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A World of Choices

Are We Better Off with International Trade?

Federal Reserve Bank of Chicago 1998 Annual Report

Our Mission
The Federal Reser ve Bank of Chicago is one of 12 regional Reser ve Banks across the United States
that, together with the Board of Governors in Washington, D.C., ser ve as the nation’s central bank.
The role of the Federal Reserve System, since its establishment by an act of Congress passed in
1913, has been to foster a strong economy, suppor ted by a stable financial system.
To this end, the Federal Reserve Bank of Chicago par ticipates in the formulation and implementation of
national monetar y policy, super vises and regulates state-member banks, bank holding companies and
foreign bank branches, and provides financial services to depository institutions and the U.S. government.
Through its head office in Chicago, branch in Detroit, regional offices in Des Moines, Indianapolis and
Milwaukee, and facility in Peoria, the Federal Reser ve Bank of Chicago serves the Seventh Federal
Reserve District, which includes major portions of Illinois, Indiana, Michigan and Wisconsin, plus all of Iowa.

Our Vision
Fur ther the public interest by fostering a sound economy and stable financial system
Provide products and services of unmatched value to those we ser ve
Set the standard for excellence in the Federal Reserve System
Work together, value diversity, communicate openly, be creative and fair
Live by our core values of integrity, respect, responsibility and excellence

Contents
President’s Message 1 Are We Better Of f with International Trade? 4 1998 Highlights 16
Directors 20 Advisor y Councils 22 Of ficers 24 Executive Changes 26 Operations Volumes 27
Financial Statements 30 Notes to Financial Statements 33

PresidentÕs Message

M ost Americans would agree that if a factory cannot turn a profit without
pouring toxic waste into a community’s water supply, that factor y should be shut
down—even if that means the loss of hundreds of jobs. When it comes to matters
of public health, the interests of the many outweigh those of the few.
Regarding the economic health of our nation, however, the American public
seems to place the interests of a few above the interests of the majority.
Economists concur that international trade and open markets are directly
responsible for greater consumer choice and a higher overall standard of living for
the American public. And yet 58 percent of those surveyed in a NBC/Wall Street

Journal poll taken at the end of 1998 said that foreign trade had been bad for
America. Why? Because open markets lead to cheaper imports that, in turn, can
cost some individuals their jobs.
How ironic that public resistance to open markets is rising just as our
economy is in the longest peace-time expansion in our history and employment
is at record levels.
Earlier this decade, I served as deputy U.S. trade representative. Opening
markets and expanding international trade was my chief concern as I negotiated
trade pacts with the countries of Europe and East Asia, including Japan and China.
As confident as I am that more open trade is crucial to the economic health of
America as we enter the next centur y, I am well aware it is not an easy matter
to change public opinion on open markets. One trade-related plant closure can
dramatically worsen public attitudes toward foreign competition, especially when
the closure puts hundreds of people out of work. It is more difficult to convince the
public that lower prices, higher-quality products, and resulting higher standards of
living are also linked to free trade.
This annual repor t focuses on the important and complex issue of international trade, examining the costs and benefits of open markets. Our economic
well being is increasingly influenced by our ability to reach untapped markets:
Nearly four-fifths of world consumption currently occurs outside the U.S. With
this new century of increased globalization soon upon us, now is the time to address
concerns over the economic and social risks associated with bringing down
barriers to trade.

The great strength of the U.S. Constitution, so emulated worldwide, is the
careful balancing of the rights of the few with the interests of the many. As the
U.S. enters the next century we have the tremendous opportunity to extend these
principles to our trade policy. Some short-term job displacement no more justifies
holding back our entire economy than it does the operation of a factor y that puts
our environment at risk. But we must meet the needs of those who are directly
affected by foreign competition. We have an obligation to develop programs that
help those facing job cuts because of open markets. Only by reducing hardship
today can we reduce future backlashes against free trade.
The per formance of the U.S. economy in 1998 was extraordinary despite
turbulence in foreign markets. Real GDP growth came in at a robust 4.3 percent
on a fourth-quarter to fourth-quarter basis. Inflation as measured by the Consumer
Price Index slowed to 1.5 percent in 1998. For the first time in 30 years inflation
was below 2 percent for two consecutive years. The unemployment rate averaged
4.5 percent for the year, the lowest level since 1969.
In 1999 we expect that real GDP growth will continue at a solid but more
sustainable rate, and that inflation and unemployment will continue to be favorable.
On a personal note, I’d like to extend my heartfelt appreciation for the hard
work of our dedicated staff, whose accomplishments are highlighted on pages 16
and 17. The achievements of the Federal Reserve Bank of Chicago also reflect the
outstanding leadership and counsel of our directors in Chicago and Detroit. Thank
you all. A special note of gratitude goes to directors Donald Schneider and Arnold
Schultz, who completed their service with the Chicago board in 1998. I would
also like to welcome James Keyes and Alan Tubbs, who joined the board at
the star t of 1999.
One of the highlights of our achievements this year was ensuring the
readiness of our important internal computer applications for Y2K. I am confident
that the success of the Federal Reser ve and the banking industry this past year
will be echoed in 1999 by enhanced consumer confidence in industry preparedness
as we approach the millennium.

Michael H. Moskow
President and Chief Executive Officer
March 26, 1999

Pictured in the Federal Reserve Bank of ChicagoÕs
new conference center, which opened in May of 1998, are (left to right)
Deputy Chairman Arthur Martinez, President Michael Moskow,
Chairman Lester McKeever, and First Vice President William Conrad.

Are We Better Off with International Trade?

What’s
Trade
Got to
Do
with
It?
Are we better off with international trade?
Most economists would say yes, pointing
out that international trade and open
markets provide more choices at lower
prices for consumers. From the morning
when we eat strawberries from Mexico to
the evening when we watch a program on a TV
made in Korea, we benefit from increased choices
at lower prices. But what are the costs?
The choices we make can mean lost jobs
and reduced incomes for some. Are the
general benefits to the population at large
wor th the sometimes painful costs for some of us?

he general consensus that open markets provide benefits is rooted in

economic theor y, specifically the natural ef ficiency of specialization. Economic
theory on the principles of international trade can be traced to 1776, when Adam
Smith discussed the importance of specialization in The Wealth of Nations. British
economist David Ricardo built on Smith’s ideas by extending the concept of specialization to trade among nations—the notion of comparative advantage.
The principle of comparative advantage, which applies to both individuals
and firms, states that nations should focus on goods and services that they are best
at producing and trade for other goods. Such trade is efficient even if the home
countr y can produce all goods more efficiently than its trading partners can.
Why? If a nation spends its time producing all goods, rather than those it is best at
producing, the result would be fewer and/or lower-quality goods and ser vices. The
surest way to achieve the highest efficiency and quality for all goods and ser vices
produced by all nations is for each country to exploit its comparative advantages.
Increasing Productivity
Some of the advantages of open markets are as obvious and familiar as
the TV in our living room or the fruit on our cereal. Open markets provide more
choices for consumers—ever ything from Italian suits to Japanese cars to Brazilian
coffee. Perhaps even more importantly, open markets mean lower prices. If countries
focus on their comparative advantage, they do a better job of allocating resources.
The cost savings achieved by each nation’s producers are passed on to consumers
in the form of lower prices. The more efficient allocation of resources fostered by

Opening Markets:
The Fruit of our Labor
Strawberries from Mexico, apples
from Canada, bananas from Costa
Rica and Equador, and grapes
from Chile. Many types of fruit
flow into the U.S. from a variety
of nations. In fact, in 1998 the U.S.
imported 8.1 million tons of fruit.
And the U.S. exported almost as
much, shipping 6.8 million tons in
1998. For example, the U.S. sends
grapefruit to Japan and France,
peaches and pears to Canada and
Mexico, apples to Taiwan, and
raisins to the United Kingdom.

open markets also results in higher quality goods and services. Only the best
products at the lowest prices can sur vive the global winnowing process. Consumers
literally have their pick of the best the world has to of fer. The result is a higher
standard of living for the population at large.
Open markets also raise our standard of living in a more subtle way by
boosting productivity growth. This is important because productivity is the key
ingredient in raising our standard of living. Open markets foster higher productivity
growth by creating stronger incentives for innovation and efficiency. Competition
from abroad compels domestic producers to develop more efficient production methods. A case in point is the U.S. auto industry,
which was roused from its sleepy complacency
during the 1970s by sudden, sharp competition from Japan.
The exchange of information and ideas
across borders, such as the adoption by U.S.
companies of the Japanese “just-in-time” inventory
method, accelerates continual change and improvement. Long-term economic vitality depends on this process
of change, described by economist Joseph Schumpeter as “creative destruction,”
in which competition weeds out inefficient companies and creates oppor tunities
for firms with new ideas, lower prices, and better products.

Costs of Open Markets
While the benefits of open markets are substantial,
they come with costs. The distribution of these costs and
benefits is often uneven, helping some industries and benefiting some individuals while harming others—especially in
the shor t run.
Export-oriented industries, of course, are helped
by open markets. So are the workers employed by these
industries. According to the 1998 Economic Report of the

President, jobs in export-oriented industries pay between
5 and 10 percent more than other jobs in the U.S. economy.
Other industries are hit hard by foreign competition; some
do not survive. Among the U.S. industries hurt by foreign
competition was the consumer electronics industry during
the 1970s. Open markets also can have a disproportionate
effect on cer tain regions or economic sectors. The downturn in the Midwest in the early 1980s, caused in part
by intense foreign competition, resulted in
one-fifth of the region’s manufacturing workers losing
their jobs.

The Steel Story
The Asian financial crisis resulted in lower prices for
imported steel, helping to keep inflation down in the U.S.
At the same time, low prices have hurt domestic steel manufacturers. In fact, several nations have been accused of
“dumping” steel on U.S. markets. Selling exports below
costs has the potential to distort the efficient allocation
of resources as much as erecting barriers to trade.

The ef fect of job losses can be devastating, regardless of the reason.
Workers who are displaced by trade may suffer greater hardship than workers
who lose their jobs for other reasons because there is a greater likelihood that an
entire industry may be affected, rather than a specific firm. However, the extent
of U.S. job losses due to international trade is open to debate. For example,
analysis in the 1998 Economic Repor t of the President indicates
that open markets were not the cause of a large percentage of
U.S. job displacement in manufacturing during the 1980s. Most of
the job losses in manufacturing during this period occurred because of technological change, according to the Report.
Another indication of the ef fect of open markets is provided by the U.S. Labor Department, which recently reported that
210,000 workers have lost their jobs as a result of the North American
Free Trade Agreement (NAFTA) since it became effective in 1994.
However, this figure is dwarfed by the 15.3 million total jobs created by the
U.S. economy from 1994 to 1998.
Formulating Trade Policy
How can the U.S. resolve the difficult tradeoffs between the benefits and
costs of open markets in determining future trade policy? Determining trade policy
is complicated by the variation in the benefits of open markets for the overall
world economy versus individual nations. Open markets provide overall benefits for
the world economy. In this way, it is in the best interests of all nations to promote
open markets. However, in some cases, it may not be beneficial for a countr y to
open its markets to another country that retains trade barriers. If each country
in a region acts on its own—on a unilateral basis—it may be optimal for each
country to retain trade barriers. It may take a binding, multi-lateral trade agreement,
such as those negotiated under the auspices of the World Trade Organization
(WTO), to create a situation in which all countries in a region are better off by
jointly removing trade barriers.
One key to formulating effective policy will be to separate the rhetoric from
the reality of trade. Often the trade debate has centered on the net effect on jobs,
a focus that is reflected in the public’s attitude. In a NBC/Wall Street Journal poll
taken in late 1998, 58 percent of those surveyed said foreign trade has been bad
for America because cheap impor ts have hurt wages and cost jobs.
Yet the key advantages of open markets are fostering lower prices and
higher-quality goods and facilitating the efficient allocation of resources. The
amorphous nature of these benefits makes them less compelling. The immediate
and ver y real pain resulting from a shuttered factory has a much more visceral
ef fect. But the advantages of open markets are vitally
important in raising our standard of living. The ongoing
challenge facing policymakers is to balance these
important benefits to the population at large with the
undeniable costs to some industries and workers.

Regional Impact

Have Open
Markets Helped the
Midwest?
Having U.S. borders open to trade and investment has helped the Midwest regain
the economic prowess lost during the downturns of the early 1980s.
Midwestern manufacturing has revived in recent years,
leading to higher relative standards of living
and low unemployment.

he Midwest’s revival is partly due to an influx of direct foreign investment to

the U.S., which totaled roughly $300 billion in the 1980s and early 1990s. Roughly
one-third of that investment was directed at manufacturing-related industries,
par ticularly the auto industr y, a Midwestern stronghold.
Productivity-enhancing management practices frequently accompanied the
investment. These include procedures such as lean manufacturing and just-in-time
inventory practices. Auto and truck manufacturers successfully adopted many of
these techniques, finding the Midwest’s transportation infrastructure and dense
concentration of suppliers and service providers ver y suitable for these new
modes of operation.
Open markets for the sale of Midwestern goods abroad have also contributed
to the region’s revival. Since 1990, manufacturing goods exports have increased
significantly in the Midwest compared with the rest of the countr y. Cer tain types
of agricultural expor ts are also up, including processed food products derived
from the region’s staple crops of corn and soybeans. Total expor ts from the Midwestern states of Iowa, Illinois, Indiana, Wisconsin and Michigan have increased
more than 80 percent since 1990.
Since trade has been beneficial to the region, why do some Midwesterners
oppose efforts to open up markets to greater trade? One reason may be a misunderstanding of the reasons behind the industrial upheavals that have dislocated
workers and their families.
Trade is often an over-emphasized factor in understanding economic upheavals. Over the course of the 20th century, trade has not been a major factor in
changing the concentration of manufacturing in the Midwest. Rather, these changes
resulted from a variety of other factors. One is the advent of the interstate highway
system, which opened new labor markets in other regions and helped disperse
manufacturing throughout the U.S.

