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T H E 8 9 F E D E R A L P OW E R 10 R E S E R V E TO PA R T I C I PAT E 11 B A N K O F C H I C A G O 12 — 2000 A N N U A L 13 R E POR T 14 The American dream rests on the foundation of full participation in sound , competitive financial markets. The Federal Reserve Bank of Chicago works to help ensure financial empowerment for citizens in the Seventh Federal Reserve District through its research , consumer education, and community programs. CONTE N TS P R E S I D E N T’ S M E S S A G E F O S T E R I N G F U L L PA R T I C I PAT I O N 2000 H I G H L I G H T S COMMUNITY SERV ICE DIRECTORS OFFICERS 01 04 16 18 20 A D V I S O RY C O U N C I L S EXECUTIVE CHANGES O P E R AT I O N S V O L U M E S F I N A N C I A L S TAT E M E N T S N O T E S T O F I N A N C I A L S TAT E M E N T S 22 24 26 27 30 33 P R E S I D E N T’S M E S SAGE Ask most people what the Federal Reserve does and they mention setting interest rates. The Fed’s monetary policy activities are well known these days, which is appropriate because they are so important. Yet the Fed plays a key role in other areas that have a powerful impact on individuals’ lives. One of these lesser-known but important roles for the Chicago Fed is the subject of this annual report: fostering “financial empowerment.” The Chicago Fed’s 2100 employees — including economists, customer service representatives, bank examiners, and operations staff— work in a variety of ways to help provide an environment in which financial empowerment can flourish. What does financial empowerment mean? I would define it as ensuring that all individuals have an opportunity to participate fully in sound, competitive financial markets. There are two aspects to financial empowerment: assuring adequate information for all parties, and providing an infrastructure that supports good-faith transactions and mutual trust. Information and trust form the foundation of our free-market economy. Information is the fuel that powers competition. Buyers and sellers need adequate information to make rational economic decisions. Trust is also a necessity for an economic system based on mutually beneficial exchange. “Without mutual trust, and market participants abiding by a rule of law, no economy can prosper,” Fed Chairman Alan Greenspan once stated. “Our system works fundamentally on individual fair dealing.” Providing information and education and promoting trustworthy transactions help to ensure that all individuals have an opportunity to be full market participants. The Fed provides the foundation for financial empowerment through its monetary policy, supervision and regulation, and financial services activities. As a policymaker, the Federal Reserve promotes a healthy growing economy with price stability. As a provider of financial services, the Fed helps ensure the safety and efficiency of the payments system. And as a supervisor and regulator, the Fed fosters a sound banking system. The Federal Reserve’s responsibilities in this area include ensuring the fair and equitable treatment of consumers in their financial transactions, ruling on applications from banks seeking to merge or buy another bank, and working with banks and community groups to encourage local economic development. The Chicago Fed also contributes in a more direct way to financial empowerment through its research efforts, outreach initiatives, and community programs. You’ll see in these pages how Chicago Fed research on banking and finance supports effective, informed decision-making by policymakers, business leaders and community groups. In particular, the report highlights a collaborative research effort by the Chicago Fed and the University of Chicago, which focuses on the use of mainstream financial markets in ethnic neighborhoods. The report also describes the Bank’s various outreach efforts, including Project Money$mart, a major new initiative designed to increase financial literacy. Forming partnerships is another strategy for achieving financial empowerment. One example is the Bank’s partnership with the U.S. Treasury to address the challenges faced by those who do not have a bank account. The Chicago Fed has + 01 F R O M L E F T : F I R ST V I C E P R E S I D E N T W I L L I A M C O N R A D , CHAIRMAN ARTHUR MARTINEZ, P R E S I D E N T A N D C H I E F E X E C U T I V E O F F I C E R M I C H A E L M O S K O W, AND DEPUTY CHAIRMAN ROBERT DARNALL. F R BC 2000 A N N U A L R E P O RT also been a leader in developing innovative par tnerships in both urban and rural areas to encourage community and economic development. As part of this effort, the Bank has served as a catalyst in bringing together a broad range of key players involved in the lending process. Through these initiatives, the Bank has helped to eliminate barriers affecting the ability of creditworthy customers to obtain small business and mortgage loans. Why is financial empowerment so important? Access to credit and financial services is essential to business owners, prospective entrepreneurs, and families because it provides them with the ability to build their dreams as full and active participants in the economy. The benefits are not limited to individuals. Financial empowerment also promotes economic vitality in neighborhoods, a key factor in community development. Of course, fostering full and active participation does not mean inappropriately influencing an individual’s financial decisions. Nor does financial empowerment mean that depository institutions should make unsound loans or not make a profit in providing services. Yet there are many consumers who could make better financial decisions if they were better informed. And there are many underserved markets that offer business opportunities for lenders. Ensuring that all individuals have an opportunity to be full participants in sound, competitive financial markets provides important benefits for consumers, businesses, and for the economy as a whole. The Chicago Fed had another successful year in 2000, as indicated by the listing of key accomplishments on pages 16 –17. The Bank’s success reflects the hard work and commitment of our staff and the leadership and counsel of our directors in Chicago and Detroit. I would like to thank our staff and our directors for their dedication. I would like to extend my special appreciation to Lester McKeever and Verne Istock, who have completed their service as directors on the Chicago board. The Chicago Fed has benefited tremendously from the support and leadership of Verne as well as Lester, who provided especially noteworthy service as the Bank’s chairman for three years. Finally, I would like to welcome William Osborn and W. James Farrell to the Chicago board. Each brings important knowledge and experience to our board deliberations. While 2000 was a year of achievement for the Bank, it was marked by a very sad event for the Chicago Fed family—the tragic death of Nancy M. Goodman. Nancy was senior vice president in charge of Community and Corporate Affairs and a member of the Management Committee when she passed away on May 31st. She was a valued colleague and trusted adviser to me and many others at the Chicago Fed. Nancy will be greatly missed, but she leaves a legacy as an outstanding communicator and exceptional leader. Thanks to the efforts of dedicated staff such as Nancy, the Chicago Fed is wellpositioned to meet the challenges of 2001. We will continue to be guided by our vision, which reaffirms our mission to serve the public interest, and commits us to set the standard of excellence in the Federal Reserve System and provide services of unmatched value to our customers and stakeholders. M I C H A E L H. M O S K O W PRESIDENT AND CHIEF EXECUTIVE OFFICER M A R C H 2 0 , 20 01 02 + 03 C H I C AG O F E D F R BC 2000 A N N U A L R E P O RT R E S E A R C H S H E D S L IG H T ON C O M P L E X F I N A N C I A L I S S U E S 3 The Chicago Fed encourages financial empowerment by conducting high-quality research and analyses on a wide variety of banking and finance issues. AR2000 3A 4 AR2000 4A 5 Full participation in sound, competitive markets is furthered when policymakers, lenders, community groups, and others better understand the complex issues related to access to credit and financial services. The Chicago Fed supports this need with scholarly research and analyses on a wide variety of banking and financial topics. The Bank has examined such topics as how the Community Reinvestment Act (CRA) influences lenders and the impact of bank mergers on competitiveness in geographic markets. Given its CRA responsibilities, the Federal Reserve has a particular interest in community and economic development. To this end, the Federal Reserve provides financial institutions, community organizations and others with information on the Community Reinvestment Act, community development, and issues related to credit access. On behalf of the Federal Reserve System, the Chicago Fed developed an innovative web resource, the Consumer and Economic Development Research and Information Center or CEDRIC (Chicagofed.org/Cedric). This web site provides a single source for finding research on consumer and economic development issues produced by the Federal Reserve and others. Lake Michigan C H I CA G O Downtown/Loop Little Village Chatham Among the Bank’s efforts is research on the use of mainstream financial markets among specific racial or ethnic groups. Researchers from the Chicago Fed in cooperation with researchers from the Center for Urban Inequality at the University of Chicago conducted surveys in two Chicago neighborhoods: Little Village, a predominantly Hispanic community, and Chatham, a predominantly Black community. This research focused on ethnic/racial differences in the use of financial services by households and access to credit for small-business owners, providing important insights not often captured in nationwide studies. AR2000 5A R E S E A R C H B Y T H E C H I C A G O F E D A N D T H E U N I V E R S I T Y O F C H I C A G O P R O V I D E D I M P O R TA N T I N S I G H T S O N H O W H O U S E H O L D S A N D S M A L L B U S I N E S S E S I N E T H N I C N E I G H B O R H O O D S O B TA I N C R E D I T A N D U S E F I N A N C I A L S E R V I C E S . 04 + 05 3.5 % Other 7.4 % Formal 7.2 % Informal 19.0 % 12.1 % 14.9 % 56.7 % 57.6 % 44.8 % 69.6 % All Personal 66.0 % Hispanic Black PERCENT OF BUSINESS OWNERS OFFERED CREDIT BY Black S U P P L I E R S I N C H AT H A M A N D L I T T L E V I L L A G E Hispanic S O U R C E O F F U N D S ( AV E R A G E P R O P O RT I O N ) U S E D F O R B U S I N E S S S TA R T - U P S I N C H AT H A M A N D L I T T L E V I L L A G E Numbers may not total 100 due to rounding. Credit Availability for Small Businesses One issue the researchers studied is whether ethnic differences affected availability of credit for small business owners or entrepreneurs in these two Chicago neighborhoods. They looked at ethnic differences in the use of formal financing from financial institutions as well as informal financing, such as loans or gifts from family, friends, or business associates. The results showed that for the two neighborhoods combined, only about 11 percent of the funds needed to start a firm were from formal sources. Sixty-four percent of start-up funds came from personal savings and about 19 percent from informal sources. The study also compared levels of startup funding across ethnic /racial groups. After adjusting for industry type and demographic and human capital characteristics, the researchers found statistically significant differences in start-up funding among Hispanic and Black owners of comparable small F R BC 2000 A N N U A L R E P O RT businesses. In particular, they found that Black owners start their businesses with only about half of the start-up funds used by comparable Hispanic business owners. The gap in start-up funding between Black and Hispanic owners does not appear to stem from differences in personal savings. The research indicates that the gap is due partly to Hispanic owners’ heavier use of financing from non-personal sources such as informal gifts or loans from family, friends, or business associates. Regarding on-going credit needs, the research finds that Hispanic owners working with a Hispanic supplier or a nearby supplier results in more credit being obtained by Hispanic-owned firms. No comparable relationships are observed for the Black owned firms. The research highlights the importance of personal savings and of informal financing sources in meeting the need for start-up funding for ethnic neighborhoods. The research findings suggest that it may be worth exploring innovative approaches to meeting credit and capital needs that combine the flexibility and informational advantages of informal financing networks with the formal sector’s ability to mobilize financial capital. Community development financial institutions and micro-lending pools are examples of ways of combining the strengths of formal and informal sources of capital. 