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The Region

Managing the Expanded Safety Net

Federal Reserve Bank o f M inneapolis 2007 Annual Report

The Region

Executive Editor: Arthur J. Rolnick
Senior Editor: David Fettig
Editor: Douglas Clement
Managing Editor: Jenni C. Schoppers
Art Director: Rick Cucci

M essage from the President

Managing the Expanded Safety Net

Message from the First Vice President

Helena Branch Board of Directors

Minneapolis Board o f Directors

Advisory Council on Small Business and Labor

Advisory Council on Agriculture

Senior Management

Officers

Financial Statements

The Region
Federal Reserve Bank of Minneapolis
RO. Box 291
Minneapolis, MN 55480-0291
E-mail: letters@mpls.frb.org
Web: minneapolisfed.org

The Region is published by the Federal Reserve Bank of
Minneapolis. The views expressed here are not necessarily those
of the Federal Reserve Bank of Minneapolis or the Federal Reserve
System. Articles may be reprinted if the source is credited and the
Public Affairs Department of the Minneapolis Fed is provided with
copies. Permission to photocopy is unrestricted.
Volume 22 Number 1, ISSN 1045-3369
May 2008

Message from
the President

The Region

fully

support

the

good in financial markets and for financial institu

extraordinary steps taken

tions. Now policymakers have another chance to

by the Federal Reserve in

examine our recommendations to better manage

response to the collapse

the safety net. In that vein, the accompanying 2007

of Bear Stearns in March

Annual Report essay discusses these recommenda

2008. As Federal Reserve

tions, explaining why they respond effectively to the

officials have testified,

TBTF problem confronting policymakers.

Bear Stearns’ bankruptcy
could have triggered sig
nificant doubt about the
viability of other invest
ment banks. Bankruptcy could also have imposed
potentially large costs on a myriad of firms with

Gary H. Stern

financial exposure to Bear Stearns. More important

President

ly, this shock to the financial sector could have spilled
over to the rest of the economy. It was on this basis—
as lender-of-last-resort with responsibility to address
systemic risk to the economy—that the Federal
Reserve took its actions.
However, the Federal Reserves response has a
potentially significant cost. The uninsured creditors
of other large financial firms may now have height
ened expectations of receiving government support
if these firms get into trouble. That is, they may per
ceive that the government will view their firm, also,
as systemically important and therefore “too big to
fail (TBTF).” Such expectations need to be
addressed by policymakers because they encourage
financial firms to take on more risk than they other
wise would, and this increased risk-taking, all else
equal, makes future financial and economic insta
bility more likely.
Moreover, this expansion of the safety net came
when TBTF was already a problem. Indeed, we have
been warning about an increasing TBTF threat for
much of the past five years, recommending a man
agement framework and specific steps to address it
and urging that policymakers act when times are

The Region

Gary H. Stern

AND

PRESIDENT

Ron J. Feldman
S E N I O R VICE P R E S I D E N T

n this essay, we first briefly explain why the govern

A Wider Safety Net,
A Larger TBTF Problem

ments response to the 2007-08 financial turmoil,

although justified, expanded the safety net and
exacerbated the existing too big to fail (TBTF)

The Federal Reserves expansion of the safety net was

problem. A larger TBTF problem is costly, having

not subtle or implied. The Federal Reserve took on

the capability to sow the seeds of future financial

risk normally borne by private parties when it sup

crises, which means we should begin now to develop

ported JPMorgan Chases purchase of Bear Stearns.

a new approach to manage TBTF.

The Federal Reserve also opened the discount win
dow to select investment banks (i.e., primary dealers).

We believe recommendations we had already
crafted to address TBTF would effectively address

One could describe the former action as one

the safety net expansion and position policymak

time and the latter program as temporary. But such

ers to respond more effectively to “the next Bear

a characterization obscures the message these

Stearns.” We describe the recommendations briefly

actions send. Through these efforts, the Federal

and explain their relevance in todays environment

Reserve sought to limit the collateral damage or

in the second half of the essay. Because our

spillovers caused by the failure of a large financial

approach and recommendations are spelled out in

firm. And these spillovers can take many forms. In

our 2004 book, Too Big To Fail: The Hazards of Bank

a simple example, the failure of a large financial

Bailouts, we conclude with excerpts from it sum

*The authors thank David Fettig, Art Rolnick, Phil Strahan, Dick
Todd, David Torregrossa, and Niel Willardson for their comments.

marizing our arguments in a bit more detail.

The Region

firm means that other large financial firms might

Now, this dulling of the depositors’ senses has the

not have loans paid back or otherwise receive funds

welcome effect in our example of stopping runs on

owed to them by the failing entity. In another case,

the largest banks. Such runs can spread into panics

the failure of a large financial firm could prevent it

and significant economic downturns. The prevention

from providing critical services to financial market

of such ill effects, as noted, motivated the Federal

participants such as clearing and settlement of

Reserve’s safety net expansion and is the reason gov

financial transactions. In both examples, the shock

ernment support during a crisis should never be cat

to financial firms could impair their normal opera

egorically ruled out.

tions, which could injure their customers and the

But the same stickiness of deposits has a major

rest of the economy. If the threat of such spillovers

downside, which is the point of our example. The

presented itself again, and spillovers frequently

large bank that fleeing depositors would otherwise

define a financial crisis, many large-firm creditors

close remains open to continue or increase its risky

would anticipate another extraordinary action or

bets. If it does not get lucky, the bank’s losses actu

resurrection of a special lending program.

ally grow. In this way, the safety net encourages risk

To be sure, Bear Stearns’ equity holders—including

taking that exposes society to increasing losses, with

many employees of the firm —took significant

their associated instability.

financial losses. This was an appropriate outcome.

O f equal concern, TBTF wastes society’s

And doesn’t this action sufficiently curtail expecta

resources. Financial firms allocate capital, and when

tions of government support in the future and thus

they work well, they ensure that high-return proj

fix whatever problem such expectations create? The

ects are funded. But excessive government support

short answer is no. The long answer requires a brief

warps that allocation process, sending too much

summary of why we care about safety net expansion

money to higher-risk projects.

and TBTF in the first place.

We focused deliberately on depositors in our

The bigger the government safety net, the more

example; we could have mentioned other short- or

the government shifts risk from creditors of finan

long-term holders of interest-bearing investments,

cial firms to taxpayers. With less to lose, creditors

insured or uninsured. For it is the reduced vigilance

have less incentive to monitor financial firms and to

of depositors and other debt holders—lulled by

discipline risk-taking. Consider an extreme but sim

implied government support—that leads large

ple case where nominally uninsured depositors at

financial institutions to take on too much risk and

the largest U.S. commercial banks come to expect

underlies TBTF. Policymakers face a TBTF problem

complete government support if their bank fails.

even if equity holders fully expect to suffer large

These depositors have essentially no reason to pull

losses upon failure of the firm in question.

their funds even if these banks take on so much risk

And policymakers faced a TBTF problem

that they doom themselves to failure.1

even before recent safety net expansions; the

1See Stern and Feldman (2004). Mishkin (2006) provides a detailed summary and critique of our book. Analysis published after the book including, but
not limited to, Morgan and Stiroh (2005), Rime (2005), and Deng et al. (2007) continues to find evidence of a TBTF problem. For Moody’s related assess
ment of the likelihood that select large banks in the United States would receive government support, see American Banker (2007). Acharya and
Yorulmazer (2007) discuss a phenomenon somewhat similar to TBTF.

The bigger the governm ent safety net, the m ore the governm ent
shifts risk from creditors o f financial firm s to taxpayers. With less
to lose, creditors have less incentive to monitor financial firm s and to
discipline risk-taking.... Now, this dulling o f the depositors’ senses has
the welcome effect in our exam ple o f stopping runs on the largest
b a n k s .... But the sam e stickiness o f deposits has a m ajor downside.
... The large bank that fleeing depositors would otherwise close
rem ains open to continue or increase its risky bets. If it does not get
lucky, the bank’s losses actually grow. In this way, the safety net
encourages risk-taking that exposes society to increasing losses,
with their associated instability.

TBTF problem we described in 2004 has grown

approach, explaining why it applies to the current sit

since then.1 Some very large banks and financial

uation and why it is preferable to other options.

firms (e.g., Countrywide Financial) faced signifi
cant pressure during the 2007-08 market distur

Managing the Safety Net, Addressing
the TBTF Problem

bance. Reporting on these cases, sometimes
months before the run on Bear Stearns, had at
times explicitly raised the specter of government

While safety net expansion has increased TBTF con

support. The initial rescue in 2007 and later nation

cerns, the essence of the problem and underlying

alization of Northern Rock in 2008 by the British

cause of TBTF have not changed since 2004:

government may have contributed to the specula

Policymakers support large-bank creditors to contain

tion. Nationalization occurred in a country viewed,

or eliminate spillover effects, but the support creates

like the United States, as having a low propensity to

an incentive for too much risk-taking in the future.

support uninsured creditors and involved a finan

Our approach is straightforward. If spillovers lead to

cial institution that supervisors did not apparently

government support, then policymakers who want to

treat as if it posed significant systemic risk.

reduce creditors’ expectations of such support should

Our concern about the preexisting TBTF prob

enact reforms that make spillovers less threatening.

lem led us to suggest policy reforms, as detailed in

Reforms that fail to address this fundamental issue

our book. We now turn to summarizing our

will not change policymaker behavior and will not

The Region

convince creditors that they face real risk of loss. We

cial firms. The goal of these reforms is to limit the

provide more details on this approach in excerpted

chance that through the payments system, one firm’s

summaries from our book following this section.

failure puts the solvency of other firms in doubt.

So what should policymakers do to address

For each of the three strategies, we recommend

concerns over spillovers? We recommend a three

that policymakers broadly communicate the actions

pronged approach (again, a few more details follow

they’ve taken to reduce expectations of bailouts. We

in the excerpts with many more details in the book

detail the form and benefits of potential communica

itself). Policymakers should

tion elsewhere, but the basic point is simple.3
Creditors will not realize that the spillover threats

□ reduce their uncertainty about the potential mag

have declined and will not change behavior unless

nitude and cost of spillovers through tools like fail

informed through effective communication.

ure simulation. This “disaster” preparation could

Put together, this approach offers at least the

either directly lead to more informed actions that

potential for a positive cycle. Policymakers limit the

reduce spillovers or provide sufficient information

need for government support by managing underly

to policymakers such that they can reduce support

ing sources of instability. Reduced expectations of

for creditors more confidently. Recent progress in

government support lead to less risk-taking and

addressing potential sources of instability also fall

greater stability.

under this approach. For example, the Federal

Our approach contrasts with some other alter

Reserve Bank of New York played an important role

natives policymakers might adopt. Some observers

in an effort to improve the processing and settle

suggest that policymakers try to manage the

ment of certain derivative transactions while the

expanded safety net, for example, by extending

Federal Deposit Insurance Corporation is taking

rules that procedurally make it more difficult for

steps to facilitate large-bank resolution absent

policymakers to support creditors. For example,

extraord in ary governm ent su p p o rt.2

the

F e d e ral

D e p o sit

In su ra n c e

C o r p o r a tio n

Improvement Act of 1991 (FDICLA) requires on□ augment policies that manage the losses one firms

the-record support from a variety of policymakers

failure imposes on its counterparties. Policymakers

before the FDIC can provide extraordinary sup

would be more willing to let large firms fail if they

port to bank creditors (FDICIA subjected such

thought the fallout would be constrained. Closing

extraordinary support to other reviews and

firms while they still have some capital left is one exam

reforms as well). Policymakers might apply these

ple of this approach (although we recommend modifi

strictures before providing support to creditors of

cations to the current “prompt closure” regime).

any financial firm.
While we do not oppose expanding the types of

□ enhance payments system reforms that limit the

firms covered under the FDICIA regime, we doubt

exposure that payment processing creates for finan-

the changes would materially reduce the support
provided to large-firm creditors. Why? These pro

2 These two examples are discussed in Stern and Feldman (2006).
3 See Stern (2007) and Stern and Feldman (2005a, b).

cedural changes do not reduce the underlying rea-

Policymakers should
□ reduce their uncertainty about the potential m agnitude and cost
o f spillovers.
□

augm ent policies that m anage the losses one firm ’s failure

im poses on its counterparties.
□ enhance paym ents system reform s that lim it the exposure that
payment processing creates for financial firms.

son policymakers provided support in the first

Supervisors with discretion, for example, cannot

place. Consider that the intervention with Bear

easily limit firm risk-taking before the damage is

Stearns involved the type of on-the-record voting

done. Minimum capital rules also seem one step

and consultations across agencies that FDICIA

too slow; that is, regulators cannot readily insti

would mandate.

tute capital rules that link minimum capital levels

Pledges of “no bailouts” from policymakers or

to current bank risk-taking.

general prohibitions against bailouts are even less cred

None of this is to suggest that our recommenda

ible unless accompanied by action. And such prohibi

tions are beyond reproach. Some of the specific rec

tions and related jawboning are unwise. Policymakers

ommendations we made in 2004 deserve a second

will face circumstances where, even accounting for dis

look given the events of 2007 and 2008. For example,

tortions to future behavior, the provision of govern

we suggested that policymakers consider imple

ment support has benefits exceeding costs.

menting a form of “coinsurance” for uninsured cred

Observers also suggest that enhanced super

itors, whereby such creditors must take some loss if

vision, or regulations like those found in Basel II,

their financial firm becomes insolvent. While our

might curtail the risk-taking of financial firms.

proposal differs from the use of coinsurance for

While supervision and regulation have an im por

insured depositors in England, some observers

tant role to play, these tools may not adequately

attribute part of the Northern Rock crisis to this fea

curtail the risk-taking encouraged by TBTF.

ture, suggesting it deserves reconsideration.

