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A n n u a l R epo r t
20 08

www.clevelandfed.org

FEDERAL RESERVE BANK of CLEVELAND

The Federal Reserve System is responsible for formulating and
implementing U.S. monetary policy. It also supervises banks and bank
holding companies and provides ﬁnancial services to depository
institutions and the federal government.
The Federal Reserve Bank of Cleveland is one of 12 regional Reserve
Banks in the United States that, together with the Board of Governors
in Washington DC, comprise the Federal Reserve System.
The Federal Reserve Bank of Cleveland, including its branch ofﬁces in
Cincinnati and Pittsburgh, serves the Fourth Federal Reserve District
(Ohio, western Pennsylvania, the northern panhandle of West Virginia,
and eastern Kentucky).

www.clevelandfed.org

It is the policy of the Federal Reserve Bank of Cleveland to provide equal
employment opportunity for all employees and applicants without regard
to race, color, religion, sex, national origin, age, or disability.

Cleveland:

Cincinnati:

Pittsburgh:

1455 East Sixth Street
Cleveland, OH 44114
216.579.2000

150 East Fourth Street
Cincinnati, OH 45202
513.721.4787

717 Grant Street
Pittsburgh, PA 15129
412.261.7800

C o n te n t s

President’s Foreword

Dedication

Breaking the Housing Cycle Crisis

2008 Operational Highlights

Statement of Auditor Independence

Management’s Report on Internal Control Over Financial Reporting

Report of Independent Auditors

Comparative Financial Statements

Notes to Financial Statements

Ofﬁcers and Consultants

Boards of Directors:
Cleveland

Cincinnati

Pittsburgh

Business Advisory Councils

Consumer Advisory Council

Sandra Pianalto, president and chief executive ofﬁcer;
Alfred M. Rankin Jr., deputy chairman; and
Tanny B. Crane, chairwoman.

President’s Foreword

The financial crisis and its sweeping effects on the economy have presented the Federal Reserve
System with unique and historic challenges. As a voting member of the Federal Open Market
Committee in 2008, I was privileged to contribute to the innovative and unprecedented actions
taken to respond to rapidly deteriorating market conditions and to promote an economic
recovery. Unfortunately, the need for these efforts continues.
■■■
Within the Fourth Federal Reserve District, the Federal Reserve Bank of Cleveland maintained
highly attentive regulatory oversight of financial institutions in 2008 and provided research that
informed our perspectives on the most pressing public policy issues. Regional outreach activities
focused on opportunities to gain firsthand insights on economic and financial conditions.
The Bank also continued to maintain the highest levels of efficiency and effectiveness in our
operations while providing leadership to Federal Reserve System and U.S. Treasury strategic
objectives. All of these efforts are outlined in the Operational Highlights section of this report,
beginning on page 22.
■■■
Unusual circumstances call for unusual responses. In addition to the need for innovative thinking
about monetary policy, the Bank began to address the rise of home mortgage foreclosures and
the collapse of housing markets within the Fourth District from a new perspective. We drew on
the knowledge of our management and staff in the Research, Supervision and Regulation, Policy
Analysis, Community Development, and Legal functions to assess the housing situation both
nationally and regionally. Working together, these experts analyzed the underlying dynamics and
evaluated potential solutions in real time as the crisis unfolded.
This year’s Annual Report essay contains some of the fruits of these efforts. We conclude that the
housing market collapse must be viewed as the result of a destructive cycle, and that remedies
must be targeted to address multiple points of market dysfunction. We pay particular attention to
policies that may be appropriate in relatively weak housing markets. Simple, one-size-fits-all, or
short-term solutions will not get the job done and will not restore health to this important sector
of the economy. Despite the magnitude of the challenge, however, we express optimism about
the steps now being taken to address the situation.

Federal Reserve Bank of Cleveland

The recession that began in late 2007 has broadened and deepened, leading to the greatest
financial stress our economy has seen since the 1930s. Many borrowers are still finding it difficult
to obtain access to credit under terms and conditions they would find in healthier times. For
consumers, the loss of wealth from the collapse of housing and equity prices has been staggering.
In 2008, the net worth of U.S. households declined by 18 percent, or by more than $11 trillion—
which amounts to nearly a year’s worth of U.S. gross domestic product.

Also helping us to navigate through turbulent economic times in 2008 were our Bank’s boards
of directors and advisory councils in Cleveland, Pittsburgh, and Cincinnati. I am indebted to
them for their dedicated service.

2008 Annual Report

First, I thank Benedict (Bick) Weissenrieder, chairman and CEO of Hocking Valley Bank in
Athens, Ohio, who is retiring after eight years of service, first on the Cincinnati Board of
Directors and then as a Cleveland director since 2003. Bick has participated on three committees, including serving as chairman of the Operations Committee for the past three years. His
many contributions, wise counsel, and unfailing support have been invaluable to our Bank.
I also thank Georgiana Riley, president and CEO of TIGG Corporation in Oakdale, Pennsylvania, who is retiring from our Pittsburgh Board of Directors after two three-year terms. Our
Bank has greatly valued her business insights and guidance.
Thanks also go to two retiring members of our Cincinnati Board of Directors. Glenn Leveridge,
president of the Winchester Market of the Central Bank and Trust Company in Lexington,
Kentucky, served for six years. We thank Glenn for his dedicated service and leadership. In
addition, Charlotte Martin, president and CEO of Great Lakes Bankers Bank in Gahanna,
Ohio, retired from the Cincinnati Board after six years. I thank Charlotte for her service to date,
and I am pleased that she has been elected to serve on the Cleveland Board beginning in 2009.
Finally, I thank Henry L. Meyer III, chairman and CEO of KeyCorp in Cleveland, who served
as our Bank’s representative on the Federal Advisory Council in 2008 and will continue in that
capacity for the coming year. We are grateful beneficiaries of Henry’s strong leadership in this
important role.
■■■
The challenges that the Federal Reserve Bank of Cleveland faced in 2008 were also very personal. In January, we learned that R. Chris Moore, our beloved first vice president, was battling
a rare and systemic form of cancer. Throughout the year, we witnessed Chris’s extraordinary
courage and determination as he fought to regain his health while maintaining a full work
schedule. Sadly, we lost Chris on February 20, 2009. This Annual Report is dedicated to his
memory.
The 1,400 employees at the Cleveland, Cincinnati, and Pittsburgh offices brought a full measure
of support and dedication to ensure the Bank’s success during this extraordinary and demanding
year. Our officers and staff continue to work tirelessly to advance our strategic objectives of
leadership in thought and deed, external focus, and operational excellence. I extend my heartiest
thanks for their commitment to the Federal Reserve Bank of Cleveland and, more broadly, to our
nation’s financial system.

Sandra Pianalto
President and Chief Executive Officer

This Annual Report is dedicated to a strong and vibrant leader at the Federal
Reserve Bank of Cleveland who left us far too soon: First Vice President and Chief
Operating Officer R. Chris Moore. Chris passed away on February 20, 2009,
at age 53 following a valiant battle with cancer.
DEDICATION

First Vice President
and Chief Operating Officer

Chris joined the Bank in 1977 as an assistant examiner in the Supervision and
Regulation Department. He was appointed vice president in 1988, and in 1996,
he was appointed senior vice president in charge of the Bank’s Supervision and
Regulation, Data Services, and Credit Risk Management departments. He was
appointed first vice president in March 2003.
As first vice president and chief operating officer, Chris oversaw the Bank’s financial
services, including cash processing, check clearing, electronic payments, and savings
bond processing, as well as related support functions, such as information technology
services, financial management, human resources, protection, and facilities. He also
led the Bank’s culture change efforts.
Chris also served the Federal Reserve System in many leadership positions. Most
recently, he was the vice chairman of the Federal Reserve System’s Conference of
First Vice Presidents and a member of the Conference of Presidents’ Committee on
Credit and Risk Management.
“Chris was a huge contributor and popular leader,” says President and CEO Sandra
Pianalto. “We will deeply miss his wonderful blend of wisdom and humor. His many
contributions to this Bank and to the Federal Reserve System helped forge our past
successes, and his presence in our midst will be sorely missed.”
A native of Cleveland, Ohio, Chris earned a BBA in finance from Southern
Methodist University in Dallas, Texas, and an MBA in banking and finance from
the Weatherhead School of Management at Case Western Reserve University
in Cleveland.
An avid curler, Chris competed at the national level and in the trials for the 1992,
1998, and 2002 Olympic Games. He was also a director and, most recently, president
of the United States Curling Association.