Domestic or Imported?
Manufacturing Increasingly Complex
Price stickers on new cars illustrate the complex nature of manufacturing,
with many autos manufactured in one country using parts produced in another.
For example, final assembly of the auto pictured here was in central Illinois,
while 23% of the parts came from Japan. It is increasingly difficult to differentiate
an export from an import.

The Realities of Trade

Who are our
Biggest Trading
Partners?
The answer might surprise you. TV pundits or politicians debating
trade policy might lead one to guess Japan or possibly Mexico.
But our biggest trading partner of goods is up north—Canada.
The United States sends more goods there—and receives
more in return—than to any other individual nation.

Classroom to the World:
The Export of Education
Exports are much more than
tangible items such as washing
machines or automobiles. Many
are services as opposed to goods.
One example of a service export
is a college education. When a
foreigner is educated in the U.S.,
that’s considered an export. Other
common services frequently exported are travel-related, or in
the financial or legal fields. Overall,
the U.S. runs a trade surplus in
services, exporting more than
it imports.

M ost equate trade with the exchange of goods. But roughly 28 percent of
our exports and 16 percent of our imports are services. If trade in goods and
ser vices is combined, the 15 countries that make up the European Union rank
ahead of Canada as the largest U.S. trading partner.
While we run a deficit in the trade of goods, we have a relatively large
surplus in the trade of ser vices. Traded services include travel, education, or
financial ser vices. If consumed by foreigners, these ser vices are considered an
export. For example, a Thai student studying at the University of Iowa is buying
education. Thus, it’s an expor t. Of all ser vice exports, those related
Imports

to travel make up about 35 percent. Other private services— including

Exports

educational, legal and financial services—make up another 58 percent.

Where U.S. imports came from and
where U.S. exports were sent in 1998

What goods do we export? Much of what we export is capital

(all figures are a percentage of either
total imports or exports of goods)
○

○

19.1%
19.3
10.4
9.4
5.6
13.3
7.8
15.1
○

○

Canada
European Union
Mexico
Asia (NICs*)
Central/South America
Japan
China
All other nations

equipment such as machines and the components to make those
22.9%
21.9
11.6
9.3
9.3
8.5
2.1
14.4

machines. In fact, capital equipment and components of capital equip-

○

ment, autos, consumer goods, and other manufactured goods make up
more than 70 percent of our goods expor ts. Nearly 30 percent of our
exports is industrial supplies or foods, feeds and beverages. And even
for many of the products in those categories, substantial manufacturing
or processing is involved.
The flip side is ver y similar: Slightly more than two-thirds of
what we import is capital equipment and components, autos and con-

* Hong Kong, Korea, Singapore and Taiwan

sumer goods. The remainder includes industrial supplies or foods, feeds
Imports

and beverages.

Exports

What goods the U.S. imported
or exported in 1998

Overall, we import more than we export. We hit a record high in

(all figures are a percentage of
total U.S. imports or exports)
○

○

29.6%
21.9
23.6
16.5
4.5
3.9
○

○

Capital goods
Industrial supplies
Consumer goods
Autos, etc.
Foods, feeds, beverages
Other goods

the overall trade deficit in 1998, importing $1.1 trillion in goods and

○

43.8%
21.7
11.6
10.6
6.8
5.4

services and exporting $931 billion. In services alone, we ran a surplus,

○

exporting $260 billion compared with the $181 billion we imported.
Relative to the size of the total U.S. economy, international trade
accounts for a modest but increasing share. The nominal value of exports of goods and services is equivalent to about 11 percent of gross
domestic product (GDP), while impor ts are about 13 percent of GDP.
That compares with 5.5 percent and 5.4 percent respectively in 1970.
As for foreign direct investment, the countries that have invested
most in the U.S. are the United Kingdom and Japan, followed by the

What services the U.S. imported
or exported in 1998

Imports

Exports

Netherlands, Germany, and Canada. Most of that investment falls in the

(all figures are a percentage of
total U.S. imports or exports)
○

○

29.5%
6.1
16.6
10.3
6.8
1.6
29.2
○

○

Travel
Royalties and license fees
Other transportation
Passenger fares
Military/Defense
U.S. government miscellaneous
Other private services

category of manufacturing, followed by wholesale trade and insurance.
27.3%
13.4
9.9
7.7
6.5
0.3
35.0

The benefits of foreign investment extend beyond the money spent.

○

New ideas and manufacturing techniques often accompany those funds.
Most U.S direct investment abroad is in the United Kingdom, followed
by Canada and Germany.
Overall, U.S. companies invest far more at home than they do
abroad. The vast majority of our trade is “inter-regional,” among businesses located in the U.S. And most foreign investment by American

Source: U.S. Department of Commerce

companies is in developed nations. In fact, most of our trade is with
developed nations.

Un d e rst anding t h e De fic it

Why Does
the U.S. Have a Trade
Deficit?
Simply put, the amount of foreign
goods and services purchased by
the U.S. is greater than the amount
of U.S. goods and services purchased by people abroad. This allows
Americans to consume more goods
and services than they produce. If
Americans buy more than they sell, they
must borrow from foreigners to finance
the purchases. In other words, foreigners
are lending to or investing in the United States.

Global Trade: A Toy Story
Most toys imported into the U.S. are duty-free. American kids enjoy a wide
variety of high-quality toys made in other countries or with parts manufactured
abroad. The U.S. imports many more toys than it exports. U.S. toy manufacturers see great potential for expanding U.S. exports, since more than 96 percent
of the world’s children live outside the U.S. With the help of regional free trade
agreements, toy industry officials look forward to expanded trade and reduced
customs tariffs worldwide.

trade deficit is not inherently undesirable. A variety of economic, social,

and demographic factors determines the relationship between a country’s goods
and services trade and capital flows. For a trade-deficit (net capital inflow) country
such as the U.S., the most important issue is not the existence of a deficit. Rather,
it’s how the impor ted capital that finances the deficit is used. When there is a
trade deficit, there must be an offsetting capital inflow into the U.S. This means
that in the current environment Americans are borrowing from abroad to finance
some of their foreign purchases.
If the borrowed capital is used to improve productivity and increase output,
it can be paid back, and at the same time the nation’s real income will have
increased. It results in not only an increase in current consumption of
imports but also an increase in the standard of living for future generations.
However, if the borrowed capital is used for non-productive endeavors,
at some future date the nation may need to reduce consumption to
ser vice and pay back the debt. That leads to a lower standard of living
than other wise would have been the case.
The recent increase in the trade deficit is par tly the result
of the financial crisis abroad and partly the result of strong U.S.
economic growth. The financial crisis in Southeast Asia has withered
economic growth in the region, reducing its demand for our exports. Strong
U.S. economic growth has increased the demand for impor ts from all markets.
In addition, the appreciation of the dollar relative to our Asian trading par tners’
currencies made their products cheaper for Americans to buy. Both factors resulted
in more imports to the U.S. At the same time, weak economic conditions abroad
reduced foreign demand for U.S. exports, and the stronger dollar made it relatively
more expensive for foreigners to buy U.S. goods and services.
Current conditions have been beneficial in some ways for the U.S. Lower
import prices have helped consumers, and have tended to hold down price increases
for domestic goods. But lower import prices have made it more dif ficult for
some import-competing domestic industries, such as steel and textiles. And other
industries, including agriculture and some capital equipment producers, have
faced a decline in exports.
1998 U.S. Trade Deficit

○

Exports: $931.3 billion

○

Imports: $1,099.9 billion

○

Deficit: $168.6 billion
Triggered by the impact of the global financial crisis, the
U.S. trade deficit on goods and services increased from
$110 billion in 1997 to a record $169 billion in 1998.

Policy Options

What About Those
Left
Behind?
A

merican trade is booming. Last year the U.S. exported $931 billion in

goods and services, about 50 percent more than just five years ago. Despite the
Asian financial crisis, exports now sustain an estimated 12 million American
jobs, including one in five in manufacturing industries. Yet many polls indicate
that Americans are unsure about the wisdom of maintaining open markets.
This may be due to the fact that the benefits are sometimes diffuse and difficult
to identify. In addition, open markets have costs. Some workers’ jobs are
eliminated because of foreign competition. For many Americans, the key
question is: What about those left behind?
Policymakers can address the inherent complexities of open
markets in two ways: working to ensure the maximum benefits
and helping to of fset the inevitable costs. The most
impor tant step in maximizing the global benefits of
open markets is for each nation to resist the temptation to shift to a more protectionist policy. Such
policies insulate specific industries against competition,
distort resource allocation, discourage innovation, and
result in higher prices for consumers.
Tariffs are the best-known type of barrier, but
non-tariff barriers are an increasingly impor tant and
visible form of trade restriction. This is due in part to
the large reductions in tariffs during the post-War period.
Technical trade barriers, such as duplicative regulations
and unnecessary paperwork, are a notable example
of a non-tariff barrier. The growing impor tance of
ser vices in international trade has highlighted
non-tariff barriers, such as the lack of a
worldwide standard for intellectual

property rights, such as patents and copyrights. And even as GATT negotiations
have steadily lowered formal barriers, some countries have created hostile environments for outside competitors with informal systems that erode the viability of
formal agreements.
The World Trade Organization (WTO) provides a mechanism for resolving
disputes and preventing an escalating series of sanctions. Building on the progress
in mediating disputes will aid the effort to create a global level playing field.
Reaping the maximum gains of open markets is important, but for many
Americans the key question is how to address the inevitable costs. In cases
where foreign competition shutters a domestic manufacturing plant, thousands
might be out of work. How do policymakers reconcile this difficult tradeoff?
Perhaps the most effective—and difficult—strategy is making high-quality
education and training more readily available. Education and training is essential

The Textile Trade:
Low-tech No Longer

because the Americans most at risk from foreign competition are low-skilled workers

Once dominant in the textile industry, the U.S. began to feel the
pinch of foreign competition in
the post-World War II period, losing market share to nations with
lower wage costs. But the U.S. is
fighting back. Once low-tech and
labor intensive, the textile industry is now almost fully automated,
particularly in the U.S., Western
Europe, and Japan. U.S. firms for
years have been investing steadily
in capital equipment and computers to improve productivity and
efficiency. This is important because all quotas in global trade in
textiles are scheduled to be eliminated by 2005.

high-skill goods and services, such workers are hit especially hard as there are

who tend to be less productive. In countries such as the U.S., which specialize in
fewer job opportunities for them.
Education and training that upgrade skills would improve productivity and
better equip workers for higher-paying, more competitive jobs in a global economy.
An impor tant starting point is ensuring high-quality elementary and secondary
education. Those already in the workforce need new training methods that better
meet the needs of employees and employers.
Another option is to do more to provide immediate, shor t-term relief for
workers displaced by foreign trade. The Trade Adjustment Assistance (TAA) program,
in place since 1962, already extends unemployment insurance payments to tradedisplaced workers after the six-month limit on regular unemployment benefits
expires. The program also provides job search assistance, worker retraining,
and relocation expenses. Under legislation implementing NAFTA, TAA benefits
are extended to workers displaced by a company moving production to
Canada or Mexico.
There are a number of proposals to supplement or replace these
existing programs. Brookings Institution economists Bob Litan and
Gary Burtless described one such proposal at a recent Chicago Fed
conference on global trade. The unemployment insurance program
proposed by Litan and Burtless would compensate trade-displaced workers
who accept a lower-paying job by providing them with a percentage of their monthly
wage loss. The additional payments would be provided only when a displaced
worker started on a new job, creating both assistance and an incentive to take a new
position as quickly as possible. (See the book Globaphobia: Confronting Fears about

Open Trade by Gary Burtless, Robert Lawrence, Rober t Litan, and Robert Shapiro
for more information on the proposal.)
Ultimately, the answer in developing effective trade policy lies in striking a
balance between efficiency and equity, preser ving the important advantages of
efficient resource allocation, while maintaining a sense of fairness in the distribution
of the benefits. Determining the appropriate balance is important because of
the potential payoff—easing the pain for those left behind in the global economy
and increasing the standard of living for the population at large.

