserve Bank of Philadelphia

27

No Evidence of CRA Role in the Crisis

I

n looking for causes of the subprime mortgage
crisis, some people have contended that the
Community Reinvestment Act (CRA) pushed
banking institutions to make high-risk mortgage
loans in lower-income communities and that such
lending led to the crisis. In a November 2008
study, Federal Reserve economists Glenn Canner
and Neil Bhutta analyzed mortgage-related data
to assess such arguments and found no empirical
evidence to support the claim that the CRA was a
major contributor to the subprime crisis.
Enacted by Congress in 1977, the CRA requires
bank regulators to encourage insured depository
institutions, such as banks and thrifts, to help meet
the credit needs of their entire community, including low- and moderate-income areas. The CRA
encourages financial institutions to extend mortgage, small business, and other types of credit to
lower-income neighborhoods and households. It
also encourages them to provide investments and
financial services to businesses and people in lowand moderate-income areas. The law, however,
does not set targets or goals for lending, investment, or services. What’s more, the law states
Former Federal Reserve Governor Randall Kroszner

that banks and thrifts should make loans and investments consistent with safe and sound banking
practices. The CRA does not cover independent
nonbank lending institutions, such as mortgage
and finance companies
In a December 2008 speech, then-Federal Reserve
Governor Randall Kroszner specifically rebutted
the claim that the CRA was a major cause of the
subprime crisis, drawing on the 2008 staff analysis
as well as earlier work done by Fed staff. According to Kroszner, “We have not yet seen empirical
evidence to support these claims, nor has it been
our experience in implementing the law over the
past 30 years that the CRA has contributed to the
erosion of safe and sound lending practices.” He
commented on two reports prepared by the Federal Reserve for Congress: the 1993 “Report to the
Congress on Community Development Lending
by Depository Institutions,” and a 2000 report,
“The Performance and Profitability of CRA-Related
Lending.” These reports analyzed the performance
of lending to lower-income borrowers and neighborhoods under the CRA. In the speech, he stated:
“These studies found that
lending to lower-income individuals and communities has
been nearly as profitable and
performed similarly to other
types of lending done by CRAcovered institutions. Thus, the
long-term evidence shows that
the CRA has not pushed banks
into extending loans that perform out of line with their traditional businesses.”
He went on to discuss the more
recent 2008 staff analysis of
the relationship of the CRA to
the subprime mortgage crisis,
which focused on two basic
questions: What share of subprime mortgage originations

28  2008 Annual Report

www.philadelphiafed.org

were related to CRA? Have
CRA-related subprime loans
performed more poorly than
other subprime loans?

Profile of Higher-Priced Lending in 2006
Banking Institutions & Affiliates

Within CRA
Outside CRA Independent
With regard to the first quesAssessment
Assessment
Mortgage
Area
Area
Company
Total
tion, the staff analysis focused
(percent)
(percent)
(percent)
(percent)
on lending activity during
2005 and 2006, the period
Non-Lower Income
7
23
27
57
that corresponded to the
Lower-Income
6
18
20
44
height of the subprime lendTOTAL
13
41
47
100*
ing boom. It found that only
6 percent of all higher-priced
* Percentages may exceed 100 because of rounding.
loans to lower-income borSource: FFIEC, HMDA Data
rowers or neighborhoods were
made by CRA-covered institutions or their affiliates. In contrast, 20 percent of
NWA was created by the U.S. Congress to provide
higher-priced loans to lower-income borrowers
financial support, technical assistance, and training
were made by independent nonbank institutions,
for community-based revitalization efforts. It works
such as mortgage or consumer finance companies,
with many CRA-covered banks and thrifts to origiwhich are not covered by the CRA. Furthermore,
nate and hold mortgages made predominantly to
nearly 60 percent of higher-priced mortgage loans
lower-income borrowers and neighborhoods. The
were unrelated to the CRA because the loans were
research showed that loans originated under the
made to middle- and upper-income borrowers.
NWA program had a lower delinquency rate than
subprime loans and a lower rate of foreclosure
With regard to the second question, the study
than prime loans.
compared the performance of subprime and Alt-A
mortgage delinquencies in lower-income neighIn addition, the study examined data made availborhoods to those in middle- and upper-income
able by RealtyTrac on foreclosure filings from
neighborhoods. Using data provided by First
January 2006 through August 2008. These data
American Loan Performance, it found that delinindicate that most foreclosure filings – about 70
quency rates of 90 days or more for subprime and
percent in 2006 – have occurred in middle- or
Alt-A loans originated between January 2006 and
upper-income neighborhoods and that foreclosure
April 2008 were high regardless of neighborhood
filings have increased at a faster pace in middle- or
income. That is, subprime or Alt-A loans made
upper-income areas than in lower-income areas,
in lower-income neighborhoods (which would be
where CRA-related lending would occur.
the focus of CRA-related lending) did not perform
worse than when such loans were made in higherAll of this research finds no evidence that the
income neighborhoods.
CRA caused the spike in defaults in the subprime
market. In his speech, Kroszner concluded, “The
To further explore this question, the study comevidence does not support the view that the CRA
pared the performance of subprime mortgages
contributed in any substantial way to the crisis in
with first mortgages originated and held under the
the subprime mortgage market.”
affordable lending programs operated by the national nonprofit NeighborWorks America (NWA).

Federal Reserve Bank of Philadelphia

29

Research Department

Responding to the Crisis

G

iven the financial crisis and the Federal
Reserve’s policy innovations in response
to it, it is not surprising that, in 2008, demands on the Philadelphia Fed’s Research Department for policy and economic analyses increased.
In addition to the usual eight meetings of the Federal Open Market Committee (FOMC), there were
six unscheduled FOMC meetings as well as several
unscheduled meetings of the Bank’s board of directors.
The Bank’s president and directors benefited from
the Research Department’s strong analyses of economic developments and policy issues through
regular and special briefings. Topics included monetary policy at the zero bound of interest rates,
interest rate spreads, the design and economic effect of the Fed’s special liquidity facilities, financial
regulatory reform, the TARP (Troubled Asset Relief
Program), and the department’s new economic
forecasting model. As Director of Research Loretta
Mester observed, “Policy is much more complicated in this economic environment.”
The Research economists also contributed to
President Charles Plosser’s 11 major speeches last
year, most of which addressed some aspect of the
financial crisis. Topics included the limits of central

Regular and Additional
FOMC Meetings in 2008
The Federal Open Market Committee (FOMC) held eight
regularly scheduled meetings in 2008. Research also helped
prepare for six unscheduled FOMC meetings as well as several
unscheduled meetings of the Bank’s board of directors.
January	
March	
April	
June	
July	

9, 21, 29-30
10, 18
29-30
24-25
24

August	
September 	
October	
December 	

Dates in bold italics were unscheduled meetings.

30  2008 Annual Report

www.philadelphiafed.org

5
16, 29
7, 28-29
15-16

banking, financial regulatory reform, and monetary
policy and financial stability. Furthermore, Research staff helped Public Affairs prepare the president for interviews and questions from the media.
All of these activities took on added importance
because President Plosser was a voting member of
the FOMC in 2008 and also because the stressed
economic environment raised the public’s level of
interest in economic developments and what
policymakers had to say about the economy. Indeed, the information specialists in the Research
library worked hard to keep the public and Bank
employees apprised of economic conditions.
Library staff fielded an increased number of requests for information from the public and from
Bank staff seeking data for studies, briefings, and
presentations.
Last year, the Federal Reserve Bank of Philadelphia and its Research Department contributed to
the debate on regulatory reform. Research staff
organized a meeting of members of the Federal
Reserve System’s working group on new financial
architecture with prominent banking scholars from
academia to discuss proposals for regulatory reform
of the financial system. This “summit meeting” was
held at the Philadelphia Fed in January 2009.
The additional workload imposed by the severe
economic downturn cut across all three sections of
the department: regional, macroeconomics, and
banking. However, the sections also maintained
their normal workload, and some of that output
focused on the turmoil in financial markets.
For example, the regional section compiles and
publishes the monthly Business Outlook Survey,
which polls Third District manufacturers, and the
quarterly South Jersey Business Survey, which is
sent to members of the Chamber of Commerce
of Southern New Jersey. In 2008, both of these
surveys kept market participants, Third District
businesses, and Fed policymakers abreast of what
was happening in the regional economy. In fact,

The Survey of Professional Forecasters (SPF), conducted by the Research Department’s Real-Time
Data Research Center, gauged what forecasters
were projecting for inflation, output, and other
economic variables, as it usually does. But like the
regional surveys, the SPF asked special questions
related to the crisis. For instance, the SPF forecasters were unanimous in saying that the U.S. economy had entered or would soon enter a period of
recession before it was declared by the National
Bureau of Economic Research. The SPF also asked
forecasters for their views on how a fiscal stimulus package would affect their estimates for gross
domestic product in 2008, 2009, and 2010. The
semi-annual Livingston Survey continued to collect
forecasters’ projections for short-term and longterm economic growth and their predictions for
the movement of inflation, interest rates, and stock
prices, providing valuable data on expectations
about the economy.

regulatory reform, banking staff published an issue
of the quarterly Banking Legislation and Policy that
provided information on a range of crisis-related
topics, including responses to the liquidity crises at
financial institutions, the government takeover of
Fannie Mae and Freddie Mac, the lending facility
that the Fed created for AIG, and the Fed’s widening of collateral accepted for loans to banks. The
quarterly Banking Brief kept market participants
and the public up to date about conditions at
banks in the Third District and nationwide.
	
Over the course of 2008, other output from the
department reflected the economists’ interest in
the financial crisis and their attempts to analyze it.
For example, Business Review articles touched on
such topics as liquidity crises, the effects of bankruptcy on homeownership, and the “fresh start”
provisions of the bankruptcy law. The department’s
Working Paper series produced studies in such
areas as monetary policy, forecasting models, core
measures of inflation as predictors of total inflation,
the effects of monetary tightening on local banks,
and central bank structure and effective central
banking. In addition, department staff produced
several special reports that discussed such topics
as the use of real-time data to date recessions and
conditions in the housing market in the Third District. Staff members also made an unusually large
number of speeches, chiefly devoted to outlooks
on the local economy.

In addition to its monetary policy work, the macroeconomics section continued its development of a
new economic forecasting model that will be used
to prepare the Bank’s quarterly forecasts. This
model has already proved useful in an environment
where economic forecasting is incredibly difficult.
In addition, the macro section prepared a briefing
on the theoretical and empirical research on the effects of financial shocks on the economy.