Federal Reserve Bank of Cleveland

R. CHRIS MOORE

Since 2006, the U.S. housing markets have struggled, and
Americans have been losing their homes at extraordinary rates.
New foreclosures in Ohio alone during the past three years
total 170,000—almost as many housing units as in the entire
city of Cleveland. The institutions, market forces, and nonprofit
community groups that normally come to the rescue of
distressed homeowners and their neighborhoods have been
overwhelmed with the growing scope of the problem.
No longer is the housing crisis limited to the borrowers or
lenders who simply made poor choices—the uncertainty is
affecting nearly everyone. From families who have been uprooted
from their homes to fiscally sound homeowners who have
nonetheless witnessed their property values plunge, the housing
market collapse has eroded what for many of us was a hardwon sense of financial security. Indeed, according to statistics
compiled in the Federal Reserve Flow of Funds Accounts, the
net worth of American households fell by $4.2 trillion between
the end of 2006 and the end of 2008 as a result of changing
fortunes in the residential real estate market.

THE FOCUS IN 2009 AND
BEYOND MUST BE ON REPAIR
AND RECOVERY.

How do we restore vitality to our housing markets and, by extension,
to our communities? In this essay, we depict the housing crisis as the
product of a destructive cycle that feeds on itself—from delinquencies
to foreclosures to capital losses and back to more delinquencies. Thinking about the housing crisis in the form of a simple, self-feeding circle
can help identify the most effective policy responses to weaken specific
links in the cycle. In our view, the housing market became engulfed
in crisis because several distinct elements of the marketplace failed in
ways that made the decline worse. To restore stability to the housing
market, we see the need for a set of coordinated policies that attack the
problem at multiple points on the cycle.
Our analysis of the housing crisis leads us to three main conclusions.
First, the magnitude of the crisis calls for the creation of new government initiatives to help steady the housing market and the provision
of public funds to assist some distressed homeowners. Second, to deal
with the fundamental problems in the marketplace, we need to craft
solutions that are likely to be sustainable over the long term. Finally,
national policymakers and regional civic leaders must be aggressive
in working collaboratively because no two housing markets are exactly
alike, even as we use an all-encompassing framework to describe
the housing crisis cycle. For example, in the Fourth Federal Reserve
District, which comprises Ohio and parts of Pennsylvania, Kentucky,
and West Virginia, policies will need to be tailored to the weak-market
conditions that prevail here.
The essay begins with a concise overview of the housing boom and
bust. We briefly sketch out recent developments in the mortgage
lending market and then describe the geographic diversity of housing
dynamics in the country. Next we explain why the housing market’s
usual balancing forces failed in this cycle, with devastating consequences. We conclude by discussing some of the potential responses
to the current situation and our view of the steps being taken to date.
Of course, political and logistical realities mean it will take some time
and patience to break the housing crisis cycle.

Federal Reserve Bank of Cleveland

Figure 1. Mortgage Securitization 1994–2007

To fully understand the housing crisis, we
must first understand the national lending
boom that preceded it. Between 1990 and
2006, mortgage originations more than
tripled in value in the United States. Huge
gains were seen everywhere from California
to Ohio to New York. It was an out-and-out
lending boom, largely attributable to two
developments—a long-term, low-interest-rate
environment, and financial innovation.

Billions of dollars

Also at work was a revolution in consumer
finance, thanks to technological and statistical
innovations in the 1990s. Credit was extended
to a broader pool of applicants. Among the
new mortgage offerings were interest-only
loans and small- or zero-down-payment
loans. This activity was largely fueled by
securitization—the process by which different parties originate, package, guarantee,
and service loans. Investment banks pooled
mortgages and sold them as mortgagebacked securities. In principle, securitization
should help financial institutions share their
risk with other institutions around the globe
and hold more diversified portfolios. As long
as borrowers do not default at the same time,
risks can be reduced and everyone benefits
(see figure 1).

3,000

2,500

2,000

1,500

1,000

500

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

0
1995

For a period in the early 1980s—leading up
to the time known as the “great disinflation”—
the real 30-year mortgage rate topped
9 percent. But the low and stable interest
rate environment over the past two decades
helped bring lower mortgage rates as well. By
2005, the real industry benchmark rate had
fallen to less than 2.5 percent. This low rate,
in turn, stimulated demand for housing by
making mortgage payments more affordable.
At the same time, real estate was seen as a
safe and financially rewarding investment.

•Total Securities Volume
•Subprime Volume

1994

2008 Annual Report

The Problem in Snapshot

Source: Mortgage Market Statistical Annual, 2008.

What Is a Subprime Loan?
Deﬁnitions vary for what constitutes a “subprime” loan. In this essay, we use it
to refer to loans that are expected to perform more poorly than prime loans.
In general, subprime borrowers have blemished credit histories and pose
greater repayment risks. A typical subprime mortgage is offered at rates more
than 2 or 3 percentage points higher than a conventional 30-year loan.

A loan may also fall into the subprime category if it is originated by a lender
that specializes in such loans or if it is available only in subprime-type contract
terms, such as a 2/28 hybrid mortgage, in which the ﬁxed rate resets after
two years to an index rate. Within the nonprime category are so-called Alt-A
loans, a credit risk somewhere between prime and subprime.

Percent change, year over year
40

•Ohio
•Kentucky
•Pennsylvania
•West Virginia
•Nevada
•Arizona

–20
1998: Q1

2000: Q1

2002: Q1

2004: Q1

2006: Q1

2008: Q1

Note: Each dot represents one of the 50 states.
Source: Federal Home Financing Agency.

Then problems surfaced in the subprime
market. The rate of serious delinquency
(payments at least two months past due)
for securitized subprime mortgages at least
12 months old more than tripled between
2003 and 2007—to the point that almost one
in every five subprime loans at least a year
old was not performing. Although subprime
loans account for only 12 percent of the
home mortgage loan market, fully half of all
U.S. foreclosure starts at the end of March
2008 involved subprime loans, according to
the Mortgage Bankers Association.

Figure 3. U.S. Foreclosure Start Rates
Percent change, year over year
2.5

2.0

•Ohio
•Kentucky
•Pennsylvania
•West Virginia
•Nevada
•Florida

1.5

1.0

0.5

0
1998: Q1

2000: Q1

2002: Q1

Note: Each dot represents one of the 50 states.
Source: Mortgage Bankers Association.

