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The Financial Crisis
Toward an Explanation and Policy Response

2008 Federal Reserve Bank of Richmond Annual Report

Mission
As a regional Reserve Bank, we work within the Federal Reserve System to foster the stability, integrity, and efficiency of the nation’s monetary, financial, and payments systems.
In doing so, we inspire trust and confidence in the U.S. financial system.

Vision
To be an innovative policy and services leader for America’s economy.

Contents
Message from the President ......................................................................................... 2
The Financial Crisis: Toward an Explanation and Policy Response ................................... 4
Message from Management .........................................................................................20
The Bank in the Community..........................................................................................24
Fifth District Economic Report ......................................................................................29
Boards of Directors, Advisory Groups, and Officers .........................................................33
Financial Statements....................................................................................................45

Federal Reserve Bank of Richmond

Jeffrey M. Lacker, President

Message from
the President

2

In last year’s Annual Report, I began this column by noting that for “many Americans, 2007
was a difficult year.” Unfortunately, 2008 was
even more difficult. The U.S. economy spent
the entire year in recession and by the fourth
quarter, economic activity was falling dramatically. In fact, we now find ourselves in the most
severe contraction in more than a generation.
At first, the recession appeared to be fairly
mild. Over the first eight months of 2008, about
700,000 jobs were lost. But in September, the
downturn intensified. In the final four months
of the year, we lost 1.9 million jobs, including
more than 500,000 in December alone. And if
you look at other measures of economic performance, almost all appear similarly dismal.
The Federal Reserve responded aggressively
to the slowdown, cutting the target for the
federal funds rate to a range of 0 to 0.25 percent in December. In addition, the Fed initiated
a number of credit programs aimed at providing liquidity to selected sectors of the economy. While I have raised questions about many
of the latter policies — in my opinion, it would
be preferable if the Federal Reserve expanded
the monetary base by purchasing Treasury securities rather than creating targeted credit
programs — they have had the effect of providing an additional monetary stimulus at a
time when that is needed. Eventually, however,
the Fed will need to find a way to effectively
“unwind” those programs, an issue discussed
in the essay of this year’s Annual Report.
In general, I am hopeful that we will see the
economy begin to grow again in late 2009. We
already have seen a few encouraging signs. For
instance, retail sales of goods and services to
consumers have increased recently, and there
are indications that many housing markets
may be bottoming out. Having said that, it
bears emphasizing that uncertainty about the

economic outlook is particularly acute right
now, and while there are signs consistent with
the emergence of stronger performance by the
end of 2009, we are likely to see some negative
economic reports in the meantime.
Which brings me to this question: What
caused the financial crisis of 2008? It’s too early
to know for certain. Indeed, financial economists will spend many years examining this
episode. But it is possible to offer informed
thoughts on the question. Some commentators
have argued that the crisis was a result of fundamental defects with the market system. Before we jump to such conclusions, however, it’s
worthwhile to understand the environment in
which financial market participants operated.

losses they may incur because of poor business
strategies or excessive risk-taking.
Anyone who questions government intervention risks being called a Pollyanna, an
unskeptical believer in free markets and an
apologist for financial fat cats. Let me be clear:
I do not believe that markets are perfect, and I
do believe that some government actions are
essential to the health and well-being of our
market economy. But the outcomes that result
from market interactions can be difficult to improve upon, and government policies can at
times cause more harm than good. As we
strive to fully understand the financial boom
and bust we have just been through, I believe
we should pay particular attention to the distor-

“As we strive to fully understand the financial boom and bust we have just been through, I believe we
should pay particular attention to the distortions that fundamentally altered the incentives faced by
firms and individuals.”
The financial sector was not unregulated
prior to the crisis. Indeed, there were substantial regulations on the books, some necessary
and wise, and some more questionable. More
importantly, in my view, there was an enormous federal financial safety net that protected market participants from bearing the
full brunt of potential losses, thus undermining
the incentives of creditors to monitor the risks
taken on by institutions that were viewed as
“too big to fail.” The safety net, of course, has
grown even larger since the onset of the crisis.
In my view, this has been a mistake. Instead of
expanding the safety net — which, as I have
argued, contributed significantly to the crisis
— we should work instead to place tighter and
more transparent limits around it. Capitalism is
a system of both profit and loss, and market
participants should not be shielded from the

Federal Reserve Bank of Richmond

tions that fundamentally altered the incentives
faced by firms and individuals. Unfortunately,
such distortions have been all too present in the
financial sector. Limiting the distortions induced
by the financial safety net should be front and
center in any efforts to improve the effectiveness of the financial system.

Jeffrey M. Lacker
President

3

The Financial Crisis:
Toward an Explanation
and Policy Response
By Aaron Steelman and John A. Weinberg
The financial market events since August 2007 — and especially those after September 2008 — have raised
a number of important issues. Some commentators have argued that these events demonstrate fundamental flaws in the market system, flaws that can be corrected only by large-scale intervention. The causes of
the financial market turmoil are far from settled and may not be fully known for some time. This essay will
offer one perspective. We will argue that, although there is some evidence of market failure, the current
crisis does not represent a wholesale failure of financial markets. Instead, we will argue that the crisis stems
from the difficulty of responding to large shocks, the roots of which are multifaceted, including past policy
errors. While there are ways in which financial regulation can be improved, there is also a strong case to be
made that the functioning of market discipline can be improved by constraining some forms of government
intervention, especially those that dampen incentives by protecting private creditors from loss.
It will be useful to think of the essay as divided into the following components. First, what has
happened in the financial markets. Second, why those events took place. Third, possible market imperfections that could produce turmoil in the financial markets and an assessment of the role they have
played in this case. And, fourth, how policymakers should respond in these difficult and uncertain times.
Again, it is important to note that the thesis offered is only tentative. Financial economists, no doubt, will
examine this period for many years to come and debate the merits of competing explanations. In doing
so, they will refine those ideas and come closer to a comprehensive understanding of what has occurred.
This research, hopefully, will be more than an academic exercise. It should provide insights to financial
market participants and policymakers so that similar events do not arise in the future.

Federal Reserve Bank of Richmond

5

What Happened: A Brief Timeline
Summer 2007:
Markets first
respond on a large
scale to concerns that
mortgage-backed
securities might
significantly underperform expectations

August 10, 2007:
Federal Reserve
announces that it
“will provide reserves
as necessary” amidst
strains in money and
credit markets

6

In the first half of 2007, as the extent of
declining home prices became apparent,
banks and other financial market participants
started to reassess the value of mortgages and
mortgage-backed securities that they owned,
especially those in the subprime segment of
the housing market. In early August 2007,
the American Home Mortgage Investment
Corporation filed for Chapter 11 bankruptcy
protection, prompting concern among financial market participants. At its August 10, 2007,
meeting, the Federal Open Market Committee
(FOMC) stated that in “current circumstances,
depository institutions may experience
unusual funding needs because of dislocations
in money and credit markets. As always, the
discount window is available as a source of
funding.” The following month, the FOMC
lowered the federal funds rate 50 basis points
to 4.75 percent, the first in a series of rate cuts
that would ultimately bring the target to a
range of 0 to 0.25 percent in December 2008.
The autumn of 2007 saw increasing strains in
a number of market segments, including assetbacked commercial paper, and banks also
began to exhibit a reluctance to lend to one
another for terms much longer than overnight.
This reluctance was reflected in a dramatic rise
in the London Interbank Offered Rate (LIBOR)
at most maturities greater than overnight.
LIBOR is a measure of the rates at which international banks make dollar loans to one
another. Since that initial disruption, financial
markets have remained in a state of high
volatility, with many interest rate spreads at
historically high levels.
In response to this turbulence, the Fed and
the federal government have taken a series of
dramatic steps. As 2007 came to a close, the
Federal Reserve Board announced the creation

of a Term Auction Facility (TAF), in which
fixed amounts of term funds are auctioned to
depository institutions against any collateral
eligible for discount window loans. So while
the TAF substituted an auction mechanism for
the usual fixed interest rate, this facility can
be seen essentially as an extension of more
conventional discount window lending. In
March 2008, the New York Fed provided term
financing to facilitate the purchase of Bear
Stearns by JPMorgan Chase through the
creation of a facility that took a set of risky
assets off the company’s balance sheet. That
month, the Board also announced the creation
of the Term Securities Lending Facility (TSLF),
swapping Treasury securities on its balance
sheet for less liquid private securities held in
the private sector, and the Primary Dealer Credit
Facility (PDCF). These actions, particularly the
latter, represented a significant expansion of the
federal financial safety net by making available
a greater amount of central bank credit, at
prices unavailable in the market, to institutions
(the primary dealers) beyond those banks that
typically borrow at the discount window.1
Throughout the summer of 2008, the
stability of the housing finance governmentsponsored enterprises, Fannie Mae and Freddie
Mac, came under increasing scrutiny. While
their core businesses have historically been
in the securitization of less risky, “conforming”
mortgages, they had in recent years accumulated significant balance sheet holdings of less
traditional mortgage assets. In September,
both companies were placed in conservatorship by the newly created Federal Housing
Finance Agency.
In the fall of 2008, financial markets
worldwide experienced another round of
heightened volatility and historic changes for
many of the largest financial institutions.

September 18, 2007:
FOMC lowers target
federal funds rate 50
basis points to 4.75
percent, the first of a
series of rate cuts

December 12, 2007:
Fed announces
creation of the Term
Auction Facility (TAF),
the first of several
new tools designed to
provide liquidity
to markets

Lehman Brothers filed for Chapter 11 bankruptcy protection; investment banking
companies Goldman Sachs and Morgan Stanley
successfully submitted applications to become
bank holding companies; Bank of America
purchased Merrill Lynch; Wells Fargo acquired
Wachovia; PNC Financial Services Group
purchased National City Corporation; and the
American International Group received significant financial assistance from the Federal
Reserve and the Treasury Department.
On the policy front, the Federal Reserve
announced the creation of several new lending
facilities — including the Asset-Backed
Commercial Paper Money Market Mutual Fund
Liquidity Facility (AMLF), the Commercial Paper
Funding Facility (CPFF), the Money Market
Investor Funding Facility (MMIFF), and the
Term Asset-Backed Securities Loan Facility
(TALF), the last of which became operational in
March 2009. The TALF was designed to support
the issuance of asset-backed securities collateralized by student loans, auto loans, credit
card loans, and loans guaranteed by the Small
Business Administration, while also expanding
the TAF and the TSLF. The creation of these
programs resulted in a tremendous expansion
of the Federal Reserve’s balance sheet. Furthermore, Congress passed the Troubled Asset
Relief Program (TARP) to be administered by
the Treasury Department. And in February
2009, the President signed the American Recovery and Reinvestment Act, a fiscal stimulus
program of roughly $789 billion. 2

Why the Crisis?
The proximate cause of the financial distress
since 2007 has been the decline in the housing
market, which imposed substantial losses on
financial institutions and led to disruptions
throughout the credit markets. These disrup-

8

tions have spread to the real economy, leaving
the United States in the midst of a significant
recession and prompting many of the
measures described earlier.
What caused the boom in the housing
market and its subsequent decline? Again, the
answers are not obvious and various explanations will need to be vetted by economists over
time. While multiple factors likely contributed
to the cycle, some of which we will discuss
below, a key factor involves the risk-taking
incentives facing market participants.
First, there were what could be called “fundamental” factors. From roughly 1995 to 2005,
the U.S. economy experienced a significant
increase in productivity growth and thus real
household income. Insofar as households saw
these conditions as likely to continue, they increased demand for housing and thus housing
prices. Indeed, housing investment and prices
continued to rise through the 2001 recession,
unlike most postwar business cycles. Those
gains in productivity and household income
began to weaken in 2005 — and with it,
consumers’ ability to repay their loans. Another
plausible explanation involves technological
advances in retail credit delivery. As financial
institutions were able to more efficiently
gather information about potential borrowers,
they were able to more carefully craft loans
to a wider segment of the population. In retrospect, some of those decisions may have been
suspect — but, again, insofar as lenders
believed economic conditions would continue
on the trajectory they were then following,
there was good reason for financial institutions
to expand lending to people who in the past
may not have received mortgages. One might
argue that both borrowers and lenders “overshot” or behaved irrationally. But, given the
information available to them at the time, their

behavior seems less like mania and more like
the actions of reasonable, foresighted actors,
who happened to make an error in judgment
about future trends in economic conditions.
In addition to what we may consider explanations based on economic fundamentals, there
were also a series of public policy decisions that
probably fueled the housing boom to levels inconsistent with market conditions. First, the
Federal Reserve pursued an accommodative
monetary policy following the terrorist attacks
of 2001. This was especially true in 2003 and
2004 when the target for the federal funds rate
was held between 1 percent and 2 percent, as
the economy began to rebound from the earlier,

Federal Reserve Bank of Richmond

brief recession. Such policy created an environment in which credit grew quite freely.3 Others
have argued that beyond the effects of monetary policy, long-term interest rates were held
down by a “global savings glut.”4 This may have
heightened investors’ interest in “reaching for
yield” by taking on greater risks.
Moreover, in an effort to expand access to
housing credit, especially for people at the lower
end of the income distribution, Fannie Mae and
Freddie Mac increased their purchases of subprime securities.5 Many of the underlying loans
in these securities proved problematic and, as
noted earlier, contributed to Fannie and Freddie
being placed under federal conservatorship.
Why have problems in the housing market
caused substantial turmoil throughout
the banking sector, leading many
institutions to become more
cautious about their current
lending actions and
investors to be cautious
in their dealings with
banks? There are at least
three possible
explanations, all
having to do
with uncertainty.