82% 58% 35% 50% 7% 3% 26% 78% Other Other White White Black Black Hispanic Hispanic P E R C E N T O F P O P U L AT I O N W I T H O U T A B A N K A C C O U N T P E R C E N T O F P O P U L AT I O N W I T H A S A V I N G S A C C O U N T Chicago Six-County Metropolitan Area Chicago Six-County Metropolitan Area Financial Services Use and Homeownership Using data from the neighborhood surveys and from a survey of Chicago’s six-county metropolitan area, the researchers examined the use of financial services and homeownership decisions made by minority consumers. Consistent with figures reported for the nation, the researchers found that roughly 10 percent of households in the Chicago metro area do not have a banking account. These households were significantly more likely to be younger, to have lower income, and to be less educated. In addition, households without a banking account were more likely to consist of members of a minority group and to reside in a low-income neighborhood. The most common reasons cited for not having or for closing a checking account were high minimum balance or fees, not writing enough checks, or not having enough money to open an account. Households without banking accounts, especially those residing in low-to-moderate-income neighborhoods, tended to meet their financial services needs by using check-cashing establishments such as currency exchanges. The research indicates that educating consumers about the benefits of using mainstream financial-services providers will help those without a banking account take advantage of cost savings and build a long-term relationship with a formal financial institution. In addition, greater access to credit opportunities is likely to result from this important relationship-building process. The characteristics that significantly influence the homeownership decision in Chatham and Little Village were household income, education and, in the case of immigrants in Little Village, years since migration to the U.S. In addition, homeowners tended to have an existing banking relationship more so than non-homeowners. The research suggests that asset-building initiatives, flexible home-loan programs, and affordable housing programs may help increase the level of homeownership. Community development lending initiatives, as prescribed by the CRA, also can meet the needs of lower-income and minority households seeking to purchase a home. Given the fundamental importance of having an established banking relationship prior to homeownership, education efforts about the home financing process and the benefits of having a banking account may also foster homeownership. These types of programs and initiatives should enhance a household’s ability to make informed financial decisions as well as foster community economic development and neighborhood stability. 06 + 07 H E L P I N G C O N S U M E R S 8 M A KE AR2000 8A F R BC 2000 A N N U A L R E P O RT G O OD 9 C R E D I T C H O I C E S AR2000 9A 10 AR2000 10A The Chicago Fed is at the forefront of helping consumers become financially empowered through informed decisions. An important part of financial empowerment is having the knowledge to make good financial choices. The Chicago Fed works actively to provide consumers key skills that allow them to manage their money more effectively and ultimately achieve their financial goals. A key initiative in this area is Project Money$mart, a comprehensive financial literacy campaign the Chicago Fed kicked off in 2000. The Money$mart campaign is a multifaceted effort. During 2000 the Money$mart program developed a brochure, a web site at Chicagofed.org, and a speakers bureau to provide important consumer information 11 AR2000 11A to those “underserved” in the marketplace. The Chicago Fed is also partnering with other groups, including co-sponsoring a conference with the Women’s Self-Employment Project, to provide financial information to low- and moderate-income women. Efforts in 2001 will include a newspaper-in-education partnership with the Chicago Sun-Times promoting financial literacy in the classroom. The Chicago Fed’s outreach also includes extensive, ongoing programs to educate teachers and consumers about economics and banking, including financial literacy. In 2000, the Bank increased its education to 12 consumers on abusive lending practices, commonly referred to as “predatory lending,” an effort that will continue in 2001. Additional topics in 2001 include financial privacy and identity theft. In a variety of different areas, in a variety of different ways, the Chicago Fed helps ensure consumers have the information they need to make good choices and be financially empowered. AR2000 13 12A AR2000 13A A P R E S E N TAT I O N B Y C H I C A G O F E D S P E A K E R J E F F S I E G E L AT T H E N O R T H W E S T S E N I O R C E N T E R I N C H I C A G O M O T I V AT E D F L O R E N C E T U N T O E S TA B L I S H A T R U S T . B E F O R E S E T T I N G U P T H E T R U S T , S H E C O N F E R R E D W I T H H E R B A N K E R , S T E FA N I E S C A R P, AT M A N U FA C T U R E R S B A N K I N C H I C A G O . 08 + 09 C H I C AGO F E D 16 AR2000 16A F R BC 2000 A N N U A L R E P O RT S P E A R H E A D S 17 PA R T N E R S H I P S AR2000 17A 18 AR2000 18A format, but focuses on access to capital and credit for small business owners. SECAP has a particular focus on under-served segments in the marketplace, primarily female- and minority-owned businesses. Among other important issues, SECAP is addressing the quality of technical assistance (TA) provided in metro Chicago. TA groups assist business owners in preparing business plans and in addressing marketing, financial, and management needs. By establishing a set of quality standards for TA providers and a related training program, SECAP hopes to foster higher quality assistance and more effective relationships between lenders and TA providers. Other key SECAP recommendations include establishing a targeted venture capital fund for smaller, women- and minority-owned businesses, and a web-based information clearinghouse for entrepreneurs with information on financing sources, seminars, technical assistance providers, and other resources. The Bank has served as a catalyst in launching innovative partnerships aimed at promoting access to credit, capital, and housing. A key responsibility for the Federal Reserve is serving as an intermediary in encouraging communication and collaboration between depository institutions, community groups, government agencies, trade associations, and other key stakeholders. Ultimately, the goal is to enhance policies and practices that affect access to credit, capital, and housing. In recent years, the Chicago Fed has worked to accomplish this goal by initiating a series of innovative and voluntary programs that bring together a wide range of players. The first of these programs was the Mortgage Credit Access Partnership (MCAP ), which involved more than 100 organizations. MCAP’s mission was to address policies and practices related to the home purchase and 19 financing process in the Chicago area, with a focus on low- and moderate-income and/or minority communities. Among the implemented recommendations developed through MCAP was an amendment to the Illinois Appraiser Licensure Act requiring fair housing and fair lending training for licensees. MCAP efforts also led to the creation of a Foreclosure Intervention Program (FIP). To date, FIP has helped over 400 families in the Chicago area avoid foreclosure and remain in their homes. A similar program modeled on MCAP, called the Housing Opportunity Partnership for Southeast Wisconsin (HOPS), was initiated in Milwaukee in 2000. The Small Enterprise Capital Access Partnership (SECAP) is similar to MCAP in AR2000 20 20A AR2000 20A A M O N G T H E I N N O VAT I V E PA R T N E R S H I P S I N I T I AT E D B Y T H E C H I C A G O F E D I S T H E S M A L L E N T E R P R I S E C A P I TA L A C C E S S PA R T N E R S H I P ( S E C A P ). S E C A P TA S K F O R C E L E A D E R S T O M U L L M A N N, G E R R I N O R I N G T O N , A N D R O S S C A R L S O N D I S C U S S H O W T O I M P L E M E N T A S E C A P R E C O M M E N D AT I O N T O E N H A N C E T H E T E C H N I C A L A S S I S TA N C E P R O V I D E D T O S M A L L B U S I N E S S O W N E R S . 10 + 11 R E AC H I N G OU T T O R U R A L C I T I Z E N S The Chicago Fed has responded to economic development issues in America’s heartland by helping to develop workable strategies through conferences and other outreach. Financial empowerment is sometimes considered an urban issue, but rural citizens share the concerns of all Americans about their economic future. Rural areas in the Midwest face a continuing population shift to the cities, affecting the level of job creation in small communities. This shift also raises questions about the future of family farming as a sustainable occupation. Ultimately the questions center on quality of life, which impacts how rural areas can compete to attract and retain educated workers and larger-scale employers. The structural changes taking place in the farm sector are inevitable, but there are ways to ease the transition. The Chicago 23 AR2000 23A 24 AR2000 24A Fed has responded to these concerns through a series of conferences, workshops, and other forums on housing and economic development issues in our nation’s heartland. The Bank’s goal is to explore these complex issues, foster partnerships, and develop workable strategies. The conferences, workshops, and forums featured a wide range of speakers, including national and local legislators, state governors, and experts in various fields such as population statistics, commodity prices, recreational development, and attracting high-tech firms with infrastructure improvements. In addition to these events, individual meetings were 25 held with community leaders, bankers, and others to share information and strategies on lending programs and initiatives. The Chicago Fed’s philosophy is to act as a catalyst in bringing people together to focus on a problem with the goal of developing effective strategies for change. Rural development will continue to play an important role in the Fed’s community development initiatives. AR2000 26 25A AR2000 26A T H E I N C R E A S I N G E N C R O A C H M E N T O F S U B U R B I A I N T O R U R A L A R E A S S Y M B O L I Z E S T H E S T R U C T U R A L C H A N G E S TA K I N G P L A C E I N R U R A L E C O N O M I E S . T H E C H I C A G O F E D S P O N S O R S A V A R I E T Y O F P R O G R A M S F O C U S I N G O N H O U S I N G A N D E C O N O M I C D E V E L O P M E N T I S S U E S I N O U R N AT I O N ’ S H E A R T L A N D . 12 + 13 F I N A N C I A L 30 E M P O W E R M E N T S TA R T S AR2000 30A F R BC 2000 A N N U A L R E P O RT 31 W I T H A B A N K A C C OU N T AR2000 31A Through an innovative partnership with the U. S. Treasury, the Chicago Fed is working to raise awareness of and promote research on consumers without a banking account. For most of us, the first step to financial empowerment is opening a bank account. From there a world of financial services opens up, including access to credit. Yet an estimated 10 percent of the American population does not have a checking or savings account. A Chicago Fed / U.S. Treasury initiative is addressing the issues posed by having a large number of individuals without a banking account. For example, the U.S. government pays more to make federal benefit payments by check than by electronic payment. In addition, those without a banking account, often low- or moderate-income individuals, face an unnecessary financial burden. Most 32 AR2000 32A 33 of those without a bank account turn to check cashing operations to pay bills — where fees are higher than what banks charge. These fees can be significant, especially for those on a limited income. The Treasury estimates that the average lifetime cost of all such charges for low-income individuals is $15,000. The non-monetary costs of not having a bank account also contribute to the challenges faced by low- and moderate-income individuals. Not only are they less able to access credit, they have more difficulty gaining the financial skills that come from working with a bank, including using credit. The Chicago Fed is working with the U.S. Treasury to promote research on and AR2000 understanding of this issue. A key initiative in 2000 was developing a web site at Chicagofed.org to foster the sharing of information on resources, pilot programs, and research. The web site includes an annotated and searchable bibliography that is being expanded to include abstracts describing each entry and available Internet links to the document. The site uses non-technical language to ensure that these documents are useful for a broad audience, including bankers. In the future, the web site will be used to promote additional Fed outreach such as conferences and other initiatives. 