A Review of the YearÕs Activities and Accomplishments

Highlights of 1998
Second Quarter (April-June)

• The Bank began building renovations to consolidate its statistical repor ting functions at one
central location at the Chicago Office, a target
that was achieved in October.
• Generally regarded as the leading conference
of its kind, the 34th annual Conference on Bank
Structure and Competition focused on payments
systems in the global economy.
• The Bank held the first meeting of the
Community Bank Council, established to promote
communication between the Chicago Fed and
community banks.
• The Chicago Fed opened its new Conference
Center, which during the year accommodated nearly
600 events for employees and visitors.
• The Bank finished the process of ensuring
that mission-critical applications that provide
electronic services to external customers are
ready for the Year 2000.
• A newly designed $20 bill was unveiled
with a variety of new security features.
• The Bank committed itself
to 72 action steps aimed at
improving performance by taking
advantage of the organization’s diversity.

• The Seventh District Cash Department was rated the Federal Reserve
System’s best operation in the first
quarter, a distinction it earned for
the entire year.
• The Bank began a successful year resulting in
achievement of its top-priority objectives and expenses well below budget.
• The Chicago Fed launched an initiative to develop
strategies for moving to the next generation of
electronic payments.
• The Illinois Check Territory set out to improve
operations and meet demanding revenue targets,
goals that were ultimately accomplished.
• The Bank embarked upon a variety of diversityrelated initiatives, including mandatory diversityawareness sessions for all employees.
• Credit risk, Year 2000 risk, event risk and fair
lending are targeted as Super vision and Regulation’s top priorities during 1998 exams.
• Supervision and Regulation launched a successful year in which more than 880 inspections, examinations, and risk assessments were carried out.
• The Bank began an effort requiring all employees
to create personal development plans.
• The Des Moines Office celebrated 25 years
of service.

○

First Quarter (January-March)

○

Fourth Quarter (October-December)

Third Quarter (July-September)

• Banks began to test their electronic connections
with the Chicago Fed for any of the financial
ser vices provided them.
• The Bank was selected to coordinate the new
System Leadership Conference, a forum designed
to help develop Federal Reserve System leaders.
• Consumer & Community Affairs coordinated
a public hearing in August on the
then-proposed merger of First
Chicago NBD and Banc One.
• Roughly 60,000 people visited
the Bank’s booth in August at
the Iowa State Fair.
• Foreign graduate students
attending the University of Illinois
at Urbana-Champaign toured the Bank, counting
them in the nearly 12,000 visitors who toured
the Chicago Fed during the year.
• Economist Daniel Aaronson explored the effect
of neighborhoods on children’s educational outcomes in a research paper, one of 20 papers from
Economic Research throughout the year accepted
for or published in leading scholarly journals.
• Economic Research staff analyzed the
competitive considerations of the First Chicago
NBD-Banc One merger, one of a record 315 cases
reviewed in 1998.
• The Check Department began using imaging
technology at its Chicago and Detroit offices to
process checks for its commercial customers.
The ser vice was previously available at just the
Des Moines and Milwaukee offices.
○

○

• The System’s Business Development
Of fice, housed in Chicago, developed
a new Web site for all Reserve Banks
focusing on the System’s financial
products and services.
• The Bank successfully ended the year having
fully recovered the costs of providing priced
financial services, including the cost of taxes and
capital and the average level of profit it would incur
if it were a private firm.
• Super vision and Regulation finished processing
the last of its 650 total applications, one of the
highest volumes in the System.
• Research Statistics enjoyed a productive year,
having met 100 percent of its report deadlines to
the Board of Governors and 99 percent of its
report deadlines to the New York Fed.
• The Bank finished cer tifying all its businesscritical computer applications for Y2K readiness,
and most are now in production.
• The Research Department hosted
an October conference with the
International Monetary Fund on
the Asian financial crisis.
• The Detroit Branch was
recognized for its quality management and per formance
excellence by the Michigan
Quality Leadership Award
program.
• The Peoria Of fice hit a new
high in December by increasing check volumes to an annual
daily average of 850,000 checks.
• The Bank played a leadership role
throughout the year in 23 System
committees.
• The Bank closed 1998 having processed 20
percent of the System’s ACH volume, as well as
the largest commercial ACH volume in the System.
• The System’s new “Sell Direct” program
located at the Chicago Fed ended the year having
processed 16,220 transactions.

○

TREASURY DIRECT
SELL DIRECT

Y2k
Making Headway on Y2K

The Federal Reser ve Bank of Chicago accomplished a great deal in 1998 to prepare
for the Year 2000. The Bank’s highest-priority objective in 1999 will be to complete
preparation of its internal systems and to help prepare the U.S. financial system for Y2K.
testing and have helped banks assess their Year
2000 readiness. Banks should have completed testing by June 30, 1999, and should have substantially
completed implementation of renovated mission-critical
systems and contingency planning activities.

The Federal Reserve System is committed to maintaining the stability of the U.S. financial system during the
date-change period. Americans have worked together
to meet important challenges in the past. Fed of ficials
are confident the financial system will be ready and
that the public will keep the Year 2000 in perspective,
realizing it is one more challenge that will be met.
Public confidence about the Year 2000 will be
strengthened by regular communication from banks,
banking super visors and trade groups. All of these
institutions and organizations should be active communicators. The Fed understands the public’s need for
accurate information and has been communicating
about Y2K efforts in a wide variety of ways. The Fed
will continue to communicate about the readiness
of the banking industr y as 1999 progresses.
Following are some questions and answers related
to Federal Reser ve Year 2000 preparations:

2) How many banks have tested so far?

Roughly 825 banks had conducted tests with
the Chicago Fed as of March 31, 1999, and roughly
7,900 had tested with Federal Reser ve Banks
across the countr y. All in all, testing has gone well,
and banks are making good progress. Banks that
have not yet completed testing are encouraged to
do so as soon as possible. The Chicago Fed is available and ready to meet their needs.
3) How are preparations going from a supervisory standpoint?

The Chicago Fed’s examinations during 1998
indicate that institutions are progressing well in their
Year 2000 compliance programs. The super visor y
agencies have established critical project milestones
that institutions must meet. For example, missioncritical system testing must be complete by June 30,
1999. Besides testing, institutions are required to
assess Year 2000-related business risks and establish outreach programs to discuss their preparedness
with customers. Contingency plans also must be
developed to address potential system failures and
liquidity management issues. The examination process
is focusing on institutions’ progress in all of these
areas. However, the ultimate responsibility for Year
2000 readiness lies with individual banks. The Chicago
Fed can monitor their progress, but individual banks
are responsible for being ready.

1) How is the Chicago Fed helping financial institutions
to which it provides financial services?

The Federal Reser ve is doing everything it can to
be sure that various methods of payment will continue
to work. Banks can test their electronic connections
with the Chicago Fed for any of the financial services
provided them. Available six days a week, this testing
is carried out in an environment that simulates many
future dates, but most impor tantly concentrates on
the century date change and leap year dates in the
Year 2000. The testing confirms the ability of banks
to interact electronically with the Federal Reserve in
a future-dated environment. A variety of outreach
seminars, bulletins and newsletters promoted the

during natural disasters and other disruptions. The
Bank is building on the plans already in place. Many
of these contingency plans will be tested and refined
in 1999. The Chicago Fed is developing alternate
manual operating procedures for automated business
applications where possible, and has a number of
other contingency plans in place for a wide variety
of other possible problems.

4) How is the Federal Reserve preparing for demands
for currency?

The Fed expects the U.S. financial system to be
ready for the Year 2000. Most people should find
their money is safe where it is. Some people might
decide to hold extra cash during the Year 2000 rollover, but few individuals are expected to hold significantly more than they typically do. As a precaution, the
Fed will increase the currency in circulation and in
Federal Reserve or commercial banks’ vaults to about
$700 billion in 1999. That provides a cushion of about
$200 billion to meet any increased demand—about
$50 billion more than the previous cushion. The Fed
will also be taking steps to ensure that depository institutions will be able to obtain currency on a timely
basis to meet the demands of their customers. If
necessar y, Federal Reserve Banks will extend their
hours to fill banks’ currency orders or take other operational steps to ensure that banks can obtain cash
quickly. The Fed will continue to assess public needs,
and if necessary, make adjustments in the currency
printing order for the fourth quarter.

9) What is the Fed doing to assess worldwide readiness?

Although the Federal Reserve can’t be responsible
for Year 2000 preparations among foreign nations and
institutions, it’s working to better understand their
level of readiness. The Federal Reserve’s direct supervisory authority is limited to offices of those foreign
banks operating in the U.S., but it will receive information on foreign bank Year 2000 readiness from
international super visory bodies and private sector
forums. The Fed will also be working with foreign
bank super visors and other U.S. supervisors to improve the flow and quality of information on foreign
Year 2000 readiness.
10) What will be the impact of the Year 2000 problem
on the U.S. economy?

5) What else is important for consumers to know?

The Year 2000 date change does not affect deposit
insurance coverage. Deposits at an FDIC-insured bank
or savings institution will continue to be protected up
to $100,000 against loss due to the failure of the
institution. Banks and savings associations are required to keep backup records for account transactions so they can recover account information in case
of an emergency.

The Fed is cautiously optimistic there will be no
significant disruptions to the economy as a result of the
Year 2000 problem. A recession seems unlikely, but
a positive outcome continues to depend on diligent
preparation and progress. The economic stakes are
very large and the spectrum of possible outcomes
ver y broad, ranging from minimal to ver y serious.
It is impossible to know exactly what will happen, but
a reasonable scenario is that the net effect of spending to correct the problem could shave one-tenth or
two-tenths of a percent off the growth of U.S. labor
productivity and could reduce GDP by one-tenth of a
percentage point per year over 1999 and 2000.

6) What are the Fed’s internal preparations for
the Year 2000?

Much of the Bank’s internal preparation has involved making sure all computer systems and applications are ready. The Bank’s most impor tant systems
were ready for Year 2000 at the end of 1998, and all
remaining systems were ready by March 31, 1999.
A comprehensive eight-phase process was used
to make sure computer hardware and operating
systems—as well as systems with embedded
chips—were ready. That was followed by testing the
processing capabilities of specific business applications in a simulated future-date environment.

11) What about the role of monetary policy?

Monetary policy can do nothing to head off Year
2000 disruptions, but the Fed will be prepared to lend
to financial institutions under appropriate circumstances or to provide needed reserves to the banking
system. In the unlikely event that serious Year
2000 disruptions resulted in significant longer-term
effects on aggregate demand, the Federal Reserve
would have an important role to play in countering
the downturn.

7) What will be the Bank’s internal focus for the
rest of the year?

The rest of the year will be devoted to certifying
the readiness of new internal software or software
that is changed, as well as to contingency planning.

For more information
Visit the Fed’s Year 2000 web site at http://www.frbsf.org/
fiser vices/cdc/index.html for information on a variety of
Year 2000 topics. For information on what banks must do to
satisfy the regulator y requirements for the Year 2000, visit
the FFIEC’s Web site at http://www.ffiec.gov/y2k/default.htm.

8) What type of contingency planning is underway?

It focuses on the Chicago Fed’s internal readiness
and its ability to interact with depository institutions.
It’s important to remember that the Chicago Fed
already has extensive contingency plans that have
been routinely tested, and occasionally implemented,

These questions and answers have been designated as
a Year 2000 Readiness Disclosure.

Directors

Board of Directors
Federal Reserve Bank of Chicago
Chairman
Lester H. McKeever, Jr.
Managing Partner
Washington, Pittman
& McKeever
Chicago, Illinois
Deputy Chairman
Arthur C. Mar tinez
Chairman and
Chief Executive Officer
Sears, Roebuck, and Co.
Hoffman Estates, Illinois
Robert J. Darnall
President and
Chief Executive Officer
Ispat North America
Chicago, Illinois
Jack B. Evans
President
The Hall-Perrine Foundation
Cedar Rapids, Iowa

Migdalia Rivera*
Chicago, Illinois
Donald J. Schneider
President
Schneider National, Inc.
Green Bay, Wisconsin
Arnold C. Schultz
Chairman and President
GNB Bancorporation
and Chairman and
Chief Executive Of ficer
The Grundy National Bank
Grundy Center, Iowa

Two new directors joined the board in 1999. They are
(left) James H. Keyes, chairman and chief executive officer
of Johnson Controls, Inc. in Milwaukee, Wisconsin, and
Alan R. Tubbs, president of Maquoketa State Bank and
Ohnward Bancshares in Maquoketa, Iowa. They replace
Donald Schneider and Arnold Schultz, who ser ved the
maximum two terms as directors.

Rober t R. Yohanan
Managing Director and
Chief Executive Of ficer
First Bank and Trust
of Evanston
Evanston, Illinois

*Inactive

Verne G. Istock
Chairman
BANK ONE Corporation
Chicago, Illinois

1998 Board of Directors, Federal Reserve Bank of Chicago, from left to right:
Donald Schneider, Jack Evans, Verne Istock, Lester McKeever, Arthur Martinez,
Arnold Schultz, Robert Yohanan, Robert Darnall.

