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The Federal Reserve Bank of Richmond
2011 Annual Report

Unsustainable Fiscal Policy
Implications for Monetary Policy

The Federal Reserve Bank of Richmond

2011 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.

The Federal Reserve Bank of Richmond

2011 Annual Report

Message from the President. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Feature Essay:
Unsustainable Fiscal Policy: Implications for Monetary Policy . . . . . . . . . . . . .

Message from Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Bank in the Community. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Fifth District Economic Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Boards of Directors, Advisory Councils, and Officers. . . . . . . . . . . . . . . . . . . . . .

Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Federal Reserve Bank of Richmond

2011 Annual Report

M E S S AG E F R O M T H E P R E S I D E N T

he past five years have presented the Federal Reserve with a
series of difficult challenges. The financial market strains that
emerged in the summer of 2007 were at first difficult to diagnose,
and even harder to know how to treat as the crisis unfolded.

The recession that began at the end of 2007 required stimulative interest rate cuts,
which the Federal Open Market Committee (FOMC) initiated in January 2008,
but the subsequent surge in inflation made it difficult to calibrate that stimulus.
Beginning in March of that year, distress at a series of financial institutions elicited
unanticipated emergency lending, which exacerbated future moral hazard problems. After interest rates were effectively reduced to zero in late 2008, the FOMC
provided further monetary stimulus through large expansions of the money supply.

Jeffrey M. Lacker
President

Meanwhile, the federal government’s budget outlook has deteriorated markedly over the past five years. The deficit has grown dramatically in the wake of a
recession-induced decline in federal revenues and increased expenditures to help
combat that downturn. The result has been a significant increase in federal debt.
These recent developments have only made more acute what is projected to be a
severe long-term problem. The nonpartisan Congressional Budget Office (CBO)
issues two long-term federal budget projections. A “baseline” scenario assumes
that current laws will remain constant, tax cuts that are set to expire will not be
extended, and spending will be held in check as promised. In that scenario, federal
debt held by the public would rise slowly over time, increasing from nearly 68
percent as a share of gross domestic product to 84 percent of GDP by 2035 and
then remaining relatively constant. That debt level is large, by historical standards,
but probably manageable. In the CBO’s “alternative” scenario—which it deems
more likely to occur—tax revenues relative to GDP would remain close to their
historical levels, and spending would increase sharply in both entitlement and
discretionary programs. In this scenario, federal debt held by the public would
exceed its historical peak of 109 percent of GDP by 2023 and surpass 200 percent
of GDP by the late 2030s.
Those projections are alarming, and if they come to pass, they could pose significant challenges for monetary policy, as Renee Haltom and John Weinberg explain
in the following essay. If the federal debt were to rise to such levels, it is conceivable
that our country could hit what economists call the “fiscal limit,” where it would
no longer be possible to raise enough money to resolve the fiscal imbalance. The
result would be a very unsatisfying choice: federal debt could be reduced through
default, or the real level of the debt could be reduced through inflationary actions
by the central bank.

The Federal Reserve Bank of Richmond

2011 Annual Report

Over many years, the Federal Reserve has worked hard to
establish and maintain the credibility of our commitment
to low and stable inflation. The FOMC recently clarified
that commitment by stating that it views an inflation rate
of 2 percent as most consistent with price stability over the
longer run. Although containing inflation has widespread
public support, one must acknowledge that the federal
government might be tempted to seek the assistance of
the central bank in addressing fiscal problems, especially
if those problems become acute. Indeed, there have been
calls in some quarters for the Fed to deliberately engineer
higher inflation to reduce the real debt burden on private
borrowers. It’s only a short step from that position to advocating inflation to reduce the real burden of the federal debt
or to minimize the interest expense on federal obligations.
During World War II, the Fed cooperated with the U.S.
Treasury Department to cap interest rates on government
debt to limit financing costs, but a massive and intrusive
program of federal price controls was required to contain
the resulting inflationary pressures. Our country’s experience with price controls in the 1970s also was disastrous,
so they are not a realistic option.
The current independence that the Federal Reserve enjoys
to conduct monetary policy—while remaining accountable
to Congress and the public—has helped it stay focused on
maintaining price stability. But pressures could emerge that
would threaten that independence if the federal government were on the brink of default.
Even more disturbing, inflation still could break loose
before the fiscal limit is reached. Research suggests that
simply approaching the fiscal limit could be enough to
convince markets that the central bank eventually will act
to alleviate fiscal pressures. Such expectations could raise
inflation without any change in central bank policy.
Apparently, market participants believe that the CBO’s
“baseline” scenario is, in fact, fairly realistic—that is, the
legislative and executive branches will agree on the difficult
measures necessary to prevent federal debt from reaching

unsustainable levels. After all, the public remains willing
to purchase government debt in the form of U.S. Treasury
securities at very low interest rates, and inflation expectations remain subdued.
That is a bright sign in what could be a very dreary fiscal
picture. But policymakers must not be complacent. Those
in charge of fiscal policy must not exploit the public’s continued trust to delay difficult compromises. And monetary
policymakers must be mindful that a central bank’s credibility, once lost, can be recovered only at a steep price.

Jeffrey M. Lacker
President

The Federal Reserve Bank of Richmond

2011 Annual Report

Unsustainable Fiscal Policy
Implications for Monetary Policy
Renee Haltom and John A. Weinberg

he debt of the United States government that is held by the public reached its highest
point since World War II in 2011, at 67.7 percent of gross domestic product (GDP).1
Annual deficits surpassed 10 percent of GDP in 2009, the highest level since 1945, dipping
to 8.7 percent of GDP in 2011. The early-to-mid 1980s was the only other point in the
postwar period in which deficits exceeded 5 percent of GDP.
Recent numbers are high by historical comparison, but
more important than the current size of the deficit and
debt is the path they are likely to follow in the future.
Federal debt held by the public was actually higher
after World War II than it is today—109 percent of
GDP in 1946, the highest level on record—but a key
difference was that large deficits then were almost
entirely associated with the temporary war effort.
The same cannot be said today; several factors point
to large demands on fiscal resources for most of the
foreseeable future. Most prevalent is the aging population. The first baby boomers reached retirement age
in 2011, and the fraction of the population aged 65 or
older will surpass 20 percent by 2035, compared to 13
percent today. For the past 30 years, there have been
roughly five working people in the United States for
every person of retirement age; that number will drop
to 2.8 after 2035. This “dependency ratio” is a rough
approximation of the number of working individuals in the economy that support, through taxes and
Social Security contributions, the people drawing
age-related benefits from the government. The aging

population will impose significant demands on federal resources through Social Security, Medicare, and
Medicaid. These programs are written into law, which
means their spending is not determined annually by
the federal budgets created by the U.S. president and
Congress, but instead can only be reduced through
major overhauls to law.2
The nonpartisan Congressional Budget Office (CBO)
projects the federal government’s long-term budget
outlook under two scenarios: a “baseline” scenario
that holds current laws constant and an “alternative”
scenario that incorporates the effects of laws the CBO
deems likely to pass. (The budget outlooks under both
scenarios are displayed in Figure 1.) The baseline
scenario reflecting current laws presents the more
optimistic view of the future path of fiscal policy. Tax
revenues are projected to reach much higher levels
than in recent history, while each category of spending
except that on Social Security, health care entitlements, and interest payments on debt is projected
to fall to its lowest level since World War II. Still, the

The Federal Reserve Bank of Richmond

2011 Annual Report

FISCAL POLICY & MONETARY POLICY:

What’s the difference?
MONETARY POLICY
FISCAL POLICY

The federal government’s
overall approach to spending,
borrowing, and taxation

• Fund government operations and services
• Manage economic growth
• Other goals vary with each administration

• The Executive Branch
• The Legislative Branch

• Spending
• Borrowing
• Taxing

Managing the money supply
to influence interest rates and
the availability of credit

DEFINITION

WHO’S
RESPONSIBLE

TOOLS

increase in revenues and decline in other spending
would be slightly more than offset by increased spending on Social Security, Medicaid, and Medicare as the
population ages. Therefore, deficits would remain
positive, causing debt levels to grow slowly over time.
Under the baseline scenario, debt held by the public
would rise to 84 percent of GDP by 2035, staying in
that ballpark for the remaining decades of the forecast.
(See Figure 2.)
The alternative scenario—the one the CBO considers
more likely—presents a more alarming picture of the
growth in federal debt. In that scenario, revenues do
not rise much from where they are today, yet spending grows rapidly. This is because of law changes the

GOALS

• Promote price stability
• Promote maximum
sustainable employment

• The Federal Reserve

• Buying and selling securities
• Lending money to banks
• Paying interest on bank reserves

CBO deems likely to take place, including an extension of the tax cuts that were enacted since 2001 and
extended in 2010. The CBO also assumes that tax laws
will be changed to keep tax revenues close to their
long-run average of 18.4 percent of GDP, rather than
rising to historically large levels as they do in the baseline scenario. In addition, Medicare payments are not
assumed to decrease as current law dictates, health care
spending under the major reform bill passed in 2010 is
not assumed to decrease after 2021 as current law prescribes, and spending on non-entitlement programs is
not assumed to fall as rapidly as in the baseline scenario.
Under these conditions, federal debt held by the public
would rise sharply after 2011, exceeding its historical
record of 109 percent of GDP as early as 2023. It would

The Federal Reserve Bank of Richmond

2011 Annual Report

Figure 1: Projected Budget Gaps (As a Percent of GDP)
The Congressional Budget Office produces two long-term budget projections: the “baseline” scenario,
based on current laws, and the “alternative” scenario, based on laws expected to pass.

BASELINE SCENARIO—Under Existing Laws*
80
70

This scenario assumes
Congress would not
change key laws that affect
spending and revenues.
For example, temporary
tax cuts would expire,
alternative-minimum-tax
relief would cease, and
Medicare payments would
decrease significantly.

60
50
40
Spending

30
Revenues

20
10
0
2012

2027

2042

2057

2072

ALTERNATIVE SCENARIO—Under Expected Laws*
80
70
60

This scenario assumes
Congress would follow
recent precedents for
modifying key laws. For
example, Congress would
extend temporary tax
cuts, provide alternativeminimum-tax relief, and
allow Medicare payments
to continue to grow.

Spending

50
40
30
Revenues

20
10
0
2012

2027

2042

2057

Source: Congressional Budget Office’s 2011 Long-Term Budget Outlook
* Projections begin with the 2012 budget.

2072

The Federal Reserve Bank of Richmond

2011 Annual Report

Figure 2: Federal Debt Held by the Public (As a Percent of GDP)
Federal debt held by the public consists primarily of U.S. Treasury securities, including those held
by the Federal Reserve. It does not include debt held in federal government accounts or securities
issued by Fannie Mae or Freddie Mac.

FEDERAL DEBT HELD BY THE PUBLIC (as a percentage of GDP)
250
HISTORICAL

PROJECTED*

200
Under
Expected Laws

150

100

The Congressional Budget
Office’s bleakest scenario,
based on laws expected
to pass, shows federal
debt held by the public
exceeding 200 percent
of GDP after 2036.

Under Existing Laws

2030

2020

2010

2000

1990

1980

1970

1960

1950

1940

Source: Congressional Budget Office’s 2011 Long-Term Budget Outlook
*Projections begin with the 2012 debt level.

surpass 200 percent of GDP—far more than double
today’s share of GDP—by the late 2030s.
The two scenarios represent optimistic and pessimistic
alternatives from a range of possible outcomes. The exer
cise shows that the evolution of the federal government’s
fiscal position depends largely on policy decisions that
have yet to be made. Given the demands on fiscal
resources coming from the aging population under
existing laws, achieving a path toward fiscal balance will
involve very difficult tradeoffs for fiscal policymakers.

Unsustainable Fiscal Policy
Economists use the word “unsustainable” to describe
debt levels projected by the CBO’s alternative scenario, a characterization reflecting the likelihood that

financial markets would force a painful adjustment in
fiscal policy before such debt levels could be reached.
That notion is based on a simple framework called
the government’s intertemporal budget constraint.
“Intertemporal” simply means “over time,” while a
budget constraint is a basic accounting identity that
says an entity must pay for everything that it purchases.
The government’s intertemporal budget constraint says
that the value of the government’s outstanding debt
must equal the present value of its expected future surpluses—that is, what financial markets believe surpluses
will be, calculated in today’s dollars.
The intertemporal budget constraint suggests that any
time the real debt increases by even a small amount—a
budget deficit is run in a single year—the expectation
of future taxes or spending must adjust to put the

The Federal Reserve Bank of Richmond

2011 Annual Report

The cost of Medicare, Social Security,
and other entitlement programs
will rise dramatically as increasing
numbers of baby boomers reach
retirement age.

equation in balance. However, the equation says only
that surpluses must eventually rise; it provides no
guidance on when that must occur. Historical experience doesn’t provide a great deal more insight. For
example, the U.S. government ran moderate deficits,
averaging roughly 3 percent of GDP every year, from
1970 to 1997, with no obvious concern from financial
market participants about the sources of future surpluses. That experience would imply that governments
can sustain moderate deficits seemingly indefinitely.
That is less likely to be true when the imbalance
between outstanding debt and future surpluses is
very large. The larger the debt grows, the larger future

surpluses—revenues in excess of spending—must be
to satisfy the equation. However, there are limits to
future surpluses. Spending cannot drop to zero; to
the contrary, spending is expected to rise to historically high levels as a percent of GDP even under the
CBO’s most optimistic scenario, and tax revenues
have an upper limit. As tax rates grow higher, they
distort incentives to work and produce, and at very
high rates would shrink the revenue collected by the
government. There are likely to be political limits to
tax revenues even before that point is reached, a reality
reflected in the CBO’s alternative scenario assumption
that tax revenues will revert to their historical average
of 18.4 percent of GDP within a decade. With debt

The Federal Reserve Bank of Richmond

2011 Annual Report

levels predicted to grow much larger than GDP within
two decades, it is clear that many years of higher taxes
would be required to produce enough surpluses to
resolve the resulting imbalance. There is some level
of debt that is high enough—although how high is
difficult to predict—that generating the amount of
future surpluses required would simply be infeasible.
That point is what economists have called the “fiscal
limit.” At the fiscal limit, the government cannot borrow further, and the government’s existing spending
promises therefore cannot be funded. At least one of
two events must occur at the fiscal limit: the government would reduce its debt levels by defaulting, or real
debt levels would be reduced through actions taken
by the central bank.
There are two main ways in which central banks can
improve governments’ fiscal positions. The first is
through “seigniorage,” the revenue that governments
effectively receive when central banks create money.
In the United States, it comes from the interest the Fed
earns on the Treasury securities it purchases to expand
the money supply. The Fed retains only the interest
revenue that it requires to fund operations, and turns
the rest over to the Treasury each fiscal year.3 The level
of seigniorage remitted annually does not significantly
affect debt: it amounts to slightly more than 1 percent
of revenues in most years.4 The governments of most
developed nations do not regularly rely on seigniorage
as a funding strategy because overreliance on seigniorage—that is, on money creation—will inevitably lead
to rising inflation. Perhaps the most famous example
of printing money to fund government operations
is Germany in the early 1920s, when the price level
doubled every two days. This action is sometimes
called “monetizing” government debt: if the market
grows unwilling to purchase government debt at low
rates, the central bank can step in to purchase that debt
directly from the government. Stanley Fischer, Ratna
Sahay, and Carlos Vegh (2002) estimate how much
government revenue can be created through seigniorage from a sample of 24 countries in the post-World
War II period. Those nations created enough money
to push annual inflation above 100 percent. During

those episodes, seigniorage amounted to just 4 percent
of GDP on average—not enough to cover their average
deficits of just below 5 percent of GDP. By comparison, deficits under the CBO’s alternative scenario are
projected to grow from a low of 5.6 percent of GDP in
2014 to more than 57 percent of GDP by 2085.
Aside from seigniorage, a central bank can reduce the
government’s debt burden by creating inflation that
was not anticipated by financial markets. Inflation
allows all borrowers, the government included, to
repay loans issued in nominal terms with cheaper
dollars than the ones they borrowed. In the United
States, inflation tends to be low and predictable from
year to year. Inflation that is higher than expected,
and therefore not priced into the contract interest rate, tends to produce only a small transfer of
wealth from lenders to borrowers. (Indeed, this is
one strong rationale behind the Fed’s price stability
objective for monetary policy.) However, roughly 90
percent of the federal government’s debt is issued
in nominal terms at prices that reflect the market’s
expectations for inflation over the life of the loan.
A significant deviation from those expectations
would produce a larger transfer of wealth from
lenders to borrowers. Historically, some central
banks—though never the Federal Reserve—have
even produced inflation for the sole purpose of
eroding the value of the government’s debt.
Today, the central banks of most developed nations
operate independently of fiscal policy considerations,
and none that the authors are aware of produce inflation for the explicit purpose of reducing government
debt levels. Between low, stable inflation and minimal
seigniorage revenue, the Federal Reserve’s policies
generally have little direct impact on the government’s
debt burden. (See Box 1 for an overview of other ways
in which fiscal and monetary policies interact.) This
could change, however, if financial markets began to
view hitting the fiscal limit as a possibility. That situation would inevitably invite monetary policymakers to
intervene since inflation presents one possible source
of revenue. (See sidebar on page 12 for a discussion
of ways in which this pressure could arise in a crisis.)

The Federal Reserve Bank of Richmond

2011 Annual Report

BOX 1

The Interaction Between Fiscal Policy
and Monetary Policy

everal of the everyday interactions between fiscal
policy and monetary policy do not have a large effect
on their respective goals to support a strong economy.
The most direct interaction in the United States is
that monetary policy is conducted in the secondary market for U.S. Treasury securities. The Fed buys treasuries
to put money into the banking system when it wants
to accommodate economic growth, and sells them to
remove money and suppress inflation. The Fed does not
exchange securities directly with the U.S. Treasury, but
instead conducts transactions with private financial market participants, which avoids conflicts of interest that
could otherwise arise from this relationship. The Fed also
affects the government’s borrowing costs when it raises
interest rates in times of strong economic growth. Today
the Fed’s independence avoids pressure to make borrowing cheaper for the government, but this was not always
the case. (See sidebar on page 12.)
More fundamentally, both fiscal policy and monetary
policy affect the broader economy through the spending

and investment decisions of households and businesses—
though neither has a perfect ability to manage the economy in this way—and as a result their policies can affect
each other’s goals. (This, too, has led to political pressures
throughout the Fed’s history, as discussed in the sidebar.)
So the Fed must consider the effects of current fiscal
policy when it sets monetary policy to pursue its goals of
price stability and healthy employment. For example, the
Fed must consider how fiscal actions are likely to affect
private demand based on how and when people expect
those actions to be paid for by increased taxes or future
expenditure reductions. Another possible effect of debtfinanced fiscal stimulus—and another way in which fiscal
and monetary policy interact—is that it could put upward
pressure on interest rates in the economy as government
borrowing rises.
Finally, as the main essay discusses, fiscal policy can have
costly implications for monetary policy in times of fiscal crisis.

In fact, economic research suggests that high debt
levels ultimately could overwhelm a central bank’s
efforts to keep prices stable. The remainder of this
essay will argue that these outcomes should be avoided
in the United States by putting fiscal policy on a
sustainable path.

Sources of Fiscal Inflation
Even without direct political pressures on the central
bank to create inflation, unsustainable fiscal policy may
be able to force that outcome. Inflation is commonly
argued to be “always and everywhere a monetary
phenomenon,” a statement reflecting the monetarist
notion that in the long run, inflation can be created
only by the central bank’s actions to increase the money
supply. However, economists Thomas Sargent and

Neil Wallace (1981) show that the central bank may
not have control over inflation in times of fiscal crisis.
This stems from the idea that the public has a limited
demand, based on its private portfolio preferences, to
hold government debt as a percent of GDP. Sargent and
Wallace model a scenario in which the government has
reached that limit on debt, yet continues to run budget deficits. If the government is to avoid default, the
central bank has no choice but to produce inflation to
reduce debt levels and satisfy the intertemporal budget
constraint. In this scenario, monetary policymakers
uncharacteristically focus on stabilizing debt, while
inflation is determined by deficit policy.5
Does this scenario resemble the way monetary and
fiscal policies are conducted in the United States? In
the Sargent and Wallace framework, fiscal authorities

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2011 Annual Report

“move first” by choosing levels of debt and surpluses,
leaving monetary policymakers to make up for any
imbalance. However, the central bank may be able
to constrain the actions of fiscal authorities by making the first move; that is, by firmly establishing the
expectation among both fiscal authorities and market
participants that it will not step in to reduce debt levels
with inflation.6 One could argue that this is the way
monetary policy is conducted in the United States,
such that the inflationary outcome that Sargent and
Wallace describe need not be a concern. Since the
early 1980s, American monetary policy has tended
to adjust interest rates fairly predictably in response
to the performance of inflation and unemployment.