34 33A H A V I N G A N E S TA B L I S H E D R E L AT I O N S H I P W I T H A D E P O S I T O R Y I N S T I T U T I O N C A N H E L P A V O I D P R O B L E M S I N M A K I N G M A J O R C R E D I T D E C I S I O N S S U C H A S R E F I N A N C I N G A H O U S E . T H E L O P E Z FA M I LY E N J O Y S T H E I R H O M E A F T E R W O R K I N G W I T H N E I G H B O R H O O D H O U S I N G S E R V I C E S ( N H S ) T O R E S O LV E I R R E G U L A R I T I E S T H E Y E N C O U N T E R E D W H E N T H E Y R E F I N A N C E D . AR2000 34A 14 + 15 CHICAGO 1ST FED HIGHLIGHTS OF 2000 2ND QUARTER The Chicago Fed, along with other Reserve Banks, launched the Check Modernization initiative in response to changes in the industry and requests from customers for more uniform services. The Bank hosted a System conference that focused on Federal Reserve discount window lending to depository institutions. Supervision and Regulation launched a successful year in which approximately 900 inspections, examinations and risk assessments were conducted. The System’s Business Development Office (BDO), located at the Chicago Fed, played a key role in determining how to respond to the findings of a National Customer Service Satisfaction Survey. The Bank commented on proposed revisions to the international framework for bank capital, one of a series of responses to requests for comment on complex policy issues during 2000. The Chicago Fed brought together auto executives, economists and labor leaders for an Auto Outlook Symposium, one of two such conferences held during the year. F R BC 2000 A N N U A L R E P O RT Measurement, Management & Macroeconomic Implications ∆ Γ Θ ∆ = Ν(d1) The redesigned $5 and $10 bills, containing enhanced security features, were distributed to financial institutions. Generally regarded as the leading conference of its kind, the 36th annual Conference on Bank Structure and Competition focused on the changing financial industry and regulation. QUARTER The Research Department sponsored a September conference entitled “Risk Management in the Global Economy: Measurement, Management and Macroeconomic Implications” with the Journal of Banking and Finance. Risk Management in the Global Economy: TAAPSLink, the Internet tender submission application, was rolled out to approximately 980 Treasury auction submitters. Economic Advisor Robert Bliss examined the pitfalls in inferring risk from financial market data, one of 31 working papers published by Economic Research during the year. 4TH The BDO launched the Business Development University, a comprehensive collection of training modules for all business development representatives throughout the System. QUARTER The Bank brought together 125 key leaders from the financial services industry to evaluate the prospects for migration to electronic payments during a two-day conference co-sponsored with the Illinois Institute of Technology and the University of Michigan. Check Operations successfully met all System quality measures designed to help ensure efficient operations and superior customer service. Economic Research had 12 papers published and 13 additional articles accepted for future publication in scholarly journals during 2000. The Bank reinforced its customer service goals during Customer Focus Week, which was centered around the theme, “ Taking Action for Our Customers/Stakeholders.” Economic Research staff analyzed 345 formal bank/bank holding company merger applications in 2000. The Bank unveiled its new and improved external web site. 3RD The Chicago Fed kicked off its financial literacy initiative, “Project Money$mart,” a program designed to help educate consumers about personal finance. Supervision and Regulation was chosen to serve as the System’s “competency center” on merchant banking in preparation for the Fed’s new responsibilities under the Gramm-LeachBliley Act. The Chicago Fed organized and hosted the first Alumni Leadership Conference for about 60 senior Fed leaders from around the System. The Bank processed more than 43 percent of its check volume through the Electronic Cash Letter deposit option in 2000. project The Chicago Fed worked with two other Reserve Banks and the Board of Governors to launch the IT Knowledge Web, which serves as a System repository for information on the supervision of Internet banking. The Detroit Branch successfully adopted the Enterprise-Wide Adjustments system as part of an effort to provide better, more uniform service to customers. The Seventh District Cash Department was rated the second most efficient currency processor in the System for 2000. The Bank launched a mentoring program as part of an effort to encourage employee development. The Customer Service Unit handled nearly 100,000 inquiries from financial institutions. Economic Research sponsored a December conference, “Designing an Effective Deposit Insurance Structure: An International Perspective,” with the Bank for International Settlements. Federal Reserve Bank of Chicago The Bank enhanced its infrastructure technology, which allowed for the development of the new UseDirectPayment.com web site and for increased function for the System Financial Services web site maintained by the Chicago Fed. QUARTER The Bank successfully conducted testing of FedLine® for the Web cash ordering with pilot banks. Senior Vice President and General Counsel William Gram explored some of the risks associated with commerce in virtual markets in a research paper, one of a series of articles on electronic payment systems written by Reserve Bank staff. The BDO redesigned the National Account Program to manage the System’s largest customer accounts more effectively across district lines. Employees celebrated the Bank’s first annual Diversity Week by highlighting their cultural richness. The Print Shop relocated to its new onsite location and transitioned from offset to electronic printing technology. Supervision and Regulation made significant progress in the execution of riskfocused supervision, including implementing a higher level of integration of safety and soundness, trust, and Information Technology exams; strengthening expertise on issues related to large, complex banking organizations; and focusing on risk in allocating examination resources. 16 + 17 COMMUNITY SERVICE 12 At the Chicago Fed, volunteerism means helping people, strengthening our communities, and creating partnerships with groups outside the Bank. During the year 2000, Bank employees in Chicago, Detroit, Des Moines, Indianapolis, Milwaukee, and Peoria continued their spirit of volunteerism by becoming involved in a number of community-related projects. Seventh District employees participated in a wide variety of volunteer projects by contributing both time and money to various charitable organizations in their communities. Listed to the right are just a few of the volunteer activities in which Chicago Fed staff took part during 2000. F R BC 2000 A N N U A L R E P O RT AR2000 13 AR2000 12A Participating in several fundraising walk-athons, which benefited the American Heart Association, the Greater Chicago Food Depository, the March of Dimes and Multiple Sclerosis. Contributing to hungerrelief efforts by sorting and packaging food for the needy at the Greater Chicago Food Depository and helping to collect food from major food conventions. 13A Fostering youth motivation by mentoring at-risk high school students and participating in Groundhog Shadow Day, where high school students observed employees at work. Serving food each month at Detroit’s Open Door Soup Kitchen for the homeless and underprivileged. S E V E N T H D I S T R I C T E M P L O Y E E S V O L U N T E E R T O A S S I S T M A N Y W O R T H Y O R G A N I Z AT I O N S . H E R E B A N K V O L U N T E E R S S P E N D T I M E AT T H E G R E AT E R C H I C A G O F O O D D E P O S I T O R Y S O R T I N G A N D PA C K A G I N G F O O D F O R T H E N E E D Y. 14 AR2000 15 AR2000 14A Helping to raise funds for the Raleigh Children’s Hospital and the MakeA-Wish Foundation in Indianapolis. 16 AR2000 15A Teaching the basics of economics to elementary and high school students through the Junior Achievement program. Collecting clothing for the Milwaukee-based Sojourner Truth House — a shelter for battered women and children. Taking a group of kids sponsored by Big Brothers Big Sisters of Central Iowa to an Iowa Cubs baseball game. 16A Collecting items for the Women’s Crisis Prevention Center in Peoria. Contributing clothing, food, money, and toys to various charities during the holiday season. 18 + 19 DI RECTORS 2 0 0 0 B O A R D O F D I R E C T O R S , F E D E R A L R E S E R V E B A N K O F C H I C A G O , F R O M L E F T T O R I G H T: V E R N E I S T O C K , L E S T E R M C K E E V E R , A L A N T U B B S , R O B E R T D A R N A L L , C O N N I E E VA N S , J A M E S K E Y E S , J A C K E VA N S , R O B E RT Y O H A N A N , A N D A RT H U R M A RT I N E Z . FEDERAL RESERVE BANK OF CHICAGO BOARD OF DIRECTORS Chairman Arthur C. Martinez Chairman Sears, Roebuck and Co. Hoffman Estates, Illinois Connie E. Evans President and Chief Executive Officer WSEP Ventures Chicago, Illinois James H. Keyes Chairman and Chief Executive Officer Johnson Controls, Inc. Milwaukee, Wisconsin Alan R. Tubbs President Maquoketa State Bank and Ohnward Bancshares Maquoketa, Iowa Deputy Chairman Robert J. Darnall Chairman and Chief Executive Officer Prime Advantage Chicago Chicago, Illinois Jack B. Evans President The Hall-Perrine Foundation Cedar Rapids, Iowa Lester H. McKeever, Jr. Managing Principal Washington, Pittman & McKeever, LLC Chicago, Illinois Robert R. Yohanan Managing Director and Chief Executive Officer First Bank & Trust Evanston, Illinois F R BC 2000 A N N U A L R E P O RT Verne G. Istock Retired President Bank One Corporation Chicago, Illinois Two new directors joined the board in 2001: W. James Farrell, chairman and chief executive officer, Illinois Tool Works, Inc., Glenview, Illinois, replaced Lester McKeever, whose term expired on December 31, 2000. William A. Osborn, chairman and chief executive officer, Northern Trust Corp. and Northern Trust Co., Chicago, Illinois, will complete Verne Istock’s unexpired term. 2 0 0 0 B O A R D O F D I R E C T O R S , D E T R O I T B R A N C H , F R O M L E F T T O R I G H T: R I C H A R D B E L L , S T E P H E N P O L K , T I M O T H Y L E U L I E T T E , D A V I D W A G N E R , E D S E L F O R D , I R M A E L D E R , A N D M A R K G A F F N E Y. DETROIT BOARD OF DIRECTORS Chairman Timothy D. Leuliette Senior Managing Director Heartland Industrial Partners Bloomfield Hills, MI Richard M. Bell President and Chief Executive Officer The First National Bank of Three Rivers Three Rivers, MI Irma B. Elder President Elder Ford Troy, Michigan Edsel B. Ford II Director Ford Motor Company Dearborn, Michigan Mark T. Gaffney President Michigan AFL-CIO Lansing, Michigan Stephen R. Polk Chairman and Chief Executive Officer R.L. Polk & Co. Southfield, Michigan David J. Wagner Chairman, President and Chief Executive Officer Old Kent Financial Corporation Grand Rapids, Michigan 20 + 21 OFFICERS F E D E R A L R E S E R V E B A N K O F C H I C A G O M A N A G E M E N T C O M M I T T E E , F R O M L E F T T O R I G H T: W I L L I A M C O N R A D , M I C H A E L M O S K O W , A N G E L A R O B I N S O N , J O H N W I X T E D , R I C H A R D A N S T E E , D E I R D R E G E H A N T, D A V I D A L L A R D I C E , A N D W I L L I A M B A R O U S K I . Michael H. Moskow President and Chief Executive Officer William C. Conrad First Vice President and Chief Operating Officer CENTRAL BANK ACTIVITIES* Economic Research and Programs William C. Hunter Senior Vice President and Director of Research Edward J. Green Senior Policy Advisor Jean L. Valerius Vice President and Senior Policy Advisor Regional Economic Programs William A. Testa Vice President and Economic Advisor Financial Markets Regulation and Payments Issues Douglas D. Evanoff Vice President and Economic Advisor Elijah Brewer III Assistant Vice President and Economic Advisor James T. Moser Research Officer and Economic Advisor Robert R. Bliss Senior Economist and Economic Advisor Robert DeYoung Senior Economist and Economic Advisor David A. Marshall Senior Economist and Economic Advisor Macroeconomic Policy Research Charles L. Evans Vice President and Economic Advisor Anne Marie L. Gonczy Assistant Vice President and Economic Advisor William A. Strauss Senior Economist and Economic Advisor Microeconomic Policy Research Daniel G. Sullivan Vice President and Economic Advisor Paula R. Worthington Research Officer and Economic Advisor Statistics Angela D. Robinson Vice President and Director of Research Statistics and Equal Employment Opportunity Officer Loretta C. Ardaugh Statistical Reports Officer Supervision and Regulation John J. Wixted, Jr. Senior Vice President Administration James A. Bluemle Vice President and Division Leader Kathleen E. Benson Director * Includes directors and senior economist and economic advisors as well as officers. Catherine M. Bourke Director Sheryn E. Bormann Director Bank and Bank Holding Company Supervision Richard C. Cahill Vice President and Division Leader Robert A. Bechaz Regional Director–Illinois Philip G. Jackson Director Jeffrey A. Jensen Regional Director–Iowa William H. Lossie Director, Supervisory Resource Group Joseph J. Turk Regional Director– Indiana and Michigan Karen Whalen-Ward Regional Director– Wisconsin Compliance/Community Reinvestment Act Douglas J. Kasl Vice President and Division Leader Richard D. Chelsvig Regional Director– Wisconsin Michael R. Jarrell Regional Director– Indiana and Michigan Martha L. Muhs Regional Director–Iowa Arthur J. Zaino Regional Director–Illinois Human Resource Development and Technology David E. Ritter Vice President and Division Leader Gregory J. Bartnicki Director Frederick L. Miller Director Global Supervision James W. Nelson Vice President and Division Leader SERVICES TO DEPOSITORY INSTITUTIONS A. Raymond Bacon Director Business Development Richard P. Anstee Senior Vice President Adrian B. D’Silva Director Mark H. Kawa Supervisory Director Business Development Office Jeffrey S. Anderson Vice President