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Board of Governors of the Federal Reserve System

2000

Board of Governors of the Federal Reserve System

2000

July 2000
This publication is available from Publications Services, Board of Governors
of the Federal Reserve System, Washington, DC 20551. It is also available
on the Board’s World Wide Web site, at http://www.federalreserve.gov/

Contents
1
1
2
2
4

Introduction
FEDERAL RESERVE BUDGET PROCESSES
AND OPERATIONAL AREAS
Background on the Federal Reserve
Summary of 1999 income and expenditures
Budget processes
Operational areas

Part I The Budgets
11
11
13
14
14

Chapter 1
FEDERAL RESERVE SYSTEM
Net expenses
Trends in expenses and employment
Operational areas
2000 budget initiatives

17
17
19
21
22
26
26
26
28

Chapter 2
BOARD OF GOVERNORS
Overview of the budget process
Highlights of the budget
Operations budget by division and account classification
Operations budget by operational area
Capital budget
Positions
Trends in expenses and employment
Extraordinary items

31
33
34
38
38
39

Chapter 3
FEDERAL RESERVE BANKS
1999 budget performance
Factors affecting the 2000 budget
Risks in the 2000 budget
2000 capital plan
Trends in expenses and employment

Part II Special Analysis
43
43
44
45
46

Chapter 4
THE GRAMM–LEACH–BLILEY ACT
Legislative overview
Issues and implementation
Supervisory coordination
Conclusion

Appendixes
49
49
52
52

Appendix A
SPECIAL CATEGORIES OF SYSTEM EXPENSE
Priced services
Capital outlays
Currency printing and circulation

55

Appendix B
SOURCES AND USES OF FUNDS

57
57
57
63

Appendix C
FEDERAL RESERVE SYSTEM AUDITS
Independent audit
General Accounting Office
Office of Inspector General

65

Appendix D
EXPENSES AND EMPLOYMENT
AT THE FEDERAL RESERVE BANKS

71

MAPS OF THE FEDERAL RESERVE SYSTEM

1

Introduction

Federal Reserve Budget Processes
and Operational Areas
To improve its effectiveness in addressing priorities and allocating resources,
the Board of Governors in 1997 converted its annual budgeting and planning
process to a two-year budget cycle and
a four-year planning cycle.
The multiyear process involves the
Board members more actively and earlier
in the discussion of alternative expenditures and thus allows the Board and
the staff to concentrate less on detailed
budgeting and more on planning and the
allocation of resources among activities.
In particular, the Board can now better
define and implement its longer-term
strategies across functional areas. The
longer budget cycle also promises to be
less burdensome to the participants and
more comprehensible to observers. The
first budget produced under the new
system covered calendar years 1998 and
1999.
Given their current business needs,
the Federal Reserve Banks will continue
to maintain an annual budget cycle.

Background on the
Federal Reserve
The Federal Reserve System consists of
the seven-member Board of Governors
in Washington, D.C., the twelve Federal
Reserve Banks with their twenty-five
Branches distributed throughout the
nation, the Federal Open Market Committee (FOMC), and three advisory
groups—the Federal Advisory Council,
the Consumer Advisory Council, and
the Thrift Institutions Advisory Coun-

cil. The System was created in 1913
by the Congress to establish a safe
and flexible monetary and banking system. Over the years, the Congress has
given the Federal Reserve more authority and responsibility for achieving
broad national economic and financial
objectives.
As the nation’s central bank, the
Federal Reserve has many, varied
responsibilities: It acts to ensure that the
nation’s economy grows at a pace
consistent with price stability; it serves
as the nation’s lender of last resort, with
responsibility for forestalling national
liquidity crises; and it is involved in
bank supervision and regulation, with
responsibilities for bank holding companies, financial holding companies
(created under the Gramm–Leach–
Bliley Act, enacted in November 1999),
state-chartered banks that are members of the Federal Reserve System, the
foreign activities of U.S. banks, and
the U.S. activities of foreign banks.
The Federal Reserve also administers
the nation’s consumer credit protection
laws.
The Federal Reserve System plays a
major role in the nation’s payment
mechanism. The Reserve Banks distribute currency and coin, provide wire
and automated clearinghouse transfers
of funds and securities, and process
domestic checks. In addition, the Federal Reserve Banks serve as the fiscal
agents of the United States and provide a variety of financial services
for the Treasury and other government
agencies.

2

Annual Report: Budget Review, 2000

Summary of 1999 Income
and Expenditures
In carrying out its responsibilities in
1999, the Federal Reserve System
incurred an estimated $1.2 billion in net
operating expenses. Total spending of an
estimated $2.4 billion was offset by an
estimated $1.2 billion in revenue from
priced services, reimbursements, and
other income.
The major source of Federal Reserve
income is earnings on the portfolio
of U.S. government securities in the
System Open Market Account, estimated at $28.2 billion in 1999. Earnings in excess of expenses, dividends,
and surplus are transferred to the
U.S. Treasury—in 1999 an estimated
$25.4 billion. (These earnings are treated
as receipts in the U.S. budget accounting
system and as anticipated earnings
projected by the Office of Management
and Budget in the U.S. budget.)

Budget Processes
The following sections give an overview
of the separate budgets and budgeting
processes followed by the Board of
Governors and the Reserve Banks.

Board of Governors
The Board’s budget covers a two-year
period. The first year of the budget
cycle—the even-numbered year—is used
to update the strategic plan for the next
four years, and the second year is used
to develop the budget for the next
two years.
The two-year cycle begins in the fall
(thus, for the 2000–01 budget, the fall of
1998). At that time, the Board’s divisions examine their operating environments and look for any adjustments to
their priorities, activities, and resources

that might improve the efficiency and
effectiveness of the Board’s operations.
The management of each division
discusses with the appropriate Board
oversight committee the issues that
result from its review. After any adjustment, the results are given to the Staff
Planning Group, a small group of senior
managers with a Boardwide perspective,
for use in their analysis of the Board’s
budget options.
After consulting with the Board-level
Committee on Board Affairs for final
guidance, the Staff Planning Group
updates the strategic plan, which is used
to prepare a preliminary budget objective that identifies the level and allocation of resources needed to support the
plan. The Committee on Board Affairs
reviews the plan and preliminary budget
objective, clarifies outstanding planning
issues with the Staff Planning Group and
division directors, and by summer of
odd-numbered years submits the budget
to the Board for its consideration. As
part of this process, individual division
budget objectives are prepared on the
basis of Boardwide priorities and planning assumptions.
The divisions use the budget objective approved by the Board to complete their budgeting under the approved
plan. The Board’s Committee on Board
Affairs, under authority delegated by the
Chairman, oversees the process until the
budget is submitted to the Board for
action at an open meeting in November
of the odd-numbered year.
The Board of Governors budgets its
activities across four operational areas
(described below). Direct costs, such as
those for salary, retirement, insurance,
and travel are billed to the operational
areas. Costs for data processing are also
charged as a direct expense to each of
the four areas according to actual usage
(at prices derived from the cost of
resources needed to provide the services

Introduction
and agreed upon before the budget year
starts); expenses for other elements of
support and overhead are distributed
among the operational areas in proportion to the share of direct costs attributable to each area.
The Board, in accordance with generally accepted accounting principles,
capitalizes certain assets and depreciates
their value over appropriate periods
instead of expensing them in their year
of purchase. Hence, the Board has both
an operations budget and a capital
budget.
After it is approved by the Board, the
budget is converted to an operating plan
that allocates expenditures by month;
the operating plan is also the vehicle
for subsequent adjustments within the
budget. Also at this point, the cash
requirement for the first half of the
calendar year is estimated, and the
amount is raised by an assessment on
each of the Reserve Banks in proportion
to its capital stock and surplus. The cash
requirement for the second half of each
year is estimated in June, and another
assessment is made in July.
The Board accounts for extraordinary
items separately from the operations
budget so that unique, one-time requirements do not compete with regular
operations and so that expenses in those
operations can be readily compared
across years without distortion. As discussed more fully in chapter 2, the
extraordinary items budget for 2000–01
consists of funds to support two periodic
surveys, one on consumer finances and
the other on small business finances, and
some remaining century date change
work.
The Board’s Office of Inspector General (OIG), in keeping with its statutory
independence, prepares its proposed
budget apart from the Board’s budget.
The OIG presents its two-year budget
directly to the Chairman for action by

3

the Board, also at an open meeting in
November.

Reserve Banks
Each year the Federal Reserve Banks
establish major operating goals for the
coming year, devise strategies for their
attainment, estimate required resources,
and monitor results. The process begins
with development of a budget guideline.
The Board of Governors reviews the
proposed level of spending and communicates the budget objective to the
Reserve Banks for their guidance. Each
Bank then develops its own budget. The
budgets are reviewed at the Board by a
committee of two governors—the Committee on Federal Reserve Bank Affairs—
both as separate documents and in light
of Systemwide issues and the plans
of the other Banks, before they are
presented to the full Board of Governors
for final action at an open meeting in
December.
The Banks’ budgets are also structured
in four operational areas (described
below), with support and overhead
charged to these areas. Special projects
are approved separately from the operations budgets; these projects are longrange research and development efforts
that have the potential to make major
improvements in the nation’s payment mechanism or in the Federal
Reserve’s ability to provide services.
The Banks, in accordance with generally accepted accounting principles,
also capitalize certain assets and depreciate their value over appropriate periods
instead of expensing them in their year
of purchase. Hence, the Banks also
have a capital budget in addition to an
operating budget and a special projects
budget.
The operations and financial performance of the Reserve Banks are

4

Annual Report: Budget Review, 2000

monitored throughout the year via a
cost-accounting system, the Planning
and Control System (PACS). Under
PACS, the costs of all Reserve Bank
services, both priced and nonpriced,
are grouped by operational area, and
the costs of support and overhead are
charged to the four areas. PACS makes
it possible to compare budgets with
actual expenses and enables the Board
of Governors to compare the financial
and operating performances of the
Reserve Banks.

public and private institutions, to assess
the state of the economy and the relationships between the financial markets
and economic activity. Staff members
provide background information for the
Board of Governors and for each meeting of the FOMC by preparing detailed
economic and financial analyses and
projections for the domestic economy
and international markets. They also
conduct longer-run economic studies
on regional, national, and international
issues.

Operational Areas

Supervision and Regulation

The Board of Governors and the Reserve
Banks account for their activities in four
major operational areas. Three of the
areas—monetary and economic policy,
supervision and regulation of financial
institutions, and services to financial
institutions and the public—are common to the Board and the Banks. The
Banks’ fourth operational area is services to the U.S. Treasury and other
government agencies, and the Board’s
fourth area is System policy direction
and oversight.

The Federal Reserve System plays a
major role in the supervision and regulation of banks and bank holding companies. The Board of Governors adopts
regulations to carry out statutory directives and establishes System supervisory and regulatory policies; the
Reserve Banks conduct on-site examinations and inspections of state member
banks and bank holding companies,
review applications for mergers, acquisitions, and changes in control from banks
and bank holding companies, and take
formal supervisory actions. In 1999 the
Federal Reserve conducted 517 examinations of state member banks and
1,427 inspections and 2,058 risk assessments of bank holding companies; it
acted on 3,874 international and domestic applications.
The Board also enforces compliance
by state member banks with the federal laws protecting consumers in their
use of credit. In 1999 the System
conducted more than 495 compliance
examinations, including 407 covering
state member banks and 88 covering
foreign banking organizations.
The Board’s supervisory responsibilities also extend to the foreign operations
of U.S. banks and, under the International
Banking Act, to the U.S. operations of

Monetary and Economic Policy
The monetary and economic policy
operational area encompasses Federal
Reserve actions to influence the availability and cost of money and credit
in the nation’s economy. These actions
include setting reserve requirements,
setting the discount rate (which affects
the cost of borrowing), and conducting
open market operations.
A vast amount of banking and financial data flows through the Reserve
Banks to the Board, where it is compiled
and made available to the public. The
research staffs at the Board and the
Reserve Banks use these data, along
with information collected by other

Introduction
foreign banks. Beyond these activities,
the Federal Reserve maintains continuous oversight of the banking industry to
ensure the overall safety and soundness
of the financial system. This broader
responsibility is reflected in the System’s
presence in financial markets, through
open market operations, and in the
Federal Reserve’s role as lender of last
resort.

Services to Financial Institutions
and the Public
The Federal Reserve System plays a
central role in the nation’s payment
mechanism, which is composed of many
independent systems that move funds
among financial institutions across the
country. The Reserve Banks obtain
currency and coin from the Bureau of
Engraving and Printing and from the
Mint and distribute it to the public
through depository institutions; they
receive deposits of currency and coin
from depository institutions; and they
identify counterfeits and destroy currency that is unfit for circulation.
In 1999 the Reserve Banks received
$445.6 billion in currency and $4.0 billion in coin from depository institutions,
distributed $554.6 billion in currency
and $5.8 billion in coin, and destroyed
$82.9 billion in unfit currency.
The Reserve Banks (along with their
Branches and regional centers) also
process checks for collection—
approximately 18 billion commercial
checks in 1999, with a total value of
nearly $15 trillion.
The Federal Reserve also plays a
central role in the nation’s payment
mechanism through its wire funds
transfer system, Fedwire. Through Fedwire, depository institutions can draw
on their deposit accounts at the Reserve
Banks and transfer funds anywhere
in the country. In 1999, approximately

5

102.8 million transfers valued at about
$343 trillion were sent over the Fedwire
funds transfer system, an average of
$3 million per transfer and $1.4 trillion
per day.
The Federal Reserve allows participants in private clearing arrangements
to exchange and settle transactions on a
net basis through deposit account balances. Users of net settlement services
include check clearinghouse associations, automated clearinghouse (ACH)
networks, credit card processors, automated teller machine networks, and
national and regional funds transfer
networks. The Reserve Banks provide
settlement services to approximately
102 local and national private-sector
clearing and settlement arrangements. In
1999 the Reserve Banks processed
about 361,000 settlement entries for
these arrangements.
The Federal Reserve currently processes settlement entries through one of
three types of service: ‘‘settlement
sheet’’; Fedwire-based; and enhanced,
which was introduced in March 1999.
These services vary operationally and
by timing of finality. The Reserve Banks
will continue to offer the Fedwire-based
settlement service. The settlement sheet
service, however, will be phased out by
year-end 2001, when all its participants
must move to the enhanced service.1
1. In the settlement sheet service, the settlement
agent for a clearinghouse provides a settlement
sheet to a Reserve Bank, which in turn posts net
debit and credit entries to the accounts of the
settling participants. The entries are provisional
until the banking day after settlement.
In the Fedwire-based service, the clearinghouse
uses a zero-balance settlement account to receive
and send out Fedwire funds transfers to settle
participants’ obligations. These transfers are final
when processed.
In the enhanced service, settlement files are
submitted through a direct electronic connection
with a Reserve Bank, and settlement is final on
settlement day.

6

Annual Report: Budget Review, 2000

Approximately 27,700 entities participate in the Federal Reserve’s ACH
service, which allows them to send or
receive payments electronically instead
of by check. The institutions use the
ACH service for credit and debit transactions. In 1999 the Reserve Banks
processed approximately 4.2 billion
ACH transactions valued at about
$13.1 trillion; approximately 19 percent
of the transactions were for the federal
government, and the rest were for
commercial establishments.
Reserve Banks provide securities services for the handling of book-entry
(computer-based) securities and the
physical collection of interest coupons
and miscellaneous items. The bookentry service, begun in 1968, enables the
holders of Treasury and government
agency securities to transfer the securities electronically to other institutions
throughout the country. In 1999 the
Reserve Banks processed approximately
13.4 million securities transfers valued
at $179.5 trillion. The noncash collection service, through which maturing or
called physical coupons and bonds are
presented for collection, processed about
700,000 transactions in 1998 and about
600,000 transactions in 1999.

Services to the U.S. Treasury
and Other Government Agencies
The Reserve Banks provide fiscal agency
and depository services to the U.S. government. Through its deposit accounts
at the Reserve Banks, the government
issues checks, makes payments, and
collects receipts. The Reserve Banks
also process the government’s Fedwire
funds transfers and automated clearinghouse payments and provide the Department of the Treasury with daily statements of account activity. Reserve Banks
make claims on the Treasury and other
government agencies for reimbursement

of the full cost of providing these
services; reimbursement was received or
is expected for all but a relatively small
portion of the expenses claimed.
As fiscal agents, Reserve Banks
provide the Treasury with services
related to the federal debt. For example,
Reserve Banks issue, service, and redeem
marketable Treasury securities and savings bonds; they also process secondary
market Fedwire securities transfers initiated by depository institutions.
The Reserve Banks operate two
book-entry (computer-based) securities
systems for the custody of Treasury
securities—the Fedwire book-entry
securities system and the Treasury
Department’s Treasury Direct. Almost
all book-entry Treasury securities are
maintained on Fedwire, which is also
the nation’s principal securities transfer
mechanism; the remainder are maintained on Treasury Direct.
As depositories, Reserve Banks collect and disburse funds on behalf of the
federal government. The Reserve Banks
maintain the Treasury’s funds account,
accept deposits of federal taxes and fees,
pay checks drawn on the Treasury’s
account, and make electronic payments
on behalf of the Treasury. In 1999 the
Treasury continued to encourage electronic payments to reduce payments
made by check.
The Reserve Banks process the business tax payments received by the more
than 10,000 depository institutions
designated to perform this function.
Institutions that receive the tax payments may place the funds in a Treasury
tax and loan (TT&L) account or remit
the funds to a Reserve Bank. The
depository institutions place collateral
with the Federal Reserve to secure
TT&L deposits and other government
deposits and investments.
The Reserve Banks also provide fiscal
agency and depository services to other

Introduction
domestic and international government
agencies. Depending on the authority
under which the services are provided,
the Reserve Banks may maintain bookentry accounts of government agency
securities; provide custody for the stock
of unissued, definitive (physical) securities; maintain and update balances of
outstanding book-entry and definitive
securities for issuers; maintain funds
accounts for government agencies; and
provide various payment services,
including the processing and destroying

7

of redeemed food coupons for the
U.S. Department of Agriculture.

System Policy Direction and
Oversight
This operational area encompasses
activities by the Board of Governors
in supervising Board and Reserve Bank
programs. Expenses for these activities
are considered overhead expenses of the
System and are therefore allocated across
the other operational areas.

Part I
The Budgets

11

Chapter 1

Federal Reserve System
For 2000, total operating expenses are
budgeted at $2,507.1 million, an increase
from estimated 1999 expenses of
4.7 percent. Of this total, $2,311.9 million is for the Reserve Banks, and
$195.2 million is for the Board of
Governors (tables 1.1 and 1.2).1 Revenue from priced services provided to
depository institutions is expected to
total $925.5 million, or 36.9 percent
of total budgeted operating expenses,
resulting in net operating expenses of
$1,264.1 million.
Not included in the budget for operations are the expenses for a Reserve
Bank special project, budgeted at
$14.0 million.2 Also excluded is the cost
of currency, budgeted at $456.4 million
for 2000, a decrease of 6.0 percent from the 1999 estimated cost of
$485.7 million.3 The distribution of
expenses is similar to that in previous
years, with the Reserve Bank’s expenses

1. The Board of Governors now budgets on a
two-year cycle (see chapter 2); in this chapter,
2000 values shown for the System and the Board
reflect the approximate first-year effect of the
Board’s 2000–01 budget.
2. As research and development efforts, special
projects are separate from the continuing operations of the System and are therefore not included
in the System’s operations budget. These relatively
costly, short-term projects are expected to benefit
both the System and the banking industry as a
whole. The special project approved for 2000
concerns check-processing standardization and is
described in chapter 3, in the section on services
provided to depository institutions.
3. The Federal Reserve bears the cost associated with the printing of new currency at the
Bureau of Engraving and Printing. Because this
cost is determined largely by public demand for
new currency, it is not included in Federal Reserve
operating expenses. See appendix A.

accounting for approximately threefourths of the total (chart 1.1).
System employment (including staff
for the special project) is budgeted at
25,408 for 2000, an increase of 269 from
the estimated 1999 level (details are
given in chapters 2 and 3.)