In sum, besides its usual annual workload, the Research Department shouldered additional responsibilities occasioned by an unprecedented financial
crisis and economic downturn. In meeting these
responsibilities, not only did the department help
keep Bank staff, directors, and interested parties in
the Third District informed and up to date, its work
also sought to lay the groundwork for improved
policymaking in the future.

the Business Outlook Survey has been shown to be
a good predictor of national economic conditions,
so it garnered even more attention than usual in
2008. The regional section also collected specific
information about how the financial crisis was affecting local businesses. For example, both surveys
included special questions that asked local business
leaders about problems in obtaining credit and
how those problems had affected production or
inventories at their firms.

The banking section also pitched in with the department’s efforts. In addition to ongoing work on

Federal Reserve Bank of Philadelphia

31

Federal Reserve Bank of Philadelphia

2008 Bank Highlights
Audit
In September, the Audit Department hosted “Best Practices and International
Standards,” a five-day workshop that brought together internal audit professionals from 10 Eastern European countries and the United States to discuss practical approaches to internal audits of central banks and financial sector regulatory
authorities. The program was a joint undertaking of the Philadelphia Fed and
the Partners for Financial Stability program, a public-private partnership of the
U.S. Agency for International Development and the East-West Management Institute, a New York-based nonprofit organization.

Cash Services
During the fourth quarter of 2008, the currency counting division began installing the first of eight new high-speed currency-processing machines. The
units include both software and hardware updates with many technological
advances for throughput and efficiency. Each upgrade will require rigorous
testing and significant retraining of staff and supervisors. The upgrade project
will continue throughout 2009. Also in the fall of 2008, Cash hosted a work
group that is revising the custody control procedures and standards for the
Federal Reserve System.

Community Affairs
In March, the Community Affairs Department hosted its third biennial conference on “Reinventing Older
Communities,” attended by more than 500 people from 29 states. During the year, it also supported the
Federal Reserve System’s Homeownership and Mortgage Initiative to help communities respond to mortgage delinquencies and foreclosures. In addition, Community Affairs staff continued efforts to broaden
economic and financial education by reaching more than 500 teachers through the department’s various
programs.

Enterprise Risk Management
Philadelphia’s ERM officer provided System leadership by co-chairing the International Operational Risk
Working Group conference and led presentations on key risk indicators and enterprise risk management.
The ERM department officer also participated in a Federal Reserve System panel discussion on fraud. ERM
led the effort to move the Bank’s District relocation facility (DRF) to New Jersey. The new DRF opened in
October.

Facilities Management
The Facilities Management Department oversaw the start of construction for the Bank’s off-site screening
facility. The new building on 7th Street in Philadelphia will be used for screening general delivery trucks,
check courier vehicles, and armored carriers before the vehicles proceed to the main Bank building. Also,
the Facilities Management staff was instrumental in getting the Bank’s new District relocation facility (DRF)
in New Jersey up and running.
32  2008 Annual Report

www.philadelphiafed.org

Financial Management Services
Staff in FMS chaired several System groups, including the COSO Coordinators Group, the Cost Accounting
Group, the Enterprise Risk Management Group, and the Government Entity Accounting Reporting System
Management Steering Group. FMS also acted as trustee chair for the Accounting Professional Education
Program. In her role as chair of the Enterprise Risk Management Group, the Bank’s chief financial officer
provided leadership on continuing efforts to identify, communicate, and mitigate risks, with an increased
focus on cross-System interdependencies.

Financial Statistics
In 2008, Financial Statistics staff continued to provide superior analysis of incoming data and provided important information to policymakers as the Federal Reserve responded to credit market disruptions. The staff
made important contributions to the Federal Reserve System’s Statistics and Reserves Technology Modernization Project, management and enhancement of existing technology applications, and System-level training.

Human Resources
HR participated in WorkReady Philadelphia, a broad-based partnership dedicated to building the region’s
future workforce, by providing summer internships in various departments throughout the Bank. The ePEP
(electronic Professional Education Program) group was involved in developing the Partnership for Progress
program, which includes a website for minority-owned and de novo banking institutions. Work
continues on development of the Bank’s multifaceted talent management program.
The Philadelphia Fed is playing a significant role in Human Resources at the Federal Reserve System level: The Bank’s president chairs the Committee on Investment
Performance, and its first vice president chairs the System’s Committee on Plan Administration, which administers the retirement and thrift plans.

Information Technology Services
IT Services managed scores of internal Bank projects, supporting most business lines, and provided significant support to the Federal Reserve System and the Treasury. Major IT leadership assignments included
enhancements to collateral management and Treasury check processing systems, software quality assurance
services, and a reworking of the architecture of the Federal Reserve’s network infrastructure. The Bank’s
Groupware Leadership Center has specific responsibility for the Federal Reserve’s collaboration suite of
technologies, including e-mail and instant messaging, the calendar function, web conferencing, unified
messaging, team workplace sites, community services, and enterprise content management. ITS also supports the Bank’s video conferencing network, an enterprise-wide service for all Federal Reserve offices.
A new video conferencing technology called telepresence was introduced in 2008 to provide very highquality communications among key Federal Reserve leaders.

Federal Reserve Bank of Philadelphia

33

Federal Reserve Bank of Philadelphia

2008 Bank Highlights

(continued)

Law Enforcement
Law Enforcement, in conjunction with Facilities Management and other departments, helped in the design and build-out of the District relocation facility (DRF)
in New Jersey, which opened in October. The department also consulted on the
build-out and integration of the security systems and operation plans for the offsite screening facility being built on 7th Street in Philadelphia. Law Enforcement
staff also planned an upgrade to the Bank’s security system, including a complete
renovation of the Law Enforcement control center.

Legal
The Bank’s general counsel continues to chair the System’s Subcommittee of Ethics Officers, which
provides information, guidance, and support to the ethics programs of all the Reserve Banks. He also arranged for ethics training for all Bank departments through online or classroom training. A Legal Department officer continues to provide legal support to Bank management regarding construction of the off-site
screening facility and to the System’s Groupware Leadership Center. Another Legal Department officer
continues to chair the System work group reviewing legal issues related to verifying the identity of those
seeking physical or electronic access to federal government sites; that officer also serves as the legal liaison
to the System’s Workers’ Compensation Coalition.

Payment Cards Center
The Payment Cards Center coordinated the activities of various Bank departments related to a broader
Program in Consumer Credit and Payments. This included co-sponsoring workshops related to the program and developing a communications plan to link more than 40 Bank professionals
who participate in the program. The center also engaged in collaborative initiatives and
events with industry trade groups, including working with the Electronic Funds Transfer
Association to host a major conference on payment card fraud. The center also published
discussion papers, and the center’s visiting scholars contributed papers to the Research
Department’s Working Paper series.

Public Affairs
The department completed the redesign of the Bank’s external website, www.philadelphiafed.org, which
now has improved navigation and new features. Department staff also worked with Bank and System colleagues to produce Partnership for Progress, a new website designed to enhance the ability of minorityowned and de novo financial institutions to thrive in a competitive banking environment. The department’s media team worked with the Bank’s Community Affairs Department and the Philadelphia Daily
News to produce the “Foreclosure Survival Guide.” Published as an insert to the paper, the guide was also
distributed to agencies helping consumers deal with foreclosures. The media team also hosted a workshop
for Third District reporters to give them a perspective on the financial crisis.

34  2008 Annual Report

www.philadelphiafed.org

Research
The Research Department provided extensive support to the Bank’s president as he dealt with policy issues surrounding the changing conditions in financial markets and the economy. The department opened
the Real-Time Data Research Center, a source of knowledge and expertise about real-time macroeconomic data, surveys of macroeconomic forecasts, and macroeconomic modeling. The Research Department’s
regional economic staff provided technical assistance to the city of Philadelphia’s Budget Office and the
Pennsylvania Intergovernmental Cooperation Authority (PICA) on city budget issues. The department
also sponsored several workshops and meetings last year that covered such topics as international trade,
macroeconomics and monetary economics, and intellectual property in financial services.

Retail Payments
Philadelphia’s Retail Payments Department successfully consolidated check-processing operations from
the Utica, N.Y., and Windsor Locks, Conn., offices in 2008. The department implemented significant
workflow changes to align operations with the increasing number of electronic check deposits and the
resulting increased printing of substitute checks, which required the installation of additional high-speed
printers. The Customer Relations staff worked with financial institutions to implement electronic presentment of checks (FedReceipt). At the end of 2008, almost 90 percent of the check deposits and almost
67 percent of the presentments were made electronically. In November, the Federal Reserve System announced further consolidation of check-processing operations, with Philadelphia’s check operation scheduled to be moved to Cleveland by late 2009. Philadelphia also enhanced the application software needed
to handle the processing of peak volumes of government checks from the early 2008 economic stimulus
program.

Supervision, Regulation and Credit
In July 2008, the department’s retail risk officer led a group of SRC staff members in conducting a weeklong math camp for more than 40 school children, grades 5 to 12 in Wilmington, Del. The participants
showed improvement in their math skills through testing before and after the camp. The department
made significant System contributions to monitoring retail credit markets; these markets are receiving
heightened attention as credit conditions deteriorate. Philadelphia staff briefed the Board of Governors
quarterly on the state of the credit card markets and prepared a quarterly profile of leading credit card
issuers. Philadelphia staff continue to provide the Board of Governors and other Reserve Banks with expertise on retail credit market issues.

Treasury Services
In 2007, the U.S. Treasury selected Philadelphia to lead the development of its Collateral Management
and Monitoring System. Last year, department staff defined high-level business
requirements, developed high-level operational requirements, began to define
user requirements, and worked with the Treasury’s Financial Management
Service Bureau to draft documentation for project governance. The department
Treasury Collateral Management
and Monitoring
also effectively managed the Federal Reserve System’s Collateral Management
System and introduced several major system enhancements. (See page 24.)

Federal Reserve Bank of Philadelphia

35

Federal Reserve Bank of Philadelphia

Board of Directors
William F. Hecht
Chairman (1) (4)
Retired President & CEO,
PPL Corporation
Charles P. Pizzi
Deputy Chairman (1) (3) (4)
President & CEO
Tasty Baking Company
Michael F. Camardo (1) (3)
Retired Executive Vice President
Lockheed Martin ITS
Keith S. Campbell (1) (3)
Chairman
Mannington Mills, Inc.