Board of Directors
Detroit Branch
Chair
Florine Mark
President and
Chief Executive Officer
The WW Group, Inc.
Farmington Hills, Michigan
Richard M. Bell
President and
Chief Executive Officer
The First National Bank
of Three Rivers
Three Rivers, Michigan
Irma B. Elder
President
Troy Motors, Inc.
Troy, Michigan
Timothy D. Leuliette
President and
Chief Operating Officer
Penske Corporation
Detroit, Michigan

Denise Ilitch
Vice Chair woman
Little Caesars Enterprises,
and President
Olympia Development, Inc.
Detroit, Michigan
Stephen R. Polk
Chairman and
Chief Executive Of ficer
R. L. Polk & Company
Southfield, Michigan
David J. Wagner
Chairman, President
and Chief Executive Officer
Old Kent Financial
Corporation
Grand Rapids, Michigan

1998 Board of Directors, Detroit Branch, from left to right:
Timothy Leuliette, David Wagner, Denise Ilitch, Florine Mark,
Stephen Polk, Irma Elder, Richard Bell.

Advisory Councils

Federal Advisory Council
Seventh District Representative
Norman R. Bobins
President and Chief Executive Officer
LaSalle National Corporation
and LaSalle National Bank
Chicago, Illinois

Advisory Council on
Agriculture, Labor,
and Small Business
Henr y Carstens
Brillion, Wisconsin
Wisconsin Agri-Ser vice
Association
Alan Garner
Mason, Michigan
Michigan Farm Bureau
Brad Glenn
Stanford, Illinois
Illinois Soybean Association
Brent Halling
Perr y, Iowa
Iowa Pork Producers
Association
John Howell
Bryant, Indiana
Indiana State Poultry
Association
Charles Shaw
Hope, Indiana
Milk Promotion Services
of Indiana
John Whipple
Shenandoah, Iowa
Iowa Corn Growers Association
Carl Camden
Troy, Michigan
Kelly Services, Inc.
Member-at-Large
John Challenger
Chicago, Illinois
Challenger, Gray & Christmas, Inc.
Member-at-Large
Linda Ewing
Detroit, Michigan
International Union, UAW
David Newby
Milwaukee, Wisconsin
Wisconsin State AFL-CIO
Steve Redfield
Chicago, Illinois
STRIVE/Chicago Employment
Council
Member-at-Large
James Rohan
Chicago, Illinois
Sullivan, Cotter and Associates
Member-at-Large
Ronald Willis
Chicago, Illinois
Chicago Federation of Labor
Lloyd Falconer
Seward, Illinois
National Federation of
Independent Business, (NFIB)

Harold F. Force
Columbus, Indiana
Indiana Chamber
of Commerce

Iowa
J. Michael Earley
Bankers Trust Company
Des Moines, Iowa

Diane McCluskey
Independent Bankers’
Bank of Illinois
Springfield, Illinois

Dwight Seegmiller
Hills Bank & Trust Company
Hills, Iowa

John McEvoy
Metro Bank
East Moline, Illinois

Paul Swenson
Iowa Trust & Savings Bank
Oskaloosa, Iowa

Michael King
First National Bank
of Decatur
Decatur, Illinois

Richard A. Waller
Security National Bank
Sioux City, Iowa

Sue Ling Gin
Chicago, Illinois
Flying Food Fare, Inc.
Member-at-Large

Michigan
Charles B. Cook
Marshall Savings Bank, FSB
Marshall, Michigan

Manuel T. Gonzalez
Indianapolis, Indiana
United States Hispanic
Chamber of Commerce

William C. Nill
First State Bank
of East Detroit
St. Clair Shores, Michigan

Richard T. Koenings
Elm Grove, Wisconsin
Independent Business
Association

Robert E. Churchill
Citizens National Bank
of Cheboygan
Cheboygan, Michigan

Myrna Ordower
Chicago, Illinois
National Association of Women
Business Owners (NAWBO)

Wisconsin
Helge S. Christensen
Bankers’ Bank
Madison, Wisconsin

James Michael Schultz
Effingham, Illinois
Illinois State Chamber
of Commerce

Richard A. Hansen
Johnson International, Inc.
Johnson Bank
Racine, Wisconsin

Billie Jo Wanink
Royal Oak, Michigan
National Association of Women
Business Owners (NAWBO)

Bradley O. Yocum
State Bank of
Howards Grove
Howards Grove, Wisconsin

Alan C. Young, CPA
Detroit, Michigan
Booker T. Washington
Business Association

Customer Advisory Groups
Central Illinois
Dale Baraks
Southeast National Bank
of Moline
Moline, Illinois

Community Bank Council
Illinois
Douglas C. Mills
First Busey Corporation
Urbana, Illinois

Gar y Elliott
The Havana National Bank
Havana, Illinois

John Rodda
Capstone Bank
Watseka, Illinois

Richard Giebelhausen
Herget National Bank
of Pekin
Pekin, Illinois

Thelma J. Smith
Illinois Ser vice Federal Savings
and Loan Association
Chicago, Illinois

William Glaze
First Bank of Illinois
Collinsville, Illinois

Indiana
Calvin Bellamy
Bank Calumet
Hammond, Indiana

Wilbur R. Lancaster
Magna Bank of Illinois
Decatur, Illinois

John W. Corey
Lafayette Savings Bank, FSB
Lafayette, Indiana

Randall Ross
First Mid-Illinois Bank
& Trust, N.A.
Mattoon, Illinois

James L. Saner, Sr.
Peoples Trust Company
Brookville, Indiana

Donald Schlor ff
Busey Bank
Urbana, Illinois

Cathy E. McHenr y
Fairmount State Bank
Fairmount, Indiana

Chicago Metropolitan
Diane Anderson
Financial Federal Trust
& Savings Bank
Olympia Fields, Illinois

John Collins
Great Lakes Credit Union
Great Lakes, Illinois
John Bailey
Baxter Credit Union
Deer field, Illinois
Thomas Darovic
Superior Bank, FSB
Oak Brook Terrace, Illinois
Richard Brattland
AMCORE Financial, Inc.
Rockford, Illinois
Edward Fur ticella
Peoples Bank SB
Munster, Indiana
Denise Currier
First of America
Chicago, Illinois
James Constantine
Sears, Roebuck and Co.
Hof fman Estates, Illinois
Arlene Kowalczyk
Downers Grove National Bank
Downers Grove, Illinois
Barbara Yeates
Cole Taylor Bank
Chicago, Illinois
Deborah Schneider
First Midwest, N.A.
Joliet, Illinois
Charles Sanger
Bank Calumet
Hammond, Indiana
Indiana
H. Matthew Ayers
State Bank of Lizton
Lizton, Indiana

Steven Bailey
Decatur Bank and Trust
Decatur, Indiana
Lynn Bierlein
Salin Bancshares, Inc.
Indianapolis, Indiana
Debora L. Cox
Irwin Union Bank & Trust
Columbus, Indiana
Rober t E. Fall
NBD Indianapolis, NA
Indianapolis, Indiana

Steven D. Flowers
Bank One Indianapolis, NA
Indianapolis, Indiana

Steve Tscherter
Lincoln Savings Bank
Reinbeck, Iowa

Patricia Lunog
Alliance Banking Company
New Buffalo, Michigan

Chanda L. Booms
Signature Bank
Bad Axe, Michigan

Pamela S. Gossett
DeMotte State Bank
DeMotte, Indiana

Northern Michigan
Barbara Gurn
The Empire National Bank
of Traverse City
Traverse City, Michigan

D. Scott Hines
The First National Bank
Three Rivers, Michigan

Cynthia Bourjally
Madison National Bank
Madison Heights, Michigan

Linda Pitsch
ChoiceOne Bank
Sparta, Michigan

Richard Bauer
Fidelity Bank
Birmingham, Michigan

Linda Comps-Klinge
State Bank of Caledonia
Caledonia, Michigan

Stephen M. Mazurek
Bank of Lenawee
Adrian, Michigan

Kathleen Alford
The Empire National Bank
of Traverse City
Traverse City, Michigan

Jaylen T. Johnson
Southern Michigan Bank
& Trust
Coldwater, Michigan

Paul Fuller
Republic Bank
Ann Arbor, Michigan

John R. Kluck
First National Bank
of Gaylord
Gaylord, Michigan

Robert Branch
Ionia County National Bank
Ionia, Michigan

Dee Ann Hammel
First Federal Savings Bank
Huntington, Indiana
Stan V. Hart
Terre Haute
First National Bank
Terre Haute, Indiana
H. Dean Hawkins
First State Bank
Morgantown, Indiana
Paul Hoover
First Merchants Bank, NA
Muncie, Indiana
Sherri Jones
Phillips Electronics
Federal Credit Union
Fort Wayne, Indiana
Sharon A. Mar x
National City Bank
Indianapolis, Indiana
Carl A. Minick
Fort Wayne National Bank
Fort Wayne, Indiana
Robert J. Ralston
Lafayettte Bank
& Trust Company
Lafayette, Indiana
Iowa
Daniel G. Augustine
Security National Bank
Sioux City, Iowa

Monte Berg
John Deere Community
Credit Union
Waterloo, Iowa
Linda Donner
First American Bank
Fort Dodge, Iowa
Dale C. Froehlich
Community State Bank
Ankeny, Iowa
Nelson Klavitter
Dubuque Bank & Trust
Dubuque, Iowa
Bill Logan
State Central Bank
Keokuk, Iowa
Victor Quinn
Quad City Bank & Trust
Bettendor f, Iowa
Marti T. Rodamaker
First Citizens National Bank
Mason City, Iowa
Steve Ollenberg
Principal Bank
Des Moines, Iowa
Robert A. Steen
Bridge Community Bank
Mechanicsville, Iowa

Brian Bromley
The Empire National Bank
of Traverse City
Traverse City, Michigan

Wendell Stoeffler
Ionia County National Bank
Ionia, Michigan

William Kirsten
First National Bank
of Gaylord
Gaylord, Michigan

Carole Sanocki
Ionia County National Bank
Ionia, Michigan

Kathleen Taskey
First National Bank
of Gaylord
Gaylord, Michigan

Chantele M. Neal
Hillsdale County
National Bank
Hillsdale, Michigan

Michael Thompson
First Community Bank
Harbor Springs, Michigan

Debra S. Smith
Hillsdale County
National Bank
Hillsdale, Michigan

Marilyne Joy
Charlevoix State Bank
Charlevoix, Michigan

Joan Hef felbower
Hastings City Bank
Hastings, Michigan

Patrick Duffy
Commercial Bank
Alma, Michigan
Janet Davison
Commercial Bank
Alma, Michigan

Jerry Van Blarcom
Southern Michigan Bank
& Trust
Coldwater, Michigan

Victoria Sager
Central State Bank
Beulah, Michigan

Emily Stafford
Hastings City Bank
Hastings, Michigan

Nikki Bright
State Savings Bank
of Frankfort
Frankfort, Michigan

Detroit Metropolitan
Michael McMinn
Metrobank
Farmington Hills, Michigan

Susan A. Eno
Citizens National Bank
of Cheboygan
Cheboygan, Michigan

Marianne Hellebuyck
Metrobank
Farmington Hills, Michigan

Mary Ann Breuer
Isabella Bank & Trust
Mt. Pleasant, Michigan

Laird Kellie
Lapeer County Bank
& Trust Co.
Lapeer, Michigan

Dennis P. Angner
Isabella Bank & Trust
Mt. Pleasant, Michigan

Kathleen Rhoades
Citizens State Bank
New Baltimore, Michigan

Leo D. Marciniak
Huron Community Bank
East Tawas, Michigan

Bonnie Vanderbossche
Citizens State Bank
New Baltimore, Michigan

Western Michigan
Robert De Jonge
Grand Bank
Grand Rapids, Michigan

Joseph Hallman
Citizens State Bank
New Baltimore, Michigan

Richard Roty
Republic Bank
Ann Arbor, Michigan
Catherine Joslin
The State Bank
Fenton, Michigan
Ronald Justice
The State Bank
Fenton, Michigan
Wisconsin
Paul Adamski
Pineries Bank
Stevens Point, Wisconsin

Terry Anderegg
Mutual Savings Bank
Milwaukee, Wisconsin
Steven Bell
Community State Bank
Union Grove, Wisconsin
Jesse L. Calkins
Blackhawk State Bank
Beloit, Wisconsin
Robert W. Fouch
Wisconsin Corporate
Credit Union
Hales Corners, Wisconsin
Timothy R. Kent
Firstar Bank
Milwaukee, Wisconsin
Guy Ringle
M&I Data Center
Milwaukee, Wisconsin
Mara Todorvic
Bank One Data Services
Milwaukee, Wisconsin
Ronald L. Slater
Bankers Bank
Madison, Wisconsin
Thomas Smith
Heritage Bank and Trust
Racine, Wisconsin
Leonard Steele
Associated Data Services
Green Bay, Wisconsin
Werner Kant
Educators Credit Union
Racine, Wisconsin

Officers

Michael H. Moskow
President and
Chief Executive Officer

Supervision and Regulation*

John J. Wixted, Jr.
Senior Vice President

William C. Conrad
First Vice President and
Chief Operating Officer

Administration
James A. Bluemle
Vice President and
Division Leader

CENTRAL BANK ACTIVITIES
Economic Research
and Programs

William C. Hunter
Senior Vice President and
Director of Research

Macroeconomic Policy
Research
Charles L. Evans
Vice President and
Economic Advisor