We recom m end that policym akers broadly com m unicate the actions
they’ve taken to reduce expectations o f b ailo u ts.... Creditors will not
realize that the spillover threats have declined and will not change
behavior unless informed through effective com m unication.
Put together, this approach offers at least the potential for a positive cycle.
Policymakers limit the need for government support by m anaging
underlying sources o f instability. Reduced expectations o f government
support lead to less risk-taking and more stability.

Our recommendations have received more gen

of the largest U.S. investment banks posed spillover

eral critiques as well. Some critics focus on the inabil

risks or raised TBTF concerns. Indeed, Paul Volcker,

ity of our recommendations, or any recommenda

in the foreword to our book, raised a similar point.

tions for that matter, to anticipate the source of the
next major disruption. These observers argue that

The implications of [the TBTF book] ... go

the idiosyncratic nature of each financial disruption

beyond the world of commercial banking.

means that policymakers can, at best, fight the last

Witness the officially encouraged (if not officially

war and cannot take steps that limit future spillovers.

financed) rescue a few years ago of Long-Term

Who could have foreseen, critics might ask, that loss

Capital Management, a large but unregulated,

es originating in subprime mortgages would ulti

secretive, speculative hedge fund. The fact is

mately lead to a freeze in the secured funding mar

the relative importance of commercial banks

kets on which Bear Stearns and others relied?

in the United States has been diminishing

The manner in which Bear Stearns imploded cer

steadily.

Consequently,

the

lessons

and

tainly caught most observers and market participants

approaches reviewed in Too Big To Fail have

by surprise. But it was no surprise that a failure of one

wider application.45

4 See Stern and Feldman (2004, ix).
5 Without implying agreement between our proposal and more recent alternatives, other parties have also suggested that policymakers respond to safety
net expansion by focusing on broad stability-related issues. For one example, see Nason (2008).

The Region

on spillover potential or which react to instabili

Moreover, we do not need to forecast the
event that brings down systemically important

ty once a firm fails.5

firm s to make progress against TBTF. Instead, we

In conclusion, we think the recommendations

need to consider the spillovers that failure might

we made several years ago have stood the test of

cause. Would that failure, for example, eliminate

time. They offer a structure and specific steps that

the availability of important clearing and settle

policymakers can take to better manage the safety

ment services? If so, what can we do today to

net and the TBTF problem. Due to its recent expan

facilitate continued provision of those services?

sion, such safety net management should, in our

Would that failure impose large losses on other

view, take a considerably higher priority with poli

firm s potentially seen as TBTF? If so, what

cymakers than it has in the past. 13

actions today would help policymakers quickly
quantify potential exposures and assess counter
parties’ management of that risk? O f course, this
approach

sure

m iss

some

potential

spillovers or risks. While not perfect, this
approach is superior to efforts that do not focus

References
Viral Acharya and Tanju Yorulmazer. 2007. “Too Many to
Fail: An Analysis of Time Inconsistency in Bank Closure
Policies? Journal of Financial Intermediation 1, 1-31.

and Financial Stability: A Workshop on Applied Banking
Research. Bank for International Settlement. Vienna,
Austria, May 9.

American Banker. 2007. “Big-Bank Safety Net.” March 6.

Gary H. Stern. 2007. “Addressing the Trade-offs: Market
Discipline, Stability and Communication.” The Region.
December.

Saiying Deng, Elyas Elyasiani, and Connie X. Mao. 2007.
“Diversification and the Cost of Debt of Bank Holding
Companies.” Journal of Banking and Finance 8, 2453-73.

Gary H. Stern and Ron J. Feldman. 2006. “Managing Too Big
To Fail by Reducing Systemic Risk: Some Recent
Developments.” The Region. June.

Frederic S. Mishkin. 2006. “How Big a Problem Is Too Big to
Fail? A Review of Gary Stern and Ron Feldman’s Too Big to
Fail: The Hazards of Bank Bailouts. Journal of Economic
Literature 4, 988-1004.

Gary H. Stern and Ron J. Feldman. 2005a. “Constructive
Commitment: Communicating Plans to Impose Losses on
Large Bank Creditors,” in Douglas D. Evanoff and George G.
Kaufman (eds.), Systemic Financial Crises: Resolving Large Bank
Insolvencies (Hackensack, N.J.: World Scientific Publishing).

Donald P. Morgan and Kevin J. Stiroh. 2005. “Too Big To Fail
after All These Years.” Federal Reserve Bank of New York
Staff Report 220.

Gary H. Stern and Ron J. Feldman. 2005b. “Addressing TBTF
When Banks Merge: A Proposal.” The Region. September.

David G. Nason. 2008. “Remarks on Treasury’s Blueprint for
a Modernized Regulatory Structure.” Press release. April 29.
Available at treasury.gov/press/releases/hp951.htm.

Gary H. Stern and Ron J. Feldman. 2004. Too Big To Fail: The
Hazards of Bank Bailouts (Washington, D.C.: Brookings
Institution Press).

Bertrand Rime. 2005. “Do ‘Too Big To Fail’ Expectations
Boost Large Bank Issuer Ratings?” Presentation at Banking

The Region

Too Big To Fail:
The H azards
o f B ank Bailouts'
Excerpts from the 2004 book by
G ary H. Stern and Ron J. Feldm an

E D I T O R ’ S N O T E : The preceding essay in this Annual Report explains the authors’ policy recommendations
in light o f the 2007-08 financial turmoil. This excerpt, from the book’s introduction, summarizes the authors’
main messages and contrasts their approach with some alternatives.

espite some progress, our central warning is

Other factors may also motivate governments

that not enough has been done to reduce credi

to protect uninsured creditors at large banks.

tors' expectations of TBTF protection. Many of the

Policymakers may provide protection because

existing pledges and policies meant to convince cred

doing so benefits them personally, by advancing

itors that they will bear market losses when large

their career, for example. Incompetent central plan

banks fail are not credible and therefore are ineffec

ning may also drive some bailouts. Although these

tive. Blanket pledges not to bail out creditors are not

factors receive some of our attention and are

credible because they do not address the factors that

addressed by some of our reforms, we think they are

motivate policymakers to protect uninsured bank

less important than the motivation to dampen the

creditors in the first place. The primary reason why

effect of a large bank failure on financial stability.

policymakers bail out creditors of large banks is to

Despite the lack of definitive evidence on the

reduce the chance that the failure of a large bank in

moral hazard costs and benefits of increased stabil

which creditors take large losses will lead other

ity generated by TBTF protection, the empirical and

banks to fail or capital markets to cease working

anecdotal data, analysis, and our general impres

efficiently.

sion-im perfect as they are—suggest that TBTF
protection imposes net costs. We also argue that the

*Excerpts are reprinted, with permission, from Too Big To Fail: The
Hazards of Bank Bailouts, Gary H. Stern and Ron J. Feldman,
Washington D.C.: Brookings Institution Press, 2004.

TBTF problem has grown in severity. Reasons for
this increase include growth in the size of the largest

The Region

banks, greater concentration of banking system

there is no realistic solution. This camp argues that

assets in large banks, the greater complexity of bank

policymakers cannot credibly commit to imposing

operations, and, finally, several trends in policy

losses on the creditors of TBTF banks. The best

including a spate of recent bailouts.

governments can do, in their view, is accept the net

Our views are held by some, but other respect

costs of TBTF, albeit with perhaps more resources

ed analysts come to different conclusions. Some

devoted to supervision and regulation and with

observers believe that the net costs of TBTF pro

greater ambiguity about precisely which institu

tection have been overstated, while others note

tions and which creditors could receive ex post

that some large financial firms have failed without

TBTF support.

their uninsured creditors being protected from

Like the third camp, we believe that policy

losses. However, even analysts who weigh the costs

makers face significant challenges in credibly put

and benefits differently than we do have reason to

ting creditors of important banks at risk of loss. A

support many of our reforms. Some of our recom

TBTF policy based on assertions of “no bailouts

mendations, for example, make policymakers less

ever” will certainly be breached. Moreover, we

likely to provide TBTF protection and address

doubt that any single policy change will dram ati

moral hazard precisely by reducing the threat of

cally reduce expected protection. But fundamen

instability. Moreover, our review of cases where

tally we part company with this third camp.

bailouts were not forthcoming suggests that poli

Policymakers can enact a series of reforms that

cymakers are, in fact, motivated by the factors we

reduce expectations of bailouts for many creditors

cite and that our reforms would push policy in the

at many institutions. Just as policymakers in many

right direction.

countries established expectations of low inflation

A second camp believes that TBTF protection

when few thought it was possible, so too can they

could impose net costs in theory, but in practice

put creditors who now expect protection at

legal regimes in the United States—which other

greater risk of loss.

developed countries could adopt—make delivery of

The first steps for credibly putting creditors of

TBTF protection so difficult as to virtually elimi

important financial institutions at risk of loss have

nate the TBTF problem.

little to do with too big to fail per se. Where need

We are sympathetic to the general and as yet

ed, countries should create or reinforce the rule of

untested approach taken by U.S. policymakers and

law, property rights, and the integrity of public

recognize that it may have made a dent in TBTF

institutions. Incorporating the costs of too big to

expectations. In the long run, however, we predict

fail into the policymaking process is another

that the system will not significantly reduce the

important reform underpinning effective m an

probability that creditors of TBTF banks will receive

agement of TBTF expectations. Appointment of

bailouts. The U.S. approach to too big to fail contin

leaders who are loath to, or at least quite cautious

ues to lack credibility.

about, providing TBTF bailouts is also a concep

Finally, a third camp also recognizes that TBTF

tually simple but potentially helpful step. Better

protection could impose net costs but believes that

public accounting for TBTF costs and concern

The Region

about the disposition o f policym akers could

restrict risk-taking, although we view S&R as hav

restrain the personal motivations that might

ing important limitations.
Finally, policymakers have a host of other avail

encourage TBTF protection.
With the basics in place, policymakers can take

able options once they have begun to address too

on TBTF expectations more credibly by directly

big to fail more effectively. For example, policymak

addressing their fear of instability. We recommend

ers could make greater use of discipline by creditors

a number of options in this regard. One class of

at risk of loss. Bank supervisors could rely more

reforms tries to reduce the likelihood that the fail

heavily on market signals in their assessment of

ure of one bank will spill over to another or to

bank risk-taking. Deposit insurers could use similar

reduce the uncertainty that policymakers face

signals to set their premiums.

when confronted with a large failing bank. These
reforms include, among other options, simulating
large bank failures and supervisory responses to

ED ITO R’S NOTE:

This excerpt, from the

them, addressing the concentration of payment

book’s conclusion, recaps the key points from the

system activity in a few banks, and clarifying the

book and offers some more details about the

legal and regulatory framework to be applied when

authors’ proposals.

a large bank fails.
Other types of reforms include reducing the
losses imposed by bank failure in the first place

Three Bottom Lines

and maintaining reforms that reduce the expo
sure between banks that is created by payments

F I R S T , the TBTF problem has not been solved, is

system activities. These policies can be effective,

getting worse, and leads, on balance, to wasted

in our view, in convincing public policymakers

resources.

that, if they refrain from a bailout, spillover
effects will be manageable. Such policies there

S E C O N D , although expectations of bailouts by

fore encourage creditors to view themselves at

uninsured creditors at large banks cannot be

risk of loss and thus improve market discipline of

eliminated, they can be reduced and better m an
aged through a credible commitment to impose

erstwhile TBTF institutions.
We are less positive about other reforms. A

losses. Policymakers can establish credible com

series of reforms that effectively punish policymak

mitments by addressing and reducing the motiva

ers who provide bailouts potentially also could

tion for bailouts.

address personal motivational factors. However, we
are not convinced that these reforms are workable

T H I R D , although other reforms could help to

and believe that they give too much credence to

establish a credible commitment, policymakers

personal motivations as a factor to explain bailouts.

should give highest priority to reforms limiting

The establishment of a basic level of supervision

the chance that one bank’s failure will threaten the

and regulation (S&R) of banks should help to

solvency of other banks.