1. Mayer, Pence, and Sherlund (2008).
2. Demyanyk and Van Hemert (2008).

2004: Q1

Investors, lenders, brokers, and borrowers all
reaped some benefits from securitization, at
least in the short run. Securitization of mortgage loans had the most profound impact on
subprime borrowers, as increases in securitization coincided with increases in subprime
mortgage lending. Such loans carried the
possibility of higher returns to investors and
were often arranged by largely unregulated
mortgage brokers. In a time of rising home
prices, concerns about repayments were
secondary because most people expected
that even the riskiest subprime mortgages
contained an implicit escape clause: that the
value of the underlying asset—the house—
would remain strong. As more and more
mortgages were originated, underwriting
standards began to slip.1 The initial deterioration in loan quality was masked by rising
house prices.2 Even the riskiest loans did
not result in losses, since the underlying
properties were still worth more than the
loans themselves.

2006: Q1

2008: Q1

In the Fourth Federal Reserve District,
the timing of the boom and bust played
out somewhat differently than in most
parts of the country. Fourth District states
participated fully in the lending boom, but
they were largely bystanders to the housing
boom (see figure 2). From 1998 through
2008, home prices were relatively flat in Ohio,
Kentucky, Pennsylvania, and West Virginia
compared with national trends. But in Ohio,
elevated rates of foreclosure starts were
evident as early as 2000, well before the
national housing bust began (see figure 3).

Federal Reserve Bank of Cleveland

Figure 2. U.S. Home Price Appreciation

2008 Annual Report

What sets Ohio apart from the national housing market?
In general, differences in regional home prices are a function of population change, land availability, the regulatory
environment, and overall economic conditions. The way
mortgage markets were regulated may have played an
important role in the Fourth District's experience, and it is
quite clear that population change and economic conditions were important.3 Unemployment was a problem in
many parts of Ohio well before the current recession,
and the ongoing flight of manufacturing jobs led to an
accompanying population flight. Cuyahoga County, which
encompasses Cleveland, has lost almost 7 percent of its
population—nearly 100,000 people—since 2000, the
steepest decline in the state and among the steepest in
the nation.
The same counties that endured significant unemployment
and population loss also suffered some of the highest foreclosure rates. Moreover, in these struggling counties, high
percentages of borrowers held subprime mortgage loans.4
Some of the highest foreclosure rates are seen in Northeast
Ohio, around the cities of Cleveland and Youngstown. In
Cuyahoga County, for example, almost 3 percent of prime
mortgages and nearly 14 percent of subprime mortgages
were in foreclosure at the end of 2008, according to figures
provided by LPS Applied Analytics.5

Figure 5. Prime Foreclosure Rates in the Fourth District

By comparison, the national foreclosure rate for prime
mortgage loans was 1 percent at the end of December, and
8.8 percent for subprime loans (see figures 4, 5, and 6).
One might think that the effects of the mortgage crisis
are being inflicted exclusively on the subprime borrowers
and lenders who entered into flawed contracts in the first
place. Not so. Researchers have found that foreclosures
can have serious spillover effects—decreasing the values
of neighboring houses, incurring costs to governments,6
and leading to increased crime.7 Troubled housing
markets put prices under downward pressure, which can
lead to more foreclosures and even abandoned properties.

Figure 4. Five Highest Subprime Foreclosure Rates in
Large* Fourth District Counties
Percent

Mahoning (Youngstown)
Summit (Akron)
Cuyahoga (Cleveland)
Stark (Canton)
Montgomery (Dayton)
* Populations greater than 250,000.
Source: LPS Applied Analytics; as of December 2008.

Figure 6. Subprime Foreclosure Rates in the
Fourth District

Cleveland

Cleveland
Youngstown

Youngstown

Pittsburgh

Columbus

Cincinnati

Columbus

Greater than 2.19%
1.69%–2.18%
1.33%–1.68%
1.02%–1.32%
0.00%–1.01%

Cincinnati

Prime Foreclosure Rates by State
United States
1.0%
Kentucky
1.3%
Ohio
2.0%
Pennsylvania
1.0%
West Virginia
1.2%

5. The LPS Applied Analytics database is the
industry’s largest, including information from
seven of the 10 major servicers. It encompasses
federal and local foreclosure ﬁling information.

Greater than 9.60%
7.54%–9.59%
6.20%–7.53%
4.01%–6.19%
0.00%–4.00%
Less than 25 loans
Subprime Foreclosure Rates by State
United States
8.8%
Kentucky
8.1%
Ohio
10.7%
Pennsylvania
7.3%
West Virginia
7.5%

Note for ﬁgures 5 and 6: The distribution is broken down into quantiles, with each class containing an equal number of data points.
Source for ﬁgures 5 and 6: LPS Applied Analytics; as of December 2008.

3. Richter (2008).
4. Cooley (2008).

14.8
14.2
13.7
12.4
12.3

6. Agpar and Duda (2005).
7. Immergluck and Smith (2006).

The Housing Crisis Cycle
In normal housing markets, people enter and exit the
ranks of homeownership constantly, with minimal
negative consequences beyond the parties immediately
involved. Backstops exist at every step of the process to
help borrowers and to deal with vacated properties:

Foreclosures are expensive for lenders too. The cost of a typical
foreclosure to a lender is up to 25 percent of the loan balance.

In a 1998 study of home values in Cleveland, researchers
found that a 1 percent increase in tax delinquencies was
associated with a $788 decline in average sale prices
within a two-block area.8 A recent study on the Columbus
metro area revealed that foreclosures and abandonment
have ripple effects in their neighborhoods, negatively
affecting the sale prices of neighboring houses.9
The magnitude of the foreclosure spillover effect seems to
depend in part on the health of the local housing market.
In bust times, foreclosures have twice the effect on nearby
prices as they do during boom times.10 The effect is not as
strong in regions where labor markets have been robust or
where housing supply has not kept up with demand.11

NOT SO

Taken together, these studies strongly indicate that
foreclosures inflict a significant toll on their communities.
The implied social costs may justify government interventions to bolster demand for housing and limit foreclosures.
But will this be enough to stabilize the housing market?
Are we tackling independent problems or are they all
pieces of a bigger puzzle? To answer these questions, we
describe how the housing crisis has taken the form of a
self-feeding cycle. We then use this cycle as a framework
for assessing potential policy responses.

• Governments and private-sector lenders offer purchaseassistance programs for first-time homeowners, helping to
keep prices stable by creating demand to match the supply.
• Homebuilders slow the growth of the housing stock by
easing up on new developments.
• Lenders refinance or modify loans for some of the
relatively few borrowers faced with extreme mortgage
distress.
• If all else fails, government-operated land banks step in
to acquire abandoned properties. Cleveland’s pioneering
land bank was one of the first to deal with tax-delinquent
properties in this way. We will explain the function of
land banks in further detail later in this essay.
In weak markets, these backstops were already stretched
to their limits before the housing crisis hit. Since the crisis
began, many regions have been unable to beat back the
wave of properties heading quickly from delinquency to
abandonment. A natural recovery has become more difficult,
especially given the unlikely prospect of increased demand
for housing in areas with declining populations.
In fact, the shock has been so large and widespread that
our national housing market is currently trapped in a
cycle of deterioration. As we see it, the cycle contains
six main components, each one leading to the next. In
the real world, these components may interact with each
other in ways that are much more complex than what our
illustration suggests (see figure 7). But even this simple
description of the housing crisis provides a framework for
understanding how the crisis builds on itself.

One might think that the effects of the mortgage crisis are being inflicted exclusively on the subprime
borrowers and lenders who entered into flawed contracts in the first place. Not so. Researchers have
found that foreclosures can have serious spillover effects—decreasing the values of neighboring
houses, incurring costs to governments, and leading to increased crime.

8. Simons, Quercia, and Maric (1998).
9. Mikelbank (2008).

10. Lin, Rosenblatt, and Yao (2009).
11. Been, Greene, and Schuetz (2007).

Federal Reserve Bank of Cleveland

• Lenders and community groups provide borrower
counseling, financial education, and foreclosure prevention programs, helping to slow the pace of defaults
(see “Foreclosure Prevention in Action,” p. 12).