Net Expenses
The System expects to recover 49.6
percent of its budgeted 2000 operating
expenses through revenue from priced
services, other income, and claims for
reimbursement. When these items are
deducted from budgeted 2000 operating
expenses, the net expenses of the System
show an increase of 3.2 percent from
estimated 1999 net operating expenses
(table 1.1).
As required by the Monetary Control
Act of 1980, revenue from priced
services represents fees set to recover,
over the long run, all direct and indirect
costs of providing the services plus
imputed costs, such as taxes that would

Chart 1.1
Distribution of Expenses of the
Federal Reserve System, 2000
Special projects, 0.5%
Currency, 15.3%

Board of
Governors, 6.6%

Reserve Banks, 77.6%
Note. See text notes 1, 2, and 3.

12

Annual Report: Budget Review, 2000

have been paid and the return on capital
that would have been earned had the
services been provided by a private
business. Table 1.3 provides details on
projected revenue from priced services;

the constraints imposed on Federal
Reserve budgets by the need to keep
such services competitive and the
calculation of fees are discussed in
appendix A.

Table 1.1
Operating Expenses of the Federal Reserve System, Net of Receipts
and Claims for Reimbursement, 1998–2000
Millions of dollars except as noted

Item

Total System operating expenses . . . . . . . . .
Less
Revenue from priced services . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . .
Claims for reimbursement1 . . . . . . . . . . . . .
Equals
Net System operating expenses . . . . . . .

Percentage change

1998
actual

1999
estimate

2000
budget

2,261.4

2,394.2

2,507.1

5.9

4.7

839.8
5.6
223.7

871.4
2.0
296.1

925.5
1.9
315.6

3.8
−64.3
32.4

6.2
−5.0
6.6

1,192.3

1,224.7

1,264.1

2.7

3.2

Note. In this and subsequent tables in this volume,
components may not sum to totals and may not yield
percentages shown because of rounding.
Operating expenses reflect all redistributions for
support and allocations for overhead, and they exclude
capital outlays and special projects.

1998 to 1999 1999 to 2000

1. Costs of fiscal agency and depository services
provided to the U.S. Treasury and other government
agencies that are billed to these agencies.

Table 1.2
Expenses of the Federal Reserve System for Operations, Special Projects,
and Currency, 1998–2000
Millions of dollars except as noted
Percentage change

Entity and
type of expense

1998
actual

1999
estimate

2000
budget

Reserve Banks . . . . . . . . . . . . . . . . . . . . . . . . .
Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonpersonnel . . . . . . . . . . . . . . . . . . . . . . . . .
Board of Governors 2 . . . . . . . . . . . . . . . . . . . .
Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonpersonnel . . . . . . . . . . . . . . . . . . . . . . . . .

2,075.3
1,311.4
763.9
186.1
130.0
56.1

2,198.6
1,403.4
795.2
195.6
133.1
62.5

2,311.9
1,475.3
836.6
195.2
139.6
55.6

5.9
7.0
4.1
5.1
2.4
11.4

5.2
5.1
5.2
−.2
4.9
−11.0

Total System operating expenses . . . . . . . .
Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonpersonnel . . . . . . . . . . . . . . . . . . . . . . . .

2,261.4
1,441.4
820.0

2,394.2
1,536.5
857.7

2,507.1
1,614.9
892.2

5.9
6.6
4.6

4.7
5.1
4.0

1

Special projects3 . . . . . . . . . . . . . . . . . . . . . . . . .

3.8

.0

14.0

Currency 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

408.3

485.7

456.4

Note. See general note to table 1.1.
1. For detailed information, see chapter 3.
2. Includes extraordinary items and expenses of the
Office of Inspector General (see text note 1).

3. See text note 2.
4. See text note 3.

1998 to 1999 1999 to 2000

. . .
19.0

. . .
−6.0

Federal Reserve System
Table 1.3
Revenue from Priced Services, 1998–2000
Millions of dollars

13

Chart 1.2
Operating Expenses of the
Federal Reserve System, 1991–2000
Billions of dollars

Service
Funds transfers and
net settlement . . . . . . . .
Automated clearinghouse .
Commercial checks . . . . . . .
Book-entry securities
transfers . . . . . . . . . . . . .
Noncash collection . . . . . . .
Special cash services . . . . .
Total . . . . . . . . . . . . . . . . . . . .

1998
1999
2000
actual estimate budget

2.5
94.5
68.4
651.8

70.7
68.6
708.9

65.9
70.4
768.0

18.8
3.6
2.7

17.4
3.0
2.9

17.0
2.0
2.1

839.8

871.4

925.5

‘‘Other income’’ (table 1.1) comes
from services provided on behalf of
the U.S. Treasury that are paid for by the
depository institutions using the services; included are fees for services such
as the settlement of transfers among
depository institutions and the wire
transfer of funds between depository
institutions and the Treasury.
Claims for reimbursement are the
expenses Reserve Banks incur in providing fiscal agency services to the Treasury
and other government agencies.
Sources and uses of funds are presented in appendix B and the audits of
the System are listed in appendix C.

Trends in Expenses and
Employment
From actual 1991 levels to budgeted
2000 amounts, the operating expenses of
the Federal Reserve System (excluding
special projects) have increased an
average of 5.1 percent per year (2.9 percent per year when adjusted for inflation) (chart 1.2). Since 1991 the cumulative change for total System expenditures
(including special projects) has been
56.4 percent, or an average of 5.1 percent per year (chart 1.3); over the same
period, nondefense discretionary spending by the federal government has

Current dollars

2.0
1992 dollars 1

1.5

1991

1996

2000

Note. For 1999, estimate; for 2000, budget (see also
text note 1).
1. Calculated with the GDP price deflator.

shown cumulative growth of 48.5 percent, or an annual average of 4.5 percent. Over the 1991–2000 period, Federal Reserve System employment has
increased 297, or 0.1 percent (chart 1.4).
From 1991 through 2000, Federal
Reserve System expenses have included
numerous major initiatives to support its
responsibilities. To maintain and improve
the nation’s payment mechanism, the
System has upgraded check and cashChart 1.3
Cumulative Change in Federal Reserve
System Expenses and Federal Government
Expenses, 1991–2000
Percent

60
Federal Reserve

40
20

Federal government

1991

1996

2000

Note. Federal Reserve System expenses are operating
expenses plus the cost of special projects; federal
government expenses are discretionary spending less
expenditures on defense. See also general note to
chart 1.2.

14

Annual Report: Budget Review, 2000

Chart 1.4
Employment in the
Federal Reserve System, 1991–2000
Thousands of persons

26
25

communications at the Federal Reserve
Information Technology office. Returns
on these investments made during the
past ten years and the reengineering
efforts within each Reserve Bank are
evident in the Federal Reserve System’s
moderate expense growth over the
period. Total employment levels, which
declined steadily from 1994 through
1998, also reflect these efforts.

24

Operational Areas
1991

1996

2000

Note. Includes special projects. See also general note
to chart 1.2.

processing equipment; led efforts—
such as check image processing—to
convert paper items to electronics; and
implemented same-day settlement
requirements.
The System played a major role in
ensuring that the financial arena was
prepared for the century date change
event. Since 1991, funds have been
devoted to maintaining the safety and
soundness of financial institutions by
expanding efforts in the supervision and
regulation area. Funding has also been
provided in this area to carry out
legislative directives such as the Community Reinvestment Act and the Federal Deposit Insurance Corporation
Improvement Act.
Across all areas, the System has
upgraded its facilities and enhanced its
automation capabilities, including the
installation of the Fednet communications network and upgrades to local area
networks and personal computers.
Expense growth over the past decade
largely reflects costs necessary to centralize functions, such as the regionalization
of various Treasury operations and the
centralization of data processing and

The expenses of the Federal Reserve
are classified according to the four
major operational areas of the System
(table 1.4). The costs of support and
overhead (including Board expenditures
for System policy direction and oversight, considered an overhead expense
of the System) are redistributed or allocated to these four areas.

2000 Budget Initiatives
Several major initiatives that affect
System budgets will continue or begin
in 2000:
• Installation of equipment and software
to support the standardization of check
processing, the image processing and
archiving of commercial checks, and
electronic access and delivery
• Consolidation of Treasury Direct and
Treasury Tax and Loan processing
• Facilities repair and maintenance.
Partly offsetting the greater expenditures associated with these initiatives
are the lower costs associated with staff
reductions, which were made possible
by several reengineering initiatives and
programs to increase efficiency in Federal Reserve operations.

Federal Reserve System

15

Table 1.4
Operating Expenses of the Federal Reserve System, by Operational Area, 1998–2000
Millions of dollars except as noted
Operational area
and entity

1998
actual

1999
estimate

2000
budget

Percentage change
1998 to 1999 1999 to 2000

Monetary and economic policy . . . . . . . . . . .
Reserve Banks . . . . . . . . . . . . . . . . . . . . . . . .
Board of Governors . . . . . . . . . . . . . . . . . . .

251.7
152.6
99.1

267.9
167.0
100.9

276.7
176.9
99.8

6.4
9.5
1.8

3.3
5.9
−1.1

Services to the U.S. Treasury and
other government agencies 1 . . . . . . . . .

223.4

223.0

241.3

−.2

8.2

Services to financial institutions
and the public . . . . . . . . . . . . . . . . . . . . . .
Reserve Banks . . . . . . . . . . . . . . . . . . . . . . . .
Board of Governors . . . . . . . . . . . . . . . . . . .

1,251.5
1,247.4
4.1

1,332.7
1,327.7
4.9

1,389.8
1,385.0
4.9

6.5
6.4
19.7

4.3
4.3
−1.3

Supervision and regulation . . . . . . . . . . . . . . .
Reserve Banks . . . . . . . . . . . . . . . . . . . . . . . .
Board of Governors . . . . . . . . . . . . . . . . . . .

534.7
451.9
82.8

570.6
480.8
89.8

599.4
508.8
90.6

6.7
6.4
8.4

5.0
5.8
.9

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve Banks . . . . . . . . . . . . . . . . . . . . . . .
Board of Governors 2 . . . . . . . . . . . . . . . . .

2,261.3
2,075.3
186.1

2,394.2
2,198.6
195.6

2,507.2
2,311.9
195.2

5.9
5.9
5.1

4.7
5.2
−.2

Note. Operating expenses reflect all redistributions
for support and allocations for overhead, and they exclude
capital outlays and special projects. The operational area
unique to the Board of Governors, System policy
direction and oversight, which is shown separately in
chapter 2, has been allocated across the operational areas
listed here. As a result, the numbers for the operational

areas in chapter 2 are not the same as the numbers shown
in this table.
1. Reserve Banks only; the Board of Governors does
not provide these services.
2. Includes expenses of the Office of Inspector General
and extraordinary items. See also text note 1.

17

Chapter 2

Board of Governors
The 2000–01 budget for the Board of
Governors provides $387.6 million for
operations, $7.8 million for extraordinary items (projects of a unique
nature), and $6.6 million for the Office
of Inspector General. The Board has
authorized 1,705 staff positions for
operational areas and 29 positions for
the Office of Inspector General; no
positions are required for the extraordinary items. The total of 1,734 positions is a decrease of 16 positions from
the number authorized at the end of
1999.

Overview of the Budget Process
On a biennial basis, the Board and its
staff undertake a process that includes
strategic planning for the next four years
and formulation of a budget for the next
two years. For the 2000–03 planning
period and the 2000–01 budget period,
the Board-level Committee on Board
Affairs, assisted by a senior-level Staff
Planning Group (SPG), guided the
process.
Each division director, working with
his or her oversight committee, examined
the division’s operations to see how
the mission, organization, and resources
needed to be adjusted to enable the
Board to carry out its mission more
efficiently and effectively. The process
reaffirmed the Board’s mission, readjusted priorities to accomplish the mission, and identified lower-priority work
that could be eliminated to fund some of
the needed programmatic increases.

Planning
The planning materials prepared by the
division directors were reviewed by the
SPG. Beyond the Board’s mission and
goals, which remain unchanged, six
main, or overarching, issues were identified and used in shaping resource
decisions reflected in the recommended
budget objective approved by the Committee on Board Affairs and the Board:
• Human resources and Board organization: These critical areas affect operations through compensation that
attracts, rewards, and retains staff;
management succession; professional
development; and coordination of
employee skills to stay abreast of the
growing complexity of operations and
improvements in technology
• Financial industry restructuring: The
Board must focus its response to
changing circumstances in the financial industry, the increasing concentration of financial institutions, and the
growing importance of international
financial activity to the Board’s
mission1
• Assistance and support to foreign
governments, central banks, and
international organizations: These
activities continue to grow in importance, requiring a greater commitment
of resources and making heavier
1. Because of the uncertain nature of the
outcome at the time the budget was prepared, no
major adjustments were included for financial
reform legislation.

18

Annual Report: Budget Review, 2000

demands on the time of key staff
members
• Technology investments: Up-to-date
and fully functioning technology
remains critical to maintaining efficient operations, implementing appropriate monetary policy decisions in
an increasingly complex environment,
and identifying supervisory risks in
the financial sector and the actions
needed to limit them
• Communications with the public: The
Board must take advantage of technology, particularly the web, to provide
materials to the public that explain
Board actions, policies, and objectives, and to provide available data
useful for research and public policy
debates
• Facilities: The Board must maintain
safe facilities that foster efficient
operations; continue necessary repairs
to the Eccles Building, which is now
more than sixty years old; and devise
a strategy to reduce the long-term cost
of space for the staff.
In the course of planning, divisions
identified areas in which they anticipated
the need for increased resources over
the next four years. Though many areas
for investment were worthwhile, the
Committee on Board Affairs focused on
initiatives related to the above overarching issues. For example, nearly threefourths of the budget increment is for
human resources issues such as a larger
pool for cash awards; a placeholder
for the 2000 and 2001 merit increases,
promotions and other salary adjustments; a reduced number of vacant
positions; and increased training.

Board Operations
The budget reflects difficult decisions
affecting current operations, provides

additional resources where operations
need to respond to changes in the
financial environment, and supports key
efforts to continue to attract and retain
the first-rate staff needed to accomplish
the Board’s mission.
The budget reflects continued pressure to keep pace with rapid and
significant changes in the national economy and the world financial system.
Technological change, which increases
the risks to the economy and provides
the tools to understand and limit those
risks, is profoundly affecting the skills
required of staff members, the automation and communication systems, and
the workload of the Board. The budget
also reflects the Board’s efforts to ensure
that consumers are treated fairly as the
financial system changes and to improve
the efficiency of Reserve Bank oversight.
These changes require additional
resources; hence, the two-year budget
increase averages 4.9 percent per year.
The increase is largely for personnel
costs, which account for nearly threefourths of the Board’s operating budget,
and investments in technology such as
the Banking Organization National
Desktop (BOND) project.

Extraordinary Items
Inclusion of certain periodic or one-time
expenses in the Board’s operations
budget can result in undue volatility in
the size of the budget. Therefore, funds
for such extraordinary items are set apart
from the operations budget. For 2000–
01, $7.8 million in operating funds has
been budgeted for three extraordinary
items: two major economic surveys and
final reports and closeout efforts to
modify or replace software to ensure
continuity of operations after the centurydate change (CDC). Because the CDC
efforts decreased sharply in the 2000–01
period, this budget is approximately

Board of Governors
$15.2 million less than in the current
period.

Office of Inspector General
The 2000–01 budget of $6.6 million for
the Office of Inspector General (OIG) is
separate from the Board’s. The OIG’s
budget is prepared in a manner that
is administratively consistent with the
preparation of the Board’s operating
budget. In conformance with the statutory independence of the office, the OIG
presents its budget directly to the Chairman of the Board of Governors for
consideration by the Board.

19

Highlights of the Budget
The 2000–01 budget represents an
increase of $35.4 million over the
1998–99 approved operating plan, an
average increase of 4.9 percent per
year (table 2.1). The discussion below
highlights the major components of this
increase as well as the primary offsetting
decreases.
The largest force driving the increase
in the budget is personnel related. The
total number of positions decreased
by sixteen from the current period
(table 2.2); however, positions eliminated
by technology improvements tend to

Table 2.1
Operating Expenses of the Board of Governors, by Division, Office,
or Special Account, 1998–99 to 2000–01
Thousands of dollars except as noted
Division, office,
or special account

1998–99
estimate1

2000–01
budget

Board Members . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and Statistics . . . . . . . . . . . . . . . . . . . . . .
International Finance . . . . . . . . . . . . . . . . . . . . . . .
Monetary Affairs . . . . . . . . . . . . . . . . . . . . . . . . . . .
Banking Supervision and Regulation . . . . . . . . .
Consumer and Community Affairs . . . . . . . . . . .
Legal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve Bank Operations
and Payment Systems . . . . . . . . . . . . . . . . . .
Staff Director for Management . . . . . . . . . . . . . .
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Support Services . . . . . . . . . . . . . . . . . . . . . . . . . . .
Information Technology (IT) . . . . . . . . . . . . . . . . .
Publications Committee . . . . . . . . . . . . . . . . . . . . .
Special projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IRM income account 2 . . . . . . . . . . . . . . . . . . . . . .

8,793
8,709
58,446
21,065
18,395
55,939
15,597
16,578

Change
Amount

Percent

8,466
9,391
60,318
22,712
19,871
58,710
17,770
17,597

−327
682
1,872
1,648
1,477
2,771
2,172
1,019

−3.7
7.8
3.2
7.8
8.0
5.0
13.9
6.1

31,090
1,439
18,819
54,801
69,551
2,733
9,675
−39,375

33,453
709
21,491
58,354
78,066
3,059
18,013
−40,368

2,362
−730
2,672
3,533
8,515
326
8,338
−993

7.6
−50.7
14.2
6.5
12.2
11.9
86.2
2.5

Total, Board operations . . . . . . . . . . . . . . . . . . . .

352,254

387,611

35,357

Extraordinary items . . . . . . . . . . . . . . . . . . . . . . . . .
Office of Inspector General . . . . . . . . . . . . . . . . . .

23,010
6,419

7,847
6,578

. . .
159

Note. Operating expenses reflect all redistributions
for support and allocations for overhead, and they exclude
capital outlays.
1. For 1998, actual; for 1999, the remainder of the
1998–99 operating plan.
2. Income from various Board divisions for use of
central information resources management (IRM)
resources.

10.0 3
. . .
2.5

3. Average annual change from 1999 to 2001 is
4.9 percent for Board operations and 1.2 percent for the
Office of Inspector General.
. . . Not applicable.

20

Annual Report: Budget Review, 2000

be less costly than those added to meet
the changes outlined in the overarching
issues. The placeholder amounts included
in the budget for merit increases are
significantly higher than the placeholders for the current biennium (4.4 percent and 4.0 percent in 2000 and 2001
respectively, compared with 3.8 percent and 3.5 percent in 1998 and 1999
respectively).2 The larger amounts are
in recognition of the need to keep the
Board’s salary structure aligned with
appropriate labor markets.

2. The actual merit increases in 1998 and 1999
were 3.8 percent and 4.2 percent respectively.
Savings from a larger number of vacant positions
offset the added cost of the higher merit payments.