Catharine M. Lemieux Director Valerie J. Van Meter Vice President Ralph A. Livesay Supervisory Director Strategic Marketing and Customer Service Kathleen H. Williams Vice President Michael E. Plaskett Supervisory Director Rosemarie V. Gould Administrative Officer F E D E R A L R E S E R V E B A N K O F C H I C A G O M A N A G E M E N T C O M M I T T E E C O N T I N U E D , F R O M L E F T T O R I G H T: C H A R L E S F U R B E E , W I L L I A M H U N T E R , E D W A R D G R E E N , J E R O M E J O H N , W I L L I A M G R A M , N AT E W U E R F F E L , C Y N T H I A C A S T I L L O , T H O M A S C I E S I E L S K I , C A R L V A N D E R W I LT , G L E N N H A N S E N , A N D B A R B A R A B E N S O N . Financial Services Charles W. Furbee Senior Vice President Milwaukee Office Michael J. Hoppe Assistant Vice President Check, Electronic and Fiscal Services Thomas G. Ciesielski Vice President Leatrice S. Mack Marketing Officer Yvonne H. Montgomery Vice President Mary H. Sherburne Vice President Annette L. Jelley Assistant Vice President Cynthia L. Rasche Assistant Vice President James M. Rudny Assistant Vice President Eve M. Boboch Operations Officer Regional Offices Des Moines Office L. Edward Ketchmark Assistant Vice President Indianapolis Office Donna M. Yates Assistant Vice President Jeffrey R. Van Treese Operations Officer SUPPORT FUNCTIONS Michael Carano Assistant Vice President Community and Corporate Affairs William J. O’Connor Assistant Vice President Peoria Facility Tyler K. Smith Assistant Vice President Consumer and Community Affairs Alicia Williams Vice President Branch Operations and Cash Operations David R. Allardice Senior Vice President and Branch Manager Corporate Communications James R. Holland Corporate Communications Officer and Assistant Vice President Cash Operations Jerome D. Nicolas Vice President Guadalupe Garcia Assistant Vice President Detroit Branch Brian D. Egan Vice President Valerie J. Van Meter Vice President Patrick A. Garrean Assistant Vice President Linda S. McDonald Assistant Vice President Donna M. Dziak Operations Officer Robert W. Lapinski Corporate Communications Officer and Assistant Vice President Corporate and Support Services Jerome F. John Senior Vice President Facilities Management, General Services and Protection Kristi L. Zimmermann Vice President Human Resource Services Barbara D. Benson Vice President Margaret K. Koenigs Assistant Vice President Richard F. Opalinski Assistant Vice President Deidre A. Gehant Personnel Officer Information Technology Services William A. Barouski Senior Vice President Business Technology Frank S. McKenna Vice President Jeffery B. Marcus Assistant Vice President Ira R. Zilist Assistant Vice President Human Capital Brenda D. Ladipo Assistant Vice President Information Security Lysette R. Bailey Assistant Vice President Network Services R. Steve Crain Assistant Vice President Business Resumption, Asset Management, Budget and Facilities Anthony J. Tempelman Assistant Vice President Legal Department William H. Gram Senior Vice President and General Counsel Elizabeth A. Knospe Vice President and Associate General Counsel Yurii Skorin Vice President and Associate General Counsel Anna M. Voytovich Assistant Vice President and Assistant General Counsel Financial Management Services, Accounting, Loans, Payment System Risk and Reserves and Financial Markets Carl E. Vander Wilt Senior Vice President and Chief Financial Officer Loans, Accounting, Payment System Risk and Reserves Gerard J. Nick Vice President Robert A. Lyon Advisor Financial and Management Services Ellen J. Bromagen Assistant Vice President Office of the General Auditor Glenn C. Hansen General Auditor Robert M. Casey Assistant General Auditor Joseph B. Green Assistant Vice President As of December 31, 2000 22 + 23 ADVISORY COUNCILS Federal Advisory Council Seventh District Representative Norman R. Bobins President and Chief Executive Officer LaSalle Bank, NA Chicago, Illinois Advisory Council on Agriculture, Labor, and Small Business Sandra Batie East Lansing, Michigan Michigan State University Michael Charles Fusilier Manchester, Michigan Fusilier Family Farm & Greenhouse Connie Greig Estherville, Iowa Little Acorn Ranch Ron Heck Perry, Iowa Checkers, Inc. Mark Legan Coatesville, Indiana Legan Livestock and Grain Jerome Rowe Dalton City, Illinois Farmers Cooperative Grain Co. Gary Steiner Mondovi, Wisconsin Wisconsin Farm Bureau Leland Strom Elgin, Illinois Strom Farm Terry Tucker Milford, Indiana Maple Leaf Farms, Inc. Leigh Tuckey Lancaster, Wisconsin LeighBert Farms F R BC 2000 A N N U A L R E P O RT J. Edward Yanos Cambridge City, Indiana Yanos Farms Member-at-Large Robert Crawford, Jr. Arlington Heights, Illinois Brook Furniture Rental, Inc. Margaret Blackshere Chicago, Illinois Illinois State Federation of Labor & Congress of Industrial Organization Thomas Crosby Crestwood, Illinois American National/ The Insurance Exchange J. Michael Borden Janesville, Wisconsin Hufcor Inc. Carl Camden Troy, Michigan Kelly Services, Inc. Member-at-Large John Challenger Chicago, Illinois Challenger, Gray & Christmas, Inc. Member-at-Large Sheila Cochran Milwaukee, Wisconsin Milwaukee County Labor Council, AFL-CIO Carl Gallman Westchester, Illinois International Association of Machinists & Aerospace Workers Ralph Deger Butler, Wisconsin Bushman Equipment, Inc. David Fisher Des Moines, Iowa Onthank Company George Franco Milwaukee, Wisconsin National Financial Corporation (NFC) Yolanda GomezStupka Southfield, Michigan Michigan Hispanic Chamber of Commerce Jan Hayhow Okemos, Michigan Michigania, Inc. Christopher LaMothe Indianapolis, Indiana Indiana Chamber of Commerce Thomas Hargrove East Chicago, Indiana United Steelworkers of America Ritch LeGrand Sioux City, Iowa LeGrand & Company Member-at-Large Matthew Harper Des Moines, Iowa Pioneer Hi-Bred International, Inc. Member-at-Large Karen Lennon Chicago, Illinois SomerCor 504, Inc. Paul Korman Des Plaines, Illinois United Auto Workers David Newby Milwaukee, Wisconsin Wisconsin State AFL-CIO Jeffrey Padden Lansing, Michigan Public Policy Associates, Inc. Community Bank Council Illinois Douglas C. Mills First Busey Corporation Urbana, Illinois John Rodda Capstone Bank Watseka, Illinois Indiana Calvin Bellamy Bank Calumet Hammond, Indiana John W. Corey Lafayette Savings Bank, FSB, Lafayette, Indiana Cathy E. McHenry Fairmount State Bank Fairmount, Indiana James L. Saner, Sr. Peoples Trust Company Brookville, Indiana Iowa J. Michael Earley Bankers Trust Company Des Moines, Iowa Dwight Seegmiller Hills Bank & Trust Company Hills, Iowa Paul Swenson Iowa Trust & Savings Bank Oskaloosa, Iowa Richard A. Waller Security National Bank Sioux City, Iowa Michigan Robert E. Churchill Citizens National Bank of Cheboygan Cheboygan, Michigan Charles B. Cook Marshall Savings Bank, FSB Marshall, Michigan Diane McCluskey Independent Bankers’ Bank of Illinois Springfield, Illinois Ron Hunt American Chartered Bank Schaumburg, Illinois William C. Nill First State Bank of East Detroit St. Clair Shores, Michigan John McEvoy Metro Bank East Moline, Illinois Mary Kosar NLSB New Lenox, Illinois Mike McKenzie First Capital Bank Peoria, Illinois Richard Marra Metro Federal Credit Union Arlington Heights, Illinois Wisconsin Richard A. Hansen Johnson International, Inc.—Johnson Bank Racine, Wisconsin Randall Ross First Mid-Illinois Bank & Trust, N.A. Mattoon, Illinois Bradley O. Yocum State Bank of Howards Grove Howards Grove, Wisconsin Jerald Sarnes The Havana National Bank Havana, Illinois Customer Advisory Groups Donald Schlorff Busey Bank Urbana, Illinois Central Illinois Sally Boers Southside Trust & Savings Bank Peoria, Illinois Craig Becker Southeast National Bank of Moline Moline, Illinois Chicago Metropolitan John Collins Great Lakes Credit Union Great Lakes, Illinois John Dabrowski Devon Bank Chicago, Illinois Mitch Bormeman Heritage Bank of Central Illinois Trivoli, Illinois Thomas Darovic Superior Bank, FSB Oak Brook Terrace, Illinois Pete Jain Citizens Equity Federal Credit Union Peoria, Illinois Edward Furticella Peoples Bank SB Munster, Indiana Michael King Peoples Bank of Macon, Macon, Illinois Wilbur R. Lancaster Union Planters Bank Decatur, Illinois Linda Little BankIllinois Champaign, Illinois Larry Gardner 1st Source Bank South Bend, Indiana Keith Gottschalk Old Kent Bank Aurora, Illinois Savannah Hannah Bank Financial Chicago Ridge, Illinois Brian D. Payne National City Bank Springfield, Illinois Charles Sanger Bank Calumet Hammond, Indiana Deborah Schneider First Midwest Bank, N.A. Joliet, Illinois Larry Stewart AMCORE Financial, Inc. Rockford, Illinois Barbara Yeates Cole Taylor Bank Chicago, Illinois Indiana H. Matthew Ayers State Bank of Lizton Lizton, Indiana Steven Bailey First Bank of Berne Berne, Indiana Lynn Bierlein Salin Bancshares, Inc. Indianapolis, Indiana Debbie L. Cox Irwin Union Bank & Trust Columbus, Indiana Steven D. Flowers Bank One Indianapolis, NA Indianapolis, Indiana Dee Ann Hammel First Federal Savings Bank Huntington, Indiana Victor Quinn Quad City Bank & Trust Bettendorf, Iowa Stan V. Hart Terre Haute First National Bank Terre Haute, Indiana Marti T. Rodamaker First Citizens National Bank Mason City, Iowa Rita Hyden Union Bank and Trust North Vernon, Indiana Robert A. Steen Bridge Community Bank Mechanicsville, Iowa Sherri Jones Phillips Electronic Credit Union Fort Wayne, Indiana Jim Miller Greenfield Banking Company Greenfield, Indiana Robert J. Ralston Lafayettte Bank & Trust Company Lafayette, Indiana Glen Raver Union Bank and Trust Greensburg, Indiana Iowa Daniel G. Augustine Security National Bank Sioux City, Iowa Linda Donner First American Bank Fort Dodge, Iowa Dale C. Froehlich Community State Bank Ankeny, Iowa Nelson Klavitter Dubuque Bank & Trust Dubuque, Iowa Bill Logan State Central Bank Keokuk, Iowa Steve Ollenberg Principal Bank Des Moines, Iowa Steve Tscherter Lincoln Savings Bank Reinbeck, Iowa Northern Michigan Dennis P. Angner Isabella Bank & Trust Mt. Pleasant, Michigan Nikki Cole State Savings Bank of Frankfort Frankfort, Michigan Jan Davison Commercial Bank Alma, Michigan Susan A. Eno Citizens National Bank of Cheboygan Cheboygan, Michigan Victoria Sager Central State Bank Beulah, Michigan Nancy Sorensen West Shore Bank Scottsville, Michigan Kenneth Sterling First Community Bank Harbor Springs, Michigan Janie Williamson Huron Community Bank East Tawas, Michigan Kathleen Vogt Community State Bank St. Charles, Michigan Western Michigan Don Baldwin Sturgis Bank & Trust Sturgis, Michigan Robert De Jonge Grand Bank Grand Rapids, Michigan Cindy Dwyer Hillsdale County National Bank Hillsdale, Michigan Marilyne Joy Charlevoix State Bank Charlevoix, Michigan Linda Grouleau Eaton Federal Savings Bank Charlotte, Michigan Bill Kirsten First National Bank of Gaylord Gaylord, Michigan Joan Heffelbower Hastings City Bank Hastings, Michigan Sandra Koenig First Federal Savings of Alpena Alpena, Michigan Sharla Leach Alden State Bank Alden, Michigan Sue Meredith Honor State Bank Honor, Michigan D. Scott Hines The First National Bank Three Rivers, Michigan Jaylen T. Johnson Southern Michigan Bank & Trust Coldwater, Michigan Linda Kaminski Kalamazoo County State Bank Schoolcraft, Michigan Linda Comps-Klinge State Bank of Caledonia Caledonia, Michigan Patricia Lunog Alliance Banking Company New Buffalo, Michigan Wendell Stoeffler Ionia County National Bank Ionia, Michigan Brad Slagh Byron Center State Bank Byron Center, Michigan Detroit Metropolitan Gordon Bade Capac State Bank Capac, Michigan Aleta Bame Metrobank Farmington Hills, Michigan Richard Bauer Fidelity Bank Birmingham, Michigan Daniel Brown Sterling Bank & Trust Southfield, Michigan Paul Fuller Republic Bank Ann Arbor, Michigan Joseph Hallman Citizens State Bank New Baltimore, Michigan Sue Harmon Onsted State Bank Onsted, Michigan Laird Kellie Lapeer County Bank & Trust Co. Lapeer, Michigan Stephen M. Mazurek Bank of Lenawee Adrian, Michigan Tom Hoekstra First Community FCU Parchment, Michigan Mark Slade Bank of Ann Arbor Ann Arbor, Michigan Jeff Jackson Michigan State University CU East Lansing, Michigan Vonda Zuhlke Tri-County Bank Brown City, Michigan Kendall Rieman Thumb National Bank & Trust Co. Pigeon, Michigan Michigan Credit Unions Steve Brewer Capital Area School Employees CU Lansing, Michigan Jackie Buchanan T&C FCU Pontiac, Michigan Cathy Burnham Credit Union One Ferndale, Michigan Debbie Burley Community Choice CU Redford, Michigan Jennifer Childs American One FCU Jackson, Michigan Linda Clark Kellogg FCU Battle Creek, Michigan Lynda Connell First Resource FCU St. Joseph, Michigan Vicki Hawkins Dort FCU Flint, Michigan Linda Hess Security FCU Flint, Michigan Judith Hillock Research FCU Warren, Michigan Lynne Kindy Team One CU Saginaw, Michigan Michele Myrick E& A CU Marysville, Michigan Mark Schuiling Dow Chemical Employees CU Midland, Michigan Werner Kant Educators Credit Union Racine, Wisconsin Steve Max Firstar Bank Milwaukee, Wisconsin James Mingey M&I Data Services Milwaukee, Wisconsin Ronald L. Slater Bankers Bank Madison, Wisconsin Thomas Smith Johnson Bank Kenosha, Wisconsin Bill Shermer Grand Rapids Teachers CU Grand Rapids, Michigan Leonard Steele Associated Data Services Green Bay, Wisconsin Lisa Tyrell T&C FFCU Pontiac, Michigan Mara Todorvic Bank One Data Services Milwaukee, Wisconsin Wisconsin Paul Adamski Pineries Bank Stevens Point, Wisconsin