As a result of this consistent stance in opposition to
inflation, financial markets view the Fed’s inflation
objectives as highly credible, as evidenced by anchored
inflation expectations. The same is true for the central
banks of many other developed nations. Some central
banks even face legally binding price stability mandates, such as the Bank of England, which must explain
its failures to the Chancellor of the Exchequer, as well
as the actions that are being taken to correct them.
The credibility that these central banks have earned
is bolstered by the operational independence most of
them have been granted by their governments, which
insulates monetary policy from pressure to set aside
price stability to temporarily boost the economy.

Could the Fed’s Monetary Policy Independence Withstand a Fiscal Crisis?
SIDEBAR

n March 4, 1951, the Federal Reserve and the Treasury
Department publicly agreed that the Fed would end
its nine-year program in support of fiscal policy. Soon after
the United States entered World War II, the Fed had committed to regularly purchasing enough Treasury debt to
keep the government’s financing costs low. The agreement
to end that program became known as the Fed-Treasury
accord, and it marked the end of an era of strong Treasury
influence over monetary policy decisions, helping to usher
in a new era of Fed independence. The accord asserted the
Fed’s authority to independently determine the size of the
money supply to reach its congressionally established goals,
which today include stable prices and healthy employment.
This separation of authority has been essential to keeping
the Fed accountable while shielding monetary policy from
short-term political influence.
The 1951 accord has not completely insulated the Fed
from political intervention, however. Pressures on the
Fed often have been motivated by a short-term interest
in economic stimulus, but the Fed also has experienced
pressures to place greater weight on price stability, including recently. Since the 1980s, despite occasional pressures,
appreciation has grown both inside and outside of central
banks for monetary policy independence as the best way
to achieve both objectives.

The main essay points to research suggesting that fiscal
imbalances can lead to inflation. This could occur most
directly through explicit pressure from elected leaders to
create inflation, but it also could stem from the central bank’s
desire to soothe an economy suffering from fiscal crisis.
It is useful to consider the conditions that likely would
arise in fiscal crisis. The federal government would face two
extreme choices: defaulting on its debt or enacting some
combination of painful spending cuts and tax increases.
The prospect of the first option would wreak havoc in
financial markets as investors become concerned about
the growing risk associated with U.S. Treasury securities.
This effect has been demonstrated by the unfolding sovereign debt crisis in Europe. In early 2010, markets began
to demand higher yields to hold debt issued by European
governments that sustained large projected debt levels.
The debt of some nations was downgraded by credit rating agencies, damaging the financial position of the many
European banks that hold large amounts of sovereign debt
because the banks were then forced to raise more capital. A
similar effect would arise in a U.S. fiscal crisis since Treasury
securities are widely held by financial institutions and play
an important role in many private market transactions as
well. The European Central Bank responded by purchasing
sovereign debt and also accepting that debt as collateral

The Federal Reserve Bank of Richmond

2011 Annual Report

In practice, however, a central bank’s credibility cannot constrain fiscal policy in any meaningful sense: it
cannot stop fiscal policymakers from running budget
deficits that continually expand the debt. As a result,
whether high debt levels would lead to inflation depends
critically on whether the public believes fiscal authorities will balance the intertemporal budget constraint,
or instead leave fiscal imbalances to be addressed by
inflation. Unfortunately, neither theory nor experience
provides a good rule of thumb for when those expectations might begin to change, potentially unleashing a
fiscal crisis, though it is reasonable to expect that such a
shift becomes more likely as projected debt levels grow
ever larger. For example, Eric Leeper (2010) imagines

in loan agreements to banks. (The ECB’s purchases were
“sterilized,” meaning that an equal amount in liquidity was
removed from the financial system so that the purchases
would not add to the overall money supply.)
The second option facing governments, a combination
of sudden tax increases and broad cuts to services, could
cause economic weakness in the short run. Independent
of the possible short-run effects of fiscal “austerity,” rational households and businesses are likely to hold back
spending in anticipation of fiscal retrenchments even
before such decisions are announced, particularly if there
is uncertainty over the specific forms those adjustments
would take. Without knowing whether payroll taxes will
be higher in five years, a planned government investment
project will come to fruition, or employer health care costs
will change abruptly, firms may delay a broad spectrum
of spending, hiring, and investment decisions until those
various sources of uncertainty have been resolved. In
Europe, too, the uncertain resolution of fiscal imbalances
has dampened spending and economic activity. Though
monetary policy cannot resolve this type of uncertainty, it
is clear that both default and extreme fiscal retrenchment
may threaten the central bank’s economic objectives.
That is why the dynamics of fiscal crisis can create difficult
short-term tradeoffs for the central bank: the economic pain

a scenario in which the federal government is almost
at its fiscal limit, but fiscal authorities still have some
ability to adjust fiscal policy to stabilize debt levels.
Being near the fiscal limit is enough to enable an equilibrium in which markets expect the central bank to
accommodate the debt with inflation in the future.
The public’s expectation of higher inflation can push
actual inflation higher before the central bank decides
to create a single dollar.7
To emphasize the power of expectations in creating
inflation, it is worth noting that a change in expectations also could bring an inflationary episode to a
quick end. Sargent (1981) looked at the hyperinfla-

associated with fiscal crisis versus the longer-term costs of
central bank intervention to reduce debt levels—including the
risk of inflation, damaged central bank credibility, and a precedent for rescuing the government from its debt. At the same
time, even the most conservative central banker might feel
compelled to intervene in hopes of limiting a panic before it
could grow more severe, despite the known costs of doing
so. (A related discussion is presented by Jeffrey Lacker, 2011.)
Averting fiscal crisis entails making people believe that
difficult fiscal policy choices will be made before they are
forced by financial markets. Thus, creating that expectation may require fiscal constraint before it seems strictly
necessary. Yet because of the difficult and unpopular
tradeoffs required to achieve fiscal balance, it may be
tempting for elected officials to delay action in hopes that
monetary policy will relieve imbalances.
Experience since the 1951 accord and the prospects
for how a fiscal crisis could unfold make clear the conditional nature of monetary policy independence. Extreme
conditions could stress both the consensus in support of
independence and the central bank’s ability to act independently. While formal agreements like the accord can
make overt political intervention in monetary policy more
difficult, such “rules” cannot ensure that the central bank
would escape difficult choices in times of crisis.

The Federal Reserve Bank of Richmond

2011 Annual Report

To bring the federal debt under
control, monetary policy offers no
good alternatives to painful fiscal
policy decisions regarding taxation
and spending.

tions experienced by Austria, Hungary, Germany,
and Poland after World War I. Each country financed
massive government deficits and war reparations
through sales of government debt to the central bank,
resulting in hyperinflation. In each case, hyperinflation was brought to a sudden end through drastic
regime changes in both fiscal and monetary policies:
each nation established an independent central bank
that was legally prohibited from extending credit to
the government and established rules that limited
fiscal policy to financing debt through private markets.
In each case, the regime change credibly convinced
market participants that the central bank would no
longer finance fiscal policy.

The lesson from this literature is that when the public
expects fiscal authorities to take action to satisfy the
budget constraint while they still can, inflation need
not rise. This is perhaps the situation in the United
States today: debt projections under the CBO’s more
likely scenario exceed historical records for most
developed countries, yet markets appear perfectly
willing to purchase government debt at low interest
rates, indicating that inflation expectations remain
low. Apparently markets believe fiscal imbalances will
be resolved through fiscal policy rather than through
inflation. However, as long as there is uncertainty
over the feasibility of generating sufficient future
surpluses, policymakers cannot be sure that market

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2011 Annual Report

expectations will not shift unexpectedly and produce
inflation. Leeper (2010) argues that a way to reduce
that uncertainty would be to establish clear rules that
govern fiscal policy in times of fiscal strain to avoid
long-term imbalances, a topic discussed at the end of
this essay. In the meantime, since uncertainty remains
over how current fiscal imbalances would be resolved,
it is useful to consider the options facing the central
bank in an environment of fiscal crisis.

Encouraging Sustainable Policy
Credible monetary policy may help postpone the
spike in inflation expectations that the above literature describes by convincing the public that the central
bank will not quickly or easily agree to erode the debt
through inflation. In many developing countries, central banks have a history of creating large amounts of
inflation to help governments finance spending. For
countries with that history, fiscal imbalances may
more easily lead to a spike in inflation. Fortunately,
the United States has no such history. The Fed can
preserve its credibility by continuing to meet its price
stability objectives, a task made more complicated in
times of economic turbulence. In the past few years,
weak economic conditions have greatly influenced the
policies of the Fed and many other central banks, while
inflation has perhaps been less of an immediate concern. It is useful to remember that the Fed’s credibility
helps make policies aimed at supporting real economic
growth more effective. For example, markets remained
confident in 2008 that the Fed would act to constrain
any inflation pressures that emerged, even as the Fed
added extraordinary liquidity to the banking system.
There are additional steps that can be taken to bolster
the Fed’s credibility. Elected leaders could reaffirm
the central bank’s independence to reassure markets
that the Fed will not face political pressure to erode
the debt through inflation, similar in spirit to the formal accord struck between the Fed and the Treasury
Department in 1951. (See sidebar on page 12.) A
formal target for inflation, like the one adopted by the
Fed in early 2012, may strengthen the central bank’s
perceived commitment to avoiding inflation.

However, these steps may not be sufficient. As
research by Sargent and Wallace and others describes,
fiscal policy that does not contain the debt may lead
to inflation even if monetary policymakers have the
best intentions. This is due to the incontrovertible
nature of the government’s intertemporal budget
constraint. When the expected path for fiscal policy
does not by itself achieve balance in the constraint
over time, the price level is the only other factor that
can adjust to provide it.
It is useful to consider how much inflation would be
required to adequately reduce current debt levels.
The opening paragraphs of this essay noted that the
historical peak of the U.S. debt-to-GDP ratio was
reached after World War II. Counting only the portion of that debt that could easily be bought and
sold in public markets, George Hall and Sargent
(2011) estimate that it took 30 years for debt to fall
from 97.2 to 16.9 as a percent of GDP. They estimate
that about 20 percent of that debt reduction came
from inflation. (Annual inflation, measured by the
Personal Consumption Expenditures Price Index,
averaged 3.2 percent over that time period.) To consider how much inflation would be required today
to address current debt imbalances, Michael Krause
and Stéphane Moyen (2011) estimate that a moderate
rise in inflation to 4 percent annually sustained for at
least 10 years—in effect a permanent doubling of the
Fed’s inflation objective—would reduce the value of
the additional debt that accrued during the 2008–09
financial crisis, not the total debt, by just 25 percent.
If the rise in inflation lasted only two or three years, a
16 percentage point increase—from roughly 2 percent
inflation today to 18 percent—would be required
to reduce that additional debt by just 3 percent to 8
percent. Such inflation rates were not reached even in
the worst days of the inflationary 1970s. The reason
inflation has such a minimal impact on debt in Krause
and Moyen’s estimates is that while inflation erodes
the value of existing nominal debt, it increases the
financing costs for newly issued debt because investors
must be compensated to be willing to hold bonds that
will be subject to higher inflation. This effect would
be greater for governments such as the United States

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2011 Annual Report

that have a short average maturity of government debt
and therefore need to reissue it often.
With these estimates in mind, it is worth recalling the
CBO’s projection that debt held by the public may triple as a percent of GDP within 25 years. The estimates
cited above suggest that inflation is simply not a viable
strategy for reducing such debt levels. In addition, it
is important to remember that inflation is costly on
many levels. Inflation high enough to significantly
erode the debt would inflict considerable damage on
the economy and would require costly policies for
the Fed to regain its credibility after the fact. Inflation
that was engineered specifically to erode debt would
provide a significant source of fiscal revenue without
approval via the democratic process, and so would
raise questions about the role of the central bank as
opposed to the roles of Congress and the executive
branch in raising fiscal revenues.
Ultimately, the solution to high debt levels must come
from fiscal authorities. Decades of monetary policy
research suggests that rules and institutions can help
ensure that central bankers take a long-run view of
their policy objectives, even when doing so entails
difficult or unpopular policy choices in the short term.
Monetary policymakers have increasingly adopted
transparent and consistent practices that make
their policy rules credible and reduce uncertainty
over their priorities.
The same rules-based institutions do not currently
exist for fiscal policy. To a degree, this is a matter of
necessity: the distributional nature of fiscal policy
ought to be subject to the approval of the general
public via the political process. However, it may be
possible to create better rules for the more objective aspects of fiscal policy, a point argued by Leeper
(2010). Just as Congress has agreed to set long-run
objectives for the Fed while leaving day-to-day policy
choices to independent monetary policymakers, fiscal
policymakers could adopt objective long-run goals for
fiscal policy—such as appropriate long-run targets for
the ratio of debt to economic growth, guidelines for
when unusual circumstances justify a large increase

in debt, and how quickly fiscal imbalances should be
resolved in that situation—while leaving the distributional details to the democratic process.
With that said, guaranteeing that policymakers will
remain committed to those rules is difficult in practice. The recent fiscal crisis in Europe provides telling
proof. As a pre-condition to joining the European
monetary union, 17 nations agreed to the Stability
and Growth Pact, an agreement obligating each nation
to maintain annual deficits of less than 3 percent of
GDP and overall debt levels of less than 60 percent of
GDP. Even the threat of sanctions for breaching this
agreement was not enough to bind the fiscal policies of many European nations, including ones that
have been the focus of the recent debt crisis and ones
currently in relative fiscal health. If everyone knows
that there are circumstances under which the rules
will be violated—such as a demographic shift or an
unprecedented financial crisis that calls upon national
resources—then those rules will fail to anchor expectations. Though rules may be helpful, they may not be
enough without some mechanism for enforcing them.
Despite the difficulties of establishing fiscal rules to
reduce uncertainty over how fiscal imbalances would
be resolved, there are encouraging examples from
within the United States of fiscal policymakers adopting a longer-term perspective. Before the Constitution
was created, the federal government had no power
to levy taxes without unanimous approval from the
states. After a period in which both federal and state
debt became significantly devalued, the fiscal regime
was changed in 1790 by creating new powers for
federal taxation and, as a quid pro quo, nationalizing
state debt. This policy established an unfortunate
precedent for relieving local governments of their debt
burdens. Nearly 50 years later, the states again had
incurred heavy debts and defaulted after the recession of the late 1830s. Creditors again looked to the
federal government, but Congress rejected proposals
to take on state debt, arguing that states had entered
into debt of their own accord to finance local projects.
The decision was costly to the federal government. Its
reputation suffered because international creditors did

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2011 Annual Report

For the past 30 years, there have
been roughly five working people
in the United States for every person
of retirement age; that number will
drop to 2.8 after 2035.

not distinguish between state and federal debt, yet the
decision forced states to rewrite their treatment of debt
in their constitutions. Many adopted the balancedbudget amendments they retain today. Sargent (2011)
describes this episode as an example of how fiscal
crises can lead to positive institutional changes.
Ultimately, the solution to current fiscal imbalances
will require our elected authorities to make difficult
decisions. The Fed’s best contribution to this process
is to maintain its commitment to monetary policy
objectives, including low and stable inflation. For
the time being, markets appear to believe that fiscal
policymakers will put future debt, spending, and tax

levels on a more sustainable path. If they are correct,
our nation will not have to experience the significant
economic challenges of a world in which those expectations have changed. n

Renee Haltom is a writer in the Research Department and
John A. Weinberg is a senior vice president and director of
research at the Federal Reserve Bank of Richmond. They
would like to thank Andreas Hornstein, Thomas A. Lubik,
Aaron Steelman, and Alexander Wolman for discussions
and detailed comments.
The views expressed are those of the authors and not
necessarily those of the Federal Reserve Bank of Richmond
or the Federal Reserve System.

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2011 Annual Report

ENDNOTES
1. There are two common ways to measure the government’s
debt burden. Debt held by the public, used in this essay,
reflects government borrowing from private financial markets.
Total federal debt, the second common measure, comprises
debt held by the public (private investors, including the
Federal Reserve) and debt held by government accounts. The
two measures have different implications. Debt held by the
public can affect the current economy by crowding out private
borrowing. In contrast, debt held by government accounts
reflects internal transactions that are not traded in capital
markets. However, that debt is nonetheless a legal liability of
the federal government and a burden on taxpayers, which is
why total debt is also used as a measure of the government’s
overall debt burden. We focus on debt held by the public
because that is the measure for which long-term projections
are readily available.
2. The aging population may not be the only source of coming
strains on government budgets. Additional, though less certain,
liabilities stem from the government’s implicit support of
other sectors of the economy. This is the support that market
participants may assume the federal government will provide
to certain markets in the event of trouble, including contingent
support to the housing agencies Fannie Mae and Freddie Mac,
as well as private pension funds. Whether the government ever
will provide this implicit support is highly uncertain, but John
Walter and Nadezhda Malysheva (2010) estimated that more
than half the private financial sector—potentially $25 trillion in
liabilities, far greater than the size of the economy—was likely
to enjoy some explicit or implicit federal backing at the end of
2009. Not included in their analysis were public sector pensions, which are underfunded by more than $3 trillion, more
than triple states’ outstanding debts, according to the most
pessimistic estimates.
3. This revenue for the Treasury effectively is a tax on the public’s
holdings of non-interest-bearing money—the currency and
bank reserves issued by the Fed—since the public would have
otherwise earned interest from holding those treasuries.
4. Since 2009, the Fed has produced a larger than average
amount of seigniorage because the Fed has earned greater interest revenue due to the large expansion of the Fed’s balance
sheet to treat the financial crisis. From 2001 through 2008,
the Fed turned an average of $26 billion over to the Treasury
each fiscal year, averaging 1.1 percent of gross fiscal receipts.
From 2009 through 2011, the Fed turned an average of $67.9
billion over to the Treasury each year, or roughly 2.7 percent
of gross fiscal receipts. Data for the Fed’s annual remissions to
the Treasury can be found in the annual reports of the Federal
Reserve Board of Governors, available on its website. Though
the seigniorage revenue remitted to the Treasury has been
larger in recent years due to the Fed’s increased interest income,
partially offsetting that increased income is the fact that the
Fed, as of 2008, pays banks interest for the reserves they hold.
The Federal Reserve System paid $3.8 billion to banks in 2011
in interest on reserves and term deposits.

5. Sargent and Wallace label this outcome the “unpleasant monetarist arithmetic” of chronic fiscal deficits. Variations of this
model are presented by Eric Leeper (1991), Christopher Sims
(1994), John Cochrane (1999), and Michael Woodford (2001),
among others.
6. Eric Leeper (1991) describes this as an “active monetary
policy / passive fiscal policy” framework. An active policy is
one that chooses its objectives—surplus or deficit levels for
fiscal policy, or money supply growth for monetary policy—as
it sees fit, leaving the “passive” entity to stabilize debt. If monetary policy is “active,” it generally follows a policy that adjusts
interest rates in response to inflation. When fiscal policy is
active, it pursues the spending and tax policies it desires without necessarily stabilizing debt. If it chooses large debt levels,
it will ultimately determine inflation as a result of Sargent and
Wallace’s “unpleasant arithmetic.”
7. This effect presents an outcome similar to the “unpleasant
monetarist arithmetic”—that chronic fiscal deficits can lead
to inflation—except that here inflation can arise even without
monetary accommodation provided by the central bank.
Accordingly, this branch of literature is called “the fiscal
theory of the price level.” Several of the references provided
in footnote five follow this line of thinking.

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2011 Annual Report

REFERENCES
Cochrane, John H. 1999. “A Frictionless View of U.S. Inflation.”
In NBER Macroeconomics Annual 1998, edited by Ben S.
Bernanke and Julio J. Rotemberg. Cambridge, Mass: MIT Press.

Leeper, Eric M. August 2010. “Monetary Science, Fiscal
Alchemy.” Paper presented at the Kansas City Fed Economic
Policy Symposium at Jackson Hole.

Congressional Budget Office. 2011. “2011 Long-Term
Budget Outlook.”

Malysheva, Nadezhda and John R. Walter. Third Quarter 2010.
“How Large Has the Federal Financial Safety Net Become?”
Federal Reserve Bank of Richmond Economic Quarterly 96 (3):
273–290.

Fischer, Stanley, Ratna Sahay, and Carlos A. Vegh. 2002. “Modern
Hyper- and High Inflations.” Journal of Economic Literature 40
(3): 837–880.
Hall, George J., and Thomas J. Sargent. July 2011. “Interest
Rate Risk and Other Determinants of Post-WWII US
Government Debt/GDP Dynamics.” American Economic Journal:
Macroeconomics 3 (3): 192–214.
Krause, Michael U., and Stéphane Moyen. April 29, 2011. “Public
Debt and Changing Inflation Targets.” Deutsche Bundesbank.
Lacker, Jeffrey M. November 16, 2011. “Understanding the
Interventionist Impulse of the Modern Central Bank.” Speech
to the CATO Institute 29th Annual Monetary Conference,
Washington, D.C.
Leeper, Eric M. 1991. “Equilibria Under ‘Active’ and ‘Passive’
Monetary and Fiscal Policies.” Journal of Monetary Economics 27:
129–147.