Higher grade levels are also affecting
personnel costs. The higher grade levels
reflect the market salaries for skills
needed for more complex operations
and special salary adjustments for critical professionals, such as financial economists. These increases also affect the
benefit-related expenses that are tied to
salary levels, such as the thrift plan and
social security.
Finally, a portion of the increase
comes from a one-time saving in 1999
from the buyout of the retiree health
insurance plan and the transfer of the
affected individuals’ coverage to the
Federal Employees Health Benefit
Program.
In sum, increased spending on personnel services, including higher compen-

Table 2.2
Positions Authorized at the Board of Governors, by Division, Office,
or Special Account, 1998–99 to 2000–01
Division, office,
or special account

1998–99
authorized

2000–01
budget

Change

Board Members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and Statistics . . . . . . . . . . . . . . . . . . . . . . . . .
International Finance . . . . . . . . . . . . . . . . . . . . . . . . . .
Monetary Affairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Banking Supervision and Regulation . . . . . . . . . . . .
Consumer and Community Affairs . . . . . . . . . . . . . .
Legal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve Bank Operations and
Payment Systems . . . . . . . . . . . . . . . . . . . . . . . . .
Staff Director for Management . . . . . . . . . . . . . . . . .
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Concern1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Support Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Information Technology (IT) . . . . . . . . . . . . . . . . . . .
Special projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

34
56
276
115
65
224
77
82

34
56
278
119
65
220
78
82

0
0
2
4
0
−4
1
0

134
2
89
31
231
279
1

134
2
87
31
213
278
3

0
0
−2
0
−18
−1
2

Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,696

1,680

−16

Reimbursable IT support . . . . . . . . . . . . . . . . . . . . . .

25

25

0

Total, Board operations . . . . . . . . . . . . . . . . . . . . . . .

1,721

1,705

−16

Office of Inspector General . . . . . . . . . . . . . . . . . . . . .

29

29

0

2

1. EEO Concern (summer intern and youth) positions
handled by the Management Division.
2. Positions in the Division of Information Technology
that provide support to the Federal Financial Institutions

Examination Council for processing data collected under
the Home Mortgage Disclosure Act and the Community
Reinvestment Act.

Board of Governors
sation packages designed to attract and
retain highly skilled staff, account for
$25.9 million, or 73.3 percent, of the
total budget increase.
The increase in the cost of goods and
services, $9.4 million, is largely due to
increased operational expenses related
to a number of projects. First, an
additional $3.0 million, or 8.5 percent of
the total increase, funds further implementation of the BOND project. Second,
rental expenses associated with the
Eccles Building Infrastructure Enhancement project account for $1.3 million,
or 3.7 percent, of the overall increase.
Finally, contractual expenses largely
related to the pent-up demand for
information technology services, restrained by Year 2000 policy decisions
and the priority assigned to software
remediation activities, are requiring an
additional $4.8 million. The remainder
of the increase is associated with rate
and volume adjustments.
Two major areas of budget decrease
are in programs and depreciation.
Program reductions worth $2.2 million
will allow added investment to support
the overarching issues identified in
planning. Depreciation expense declined
$2.9 million because of the change in
the Board’s capitalization policy that
took effect on January 1, 1998. Other,
smaller decreases come from changes in
operations. For example, mailing costs
are declining because of an improved
ability to disseminate information to
constituent groups through electronic
distribution of documents and expansion
of the Board’s web site.

Risk Areas
Division directors identified items that
could require significant additional
resources during the 2000–01 period.
These items are as follows:

21

• Passage of a financial modernization
bill
• Some job families in which current
compensation packages do not seem
to be competitive in the job market
• Possible changes to the position
vacancy rates used in developing the
proposed salary budget and the resulting facility requirements should staffing patterns change
• A sharp increase in the rate of
financial innovation.

Operations Budget by Division
and Account Classification
The largest increase in the 2000–01
budget is in the area of personnel
services (table 2.3). The budget for
personnel services (salaries, retirement,
and insurance) is $25.9 million greater
than the 1998–99 budget (an average
increase of 4.9 percent per year). As
the number of authorized positions
is actually declining by sixteen during
this period, this dollar increase is due
to higher compensation levels necessary
to attract and retain highly skilled staff
members and a projected reduction in
the number of vacant positions
(table 2.2).
The 2000–01 budget for goods and
services is $9.4 million greater than
the 1998–99 budget (also an average
increase of 4.9 percent per year). Much
of the increase in the area of goods and
services is attributable to a $4.8 million (9.8 percent per year) increase in
contractual professional services associated with outsourcing the cafeteria services, purchasing additional economic
data, providing technical assistance with
the Daylight Overdraft Reporting and
Pricing System, and obtaining contractual support for various information
technology initiatives. Increases in programming efforts on the BOND project
account for $3.0 million.

22

Annual Report: Budget Review, 2000

Table 2.3
Operating Expenses of the Board of Governors, by Account Classification,
1990–91 to 2000–01
Thousands of dollars except as noted
Account classification

1990–91

1992–93

1994–95

1996–97

Personnel services
Salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

143,130
9,662
11,429
164,222

169,265
13,366
14,407
197,039

190,210
15,564
16,862
222,637

211,005
18,015
19,196
248,215

Goods and services
Travel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postage and shipping . . . . . . . . . . . . . . . . . . . . . . .
Telecommunications . . . . . . . . . . . . . . . . . . . . . . . .
Printing and binding . . . . . . . . . . . . . . . . . . . . . . . .
Publications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stationery and supplies . . . . . . . . . . . . . . . . . . . . .
Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment . . . . . . . . . . . . . . . . . . . .
Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Books and subscriptions . . . . . . . . . . . . . . . . . . . .
Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Building repairs and alterations . . . . . . . . . . . . . .
Furniture and equipment repairs
and maintenance . . . . . . . . . . . . . . . . . . . . . . .
Contingency Processing Center . . . . . . . . . . . . . .
Contractual professional services . . . . . . . . . . . .
Tuition, registration, and membership fees . . .
Subsidies and contributions . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6,864
2,347
3,364
2,238
406
1,668
4,529
1,521
−282
1,187
3,388
1,945

8,453
2,327
3,665
2,237
2,212
1,635
5,615
2,442
3,156
1,451
3,683
3,402

9,399
2,483
4,168
2,866
2,976
1,755
6,453
2,497
7,202
1,913
4,145
3,273

9,391
2,261
4,367
2,829
2,544
1,756
7,865
2,568
8,648
1,904
3,995
2,996

3,734
427
5,355
1,273
1,168
11,489
−4,635
47,986

4,072
465
9,666
1,823
1,504
12,574
−8,309
62,074

4,198
206
13,797
2,394
1,433
14,347
−16,175
69,330

3,285
0
19,438
2,311
1,299
17,683
−18,502
76,638

Total, Board operations . . . . . . . . . . . . . . . . . . . .

212,208

259,113

291,967

324,853

Extraordinary items . . . . . . . . . . . . . . . . . . . . . . . . .
Office of Inspector General . . . . . . . . . . . . . . . . . .

0
227

0
780

0
239

4,196
5,975

Partially offsetting these increases are
program reductions in various areas
throughout the Board. These include
specialized activities in the Division of
Banking Supervision and Regulation,
cafeteria services, streamlined operations in the Management Division,
attrition in the Office of the Secretary,
and administrative reductions in the
Division of Information Technology
(table 2.1).
Savings in support-related areas
include a reduction in postage and
shipping expenses due to increased use
of the Internet and intranet for information sharing, lower depreciation costs

following the 1998 raising of the capitalization threshold, and increased
income from other government agencies and Reserve Banks for information
technology services.

Operations Budget by
Operational Area
The Board’s operations budget supports
four broadly defined areas of operation:
monetary and economic policy, supervision and regulation, services to financial institutions and the public, and
System policy direction and oversight
(tables 2.4 and 2.5).

Board of Governors

23

Table 2.3
Continued
Thousands of dollars except as noted

Account classification

1998–99
estimate

2000–01
budget

Average annual change
(percent)
1998–2001

Personnel services
Salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1990–2001

224,267
19,204
14,313
257,784

246,103
21,147
16,444
283,694

4.8
4.9
7.2
4.9

5.6 1
8.1
3.7
5.6

10,477
2,106
5,484
2,281
2,817
1,972
10,419
8,111
8,986
1,954
4,418
3,145

11,194
1,716
6,164
2,608
2,297
2,062
10,521
8,632
10,422
2,109
4,619
3,635

3.4
−9.7
6.0
6.9
−9.7
2.3
.5
3.2
7.7
3.9
2.2
7.5

5.0
−3.1
6.2
1.5 1
. . .1
2.1 1
8.8
19.0 2
. . .1
5.9
3.1
6.5

3,708
200
23,345
3,000
1,418
20,865
20,234
94,470

4,273
0
28,145
3,412
1,482
17,939
17,312
103,917

7.4
. . .
9.8
6.6
2.2
−7.3
−7.5
4.9

1.4
. . .
18.0
10.4
2.4
4.6
14.1
8.0

Total, Board operations . . . . . . . . . . . . . . . . . . . .

352,254

387,611

4.9

6.2

Extraordinary items . . . . . . . . . . . . . . . . . . . . . . . . .
Office of Inspector General . . . . . . . . . . . . . . . . . .

23,010
6,419

7,847
6,758

. . .
1.2

. . .
40.0

Goods and services
Travel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postal and shipping . . . . . . . . . . . . . . . . . . . . . . . . .
Telecommunications . . . . . . . . . . . . . . . . . . . . . . . .
Printing and binding . . . . . . . . . . . . . . . . . . . . . . . .
Publications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stationery and supplies . . . . . . . . . . . . . . . . . . . . .
Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment . . . . . . . . . . . . . . . . . . . .
Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Books and subscriptions . . . . . . . . . . . . . . . . . . . .
Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Building repairs and alterations . . . . . . . . . . . . . .
Furniture and equipment repairs
and maintenance . . . . . . . . . . . . . . . . . . . . . . .
Contingency Processing Center . . . . . . . . . . . . . .
Contractual professional services . . . . . . . . . . . .
Tuition/registration and membership fees . . . .
Subsidies and contributions . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1. Accounting for income in performance reports
changed during the period. Until 1991, income was netted
against expenses in the appropriate cost center and
program; since then, income has been captured in the ‘‘all
other’’ account. The change has had only a minor effect
on the 1990–2001 percentage change in the accounts
for salaries, printing and binding, and stationary and
supplies, but in the accounts for publications and rentals,

it has made a measurement of the 1990–2001 change
meaningless.
2. Beginning in 1998 the threshold for capitalizing and
depreciating a purchase rather than expensing it rose from
$1,000 to $5,000. The data for 1996–97 have been
adjusted, but accurate adjustments for earlier years are not
possible.
. . . Not applicable.

Monetary and Economic Policy

monitoring and analysis of developments in the money and credit markets,
the setting of reserve requirements, the
approval of changes in the discount rate,
and other activities related to managing the nation’s monetary policy. The
entire increase is associated with higher
costs of personnel, including the addi-

The 2000–01 budget for monetary and
economic policy is $163.9 million, an
increase of $12.2 million, or an average
of 4.0 percent per year more than the
1998–99 operating plan. Activities in
this operational area include the Board’s

24

Annual Report: Budget Review, 2000

tion of four positions in the Division
of International Finance to meet the
expanding need for risk assessment and
analysis.
Beyond the increase tied to personnel
services are initiatives in the Division of
Research and Statistics to collect more

data related to developments in financial
markets; gain a better understanding of
embodied technological change; expand
the sectoral productivity database; and
further assess credit bureau data. These
initiatives are all funded by reductions,
primarily in automation support.

Table 2.4
Expenses of the Board of Governors for Operational Areas,
Extraordinary Items, and Office of Inspector General, 1998–99 to 2000–01
Thousands of dollars except as noted
1998–99
estimated

2000–01
budget

Monetary and economic policy . . . . . . . . . . . . . .
Supervision and regulation . . . . . . . . . . . . . . . . . .
Services to financial institutions
and the public . . . . . . . . . . . . . . . . . . . . . . . . .
System policy direction and oversight . . . . . . .

151,633
129,622

Activity

Change
Amount

Percent

163,878
148,864

12,245
19,242

8.1
14.8

6,811
64,187

7,907
66,962

1,096
2,775

16.1
4.3

Total, Board operations . . . . . . . . . . . . . . . . . . . .

352,253

387,611

35,358

10.0

Extraordinary items . . . . . . . . . . . . . . . . . . . . . . . . .
Office of Inspector General . . . . . . . . . . . . . . . . . .

23,010
6,419

7,847
6,578

. . .
159

. . .
2.5

Note. See notes to table 2.1.
. . . Not applicable.

Table 2.5
Positions Authorized at the Board of Governors for Operational Areas,
Support and Overhead, and Office of Inspector General, 1998–99 to 2000–01
Activity

1998–99
estimate

2000–01
budget

Change

Monetary and economic policy . . . . . . . . . . . . . . . . .
Supervision and regulation . . . . . . . . . . . . . . . . . . . . .
Services to financial institutions and the public . .
System policy direction and oversight . . . . . . . . . .

426
384
22
173

432
381
22
173

6
−3
0
0

Support and overhead . . . . . . . . . . . . . . . . . . . . . . . . . .

691

672 1

−19

Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,696

1,680

−16

Reimbursable IT support . . . . . . . . . . . . . . . . . . . . . .

25

25

0

Total, Board operations . . . . . . . . . . . . . . . . . . . . . . .

1,721

1,705

−16

Office of Inspector General . . . . . . . . . . . . . . . . . . . . .

29

29

0

2

1. Includes positions for 17 youth, 10 worker trainees,
and 4 summer interns.
2. Positions in the Division of Information Technology
that provide support to the Federal Financial Institutions

Examination Council for processing data collected under
the Home Mortgage Disclosure Act and the Community
Reinvestment Act.

Board of Governors

Supervision and Regulation
The 2000–01 budget for supervision and
regulation is $148.9 million, an increase
of $19.2 million, or an average of
7.2 percent per year more than the
1998–99 operating plan. Activities in
this area include working with other
federal and state financial authorities to
ensure safety and soundness in the
operation of financial institutions, stability in the financial markets, and fair
and equitable treatment of consumers in
their financial transactions. The budget,
as described below, enhances supervisory activities such as continuous
monitoring, inspection, and examination
of banking organizations to assess their
condition and their compliance with
relevant laws and regulations.
The percentage increase for this
operational area is greater than the
percentage for the overall budget.
Besides the normal factors affecting
compensation in each of the operational
areas, new work approved in the current
budget period, such as the BOND
project in the Division of Banking
Supervision and Regulation, is having a
significant effect. The processing of
applications will be enhanced through
investment in the Application Information System.
This operational area has also been
successful in filling many positions that
were vacant for long periods in 1998
following the voluntary retirement incentive program. It has been able to do so
in part because of compensation adjustments within key job families to improve
retention and assist with recruiting.
Thus, in the Division of Banking Supervision and Regulation, the vacancy rate
has decreased. The number of positions
in the Consumer Affairs area has
increased, and the investment in software
to better analyze data gathered under the
Community Reinvestment Act and the

25

Home Mortgage Disclosure Act continues to be substantial.

Services to Financial Institutions
and the Public
The 2000–01 budget for oversight
of Reserve Bank services to financial
institutions and the public is $7.9 million, an increase of $1.1 million, or an
average of 7.7 percent a year more
than the 1998–99 operating plan. This
operational area provides support to, and
oversight of, the Federal Reserve Banks
and Branches—specifically, evaluation
of the operational and pricing performance for the check-payment activities
of the Reserve Banks; oversight of the
electronic payments mechanism; and
annual evaluation of the Federal Reserve
System’s currency, coin, and food coupon operations. The increase reflects
new software development for managing the currency operations and a lower
projected rate of vacancies in key
programs analyzing payment system
risk.

System Policy Direction and
Oversight
The 2000–01 budget for System policy
direction and oversight is $67.0 million, an increase of $2.8 million, or an
average of 2.1 percent per year more
than the 1998–99 operating plan. This
operational area covers oversight and
direction of Board and Reserve Bank
programs. It includes programs that
directly support Board members in
carrying out their oversight function for
Reserve Bank operations, budgeting and
accounting, financial examinations, audit
and operations reviews, and automation
and communications. Salary increases
are the largest single factor in the higher
costs of this area, which are tempered by

26

Annual Report: Budget Review, 2000

lower costs associated with changes in
oversight policy.

Capital Budget
The Board’s 2000–01 capital budget is
$23.8 million, an increase of $3.8 million from the 1998–99 operating plan.
Of this total, $12.0 million is for regular
operations, an increase of $0.4 million
above the 1998–99 level. This portion of
the budget supports continued improvements in office automation and major
upgrades to the information infrastructure, including a major cable upgrade to
enhance bandwidth and communication
speeds. Funds are also provided for the
restoration of aging facilities such as
restrooms; mail distribution and central
file storage systems; heating, ventilation, and air conditioning systems; and
other, smaller facilities projects.
The remaining $11.8 million is for
continuation of the Eccles Building
Infrastructure Enhancement Project. The
$3.4 million increase over expenditures
in 1998–99 is due to the phased nature
of the project, which began in July 1999.
The project, which is extending the
building’s useful life, enhancing fire
safety systems, replacing piping and
voice and data cabling, and making
other related repairs, is scheduled for
completion in 2002.

Positions
The overall position authorization for
the Board decreased by 16, primarily in
overhead and support areas, from the
approved 1998–99 budget, to a total of
1,705 positions.
Reductions in support-related areas
include a significant number in Support
Services due to faster-than-anticipated
consolidation of the duplicating, publications, and cafeteria functions, reflecting
reorganizations and changes in business

practices to increase efficiency. Reductions are projected for the Division of
Information Technology and the Management Division as part of their planning initiatives to increase efficiency
and effectiveness. Finally, reductions
in the Division of Banking Supervision
and Regulation have been proposed to
accommodate shifting priorities.
These decreases are partially offset
by an increase of seven positions in the
core mission areas. Two positions have
been added in the Division of Research
and Statistics to expand its analysis of
financial markets data and to continue
development of a sectoral productivity
database. Four economist positions have
been added in the Division of International Finance to meet the expanding
need for risk assessment and analysis in
the monetary policy and research areas
to enable the Board to keep current on
the rapid changes in the financial industry both domestically and abroad. An
analyst position has been added in the
Division of Consumer and Community
Affairs to handle a growing volume of
consumer complaints and a shift to a
more risk-focused approach to consumer
compliance examinations.

Trends in Expenses
and Employment
The rate of increase in the 2000–01
budget, 4.9 percent on an annual basis,
is slightly higher than the 4.1 percent
rate in the 1998–99 biennium. The
projected annual rate of increase over
the 1990–91 to 2000–01 period averages
6.2 percent (table 2.3; see also charts
2.1–2.5). The main cause of the larger
increase over the entire period is the
net increase in positions, higher salary
and benefit costs, and an increasingly
sophisticated automation system required
to manage a sharp increase in the volume and complexity of the Board’s

Board of Governors
Chart 2.1
Operating Expenses of the
Board of Governors, 1990–2001

27

Chart 2.2
Expenses for Personnel Services
at the Board of Governors, 1990–2001

Millions of dollars

Millions of dollars

200

125

Current dollars

175

Current dollars

1992 dollars

100

150
1992 dollars 1

75

125

1990

1995

2001

1990

1995

2001

Note. See notes to chart 2.1.
Millions of dollars
Year

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001

............
............
............
............
............
............
............
............
............
............
............
............