Foreclosure Prevention in Action
For years, organizations in the Fourth District and nationwide have provided assistance to
homeowners in danger of foreclosure. The housing crisis has recently pushed many of these
organizations to a breaking point.

2008 Annual Report

At Neighborhood Housing Services (NHS) of Greater Cleveland, Executive Director Lou Tisler
recalls that 75 percent of his clients four years ago sought pre-homeownership counseling.
Today, 75 percent require foreclosure prevention assistance.

NHS is headquartered in Cleveland’s Slavic Village, where foreclosures are affecting as many
as one in four homes. “We’re at the epicenter of where it all started,” Tisler says. As before,
many of the agency’s applicants have recently suffered job loss or other shocks to their
incomes. Today, only about one out of every three applicants is accepted for mortgage
assistance funds. But of those who are accepted, only 1 percent default on their loans.
One of the longest-running foreclosure prevention efforts is administered by the Pennsylvania Housing Finance Agency (PHFA). The Homeowners’ Emergency Mortgage Assistance
Program, or HEMAP, launched in 1983 and has helped keep 42,000 families in their homes.
Funded by $234 million in government appropriations, the program has lent $430 million
over the years to borrowers who have experienced job loss, medical bills, and other shocks to
their incomes. It pays partial or full mortgage payments for up to 24 months or $60,000 in
assistance, whichever comes first. The idea is that the assistance will provide homeowners
time to get back on their feet with employment or health.
Applications have surged from about 8,000 in 2004 to more than 12,000 in 2008. “The
crisis is putting a strain on our program, which means we can approve fewer applications,”
says Brian Hudson, PHFA executive director. “It’s going to be a very challenging year.”

1. Lending and Housing Market Disruptions

Disruptions to Lending
and Housing Market
Entry and Exit
1

Defaults and
Delinquencies

Capital Losses
6

Home Price
Depreciation

Foreclosures

Our economy is trying to find its footing after
an extended period of credit misallocation.
In boom markets, home prices were bid up to
record levels. In weak markets, free-flowing
credit buttressed prices that otherwise would
have fallen given underlying economic conditions. When lending and housing markets
are disrupted, everyone tries to discover
what homes and mortgages are really worth.
The uncertainty makes mortgage lenders
and investors more cautious, so that many
prospective homebuyers can no longer get the
financing they need. Others put off purchases
until they can see some sign of stability.
Existing homeowners who can no longer keep
up with payments—perhaps because of job
loss—may wish to sell their homes but cannot
find buyers. Homeowners forced to move in
search of new work may keep their properties
on the market for a long time, waiting for the
market to recover.

In this way, disruptions to the lending and
housing markets spin in two directions:
to defaults and delinquencies, leading to
foreclosure, or to an oversupply of housing.

Oversupply of Housing

Figure 8: Seriously Delinquent Subprime Loans in the Fourth Districta
2001

2002

2003

2004

2005

2006

2007

Percent
20
18
16
14
12
10

2. Delinquencies and Defaults
The recent rash of delinquencies and
defaults was years in the making. Increasingly relaxed underwriting practices led to a
nosedive in mortgage loan performance by
2004. In Ohio, for example, 10 percent of all
subprime mortgages that year were seriously
delinquent (more than two months late)
within 12 months of origination. By 2007,
this delinquency rate approached 19 percent
(see figure 8).
In the past, borrowers and investors could
have counted on painless refinancings and
brisk housing markets to save troubled
mortgages from foreclosure. In this crisis,
those options are no longer available.

8
6
4
2
0
Kentucky

Ohio

Pennsylvania

a. By origination year, at the age of 12 months (60–plus day delinquent loans,
including foreclosures and real-estate-owned [REO] properties).
Source: Loan Performance.

West Virginia

Federal Reserve Bank of Cleveland

Figure 7: Cycle of Deterioration

3. Foreclosures
When the emergency exits of the housing market are
blocked, foreclosure is the last remaining option. By the
end of 2008, a record-setting 3.3 percent of U.S. mortgage loans were in foreclosure, according to the Mortgage
Bankers Association. For the year, an estimated 2.2 million
foreclosures were expected nationwide. Within certain
neighborhoods, foreclosures became even more rampant
and concentrated.

2008 Annual Report

Even though foreclosure starts seem to have peaked
recently, these numbers may underestimate the underlying
problem. Financial institutions and investors, overwhelmed
by foreclosure proceedings, are declaring a moratorium
on additional foreclosure filings. This situation creates a
misleading signal about the actual magnitude of loan
delinquencies and borrowers’ stress.

4. Oversupply of Housing
After foreclosure (or in some cases, direct disruptions to
the lending and housing markets), the next step on the
housing crisis cycle is an oversupply of houses on the
market. In some regions, the oversupply problem may
prove to be temporary. Vacant housing in healthier
markets will eventually be absorbed by growing populations as the economy rebounds. Economists refer to this
type of problem as “cyclical”—it can fix itself over time
even though the process may be slow and painful.
In weaker markets, long-abandoned properties have little
hope of finding new buyers because houses for sale do
not meet the needs and preferences of potential buyers.
The homes may reflect the tastes of many decades ago, or
may simply be too numerous given current and expected
population levels. This is the type of problem economists
call “structural”—it lies in the structure of the market itself,
and some policy action will be necessary to put the market
on a more sustainable path.
A different type of problem currently exists in all markets,
whether they are growing or declining—the uncertainty
about the path of future home prices. Economists refer to this
as a “frictional” problem. Lenders are worried and buyers are
timid, creating a friction that seizes up the process of moving
homes from sellers to buyers. Frictional problems may heal
on their own when prices reach a bottom, or some policy
assistance may be needed to speed up the adjustments.

5. Home Price Depreciation
When the oversupply of houses collides with a market
of buyers who have diminished expectations about the
future and reduced access to credit, the result is falling
home prices.
In some markets, depreciation motivated borrowers who
had bought homes as investments to unload them en masse,
which led to further depreciation. In other markets, like

When the oversupply of houses collides with a market of
buyers who have diminished expectations about the future
and reduced access to credit, the result is falling home
prices.

Cuyahoga County, depreciation revealed a market built on
shaky subprime mortgages. Now, foreclosures of homes
purchased with these subprime mortgages are spreading
across neighborhoods, further dragging down prices.
At worst, foreclosed homes become abandoned homes, and
blight ensues, promoting further abandonment. In a single
city block with even just a handful of abandoned homes—
the sort of blocks that are all too easy to find in parts of the
Fourth District—neighboring homeowners are faced with
strong economic incentives to walk away from their own
increasingly worthless houses.

6. Capital Losses
Saddled with foreclosed homes and depreciating mortgagebacked securities on their balance sheets, lenders take
steep losses. According to Bloomberg, banks and brokerages worldwide have sustained more than $935 billion
in credit losses so far in the crisis. The resulting hits to
capital, together with the difficulty of raising new equity
funds, have cut the bloodline of credit creation.
Capital is a cushion that financial institutions maintain to
absorb unexpected losses. As the cushion thins, financial
institutions reduce their lending and risk exposures so that
whatever is left of their capital will be enough to cover
potential losses.
This decline in lending creates another disruption to the
mortgage and housing markets. And so we return to the
beginning of the housing crisis cycle—further delinquencies,
foreclosures, oversupply of housing, home price declines,
and additional capital losses. It then becomes a destructive,
self-reinforcing cycle.