9

March 11, 2008:
Fed creates Term
Securities Lending
Facility (TSLF), which
trades banks’ illiquid
assets, including
mortgage-backed
securities, for
liquid Treasury
securities

March 16, 2008:
Fed creates Primary
Dealer Credit Facility
(PDCF), allowing it
to lend to primary
dealers for the
first time

10

First, there is uncertainty about the aggregate
magnitude of the losses financial institutions
are likely to suffer. Many of the mortgages they
issued are of relatively recent vintage, so how
those borrowers — and, in turn, the lenders —
will fare is unclear. Also, the extent of mortgage
defaults and foreclosures will depend on the
size of the decline in house prices — an
ongoing process as of this writing.
Second, financial market participants are
unsure about the distribution of those losses.
Mortgage risks were spread widely, through
securitization and use of the insurance capabilities provided by credit derivative contracts.
Thus, institutions are concerned about how
their counterparties’ mortgage-related losses
will affect their own viability.
Third, there is policy uncertainty. After the
onset of the crisis, the Federal Reserve and the
Treasury took several actions to help stabilize
the financial sector. However, these actions
appeared to evolve on a case-by-case basis.
Some institutions received support, while others did not, making it more difficult for market
participants to discern the governing principles
and to make predictions about future policy
moves. These institutions were already facing
an uncertain economic environment, which
contributed to relatively sparse lending opportunities. Coupled with an uncertain public
policy environment, it is not surprising that
many have been hesitant to lend and that many
have had trouble raising private capital.
Any narrative of this boom-and-bust cycle
must take into account the risk-taking incentives of financial market participants. And, here,
the role of the federal financial safety net is
important. Many financial transactions take
place under some form of government protection. Some protections are explicit — such as
the guarantee offered to bank depositors.

Arguably, such protection has reduced depositors’ incentive to scrutinize the riskiness of their
banks’lending practices and may have contributed to the crisis experienced by thrifts in
the 1980s. In addition, it seems likely that market participants view the safety net to include
more than simply those explicit guarantees.
That is to say, many market participants may
believe that there are implicit guarantees,
which also affect their risk-taking behavior.6
For instance, there has long been a widely held
notion that some financial institutions are
simply“too big to fail.” Such institutions are
perceived to be essential to the functioning of
domestic and often of international financial
markets. As a result, these institutions and
their creditors may assume that, should they
encounter difficulties due to unwise lending
practices, the public sector will respond to
maintain their solvency.7
Such public-sector action might take
several forms. It could involve direct lending
to troubled firms by the Federal Reserve or the
Treasury Department. Or it could take a less
direct form, such as that which occurred in the
case of Long-Term Capital Management (LTCM).
The Federal Reserve helped to orchestrate a
recapitalization of LTCM by its creditors. Had
LTCM’s creditors not taken action to keep the
firm from bankruptcy, it is unclear how the Fed
would have responded. But market participants
might have reasonably assumed — given the
Fed’s interest in seeing LTCM survive — that
explicit federal assistance would have been
forthcoming. Further, the Fed’s involvement
signaled a concern about the possible systemic
consequences of losses incurred by the large
institutions that were exposed to LTCM.8
Given the presence of the federal financial
safety net — both its explicit and implicit
guarantees — what options do policymakers

face? Some might argue that the moral hazard
problems associated with a large federal financial safety net cannot be avoided, especially in
rich, advanced countries. As a result, we must
more stringently regulate those firms that may
avail themselves to such protection to ensure
that they are acting prudently and, hence, to
protect the taxpayer. Indeed, one may be skeptical — or remain relatively agnostic — about
the inevitability or desirability of the federal financial safety net, yet still argue that, given its
presence, the current regulatory regime may
need to remain intact or be strengthened.9
Such arguments are reasonable. However,
additional regulation of financial markets
would likely hamper innovation in that industry. An alternative approach is to seek to reduce
the scope of explicit safety net protection — as

Federal Reserve Bank of Richmond

well as creditors’ expectations of implicit protection of firms deemed too big to fail.10 The
presence of the federal financial safety net was
not the sole cause of questionable risk-taking
by financial institutions.11 But it likely altered
those institutions’ behavior and, hence, contributed to the current turmoil. Any future
attempt to redesign financial regulation should
be undertaken with an assessment of the safety
net, including the desirability and feasibility of
scaling back implicit protections. Attempting to
restructure the regulatory landscape without
taking into account the effects of the safety net
is like “putting the cart before the horse.” 12

11

March 14-24, 2008:
Fed announces it
will provide term
financing for
JPMorgan Chase to
purchase Bear Stearns
by taking risky securities off Bear’s balance
sheet via the PDCF

September 7, 2008:
Federal Housing
Finance Agency
(FHFA) places Fannie
Mae and Freddie
Mac in government
conservatorship
following increasing
scrutiny over
their soundness

In summary, the boom and subsequent
decline in the housing market had numerous
causes. In hindsight, private lenders and
borrowers may have made some imprudent
decisions. But they were acting on what they
believed to be sound information about the
current state of the economy and the path of
future growth.
Also, the Federal Reserve kept interest rates
low for a long period, which may have encouraged additional lending that exacerbated the
crisis. In addition, the government-sponsored
enterprises greatly expanded their portfolios,
boosting the market for loans that have proved
difficult for many borrowers to repay. Finally,
the presence of the federal financial safety net
likely encouraged institutions to take risks that
they otherwise would have foregone.
The decline in the housing market has sent
shocks throughout the banking industry and
related financial institutions. Already, the Federal Reserve, the Treasury Department, and
Congress have taken considerable actions to
stem the financial crisis. Later, we will comment
on those programs and consider how the
Federal Reserve, in particular, should try to
implement an “exit strategy” that will ultimately
lead to the winding down of current lending
facilities and to renewed focus on price stability.

Rationales for Public-Sector
Credit in Financial Crises
Much of the public policy response to turmoil
in financial markets over the last two years has
taken the form of expanded lending by the Fed
and central banks in other countries. The extension of credit to financial institutions has long
been one of the tools available to a central
bank for managing the supply of money —
specifically, bank reserves — to the economy.
Indeed, discount window lending by the 12

12

Reserve Banks was the primary means for
affecting the money supply at the time the Fed
was created. Over time, open market operations, in which the Fed buys and sells securities
in transactions with market participants, have
become the main tool for managing the money
supply. Lending became a relatively little-used
tool, mainly accessed by banks with occasional
unexpected flows into or out of their Fed
reserve accounts late in the day. If such banks
were to seek funding in the market, they would
likely have to pay above-normal rates for a
short-term (overnight) loan. In this way, the
discount window became a tool for dampening
day-to-day fluctuations in the federal funds
rate. In 2006, average weekly lending by the
Reserve Banks through the discount window
was $59 million.
Since the outset of the widespread market
disruptions in the summer of 2007, the Fed has
changed the terms of its lending to banks and
created new lending facilities. In the first three
quarters of 2008, weekly Fed lending averaged
$132.2 billion, and in the fourth quarter of the
year, that figure rose to $847.8 billion.
In some cases, lending in response to a crisis
can be seen as an extension of the use of
central bank credit as a tool for managing the
money supply. But for much of the current crisis, the Fed has not used its lending in this way.
Even though lending rose sharply, the Fed’s
overall balance sheet, and therefore its supply
of money to the economy, remained roughly
unchanged until September 2008. Until that
time, the Fed was “sterilizing,” or offsetting, its
lending growth with open market operations.
This suggests that, at least initially, the aim of
expanded Fed credit was not growth in the
overall supply of money or liquidity to markets
but rather the direction of money or liquidity to
particular market segments deemed to be in

the greatest need of support.
The use of sterilized lending in order to direct
funding to institutions or markets is based on
the belief that, at times, financial markets
cannot properly function in directing funds to
where they are needed the most.13 Like any
argument about the need for or consequences
of public-sector intervention in markets, this is a
statement of economic theory. In discussions of
the Fed’s actions in the last two years, two theoretical concepts have stood out as reasons why
markets might fail to effectively allocate funds
among market participants — coordination
problems and “firesale” prices.
The classic example of a coordination problem in a financial market is a bank run. When
depositors have the right to take their funds
out of the bank on demand, and when the
bank uses these highly liquid liabilities to fund
longer-term, illiquid assets, then the bank is
fragile in the sense that a sudden demand by
many depositors for their money could force
the bank to liquidate some of its longer-term
assets inefficiently. This fragility makes the bank
subject to a run in which depositors demand
their funds because they think other depositors
are doing the same. In such a case, all depositors might be better off if they could coordinate
their decisions and leave their money in the
bank, saving the bank from the costs of inefficient liquidations. The inability to coordinate
means that bank runs could conceivably cause
even a solvent bank to fail.14
The key characteristic that makes runs possible is the maturity mismatch on a bank’s balance
sheet — funding long-term assets with shortterm liabilities. In recent years, this feature has
not been limited to traditional, commercial
banking. The securitization of mortgages and
other assets has brought with it a number of
other types of this maturity transformation —

Federal Reserve Bank of Richmond

asset-backed commercial paper, auction-rate
securities, and the funding of investment banks’
holdings of securities through overnight repurchase agreements. Most of these nonbank
arrangements have come under stress at some
point during the ongoing market turbulence.
The fragility that makes runs possible, however, is itself the result of choices made by
market participants. The willingness to create a
fragile balance sheet structure should depend
on market participants’ beliefs about what
would happen in the event of a run-like event.
And part of these beliefs should involve people’s
expectations about public-sector actions in the
event of a run. In particular, the likelihood of
assistance in the form of government or central
bank lending reduces the prospective private
costs of a run and, on the margin, increases the
incentive to engage in maturity transformation.
This is an essential part of the moral hazard
problem resulting from the federal financial
safety net.15
Another important ingredient of the theory
of runs is that the early liquidation of long-term
assets is costly. If a bank is forced to sell an
asset to meet its depositors’ demands for funds,
there must be a real loss compared to holding
the asset to maturity. If all assets could be sold
at a price equal to the expected, discounted
present value of the ultimate returns, then
depositors’ demands could be met without loss,
which in turn eliminates a depositor’s incentive
to run. In traditional banking, the possibility of
a run comes from the notion that the bank
would have to sell loans, for which the originating bank has an advantage in monitoring
borrowers’ performance and ensuring repayment. But in the recent episode, assets at the
heart of maturity transformation increasingly
have been asset-backed securities, for which
there may be no particular advantage to the

13

September 15, 2008:
Lehman Brothers
files for Chapter 11
bankruptcy protection

October 3, 2008:
President Bush
signs into law the
Emergency Economic
Stabilization Act of
2008, establishing
the $700 billion
Troubled Asset Relief
Program (TARP)

November 25, 2008:
Fed announces
creation of the
Term Asset-Backed
Securities Loan
Facility (TALF),
supporting the
issuance of assetbacked securities.
Becomes operational
in March 2009

14

institution holding securities on its balance
sheet. Indeed, such securities were envisioned
as a way of making loans more “tradeable” by
pooling together many loans into a security.
Through much of this episode of financial
volatility, many commentators have argued
that the prices observed on many types of
assets, especially those related to housing,
represent deviations from fundamental market
value. The available prices are seen as firesale
prices — lower than fundamental value because many institutions have been or may be
forced to sell their assets in attempts to repair
their balance sheets. For such low prices to
persist, there must be no patient market participants with the financial resources and knowledge necessary to profit from buying assets at
artificially low prices. This suggests that either the
fundamental shocks affecting financial markets
were so pervasive as to compromise essentially
all participants’financial positions or there is
some incompleteness or segmentation that
prevents those with financial resources from
taking advantage of arbitrage opportunities.16
Theories of market imperfections that give
rise to financial market disruptions in which
prices deviate persistently from fundamentals
might imply that targeted public-sector credit
can improve the functioning of the market. But
matching conditions observed in actual markets
to conditions in these theories is a difficult judgment. Much of what we have observed is also
consistent with a market in which significant
fundamental shocks have greatly increased the
uncertainty facing market participants. If policymakers have no better information than market
participants about fundamental values as
compared to market prices, then the ability of
targeted public-sector intervention to improve
market conditions is limited.