Sargent, Thomas J. May 1981. “The Ends of Four Big Inflations.”
Federal Reserve Bank of Minneapolis Working Paper No. 158.
Sargent, Thomas J. December 8, 2011. “United States Then,
Europe Now.” Nobel Prize Lecture.
Sargent, Thomas J., and Neil Wallace. Fall 1981. “Some
Unpleasant Monetarist Arithmetic.” Federal Reserve Bank of
Minneapolis Quarterly Review 5 (3).
Sims, Christopher A. 1994. “A Simple Model for Study of the
Determination of the Price Level and the Interaction of
Monetary and Fiscal Policy.” Economic Theory 4 (3): 381–399.
Woodford, Michael. January 2001. “Fiscal Requirements for Price
Stability.” NBER Working Paper No. 8072.

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2011 Annual Report

M E S S AG E F R O M M A N AG E M E N T

he Federal Reserve System has been the subject of much
controversy. We hear that the central bank did too much, or
too little, during the financial crisis and that we should be doing
more, or less, to promote economic growth and low inflation.

The Fed is no stranger to controversy. Since our founding almost 100 years ago, we
have tried our best to serve the public. We have not always gotten it right, and we
have learned many lessons, although scholars continue to debate both the causes of
economic events and the efficacy of actions taken by the Fed and others. Let’s look
at some examples of lessons learned since our founding and at our key roles today.

Sarah G. Green
First Vice President and
Chief Operating Officer

Prior to our founding, the country did not have a centrally managed currency,
and it experienced periods of financial panic. In 1913, the Federal Reserve Act
established the Fed as a national clearinghouse to help resolve these issues. The
debate about the central bank had hinged largely on the extent to which authority
would be vested in the powerful money centers or dispersed throughout the nation.
The Federal Reserve System—which includes 12 independent regional Reserve
Banks and a federal agency, the Board of Governors—represents a compromise
between those alternative views. From its start, the Fed has balanced the sometimes competing interests of different parts of the country and different parts of
the banking system. The importance of staying close to Main Street, even as we
address national economic issues, is an enduring lesson.
Since our founding, the economy has been through good times and bad. The Roaring
Twenties was a time of great prosperity. Then, during the early years of the Great
Depression, gross domestic product declined 30 percent, and unemployment rose to
25 percent. One-third of all banks failed. During this period, the Fed’s interest rate
policy fluctuated, but the Fed’s actions were insufficient to prevent a collapse of the
money supply and prices. Along with other factors, this policy error contributed to
the depth and duration of the depression. This was a lesson learned—provide accommodative monetary policy in times of severe economic stress and falling prices.
During World War II, the U.S. Treasury pressed the Fed to cap interest rates to
help finance government debt. This created inflationary pressure. Through this
experience, we learned the importance of keeping monetary policy independent
from fiscal policy. In 1951, the Fed and the Treasury reached an accord, which
gave the Fed independence to set interest rates in pursuit of economic stability.
In the mid-1960s and 1970s, inflation began to rise, and policymakers did not
respond effectively. During this period, called the Great Inflation, inflation spiked

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2011 Annual Report

into double digits. Beginning in 1979, the Federal Open
Market Committee (FOMC) increased interest rates to
bring inflation back under control, causing a sharp recession in the early 1980s. This lesson was clear—do not let
inflation creep out of control.
From 1985 to 2007, we enjoyed a long period of generally favorable economic performance called the Great
Moderation. Improved monetary policy contributed to this
prosperous period, which came to an abrupt end with the
latest financial crisis. The causes of the crisis and the severe
recession that followed remain a matter of debate. Certainly
imprudent risk taking by many financial institutions and
imperfect oversight by the Fed and other regulators played
a role. So too did the incentives created by a large and
ambiguously defined federal financial safety net.
Let’s turn now from history to look briefly at the Federal
Reserve today and to think about the implications of the
lessons learned. The mission of the Federal Reserve System
is to ensure the stability, integrity, and efficiency of the
nation’s monetary, financial, and payments systems. We
accomplish this through our monetary policy, supervision
and regulation, and payments roles.
In our monetary policy role, during the most recent recession, the FOMC established and continues to pursue a
highly accommodative monetary policy while remaining vigilant about inflation. Our decentralized structure
provides us with a deep and broad understanding of the
economy and with the political independence needed to
make decisions in the long-run interest of the public.
The Federal Reserve’s focus on supervision and regulation
ensures that financial institutions follow safe and sound
practices and that they identify and mitigate risk. Many
community and regional banks remain weak, so Reserve
Banks have increased the frequency and depth of examinations. The Board of Governors and the Reserve Banks also
have strengthened their oversight of the largest financial
institutions. We are performing stress tests that assess

how prepared they are for adverse financial and economic
scenarios. We also are implementing enhanced capital
standards and resolution plans.
The Federal Reserve System began as a system of clearinghouses for payments between banks, and continues
in that role today. In 2011, we transferred more than $4
trillion per day on average in electronic payments, checks,
and currency and coin. We also acted as the fiscal agent of
the U.S. Treasury. These services underpin the day-to-day
economic activities of consumers and businesses.
The community outreach activities of the Reserve Banks
and the Board of Governors are integral to all three of our
roles. Recently, our local outreach has focused on issues
such as housing foreclosures, small business lending,
workforce development, and nonprofit capacity building.
The economy works best with a well-informed public, so
we focus also on economic education and financial literacy.
Central banking depends both on science and judgment.
There is no simple, single formula for optimal economic
policy. So perhaps we should not be surprised by the level
of controversy about the Federal Reserve, or even proposals
to “end the Fed.” Our roles and policies have evolved as we
have learned from our history, but our founders created a
structure that has withstood the test of time and that brings
a mix of independent regional and national views to the
policy table. In 2013, the Federal Reserve System will commemorate its centennial, and our dedicated people are ready
to carry our public service mission into the next century.
Ultimately, the public will judge how effectively we fulfill
our responsibilities as a central bank.

Sarah G. Green
First Vice President and
Chief Operating Officer

BANK IN THE COMMUNITY

Providing Resources that
Strengthen the Fifth District

he Federal Reserve Bank of Richmond is one of 12 regional Reserve Banks that,
along with the Board of Governors, constitute the Federal Reserve System. This
regional structure enhances the Fed’s ability to facilitate payments, regulate financial
institutions (most of them local or regional), and closely monitor economic conditions
that inform monetary policy decisions. The regional structure also puts the Richmond
Fed in a unique position to provide additional resources that strengthen communities
throughout the Fifth District.

The Bank is based in Richmond with branch offices
in Baltimore and Charlotte, but it gathers economic
information from all parts of the Federal Reserve’s
Fifth District, which includes Virginia, Maryland,
North Carolina, South Carolina, Washington, D.C.,
and most of West Virginia. The Bank conducts surveys,
telephone interviews, and face-to-face meetings with
people throughout the District. It then synthesizes and
analyzes this information and makes it available to the
public in a variety of formats, including publications,
presentations, websites, and databases. The Richmond
Fed often convenes conferences and seminars that
bring people together from different perspectives
to discuss issues that are important to the economic
vitality of their communities. The Bank also partners
with educators to promote economic education and
financial literacy, and it works with its own employees
to create a culture of community service.

Gathering Information
The Bank’s ability to collect vital economic information from throughout the Fifth District begins with its
oversight boards. Nine directors oversee management
of the Federal Reserve Bank of Richmond. Member
banks elect six of them, and the Board of Governors

appoints the other three. The Bank’s branch offices in
Baltimore and Charlotte each have seven-member
boards, with four directors elected by the Richmond
Board and three appointed by the Board of Governors.
Board members provide anecdotal information and
unique perspectives from a wide variety of fields
including banking, finance, housing, health care,
construction, insurance, petroleum, power generation, information technology, organized labor, and
higher education.
The Richmond Fed also gathers information from
three advisory councils. The Community Investment
Council keeps the Bank abreast of emerging economic
issues in Fifth District communities, including low- and
moderate-income neighborhoods in both urban and
rural areas; the Community Depository Institutions
Advisory Council provides information and advice
about lending conditions and other concerns; and the
Payments Advisory Council helps the Bank respond to
the evolving needs of its banking constituency.
Boards and advisory councils bring valuable information to the Bank, but Bank officials also go out
into the community to obtain first-hand knowledge
of economic issues and trends. The Bank’s top man-

The Federal Reserve Bank of Richmond

2011 Annual Report

photo: jim strader

seafood industries. They also toured NASA’s Wallops
Flight Facility, where the space agency launches rockets on orbital and suborbital missions.

Shane Griffin, assistant manager of the Perdue hatchery on Maryland’s
Eastern Shore, shows visitors from the Bank how to distinguish
between male and female baby chicks.

The Bank frequently reaches out to the community
by organizing business roundtables that represent
cross-sections of Fifth District economies. In 2011,
the Bank’s regional economics group hosted 11
roundtables, including three in Richmond, three
in Charlotte, three in Baltimore, one in Charleston,
S.C., and one in Charleston, W.Va. The group also
conducts monthly and quarterly business surveys
that track economic activity throughout the District.
Survey participants share their first-hand knowledge
of recent economic conditions and their expectations
for the next six months.

Sharing Resources
agers routinely travel throughout the District, as do
many other employees of the Richmond Fed. Twice
a year, the Bank’s president, Jeff Lacker, and first vice
president, Sally Green, lead delegations on extended
trips to gain more in-depth knowledge about local
economies. In the past five years, these delegations
have visited Central Maryland, Virginia’s Southwest
and Southside regions, West Virginia’s Metro Valley
and Mountaineer regions, South Carolina’s Upstate
and Charleston regions, and North Carolina’s Eastern
and Research Triangle regions.
In May 2011, Bank officials spent three days learning
about economic activity in Northern Virginia and
Washington, D.C. Among their many stops, they
toured Marine Corps Base Quantico and discussed
with local leaders how military base closings and
realignments might affect the region’s economy. They
also consulted with groups of business executives and
information technology professionals.
In October 2011, Bank leaders visited the Eastern
Shore of Maryland and Virginia, where agriculture
and aquaculture are staples of the economy. They
toured a chicken hatchery and an oyster hatchery
and participated in discussions about the poultry and

Although the Richmond Fed does not share proprietary information obtained in confidence from
individual business leaders, the Bank often synthesizes
and analyzes this information and releases it to the
public in aggregate formats.
Results of the Bank’s surveys, for example, are available at richmondfed.org/research/regional_economy.
This regional economics website also provides data,
analysis, and presentations from the Bank’s regional
economists, including the Bank’s contribution to the
Federal Reserve’s Beige Book, which summarizes current economic conditions in each Federal Reserve
district eight times per year.
Another portion of the Bank’s website, richmondfed.org/community_development, provides a wealth
of resources, including several publications from
the Community Development Department. In 2011,
Community Scope devoted two issues to exploring the
strategies and results of the federal Neighborhood
Stabilization Program. The department also publishes
Fifth District Footprint, an online publication that
debuted in 2011. Each issue of the Footprint focuses
on mapping key economic trends across the District’s
cities and counties. The publication has highlighted

The Federal Reserve Bank of Richmond

2011 Annual Report

several data sets, including information on poverty
rates, broadband access, vacant housing, and homemortgage modifications.
The Community Development Department also
maintains the Map Resource Center, online collections of data maps that cover the Fifth District as a
whole, each state within the region, and the District
of Columbia. The maps also display data by zip code
and census tract. The Bank’s other data resource centers provide extensive information about community
development and foreclosure prevention.

photo: jen giovannitti

The Richmond Fed encourages local governments and
nonprofit organizations to use these and other Bank
resources to make data-driven decisions that improve
their operations. In October 2011, for instance, the
Community Development Department held an interactive conference in Richmond called “Unleashing
the Power of Local Data.” The conference, which
explored ways to use data to enhance neighborhood
stabilization efforts, attracted 110 participants from
11 states and the District of Columbia. The Richmond
Fed partnered with the Board of Governors to hold a
similar conference at the Bank’s Baltimore branch in
December 2011. The conference attracted more than
200 leaders of community development initiatives
from across the United States.

The Bank frequently convenes meetings that bring
together people who share mutual interests in strengthening their communities. In June 2011, for example,
the Community Development Department collaborated with Virginia Commonwealth University’s
Nonprofit Learning Point to introduce nonprofit
managers in the Richmond area to business leaders
who might be interested in serving on their boards.
The event was the fourth in a series of workshops
designed to help nonprofit organizations leverage
their resources. In December 2011, a fifth workshop
focused on how nonprofits can harness innovation.

Teaching Money Matters
The Richmond Fed devotes considerable resources to
promoting economic education and financial literacy.
The Bank’s economic education team helped establish
a high school course on economics and personal
finance that is required for graduation from Virginia’s
public schools, and in 2011, the team helped develop
a website, TeachingMoneyVa.org, that provides
resources to instructors who teach the course. The
Bank partners with the Virginia Council on Economic
Education and several other organizations to maintain
the website and enhance its content.
The economic education team also produces 5E
Educator, an instructional resource with about 700
subscribers, including many high school and middle
school teachers. 5E Educator provides lesson plans and
classroom activities based on articles from the Bank’s
research publications.
Another popular resource for economic education
is The Fed Experience, an interactive exhibit that
occupies the first floor of the Bank’s Richmond headquarters. Since opening in 2010, The Fed Experience
has welcomed more than 15,000 visitors with games,
videos, and displays that highlight economic concepts, market dynamics, economic history, and the
role of the Federal Reserve. The exhibit, which is
free and open to the public, presents information on
several levels, engaging visitors from kindergarteners
to retirees.
The Richmond Fed partnered with the Board of Governors to
host a national conference in Baltimore that focused on strategic
uses of data to promote neighborhood stabilization.

The Federal Reserve Bank of Richmond

2011 Annual Report

College students developed some of the financial literacy videos in The Fed Experience by competing in
an annual contest called “Share the Wealth.” One video,
produced by University of Richmond students, features
a young man who falls for an easy-credit scheme and
buys a big-screen TV that he cannot afford. The video’s
punch line says: “Spend money you don’t have. Live in
your mom’s basement. Read the fine print.”
A more scholarly competition, the College Fed
Challenge, attracted teams from 30 colleges and universities throughout the Fifth District in 2011. They
analyzed economic scenarios and made monetary
policy decisions as though they were members of the
Federal Open Market Committee. A team from the
University of North Carolina at Chapel Hill won the
most recent contest, which was judged by several of
the Bank’s economists. Then the UNC team earned an
honorable mention in the national College Fed Challenge
at the Board of Governors in Washington, D.C.
Other collegiate programs are more collaborative than
competitive. Afternoon @ the Fed, for example, supplements classroom experience by bringing together
students, professors, and Bank economists for deeper
discussions about monetary policy and the economy.
In 2011, this three-part program attracted several
hundred participants—in person and online—to sessions in Richmond, Baltimore, and Charlotte.

Strengthening the Community
Serving Fifth District communities is an important
part of the Richmond Fed’s daily operations, but that
commitment does not end at 5 p.m. Many of the
Bank’s 1,450 employees in Richmond, Baltimore, and
Charlotte donate significant time, talent, and financial
resources to a wide variety of nonprofit efforts.
Fedcorps, a volunteer organization run by employees
and retirees, helps create a culture of community service within the Bank. In 2011, employees and retirees
supported several dozen Fedcorps initiatives with
thousands of community service hours. Fedcorps volunteers partnered with national organizations, such

photo: larry cain

Fedcorps mentor Shonda Stewart (right) works with Ahmarri
Simmons (left) and Lamar Bowman during the Bank’s lunch
buddies program at Bellevue Elementary School in Richmond.

as Junior Achievement and Habitat for Humanity,
and they worked with local groups, such as hospitals
and food banks. They mentored students, collected
clothing, served meals, donated blood, and walked or
ran countless miles to raise money for worthy causes.
To encourage more employees to get involved, the
Bank provides two days of paid leave each year that
employees may use to work on community service
projects. But the official tally of those community
service days measures only a small portion of their
contributions to the community. Some employees
deliver Meals on Wheels during their lunch breaks.
Many employees coach youth sports in the evenings
and on weekends, while others pull night shifts at
volunteer fire departments and rescue squads.
The Federal Reserve Bank of Richmond exemplifies
24/7 commitment. The Bank’s primary functions—
conducting monetary policy, regulating financial
institutions, and facilitating payments—are roundthe-clock responsibilities. And that same level of
dedication spills over into the Bank’s efforts to provide
additional resources to the community. These initiatives
are supported and encouraged by the Bank, but they are
powered by the collective desire of the Bank’s employees
to make a difference in the communities they serve. n

FIFTH DISTRICT ECONOMIC REPORT

Fifth District Economy
Continued to Stabilize in 2011

he Fifth District economy—like the national economy—remained weaker in 2011 than
most economists and policymakers had anticipated at the outset. Slow growth in gross
domestic product and consumer spending in the United States was reflected in Fifth District
economic activity as the region faced weak retail spending, sluggish labor markets, and
continued uncertainty among area businesses. Exacerbating the economic uncertainty was
the wrangling over the debt ceiling and potential budget cuts, which would have a sizeable
impact on the District, where the federal government’s presence is particularly strong.

Meanwhile, area banks continued to operate in a challenging environment, and real estate activity remained
subdued as expected. Despite the prolonged weakness,
however, a gradual recovery in the District seemed to
take hold across several sectors of the economy in the
second half of 2011.

Labor Market Conditions
Although labor markets in the Fifth District did not
rebound as strongly as might be expected after such
a deep recession, District hiring activity did pick
up in 2011 after two years of employment decline
(2008 and 2009) and a third year of slow growth in
2010. (See Figure 1.) The District’s net job increase
of 168,600 workers in 2011 exceeded the increase in
2007. Employment growth was uneven during the year,
however. Much of the momentum in the first quarter
of 2011 was lost to payroll declines or inconsistent
growth in the late spring and summer months before
hiring activity picked up again in the fall. National
employment growth also slowed in the middle of
the year, but U.S. employment slightly outperformed
District employment over the year, growing 1.4 percent
compared to the District’s 1.3 percent.

The District’s overall employment trend in 2011 was
driven primarily by increases in the professional and
business services sector and the education and health
services sector, although the leisure and hospitality
sector and the trade, transportation, and utilities
sector also expanded notably. Annual gains were
distributed somewhat evenly across District states,
with most states posting job growth of between
1 percent and 2 percent in 2011. The sharpest deviation was the District of Columbia, where employment
expanded 2.8 percent.
Private sector hiring drove overall job expansion in
the Fifth District; government employment in the
District grew only 0.3 percent (6,800 net jobs) in 2011.
Those gains were concentrated entirely in federal government employment, which expanded 1.4 percent
(8,800 jobs). Only the District of Columbia and West
Virginia reported contractions in federal government
employment. Meanwhile, state and local governments
in the Fifth District reduced their payrolls by 2,000
workers. North Carolina and South Carolina combined trimmed 14,600 state and local government
jobs, while Virginia added more than 9,000 state and
local government jobs.

The Federal Reserve Bank of Richmond

2011 Annual Report

FIGURE 1

Unemployment Rates in the Fifth District and the United States
11
10
9
8
PERCENT

United States

6
5
Fifth District

4
3
2
1

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

Sources: Bureau of Labor Statistics, Haver Analytics

Federal Government Presence
Challenges facing state and local governments during
the past few years reflected national trends. The federal
government, on the other hand, plays a unique role in the
Fifth District. In March 2011, approximately one-quarter
of all federal government workers were employed in the
District—clustered in and around Washington, D.C.,
and in numerous civilian and military facilities across
the Fifth District. In fact, the federal government is the
Fifth District’s largest employer. Even excluding the U.S.
Postal Service and the military, the federal government
employed 4 percent of District workers in March 2011;
in the United States as a whole, the federal government
employed only 1.6 percent of workers.
Of course, non-defense employment statistics understate the role of the federal government in the District
because of the large military presence. From the
Pentagon in Washington, D.C., to the Navy installations in Hampton Roads, Va., to Fort Bragg in

Fayetteville, N.C., the military is an important engine
of local employment. According to 2009 data, more
than 250,000 military personnel—23.5 percent of the
nation’s total—are stationed in the District.
Even including military personnel, the role of the
federal government in District labor markets is understated. In addition to grants, loans, guarantees, direct
payments, insurance, and other expenditures, the
federal government purchases goods and services
through contracts with private sector businesses—a
sizeable number of them in the Washington, D.C.,
metropolitan area. Federal contract spending grew
10.3 percent per year on average from 2000 through
2010, representing approximately 0.8 percent of the
District’s economy during that time. (See Figure 2.)
Federal jobs and spending sheltered the District from
some of the labor market contractions that affected

The Federal Reserve Bank of Richmond

2011 Annual Report

FIGURE 2

Federal Contract Spending
By County in the Fifth District

MORGANTOWN

(Fiscal Year 2010)

BALTIMORE

$ In Thousands
0 – 421

WASHINGTON
CHARLESTON

421 – 2,395
2,395 – 10,273

RICHMOND

10,273 – 69,495

ROANOKE

69,495 – 24,385,184

NORFOLK

Military Installations

GREENSBORO

Properties Owned or Leased
by the U.S. General Services
Administration

RALEIGH
CHARLOTTE
GREENVILLE

FAYETTEVILLE
JACKSONVILLE

COLUMBIA
Note: Military Installations include
installations for Army, Marine Corps,
Navy, Air Force, Coast Guard, and
the Defense Logistics Agency.
Sources: Federal Procurement Data
System; Department of Defense;
U.S. General Services Administration.