Potential Responses
Suppose we find a way to cure delinquencies and, thus,
new foreclosures. But if the housing inventory overhang
is not corrected, the uncertainty about home prices will
persist. Lenders will continue to be saddled with foreclosed properties, potential buyers will continue to sit on
the sidelines, and new delinquencies will arise as troubled
homeowners cannot exit the housing market. We are back
in the full cycle.

1. Loan Modiﬁcations
Foreclosures are expensive. The cost of a typical foreclosure to a lender is up to 25 percent of the loan balance.12
In times of falling prices, loan modifications look increasingly attractive to lenders, servicers, and investors—
not to mention defaulting borrowers. In our cycle, loan
modifications specifically target the links between market
disruptions, defaults, and foreclosures.

Alternatively, suppose we raze all excess housing supply and
prices are ready to recover. But unless we recapitalize our
financial system, new loans will not be forthcoming. Without
loans, new buyers cannot enter the housing market and
sellers cannot exit. We are back to the cycle with increasing
delinquencies, foreclosures, and vacant properties.

A loan modification is a permanent change in the terms
of a mortgage loan. Typically, the new terms—which may
include an extension of the maturity of the loan, forgiveness
or delay in the collection of missed payments, lowering of
interest rates, or the elimination of prepayment penalties—
make the mortgage more affordable for the borrower.

Unless we attack the cycle at multiple points, there is a
chance that our efforts will fall short. We also know that
some efforts will be more effective or necessary in some
regions of the country than others. Moreover, the wider
effects of the housing crisis compel us to undertake public
interventions aimed at stabilizing the housing market and
our neighborhoods (see “Federal Reserve Actions”).

However, securitization has made the loan modification
process more difficult and expensive than it was in earlier
decades. Loan servicers, for example, are contractually
required to allow a modification only if it is in the best
interest of investors. Defining “investors’ best interest” is
hardly straightforward. Some pooling contracts allow for
modifications only in the event of default and forbid proactive modifications of high-risk loans. Others may allow,
for example, only up to 5 percent of the loans in a pool to
undergo modifications each year.

In this section, we review proposals that address specific
points in the cycle and then consider whether they
together constitute a full-scale attack on the crisis.

Federal Reserve Actions
The Federal Reserve System has already undertaken a number of efforts to address the foreclosure crisis. First, we have asked
mortgage lenders and servicers to consider loan workouts in appropriate situations. Also, in partnership with the national nonproﬁt
NeighborWorks® America, we are developing programs to ease the problem of foreclosures and vacant properties.
In July 2008, the Federal Reserve acted to address unfair and deceptive mortgage lending with approval of a ﬁnal rule under the
Home Ownership and Equity Protection Act. More recently, we have sought public comment on revisions to the Truth in Lending
Act. Consumer protection is important, but it is not possible to ensure complete safety. The Federal Reserve’s job is to ensure as
much information and transparency as possible while restoring an appropriate appetite for risk.
To get credit markets functioning again, we have taken actions ranging from lowering the federal funds target rate to developing a set
of policy tools to support borrowers and investors in key markets. In March 2009, the Federal Reserve announced plans to purchase
up to $1.25 trillion of mortgage-backed securities from government-sponsored enterprises by the end of the year. This program in
particular is intended to improve the ﬂow of credit to homebuyers and to allow existing homeowners to reﬁnance at lower rates.

12. Mason (2007).

Federal Reserve Bank of Cleveland

2008 Annual Report

To understand why such severe restrictions were put in
place, consider the state of the housing market during the
boom. Any troubled borrower could try to refinance his
mortgage and lower his payments. Borrowers who did
not qualify for refinancing were most likely to be such
poor risks that most would not be helped by a modification; a foreclosure would be the most efficient outcome.
However, if servicers had unlimited power to modify
mortgages, they would have an incentive to modify every
loan and avoid foreclosure to maximize their compensation for loans serviced. To limit this type of behavior,
investors imposed heavy restrictions on the number of
modifications and, in most cases, provided no compensation to the servicer for the extra costs of modifying a
loan. With the expectation of relatively few foreclosures
and healthy housing markets, these contracts were
designed to favor foreclosures over modifications.
It is a different world today, but the old contracts are still
in force. Servicers and most investors would probably
prefer removing those restrictions and restoring some
cash flow from these loans to being stuck with unwanted
properties. However, some investors would likely be
disadvantaged by loan modifications. With millions of
mortgages and thousands of investors involved, obtaining
an agreement to modify the rules would be practically
impossible.

Allowing some people to continue living in their homes as
renters would help neighborhoods by keeping homes occupied
and avoiding vacancy and abandonment.

This type of coordination problem creates an opportunity for constructive policy action. First, servicers need
to receive compensation for loan modifications because
investors will not reimburse them for some of the costs.
Second, when loans are modified, some investors will
be forced to take losses. Currently, the threat of investor
litigation to prevent such losses tends to freeze any
modification effort in its tracks, or makes modifications
too superficial to help the borrower. Indeed, re-default
rates are high among modified loans: 46 percent of
U.S. borrowers whose mortgages were modified during
the second quarter of 2008 were delinquent after eight
months.13 Thus, a temporary shielding of servicers from
investor lawsuits may be necessary to get modifications
done right and on a large scale. Third, removing restrictions on servicers brings us back to the original problem
of too many modifications at investors’ expense. Policymakers must put a mechanism in place that rewards
successful modifications. One such program announced
by the Treasury would pay $1,000 per year for three years
to servicers for each modified mortgage that remains
current in that period. While we cannot conclude that
this policy is the only way or the best way to incentivize
servicers, it is likely to be helpful.
Land banks are government entities that can acquire distressed
properties, clear title defects, and convert the properties to
alternative uses.
13. Ofﬁce of the Comptroller of the Currency and Ofﬁce of Thrift Supervision (2009).

Hiring a team of expert, certiﬁed inspectors to check
code compliance one property at a time is expensive.
So last year, the Cleveland Neighborhood Development
Coalition, the nonproﬁt umbrella group for the city’s
community development corporations (CDCs), partnered
with the city’s Department of Building and Housing to
create a new code enforcement program.
Now, city code enforcement staff work in tandem with
about 20 participating CDCs. The city diverts routine
complaints to the CDCs for screening. In neighborhoods,
CDCs have developed a “good cop” reputation that
helps ensure that properties are maintained. Meanwhile,
city inspectors are free to handle and follow up on more
serious cases.
“It works really well,” says Cleveland Councilman Jay
Westbrook. “I think of it in public health terms. The
mortgage crisis is an epidemic, and code enforcement
is your frontline defense. It’s your country doctors—your
general practitioners on the frontlines—who are detecting
the disease and triaging the treatments.”

2. Converting Owners to Renters
While loan modifications may succeed at severing the
link between market disruptions and delinquencies
and foreclosures, in many weak markets of the Fourth
District, we are still left with a large inventory of vacant
housing units.
In growing communities, one way to deal with the inventory problem is to convert existing vacant units into
rental properties. In calmer times, private investors would
purchase vacant units and make the changes themselves
given the opportunity for profit. However, these are not
calm times, and the inventory is massive. The first investor
to attempt such conversions will test the survivability of
a neighborhood—but followers will come only if the first
succeeds. Therefore, policymakers may find it necessary
to subsidize the first movers.
An alternative policy would be to allow some people to
continue living in their homes as renters. Some former
homeowners may have the option of buying back the
property in the future. For example, Fannie Mae and
Freddie Mac recently announced that renters of foreclosed
properties and some owners will be allowed to remain in
their houses as renters on month-to-month leases. This
policy would help neighborhoods by keeping homes
occupied and avoiding vacancy and abandonment. To
be clear, some rent-to-own programs are little more than
investment scams that do little good in neighborhoods.
By contrast, well-established community development
corporations have a history of reliably managing such
programs and might be useful resources in future efforts
on this front.