Terry Anderegg Mutual Savings Bank Milwaukee, Wisconsin Susan Banker St. Francis Bank Milwaukee, Wisconsin Denis Conerton Blackhawk State Bank Beloit, Wisconsin Robert W. Fouch Wisconsin Corporate Credit Union Muskego, Wisconsin Gail Groleau Anchor Bank FSB Madison, Wisconsin 24 + 25 EXECUTIVE CHANGES DIRECTORS At year-end 2000 the following appointments OFFICERS Members of the Federal Reserve Bank of Chicago’s and elections to terms beginning in 2001 The Bank’s board of directors acted on the following boards of directors are selected to represent a cross were announced: promotions during 2000: section of the Seventh District economy, including • Arthur C. Martinez re-designated Chairman consumers, industry, agriculture, the service sector, and Robert J. Darnall re-designated labor, and commercial banks of various sizes. Deputy Chairman. The Chicago board consists of nine members. Member banks elect three bankers and three nonbankers. The Board of Governors appoints three additional nonbankers and designates the Reserve Bank chair and deputy chair from among its three appointees. The Detroit Branch has a seven-member board of directors. The Board of Governors appoints three nonbankers and the Chicago Reserve Bank • W. James Farrell appointed to a three-year term. • William A. Osborn elected to complete a three-year term. • Jack B. Evans re-elected to a second three-year term. • Robert R. Yohanan re-elected to a second three-year term. • Timothy D. Leuliette re-appointed to a board appoints four additional directors. The second three-year term and re-designated Branch board selects its own chair each year, Branch Chairman. with the approval of the Chicago board. All Reserve Bank and Branch directors serve three-year terms, with a two-term maximum. • Jeffery S. Anderson to vice president, Business Development Office • Elizabeth A. Knospe to vice president and associate general counsel, Legal • Mary H. Sherburne to vice president, Check Services • Kristi L. Zimmermann to vice president, Corporate and Support Services • Michael J. Hoppe to assistant vice president, Milwaukee Office • Linda S. McDonald to assistant vice president, Detroit Branch • Ira R. Zilist to assistant vice president, Information Technology Services ADVISORY COUNCILS The Federal Advisory Council, which meets quarterly New officers appointed by the board in 2000 were: to discuss business and financial conditions with • Gordon Werkema to first vice president Chicago Reserve Bank and its Detroit Branch the Board of Governors in Washington, D.C., is • Edward J. Green to senior policy advisor, effective in 2000 were: comprised of one banker from each of the 12 Federal Director appointments and elections at the • Arthur C. Martinez designated Chairman. • Robert J. Darnall reappointed to a second three-year term and designated Deputy Chairman. • Verne G. Istock re-elected to a second three-year term. • Connie E. Evans elected to a three-year term. Reserve Districts. Each year the Chicago Reserve Bank’s board of directors selects a representative to this group. Norman R. Bobins served a third consecutive year as the District’s representative in 2000. Alan G. McNally, chairman and chief executive officer, Harris Bankcorp, Inc., was appointed to serve a one-year term beginning January 1, 2001. Members of the Community Bank Council • Timothy D. Leuliette designated Branch Chair. served the third year of their terms in 2000. Members • Irma B. Elder reappointed to a second of the Advisory Council on Agriculture, Labor and three-year term as Branch director. • Edsel B. Ford I I appointed to a three-year term as Branch director. • Mark T. Gaffney appointed to complete a three-year term as Branch director. Small Business, who are selected from nominations by Seventh District organizations, served the first year of their terms in 2000. The councils provide a Economic Research • Karen Kane to senior vice president, Community and Corporate Affairs • Michael Carano to assistant vice president, Corporate Services • Annette L. Jelley to assistant vice president, Check Services • Donna M. Dziak to operations officer, Detroit Branch • Leatrice S. Mack to marketing officer, Milwaukee Office • Jeffrey R. Van Treese to operations officer, Indianapolis Office vital communication link between the Bank and these important sectors. Wayne R. Baxter, vice president of Facilities Management and Protection, retired after 37 years of service. F R BC 2000 A N N U A L R E P O RT OPERATIONS VOLUMES DOLLAR 2000 AMOUNT 1999 NUMBER 2000 OF ITEMS 1999 C H E C K & E L E C T R O N I C PAY M E N T S Checks, NOWs, & Share Drafts Processed 1.7 Trillion 1.6 Trillion 2.3 Billion 2.2 Billion Fine Sort & Packaged Checks Handled 21.1 Billion 26.6 Billion 40.0 Million 49.1 Million U.S. Government Checks Processed 37.5 Billion 39.5 Billion 35.9 Million 36.1 Million 2.5 Trillion 2.5 Trillion 869.8 Million 824.8 Million 57.0 Trillion 53.8 Trillion 20.7 Million 20.4 Million 51.0 Billion 41.9 Billion 3.1 Billion 3.0 Billion Automated Clearing House (ACH) Items Processed Transfer of Funds C A S H O P E R AT I O N S Currency Received and Counted Unfit Currency Destroyed 9.5 Billion 5.4 Billion 731.3 Million 587.8 Million Coin Bags Received and Processed 1.3 Billion 1.0 Billion 3.5 Million 3.6 Million Definitive Securities 124.5 Billion 143.8 Billion 6.4 Thousand 8.5 Thousand Book Entry Securities 277.9 Billion 278.9 Billion Purchase & Sale 1.6 Billion 1.7 Billion 5.2 Thousand 6.5 Thousand Book Entry Government Securities 3.8 Trillion 4.8 Trillion 709.0 Thousand 760.8 Thousand 7.9 Billion 4.6 Billion 2.1 Thousand 1.2 Thousand SECURITIES SERVICES FOR DEPOSITORY INSTITUTIONS Safekeeping Balance December 31: — — LOANS TO DEPOSITORY INSTITUTIONS Total Loans Made During Year SERVICES TO U.S. TREASURY AND GOVERNMENT AGENCIES Federal Tax Deposits Processed 16.1 Billion 12.3 Billion Food Stamps Redeemed 640.2 Million 743.1 Million Sell Direct Transactions Processed 655.8 Million 581.2 Million 437.6 Thousand 612.7 Thousand 127.4 Million 146.3 Million 16.4 Thousand 15.7 Thousand 26 + 27 2000 FINANCIAL REPORTS MANAGEMENT ASSERTION February 21, 2001 To the Board of Directors of the Federal Reserve Bank of Chicago Even an effective process of internal controls, 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. The management of the Federal Reserve Bank of Chicago (FRBC) is The management of the FRBC assessed its process of internal con- responsible for the preparation and fair presentation of the Statement trols over financial reporting including the safeguarding of assets reflected of Financial Condition, Statement of Income, and Statement of Changes in the Financial Statements, based upon the criteria established in the in Capital as of December 31, 2000 (the “Financial Statements”). “Internal Control — Integrated Framework” issued by the Committee of The Financial Statements have been prepared in conformity with the Sponsoring Organizations of the Treadway Commission (COSO). Based accounting principles, policies, and practices established by the Board on this assessment, the management of the FRBC believes that the of Governors of the Federal Reserve System and as set forth in the FRBC maintained an effective process of internal controls over financial Financial Accounting Manual for the Federal Reserve Banks, and as reporting including the safeguarding of assets as they relate to the such, include amounts, some of which are based on judgments and Financial Statements. estimates of management. The management of the FRBC is responsible for maintaining an effective process of internal controls over financial reporting including Federal Reserve Bank of Chicago Federal Reserve Bank of Chicago Michael Moskow President and Chief Executive Officer William Conrad First Vice President and Chief Operating Officer the safeguarding of assets as they relate to the Financial Statements. Such internal controls are designed to provide reasonable assurance to management and to the Board of Directors regarding the preparation of reliable Financial Statements. This process of internal controls contains self-monitoring mechanisms, including, but not limited to, divisions of responsibility and a code of conduct. Once identified, any material deficiencies in the process of internal controls are reported to management, and appropriate corrective measures are implemented. 230 SOUTH LA SALLE STREET CHICAGO, ILLINOIS 60604 -1413 www.chicagofed.org F R BC 2000 A N N U A L R E P O RT 2000 FINANCIAL REPORTS PricewaterhouseCoopers LLP 203 North LaSalle Street Chicago, IL 60601-1210 Telephone (312) 701 5500 Facsimile (312) 701 6533 PricewaterhouseCoopers LLP 203 North LaSalle Street Chicago, IL 60601-1210 Telephone (312) 701 5500 Facsimile (312) 701 6533 REPORT OF INDEPENDENT ACCOUNTANTS REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of The Federal Reserve Bank of Chicago We have examined management’s assertion that the Federal Reserve To the Board of Governors of the Federal Reserve System and the Board of Directors of the Federal Reserve Bank of Chicago Bank of Chicago (“FRB-Chicago”) maintained effective internal control We have audited the accompanying statements of condition of The Federal over financial reporting and the safeguarding of assets as they relate Reserve Bank of Chicago (the “Bank”) as of December 31, 2000 and to the Financial Statements as of December 31, 2000, included in the 1999, and the related statements of income and changes in capital for accompanying Management’s Assertion. the years then ended. These financial statements are the responsibility Our examination was made in accordance with standards established by the American Institute of Certified Public Accountants, and accordingly, included obtaining an understanding of the internal control over financial of the Bank’s management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with auditing standards gen- reporting, testing, and evaluating the design and operating effectiveness erally accepted in the United States of America. Those standards require of the internal control, and such other procedures as we considered that we plan and perform the audit to obtain reasonable assurance about necessary in the circumstances. We believe that our examination provides whether the financial statements are free of material misstatement. An audit a reasonable basis for our opinion. includes examining, on a test basis, evidence supporting the amounts and Because of inherent limitations in any internal control, misstatements disclosures in the financial statements. An audit also includes assessing due to error or fraud may occur and not be detected. Also, projections the accounting principles used and significant estimates made by manage- of any evaluation of the internal control over financial reporting to future ment, as well as evaluating the overall financial statement presentation. periods are subject to the risk that the internal control may become We believe that our audits provide a reasonable basis for our opinion. inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management’s assertion that the FRB-Chicago maintained As discussed in Note 3, the financial statements were prepared in conformity with the accounting principles, policies, and practices established by the Board of Governors of the Federal Reserve System. These principles, effective internal control over financial reporting and over the safeguarding policies, and practices, which were designed to meet the specialized of assets as they relate to the Financial Statements as of December 31, accounting and reporting needs of The Federal Reserve System, are set 2000, is fairly stated, in all material respects, based upon criteria described forth in the “Financial Accounting Manual for Federal Reserve Banks” and in “Internal Control-Integrated Framework” issued by the Committee of constitute a comprehensive basis of accounting other than accounting Sponsoring Organizations of the Treadway Commission. principles generally accepted in the United States of America. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Bank as of December 31, 2000 and 1999, and results of its operations for the years then ended, March 02, 2001 Chicago, Illinois on the basis of accounting described in Note 3. March 02, 2001 28 + 29 2000 FINANCIAL STATEMENTS 2000 S TAT E M E N T S O F C O N D I T I O N (IN MILLIONS) AS OF DECEMBER 31, 1999 ASSETS Gold Certificates $ 1,064 $ 993 Special Drawing Rights Certificates 212 Coin 114 32 1,119 753 25 34 62,020 45,448 1,409 1,581 Items in Process of Collection Loans to Depository Institutions U.S. Government and Federal Agency Securities, Net Investments Denominated in Foreign Currencies Accrued Interest Receivable Interdistrict Settlement Account Bank Premises and Equipment, Net Other Assets Total Assets 549 722 457 — 23,292 135 141 37 33 $ 66,857 $ 73,313 $ 61,206 $ 68,385 LIABILITIES AND CAPITAL Liabilities: Federal Reserve Notes Outstanding, Net Deposits Depository Institutions Other Deposits 2,796 4 2,970 4 Deferred Credit Items 575 637 Interest on Federal Reserve Notes Due U.S. Treasury 132 54 Interdistrict Settlement Account 770 — 85 83 Accrued Benefit Cost Other Liabilities Total Liabilities 25 $ 65,593 24 $ 72,157 Capital: Capital Paid-In 632 Surplus 632 578 578 Total Capital $ 1,264 $ 1,156 Total Liabilities and Capital $ 66,857 $ 73,313 The accompanying notes are an integral part of these financial statements. F R BC 2000 A N N U A L R E P O RT 2000 FINANCIAL STATEMENTS 2000 S TAT E M E N T S O F I N C O M E (IN MILLIONS) FOR THE YEARS ENDED DECEMBER 31, 1999 INTEREST INCOME Interest on U.S. Government and Federal Agency Securities $ Interest on Investments Denominated in Foreign Currencies O T H E R O P E R AT I N G I N C O M E $ 24 Interest on Loans to Depository Institutions Total Interest Income 3,545 22 6 $ 3,575 2,587 2 $ 2,611 ( LOSS) Income from Services 98 Reimbursable Services to Government Agencies 97 20 22 (127) (49) U.S. Government Securities (Losses), Net (9) (2) Other Income 9 7 Foreign Currency (Losses), Net Total Other Operating Income (Loss) $ (9) $ 75 $ 141 $ 139 O P E R AT I N G E X P E N S E S Salaries and Other Benefits Occupancy Expense 19 19 Equipment Expense 19 19 Cost of Unreimbursed Treasury Services Assessments by Board of Governors Other Expenses 1 1 66 65 101 96 Total Operating Expenses $ 347 $ 339 Net Income Prior to Distribution $ 3,219 $ 2,347 36 $ 36 DISTRIBUTION OF NET INCOME Dividends Paid to Member Banks $ Transferred to (from) Surplus Payments to U.S. Treasury as Interest on Federal Reserve Notes Total Distribution $ 391 (5) 2,792 2,316 3,219 $ 2,347 The accompanying notes are an integral part of these financial statements. 