CHARLESTON
BEAUFORT

the rest of the country in the latest recession. The
District’s unemployment rate has remained consistently below the national average, largely due to low
unemployment in the Washington, D.C., metropolitan
area (which includes parts of Maryland, Virginia, and
West Virginia). However, if federal budget problems
lead to a significant reduction in federal spending in
2012, this would affect District labor markets markedly more than labor markets in other parts of the
country. Already, there are reports that the uncertainty
surrounding the federal budget impeded business
spending and investment in 2011. Also, military and
civilian employees are likely to be affected by federal
budget cuts in 2012. Even if those spending cuts do

not lead to outright elimination of jobs, they could
produce further pay freezes or reductions that would
affect residents of the District disproportionately.

Real Estate Conditions
As in the nation, real estate markets in the Fifth
District remained weak throughout 2011. Housing
markets stabilized and improved modestly—both in
number and value of sales—toward the middle of the
year, but activity remained sluggish at best. In general,
sales of low- to mid-price homes continued to fare
better than sales of more expensive homes, and short
sales—which occur when a home is sold for less than

The Federal Reserve Bank of Richmond

2011 Annual Report

the outstanding mortgage balance and the mortgage
lender agrees to a lower payout—represented a sizeable share of total activity in most markets.
Continued delinquency and foreclosure activity only
exacerbated the excess inventory problem in the
District. Although the share of mortgages with payments more than 90 days past due stabilized in 2011,
the foreclosure inventory continued to rise. By the
end of the year, the District had more than 145,000
mortgages in foreclosure, representing 3.1 percent
of all mortgages in the region. Of the Fifth District
jurisdictions, only Virginia and West Virginia did not
suffer a rise in the number of homes facing foreclosure
in 2011. In more positive news, the share of mortgages
with payments more than 90 days past due decreased
in all Fifth District states. Only D.C. saw an increase
in that category.
With slow home sales and high inventories, it is not
surprising that house prices continued to fall, albeit
at a much slower pace. According to data from the
Federal Housing Finance Agency, house prices in the
District fell notably in the first two quarters of the year,
and although prices stabilized toward the end of the
year, home values still depreciated 2.4 percent over the
course of 2011. This trend was evident across all Fifth
District states. Only the District of Columbia reported
higher home values for the whole year.
Most sources indicated that commercial real estate
activity was stable over the course of 2011, but reports
were inconsistent throughout the year. Generally,
vacancy rates neither rose nor fell notably in most
District markets, and the reports of improved sales of
office, industrial, or retail space were roughly matched
by those stating that demand was stagnant across all
commercial markets. In general, the ratio of leasing
to buying increased over the year, and challenges in
obtaining financing continued to hold up many deals.

Banking Conditions
Over the course of 2011, banks faced numerous challenges, including regulatory changes, a U.S. sovereign

debt downgrade, distressed international markets,
continued slow economic recovery, and a subdued
housing market. Despite these challenges, banks in the
Fifth District and nationwide hinted at slight signs of
recovery through stabilizing credit quality and modest
improvement in earnings.
The share of unprofitable institutions in the District
decreased from 31 percent to 25 percent during the
year. Moreover, the median return on average assets
for banks in the District improved 10 basis points to
0.45 percent, but remained well below the national
median of 0.77 percent. Large institutions (banks with
total assets greater than $1 billion) faced heightened
earnings pressures due to the current low-rate environment. Margins at these institutions constricted as
pressures on loan yields more than offset lower interest expense. For smaller banks, lingering credit quality
issues continued to hamper earnings. Loan losses
remained most noticeable in commercial and residential real estate portfolios. Because small District
banks (those with total assets less than $1 billion)
held higher concentrations of these loans before the
recession, their credit quality improvement continued
to lag the nation. At 1.27 percent, aggregate losses as
a percentage of loans at small institutions remained
higher than at their nationwide peers (0.89 percent).
For the first time since the recession began, however,
losses trended downward, ending the fourth quarter
19 basis points below year-end 2010. Banks were able
to reduce their reserves for future loan losses, aiding
a slight upward trend in earnings.
Capital positions also improved, primarily driven by
deleveraging and continued marginal balance sheet
contraction due to negative annual loan growth.
Though District levels have trailed the national
median since the previous recession, capital ratios
began a long road to recovery in 2010 and improved
steadily over the course of 2011. The increasing rate of
capitalization was driven by large institutions, while
smaller banks that had built relatively substantial
reserve balances before the recession saw levels stabilize in 2011 after drastic reductions in capital over
the past four years.

The Federal Reserve Bank of Richmond

2011 Annual Report

Business Conditions

Summary

The first part of 2011 saw challenging but improving conditions for businesses in the Fifth District.
Manufacturing activity remained quite strong,
although high energy and commodity prices squeezed
margins for many District manufacturers in the first
part of the year—a phenomenon that was exacerbated
by turmoil in the Middle East. Many businesses also
expressed an unwillingness to invest significantly
given uncertainty about the direction of government
policy and the federal budget. Nonetheless, businesses—particularly manufacturing firms—remained
upbeat about rises in domestic and international
demand for goods in early 2011.

Neither the national nor the Fifth District economy
did as well in 2011 as was hoped or anticipated.
Generally weak economic conditions were compounded by uncertainty engendered by national
policy debates and concerns about global markets.
As consumer spending and retail activity remained
weak, businesses held back and labor markets continued to struggle. Furthermore, as expected, residential
and commercial real estate activity was weak, and
banks struggled in a challenging lending environment. Despite all of this, the economy continued to
stabilize throughout 2011 and began to recover and
improve toward the end of the year. n

As the year progressed, some manufacturers reported
strong demand and potential expansion, but many
others cited uncertain global conditions and sluggish
consumer spending domestically as drags on their
business. The Federal Reserve Bank of Richmond
maintains a composite manufacturing index based
on the Bank’s Fifth District Survey of Manufacturing
Activity. The index started the year firmly in positive
territory, but spent most of the summer and autumn
months below zero. (The Bank’s manufacturing and
service sector indexes are diffusion indexes. A positive
reading indicates that the number of firms reporting
expansion exceeded the number of firms reporting
contraction.) The March tsunami in Japan negatively
affected some District manufacturers, mostly auto
parts suppliers. Export activity remained generally
steady throughout the year, although imports were
soft, perhaps due to sluggish demand in domestic
retail. On the whole, 2011 brought tighter margins for
District manufacturers, but a more positive outlook
than any of the three previous years.
The service sector also contracted somewhat toward
the middle of 2011. The Bank’s service sector indexes
for revenues and employment were below zero for
most of the summer and early autumn months. Retail
activity was weak, as well, as increased consumer
uncertainty manifested itself in a particularly volatile
index for retail revenues throughout 2011.

Note: Regional economic data are current as of March 13, 2012.
Banking conditions data are current as of December 31, 2011.

B OA R D S O F D I R E C T O R S , A DV I S O R Y C O U N C I L S , A N D O F F I C E R S

Federal Reserve Bank of Richmond Board of Directors . . . . . . . . . . . . . . . . . . .

Baltimore Branch Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Charlotte Branch Board of Directors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Community Depository Institutions Advisory Council. . . . . . . . . . . . . . . . . . . . .

Community Investment Council. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Payments Advisory Council. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Management Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Federal Reserve Bank of Richmond

2011 Annual Report

BOARDS OF DIRECTORS, ADVISORY COUNCILS, AND OFFICERS
32

Federal Reserve Bank of Richmond
Board of Directors
The Bank’s board of directors 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 appoints 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 the Fifth
District’s 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.
Baltimore and Charlotte Branches
Boards of Directors
The Bank’s Baltimore and Charlotte branches 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.

Community Depository Institutions
Advisory Council
Created in 2011, the Bank’s Community Depository
Institutions Advisory Council advises the Bank’s management and the Board of Governors on the economy,
lending conditions, and other issues from the perspective of banks, thrifts, and credit unions with total
assets under $10 billion. The council’s members are
appointed by the Bank’s president.
Community Investment Council
Established in 2011, the Community Investment
Council advises the Bank’s management about emerging issues and trends in communities across the Fifth
District, including low- and moderate-income neighborhoods in urban and rural areas. The council’s
members are appointed by the Bank’s president.
Payments Advisory Council
Created in 1978, the Payments Advisory Council
serves as a forum for communication with financial
institutions about financial services provided by the
Federal Reserve. The council helps the Bank respond
to the evolving needs of its banking constituency.
Council members are appointed by the Bank’s first
vice president.
Listings include members who served during 2011.

THANK YOU
We are grateful to our boards of directors for their guidance, leadership, expertise, and integrity. Their
insight into regional and national economic conditions is essential to our work as a policy leader, and their
vision will help us continue to support the economic recovery in the Fifth District and across the nation.
Thank you to those directors who have completed their service on our boards: Dana S. Boole and Kelly S. King
of the Richmond Board; Biana J. Arentz of the Baltimore Board; Ronald Blackwell, who served as chairman
of the Baltimore Board; and Linda L. Dolny and James H. Speed, Jr., of the Charlotte Board.
We also welcome our new directors: Marshall O. Larsen and Edward L. Willingham, IV, of the Richmond
Board; Stephen R. Sleigh and Jana Wheatley of the Baltimore Board; and Claude Z. Demby and
Christopher J. Estes of the Charlotte Board.

The Federal Reserve Bank of Richmond

2011 Annual Report

BOARD OF DIRECTORS | FEDERAL RESERVE BANK OF RICHMOND
33

Left to right: Margaret E. McDermid, Kelly S. King, Dana S. Boole, Russell C. Lindner, Linda D. Rabbitt, Alan L. Brill, Patrick C. Graney, III,

Richard J. Morgan, Wilbur E. Johnson

CHAIRMAN

Margaret E. McDermid
Senior Vice President and
Chief Information Officer
Dominion Resources, Inc.
Richmond, Virginia
DEPUTY CHAIRMAN

Linda D. Rabbitt
Chairman and Chief Executive Officer
Rand Construction Corporation
Washington, D.C.
Dana S. Boole
President and Chief Executive Officer
Community Affordable Housing
Equity Corporation
Raleigh, North Carolina
Alan L. Brill
President and Chief Executive Officer
Capon Valley Bank
Wardensville, West Virginia

Patrick C. Graney, III
Maxum East Regional President
Maxum Petroleum
Belle, West Virginia
Wilbur E. Johnson
Managing Partner
Young Clement Rivers, LLP
Charleston, South Carolina
Kelly S. King
Chief Executive Officer
BB&T Corporation
Winston-Salem, North Carolina
Russell C. Lindner
Chairman and Chief Executive Officer
The Forge Company
Washington, D.C.
Richard J. Morgan
President and Chief Executive Officer
CommerceFirst Bank
Annapolis, Maryland

FEDERAL ADVISORY COUNCIL
REPRESENTATIVE

Richard D. Fairbank
Chairman and Chief Executive Officer
Capital One Financial Corporation
McLean, Virginia

The Federal Reserve Bank of Richmond

2011 Annual Report

BOARD OF DIRECTORS | BALTIMORE BRANCH
34

Left to right: William B. Grant, Biana J. Arentz, Jenny G. Morgan, Ronald Blackwell, James T. Brady, Anita G. Newcomb, Samuel L. Ross

CHAIRMAN

Ronald Blackwell
Chief Economist
AFL-CIO
Washington, D.C.
Biana J. Arentz
President and Chief Executive Officer
Hemingway’s, Inc.
Stevensville, Maryland
James T. Brady
Managing Director–Mid-Atlantic
Ballantrae International, Ltd.
Ijamsville, Maryland
William B. Grant
Chairman, President and
Chief Executive Officer
First United Corporation and
First United Bank & Trust
Oakland, Maryland

Jenny G. Morgan
President
basys, inc.
Linthicum, Maryland
Anita G. Newcomb
President and Managing Director
A.G. Newcomb & Company
Columbia, Maryland
Samuel L. Ross
Chief Executive Officer
Bon Secours Baltimore Health System
Baltimore, Maryland

The Federal Reserve Bank of Richmond

2011 Annual Report

BOARD OF DIRECTORS | CHARLOTTE BRANCH
35

Left to right: James H. Speed, Jr., Lucia Z. Griffith, Claude C. Lilly, Robert R. Hill, Jr., John S. Kreighbaum, Linda L. Dolny,

David J. Zimmerman

CHAIRMAN

Claude C. Lilly
Dean
College of Business and
Behavioral Science
Clemson University
Clemson, South Carolina
Linda L. Dolny
Former President
PML Associates, Inc.
Greenwood, South Carolina
Lucia Z. Griffith
Chief Executive Officer and Principal
METRO Landmarks
Charlotte, North Carolina
Robert R. Hill, Jr.
President and Chief Executive Officer
SCBT Financial Corporation
Columbia, South Carolina

John S. Kreighbaum
President and Chief Executive Officer
Carolina Premier Bank and
Premara Financial, Inc.
Charlotte, North Carolina
James H. Speed, Jr.
President and Chief Executive Officer
North Carolina Mutual
Life Insurance Company
Durham, North Carolina
David J. Zimmerman
President
Southern Shows, Inc.
Charlotte, North Carolina

The Federal Reserve Bank of Richmond

2011 Annual Report

COMMUNITY DEPOSITORY INSTITUTIONS ADVISORY COUNCIL
36

Left to right: Michael L. Middleton, Carl Ratcliff, F. Michael Nelson, Kim D. Saunders, F. Edward Broadwell, Jr., John Lane, R. Wayne Hall,

Charles H. Majors, Jan Roche

CHAIRMAN

Charles H. Majors*
Chairman and Chief Executive Officer
American National Bank and
American National Bankshares, Inc.
Danville, Virginia
G. William Beale
President and Chief Executive Officer
Union First Market Bank
Ruther Glen, Virginia
F. Edward Broadwell, Jr.
Chairman and Chief Executive Officer
HomeTrust Bank
Asheville, North Carolina
Kathleen Walsh Carr
President
Cardinal Bank/Washington
Washington, D.C.

R. Wayne Hall
President and Chief Executive Officer
First Federal Savings & Loan and
First Financial Holdings, Inc.
Charleston, South Carolina
John Lane
President and Chief Executive Officer
Congressional Bank
Bethesda, Maryland
Michael L. Middleton
Chairman and Chief Executive Officer
Community Bank of Tri-County
Waldorf, Maryland
F. Michael Nelson
President and Chief Executive Officer
Pleasants County Bank
St. Mary’s, West Virginia
Carl Ratcliff
President and Chief Executive Officer
ABNB Federal Credit Union
Chesapeake, Virginia

Jan Roche
President and Chief Executive Officer
State Department Federal Credit Union
Alexandria, Virginia
Kim D. Saunders
President and Chief Executive Officer
Mechanics & Farmers Bank
Durham, North Carolina
Gwen Thompson
President and Chief Executive Officer
Clover Community Bank and
Clover Community Bankshares, Inc.
Clover, South Carolina
*In 2011, Charles H. Majors served as the Fifth
District’s representative on the Community
Depository Institutions Advisory Council at the
Federal Reserve Board of Governors.

The Federal Reserve Bank of Richmond

2011 Annual Report

COMMUNITY INVESTMENT COUNCIL
37

Left to right: Marlo Scruggs, R. Scott Woods, Samuel L. Erwin, Jane Henderson, Chris Kukla, Mike Franklin, Clarence J. Snuggs

CHAIRMAN

Jane Henderson
President and Chief Executive Officer
Virginia Community Capital
Christiansburg, Virginia
Samuel L. Erwin
President and Chief Executive Officer
The Palmetto Bank and
Palmetto Bancshares, Inc.
Greenville, South Carolina
Mike Franklin
Owner
Franklin’s Brewery
Hyattsville, Maryland
Jonathan Gueverra
Chief Executive Officer
University of the District of Columbia
Community College
Washington, D.C.

Chris Kukla
Senior Counsel for Government Affairs
Center for Responsible Lending
Durham, North Carolina

Mark Sissman
President
Healthy Neighborhoods, Inc.
Baltimore, Maryland

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

Clarence J. Snuggs
Deputy Secretary
Maryland Department of Housing
and Community Development
Crownsville, Maryland

Sandra Mikush
Deputy Director
Mary Reynolds Babcock Foundation
Winston-Salem, North Carolina
Connie G. Nyholm
Co-owner and Managing Partner
VIRginia International Raceway
Alton, Virginia
Marlo Scruggs
Vice President, Community
Development Specialist
BB&T Corporation
Charleston, West Virginia

R. Scott Woods
President and Chief Executive Officer
South Carolina Federal Credit Union
North Charleston, South Carolina

The Federal Reserve Bank of Richmond

2011 Annual Report

PAYMENTS ADVISORY COUNCIL
38

Left to right: Scott Jennings, E. Stephen Lilly, Kenneth L. Greear, Kenneth L. Richey, David Willis, Eileen M. Pirson, Rex Hockemeyer,

Wanda S. Shade, Ronald L. Bowling

Martin W. Patterson
Senior Vice President, Banking Operations
SunTrust Banks
Richmond, Virginia

Daniel O. Cook, Jr.
Executive Vice President and
Chief Operating Officer
Arthur State Bank
Union, South Carolina

James Evans
Executive Vice President,
Deposit Operations
Capital One Bank
Richmond, Virginia

Ronald L. Bowling
President and Chief Executive Officer
First Peoples Bank
Mullens, West Virginia

Valerie Curtis
Vice President, Member Services
Coastal Federal Credit Union
Raleigh, North Carolina

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

Tanya A. Butts
Executive Vice President and
Chief Operating Officer
The South Financial Group
Lexington, South Carolina

Jeff W. Dick
President and Chief Executive Officer
MainStreet Bank
Herndon, Virginia

Robert J. Gerth
Group Vice President, Central Operations
M&T Bank
Baltimore, Maryland

Tim Dillow
Senior Vice President
BB&T Corporation
Wilson, North Carolina

Tina Giorgio
Senior Vice President
Sandy Spring Bank
Columbia, Maryland

Debra E. Droppleman
Chief Financial Officer
Fairmont Federal Credit Union
Fairmont, West Virginia

Kenneth L. Greear
Executive Vice President
United Bank
Charleston, West Virginia

Rodney Epps
Senior Vice President and
Chief Operating Officer
Industrial Bank of Washington
Washington, D.C.