As an approach to preventing vacancy and abandonment,
code enforcement—compelling property owners to maintain
their properties—may be among the most effective.

Federal Reserve Bank of Cleveland

A Unique Partnership

2008 Annual Report

3. The Land Bank Approach

4. Code Enforcement

Dealing with the oversupply problem in weak-market
areas may require further government involvement such
as land banks. Given that the housing stock is larger than
the population in some Fourth District counties, for
example, there is no profit in conversion to rental use.
Therefore, some vacant and abandoned properties must
be repaired and sold (or rented) if there is still value left
in the neighborhood; others may need to be demolished.

As an approach to preventing vacancy and abandonment,
code enforcement—compelling property owners to maintain their properties—may be among the most effective. The
“broken window” theory tells us that damaged properties
can lead to further deterioration on their streets, ultimately
spurring a spiral of disinvestment. Code enforcement can
weaken the link between housing oversupply and home
price depreciation.

The costs of dealing with vacant and abandoned properties fall mainly to local governments, which are often unable
to break the cycle of foreclosure to abandonment to blight.
They are thwarted by heavy costs, the lack of a timely legal
mechanism to acquire properties, liability concerns, and no
overarching strategy to address the problem at a regional
level. Land banks provide that mechanism.

The devil, of course, is in the details. Often, the data sources
that local governments use to track the condition, ownership, and legal status of distressed or abandoned properties
are fragmented and inaccurate.15 Local governments spend
large amounts of time and money to locate and serve
notices of code violations, search warrants, demolition
notices, nuisance abatement assessments, or legal actions.
In addition, there can be delays in the recording of deeds on
properties, or assignments and transfers of liens.

At their simplest, land banks are government entities that
can acquire distressed properties, clear title defects, and
convert the properties to alternative uses. All of these
tools require legislation to award government entities with
appropriate powers.
Ohio’s recently adopted land bank legislation, which
applies to Cuyahoga County over two years, aims to give
such entities the powers they need to address vacant and
abandoned housing on a regional basis.14 These powers
include streamlining the property acquisition process
via tax foreclosure; securing funding sources without
creating new taxes; and providing the ability to organize
as corporations that are legally distinct from local
governments. Among other benefits, the new Ohio rules
help land banks act as repositories for data, allowing for
region-by-region evaluation of the vacant and abandoned
housing problem. In addition, the time it takes for Ohio
land banks to acquire vacant properties should shorten,
which in turn should speed the properties’ return to real
property tax rolls if possible.
The land bank system has its own pitfalls, however. In
the rush to help people in need, it is easy to lose sight of
which neighborhoods are viable and which are not. A
land bank that renovates homes in an otherwise blighted
area is unlikely to promote wider revitalization. The home
may very quickly be abandoned anew, if foreclosures and
abandoned properties are growing much faster than the
land bank can fix and use them. Therefore, a transparent
and accountable triage process is necessary to identify
the neighborhoods that can benefit from a land bank’s
involvement. If the new Ohio land bank legislation can be
measured as effective in Cuyahoga County, a statewide
and permanent rollout should be considered.

14. Fitzpatrick (2009).
15. Lind (2008).

Securitization of mortgages has made tracking lien holders
an expensive challenge. Considering the vast numbers of
abandoned houses and lots where the liens have less value
than the cost of the legal process to clear them, this recordkeeping chaos imposes a steep cost on taxpayers. Beyond
new funding, code enforcement efforts might benefit from
more creative approaches (see “A Unique Partnership,” p. 17).

5. Recapitalization
As all of these efforts carry on, financial institutions absorb
significant damage. With capital levels low, new funds are
harder to come by, as institutions appear to be at greater
risk than before. Financial institutions that cannot raise new
capital cannot resume lending, so offsetting losses with new
reserves is an important step in breaking the cycle. Thus,
government programs aimed at stabilizing financial institutions and strengthening their capacity to lend should not be
regarded as a strategy that is independent from stabilizing
housing markets. Improving borrowers’ access to housing
credit on favorable terms requires that financial institutions have the capacity and confidence to lend. Of course,
if banks and other financial institutions are to be recapitalized with taxpayer money, the infusions should be provided
through programs that are both transparent and adequately
sized to the problem. These programs should also provide
an upside to taxpayers if and when profitability returns.
The details of how to recapitalize the banking system are
complex—and well beyond the scope of this essay. Economists at the Federal Reserve Bank of Cleveland continue
to study recapitalization strategies. We encourage further
investigation of this necessary step in halting the housing
crisis cycle.

Youngstown’s Reinvention
Over the past three years, the city of Youngstown has demolished more than 1,500 structures, most
of them homes. None of that old housing stock has been replaced.

“Getting smaller doesn’t have to be a bad thing,” Williams says.
“It doesn’t necessarily mean inferior.”
Youngstown was once the nation’s steel mill hub, teeming with industry. The slow-motion decline
began in the 1970s. Amid mounting evidence that there would be no economic comeback, Williams
began pushing the notion that a readjustment of expectations and plans for the future was in order.
At its core, Youngstown 2010 is a land-use plan. The ground underneath many of the demolished properties is held in the city land bank. Formerly residential neighborhoods are being rezoned for recreation
or “green” industry. In some cases, back taxes are forgiven on abandoned lots so that neighboring
landowners can take over upkeep. New residential construction is managed with a greater degree of
oversight, particularly residential housing ﬁnanced with low-income housing tax credits.
Other guiding principles of the Youngstown 2010 plan include preserving historical structures,
clearing access to the Mahoning River, and improving neighborhood safety. Funding has come
primarily through Housing and Urban Development block grants.
The reviews to date have been largely positive. City managers from around the country have visited
Youngstown to replicate its model. Williams admits that it remains challenging to allocate increasingly
scarce resources given the city’s shrinking tax base. But as the plan becomes technically obsolete
with the impending arrival of 2010, Williams is looking forward to development of Youngstown 2020.
As he sees it, the old plan will simply be updated and roll over into the new plan.

“It’s a journey,” Williams says, “not a destination.”

Several communities are following
Youngstown’s lead in rethinking their
neighborhoods. In this rendering, the
Cleveland Urban Design Collaborative
imagines existing housing integrated with
new waterways and green space created
from formerly vacant housing.

Federal Reserve Bank of Cleveland

To Youngstown Mayor Jay Williams, this is progress. The “Youngstown 2010” plan he has championed
for nearly a decade aims to re-size the city to better ﬁt its population. Youngstown was designed to hold
as many as 250,000 people within its 35 square miles; at its peak, 175,000 lived there. Today it has
80,000 residents.