Past, Current, and Future
Public Policy Responses
It is understandable that the Federal Reserve,
the Treasury Department, and Congress were
eager to act as the financial system began to
face what many feared to be systemic risks.
However, problems in the financial system have
persisted in spite of these efforts and some of
those resulting policies could create challenges
of their own over time.
The most fundamental issue, of course, is
moral hazard. How will current federal intervention affect the behavior of banks and investors
in the future? That is, will the support that has
been provided encourage financial institutions
to engage in behavior that they otherwise
would have eschewed? Basic economic theory
suggests so: The more something is subsidized,
the more that is likely to be provided. In this
case, the “something” is leveraged risk-taking,
leading to potentially imprudent lending. How
large this effect will be is ultimately an empirical
question. But it is important to note that even if
all of the new lending facilities were eliminated
as the economy and financial system recover,
moral hazard will still be a problem. Market
participants know that federal support was
readily forthcoming during the current turmoil
— and most now would reasonably expect
that such support will be there when the next
turmoil occurs. Changing these expectations
will be a long and hard process. In short, the Fed
will need to regain credibility for not bailing out
insolvent institutions — and as we know from
our experience with monetary policy in the
1970s, such efforts to gain credibility can be
long and difficult.17
The current situation, with a vastly expanded
financial safety net, presents long-term challenges with respect to private-sector risk-taking
and risk-management incentives. Even in the

November 25, 2008:
Fed announces
program to purchase
direct obligations
of Fannie Mae and
Freddie Mac, and
mortgage-backed
securities backed
by them.
Purchases begin
January 5, 2009

December 11, 2008:
The Business Cycle
Dating Committee
of the National
Bureau of Economic
Research announces
that the recession
began in
December 2007

December 16, 2008:
FOMC votes to
establish a range for
the fed funds rate of
0 to 0.25 percent

16

near term, the task of scaling back the safety net
toward its pre-crisis status raises many difficult
questions. For instance, the extent to which
the new lending facilities should be either eliminated or moved to the Treasury Department is a
matter of debate. But, as a matter of governance
and central bank independence, there is a
strong argument that those facilities which target specific industries or credit markets should
be handled first. The provision of subsidized
credit — especially on a sustained basis — is a
fiscal policy action. Depending on one’s perspective, this may or may not be a desirable
policy goal, but it is arguably not one that
should be pursued by the central bank. Placing
the administration and funding of such programs under the direction of the Treasury
Department puts those programs more directly
under congressional authority.
The conflation of the roles of the Federal
Reserve and the Treasury Department during
the current crisis could threaten the Fed’s independence. The Federal Reserve’s principal policy
goal is to conduct monetary policy in pursuit of
price stability and sustainable macroeconomic
growth. That goal is much harder to pursue in a
world where the Fed is also operating a number
of lending facilities. In the near term, inflation
does not appear to be a problem, certainly not
relative to continued weakness in the real
economy. But when the economy recovers, the
Fed must have the flexibility to restrain monetary growth and prevent rising inflation. And
the Fed’s ability to exercise this vigilance will be
enhanced if it can separate its credit policy activities from its management of the money supply.
Expansion of Fed credit expands the monetary base by adding to reserves held by the
banking system with the Fed. Indeed, from the
beginning of September of 2008 through the
end of the year, total reserves held at the Fed

grew from close to $10 billion to about $785
billion. Other things equal, an expansion of the
monetary base is stimulative. Such stimulus is
generally warranted in a period of economic
contraction. But when the economy recovers,
the Fed will need to have the flexibility to remove the monetary stimulus brought about by
an expanded base.
Fundamentally, the Fed must determine how
it wishes to act as a lender of last resort. The
Fed could benefit from heeding the advice of
two classical economists, Henry Thornton and
Walter Bagehot, who considered how the Bank
of England could act effectively as the lender of
last resort. The Thornton-Bagehot framework
stressed six key points:
I Protecting the aggregate money stock, not
individual institutions
I Letting insolvent institutions fail
I Accommodating only sound institutions
I Charging penalty rates
I Requiring good collateral
I Preannouncing these conditions well in
advance of any crisis so that the market
would know what to expect.18
Current Federal Reserve credit policy has
deviated from most if not all of these principles.
Before the crisis, the Fed’s lender of last resort
activity functioned as a standing facility with
fixed terms. Through the crisis, the Fed’s approach has evolved and changed in numerous
directions, including the direction of credit to
particular market segments and institutions.
Beyond winding down its many new lending
vehicles, the Fed will need to make it clear to
all market participants which principles it will
follow during future crises. Reductions in the
Fed’s credit activities — even in the near term
— do not need to result in monetary contraction, as those programs can be replaced by
asset purchases.

This last point also applies to actions taken
beyond those of the Federal Reserve. Public
policies by all agencies must be well articulated
and time consistent so that market actors can
make rational plans regarding their financial
and other business affairs. Arguably, such policy
uncertainty did much to prolong the Great
Depression in the United States.19 In addition,
policymakers should be wary about the
potential productivity-dampening effects of
ill-considered fiscal and regulatory policies.
There is some evidence that such policies slowed
productivity in the United States during the
1930s20 and in Japan during the 1990s.21 While,
as noted earlier, the Federal Reserve should not
be directly involved in appropriating funds, it is
not beyond its bounds to offer thoughts on the
relative efficiency of such programs pursued by
the legislative and executive bodies.

Conclusion
The United States — and, indeed, the whole
world — has experienced a significant financial
and economic crisis since late 2007, and especially since September of 2008. The causes of
that crisis are multifaceted and will require
much future research. However, policymakers
must act in real time on the best information
available. It is not surprising that policymakers
have taken a very active approach to the current
crisis; after all, the costs of inaction were perceived to be quite large. The effects of those
actions, just like the causes of the crisis, will no
doubt continue to be the subject of much study
and commentary for some time.
This episode has brought a number of particular questions to the forefront, questions that
will be at the center of ongoing efforts to
strengthen our financial system. Among those
are questions regarding the possible sources
of incentives for financial market participants

Federal Reserve Bank of Richmond

to take excessive risks. One candidate discussed
earlier involves the incentive effects of the
federal financial safety net. The significance of
this potential contributor to risk-taking lies in its
implications for how we think about the role of
Fed credit in ensuring financial stability. While
the liberal provision of credit can cushion the
effects of a crisis, expectation of such credit
availability can dampen incentives to take
actions that may limit the likelihood of a crisis.
This tradeoff lies at the heart of any effort to
design a set of policies that achieves a balance
between the roles of government and market
forces in disciplining the incentives of participants in our financial system.
The authors are, respectively, director of publications, and senior vice president and director of
research at the Federal Reserve Bank of Richmond.
They would like to thank Bob Hetzel, Jeff Lacker,
Ned Prescott, and John Walter for helpful comments and suggestions. The views expressed are
those of the authors and not necessarily those of
the Federal Reserve System.

17

Endnotes
1 The term “bank” is used broadly to refer to all de-

pository institutions — including banks, thrifts,
and credit unions — with routine access to the discount window.
2 For a comprehensive timeline of the financial crisis,

see the Federal Reserve Bank of St. Louis’ Web site,
“The Financial Crisis: A Timeline of Events and
Policy Actions,” at
http://www.stlouisfed.org/timeline/default.cfm.

12 Kareken (1983) used this analogy in the slightly

different context of banking deregulation in the
1980s.
13 Goodfriend and King (1988) argue that with well-

functioning markets to redistribute funds, open
market operations are sufficient to provide liquidity to markets.
14 Diamond and Dybvig (1983).

3 Taylor (2008).

15 Lacker (2008). See also Ennis and Keister (2007).

4 Bernanke (2005).

16 Allen and Gale (1998) describe the phenomenon

of “cash in the market pricing” in a financial crisis.
5 Meltzer (2009).
6 Walter and Weinberg (2002).
7 Such protection does not extend to the financial

sector only. Other industries, such as the airline
and automobile industries, have also received
government assistance in the past decade.
8 Haubrich (2007).
9 Edward (1999).
10 Stern and Feldman (2004) argue that too-big-to-

fail protection imposes net costs on society and
that the problem has grown in severity over time.
11 For instance, Diamond and Rajan (2009) argue

that, over short periods of time, even vigilant
creditors may have difficulty monitoring whether
financial managers are engaged in excessive risktaking, especially in the case of new products.

18

17 Goodfriend and Lacker (1999) discuss how central

banks could build a reputation for limiting their
lending commitments, just as central banks acquired credibility for maintaining price stability.
18 Humphrey (1989).
19 Higgs (1997).
20 Cole and Ohanian (2004).
21 Hayashi and Prescott (2002) and Hoshi and

Kashyap (2004).

References
Allen, Franklin, and Douglas M. Gale. 1998. “Optimal
Financial Crises.” Journal of Finance 53 (4): 1245-84.
Bernanke, Ben S. 2005. “The Global Saving Glut and
the U.S. Current Account Deficit.” Remarks before the
Virginia Association of Economists, Richmond, Va.
(March 10).
Cole, Harold L., and Lee E. Ohanian. 2004. “New Deal
Policies and the Persistence of the Great Depression:
A General Equilibrium Analysis.” Journal of Political
Economy 112 (4): 779-816.

Hayashi, Fumio, and Edward C. Prescott. 2002. “The
1990s in Japan: A Lost Decade.” Review of Economic
Dynamics 5 (1): 206-35.
Higgs, Robert. 1997. “Regime Uncertainty: Why the
Great Depression Lasted So Long and Why Prosperity Resumed After the War.” Independent Review 1 (4):
561-90.
Hoshi, Takeo, and Anil Kashyap. 2004. “Japan’s Financial Crisis and Economic Stagnation.” Journal of
Economic Perspectives 18 (1): 3-26.

Diamond, Douglas W., and Philip H. Dybvig. 1983.
“Bank Runs, Deposit Insurance, and Liquidity.”
Journal of Political Economy 91 (3): 401-19.

Humphrey, Thomas M. 1989. “Lender of Last Resort:
The Concept in History.” Federal Reserve Bank of
Richmond Economic Review 75 (2): 8-16.

Diamond, Douglas W., and Raghuram G. Rajan. 2009.
“The Credit Crisis: Conjectures About Causes and
Remedies.” National Bureau of Economic Research
Working Paper 14739 (February).

Kareken, John H. 1983. “Deposit Insurance Reform or
Deregulation Is the Cart, Not the Horse.” Federal Reserve Bank of Minneapolis Quarterly Review 7 (2):
Not numbered.

Edward, Franklin R. 1999. “Hedge Funds and the
Collapse of Long-Term Capital Management.” Journal
of Economic Perspectives 13 (2): 189-210.

Lacker, Jeffrey M. 2008. “Financial Stability and Central Banks.” Remarks before the European Economics
and Financial Centre, London, England (June 5).

Ennis, Huberto M., and Todd Keister. 2007. “Bank
Runs and Institutions: The Perils of Intervention.”
Federal Reserve Bank of Richmond Working Paper
07-02 (March).

Meltzer, Allan H. 2009. “The Global Financial Crisis of
2007-2009.” American Enterprise Institute, manuscript (January).

Goodfriend, Marvin, and Robert G. King. 1988.
“Financial Deregulation, Monetary Policy, and
Central Banking.” Federal Reserve Bank of Richmond
Economic Review 74 (3): 3-22.
Goodfriend, Marvin, and Jeffrey M. Lacker. 1999.
“Limited Commitment and Central Bank Lending.”
Federal Reserve Bank of Richmond Economic
Quarterly 85 (4): 1-27.
Haubrich, Joseph G. 2007. “Some Lessons on the
Rescue of Long-Term Capital Management.” Federal
Reserve Bank of Cleveland Policy Discussion Paper
19 (April).

Federal Reserve Bank of Richmond

Stern, Gary H., and Ron J. Feldman. 2004. Too Big to
Fail: The Hazards of Bank Bailouts. Washington, D.C.:
Brookings Institution Press.
Taylor, John B. 2008. “The Financial Crisis and the
Policy Responses: An Empirical Analysis of What
Went Wrong.” Stanford University, manuscript
(November).
Walter, John R., and John A. Weinberg. 2002. “How
Large is the Federal Financial Safety Net?” Cato
Journal 21 (3): 369-93.

19

Sally Green, First Vice President

Message from
Management

20

What an extraordinary year! When the economy
is humming along, financial markets and financial institutions are healthy and growing, and
the payments system is functioning efficiently
and reliably, you don’t see the Federal Reserve
featured daily in the news media. We prefer that.
Instead, in 2008 you saw us often on the front
page and on the airwaves.
Institutions like the Federal Reserve sometimes are perceived as being bureaucratic —
anchored in contentment and bound by habit.
While we honor our history and rely on proven
practices, our focus is on the future. Our vision
in the Fifth District is to be an innovative policy
and services leader for America’s economy. We
take our public service responsibility to heart
and continually seek, through the work we do,
to earn the confidence of those we serve. This is
especially true in times when much is at stake.
It often seems that people would like the
Fed to wave a magic wand and instantly fix the
economy and financial markets! But we cannot
do that. Economic and financial activity reflects
a set of decisions made by a multitude of individuals, corporations, and government entities
in a free market system. As one of the actors in
this drama, the Federal Reserve plays a very
important role through our monetary policy,
supervision of financial institutions, payments
system, and community outreach activities. The
events during late 2007 and throughout 2008
called us to step up to these roles as never before.
In the public eye, the Fed is often personified
by the Chairman of the Board of Governors —
for many years Chairman Greenspan and more
recently Chairman Bernanke. Behind these very
capable leaders are many other competent individuals, both at the Board of Governors and at
the 12 Reserve Banks. Our strength at times like
these is in our ability to bring broad expertise

and a variety of views to the policy table. We
would argue that one of the most important
ingredients in performing our roles effectively,
and in earning your confidence, is the ability of
our staff to understand emerging developments and to provide alternative solutions.
In 2008 a team of economists in the Fifth
District analyzed the conditions underlying first
a growing economy and rising inflation, and
then a weakening economy and lower inflation.
This team spent untold hours performing research on topics such as the economic impact of
the Troubled Asset Relief Program (TARP) and
advising our president, Jeff Lacker, on alternative monetary policy actions. As a member of

and analyzed information and participated in
policy discussions related to acquisitions and
various types of government support for these
institutions. A testament to the breadth and
depth of our expertise, the Board of Governors,
the New York Fed, and the U.S. Treasury called
upon members of our staff to assist with issues
in financial institutions outside the District and
in the implementation of the TARP.
As noted in the lead essay in this Annual
Report, in 2008 the Fed expanded its lending
beyond traditional boundaries to new types of
institutions and under new terms. In the Fifth
District, the number of loans made through our
discount window increased more than tenfold.