30 + 31 2000 FINANCIAL STATEMENTS 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) CAPITAL FOR THE YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999 PAID-IN Balance at January 1, 1999 (11.7 Million Shares) $ 583 TOTAL SURPLUS $ 583 CAPITAL $ 1,166 Net Income Transferred from Surplus — (5) (5) Net Change in Capital Stock Redeemed (0.1 Million Shares) (5) — (5) Balance at December 31, 1999 (11.6 Million Shares) $ 578 $ 578 $ 1,156 Net Income Transferred to Surplus — 391 391 Surplus Transfer to the U.S. Treasury — (337) (337) Net Change in Capital Stock Issued (1.0 Million Shares) Balance at December 31, 2000 (12.6 Million Shares) The accompanying notes are an integral part of these financial statements. F R BC 2000 A N N U A L R E P O RT 54 $ 632 — $ 632 54 $ 1,264 NOTES TO FINANCIAL STATEMENTS 1. O R G A N I Z AT I O N elected by member banks, three represent the public foreign currencies, maintain reciprocal currency The Federal Reserve Bank of Chicago (“Bank”) and three represent member banks. Member banks arrangements (“F/X swaps”) with various central is part of the Federal Reserve System (“System”) are divided into three classes according to size. banks, and “warehouse” foreign currencies for the created by Congress under the Federal Reserve Act Member banks in each class elect one director U.S. Treasury and Exchange Stabilization Fund of 1913 (“Federal Reserve Act”) which established representing member banks and one representing (“ESF”) through the Reserve Banks. the central bank of the United States. The System the public. In any election of directors, each member consists of the Board of Governors of the Federal bank receives one vote, regardless of the number 3. SIGNIFICANT ACCOUNTING POLICIES Reserve System (“Board of Governors”) and twelve of shares of Reserve Bank stock it holds. Accounting principles for entities with the unique Federal Reserve Banks (“Reserve Banks”). The powers and responsibilities of the nation’s central Reserve Banks are chartered by the federal govern- 2. O P E R AT I O N S A N D S E R V I C E S bank have not been formulated by the Financial ment and possess a unique set of governmental, The System performs a variety of services and Accounting Standards Board. The Board of Governors corporate, and central bank characteristics. Other operations. Functions include: formulating and has developed specialized accounting principles major elements of the System are the Federal Open conducting monetary policy; participating actively and practices that it believes are appropriate for Market Committee (“FOMC”) and the Federal Advisory in the payments mechanism, including large-dollar the significantly different nature and function of Council. The FOMC is composed of members of transfers of funds, automated clearinghouse oper- a central bank as compared to the private sector. the Board of Governors, the president of the Federal ations and check processing; distribution of coin These accounting principles and practices are Reserve Bank of New York (“FRBNY”) and, on a and currency; fiscal agency functions for the U.S. documented in the “Financial Accounting Manual rotating basis, four other Reserve Bank presidents. Treasury and certain federal agencies; serving as for Federal Reserve Banks” (“Financial Accounting the federal government’s bank; providing short- Manual”), which is issued by the Board of Governors. Structure term loans to depository institutions; serving the All Reserve Banks are required to adopt and apply The Bank and its branch in Detroit, Michigan, serve consumer and the community by providing educa- accounting policies and practices that are consistent the Seventh Federal Reserve District, which includes tional materials and information regarding consumer Iowa and portions of Michigan, Illinois, Wisconsin laws; supervising bank holding companies, and and Indiana. In accordance with the Federal Reserve state member banks; and administering other Act, supervision and control of the Bank is exercised regulations of the Board of Governors. The Board by a Board of Directors. Banks that are members of Governors’ operating costs are funded through of the System include all national banks and any assessments on the Reserve Banks. with the Financial Accounting Manual. The financial statements have been prepared in accordance with the Financial Accounting Manual. Differences exist between the accounting principles and practices of the System and generally accepted accounting principles in the United States (“GAAP”). The primary differences are the presentation of all security holdings at amortized cost, rather than at the fair value presentation requirements of GAAP, and the accounting for matched sale-purchase transactions as separate sales and purchases, rather than secured borrowings with pledged collateral, as is required by GAAP. In addition, the Bank has elected not to present a Statement of Cash Flows. The Statement of Cash Flows has not been included as the liquidity and cash position of the Bank are not of primary concern to the users of these state chartered bank that applies and is approved for membership in the System. The FOMC establishes policy regarding open market operations, oversees these operations, and issues authorizations and directives to the FRBNY Board of Directors for its execution of transactions. Authorized trans- The Federal Reserve Act specifies the composition action types include direct purchase and sale of of the board of directors for each of the Reserve securities, matched sale-purchase transactions, Banks. Each board is composed of nine members the purchase of securities under agreements to serving three-year terms: three directors, including resell, and the lending of U.S. government securi- those designated as Chairman and Deputy Chairman, ties. The FRBNY is also authorized by the FOMC to are appointed by the Board of Governors, and six hold balances of and to execute spot and forward directors are elected by member banks. Of the six foreign exchange and securities contracts in nine 32 + 33 NOTES TO FINANCIAL STATEMENTS financial statements. Other information regarding the Bank’s activities is provided in, or may be derived from, the Statements of Condition, Income, and Changes in Capital. Therefore, a Statement of Cash Flows would not provide any additional useful information. There are no other significant differences between the policies outlined in the Financial Accounting Manual and GAAP. The preparation of the financial statements in conformity with the Financial Accounting Manual requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and 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. upon Federal Reserve notes outstanding in each District at the end of the preceding year. b. Special Drawing Rights Certificates Special drawing rights (“SDRs”) are issued by the International Monetary Fund (“Fund”) to its members in proportion to each member’s quota in the Fund at the time of issuance. SDRs serve as a supplement to international monetary reserves and may be transferred from one national monetary authority to another. Under the law providing for United States participation in the SDR system, the Secretary of the U.S. Treasury is authorized to issue SDR certificates, somewhat like gold certificates, to the Reserve Banks. At such time, equivalent amounts in dollars are credited to the account established for the U.S. Treasury, and the Reserve Banks’ SDR certificate accounts are increased. The Reserve Banks are required to purchase SDRs, at the direction of the U.S. Treasury, for the purpose of financing SDR a. Gold Certificates The Secretary of the Treasury is authorized to issue gold certificates to the Reserve Banks to monetize gold held by the U.S. Treasury. Payment for the gold certificates by the Reserve Banks is made by crediting equivalent amounts in dollars into the account established for the U.S. Treasury. These gold certificates held by the Reserve Banks are required to be backed by the gold of the U.S. Treasury. The U.S. Treasury may reacquire the gold certificates at any time and the Reserve Banks must deliver them to the U.S. Treasury. At such time, the U.S. Treasury’s account is charged and the Reserve Banks’ gold certificate accounts are lowered. The value of gold for purposes of backing the gold certificates is set by law at $42 2⁄9 a fine troy ounce. The Board of Governors allocates the gold certificates among Reserve Banks once a year based F R BC 2000 A N N U A L R E P O RT and fully collateralized. If any loans were deemed to be uncollectible, an appropriate reserve would be established. Interest is recorded on the accrual basis and is charged at the applicable discount rate established at least every fourteen days by the Board of Directors of the Reserve Banks, subject to review by the Board of Governors. However, Reserve Banks retain the option to impose a surcharge above the basic rate in certain circumstances. certificate acquisitions or for financing exchange stabilization operations. The Board of Governors allocates each SDR transaction among Reserve Banks based upon Federal Reserve notes outstanding in each District at the end of the preceding year. c. Loans to Depository Institutions The Depository Institutions Deregulation and Monetary Control Act of 1980 provides that all depository institutions that maintain reservable transaction accounts or nonpersonal time deposits, as defined in Regulation D issued by the Board of Governors, have borrowing privileges at the discretion of the Reserve Banks. Borrowers execute certain lending agreements and deposit sufficient collateral before credit is extended. Loans are evaluated for collectibility, and currently all are considered collectible d. U.S. Government and Federal Agency Securities and Investments Denominated in Foreign Currencies The FOMC has designated the FRBNY to execute open market transactions on its behalf and to hold the resulting securities in the portfolio known as the System Open Market Account (“SOMA”). In addition to authorizing and directing operations in the domestic securities market, the FOMC authorizes and directs the FRBNY to execute operations in foreign markets for major currencies in order to counter disorderly conditions in exchange markets or other needs specified by the FOMC in carrying out the System’s central bank responsibilities. Purchases of securities under agreements to resell and matched sale-purchase transactions are accounted for as separate sale and purchase transactions. Purchases under agreements to resell are transactions in which the FRBNY purchases a security and sells it back at the rate specified at the commencement of the transaction. Matched salepurchase transactions are transactions in which the FRBNY sells a security and buys it back at the rate specified at the commencement of the transaction. Effective April 26, 1999 FRBNY was given the sole authorization by the FOMC to lend U.S. government securities held in the SOMA to U.S. government securities dealers and to banks participating NOTES TO FINANCIAL STATEMENTS in U.S. government securities clearing arrangements, in order to facilitate the effective functioning of the domestic securities market. These securities-lending transactions are fully collateralized by other U.S. government securities. FOMC policy requires the lending Reserve Bank to take possession of collateral in amounts in excess of the market values of the securities loaned. The market values of the collateral and the securities loaned are monitored by FRBNY on a daily basis, with additional collateral obtained as necessary. The securities loaned continue to be accounted for in SOMA. Prior to April 26, 1999 all Reserve Banks were authorized to engage in such lending activity. Foreign exchange contracts are contractual agreements between two parties to exchange specified currencies, at a specified price, on a specified date. Spot foreign contracts normally settle two days after the trade date, whereas the settlement date on forward contracts is negotiated between the