The Region

We now provide supporting points for these

Commitment as the Solution

conclusions.
—In order to change the expectations of bailouts,

The Problem

policymakers must convince uninsured creditors
that they will bear losses when large banks fail;

—Even though they are not entitled to government

changes in policy toward the uninsured must

protection, uninsured creditors of a large or sys-

involve a credible commitment.

temically important bank believe they will be

—A credible commitment to impose losses must be

shielded from at least part of the loss in the event of

built on reforms directly reducing the incentives that

bank failure.

lead policymakers to bail out uninsured creditors.

—Anticipation of government protection warps

—Reforms that forbid coverage for the uninsured

the amount and pricing of funding that creditors

are not credible because they do not address under

provide a TBTF bank, which, in turn, leads banks

lying motivations and are easily circumvented.

to take excessive risk and make poor use of
financial capital. The costs o f poor resource use
resulting from TBTF guarantees appear to be
quite high. We believe these costs exceed the
benefits of TBTF coverage in most cases, but
even those who weigh the costs and benefits dif
ferently should be able to support many of our

—Policymakers have considerable experience in
establishing credible commitments in the setting of
monetary policy. The experience of monetary policy
over the last two decades demonstrates the feasibility
of reducing long-held expectations, such as those like
ly held by uninsured creditors of large banks.

reforms.
—Expectations of TBTF coverage have likely

Specific Motivations and Reforms

grown and become more strongly held because
more banks are now “large” and because a sm all

—The most important motivation for bailouts is to
prevent the failure of one bank from threatening

er group of banks controls a greater share of

other banks, the Financial sector, and overall econom

banking assets and provides key banking services.

ic performance. To reduce that motivation, we recom

In addition, banks have become increasingly

mend that policymakers in developed countries take

complex, making it more difficult for policymak

three general steps: enact policies and procedures that

ers to predict the fallout from bank failure and to

would reduce their uncertainty about the potential for

refuse to provide subsequent coverage to unin

spillovers; implement policies that directly limit cred

sured creditors.

itor losses or allocate losses such that market disci

—Reforms over the last decade aiming to limit
TBTF protection, including those adopted in the
United States, are unlikely to be effective in the long

pline increases without an excessive increase in insta
bility; and consider or follow up on payment system
reforms that reduce the threat of spillovers.

run (although they have yet to be tested and may

—Reforms that reduce policymaker uncertainty

have made a dent in TBTF expectations).

include the following: increase supervisory planning

The Region

for, and simulation of, a large bank failure; undertake
targeted efforts that reduce the likelihood and cost of
failure for banks dominating payment markets; make
legal and regulatory adjustments that clarify the
treatment of bank creditors at failure; and provide
liquidity more rapidly to uninsured creditors.
—Reforms that could address concerns of excessive
creditor loss include the following: close institutions
before they can impose large losses; require banks in a
weak position to increase the financial cushion to
absorb losses; impose rules that require creditors to
absorb at least some loss when their bank fails (for
example, requiring coinsurance); and allow for select
coverage of the nominally uninsured while, in general,
making it more likely that creditors will suffer losses.
—Although payment system reforms are quite com
plex in implementation, they are fairly straightfor
ward in concept. One type of reform would elimi
nate or significantly limit the amount that banks owe
each other through the payment system. A second
type of reform would establish methods by which a
bank owed funds by a failing institution could offset
losses (for example, by seizing collateral). □

Federal Reserve Bank of Minneapolis

2007
Operations
Report

The Region

Message from the First Vice President

In the coming years, the

met nearly all quality measures. The Board of

Federal Reserve System

Governors 2007 Review noted that all areas exam

faces significant challenges

ined were well controlled.

and uncertainties as it

□ The Bank continued to lead the Financial

seeks to fulfill its mission

Services Policy Committee (the Federal Reserve

to foster the stability,

System’s payments policymaking arm) and the

integrity, and efficiency

Financial Services Council effectively, as evidenced

of the nations monetary,

by meeting their respective high priority objectives.

financial, and payments

The Bank received favorable feedback on its leader

systems. Financial market

ship from other Reserve Banks and the Product and

developments, declining

Support Offices.

paper check volumes, continued financial industry
consolidation, security concerns, and the pace of

□ The Bank pursued several initiatives as part of its

technological change will all pose challenges for the

continuing commitment to advance research and

Federal Reserve in carrying out its responsibilities.

economic and financial literacy, as well as to increase
awareness of community development issues. Policy

In response to these challenges, the Federal Reserve

contributions included publication of a number of

Bank of Minneapolis remains focused on effective

scholarly articles by the Bank’s economists and

ly executing its strategic plan, which is directed at

advisers. In addition, the Research department pub

ensuring all System objectives are met while also

lished a book of groundbreaking papers titled Great

maximizing the Banks operational efficiency and

Depressions of the Twentieth Century.

quality of service delivery. In addition, the Bank
continues to seek opportunities to make important

□ Challenges in 2007 included the consolidation of

System contributions and pursue new business

the Helena Branch check operations into Denver

activities. In 2007, the Banks many achievements

and the decision to consolidate the Minneapolis

demonstrate our effectiveness in executing our

check operations into Cleveland in 2009. Helena

strategic plan and building on our strengths.

successfully tran sition ed to a substitute check print

operation in October 2007, and efforts are well

□ Overall, Bank performance was strong in 2007.

under way for the Minneapolis consolidation, with

Bank expenses were below budgeted levels after

particular emphasis on providing assistance to the

adjusting for unplanned costs related to the System

affected staff.

decisions to consolidate the Minneapolis check and
the Federal Reserve-Electronic Tax Application

□ FedACH launched phase one of a multiyear initia

operations. Revenue for priced services exceeded

tive to modernize its core payments software and pro

plan. Most efficiency measures in the check and

cessing platform using distributed technologies.

cash operations were better than plan, and the Bank

Accomplishments included business process model-

2007 by the N um bers
In 2007, the Federal Reserve Bank of Minneapolis processed:
■ 10.6 billion ACH (Automated Clearing House) payments worth approxi
mately $18.4 trillion. FedACH is a nationwide system, developed and
operated by Minneapolis staff on behalf of the entire Federal Reserve
System, which provides the electronic exchange of debits and credits.
■ 825 million check items worth $1.2 trillion; 52 percent of the items were
received electronically.
* $10.3 billion of excess currency deposited by financial institutions,
destroyed $939 million of worn and torn currency, and shipped $11.7 billion
of currency to financial institutions.
■ Forms, tenders, account maintenance and other customer transactions for
365,000 active Legacy Treasury Direct accounts for individuals holding
Treasury securities totaling $70 billion, and 3.7 million savings bond
purchase requests worth $2.0 billion, as one of two Treasury Retail
Securities sites in the Federal Reserve System.
■ 219,000 transaction items worth more than $519 billion through FR-ETA
(Federal Reserve-Electronic Tax Application), a same-day payment
mechanism, hosted by the Minneapolis Fed, for businesses paying federal
taxes via their financial institutions.

The Region

ing, technology research, and staff training. Also,

The Bank’s success in 2007 is a result of the dili

FedACH assumed new line management responsibil

gence and strong commitment to excellence by our

ity for Atlanta-based Customer Operations Sites and

employees and Board of Directors. Together we will

CBAFs, which mirror operations in Minneapolis.

continue to effectively implement our strategic plan,
build on our strengths, and address the many chal

□ The Supervision, Regulation, and Credit (SRC)

lenges we face while also carrying out the Federal

Division provided effective oversight of the Districts

Reserve System’s mission to foster stability, integrity,

only large complex banking organization and devoted

and efficiency in the nation’s monetary, financial,

considerable supervisory resources to areas of highest

and payments systems.

risk. SRC complied with all System policies and
guidelines and had no material shortcomings in
meeting reporting deadlines or internal metrics for
ongoing operations. Three operations reviews con
ducted by the Board of Governors were favorable, and
there were no findings on SRC’s Credit, Payments

James M. Lyon

System Risk, and Reserves operations.

First Vice President

□ The Bank was awarded responsibility for main
taining and enhancing the Systems Technology
Project Standards. Bank staff also led a key portion
of the Information Technology Cost Allocation
Study effort.

SRC partnered with the Customer

Contact Center to develop and implement Federal
Reserve Consumer Help, a System resource center
for consumers who have questions or concerns
about banking-related matters.
□ The Bank is the host site for the Learning
Management Support Office (LMSO), which has
responsibility for implementing and supporting
FedLearn. Implementation of FedLearn was suc
cessfully completed on schedule and within the
approved budget. All Reserve Banks and business
lines use FedLearn for course administration and to
deliver eLearning. The LMSO was also selected to
deploy FedLearn at the Board.

The Region

Helena Branch Board of Directors
Appointed by the Federal
Reserve Bank of Minneapolis

Joy N. Ott
REGIONAL PRESIDENT AND
CHIEF EXECUTIVE OFFICER

Wells Fargo Bank Montana NA
Billings, Montana

John L. Franklin
PRESIDENT AND CHIEF
EXECUTIVE OFFICER

First Bank of Sidney
Sidney, Montana

Timothy J. Bartz
CHIEF EXECUTIVE OFFICER

Anderson ZurMuehlen & Co. PC
Helena, Montana

Appointed by the Board of
Governors of the Federal Reserve
System

Lawrence R. Simkins
PRESIDENT

Washington Corporations
Missoula, Montana

Dean Folkvord
GENERAL MANAGER
AND CHIEF EXECUTIVE
OFFICER

W heat M ontana Farm s

and Bakery
Three Forks, Montana

Lawrence R. Simkins

Dean Folkvord

CHAIR

VICE CHAIR

Seated (from left): Joy Ott, John Franklin;
standing (from left): Dean Folkvord,
Timothy Bartz, Lawrence Simkins

Federal Advisory
Council Member

Lyle Knight
PRESIDENT AND CHIEF
OPERATING OFFICER

First Interstate Bank
Billings, Montana

The Region

Minneapolis Board of Directors

Frank L. Sim s

C lass A Directors

C lass B Directors

C lass C D irectors

CHAIR

(elected by member banks to
represent member banks)

(elected by member banks to
represent the public)

(appointed by the Board of
Governors to represent the
public)

Jam es J. Hynes

Peter J. H addeland

W illiam J. Shorm a

James J. Hynes

DEPUTY CHAIR

PRESIDENT

PRESIDENT AND CHIEF

EXECUTIVE

First N ational Rank o f

EXECUTIVE OFFICER

A D M IN IST R A T O R

Mahnomen
Mahnomen, Minnesota

Shur-Co
Yankton, South Dakota

Twin City Pipe Trades
Service Association
St. Paul, Minnesota

John H. Hoeven Jr.

Todd L. Johnson

CHAIRMAN AND CHIEF

Jake M arvin

EXECUTIVE OFFICER

CHAIRMAN AND CHIEF

First Western Bank & Trust
Minot, North Dakota

Reuben Johnson & Son Inc.
& Affiliated Cos.
Superior, Wisconsin

EXECUTIVE OFFICER

Marvin Windows and Doors
Warroad, Minnesota

Thom as W. Scott
CHAIRMAN

Randy Peterson

Frank L. Sim s

First Interstate BancSystem Inc.
Billings, Montana

FACILITY DIRECTOR

CORPO RAT E VICE

Lake Superior State University
Sank Ste. Marie, Michigan

TRANSPORTATION

PRESIDENT,

Cargill Inc.
Wayzata, Minnesota
Seated (from left); James Hynes, Randy
Peterson, Thomas Scott, Frank Sims; standing
(from left): John Hoeven, Peter Haddeland,
William Shorma, Todd Johnson, Jake Marvin

The Region

Advisory Council on Small Business and Labor

James Hynes

Skip Duemeland

Sarah Harris

Jon Reissner

(CHAIRMAN)

CHIEF EXECUTIVE

PRINCIPAL

PRESIDENT AND CHIEF

OFFICER

Eberhardt Advisory LLC
Minneapolis, Minnesota

EXECUTIVE OFFICER

EXECUTIVE
ADMINISTRATOR

Twin City Pipe Trades
Service Association
St. Paul, Minnesota

Duemelands
Commercial Properties
Bismarck, North Dakota

MagStar Technologies Inc.
Hopkins, Minnesota

Harry Lerner
CHIEF EXECUTIVE

G. Bradley Schlossman

Rolin Erickson

OFFICER

CHIEF EXECUTIVE

David Brown

PRESIDENT

SEN IO R VICE

Montana Resources LLP
Butte, Montana

Lerner Publishing Group
Minneapolis, Minnesota

PRESIDENT

Business Banking
Home Federal Bank
Sioux Falls, South Dakota

Keith Moyle
Kim Hamilton

VI CE P R E S I D E N T AND

Nancy Straw

OWNER

GENERAL MANAGER

PRESIDENT AND CHIEF

White Winter Winery
Iron River, Wisconsin

Upper Peninsula Power Co.
Ishpeming, Michigan

EXECUTIVE OFFICER

Seated (from left): Kim Hamilton, Harry Lerner, G.
Bradley Schlossman, Nancy Straw, David Brown; stand
ing (from left): Keith Moyle, Sarah Harris, Jon Reissner,
Rolin Erickson, James Hynes, Skip Duemeland