“We would argue that one of the most important ingredients in performing our roles effectively, and
in earning your confidence, is the ability of our staff to understand emerging developments and to
provide alternative solutions.”
the Federal Open Market Committee, he participated in the discussions that lowered the fed
funds rate from 4 percent to a range of 0 to 0.25
percent and dramatically expanded the monetary base to deal with the recession. Economists
and Bank leaders were also called upon to speak
at numerous events in the District as local communities and constituents sought to understand
changing economic conditions.
The Fifth District has an unusually robust and
diverse banking community. Over the past five
years we have built Supervision teams with
expertise in credit, market, operational, and
liquidity risk management. In 2008 the staff
worked around the clock as our largest financial institutions acquired other institutions,
with new types of risks, and as the health of
some of our community financial institutions
deteriorated. The Supervision teams gathered

Federal Reserve Bank of Richmond

To meet the increased demand and ensure
thorough scrutiny of pledged collateral, several
Supervision staff members were temporarily
reassigned to our lending function. Also, since
many financial institutions that we do not
formally supervise can borrow from us, we significantly increased the breadth and depth of
our financial institution surveillance program.
The payments system underpins economic
activity in the United States. Although the Fed
transfers almost $4.8 trillion daily among financial institutions, this behind-the-scenes role is
rarely in the public eye. We are committed to
provide to the financial institutions that serve
consumers and corporations: Fedwire and
securities transfers; payroll and other forms of
electronic payments; and check currency and
coin services that are timely and completely
reliable. In 2008 in the Fifth District, our staff

21

led important initiatives in each of these service
areas and contributed to the evolution toward
a more fully electronic U.S. payments system.
In addition to the three “core” roles noted
above, we reach out within our Fifth District
communities to learn, share our research and
expertise, and bring value, particularly in the
areas of community development and economic education. This year’s “Bank in the
Community” section in the Annual Report
provides a snapshot of our leadership during
2008, both at the national level and within the
District, related to the significant home ownership and mortgage foreclosure challenges in
the current environment.
The full effect of all the actions we have taken
in 2007, 2008, and 2009 is not yet known. In the
end, public confidence in the Fed will rest on
the ways in which we engage our constituents
and contribute to positive outcomes for the
economy, the financial system, the payments
system, and our communities. In the meantime,
we are a deeply committed group of professionals who understand the importance of our
public service mission and who are working
hard for America’s economy.

Sally Green
First Vice President

22

Thank You
We sincerely thank all the members of the 2008 boards of directors for their guidance and leadership. We are equally grateful to our advisory groups for their support throughout the past year.
Each individual and the partnerships formed helped us to better serve the Fifth District communities and organizations.
We express special thanks to the members of our boards of directors whose terms ended in 2008:
Hunter R. Hollar and Thomas J. Mackell, Jr., from our Richmond Board
Cynthia Collins Allner from our Baltimore Board
We also extend a warm welcome to our new members, whose terms began in 2009:
Kelly S. King and Linda D. Rabbitt from our Richmond Board
Jenny G. Morgan from our Baltimore Board

Federal Reserve Bank of Richmond

23

Angelyque Campbell, Community Affairs, speaks at an
event on foreclosure, one of the Richmond Fed’s efforts to
educate District communities on the foreclosure crisis.

The Bank in
the Community
Foreclosure prevention
in the Fifth District

24

The end of 2008 marked a full year spent in a
housing-led recession and financial crisis, which
resulted in a record-setting number of mortgage
delinquencies and foreclosures. The impact on
the overall economy and certain regions in
particular has been profound, putting the Fed’s
relationships with local communities into
the spotlight.
The nationwide housing boom that followed
the 2001 recession brought about a dramatic
increase in mortgage lending throughout the
country, particularly in subprime markets.
According to the Mortgage Bankers Association,
the share of all mortgages classified as “subprime” grew from slightly more than 4 percent
in the beginning of 2003 for both the Fifth
District and the nation as a whole, to more than
14 percent nationally and nearly 11.5 percent
for the District at its peak in the middle of 2007.
We now know that several factors led to an
extension of mortgages to borrowers who
would perhaps otherwise not have received
them. Mortgage underwriting standards
weakened under the assumption that the housing market boom would continue. Substantial
innovations in financial markets, combined with
weak incentives for mortgage originators to
ensure the viability of mortgages, supported a
widespread proliferation of subprime lending.
While many of the mortgages extended during
this time may have remained sound in an
environment of continually rising house prices,
homeowners’ability or willingness to stay
current on many of them was compromised with
the fall in house prices.
When house prices started declining, many
homeowners quickly found themselves“underwater,” meaning they owed more on their
mortgages than their homes were worth.
Refinancing was not an option for many
because they had little equity in their homes,

and lenders were less willing to refinance
what turned out to be risky mortgages. As
shown in the figure below, the declining
growth in house prices coincided with a severe
spike in delinquencies and foreclosures. House
prices nationally dropped more than 4.6 percent from their peak in the second quarter of
2007 through the end of 2008, and in the District fell more than 3.5 percent over the same
time period. The share of mortgages nationally
that were “seriously delinquent” (90 days or
more past due or in foreclosure) multiplied
more than two-and-a-half times from the middle of 2007 to the end of 2008, with Fifth District
serious delinquencies growing nearly as much.
Because of the severity of the foreclosure
problem, the Federal Reserve Board of Governors and regional Reserve Banks joined together
to create the Homeownership and Mortgage
Initiatives (HMI), a comprehensive national
strategy to provide a response to the foreclosure
crisis. The HMI leverages the Federal Reserve

System’s substantial knowledge and expertise
related to mortgage markets to help policymakers, community groups, and the public deal with
the problem.
A focal point of the HMI effort has been to
develop a strong base of research and knowledge about the foreclosure crisis, its causes,
and its potential spillover effects. One critical
aspect of the System’s research efforts has been
to identify foreclosure “hot spots” throughout
the country, since housing markets can differ
drastically within state and even county lines.
The Fed has worked extensively to acquire and
compile foreclosure and delinquency data to
create detailed maps and analyses of regions in
the country affected by foreclosures.
Armed with this information, the regional
Reserve Banks, including the Federal Reserve
Bank of Richmond, have disseminated research
and analysis through several strategic avenues.
By partnering with community development
practitioners, housing counselors, nonprofit

House Prices and Seriously Delinquent Mortgages
U.S. and Fifth District
House Prices,
Year-over-Year Percent Change

Seriously Delinquent Mortgages,
Year-over-Year Percentage Point Differences
3.0

20

2.5
15
2.0
10

1.5
1.0

5
0.5
0

0.0

Fifth District (Left axis)

-0.5

U.S. (Left axis)

-1.0

Fifth District (Right axis)

-1.5

U.S. (Right axis)

-5
-10
1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Sources: Mortgage Bankers Association, Federal Housing Finance Agency, Haver Analytics
Note: Serious delinquencies are defined as 90 days or more past due or in foreclosure.

Federal Reserve Bank of Richmond

25

organizations, and local governments, the Richmond Fed hopes to help communities with
large numbers of delinquencies to prevent them
from going into foreclosure, and in instances
where foreclosure cannot be prevented, to help
mitigate the costs and spillover effects.
In one key effort in 2008, the Federal Reserve
Bank of Richmond partnered with several Fifth
District universities to hold a series of forums
on“The Widespread Impacts of Mortgage
Foreclosures: From Credit Markets to Local
Communities.” The forums helped attendees
connect broader stories about the economic
crisis in the media with the effects of foreclosure
evident in local communities. Presentations
covered real estate conditions, the widespread
impacts of mortgage foreclosures in credit
markets and local communities, the role of
mortgage services, financial spillovers from
Percentage of Owner-Occupied Homes
with Mortgage Loans in Foreclosure or
Real Estate Owned (REO)

0.00 - 1.00
1.01 - 2.00
2.01 - 3.00
3.01 - 4.00
4.01 - 10.00

Sources: Federal Reserve Bank of Richmond estimates
using LPS (Lender Processing Services, Inc.) Applied
Analytics and Mortgage Banker’s Association data.
Data from December 2008.
Note: Uncategorized zip codes have fewer than 250 loans
or have no data available.

26

the housing market shakeout, and the Federal
Reserve’s response to the housing market downturn. The forums were open to the public, were
held in communities that have experienced
particularly high rates of delinquencies and
foreclosures, and were widely attended.

Local Problems and Local Solutions
The structure of the Federal Reserve System
has allowed the regional Reserve Banks to
collaborate, with each tailoring its foreclosure
mitigation efforts to the needs of the local
communities. In the Fifth District, Richmond
Fed staff from the Community Affairs, Research,
and Banking Supervision & Regulation
departments worked together to track local
developments and convene with regional stakeholders to share information and explore ways to
mitigate foreclosures and their spillover effects.

The Fifth District’s economy has, in this
recession, generally followed the downward
economic trend of the nation, but less severely.
Fortunately, the District has never, on balance,
seen the same run-up in subprime lending as
other hard-hit areas in the country, so the
decline in the housing market and the resulting
economic struggles have been smaller
in magnitude.
Regardless, there are areas within the District
that have been heavily affected by the housing
market fallout. The accompanying map displays
the percentage of all owner-occupied homes
with mortgages that are in foreclosure or are
“real estate owned” within the Fifth District as
of December 2008. Some of these areas, such as
much of South Carolina, have high foreclosure
rates spread over relatively small populations.
On the other hand, two heavily populated
counties just outside of Washington, D.C. —
Prince William in Virginia and Prince George’s
in Maryland — are among the hardest hit
within the Fifth District and thus have been the
focus of recent efforts by the Richmond Fed’s
Community Affairs and Research departments.
The Federal Reserve Bank of Richmond
targeted these communities because of their
high incidence of delinquency and foreclosure
activity spurred by region-specific conditions.
In Prince George’s County, the story is largely
one of an above-average concentration of
subprime lending. By the middle of 2008, the
county reported a high number of delinquencies that had not yet progressed to foreclosure,
in part because of a moratorium on foreclosures in the state of Maryland. Now that the
moratorium has expired, foreclosures have
started to rise as well.
In contrast, Prince William County (and the
hard-hit neighboring cities of Manassas and
Manassas Park) is an area that experienced

Federal Reserve Bank of Richmond

Steve Sanderford (left) and Mike Riddle, both of Banking Supervision
& Regulation, participate in the forum at Longwood University in
Farmville, Va., which helped local regions address spikes in foreclosure.

large increases in housing construction during
the boom years. Its Spanish-speaking population was disproportionately affected by the
housing downturn, since it relied heavily on the
construction industry for employment — the
same industry that suffered when housing
prices stopped rising, causing residents to flee
in search of other opportunities. Overbuilding,
the economic downturn, and the rise in gas
prices left the Virginia county exposed to
delinquencies and foreclosures.
Because numbers don’t tell the whole
foreclosure story, conducting field work in
these affected areas and establishing ongoing
relationships with local governments and community development practitioners have helped
to qualify the data gathered by Fed researchers
about the impact of mortgage delinquency. This
will allow prevention resources to be applied to
where they are needed most.
For example, in Prince George’s and Prince
William counties, as well as other communities,
the Richmond Fed has sponsored training
programs for housing counselors who were
formally trained only to get people into homes

27

— not to help them stay there or find an alternative if avoiding foreclosure was not an option. Prince William County had more than
7,000 properties in foreclosure when
Bank staff first visited in the middle of 2008,
with only one housing counselor present in the
region. Through training seminars sponsored
by the Richmond Fed in conjunction with
NeighborWorks America, a nonprofit group,
Prince William County now has 10 housing
counselors trained in foreclosure prevention
who are working with affected households to
keep them in their homes.
The efforts in Prince William and Prince
George’s counties show how understanding
the regional economic environment is key to
identifying how resources should be applied
within a region. Further, through these efforts,
the Richmond Fed has been able to help assess
how likely the crisis is to spill over into neighboring areas, where preventative measures
can then be taken.