contracting parties, but will extend beyond two days from the trade date. The FRBNY generally enters into spot contracts, with any forward contracts generally limited to the second leg of a swap/ warehousing transaction. The FRBNY, on behalf of the Reserve Banks, maintains renewable, short-term F/X swap arrangements with authorized foreign central banks. The parties agree to exchange their currencies up to a pre-arranged maximum amount and for an agreed upon period of time (up to twelve months), at an agreed upon interest rate. These arrangements give the FOMC temporary access to foreign currencies that it may need for intervention operations to support the dollar and give the partner foreign central bank temporary access to dollars it may need to support its own currency. Drawings under the F/X swap arrangements can be initiated by either the FRBNY or the partner foreign central bank, and must be agreed to by the drawee. The F/X swaps are structured so that the party initiating the transaction (the drawer) bears the exchange rate risk upon maturity. The FRBNY will generally invest the foreign currency received under an F/X swap in interest-bearing instruments. Warehousing is an arrangement under which the FOMC agrees to exchange, at the request of the Treasury, U.S. dollars for foreign currencies held by the Treasury or ESF over a limited period of time. The purpose of the warehousing facility is to supplement the U.S. dollar resources of the Treasury and ESF for financing purchases of foreign currencies and related international operations. In connection with its foreign currency activities, the FRBNY, on behalf of the Reserve Banks, may enter into contracts which contain varying degrees of off-balance sheet market risk, because they represent contractual commitments involving future settlement, and counter-party credit risk. The FRBNY controls credit risk by obtaining credit approvals, establishing transaction limits, and performing daily monitoring procedures. While the application of current market prices to the securities currently held in the SOMA portfolio and investments denominated in foreign currencies may result in values substantially above or below their carrying values, these unrealized changes in value would have no direct effect on the quantity of reserves available to the banking system or on the prospects for future Reserve Bank earnings or capital. Both the domestic and foreign components of the SOMA portfolio from time to time involve transactions that can result in gains or losses when holdings are sold prior to maturity. However, decisions regarding the securities and foreign currencies transactions, including their purchase and sale, are motivated by monetary policy objectives rather than profit. Accordingly, earnings and any gains or losses resulting from the sale of such currencies and securities are incidental to the open market operations and do not motivate its activities or policy decisions. U.S. government and federal agency securities and investments denominated in foreign currencies comprising the SOMA are recorded at cost, on a settlement-date basis, and adjusted for amortization of premiums or accretion of discounts on a straight-line basis. Interest income is accrued on a straight-line basis and is reported as “Interest on U.S. Government Securities” or “Interest on Foreign Currencies,” as appropriate. Income earned on securities lending transactions is reported as a component of “Other Income.” Gains and losses resulting from sales of securities are determined by specific issues based on average cost. Gains and losses on the sales of U.S. government and federal agency securities are reported as “U.S. Government Securities (Losses), net.” Foreign currency denominated assets are revalued monthly at current market exchange rates in order to report these assets in U.S. dollars. Realized and unrealized gains and losses on investments denominated in foreign currencies are reported as “Foreign Currency (Losses), Net.” Foreign currencies held through F/X swaps, when initiated by the counter party, and warehousing arrangements are revalued monthly, with the unrealized gain or loss reported by the FRBNY as a component of “Other Assets” or “Other Liabilities,” as appropriate. Balances of U.S. government and federal agencies securities bought outright, investments denominated in foreign currency, interest income, amortization of premiums and discounts on securities bought outright, gains and losses on sales of 34 + 35 NOTES TO FINANCIAL STATEMENTS securities, and realized and unrealized gains and losses on investments denominated in foreign cur- other Reserve Banks is reported as the “Interdistrict Settlement Account.” rencies, excluding those held under an F/X swap obligations of the United States, Federal Reserve notes are backed by the full faith and credit of the United States government. arrangement, are allocated to each Reserve Bank. g. Federal Reserve Notes Effective April 26, 1999 income from securities Federal Reserve notes are the circulating currency account represents Federal Reserve notes reduced lending transactions undertaken by FRBNY was of the United States. These notes are issued through by cash held in the vaults of the Bank of $9,479 also allocated to each Reserve Bank. Securities the various Federal Reserve agents to the Reserve million, and $10,920 million at December 31, 2000 purchased under agreements to resell and unrealized Banks upon deposit with such Agents of certain and 1999, respectively. gains and losses on the revaluation of foreign cur- classes of collateral security, typically U.S. govern- rency holdings under F/X swaps and warehousing ment securities. These notes are identified as issued h. Capital Paid-In arrangements are allocated to the FRBNY and not to a specific Reserve Bank. The Federal Reserve The Federal Reserve Act requires that each member to other Reserve Banks. Act provides that the collateral security tendered by bank subscribe to the capital stock of the Reserve the Reserve Bank to the Federal Reserve Agent Bank in an amount equal to 6% of the capital and e. Bank Premises and Equipment must be equal to the sum of the notes applied surplus of the member bank. As a member bank’s Bank premises and equipment are stated at cost for by such Reserve Bank. In accordance with capital and surplus changes, its holdings of the less accumulated depreciation. Depreciation is the Federal Reserve Act, gold certificates, special Reserve Bank’s stock must be adjusted. Member calculated on a straight-line basis over estimated drawing rights certificates, U.S. government and banks are those state-chartered banks that apply useful lives of assets ranging from 2 to 50 years. agency securities, tri-party agreements, loans to and are approved for membership in the System New assets, major alterations, renovations and depository institutions, and investments denominated and all national banks. Currently, only one-half of improvements are capitalized at cost as additions in foreign currencies are pledged as collateral for net the subscription is paid-in and the remainder is to the asset accounts. Maintenance, repairs and Federal Reserve notes outstanding. The collateral subject to call. These shares are nonvoting with minor replacements are charged to operations in value is equal to the book value of the collateral a par value of $100. They may not be transferred the year incurred. Internally developed software tendered, with the exception of securities, whose or hypothecated. By law, each member bank is is capitalized based on the cost of direct materials collateral value is equal to the par value of the entitled to receive an annual dividend of 6% on and services and those indirect costs associated securities tendered. The Board of Governors may, the paid-in capital stock. This cumulative dividend with developing, implementing, or testing software. at any time, call upon a Reserve Bank for additional is paid semiannually. A member bank is liable for security to adequately collateralize the Federal Reserve Bank liabilities up to twice the par value f. Interdistrict Settlement Account Reserve notes. The Reserve Banks have entered of stock subscribed by it. At the close of business each day, all Reserve into an agreement which provides for certain assets Banks and branches assemble the payments due of the Reserve Banks to be jointly pledged as col- i. Surplus to or from other Reserve Banks and branches as lateral for the Federal Reserve notes of all Reserve The Board of Governors requires Reserve Banks a result of transactions involving accounts residing Banks in order to satisfy their obligation of providing to maintain a surplus equal to the amount of capital in other Districts that occurred during the day’s sufficient collateral for outstanding Federal Reserve paid-in as of December 31. This amount is intended operations. Such transactions may include funds notes. In the event that this collateral is insufficient, to provide additional capital and reduce the possi- settlement, check clearing and automated clearing the Federal Reserve Act provides that Federal bility that the Reserve Banks would be required to house (“ACH”) operations, and allocations of shared expenses. The cumulative net amount due to or from Reserve notes become a first and paramount lien call on member banks for additional capital. Reserve on all the assets of the Reserve Banks. Finally, as Banks are required by the Board of Governors to F R BC 2000 A N N U A L R E P O RT The “Federal Reserve Notes Outstanding, Net” NOTES TO FINANCIAL STATEMENTS transfer to the U.S. Treasury excess earnings, after providing for the costs of operations, payment of dividends, and reservation of an amount necessary to equate surplus with capital paid-in. The Consolidated Appropriations Act of 2000 (Public Law 106–113, Section 302) directed the Reserve Banks to transfer to the U.S. Treasury additional surplus funds of $3,752 million during the Federal Government’s 2000 fiscal year. The Federal Reserve Bank of Chicago transferred $337 million to the U.S. Treasury during the year ended December 31, 2000. Reserve Banks were not permitted to replenish the surplus for these amounts during fiscal year 2000, which ended September 30, 2000; however, the surplus was replenished by December 31, 2000. In the event of losses or a substantial increase in capital, payments to the U.S. Treasury are suspended until such losses or increases in capital are recovered through subsequent earnings. Weekly payments to the U.S. Treasury may vary significantly. The maturities of U.S. government and federal 4. U.S. GOVERNMENT AND FEDERAL AGENCY SECURITIES agency securities bought outright, which were allo- Securities bought outright are held in the SOMA at cated to the Bank at December 31, 2000, were as the FRBNY. An undivided interest in SOMA activity, follows (in millions): with the exception of securities held under agree- percentage basis derived from an annual settlement Maturities of Securities Held U.S. Govt. Securities Federal Agency Obligations of interdistrict clearings. The settlement, performed Total Within 15 Days in April of each year, equalizes Reserve Bank gold 16 Days to 90 Days $ 2,159 – $ 2,159 13,033 – certificate holdings to Federal Reserve notes out- 13,033 91 Days to 1 Year 15,016 – 15,016 standing. The Bank’s allocated share of SOMA Over 1 Year to 5 Years 15,884 16 15,900 balances was approximately 11.961% and 9.392% Over 5 Years to 10 Years 6,634 – 6,634 at December 31, 2000 and 1999, respectively. Over 10 Years 8,481 – 8,481 16 $ 61,223 and income, is allocated to each Reserve Bank on a The Bank’s allocated share of securities held in Total $ 61,207 $ $ the SOMA at December 31, that were bought outright, were as follows (in millions): At December 31, 2000, and 1999, matched 2000 1999 sale-purchase transactions involving U.S. government securities with par values of $21,112 million PA R VA L U E and $39,182 million, respectively, were outstandFederal Agency $ 16 $ 17 ing, of which $2,525 million and $3,680 million were allocated to the Bank. Matched sale-purchase U.S. Government: j. Income and Costs Related to Treasury Services The Bank is required by the Federal Reserve Act to serve as fiscal agent and depository of the United States. By statute, the Department of the Treasury is permitted, but not required, to pay for these services. The costs of providing fiscal agency and depository services to the Treasury Department that have been billed but will not be paid are reported as the “Cost of Unreimbursed Treasury Services.” PA R VA L U E ments to resell and the related premiums, discounts Bills 21,380 16,579 Notes 28,729 20,518 Bonds 11,098 7,793 $ 61,223 $ 44,907 1,164 855 (367) (314) $ 62,020 $ 45,448 transactions are generally overnight arrangements. 5. I N V E S T M E N T S D E N O M I N AT E D I N FOREIGN CURRENCIES Total Par Value Unamortized Premiums The FRBNY, on behalf of the Reserve Banks, holds foreign currency deposits with foreign central banks and the Bank for International Settlements and Unaccreted Discounts Total Allocated to Bank invests in foreign government debt instruments. Foreign government debt instruments held include both securities bought outright and securities held k. Taxes The Reserve Banks are exempt from federal, state, and local taxes, except for taxes on real property, which are reported as a component of “Occupancy Expense.” Total SOMA securities bought outright were under agreements to resell. These investments $518,501 million and $483,902 million at are guaranteed as to principal and interest by the December 31, 2000 and 1999, respectively. foreign governments. 