OFFICER

West Acres Development
Fargo, North Dakota

West Central Initiative
Fergus Falls, Minnesota

The Region

Advisory Council on Agriculture

Maurice Reiner

Dean Folkvord

Joel Dick

William Kaul

(CHAIRMAN)

VICE PRESID ENT AND

VICE P RES IDE NT

PRESIDENT, YANKTON

Great River Energy
Elk River, Minnesota

MARKET

GENERAL MANAGER
AND CHIEF EXECUTIVE
OFFICER

Wheat Montana Farms
and Bakery
Three Forks, Montana

CHIEF OPERATING
OFFICER

Roman Meal Milling Co.
Fargo, North Dakota

OWNER

Stephen Hansen
PRESIDENT

Richard Dale
OWNER

Highland Valley Farm
Bayfield, Wisconsin

Duane Kroll

F.
H.C. Inc.
Oakes, North Dakota

G. C. “Tucker” Hughes
PRESIDENT

Kroll Farm
Royalton, Minnesota

Jeff Lakner

Rodney Schmidt
DISTRICT MANAGER

Bayer Crop Science
Lakeville, Minnesota

OWNER

Lakner Farms
Wessington, South Dakota

Claire Seefeldt
VICE PRESIDEN T

First National Bank
Milnor, North Dakota

Hughes & Sons Cattle Co.
Stanford, Montana

Seated (from left): William Kaul, Richard Dale, Joel
Dick; standing (from left): Maurice Reiner, Duane
Kroll, Claire Seefeldt, Jeff Lakner, Stephen Hansen,
Dean Folkvord, Tucker Hughes

First National Bank
of South Dakota
Yankton, South Dakota

;251

The Region

Federal Reserve Bank of Minneapolis

Senior Management

Gary H. Stern

Duane A. Carter

Claudia S. Swendseid

PRESIDENT

SEN IOR VICE PR ES ID E NT

SENIOR VICE PRESIDENT

AND EQUAL EM P L OY ME NT

James M. Lyon

OPPORTUNITY OFFICER

Creighton R. Fricek
SENIOR VICE PRESIDENT
AND CORPORAT E SECRETARY

Arthur J. Rolnick
SENIOR VICE PRESIDENT
A N D D I R E C T O R OF R E S E A R C H

Seated (from left): James Lyon, Arthur Rolnick,
Duane Carter; standing (from left): Creighton Fricek,
Gary Stern, Claudia Swendseid, Niel Willardson

Niel D. Willardson
SEN IO R VICE PR ES ID ENT

FIRST VICE PRESIDENT

AND GENERAL COUNSEL

The Region

Officers

Ron J. Feldman

Mary E. Vignalo

Barbara G. Coyle

Mark A. Rauzi

VICK P RES IDE NT

VICE PRESIDENT

A S SI S TA N T VICE

AS SI S T A N T VICE

PRESIDENT

David G. Fettig
VICE PRESIDENT

Warren E. Weber
SENIOR RESEARC H

James T. Deusterhoff

Randy L. St. Aubin

OFFICER

A S SI S TA N T VICE

AS SI S T A N T VICE

P R ESIDE NT AND

P R E S I D E N T AND

DISCOUNT OFFICER

ASSISTANT GENERAL

Michael Garrett
VICE P RES ID ENT

AUDITOR

Peter Baatrup
Linda M. Gilligan
VICE PR ES ID ENT AND
GENERAL AUDITOR

Matthew D. Larson
VICE PRES ID ENT

Scott F. Forss

AS SISTANT VICE
PR ES ID E NT AND
ASSISTANT GENERAL

AS SIS TA N T VICE

Tamra J. Wheeler

PRESIDENT

AS SI S TA N T VICE
PRESIDENT

COUNSEL

Jean C. Garrick
Nicole Bennett
A SSI ST AN T VICE

A S SI S TA N T VICE

John E. Yanish

PRESIDENT

A SSI ST AN T VICE
PRESIDENT

PRESIDENT

Frederick L. Miller

Peter J. Gavin

VICE P R ES ID E NT

A SSI ST AN T VICE

Kelly A. Bernard

PRESIDENT

AS SIS TAN T VICE

Kinney G. Misterek

Jacqueline G. King

VICE PRESIDENT

AS SI S TA N T VICE

Sheryl L. Britsch
Marie R. Munson

ASSI STAN T VICE

VICE PRES ID ENT

PRESIDENT

Paul D. Rimmereid

Jacquelyn K. Brunmeier

VICE P R ESI DEN T

AS SIS TA N T VICE

AND CH IE F F IN AN CI AL

PRESIDENT

AS SIS TAN T VICE

VICE P R ES ID E NT AND
BRANCH MANAGER

December 31, 2007
A S SI S TA N T VICE
PRESIDENT

VICE P R ES I D E N T AND

PRESIDENT

Deborah A. Koller
AS SI S TA N T VICE
PRESIDENT

DEPUTY GENERAL

James A. Colwell

Todd A. Maki

AS SIS TAN T VICE

AS SISTA N T VICE

PRESIDENT

VICE PRESIDENT

Walter A. Cox
Cheryl L. Venable

ASSI ST AN T VICE

VICE P RES IDE NT

PRESIDENT

P R ES I D E N T AND
C O M M U N I T Y AFFAIRS

Elizabeth W. Kittelson

Michelle R. Brunn
Susan K. Rossbach

Richard M. Todd

R. Paul Drake

OFFICER

COUNSEL

Flelena Branch Officer

PRESI D E NT

Barbara J. Pfeffer
A SSI ST AN T VICE
PRESIDENT

Auditor Independence
The firm engaged by the Board of Governors for the
audits of the individual and combined financial state
ments of the Reserve Banks for 2007 was Deloitte &
Touche LLP (D&T). Fees for these services totaled $4.7
million. To ensure auditor independence, the Board of
Governors requires that D&T be independent in all
matters relating to the audit. Specifically, D&T may not
perform services for the Reserve Banks or others that
would place it in a position of auditing its own work,
making management decisions on behalf of the
Reserve Banks, or in any other way impairing its audit
independence. In 2007, the Bank did not engage D&T
for any material advisory services.

Federal Reserve Bank of Minneapolis

2007
Financial
Statements
December 31,2007 and 2006
Letter to Directors

Report o f Independent Auditors

Statements o f Condition

Statements o f Income and
Comprehensive Income

Statements o f Changes in Capital

Notes to Financial Statements

90 Hennepin Avenue, P.O. Box 291
Minneapolis, Minnesota 55480-0291
Phone 612 204-5000

March 20, 2008
To the Board of Directors
Federal Reserve Bank of Minneapolis
90 Hennepin Avenue, P.O. Box 291
Minneapolis, MN 55480
The management of the Federal Reserve Bank of Minneapolis (“FRBM”) is responsible for the
preparation and fair presentation of the Statement of Condition, Statements of Income and
Comprehensive Income, and Statement of Changes in Capital as of December 31, 2007 (the
“Financial Statements”). The Financial Statements have been prepared in conformity with the
accounting principles, policies and practices established by the Board of Governors of the Federal
Reserve System and as set forth in the Financial Accounting Manual for the Federal Reserve
Banks (“Manual”), and as such, include amounts, some of which are based on management
judgments and estimates. To our knowledge, the Financial Statements are, in all material
respects, fairly presented in conformity with the accounting principles, policies and practices
documented in the Manual and include all disclosures necessary for such fair presentation.
The management of the FRBM is responsible for establishing and maintaining effective internal
control over financial reporting as it relates to the Financial Statements. Such internal control
is designed to provide reasonable assurance to management and to the Board of Directors
regarding the preparation of the Financial Statements in accordance with the Manual. Internal
control contains self-monitoring mechanisms, including, but not limited to, divisions of
responsibility and a code of conduct. Once identified, any material deficiencies in internal
control are reported to management and appropriate corrective measures are implemented.
Even effective internal control, no matter how well designed, has inherent limitations, including
the possibility of human error, and therefore can provide only reasonable assurance with
respect to the preparation of reliable financial statements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.

The management of the FRBM assessed its internal control over financial reporting reflected
in the Financial Statements, based upon the criteria established in the “Internal C o n tro lIntegrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this assessment, we believe that the FRBM maintained effective inter
nal control over financial reporting as it relates to the Financial Statements.
Federal Reserve Bank of Minneapolis

Gary H. Stern

James M. Lyon

Paul D. Rimmereid

President

First Vice President

Chief Financial Officer

Deloitte.

Deloitte & Touche LLP

400 One Financial Plaza
120 South Sixth Street
Minneapolis, MN 55402-1844
USA
Tel: +1 612 397 4000
Fax: +1 612 397 4450
www.deloitte.com

Treadway Commission. FRB Minneapolis’s management is responsible for these financial statements, for
maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying M an ag e m e n t A ssertio n . Our responsi
bility is to express an opinion on these financial statements and an opinion on FRB Minneapolis's internal con
trol over financial reporting based on our audit. The financial statements of FRB Minneapolis for the year
ended December 31, 2006 were audited by other auditors whose report, dated March 12, 2007, expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free o f material m isstatement and whether effective

internal control over financial reporting was maintained in all material respects. Our audit of the financial
statements included examining, on a test basis, evidence supporting the amounts and disclosures in the finan
cial statements, assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of internal con
trol based on the assessed risk. Our audit also included performing such Other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
FRB Minneapolis’s internal control over financial reporting is a process designed by, or under the supervision
of, FRB Minneapolis’s principal executive and principal financial officers, or persons performing similar func
tions, and effected by FRB Minneapolis’s board of directors, management, and other personnel to provide rea
sonable assurance regarding the reliability of financial reporting and the preparation of financial statements for

Member of
Deloitte Touche Tohmatsu

external purposes in accordance with the accounting principles established by the Board of Governors of the
Federal Reserve System. FRB Minneapolis’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of FRB Minneapolis; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with
the accounting principles established by the Board of Governors of the Federal Reserve System, and that
receipts and expenditures of FRB Minneapolis are being made only in accordance with authorizations of man
agement and directors of FRB Minneapolis; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of FRB Minneapolis’s assets that could have a
material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility o f col
lusion or improper management override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness o f the internal
control over financial reporting to future periods are subject to the risk that the controls may become inade
quate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
As described in Note 3 to the financial statements, FRB Minneapolis has prepared these financial statements
in conformity with accounting principles established by the Board of Governors of the Federal Reserve System,
as set forth in the F in a n c ia l A ccountin g M a n u a l f o r F ed eral R eserve B a n k s , which is a comprehensive basis of
accounting other than accounting principles generally accepted in the United States o f America. The effects
on such financial statements of the differences between the accounting principles established by the Board of
Governors of the Federal Reserve System and accounting principles generally accepted in the United States of
America are also described in Note 3.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial
position of FRB Minneapolis as of December 31,2007, and the results of its operations for the year then ended,
on the basis of accounting described in Note 3. Also, in our opinion, FRB Minneapolis maintained, in all mate
rial respects, effective internal control over financial reporting as of December 31, 2007, based on the criteria
established in In te rn al C on trol— In tegrated F ram ew o rk issued by the Committee of Sponsoring Organizations
of the Treadway Commission.

March 20, 2008

fttKWV&HOUtfOOPERS B
PricewaterhouseCoopers LLP

Suite 1400
225 South Sixth Street
Minneapolis MN 55402
Telephone (612) 596 6000
Facsimile (612) 373 7160

Report of Independent Auditors
To the Board of Governors of the Federal Reserve System
and the Board of Directors o f the Federal
Reserve Bank of Minneapolis:
We have audited the accompanying statement o f condition o f the Federal Reserve Bank o f Minneapolis (the
“Bank”) as of December 31, 2006, and the related statements of income and changes in capital for the year
then ended, which have been prepared in conformity with the accounting principles, policies, and practices
established by the Board of Governors of the Federal Reserve System. These financial statements are the
responsibility o f the Banks management. Our responsibility is to express an opinion on these financial state
ments based on our audit.
We conducted our audit in accordance with generally accepted auditing standards as established by the
Auditing Standards Board (United States) and in accordance with the auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, and eval
uating the overall financial statement presentation. We believe that our audit provides a reasonable basis for
our opinion.
As described in Note 3, these 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,
policies, and practices, which were designed to meet the specialized accounting and reporting needs o f the
Federal Reserve System, are set forth in the F in a n c ia l A ccou ntin g M a n u a l f o r F e d e ral R eserve B a n k s which is a
comprehensive basis of accounting other than accounting 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 31,2006, and the results of its operations for the year then ended, on the
basis o f accounting described in Note 3.