Current dollars

1992 dollars 1

102.4
109.8
122.8
136.3
140.7
151.2
162.7
163.3
171.6
180.6
187.4
200.2

110.0
113.0
122.8
132.8
133.9
140.5
148.2
146.0
151.6
157.5
160.3
167.7

Note. For 1999, estimate; for 2000–01, budget.
Excludes the Office of Inspector General and extraordinary items. The annual values for 1998–99 and 2000–01
are the approximate calendar-year effects of the respective
two-year budgets.
1. Calculated with the GDP price deflator.

workload. The higher increase from the
last budget results from a larger merit
component (4.4 percent for 2000 versus
3.5 percent for 1999), major software
development costs for the supervision
and regulation function, and a smaller
volume of savings from administrative
actions and programmatic reductions.
Approximately three-fourths of the
Board’s operating expenses are for
personnel; consequently, analysis of
trends is heavily tied to staffing levels.
From 1990 to 2001, the number of
authorized positions for Board opera-

tions rose from 1,570 to 1,705, a net
increase of 135, or 8.6 percent.
Automation changes to provide sophisticated analytical tools to staff
members, manage larger data sets, and
provide information to the public over
the Board’s web site required a net
increase of 32 positions over the 1990–
2001 period. Automation—accompanied
by a decline in clerical tasks and a sharp
increase in positions requiring higher
technical and analytical skills—also
resulted in major changes in the composition of the Board’s staff.
Changes in banking, frequently associated with automation enhancements,
Chart 2.3
Expenses for Goods and Services
at the Board of Governors, 1990–2001
Millions of dollars

45
Current dollars
1992 dollars

30
15

1990

1995

Note. See notes to chart 2.1.

2001

28

Annual Report: Budget Review, 2000

Chart 2.4
Annual Change in Operating Expenses
of the Board of Governors, 1990–2001

Chart 2.5
Employment and Authorized Positions
at the Board of Governors, 1990–2001

Percent

Thousands
Authorized positions

12

1.7

9
1.6
Employment

6

1.5

3

1990

1995

2001

1990

Note. Year-end data. see also general note to
chart 2.1.

increased the complexity of safety
andsoundness activities and caused
an increase of 51 positions over the
period. Increased attention to consumer
issues, including collection and analysis
of data collected under the Home
Mortgage Disclosure Act and Community Reinvestment Act, added 35 positions. Increasing complexity of monetary policy issues resulted in a increase
of 34 positions. Oversight of Reserve
Bank operations became more complex
resulting in an increase 12 positions.
These increases were partially offset
by a decline of 29 administrative and
support positions resulting from capital
investments, improved efficiency, and
outsourcing.
While the number of positions at the
Board has fluctuated during the 1990 to
2001 period, the salary budget (not
including retirement and insurance
benefits) has remained relatively stable
at roughly 65 percent of operating
expenses. The portion of operating
expenses devoted to retirement and
insurance has decreased approximately
1 percentage point over the period as a
result of administrative actions to limit
these costs for health insurance and
other benefits.

1995
Year

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001

............
............
............
............
............
............
............
............
............
............
............
............

2001

Employment

Authorized
positions

1,505
1,517
1,563
1,636
1,635
1,644
1,686
1,638
1,628
1,631
1,631
1,631

1,529
1,542
1,639
1,664
1,664
1,665
1,712
1,713
1,694
1,698
1,674
1,674

Note. Year-end data. Excludes summer intern and
youth positions as well as positions for the Office of
Inspector General. These positions number 60 for 2000
and 2001. Includes positions that provide support to the
Federal Financial Institutions Examination Council for
processing data collected under the Home Mortgage
Disclosure Act and the Community Reinvestment Act.

Extraordinary Items
The Board’s extraordinary items budget
provides $7.8 million for three projects.
The first, a survey of consumer finances
($5.5 million), will provide financial
data for various policy analysis and
monetary policy purposes. This effort
reflects the Board’s interest in improving the quality of economic data by
obtaining information on the income,
assets, debts, pensions, employment, use
of financial services, savings behavior,

Board of Governors
and other characteristics of U.S. households. Cross-categorization of the data
will allow important statistical observations useful in a wide variety of economic studies.
The second project is the completion
of a survey of small business finances
(NSSBF), begun in 1999 for data as of
year-end 1998 ($1.2 million). The purpose of the survey is to gather data from
small businesses on their financial
relationships, credit experiences, lending terms and conditions, income and
balance sheet information, location and
types of financial institutions used, and
other firm characteristics. The NSSBF is
used in analyzing the competitive effect
of bank mergers, in benchmarking other
data series (such as the noncorporate
sector of the flow-of-funds statistics),
and in writing the quinquennial small

29

business report mandated by section 227
of the Economic Growth and Regulatory
Paperwork Reduction Act of 1996. It is
also used for research and policy analysis
of a wide variety of issues in small
business finances.
Last, the extraordinary items budget
provides $1.2 million to complete bringing the Board’s software into compliance with the century date change.
These funds are for completion of system monitoring over the leap year day
(February 29); work related to the event
management activities in January; and
decommissioning test facilities and
equipment that are no longer needed.
Over the past three years, funds for this
project, which have totaled $17.6 million, have been used to remediate,
test, and implement Year 2000 versions
of the Board’s information systems.

31

Chapter 3

Federal Reserve Banks
The final budgets of the twelve Reserve
Banks for 2000 total $2,325.9 million,
an increase of $127.3 million, or
5.8 percent, from 1999 estimated
expenses.1 When the cost of the check
standardization special project is
excluded from the 2000 budget, the
Reserve Bank budgets total $2,311.9 million, an increase of $113.3 million, or
5.2 percent, from the 1999 estimate
(table 3.1). The Reserve Banks’ 2000
budgets are above the 1999 approved
budget by $166.7 million, or 7.7 percent. The budget increase, as detailed
later in this chapter, is largely a result
of the full-year effect of factors that
created a net 1999 expense overrun of
$39.4 million.
Approximately 54 percent of Reserve
Bank expenses in the 2000 budget are
offset by priced service revenues,
reimbursable claims for services provided to the U.S. Treasury and other
agencies, and income from funds settlement fees associated with the transfer
of Treasury securities. Priced service
revenues are budgeted to increase
6.2 percent because of higher check
volumes and price increases. Reimbursable claims will increase 6.6 percent,
primarily because of transition costs

1. Excludes capital outlays. Includes expenses
budgeted by Federal Reserve Information Technology (FRIT) and the System’s Office of Employee
Benefits (OEB); expenses from these entities have
been charged to the Reserve Banks, as appropriate,
and included in their budgets. Because of their
unique roles within the System, FRIT and the OEB
have prepared their own budgets. Data for FRIT
are included in this document; the OEB’s staffing
level of 36 ANP and proposed capital budget of
$2.7 million are not discussed further here.

associated with the Treasury Direct consolidation initiative.
The total Reserve Bank increase of
$113.3 million provides funding for
each District’s salary administration and
benefit programs, District projects and
centralized operations, and various
System-defined factors, including check
standardization, check imaging, and
the installation in several Districts of
a check-adjustment system based on
local-area-network (LAN) computer
technology.
At individual Reserve Banks, 2000
budgeted expenses exceed 1999 estimated expenses by 1.0 percent to
13.8 percent (chart 1.1). The variation
among Districts reflects a movement
toward centralization of functions and
the degree to which a District supports
Treasury projects and System factors.
For example, St. Louis will become the
consolidation site for the Treasury
Investment Program during 2000. Also,
Treasury Direct operations will be
Chart 3.1
Change in Operating Expenses of the
Federal Reserve Banks, 1999–2000
Percent

12
System average

8
4

BO NY PH CL RI AT CH SL MI KC DA SF
Note. Excludes special project. For 1999, estimate;
for 2000, budget.

32

Annual Report: Budget Review, 2000

consolidated at the Boston, Minneapolis, and Dallas Banks.
The average number of personnel
(ANP) projected to be employed during
2000 at the Reserve Banks and FRIT
is 23,751, an increase of 265 ANP, or
1.1 percent, from 1999 estimated staff
levels (table 3.2).2 The expected increase

of 240 ANP, or 1.0 percent, in Reserve
Bank employment is largely the annualized effect of 1999 staff additions and, to
a lesser extent, initiatives planned for
2000. FRIT employment is expected to
increase 25 ANP, or 4.0 percent, resulting from several initiatives, including
expanded services to FRB New York,

2. The term average number of personnel
describes levels and changes in employment at the
Reserve Banks. ANP is the average number of
employees in terms of full-time positions for the

period. For instance, a full-time employee who
starts work on July 1 counts as 0.5 ANP for that
calendar year; two half-time employees who start
on January 1 count as 1 ANP.

Table 3.1
Expenses of the Federal Reserve Banks, Net of Receipts and Claims for Reimbursement,
1999–2000
Millions of dollars except as noted

Item

Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special project 1 . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less
Revenue from priced services . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . .
Claims for reimbursement . . . . . . . . . . .
Equals
Net expenses . . . . . . . . . . . . . . . . . . . . . . .

1999
estimate

2000
budget

2,198.6
.0
2,198.6

Change
Amount

Percent

2,311.9
14.0
2,325.9

113.3
. . .
127.3

5.2
. . .
5.8

871.4
2.0
296.1

925.5
1.9
315.6

54.1
−.1
19.5

6.2
−5.0
6.6

1,029.1

1,082.9

53.8

5.2

Note. See text note 1; see also notes to table 1.1,
chapter 1.

1. Check-processing standardization.

Table 3.2
Employment at the Federal Reserve Banks, 1999–2000
Average number of personnel except as noted

Item

Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Reserve Information
Technology . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1999
estimate

2000
budget

22,867
620
23,487

Change
Amount

Percent

23,107

240

1.0

644
23,751

25
265

4.0
1.1

Special project 1 . . . . . . . . . . . . . . . . . . . . . . .

0

5

. . .

. . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

23,487

23,756

270

1.1

Note. See notes to table 3.1. See text note 2 for
definition of average number of personnel.

1. Includes Federal Reserve Information Technology.

Federal Reserve Banks
the check standardization project, and
modernization of the production environment (for expenses and ANP by District
and by operational area, see appendix D,
tables D.1 through D.4).

1999 Budget Performance
The Reserve Banks estimate that 1999
expenses will be $2,198.6 million, an
increase of $39.4 million, or 1.8 percent,
from the approved 1999 budget of
$2,159.2 million and an increase of
$121.6 million, or 5.9 percent, above
1998 actual expenses. ANP for 1999
is estimated at 22,867, an increase of
216 ANP, or 1.0 percent, from the
approved 1999 level (tables 3.3, D.5,
and D.6).
Estimated 1999 expenses at eleven
of the twelve Banks are above the
approved 1999 budgets by amounts
ranging from 0.9 percent in Philadelphia
to 4.0 percent at Kansas City. New York
is estimating its 1999 expenses to be
$0.8 million, or 0.2 percent, below
budget (table D.5).
Unanticipated volume increases in the
check and currency areas are contributing $43.6 million to the 1999 overrun.
The check service accounts for the
majority of the expense overrun and is
249 ANP over budget. System-processed
check volumes are estimated to increase

33

about 3.5 percent over budget, with percentage volume growth in the double
digits in both Philadelphia and Kansas
City. The increase in volume is attributable to several factors, including
market-based pricing, new product offerings, and the withdrawal of some
correspondent banks from the check
processing service. The Reserve Banks
have estimated that 1999 check revenues
will fully cover all check costs.
The currency service has also experienced unforeseen volume increases.
Additional shifts to process the currency
and increased supply and shipping costs
are contributing 62 ANP and $9.9 million to the overrun. The rise in currency
paying and receiving volumes, which
are now expected to be 12 percent
higher than budgeted, is due in part to
the Board’s decision to reduce backlogs
to less than ten days to ensure that
Reserve Banks were prepared to handle
year-end processing demands.
Expenses related to century date
change (Y2K) initiatives throughout the
System are estimated to be $39.4 million, $10.3 million higher than approved
1999 budget levels. The main factor
behind this overrun is an increase in
overtime related to testing. The number
of weekends that depository institutions
tested with a Reserve Bank was greater
than budgeted.

Table 3.3
Budget Performance of the Federal Reserve Banks, Operational Expenses and Employment,
1999

Item

Operating expenses
(millions of dollars) . . . . . . . . . . . . . . .
Employment
(average number of personnel) . . . . .
Note. See notes to table 3.2.

1999
budget

1999
estimate

2,159.2

2,198.6

22,651

22,867

Change
Amount

Percent

39.4

1.8

216

1.0

34

Annual Report: Budget Review, 2000

The 1999 estimate includes another
Y2K project—the creation of strategic
inventory locations (SILs) in the fall of
1999 for the precautionary storage of
currency. The Districts estimate that
the unbudgeted expenses for shipping,
insurance, and other costs related to
establishing the SILs will add $4.9 million to 1999 expenses.
The final factor contributing to the
overall increase in 1999 expenses is
lower-than-anticipated capitalized software costs related to internally developed
applications. Beginning in 1999, Reserve
Banks began to capitalize costs related
to certain software development projects. Delays in a number of projects
throughout the System are estimated to
add $3.7 million to 1999 expenses, with
a corresponding reduction in capital
projects.
Partially offsetting these overruns are
lower-than-anticipated occupancy costs
in the New York District ($3.6 million)
and, over the System as a whole, an
estimated net underrun of $1.1 million
in expenses related to the check-imaging
initiative.

Factors Affecting the 2000
Budget
Personnel expenses, which include both
salaries and benefits, represent 64 percent
of Reserve Bank expenses and are the
principal source of the year-over-year
budget increase. Reserve Bank budgets
include $80.3 million to fund salary
administration programs (merit increases,
promotions, and so on) for officers and
employees (table D.7).3 The budgets
include average merit increases of
3. Salary administration represents the budgeted
funds that are available to increase compensation
to officers and employees in the coming year.
It does not include adjustments for changes in
staffing levels, turnover and lag in hiring, and
overtime.

4.4 percent for officers and 4.2 percent
for employees, totaling $44.2 million,
or 55 percent, of the total salary
administration budget (chart 3.2). Promotions, reclassifications, and market
adjustments represent $14.1 million;
retention payments represent $2.4 million; and officer and employee cash
awards and incentive payments represent
$19.6 million. The merit and other
salary-related expenses are in line with
trends in both the public and private
sectors.
Officer turnover (including retirement) continues to be low, with five
Banks projecting no turnover in 2000.
The remaining Banks project officer
turnover in a range from 2.0 percent
(Minneapolis) to 7.4 percent (San
Francisco). Employee turnover in 2000
is projected to range from 8.5 percent
(Chicago) to 14.7 percent (Cleveland).
Banks are reporting higher turnover in
checks and some professional and technical areas. Turnover in the information
technology area appears to have stabilized in 1999 and is expected to remain
low in 2000. In 2000, however, continuing market pressures will increase the
risk of losing employees with critical
skills. As a result, the Banks plan greater

Chart 3.2
Components of Salary Administration at the
Federal Reserve Banks, 2000
Merit, 55%

Retention
payments,
3%

Cash awards and incentives, 24%
Note. See text note 3.

Promotion,
reclassification, and
market
adjustment,
18%

Federal Reserve Banks
use of variable pay, retention incentives,
and other monetary and nonmonetary
rewards for key officers and employees.
Retirement and other benefit expenses,
which account for 13 percent of Reserve
Bank budgets, are anticipated to increase
$18.3 million, or 6.3 percent, in 2000.
The primary factors include increases
in salary-related benefits such as social
security and employee thrift plan
contributions, which are directly related
to the increased number of ANP. Other
contributing factors include higher
postretirement and postemployment
valuations, which are directly related
to changes in actuarial assumptions.
Employer costs for health and dental
plans are also budgted to increase in
2000.
The 2000 budgets are also being
affected by several other initiatives at

35

the Reserve Banks (table 3.4). Many of
these initiatives are the same as those
identified as factors influencing the 1999
budget overrun. For example, the fullyear effect of the dramatic increases in
check volume this year are reflected in
salary, benefit, equipment, and depreciation costs in the 2000 budgets.
Projects in their infancy in 1999, such as
check standardization and enterprisewide
check adjustments, will demand much
greater resources in 2000, while century
date change and SIL costs in 2000 are
projected to be lower.

Priced Services Provided to
Depository Institutions
Factors affecting the budget for services
provided to depository institutions
include standardization of the check-

Table 3.4
Changes in Expense and Employment for Major Initiatives at the Federal Reserve Banks,
1999–2000
Millions of dollars except as noted
Change
1999
estimate

2000
budget

Priced services provided to
depository institutions
Check standardization . . . . . . . . . . . . . . . . . . . . . .
Enterprisewide check adjustment . . . . . . . . . . .
Commercial check imaging (total) . . . . . . . . . .

12.6
2.4
23.3

Reimbursable services
Treasury Direct consolidation . . . . . . . . . . . . . .
Treasury Tax and Loan consolidation . . . . . . .
Imaging for government agencies (total) . . . .
Central bank services
Strategic inventory location . . . . . . . . . . . . . . . .

Initiative

Amount

Average
number of
personnel

20.9
4.3
27.1

8.3
1.9
3.9

34
12
30

18.7
5.7
13.7

24.2
6.5
16.1

5.5
.8
2.4

81
−1
22

4.9

3.1

−1.7

0

Cross-functional areas (incremental costs)
Century date change
Federal Reserve Banks . . . . . . . . . . . . . . . . . .
Federal Reserve Information
Technology . . . . . . . . . . . . . . . . . . . . . . . . .

9.7

3.9

−5.8

−31

4.9

1.7

−3.3

−21

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

95.9

107.8

11.9

126

Note. See notes to table 3.2.

36

Annual Report: Budget Review, 2000

processing hardware and software,
enterprisewide check adjustments, and
commercial check imaging.
Check-Processing Standardization
The Reserve Banks plan to undertake
a multiyear initiative to standardize
check hardware and software, consolidate processing at FRIT, and develop
common applications that all Reserve
Banks will use. Some of the benefits
of this effort will be improved delivery
of checks, greater flexibility to address
volume shifts, better contingency, and
lower ongoing operating costs. The
increase in the 2000 budgets represents
costs for the recently approved directive
to use a single-platform strategy. The
costs associated with this effort have
been segregated in a System project and
a special project.
The check standardization System
project was established to capture and
track expenses associated with the
standardization and conversion to a
single operating platform. System project expenses reflecting incremental
increases of $8.3 million and 34 ANP
are included in the 2000 budget.
In addition to these expenses, a check
standardization special project has been
established to capture excess capacity
and unique transition-related expenses
during the conversion. The budget for
the 2000 check standardization special
project is $14.0 million and 5 ANP.
Enterprisewide Check Adjustments
Expenses included in the budget associated with implementing the Enterprisewide Check Adjustment System are
$4.3 million and 25 ANP, an increase of
$1.9 million and 12 ANP from 1999
estimated expenses. These costs are to
establish a centrally staffed function to
manage the day-to-day operations for

this nationwide, standard, LAN-based
application for check adjustments. Additional costs for personnel, software
licensing, and maintenance have been
included in the budget. Installation is
currently projected to be completed by
the end of 2000.
Commercial Check Imaging
Equipment, software, and staff expenses
associated with commercial check
image services are projected to be
$27.1 million in 2000, an increase of
$3.9 million and about 30 ANP above
1999 estimates. The 2000 budget
includes funding to support commercial
check pilot projects in the Utica and
Helena offices, as well as costs incurred
in the other Districts to support increased
customer demand and implementation
of the national commercial image
archive.