The Landscape for 2009
The future of the economy is uncertain, but
most economists expect housing market strains
to persist through much of 2009. The Federal
Reserve has expressed its continuing commitment to taking necessary action to avert ongoing economic weakness through monetary
policy and other credit mechanisms. In addition,
the Fifth District will continue outreach efforts
in 2009 to address delinquencies and foreclosures. A number of additional university forums
and other outreach events are planned, as well
as more training sessions for housing counselors
to specialize in foreclosure prevention. Importantly, the relationships established with local
communities will include an ongoing discussion
of how to assist areas overwhelmed by delin-

28

quencies and foreclosures.
As one of its final delinquency and foreclosure mitigation efforts of 2008, the Federal
Reserve System hosted a research conference
on housing and mortgage markets in
Washington, D.C., on December 4th and 5th.
The Richmond Fed provided important
leadership for this event. The agenda included
discussions on current research on the mortgage markets, options for loan workouts, and
the efficacy of efforts to reduce preventable
foreclosures, as well as assessing the spillover
effects from foreclosures. Federal Reserve
Chairman Ben Bernanke delivered the keynote
address and concluded his remarks by reinforcing the Fed’s ongoing commitment to reducing preventable foreclosures by actively
engaging the community. “Because housing
and mortgage markets are tightly interlinked
with the rest of the economy, actions to
strengthen financial markets and the broader
economy are important ways to address
housing issues,” he said. “By the same token,
steps that stabilize the housing market will
help stabilize the economy as well.”

Fifth District Online
Foreclosure Resources
Conferences and Events

http://www.richmondfed.org/
conferences_and_events/community_
development
Foreclosure Resource Center

http://www.richmondfed.org/
community_development/foreclosure_
resource_center

Fifth District Economic Report
Labor Market Conditions

The Fifth District economy weakened in 2008
as the housing market malaise deepened and
infected all sectors and jurisdictions of the
District. The economic uncertainty that gripped
the nation in 2008 did not spare the Fifth
District. Credit conditions tightened, hiring activity declined steadily, and the increased cost
of energy and food in the first half of the year
hurt the bottom lines of District households
and firms. Furthermore, the deterioration in
housing conditions that had been concentrated
in the northern regions of our District (District
of Columbia, Maryland, and Virginia) spread to
the Carolinas. Nonetheless, the Fifth District
continued to outperform the nation on a number of key measures.

The Fifth District economy shed 287,600 jobs
(2.1 percent) in 2008 after five years of payroll
expansion. The District job market fared
slightly better than the national market, where
employment declined 2.2 percent in 2008.
Hiring activity in the District’s goods-producing sector was particularly downbeat as those
industries shed 161,600 jobs over the year, more
than three times the losses in 2007. Builders
alone cut over 81,000 jobs as employment in
the construction industry contracted 9.6 percent — its worst performance in more than 10
years. Employment reports from the service
sector were also grim as firms shed 125,600 jobs
in 2008, with the trade, transportation, and
utilities industry alone cutting 102,600 workers.

Payroll Employment
Year-over-Year Percent Change, December 2007–December 2008
U.S.

Fifth District

-1.9
-1.6

Total
-6.9
-7.1

Mining & Construction

-5.7

Manufacturing

-5.3
-3.1
-2.9
-2.8

Trade, Transportation & Utilities
Information

-1.1
-1.8

Finance
-3.8

Professional & Business Services

-1.3

-3.1

Education & Health Services

2.5

2.9

-1.2
-1.0

Leisure & Hospitality

0.8
1.1

Government
-0.7
-1.0

Other Services
-8.0

-7.0

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

Sources: Bureau of Labor Statistics, Haver Analytics

Federal Reserve Bank of Richmond

29

All service-sector industries outside of education and health services, and government
posted employment declines over the year.
Employment also contracted across District
jurisdictions in 2008. North Carolina and South
Carolina shed 3.0 percent and 3.3 percent of
their workforces, respectively, as firms cut
workers in each month of the last two quarters.
Employment in Maryland and Virginia contracted 1.7 percent and 1.5 percent, respectively,
for the first annual contraction in either state
since 2001. Only the District of Columbia added
jobs (6,400) over the year. The deeper losses in
the Carolinas were due partly to the larger drops
in goods-producing and trade-oriented employment in those states. In North Carolina, the construction industry, the manufacturing industry
and the trade, transportation, and utilities industry accounted for 71.9 percent of total job

losses. In South Carolina, the three industries
accounted for 58.4 percent of job losses. In addition, North Carolina’s professional and business
services industry struggled as firms cut 29,500
jobs (5.8 percent) in 2008.
Metro-level labor markets weakened considerably as employers in the Fifth District’s major
metropolitan areas shed 154,700 jobs in 2008.
Only three metro areas in the District posted
payroll gains over the year — Durham, N.C.;
Charleston, W.Va; and Morgantown, W.Va.
Meanwhile, six metro areas lost over 10,000
jobs in 2008: Charlotte, N.C. (31,900); Baltimore, Md. (24,900); Richmond, Va. (16,500);
Greensboro-High Point, N.C. (15,900); Raleigh,
N.C. (11,100); and Virginia Beach, Va. (10, 400).

Change in U.S. Home Prices by MSA
Percent Change 4Q:07 - 4Q:08

-49.5 – -6.2

-6.1 – -2.2

-2.1 – -0.1

Source: Federal Housing Finance Agency

30

0.0 – 1.5

1.6 – 10.4

Housing Market Conditions
The slowdown in national and Fifth District
housing markets that began in 2007 worsened
in 2008. Mortgage delinquency and home
foreclosure rates continued to rise across Fifth
District jurisdictions as existing home sales,
house prices, and new residential construction
levels fell. In particular, housing conditions in
North Carolina and South Carolina — where
markets had posted sales and price gains well
after the northern parts of the District began
to soften — started weakening in the spring
and early summer.
One of the big stories of 2008 was the rise in
delinquency and foreclosure rates across the
nation, particularly in the subprime mortgage
market. Although the percentage of total mortgage loans to subprime borrowers remained
lower in the Fifth District than in the nation, and
the foreclosure rate in the District was below the
national mark throughout 2008, delinquency
rates rose across District jurisdictions.
Fifth District house prices fell 3.7 percent
in 2008, as measured by the Federal Housing Finance Agency’s House Price Index. The District
house price depreciation was less severe than
the national depreciation of 4.5 percent, reflecting the 1.1 percent and 0.3 percent average
house price growth in North Carolina and South
Carolina, respectively. Although house prices in
the Carolinas began to fall in the third quarter of
2008 (for the first time since the early 1980s),
prices grew over the year. Without the appreciation in the Carolinas and the roughly stagnant
prices in West Virginia, the Fifth District house
price decline would have been steeper than that
of the nation, with 6.0 percent depreciation in
the District of Columbia, 7.7 percent depreciation in Maryland, and 4.6 percent depreciation
in Virginia.

Federal Reserve Bank of Richmond

Much of the housing downturn in Maryland
and Virginia was fueled by the softening of the
Washington, D.C., metro area market, where
house prices fell 12.1 percent in 2008. Other
metro areas in Maryland and Virginia also saw
falling house prices, although none dropped as
sharply as those in the D.C. metro area.
In certain housing measures, the Fifth District
began to look a bit weaker than the nation in
2008. Residential permit levels fell 51.4 percent
in the Fifth District compared to 46.5 percent in
the nation as a whole. Furthermore, existing
home sales in the Fifth District fell 21.9 percent
over the year, while sales in the United States
fell 5.9 percent.

Household Conditions
Considering labor and housing market
conditions, it is not surprising that the economic circumstances of District households
deteriorated in 2008. At 6.6 percent, the
District unemployment rate ended 2008
below the national 7.2 percent mark, although
joblessness grew on par with the national yearover-year increase of 2.3 percentage points.
Joblessness soared in Fifth District jurisdictions in 2008. The largest increase was in North
Carolina, where unemployment jumped 3.1
percentage points to end the year at 8.1 percent. The highest unemployment rate was
8.8 percent in South Carolina — 3.0 percentage
points above the mark at the end of 2007.
Meanwhile, the District of Columbia rate
climbed to 8.2 percent from 5.8 percent,
Maryland unemployment rose to 5.4 percent
from 3.6 percent, and Virginia jumped to 5.0
percent from 3.3 percent.
On a more positive note, households were
buoyed by growth in real personal income that
spread across Fifth District jurisdictions.

31

Personal income growth surpassed the national
rate of 0.5 percent in every jurisdiction over the
year, leaving the District with a combined real
personal income growth of 1.0 percent.

Business Conditions
District businesses struggled in 2008 with declining demand, tightening credit conditions,
and general economic uncertainty. In addition,
the rising cost of energy in the first part of the
year strained firms’ profit margins.
The general decline in the manufacturing industry was buoyed a bit in the beginning of
2008 by growing export activity fueled by a
weak dollar and strong overseas demand.
Over the year, however, the globalization of
the economic malaise and the weakening of
the dollar reduced international demand for
U.S. goods, and exports began to decline. The
Federal Reserve Bank of Richmond’s survey
readings on manufacturing activity fell to
record lows in the second half of the year.
Another big story of 2008 was the tightening
of credit conditions that was evident across the
nation and the Fifth District. More stringent
mortgage loan requirements continued — and
deepened — in 2008, but the problems in
the banking sector translated into increased
difficulty obtaining credit for non-mortgage
loans as well. Therefore, in addition to weaker
demand and general economic uncertainty,
the difficulty obtaining credit and the increased
cost of borrowing curtailed activity and negatively impacted capital expenditures in 2008
and planned expenditures for 2009. This has
been particularly true for manufacturing and
construction firms. Even when credit has been
extended, uncertainty about the future has
made firms more reluctant to incur debt; in
other words, evidence suggests that the supply

32

of and demand for credit has fallen. Throughout
2008, commercial developers noted delays and
cancellations of construction projects.
The service sector also contracted over the
year. The Richmond Fed survey index of retail
revenues was in negative territory throughout
2008, as sales of big-ticket items — such as
automobiles and furniture — declined steadily.
Shopper traffic also dwindled as consumers
suffered from rising food and energy costs
in the beginning of 2008, and heightened
economic uncertainty in the second half of the
year. District retailers reported lackluster holiday
sales. Meanwhile, although services firms generally outperformed retailers, even services firms’
revenues deteriorated steadily over 2008, with
the index hitting a near-record low in the last
month of the year.

Looking Ahead
The Fifth District’s economy softened along
with the nation’s in 2008, and remained weak as
it headed into 2009. It seems likely that housing
markets in the northern parts of the District will
begin to stabilize toward the middle-to-end of
2009, which should relieve households,
strengthen firms, and bolster labor market conditions. The slowdown in lending and planned
capital expenditures could affect firms for years
to come, but some positive economic developments are expected in the Fifth District — led
by the more service-oriented urban areas —
toward the end of 2009.
The data presented and discussed are accurate
as of March 24, 2009.

Boards of Directors, Advisory Groups, and Officers
Federal Reserve Bank of Richmond Board of Directors ...................................................35
Baltimore Office Board of Directors ...............................................................................36
Charlotte Office Board of Directors................................................................................37
Small Business and Agriculture Advisory Council ...........................................................38
Community Development Advisory Council ...................................................................39
Operations Advisory Committee ...................................................................................40
Management Committee and Officers...........................................................................42

Federal Reserve Bank of Richmond

33

Boards of Directors, Advisory Groups, and Officers
Federal Reserve Bank of Richmond
Board of Directors

Small Business and Agriculture Advisory
Council

Our Richmond Board oversees the management
of the Bank and its Fifth District offices, provides
timely business and economic information,
participates in the formulation of national
monetary and credit policies, and serves as a
link between the Federal Reserve System and
the private sector. The Board also has the
responsibility of appointing the Bank’s
president and first vice president, with approval
from the Federal Reserve Board of Governors.
Six directors are elected by banks in the Fifth
District that are members of the Federal
Reserve System, and three are appointed by
the Board of Governors.
The Bank’s board of directors annually
appoints our District representative to the
Federal Advisory Council, which consists of one
member from each of the 12 Federal Reserve
Districts. The Council meets four times a year
with the Board of Governors to consult on
business conditions and issues related to the
banking industry.

Established in 1985, the Small Business and
Agriculture Advisory Council advises the Bank
president and other senior officers on the
impact that monetary, banking, and fiscal
policies have on the District’s small business
and agricultural sectors. The Council’s 12
members are appointed by the Bank president.

Baltimore and Charlotte Office
Boards of Directors
Our Baltimore and Charlotte Offices have
separate boards that oversee operations at
their respective locations and, like our
Richmond Board, contribute to policymaking
and provide timely business and economic
information about the District. Four directors
on each of these boards are appointed by the
Richmond directors, and three are appointed
by the Board of Governors.

34

Community Development Advisory Council
Created in 1998 to enhance communication
between the Bank and the public concerning
community development issues, our Community Development Advisory Council advises the
Bank president and other senior officers on
community development concerns and related
policy matters. The Council’s eight members are
appointed by the Bank president.