John G. Gerlach (1) (2)
President
Pocono Community Bank
Aaron L. Groff, Jr. (1) (2) (4)
Chairman, President, & CEO
Ephrata National Bank
Garry L. Maddox (1) (2) 4)	
President & CEO
A. Pomerantz & Company
Jeremy Nowak (1) (2)
President & CEO
The Reinvestment Fund

(1) Executive Committee

Ted T. Cecala (1) (3)
Chairman & CEO
Wilmington Trust Corporation

36  2008 Annual Report

www.philadelphiafed.org

(2) Audit Committee
(3) Management and Budget Committee
(4) Nominating and Governance Committee

Standing left to right: Ted T. Cecala, Aaron L. Groff, Jr., John G. Gerlach; seated left to right: Charles P. Pizzi,
Jeremy Nowak, Michael F. Camardo, Garry L. Maddox, Keith S. Campbell; front, center: William F. Hecht.

Federal Reserve Bank of Philadelphia

37

Federal Reserve Bank of Philadelphia

Economic Advisory Council
Renee Amoore
President & CEO		
The Amoore Group	
King of Prussia, PA	
Daniel Blaschak
Treasurer
Blaschak Coal, Inc.	
Mahanoy City, PA
Edward Coryell
Business Manager	
Metropolitan Regional Council
of Carpenters	
Philadelphia, PA		
James Hargadon
Executive Vice President & CFO
Oki Data Americas, Inc.
Mt. Laurel, NJ
Alexander Hatala
CEO			
Lourdes Health System		
Camden, NJ		

Kelly Johnston
Vice President
Government Affairs
Campbell Soup Company
Camden, NJ
Sharmain Matlock-Turner
CEO
Greater Philadelphia Urban
Affairs Coalition
Philadelphia, PA
Eric May
President & Owner		
Pen-Fern Oil Co., Inc.	
Dallas, PA
William W. Moore
President & CEO
Independence Visitor Center
Philadelphia, PA	
			
Christopher Schell
President		
Schell Brothers Construction	
Lewes, DE		

George Tsetsekos
Dean
Drexel University
Philadelphia, PA
Kenneth Tuckey
President		
Tuckey Mechanical Services	
Carlisle, PA		
Mark Wagner
President & CEO		
White Oak Mills, Inc.	
Elizabethtown, PA	
David Wenger
President & CEO
Transport Decisions
Churchville, PA

The Federal Reserve Bank of Philadelphia’s Economic Advisory Council, which was created in 2008,
includes representatives from the tourism, health-care, retail, and food industries, as well as organized
labor. The council’s 14 members reflect our District’s diverse economic base and represent a broader
geographic area than the previous council structure. The council advises Federal Reserve officials on
regional business conditions and economic issues that have an impact on the marketplace.

38  2008 Annual Report

www.philadelphiafed.org

Federal Reserve Bank of Philadelphia

Senior Staff

The Bank’s senior staff consists of the president, first vice president, and other key senior officers. Pictured in front:
William H. Stone, Jr., First Vice President (left), and Charles I. Plosser, President; second row from left: Richard W.
Lang, Executive Vice President; Michael E. Collins, Executive Vice President and Lending Officer; Donna Franco,
Senior Vice President and Chief Financial Officer; and Milissa Tadeo, Senior Vice President; back row from left: Blake
Prichard, Executive Vice President; Arun Jain, Senior Vice President; and Loretta J. Mester, Senior Vice President and
Director of Research.
Federal Reserve Bank of Philadelphia

39

Federal Reserve Bank of Philadelphia

Current Officers
Charles I. Plosser
President and CEO
William H. Stone, Jr.
First Vice President
Michael E. Collins
Executive Vice President
and Lending Officer
Supervision, Regulation
and Credit
Richard W. Lang
Executive Vice President
D. Blake Prichard
Executive Vice President
Donna L. Franco
Senior Vice President and
Chief Financial Officer
Mary Ann Hood
Senior Vice President
and EEO Officer
Human Resources
Arun K. Jain
Senior Vice President
Retail Payments
William W. Lang
Senior Vice President and
Chief Examination Officer
Supervision, Regulation
and Credit
Loretta J. Mester
Senior Vice President and
Director of Research
Milissa M. Tadeo
Senior Vice President
Cash Services and Treasury
Services
John D. Ackley
Vice President
Treasury Services
John G. Bell
Vice President
Financial Statistics
Mitchell S. Berlin
Vice President
and Economist
Research
Robert J. Bucco
Vice President
Wholesale Product Office
Peter P. Burns
Vice President and Director
Payment Cards Center

Michael Dotsey
Vice President and Senior
Economic Policy Advisor
Research

Donna Brenner
Assistant Vice President
Enterprise Risk Management

James S. Ely
Vice President
Public Affairs

Brian Calderwood
Assistant Vice President
Information Technology
Services

Edward M. Mahon
Vice President and General
Counsel
Legal

Jennifer E. Cardy
Assistant Vice President
Financial Management
Services

Alice Kelley Menzano
Vice President
Information Technology
Services

Shirley L. Coker
Assistant Vice President
and Counsel
Legal

Mary DeHaven Myers
Vice President and
Community Affairs Officer

Maryann T. Connelly
Assistant Vice President
and Counsel
Legal

A. Reed Raymond, III
Vice President and Chief
Administrative Officer
Supervision, Regulation
and Credit
Patrick M. Regan
Vice President
Information Technology
Services
Michelle M. Scipione
Vice President
Cash Services
Richard A. Sheaffer
Vice President and General
Auditor
Herbert E. Taylor
Vice President and
Corporate Secretary
Vish P. Viswanathan
Vice President and
Discount Officer
Supervision, Regulation
and Credit
James K. Welch
Vice President
Law Enforcement and
Facilities Management
Kei-Mu Yi
Vice President and
Economist
Research
Aileen C. Boer
Assistant Vice President
Research

Cynthia L. Course
Assistant Vice President
Supervision, Regulation
and Credit
and Assistant Secretary
Frank J. Doto
Assistant Vice President
Supervision, Regulation
and Credit
Michael T. Doyle
Assistant Vice President
Information Technology
Services
Gregory Fanelli
Assistant Vice President
Retail Payments
Suzanne W. Furr
Assistant Vice President and
Assistant General Auditor
William L. Gaunt
Assistant Vice President
Supervision, Regulation
and Credit
Stephen G. Hart
Assistant Vice President
Human Resources
Robert Hunt
Assistant Vice President
Payment Cards Center
John P. Kelly
Assistant Vice President
Retail Payments
Elisabeth V. Levins
Assistant Vice President
Supervision, Regulation
and Credit

Leonard Nakamura
Assistant Vice President and
Economist
Research
Camille M. Ochman
Assistant Vice President
Cash Services
Anthony T. Scafide, Jr.
Assistant Vice President
Customer Relations
Stephen J. Smith
Assistant Vice President and
Counsel
Legal
Eric A. Sonnheim
Assistant Vice President
Supervision, Regulation and
Credit
Marie Tkaczyk
Assistant Vice President
Information Technology
Services
Patrick F. Turner
Assistant Vice President
Information Technology
Services
Todd Vermilyea
Assistant Vice President
Supervision, Regulation and
Credit
Constance H. Wallgren
Assistant Vice President
Supervision, Regulation and
Credit
Christopher C. Henderson
Retail Risk Officer
Supervision, Regulation and
Credit
Thomas J. Lombardo
Financial Services Industry
Relations Officer
Customer Relations
and Assistant Secretary
Robert F. Mucerino
Treasury Services Officer
Treasury Services
Wanda Preston
Check Adjustments Officer
Retail Payments
Gail L. Todd
Credit Officer
Supervision, Regulation and
Credit

Includes promotions through March 2009
40  2008 Annual Report

www.philadelphiafed.org

Federal Reserve Bank of Philadelphia

Operating Statistics
In 2008, Philadelphia’s total volume of commercial
checks processed decreased 44 percent, and the
dollar value of transactions decreased 50 percent,
as a result of the general decline in check processing in the nation’s payment system. The volume
of commercial checks received as Check 21 electronic images increased 106 percent, and the dollar value increased 50 percent in 2008.
During the second and third quarters, government
check volumes spiked compared with recent trends
because of the federal government’s economic
stimulus package. However, the volume and dollar value of U.S. government checks decreased 20
and 25 percent, respectively, in 2008, mostly because Philadelphia’s government check operation
was consolidated at the St. Louis Reserve Bank in
August 2008. Additionally, this decline follows the
same downward experience as commercial checks
because the Treasury is increasingly using electronic payments and because depositing banks are
converting government paper checks to Check 21
electronic images. The Philadelphia Reserve Bank
will remain a contingency site for U.S. government
check processing.
In 2008, Philadelphia continued to be a major
processor of cash in the Federal Reserve System,
although the volume of currency processed decreased almost 6 percent because of a Federal

Reserve System policy that requires financial institutions to recirculate more currency internally or
pay a fee to the Fed. Because the Bank processed a
greater proportion of smaller denomination notes,
the actual dollar value of currency processed decreased by a more significant margin (22 percent).
In 2008, the volume of coin bags processed on-site
increased 8 percent because of increased activity
by two external self-service coin-counting operations and an overabundance of coin in the District
resulting from the 10th year of the State Quarters
program. The value of processed coin, however,
decreased slightly (4 percent) because the Bank
processed a smaller proportion of dollar coins.
In 2008, there was a significant increase in discount window lending activity, both in the number
of loans and the value of loans advanced by the
Reserve Bank. The financial turbulence and the
tightening of liquidity in the economy resulted in
many depository institutions relying on the discount window as a source of funds to meet their
liquidity needs. In addition to the normal lending
programs (i.e., primary credit), financial institutions
also took advantage of the new lending programs
introduced by the Federal Reserve, such as the
Term Auction Facility (TAF). Discount window
activity increased significantly in the Third District
during the late third quarter and fourth quarter of
2008.