Leton Harding
Executive Vice President
The First Bank & Trust Company
Abingdon, Virginia

Chairman

Mitch Christensen
Executive Vice President,
Enterprise Payments Strategy
Wells Fargo & Company
Scottsdale, Arizona
R. Lee Clark
Executive Vice President, Operations
TowneBank
Suffolk, Virginia

The Federal Reserve Bank of Richmond

2011 Annual Report

PAYMENTS ADVISORY COUNCIL
39

Left to right: Jeff W. Dick, Tim Dillow, Susan Haschen, Rick Rhoads, D. Gerald Sink, Gayle Youngblood, David Hines,

Martin W. Patterson, Valerie Curtis

Susan Haschen
Vice President, Operations
Easton Bancorp, Inc.
Easton, Maryland

Marie B. LaQuerre
Senior Vice President
Bank of America
Charlotte, North Carolina

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

David Hines
Senior Vice President and Cashier
Community Bank of Parkersburg
Parkersburg, West Virginia

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

Wanda S. Shade
Senior Vice President, Retail Banking
Frederick County Bank
Frederick, Maryland

Rex Hockemeyer
Executive Vice President,
Director of Operations and IT
Union First Market Bankshares Corporation
Ruther Glen, Virginia
Scott Jennings
Senior Vice President and
Chief Operating Officer
Summit Community Bank
Moorefield, West Virginia
John J. King
President
MACHA – The Mid-Atlantic
Payments Association
Hanover, Maryland

Eileen M. Pirson
Group Vice President, Central
Operations Administration
M&T Bank
Amherst, New York
Rick Rhoads
Senior Vice President, E-Services
State Employees’ Credit Union
Raleigh, North Carolina
Kenneth L. Richey
Director, Corporate Cash Management
Synovus Financial Corporation
Columbia, South Carolina

Woody Shuler
Vice President, Finance
SRP Federal Credit Union
North Augusta, South Carolina
D. Gerald Sink
Senior Vice President
NewBridge Bank
Lexington, North Carolina
David Willis
Senior Vice President,
Debit Card and Funds Services
Navy Federal Credit Union
Vienna, Virginia
Gayle Youngblood
Senior Operations Manager
State Employees Credit Union of Maryland
Linthicum, Maryland

The Federal Reserve Bank of Richmond

2011 Annual Report

MANAGEMENT COMMITTEE
40

Left to right: Matthew A. Martin, Robert E. Wetzel, Jr., Michelle H. Gluck, Sarah G. Green, Victor M. Brugh, II, Jeffrey M. Lacker,

Jennifer J. Burns, Claudia N. MacSwain, John A. Weinberg, Tammy H. Cummings, David E. Beck, Janice E. Clatterbuck, Roland Costa

Jeffrey M. Lacker
President
Sarah G. Green
First Vice President and
Chief Operating Officer
David E. Beck
Senior Vice President and
Baltimore Regional Executive,
Treasury and Payments Services
Victor M. Brugh, II
Medical Director
Jennifer J. Burns
Senior Vice President,
Supervision, Regulation and Credit
Janice E. Clatterbuck
Senior Vice President and
Chief Information Officer,
Corporate Support Services
Roland Costa
Senior Vice President,
Currency Technology Office

Tammy H. Cummings
Senior Vice President, Human Resources,
and Director of Diversity and Inclusion
Michelle H. Gluck
Senior Vice President and General Counsel,
Civic Engagement, Corporate Communications,
and Government Affairs
Claudia N. MacSwain
Senior Vice President and
Chief Financial Officer,
Corporate Planning
Matthew A. Martin
Senior Vice President and
Charlotte Regional Executive,
Community Development and Outreach
John A. Weinberg
Senior Vice President and
Director of Research
Robert E. Wetzel, Jr.
Senior Vice President and General Auditor

The Federal Reserve Bank of Richmond

2011 Annual Report

OFFICERS
41

William S. Cooper, Jr.
Vice President and Deputy Director
of Diversity and Inclusion
Alan H. Crooker
Vice President
Constance B. Frudden
Vice President
Joan T. Garton
Vice President
A. Linwood Gill, III
Vice President
Howard S. Goldfine
Vice President
Anne C. Gossweiler
Vice President
Bruce E. Grinnell
Vice President
Mattison W. Harris
Vice President
Wendi Homza Hickman
Vice President
Andreas L. Hornstein
Vice President
Eugene W. Johnson, Jr.
Vice President
Gregory A. Johnson
Vice President
Mary S. Johnson
Vice President
Malissa M. Ladd
Vice President
Ann B. Macheras
Vice President
Andrew S. McAllister
Vice President
Dennis G. McDonald
Vice President
P.A.L. Nunley
Deputy General Counsel
Lisa T. Oliva
Vice President
Edward S. Prescott
Vice President
Arlene S. Saunders
Vice President
Michael L. Wilder
Vice President and Controller
Kimberly Zeuli
Vice President
Becky C. Bareford
Assistant Vice President

Hattie R.C. Barley
Assistant Vice President

James T. Nowlin
Assistant Vice President

Granville Burruss
Assistant Vice President

Pamela S. Rabaino
Assistant Vice President

John B. Carter, Jr.
Assistant Vice President

Dennis P. Smith
Assistant General Counsel

Christy R. Cleare
Assistant Vice President

Rebecca J. Snider
Assistant Vice President

Todd E. Dixon
Assistant Vice President

Jeffrey K. Thomas
Assistant Vice President

Adam M. Drimer
Assistant Vice President

Sandra L. Tormoen
Assistant Vice President

Daniel E. Elder
Assistant Vice President

Lauren E. Ware
Assistant Vice President

James K. Hayes
Assistant Vice President

Karen J. Williams
Assistant Vice President

Samuel Hayes, III
Assistant Vice President

H. Julie Yoo
Assistant Vice President

Kathleen R. Houghtaling
Assistant Vice President

BALTIMORE BRANCH

Cathy I. Howdyshell
Assistant Vice President

Steven T. Bareford
Assistant Vice President

John S. Insley, Jr.
Assistant Vice President

Karen L. Brooks
Assistant Vice President and
Baltimore Deputy Regional Executive

D. Keith Larkin
Assistant Vice President
James W. Lucas
Assistant Vice President
Steve V. Malone
Assistant Vice President
Randal C. Manspile
Assistant Vice President
Page W. Marchetti
Assistant Vice President and Secretary
Jonathan P. Martin
Assistant Vice President
William R. McCorvey, Jr.
Assistant General Counsel
Diane H. McDorman
Assistant Vice President
Robert J. Minteer
Assistant Vice President
Johnnie E. Moore
Assistant Vice President
Barbara J. Moss
Assistant Vice President
C. Kim Nguyen
Assistant Vice President
Edward B. Norfleet
Assistant Vice President

Amy L. Eschman
Assistant Vice President
CHARLOTTE BRANCH

Marshal S. Auron
Vice President
Lisa A. White
Vice President
Terry J. Wright
Vice President and Charlotte
Deputy Regional Executive
John A. Beebe
Assistant Vice President
Margaretta C. Blackwell
Assistant Vice President
Melissa M. Gill
Assistant Vice President
Evangelos Sekeris
Assistant Vice President
Kelly J. Stewart
Assistant Vice President
Richard F. Westerkamp, Jr.
Assistant Vice President
Listings include officers who retired
or left the Bank during 2011.
We thank them for their service.

The Federal Reserve Bank of Richmond

2011 Annual Report

The Federal Reserve Bank of Richmond

2011 Annual Report

F I N A N C I A L S TAT E M E N T S

Statement of Auditor Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Management’s Report on Internal Control Over Financial Reporting . . . . . . .

Independent Auditors’ Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

FINANCIAL STATEMENTS:
Statements of Condition as of December 31, 2011 and
December 31, 2010. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Statements of Income and Comprehensive Income for the Years Ended
December 31, 2011 and December 31, 2010. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Statements of Changes in Capital for the Years Ended
December 31, 2011 and December 31, 2010. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Federal Reserve Bank of Richmond

2011 Annual Report

S TAT E M E N T O F A U D I T O R I N D E P E N D E N C E

In 2011, the Board of Governors engaged Deloitte & Touche LLP (D&T) to audit
the combined and individual financial statements of the Reserve Banks and
those of the consolidated LLC entities. 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. In 2011, D&T also conducted audits of internal control over financial reporting for each of the Reserve Banks and the consolidated
LLC entities. Fees for D&T’s services totaled $8 million, of which $2 million was
for the audits of the consolidated LLC entities. To ensure auditor independence,
the Board of Governors requires that D&T be independent in all matters relating to the audits. 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 the Reserve Banks, or in any other way
impairing its audit independence. In 2011, the Bank did not engage D&T for any
non-audit services.

The Federal Reserve Bank of Richmond

2011 Annual Report

M A N AG E M E N T ’ S R E P O R T

Management’s Report on Internal Control Over Financial Reporting
March 20, 2012
To the Board of Directors:
The management of the Federal Reserve Bank of Richmond (Bank) is responsible for the
preparation and fair presentation of the Statements of Condition as of December 31, 2011 and
2010, and the Statements of Income and Comprehensive Income, and Statements of Changes in
Capital for the years then ended (the Financial Statements). The Financial Statements have been
prepared in conformity with the accounting principles, policies, and practices established by
the Board of Governors of the Federal Reserve System as set forth in the Financial Accounting
Manual for Federal Reserve Banks (FAM), and, as such, include some amounts that are based
on management judgments and estimates. To our knowledge, the Financial Statements are, in
all material respects, fairly presented in conformity with the accounting principles, policies and
practices documented in the FAM and include all disclosures necessary for such fair presentation.
The management of the Federal Reserve Bank of Richmond is responsible for establishing
and maintaining effective internal control over financial reporting as it relates to the Financial
Statements. The Federal Reserve Bank of Richmond’s internal control over financial reporting is
designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of Financial Statements for external reporting purposes in accordance with the FAM.
The Bank’s internal control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect
the transactions and dispositions of the Bank’s assets; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of Financial Statements in accordance
with FAM, and that the Bank’s receipts and expenditures are being made only in accordance with
authorizations of its management and directors; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition of the Bank’s assets
that could have a material effect on its Financial Statements.
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 Federal Reserve Bank of Richmond assessed its internal control
over financial reporting 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 Federal Reserve Bank of Richmond maintained
effective internal control over financial reporting.
Federal Reserve Bank of Richmond

Jeffrey M. Lacker
President

Sarah G. Green

Claudia N. MacSwain

First Vice President and
Chief Operating Officer

Senior Vice President and
Chief Financial Officer

The Federal Reserve Bank of Richmond

2011 Annual Report

INDEPENDENT AUDITORS’ REPORT

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, 2011 and 2010, and the related Statements
of Income and Comprehensive Income, and of Changes in Capital for the years then ended,
which have been prepared in conformity with accounting principles established by the
Board of Governors of the Federal Reserve System. We also have audited the internal control
over financial reporting of the FRB Richmond as of December 31, 2011, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The FRB Richmond’s management is responsible
for these Financial Statements, for maintaining effective internal control over financial
reporting, and for its assertion of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on these Financial Statements and an
opinion on the FRB Richmond’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with generally accepted auditing standards as
established by the Auditing Standards Board (United States) and in accordance with the
auditing standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the Financial Statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material respects. Our audits of
the Financial Statements included examining, on a test basis, evidence supporting the amounts
and disclosures in the Financial Statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included performing such other procedures
as we considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
The FRB Richmond’s internal control over financial reporting is a process designed by, or
under the supervision of, the FRB Richmond’s principal executive and principal financial officers,
or persons performing similar functions, and effected by the 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. The FRB Richmond’s internal control over financial reporting includes those

The Federal Reserve Bank of Richmond

2011 Annual Report

INDEPENDENT AUDITORS’ REPORT

policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the FRB Richmond;
(2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of Financial Statements in accordance with the accounting principles established
by the Board of Governors of the Federal Reserve System, and that receipts and expenditures of
the FRB Richmond are being made only in accordance with authorizations of management and
directors of the FRB Richmond; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the 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, the 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, such Financial Statements present fairly, in all material respects, the
financial position of the FRB Richmond as of December 31, 2011 and 2010, and the results of
its operations for the years then ended, on the basis of accounting described in Note 4. Also, in
our opinion, the FRB Richmond maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2011, based on the criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.

Deloitte & Touche LLP
March 20, 2012
Richmond, Virginia

The Federal Reserve Bank of Richmond

2011 Annual Report

S TAT E M E N T S O F C O N D I T I O N (in millions)

2011

As of December 31,

2010

Assets
Gold certificates

872

$ 846

Special drawing rights certificates

412

Coin

409

354

Loans to depository institutions
System Open Market Account:
Treasury securities, net

202,139

121,514

Government-sponsored enterprise debt securities, net

12,453

17,422

Federal agency and government-sponsored enterprise mortgage-backed securities, net

97,965

114,424

5,321

7,253

Foreign currency denominated assets, net
Central bank liquidity swaps
Accrued interest receivable
Bank premises and equipment, net
Items in process of collection
Other assets
Total assets

20,469

2,279

1,621

333

342,753

264,361

83,711

76,694

Liabilities and Capital
Federal Reserve notes outstanding, net
System Open Market Account:
Securities sold under agreements to repurchase
Other liabilities

11,537

6,800

158

—

111,914

105,026

Deposits:
Depository institutions
Other deposits
Interest payable to depository institutions
Accrued benefit costs
Deferred credit items
Accrued interest on Federal Reserve notes
Interdistrict settlement account

249

217

240

2,041

123,650

62,497

Other liabilities

Total liabilities

331,625

253,483

Capital paid-in

5,564

5,439

Surplus (including accumulated other comprehensive loss of $49 million and $31 million
at December 31, 2011 and 2010, respectively)

5,564

5,439

11,128

10,878

Total capital
Total liabilities and capital

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

342,753

264,361

The Federal Reserve Bank of Richmond

2011 Annual Report

S TAT E M E N T S O F I N C O M E A N D C O M P R E H E N S I V E I N C O M E (in millions)

2011

For the years ended December 31,

2010

Interest income
System Open Market Account:
Treasury securities, net

Government-sponsored enterprise debt securities, net
Federal agency and government-sponsored enterprise mortgage-backed securities, net
Foreign currency denominated assets, net
Central bank liquidity swaps
Total interest income

4,864

2,420

351

318

4,403

4,096

9,677

6,899

268

446

Interest expense
System Open Market Account:
Securities sold under agreements to repurchase
Deposits:
Depository institutions
Term Deposit Facility
Total interest expense
Net interest income

—

274

456

9,403

6,443

Non-interest income
System Open Market Account:
Treasury securities gains, net
Federal agency and government-sponsored enterprise mortgage-backed securities gains, net
Foreign currency gains, net

261

—

154

Compensation received for service costs provided

Reimbursable services to government agencies

Other
Total non-interest income

366

279

Operating expenses
Salaries and benefits

335

312

Occupancy

Equipment

152

170

Assessments:
Board of Governors operating expenses and currency costs
Bureau of Consumer Financial Protection
Office of Financial Research

Other
Total operating expenses
Net income prior to distribution
Change in prior service costs related to benefit plans
Change in actuarial losses related to benefit plans
Comprehensive income prior to distribution

(110)

547

481

9,222

6,241

(4)

(14)

9,204

330

6,252

Distribution of comprehensive income:
Dividends paid to member banks
Transferred to (from) surplus and change in accumulated other comprehensive loss

125

Payments to Treasury as interest on Federal Reserve notes
Total distribution
The accompanying notes are an integral part of these financial statements.

8,749
$

9,204

349
(1,701)
7,604

6,252

The Federal Reserve Bank of Richmond

2011 Annual Report

S TAT E M E N T S O F C H A N G E S I N C A P I TA L
(in millions, except share data)

Surplus
For the years ended
December 31, 2011 and
December 31, 2010

Balance at January 1, 2010
(142,793,445 shares)

Capital paid-in

Net change in capital stock
redeemed (34,016,332 shares)

(1,701)

Transferred from surplus and
change in accumulated
other comprehensive loss
Balance at December 31, 2010
(108,777,113 shares)

7,140

Net income
retained

5,439

5,470

125

—

Transferred to surplus and
change in accumulated
other comprehensive loss

—

143

5,564

5,613

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

(42)

Total surplus

—

(1,712)

Net change in capital stock
issued (2,507,360 shares)

Balance at December 31, 2011
(111,284,473 shares)

—

—
$

7,182

Accumulated
other
comprehensive
loss

—

11
$

(31)

(1,701)
$

—

(18)
$

(49)

7,140

Total capital

$ 14,280
(1,701)

(1,701)

5,439

$ 10,878

—

125

5,564

$ 11,128

The Federal Reserve Bank of Richmond

2011 Annual Report

N O T E S T O F I N A N C I A L S TAT E M E N T S

Structure
The Federal Reserve Bank of Richmond (Bank) is part of the Federal Reserve System (System) and is one of the 12 Federal
Reserve Banks (Reserve Banks) created by Congress under the Federal Reserve Act of 1913 (Federal Reserve Act), which
established the central bank of the United States. The Reserve Banks are chartered by the federal government and possess a
unique set of governmental, corporate, and central bank characteristics. The Bank serves the 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. Member banks are divided into three classes according to size. Member
banks in each class elect one director representing member banks and one representing the public. In any election of directors,
each member bank receives one vote, regardless of the number of shares of Reserve Bank stock it holds.
In addition to the 12 Reserve Banks, the System also consists, in part, of the Board of Governors and the Federal Open
Market Committee (FOMC). The Board of Governors, an independent federal agency, is charged by the Federal Reserve Act
with a number of specific duties, including general supervision over the Reserve Banks. The FOMC is composed of members
of the Board of Governors, the president of the Federal Reserve Bank of New York (FRBNY), and, on a rotating basis, four
other Reserve Bank presidents.

Operations and Services
The Reserve Banks perform a variety of services and operations. These functions include participating in formulating and
conducting monetary policy; participating in the payment system, including large-dollar transfers of funds, automated clearinghouse (ACH) operations, and check collection; distributing coin and currency; performing fiscal agency functions for the
U.S. Department of the Treasury (Treasury), certain federal agencies, and other entities; serving as the federal government’s
bank; providing short-term loans to depository institutions; providing loans to participants in programs or facilities with
broad-based eligibility in unusual and exigent circumstances; serving consumers and communities by providing educational
materials and information regarding financial consumer protection rights and laws and information on community development
programs and activities; and supervising bank holding companies, state member banks, savings and loan holding companies,
and U.S. offices of foreign banking organizations pursuant to authority delegated by the Board of Governors. Certain services
are provided to foreign and international monetary authorities, primarily by the FRBNY.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), which was signed into
law and became effective on July 21, 2010, changed the scope of some services performed by the Reserve Banks. Among other
things, the Dodd-Frank Act established a Bureau of Consumer Financial Protection (Bureau) as an independent bureau within
the System that has supervisory authority over some institutions previously supervised by the Reserve Banks under delegated
authority from the Board of Governors in connection with those institutions’ compliance with consumer protection statutes;
limited the Reserve Banks’ authority to provide loans in unusual and exigent circumstances to lending programs or facilities
with broad-based eligibility or to designated financial market utilities; and vested the Board of Governors with all supervisory
and rule-writing authority for savings and loan holding companies.
The FOMC, in conducting monetary policy, establishes policy regarding domestic open market operations, oversees
these operations, and issues authorizations and directives to the FRBNY to execute transactions. The FOMC authorizes and
directs the FRBNY to conduct operations in domestic markets, including the direct purchase and sale of Treasury securities,
government-sponsored enterprise (GSE) debt securities, federal agency and GSE mortgage-backed securities (MBS), the
purchase of these securities under agreements to resell, and the sale of these securities under agreements to repurchase. The
FRBNY holds the resulting securities and agreements in a portfolio known as the System Open Market Account (SOMA). The
FRBNY is authorized to lend the Treasury securities and federal agency and GSE debt securities that are held in the SOMA.

The Federal Reserve Bank of Richmond

2011 Annual Report

N O T E S T O F I N A N C I A L S TAT E M E N T S

In addition to authorizing and directing operations in the domestic securities market, the FOMC authorizes the FRBNY
to conduct operations in foreign markets in order to counter disorderly conditions in exchange markets or to meet other needs
specified by the FOMC to carry out the System’s central bank responsibilities. Specifically, the FOMC authorizes and directs
the FRBNY to hold balances of, and to execute spot and forward foreign exchange and securities contracts for, 14 foreign
currencies and to invest such foreign currency holdings, while maintaining adequate liquidity. The FRBNY is authorized and
directed by the FOMC to maintain reciprocal currency arrangements with the Bank of Canada and the Bank of Mexico in
the maximum amounts of $2 billion and $3 billion, respectively, and to warehouse foreign currencies for the Treasury and
the Exchange Stabilization Fund.
Although the Reserve Banks are separate legal entities, they collaborate on the delivery of certain services to achieve greater
efficiency and effectiveness. This collaboration takes the form of centralized operations and product or function offices that have
responsibility for the delivery of certain services on behalf of the Reserve Banks. Various operational and management models
are used and are supported by service agreements between the Reserve Banks. In some cases, costs incurred by a Reserve Bank
for services provided to other Reserve Banks are not shared; in other cases, the Reserve Banks are reimbursed for costs incurred
in providing services to other Reserve Banks. Major services provided by the Bank on behalf of the System and for which the
costs were not reimbursed by the other Reserve Banks include Standard Cash Automation, Currency Technology Office, IT
Transformation Initiatives, 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 $258 million and $255 million for the years ended December 31, 2011 and
2010, respectively, and is included in “Operating expenses: Other” on the Statements of Income and Comprehensive Income.

Financial Stability Activities
The Reserve Banks have implemented the following programs that support the liquidity of financial institutions and foster
improved conditions in financial markets.
Large-Scale Asset Purchase Programs and Reinvestment of Principal Payments
On March 18, 2009, the FOMC authorized and directed the FRBNY to purchase $300 billion of longer-term Treasury securities
to help improve conditions in private credit markets. The FRBNY began the purchases of these Treasury securities in March
2009 and completed them in October 2009. On August 10, 2010, the FOMC announced that the Federal Reserve would maintain
the level of domestic securities holdings in the SOMA portfolio by reinvesting principal payments from GSE debt securities
and federal agency and GSE MBS in longer-term Treasury securities. On November 3, 2010, the FOMC announced its intention to expand the SOMA portfolio holdings of longer-term Treasury securities by an additional $600 billion and completed
these purchases in June 2011. On June 22, 2011, the FOMC announced that the Federal Reserve would maintain its existing
policy of reinvesting principal payments from all domestic securities in Treasury securities. On September 21, 2011, the FOMC
announced that the Federal Reserve intends to purchase, by the end of June 2012, $400 billion par value of Treasury securities
with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities
of 3 years or less, of which $133 billion has been purchased and $134 billion sold as of December 31, 2011. In addition, the
FOMC announced that it will maintain its existing policy of rolling over maturing Treasury securities at auction, and, rather
than reinvesting principal payments from GSE debt securities and federal agency and GSE MBS in Treasury securities, such
payments will be reinvested in federal agency and GSE MBS.
The FOMC authorized and directed the FRBNY to purchase GSE debt securities and federal agency and GSE MBS,
with a goal to provide support to mortgage and housing markets and to foster improved conditions in financial markets more
generally. The FRBNY was authorized to purchase up to $175 billion in fixed-rate, non-callable GSE debt securities and $1.25
trillion in fixed-rate federal agency and GSE MBS. Purchases of GSE debt securities began in November 2008, and purchases
of federal agency and GSE MBS began in January 2009. The FRBNY completed the purchases of GSE debt securities and federal agency and GSE MBS in March 2010. The settlement of all federal agency and GSE MBS transactions was completed by
August 2010. As discussed above, on September 21, 2011, the FOMC announced that the Federal Reserve will begin to reinvest
principal payments from its holdings of GSE debt securities and federal agency and GSE MBS in federal agency and GSE MBS.