The Way Forward

2008 Annual Report

The breadth and depth of the housing market decline call
for a massive, multifaceted response—one that takes into
account the different needs of different communities with
a constant eye on the long term. A set of coordinated
policies that attacks multiple points in the housing crisis
cycle can help to balance the supply of housing with the
demand for homeownership. A multipronged approach
is also useful because it recognizes that some programs—
even well-designed ones with all the right incentives—
may take longer than others to bring relief.
What works in Cleveland may not be necessary or useful
in Cincinnati, or even Chicago. This reality underlines the
desirability for flexible approaches to the problem, region
by region, neighborhood by neighborhood. Our intent
has been to provide a framework for evaluating policy
options more generally.
The Administration’s Homeowner Affordability and Stability
Plan, as proposed in February 2009, takes aim at many of
the links we identify in the cycle. The plan addresses at-risk
homeowners who are already behind on their mortgage
payments or who are struggling to keep their loans current.
This program is voluntary, but it provides incentives to loan
servicers to modify loans, and incentives to borrowers to stay
current on their modified loans. Another feature of the plan
directs the housing agencies Fannie Mae and Freddie Mac
to refinance conforming loans they hold or securitize for
certain eligible borrowers.16

Why build more housing when the market is sending
strong signals that demand lies elsewhere? Indeed, the
sharp pullback in subprime lending and the return of
sound underwriting practices we are witnessing today are
necessary and expected steps in the recovery process.
Even under the best of circumstances, a housing recovery
will not be immediate, so short-term policy actions will
take time to work their way through the system. Also,
recovery in the housing markets does not necessarily
mean that our neighborhoods will go back to the way
they were in their most vibrant heyday. Some neighborhoods will undergo an unwinding, not a revival. This is
especially true for regions with declining populations (see
“Youngstown’s Reinvention,” p. 19). People may leave, but
the housing stock remains. To clear the market, house
prices must fall. Consequently, shrinking cities tend to
have inexpensive housing disproportionately occupied by
poor people.17

Policymakers are also considering whether to enact legislation to allow judges to modify loan terms and balances
due on mortgage loans for principal residences as part of
a bankruptcy proceeding, and whether to extend a “safe
harbor” to loan servicers who modify loans “in good faith
on behalf of investors” even though the modifications are
outside the scope of their existing discretion. Although
these actions effectively upset prior contractual agreements
between borrowers and lenders, they might be necessary in
a time of crisis. However, this type of legislation may affect
the willingness of lenders and investors to provide housing
credit long after the current crisis has ended. We urge that
the long-term health of the housing markets be kept in
mind, so that changes made to address today’s crisis are
consistent with the future availability of private mortgage
credit on reasonable terms and conditions.
The textbook rules of economics still apply during this
crisis. We want to avoid policies that produce “deadweight
loss”—providing incentives like tax breaks or loan workouts for people to do things they would have done anyway.
We want to stay out of the way of resource reallocation.
16. Loans on single-unit properties as high as $729,750 will qualify.
17. Glaeser and Gyourko (2005).

It is far too easy to say that recoveries happen
because they always do. We can and should help
our communities in their time of need.

References

It is far too easy to say that recoveries happen
because they always do. We can and should help our
communities in their time of need. A first step is
breaking the housing crisis cycle. Then the recovery
can really begin.

Agpar, William C., and Mark Duda. 2005. Collateral Damage:The
Municipal Impact of Today’s Mortgage Foreclosure Boom. Minneapolis:
Homeownership Foundation.
Been, Vicki, Solomon Greene, and Jenny Schuetz. 2007. “Spillover
Effects of Foreclosures on Property Values in New York.” Paper
presented at the New York City Subprime Lending and Foreclosure
Summit (December 12).
Cooley, Carl. 2008. “Subprime Loan Report for Cleveland and the
Fourth District.” Federal Reserve Bank of Cleveland, Behind the
Numbers (November).
Demyanyk,Yuliya, and Otto Van Hemert. 2008. “Understanding the
Subprime Mortgage Crisis.” Working Paper. Social Science Research
Network (December 5): http://ssrn.com/abstract=1020396 (accessed
March 20, 2009).
Fitzpatrick, Thomas J. IV. 2009. “Understanding Ohio’s Land Bank
Legislation.” Policy Discussion Paper No. 25. Federal Reserve Bank
of Cleveland (January).
Glaeser, Edward L., and Joseph Gyourko. 2005. “Urban Decline and
Durable Housing.” Journal of Political Economy 113(2): 345–75.
Immergluck, Dan, and Geoff Smith. 2006. “The External Costs of
Foreclosure: The Impact of Single-Family Mortgage Foreclosures on
Property Values.” Housing Policy Debate 17(1): 57–80.
Lin, Zhenguo, Eric Rosenblatt, and Vincent W.Yao. 2009. “Spillover
Effects of Foreclosures on Neighborhood Property Values.” Journal of
Real Estate Finance and Economics 38(4): 387–407.
Lind, Kermit J. 2008. “The Perfect Storm: An Eyewitness Report
from Ground Zero in Cleveland’s Neighborhoods.” Journal of
Affordable Housing 17(3): 237–58.
Mason, Joseph R. 2007. “Mortgage Loan Modification: Promises
and Pitfalls.” Working Paper Series. Wharton Financial Institutions
(October 3).
Mayer, Christopher J., Karen M. Pence, and Shane M. Sherlund.
2008. “The Rise in Mortgage Defaults.” Federal Reserve Board of
Governors Finance and Economics Discussion Series (November).

A ﬁrst step is breaking the
housing crisis cycle.

THEN THE RECOVERY CAN REALLY BEGIN.

Mikelbank, Brian A. 2008. “Spatial Analysis of the Impact of Vacant,
Abandoned, and Foreclosed Properties.” Report submitted to the
Office of Community Affairs, Federal Reserve Bank of Cleveland
(November).
Office of the Comptroller of the Currency and Office of Thrift
Supervision. 2009. “OCC and OTS Mortgage Metrics Report:
Disclosure of National Bank and Federal Thrift Mortgage Loan
Data” (April).
Richter, Francisca. 2008. “An Analysis of Foreclosure Rate Differentials in Soft Markets.” Working Paper 08-11. Federal Reserve Bank of
Cleveland (November).
Simons, Robert A., Roberto G. Quercia, and Ivan Maric. 1998. “The
Value Impact of New Residential Construction and Neighborhood
Disinvestment on Residential Sales Price.” Journal of Estate Research
15(2): 147–61.

Federal Reserve Bank of Cleveland

Shrinking cities wishing to ensure their viability
must be assertive about removing blighted housing
from the market, using land banks, and enforcing
building codes. Cities that cannot expect to grow
out of their excessive housing stock might also
benefit from new ways of working together with
business leaders, community organizations, and
community development lenders on land-use
strategy. Coming to grips with new views of the
future is perhaps the greatest challenge.

2008 Operational Highlights

■■■

The Federal Reserve Bank of Cleveland responded to unprecedented
economic challenges in 2008 while maintaining the highest levels of
operational excellence in serving the needs of the U.S. Treasury and the
public and adapting to an evolving payments system.

Central Bank Operations

The Supervision and Regulation function responded to the financial crisis

The Research function maintained comprehensive support for the president’s
policy contributions to the Federal Open Market Committee and advanced
original research in many subject areas. Concepts presented in the Bank’s
2007 Annual Report essay on central banks and crisis management were
further advanced by a joint conference with the Federal Deposit Insurance
Corporation on identifying and resolving financial crises. The function also
maintained an active presence in the region to expand public understanding
of economic and financial market developments.

The Ofﬁce of Policy Analysis coordinated the Bank’s efforts to identify
emerging trends and provide research-informed perspectives on public policy
issues. Focusing on the root causes of the mortgage foreclosure crisis and the
economic impact of housing vacancy and abandonment, the Bank shared
information with community development groups and public officials.
As Ohio legislators considered a bill to revamp the state’s existing laws on
land banks, the Bank published an analysis of land banks as a tool to address
the problem of vacant and abandoned properties. This analysis is intended
to be of interest to policymakers nationwide. The Bank also focused on
opportunities for regulatory reform and conducted numerous meetings
with nationally renowned experts, with an eye toward developing a set of
principles for regulatory reform.

December 10, 2008. Joint Board of Directors
dinner with guest speaker William Dudley, current
president of the Federal Reserve Bank of New York.