Jean L. Valerius
Vice President and
Senior Policy Advisor

Anne Marie L. Gonczy
Assistant Vice President
and Economic Advisor

Financial Markets Regulation
and Payments Issues
Douglas D. Evanoff
Vice President and
Economic Advisor

Microeconomic Policy
Research
Daniel G. Sullivan
Vice President and
Economic Advisor

Elijah Brewer III
Assistant Vice President
and Economic Advisor

Paula R. Worthington
Research Officer and
Economic Advisor

James T. Moser
Research Officer and
Economic Advisor

Regional Economic Programs
William A. Testa
Vice President and
Economic Advisor

Sheryn E. Bormann
Director
Michael R. Jarrell
Director
Bank and Bank Holding
Company Supervision
Barbara D. Benson
Vice President and
Division Leader

Global Supervision
James W. Nelson
Vice President and
Division Leader

Adrian B. D’Silva
Director
Philip G. Jackson
Director
Mark H. Kawa
Director
Catharine M. Lemieux
Director
William H. Lossie, Jr.
Director

Robert A. Bechaz
Regional Director – Illinois

Anne M. Phillips
Director

Richard C. Cahill
Regional Director – Indiana/
Michigan

Barbara A. Werner
Director

Frederick L. Miller
Regional Director – Wisconsin

Loretta C. Ardaugh
Statistical Repor ts Officer

Paulette M. Myrie-Hodge
Regional Director — Illinois

A. Raymond Bacon
Special Exams Director

Jeffrey A. Jensen
Regional Director – Iowa

Statistics
Angela D. Robinson
Vice President
and Director of
Research Statistics

Kevin P. Murray
Regional Director — Iowa

Information Technology
and Staff Development
David E. Ritter
Vice President
and Division Leader

Joseph J. Turk
Director, Supervisor y
Resource Group

Gregor y J. Bartnicki
Director

Compliance and Community
Reinvestment Act
Douglas J. Kasl
Vice President and
Division Leader

Catherine M. Bourke
Director

Richard D. Chelsvig
Regional Director – Wisconsin
Ellen J. Holmgren
Regional Director – Indiana/
Michigan

Margaret M. Beutel
Director

Kathrine L. Kielma
Director
Karen M. Whalen-Ward
Director – Cultural
Transformation

* Includes directors as well as officers

Federal Reserve Bank of Chicago Management Committee, from left to right: William Conrad, Michael Moskow,
Deirdre Grant, William Barouski, William Gram, Thomas Ciesielski, Carl Vander Wilt, David Allardice, Glenn Hansen,
William Hunter, Charles Furbee, John Wixted, Richard Anstee, Nancy Goodman.

SERVICES TO DEPOSITORY
INSTITUTIONS
Business Development

Richard P. Anstee
Senior Vice President
Business Development Office
Valerie J. Van Meter
Vice President
Strategic Marketing
and Customer Service
Kathleen H. Williams
Vice President

Rosemarie A. Gould
Administrative Officer
Retail Payment Services

Charles W. Furbee
Senior Vice President
Automated Clearing House
and Customer Support
Jerome F. John
Vice President

Cynthia L. Rasche
Assistant Vice President
Marketing and
Business Development
Katherine McDonald
Retail Payments Officer
Check Services
Yvonne H. Montgomery
Vice President

Tyler K. Smith
Assistant Vice President
Regional Offices
Des Moines Office
L. Edward Ketchmark
Assistant Vice President

Indianapolis Office
Donna M. Yates
Assistant Vice President
Milwaukee Office
Michael J. Hoppe
Operations Officer
Peoria Facility
Mary H. Sherburne
Assistant Vice President

Robert W. Lapinski
Corporate Communications
Officer and Assistant
Vice President

Branch Operations
and Cash Operations

David R. Allardice
Senior Vice President
and Branch Manager

Facilities Management
and Protection
Wayne R. Baxter
Vice President

Cash Operations
Jerome D. Nicolas
Vice President

General Services
Kristi L. Zimmermann
Assistant Vice President

Guadalupe Garcia
Assistant Vice President
Detroit Branch
Brian D. Egan
Vice President

Culture Transformation

Deirdre A. Grant
Cultural Transformation Leader
and Equal Employment
Oppor tunity Officer

Valerie Van Meter
Vice President
Patrick A. Garrean
Assistant Vice President

Human Resource Services

Joseph R. O’Connor
Assistant Vice President

Thomas G. Ciesielski
Vice President

F. Alan Wells
Assistant Vice President

Margaret K. Koenigs
Assistant Vice President

Linda S. McDonald
Operations Officer

Richard F. Opalinski
Assistant Vice President

Electronic and
Fiscal Services

Information Technology
Services
William A. Barouski
Senior Vice President

Thomas G. Ciesielski
Vice President
James M. Rudny
Assistant Vice President

Information Management
Frank McKenna
Vice President

R. Steve Crain
Assistant Vice President

SUPPORT FUNCTIONS
Community and
Internal Services

Brenda D. Ladipo
Assistant Vice President

Nancy M. Goodman
Senior Vice President

Lysette R. Bailey
Training and Information
Security Officer

Consumer and
Community Affairs
Alicia Williams
Vice President
Corporate Communications
James R. Holland
Corporate Communications
Officer and Assistant
Vice President

Legal Services
Yurii Skorin
Vice President and
Associate General Counsel

Elizabeth A. Knospe
Assistant Vice President and
Assistant General Counsel
Anna M. Voytovich
Assistant Vice President and
Assistant General Counsel
Management Services,
Accounting, Loans and
Payment System Risk

Carl E. Vander Wilt
Senior Vice President and
Chief Financial Officer
Loans, Accounting, and
Payment System Risk
Gerard J. Nick
Vice President

William J. O’Connor
Assistant Vice President
Ellen J. Bromagen
Assistant Vice President
Robert A. Lyon
Loans Officer
Financial and
Management Services
Jeffrey S. Anderson
Assistant Vice President

Jeffrey B. Marcus
Assistant Vice President

Ira R. Zilist
Information
Technology Officer

Office of the General Auditor

Technology Services
Thomas M. Matsumoto
Assistant Vice President

Robert M. Casey
Assistant General Auditor

Contingency Services
and Century Date Change
Anthony J. Tempelman
Assistant Vice President

Legal Department and
Office of the Secretary
William H. Gram
Senior Vice President,
General Counsel
and Secretar y

Glenn C. Hansen
General Auditor

Joseph B. Green
Audit Officer

As of December 31, 1998

1998 Executive Changes

Directors

Advisory Councils

Members of the Federal Reser ve Bank of Chicago’s
board of directors are selected to represent a cross section of the Seventh District economy, including consumers,
industr y, agriculture, the ser vice sector, labor, and commercial banks of various sizes.

The Federal Advisor y Council, which meets quarterly to
discuss business and financial conditions with the Board
of Governors in Washington, D.C., is comprised of one
banker from each of the 12 Federal Reserve Districts.
Each year the Chicago Reserve Bank’s board of directors
selects a representative to this group. Norman R. Bobins
was appointed to serve a second one-year term beginning
January 1, 1999.

The board consists of nine members. Member banks
elect three bankers and three nonbankers. The Board of
Governors appoints three additional nonbankers and
designates the Reserve Bank chair and deputy chair from
among its three appointees.

The Community Bank Council was established in 1998.
Members of the Advisory Council on Agriculture, Labor and
Small Business, who are selected from nominations by
Seventh District organizations, served the second year of
their terms in 1998. The councils provide a vital communication link between the Bank and these important sectors.

The Detroit Branch has a seven-member board of directors.
The Board of Governors appoints three nonbankers and
the Chicago Reser ve Bank board appoints four additional
directors. The Branch board selects its own chair each
year. All Reserve Bank and Branch directors serve threeyear terms, with a two-term maximum.

Officers

The Bank’s board of directors acted on the following
promotions during 1998:

Director appointments and elections at the Chicago Reserve
Bank and its Detroit Branch effective in 1998 were:

• William A. Barouski to senior vice president, Information
Technology Ser vices.

• Lester H. McKeever, Jr. reappointed to a second three-year
term and redesignated Chairman.

• Brian D. Egan to vice president, Detroit Branch.

• Arthur C. Mar tinez redesignated Deputy Chairman.

• Douglas D. Evanoff to vice president, Economic Research.

• Jack B. Evans, President of The Hall-Perrine Foundation,
Cedar Rapids, Iowa, and Rober t R. Yohanan, Managing
Director and Chief Executive Officer of First Bank & Trust,
Evanston, Illinois, appointed to three-year terms as directors replacing Thomas C. Dorr and Stefan S. Anderson.

• Charles L. Evans to vice president, Economic Research.

• Florine Mark redesignated Branch Chair.

• Angela D. Robinson to vice president and director of
research statistics, Statistics

• Frank S. McKenna to vice president, Information Technology Ser vices.
• Jerome D. Nicolas to vice president, Cash.

• Timothy D. Leuliette reappointed as Branch director.
• David J. Wagner, Chairman, President, and Chief Executive
Officer of Old Kent Financial Corporation and Chairman of
Old Kent Bank, Grand Rapids, Michigan, appointed to threeyear term as Branch director, replacing Charles R. Weeks.

• Daniel G. Sullivan to vice president, Economic Research.

At year-end 1998 the following appointments and elections
to terms beginning in 1999 were announced:

• Ellen Bromagen to assistant vice president, Accounting.

• William A. Testa to vice president, Economic Research.
• Kathleen H. Williams to vice president, Strategic Marketing
and Customer Service.
• Cynthia L. Rasche to assistant vice president, Retail
Operations.

• Lester H. McKeever, Jr. was redesignated to a third term
as Chairman.

New officers appointed by the board in 1998 were:

• Arthur C. Mar tinez was reappointed to a second threeyear term and redesignated Deputy Chairman.

• Lysette R. Bailey to training and information security
officer, Information Technology Ser vices.

• James H. Keyes, Chairman and Chief Executive Officer,
Johnson Controls, Inc., Milwaukee, Wisconsin, was elected
to a three-year term, replacing Donald Schneider.

• Deirdre A. Grant to cultural transformation leader and
EEO officer, Cultural Transformation.

• Alan R. Tubbs, President, Maquoketa State Bank and
Ohnward Bancshares, Maquoketa, Iowa, was elected to
a three-year term replacing Arnold C. Schultz.

• Michael J. Hoppe to operations officer, Milwaukee Office.

• Florine Mark was redesignated Branch Chair.

• Linda S. McDonald to operations officer, Detroit Branch.

• Stephen R. Polk and Richard M. Bell were reappointed
to a second three-year term as Branch directors.

• Ira R. Zilist to information technology officer, Information
Technology Ser vices.

• Katherine McDonald to retail payments officer, Retail
Payment Services.

George Coe retired after 37 years of service to the
Federal Reser ve System.

Operations Volumes

Dollar Amount
1998

Number of Items

1997

1998

1997

Check & Electronic Payments
Checks, NOWs, & share drafts processed

1.5 trillion

1.3 trillion

2.0 billion

1.9 billion

Fine sort & packaged checks handled

46.7 billion

64.1 billion

76.0 million

120.3 million

U.S. government checks processed

43.7 billion

41.4 billion

41.8 million

40.7 million

2.5 trillion

2.2 trillion

744.3 million

687.1 million

46.8 trillion

37.0 trillion

20.5 million

16.8 million

–

650.2 million

524.3 million

Automated Clearing House (ACH) items processed
Transfer of funds
Electronic cash letters processed

–

Cash Operations
Currency received and counted
Unfit currency destroyed
Coin received and counted

39.4 billion

39.3 billion

2.8 billion

6.6 billion

10.8 billion

629.6 million

831.2 million

858.3 million 759.8 million

8.4 billion

5.0 billion

Securities Services for Depository Institutions
Safekeeping balance December 31:
Definitive securities

20.7 billion

12.7 billion

273.4 billion

282.5 billion

Purchase & Sale

3.4 billion

3.1 billion

Book-entr y government securities

7.4 trillion

7.2 trillion

2.5 billion

4.0 billion

33.3 million

37.4 million

0.8 thousand

3.2 thousand

2.5 million

3.8 million

9.2 thousand

11.7 thousand

11.0 billion

46.8 billion

Food stamps redeemed

832.3 million

1.5 billion

Sell Direct transactions processed

510.6 million 132.3 million

Book-entr y securities

14.4 thousand
–
7.0 thousand

23.5 thousand
–
11.1 thousand

876.1 thousand 979.4 thousand

Loans to Depository Institutions
Total loans made during year

0.8 thousand

1.6 thousand

Services to U.S. Treasury and Government Agencies
Redemptions of definitive government securities
Government coupons paid
Federal tax deposits processed

703.0 thousand 773.2 thousand
166.3 million
16.2 thousand

291.3 million
4.2 thousand

1998 Financial Statements

Management Asser tion
March 5, 1999
To the Board of Directors of The Federal Reserve Bank of Chicago:
The management of the Federal Reserve Bank of Chicago (FRBC) is responsible for the preparation and fair presentation
of the Statement of Financial Condition, Statement of Income, and Statement of Changes in Capital as of December 31, 1998
(the “Financial Statements”). The Financial Statements have been prepared in conformity with the accounting principles,
policies, and practices established by the Board of Governors of the Federal Reserve System and as set for th in the Financial
Accounting Manual for the Federal Reserve Banks, and as such, include amounts, some of which are based on judgments
and estimates of management.
The management of the FRBC is responsible for maintaining an effective process of internal controls over financial
repor ting including the safeguarding of assets as they relate to the Financial Statements. Such internal controls are
designed to provide reasonable assurance to management and to the Board of Directors regarding the preparation of
reliable Financial Statements. This process of internal controls contains self-monitoring mechanisms, including, but not
limited to, divisions of responsibility and a code of conduct. Once identified, any material deficiencies in the process of
internal controls are reported to management, and appropriate corrective measures are implemented.
Even an effective process of internal controls, no matter how well designed, has inherent limitations, including the
possibility of human error, and therefore can provide only reasonable assurance with respect to the preparation of reliable
Financial Statements.
The management of the FRBC assessed its process of internal controls over financial reporting including the safeguarding
of assets reflected in the Financial Statements, based upon the criteria established in the “Internal Control – Integrated
Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this
assessment, the management of the FRBC believes that the FRBC maintained an effective process of internal controls
over financial repor ting including the safeguarding of assets as they relate to the Financial Statements.