Operations Advisory Committee
The Operations Advisory Committee was
established by the Bank in 1978 to serve
as a forum for communication with financial
institutions about the Federal Reserve’s
financial services and to help the Bank
respond to the changing needs of our
banking constituency. Committee members
are appointed by the Bank’s first vice president.
Listings as of December 31, 2008

Federal Reserve Bank of Richmond
Board of Directors
CHAIRMAn

Thomas J. Mackell, Jr.

Warrenton, Virginia

Dwight V. Neese

Director, President, and Chief
Executive Officer
Provident Community Bank and
Provident Community Bancshares, Inc.
Rock Hill, South Carolina
Kenneth R. Sparks

President and Chief Executive Officer
Ken Sparks Associates LLC
White Stone, Virginia

DEPuTY CHAIRMAn

Lemuel E. Lewis

Patrick C. Graney, III

President
LocalWeather.com
Suffolk, Virginia

President
Petroleum Products, Inc.
Belle, West Virginia

Dana S. Boole

Hunter R. Hollar

President and Chief Executive Officer
Community Affordable Housing
Equity Corp.
Raleigh, North Carolina

President and Chief Executive Officer
Sandy Spring Bancorp
Sandy Spring Bank
Olney, Maryland

Robert H. Gilliam, Jr.

Margaret E. McDermid

President and Chief Executive Officer
The First National Bank of Altavista
Altavista, Virginia

Senior Vice President and Chief
Information Officer
Dominion Resources, Inc.
Richmond, Virginia

FEDERAL ADvISORY COunCIL REPRESEnTATIvE

Kenneth D. Lewis

Chairman, Chief Executive Officer,
and President
Bank of America Corp.
Charlotte, North Carolina
35

Baltimore Office Board of Directors

CHAIRMAn

Cynthia Collins Allner

Principal
Miles & Stockbridge P.C.
Baltimore, Maryland

Biana J. Arentz

William B. Grant

President and Chief Executive Officer
Hemingway’s Inc.
Stevensville, Maryland

Chairman and Chief Executive Officer
First United Corp. and
First United Bank & Trust
Oakland, Maryland

Ronald Blackwell

Chief Economist
AFL-CIO
Washington, D.C.

Michael L. Middleton

Chairman and President
Community Bank of Tri-County
Waldorf, Maryland

James T. Brady

Managing Director–Mid-Atlantic
Ballantrae International, Ltd.
Ijamsville, Maryland

36

William R. Roberts

President–Verizon Maryland/D.C.
Verizon Maryland Inc.
Baltimore, Maryland

Charlotte Office Board of Directors

CHAIRMAn

Claude C. Lilly

Dean
College of Business and Behavioral Science
Clemson University
Clemson, South Carolina

Linda L. Dolny

Barry L. Slider

David J. Zimmerman

President
PML Associates, Inc.
Greenwood, South Carolina

President and CEO
First South Bancorp, Inc.
and First South Bank
Spartanburg, South Carolina

President
Southern Shows, Inc.
Charlotte, North Carolina

Michael C. Miller

Chairman and President
FNB United Corp. and CommunityONE
Bank, N.A.
Asheboro, North Carolina

Federal Reserve Bank of Richmond

James H. Speed, Jr.

President and Chief Executive Officer
North Carolina Mutual Life
Insurance Company
Durham, North Carolina

37

Small Business and Agriculture Advisory Council

Seated left to right: B. Lang; F. Darby; S. Cowart; W. Ditman; and J. Tabb Standing left to right: C. Nyholm; D. Arnold; R. Bryant; R. Warren; and M. Clark
CHAIRMAn

Jane Tabb

S. Lake Cowart, Jr.

Connie G. Nyholm

Secretary
Lyle C. Tabb & Sons, Inc.
Kearneysville, West Virginia

Vice President
Cowart Seafood Corp.
Lottsburg, Virginia

Co-Owner/Managing Partner
VIRginia International Raceway
Alton, Virginia

David Arnold

F. Guy Darby, Jr.

R. Gerald Warren

President
Class VI River Runners, Inc.
Lansing, West Virginia

Owner/President
F. Guy Darby & Son Farm
Darby Oil Inc.
Chester, South Carolina

President
Warren Farming Co., Inc.
Warren Swine Farms
Newton Grove, North Carolina

Ronnie L. Bryant

President and Chief Executive Officer
Charlotte Regional Partnership
Charlotte, North Carolina

William W. Ditman

Chairman Emeritus
Willow Construction, LLC
Easton, Maryland

Martha Anne Clark

Owner
Clark’s Elioak Farm
Ellicott City, Maryland

38

Barbara B. Lang

President and Chief Executive Officer
DC Chamber of Commerce
Washington, D.C.

Community Development Advisory Council

Seated left to right: D. Swinton; J. Henderson; and P. Ponne Standing left to right: M. Stegman; T. Somanath; S. Walden; E. Stein; B. Mazyck; and P. Caldwell
CHAIRMAn

Jane N. Henderson

Peter J. Ponne

Eric Stein

President
Virginia Community Capital, Inc.
Christiansburg, Virginia

Senior Vice President and Manager
SunTrust CDC, Mid-Atlantic Region
SunTrust Bank
Baltimore, Maryland

President
Center for Community Self-Help
Durham, North Carolina
David H. Swinton

Phyllis R. Caldwell

President
Washington Area Women’s Foundation
Washington, D.C.

T.K. Somanath

Executive Director
Better Housing Coalition
Richmond, Virginia

Sharon Walden

Bernie Mazyck

President and Chief Executive Officer
South Carolina Association of Community
Development Corporations (SCACDC)
Charleston, South Carolina

Federal Reserve Bank of Richmond

President
Benedict College
Columbia, South Carolina

Michael Stegman

Director of Policy
The John D. and Catherine T. MacArthur
Foundation
Chicago, Illinois

Executive Director
Stop Abusive Family Environments
(S.A.F.E.)
Welch, West Virginia

39

Operations Advisory Committee

Seated left to right: R. Mielke; R. Reardon; and J. Lovern Standing left to right: L. Clark; E. Lilly; M. Patterson; D. Willis; and G. Sink
CHAIRMAn

R. Lee Clark

Marie B. LaQuerre

Martin W. Patterson

Executive Vice President
Operations
TowneBank
Suffolk, Virginia

Senior Vice President
Business Executive
Bank of America
Charlotte, North Carolina

Daniel O. Cook, Jr.

E. Stephen Lilly

Executive Vice President and
Chief Operating Officer
Arthur State Bank
Union, South Carolina

Senior Vice President and
Chief Operating Officer
First Community Bancshares, Inc.
Bluefield, Virginia

Tim Dillow

Joan Lovern

Senior Vice President
Branch Banking and Trust
Wilson, North Carolina

Vice President
Virginia Bank & Trust Co.
Danville, Virginia

Debra E. Droppleman

Gerald McQuaid

Chief Financial Officer
Fairmont Federal Credit Union
Fairmont, West Virginia

Senior Vice President
Division Executive, Bank Operations
Chevy Chase Bank, FSB
Laurel, Maryland

Senior Vice President
Banking Operations
SunTrust Banks
Richmond, Virginia
Linda J. Adams

Director
Enterprise Banking and
Payments Services
Capital One
Glen Allen, Virginia
Tanya A. Butts

Executive Vice President,
Chief Operations and Technology Officer
The South Financial Group
Lexington, South Carolina
Cynthia B. Cervenka

President and Chief Executive Officer
Damascus Community Bank
Damascus, Maryland

40

Kenneth L. Greear

Executive Vice President
United Bank
Charleston, West Virginia

Rita B. Mielke

Vice President and Chief
Operating Officer
The Centreville National Bank
of Maryland
Centreville, Maryland

Seated left to right: N. Robinson; T. Butts; and K. Greear Standing left to right: D. Cook; P. Slaby; S. Perry; and K. Richey

Gerry Felton

Rick Rhoads

Paul A. Slaby

Director
Bank Operations Services
RBC Centura Bank
Rocky Mount, North Carolina

Senior Vice President
E-Services
State Employees’Credit Union
Raleigh, North Carolina

Senior Vice President Finance
Aberdeen Proving Ground
Federal Credit Union
Edgewood, Maryland

Patricia Muldoon

Kenneth L. Richey

Karla Strosnider

Senior Vice President and
Chief Operating Officer
Citizens National Bank of Berkeley Springs
Berkeley Springs, West Virginia

Director
Corporate Cash Management
Synovus Financial Corporation
Columbia, South Carolina

Senior Vice President
Operations
Centra Bank, Inc.
Morgantown, West Virginia

Stephen B. Perry

Norman K. Robinson

William Swords

Senior Operations Officer and Cashier
Virginia National Bank
Charlottesville, Virginia

President
EastPay
Richmond, Virginia

Senior Vice President
Wachovia Corporation
Atlanta, Georgia

Melissa Quirk

John Russ

David Willis

Executive Vice President
The Columbia Bank
Columbia, Maryland

President and Chief Executive Officer
Community FirstBank of Charleston
Charleston, South Carolina

Vice President
Debit Card and Funds Services
Navy Federal Credit Union
Vienna, Virginia

Ralph Reardon

D. Gerald Sink

Senior Vice President and
Chief Financial Officer
Coastal Federal Credit Union
Raleigh, North Carolina

Senior Vice President
NewBridge Bank
Lexington, North Carolina

Federal Reserve Bank of Richmond

Thomas Wilson

Senior Vice President and
Chief Financial Officer
Industrial Bank of Washington
Washington, D.C.

41

Management Committee

Seated left to right:
J. McAfee; J. Weinberg; and C. MacSwain
Standing left to right:
R. Wetzel; J. Clatterbuck; M. Alfriend;
S. Green; J. Kane; J. Lacker;
D. Beck; M. Shuler; and V. Brugh

Jeffrey M. Lacker

Jeffrey S. Kane

President

Senior Vice President
Charlotte Office

Sally Green

First Vice President

Claudia N. MacSwain

Malcolm C. Alfriend

Senior Vice President
and Chief Financial Officer

Senior Vice President
David E. Beck

Senior Vice President
Baltimore Office
Victor M. Brugh, II

James McAfee

Senior Vice President
and General Counsel
Marsha S. Shuler

Senior Vice President

Medical Director
John A. Weinberg
Janice E. Clatterbuck

Senior Vice President

Senior Vice President
and Director of Research
Robert E. Wetzel, Jr.

Senior Vice President
and General Auditor

42

Officers
OFFICERS COnTInuED

Anne C. Gossweiler

Karen J. Williams

James M. Barnes

Assistant Vice President

Assistant Vice President

Vice President

Cathy I. Howdyshell

H. Julie Yoo

Roland Costa

Assistant Vice President

Assistant Vice President

Vice President

Gregory A. Johnson

Alan H. Crooker

Assistant Vice President

BALTIMORE OFFICE

Vice President

Mary S. Johnson

Steven T. Bareford

Tammy H. Cummings

Assistant Vice President

Assistant Vice President

Vice President

James W. Lucas

Karen L. Brooks

Constance B. Frudden

Assistant Vice President

Assistant Vice President

Vice President

Steve V. Malone

Amy L. Eschman

A. Linwood Gill, III

Assistant Vice President

Assistant Vice President

Vice President

Page W. Marchetti

Howard S. Goldfine

Assistant Vice President
and Secretary

CHARLOTTE OFFICE

Vice President
Mattison W. Harris

Jonathan P. Martin

Vice President

Vice President

Assistant Vice President

Jennifer J. Burns

Andreas L. Hornstein

Andrew S. McAllister

Vice President

Vice President

Assistant Vice President

Stacy L. Coleman

Eugene W. Johnson, Jr.

William R. McCorvey, Jr.

Vice President

Vice President

Assistant General Counsel

Terry J. Wright

Malissa M. Ladd

Dennis G. McDonald

Vice President

Vice President

Assistant Vice President

Christopher S. Cook

P. A. L. Nunley

Diane H. McDorman

Assistant Vice President

Deputy General Counsel

Assistant Vice President

T. Stuart Desch

Lisa T. Oliva

Robert J. Minteer

Assistant Vice President

Vice President

Assistant Vice President

Ronald B. Holton

Edward S. Prescott

Susan Q. Moore

Assistant Vice President

Vice President

Assistant Vice President

Richard J. Kuhn

Howard S. Whitehead

Barbara J. Moss

Assistant Vice President

Vice President

Assistant Vice President

Adam S. Pilsbury

Michael L. Wilder

Edward B. Norfleet

Assistant Vice President

Vice President and Controller

Assistant Vice President

Kelly J. Stewart

Hattie R. C. Barley

Kelly W. Phillips

Assistant Vice President

Assistant Vice President

Assistant Vice President

Richard F. Westerkamp, Jr.

Jessica B. Brooks

Arlene S. Saunders

Assistant Vice President

Assistant Vice President

Assistant Vice President

Lisa A. White

Granville Burruss

Rebecca J. Snider

Assistant Vice President

Assistant Vice President

Assistant Vice President

John B. Carter, Jr.