SERVICES TO DEPOSITORY INSTITUTIONS	

			
2008	
2008	
2007	
2007
			Volume	Dollar Value	Volume	Dollar Value
Check services:
	
Commercial checks –
		
Paper processed	
		
Check 21 received	
	
U.S. government checks	
Cash operations:
	
Currency processed	
	
Coin paid and received	
	
Loans to depository
institutions during the year	
	

554.8 million checks	 $1,094.3 billion	 998.3 million checks	 $2,174.9 billion
1.2 billion checks	
$2,509.1 billion	 583.7 million checks	 $1,677.0 billion
40.9 million checks	
$47.7 billion	
51.4 million checks	
$63.5 billion
1,793.2 million notes	
404.9 thousand bags	

$29.0 billion	
$187.5 million	

1,903.9 million notes	
375.5 thousand bags	

$37.1 billion
$195.8 million	

437 loans	

$2,264.8 billion	

107 loans	

$991.9 million	

Federal Reserve Bank of Philadelphia

41

FEDERAL RESERVE BANK OF PHILADELPHIA

Statement of Auditor Independence

In 2008, the Board of Governors engaged Deloitte & Touche LLP (D&T) for the audits of the individual
and combined financial statements of the Reserve Banks. Fees for D&T’s services are estimated to be
$10.2 million. Approximately $2.7 million of the estimated total fees were for the audits of the limited
liability companies (LLCs) that are associated with recent Federal Reserve actions to address the financial
crisis, and are consolidated in the financial statements of the Federal Reserve Bank of New York.1 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 2008, the Bank did not engage D&T for any non-audit
services.
1
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.

42  2008 Annual Report

www.philadelphiafed.org

FEDERAL RESERVE BANK OF PHILADELPHIA

Financial ReportS Contents

Letter to Directors	

44

Report of Independent Auditors	

45

Statements of Condition	

47

Statements of Income and Comprehensive Income	

48

Statements of Changes in Capital	

49

Notes to Financial Statements	

50

Federal Reserve Bank of Philadelphia

43

FEDERAL RESERVE BANK OF PHILADELPHIA

Letter to Directors

44  Annual Report 2008

www.philadelphiafed.org

FEDERAL RESERVE BANK OF PHILADELPHIA

Report of Independent Auditors

Federal Reserve Bank of Philadelphia

45

FEDERAL RESERVE BANK OF PHILADELPHIA

Report of Independent Auditors

46  Annual Report 2008

www.philadelphiafed.org

FEDERAL RESERVE BANK OF PHILADELPHIA

STATEMENTS OF CONDITION
(in millions)

As of December 31, 2008 and December 31, 2007					

			
ASSETS			

2008	

2007

Gold certificates	
$	
453 	
$	
Special drawing rights certificates	
	
83 		
Coin	 		
137 		
Items in process of collection	
	
237 		
Loans to depository institutions		 38,629 		
System Open Market Account:			
	Securities purchased under agreements to resell	
	
3,493 		
	
U.S. government, Federal agency, and government-sponsored
		 enterprise securities, net	
	 21,926 		
	Investments denominated in foreign currencies	
	
2,438 		
	
Central bank liquidity swaps	
	 54,424 		
Interdistrict settlement account		
- 		
	
85 		
Bank premises and equipment, net	
Accrued interest receivable	
	
377 		
Other assets	
	
56 		
		Total assets	
$	
$	122,338 	
			
LIABILITIES AND CAPITAL			
Federal Reserve notes outstanding, net	
$	
$	 36,205 	
System Open Market Account:			
	Securities sold under agreements to repurchase		
3,858	
	
Deposits:			
	Depository institutions	
	
10,565 		
	Other deposits	
	
4 		
Deferred credit items	
	
515 		
Interest on Federal Reserve notes due to U.S. Treasury	
	
7 		
Interdistrict settlement account	
	
66,458 		
Accrued benefit costs		
79 		
Other liabilities	
	
17 		
	
Total liabilities	
	 117,708 		
			
Capital paid-in	
	
2,315 		
Surplus (including accumulated other comprehensive loss of $24 			
	
and $19 at December 31, 2008 and 2007, respectively)	
	
2,315 		
	
Total capital	
	
4,630 		
		Total liabilities and capital	

$	 122,338 	

$	

455
83
88
317
2,057
32,987
2,707
2,877
794
87
285
55
42,792

34,165
1,946
2,664
5
215
91
69
11
39,166
1,813
1,813
3,626
42,792

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

Federal Reserve Bank of Philadelphia

47

FEDERAL RESERVE BANK OF PHILADELPHIA

STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(in millions)

For the years ended December 31, 2008 and December 31, 2007

	
2008	
Interest income:			
	Loans to depository institutions	
$	
55 	
$	
	System Open Market Account:			
		Securities purchased under agreements to resell	
	
83 		
		
U.S. government, Federal agency, and
		
government-sponsored enterprise securities	
	
1,125 		
		Investments denominated in foreign currencies	
	
62 		
		
Central bank liquidity swaps	
	
356 		
			 Total interest income	
	
1,681 		
			
Interest expense:			
	System Open Market Account:			
		Securities sold under agreements to repurchase		
32 		
	Depository institutions deposits	
	
9 		
		
Total interest expense	
	
41 		
			 Net interest income	
	
1,640 		
			
Non-interest income:			
	System Open Market Account:			
		
U.S. government, Federal agency, and
		
	
166 		
government-sponsored enterprise securities gains, net	
		
Foreign currency gains, net	
	
135 		
	
Compensation received for services provided	
	
40 		
	Reimbursable services to government agencies	
	
32 		
	Other income	
	
37 		
			 Total non-interest income	
	
410 		
			
Operating expenses:			
	Salaries and other benefits	
	
101 		
	Occupancy expense	
	
12 		
	Equipment expense	
	
13 		
	Assessments by the Board of Governors	
	
66 		
	Other expenses 	
	
38 		
			 Total operating expenses		
230 		
			
	
1,820 		
Net income prior to distribution	
			
Change in funded status of benefit plans	
	
(5)		
			 Comprehensive income prior to distribution	
1,815 	
$	
$	
			
Distribution of comprehensive income:			
	Dividends paid to member banks	
127	
$	
$	
	
Transferred to surplus and change in accumulated other
	
	
502 		
comprehensive loss	
	
Payments to U.S. Treasury as interest on Federal Reserve notes	
	
1,186 		
			Total distribution	
1,815 	
$	
$	
The accompanying notes are an integral part of these financial statements.
48  Annual Report 2008

www.philadelphiafed.org

2007
63
1,703
62
3
1,831

74
74
1,757

243
38
31
6
318
96
11
12
67
41
227
1,848
5
1,853
109
3
1,741
1,853

FEDERAL RESERVE BANK OF PHILADELPHIA

STATEMENTS OF CHANGES IN CAPITAL
(in millions, except share data)

For the years ended December 31, 2008 and December 31, 2007

	Surplus	
		
				
Accumulated		

	
	
	

		Net 	Other
Capital	Income	 Comprehensive 	 Total	
Paid-In	Retained	Loss 	Surplus	

Balance at January 1, 2007
(36.2 million shares)	
$	 1,810 	 $	 1,834 	 $	
	Net change in capital stock issued
	
	
3 		
(0.1 million shares)	
- 		
	 Transferred to surplus and change
	
- 		
in accumulated other comprehensive loss	 	
(2)		
Balance at December 31, 2007
(36.3 million shares)	
	Net change in capital stock issued
	
(10.0 million shares)	
	 Transferred to surplus and change in
	
accumulated other comprehensive loss	

$	 1,813 	

$	 1,832 	

$	

(24)	

$	 1,810 	

Total
Capital

$	3,620

- 		

- 		

3

5 		

3 		

3

(19)	

$	 1,813	

$	3,626

	

502 		

- 		

- 		

- 		 502

	

- 		

507 		

(5)		

502 		 502

Balance at December 31, 2008
$	 2,315	
$	 2,339	
$	 (24)	
(46.3 million shares)	
									

$	 2,315	

$	4,630

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

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1. Structure
The Federal Reserve Bank of Philadelphia (“Bank”) is part of the Federal Reserve System (“System”) and is
one of the twelve 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 Third Federal Reserve District, which includes Delaware and
portions of New Jersey and Pennsylvania.
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 in the System. 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.
The System also consists, 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. Functions include participation in formulating
and conducting monetary policy; participation in the payments system, including large-dollar transfers of
funds, automated clearinghouse (“ACH”) operations, and check collection; distribution of coin and currency;
performance of fiscal agency functions for the U.S. Treasury, certain federal agencies, and other entities;
serving as the federal government’s bank; provision of short-term loans to depository institutions; provision
of loans to individuals, partnerships, and corporations in unusual and exigent circumstances; service to
the consumer and the community by providing educational materials and information regarding consumer
laws; and supervision of 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.
The FOMC, in the conduct of monetary policy, establishes policy regarding domestic open market operations,
oversees these operations, and annually issues authorizations and directives to the FRBNY to execute
transactions. The FRBNY is authorized and directed by the FOMC to conduct operations in domestic
markets, including the direct purchase and sale of securities of the U.S. government, Federal agencies, and
government-sponsored enterprises (“GSEs”), the purchase of these securities under agreements to resell, the
sale of these securities under agreements to repurchase, and the lending of these securities. The FRBNY
executes these transactions at the direction of the FOMC and holds the resulting securities and agreements
in the portfolio known as the System Open Market Account (“SOMA”).

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In addition to authorizing and directing operations in the domestic securities market, the FOMC authorizes
and directs the FRBNY to execute operations in foreign markets in order to counter disorderly conditions
in exchange markets or to meet other needs specified by the FOMC in carrying out the System’s central
bank responsibilities. The FRBNY is authorized by the FOMC to hold balances of, and to execute spot and
forward foreign exchange and securities contracts for, fourteen foreign currencies and to invest such foreign
currency holdings ensuring adequate liquidity is maintained. The FRBNY is also authorized and directed by
the FOMC to maintain reciprocal currency arrangements with fourteen central banks and to “warehouse”
foreign currencies for the U.S. Treasury and Exchange Stabilization Fund (“ESF”) through the Reserve Banks.
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 providing the service and the other 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 reimburse the other Reserve Banks for services provided to them.
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 Collateral Management System, Electronic Cash Letter System, Groupware
Leadership Center, Treasury Check Information Services Central Business Administration Function, and
Treasury Direct Central Business Administration Function.