Federal Reserve Bank of Chicago

Michael Moskow
President and Chief Executive Officer

William Conrad
First Vice President and Chief Operating Officer

Repor t of Independent Accountants
To the Board of Directors of The Federal Reserve Bank of Chicago:
We have examined management’s assertion that the Federal Reserve Bank of Chicago (“FRB Chicago”) maintained effective
internal control over financial reporting and the safeguarding of assets as they relate to the Financial Statements as of
December 31, 1998, included in the accompanying Management’s Assertion.
Our examination was made in accordance with standards established by the American Institute of Cer tified Public
Accountants, and accordingly, included obtaining an understanding of the internal control over financial reporting, testing,
and evaluating the design and operating effectiveness of the internal control, and such other procedures as we considered
necessary in the circumstances. We believe that our examination provides a reasonable basis for our opinion.
Because of inherent limitations in any internal control, misstatements due to error or fraud may occur and not be
detected. Also, projections of any evaluation of the internal control over financial repor ting to future periods are subject
to the risk that the internal control may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, management’s assertion that the FRB Chicago maintained effective internal control over financial
repor ting and over the safeguarding of assets as they relate to the Financial Statements as of December 31, 1998, is
fairly stated, in all material respects, based upon criteria described in “Internal Control - Integrated Framework” issued
by the Committee of Sponsoring Organizations of the Treadway Commission.

Chicago, Illinois
March 5, 1999

1998 Financial Statements

PricewaterhouseCoopers LLP
203 North LaSalle Street
Chicago, IL 60601-1210
Telephone: 312-701-5500
Facsimile: 312-701-6533

Repor t of Independent Accountants

To the Board of Governors of the Federal Reserve System
and the Board of Directors of the Federal Reserve Bank of Chicago
We have audited the accompanying statements of condition of The Federal Reserve Bank of Chicago (the “Bank”) as of
December 31, 1998 and 1997, and the related statements of income and changes in capital for the years then ended.
These financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion
on the financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we
plan and per form the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 3, the financial statements were prepared in conformity with the accounting principles, policies,
and practices established by the Board of Governors of The Federal Reserve System. These principles, policies, and practices,
which were designed to meet the specialized accounting and repor ting needs of The Federal Reserve System, are set forth
in the “Financial Accounting Manual for Federal Reserve Banks” and constitute a comprehensive basis of accounting other
than the generally accepted accounting principles.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position
of the Bank as of December 31, 1998 and 1997, and results of its operations for the years then ended, on the basis
of accounting described in Note 3.

Chicago, Illinois
March 5, 1999

1998 Financial Statements

Statement of Condition (in millions) As of December 31,

1998

1997

Assets
Gold Cer tificates .................................................................................................................

998

1,069

Special Drawing Rights Certificates ......................................................................................

900

Coin ...................................................................................................................................

Items in Process of Collection ..............................................................................................

794

773

Loans to Depositor y Institutions ...........................................................................................

U.S. Government and Federal Agency Securities, Net .............................................................

43,841

46,293

Investments Denominated in Foreign Currencies ...................................................................

1,911

1,989

Accrued Interest Receivable .................................................................................................

414

438

Interdistrict Settlement Account ...........................................................................................

1,838

Bank Premises and Equipment, Net .....................................................................................

141

143

Other Assets ......................................................................................................................

Total Assets ...........................................................................................................................

$ 50,903

$ 51,757

$ 44,608

$ 40,531

Depository Institutions ....................................................................................................

4,282

3,570

Other Deposits ................................................................................................................

Deferred Credit Items ..........................................................................................................

609

679

Surplus Transfer Due U.S. Treasur y ......................................................................................

Interdistrict Settlement Account ...........................................................................................

–

5,705

Accrued Benefit Cost ...........................................................................................................

Other Liabilities...................................................................................................................

Total Liabilities .......................................................................................................................

$ 49,737

$ 50,728

Capital Paid-in .....................................................................................................................

583

527

Surplus ..............................................................................................................................

583

502

–

Liabilities and Capital

Liabilities:
Federal Reserve Notes Outstanding, Net ..............................................................................
Deposits:

Capital:

Total Capital ...........................................................................................................................

Total Liabilities and Capital ......................................................................................................

$ 50,903

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

1,166

1,029

$ 51,757

1998 Financial Statements

Statement of Income (in millions) For the years ended December 31,

1998

1997

Interest Income:
Interest on U.S. Government Securities ................................................................................

2,625

$ 2,696

Interest on Foreign Currencies .............................................................................................

Interest on Loans to Depository Institutions ..........................................................................

2,669

$ 2,742

Income from Ser vices .........................................................................................................

Reimbursable Services to Government Agencies ...................................................................

Foreign Currency Gains (losses), Net ....................................................................................

181

(303)

Government Securities Gains, Net ........................................................................................

Total Interest Income ...........................................................................................................

Other Operating Income (Loss):

Other Income ......................................................................................................................
Total Other Operating Income (Loss) .....................................................................................

5
$

307

4
$

(186)

Operating Expenses:
Salaries and Other Benefits .................................................................................................

129

127

Occupancy Expense ............................................................................................................

Equipment Expense .............................................................................................................

Cost of Unreimbursed Treasur y Ser vices ..............................................................................

Assessments by Board of Governors ....................................................................................

Other Expenses ..................................................................................................................

Total Operating Expenses ....................................................................................................

317

Net Income Prior to Distribution ...........................................................................................

2,659

323

$ 2,233

Distribution of Net Income:
Dividends Paid to Member Banks .........................................................................................

Transferred to (from) Surplus ...............................................................................................

Payments to U.S. Treasur y as Interest on Federal Reserve Notes ...........................................

770

Payments to U.S. Treasur y as Required by Statute ................................................................
Total Distribution .................................................................................................................

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

32
(10)
–

1,775

2,211

2,659

$ 2,233

1998 Financial Statements

Statement of Changes in Capital (in millions)
For the years ended Dec. 31, 1998 and Dec. 31, 1997

Capital Paid-in

Balance at January 1, 1997 (10.7 million shares) ..............................................

537

Surplus Total Capital
$ 524

$ 1,061

Net Income Transferred (from) Surplus ..........................................................

(10)

Statutor y Surplus Transfer to the U.S. Treasur y ..............................................

(12)

Net Change in Capital Stock (Redeemed) (0.2 million shares) .........................

(10)

Balance at December 31, 1997 (10.5 million shares) ........................................

527

$ 502

$ 1,029

–

Net Income Transferred to Surplus ................................................................
Net Change in Capital Stock Issued (1.2 million shares) .................................
Balance at December 31, 1998 (11.7 million shares) ........................................

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

56
$

583

–

$ 583

(10)

$ 1,166

Notes to Financial Statements

1. Organization
The Federal Reserve Bank of Chicago (“Bank”) is part
of the Federal Reser ve System (“System”) created by
Congress under the Federal Reserve Act of 1913 (“Federal
Reser ve Act”), which established the central bank of the
United States. The System consists of the Board of Governors of the Federal Reserve System (“Board of Governors”)
and twelve Federal Reser ve Banks (“Reserve Banks”). The
Reser ve Banks are chartered by the federal government
and possess a unique set of governmental, corporate, and
central bank characteristics. Other major elements of the
System are the Federal Open Market Committee (“FOMC”),
and the Federal Advisory Council. The FOMC is composed
of members of the Board of Governors, the president of
the Federal Reserve Bank of New York (“FRBNY”) and, on
a rotating basis, four other Reserve Bank presidents.

government’s bank; providing short-term loans to depository
institutions; serving the consumer and the community by
providing educational materials and information regarding
consumer laws; supervising bank holding companies and
state member banks; and administering other regulations of
the Board of Governors. The Board of Governors’ operating
costs are funded through assessments on the Reserve Banks.
The FOMC establishes policy regarding open market
operations, oversees these operations, and issues authorizations and directives to the FRBNY for its execution of
transactions. Authorized transaction types include direct
purchase and sale of securities, matched sale-purchase
transactions, the purchase of securities under agreements
to resell, and the lending of U.S. government securities.
Additionally, the FRBNY is authorized by the FOMC to
hold balances of and to execute spot and for ward foreign
exchange and securities contracts in four teen foreign
currencies, maintain reciprocal currency arrangements
(“F/X swaps”) with various central banks, and “warehouse”
foreign currencies for the U.S. Treasur y and Exchange
Stabilization Fund (“ESF”) through the Reser ve Banks.

Structure
The Bank and its branch in Detroit, Michigan serve the
Seventh Federal Reser ve District, which includes Iowa and
por tions of Illinois, Indiana, Michigan, and Wisconsin. In
accordance with the Federal Reserve Act, super vision and
control of the Bank is exercised by a Board of Directors.
Banks that are members of the System include all national
banks and any state char tered bank that applies and is
approved for membership in the System.

3. Significant Accounting Policies
Accounting principles for entities with the unique powers
and responsibilities of the nation’s central bank have not
been formulated by the Financial Accounting Standards
Board. The Board of Governors has developed specialized
accounting principles and practices that it believes are
appropriate for the significantly different nature and function
of a central bank as compared to the private sector. These
accounting principles and practices are documented in the
“Financial Accounting Manual for Federal Reserve Banks”
(“Financial Accounting Manual”), which is issued by the
Board of Governors. All Reserve Banks are required to
adopt and apply accounting policies and practices that
are consistent with the Financial Accounting Manual.
The financial statements have been prepared in accordance with the Financial Accounting Manual. Differences
exist between the accounting principles and practices of
the System and generally accepted accounting principles
(“GAAP”). The primary dif ferences are the presentation
of all security holdings at amortized cost, rather than at
the fair value presentation requirements of GAAP, and
the accounting for matched sale-purchase transactions
as separate sales and purchases, rather than secured
borrowings with pledged collateral, as is required by
GAAP. In addition, the Bank has elected not to present
a Statement of Cash Flows or a Statement of Comprehensive Income.

Board of Directors
The Federal Reser ve Act specifies the composition
of the board of directors for each of the Reserve Banks.
Each board is composed of nine members serving three-year
terms: three directors, including those designated as
Chairman and Deputy Chairman, are appointed by the Board
of Governors, and six directors are elected by member
banks. Of the six elected by member banks, three represent
the public and three represent member banks. Member
banks are divided into three classes according to size. Member banks in each class elect one director representing member banks and one representing the public. In any election of
directors, each member bank receives one vote, regardless
of the number of shares of Reser ve Bank stock it holds.
2. Operations and Services
The System per forms a variety of ser vices and operations. Functions include: formulating and conducting monetary policy; participating actively in the payments mechanism,
including large-dollar transfers of funds, automated clearinghouse operations and check processing; distribution of coin
and currency; fiscal agency functions for the U.S. Treasury
and certain federal agencies; serving as the federal

Notes to Financial Statements
reser ves and may be transferred from one national
monetar y authority to another. Under the law providing
for United States par ticipation in the SDR system, the
Secretar y of the U.S. Treasury is authorized to issue SDR
certificates, somewhat like gold certificates, to the Reserve
Banks. At such time, equivalent amounts in dollars are
credited to the account established for the U.S. Treasury, and
the Reserve Banks’ SDR certificate accounts are increased.
The Reser ve Banks are required to purchase SDRs, at the
direction of the U.S. Treasury, for the purpose of financing
SDR cer tificate acquisitions or for financing exchange
stabilization operations. The Board of Governors allocates
each SDR transaction among Reserve Banks based upon
Federal Reserve notes outstanding in each District at the
end of the preceding year.