Reimbursable Services
Factors affecting the budget for reimbursable services include the consolidation
of support for Treasury Direct, changes
in the Treasury Tax and Loan system,
and the introduction of imaging for
government agencies. Costs in these
three areas are fully reimbursable.
Treasury Direct Consolidation
The processing of requests from the
public to purchase Treasury securities
through the Treasury Direct program
will be consolidated in three Districts .
...
The
three Districts have budgeted $12.3 million in 2000 for the equipment costs and
182 ANP associated with this project.
Budgets for the Districts losing Treasury
Direct operations include staff reductions for 2000 totaling 56 ANP. The cost

Federal Reserve Banks
savings resulting from these staff reductions are partially offset by budgeted
retention incentives necessary to ensure
a smooth transition. Processing at all
sites will continue until the three consolidation sites are fully operational.
Further ANP reductions are expected
upon the completion of the transition,
tentatively planned for December 2000.
Consolidation of Treasury Tax and
Loan Operations
The consolidation of the operations
supporting the Treasury Investment
Program (TIP) and Paper Tax System
(PATAX) at the St. Louis Reserve Bank
will replace the existing TT&L software
and staff at all Reserve Banks. TIP is a
centralized application that will be used
to manage the Treasury’s tax receipts
that are invested in depository institutions. TIP and PATAX, to be implemented in 2000, will improve capabilities for monitoring investment activity
and monitoring collateral and make the
tax-collection process fully electronic.
The 2000 budget includes an increase
of 20 ANP in St. Louis, which is offset
by a reduction of 21 ANP in the other
Reserve Banks. When centralized processing is fully implemented in 2000,
additional ANP reductions are expected.
Imaging for Government Agencies
Imaging projects for government agencies total $12.6 million in 2000 and
include the imaging and archiving of
government checks and EZ Clear
savings bonds. The 2000 budget also
includes $3.5 million and 22 ANP associated with the postal money order
image project. Production implementation of the money order project has been
deferred from 1999 to the second
quarter of 2000.

37

Central Bank Services
The largest factor affecting the budget
for central bank services is the Y2Krelated strategic inventory location (SIL)
project. The project created seventynine supplemental cash-storage sites
apart from Reserve Bank offices to
facilitate cash access for depository
institutions around the time of the
century date change, should circumstances demand it. The Reserve Bank
budgets for 2000 provide $3.1 million
to cover SIL-related transportation,
storage, and insurance fees through the
first quarter of 2000, when the sites were
closed.

Cross-Functional Areas
The largest factor affecting the budgets
for the cross-functional areas is the century date change effort. Reserve Banks
and FRIT have included $13.0 million
and 102 ANP in their 2000 budgets for
both reallocated and incremental
resources related to Y2K issues. The
102 ANP is a decrease of 387 ANP,
or 79.2 percent, from 1999 estimated
staffing levels. The Y2K-related staff
included in the 2000 budgets was
available to address potential problems
and to complete administrative duties to
bring the century date change project to
a close during the first quarter of 2000.
Funds for the final stages of retention
and incentive programs are also included
in the 2000 budgets.
The reallocated staff resources that
had been dedicated to the Y2K effort
will be deployed to address demands for
other information technology projects.
Incremental Y2K costs are budgeted
to decline $5.8 million at the Reserve
Banks and $3.3 million at FRIT.
Incremental staff associated with this
initiative will decline 52 ANP from

38

Annual Report: Budget Review, 2000

1999 estimates, of which 31 are located
in the Reserve Banks and 21 at FRIT.

Risks in the 2000 Budget
Reserve Banks have noted several common risks associated with the 2000
budgets. First, key projects for the
Treasury could create budget uncertainties. Modifications to implementation
and consolidation schedules or application requirements could affect costs
for software, equipment, and human
resources.
The System’s check standardization
project may present significant risk for
the 2000 budget as well. When scheduling for the project is completed, several
Districts may find they are facing
higher-than-budgeted expenses in 2000,
particularly if the implementation
schedule is accelerated.
Finally, the market for skilled employees remains very tight. Initiatives that
are contingent upon successful staffing
efforts present additional uncertainties
in the 2000 budget.

2000 Capital Plan
The 2000 capital budgets submitted by
the Reserve Banks and FRIT total
$514.3 million, an increase of $132.1 million from the 1999 estimated levels. The
budget includes $469.3 million for the
Banks and $45.0 million for FRIT. As in
previous years, the 2000 capital budgets
developed by the Reserve Banks and
FRIT include funding for projects that
support the strategic direction outlined
in the Banks’ plans. These strategic
goals include improving operational
efficiency and effectiveness, improving
services to Bank customers, and providing a safe, high-quality work environment. In support of these strategies,
the 2000 budget includes four major
categories of capital outlays—buildings

and facilities, automation, payment
services, and Treasury-related initiatives (chart 3.3; see tables D.8 and
D.9 for details by District and asset
classification).

Buildings and Facilities
The proposed capital budget includes
an estimated $260.0 million for the
modernization or replacement of physical facilities and replacement or upgrading of critical systems. Of the total
building-related expenses, $183.4 million (70.5 percent) is attributable to
eight initiatives with budgets greater
than $4.0 million. These include two
in the Atlanta District (new Atlanta
and Birmingham buildings), one in the
San Francisco District (Phoenix cash
facility), one in the Dallas District
(new Houston building), three in the
New York District (improvements at
33 Maiden Lane and restorations and
renovations at the main building), and
one in the St. Louis District (check
department renovations). The Kansas
City District has also budgeted for a
facility space evaluation project for the
head office. In addition to the larger
projects described, funding is also
provided for the replacement of routine
Chart 3.3
Major Capital Projects at the Federal Reserve
Banks, 2000
Treasury, 2%
Automation,
22%
Other,
5%

Major
building,
51%

Payments, 20%

Note. Includes Federal Reserve Information Technology.

Federal Reserve Banks
building-related equipment and the
replacement of furniture and fixtures.

Automation
The proposed capital budget includes
$110.6 million in funding for major
automation initiatives. These projects
do not include the automation components of building, payments, or Treasuryrelated initiatives that are discussed
separately. The strategic directions
outlined in the individual Bank budgets
linclude enhanced technological capabilities, the continued implementation of
LAN technology, the development of
common office environments and webbased applications, and various enhancements and replacements that were
deferred to ensure Y2K preparedness.
Aside from the $45.0 million included
for FRIT, the automation total includes
$22.7 million in funding for major
software application development,
enhancements, and purchases. New
York’s Transaction Processing System
initiative ($2.7 million) and the Statistics
and Reserves System ($1.9 million) for
all the Districts, as well as a number of
smaller projects, contribute to software
outlays.
The largest share of the remaining
funds supports the Districts’ distributed
technology strategies and replacement
of personal computers. Nearly all Banks
are operating under a three-year replacement strategy and continue to convert
applications from the mainframe to a
LAN environment and, to a lesser
extent, web-based solutions.

Payment System Improvements
The 2000 capital budget includes
$105.3 million for initiatives related to
payment system improvements. These
initiatives include the acquisition and
installation of high-speed check imaging

39

equipment, replacements for check
reader–sorters and endorsers, the ongoing development of a common check
platform and related applications, the
implementation of the enterprisewide
check adjustment system, and settlementrelated initiatives.

Treasury-Related Initiatives
Major Treasury-related initiatives
account for $11.6 million of the capital
budget. These projects include $4.1 million related to the Treasury Direct consolidation, $1.5 million for the continued
development of the EZ-Clear Savings
Bond Image and Archive Retrieval
System, and $1.1 million for the Savings
Bond Architecture Project. In addition
to these major initiatives, funding is also
included for the continued development
of the system for Intragovernmental
Payment and Collection, the Automated
Standard Application for Payments, and
the TIP and PATAX applications.

Trends in Expenses and
Employment
Over the ten years ending with the 2000
budget, Reserve Bank expenses have
increased an average of 5.0 percent per
year (chart 3.4), and the average number
of employees at the Reserve Banks
(including FRIT) has increased 160,
from 23,596 in 1991 to 23,756 in 2000
(chart 3.5). Over the five years ending
with the 2000 budget, Reserve Bank
expenses have increased an average
of 4.4 percent per year when special
projects are excluded, and 4.0 percent
when special projects are included.
Overall, expenses have been affected
during this five-year period by increases
in check and cash volumes, higher
retirement and benefits costs, and
information technology requirements,

40

Annual Report: Budget Review, 2000

Chart 3.4
Operating Expenses of the
Federal Reserve Banks, 1991–2000

Chart 3.5
Employment at the
Federal Reserve Banks, 1991–2000

Billions of dollars

ANP, in thousands

2.2

Current dollars

24
1.8

1992 dollars 1

23
1.4

1991

1996

2000

1991

1996

2000

Note. Excludes special projects. For 1999, estimate;
for 2000, budget.
1. Calculated with the GDP price deflator.

Note. Includes Federal Reserve Automation Services
and special projects. For 1999, estimate; for 2000, budget.
See text note 2 for definition of ANP.

including the century date change
initiative.
Since 1996, overall staff levels have
increased 198 ANP. Staff increased
in services provided to financial institutions and the public (417 ANP),
primarily as a result of increases in the
volume of processed checks. Support
services also increased (185 ANP),
primarily because of needs in the
information technology area. Partially

offsetting the increases are reductions
to staff in the supervision and regulation area (163 ANP), services to the
Treasury and other government agencies (148 ANP), overhead services
(90 ANP), and the monetary and economic policy service (3 ANP). These
staff reductions have been due largely to
consolidation of operations and increased
operational efficiencies throughout the
System.

Part II
Special Analysis

43

Chapter 4

The Gramm–Leach–Bliley Act
In recent decades, financial markets here
and abroad had advanced well beyond
the structures assumed by U.S. banking
laws. The growing divergence between
markets and laws created new challenges for U.S. financial institutions
in their efforts to serve customers and
compete in world markets, forcing them
to devise costly and inefficient ways to
meet market demands. The Gramm–
Leach–Bliley Act of 1999 (Public Law
106-102) provides long-needed reform
of the U.S. financial regulatory system:
It recognizes market pressures that have
been building for many years, creates
the necessary legal and supervisory
framework for accommodating further
evolution, and minimizes the need for
U.S. institutions to adapt their efforts to
outmoded law.

Legislative Overview
The Gramm–Leach–Bliley Act is wide
ranging, creating ways for traditional
bank holding companies and foreign
banks to expand into a host of new
insurance and securities activities and
for insurance and securities firms to
enter commercial banking. Moreover, it
does so in a relatively expeditious way,
avoiding many of the regulatory procedures that would have been required in
the past.
For a bank holding company to
become a financial holding company
(FHC) and be eligible to engage in new
activities, the act requires that all U.S.
depository institutions controlled by the
holding company be well capitalized
and well managed and have satisfactory
ratings issued under the Community
Reinvestment Act. Foreign banks that

operate U.S. branches or agencies or that
own or control U.S. commercial lending
companies and wish to become FHCs
must meet capital and management
standards that, in the judgment of the
Federal Reserve, are ‘‘comparable’’ to
those imposed on U.S. banks.
The legislation also provides institutions flexibility in structuring their activities by allowing them a choice of
conducting certain financial activities
within subsidiaries of commercial banks
or through direct nonbank subsidiaries
of the holding company. Subsidiaries
of banks may engage in all financial
activities permissible to FHCs, including securities underwriting and dealing,
except those that involve insurance
underwriting, merchant banking, or real
estate investment or development. The
act makes even merchant banking more
broadly permissible in FHCs, and
merchant banking might become permissible for subsidiaries of banks in five
years if both the Federal Reserve and the
Treasury agree with that approach.1
In permitting expanded powers for
financial institutions, the Congress saw
the need for adequate supervisory
oversight and also for potentially greater
overlap in regulatory jurisdictions.
Accordingly, it assigned to the Federal
Reserve the role of ‘‘umbrella supervisor,’’ that is, supervisor for all U.S.
financial holding companies, and gave it
authority to establish minimum capital

1. Merchant banking is an activity in which a
financial institution invests in a corporation, taking
up to full ownership and usually a seat on the
board of directors, but does not engage in its
day-to-day management.

44

Annual Report: Budget Review, 2000

requirements for these firms. The act
preserved for U.S. functional regulators
the responsibility for the entities they
oversee. The Securities and Exchange
Commission, for example, will continue
to set prudential and operating rules for
its registered brokers and dealers, and
the self-regulatory organizations such
as the New York Stock Exchange and
the National Association of Securities
Dealers will continue to supervise and
examine the activities of their respective
members. Likewise, state insurance commissions will continue to set rules for
insurance companies chartered in their
states and monitor and enforce compliance with the standards.
Federal Reserve supervisors will not
interfere with, or unnecessarily duplicate,
the efforts of the functional regulators
and will rely as much as possible on
their reports and on public information.
The role of other U.S. bank regulators
remains unchanged, and the Federal
Reserve will continue to coordinate with
them its oversight of holding companies.
The Federal Reserve’s objective as
umbrella supervisor will be to understand
the holding company’s group-wide,
or consolidated, financial condition, to
insure that companies have adequate
information systems and internal controls
in place, and to identify emerging
threats to banks arising from their
nonbank affiliates.

Issues and Implementation
The Gramm–Leach–Bliley Act, along
with the implementing regulations and
supervisory policies, may materially
transform the U.S. financial system. By
validating affiliations between banks
and diversified financial services firms,
the legislation sets the stage for improving the competitiveness and efficiency
of financial markets and providing a
broader array of financial products to

consumers. With the flexibility introduced by the new legislation—together
with the workings of time, technology,
and innovation—one can expect world
financial markets and institutions a
decade from now to look much different
from the way they do today. Whether
the new landscape will be fruitful for
institutions and consumers depends a
great deal on how well government and
industry develop regulations and define
new strategies for competing effectively
in the years ahead.
Market discipline declines as protection against risk is perceived to rise;
hence, market discipline cannot prevail
while noninsured creditors believe that
their funds are not at risk in banks and
their affiliates. Preventing the extension
of such a distortion by preventing the
extension of the federal safety net to
more institutions remains an important
consideration for the Federal Reserve as
it constructs supervisory and regulatory
policies under financial reform. The
federal safety net gives banks the special
benefits of access to federal deposit
insurance and to the Federal Reserve’s
clearing process and discount window.
Extending that access could distort
market incentives and practices through
the enlargement of the risks of moral
hazard and thereby expose U.S. taxpayers to the kind of dangers realized a
decade or more ago during the thrift
institutions crisis.
The Federal Reserve has sought to
address the risks associated with any
extension of the safety net by separating
the conduct of new activities as much as
reasonably possible from insured depositories and by providing a framework for
adequate supervision of financial holding companies. Such efforts will contribute to the market discipline necessary to
make supervision most effective.
Determining the right mix of active
government oversight and market dis-

The Gramm–Leach–Bliley Act
cipline has become more difficult as
financial markets and institutions have
grown larger and more complex. In
fulfilling its role of umbrella supervisor,
the Federal Reserve must look across
the entire financial holding company
to adequately assess its risk management process and financial condition.
Fortunately, the diversification that
comes with the greater size and range
of activities of today’s large financial
institutions has improved the ability of
these firms to withstand shocks and has
probably reduced the likelihood that one
or more of them will fail. On the other
hand, the increased size of these institutions has likewise increased the potential
damage to the whole financial system
that might come from the failure of just
one of them.

Supervisory Coordination
The supervision of FHCs requires the
Federal Reserve to coordinate its policies and actions with functional and
other financial regulators in this country
and abroad. In the past year or so, the
countries represented on the Basel Committee of Banking Supervision agreed to
structure their financial oversight programs around three so-called pillars:
sound capital standards, effective supervision, and market discipline fueled by
adequate public disclosures.2

Capital Standards
Regarding capital standards and foreign
banks, the Gramm–Leach–Bliley Act
requires the Federal Reserve to apply
standards ‘‘comparable’’ to those applied
to U.S. firms and requires institutions to
2. The member countries are the Group of Ten:
Belgium, Canada, France, Germany, Italy, Japan,
the Netherlands, Sweden, Switzerland, the United
Kingdom, and the United States.

45

meet more than the minimum standards
of financial strength. While the Board is
sensitive to concerns about extending
U.S. standards extraterritorially, it must
also provide a ‘‘level playing field’’ for
competition in this country, recognizing
material differences in the structure and
composition of foreign bank balance
sheets and in the effective capital requirements of home country supervisors.
The approach that the Federal Reserve
has taken for foreign banks reflects the
wide variety of factors that should be
considered in assessing capital adequacy,
such as the composition of various debt
and equity accounts, accounting standards, long-term debt ratings, and
whether home country supervisors
practice consolidated, comprehensive
supervision. This potentially case-bycase approach for foreign banks should
provide the flexibility necessary to
address different banking and operating
structures in a manner equitable to all.

Effective Supervision and Risk
Management
While all banks must adhere to minimum regulatory capital standards, a
more fundamental and growing need is
for them to better understand the scope
of their economic risks. The astute
management of risk is most important
among large, complex banking organizations, whose activities and innovative
practices have evolved beyond those
envisioned in the current regulatory
capital standard, the 1988 Basel Capital Accord. For these institutions, in
particular, the accord—even with its
subsequent amendments—may not provide a sufficient measure of capital
adequacy.
Only through the continued progress
of the banking industry in managing
underlying economic risks can the
Federal Reserve and other regulators of

46

Annual Report: Budget Review, 2000

internationally active banks make corresponding progress in developing regulatory capital standards that are more
sensitive to such risks. As with most
major initiatives, the banking and regulatory community must work together
toward a solution.
The Federal Reserve conducts much
of its regulatory work in this area
through the Basel Committee on Banking Supervision. In 1999 the committee
issued for comment a proposed amendment to the 1988 Basel accord that
would make greater use of external
credit ratings and provide more consistent treatment of collateral, guarantees,
and other protective measures by which
banks mitigate risk. It also agreed to
pursue an alternative approach for capital
standards that would build upon banks’
internal credit ratings of borrowers and
counterparties and other aspects of their
internal credit risk models. In an effort
to spur this process and otherwise
strengthen risk management techniques,
the Federal Reserve has told large U.S.
bank holding companies and state
member banks that their internal assessments of economic risks and capital
adequacy will be closely evaluated
during supervisory reviews.

Market Discipline and Disclosure
Market discipline, conveyed through
credit ratings, funding costs, stock
performance, and other factors, can help
greatly in controlling risk in large,
complex institutions. By making use of
market judgments as potential early
warning signals—particularly in the case

of large, publicly traded institutions—
supervisors may be able to strengthen
their performance while intruding less
into the activities of banks and bank
holding companies.
Generating market discipline, however, requires the disclosure of relevant
information. Although regulatory agencies can help, the banking and investing
community should require institutions
to provide continually improving measures of risk and substantive discussions
of their risk management processes.
Heavy reliance on the supervisory
process and regulatory standards, alone,
cannot suffice.

Conclusion
Implementing the new Gramm–Leach–
Bliley Act, developing and maintaining
better capital standards, and providing
prudential oversight to a growing and
increasingly diverse U.S. financial system
present many challenges for the years
ahead. Financial institutions and their
regulators must remain flexible and
innovative in dealing with rapidly changing markets and financial products.
Large banking organizations and financial holding companies, in particular,
must be willing to meet high standards
of soundness and disclosure and improve
their ability to assess risk in step with
the burgeoning complexity of the
marketplace. The potential benefits from
financial reform should be substantial, but they will be so only if both
government and industry work together
to keep the system sound.

Appendixes

49

Appendix A

Special Categories of System Expense
Fees for priced services and the treatment of capital outlays are explained in
this appendix. Also described are the
Federal Reserve’s expenses for currency
printing.

Priced Services
The Monetary Control Act of 1980
requires the Federal Reserve to make
available to all depository institutions,
for a fee, certain services that the Federal Reserve had previously provided
without explicit charge and only to
member banks. As the act requires, the
fees charged for providing these priced
services are based on the cost of
providing the services, including all
direct and indirect costs, the interest on
items credited before actual collection
(float), and the private sector adjustment
factor (PSAF). The PSAF takes into
account the return on capital that would
have been provided, and the taxes that
would have been paid, had the services
been furnished by a private business
firm.