Federal Reserve Bank of Minneapolis

STATEMENTS OF CONDITION
(in millions)

December 31,
2007

December 31.
2006

A ssets

Gold certificates
Special drawing rights certificates
Coin
Items in process of collection
Loans to depository institutions

30
45
98
928
14,877

15,930
380
137
-

851
127

Interdistrict settlement account
Bank premises and equipment, net

2,140
122

Other assets
$

20
19,444

211
30
31
219
22

Securities purchased under agreements to resell
U.S. government securities, net
Investments denominated in foreign currencies
Accrued interest receivable

Total assets

203

130
19
$

17,109

14,893
602

Liabilities and Capital

Liabilities
Federal Reserve notes outstanding, net
$
Securities sold under agreements to repurchase
Deposits
Depository institutions
Other deposits
Deferred credit items
Interest on Federal Reserve notes due to U.S. Treasury
Interdistrict settlement account
Accrued benefit costs
Other liabilities
Total liabilities

16,429
877
1,104
1
222

455
1
288

38
55
8
18,734

16
237
60
5
16,557

355

276

355

276

710
19,444

552

Capital
Capital paid-in
Surplus (including accumulated other
comprehensive loss of $1 million and $12 million
at December 31, 2007 and 2006, respectively)
Total capital
Total liabilities and capital

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

17,109

Federal Reserve Bank of Minneapolis

STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(in millions)

For the years ended
December 31, December 31,
2007
2006
Interest income
Interest on U.S. government securities
$
Interest on securities purchased under agreements to resell

777

Interest on investments denominated in foreign currencies
Interest on loans to depository institutions
Total interest income

10
2
817

721
7
3
731

Interest expense
Interest expense on securities sold under agreements
to repurchase

783

704

Compensation received for services provided
Reimbursable services to government agencies

79
29

Foreign currency gains, net
Other income
Total other operating income

34
1

74
26
22

Net interest income
Other operating income

1
123

143

Operating expenses
Salaries and other benefits
Occupancy expense

105
12
7
20
43
187
739

Equipment expense
Assessments by the Board of Governors
Other expenses
Total operating expenses
Net income prior to distribution
Change in funded status of benefit plans
Comprehensive income prior to distribution

98
11
7
18
41
175
652

750

652

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

Payments to U.S. Treasury as interest on
Federal Reserve notes
Total distribution

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

652

594

750

652

Federal Reserve Bank of Minneapolis

STATEMENTS OF CHANGES IN CAPITAL
(in millions)

For the years ended
December 31, 2007 and December 31, 2006
Surplus

Capital
Paid-In

Balance at January 1,2006

245

Accumulated
Other
Net Income Comprehensive Total
Retained
Loss
Surplus

245

Total
Capital

245

490

(4.9 million shares)
Net change in capital stock
issued (0.6 million shares)
Transferred to surplus

Adjustment to initially apply
SFAS No. 158
Balance at December 31,2006

(12)
$

276

288

(12)

276

552

(5.5 million shares)
Net change in capital stock
issued (1.6 million shares)

Transferred to surplus and
change in accumulated
other comprehensive loss
Balance at Decem ber 31,2007

(7.1 million shares)

355

356

(1)

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

355

710

Federal Reserve Bank of Minneapolis

Notes to Financial Statements

1. STRUCTURE
The Federal Reserve Bank of Minneapolis (“Bank”) is part of the Federal Reserve System
(“System”) and one of the twelve Reserve Banks (“Reserve Banks”) created by Congress under
the Federal Reserve Act of 1913 (“Federal Reserve Act”), which established the central bank of
the United States. The Reserve Banks are chartered by the federal government and possess a
unique set of governmental, corporate, and central bank characteristics. The Bank and its
branch in Helena, Montana, serve the Ninth Federal Reserve District, which includes
Minnesota, Montana, North Dakota, South Dakota, and portions of Michigan and Wisconsin.
In accordance with the Federal Reserve Act, supervision and control of the Bank is exercised by
a board of directors. The Federal Reserve Act specifies the composition of the board of direc
tors for each of the Reserve Banks. Each board is composed of nine members serving three-year
terms: three directors, including those designated as chairman and deputy chairman, are
appointed by the Board of Governors of the Federal Reserve System (“Board of Governors”) to
represent the public, and six directors are elected by member banks. Banks that are members of
the System include all national banks and any state-chartered banks that apply and are approved
for membership in the System. Member banks are divided into three classes according to size.
Member banks in each class elect one director representing member banks and one represent
ing the public. In any election of directors, each member bank receives one vote, regardless of
the number of shares of Reserve Bank stock it holds.
The System also consists, in part, of the Board of Governors and the Federal Open Market
Committee (“FOMC”). The Board of Governors, an independent federal agency, is charged by
the Federal Reserve Act with a number of specific duties, including general supervision over the
Reserve Banks. The FOMC is composed of members of the Board of Governors, the president
of the Federal Reserve Bank of New York (“FRBNY”), and on a rotating basis four other Reserve
Bank presidents.

2. OPERATIONS AND SERVICES
The Reserve Banks perform a variety of services and operations. Functions include participa
tion in formulating and conducting monetary policy; participation in the payments system,
including large-dollar transfers of funds, automated clearinghouse (“ACH”) operations, and
check collection; distribution of coin and currency; performance of fiscal agency functions for
the U.S. Treasury, certain federal agencies, and other entities; serving as the federal govern
ments bank; provision of short-term loans to depository institutions; service to the consumer
and the community by providing educational materials and information regarding consumer
laws; and supervision of bank holding companies, state member banks, and U.S. offices of for
eign banking organizations. Certain services are provided to foreign and international mone
tary authorities, primarily by the FRBNY.

F ed e ra l R e se rv e B a n k
o f M in n e a p o lis

Notes to
Financial Statements
(Continued)

The FOMC, in the conduct of monetary policy, establishes policy regarding domestic open mar
ket operations, oversees these operations, and annually issues authorizations and directives to the
FRBNY for its execution of transactions. The FRBNY is authorized and directed by the FOMC to
conduct operations in domestic markets, including the direct purchase and sale of U.S. govern
ment securities, the purchase of securities under agreements to resell, the sale of securities under
agreements to repurchase, and the lending of U.S. government securities. The FRBNY executes
these open market transactions at the direction of the FOMC and holds the resulting securities
and agreements in the portfolio known as the System Open Market Account (“SOMA”).
In addition to authorizing and directing operations in the domestic securities market, the
FOMC authorizes and directs the FRBNY to execute operations in foreign markets for major
currencies in order to counter disorderly conditions in exchange markets or to meet other
needs specified by the FOMC in carrying out the Systems central bank responsibilities. The
FRBNY is authorized by the FOMC to hold balances of, and to execute spot and forward for
eign exchange (“FX”) and securities contracts for, nine foreign currencies and to invest such
foreign currency holdings ensuring adequate liquidity is maintained. The FRBNY is authorized
and directed by the FOMC to maintain reciprocal currency arrangements (“FX swaps”) with
four central banks and “warehouse” foreign currencies for the U.S. Treasury and Exchange
Stabilization Fund (“ESF”) through the Reserve Banks. In connection with its foreign currency
activities, the FRBNY may enter into transactions that contain varying degrees of off-balancesheet market risk that results from their future settlement and counter-party credit risk. The
FRBNY controls credit risk by obtaining credit approvals, establishing transaction limits, and
performing daily monitoring procedures.
Although the Reserve Banks are separate legal entities, in the interests of greater efficiency and
effectiveness they collaborate in the delivery of certain operations and services. The collabora
tion takes the form of centralized operations and product or function offices that have responsi
bility for the delivery of certain services on behalf of the Reserve Banks. Various operational and
management models are used and are supported by service agreements between the Reserve
Bank providing the service and the other eleven Reserve Banks. In some cases, costs incurred by
a Reserve Bank for services provided to other Reserve Banks are not shared; in other cases, the
Reserve Banks are billed for services provided to them by another Reserve Bank.
Major services provided on behalf of the System by the Bank, for which the costs were not redis
tributed to the other Reserve Banks, include application development and centralized business
administration functions for FedACH payment services, the Electronic Access Customer
Contact Center, the Financial Services Policy Committee, and the FedMail and FedPhone
Leadership Center.

3. SIGNIFICANT ACCOUNTING POLICIES
Accounting principles for entities with the unique powers and responsibilities of the nations
central bank have not been formulated by accounting standard-setting bodies. The Board of
Governors has developed specialized accounting principles and practices that it considers to be
appropriate for the nature and function of a central bank, which differ significantly from those
of the private sector. These accounting principles and practices are documented in the F inancial
Accounting M an u al f o r Federal Reserve B anks (“Financial Accounting Manual”), which is issued

F e d e ra l R e se rv e B a n k
o f M in n e a p o lis

Notes to
Financial Statements
(Continued)

by the Board of Governors. All of the Reserve Banks are required to adopt and apply account
ing policies and practices that are consistent with the Financial Accounting Manual and the
financial statements have been prepared in accordance with the Financial Accounting Manual.
Differences exist between the accounting principles and practices in the Financial Accounting
Manual and generally accepted accounting principles in the United States (“GAAP”), primarily
due to the unique nature of the Banks powers and responsibilities as part of the nations central
bank. The primary difference is the presentation of all securities holdings at amortized cost, rather
than using the fair value presentation required by GAAP. U.S. government securities and invest
ments denominated in foreign currencies comprising the SOMA are recorded at cost, on a settle
ment-date basis, and adjusted for amortization of premiums or accretion of discounts on a
straight-line basis. Amortized cost more appropriately reflects the Banks securities holdings given
the Systems unique responsibility to conduct monetary policy. While the application of current
market prices to the securities holdings may result in values substantially above or below their car
rying values, these unrealized changes in value would have no direct effect on the quantity of
reserves available to the banking system or on the prospects for future Bank earnings or capital.
Both the domestic and foreign components of the SOMA portfolio may involve transactions that
result in gains or losses when holdings are sold prior to maturity. Decisions regarding securities
and foreign currency transactions, including their purchase and sale, are motivated by monetary
policy objectives rather than profit. Accordingly, market values, earnings, and any gains or loss
es resulting from the sale of such securities and currencies are incidental to the open market oper
ations and do not motivate decisions related to policy or open market activities.
In addition, the Bank has elected not to present a Statement of Cash Flows because the liquid
ity and cash position of the Bank are not a primary concern given the Reserve Banks’ unique
powers and responsibilities. A Statement of Cash Flows, therefore, would not provide addition
al meaningful information. Other information regarding the Bank’s activities is provided in, or
may be derived from, the Statements of Condition, Income and Comprehensive Income, and
Changes in Capital. There are no other significant differences between the policies outlined in
the Financial Accounting Manual and GAAR
The preparation of the financial statements in conformity with the Financial Accounting
Manual requires management to make certain estimates and assumptions that affect the report
ed amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of income and expenses during the
reporting period. Actual results could differ from those estimates. Unique accounts and signif
icant accounting policies are explained below.

a. G old a n d Sp ecial D raw in g R ights C ertificates
The Secretary of the U.S. Treasury is authorized to issue gold and special drawing rights
(“SDR”) certificates to the Reserve Banks.
Payment for the gold certificates by the Reserve Banks is made by crediting equivalent amounts in
dollars into the account established for the U.S. Treasury. The gold certificates held by the Reserve
Banks are required to be backed by the gold of the U.S. Treasury. The U.S. Treasury may reacquire
the gold certificates at any time and the Reserve Banks must deliver them to the U.S. Treasury. At
such time, the U.S. Treasury’s account is charged, and the Reserve Banks’ gold certificate accounts

F ed e ral R e se rv e B a n k
o f M in n e a p o lis

Notes to
Financial Statements
(Continued)

are reduced. The value of gold for purposes of backing the gold certificates is set by law at $42 2/9 a
fine troy ounce. The Board of Governors allocates the gold certificates among Reserve Banks once
a year based on the average Federal Reserve notes outstanding in each Reserve Bank
SDR certificates are issued by the International Monetary Fund (“Fund”) to its members in pro
portion to each member’s quota in the Fund at the time of issuance. SDR certificates serve as a
supplement to international monetary reserves and may be transferred from one national mon
etary 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. When SDR certificates are issued to the Reserve Banks,
equivalent amounts in dollars are credited to the account established for the U.S. Treasury and
the Reserve Banks’ SDR certificate accounts are increased. The Reserve Banks are required to
purchase SDR certificates, at the direction of the U.S. Treasury, for the purpose of financing
SDR acquisitions or for financing exchange stabilization operations. At the time SDR transac
tions occur, the Board of Governors allocates SDR certificate transactions among Reserve
Banks based upon each Reserve Bank’s Federal Reserve notes outstanding at the end of the pre
ceding year. There were no SDR transactions in 2007 or 2006.