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Central Bank Liquidity Swaps
The FOMC authorized and directed the FRBNY to establish central bank liquidity swap arrangements, which could be structured as either U.S. dollar liquidity or foreign currency liquidity swap arrangements.
In May 2010, U.S. dollar liquidity swap arrangements were re-authorized with the Bank of Canada, the Bank of England,
the European Central Bank, the Bank of Japan, and the Swiss National Bank through January 2011. Subsequently, these arrangements were extended through February 1, 2013. There is no specified limit to the amount that may be drawn by the Bank of
England, the European Central Bank, the Bank of Japan, and the Swiss National Bank under these swap arrangements; the
Bank of Canada may draw up to $30 billion under the swap arrangement with the FRBNY. In addition to the central bank
liquidity swap arrangements, the FOMC has authorized reciprocal currency arrangements with the Bank of Canada and the
Bank of Mexico, as discussed in Note 2.
Foreign currency liquidity swap arrangements were authorized with four foreign central banks and provided the Reserve
Banks with the capacity to offer foreign currency liquidity to U.S. depository institutions. The authorization for these swap
arrangements expired on February 1, 2010. In November 2011, as a contingency measure, the FOMC agreed to establish
temporary bilateral liquidity swap arrangements with the Bank of Canada, the Bank of England, the European Central Bank,
the Bank of Japan, and the Swiss National Bank so that liquidity can be provided in any of their currencies if necessary. The
swap lines are authorized until February 1, 2013.
Lending to Depository Institutions
The Term Auction Facility (TAF) promoted the efficient dissemination of liquidity by providing term funds to depository
institutions. The last TAF auction was conducted on March 8, 2010, and the related loans matured on April 8, 2010.
Lending to Primary Dealers
The Term Securities Lending Facility (TSLF) promoted liquidity in the financing markets for Treasury securities. Under the
TSLF, the FRBNY could lend up to an aggregate amount of $200 billion of Treasury securities held in the SOMA to primary
dealers on a secured basis for a term of 28 days. The authorization for the TSLF expired on February 1, 2010.
The Term Securities Lending Facility Options Program (TOP) offered primary dealers the opportunity to purchase an
option to draw upon short-term, fixed-rate TSLF loans in exchange for eligible collateral. The program was suspended effective
with the maturity of the June 2009 TOP options, and authorization for the program expired on February 1, 2010.
Other Lending Facilities
The Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) provided funding to depository institutions and bank holding companies to finance the purchase of eligible high-quality asset-backed commercial paper
(ABCP) from money market mutual funds. The Federal Reserve Bank of Boston administered the AMLF and was authorized
to extend these loans to eligible borrowers on behalf of the other Reserve Banks. The authorization for the AMLF expired on
February 1, 2010.

Significant Accounting Policies
Accounting principles for entities with the unique powers and responsibilities of a nation’s central bank have not been formulated by accounting standard-setting bodies. The Board of Governors has developed specialized accounting principles and
practices that it considers to be appropriate for the nature and function of a central bank. These accounting principles and
practices are documented in the Financial Accounting Manual for Federal Reserve Banks (FAM), which is issued by the Board
of Governors. The Reserve Banks are required to adopt and apply accounting policies and practices that are consistent with
the FAM, and the financial statements have been prepared in accordance with the FAM.
Limited differences exist between the accounting principles and practices in the FAM and accounting principles generally
accepted in the United States of America (GAAP), due to the unique nature of the Bank’s powers and responsibilities as part
of the nation’s central bank and given the System’s unique responsibility to conduct monetary policy. The primary differences
are the presentation of all SOMA securities holdings at amortized cost and the recording of SOMA securities on a settlementdate basis. Amortized cost, rather than the fair value presentation, more appropriately reflects the Bank’s securities holdings

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given the System’s unique responsibility to conduct monetary policy. Although the application of fair value measurements to
the securities holdings may result in values substantially greater or less than their carrying values, these unrealized changes
in value have no direct effect on the quantity of reserves available to the banking system or on the prospects for future Bank
earnings or capital. Both the domestic and foreign components of the SOMA portfolio may involve transactions that result
in gains or losses when holdings are sold before maturity. Decisions regarding securities and foreign currency transactions,
including their purchase and sale, are motivated by monetary policy objectives rather than profit. Accordingly, fair values,
earnings, and gains or losses resulting from the sale of such securities and currencies are incidental to open market operations
and do not motivate decisions related to policy or open market activities. Accounting for these securities on a settlement-date
basis, rather than the trade-date basis required by GAAP, better reflects the timing of the transaction’s effect on the quantity of
reserves in the banking system. The cost bases of Treasury securities, GSE debt securities, and foreign government debt instruments are adjusted for amortization of premiums or accretion of discounts on a straight-line basis, rather than using the interest
method required by GAAP.
In addition, the Bank does not present a Statement of Cash Flows, as required by GAAP, because the liquidity and cash
position of the Bank are not a primary concern given the Reserve Banks’ unique powers and responsibilities as a central
bank. 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, and the accompanying notes to the financial statements. There
are no other significant differences, other than those described above, between the policies outlined in the FAM and GAAP.
Preparing the financial statements in conformity with the FAM requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of income and expenses during the reporting period. Actual results
could differ from those estimates. Unique accounts and significant accounting policies are explained below.
a. Consolidation
The Dodd-Frank Act established the Bureau as an independent bureau within the System, and section 1017 of the Dodd-Frank
Act provides that the financial statements of the Bureau are not to be consolidated with those of the Board of Governors or
the System. Section 152 of the Dodd-Frank Act established the Office of Financial Research (OFR) within the Treasury. The
Board of Governors funds the Bureau and OFR through assessments on the Reserve Banks as required by the Dodd-Frank
Act. The Reserve Banks reviewed the law and evaluated the design of and their relationships to the Bureau and the OFR and
determined that neither should be consolidated in the Bank’s financial statements.
b. Gold and Special Drawing Rights Certificates
The Secretary of the Treasury is authorized to issue gold and special drawing rights (SDR) certificates to the Reserve Banks. Upon
authorization, the Reserve Banks acquire gold certificates by crediting equivalent amounts in dollars to the account established
for the Treasury. The gold certificates held by the Reserve Banks are required to be backed by the gold owned by the Treasury. The
Treasury may reacquire the gold certificates at any time and the Reserve Banks must deliver them to the Treasury. At such time,
the Treasury’s account is charged, and the Reserve Banks’ gold certificate accounts are reduced. The value of gold for purposes
of backing the gold certificates is set by law at $42 2/9 per fine troy ounce. The Board of Governors allocates the gold certificates
among the Reserve Banks once a year based on the average Federal Reserve notes outstanding at each Reserve Bank.
SDR certificates are issued by the International Monetary Fund (IMF) to its members in proportion to each member’s
quota in the IMF at the time of issuance. SDR certificates serve as a supplement to international monetary reserves and may
be transferred from one national monetary authority to another. Under the law providing for U.S. participation in the SDR
system, the Secretary of the Treasury is authorized to issue SDR certificates to the Reserve Banks. When SDR certificates are
issued to the Reserve Banks, equivalent amounts in U.S. dollars are credited to the account established for the Treasury and
the Reserve Banks’ SDR certificate accounts are increased. The Reserve Banks are required to purchase SDR certificates, at the
direction of the Treasury, for the purpose of financing SDR acquisitions or for financing exchange stabilization operations.
At the time SDR transactions occur, the Board of Governors allocates SDR certificate transactions among the Reserve Banks
based upon each Reserve Bank’s Federal Reserve notes outstanding at the end of the preceding year. SDRs are recorded by the
Bank at original cost. There were no SDR transactions during the years ended December 31, 2011 and 2010.

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c. Coin
The amount reported as coin in the Statements of Condition represents the face value of all United States coin held by the
Bank. The Bank buys coin at face value from the U.S. Mint in order to fill depository institution orders.
d. Loans
Loans to depository institutions are reported at their outstanding principal balances, and interest income is recognized on
an accrual basis.
Loans are impaired when current information and events indicate that it is probable that the Bank will not receive
the principal and interest that are due in accordance with the contractual terms of the loan agreement. Impaired loans are
evaluated to determine whether an allowance for loan loss is required. The Bank has developed procedures for assessing the
adequacy of any allowance for loan losses using all available information to identify incurred losses. This assessment includes
monitoring information obtained from banking supervisors, borrowers, and other sources to assess the credit condition of
the borrowers and, as appropriate, evaluating collateral values. Generally, the Bank would discontinue recognizing interest
income on impaired loans until the borrower’s repayment performance demonstrates principal and interest would be received
in accordance with the terms of the loan agreement. If the Bank discontinues recording interest on an impaired loan, cash
payments are first applied to principal until the loan balance is reduced to zero; subsequent payments are applied as recoveries
of amounts previously deemed uncollectible, if any, and then as interest income.
e. Securities Purchased Under Agreements to Resell, Securities Sold Under Agreements to Repurchase,
and Securities Lending
The FRBNY may engage in purchases of securities with primary dealers under agreements to resell (repurchase transactions).
These repurchase transactions are settled through a triparty arrangement. In a triparty arrangement, two commercial custodial
banks manage the collateral clearing, settlement, pricing, and pledging, and provide cash and securities custodial services for
and on behalf of the Bank and counterparty. The collateral pledged must exceed the principal amount of the transaction by a
margin determined by the FRBNY for each class and maturity of acceptable collateral. Collateral designated by the FRBNY as
acceptable under repurchase transactions primarily includes Treasury securities (including TIPS and STRIP Treasury securities); direct obligations of several federal and GSE-related agencies, including Federal National Mortgage Association (Fannie
Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac); and pass-through MBS of Fannie Mae, Freddie Mac, and
Government National Mortgage Association. The repurchase transactions are accounted for as financing transactions with
the associated interest income recognized over the life of the transaction.
The FRBNY may engage in sales of securities under agreements to repurchase (reverse repurchase transactions) with
primary dealers and, beginning August 2010, with selected money market funds. The list of eligible counterparties was subsequently expanded to include GSEs, effective in May 2011, and bank and savings institutions, effective in July 2011. These reverse
repurchase transactions may be executed through a triparty arrangement as an open market operation, similar to repurchase
transactions. Reverse repurchase transactions may also be executed with foreign official and international account holders as
part of a service offering. Reverse repurchase agreements are collateralized by a pledge of an amount of Treasury securities, GSE
debt securities, and federal agency and GSE MBS that are held in the SOMA. Reverse repurchase transactions are accounted for
as financing transactions, and the associated interest expense is recognized over the life of the transaction. These transactions
are reported at their contractual amounts as “System Open Market Account: Securities sold under agreements to repurchase”
and the related accrued interest payable is reported as a component of “Other liabilities” in the Statements of Condition.
Treasury securities and GSE debt securities held in the SOMA may be lent to primary dealers to facilitate the effective
functioning of the domestic securities markets. The amortized cost basis of securities lent continues to be reported as “Treasury
securities, net” or “Government-sponsored enterprise debt securities, net,” as appropriate, in the Statements of Condition.
Overnight securities lending transactions are fully collateralized by Treasury securities that have fair values in excess of the
securities lent. The FRBNY charges the primary dealer a fee for borrowing securities, and these fees are reported as a component of “Non-interest income: Other” in the Statements of Income and Comprehensive Income.
Activity related to securities purchased under agreements to resell, securities sold under agreements to repurchase, and
securities lending is allocated to each of the Reserve Banks on a percentage basis derived from an annual settlement of the
interdistrict settlement account that occurs in the second quarter of each year.

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f. Treasury Securities; Government-Sponsored Enterprise Debt Securities; Federal Agency and
Government-Sponsored Enterprise Mortgage-Backed Securities; Foreign Currency Denominated
Assets; and Warehousing Agreements
Interest income on Treasury securities, GSE debt securities, and foreign currency denominated assets comprising the SOMA
is accrued on a straight-line basis. Interest income on federal agency and GSE MBS is accrued using the interest method and
includes amortization of premiums, accretion of discounts, and gains or losses associated with principal paydowns. Premiums
and discounts related to federal agency and GSE MBS are amortized over the term of the security to stated maturity, and the
amortization of premiums and accretion of discounts are accelerated when principal payments are received. Gains and losses
resulting from sales of securities are determined by specific issue based on average cost. Treasury securities, GSE debt securities,
and federal agency and GSE MBS are reported net of premiums and discounts in the Statements of Condition, and interest
income on those securities is reported net of the amortization of premiums and accretion of discounts in the Statements of
Income and Comprehensive Income.
In addition to outright purchases of federal agency and GSE MBS that are held in the SOMA, the FRBNY enters into dollar
roll transactions (dollar rolls), which primarily involve an initial transaction to purchase or sell “to be announced” (TBA) MBS
for delivery in the current month combined with a simultaneous agreement to sell or purchase TBA MBS on a specified future
date. In 2010, the FRBNY also executed a limited number of TBA MBS coupon swap transactions, which involve a simultaneous
sale of a TBA MBS and purchase of another TBA MBS of a different coupon rate. During the year-ended December 31, 2010,
the FRBNY’s participation in the dollar roll and coupon swap markets furthered the MBS purchase program goals of providing support to the mortgage and housing markets and of fostering improved conditions in financial markets more generally.
During the year-ended December 31, 2011, the FRBNY executed dollar rolls primarily to facilitate settlement. The FRBNY
accounts for outstanding commitments under dollar roll and coupon swaps as purchases or sales on a settlement-date basis.
Net gains resulting from dollar roll and coupon swap transactions are reported as “Non-interest income: System Open Market
Account: Federal agency and government-sponsored enterprise mortgage-backed securities gains, net” in the Statements of
Income and Comprehensive Income.
Foreign currency denominated assets, which can include foreign currency deposits, securities purchased under agreements to resell, and government debt instruments, are revalued daily at current foreign currency market exchange rates in
order to report these assets in U.S. dollars. Realized and unrealized gains and losses on foreign currency denominated assets
are reported as “Non-interest income: System Open Market Account: Foreign currency gains, net” in the Statements of Income
and Comprehensive Income.
Activity related to Treasury securities, GSE debt securities, and federal agency and GSE MBS, including the premiums,
discounts, and realized gains and losses, is allocated to each Reserve Bank on a percentage basis derived from an annual
settlement of the interdistrict settlement account that occurs in the second quarter of each year. Activity related to foreign
currency denominated assets, including the premiums, discounts, and realized and unrealized gains and losses, is allocated to
each Reserve Bank based on the ratio of each Reserve Bank’s capital and surplus to the Reserve Banks’ aggregate capital and
surplus at the preceding December 31.
Warehousing is an arrangement under which the FOMC has approved the exchange, at the request of the Treasury, of
U.S. dollars for foreign currencies held by the Treasury over a limited period. The purpose of the warehousing facility is to
supplement the U.S. dollar resources of the Treasury for financing purchases of foreign currencies and related international
operations. Warehousing agreements are designated as held-for-trading purposes and are valued daily at current market
exchange rates. Activity related to these agreements is allocated to each Reserve Bank based on the ratio of each Reserve Bank’s
capital and surplus to the Reserve Banks’ aggregate capital and surplus at the preceding December 31.
g. Central Bank Liquidity Swaps
Central bank liquidity swaps, which are transacted between the FRBNY and a foreign central bank, can be structured as either
U.S. dollar liquidity or foreign currency liquidity swap arrangements.
Central bank liquidity swaps activity, including the related income and expense, is allocated to each Reserve Bank based
on the ratio of each Reserve Bank’s capital and surplus to the Reserve Banks’ aggregate capital and surplus at the preceding
December 31. The foreign currency amounts associated with these central bank liquidity swap arrangements are revalued
daily at current foreign currency market exchange rates.

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U.S. dollar liquidity swaps
At the initiation of each U.S. dollar liquidity swap transaction, the foreign central bank transfers a specified amount of its currency to a restricted account for the FRBNY in exchange for U.S. dollars at the prevailing market exchange rate. Concurrent
with this transaction, the FRBNY and the foreign central bank agree to a second transaction that obligates the foreign central
bank to return the U.S. dollars and the FRBNY to return the foreign currency on a specified future date at the same exchange
rate as the initial transaction. The Bank’s allocated portion of the foreign currency amounts that the FRBNY acquires are
reported as “System Open Market Account: Central bank liquidity swaps” in the Statements of Condition. Because the swap
transaction will be unwound at the same U.S. dollar amount and exchange rate that were used in the initial transaction, the
recorded value of the foreign currency amounts is not affected by changes in the market exchange rate.
The foreign central bank compensates the FRBNY based on the foreign currency amounts it holds for the FRBNY. The
Bank’s allocated portion of the amount of compensation received during the term of the swap transaction is reported as “Interest
income: System Open Market Account: Central bank liquidity swaps” in the Statements of Income and Comprehensive Income.
Foreign currency liquidity swaps
The structure of foreign currency liquidity swap transactions involves the transfer by the FRBNY, at the prevailing market
exchange rate, of a specified amount of U.S. dollars to an account for the foreign central bank in exchange for its currency. The
foreign currency amount received would be reported as a liability by the Bank.
h. Bank Premises, Equipment, and Software
Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on a straight-line
basis over the estimated useful lives of the assets, which range from 2 to 50 years. Major alterations, renovations, and improvements are capitalized at cost as additions to the asset accounts and are depreciated over the remaining useful life of the asset
or, if appropriate, over the unique useful life of the alteration, renovation, or improvement. Maintenance, repairs, and minor
replacements are charged to operating expense in the year incurred.
Costs incurred for software during the application development stage, whether developed internally or acquired for
internal use, are capitalized based on the purchase cost and the cost of direct services and materials associated with designing,
coding, installing, and testing the software. Capitalized software costs are amortized on a straight-line basis over the estimated
useful lives of the software applications, which generally range from two to five years. Maintenance costs related to software
are charged to operating 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.
i. 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.
j. Federal Reserve Notes
Federal Reserve notes are the circulating currency of the United States. These notes, which are identified as issued to a specific
Reserve Bank, must be fully collateralized. All of the Bank’s assets are eligible to be pledged as collateral. The collateral value
is equal to the book value of the collateral tendered with the exception of securities, for which the collateral value is equal to
the par value of the securities tendered. The par value of securities sold under agreements to repurchase is deducted from the
eligible collateral value.
The Board of Governors may, at any time, call upon a Reserve Bank for additional security to adequately collateralize
outstanding Federal Reserve notes. To satisfy the obligation to provide sufficient collateral for outstanding Federal Reserve
notes, the Reserve Banks have entered into an agreement that provides for certain assets of the Reserve Banks to be jointly
pledged as collateral for the Federal Reserve notes issued to all Reserve Banks. In the event that this collateral is insufficient,
the Federal Reserve Act provides that Federal Reserve notes become a first and paramount lien on all the assets of the Reserve

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Banks. Finally, Federal Reserve notes are obligations of the United States government.
“Federal Reserve notes outstanding, net” in the Statements of Condition represents the Bank’s Federal Reserve notes
outstanding, reduced by the Bank’s currency holdings of $10,670 million and $12,999 million at December 31, 2011 and 2010,
respectively.
At December 31, 2011 and 2010, all Federal Reserve notes issued to the Reserve Banks were fully collateralized. At December
31, 2011, all gold certificates, all special drawing right certificates, and $1,018 billion of domestic securities held in the SOMA
were pledged as collateral. At December 31, 2011, no investments denominated in foreign currencies were pledged as collateral.
k. Deposits
Depository institutions
Depository institutions’ deposits represent the reserve and service-related balances, such as required clearing balances, in the
accounts that depository institutions hold at the Bank. The interest rates paid on required reserve balances and excess balances
are determined by the Board of Governors, based on an FOMC-established target range for the federal funds rate. Interest
payable is reported as “Interest payable to depository institutions” in the Statements of Condition.
The Term Deposit Facility (TDF) consists of deposits with specific maturities held by eligible institutions at the Reserve
Banks. The Reserve Banks pay interest on these deposits at interest rates determined by auction. Interest payable is reported
as “Interest payable to depository institutions” in the Statements of Condition. There were no deposits held by the Bank under
the TDF at December 31, 2011 and 2010.
Other
Other deposits include foreign central bank and foreign government deposits held at the FRBNY that are allocated to the Bank.
l. Items in Process of Collection and Deferred Credit Items
“Items in process of collection” primarily represents amounts attributable to checks that have been deposited for collection and
that, as of the balance sheet date, have not yet been presented to the paying bank. “Deferred credit items” is the counterpart
liability to items in process of collection. The amounts in this account arise from deferring credit for deposited items until the
amounts are collected. The balances in both accounts can vary significantly.
m. Capital Paid-in
The Federal Reserve Act requires that each member bank subscribe to the capital stock of the Reserve Bank in an amount
equal to 6 percent of the capital and surplus of the member bank. These shares are non-voting, with a par value of $100, and
may not be transferred or hypothecated. As a member bank’s capital and surplus changes, its holdings of Reserve Bank stock
must be adjusted. Currently, only one-half of the subscription is paid in and the remainder is subject to call. A member bank
is liable for Reserve Bank liabilities up to twice the par value of stock subscribed by it.
By law, each Reserve Bank is required to pay each member bank an annual dividend of 6 percent on the paid-in capital
stock. This cumulative dividend is paid semiannually. To meet the Federal Reserve Act requirement that annual dividends be
deducted from net earnings, dividends are presented as a distribution of comprehensive income in the Statements of Income
and Comprehensive Income.
n. Surplus
The Board of Governors requires the Reserve Banks to maintain a surplus equal to the amount of capital paid-in. On a daily
basis, surplus is adjusted to equate the balance to capital paid-in. Accumulated other comprehensive income is reported as
a component of “Surplus” in the Statements of Condition and the Statements of Changes in Capital. Additional information
regarding the classifications of accumulated other comprehensive income is provided in Notes 12 and 13.
o. Interest on Federal Reserve Notes
The Board of Governors requires the Reserve Banks to transfer excess earnings to the Treasury as interest on Federal Reserve
notes after providing for the costs of operations, payment of dividends, and reservation of an amount necessary to equate
surplus with capital paid-in. This amount is reported as “Payments to Treasury as interest on Federal Reserve notes” in the