Annual Pricing Process
To meet the requirement for the full
recovery of costs, the Federal Reserve
has developed an annual pricing process
involving a review of Reserve Bank
expenses in addition to the review
required by the System’s budget processes. Use of the budgets is an integral
part of the pricing exercise because most
of the recoverable costs of priced
services are direct and indirect costs
as determined by the budgets. To assist
depository institutions in their planning
to provide or use correspondent banking

services, the Federal Reserve usually
sets each year’s prices only once, in the
fourth quarter of the preceding year.
Fees for Federal Reserve services
must be approved by the product director for the respective service, by the
Financial Services Policy Committee,
and ultimately by the Board of Governors.1 If fees for any service are set so
that the full recovery of costs is not
anticipated, the Board announces the
rationale.
The cost of float is estimated by
applying the current federal funds rate to
the level of float expected to be generated in the coming year. Estimates of
income taxes and the return on capital
are based on tax and financing rates
derived from a model of the fifty largest
U.S. bank holding companies; these
rates are applied to the assets the Federal
Reserve expects to use in providing
priced services in the coming year. The
other components of the PSAF are
derived from the budgets of the Reserve
Banks and the Board: the imputed sales
tax (based on budgeted outlays for
materials, supplies, and capital assets);
the imputed assessment for insurance
by the Federal Deposit Insurance Corporation (FDIC) (based on expected
clearing balances and amounts deferred
to depository institutions for items
deposited for collection with the Reserve
1. The product directors are the first vice
presidents at selected Reserve Banks with
responsibility for day-to-day policy guidance over
specific Systemwide priced services. The Financial Services Policy Committee comprises the
presidents of three Reserve Banks, the first vice
presidents of three other Reserve Banks, and, as
liaison, the director of the Board’s Division of
Reserve Bank Operations and Payment Systems.

50

Annual Report: Budget Review, 2000

Banks); and the portion of the expenses
of the Board of Governors that is
directly related to the development of
priced services.
The intent of the PSAF calculation is
to require the Federal Reserve to include
in the costs of its priced services the
costs that would have been incurred had

the services been provided by a privatesector firm.

Calculation of the PSAF for 2000
In 1999 the Board approved a 2000
private sector adjustment factor for
Reserve Bank priced services of

Table A.1
Pro Forma Balance Sheet for Federal Reserve Priced Services, 1998 and 1999
Millions of dollars
Item

1999

Assets
Short-term assets
Imputed reserve requirement on clearing balances . . . . . . . .
757.7
Investment in marketable securities . . . . . . . . . . . . . . . . . . . . . 6,819.6
69.1
Receivables 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.1
Materials and supplies 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20.2
Prepaid expenses 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Items in process of collection . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,470.7
Total short-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2000

762.2
6,859.5
74.2
3.4
21.4
3,804.2
11,141.4

11,524.9

Long-term assets
386.6
Premises 1,2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
150.3
Furniture and equipment 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
21.1
Leasehold improvements and long-term prepayments . . . .
1
...
Prepaid pension costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total long-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

558.1

1,255.8

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11,699.5

12,780.7

411.7
180.1
64.2
599.8

Liabilities
Short-term liabilities
Clearing balances and balances arising
from early credit of uncollected items . . . . . . . . . . . . . . 7,557.3
Deferred-credit items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,470.7
93.4
Short-term debt 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total short-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7,621.7
3,804.2
99.0
11,141.4

11,524.9

Long-term liabilities
...
Postemployment and retirement benefits 1 . . . . . . . . . . . . . . . .
207.6
Long-term debt 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

207.6

639.2

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11,349.0

12,164.1

Equity3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

350.5

616.6

Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11,699.5

12,780.7

Note. Data are averages for the year.
1. Financed through the private sector adjustment
factor; other assets are self-financing.
2. Includes allocations of Board of Governors’ assets
to priced services of $0.5 million for 2000 and
$.04 million for 1999.

238.3
400.9

3. Imputed figures representing the source of financing
for certain priced-service assets.
. . . Not applicable

Special Categories of System Expense
$192.6 million, an increase of $76.8 million, or 66.3 percent, from the PSAF of
$115.8 million targeted for 1999.

51

Asset Base
The value of Federal Reserve assets to
be used in providing priced services in

Table A.2
Derivation of the Private Sector Adjustment Factor (PSAF), 1999 and 2000
Millions of dollars except as noted
Item

1999

2000

PSAF Components
Assets to be financed 1
Short-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

93.4
558.1
651.4

99.0
1,017.5
1,116.5

Weighted average costs (percent)
Capital structure 3
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14.8
31.7
53.5

9.0
35.8
55.1

Financing rates and costs 3
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5.1
6.6

5.1
6.6

Pretax return on equity 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average long-term cost of capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

23.5
17.2

23.3
16.7

Tax rate (percent) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

32.0

31.5

Capital costs 5
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.8
13.7
82.4
100.8

5.0
26.5
143.7
175.2

Other costs
Sales taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assessment for federal deposit insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses of Board of Governors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8.7
2.8
3.4
14.9

10.3
2.9
4.2
17.4

Total PSAF recoveries
Millions of dollars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As a percentage of capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As a percentage of expenses 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

115.8
17.8
18.2

192.6
17.3
28.0

Required PSAF Recoveries

1. Calculated with the ‘‘direct determination of assets’’
method.
2. Consists of total priced long-term assets, including
the priced portion of Federal Reserve Information
Technology assets less, for 2000 only, liabilities for
postemployment and retirement benefits.
3. All short-term assets are assumed to be financed
with short-term debt. Of the total 1999 long-term assets,
37.2 percent are assumed to be financed with long-term
debt and 62.8 percent with equity; for 2000 the
proportions are . The data are 39.4 percent with long-term
debt and 60.6 percent with equity.

4. The pretax rate of return on equity is based on the
average after-tax rate of return on equity, adjusted by the
effective tax rate to yield the pretax rate of return on
equity for each bank holding company for each year.
These data are then averaged over five years to yield the
pretax return on equity for use in the PSAF.
5. Systemwide expenses for priced services, less
shipping, were budgeted at $636.9 million for 1999 and
$687.0 million for 2000.

52

Annual Report: Budget Review, 2000

2000 is estimated at $12,780.7 million
(table A.1). The value of assets assumed
to be financed through debt and equity
in 2000 is $1,116.5 million, an increase
of $465.1 million, or 71.4 percent, from
1999 (table A.2). More than three
fourths of this increase results from
including net pension assets (prepaid
pension costs less postemployment and
retirement liabilities) of $361.5 million
in priced assets to be financed through
PSAF, with building projects in two
Districts and check standardization and
imaging initiatives accounting for the
remaining increase.
Cost of Capital and Taxes
and Other Imputed Costs
For 2000, a pretax rate of return on
equity of 23.3 percent, or $143.7 million, is planned. Other required PSAF
recoveries for 2000—imputed sales
taxes, the imputed FDIC insurance
assessment, and Board expenses—total
$17.4 million (table A.2).

Capital Outlays
Under generally accepted accounting
principles (GAAP), the cost of an asset
that is expected to benefit an entity over
future periods should be allocated over
those periods. Such treatment allows
a realistic measurement of operating
performance. In accordance with GAAP,
the Federal Reserve System depreciates
the cost of fixed assets over their estimated useful lives.
The Banks capitalize and depreciate
all assets that cost $1,500 or more; they
may either capitalize or expense assets
costing less. The capitalization guideline
for the Board is $5,000.
The Banks maintain a multiyear plan
for capital spending. The Board, in turn,
requires the Banks to budget annually

for capital outlays by capital class to
estimate the effect of total operating
and capital spending. During the budget
year, the Banks must submit proposals
for major purchases of assets to the
Board for further review and approval.
The Board of Governors also reviews
capital expenditures for the Board.

Currency Printing
and Circulation
The Department of the Treasury’s
Bureau of Engraving and Printing prints
U.S. currency; the Federal Reserve
Banks put it into circulation through
depository institutions and destroy it as
it wears out (table A.3). Under authority
delegated by the Board, the Director of
the Division of Reserve Bank Operations and Payment Systems submits an
order for new currency to the Bureau of
Engraving and Printing each July. Upon
reviewing the order, the bureau establishes a billing rate for new currency,
which the Board’s staff uses to prepare
the annual budget for new currency.
Once the Board establishes the currency
budget, it assesses the Federal Reserve
Table A.3
Currency in Circulation, New Notes Issued,
and Notes Destroyed, 1999
Millions of pieces
Notes
in
circulation 1

New
notes
issued 2

Notes
destroyed

...........
...........
...........
...........
...........
...........
...........

7,536
602
1,799
1,620
5,804
1,294
3,862

3,865
25
866
788
2,744
426
879

3,767
4
694
616
1,736
183
257

Total . . . . . . . . .

22,516

9,593

7,257

Dollar
denomination
1
2
5
10
20
50
100

1. As of December 31, 1999.
2. Does not include additions to inventory at the
Reserve Banks.

Special Categories of System Expense
Banks through an accounting procedure similar to that used in assessing
the Banks for the Board’s operating
expenses.
Estimated currency expenditures for
1999 total $485.7 million, which is
$14.4 million, or 2.9 percent, less than
the budgeted amount (table A.4). Note
production in the fourth quarter of 1999
is estimated to have been 332.0 million notes less than originally budgeted
because Reserve Bank inventories
reached the desired Year 2000 precautionary levels by October 1. The 2000
budget for new currency is $456.4 million, or 6.0 percent less than the 1999
estimated expenditures (chart A.1).

Printing of Federal Reserve Notes
Because of the 1999 buildup of precautionary currency inventories, the
Board limited the print order for the
2000 budget to 9.0 billion notes, which
represents a minimum-efficiency production schedule for the BEP. The budget
for printing the 9.0 billion new notes is
$437.0 million, or 95.7 percent of the
total 2000 currency budget. For January
through September (the calendar 2000
portion of the federal government’s

53

Chart A.1
Federal Reserve Budget for
Supplying U.S. Currency, 1991–2000
Millions of dollars

400

200

1991

1995

2000

Note. For 1999 estimate; for 2000, budget.

fiscal 2000, production is set at 7.0 billion notes. The Board’s staff estimates
that for October through December
2000, production could be 2.0 billion
notes.
The BEP charges the Board separately
for each of the three types of currency
produced: unthreaded ($1s), New Currency Design (NCD) without opticalvarying ink ($5s), and NCD with opticalvarying ink ($10s, $20s, $50s, and
$100s) (table A.5).2 The average price
2. The color of optical-varying ink varies
between green and black as the angle at which it is
viewed changes.

Table A.4
Federal Reserve Costs of Supplying Currency, 1999 and 2000
Thousands of dollars except as noted
Item

1999
estimate

2000
budget

Percentage
change

Printing of new Federal Reserve notes . . . . . . . . . . . . . . . . . . . . . . . . . .
Shipment of new notes by Bureau of Engraving and Printing . . . .
Intra-System shipment of fit notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Counterfeit deterrence research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return of currency pallets to Bureau of
Engraving and Printing 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reimbursement to the U.S. Treasury’s
Office of Currency Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

465,097
13,016
1,579
3,446

436,984
9,900
4,000
2,800

−6.0
−23.9
153.3
−18.8

6

30

400.0

2,523

2,700

7.0

Total cost of currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

485,667

456,414

−6.0

1. Pallets, on which the BEP stores and ships currency
to Reserve Bank offices, facilitate efficient handling

and storage of the notes. The pallets remain at the Reserve
Bank offices until the currency is paid into circulation.

54

Annual Report: Budget Review, 2000

Table A.5
Projected Cost of Printing New Notes, by Type of Note, 2000
Type of currency

Number of
notes (millions)

Percentage of
total notes

Cost per
thousand notes
(dollars)

Total cost
(thousands of
dollars)

Unthreaded ($1s) . . . . . . . . . . . . . . . . . . . . . .
New Currency Design 1
$5s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10s, $20s, $50s, $100s . . . . . . . . . . . . .

4,832.0

54

35.35

170,811

678.4
3,462.4

8
39

60.20
65.08

40,840
225,333

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8,972.8

100

47.23

436,984

1. All NCD denominations except $5s carry opticalvarying ink (see text note 2).

charged to the Board by the BEP for
producing all three types of notes will
increase 10.4 percent in 2000, from
$42.77 per thousand notes printed to
$47.23. During 2000, 42.6 percent of
the notes produced will be NCDs, and
the remaining 53.9 percent will be
unthreaded.
The billing rate for each type blends
the costs of producing the notes at
the Washington, D.C., and Fort Worth,
Texas, facilities of the BEP. The average
billing cost in 2000 is higher relative to
the number of notes printed because this
is the first year that the BEP will print
NCD $5s and $10s.

Shipment of Currency
The budget provides funds for shipments from the BEP and between
Reserve Bank offices. Primarily because
of a lower volume of note production
in 2000, the budget for currency transportation from the BEP to Reserve
Banks is $9.9 million, or 24 percent less
than 1999 estimated expenses.
Intra-System shipments are used to
move currency from offices with excess
fit currency to offices that would otherwise require new currency from the
BEP. Ten Reserve Banks requested
$50 or $100 notes when they submitted
their fiscal 2000 print orders to the

Board; because the BEP is not printing
$50 and $100 notes in fiscal 2000, these
ten Reserve Banks will need to obtain
these denominations from other Reserve
Banks. As a result, The 2000 budget for
currency shipments between Reserve
Banks is $4.0 million, or 153 percent
greater than 1999 estimated expenses.

Counterfeit Deterrence Research
In December 1999 an international
steering group decided to recommend
approving the second phase of the
three-year counterfeit deterrence research
project. The 2000 budget includes a
$2.8 million placeholder to fund the
second phase.

Treasury’s Office of Currency
Standards
The Treasury’s Office of Currency
Standards (OCS) develops standards
for the cancellation, destruction, and
accounting of unfit currency at the
Federal Reserve Banks. In turn, as a
public service, the BEP processes claims
for the redemption of damaged or
mutilated currency that is turned over to
the Reserve Banks. The 2000 currency
budget includes $2.7 million to reimburse the Treasury for OCS expenses.

55

Appendix B

Sources and Uses of Funds
The Federal Reserve System, in accordance with generally accepted accounting principles, accrues income and
expenses and capitalizes acquisitions of
assets whose useful lives extend over
several years (see appendix A).
The System derives its income primarily from earnings on U.S. government securities that the Federal Reserve
has acquired through open market operations, one of the tools of monetary
policy. These earnings account for
approximately 95 percent of current
income (table B.1).
The current expenses of the Reserve
Banks consist of their operating expenses
and the costs of the earnings credits
Table B.1
Income of the Federal Reserve System,
1998 and 1999
Millions of dollars
Source

1998
actual

1999
estimate

Loans . . . . . . . . . . . . . . . . . . . . . . .
U.S. government securities . . .
Foreign currencies . . . . . . . . . . .
Priced services . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . .

8.8
26,842.4
435.2
816.0
47.0

11.1
28,216.1
224.8
835.9
58.9

Total . . . . . . . . . . . . . . . . . . . . . . .

28,149.4

29,346.8

granted to depository institutions on
clearing balances held with the Reserve
Banks (table B.2). The Reserve Banks
record extraordinary adjustments to
current net income in a profit and loss
account. The primary entries in the
account are for gains or losses on the
sale of U.S. government securities and
for gains or losses on assets denominated
in foreign currencies that result either
from the sale of those assets or from
their revaluation at market exchange
rates.
The Reserve Banks maintain a surplus account to absorb unexpected
losses, much as commercial establishments retain earnings. The Board of
Governors requires that the surplus
account at year-end be an amount equal
to the capital paid in by the member
banks. Since the end of 1964, the
Board’s policy has been to transfer to
the U.S. Treasury all net income after
paying the statutory dividend to member banks and the amount necessary to
equate surplus to paid-in capital. The
amount transferred is classified as interest on Federal Reserve notes. Such
payments were $26.6 billion for 1998
and are estimated to be $25.4 billion for
1999.

56

Annual Report: Budget Review, 2000

Table B.2
Distribution of the Income of the Federal Reserve Banks, 1998 and 1999
Millions of dollars
Item

1998
actual

1999
estimate

Current income 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less
Current expenses of Reserve Banks 2
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs of earnings credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equals
Current net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plus
Net additions to, or deductions from (−), current net income 3 . . . . . . . . . . . . . . . . .
Less
Cost of unreimbursed Treasury services 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

28,149

29,347

1,487
346

1,531
321

26,316

27,495

1,914

−526

8

8

Assessments by the Board
Board expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

178
409

214
485

Other distributions
Dividends paid to member banks 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers to, or from (−), surplus 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

343
732

374
479

Equals
Payment to U.S. Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

26,561

25,410

1. See table B.1.
2. Net of reimbursements due from the U.S. Treasury
and other government agencies. Also reflects reductions
in credits for net periodic pension cost amounting to
$288.4 million in 1998 and $366.8 million in 1999.
3. This account is the same as that reported under the
same name in the table ‘‘Income and Expenses of Federal Reserve Banks’’ in the Statistical Tables section of
the Board’s Annual Report and includes realized and
unrealized gains on assets denominated in foreign
currencies, gains on sales of U.S. government securities,
and miscellaneous gains and losses.

4. The cost of services provided to the U.S. Treasury
that are reimbursable under agreements with the Treasury
and for which reimbursement is not anticipated.
5. The Federal Reserve Act requires the Federal
Reserve to pay dividends to member banks at the rate of
6 percent of paid-in capital.
6. Each year, to provide a reserve against losses, the
Federal Reserve transfers to its surplus account an amount
sufficient to equate surplus to paid-in capital.

57

Appendix C

Federal Reserve System Audits
The Board of Governors, each of the
Reserve Banks, and the Federal Reserve
System as a whole are all subject to
several levels of audit and review. At
each Federal Reserve Bank, a full-time
staff of auditors under the direction of a
general auditor reports directly to the
Bank’s board of directors. The Board’s
Division of Reserve Bank Operations
and Payment Systems, acting on behalf
of the Board of Governors, regularly
audits the financial operations of each
of the Banks and periodically reviews
all other Bank operations. In addition,
the financial statements of the Reserve
Banks are audited annually by an independent outside auditor.
The Office of Inspector General (OIG)
conducts audits and investigations of the
programs and operations of the Board
and those Board functions delegated
to the Federal Reserve Banks. The OIG
retains an independent auditor each year
to certify the fairness of the Board’s
financial statements and its compliance
with laws and regulations affecting
those financial statements.

Independent Audit
The Board of Governors contracts
with an external audit firm, currently
PricewaterhouseCoopers L.L.P., for an
annual financial audit of the combined
Reserve Bank financial statements and
the financial statements of each of
the twelve Reserve Banks. The Reserve
Banks are also audited by each Bank’s
internal audit function and by the
Board’s financial examiners.

General Accounting Office
The 1978 passage of the Federal Banking Agency Audit Act (Public Law
95–320) brought most of the operations
of the Federal Reserve System under
the purview of the General Accounting Office (GAO). The GAO, which
currently has 9 projects in various
stages of completion, since 1979 has
completed 178 reports on selected
aspects of Federal Reserve operations
(tables C.1 and C.2). The GAO has also
involved the Federal Reserve in about
99 other reviews not directly related
to the System and has terminated 56
others before completion. The reports
are available directly from the GAO.