b. L o an s to D epository In stitu tions
Depository institutions that maintain reservable transaction accounts or nonpersonal time
deposits, as defined in regulations issued by the Board of Governors, have borrowing privileges
at the discretion of the Reserve Bank. Borrowers execute certain lending agreements and
deposit sufficient collateral before credit is extended. The Bank offers three discount window
programs to depository institutions: primary credit, secondary credit, and seasonal credit, each
with its own interest rate. Interest is accrued using the applicable discount rate established at
least every fourteen days by the board of directors of the Reserve Bank, subject to review and
determination by the Board of Governors.
In addition, depository institutions that are eligible to borrow under the Reserve Bank’s pri
mary credit program are also eligible to participate in the temporary Term Auction Facility
(“TAF”) program. Under the TAF program, the Reserve Banks conduct auctions for a fixed
amount of funds, with the interest rate determined by the auction process, subject to a mini
mum bid rate. All advances under the TAF must be fully collateralized.
Outstanding loans are evaluated for collectibility, and currently all are considered collectible
and fully collateralized. If loans were ever deemed to be uncollectible, an appropriate reserve
would be established.
c. U.S. G overnm ent Secu rities a n d Investm ents D en o m in ated in Foreign C urrencies
Interest income on U.S. government securities and investments denominated in foreign curren
cies comprising the SOMA is accrued on a straight-line basis. Gains and losses resulting from
sales of securities are determined by specific issues based on average cost. Foreign-currencydenominated assets are revalued daily at current foreign currency market exchange rates in
order to report these assets in U.S. dollars. Realized and unrealized gains and losses on invest
ments denominated in foreign currencies are reported as “Foreign currency gains, net” in the
Statements of Income and Comprehensive Income.

F ed e ra l R e se rv e B a n k
o f M in n e a p o lis

Notes to
Financial Statements
(Continued)

Activity related to U.S. government securities, including the premiums, discounts, and realized
and unrealized gains and losses, is allocated to each Reserve Bank on a percentage basis derived
from an annual settlement of the interdistrict settlement account that occurs in April of each
year. The settlement also equalizes Reserve Bank gold certificate holdings to Federal Reserve
notes outstanding in each District. Activity related to investments denominated in foreign cur
rencies is allocated to each Reserve Bank based on the ratio of each Reserve Banks capital and
surplus to aggregate capital and surplus at the preceding December 31.

d. Securities

P u rch ased U nder A greem ents to Resell, Securities S o ld U nder A greem ents to

Repurchase, a n d Secu rities L en d in g

The FRBNY may engage in tri-party purchases of securities under agreements to resell (“tri
party agreements”). Tri-party agreements are conducted with two commercial custodial banks
that manage the clearing and settlement of collateral. Collateral is held in excess of the contract
amount. Acceptable collateral under tri-party agreements primarily includes U.S. government
securities, pass-through mortgage securities of the Government National Mortgage
Association, Federal Home Loan Mortgage Corporation, and Federal National Mortgage
Association, STRIP securities of the U.S. Government, and “stripped” securities of other gov
ernment agencies. The tri-party agreements are accounted for as financing transactions, with
the associated interest income accrued over the life of the agreement.
Securities sold under agreements to repurchase are accounted for as financing transactions and
the associated interest expense is recognized over the life of the transaction. These transactions
are reported in the Statements of Condition at their contractual amounts and the related
accrued interest payable is reported as a component of “Other liabilities.”
U.S. government securities held in the SOMA are lent to U.S. government securities dealers in
order to facilitate the effective functioning of the domestic securities market. Securities-lending transactions are fully collateralized by other U.S. government securities and the collateral
taken is in excess of the market value of the securities loaned. The FRBNY charges the dealer a
fee for borrowing securities and the fees are reported as a component of “Other income.”
Activity related to securities sold under agreements to repurchase and securities lending is allo
cated to each of the Reserve Banks on a percentage basis derived from an annual settlement of
the interdistrict settlement account. On February 15, 2007, the FRBNY began allocating to the
other Reserve Banks the activity related to securities purchased under agreements to resell.

e. F X Sw ap A rrangem ents a n d W arehousing A greem ents
FX swap arrangements are contractual agreements between two parties, the FRBNY and an
authorized foreign central bank, whereby the parties agree to exchange their currencies up to
a prearranged maximum amount and for an agreed-upon period of time (up to twelve
months), at an agreed-upon interest rate. These arrangements give the FOMC temporary
access to the foreign currencies it may need to support its international operations and give
the authorized foreign central bank temporary access to dollars. Drawings under the FX swap
arrangements can be initiated by either party and must be agreed to by the other party. The
FX swap arrangements are structured so that the party initiating the transaction bears the
exchange rate risk upon maturity. Foreign currencies received pursuant to these agreements

F ed e ral R e se rv e B a n k
o f M in n e a p o lis

Notes to
Financial Statements
(Continued)

are reported as a component of “Investments denominated in foreign currencies” in the
Statements of Condition.
Warehousing is an arrangement under which the FOMC agrees to exchange, at the request of
the U.S. Treasury, U.S. dollars for foreign currencies held by the U.S. Treasury or ESF over a lim
ited period of time. The purpose of the warehousing facility is to supplement the U.S. dollar
resources of the U.S. Treasury and ESF for financing purchases of foreign currencies and relat
ed international operations.
FX swap arrangements and warehousing agreements are revalued daily at current market
exchange rates. Activity related to these agreements, with the exception of the unrealized gains
and losses resulting from the daily revaluation, is allocated to each Reserve Bank based on the
ratio of each Reserve Banks capital and surplus to aggregate capital and surplus at the preced
ing December 31. Unrealized gains and losses resulting from the daily revaluation are record
ed by FRBNY and not allocated to the other Reserve Banks.
f. B a n k P rem ises, E quipm ent, a n d Softw are
Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is cal
culated on a straight-line basis over the estimated useful lives of the assets, which range from two
to fifty years. Major alterations, renovations, and improvements are capitalized at cost as additions
to the asset accounts and are depreciated over the remaining useful life of the asset or, if appropri
ate, over the unique useful life of the alteration, renovation, or improvement. Maintenance, repairs,
and minor replacements are charged to operating expense in the year incurred.
Costs incurred for software during the application development stage, either developed internally or
acquired for internal use, are capitalized based on the cost of direct services and materials associat
ed with designing, coding, installing, or testing software. Capitalized software costs are amortized
on a straight-line basis over the estimated useful lives of the software applications, which range from
two to five years. Maintenance costs related to software are charged to expense in the year incurred.
Capitalized assets including software, buildings, leasehold improvements, furniture, and equip
ment are impaired when events or changes in circumstances indicate that the carrying amount
of assets or asset groups is not recoverable and significantly exceeds their fair value.

g. In terd istrict Settlem ent A ccount
At the close of business each day, each Reserve Bank assembles the payments due to or from
other Reserve Banks. These payments result from transactions between Reserve Banks and
transactions that involve depository institution accounts held by other Reserve Banks, such as
Fedwire funds and securities transfers, and check and ACH transactions. The cumulative net
amount due to or from the other Reserve Banks is reflected in the “Interdistrict settlement
account” in the Statements of Condition.

h. F ed eral R eserve N otes
Federal Reserve notes are the circulating currency of the United States. These notes are issued
through the various Federal Reserve agents (the chairman of the board of directors of each

F ed e ra l R e se rv e B a n k
o f M in n e a p o lis

Notes to
Financial Statements
(Continued)

Reserve Bank and their designees) to the Reserve Banks upon deposit with such agents of spec
ified classes of collateral security, typically U.S. government securities. These notes are identi
fied as issued to a specific Reserve Bank. The Federal Reserve Act provides that the collateral
security tendered by the Reserve Bank to the Federal Reserve agent must be at least equal to the
sum of the notes applied for by such Reserve Bank.
Assets eligible to be pledged as collateral security include all of the Banks assets. The col
lateral value is equal to the book value of the collateral tendered, with the exception of
securities, for which the collateral value is equal to the par value of the securities tendered.
The par value of securities pledged for securities sold under agreements to repurchase is
deducted.
The Board of Governors may, at any time, call upon a Reserve Bank for additional security to
adequately collateralize the Federal Reserve notes. To satisfy the obligation to provide sufficient
collateral for outstanding Federal Reserve notes, the Reserve Banks have entered into an agree
ment that provides for certain assets of the Reserve Banks to be jointly pledged as collateral for
the Federal Reserve notes issued to all Reserve Banks. In the event that this collateral is insuf
ficient, the Federal Reserve Act provides that Federal Reserve notes become a first and para
mount lien on all the assets of the Reserve Banks. Finally, Federal Reserve notes are obligations
of the United States government. At December 31,2007, all Federal Reserve notes issued to the
Reserve Banks were fully collateralized.
“Federal Reserve notes outstanding, net” in the Statements of Condition represents the Bank’s
Federal Reserve notes outstanding, reduced by the Bank’s currency holdings of $2,790 million
and $2,549 million at December 31, 2007 and 2006, respectively.

i. Item s in Process o f C ollection a n d D eferred C redit Item s
“Items in process of collection” in the Statements of Condition primarily represents amounts
attributable to checks that have been deposited for collection and that, as of the balance sheet
date, have not yet been presented to the paying bank. “Deferred credit items” are the counter
part liability to items in process of collection, and the amounts in this account arise from defer
ring credit for deposited items until the amounts are collected. The balances in both accounts
can vary significantly.
j. C a p ita l P aid -in
The Federal Reserve Act requires that each member bank subscribe to the capital stock of the
Reserve Bank in an amount equal to 6 percent of the capital and surplus of the member bank.
These shares are nonvoting with a par value of $100 and may not be transferred or hypothe
cated. As a member bank’s capital and surplus changes, its holdings of Reserve Bank stock
must be adjusted. Currently, only one-half of the subscription is paid-in and the remainder is
subject to call. A member bank is liable for Reserve Bank liabilities up to twice the par value
of stock subscribed by it.
By law, each Reserve Bank is required to pay each member bank an annual dividend of 6 per
cent on the paid-in capital stock. This cumulative dividend is paid semiannually. To reflect the
Federal Reserve Act requirement that annual dividends are deducted from net earnings, divi-

F ed e ral R e se rv e B a n k
o f M in n e a p o lis

Notes to
Financial Statements
(Continued)

dends are presented as a distribution of comprehensive income in the Statements of Income and
Comprehensive Income.

Su rp lu s

The Board of Governors requires the Reserve Banks to maintain a surplus equal to the amount
of capital paid-in as of December 31 of each year. This amount is intended to provide addition
al capital and reduce the possibility that the Reserve Banks would be required to call on mem
ber banks for additional capital.
Accumulated other comprehensive income is reported as a component of surplus in the Statements
of Condition and the Statements of Changes in Capital. The balance of accumulated other compre
hensive income is comprised of expenses, gains, and losses related to defined benefit pension plans
and other postretirement benefit plans that, under accounting standards, are included in other
comprehensive income but excluded from net income. Additional information regarding the clas
sifications of accumulated other comprehensive income is provided in Notes 9 and 10.
The Bank initially applied the provisions of SFAS No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans, at December 31, 2006. This accounting stan
dard requires recognition of the overfunded or underfunded status of a defined benefit postre
tirement plan in the Statements of Condition, and recognition of changes in the funded status
in the years in which the changes occur through comprehensive income. The transition rules
for implementing the standard required applying the provisions as of the end of the year of ini
tial implementation, and the effect as of December 31, 2006, is recorded as “Adjustment to ini
tially apply SFAS No. 158” in the Statements of Changes in Capital.
1. Interest on F ed eral R eserve N otes
The Board of Governors requires the Reserve Banks to transfer excess earnings to the U.S.
Treasury as interest on Federal Reserve notes, after providing for the costs of operations, pay
ment of dividends, and reservation of an amount necessary to equate surplus with capital paidin. This amount is reported as “Payments to U.S. Treasury as interest on Federal Reserve notes”
in the Statements of Income and Comprehensive Income and is reported as a liability, or as an
asset if overpaid during the year, in the Statements of Condition. Weekly payments to the U.S.
Treasury may vary significantly.
In the event of losses or an increase in capital paid-in at a Reserve Bank, payments to the U.S.
Treasury are suspended and earnings are retained until the surplus is equal to the capital paid-in.
In the event of a decrease in capital paid-in, the excess surplus, after equating capital paid-in
and surplus at December 31, is distributed to the U.S. Treasury in the following year.

m. Incom e a n d C osts R elated to U.S. T reasury 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. During the years ended December 31, 2007 and 2006, the Bank was reim
bursed for all services provided to the Department of Treasury.