36 + 37 NOTES TO FINANCIAL STATEMENTS Each Reserve Bank is allocated a share of for- The maturity distribution of investments denom- The Bank leases unused space to outside eign-currency-denominated assets, the related inated in foreign currencies which were allocated to tenants. Those leases have terms ranging from 1 interest income, and realized and unrealized foreign the Bank at December 31, 2000, were as follows to 11 years. Rental income from such leases was currency gains and losses, with the exception of (in millions): $3 million for each of the years ended December 31, unrealized gains and losses on F/X swaps and warehousing transactions. This allocation is based on the ratio of each Reserve Bank’s capital and surplus to aggregate capital and surplus at the preceding December 31. The Bank’s allocated share of investments denominated in foreign currencies was 2000 and 1999. Future minimum lease payments Maturities of Investments Denominated in Foreign Currencies under non-cancelable agreements in existence at Within 1 Year $ 1,323 Over 1 Year to 5 Years 37 Over 5 Years to 10 Years 39 Over 10 Years 10 2001 2 2002 2 2003 2 2004 2 no open foreign exchange contracts or outstanding 2005 2 F/X swaps. Thereafter 6 approximately 8.994% and 9.795% at December 31, Total 2000 and 1999, respectively. The Bank’s allocated share of investments denominated in foreign currencies, valued at current exchange rates at December 31, were as follows (in millions): Government Debt Instruments Including Agreements to Resell At December 31, 2000 and 1999, there were Total nothing outstanding. $ 417 $ Government Debt Instruments Including Agreements to Resell Accrued Interest Total At December 31, 2000, the Bank was obligated 424 247 249 247 32 6. BANK PREMISES AND EQUIPMENT under noncancelable leases for premises and equip- A summary of bank premises and equipment at December 31 is as follows (in millions): ment with terms ranging from 1 to approximately 7 years. These leases provide for increased rentals based upon increases in real estate taxes, operating 2000 1999 Land 494 872 4 $ 1,409 4 $ 1,581 Buildings $ 5.8 $ 5.8 128.7 129.1 16.5 18.6 Construction in Progress 1.1 0.3 Furniture and Equipment 101.0 98.8 253.1 252.6 (118.6) (111.6) $ 134.5 $ 141.0 Building Machinery and Equipment cies were $15,670 million and $16,140 million at December 31, 2000 and 1999, respectively. Accumulated Depreciation Bank Premises and Equipment, Net costs or selected price indices. Rental expense under operating leases for Bank Premises and Equipment: certain operating facilities, warehouses, and data processing and office equipment (including taxes, insurance and maintenance when included in rent), Total investments denominated in foreign curren- Depreciation expense was $14.7 million for the years ended December 31, 2000 and 1999. F R BC 2000 A N N U A L R E P O RT 16 7. COMMITMENTS AND CONTINENCIES Japanese Yen: Foreign Currency Deposits $ warehousing facility was $5,000 million, with 1999 European Union Euro: Foreign Currency Deposits $ 1,409 At December 31, 2000 and 1999, the 2000 December 31, 2000, were (in millions): net of sublease rentals, was $2 million for each of the years ended December 31, 2000 and 1999. Certain of the Bank’s leases have options to renew. NOTES TO FINANCIAL STATEMENTS Future minimum rental payments under non- The Bank is involved in certain legal actions and cancelable operating leases, net of sublease rentals, claims arising in the ordinary course of business. with terms of one year or more, at December 31, Although it is difficult to predict the ultimate outcome 2000, were (in millions): of these actions, in management’s opinion, based on discussions with counsel, the aforementioned litigation and claims will be resolved without material 9. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS AND POSTEMPLOYMENT BENEFITS Postretirement Benefits Other than Pensions In addition to the Bank’s retirement plans, employees who have met certain age and length of service 2001 1 adverse effect on the financial position or results 2002 1 of operations of the Bank. 2003 1 2004 1 8. RETIREMENT AND THRIFT PLANS 2005 1 Retirement Plans ingly, has no plan assets. Net postretirement benefit Thereafter 1 The Bank currently offers two defined benefit retire- cost is actuarially determined using a January 1 ment plans to its employees, based on length of measurement date. service and level of compensation. Substantially Following is a reconciliation of beginning and ending balances of the benefit obligation (in millions): Total $ 6 Subsequent to year-end, management signed all of the Bank’s employees participate in the a lease for a new check processing center, located Retirement Plan for Employees of the Federal near Midway airport. The term of the lease is for Reserve System (“System Plan”) and the Benefit 10 years with a total lease cost of $3 million. Equalization Retirement Plan (“BEP”). The System Management anticipates spending $4 million on Plan is a multi-employer plan with contributions improvements prior to occupying the building in fully funded by participating employers. No separate the 3rd quarter of 2001. accounting is maintained of assets contributed by Under the Insurance Agreement of the Federal the participating employers. The Bank’s projected 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, accord- 2000 Accumulated Postretirement Benefit Obligation at January 1 74.6 1.6 Interest Cost of Accumulated Benefit Obligation 4.7 4.6 (0.1) (3.1) 0.2 0.2 (3.4) (3.5) – (7.1) of the Reserve Banks has agreed to bear, on a per BEP at December 31, 2000 and 1999, and for the incident basis, a pro rata share of losses in excess years then ended, are not material. Actuarial (Gain) of 1% of the capital paid-in of the claiming Reserve Thrift Plans Contributions by Plan Participants Bank, up to 50% of the total capital paid-in of all Employees of the Bank may also participate in the Reserve Banks. Losses are borne in the ratio that Benefits Paid defined contribution Thrift Plan for Employees of the a Reserve Bank’s capital paid-in bears to the total Federal Reserve System (“Thrift Plan”). The Bank’s capital paid-in of all Reserve Banks at the beginning Thrift Plan contributions totaled $4.4 million and of the calendar year in which the loss is shared. No $4.3 million for the years ended December 31, claims were outstanding under such agreement at 2000 and 1999, respectively, and are reported as December 31, 2000 or 1999. a component of “Salaries and Other Benefits.” of $3 million. $ 1.4 benefit obligation and net pension costs for the As of December 31, 2000, the Bank had a 67.3 Service Cost-Benefits Earned During the Period Reserve Banks dated as of March 2, 1999, each commitment to sell its Westgate facility for a total $ 1999 Plan Amendments, Acquisitions, Foreign Currency Exchange Rate Changes, Business Combinations, Divestitures, Curtailments, Settlements, Special Termination Benefits Accumulated Postretirement Benefit Obligation at December 31 $ 70.1 $ 67.3 38 + 39 NOTES TO FINANCIAL STATEMENTS Following is a reconciliation of the beginning and Assumed health care cost trend rates have a Postemployment Benefits ending balance of the plan assets, the unfunded significant effect on the amounts reported for health The Bank offers benefits to former or inactive employ- postretirement benefit obligation, and the accrued care plans. A one percentage point change in ees. Postemployment benefit costs are actuarially postretirement benefit cost (in millions): assumed health care cost trend rates would have determined and include the cost of medical and the following effects for the year ended December 31, dental insurance, survivor income, and disability 2000 (in millions): benefits. Costs were projected using the same 2000 Fair Value of Plan Assets at January 1 $ Actual Return on Plan Assets 1999 – $ – – – Contributions by the Employer 3.2 3.3 Contributions by Plan Participants 0.2 0.2 Benefits Paid (3.4) One Percentage Point Increase Effect on Aggregate of Service and Interest Cost Components of Net Periodic Postretirement Benefit Cost One Percentage Point Decrease respectively. This cost is included as a component $ 1.2 $ (1.0) $ – $ – Unfunded Postretirement Benefit Obligation $ 70.1 $ 67.3 of net periodic postretirement benefit cost for the years ended December 31 (in millions): 10.5 (8.8) The following is a summary of the components Unrecognized Net Actuarial Gain (9.3) (9.4) 2000 Accrued Postretirement Benefit Cost Service Cost-Benefits Earned During the Period $ 74.7 $ as a component of “Accrued Benefit Cost.” At December 31, 2000 and 1999, the weightedaverage assumption used in developing the postretirement benefit obligation was 7.5 percent. For measurement purposes, an 8.75 percent annual rate of increase in the cost of covered health care benefits was assumed for 2001. Ultimately, the health care cost trend rate is expected to decrease gradually to 5.50 percent by 2008, and remain at that level thereafter. F R BC 2000 A N N U A L R E P O RT $ 1999 1.4 $ 1.6 73.1 Accrued postretirement benefit cost is reported Interest Cost of Accumulated Benefit Obligation 4.7 4.6 Amortization of Prior Service Cost (1.3) (0.9) – 0.3 Recognized Net Actuarial Loss Net Periodic Postretirement Benefit Cost $ 4.8 $ Net periodic postretirement benefit cost is reported as a component of “Salaries and Other Benefits.” of “Accrued Benefit Cost.” Net periodic postemployment benefit costs included in 2000 and 1999 Fair Value of Plan Assets at December 31 15.2 accrued postemployment benefit cost recognized the years ended December 31, 2000 and 1999, Effect on Accumulated Postretirement Benefit Obligation 13.9 used for projecting postretirement costs. The by the Bank was $10 million and $9 million for (3.5) Unrecognized Prior Service Cost discount rate and health care trend rates as were 5.6 operating expenses were $2 million for each year. RESOURCES To access the materials referenced in this report, use the following: • The Federal Reserve Bank of Chicago web site is chicagofed.org. • To find information on the Bank’s community development initiatives, refer to chicagofed.org/community development. • To find information on Project Money$mart, refer to chicagofed.org/consumer information/projectmoneysmart. • For information on the cooperative effort with the U.S. Treasury focusing on individuals without bank accounts, refer to chicagofed.org/unbanked. • For information on the Bank’s OUR MISSION • Summaries of the Bank’s research and one of 12 regional Reserve Banks across the in the Policy Issues newsletter, which is United States that, together with the Board of available electronically at chicagofed.org/ Governors in Washington, D.C., serve as the publications/policyissues. A hard-copy nation’s central bank. The role of the Federal subscription is available by calling the Public Reserve System, since its establishment by an Information Center at (312) 322-5111. act of Congress passed in 1913, has been to • For copies of the Bank’s journal, Economic Perspectives, refer to chicagofed.org/ To this end, the Federal Reserve Bank of Chicago participates in the formulation and (312) 322-5111. implementation of national monetary policy, • For copies of the Bank’s newsletters on community and economic development, Economic News and Views, and Profitwise, refer to chicagofed.org/publications/ economicdevnewsandviews and chicagofed.org/publications/profitwise and Information Center, refer to chicagofed.org/cedric. financial system. or call the Public Information Center at newsandevents/speakerbureau. and Economic Development Research foster a strong economy, supported by a stable publications/economicperspectives speakers bureau, refer to chicagofed.org/ • To access CEDRIC, the Consumer The Federal Reserve Bank of Chicago is analyses on various topics can be found or call the Public Information Center at (312) 322-5111. supervises and regulates state-member banks, bank holding companies and foreign bank branches, and provides financial services to depository institutions and the U.S. government. Through its head office in Chicago, branch in Detroit, regional offices in Des Moines, Indianapolis and Milwaukee, and facility in Peoria, the Federal Reserve Bank of Chicago serves the Seventh Federal Reserve District, which includes major portions of Illinois, Indiana, Michigan and Wisconsin, plus all of Iowa. OUR V ISION • Further the public interest by fostering a sound economy and stable financial system • Provide products and services of unmatched value to those we serve • Set the standard for excellence in the Federal Reserve System For additional copies of this annual report contact the Public Information Center, Federal Reserve Bank of Chicago, at ( 312 ) 322-5111 or access the Bank’s web site at chicagofed.org. • Work together, value diversity, communicate openly, be creative and fair • Live by our core values of integrity, respect, responsibility and excellence HE AD OFFICE 230 South LaSalle Street P.O. 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