58

Annual Report: Budget Review, 2000

Table C.1
Active GAO Projects Relating to the Federal Reserve, Year-End 1999
Subject

Date initiated

Banking agencies’ risk-based examinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
President’s Working Group on Financial Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. government’s financial statements in FY 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CFTC reauthorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security protection of government officials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impact of the euro for the United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities day trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rules governing S-corporations on community banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-Term Capital Management follow-up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1-27-99
3-11-99
5-13-99
7-15-99
7-29-99
9-10-99
9-10-99
12-1-99
12-1-99

Table C.2
Completed GAO Reports Relating to the Federal Reserve System, 1999
Report
Comparing Policies and Procedures of the Three Bank
Regulatory Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Are OPEC Financial Holdings a Danger to U.S. Banks or the Economy? .
Federal Systems Not Designed to Collect Data on All Foreign
Investments in U.S. Depository Institutions . . . . . . . . . . . . . . . . . . . . . . .
Considerable Increase in Foreign Banking in United States since 1972 .
Investment Policies, Practices and Performance
of Federal Retirement Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Supervision of Bank Holding Companies Needs Better, More
Formalized Supervision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Federal Reserve Should Assure Compliance
with the 1970 Bank Holding Company Act Amendments . . . . . . . . .
Federal Agencies’ Initial Problems with the Right to Financial
Privacy Act of 1978 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Internal Auditing Can Be Strengthened in the Federal Reserve System .
Despite Positive Effects, Further Foreign Acquisitions of U.S. Banks
Should Be Limited until Policy Conflicts Are Fully Addressed . . . .
Federal Examinations of Financial Institutions: Issues That
Need to Be Resolved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Examinations of Financial Institutions Do Not Assure Compliance
with Consumer Credit Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disappointing Progress in Improving Systems for Resolving
Billions in Audit Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
An Economic Overview of Bank Solvency Regulation . . . . . . . . . . . . . . . . .
Federal Reserve Security over Currency Transportation Is Adequate . . . .
The Federal Structure for Examining Financial Institutions
Can Be Improved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Response to Questions Bearing on the Feasibility
of Closing the Federal Reserve Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank Secrecy Act Reporting Requirements Have Not Met
Expectations, Suggesting Need for Amendment . . . . . . . . . . . . . . . . . . .
Federal Reserve Could Improve the Efficiency of Bank Holding
Company Inspections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Institution Regulatory Agencies Should Perform Internal Audit
Reviews of their Examination and Supervision Activities . . . . . . . . .
Information on Selected Aspects of Federal Reserve System Expenditures .
Federal Review of Intrastate Branching Can Be Reduced . . . . . . . . . . . . . .
Despite Improvements, Recent Bank Supervision Could
Be More Effective and Less Burdensome . . . . . . . . . . . . . . . . . . . . . . . .

Number

Date issued

GGD-79-27
EMD-79-45

3-29-79
6-11-79

GGD-79-42
GGD-79-75

6-19-79
8-1-79

FPCD-79-17

8-31-79

GGD-80-20

2-12-80

GGD-80-21

3-12-80

GGD-80-64
GGD-80-59

5-29-80
8-8-80

GGD-80-66

8-26-80

GGD-81-12

1-6-81

GGD-81-13

1-21-81

AFMD-81-27
PAD-81-25
GGD-81-27

1-23-81
2-13-81
2-23-81

GGD-81-21

4-24-81

GGD-81-49

5-21-81

GGD-81-80

7-23-81

GGD-81-79

8-18-81

GGD-82-5

10-19-81

GGD-82-33
GGD-82-31

2-12-82
2-24-82

GGD-82-21

2-26-82

Federal Reserve System Audits

59

Table C.2
Continued
Report
Issues to Be Considered while Debating Interstate Bank Branching . . . . .
The Federal Reserve Should Move Faster to Eliminate Subsidy
of Check-Clearing Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Information about Depository Institutions’ Ancillary Activities Is Not
Adequate for Policy Purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank Merger Process Should Be Modernized and Simplified . . . . . . . . . . .
An Analysis of Fiscal and Monetary Policies . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank Examination for Country Risk and International Lending . . . . . . . . .
Credit Insurance Disclosure Provisions of the Truth-in-Lending Act
Consistently Enforced Except When Decisions Appealed . . . . . . . . . .
Survey of Investor Protection and the Regulation
of Financial Intermediaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Institutions Regulatory Agencies Can Make Better Use
of Consumer Complaint Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expediting Tax Deposits Can Increase the Government’s
Interest Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unauthorized Disclosure of the Federal Reserve’s
Monetary Policy Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Financial Institutions Examination Council Has Made Limited
Progress toward Accomplishing Its Mission . . . . . . . . . . . . . . . . . . . . . .
Control Improvements Needed in Accounting for Treasury Securities
at the Federal Reserve Bank of New York . . . . . . . . . . . . . . . . . . . . . . . .
Statutory Requirements for Examining International Banking
Institutions Need Attention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supervisory Examinations of International Banking Facilities
Need to Be Improved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
An Examination of Concerns Expressed about the Federal Reserve’s
Pricing of Check-Clearing Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Difficulties in Evaluating the Effectiveness of the Community
Reinvestment Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International Coordination of Bank Supervision: The Record to Date . . .
Implementation of the Export Trading Company Act of 1982 . . . . . . . . . .
Information on Independent Public Accountant Audits
of Financial Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
An Analysis of Two Types of Pooled Investment Funds . . . . . . . . . . . . . . .
How the Markets Are Developed and How They Are Regulated . . . . . . .
U.S. Banking Supervision and International Supervisory Principles . . . . .
Financial Institution Regulators’ Compliance Examination . . . . . . . . . . . . .
The Market’s Structure, Risks, and Regulation . . . . . . . . . . . . . . . . . . . . . . . .
Dealer Views on Market Operations and Federal Reserve
Securities Transfer System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Questions about the Federal Reserve’s Securities Transfer System . . . . . .
Federal Reserve Board Opposition to Credit Card Interest Rate Limits .
Insulating Banks from the Potential Risk of Expanded Activities . . . . . . .
The Federal Reserve Response Regarding Its Market-Making Standard .
Change in Fees and Deposit Account Interest Rates since Deregulation .
An Examination of Views Expressed about Access to Brokers’ Services .
Issues Related to Repeal of the Glass–Steagall Act . . . . . . . . . . . . . . . . . . . .
Preliminary Observations on the October 1987 Crash . . . . . . . . . . . . . . . . . .
Supervision of Overseas Lending Is Inadequate . . . . . . . . . . . . . . . . . . . . . . .
Competitive Concerns of Foreign Financial Firms in Japan,
the United Kingdom and the United States . . . . . . . . . . . . . . . . . . . . . . .
Administrative Expenses at FHLBB and FRB for 1985 and 1986 . . . . . .

Number

Date issued

GGD-82-36

4-9-82

GGD-82-22

5-7-82

GGD-82-57
GGD-82-53
PAD-82-45
ID-82-52

6-1-82
8-16-82
8-31-82
9-2-82

GGD-83-3

10-25-82

GGD-83-30

7-13-83

GGD-83-13

8-25-83

GGD-84-14

11-21-83

GGD-84-40

2-3-84

GGD-84-4

2-3-84

AFMD-84-10

5-2-84

GGD-84-39

7-11-84

GGD-84-65

9-30-84

GGD-85-9A

1-14-85

OCE-86-1

11-4-85

NSIAD-86-40
NSIAD-86-42

2-6-86
2-27-86

GGD-84-44FS
GGD-86-63
GGD-86-26
NSIAD-86-93
GGD-86-94
GGD-86-80BR

4-21-86
5-12-86
5-15-86
7-25-86
8-1-86
8-20-86

GGD-86-147FS
GGD-87-15BR

9-29-86
10-20-86

GGD-87-38BR
GGD-87-35
GGD-87-55FS
GGD-87-70
GGD-88-8

4-7-87
4-14-87
4-21-87
7-13-87
12-18-87

GGD-88-37
GGD-88-38
NSIAD-88-87

1-22-88
1-26-88
5-5-88

NSIAD-88-171
AFMD-88-33

6-2-88
6-15-88

60

Annual Report: Budget Review, 2000

Table C.2
Completed GAO Reports Relating to the Federal Reserve System—Continued
Report

Number

Date issued

Government in the Sunshine Act Compliance at Selected Agencies . . . .
Trends in Commercial Bank Performance, December 1976–June 1987 . .
U.S. Commercial Banks’ Securities Activities in London . . . . . . . . . . . . . . .
Lending to Troubled Sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Government Check-Cashing Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

GGD-88-97
GGD-88-106BR
NSIAD-88-238
GGD-88-126BR
GGD-89-12

7-20-88
7-28-88
9-8-88
9-26-88
10-7-88

Conflict of Interest: Abuses in Commercial Banking Institutions . . . . . . .
Competitive Fairness Is an Elusive Goal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Independent Audits Needed to Strengthen Internal Control
and Bank Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Information on the System’s Check Collection Service . . . . . . . . . . . . . . . .

GGD-89-35
GGD-89-61

1-27-89
5-12-89

AFMD-89-25
GGD-90-17

5-31-89
12-15-89

Oversight of Critical Banking Systems Should Be Strengthened . . . . . . . .
Activities of Securities of Bank Holding Companies . . . . . . . . . . . . . . . . . . .
The Stock, Options, and Futures Markets Are Still at Risk . . . . . . . . . . . . .
Update on U.S. Commercial Banks’ Securities in London . . . . . . . . . . . . . .
U.S. Financial Services’ Competitiveness under the Single
Market Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Limited Public Demand for New Dollar Coin or Elimination of Pennies .
Oversight of Automation Used to Clear and Settle Trades Is Uneven . . .
The Government’s Exposure to Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office of Inspector General Operations at Financial Regulatory Agencies .
Additional Reserves and Reform Needed to Strengthen the Fund . . . . . . .
More Transaction Information and Investor Protection Measures
Are Needed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issues Relating to Banks Selling Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . .

IMTEC-90-14
GGD-90-48
GGD-90-33
NSIAD-90-98

1-14-90
3-14-90
4-11-90
5-7-90

NSIAD-90-99
GGD-90-88
IMTEC-90-47
GGD-90-97
AFMD-90-55FS
AFMD-90-100

5-21-90
5-23-90
7-12-90
8-15-90
8-24-90
9-11-90

GGD-90-114
GGD-90-113

9-14-90
9-25-90

Implementation of Risk-Based Capital Adequacy Standards . . . . . . . . . . . .
Overview of Six Foreign Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposit Insurance: A Strategy for Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank Supervision: Prompt and Forceful Regulatory Actions Needed . . . .
Many Federal Agencies Collect and Disseminate Information . . . . . . . . . .
Money Laundering: The U.S. Government Is Responding to the Problem .
A Framework for Limiting the Government’s Exposure to Risks . . . . . . .
Treasury Tax and Loan Activity at Two Troubled Banks . . . . . . . . . . . . . .
OCC’s Supervision of the Bank of New England
Was Not Timely or Forceful . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank Holding Company Securities Subsidiaries’ Market
Activities Update . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time Limits on Holding Deposits Generally Met
but More Oversight Needed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legislation Needed to Strengthen Bank Oversight . . . . . . . . . . . . . . . . . . . . .

NSIAD-91-80
NSIAD-91-104
GGD-92-26
GGD-91-69
NSIAD-91-173
NSIAD-91-130
GGD-91-90
AFMD-91-87

1-25-91
2-22-91
3-4-91
4-15-91
5-1-91
5-16-91
5-22-91
9-12-91

Contracting Practices with Data Processing Servicers . . . . . . . . . . . . . . . . . .
Challenges to Harmonizing International Capital Standards Remain . . . .
Assessing the Need to Regulate Additional Financial Activities . . . . . . . .
Call Report Automation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Flexible Accounting Rules Lead to Inflated Financial Reports . . . . . . . . . .
Cross-Border Information Sharing Is Improving, but Obstacles Remain .
Changes in Collateral Practices Could Reduce the Federal
Government’s Risk of Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Initial Assessment of Certain BCCI Activities in the U.S. . . . . . . . . . . . . . .
Appraisal Reform: Implementation Status and Unresolved Issues . . . . . . .
Bank and Thrift Criminal Fraud: The Federal Commitment
Could Be Broadened . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FRB Examinations and Inspections Do Not Fully Assess Bank Safety
and Soundness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Improvements Needed in Examination Quality and Regulatory Structure . .

GGD-91-128

9-16-91

GGD-91-131

9-20-91

GGD-91-132
AFMD-92-19

9-30-91
10-21-91

GGD-92-19
GGD-92-41
GGD-92-70
IMTEC-92-60R
AFMD-92-52
GGD-92-110

2-5-92
3-10-92
4-21-92
5-28-92
6-1-92
7-28-92

AFMD-92-54
GGD-92-96
GGD-93-19

9-14-92
9-30-92
10-30-92

GGD-93-48

1-8-93

AFMD-93-13
AFMD-93-15

2-16-93
2-16-93

Federal Reserve System Audits

61

Table C.2
Continued
Report
Personnel Engaged in Public and Congressional Affairs
in Federal Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit Availability Guidance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury Automation: Automated Auction May Not Achieve Benefits
or Operate Properly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IRS Can Improve the Federal Tax Deposit System . . . . . . . . . . . . . . . . . . . .
Funding Foreign Bank Examinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preliminary Information Related to a Futures Transaction Fee . . . . . . . . . .
The Business Environment in the United States, Japan,
and Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory Impediments to Small Business Lending Should Be
Removed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recent Developments in Foreign Exchange Markets . . . . . . . . . . . . . . . . . . .
Benefits and Risks of Removing Regulatory Restrictions . . . . . . . . . . . . . . .
Regulatory Burden: Recent Studies, Industry Issues,
and Agency Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Strengthening the Framework for Supervising International Banks . . . . . .
Insider Problems and Violations Indicate Broader Management
Deficiencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Credit Card Industry: Competitive Developments Need to be
Closely Monitored . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Better Guidance Is Needed for Real Estate Evaluations . . . . . . . . . . . . . . . .
Treasury Securities Auction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Divergent Loan Loss Methods Undermine Usefulness
of Financial Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interstate Banking: Experiences in Three Western States . . . . . . . . . . . . . . .
Lessons Learned from Resolving First City Bancorporation of Texas . . .
Investment of Trust Assets in Bank Proprietary Mutual Funds . . . . . . . . .
Status Report on the Initiative to Improve Economic Statistics . . . . . . . . .
Mandated Studies to Review Costly Bank and Thrift Failures . . . . . . . . . .
Differences in Screening Bank Executives . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Banks’ Securities Activities: Oversight Differs Depending on Activity
and Regulator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mutual Funds: Impact on Bank Deposits and Credit Availability . . . . . . .
Bank Mutual Funds: Sales Practices and Regulatory Issues . . . . . . . . . . . .
Challenges Remain to Successfully Implement CRA . . . . . . . . . . . . . . . . . . .
Foreign Banks: Assessing Their Role in the U.S. Banking System . . . . . .
Federal Reserve Banks: Internal Control, Accounting,
and Auditing Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico’s Financial Crisis: Origins, Awareness, Assistance,
and Initial Efforts to Recover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Counterfeit U.S. Currency Abroad: Issues and U.S. Deterrence Efforts . .
Money Laundering: A Framework for Understanding
U.S. Efforts Overseas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Reserve System: Current and Future Challenges
Require Systemwide Attention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair Lending: Federal Oversight and Enforcement Improved
but Some Challenges Remain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Reserve Banks: Inaccurate Reporting of Currency
at the Los Angeles Branch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Implementation of the Foreign Bank Supervision Enhancement
Act of 1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Derivatives: Actions Taken or Proposed since May 1994 . . . . .
Inspectors General: Mandated Studies to Review Costly Bank
and Thrift Failures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory Burden: Measurement Challenges and Concerns
Raised by Selected Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank Oversight Structure: U.S. and Foreign Experience May Offer
Lessons for Modernizing U.S. Structure . . . . . . . . . . . . . . . . . . . . . . . . . .

Number

Date issued

GGD-93-71FS
GGD-93-15R

3-8-93
3-30-93

IMTEC-93-28
AFMD-93-40
GGD-93-35R
GGD-93-108

4-27-93
4-28-93
5-4-93
5-17-93

GGD-93-124

8-9-93

GGD-93-121
GGD-93-154
GGD-94-26

9-7-93
9-24-93
11-2-93

GGD-94-28

12-13-93

GGD-94-68

3-21-94

GGD-94-88

3-30-94

GGD-94-23
GGD-94-144
AIMD-94-165R
AIMD-95-8
GGD-95-35
GGD-95-37
GGD-95-21
GGD-95-98
GGD-95-126
GGD-95-181R
GGD-95-214
GGD-95-230
GGD-95-210
GGD-96-23
GGD-96-26
AIMD-96-5

4-28-94
5-24-94
8-25-94
10-31-94
12-30-94
3-15-95
3-16-95
7-7-95
7-31-95
8-17-95
9-21-95
9-22-95
9-27-95
11-28-95
2-7-96
2-9-96

GGD-96-56
GGD-96-11

2-23-96
2-26-96

GGD-96-105

5-24-96

GGD-96-128

6-17-96

GGD-96-145

8-13-96

AIMD-96-146

9-30-96

GGD-96-187
GGD-AIMD-97-8

9-30-96
11-1-96

GGD-97-4

11-7-96

GGD-97-2

11-18-96

GGD-97-23

11-20-96

62

Annual Report: Budget Review, 2000

Table C.2
Completed GAO Reports Relating to the Federal Reserve System—Continued
Report
Bank Oversight Structure: U.S. and Foreign Experience May Offer
Lessons for Modernizing U.S; Structure . . . . . . . . . . . . . . . . . . . . . . . . . .
Implementation of FDICIA’s Prompt Regulatory Action Provisions . . . . .
Bank Regulatory Structure: Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank Data: Material Loss of Oversight Information from
Interstate Banking Is Unlikely . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Commodity Exchange Act: Legal and Regulatory Issues Remain . .
Treasury’s Plan to Study Genuine and Counterfeit U.S. Currency Abroad .
Bank Oversight: Few Cases of Tying Have Been Detected . . . . . . . . . . . . .
Foreign Banks: Opportunities Exist to Enhance Supervision Programs
as Implementation Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Four Financial Crises in the 1980s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments, Clearance, and Settlement: A Guide to the Systems, Risks,
and Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International Financial Crises: Efforts to Anticipate, Avoid,
and Resolve Sovereign Crises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Reserve Banks: Internal Controls Over Cash at Atlanta,
Los Angeles, and Philadelphia Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign Banks: Internal Control and Audit Weaknesses in U.S. Branches .
OTC Derivatives: Additional Oversight Could Reduce Costly
Sales Practice Disputes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Information on Private Banking and Its Vulnerability
to Money Laundering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Electronic Banking: Experiences Reported by Banks
in Implementing On-line Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory Oversight of Offshore Private Banking Activities . . . . . . . . . . .
Year 2000 Computing Crisis: Actions Needed
on Electronic Data Exchanges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Experience With Electronic Check Presentment . . . . . . . . . . . . . . . . . . . . . . .
Risk-Based Capital: Regulatory and Industry Approaches
to Capital and Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
High-Loan-To-Value Lending: Information on Loans Exceeding
Home Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Live Loan Checks: Information on Unsolicited Consumer Loans . . . . . . . .
for Preapproved Borrowers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year 2000 Computing Crisis: Federal Reserve Is Acting to Ensure
Financial Institutions Are Fixing Systems But Challenges Remain. .
Federal Reserve Banks: Areas for Improvements in Computer Controls .
The Results Act: Observations on the Federal Reserve’s
1998–99 Biennial Performance Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory Burden: Some Agencies’ Claims Regarding Lack
of Rulemaking Discretion Have Merit . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year 2000 Computing Crisis: Federal Reserve Has Established
Effective Year 2000 Management Controls for Internal
Systems Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year 2000: Financial Institution and Regulatory
Efforts to Address International Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Electronic Banking: Enhancing Federal Oversight
of Internet Banking Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Reserve Banks: Areas for Improvement in Computer Controls .
Federal Reserve Board: Merger Process Needs Guidelines
for Community Reinvestment Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International Finance: Actions Taken to Reform Financial Sectors
in Asian Emerging Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long Term Capital Management: Regulators Need to Focus Greater
Attention on Systemic Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Large Bank Mergers: Fair Lending Review Could be Enhanced
With Better Coordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Number

Date issued

GGD-07-23
GGD-97-18
GGD-97-5

11-20-96
11-21-96
12-27-96

GGD-97-49
GGD-97-50
NSIAD-97-104
GGD-97-58

3-26-97
4-7-97
4-11-97
5-8-97

GGD-97-80
GGD-97-96

5-9-97
5-21-97

GGD-97-73

6-20-97

GGD-NSIAD-97-168

7-7-97

AIMD-97-127
GGD-97-181

8-28-97
9-29-97

GGD-98-5

10-2-97

GGD-98-19R

10-30-97

GGD-98-34
GGD-98-154

1-15-98
6-29-98

AIMD-98-124
GGD-98-145

7-1-98
7-14-98

GGD-98-153

7-20-98

GGD-98-169

8-13-98

GGD-98-176

8-14-98

AIMD-98-248
AIMD-99-5

9-17-98
10-14-98

GGD-99-9R

11-9-98

GGD-99-20

1-18-99

AIMD-99-78

4-9-99

GGD-99-62

4-27-99

GGD-99-91
AIMD-99-245

7-16-99
8-13-99

GGD-99-180

9-24-99

GGD-99-157

9-28-99

GGD-00-3

10-29-99

GGD-00-16

11-3-99

Federal Reserve System Audits

63

Table C.3
Completed OIG Audit Reports Relating to the Federal Reserve System, 1999
Report

Number

Month issued

Interim Assessment of the Board’s Year 2000 Readiness Activities
(Advisory Letter) 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Audit of the Board’s Academic Assistance Program . . . . . . . . . . . . . . . . . . . . . . . . .
Audit of the Federal Reserve’s Implementation of
the Community Reinvestment Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Joint Review of the Federal Financial Institutions Examination Council’s
(FFIEC’s) Training Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Audit of the Federal Reserve Employee Benefits System’s Financial
Statements (year ended 12-31-98) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Audit of the Board’s Reports Clearance Process (Advisory Letter) . . . . . . . . . . .
Audit of the Board’s Financial Statements
and Financial Audit Report (year ended 12-31-98) . . . . . . . . . . . . . . . . . . . . . .
Audit of the FFIEC’s Financial Statements (year ended 12-31-98) . . . . . . . . . . . .