F ed e ra l R e se rv e B a n k

n. C om p ensation Received f o r Services P rov id ed

o f M in n e a p o lis

Notes to
Financial Statements
(Continued)

The Federal Reserve Bank of Atlanta (“FRBA”) has overall responsibility for managing the Reserve
Banks’ provision of check and ACH services to depository institutions, and, as a result, recognizes
total System revenue for these services on its Statements of Income and Comprehensive Income.
Similarly, the FRBNY manages the Reserve Banks’ provision of Fedwire funds and securities trans
fer services, and recognizes total System revenue for these services on its Statements of Income and
Comprehensive Income. The FRBA and FRBNY compensate the other Reserve Banks for the costs
incurred to provide these services. The Federal Reserve Bank of Chicago (FRBC) manages the
Reserve Banks’ provision of electronic access services to depository institutions, recognizes total
System revenue for these services on its Statements of Income and Comprehensive Income, and,
beginning in 2007, compensates the other Reserve Banks for the costs incurred to provide these
services. The Bank reports this compensation as “Compensation received for services provided” in
the Statements of Income and Comprehensive Income..
o. A ssessm ents by the B o a r d o f G overnors
The Board of Governors assesses the Reserve Banks to fund its operations based on each Reserve
Bank’s capital and surplus balances as of December 31 of the prior year. The Board of Governors
also assesses each Reserve Bank for the expenses incurred for the U.S. Treasury to prepare and
retire Federal Reserve notes based on each Reserve Bank’s share of the number of notes compris
ing the System’s net liability for Federal Reserve notes on December 31 of the prior year.

p. Taxes
The Reserve Banks are exempt from federal, state, and local taxes, except for taxes on real prop
erty. The Bank’s real property taxes were $3 million for each of the years ended December 31,
2007 and 2006, and are reported as a component of “Occupancy expense.”
q. R estru ctu rin g C h arges
The Reserve Banks recognize restructuring charges for exit or disposal costs incurred as part of
the closure of business activities in a particular location, the relocation of business activities
from one location to another, or a fundamental reorganization that affects the nature of opera
tions. Restructuring charges may include costs associated with employee separations, contract
terminations, and asset impairments. Expenses are recognized in the period in which the Bank
commits to a formalized restructuring plan or executes the specific actions contemplated in the
plan and all criteria for financial statement recognition have been met.
Note 11 describes the Bank’s restructuring initiatives and provides information about the costs
and liabilities associated with employee separations and contract terminations. The costs asso
ciated with the impairment of certain of the Bank’s assets are discussed in Note 6. Costs and lia
bilities associated with enhanced pension benefits in connection with the restructuring activi
ties for all of the Reserve Banks are recorded on the books of the FRBNY.

F ed eral R e se rv e B a n k

r. Recently Issu ed A ccounting S ta n d a rd s

o f M in n e a p o lis

Notes to
Financial Statements
(Continued)

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”).
SFAS No. 157 establishes a single authoritative definition of fair value, sets out a framework for
measuring fair value, and expands on required disclosures about fair value measurement. SFAS
No. 157 is generally effective for the Bank on January 1,2008, though the effective date of some
provisions is January 1, 2009. The provisions of SFAS No. 157 will be applied prospectively and
are not expected to have a material effect on the Banks financial statements.

4. U.S. GOVERNMENT SECURITIES, SECURITIES PURCHASED UNDER AGREE
MENTS TO RESELL, SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE,
AND SECURITIES LENDING
The FRBNY, on behalf of the Reserve Banks, holds securities bought outright in the SOMA.
The Banks allocated share of SOMA balances was approximately 1.995 percent and 2.033 percent
at December 31, 2007 and 2006, respectively.
The Banks allocated share of U.S. Government securities, net, held in the SOMA at December 31,
was as follows (in millions):
2007

2006

Par value
U.S. government
Bills

Notes

4,546
8,016
2,215
14,777

Bonds
Total par value
Unamortized premiums

159

Unaccreted discounts
Total allocated to the Bank

(59)
14,877

5,631
8,180
2,023
15,834
177
(81)
15,930

At December 31,2007 and 2006, the fair value of the U.S. government securities allocated to the
Bank, excluding accrued interest, was $15,506 million and $16,180 million, respectively, as
determined by reference to quoted prices for identical securities.
The total of the U.S. government securities, net, held in the SOMA was $745,629 million and
$783,619 million at December 31,2007 and 2006, respectively. At December 31,2007 and 2006,
the fair value of the U.S. government securities held in the SOMA, excluding accrued interest,
was $777,141 million and $795,900 million, respectively, as determined by reference to quoted
prices for identical securities.
Although the fair value of security holdings can be substantially greater or less than the record
ed value at any point in time, these unrealized gains or losses have no effect on the ability of the
Reserve Banks, as central bank, to meet their financial obligations and responsibilities, and
should not be misunderstood as representing a risk to the Reserve Banks, their shareholders, or
the public. The fair value is presented solely for informational purposes.

Federal Reserve Bank
of Minneapolis

Financial information related to securities purchased under agreements to resell and securities sold
under agreements to repurchase for the year ended December 31,2007, was as follows (in millions):

Notes to
Financial Statements
(Continued)

Securities Purchased
Under Agreements
to Resell

Securities Sold
Under Agreements
to Repurchase

Allocated to the Bank
Contract amount outstanding,
end of year

Weighted average amount outstanding,
during the year

928

877

700

695

1,028

877

879

Maximum month-end balance
outstanding, during the year
Securities pledged, end of year
System total
Contract amount outstanding, end of year

46,500

43,985

Weighted average amount outstanding,
during the year

35,073

34,846

51,500

43,985

Maximum month-end balance outstanding,
during the year

44,048

Securities pledged, end of year

At December 31, 2006, the total contract amount of securities sold under agreements to repur
chase was $29,615 million, of which $602 million was allocated to the Bank. The total par value
of SOMA securities that were pledged for securities sold under agreements to repurchase at
December 31, 2006, was $29,676 million, of which $603 million was allocated to the Bank.
The contract amounts for securities purchased under agreements to resell and securities sold
under agreements to repurchase approximate fair value.
The maturity distribution of U.S. government securities bought outright, securities purchased
under agreements to resell, and securities sold under agreements to repurchase that were allo
cated to the Bank at December 31, 2007, was as follows (in millions):
U.S. Government
Securities
(Par Value)

Within 15 days

545

Securities Purchased Securities Sold Under
Under Agreements
Agreements to
Repurchase
to Resell
(Contract amount)
(Contract amount)

928

877

16 days to 90 days

2,987

91 days to 1 year

3,038

Over 1 year to 5 years

4,800

Over 5 years to 10 years

1,635

Over 10 years

1,772

Total allocated to the Bank

14,777

928

877

At December 31, 2007 and 2006, U.S. government securities with par values of $16,649 million
and $6,855 million, respectively, were loaned from the SOMA, of which $332 million and $139
million, respectively, were allocated to the Bank.

F ed e ra l R e se rv e B a n k

5. IN V E S T M E N T S D E N O M IN A T E D IN F O R E IG N C U R R E N C IE S

o f M in n e a p o lis

Notes to
Financial Statements
(Continued)

The FRBNY, on behalf of the Reserve Banks, holds foreign currency deposits with foreign cen
tral banks and with the Bank for International Settlements and invests in foreign government
debt instruments. Foreign government debt instruments held include both securities bought
outright and securities purchased under agreements to resell. These investments are guaran
teed as to principal and interest by the issuing foreign governments.
The Bank’s allocated share of investments denominated in foreign currencies was approximately
1.799 percent and 1.855 percent at December 31, 2007 and 2006, respectively.
The Banks allocated share of investments denominated in foreign currencies, including accrued
interest, valued at foreign currency market exchange rates at December 31, was as follows (in
millions):
2007

2006

European Union Euro
Foreign currency deposits

Securities purchased under agreements to resell
Government debt instruments
Japanese Yen
Foreign currency deposits
Government debt instruments

495

116

46
84

103

Swiss Franc
Foreign currency deposits
Total allocated to the Bank

73
851

380

At December 31, 2007, the total amount of foreign currency deposits held under FX contracts
was $24,381 million, of which $439 million was allocated to the Bank. At December 31, 2006,
there were no open foreign exchange contracts.
At December 31, 2007 and 2006, the fair value of investments denominated in foreign curren
cies, including accrued interest, allocated to the Bank was $850 million and $379 million,
respectively. The fair value of government debt instruments was determined by reference to
quoted prices for identical securities. The cost basis of foreign currency deposits and securities
purchased under agreements to resell, adjusted for accrued interest, approximates fair value.
Similar to the U.S. government securities discussed in Note 4, unrealized gains or losses have
no effect on the ability of a Reserve Bank, as central bank, to meet its financial obligations and
responsibilities.
Total System investments denominated in foreign currencies were $47,295 million and $20,482
million at December 31, 2007 and 2006, respectively. At December 31, 2007 and 2006, the fair
value of the total System investments denominated in foreign currencies, including accrued
interest, was $47,274 million and $20,434 million, respectively.

Federal Reserve Bank
of Minneapolis

The maturity distribution of investments denominated in foreign currencies that were allocat
ed to the Bank at December 31, 2007, was as follows (in millions):

Notes to
Financial Statements
(Continued)

Within 15 days

European
Euro

Japanese
Yen

16 days to 90 days
91 days to 1 year

54
7

Over 1 year to 5 years
Total allocated to the Bank

90
416

625

56
$

69
$

Swiss
Franc

153

Total
144

496

125
$

851

At December 31, 2007 and 2006, the authorized warehousing facility was $5,000 million with
no balance outstanding.

6. BANK PREMISES, EQUIPMENT, AND SOFTWARE
Bank premises and equipment at December 31 was as follows (in millions):
2007

2006

Bank premises and equipment
Land

Buildings
Building machinery and equipment

18
114

15
39

185

186
(56)

(63)
122

130

Subtotal
Accumulated depreciation

Depreciation expense, for the year ended December 31

Furniture and equipment

Bank premises and equipment, net

18
115

The Bank leases space to an outside tenant with a remaining lease of five years. Rental income
from such lease was immaterial for the years ended December 31, 2007 and 2006, and is report
ed as a component of “Other income.” Future minimum lease payments that the Bank will receive
under the noncancelable lease agreement in existence at December 31, 2007, are immaterial.
The Bank has capitalized software assets, net of amortization, of $5 million for the years ended
December 31,2007 and 2006. Amortization expense was $2 million and $1 million for the years
ended December 31,2007 and 2006. Capitalized software assets are reported as a component of
“Other assets” and the related amortization is reported as a component of “Other expenses.”
Assets impaired as a result of the Banks restructuring plan, as discussed in Note 11, include check
equipment. Asset impairment losses of $2 million and $127 thousand for the periods ending
December 31,2007 and 2006, respectively, were determined using fair values based on quoted mar
ket values or other valuation techniques and are reported as a component of “Other expenses.”

F ed e ra l R e se rv e B a n k

7. C O M M IT M E N T S A N D C O N T IN G E N C IE S

o f M in n e a p o lis

Notes to
Financial Statements
(Continued)

At December 31, 2007, the Bank was obligated under a noncancelable lease for premises and
equipment with a remaining term of six years. This lease provides for increased rental pay
ments based upon increases in real estate taxes, operating costs, or selected price indices.
Rental expense under operating leases for certain operating facilities, warehouses, and data pro
cessing and office equipment (including taxes, insurance and maintenance when included in
rent), net of sublease rentals, was $271 thousand and $273 thousand for the years ended
December 31, 2007 and 2006, respectively.
Future minimum rental payments under the noncancelable operating lease net of sublease
rentals, with a remaining term of one year or more, at December 31, 2007, were not material.
At December 31, 2007, there were no material unrecorded unconditional purchase commit
ments or long-term obligations in excess of one year.
Under the Insurance Agreement of the Federal Reserve Banks, each of the Reserve Banks has
agreed to bear, on a per incident basis, a pro rata share of losses in excess of 1 percent of the
capital paid-in of the claiming Reserve Bank, up to 50 percent of the total capital paid-in of all
Reserve Banks. Losses are borne in the ratio of a Reserve Banks capital paid-in to the total cap
ital paid-in of all Reserve Banks at the beginning of the calendar year in which the loss is shared.
No claims were outstanding under the agreement at December 31, 2007 or 2006.
The Bank is involved in certain legal actions and claims arising in the ordinary course of business.
Although it is difficult to predict the ultimate outcome of these actions, in management s opinion,
based on discussions with counsel, the aforementioned litigation and claims will be resolved with
out material adverse effect on the financial position or results of operations of the Bank.