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Statements of Income and Comprehensive Income. The amount due to the Treasury is reported as “Accrued interest on Federal
Reserve notes” in the Statements of Condition.
If earnings during the year are not sufficient to provide for the costs of operations, payment of dividends, and equating
surplus and capital paid-in, payments to the Treasury are suspended. A deferred asset is recorded that represents the amount
of net earnings a Reserve Bank will need to realize before remittances to the Treasury resume. This deferred asset is periodically reviewed for impairment.
p. Income and Costs Related to Treasury Services
When directed by the Secretary of the Treasury, the Bank is required by the Federal Reserve Act to serve as fiscal agent and
depositary of the United States Government. By statute, the Treasury has appropriations to pay for these services. During the
years ended December 31, 2011 and 2010, the Bank was reimbursed for all services provided to the Treasury as its fiscal agent.
q. Compensation Received for Service Costs Provided
The Federal Reserve Bank of Atlanta (FRBA) has overall responsibility for managing the Reserve Banks’ provision of check and
ACH services to depository institutions and, as a result, recognizes total System revenue for these services in its Statements
of Income and Comprehensive Income. Similarly, the FRBNY manages the Reserve Banks’ provision of Fedwire funds and
securities services and recognizes total System revenue for these services in its Consolidated Statements of Income and
Comprehensive Income. The FRBA and the FRBNY compensate the applicable Reserve Banks for the costs incurred to provide these services. The Bank reports this compensation as “Non-interest income: Compensation received for service costs
provided” in the Statements of Income and Comprehensive Income.
r. Assessments
The Board of Governors assesses the Reserve Banks to fund its operations, the operations of the Bureau and, for a two-year
period following the July 21, 2010 effective date of the Dodd-Frank Act, the OFR. These assessments are allocated to each
Reserve Bank based on each Reserve Bank’s capital and surplus balances as of December 31 of the prior year for the Board
of Governors’ operations and as of the most recent quarter for the Bureau and OFR operations. The Board of Governors also
assesses each Reserve Bank for the expenses incurred by the Treasury to produce and retire Federal Reserve notes based on
each Reserve Bank’s share of the number of notes comprising the System’s net liability for Federal Reserve notes on December
31 of the prior year.
During the period prior to the Bureau transfer date of July 21, 2011, there was no limit on the funding provided to the
Bureau and assessed to the Reserve Banks; the Board of Governors was required to provide the amount estimated by the
Secretary of the Treasury needed to carry out the authorities granted to the Bureau under the Dodd-Frank Act and other federal law. The Dodd-Frank Act requires that, after the transfer date, the Board of Governors fund the Bureau in an amount not
to exceed a fixed percentage of the total operating expenses of the System as reported in the Board of Governors’ 2009 annual
report, which totaled $4.98 billion. The fixed percentage of total 2009 operating expenses of the System is 10 percent ($498.0
million) for 2011, 11 percent ($547.8 million) for 2012, and 12 percent ($597.6 million) for 2013. After 2013, the amount will
be adjusted in accordance with the provisions of the Dodd-Frank Act. The Bank’s assessment for Bureau funding is reported
as “Assessments: Bureau of Consumer Financial Protection” in the Statements of Income and Comprehensive Income.
The Board of Governors assesses the Reserve Banks to fund the operations of the OFR for the two-year period following
enactment of the Dodd-Frank Act; thereafter, the OFR will be funded by fees assessed on bank holding companies and nonbank financial companies that meet the criteria specified in the Dodd-Frank Act.
s. Taxes
The Reserve Banks are exempt from federal, state, and local taxes, except for taxes on real property. The Bank’s real property
taxes were $3 million and $2 million for the years ended December 31, 2011 and 2010, respectively, and are reported as a
component of “Operating expenses: Occupancy” in the Statements of Income and Comprehensive Income.

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t. Restructuring Charges
The Reserve Banks recognize restructuring charges for exit or disposal costs incurred as part of the closure of business activities
in a particular location, the relocation of business activities from one location to another, or a fundamental reorganization that
affects the nature of operations. Restructuring charges may include costs associated with employee separations, contract terminations, and asset impairments. Expenses are recognized in the period in which the Bank commits to a formalized restructuring
plan or executes the specific actions contemplated in the plan and all criteria for financial statement recognition have been met.
Note 14 describes the Bank’s restructuring initiatives and provides information about the costs and liabilities associated
with employee separations and contract terminations. Costs and liabilities associated with enhanced pension benefits in connection with the restructuring activities for all of the Reserve Banks are recorded on the books of the FRBNY.
The Bank had no significant restructuring activities in 2011 and 2010.
u. Recently Issued Accounting Standards
In July 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010–20, Receivables
(Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, which requires
additional disclosures about the allowance for credit losses and the credit quality of loan portfolios. The additional disclosures
include a rollforward of the allowance for credit losses on a disaggregated basis and more information, by type of receivable, on
credit quality indicators, including the amount of certain past-due receivables and troubled debt restructurings and significant
purchases and sales. The adoption of this update is effective for the Bank for the year ended December 31, 2011, and did not
have a material effect on the Bank’s financial statements.
In April 2011, the FASB issued ASU 2011–02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring
Is a Troubled Debt Restructuring, which clarifies accounting for troubled debt restructurings, specifically clarifying creditor concessions and financial difficulties experienced by borrowers. This update is effective for the Bank for the year ended
December 31, 2012, and is not expected to have a material effect on the Bank’s financial statements.
In April 2011, the FASB issued ASU 2011–03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for
Repurchase Agreements, which reconsidered the effective control for repurchase agreements. This update prescribes when the
Bank may or may not recognize a sale upon the transfer of financial assets subject to repurchase agreements. This determination is based, in part, on whether the Bank has maintained effective control over the transferred financial assets. This update
is effective for the Bank for the year ended December 31, 2012, and is not expected to have a material effect on the Bank’s
financial statements.
In June 2011, the FASB issued ASU 2011–05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income,
which requires a reporting entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but
consecutive statements. This update eliminates the option to present the components of other comprehensive income as part
of the statement of shareholders’ equity. The update is intended to improve the comparability, consistency, and transparency
of financial reporting and to increase the prominence of items by presenting the components reported in other comprehensive income. The Bank has adopted the update in this ASU effective for the year ended December 31, 2011, and the required
presentation is reflected in the Bank’s financial statements.
In December 2011, the FASB issued ASU 2011–11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and
Liabilities. This update will require a reporting entity to present enhanced disclosures for financial instruments and derivative
instruments that are offset or subject to master netting agreements or similar such agreements. This update is effective for the
Bank for the year ended December 31, 2013, and is not expected to have a material effect on the Bank’s financial statements.
In December 2011, the FASB issued ASU 2011–12, Comprehensive Income (Topic 220): Deferral of the Effective Date for
Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in Accounting
Standards Update No. 2011–05. This update indefinitely defers the requirements of ASU 2011–05 related to presentation of
reclassification adjustments.

The Federal Reserve Bank of Richmond

2011 Annual Report

N O T E S T O F I N A N C I A L S TAT E M E N T S

Loans
The remaining maturity distribution of loans outstanding at December 31, 2011, and total loans outstanding at December 31,
2010, was as follows (in millions):
2011

2010

Within 15 days

Loans to depository institutions

Total

Loans to Depository Institutions
The Bank offers primary, secondary, and seasonal loans to eligible borrowers, and each program has its own interest rate.
Interest is accrued using the applicable interest rate established at least every 14 days by the Bank’s board of directors, subject
to review and determination by the Board of Governors. Primary and secondary loans are extended on a short-term basis,
typically overnight, whereas seasonal loans may be extended for a period of up to nine months.
Primary, secondary, and seasonal loans are collateralized to the satisfaction of the Bank to reduce credit risk. Assets eligible
to collateralize these loans include consumer, business, and real estate loans; Treasury securities; GSE debt securities; foreign
sovereign debt; municipal, corporate, and state and local government obligations; asset-backed securities; corporate bonds;
commercial paper; and bank-issued assets, such as certificates of deposit, bank notes, and deposit notes. Collateral is assigned
a lending value that is deemed appropriate by the Bank, which is typically fair value reduced by a margin. Loans to depository institutions are monitored daily to ensure that borrowers continue to meet eligibility requirements for these programs.
The financial condition of borrowers is monitored by the Bank, and, if a borrower no longer qualifies for these programs, the
Bank will generally request full repayment of the outstanding loan or, for primary or seasonal loans, 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.
Allowance for Loan Loss
At December 31, 2011 and 2010, the Bank did not have any impaired loans and no allowance for loan losses was required.
There were no impaired loans during the years ended December 31, 2011 and 2010.

Treasury Securities; Government-Sponsored Enterprise Debt Securities; Federal Agency
and Government-Sponsored Enterprise Mortgage-Backed Securities; Securities Purchased
Under Agreements to Resell; Securities Sold Under Agreements to Repurchase; and
Securities Lending
The FRBNY, on behalf of the Reserve Banks, holds securities bought outright in the SOMA.
The Bank’s allocated share of SOMA balances was approximately 11.549 percent and 11.389 percent at December 31,
2011 and 2010, respectively.

The Federal Reserve Bank of Richmond

2011 Annual Report

N O T E S T O F I N A N C I A L S TAT E M E N T S

The Bank’s allocated share of Treasury securities, GSE debt securities, and federal agency and GSE MBS, net, excluding
accrued interest, held in the SOMA at December 31 was as follows (in millions):
2011
Par

Bills

2,128

Unamortized
premiums

Unaccreted
discounts

—

Total
amortized cost

—

Fair value

2,128

Notes

148,560

3,095

(142)

151,513

160,465

Bonds

41,424

7,085

(11)

48,498

58,749

$ 202,139

$ 221,342

Total Treasury securities

$ 192,112

10,180

(153)

GSE debt securities

12,010

445

(2)

12,453

Federal agency and
GSE MBS

96,744

1,341

(120)

97,965

$ 103,421

13,193

2010
Par

Bills

2,098

Unamortized
premiums

Unaccreted
discounts

—

Total
amortized cost

—

Fair value

2,098

Notes

88,069

1,601

(87)

89,583

91,647

Bonds

26,170

3,728

(65)

29,833

33,000

$ 121,514

$ 126,745

Total Treasury securities

$ 116,337

5,329

(152)

GSE debt securities

16,794

630

(2)

Federal agency and
GSE MBS

$ 112,994

1,607

(177)

17,422

$ 114,424

17,856

$ 116,851

The total of the Treasury securities, GSE debt securities, and federal agency and GSE MBS, net, excluding accrued interest,
held in the SOMA at December 31 was as follows (in millions):
2011

2010

Amortized cost

Bills

18,423

Fair value

18,423

Amortized cost

18,422

Fair value

18,422

Notes

1,311,917

1,389,429

786,575

804,703

Bonds

419,937

508,694

261,955

289,757

Total Treasury securities

$ 1,750,277

$ 1,916,546

$ 1,066,952

$ 1,112,882

GSE debt securities

107,828

114,238

Federal agency and GSE MBS

848,258

895,495

$ 1,004,695

152,972

156,780

$ 1,026,003

The Federal Reserve Bank of Richmond

2011 Annual Report

N O T E S T O F I N A N C I A L S TAT E M E N T S

The fair value amounts in the preceding tables are presented solely for informational purposes. Although the fair value of
security holdings can be substantially greater than or less than the recorded value at any point in time, these unrealized
gains or losses have no effect on the ability of the Reserve Banks, as the central bank, to meet their financial obligations and
responsibilities. The fair value of federal agency and GSE MBS was determined using a model-based approach that considers
observable inputs for similar securities; fair value for all other SOMA security holdings was determined by reference to quoted
prices for identical securities.
The fair value of the fixed-rate Treasury securities, GSE debt securities, and federal agency and GSE MBS in the SOMA’s
holdings is subject to market risk, arising from movements in market variables, such as interest rates and securities prices. The
fair value of federal agency and GSE MBS is also affected by the expected rate of prepayments of mortgage loans underlying
the securities.
The following table provides additional information on the amortized cost and fair values of the federal agency and GSE
MBS portfolio at December 31 (in millions):
2011
Distribution of MBS holdings
by coupon rate

2010

Amortized cost

Fair value

Amortized cost

Fair value

Allocated to the Bank:
3.0%

152

154

—

3.5%

2,242

2,271

4.0%

18,649

19,606

19,097

19,179

4.5%

46,943

49,796

56,680

57,947

5.0%

21,076

22,251

26,356

27,054

5.5%

7,714

8,092

10,605

10,919

6.0%

1,057

1,110

1,470

1,523

6.5%
Total

132
$

141

97,965

1,313

177

103,421

1,336

189

114,424

—

116,851

Total SOMA:
3.0%

Total

—

3.5%

19,415

19,660

341

352

4.0%

161,481

169,763

167,675

168,403

4.5%

406,465

431,171

497,672

508,798

5.0%

182,497

192,664

231,420

237,545

5.5%

66,795

70,064

93,119

95,873

6.0%

9,152

9,616

12,910

13,376

6.5%

1,140

1,221

1,558

1,656

895,495

$ 1,004,695

$ 1,026,003

848,258

The Federal Reserve Bank of Richmond

2011 Annual Report

N O T E S T O F I N A N C I A L S TAT E M E N T S

There were no transactions related to securities purchased under agreements to resell during the years ended December 31,
2011 and 2010. Financial information related to securities sold under agreements to repurchase for the years ended December
31 was as follows (in millions):
2011

2010

Allocated to the Bank:
Contract amount outstanding, end of year

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

11,537

6,800

8,315

5,364

14,380

7,673

9,942

4,970

11,537

6,800

Total SOMA:
Contract amount outstanding, end of year

Average daily amount outstanding, during the year

99,900

59,703

72,227

58,476

124,512

77,732

Securities pledged (par value), end of year

86,089

43,642

Securities pledged (market value), end of year

99,900

59,703

Maximum balance outstanding, during the year

The contract amounts for securities sold under agreements to repurchase approximate fair value. FRBNY executes transactions
for the purchase of securities under agreements to resell primarily to temporarily add reserve balances to the banking system.
Conversely, transactions to sell securities under agreements to repurchase are executed to temporarily drain reserve balances
from the banking system and as part of a service offering to foreign official and international account holders.
The remaining maturity distribution of Treasury securities, GSE debt securities, federal agency and GSE MBS bought
outright, and securities sold under agreements to repurchase that were allocated to the Bank at December 31, 2011, was as
follows (in millions):
Within
15 days

Treasury securities
(par value)
GSE debt securities
(par value)
Federal agency and
GSE MBS (par value)*
Securities sold under
agreements to
repurchase
(contract amount)

16 days to
90 days

1,876

3,131

91 days to
1 year

10,383

Over 1 year
to 5 years

Over 5 years
to 10 years

75,034

75,058

Over
10 years

Total

26,630

$ 192,112

288

580

2,275

6,999

1,597

271

12,010

—

96,738

96,744

11,537

—

11,537

* The par amount shown for Federal agency and GSE MBS is the remaining principal balance of the underlying mortgages.

Federal agency and GSE MBS are reported at stated maturity in the table above. The estimated weighted average life of these
securities at December 31, 2011, which differs from the stated maturity primarily because it factors in scheduled payments
and prepayment assumptions, is approximately 2.4 years.

The Federal Reserve Bank of Richmond

2011 Annual Report

N O T E S T O F I N A N C I A L S TAT E M E N T S

The amortized cost and par value of Treasury securities and GSE debt securities that were loaned from the SOMA at
December 31 was as follows (in millions):
Allocated to the Bank
Amortized cost
2011

Treasury securities
GSE debt securities

1,746

Par value

2010

2011

2,577

147

192

2010

1,614

140

2,515
183

Total SOMA
Amortized cost

Treasury securities
GSE debt securities

Par value

2011

2010

2011

2010

$ 15,121

$ 22,627

$ 13,978

$ 22,081

1,276

1,686

1,216

1,610

The FRBNY enters into commitments to buy Treasury and GSE debt securities and records the related securities on a settlementdate basis. As of December 31, 2011, the total purchase price of the Treasury securities under outstanding commitments was
$3,200 million. The total purchase price of outstanding commitments allocated to the Bank was $370 million. These commitments had contractual settlement dates extending through January 3, 2012. As of December 31, 2011, the fair value of Treasury
securities under outstanding purchase commitments was $3,208 million, of which $370 million was allocated to the Bank.
The FRBNY enters into commitments to buy and sell federal agency and GSE MBS and records the related securities
on a settlement-date basis. As of December 31, 2011, the total purchase price of the federal agency and GSE MBS under outstanding purchase commitments was $41,503 million, of which $513 million was related to dollar roll transactions. The total
purchase price of outstanding purchase commitments allocated to the Bank was $4,793 million, of which $59 million was
related to dollar roll transactions. As of December 31, 2011, the total sales price of the federal agency and GSE MBS under
outstanding sales commitments was $4,430 million, all of which was related to dollar roll transactions. The total sales price
of outstanding sales commitments allocated to the Bank was $512 million, all of which was related to dollar roll transactions.
These commitments, which had contractual settlement dates extending through February 2012, are for the purchase and sale
of TBA MBS for which the number and identity of the pools that will be delivered to fulfill the commitment are unknown at
the time of the trade. As of December 31, 2011, the fair value of federal agency and GSE MBS purchases and sales, net under
outstanding commitments was $41,873 million and $4,473 million, respectively, of which $4,836 million and $517 million,
respectively, was allocated to the Bank. These commitments are subject to varying degrees of off-balance-sheet market risk
and counterparty credit risk that result from their future settlement. The FRBNY requires the posting of cash collateral for
commitments as part of the risk management practices used to mitigate the counterparty credit risk.

The Federal Reserve Bank of Richmond

2011 Annual Report

N O T E S T O F I N A N C I A L S TAT E M E N T S

Other liabilities, which are related to federal agency and GSE MBS purchases and sales, includes the FRBNY’s obligation
to return cash margin posted by counterparties as collateral under commitments to purchase and sell federal agency and GSE
MBS. In addition, other liabilities includes obligations that arise from the failure of a seller to deliver securities to the FRBNY
on the settlement date. Although the FRBNY has ownership of and records its investments in the MBS as of the contractual
settlement date, it is not obligated to make payment until the securities are delivered, and the amount included in other
liabilities represents the FRBNY’s obligation to pay for the securities when delivered. The amount of other liabilities allocated
to the Bank and held in the SOMA at December 31 was as follows (in millions):
Allocated to the Bank
2011

Cash margin

Total

2010

147

158

Obligations from
MBS transaction fails

Total SOMA
2011

—

2010

1,271

1,368

—

During the years ended December 31, 2011 and 2010, the Reserve Banks recorded net gains from federal agency and GSE MBS
transactions of $10 million and $782 million, respectively, of which $1 million and $61 million, respectively, were allocated
to the Bank. These net gains are reported as “Non-interest income: Federal agency and government-sponsored enterprise
mortgage-backed securities gains, net” in the Statements of Income and Comprehensive Income.