. . .

January

A9811
A9810

February
March

A9808

March

A9902

March

A9812
A9901

May
May

A9901

May

1. The fourth such assessment that consolidated
information from separate audits of the three components
of the Board’s response to the Year 2000 problem:
oversight of financial institution efforts by the Division
of Banking Supervision and Regulation (A9713), Board

systems (A9803), and monitoring of Reserve bank efforts
by the Division of Reserve Bank Operations and Payment
Systems (A9807).
. . . Not applicable.

Office of Inspector General

mental agencies to promote economy
and efficiency and to detect and prevent
fraud and abuse in activities administered
or financed by the Board. The OIG
keeps the Congress and the Chairman of
the Board fully informed about serious
abuses and deficiencies and about the
status of any corrective actions.
During 1999, the OIG publicly
reported on eight audits, reviews, and
assessments (table C.3) and conducted a
number of follow-up reviews to evaluate
actions taken on earlier recommendations. In addition, the OIG informally
provided Board management with suggestions for improvements to the century date change program. The OIG also
closed seven investigations and performed numerous legislative and regulatory reviews.

The Board’s Office of Inspector General
functions in accordance with the Inspector General Act of 1978, as amended.
The OIG plans and conducts audits and
investigations of the programs and operations of the Board and its delegated
functions at the Federal Reserve Banks.
The OIG also reviews existing and
proposed legislation and regulations
for economy and efficiency. It recommends policies, and it supervises and
conducts activities that promote economy and efficiency and that prevent and
detect waste, fraud, and abuse in Board
and Board-delegated programs and
operations.
In addition, it coordinates its efforts
with other governmental and nongovern-

65

Appendix D

Expenses and Employment
at the Federal Reserve Banks
Table D.1
Operating Expenses of the Federal Reserve Banks, by District, 1999 and 2000
Thousands of dollars except as noted

District

1999
estimate

2000
budget

Change
Amount

Percent

Boston . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New York . . . . . . . . . . . . . . . . . . . . . . . . . .
Philadelphia . . . . . . . . . . . . . . . . . . . . . . . .
Cleveland . . . . . . . . . . . . . . . . . . . . . . . . . .
Richmond . . . . . . . . . . . . . . . . . . . . . . . . . .
Atlanta . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chicago . . . . . . . . . . . . . . . . . . . . . . . . . . . .
St. Louis . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minneapolis . . . . . . . . . . . . . . . . . . . . . . . .
Kansas City . . . . . . . . . . . . . . . . . . . . . . . .
Dallas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
San Francisco . . . . . . . . . . . . . . . . . . . . . . .

119,283
447,901
112,442
131,173
171,337
254,482
223,278
113,674
110,192
136,184
135,392
243,267

125,597
462,234
119,350
132,514
181,017
270,313
235,202
129,353
117,876
143,542
143,654
251,258

6,314
14,333
6,908
1,341
9,680
15,832
11,924
15,679
7,685
7,359
8,262
7,991

5.3
3.2
6.1
1.0
5.6
6.2
5.3
13.8
7.0
5.4
6.1
3.3

Total, all Districts . . . . . . . . . . . . . . . . . .

2,198,603

2,311,910

113,307

5.2

Special project
Check standardization . . . . . . . . . . . . . . .

0

13,995

. . .

. . .

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,198,603

2,325,905

127,302

5.8

Note. See notes to table 3.1, chapter 3.
. . . Not applicable.

66

Annual Report: Budget Review, 2000

Table D.2
Employment at the Federal Reserve Banks, by District, 1999 and 2000
Average number of personnel except as noted
1999
estimate

2000
budget

Boston . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New York . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Philadelphia . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cleveland . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Richmond . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Atlanta . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chicago . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
St. Louis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minneapolis . . . . . . . . . . . . . . . . . . . . . . . . . . .
Kansas City . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dallas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
San Francisco . . . . . . . . . . . . . . . . . . . . . . . . .

1,235
3,835
1,264
1,364
2,141
2,676
2,160
1,285
1,232
1,593
1,549
2,533

Total, all Districts . . . . . . . . . . . . . . . . . . . .

District

Change
Amount

Percent

1,308
3,654
1,287
1,381
2,195
2,762
2,163
1,324
1,270
1,614
1,635
2,515

73
−182
23
18
54
86
2
39
38
21
86
−18

5.9
−4.7
1.8
1.3
2.5
3.2
.1
3.0
3.1
1.3
5.5
−.7

22,867

23,107

240

1.0

Federal Reserve Information
Technology (FRIT) . . . . . . . . . . . . . . .

620

644

25

4.0

District and FRIT Total . . . . . . . . . . . . . . . .

23,487

23,751

265

1.1

Special project
Check standardization . . . . . . . . . . . . . . . . . .

0

5

. . .

. . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

23,487

23,756

270

1.1

Note. See notes to table 3.2, chapter 3.

. . . Not applicable.

Table D.3
Operating Expenses of the Federal Reserve Banks, by Operational Area, 1995–2000
Thousands of dollars except as noted

Operational area

1999
estimate

2000
budget

Average
annual
change
(percent)

1995

1996

1997

1998

128,303

138,649

144,103

152,580

167,022

176,908

6.6

Monetary and economic
policy. . . . . . . . . . . . . .
Services to the
U.S. Treasury and
other government
agencies . . . . . . . . . . .
Services to financial
institutions and
the public
Nonpriced1 . . . . . . . . . .
Priced . . . . . . . . . . . . . . .

216,790

215,609

207,079

223,414

223,008

241,269

2.2

437,210
690,110

509,279
668,166

524,325
690,744

530,120
717,284

531,731
796,005

550,436
834,539

4.7
3.9

Supervision and
regulation . . . . . . . . .

392,294

424,402

436,392

451,859

480,836

508,759

5.3

Total . . . . . . . . . . . . . . . . . . 1,864,707

1,956,104

2,002,643

2,075,256

2,198,602

2,311,910

4.4

1. Includes government check and postal money order
services, which are fully reimbursable.

Expenses and Employment

67

Table D.4
Employment at the Federal Reserve Banks, by Operational Area, 1995–2000
Average number of personnel except as noted

Operational area

1999
estimate

2000
budget

Average
annual
change
(percent)

1995

1996

1997

1998

737

734

718

712

719

731

−.2

1,683

1,543

1,438

1,410

1,331

1,395

−3.7

8,209

8,083

7,954

8,106

8,403

8,500

.7

3,074

3,111

2,980

2,886

2,943

2,948

−.8

Support . . . . . . . . . . . . . . . .
Overhead . . . . . . . . . . . . . .

4,511
4,949

4,537
4,901

4,572
4,821

4,561
4,722

4,699
4,772

4,722
4,811

.9
−.6

Total . . . . . . . . . . . . . . . . . .

23,162

22,909

22,483

22,369

22,867

23,107

.0

Monetary and economic
policy . . . . . . . . . . . . .
Services to the
U.S. Treasury and
other government
agencies . . . . . . . . . . .
Services to financial
institutions and
the public . . . . . . . . .
Supervision and
regulation . . . . . . . . .

Note. See notes to tables D.2 and D.3.

Table D.5
Budget Performance of the Federal Reserve Banks,
Operating Expenses, by District, 1999
Thousands of dollars except as noted

District

1999
budget

1999
estimate

Change
Amount

Percent

Boston . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New York . . . . . . . . . . . . . . . . . . . . . . . . . .
Philadelphia . . . . . . . . . . . . . . . . . . . . . . . .
Cleveland . . . . . . . . . . . . . . . . . . . . . . . . . .
Richmond . . . . . . . . . . . . . . . . . . . . . . . . . .
Atlanta . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chicago . . . . . . . . . . . . . . . . . . . . . . . . . . . .
St. Louis . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minneapolis . . . . . . . . . . . . . . . . . . . . . . . .
Kansas City . . . . . . . . . . . . . . . . . . . . . . . .
Dallas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
San Francisco . . . . . . . . . . . . . . . . . . . . . . .

117,984
448,748
111,473
126,283
166,190
247,232
219,156
112,452
108,556
130,888
132,699
237,599

119,283
447,901
112,442
131,173
171,337
254,482
223,278
113,674
110,192
136,184
135,392
243,267

1,334
−846
969
4,889
5,147
7,250
4,122
1,222
1,636
5,296
2,693
5,668

1.1
−.2
.9
3.9
3.1
2.9
1.9
1.1
1.5
4.0
2.0
2.4

Total, all Districts . . . . . . . . . . . . . . . . . .

2,159,222

2,198,603

39,381

1.8

Note. See general note to table 3.1, chapter 3.

68

Annual Report: Budget Review, 2000

Table D.6
Budget Performance of the Federal Reserve Banks,
Employment, by District, 1999
Average number of personnel except as noted
1999
budget

1999
estimate

Boston . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New York . . . . . . . . . . . . . . . . . . . . . . . . . .
Philadelphia . . . . . . . . . . . . . . . . . . . . . . . .
Cleveland . . . . . . . . . . . . . . . . . . . . . . . . . .
Richmond . . . . . . . . . . . . . . . . . . . . . . . . . .
Atlanta . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chicago . . . . . . . . . . . . . . . . . . . . . . . . . . . .
St. Louis . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minneapolis . . . . . . . . . . . . . . . . . . . . . . . .
Kansas City . . . . . . . . . . . . . . . . . . . . . . . .
Dallas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
San Francisco . . . . . . . . . . . . . . . . . . . . . . .

1,235
3,833
1,254
1,366
2,130
2,612
2,159
1,265
1,216
1,535
1,500
2,549

Total, all Districts . . . . . . . . . . . . . . . . . .

22,652

District

Note. See notes to table 3.2, chapter 3.

Change
Amount

Percent

1,235
3,835
1,264
1,364
2,141
2,676
2,160
1,285
1,232
1,593
1,549
2,533

0
3
10
−2
11
64
2
20
17
59
49
−15

.0
.1
.8
−.2
.5
2.4
.1
1.6
1.4
3.8
3.3
−.6

22,867

216

1.0

Expenses and Employment

69

Table D.7
Salary Administration Expenses of the Federal Reserve Banks for Officers
and Employees, by District, 2000
Thousands of dollars except as noted
Total
Promotion
and reclassification

Market
adjustment

Cash
awards

2,525
9,599
2,189
2,400
3,638
4,703
4,265
2,014
2,047
2,862
2,556
5,375

859
1,592
419
351
1,059
941
1,494
262
274
904
270
824

418
1,149
163
65
1,075
618
400
80
79
425
207
220

395
3,802
643
779
1,271
1,602
1,301
708
698
966
812
1,485

817
731
395
453
279
298
452
274
148
265
158
874

Total . . . . . . . . . . . . . . . 44,174

9,249

4,899

14,462

206

0

170

District

Boston . . . . . . . . . . . . . .
New York . . . . . . . . . . .
Philadelphia . . . . . . . . .
Cleveland . . . . . . . . . . .
Richmond . . . . . . . . . . .
Atlanta . . . . . . . . . . . . . .
Chicago . . . . . . . . . . . . .
St. Louis . . . . . . . . . . . .
Minneapolis . . . . . . . . .
Kansas City . . . . . . . . .
Dallas . . . . . . . . . . . . . . .
San Francisco . . . . . . .

Federal Reserve
Information
Technology . . . . .

Merit

1,923

Note. See text note 3, chapter 3, for definition of
salary administration.
Merit: The amount of budgeted salary expense that
reflects the cumulative effect of planned salary increases
based on performance.
Promotions and reclassifications: The amount of
budgeted salary expense that reflects the cumulative effect
of salary increases for individuals as a result of grade
promotions and reclassifications resulting from a job
evaluation.
Market adjustment: The amount of budgeted salary
expense to bring individual salaries to the minimum of
grade range or to better align salaries with the market.

Amount

As a share
of total
personnel
expense
(percent)

0
155
330
123
128
40
150
344
0
352
172
649

5,014
17,028
4,138
4,171
7,451
8,202
8,062
3,681
3,245
5,775
4,175
9,428

7.3
7.0
6.9
6.9
7.6
6.9
7.2
6.4
5.8
7.9
5.7
6.7

5,143

2,443

80,370

6.9

545

472

3,315

7.1

Incentive Retention
payments payments

Cash awards: The amount of other personnel expense
that represents payments for awards in recognition of
exceptional achievements.
Incentive payments: The amount of other personnel
expense that represents payments for the achievement of
predetermined goals.
Retention payments: The amount of other personnel
expense that represents payments to employees based
upon contractual agreement with the Bank. Generally
used to retain staff in ‘‘hot market’’ jobs or positions
critical to the success of the Bank.

70

Annual Report: Budget Review, 2000

Table D.8
Capital Outlays of the Federal Reserve Banks, by District, 1999 and 2000
Thousands of dollars except as noted
1999
estimate

2000
budget

Boston . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New York . . . . . . . . . . . . . . . . . . . . . . . . . .
Philadelphia . . . . . . . . . . . . . . . . . . . . . . . .
Cleveland . . . . . . . . . . . . . . . . . . . . . . . . . .
Richmond . . . . . . . . . . . . . . . . . . . . . . . . . .
Atlanta . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chicago . . . . . . . . . . . . . . . . . . . . . . . . . . . .
St. Louis . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minneapolis . . . . . . . . . . . . . . . . . . . . . . . .
Kansas City . . . . . . . . . . . . . . . . . . . . . . . .
Dallas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
San Francisco . . . . . . . . . . . . . . . . . . . . . . .

11,990
85,613
9,483
21,423
23,215
108,222
18,360
17,434
9,013
8,079
9,346
29,919

Total, all Districts . . . . . . . . . . . . . . . . . .

District

Change
Amount

Percent

19,623
68,888
11,048
70,485
14,617
135,015
35,969
17,816
4,674
14,000
41,383
35,740

7,633
−16,725
1,565
49,062
−8,598
26,793
17,609
382
−4,339
5,921
32,037
5,821

63.7
−19.5
16.5
229.0
−37.0
24.8
95.9
2.2
−48.1
73.3
342.8
19.5

352,098

469,258

117,160

33.3

Federal Reserve Information
Technology . . . . . . . . . . . . . . . . . . . .

31,685

45,048

13,363

42.2

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

383,783

514,306

130,523

34.0

Table D.9
Capital Outlays of the Federal Reserve Banks, by Asset Classification, 1999 and 2000
Thousands of dollars except as noted
1999
estimate

2000
budget

Data processing and data
communications equipement . . . .
Furniture, furnishings, and fixtures . . .
Other equipment . . . . . . . . . . . . . . . . . . . .
Land and other real estate . . . . . . . . . . .
Building . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Building machinery and equipment . .
Leashold improvements . . . . . . . . . . . . .
Software . . . . . . . . . . . . . . . . . . . . . . . . . . .

118,921
27,828
21,737
5,088
121,792
20,430
18,714
49,273

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

383,783

Asset classification

Note. Includes Federal Reserve Information Technology.

Change
Amount

Percent

137,254
27,915
17,652
32,312
172,057
29,479
3,709
93,928

18,333
88
−4,086
27,224
50,266
9,050
−15,005
44,655

15.4
.3
−18.8
535.0
41.3
44.3
−80.2
90.6

514,306

130,523

34.0

Maps of the
Federal Reserve System

72

Annual Report: Budget Review, 2000

The Federal Reserve System

1

9
2

MINNEAPOLIS

7

12
SAN FRANCISCO

CHICAGO

10

CLEVELAND

4

KANSAS CITY
ST. LOUIS

8
11 DALLAS

BOSTON

NEW YORK
3PHILADELPHIA

RICHMOND

5

6ATLANTA

ALASKA
HAWAII

Legend
Both pages
Federal Reserve Bank city
Board of Governors of the Federal
Reserve System, Washington, D.C.

Note
The Federal Reserve officially identifies
Districts by number and Reserve Bank
city (shown on both pages) and by letter
(shown on the facing page).
In the 12th District, the Seattle Branch
serves Alaska and the San Francisco
Bank serves Hawaii.
The System serves commonwealths
and territories as follows: The New York

Facing page

•

Federal Reserve Branch city
Branch boundary

Bank serves the Commonwealth of
Puerto Rico and the U.S. Virgin Islands;
the San Francisco Bank serves American
Samoa, Guam, and the Commonwealth
of the Northern Mariana Islands. The
maps show the boundaries within the
System as of year-end 1999.

Maps of the Federal Reserve System
1–A

2–B

4–D

3–C

5–E

Pittsburgh

ME

73

Baltimore

MD

NY
PA
VA

NJ

PA

CT

OH

VT

WV

WV
NH

Buffalo
NY

NJ

CT

NC

Cincinnati

DE

MA

Charlotte

KY

SC

RI

BOSTON

NEW YORK

7–G

6–F

RICHMOND

CLEVELAND

PHILADELPHIA

8–H

Nashville

TN

KY

Birmingham

AL

MI
IL

WI

MS

GA

Detroit

IA

IN

Louisville

MO

TN
LA

AR

Jacksonville

New Orleans

Memphis

IL

Little
Rock

IN

FL

MS

Miami

9–I

ST. LOUIS

CHICAGO

ATLANTA
MT
ND

MN

Helena

MI
WI
SD

MINNEAPOLIS
12–L

10–J
WY

NE

Omaha

CO

MO

Denver

KS

ALASKA

WA

Seattle

NM

Oklahoma City
Portland
OK
OR

KANSAS CITY

ID
CA
NV

11–K

TX

Salt Lake City

NM

LA

El Paso

UT

Houston
Los Angeles
San Antonio
HAWAII
AZ

DALLAS

SAN FRANCISCO

FRB1/1–1200–0700–C