3. Recent Financial Stability Activities
The Federal Reserve has implemented a number of programs designed to support the liquidity of financial
institutions and to foster improved conditions in financial markets. These new programs, which are set forth
below, have resulted in significant changes to the Bank’s financial statements.
Expanded Open Market Operations and Support for Mortgage Related Securities
The Single-Tranche Open Market Operation Program, created on March 7, 2008, allows primary dealers
to initiate a series of term repurchase transactions that are expected to accumulate up to $100 billion in
total. Under the provisions of the program, these transactions are conducted as 28-day term repurchase
agreements for which primary dealers pledge U.S. Treasury and agency securities and agency MortgageBacked Securities (“MBS”) as collateral. The FRBNY can elect to increase the size of the term repurchase
program if conditions warrant. The repurchase transactions are reported as “System Open Market Account:
Securities purchased under agreements to resell” in the Statements of Condition.
The GSE and Agency Securities and MBS Purchase Program was announced on November 25, 2008. The
primary goal of the program is to provide support to the mortgage and housing markets and to foster improved
conditions in financial markets. Under this program, the FRBNY will purchase the direct obligations of
housing-related GSEs and MBS backed by the Federal National Mortgage Association (“Fannie Mae”),
the Federal Home Loan Mortgage Corporation (“Freddie Mac”), and the Government National Mortgage
Association (“Ginnie Mae”). Purchases of the direct obligations of housing-related GSEs began in November
2008 and purchases of GSE and agency MBS began in January 2009. There were no purchases of GSE and
agency MBS during the period ended December 31, 2008. The program was initially authorized to purchase
up to $100 billion in GSE direct obligations and up to $500 billion in GSE and Agency MBS. In March 2009,

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the FOMC authorized FRBNY to purchase up to an additional $750 billion of GSE and Agency MBS and up
to an additional $100 billion of GSE direct obligations.
The FRBNY holds the resulting securities and agreements in the SOMA portfolio and the activities of both
programs are allocated to the other Reserve Banks.
Central Bank Liquidity Swaps
The FOMC authorized the FRBNY to establish temporary reciprocal currency swap arrangements (central
bank liquidity swaps) with the European Central Bank and the Swiss National Bank on December 12, 2007
to help provide liquidity in U.S. dollars to overseas markets. Subsequently, the FOMC authorized reciprocal
currency swap arrangements with additional foreign central banks. Such arrangements are now authorized
with the following central banks: the Reserve Bank of Australia, the Banco Central do Brasil, the Bank of
Canada, Danmarks Nationalbank, the Bank of England, the European Central Bank, the Bank of Japan,
the Bank of Korea, the Banco de Mexico, the Reserve Bank of New Zealand, Norges Bank, the Monetary
Authority of Singapore, Sveriges Riksbank, and the Swiss National Bank. The activity related to the program
is allocated to the other Reserve Banks. The maximum amount of borrowing permissible under the swap
arrangements varies by central bank. The central bank liquidity swap arrangements are authorized through
October 30, 2009.
Lending to Depository Institutions
The temporary Term Auction Facility (“TAF”) program was created on December 12, 2007. The goal of
the TAF is to help promote the efficient dissemination of liquidity, which is achieved by the Reserve Banks
injecting term funds through a broader range of counterparties and against a broader range of collateral
than open market operations. Under the TAF program, Reserve Banks auction term funds to depository
institutions against a wide variety of collateral. All depository institutions that are judged to be in generally
sound financial condition by their Reserve Bank and that are eligible to borrow under the primary credit
program are eligible to participate in TAF auctions. All advances must be fully collateralized. The loans are
reported as “Loans to depository institutions” in the Statements of Condition.
Lending to Primary Dealers
The Term Securities Lending Facility (“TSLF”) was created on March 11, 2008, to promote the liquidity in
the financing markets for U.S. Treasuries and other collateral. Under the TSLF, the FRBNY will lend up to
an aggregate amount of $200 billion of U.S. Treasury securities to primary dealers secured for a term of 28
days. Securities loans are collateralized by a pledge of other securities, including federal agency debt, federal
agency residential mortgage-backed securities, and non-agency AAA/Aaa-rated private-label residential
mortgage-backed securities, and are awarded to primary dealers through a competitive single-price auction.
The TSLF is authorized through October 30, 2009. The fees related to these securities lending transactions
are reported as a component of “Non-interest income (loss): Other income” in the Statements of Income
and Comprehensive Income.
The Term Securities Lending Facility Options Program (“TOP”), created on July 30, 2008, offers primary
dealers the option to draw upon short-term, fixed-rate TSLF loans in exchange for eligible collateral. The
options are awarded through a competitive auction. The program is intended to enhance the effectiveness of
the TSLF by ensuring additional securities liquidity during periods of heightened collateral market pressures,
such as around quarter-end dates. TOP auction dates are determined by the FRBNY, and the program
authorization ends concurrently with the TSLF.

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Other Lending Facilities
The Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (“AMLF”), created on
September 19, 2008, is a lending facility that provides funding to U.S. depository institutions and bank holding
companies to finance the purchase of high-quality asset-backed commercial paper (“ABCP”) from money
market mutual funds under certain conditions. The program is intended to assist money market mutual
funds that hold such paper to meet the demands for investor redemptions and to foster liquidity in the ABCP
market and money markets more generally. The Federal Reserve Bank of Boston (“FRBB”) administers the
AMLF and is authorized to extend these loans to eligible borrowers on behalf of the other Reserve Banks. All
loans extended under the AMLF are recorded as assets by the FRBB and, if the borrowing institution settles
to a depository account in the Third Reserve District, the funds are credited to the institution’s depository
account and settled between the Banks through the interdistrict settlement account. The credit risk related
to the AMLF is assumed by the FRBB. The FRBB is authorized to finance the purchase of commercial paper
through October 30, 2009.

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 (”Financial Accounting Manual” or “FAM”), which is issued by the Board of
Governors. All of 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.
Differences exist between the accounting principles and practices in the FAM and generally accepted
accounting principles in the United States (“GAAP”), primarily due to the unique nature of the Bank’s powers
and responsibilities as part of the nation’s central bank. The primary difference is the presentation of all
SOMA securities holdings at amortized cost rather than using the fair value presentation required by GAAP.
U.S. government, Federal agency, and GSE securities, and investments denominated in foreign currencies
comprising the SOMA are recorded at cost, on a settlement-date basis, and are adjusted for amortization of
premiums or accretion of discounts on a straight-line basis. Amortized cost more appropriately reflects the
Bank’s securities holdings given the System’s unique responsibility to conduct monetary policy. Although
the application of current market prices to the securities holdings may result in values substantially above or
below their carrying values, these unrealized changes in value would 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 prior to maturity. Decisions regarding securities and foreign currency
transactions, including their purchase and sale, are motivated by monetary policy objectives rather than
profit. Accordingly, fair values, earnings, and any gains or losses resulting from the sale of such securities and
currencies are incidental to the open market operations and do not motivate decisions related to policy or
open market activities.
In addition, the Bank has elected not to present a Statement of Cash Flows 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.

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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. Certain amounts relating to
the prior year have been reclassified to conform to the current-year presentation. Unique accounts and
significant accounting policies are explained below.
a. Gold and Special Drawing Rights Certificates
The Secretary of the U.S. Treasury is authorized to issue gold and special drawing rights (“SDR”) certificates
to the Reserve Banks.
Payment for the gold certificates by the Reserve Banks is made by crediting equivalent amounts in dollars into
the account established for the U.S. Treasury. The gold certificates held by the Reserve Banks are required
to be backed by the gold of the U.S. Treasury. The U.S. Treasury may reacquire the gold certificates at any
time and the Reserve Banks must deliver them to the U.S. Treasury. At such time, the U.S. 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 a 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 in each Reserve Bank.
SDR certificates are issued by the International Monetary Fund (“Fund”) to its members in proportion to each
member’s quota in the Fund 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 U.S. Treasury is authorized to issue
SDR certificates somewhat like gold certificates to the Reserve Banks. When SDR certificates are issued to
the Reserve Banks, equivalent amounts in dollars are credited to the account established for the U.S. Treasury,
and the Reserve Banks’ SDR certificate accounts are increased. The Reserve Banks are required to purchase
SDR certificates, at the direction of the U.S. 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. There were no SDR transactions in 2008 or
2007.
b. Loans to Depository Institutions
Loans are reported at their outstanding principal balances net of commitment fees. Interest income is
recognized on an accrual basis. Loan commitment fees are generally deferred and amortized on a straightline basis over the commitment period, which is not materially different from the interest method.
Outstanding loans are evaluated to determine whether an allowance for loan losses is required. The Bank has
developed procedures for assessing the adequacy of the allowance for loan losses that reflect the assessment
of credit risk considering all available information. This assessment includes monitoring information obtained
from banking supervisors, borrowers, and other sources to assess the credit condition of the borrowers.
Loans are considered to be impaired when it is probable that the Bank will not receive principal and interest
due in accordance with the contractual terms of the loan agreement. The amount of the impairment is
the difference between the recorded amount of the loan and the amount expected to be collected, after
consideration of the fair value of the collateral. Recognition of interest income is discontinued for any loans

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that are considered to be impaired. Cash payments made by borrowers on impaired loans are applied to
principal until the balance is reduced to zero; subsequent payments are recorded as recoveries of amounts
previously charged off and then to interest income.
c. Securities Purchased Under Agreements to Resell, Securities Sold Under Agreements to Repurchase,
and Securities Lending
The FRBNY may engage in tri-party purchases of securities under agreements to resell (“tri-party agreements”).
Tri-party agreements are conducted with two commercial custodial banks that manage the clearing and
settlement of collateral. Collateral is held in excess of the contract amount. Acceptable collateral under triparty agreements primarily includes U.S. government securities; pass-through mortgage securities of Fannie
Mae, Freddie Mac, and Ginnie Mae; STRIP securities of the U.S. government; and “stripped” securities of
other government agencies. The tri-party agreements are accounted for as financing transactions and the
associated interest income is accrued over the life of the agreement.
Securities sold under agreements to repurchase 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 in the Statements of Condition and the related accrued interest payable is reported
as a component of “Other liabilities.”
U.S. government securities held in the SOMA are lent to U.S. government securities dealers to facilitate the
effective functioning of the domestic securities market. Overnight securities lending transactions are fully
collateralized by other U.S. government securities. Term securities lending transactions are fully collateralized
with investment-grade debt securities, collateral eligible for tri-party repurchase agreements arranged by the
Open Market Trading Desk, or both. The collateral taken in both overnight and term securities lending
transactions is in excess of the fair value of the securities loaned. The FRBNY charges the primary dealer a
fee for borrowing securities, and these fees are reported as a component of “Other 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.
d. U.S. Government, Federal Agency, and Government-Sponsored Enterprise Securities; Investments
Denominated in Foreign Currencies; and Warehousing Agreements
Interest income on U.S. government, Federal agency, and GSE securities and investments denominated in
foreign currencies comprising the SOMA is accrued on a straight-line basis. Gains and losses resulting from
sales of securities are determined by specific issue based on average cost. 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 investments denominated in foreign currencies are
reported as “Foreign currency gains, net” in the Statements of Income and Comprehensive Income.
Activity related to U.S. government, Federal agency, and GSE securities, 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. The settlement
also equalizes Reserve Bank gold certificate holdings to Federal Reserve notes outstanding in each District.
Activity related to investments denominated in foreign currencies, 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.