The Federal Reserve Bank of Richmond

2011 Annual Report

N O T E S T O F I N A N C I A L S TAT E M E N T S

Information about transactions related to Treasury securities, GSE debt securities, and federal agency and GSE MBS
during the year ended December 31, 2011, is summarized as follows (in millions):
Allocated to the Bank

Bills

Balance December 31, 2010

Purchases

Notes

2,098

89,583

27,550

Sales1

—

Realized gains, net2

—

Principal payments
and maturities

Bonds

83,913

29,833

18,616

(15,907)

—

261

(27,551)

Total
Treasury
securities

—

(7,744)

121,514

GSE debt
securities

114,424

130,079

—

4,867

(15,907)

—

261

—

17,422

Federal
agency and
GSE MBS

(35,295)

(4,993)

(22,480)

(1,085)

(193)

(364)

Amortization of premiums
and discounts

(512)

(574)

Inflation adjustment on
inflation-indexed
securities

—

148

126

274

—

Annual reallocation
adjustment3

1,771

497

2,298

217

1,518

Balance December 31, 2011

2,128

151,513

48,498

202,139

12,453

97,965

14,695

124,158

—

4,730

Supplemental information—par value of transactions:
Purchases

27,551

Proceeds from sales

81,912

—

(15,571)

—

(15,571)

—

Total SOMA

Bills

Balance December 31, 2010

Purchases

18,422

239,487

Sales

Notes

Realized gains, net2

(239,494)

$ 1,066,952

161,876

1,132,615

—
—

(67,273)

—

(4,445)

Inflation adjustment on
inflation-indexed
securities

—

1,284

18,423

$ 1,311,917

261,955

2,258

Amortization of premiums
and discounts

Balance December 31, 2011

(137,734)

—

Principal payments
and maturities

Bonds

731,252

—

786,575

Total
Treasury
securities

GSE debt
securities

(137,734)
2,258

Federal
agency and
GSE MBS

152,972

$ 1,004,695

—

42,145

—

(306,767)

(43,466)

(195,413)

(4,985)

(9,422)

(1,678)

(3,169)

1,091

2,375

419,937

$ 1,750,277

107,828

848,258

127,802

$ 1,081,174

—

40,955

—

Supplemental information—par value of transactions:
Purchases
Proceeds from sales
1

239,494
—

713,878
(134,829)

—

(134,829)

—

Purchases and sales are reported on a settlement-date basis and include payments and receipts related to principal, premiums, discounts, and
inflation compensation included in the basis of inflation-indexed securities. The amount reported as sales also includes realized gains, net.
Adjustments for realized gains, net is required because these amounts do not affect the reported amount of the related securities. Excludes
gains and losses that result from net settled MBS TBA transactions.
Reflects the annual adjustment to the Bank’s allocated portion of the related SOMA securities that results from the annual settlement of the
interdistrict settlement account, as discussed in Note 4f.

The Federal Reserve Bank of Richmond

2011 Annual Report

N O T E S T O F I N A N C I A L S TAT E M E N T S

Foreign Currency Denominated Assets
The FRBNY holds foreign currency deposits with foreign central banks and the Bank for International Settlements and invests
in foreign government debt instruments of Germany, France, and Japan. These foreign government debt instruments are
guaranteed as to principal and interest by the issuing foreign governments. In addition, the FRBNY enters into transactions
to purchase Euro-denominated government debt securities under agreements to resell for which the accepted collateral is the
debt instruments issued by the governments of Belgium, France, Germany, Italy, the Netherlands, and Spain.
The Bank’s allocated share of foreign currency denominated assets was approximately 20.505 percent and 27.845 percent
at December 31, 2011 and 2010, respectively.
The Bank’s allocated share of foreign currency denominated assets, including accrued interest, valued at amortized cost
and foreign currency market exchange rates at December 31 was as follows (in millions):
2011

2010

Euro:
Foreign currency deposits

Securities purchased under agreements to resell

1,921

1,965

—

687

German government debt instruments

386

514

French government debt instruments

540

767

817

1,081

1,657

2,239

Japanese yen:
Foreign currency deposits
Japanese government debt instruments
Total allocated to the Bank

5,321

7,253

At December 31, 2011 and 2010, the fair value of foreign currency denominated assets, including accrued interest, allocated to
the Bank was $5,355 million and $7,299 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 Treasury securities, GSE debt
securities, and federal agency and GSE MBS discussed in Note 6, unrealized gains or losses have no effect on the ability of a
Reserve Bank, as the central bank, to meet its financial obligations and responsibilities. The fair value is presented solely for
informational purposes.
Total Reserve Bank foreign currency denominated assets were $25,950 million and $26,049 million at December 31, 2011
and 2010, respectively. At December 31, 2011 and 2010, the fair value of the total Reserve Bank foreign currency denominated
assets, including accrued interest, was $26,116 million and $26,213 million, respectively.
The remaining maturity distribution of foreign currency denominated assets that were allocated to the Bank at December
31, 2011, was as follows (in millions):
Within
15 days

Euro
Japanese yen
Total

$ 1,097

16 days to
90 days

91 days to
1 year

857
$ 1,954

601

434

Over 1 year
to 5 years

715

136

645

836

737

$ 1,079

$ 1,551

Total

2,847
2,474

5,321

The Federal Reserve Bank of Richmond

2011 Annual Report

N O T E S T O F I N A N C I A L S TAT E M E N T S

At December 31, 2011 and 2010, the authorized warehousing facility was $5 billion, with no balance outstanding.
There were no transactions related to the authorized reciprocal currency arrangements with the Bank of Canada and the
Bank of Mexico during the years ended December 31, 2011 and 2010.
There were no foreign exchange contracts related to open market operations outstanding as of December 31, 2011.
The FRBNY enters into commitments to buy foreign government debt instruments and records the related securities on
a settlement-date basis. As of December 31, 2011, there were $216 million of outstanding commitments to purchase Eurodenominated government debt instruments, of which $44 million was allocated to the Bank. These securities settled on January
4, 2012, and replaced Euro-denominated government debt instruments held in the SOMA that matured on that date. As of
December 31, 2011, the fair value of Euro-denominated government debt instruments under outstanding commitments was
$216 million of which $44 million was allocated to the Bank.
In connection with its foreign currency activities, the FRBNY may enter into transactions that are subject to varying
degrees of off-balance-sheet market risk and counterparty credit risk that result from their future settlement. The FRBNY
controls these risks by obtaining credit approvals, establishing transaction limits, receiving collateral in some cases, and performing daily monitoring procedures.

Central Bank Liquidity Swaps
U.S. Dollar Liquidity Swaps
The Bank’s allocated share of U.S. dollar liquidity swaps was approximately 20.505 percent and 27.845 percent at December 31,
2011 and 2010, respectively.
The total foreign currency held under U.S. dollar liquidity swaps in the SOMA at December 31, 2011 and 2010, was
$99,823 million and $75 million, respectively, of which $20,469 million and $21 million, respectively, was allocated to the Bank.
The remaining maturity distribution of U.S. dollar liquidity swaps that were allocated to the Bank at December 31 was
as follows (in millions):
2011
Within 15 days

Euro

Japanese yen
Swiss franc
Total

7,045

2010

16 days to 90 days

10,474

Total

Within 15 days

17,519

Total

1,853

1,016

2,869

—

8,963

11,506

20,469

Foreign Currency Liquidity Swaps
There were no transactions related to the foreign currency liquidity swaps during the years ended December 31, 2011 and 2010.

The Federal Reserve Bank of Richmond

2011 Annual Report

N O T E S T O F I N A N C I A L S TAT E M E N T S

Bank Premises, Equipment, and Software
Bank premises and equipment at December 31 were as follows (in millions):
2011

2010

Bank premises and equipment:
Land and land improvements

Buildings
Building machinery and equipment

234

231

Construction in progress

Furniture and equipment

296

276

656

634

(323)

(301)

Subtotal
Accumulated depreciation
Bank premises and equipment, net

333

Depreciation expense, for the years ended December 31

Bank premises and equipment at December 31 included the following amounts for capitalized leases (in millions):
2011

Leased premises and equipment under capital leases

Accumulated depreciation

2010

(13)

18
(8)

Leased premises and equipment under capital leases, net

Depreciation expense related to leased premises and
equipment under capital leases

The Bank leases space to outside tenants with remaining lease terms ranging from 1 to 7 years. Rental income from such leases
was $1 million for each of the years ended December 31, 2011 and 2010 and is reported as a component of “Non-interest
income: Other” in the Statements of Income and Comprehensive Income. Future minimum lease payments that the Bank will
receive under non-cancelable lease agreements in existence at December 31, 2011, are as follows (in thousands):
2012

1,222

2013

1,279

2014

1,319

2015

1,244

2016

1,213

Thereafter
Total

699
$

6,976

The Bank had capitalized software assets, net of amortization, of $35 million and $29 million at December 31, 2011 and 2010,
respectively. Amortization expense was $13 million and $12 million for the years ended December 31, 2011 and 2010, respectively.
Capitalized software assets are reported as a component of “Other assets” in the Statements of Condition and the related amortization is reported as a component of “Operating expenses: Other” in the Statements of Income and Comprehensive Income.

The Federal Reserve Bank of Richmond

2011 Annual Report

N O T E S T O F I N A N C I A L S TAT E M E N T S

Commitments and Contingencies
Conducting its operations, the Bank enters into contractual commitments, normally with fixed expiration dates or termination
provisions, at specific rates and for specific purposes.
At December 31, 2011, the Bank was obligated under non-cancelable leases for premises and equipment with remaining
terms ranging from three to approximately four years.
Rental expense under operating leases for certain operating facilities, warehouses, and data processing and office equipment (including taxes, insurance, and maintenance when included in rent), net of sublease rentals, was $360 thousand and $256
thousand for the years ended December 31, 2011 and 2010, respectively. Certain of the Bank’s leases have options to renew.
Future minimum rental payments under non-cancelable operating leases, net of sublease rentals, with terms of one year
or more, at December 31, 2011, were not material.
At December 31, 2011, there were no material unrecorded unconditional purchase commitments or obligations in excess
of one year.
At December 31, 2011, the Bank had commitments of approximately $8 million for the construction and acquisition of
an air-handling unit at its Richmond facility. Expected fixed payments for the next two years under these commitments are
as follows (in millions):
2012
2013

4
4

Under the Insurance Agreement of the Reserve Banks, each of the Reserve Banks has agreed to bear, on a per incident basis,
a share of certain losses in excess of 1 percent of the capital paid-in of the claiming Reserve Bank, up to 50 percent of the total
capital paid-in of all Reserve Banks. Losses are borne in the ratio of a Reserve Bank’s capital paid-in to the total capital 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, 2011 and 2010.
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 legal actions
and claims will be resolved without material adverse effect on the financial position or results of operations of the Bank.

Retirement and Thrift Plans
Retirement Plans
The Bank currently offers three defined benefit retirement plans to its employees, based on length of service and level of compensation. Substantially all of the employees of the Reserve Banks, Board of Governors, and Office of Employee Benefits of the
Federal Reserve System (OEB) participate in the Retirement Plan for Employees of the Federal Reserve System (System Plan).
Under the Dodd-Frank Act, newly hired Bureau employees are eligible to participate in the System Plan and transferees from
other governmental organizations can elect to participate in the System Plan. In addition, employees at certain compensation levels participate in the Benefit Equalization Retirement Plan (BEP) and certain Reserve Bank officers participate in the
Supplemental Retirement Plan for Select Officers of the Federal Reserve Banks (SERP).
The System Plan provides retirement benefits to employees of the Reserve Banks, Board of Governors, OEB, and certain
employees of the Bureau. The FRBNY, on behalf of the System, recognizes the net asset or net liability and costs associated with
the System Plan in its consolidated financial statements. During the year ended December 31, 2011, certain costs associated
with the System Plan were reimbursed by the Bureau. During the year ended December 31, 2010, costs associated with the
System Plan were not reimbursed by other participating employers.
The Bank’s projected benefit obligation, funded status, and net pension expenses for the BEP and the SERP at December 31,
2011 and 2010, and for the years then ended, were not material.

The Federal Reserve Bank of Richmond

2011 Annual Report

N O T E S T O F I N A N C I A L S TAT E M E N T S

Thrift Plan
Employees of the Bank participate in the defined contribution Thrift Plan for Employees of the Federal Reserve System (Thrift
Plan). The Bank matches 100 percent of the first 6 percent of employee contributions from the date of hire and provides an
automatic employer contribution of 1 percent of eligible pay. The Bank’s Thrift Plan contributions totaled $14 million and
$13 million for the years ended December 31, 2011 and 2010, respectively, and are reported as a component of “Operating
expenses: Salaries and benefits” in the Statements of Income and Comprehensive Income.

Postretirement Benefits Other Than Retirement Plans and Postemployment Benefits
Postretirement Benefits Other Than Retirement Plans
In addition to the Bank’s retirement plans, employees who have met certain age and length-of-service requirements are eligible
for both medical benefits and life insurance coverage during retirement.
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):
2011

Accumulated postretirement benefit obligation at January 1

Service cost benefits earned during the period

2010

193.0

191.8

8.6

8.3

Interest cost on accumulated benefit obligation

10.4

11.3

Net actuarial loss

17.9

1.5

2.7

2.2

(10.5)

(12.2)

Contributions by plan participants
Benefits paid
Medicare Part D subsidies
Plan amendments
Accumulated postretirement benefit obligation at December 31

0.7

0.6

(0.9)

(10.5)

221.9

193.0

The Federal Reserve Bank of Richmond

2011 Annual Report

N O T E S T O F I N A N C I A L S TAT E M E N T S

At December 31, 2011 and 2010, the weighted-average discount rate assumptions used in developing the postretirement benefit
obligation were 4.50 percent and 5.25 percent, respectively.
Discount rates reflect yields available on high-quality corporate bonds that would generate the cash flows necessary to
pay the plan’s benefits when due.
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):
2011

Fair value of plan assets at January 1

2010

—

Contributions by the employer

7.1

9.4

Contributions by plan participants

2.7

2.2

(10.5)

(12.2)

0.7

0.6

Benefits paid
Medicare Part D subsidies
Fair value of plan assets at December 31

—

Unfunded obligation and accrued postretirement benefit cost

221.9

193.0

17.2

20.6

Amounts included in accumulated other comprehensive loss
are shown below:
Prior service cost
Net actuarial loss
Total accumulated other comprehensive loss

(66.2)
(49.0)

(52.4)
$

(31.8)

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:
2011

2010

Health-care cost trend rate assumed for next year

7.50%

8.00%

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

5.00%

Year that the rate reaches the ultimate trend rate

2017

Assumed health-care cost trend rates have a significant effect on the amounts reported for health-care plans. A 1 percentage
point change in assumed health-care cost trend rates would have the following effects for the year ended December 31, 2011
(in millions):
1 percentage point
increase

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

3.5
33.7

1 percentage point
decrease

(2.8)
(27.4)

The Federal Reserve Bank of Richmond

2011 Annual Report

N O T E S T O F I N A N C I A L S TAT E M E N T S

The following is a summary of the components of net periodic postretirement benefit expense for the years ended
December 31 (in millions):
2011

Service cost-benefits earned during the period

2010

8.6

8.3

Interest cost on accumulated benefit obligation

10.4

11.3

Amortization of prior service cost

(4.3)

(3.4)

Amortization of net actuarial loss

4.1

5.2

Net periodic postretirement benefit expense

18.8

21.4

Estimated amounts that will be amortized from accumulated other comprehensive loss
into net periodic postretirement benefit expense in 2012 are shown below:
Prior service cost

Net actuarial loss

(4.2)
5.6

Total

1.4

Net postretirement benefit costs are actuarially determined using a January 1 measurement date. At January 1, 2011 and 2010,
the weighted-average discount rate assumptions used to determine net periodic postretirement benefit costs were 5.25 percent
and 5.75 percent, respectively.
Net periodic postretirement benefit expense is reported as a component of “Operating expenses: Salaries and benefits”
in the Statements of Income and Comprehensive Income.
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 $512 thousand and $534 thousand in the years ended December 31, 2011
and 2010, respectively. Expected receipts in 2012, related to benefits paid in the years ended December 31, 2011 and 2010,
are $371 thousand.
Following is a summary of expected postretirement benefit payments (in millions):
Without subsidy

2012

9.8

With subsidy

9.1

2013

10.4

9.6

2014

10.9

10.0

2015

11.6

10.6

2016

12.2

11.1

2017–2021

74.2

66.6

$ 129.1

$ 117.0

Total

The Federal Reserve Bank of Richmond

2011 Annual Report

N O T E S T O F I N A N C I A L S TAT E M E N T S

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, disability benefits, and
self-insured workers’ compensation expenses. The accrued postemployment benefit costs recognized by the Bank at December 31,
2011 and 2010, were $20 million and $19 million, respectively. This cost is included as a component of “Accrued benefit costs”
in the Statements of Condition. Net periodic postemployment benefit expense included in 2011 and 2010 operating expenses
were $4 million and $2 million, respectively, and are recorded as a component of “Operating expenses: Salaries and benefits”
in the Statements of Income and Comprehensive Income.

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 retirement plans

Balance at January 1, 2010

(42)

Change in funded status of benefit plans:
Prior service costs arising during the year

Amortization of prior service cost

(3)

Change in prior service costs related to benefit plans

Net actuarial loss arising during the year

(2)

Amortization of net actuarial loss

Change in actuarial losses related to benefit plans

Change in funded status of benefit plans—other comprehensive loss
Balance at December 31, 2010

11
$

(31)

Change in funded status of benefit plans:
Amortization of prior service cost

(4)

Change in prior service costs related to benefit plans

(4)

Net actuarial loss arising during the year

(18)

Amortization of net actuarial loss

Change in actuarial losses related to benefit plans

(14)

Change in funded status of benefit plans—other comprehensive loss
Balance at December 31, 2011

(18)
$

(49)

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

The Federal Reserve Bank of Richmond

2011 Annual Report

N O T E S T O F I N A N C I A L S TAT E M E N T S

Business Restructuring Charges
The Bank had no business restructuring charges in 2011 or 2010.
Before 2010, the Reserve Banks announced their check restructuring initiatives to align the check processing infrastructure
and operations with declining check processing volumes. The new infrastructure consolidated operations into two regional
Reserve Bank processing sites; one in Cleveland, for paper check processing, and one in Atlanta, for electronic check processing. Additional announcements prior to 2010 included restructuring plans associated with the U.S. Treasury’s Collections and
Cash Management Modernization (CCMM) initiative.
Following is a summary of financial information related to the restructuring plans (in millions):
2009 and prior restructuring plans

Information related to restructuring plans as of December 31, 2011:
Total expected costs related to restructuring activity

Estimated future costs related to restructuring activity

8.3
—

Expected completion date

2011

Reconciliation of liability balances:
Balance at January 1, 2010

Adjustments

0.1

Payments
Balance at December 31, 2010

(0.9)
$

Adjustments

0.2
0.1

Payments
Balance at December 31, 2011

1.0

(0.1)
$

0.2

Employee separation costs are primarily severance costs for identified staff reductions associated with the announced restructuring plans. Separation costs that are provided under terms of ongoing benefit arrangements are recorded based on the
accumulated benefit earned by the employee. Separation costs that are provided under the terms of one-time benefit arrangements are generally measured based on the expected benefit as of the termination date and recorded ratably over the period to
termination. Restructuring costs related to employee separations are reported as a component of “Operating expenses: Salaries
and benefits” in the Statements of Income and Comprehensive Income.
Adjustments to the accrued liability are primarily due to changes in the estimated restructuring costs and are shown as a
component of the appropriate expense category in the Statements of Income and Comprehensive Income.
Costs associated with enhanced pension benefits for all Reserve Banks are recorded on the books of the FRBNY as
discussed in Note 11.

Subsequent Events
There were no subsequent events that require adjustments to or disclosures in the financial statements as of December 31, 2011.
Subsequent events were evaluated through March 20, 2012, which is the date that the Bank issued the financial statements.

The Federal Reserve Bank of Richmond

2011 Annual Report

A B B R E V I AT I O N S

ACH Automated Clearinghouse
AMLF Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility
ASU Accounting Standards Update
BEP Benefit Equalization Retirement Plan
Bureau Bureau of Consumer Financial Protection
FAM Financial Accounting Manual for Federal Reserve Banks
FASB Financial Accounting Standards Board
Fannie Mae Federal National Mortgage Association
Freddie Mac Federal Home Loan Mortgage Corporation
FOMC Federal Open Market Committee
FRBA Federal Reserve Bank of Atlanta
FRBNY Federal Reserve Bank of New York
GAAP Accounting Principles Generally Accepted in the United States of America
GSE Government-Sponsored Enterprise
IMF International Monetary Fund
MBS Mortgage-Backed Securities
OEB Office of Employee Benefits of the Federal Reserve System
OFR Office of Financial Research
SDR Special Drawing Rights
SERP Supplemental Retirement Plan for Select Officers of the Federal Reserve Banks
SOMA System Open Market Account
STRIP Separate Trading of Registered Interest and Principal of Securities
TAF Term Auction Facility
TBA To Be Announced
TDF Term Deposit Facility
TIPS Treasury Inflation-Protected Securities
TOP Term Securities Lending Facility Options Program
TSLF Term Securities Lending Facility

The Federal Reserve Bank of Richmond

2011 Annual Report

The Federal Reserve Bank of Richmond

The Federal Reserve Bank of Richmond 2011 Annual Report
was produced by the Research Department, Publications Division.
Managing Editor: Karl Rhodes
Design: MillerCox Design, Inc.
Photography: Larry Cain
Printing: Federal Reserve Bank of Richmond
Special thanks to Susan Maxey, Jessica Romero, Tim Sablik,
Jim Strader, and Sonya Ravindranath Waddell.
The Annual Report is also available on the Federal Reserve Bank of
Richmond’s Web site, www.richmondfed.org.
For additional print copies, please call the subscription request line at
(800) 322-0565 or email research.publications@rich.frb.org.

2011 Annual Report

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

Full text of Annual Report of the Federal Reserve Bank of Richmond : 2011 Annual Report : Unsustainable Fiscal Policy: Implications for Monetary Policy

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