3. Significant Accounting Policies, continued

The Statement of Cash Flows has not been included
as the liquidity and cash position of the Bank are not
of primary concern to the users of these financial statements. The Statement of Comprehensive Income, which
comprises net income plus or minus cer tain adjustments,
such as the fair value adjustment for securities, has not
been included because as stated above the securities are
recorded at amortized cost and there are no other adjustments in the determination of Comprehensive Income
applicable to the Bank. Other information regarding the
Bank’s activities is provided in, or may be derived from, the
Statements of Condition, Income, and Changes in Capital.
Therefore, a Statement of Cash Flows or a Statement of
Comprehensive Income would not provide any additional
useful information. There are no other significant differences
between the policies outlined in the Financial Accounting
Manual and GAAP.
The preparation of the financial statements in conformity
with the Financial Accounting Manual requires management
to make cer tain estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the reporting period. Actual results could
differ from those estimates. Unique accounts and significant
accounting policies are explained below.

c. Loans to Depository Institutions
The Depository Institutions Deregulation and Monetar y
Control Act of 1980 provides that all depository institutions
that maintain reser vable transaction accounts or nonpersonal time deposits, as defined in Regulation D issued
by the Board of Governors, have borrowing privileges at
the discretion of the Reser ve Banks. Borrowers execute
certain lending agreements and deposit sufficient collateral
before credit is extended. Loans are evaluated for collectibility, and currently all are considered collectible and fully
collateralized. If any loans were deemed to be uncollectible,
an appropriate reser ve would be established. Interest is
recorded on the accrual basis and is charged at the applicable discount rate established at least every four teen
days by the Board of Directors of the Reserve Banks, subject
to review by the Board of Governors. However, Reserve
Banks retain the option to impose a surcharge above the
basic rate in certain circumstances.

a. Gold Certificates
The Secretar y of the Treasur y is authorized to issue
gold cer tificates to the Reserve Banks to monetize gold
held by the U.S. Treasury. Payment for the gold certificates
by the Reser ve Banks is made by crediting equivalent
amounts in dollars into the account established for the
U.S. Treasury. These gold certificates held by the Reserve
Banks are required to be backed by the gold of the U.S.
Treasur y. The U.S. Treasury may reacquire the gold cer tificates at any time and the Reser ve Banks must deliver
them to the U.S. Treasur y. At such time, the U.S. Treasury’s
account is charged and the Reser ve Banks’ gold cer tificate accounts are lowered. The value of gold for purposes
of backing the gold certificates is set by law at $42 2/9
a fine troy ounce. The Board of Governors allocates the gold
certificates among Reserve Banks once a year based upon
Federal Reserve notes outstanding in each District at the
end of the preceding year.

d. U.S. Government and Federal Agency Securities
and Investments Denominated in Foreign Currencies
The FOMC has designated the FRBNY to execute open
market transactions on its behalf and to hold the resulting
securities in the portfolio known as the System Open
Market Account (“SOMA”). In addition to authorizing and
directing operations in the domestic securities market,
the FOMC authorizes and directs the FRBNY to execute
operations in foreign markets for major currencies in order
to counter disorderly conditions in exchange markets or
other needs specified by the FOMC in carrying out the
System’s central bank responsibilities.
Purchases of securities under agreements to resell and
matched sale-purchase transactions are accounted for as
separate sale and purchase transactions. Purchases under
agreements to resell are transactions in which the FRBNY
purchases a security and sells it back at the rate specified
at the commencement of the transaction. Matched

b. Special Drawing Rights Cer tificates
Special drawing rights (“SDRs”) are issued by the International Monetary Fund (“Fund”) to its members in proportion
to each member’s quota in the Fund at the time of issuance.
SDRs ser ve as a supplement to international monetary

Notes to Financial Statements
In connection with its foreign currency activities, the
FRBNY, on behalf of the Reser ve Banks, may enter into
contracts which contain var ying degrees of of f-balance
sheet market risk, because they represent contractual
commitments involving future settlement, and counter-par ty
credit risk. The FRBNY controls credit risk by obtaining
credit approvals, establishing transaction limits, and performing daily monitoring procedures.
While the application of current market prices to the
securities currently held in the SOMA por tfolio and investments denominated in foreign currencies may result in
values substantially above or below their carrying values,
these unrealized changes in value would have no direct
effect on the quantity of reser ves available to the banking system or on the prospects for future Reser ve Bank
earnings or capital. Both the domestic and foreign components of the SOMA por tfolio from time to time involve
transactions that can result in gains or losses when holdings
are sold prior to maturity. However, decisions regarding
the securities and foreign currencies transactions, including their purchase and sale, are motivated by monetary
policy objectives rather than profit. Accordingly, earnings
and any gains or losses resulting from the sale of such
currencies and securities are incidental to the open
market operations and do not motivate its activities or
policy decisions.
U.S. government and federal agency securities and
investments denominated in foreign currencies comprising
the SOMA are recorded at cost, on a settlement-date basis,
and adjusted for amor tization of premiums or accretion of
discounts on a straight-line basis. Interest income is accrued
on a straight-line basis and is reported as “Interest on U.S.
government securities” or “Interest on foreign currencies,”
as appropriate. Income earned on securities lending
transactions is reported as a component of “Other income.”
Gains and losses resulting from sales of securities are
determined by specific issues based on average cost.
Gains and losses on the sales of U.S. government and
federal agency securities are repor ted as “Government
securities gains, net”. Foreign currency denominated assets
are revalued monthly at current market exchange rates
in order to repor t these assets in U.S. dollars. Realized
and unrealized gains and losses on investments denominated in foreign currencies are reported as “Foreign
currency gains (losses), net”. Foreign currencies held
through F/X swaps, when initiated by the counter party,
and warehousing arrangements are revalued monthly,
with the unrealized gain or loss repor ted by the FRBNY
as a component of “Other assets” or “Other liabilities,”
as appropriate.
Balances of U.S. government and federal agencies
securities bought outright, investments denominated in
foreign currency, interest income, amortization of premiums

3. Significant Accounting Policies, continued
d. U.S. Government and Federal…, continued

sale-purchase transactions are transactions in which
the FRBNY sells a security and buys it back at the rate
specified at the commencement of the transaction.
Reserve Banks are authorized by the FOMC to lend U.S.
government securities held in the SOMA to U.S. government
securities dealers and to banks participating in U.S. government securities clearing arrangements, in order to facilitate
the effective functioning of the domestic securities market.
These securities-lending transactions are fully collateralized
by other U.S. government securities. FOMC policy requires
the lending Reserve Bank to take possession of collateral
in amounts in excess of the market values of the securities
loaned. The market values of the collateral and the securities
loaned are monitored by the lending Reserve Bank on a
daily basis, with additional collateral obtained as necessary.
The securities loaned continue to be accounted for in
the SOMA.
Foreign exchange contracts are contractual agreements
between two parties to exchange specified currencies, at a
specified price, on a specified date. Spot foreign contracts
normally settle two days after the trade date, whereas the
settlement date on forward contracts is negotiated between
the contracting par ties, but will extend beyond two days
from the trade date. The FRBNY generally enters into spot
contracts, with any for ward contracts generally limited to
the second leg of a swap/warehousing transaction.
The FRBNY, on behalf of the Reserve Banks, maintains
renewable, short-term F/X swap arrangements with authorized foreign central banks. The parties agree to exchange
their currencies up to a pre-arranged maximum amount
and for an agreed upon period of time (up to twelve months),
at an agreed upon interest rate. These arrangements give
the FOMC temporary access to foreign currencies that it
may need for intervention operations to support the dollar
and give the partner foreign central bank temporary access
to dollars it may need to support its own currency. Drawings under the F/X swap arrangements can be initiated
by either the FRBNY or the par tner foreign central bank,
and must be agreed to by the drawee. The F/X swaps are
structured so that the party initiating the transaction (the
drawer) bears the exchange rate risk upon maturity. The
FRBNY will generally invest the foreign currency received
under an F/X swap in interest-bearing instruments.
Warehousing is an arrangement under which the FOMC
agrees to exchange, at the request of the Treasur y, U.S.
dollars for foreign currencies held by the Treasury or ESF over
a limited period of time. The purpose of the warehousing
facility is to supplement the U.S. dollar resources of the
Treasur y and ESF for financing purchases of foreign currencies and related international operations.

Notes to Financial Statements
notes outstanding. The collateral value is equal to the book
value of the collateral tendered, with the exception of
securities, whose collateral value is equal to the par value
of the securities tendered. The Board of Governors may,
at any time, call upon a Reserve Bank for additional security
to adequately collateralize the Federal Reser ve notes. To
satisfy its obligation to provide sufficient collateral for its
outstanding Federal Reser ve notes, the Reserve Banks
have entered into an agreement that provides that cer tain
assets of the Reserve Banks are jointly pledged as collateral
for the Federal Reser ve notes of all Reserve Banks. In
the event that this collateral is insufficient, the Federal
Reser ve Act provides that Federal Reser ve notes become
a first and paramount lien on all the assets of the Reser ve
Banks. Finally, as obligations of the United States, Federal
Reserve notes are backed by the full faith and credit of
the United States government.
The “Federal Reserve notes outstanding, net” account
represents Federal Reserve notes reduced by cash held in
the vaults of the Bank of $9,506 million, and $6,589 million
at December 31, 1998 and 1997, respectively.

3. Significant Accounting Policies, continued
d. U.S. Government and Federal…, continued

and discounts on securities bought outright, gains and
losses on sales of securities, and realized and unrealized
gains and losses on investments denominated in foreign
currencies, excluding those held under an F/X swap
arrangement, are allocated to each Reserve Bank. Securities
purchased under agreements to resell and the related
premiums, discounts and income, and unrealized gains
and losses on the revaluation of foreign currency holdings
under F/X swaps and warehousing arrangements are allocated
to the FRBNY and not to other Reserve Banks. Income
from securities lending transactions is recognized only by
the lending Reserve Bank.

e. Bank Premises and Equipment
Bank premises and equipment are stated at cost less
accumulated depreciation. Depreciation is calculated on
a straight-line basis over estimated useful lives of assets
ranging from 2 to 50 years. New assets, major alterations,
renovations and improvements are capitalized at cost
as additions to the asset accounts. Maintenance, repairs
and minor replacements are charged to operations in the
year incurred.

h. Capital Paid-in
The Federal Reserve Act requires that each member
bank subscribe to the capital stock of the Reserve Bank in an
amount equal to 6% of the capital and surplus of the member
bank. As a member bank’s capital and surplus changes,
its holdings of the Reserve Bank’s stock must be adjusted.
Member banks are those state-chartered banks that apply
and are approved for membership in the System and all
national banks. Currently, only one-half of the subscription
is paid-in and the remainder is subject to call. These shares
are nonvoting with a par value of $100. They may not be
transferred or hypothecated. By law, each member bank is
entitled to receive an annual dividend of 6% on the paid-in
capital stock. This cumulative dividend is paid semiannually.
A member bank is liable for Reserve Bank liabilities up to
twice the par value of stock subscribed by it.

f. Interdistrict Settlement Account
At the close of business each day, all Reserve Banks
and branches assemble the payments due to or from other
Reser ve Banks and branches as a result of transactions
involving accounts residing in other Districts that occurred
during the day’s operations. Such transactions may include
funds settlement, check clearing and automated clearinghouse (“ACH”) operations, and allocations of shared
expenses. The cumulative net amount due to or from
other Reser ve Banks is repor ted as the “Interdistrict
settlement account.”
g. Federal Reser ve Notes
Federal Reserve notes are the circulating currency of
the United States. These notes are issued through the
various Federal Reserve agents to the Reser ve Banks
upon deposit with such Agents of certain classes of collateral
security, typically U.S. government securities. These notes
are identified as issued to a specific Reser ve Bank. The
Federal Reser ve Act provides that the collateral security
tendered by the Reserve Bank to the Federal Reserve Agent
must be equal to the sum of the notes applied for by such
Reserve Bank. In accordance with the Federal Reser ve Act,
gold certificates, special drawing rights certificates, U.S.
government and agency securities, loans allowed under
Section 13, and investments denominated in foreign currencies are pledged as collateral for net Federal Reserve

Surplus

The Board of Governors requires Reserve Banks to
maintain a surplus equal to the amount of capital paid-in as
of December 31. This amount is intended to provide additional
capital and reduce the possibility that the Reserve Banks
would be required to call on member banks for additional
capital. Reserve Banks are required by the Board of Governors to transfer to the U.S. Treasur y excess earnings,
after providing for the costs of operations, payment of
dividends, and reser vation of an amount necessary to
equate surplus with capital paid-in. Payments made after
September 30, 1998 represent payment of interest on
Federal Reserve notes outstanding.

Notes to Financial Statements
The Bank’s allocated share of securities held in the
SOMA at December 31, that were bought outright, were
as follows (in millions):

3. Significant Accounting Policies, continued
i.

Surplus, continued

1998

The Omnibus Budget Reconciliation Act of 1993 (Public
Law 103-66, Section 3002) codified the existing Board surplus policies as statutory surplus transfers, rather than as
payments of interest on Federal Reserve notes, for federal
government fiscal years 1998 and 1997 (which began on
October 1, 1997 and 1996, respectively). In addition, the
legislation directed the Reser ve Banks to transfer to the
U.S. Treasur y additional surplus funds of $107 million and
$106 million during fiscal years 1998 and 1997, respectively. Reserve Banks were not permitted to replenish surplus for these amounts during this time. The Reser ve
Banks made these transfers on October 1, 1997 and October 1, 1996, respectively. The Bank’s share of the 1997
transfer is reported as “Statutory surplus transfer to the
U.S. Treasur y.”
In the event of losses, payments to the U.S. Treasury
are suspended until such losses are recovered through
subsequent earnings. Weekly payments to the U.S. Treasury
vary significantly.