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Warehousing is an arrangement under which the FOMC agrees to exchange, at the request of the U.S.
Treasury, U.S. dollars for foreign currencies held by the U.S. Treasury or ESF over a limited period of time.
The purpose of the warehousing facility is to supplement the U.S. dollar resources of the U.S. Treasury and
ESF for financing purchases of foreign currencies and related international operations.
Warehousing agreements are designated as held for trading 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.
e. Central Bank Liquidity Swaps
At the initiation of each central bank liquidity swap transaction, the foreign central bank transfers a specified
amount of its currency to 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. The foreign currency amounts that the FRBNY acquires
are reported as “Central bank liquidity swaps” on the Statements of Condition. Because the swap transaction
will be unwound at the same exchange rate that was 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 pays interest to the FRBNY based on the foreign currency amounts held by the
FRBNY. The FRBNY recognizes interest income during the term of the swap agreement and reports the
interest income as a component of “Interest income: Central bank liquidity swaps” in the Statements of
Income and Comprehensive Income.
Activity related to these swap transactions, including the related interest income, 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. Similar to other investments denominated in foreign currencies, the foreign
currency holdings associated with these central bank liquidity swaps are revalued at current foreign currency
market exchange rates. Because the swap arrangement will be unwound at the same exchange rate that
was used in the initial transaction, the obligation to return the foreign currency is also revalued at current
foreign currency market exchange rates and is recorded in a currency exchange valuation account by the
FRBNY. This revaluation method eliminates the effects of the changes in the market exchange rate. As of
December 31, 2008, the FRBNY began allocating this currency exchange valuation account to the Bank and,
as a result, the reported amount of central bank liquidity swaps reflects the Bank’s allocated portion at the
contract exchange rate.
f. 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.
g. 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 two to fifty 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

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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 cost of direct services and materials associated with
designing, coding, installing, and testing the software. Capitalized software costs are amortized on a straightline basis over the estimated useful lives of the software applications, which range from 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.
h. Federal Reserve Notes
Federal Reserve notes are the circulating currency of the United States. These notes are issued through
the various Federal Reserve agents (the chairman of the board of directors of each Reserve Bank and their
designees) to the Reserve Banks upon deposit with such agents of specified classes of collateral security,
typically U.S. government securities. These notes are identified as issued to a specific Reserve Bank. The
Federal Reserve Act provides that the collateral security tendered by the Reserve Bank to the Federal Reserve
agent must be at least equal to the sum of the notes applied for by such Reserve Bank.
Assets eligible to be pledged as collateral security include all of the Bank’s assets. 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 pledged for securities sold under
agreements to repurchase is deducted.
The Board of Governors may, at any time, call upon a Reserve Bank for additional security to adequately
collateralize the 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. At December 31, 2008 and 2007, all Federal
Reserve notes issued to the Reserve Banks were fully collateralized.
“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 $5,013 million and $7,564 million at
December 31, 2008 and 2007, respectively.
i. Items in Process of Collection and Deferred Credit Items
“Items in process of collection” in the Statements of Condition 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, and 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.
j. Capital Paid-in
The Federal Reserve Act requires that each member bank subscribe to the capital stock of the Reserve

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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 reflect 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.
k. 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. This amount is intended to provide additional capital and reduce
the possibility that the Reserve Banks will be required to call on member banks for additional capital.
Accumulated other comprehensive income is reported as a component of surplus in the Statements of
Condition and the Statements of Changes in Capital. The balance of accumulated other comprehensive
income is comprised of expenses, gains, and losses related to other postretirement benefit plans that,
under accounting standards, are included in other comprehensive income, but excluded from net income.
Additional information regarding the classifications of accumulated other comprehensive income is provided
in Notes 12 and 13.
l. Interest on Federal Reserve Notes
The Board of Governors requires the Reserve Banks to transfer excess earnings to the U.S. 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 U.S.
Treasury as interest on Federal Reserve notes” in the Statements of Income and Comprehensive Income and
is reported as a liability, or as an asset if overpaid during the year, in the Statements of Condition. Weekly
payments to the U.S. Treasury may vary significantly.
In the event of losses or an increase in capital paid-in at a Reserve Bank, payments to the U.S. Treasury are
suspended and earnings are retained until the surplus is equal to the capital paid-in.
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 U.S. Treasury in the following year.
m. Interest on Depository Institution Deposits
Beginning October 9, 2008, the Reserve Banks began paying interest to depository institutions on qualifying
balances held at the Banks. Authorization for payment of interest on these balances was granted by Title II
of the Financial Services Regulatory Relief Act of 2006, which had an effective date of 2011. Section 128
of the Emergency Economic Stabilization Act of 2008, enacted on October 3, 2008, made that authority
immediately effective. The interest rates paid on required reserve balances and excess balances are based
on an FOMC-established target range for the effective federal funds rate.
n. Income and Costs Related to U.S. Treasury Services
The Bank is required by the Federal Reserve Act to serve as fiscal agent and depository of the United States.
By statute, the Department of the Treasury has appropriations to pay for these services. During the years

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ended December 31, 2008 and 2007, the Bank was reimbursed for substantially all services provided to the
Department of the Treasury as its fiscal agent.
The Treasury and other government agencies reimbursement process for all Reserve Banks is centralized at
the Bank. Each Reserve Bank transfers its Treasury reimbursement receivable to the Bank. The reimbursement
receivable is reported in “Other assets” and totaled $34 million and $33 million at December 31, 2008
and 2007, respectively. The cost of unreimbursed Treasury services is reported in “Other expense” and was
immaterial at December 31, 2008 and 2007.
o. Compensation Received for Services 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 transfer services, and recognizes total
System revenue for these services on its Statements of Income and Comprehensive Income. The FRBA and
FRBNY compensate the other Reserve Banks for the costs incurred to provide these services. The Bank
reports this compensation as “Compensation received for services provided” in the Statements of Income
and Comprehensive Income.
p. Assessments by the Board of Governors
The Board of Governors assesses the Reserve Banks to fund its operations based on each Reserve Bank’s
capital and surplus balances as of December 31 of the prior year. The Board of Governors also assesses
each Reserve Bank for the expenses incurred for the U.S. Treasury to prepare 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.
q. Taxes
The Reserve Banks are exempt from federal, state, and local taxes, except for taxes on real property and,
in some states, sales taxes on construction-related materials. The Bank’s real property taxes were $2
million for each of the years ended December 31, 2008 and 2007 and are reported as a component of
“Occupancy expense.”
r. 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 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.
s. Recently Issued Accounting Standards
In September 2006, FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which established
a single authoritative definition of fair value and a framework for measuring fair value, and expands the

Federal Reserve Bank of Philadelphia

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FEDERAL RESERVE BANK OF PHILADELPHIA

Notes to Financial Statements

required disclosures for assets and liabilities measured at fair value. SFAS 157 was effective for fiscal years
beginning after November 15, 2007, with early adoption permitted. The Bank adopted SFAS 157 effective
January 1, 2008. The provisions of this standard have no material effect on the Bank’s financial statements.
In February 2007, FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities, including an amendment of FASB Statement No. 115” (“SFAS 159”), which provides companies
with an irrevocable option to elect fair value as the measurement for selected financial assets, financial
liabilities, unrecognized firm commitments, and written loan commitments that are not subject to fair value
under other accounting standards. There is a one-time election available to apply this standard to existing
financial instruments as of January 1, 2008; otherwise, the fair value option will be available for financial
instruments on their initial transaction date. SFAS 159 reduces the accounting complexity for financial
instruments and the volatility in earnings caused by measuring related assets and liabilities differently, and
it eliminates the operational complexities of applying hedge accounting. The Bank adopted SFAS 159
effective January 1, 2008. The provisions of this standard have no material effect on the Bank’s financial
statements.
In February 2008, FASB issued FASB Staff Position (“FSP”) FAS 140-3, “Accounting for Transfers of Financial
Assets and Repurchase Financing Transactions.” FSP FAS 140-3 requires that an initial transfer of a financial
asset and a repurchase financing that was entered into contemporaneously with, or in contemplation of,
the initial transfer be evaluated together as a linked transaction under SFAS 140 “Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities”, unless certain criteria are met. FSP FAS
140-3 is effective for the Bank’s financial statements for the year beginning on January 1, 2009 and earlier
adoption is not permitted. The provisions of this standard will not have a material effect on the Bank’s
financial statements.

5. Loans
The loan amounts outstanding to depository institutions at December 31 were as follows (in millions):
	

2008

Primary, secondary, and seasonal credit	

329
38,300
38,629

$	
TAF	 		
	Total loans to depository institutions	
$	

Loans to depository institutions
The Bank offers primary, secondary, and seasonal credit to eligible borrowers. Each program has its own
interest rate. Interest is accrued using the applicable interest rate established at least every fourteen days by
the board of directors of the Reserve Bank, subject to review and determination by the Board of Governors.
Primary and secondary credits are extended on short-term basis, typically overnight, whereas seasonal
credit may be extended for a period 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, U.S.