Jeffrey K. Thomas

Assistant Vice President

Assistant Vice President

Todd E. Dixon

Sandra L. Tormoen

Assistant Vice President

Assistant Vice President

Adam M. Drimer

Lauren E. Ware

Assistant Vice President

Assistant Vice President

R. William Ahern

Listings as of December 31, 2008

Daniel E. Elder

Assistant Vice President
Joan T. Garton

Assistant Vice President

Federal Reserve Bank of Richmond

43

Financial Statements
Management Assertion ................................................................................................46
Report of Independent Auditors ...................................................................................47
Comparative Financial Statements................................................................................50
notes to Financial Statements ......................................................................................53
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 Govenors 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.

Federal Reserve Bank of Richmond

45

Management Assertion
April 2, 2009

To the Board of Directors:
The management of the Federal Reserve Bank of Richmond (“FRB Richmond”) is responsible for
the preparation and fair presentation of the Statement of Financial Condition, Statements of Income and Comprehensive Income, and Statement of Changes in Capital as of December 31, 2008
(the "Financial Statements"). The Financial Statements have been prepared in conformity with the
accounting principles, policies, and practices established by the Board of Governors of the Federal
Reserve System and as set forth in the Financial Accounting Manual for the Federal Reserve Banks
(“Manual”), and as such, include amounts, some of which are based on management judgments
and estimates. To our knowledge, the Financial Statements are, in all material respects, fairly presented in conformity with the accounting principles, policies and practices documented in the
Manual and include all disclosures necessary for such fair presentation.
The management of the FRB Richmond is responsible for establishing and maintaining effective
internal control over financial reporting as it relates to the Financial Statements. Such internal control is designed to provide reasonable assurance to management and to the Board of Directors regarding the preparation of the Financial Statements in accordance with the Manual. Internal
control contains self-monitoring mechanisms, including, but not limited to, divisions of responsibility and a code of conduct. Once identified, any material deficiencies in internal control are reported to management and appropriate corrective measures are implemented.
Even effective internal control, no matter how well designed, has inherent limitations, including
the possibility of human error, and therefore can provide only reasonable assurance with respect to
the preparation of reliable financial statements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The management of the FRB Richmond assessed its internal control over financial reporting
reflected in the Financial Statements, based upon the criteria established in the Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, we believe that the FRB Richmond maintained effective internal control over financial reporting as it relates to the Financial Statements.

Federal Reserve Bank of Richmond

Jeffrey M. Lacker
President

46

Sally Green
First Vice President

Claudia n. MacSwain
Senior Vice President and
Chief Financial Officer

Report of Independent Auditors
To the Board of Governors of the Federal Reserve System
and the Board of Directors of the Federal Reserve Bank of Richmond:
We have audited the accompanying statements of condition of the Federal Reserve Bank of
Richmond (“FRB Richmond”) as of December 31, 2008 and 2007 and the related statements of
income and comprehensive income and changes in capital for the years then ended, which have
been prepared in conformity with accounting principles established by the Board of Governors
of the Federal Reserve System. We also have audited the internal control over financial reporting
of FRB Richmond as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. FRB Richmond’s management is responsible for these financial statements, for maintaining
effective internal control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Management’s Assertion.
Our responsibility is to express an opinion on these financial statements and an opinion on FRB
Richmond’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide a reasonable
basis for our opinions.
FRB Richmond’s internal control over financial reporting is a process designed by, or under the
supervision of, FRB Richmond’s principal executive and principal financial officers, or persons
performing similar functions, and effected by FRB Richmond’s board of directors, management,
and other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with the accounting principles established by the Board of Governors of the Federal Reserve System. FRB Richmond’s
internal control over financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of FRB Richmond; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with the
(continued)

Federal Reserve Bank of Richmond

47

accounting principles established by the Board of Governors of the Federal Reserve System, and that
receipts and expenditures of FRB Richmond are being made only in accordance with authorizations
of management and directors of FRB Richmond; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of FRB Richmond’s assets
that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods are
subject to the risk that the controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
As described in Note 4 to the financial statements, FRB Richmond has prepared these financial
statements in conformity with accounting principles established by the Board of Governors of
the Federal Reserve System, as set forth in the Financial Accounting Manual for Federal Reserve
Banks, which is a comprehensive basis of accounting other than accounting principles generally
accepted in the United States of America. The effects on such financial statements of the differences between the accounting principles established by the Board of Governors of the Federal
Reserve System and accounting principles generally accepted in the United States of America
are also described in Note 4.
In our opinion, the financial statements referred to above present fairly, in all material respects,
the financial position of FRB Richmond as of December 31, 2008 and 2007, and the results of its operations for the years then ended, on the basis of accounting described in Note 4. Also, in our opinion,
FRB Richmond maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2008, based on the criteria established in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Deloitte & Touche LLP
April 2, 2009

48

Federal Reserve Bank of Richmond

49

Statements of Condition (in millions)
2008

As of December 31,
Assets
Gold certificates
Special drawing rights certificates
Coin
Items in process of collection
Loans to depository institutions
System Open Market Account:
Securities purchased under agreements to resell
U.S. government, Federal agency, and government-sponsored
enterprise securities, net
Investments denominated in foreign currencies
Central bank liquidity swaps
Bank premises and equipment, net
Prepaid interest on Federal Reserve notes due from U.S. Treasury
Accrued interest receivable
Other assets
Total assets
Liabilities and Capital
Federal Reserve notes outstanding, net
System Open Market Account:
Securities sold under agreements to repurchase
Deposits:
Depository institutions
Other deposits
Deferred credit items
Interest on Federal Reserve notes due to U.S. Treasury
Interdistrict settlement account
Accrued benefit costs
Other liabilities
Total liabilities
Capital paid-in
Surplus (including accumulated other comprehensive loss of
$47 and $50 million at December 31, 2008 and 2007, respectively)
Total capital
Total liabilities and capital

The accompanying notes are an integral part of these financial statements.
50

$

891
147
233
41
75,582

2007
$

869
147
134
154
905

7,254

4,029

45,538
6,717
149,945
332
70
925
92
$ 287,767

64,603
6,120
6,505
287
—
559
101
$ 84,413

$ 69,220

$ 66,785

8,012

3,811

34,056
90
172
—
163,991
201
65
275,807

1,780
64
111
450
1,177
189
54
74,421

5,980

4,996

5,980
11,960
$ 287,767

4,996
9,992
$ 84,413

Statements of Income and Comprehensive Income (in millions)
2008

For the year ended December 31,
Interest Income
Loans to depository institutions
System Open Market Account:
Securities purchased under agreements to resell
U.S. government, Federal agency, and government-sponsored
enterprise securities
Investments denominated in foreign currencies
Central bank liquidity swaps
Total interest income
Interest Expense
System Open Market Account:
Securities sold under agreements to repurchase
Depository institutions deposits
Total interest expense
Net interest income
Non-interest Income
System Open Market Account:
U.S. government, Federal agency, and government-sponsored
enterprise securities gains, net
Foreign currency gains, net
Compensation received for services provided
Reimbursable services to government agencies
Other income
Total non-interest income
Operating Expenses
Salaries and other benefits
Occupancy expense
Equipment expense
Assessments by the Board of Governors
Other credits
Total operating expenses
Net income prior to distribution
Change in funded status of benefit plans
Comprehensive income prior to distribution
Distribution of Comprehensive Income
Dividends paid to member banks
Transferred to surplus and change in accumulated other
comprehensive loss
Payments to U.S. Treasury as interest on Federal Reserve notes
Total distribution

$

389

2007
$

3

170

$

122

2,286
168
976
3,989

3,314
146
8
3,593

$

66
133
199
3,790

144
—
144
3,449

332
341
48
31
75
827

—
501
56
29
15
601

$

295
39
55
140
(132)
397
4,220
3
4,223

$

287
35
56
129
(83)
424
3,626
23
3,649

$

318

$

263

$

984
2,921
4,223

$

903
2,483
3,649

The accompanying notes are an integral part of these financial statements.
Federal Reserve Bank of Richmond

51

Statements of Changes in Capital (in millions)

For the years ended
December 31, 2008
and December 31, 2007
Balance at January 1, 2007
(81.8 million shares)
Net change in capital stock issued
(18.1 million shares)
Transferred to surplus and
change in accumulated other
comprehensive loss
Balance at December 31, 2007
(99.9 million shares)
Net change in capital stock issued
(19.7 million shares)
Transferred to surplus and
change in accumulated other
comprehensive loss
Balance at December 31, 2008
(119.6 million shares)

Capital
Paid-In

Net Income
Retained

Surplus
Accumulated
Other
Comprehensive
Loss

$ 4,093

$ 4,166

$ (73)

$ 4,093

$ 8,186

903

—

—

—

903

—

880

23

903

903

$ 4,996

$ 5,046

$ (50)

$ 4,996

$ 9,992

984

—

—

—

984

—

981

3

984

984

$ 5,980

$6,027

$ (47)

$ 5,980

$11,960

The accompanying notes are an integral part of these financial statements.
52

Total
Surplus

Total
Capital

notes to Financial Statements
1. Structure
The Federal Reserve Bank of Richmond (“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 Fifth Federal Reserve District, which includes Maryland, North
Carolina, South Carolina, Virginia, District of Columbia, and portions of West Virginia.
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, in-

Federal Reserve Bank of Richmond

cluding 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 governmentsponsored enterprises (“GSEs”), the purchase of
these securities under agreements to resell, the
sale of these securities under agreements to

53

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”).
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 Standard Cash Automation, Currency Technology

54

Office, Enterprise-wide Security Projects, Enterprise
Security Operations Coordination, the Payroll Central Business Administration Function, Daylight
Overdraft Reporting and Pricing, and the National
Procurement Office. Costs are, however, redistributed to the other Reserve Banks for computing and
support services the Bank provides for the System.
The Bank’s total reimbursement for these services
was $301 million and $296 million for the years
ended December 31, 2008 and 2007, respectively,
and is included in“Other credits”on the Statements
of Income and Comprehensive Income.

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 28day term repurchase agreements for which primary dealers pledge U.S. Treasury and agency
securities and agency Mortgage-Backed 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 mar-

kets 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, 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.

Federal Reserve Bank of Richmond

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 mortgagebacked 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

55

transactions are reported as a component of“Noninterest 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 shortterm, 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.

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 Fifth 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.

56

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.
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

Federal Reserve Bank of Richmond

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 (the“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

57

income is recognized on an accrual basis. Loan
commitment fees are generally deferred and
amortized on a straight-line 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 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 tri-party agreements
primarily includes U.S. government securities;

58

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
(losses) 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.
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

Federal Reserve Bank of Richmond

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

59

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 the 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 the alteration, renovation, or improvement. Maintenance,
repairs, and minor replacements are charged to
operating expense in the year incurred.

60

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 straight-line
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 $11,552 million
and $13,767 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 Bank in an amount equal to 6 percent of the

Federal Reserve Bank of Richmond

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.

61

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

62

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 ended December 31,
2008 and 2007, the Bank was reimbursed for all
services provided to the Department of the
Treasury as its fiscal agent.

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 constructionrelated 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. The costs associated with the impairment of certain of the Bank’s
assets are discussed in Note 9. 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 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

Federal Reserve Bank of Richmond

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.

63

5. Loans
The loan amounts outstanding to depository
institutions at December 31 were as follows
(in millions):
2008
2007
Primary, secondary, and
seasonal credit
TAF
Total loans to depository
institutions

$

452
75,130

$

130
775

$ 75,582

$

905

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
Bank, subject to review and determination by the
Board of Governors. Primary and secondary credits are extended on a 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. 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 the 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

64

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):
Primary, secondary,
and seasonal credit
Within 15 days
16 days to 90 days
Total loans

$
$

202
250
452

TAF
$ 41,980
33,150
$ 75,130

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 9.068 percent and 8.664 percent at
December 31, 2008 and 2007, respectively.
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
U.S. government securities:
Bills
$ 1,671
Notes
30,357
Bonds
11,128
Federal agency and
GSE securities
1,787
Total par value
Unamortized premiums
Unaccreted discounts
Total allocated to
the Bank

2007
$ 19,740
34,811
9,617
—

44,943
730
(135)

64,168
692
(257)

$ 45,538

$ 64,603

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 $51,363 million and $67,333
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

Federal Reserve Bank of Richmond

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
Securities
purchased
sold under
under agreements agreements to
to resell
repurchase
2008 2007 2008 2007
Allocated to the Bank:
Contract amount
outstanding, end
of year
$ 7,254 $ 4,029 $ 8,012 $ 3,811
Weighted average
amount
outstanding,
during the year
8,799 3,039 5,936 3,019
Maximum
month-end
balance
outstanding,
during the year
10,791 4,462 8,937 3,811
Securities pledged,
end of year
—
— 7,154 3,816
System total:
Contract amount
outstanding, end
of year
Weighted average
amount
outstanding,
during the year
Maximum
month-end
balance
outstanding,
during the year
Securities pledged,
end of year

$ 80,000 $46,500 $88,352 $43,985

97,037

35,073

65,461 34,846

119,000

51,500

98,559 43,985

—

— 78,896 44,048

65

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 is shown in the Maturity Distribution table at the bottom of page 66.
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 $16,391 million and $1,443 million, respectively, were allocated to the Bank.

inated 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

66

$

1,917

1,104
1,248

681
1,246

943
1,915

751
1,525
$ 6,120

At December 31, 2008 and 2007, the fair value
of investments denominated in foreign currencies, including accrued interest, allocated to the
Bank was $6,775 million and $6,115 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.