1997

Par value:
Federal Agency

U.S. Government:
Bills
Notes
Bonds
Total Par Value

18,699
18,038
6,670

21,026
18,582
6,337

$ 43,439

$ 46,018

Unamor tized Premiums

709

661

Unaccreted Discounts

(307)

(386)

Total allocated to Bank

$ 43,841

$ 46,293

Total SOMA securities bought outright were $456,667
million and $434,001 million at December 31, 1998 and
1997, respectively.
The maturities of U.S. government and federal agency
securities bought outright, which were allocated to the
Bank at December 31, 1998, were as follows (in millions):
Par Value

Cost of Unreimbursed Treasury Services
The Bank is required by the Federal Reserve Act to
ser ve as fiscal agent and depositor y of the United
States. By statute, the Depar tment of the Treasur y is
permitted, but not required, to pay for these ser vices.
The costs of providing fiscal agency and depository services to the Treasur y Department that have been billed
but will not be paid are repor ted as the “Cost of unreimbursed Treasur y ser vices.”

Maturities
of Securities
Held

U.S.
Government
Securities

Within 15 days
16 days to 90 days

k. Taxes
The Reser ve Banks are exempt from federal, state,
and local taxes, except for taxes on real proper ty, which
are reported as a component of “Occupancy expense.”

111

Federal
Agency
Obligations
$

–

Total
$

111

9,517

9,519

91 days to 1 year

13,789

13,796

Over 1 year to 5 years

10,348

10,342

Over 5 years to
10 years

4,303

4,320

Over 10 years

5,345

–

5,345

$ 43,439

Total

$ 43,407

At December 31, 1998, and 1997, matched salepurchase transactions involving U.S. government securities
with par values of $20,927 million and $17,027 million,
respectively, were outstanding, of which $2,009 million
and $1,816 million respectively, were allocated to the
Bank. Matched sale-purchase transactions are generally
overnight arrangements.

4. U.S. Government and Federal Agency Securities
Securities bought outright and held under agreements
to resell are held in the SOMA at the FRBNY. An undivided interest in SOMA activity, with the exception of securities held under agreements to resell and the related
premiums, discounts and income, is allocated to each
Reser ve Bank on a percentage basis derived from an
annual settlement of interdistrict clearings. The settlement, per formed in April of each year, equalizes Reser ve
Bank gold certificate holdings to Federal Reser ve notes
outstanding. The Bank’s allocated share of SOMA balances was approximately 9.600% and 10.666% at December
31, 1998 and 1997, respectively.

5. Investments Denominated in Foreign Currencies
The FRBNY, on behalf of the Reser ve Banks, holds
foreign currency deposits with foreign central banks and the
Bank for International Settlements and invests in foreign
government debt instruments. Foreign government debt
instruments held include both securities bought outright
and securities held under agreements to resell. These
investments are guaranteed as to principal and interest by
the foreign governments.

Notes to Financial Statements
6. Bank Premises and Equipment
A summar y of bank premises and equipment at
December 31 is as follows (in millions):

5. Investments Denominated…, continued

Each Reserve Bank is allocated a share of foreigncurrency-denominated assets, the related interest income,
and realized and unrealized foreign currency gains and
losses, with the exception of unrealized gains and losses on
F/X swaps and warehousing transactions. This allocation
is based on the ratio of each Reserve Bank’s capital and
surplus to aggregate capital and surplus at the preceding
December 31. The Bank’s allocated share of investments
denominated in foreign currencies was approximately
9.660% and 11.667% at December 31, 1998 and 1997,
respectively.
The Bank’s allocated share of investments denominated
in foreign currencies, valued at current exchange rates at
December 31, were as follows (in millions):
1998

1998
Bank premises and equipment:
Land

Government debt instruments
including agreements to resell

1,010

Building machinery & equipment

229

Government debt instruments
including agreements to resell
Accrued interest
$

Furniture and equipment

100

141

(96)
$

599

572

10
$

44
$

Bank premises and equipment
Accumulated depreciation

3
(1)

Capitalized leases, net

1999

2000

2001

2002

2003

Thereafter

5
$

$ 1,819

Over 5 years to 10 years

1997

The Bank leases unused space to outside tenants.
Those leases have terms ranging from 1 to 13 years. Rental
income from such leases was $2 million for each of the
years ended December 31, 1998 and 1997. Future minimum lease payments under agreements in existence at
December 31, 1998, were (in millions):

1,989

Maturities of Investments
Denominated in Foreign Currencies
48

143

375
67

Over 1 year to 5 years

239

Depreciation expense was $15 million for each of the
years ended December 31, 1998 and 1997.
Bank premises and equipment at December 31 include
the following amounts for leases that have been capitalized
(in millions):

Total investments denominated in foreign currencies
were $19,769 million and $17,046 million at December
31, 1998 and 1997, respectively, which include $15
million and $3 million in unearned interest for 1998 and
1997 respectively, collected on cer tain foreign currency
holdings that are allocated solely to the FRBNY.
The maturities of investments denominated in foreign
currencies which were allocated to the Bank at December
31, 1998, were as follows (in millions):

Total

250
(109)

Bank premises and equipment, net $

965

1,911

6
122

1998

Foreign currency deposits

Within 1 year

Japanese Yen:

Total

6
125

Construction in progress

Accumulated depreciation

1997
$

Buildings

German Marks:
Foreign currency deposits

1997

7. Commitments and Contingencies
At December 31, 1998, the Bank was obligated under
noncancelable leases for premises and equipment with terms
ranging from 1 to approximately 8 years. These leases provide
for increased rentals based upon increases in real estate
taxes, operating costs or selected price indices.

1,911

At December 31, 1998 and 1997, there were no open
foreign exchange contracts or outstanding F/X swaps.
At December 31, 1998 and 1997, the warehousing
facility was $5,000 million, with zero outstanding.

Notes to Financial Statements
8. Retirement and Thrift Plans
Retirement Plans
The Bank currently offers two defined benefit retirement plans to its employees, based on length of service
and level of compensation. Substantially all of the Bank’s
employees participate in the Retirement Plan for Employees
of the Federal Reser ve System (“System Plan”) and the
Benefit Equalization Retirement Plan (“BEP”). The System
Plan is a multi-employer plan with contributions fully funded
by par ticipating employers. No separate accounting is
maintained of assets contributed by the par ticipating
employers. The Bank’s projected benefit obligation and net
pension costs for the BEP at December 31, 1998 and
1997, and for the years then ended, are not material.

7. Commitments and Contingencies, continued

Rental expense under operating leases for cer tain
operating facilities, warehouses, and data processing and
office equipment (including taxes, insurance and maintenance when included in rent), net of sublease rentals, was
$2.3 million and $2.2 million for the years ended December
31, 1998 and 1997, respectively. Certain of the Bank’s
leases have options to renew.
Future minimum rental payments under noncancelable
operating leases and capital leases, net of sublease rentals,
with terms of one year or more, at December 31, 1998,
were (in thousands):
Operating

Capital

1999

$ 1,303

2000

1,073

175

2001

847

175

2002

561

175

2003

375

Thereafter

998
$

175

Thrift plan
Employees of the Bank may also par ticipate in the
defined contribution Thrift Plan for Employees of the Federal
Reser ve System (“Thrift Plan”). The Bank’s Thrift Plan contributions totaled $4.0 million and $3.9 million for the years
ended December 31, 1998 and 1997, respectively, and are
reported as a component of “Salaries and other benefits.”

–

5,157

729

Amount representing interest
Present value of net minimum lease payments

(115)
614

9. Postretirement Benefits Other Than Pensions and
Postemployment Benefits
Postretirement benefits other than pensions
In addition to the Bank’s retirement plans, employees
who have met certain age and length of service requirements
are eligible for both medical benefits and life insurance
coverage during retirement.
The Bank funds benefits payable under the medical
and life insurance plans as due and, accordingly, has no
plan assets. Net postretirement benefit cost is actuarially
determined using a Januar y 1 measurement date.
Following is a reconciliation of beginning and ending
balances of the benefit obligation (in millions):

At December 31, 1998, the Bank had no other material
commitments or long-term obligations in excess of one
year outstanding.
Under the Insurance Agreement of the Federal Reserve
Banks dated as of June 7, 1994, each of the Reserve
Banks has agreed to bear, on a per incident basis, a pro
rata share of losses in excess of 1% of the capital of the
claiming Reser ve Bank, up to 50% of the total capital and
surplus of all Reserve Banks. Losses are borne in the ratio
that a Reserve Bank’s capital bears to the total capital of
all Reserve Banks at the beginning of the calendar year in
which the loss is shared. No claims were outstanding
under such agreement at December 31, 1998 or 1997.
The Bank is involved in cer tain legal actions and claims
arising in the ordinary course of business. Although it is
difficult to predict the ultimate outcome of these actions, in
management’s opinion, based on discussions with counsel,
the aforementioned litigation and claims will be resolved
without material adverse effect on the financial position
or results of operations of the Bank.

1998
Accumulated postretirement
benefit obligation at Januar y 1

63.3

60.9

Service cost-benefits earned
during the period

1.4

Interest cost of accumulated
benefit obligation

4.5

4.3

Actuarial loss (gain)

8.4

(0.3)

1.3

Contributions by plan participants

0.3

Benefits paid

(3.3)

(3.2)

Accumulated postretirement
benefit obligation at Dec. 31

1997

74.6

63.3

Notes to Financial Statements
The following is a summary of the components of net
periodic postretirement benefit cost for the years ended
December 31 (in millions):

9. Postretirement Benefits…, continued

Following is a reconciliation of the beginning and ending
balance of the plan assets, the unfunded postretirement
benefit obligation, and the accrued postretirement benefit
cost (in millions):
1998
Fair value of plan assets
at January 1

1998
Service cost-benefits earned
during the period

0.0

Amortization of prior service cost

Contributions by the employer

3.0

2.9

Contributions by plan participants

0.3

Net periodic postretirement
benefit cost

(3.3)

(3.2)

Benefits paid

0.0

Fair value of plan assets
at December 31

0.0

Unfunded postretirement
benefit obligation

74.6

63.3

Unrecognized prior service cost

8.9

9.9

Unrecognized net actuarial (loss)

(12.8)

(4.4)

Accrued postretirement
benefit cost

70.7

Discount rate

6.25%

7.00%

For measurement purposes, an 8.5% annual rate of
increase in the cost of covered health care benefits was
assumed for 1999. Ultimately, the health care cost trend
rate is expected to decrease gradually to 4.75% by 2006,
and remain at that level thereafter.
Assumed health care cost trend rates have a significant
effect on the amounts reported for health care plans. A one
percentage point change in assumed health care cost trend
rates would have the following effects for the year ended
December 31, 1998 (in millions):
1 Percentage 1 Percentage
Point Increase Point Decrease

Effect on aggregate of ser vice
and interest cost components
of net periodic postretirement
benefit cost
Effect on accumulated
postretirement benefit obligation

1.0
11.8

1.3

4.4

4.3

(0.9)

4.9

4.7

Postemployment benefits:
The Bank offers benefits to former or inactive employees.
Postemployment benefit costs are actuarially determined and
include the cost of medical and dental insurance, survivor
income, and disability benefits. Costs were projected using
the same discount rate and health care trend rates as were
used for projecting postretirement costs. The accrued
postemployment benefit costs recognized by the Bank at
December 31, 1998 and 1997, were $8.5 million and $7.4
million, respectively. This cost is included as a component
of “Accrued benefit cost.” Net periodic postemployment
benefit costs included in 1998 and 1997 operating expenses
were $1.9 million and $1.6 million, respectively.

Accrued postretirement benefit cost is repor ted as a
component of “Accrued benefit cost.”
The weighted-average assumption used in developing
the postretirement benefit obligation as of December 31
is as follows:
1997

1.4

Net periodic postretirement benefit cost is reported as
a component of “Salaries and other benefits.”

68.8

1998

Interest cost of accumulated
benefit obligation

1997

(1.1)
(12.2)

Head Office
230 South LaSalle Street
P.O. Box 834
Chicago, Illinois 60690-0834
312-322-5322
Detroit Branch
160 West For t Street
P.O. Box 1059
Detroit, Michigan 48231-1059
313-961-6880
Des Moines Office
2200 Rittenhouse Street
Suite 150
Des Moines, Iowa 50321
515-256-6100
Indianapolis Office
8311 North Perimeter Road
Indianapolis, Indiana 46241
317-244-7744
Milwaukee Office
304 East State Street
P.O. Box 361
Milwaukee, Wisconsin 53201-0361
414-276-2323
Peoria Facility
6100 West Dirksen Parkway
Peoria, Illinois 61607
309-633-5000

For additional copies of this annual repor t contact the
Public Information Center, Federal Reser ve Bank of Chicago,
at 312-322-5111 or access the Bank’s Internet home page
at http://www.frbchi.org.

Full text of Annual Report of the Federal Reserve Bank of Chicago : 1998 Annual Report : A World of Choices: Are We Better off With International Trade?

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