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FEDERAL RESERVE BANK OF PHILADELPHIA

Notes to Financial Statements

Treasury securities, Federal agency securities, GSE obligations, foreign sovereign debt obligations, municipal
or corporate obligations, 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 deemed appropriate by the Bank, which is typically fair value or face
value reduced by a margin.
Depository institutions that are eligible to borrow under a Bank’s primary credit program are also eligible to
participate in the temporary TAF program. Under the TAF program, the Reserve Banks conduct auctions for
a fixed amount of funds, with the interest rate determined by the auction process, subject to a minimum bid
rate. TAF loans are extended on a short-term basis, with terms of either 28 or 84 days. All advances under
the TAF must be fully collateralized. Assets eligible to collateralize TAF loans include the complete list noted
above for loans to depository institutions. Similar to the process used for primary, secondary, and seasonal
credit, a lending value is assigned to each asset accepted as collateral for TAF loans.
Loans to depository institutions are monitored on a daily basis 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 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.
The maturity distribution of loans outstanding at December 31, 2008 was as follows (in millions):
	
	
Within 15 days	
16 days to 90 days	
Total loans	

Primary, secondary,
and seasonal credit	
$	
	
$	

319 	
$	
10 		
329 	
$	

TAF
7,550
30,750
38,300

Allowance for loan losses
At December 31, 2008 and 2007, no loans were considered to be impaired and the Bank determined that no
allowance for loan losses was required.

6. U.S. Government, Federal Agency, and Government-Sponsored
Enterprise 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 4.366 percent and 4.424 percent at December 31,
2008 and 2007, respectively.

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FEDERAL RESERVE BANK OF PHILADELPHIA

Notes to Financial Statements

The Bank’s allocated share of U.S. government, Federal agency, and GSE securities, net held in the SOMA at
December 31 was as follows (in millions):
		

2008	

2007

U.S. government securities:			
Bills	
$	
804 	
$	 10,080
	
	Notes	
	 14,617 		
17,775
4,910
	
Bonds	
	
5,358 		
Federal agency and GSE securities	
	
861 		
	
Total par value	
	 21,640 		
32,765
Unamortized premiums	
	
351 		
353
Unaccreted discounts	
	
(65)		
(131)
	Total allocated to the Bank	
$	 21,926 		 $32,987

At December 31, 2008 and 2007, the fair value of the U.S. government, Federal agency, and GSE securities
allocated to the Bank, excluding accrued interest, was $24,731 million and $34,381 million, respectively, as
determined by reference to quoted prices for identical securities.
The total of the U.S. government, Federal agency, and GSE securities, net, held in the SOMA was $502,189
million and $745,629 million at December 31, 2008 and 2007, respectively. At December 31, 2008 and
2007, the fair value of the U.S. government, Federal agency, and GSE securities held in the SOMA, excluding
accrued interest, was $566,427 million and $777,141 million, respectively, as determined by reference to
quoted prices for identical securities.
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
central bank, to meet their financial obligations and responsibilities and do not represent a risk to the Reserve
Banks, their shareholders, or the public. The fair value is presented solely for informational purposes.
Financial information related to securities purchased under agreements to resell and securities sold under
agreements to repurchase for the years ended December 31, 2008 and 2007, were as follows (in millions):
	Securities purchased under	Securities sold under	
	
agreements to resell	
agreements to repurchase
	
2008	
2007	
2008	
2007	
Allocated to the Bank:								
	 Contract amount outstanding, end of year	
$	 3,493	 $	 2,057	
$	 3,858	 $	 1,946
	 Weighted average amount outstanding, during the year		 4,237 		 1,552 		 2,858 		 1,542
	 Maximum month-end balance outstanding, during the year		 5,196		 2,278		 4,303		 1,946
	Securities pledged, end of year						 3,445		 1,949 	
							
System total:								
	 Contract amount outstanding, end of year	
$	80,000 	 $	46,500	
$	88,352	 $	 43,985
	 Weighted average amount outstanding, during the year	
	 97,037 		 35,073 		 65,461 		 34,846
	 Maximum month-end balance outstanding, during the year	 	119,000 		 51,500 		 98,559 		 43,985
	Securities pledged, end of year						 78,896 		 44,048

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FEDERAL RESERVE BANK OF PHILADELPHIA

Notes to Financial Statements

The contract amounts for securities purchased under agreements to resell and securities sold under agreements
to repurchase approximate fair value.
The maturity distribution of U.S. government, Federal agency, and GSE securities bought outright, securities
purchased under agreements to resell, and securities sold under agreements to repurchase that were allocated
to the Bank at December 31, 2008, was as follows (in millions):
				
Securities
			Subtotal: U.S.	
purchased	Securities
		
Federal 	
government,	
under	
sold under
	
U.S.	
agency and 	 Federal agency,	 agreements to	 agreements 		
	
government	
GSE	
and GSE	
resell	
to repurchase
	
securities 	
securities	
securities	
(Contract	
(Contract
(Par value)	
amount)
	
(Par value)	
(Par value)	
amount)	
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 allocated to the Bank 	

$	
$	 836 	
	
915 		
	 2,765 		
	 7,568 		
	 4,249 		
	 4,446 		
$	
$	20,779 	

20 	
$	
856 	
$	 1,747 	
$	 3,858
143 		 1,058 		 1,746 		
43 		 2,808 		
- 		
496 		 8,064 		
- 		
159 		 4,408 		
- 		
- 		 4,446 		
- 		
861 	
$	 21,640 	
$	 3,493 	
$	 3,858

At December 31, 2008 and 2007, U.S. government securities with par values of $180,765 million and
$16,649 million, respectively, were loaned from the SOMA, of which $7,892 million and $737 million,
respectively, were allocated to the Bank.

7. Investments Denominated in Foreign Currencies
The FRBNY, on behalf of the Reserve Banks, holds foreign currency deposits with foreign central banks and
with the Bank for International Settlements and invests in foreign government debt instruments. These
investments are guaranteed as to principal and interest by the issuing foreign governments.
The Bank’s allocated share of investments denominated in foreign currencies was approximately 9.829
percent and 11.814 percent at December 31, 2008 and 2007, respectively.
The Bank’s allocated share of investments denominated in foreign currencies, including accrued interest,
valued at foreign currency market exchange rates at December 31, was as follows (in millions):
		
2008
Euro:
Foreign currency deposits
Securities purchased under agreements to resell
Government debt instruments
Japanese yen:
Foreign currency deposits
Government debt instruments
Total allocated to the Bank 

2007

547
401
453

848
301
551

342
695
$ 2,438

332
675
$ 2,707

Federal Reserve Bank of Philadelphia

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FEDERAL RESERVE BANK OF PHILADELPHIA

Notes to Financial Statements

At December 31, 2008 and 2007, the fair value of investments denominated in foreign currencies, including
accrued interest, allocated to the Bank was $2,459 million and $2,704 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 U.S. government, Federal agency, and GSE
securities discussed in Note 6, unrealized gains or losses have no effect on the ability of a Reserve Bank, as
central bank, to meet its financial obligations and responsibilities.
Total System investments denominated in foreign currencies were $24,804 million and $22,914 million at
December 31, 2008 and 2007, respectively. At December 31, 2008 and 2007, the fair value of the total
System investments denominated in foreign currencies, including accrued interest, was $25,021 million
and $22,892 million, respectively.
The maturity distribution of investments denominated in foreign currencies that were allocated to the Bank
at December 31, 2008, 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
$
747
115
172
367
$ 1,401

Japanese Yen
$
342
62
195
438
$ 1,037

Total
$ 1,089
177
367
805
$ 2,438

At December 31, 2008 and 2007, the authorized warehousing facility was $5 billion, with no balance
outstanding.
In connection with its foreign currency activities, the FRBNY may enter into transactions that contain varying
degrees of off-balance-sheet market risk that result from their future settlement and counter-party credit
risk. The FRBNY controls these risks by obtaining credit approvals, establishing transaction limits, and
performing daily monitoring procedures.

8. Central Bank Liquidity Swaps
Central bank liquidity swap arrangements are contractual agreements between two parties, the FRBNY
and an authorized foreign central bank whereby the parties agree to exchange their currencies up to a
prearranged maximum amount and for an agreed-upon period of time. At the end of that period of time,
the currencies are returned at the original contractual exchange rate and the foreign central bank pays
interest to the Federal Reserve at an agreed-upon rate. These arrangements give the authorized foreign
central bank temporary access to U.S. dollars. Drawings under the swap arrangements are initiated by the
foreign central bank and must be agreed to by the Federal Reserve.
The Bank’s allocated share of central bank liquidity swaps was approximately 9.829 percent and 11.814
percent at December 31, 2008 and 2007, respectively.

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FEDERAL RESERVE BANK OF PHILADELPHIA

Notes to Financial Statements

At December 31, 2008 and 2007, the total System amount of foreign currency held under central bank
liquidity swaps was $553,728 million and $24,353 million, respectively, of which $54,424 million and
$2,877 million, respectively, was allocated to the Bank.
The maturity distribution of central bank liquidity swaps that were allocated to the Bank at December 31
was as follows (in millions):
2008
Within 15 days
Australian dollar

$

Euro
Japanese yen

16 days to 90 days

983

Danish krone

2007
$

 Total

1,261

$

16 days to 90 days

2,244

$

-

-

1,475

1,475

-

14,838

13,798

28,636

2,396

4,707

7,354

12,061

-

Korean won

-

1,017

1,017

-

Norwegian krone

216

592

808

-

Swedish krona

983

1,474

2,457

-

Swiss franc

1,889

585

2,474

481

U.K. pound

12

3,240

3,252

-

$ 23,628

$ 30,796

$ 54,424

Total

$

2,877

9. Bank Premises, Equipment, and Software
Bank premises and equipment at December 31 were as follows (in millions):
2008

2007

Bank premises and equipment: 
Land

$

7

$

7

Buildings

92

87

Building machinery and equipment

15

14

1

3

Construction in progress
Furniture and equipment
Subtotal
Accumulated depreciation

68

68

183

179

(98)

(92)

Bank premises and equipment, net

$ 85

$

87

Depreciation expense, for the year ended December 31

$ 11

$

10

Federal Reserve Bank of Philadelphia

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FEDERAL RESERVE BANK OF PHILADELPHIA

Notes to Financial Statements

The Bank leases space to an outside tenant with a remaining lease term of 2 years. Rental income from
such leases was $1 million for each of the years ended December 31, 2008 and 2007 and is reported
as a component of “Other income.” Future minimum lease payments that the Bank will receive under
noncancelable lease agreements in existence at December 31, 2008, are as follows (in millions):
2009

$ 2

2010

2

Total

$ 4

The Bank has capitalized software assets, net of amortization, of $5 million and $6 million at December 31,
2008 and 2007, respectively. Amortization expense was $2 million for each of the years ended December
31, 2008 and 2007. Capitalized software assets are reported as a component of “Other assets” and the
related amortization is reported as a component of “Other expenses.”