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 27.079 percent and 26.710 percent at
December 31, 2008 and 2007, respectively.
The Bank’s allocated share of investments denom-

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

$ 1,507

$ 6,717

Total allocated to the Bank

7. Investments Denominated in Foreign
Currencies

Maturity
Distribution
(in millions)

2007

Federal
Subtotal:
Securities
Securities
agency and U.S. goverment, purchased under
sold under
U.S. government
GSE
Federal agency,
agreements to
agreements to
securities
securities and GSE securities
resell
repurchase
(Par value)
(Par value)
(Par value)
(Contract amount) (Contract amount)
$

1,735
1,901
5,743
15,717
8,826
9,234

$ 43,156

$

41
298
88
1,030
330
—

$

1,776
2,199
5,831
16,747
9,156
9,234

$

3,627
3,627
—
—
—
—

$

8,012
—
—
—
—
—

$ 1,787

$

44,943

$

7,254

$

8,012

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):
Japanese
Euro
Yen
Total
Within 15 days
16 days to 90 days
91 days to 1 year
Over 1 year to 5 years
Total allocated
to the Bank

$ 2,056
317
474
1,012

$ 943
170
538
1,207

$ 2,999
487
1,012
2,219

$ 3,859

$ 2,858

$ 6,717

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 Bank of Richmond

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 27.079 percent
and 26.710 percent at December 31, 2008 and
2007, respectively.
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
$149,945 million and $6,505 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 16 days to
days
90 days

Total

2007
16 days to
90 days

Australian
dollar
$ 2,708 $ 3,474 $ 6,182 $ —
Danish
krone
—
4,062
4,062
—
Euro
40,881 38,015 78,896 5,418
Japenese
yen
12,969 20,261 33,230
—
Korean
won
—
2,803
2,803
—
Norwegian
krone
596
1,632
2,228
—
Swedish
krona
2,708
4,062
6,770
—
Swiss franc 5,205
1,612
6,817 1,087
U.K. pound
32
8,925
8,957
—
Total
$65,099 $84,846 $149,945 $ 6,505

67

9. Bank Premises, Equipment, and Software
Bank premises and equipment at December 31
were as follows (in millions):
2008
Bank premises and equipment:
Land
$ 38
Buildings
162
Building machinery and equipment
66
Construction in progress
63
Furniture and equipment
280

2007
$ 35
150
58
31
293

10

10. Commitments and Contingencies

567

Accumulated depreciation

(277)

(280)
$ 287
$ 44

Bank premises and equipment at December 31
included the following amounts for capitalized
leases (in millions):
2008

2007

$

$

Accumulated depreciation
Leased premises and equipment
under capital leases, net
Depreciation expense related to
leased premises and equipment
under capital leases

21
(13)

$

$

8

4

$

$

20

4

The Bank leases space to outside tenants with
remaining lease terms ranging from 2 to 9 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 thousands):

68

$

971
1,027
1,003
579
507
2,056
6,143

(10)

609

Leased premises and equipment
under capital leases

$

The Bank has capitalized software assets, net
of amortization, of $24 million and $35 million at
December 31, 2008 and 2007, respectively. Amortization expense was $19 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.”
Assets impaired as a result of the Bank’s restructuring plan, as discussed in Note 14, include check
equipment and check software. Asset impairment
losses of $3 million for the period ending December 31, 2007 were determined using fair values
based on quoted fair values or other valuation
techniques and are reported as a component of
“Other expenses.” The Bank had no impairment
losses in 2008.

Subtotal

Bank premises and equipment, net $ 332
Depreciation expense, for the
years ended December 31
$ 44

2009
2010
2011
2012
2013
Thereafter
Total

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 of approximately one year.
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 and rental charges to
other entities within the System, was approximately $1 million for each of the years ended

December 31, 2008 and 2007.
Future minimum rental payments under noncancelable operating leases and capital leases,
net of sublease rentals, with terms of one year or
more, at December 31, 2008 were not material.
At December 31, 2008, there were no material
unrecorded unconditional purchase commitments
or long-term obligations in excess of one year.
At December 31, 2008 and 2007, respectively,
the Bank had commitments of approximately $7
million and $51 million, for the construction of an
employee parking deck at the Richmond Office
and security enhancements throughout the District. Expected payments related to these commitments are $7 million for the year ending
December 31, 2009.
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. Substan-

Federal Reserve Bank of Richmond

tially 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 $10 million and $9 million
for 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

69

automatic employer contribution of 1 percent of
eligible pay.

12. Postretirement Benefits Other Than
Pensions and Postemployment Benefits

2008

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
Service cost-benefits earned
during the period
Interest cost on accumulated
benefit obligation
Net actuarial loss (gain)
Curtailment gain
Contributions by plan participants
Benefits paid
Medicare Part D subsidies
Plan amendments
Accumulated postretirement
benefit obligation at
December 31

2007

$ 170.3

$ 175.1

6.8

7.5

10.8
1.0
(0.6)
1.5
(8.3)
0.5
—

10.3
(14.0)
(1.0)
1.3
(8.4)
0.5
(1.0)

Fair value of plan assets
at January 1
Contributions by the employer
Contributions by plan participants
Benefits paid
Medicare Part D subsides
Fair value of plan assets
at December 31
Unfunded obligation and accrued
postretirement benefit cost
Amounts included in accumulated
other comprehensive loss are
shown below:
Prior service cost
Net actuarial loss
Deferred curtailment gain
Total accumulated other
comprehensive loss

2007

$

—
6.3
1.5
(8.3)
0.5

$

—
6.6
1.3
(8.4)
0.5

$

—

$

—

$ 182.0

$ 170.3

$

$

4.3
(51.8)
0.4

5.2
(56.0)
0.6

$ (47.1) $ (50.2)

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

$ 182.0

$170.3

At December 31, 2008 and 2007, the weightedaverage 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 highquality corporate bonds that would generate the
cash flows necessary to pay the plan’s benefits
when due.

70

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):

Health care cost trend rate
assumed for next year
Rate to which the cost trend
rate is assumed to decline
(the ultimate trend rate)
Year that the rate reaches
the ultimate trend rate

2007

7.50 %

8.00 %

5.00 %

5.00 %

2014

2013

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):

1% Point
Increase
Effect on aggregate of
service and interest cost
components of net
periodic postretirement
benefit costs
Effect on accumulated
postretirement benefit
obligation

1% Point
Decrease

$

$

2.9
23.8

(2.3)
(19.7)

The following is a summary of the components
of net periodic postretirement benefit expense for
the years ended December 31 (in millions):
2008
Service cost-benefits
earned during the period
$ 6.8
Interest cost on accumulated
benefit obligation
10.8
Amortization of prior service cost
(1.4)
Amortization of net actuarial loss
5.2
Total periodic expense
Curtailment gain
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:
Prior service cost
$
Net actuarial loss
Total

$

2007
$

7.5
10.3
(1.4)
7.9

21.4
(0.2)

24.3
—

21.2

24.3

(1.5)
4.1

Without
Subsidy

2.6

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 net curtailment gain was recognized in net

Federal Reserve Bank of Richmond

income in the year ended December 31, 2008 related to employees who terminated employment
during 2008. A deferred curtailment gain was
recorded in 2007 as a component of accumulated
other comprehensive loss; the gain will be recognized in net income in the future 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
$0.4 million and $0.8 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.
Following is a summary of expected postretirement benefit payments (in millions):

2009
2010
2011
2012
2013
2014-2018

$

9.1
10.0
10.8
11.5
12.1
70.7

Total

$ 124.2

With
Subsidy

$

8.4
9.3
10.1
10.7
11.2
64.4

$ 114.1

71

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 $16 million for each of
the years. 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 $2 million and $4 million, respectively, and are recorded as a component of
“Salaries and other benefits” in the Statements of
Income and Comprehensive Income.

Change in funded status of
benefit plans:
Prior service costs arising
during the year
Net actuarial loss arising
during the year
Amortization of prior
service cost
Amortization of net
actuarial loss
Change in funded status of benefit
plans–other comprehensive loss
Balance at December 31, 2008

1
(1)
(2)
5
3
$

(47)

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

14. Business Restructuring Charges
13. Accumulated Other Comprehensive Income and Other Comprehensive Income
Following is a reconciliation of beginning and
ending balances of accumulated other comprehensive loss (in millions):
Amount related to
postretirement
benefits other
than pensions

$

(73)

2007 Restructuring Plans
In 2007, the Reserve Banks announced a restructuring initiative to align the check processing infrastructure and operations with declining check
processing volumes. Additional announcements
in 2007 included restructuring plans associated
with the U.S. Treasury’s Collections and Cash Management Modernization (CCMM) initiative.

(1)
8

Change in funded status of benefit
plans–other comprehensive loss

23
$

(50)

(continued in next column)

72

In 2008, the Reserve Banks announced the acceleration of their check restructuring initiatives to
align the check processing infrastructure and operations with declining check processing volumes.
The new infrastructure will involve consolidation
of operations into two regional Reserve Bank processing sites in Cleveland and Atlanta.

15
1

Balance at January 1, 2007
Change in funded status of
benefit plans:
Net actuarial gain arising
during the year
Deferred curtailment gain
Amortization of prior
service cost
Amortization of net
actuarial loss

Balance at December 31, 2007

2008 Restructuring Plans

2006 and Prior Restructuring Costs
The Bank incurred various restructuring charges
prior to 2007 related to the restructuring of savings bonds operations.
Following is a summary of financial information
related to the restructuring plans (in millions):

Restructuring Plans
2006 &
prior 2007 2008 Total
Information related
to restructuring
plans as of
December 31, 2008:
Total expected costs
related to
restructuring
activity
$ 0.9 $ 7.2 $ 2.3
Estimated future
costs related
to restructuring
activity
—
0.5
0.1
Expected
completion date 2005 2010 2009
Reconciliation of
liability balances:
Balance at
January 1, 2007
Employee
separation costs
Adjustments
Balance at
December 31,
2007
Employee
separation costs
Adjustments
Payments
Balance at
December
31, 2008

$ 10.4

0.6

ments of Income and Comprehensive Income.
Adjustments to the accrued liability are primarily
due to changes in the estimated restructuring costs
and are shown as a component of the appropriate
expense category in the Statements of Income and
Comprehensive Income.
Restructuring costs associated with the impairment of certain Bank assets, including software,
buildings, leasehold improvements, furniture, and
equipment, are discussed in Note 9. 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
$ 0.1 $ — $ —
—
(0.1)

—
—

5.8
(0.1)

$ — $ 5.8 $ —

$ 5.8

—
—
—

5.8
—

$ 0.1

1.2
(0.4)
(1.7)

2.3
—
(0.2)

3.5
(0.4)
(1.9)

$ — $ 4.9 $ 2.1 $ 7.0

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 StateFederal Reserve Bank of Richmond

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 AssetBacked 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.
The Bank, the U.S. Treasury, and the Federal Deposit Insurance Corporation jointly announced on
January 15, 2009 that the U.S. government would
provide financial support to Bank of America Corporation (“Bank of America”). The arrangement
provides funding support for possible future principal losses relating to a designated pool of up to
$118 billion of financial instruments. The Bank’s
commitment under the arrangement is to provide
a non-recourse loan to Bank of America if and
when qualifying losses of $18 billion have been
recorded in the pool. Interest and fees would be
with recourse to Bank of America. This arrangement extends for a maximum of ten years for residential assets and five years for non-residential
assets. As the details of the arrangement have not
been finalized, the Bank has not determined the
accounting treatment for this transaction.
73

The Federal Reserve Bank of Richmond
2008 Annual Report was produced by the
Research Department, Publications Division
and the Public Affairs Department, Graphics
Division.

Special Thanks to: Alice Broaddus,
Angelyque Campbell, Matthew Conner,
Renee Courtois, Amanda L. Kramer,
Ned Prescott, Jim Strader, and
Sonya Ravindranath Waddell.

Managing Editor: Julia Ralston Forneris

This Annual Report is also available on
the Federal Reserve Bank of Richmond’s
Web site at www.richmondfed.org. For
additional print copies, contact the
Research Publications Subscription and
Copy Request Line at (800) 322-0565.

Designer: Cecilia Bingenheimer
Illustrator: Chris OBrion
Article Editor: Elaine Mandaleris-Preddy
Photography: Larry Cain and
Geep Schurman
Printer: Federal Reserve Bank of Richmond

Fifth Federal Reserve District Offices
Richmond
701 East Byrd Street
Richmond, Virginia 23219
(804) 697-8000
Baltimore
502 South Sharp Street
Baltimore, Maryland 21201
(410) 576-3300
Charlotte
530 East Trade Street
Charlotte, North Carolina 28202
(704) 358-2100

www.richmondfed.org


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102