8. RETIREMENT AND THRIFT PLANS
Retirem ent P la n s

The Bank currently offers three defined benefit retirement plans to its employees, based on
length of service and level of compensation. Substantially all of the Banks employees partici
pate in the Retirement Plan for Employees of the Federal Reserve System (“System Plan”).
Employees at certain compensation levels participate in the Benefit Equalization Retirement
Plan (“BEP”) and certain Reserve Bank officers participate in the Supplemental Employee
Retirement Plan (“SERP”).
The System Plan provides retirement benefits to employees of the Federal Reserve Banks, the
Board of Governors, and the Office of Employee Benefits of the Federal Reserve Employee
Benefits System. The FRBNY, on behalf of the System, recognizes the net asset and costs asso
ciated with the System Plan in its financial statements. Costs associated with the System Plan
are not redistributed to other participating employers.
The Banks projected benefit obligation, funded status, and net pension expenses for the BEP and
the SERP at December 31, 2007 and 2006, and for the years then ended, were not material.

F e d e ra l R e se rv e B a n k

T hrift P lan

o f M in n e a p o lis

Notes to
Financial Statements
(Continued)

Employees of the Bank may also participate in the defined contribution Thrift Plan for
Employees of the Federal Reserve System (“Thrift Plan”). The Banks Thrift Plan contributions
totaled $4 million and $3 million for the years ended December 31, 2007 and 2006, respective
ly, and are reported as a component of “Salaries and other benefits” in the Statements of Income
and Comprehensive Income. The Bank matches employee contributions based on a specified
formula. For the years ended December 31, 2007 and 2006, the Bank matched 80 percent on
the first 6 percent of employee contributions for employees with less than five years of service
and 100 percent on the first 6 percent of employee contributions for employees with five or
more years of service.

9. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
AND POSTEMPLOYMENT BENEFITS
P o stretirem en t B e n e fits o th e r th an P e n sio n s

In addition to the Bank’s retirement plans, employees who have met certain age and length-ofservice 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
ingly, has no plan assets.
Following is a reconciliation of the beginning and ending balances of the benefit obligation
(in millions):
2007
Accumulated postretirement benefit obligation at
January 1

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

54.4
2.5
3.1
(8.7)
(1.4)

2006
$

41.6
1.7
2.4
10.4

0.4

(2.2)
0.2

(2.2)

0.1

Accumulated postretirement benefit obligation at
December 31

48.3

54.4

At December 31,2007 and 2006, the weighted-average discount rate assumptions used in devel
oping the postretirement benefit obligation were 6.25 percent and 5.75 percent, respectively.
Discount rates reflect yields available on high-quality corporate bonds that would generate the
cash flows necessary to pay the plans benefits when due.

F ed e ral R e se rv e B a n k
o f M in n e a p o lis

Notes to
Financial Statements
(Continued)

Following is a reconciliation of the beginning and ending balance of the plan assets, the
unfunded postretirement benefit obligation, and the accrued postretirement benefit costs
(in millions):
2007
Fair value of plan assets at January 1

Contributions by the employer

Unfunded obligation and accrued postretirement
benefit cost

1.6
0.4

Contributions by plan participants
Benefits paid, net of Medicare Part D subsidies
Fair value o f plan assets at December 31

2006
1.7
0.4

(2.0)
-

48.3

54.4

3.4

5.2

(2.1)

Amounts included in accumulated other
comprehensive loss are shown below
Prior service cost

Net actuarial loss

(5.4)

Deferred curtailment gain

(17.2)

0.6

Total accumulated other comprehensive loss

(1.4)

(12.0)

Accrued postretirement benefit costs are reported as a component of “Accrued benefit costs”
in the Statements of Condition.
For measurement purposes, the assumed health care cost trend rates at December 31 are as follows:
2007
Health care cost trend rate assumed for next year

8.00%

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

5.00%

Year that the rate reaches the ultimate trend rate

2006
9.00%
5.00%
2012

2013

Assumed health care cost trend rates have a significant effect on the amounts reported for
health care plans. A one percentage point change in assumed health care cost trend rates would
have the following effects for the year ended December 31, 2007 (in millions):
One Percentage
Point Increase

One Percentage
Point Decrease

Effect on aggregate o f service
and interest cost components of net periodic
postretirement benefit costs

1.0

(0.8)

6.4

(5.3)

Effect on accumulated postretirement
benefit obligation

F e d e ra l R e se rv e B a n k
o f M in n e a p o lis

Notes to
Financial Statements
(Continued)

Following is a summary o f the components of net periodic postretirement benefit
expense for the years ended December 31 (in millions):
2007
Service cost-benefits earned during the period

Interest cost on accumulated benefit obligation
Amortization of prior service cost

6.1

1.7
2.4

(1.1)
1.6
6.1

Amortization o f net actuarial loss
Total periodic expense
Net periodic postretirement benefit expense

2006
2.5
3.1

(1.1)
0.3
3.3
$

3.3

Estimated amounts that will be amortized from accumulated other comprehensive loss
into net periodic postretirement benefit expense in 2008 are shown below:
Prior service cost

(0.9)

Net actuarial loss
Total

0.1
(08)

Net postretirement benefit costs are actuarially determined using a January 1 measurement date.
At January 1,2007 and 2006, the weighted-average discount rate assumptions used to determine
net periodic postretirement benefit costs were 5.75 percent and 5.50 percent, respectively.
Net periodic postretirement benefit expense is reported as a component of “Salaries and other
benefits” in the Statements of Income and Comprehensive Income.
A deferred curtailment gain was recorded in 2007 as a component of accumulated other com
prehensive loss; the gain will be recognized in net income in future years when the related
employees terminate employment.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 established a
prescription drug benefit under Medicare (“Medicare Part D”) and a federal subsidy to spon
sors of retiree health care benefit plans that provide benefits that are at least actuarially equiva
lent to Medicare Part D. The benefits provided under the Banks plan to certain participants are
at least actuarially equivalent to the Medicare Part D prescription drug benefit. The estimated
effects of the subsidy, retroactive to January 1, 2004, are reflected in actuarial loss in the accu
mulated postretirement benefit obligation and net periodic postretirement benefit expense.
There were no receipts of federal Medicare Part D subsidies in the year ended December 31,
2006. Receipts in the year ending December 31, 2007, related to benefits paid in the years
ended December 31,2007 and 2006, were $0.1 million and $0.2 million, respectively. Expected
receipts in 2008 related to benefits paid in the year ended December 31,2007, are $0.1 million.

F ed e ral R e se rv e B a n k

Following is a summary of expected postretirement benefit payments (in millions):

o f M in n e a p o lis

Notes to
Financial Statements
(Continued)

Without Subsidy
2008
2009
2010

2.7
3.0

Total

2.5
2.8

3.3

3.1

3.6
3.8

3.3
3.5

22.2

19.8

2011
2012
2013 - 2017

With Subsidy

38.6

35.0

Postem ploym ent B enefits

The Bank offers benefits to former or inactive employees. Postemployment benefit costs are
actuarially determined using a December 31 measurement date and include the cost of medical
and dental insurance, survivor income, and disability benefits. The accrued postemployment
benefit costs recognized by the Bank at December 31,2007 and 2006, were $5 million. This cost
is included as a component of “Accrued benefit costs” in the Statements of Condition. Net peri
odic postemployment benefit expense included in 2007 and 2006 operating expenses were $1
million and $2 million, respectively, and are recorded as a component of “Salaries and other
benefits” in the Statements of Income and Comprehensive Income.

10. ACCUMULATED OTHER COMPREHENSIVE INCOME AND
OTHER COMPREHENSIVE INCOME
Following is a reconciliation of beginning and ending balances of accumulated other compre
hensive loss (in millions):
Amount Related to
Postretirement Benefits
other than Pensions
Balance at January 1, 2006
Adjustment to initially apply SFAS No. 158
Balance at December 31, 2006
Change in funded status of benefit plans
Prior service costs arising during the year
Net actuarial gain arising during the year
Deferred curtailment gain
Amortization of prior service cost

$
$
$

(12)
(12)
(1)
10
1
(1)
2

Amortization of net actuarial loss
Change in funded status of benefit plans - other
comprehensive income

Balance at December 31, 2007

(1)

Additional detail regarding the classification of accumulated other comprehensive loss is included
in Note 9.

F e d e ra l R e se rv e B a n k

11. BUSINESS RESTRUCTURING CHARGES

o f M in n e a p o lis

Notes to
Financial Statements
(Continued)

2 0 0 7 R estru ctu rin g P la n s

In 2007, the Reserve Banks announced a restructuring initiative to align the check processing
infrastructure and operations with declining check processing volumes. The new infrastructure
will involve consolidation of operations, including the Minneapolis office, into four regional
Reserve Bank processing sites in Philadelphia, Cleveland, Atlanta, and Dallas. Additional
announcements in 2007 included restructuring plans associated with U.S. Treasury operations.
2 0 0 6 R estru ctu rin g P la n s

In 2006, the Reserve Banks announced a restructuring initiative to align the check processing
infrastructure and operations with declining check processing volumes. As a result, the Helena
branch operations were consolidated to the Denver processing site in 2007.
Following is a summary of financial information related to the restructuring plans (in millions):
2006
2007
Restructuring Restructuring
Plans
Plans

Total

Information related to restrucuring
plans as of December 31, 2007
Total expected costs related to
restructuring activity

1.0

Estimated future costs related to
restructuring activity

4.7

0.7

Expected completion date

2007

5.7
0.7

2009

Reconciliation o f liability balances
Balance at January 1, 2006
Employee separation costs
Payments
Balance at December 31, 2006
Employee separation costs

Adjustments

1.0
0.4

(0.8)
0.3

1.0

4.0
-

4.0

(0.3)

Payments
Balance at December 31, 2007

1.0

1.0
4.4
(0.3)
(0.8)
4.3

Employee separation costs are primarily severance costs for identified staff reductions associat
ed with the announced restructuring plans. Separation costs that are provided under terms of
ongoing benefit arrangements are recorded based on the accumulated benefit earned by the
employee. Separation costs that are provided under the terms of one-time benefit arrangements
are generally measured based on the expected benefit as of the termination date and recorded
ratably over the period to termination. Restructuring costs related to employee separations are
reported as a component of “Other liabilities” in the Statements of Condition and “Salaries and
other benefits” in the Statements of Income and Comprehensive Income.

F ed e ral R e se rv e B a n k
o f M in n e a p o lis

Notes to
Financial Statements
(Continued)

Restructuring costs associated with the impairment of certain check equipment are discussed
in Note 6. Costs associated with enhanced pension benefits for all Reserve Banks are recorded
on the books of the FRBNY as discussed in Note 8.

12. SUBSEQUENT EVENTS
In March 2008, the Board of Governors announced several initiatives to address liquidity
pressures in funding markets and promote financial stability, including increasing the Term
Auction Facility (see Note 3b) to $100 billion and initiating a series of term repurchase trans
actions (see Notes 3d and 4) that may cumulate to $100 billion. In addition, the Reserve Banks’
securities lending program (see Notes 3d and 4) was expanded to lend up to $200 billion of
Treasury securities to primary dealers for a term of 28 days, secured by federal agency debt, fed
eral agency residential mortgage-backed securities, agency collateralized mortgage obligations,
non-agency AAA/Aaa-rated private-label residential mortgage-backed securities, and
AAA/Aaa-rated commercial mortgage-backed securities. The FOMC also authorized increases
in its existing temporary reciprocal currency arrangements (see Notes 3e and 5) with specific
foreign central banks. These initiatives will affect 2008 activity related to loans to depository
institutions, securities purchased under agreements to resell, U.S. government securities, net, and
investments denominated in foreign currencies, as well as income and expenses. The effects of
the initiatives do not require adjustment to the amounts recorded as of December 31, 2007.

For more information on the Minneapolis Fed and
the Federal Reserve System, go to minneapolisfed.org.
Useful telephone numbers (612 area code unless
otherwise indicated):

For the Public
Consumer Affairs Help Line: 204-6500
Media Inquiries: 204-5261
Research Library: 204-5509
Treasury Auction Results, Current Offerings, Bills,
Notes, Bonds: 1-800-722-2678

For Financial Institutions
Accounting Customer Support:
1-800-309-6156
Cash Services Help Line: 204-5227 or
1-800-553-9656 ext. 5227
Check Customer Service/Adjustments:
1-800-283-2830
Electronic Access Customer Contact Center
FedLine Support: 1-888-333-7010
Computer Interface Support: 1-800-769-3265
FedACH Central Operations Support:
204-5555 or 1-888-883-2180
Ninth District Business Development:
204-6933 or 1-800-553-9656 ext. 6933
Savings Bond Customer Service:
1-800-553-2663

Full text of Annual Report of the Federal Reserve Bank of Minneapolis : 2007 Annual Report : Managing the Expanded Safety Net

FRASER