10. Commitments and Contingencies
In the normal course of its operation, the Bank enters into contractual commitments, normally with fixed
expiration dates or termination provisions, at specific rates and for specific purposes.
At December 31, 2008, the Bank was obligated under noncancelable leases for premises and equipment
with remaining terms ranging from 1 to approximately 11 years. One equipment lease provides for increased
rental payments based upon increases in operating quantity.
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 for each of the years ended December 31, 2008 and 2007. Certain of the Bank’s
leases have options to renew. The Bank has no capital leases.
Future minimum rental payments under noncancelable operating leases, net of sublease rentals, with
remaining terms of one year or more, at December 31, 2008 are as follows (in thousands):
Operating Leases
2009

$

483

2010

466

2011

478

2012

484

2013

434

Thereafter
Future minimum rental payments

2,383
$ 4,728

At December 31, 2008, there were no material unrecorded unconditional purchase commitments or longterm obligations in excess of one year.

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FEDERAL RESERVE BANK OF PHILADELPHIA

Notes to Financial Statements

Under the Insurance Agreement of the Federal Reserve Banks, each of the Reserve Banks has agreed to
bear, on a per incident basis, a pro rata share of losses in excess of one 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 paid-in of all Reserve Banks at the beginning
of the calendar year in which the loss is shared. No claims were outstanding under the agreement at
December 31, 2008 or 2007.
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 Bank’s employees participate in the Retirement Plan
for Employees of the Federal Reserve System (“System Plan”). Employees at certain compensation levels
participate in the Benefit Equalization Retirement Plan (“BEP”) and certain Reserve Bank officers participate
in the Supplemental Employee Retirement Plan (“SERP”).
The System Plan provides retirement benefits to employees of the Federal Reserve Banks, the Board of
Governors, and the Office of Employee Benefits of the Federal Reserve Employee Benefits System. The
FRBNY, on behalf of the System, recognizes the net asset or net liability and costs associated with the
System Plan in its financial statements. Costs associated with the System Plan are 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, 2008 and 2007, and for the years then ended, were not material.
Thrift Plan
Employees of the Bank may also 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. For the years ended December 31, 2008 and 2007, the Bank matched 80 percent on the first 6
percent of employee contributions for employees with less than five years of service and 100 percent on
the first 6 percent of employee contributions for employees with five or more years of service. The Bank’s
Thrift Plan contributions totaled $3 million for each of the years ended December 31, 2008 and 2007,
respectively, and are reported as a component of “Salaries and other benefits” in the Statements of Income
and Comprehensive Income. Beginning in 2009, the Bank will match 100 percent of the first 6 percent of
employee contributions from the date of hire and provide an automatic employer contribution of 1 percent
of eligible pay.

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67

FEDERAL RESERVE BANK OF PHILADELPHIA

Notes to Financial Statements

12. Postretirement Benefits Other Than Pensions and
Postemployment Benefits
Postretirement Benefits Other Than Pensions
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.
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):
	
2008
Accumulated postretirement benefit obligation at January 1

$

62.9

2007
$

63.1

Service cost-benefits earned during the period

2.0

1.9

Interest cost on accumulated benefit obligation

4.2

3.6

Net actuarial loss (gain)
Curtailment gain
Contributions by plan participants
Benefits paid
Medicare Part D subsidies
Accumulated postretirement benefit obligation at December 31

$

8.7

(3.0)

(2.4)

-

1.4

1.3

(4.6)

(4.3)

0.3

0.3

72.5

$

62.9

At December 31, 2008 and 2007, the weighted-average discount rate assumptions used in developing the
postretirement benefit obligation were 6.00 percent and 6.25 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.

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FEDERAL RESERVE BANK OF PHILADELPHIA

Notes to Financial Statements

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):
		
2008
Fair value of plan assets at January 1

2007

$

-

$

-

Contributions by the employer

2.9

2.7

Contributions by plan participants

1.4

1.3

(4.6)

(4.3)

Benefits paid
Medicare Part D subsidies

0.3

0.3

Fair value of plan assets at December 31

$

-

$

-

Unfunded obligation and accrued postretirement benefit cost

$

72.5

$

62.9

Amounts included in accumulated other comprehensive loss are shown below (in millions):
Prior service cost
Net actuarial loss
Deferred curtailment gain
Total accumulated other comprehensive loss

$

2.3

$

3.7

(26.3)

(22.6)

0.4

-

$ (23.6)

$ (18.9)

Accrued postretirement benefit costs are reported as a component of “Accrued benefit costs” in the
Statements of Condition.
For measurement purposes, the assumed health care cost trend rates at December 31 are as follows:
	
2008

2007

Health care cost trend rate assumed for next year

7.50%

8.00%

Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)

5.00%

5.00%

2014

2013

Year that the rate reaches the ultimate trend rate

Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans.
A one percentage point change in assumed health care cost trend rates would have the following effects for
the year ended December 31, 2008 (in millions):
	
One Percentage
Point Increase
Effect on aggregate of service and interest cost components of
net periodic postretirement benefit costs
Effect on accumulated postretirement benefit obligation

$

One Percentage
Point Decrease

-

$ (0.2)

0.5

(1.7)

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FEDERAL RESERVE BANK OF PHILADELPHIA

Notes to Financial Statements

The following is a summary of the components of net periodic postretirement benefit expense for the years
ended December 31 (in millions):
	
2008

2007

$

2.0

$ 1.9

4.2

3.6

Amortization of prior service cost

(1.3)

(1.3)

Amortization of net actuarial loss

2.9

3.2

7.8

7.4

0.1

-

7.9

$ 7.4

Service cost-benefits earned during the period
Interest cost on accumulated benefit obligation

Total periodic expense
Curtailment loss
Net periodic postretirement benefit expense

$

Estimated amounts that will be amortized from accumulated other comprehensive loss into net
periodic postretirement benefit expense in 2009 are shown below (in millions):
Prior service cost

$ (1.2)

Net actuarial loss

2.4

Total

$

1.2

Net postretirement benefit costs are actuarially determined using a January 1 measurement date. At
January 1, 2008 and 2007, the weighted-average discount rate assumptions used to determine net periodic
postretirement benefit costs were 6.25 percent and 5.75 percent, respectively.
Net periodic postretirement benefit expense is reported as a component of “Salaries and other benefits” in
the Statements of Income and Comprehensive Income. A deferred curtailment gain was recorded in 2008
as a component of accumulated other comprehensive loss; the gain will be recognized in net income in
future years when the related employees terminate 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 loss in the
accumulated postretirement benefit obligation and net periodic postretirement benefit expense.
Federal Medicare Part D subsidy receipts were $0.3 million and $0.5 million in the years ended December
31, 2008 and 2007, respectively. Expected receipts in 2009, related to benefits paid in the years ended
December 31, 2008 and 2007 are $0.2 million.

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FEDERAL RESERVE BANK OF PHILADELPHIA

Notes to Financial Statements

Following is a summary of expected postretirement benefit payments (in millions):
	
Without Subsidy

With Subsidy

$

$

2009

4.2

3.7

2010

4.6

4.1

2011

4.9

4.4

2012

5.2

4.7

2013

5.5

4.9

31.4

27.6

2014 - 2018
Total

$

55.8

$

49.4

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, 2008 and 2007 were $5 million. This cost is included as a component of “Accrued
benefit costs” in the Statements of Condition. Net periodic postemployment benefit expense included in
2008 and 2007 operating expenses were $0.4 million and $1 million, respectively, and are recorded as a
component of “Salaries and other benefits” in the Statements of Income and Comprehensive Income.

13. Accumulated Other Comprehensive Income And Other
Comprehensive Income
Following is a reconciliation of beginning and ending balances of accumulated other comprehensive income
(loss) (in millions):
Amount Related to
Postretirement Benefits
Other Than Pensions
Balance at January 1, 2007

$

(24)

Change in funded status of benefit plans:
Net actuarial gain arising during the year

3

Amortization of prior service cost

(1)

Amortization of net actuarial loss

3

Change in funded status of benefit plans - other comprehensive income
Balance at December 31, 2007

5
$

(19)

Change in funded status of benefit plans:
Net actuarial loss arising during the year

(7)

Amortization of prior service cost

(1)

Amortization of net actuarial loss

3

Change in funded status of benefit plans - other comprehensive loss
Balance at December 31, 2008

(5)
$

(24)

Federal Reserve Bank of Philadelphia

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FEDERAL RESERVE BANK OF PHILADELPHIA

Notes to Financial Statements

Additional detail regarding the classification of accumulated other comprehensive loss is included in Note
12.

14. Business Restructuring Charges
2008 Restructuring Plans
In 2008, the Reserve Banks announced the acceleration of their check restructuring initiative to align
the check processing infrastructure and operations with declining check processing volumes. The new
infrastructure will involve consolidation of operations into two regional Reserve Bank processing sites in
Cleveland and Atlanta.
2007 Restructuring Plans
In 2007, the Bank announced a restructuring plan related to align the check processing infrastructure and
operations with declining check processing volumes. The Bank’s costs associated with the restructuring
were not material.
Following is a summary of financial information related to the restructuring plans (in millions):
	
2008 Restructuring Plans
Information related to restructuring plans as of December 31, 2008:
Total expected costs related to restructuring activity

$

Estimated future costs related to restructuring activity

2.9
0.1

Expected completion date

2009

Reconciliation of liability balances:
Balance at December 31, 2007

$

Employee separation costs

2.8

Other costs

0.3

Adjustments

(0.2)

Balance at December 31, 2008

$

2.9

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 “Salaries and other
benefits” in the Statements of Income and Comprehensive Income.
Other costs include retention benefits and outplacement services and are shown as components of “Salaries
and other benefits” and “Other expenses”, respectively, in the Statements of Income and Comprehensive
Income.

72  Annual Report 2008

www.philadelphiafed.org

FEDERAL RESERVE BANK OF PHILADELPHIA

Notes to Financial Statements

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
In February 2009, the System announced the extension through October 30, 2009, of liquidity programs
that were previously scheduled to expire on April 30, 2009. The extension pertains to the Asset-Backed
Commercial Paper Money Market Mutual Fund Liquidity Facility and the Term Securities Lending Facility.
In addition, the temporary reciprocal currency arrangements (swap lines) between the Federal Reserve and
other central banks were extended to October 30, 2009.

Federal Reserve Bank of Philadelphia

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