Federal Reserve Bank of Cleveland

by strengthening its monitoring and oversight of Fourth District institutions
and by providing support to other Federal Reserve district offices. Through
our Credit Risk Management function, the Bank adapted its operations and
risk management processes to implement the Federal Reserve’s new credit
facilities, managing significant growth in new collateral arrangements and
additional monitoring of intraday credit. The Statistics and Analysis function
ensured that reports received from Fourth District institutions, upon which
many decisions and actions were based, were timely and accurate.

May 8, 2008. Ben Bernanke, chairman of the Board
of Governors of the Federal Reserve System, speaks
to Federal Reserve Bank of Cleveland employees at a
special program hosted at the Bank.

2008 Annual Report

The Bank’s Learning Center and Money Museum offered additional opportunities to strengthen public awareness of the role of the Federal Reserve
System and provided economic education and financial literacy resources
for educators and students.
The Community Development function conducted extensive outreach during
2008, sharing the Bank’s policy perspectives with community development
practitioners and public officials. These efforts enabled the Bank to remain
informed of emerging issues and opportunities to respond to them. The
Bank contributed to the development of the System’s “Recovery, Renewal,
Rebuilding” events to address the housing market crisis, and hosted a
research conference on vacant properties in weak-market cities.
The Bank also provided analytical support to public officials as they explored
ways to optimize the use of funding made available by the Department of
Housing and Urban Development through the Housing and Economic
Recovery Act of 2008. In addition, the Bank also crafted two of the 16 case
studies included in the System’s landmark study, The Enduring Challenge of
Concentrated Poverty: Case Studies from Across the U.S., and provided guidance
on the research direction of the project.

June 11-12, 2008. Sixth annual Community
Development Policy Summit. (L-R): Jeff Gatica, senior
Community Development advisor, Federal Reserve
Bank of Cleveland; Paul Ginger, Central District
Community Affairs ofﬁcer, Ofﬁce of the Comptroller
of the Currency; Glenn Brewer, Community Affairs
specialist, Federal Deposit Insurance Corporation;
and Ruth Clevenger, vice president and Community
Affairs ofﬁcer, Federal Reserve Bank of Cleveland.

Core Business Operations

The Cash function maintained a superior ranking for all System efficiency
standards and helped lead System efforts to standardize software requirements and operational practices.

The eGovernment function provides strategic, product development,
project management, and operational support for two significant
Treasury business lines: the processing of internet-originated collections
and the settlement of check and ACH debit transactions. It also supports
one emerging business line, the online banking channel. The function
achieved the highest possible operational ratings from the U.S. Treasury
and met or exceeded all cost targets. The Bank provided analysis and
insights to the Treasury to support the future strategy for modernizing
its collection and cash management operations.

The Treasury Retail Securities function received the highest possible rating
from the U.S. Treasury and met all quantitative and qualitative Treasury
measurements. The Bank continues to support the Bureau of the Public
Debt initiatives, providing leadership to the business scanning project and
expanding services to retail customers.

To support all of these outcomes, the Bank continued its culture change program through a focus
on learning, leadership, and innovation. These efforts, combined with human capital plans to
strengthen existing skills, are intended to help the Bank accommodate new opportunities to support Federal Reserve System strategies. To that end, the Bank hosted a talent management summit
to provide expert insights on its approach and to share best practices with other Reserve Banks.

June 25, 2008. Lunchtime learning event presented
to Federal Reserve Bank of Cleveland employees by
Paul Kaboth, assistant vice president in Supervision
and Regulation Administration.

Federal Reserve Bank of Cleveland

The Check function was selected as the Federal Reserve System’s final paper
check processing site and the final site for check adjustments, reflecting a
long-term commitment to efficiency, effectiveness, and customer service. In
support of the System’s strategy to streamline operations in response to an
increasingly electronic payments system, the Bank successfully consolidated
Buffalo and Cincinnati check operations with minimal customer impact.

■■■

Statement of Auditor Independence

Management’s Report on Internal Control Over Financial Reporting

Report of Independent Auditors

Comparative Financial Statements

Notes to Financial Statements

AUDITOR INDEPENDENCE
In 2008, the Board of Governors engaged Deloitte & Touche LLP (D&T) for the audits of the individual and
combined financial statements of the Reserve Banks. Fees for D&T’s services are estimated to be $10.2 million.
Approximately $2.7 million of the estimated total fees were for the audits of the limited liability companies (LLCs)
that are associated with recent Federal Reserve actions to address the financial crisis, and are consolidated in the
financial statements of the Federal Reserve Bank of New York.1 To ensure auditor independence, the Board of
Governors requires that D&T be independent in all matters relating to the audit. Specifically, D&T may not
perform services for the Reserve Banks or others that would place it in a position of auditing its own work, making
management decisions on behalf of Reserve Banks, or in any other way impairing its audit independence. In 2008,
the Bank did not engage D&T for any non-audit services.

1. Each LLC will reimburse the Board of Governors for the fees related to the audit of its ﬁnancial statements from the entity’s
available net assets.

Management’s Report on Internal Control
Over Financial Reporting

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

Federal Reserve Bank of Cleveland
April 2, 2009

Sandra Pianalto
President & Chief Executive Officer

Gregory L. Stefani
Senior Vice President & Chief Financial Officer

Federal Reserve Bank of Cleveland

To the Board of Directors of the Federal Reserve Bank of Cleveland:

2008 Annual Report

Report of Independent Auditors

To the Board of Governors of the Federal Reserve System
and the Board of Directors of the Federal Reserve Bank of Cleveland:
We have audited the accompanying statements of condition of the Federal Reserve Bank of
Cleveland (“FRB Cleveland”) as of December 31, 2008 and 2007 and the related statements of
income and comprehensive income and changes in capital for the years then ended, which have
been prepared in conformity with accounting principles established by the Board of Governors of
the Federal Reserve System. We also have audited the internal control over financial reporting
of the FRB Cleveland as of December 31, 2008, based on criteria established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The FRB Cleveland’s management is responsible for these financial statements,
for maintaining effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to
express an opinion on these financial statements and an opinion on the FRB Cleveland’s internal
control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement
and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement presentation.
Our audit of internal control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk.
Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.

Member of
Deloitte Touche Tohmatsu

Because of the inherent limitations of internal control over financial reporting, including the possibility
of collusion or improper management override of controls, material misstatements due to error or
fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods are subject to the risk
that the controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
As described in Note 4 to the financial statements, the FRB Cleveland has prepared these financial
statements in conformity with accounting principles established by the Board of Governors of the
Federal Reserve System, as set forth in the Financial Accounting Manual for Federal Reserve Banks,
which is a comprehensive basis of accounting other than accounting principles generally accepted in
the United States of America. The effects on such financial statements of the differences between the
accounting principles established by the Board of Governors of the Federal Reserve System and
accounting principles generally accepted in the United States of America are also described in Note 4.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
financial position of the FRB Cleveland as of December 31, 2008 and 2007, and the results of its
operations for the years then ended, on the basis of accounting described in Note 4. Also, in our
opinion, the FRB Cleveland maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2008, based on the criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

April 2, 2009

Federal Reserve Bank of Cleveland

The FRB Cleveland’s internal control over financial reporting is a process designed by, or under the
supervision of, the FRB Cleveland’s principal executive and principal financial officers, or persons
performing similar functions, and effected by the FRB Cleveland’s board of directors, management,
and other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with the accounting
principles established by the Board of Governors of the Federal Reserve System. The FRB Cleveland’s
internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the FRB Cleveland; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with the
accounting principles established by the Board of Governors of the Federal Reserve System, and
that receipts and expenditures of the FRB Cleveland are being made only in accordance with
authorizations of management and directors of the FRB Cleveland; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition
of the FRB Cleveland’s assets that could have a material effect on the financial statements.

Comparative Financial Statements

Statements of Condition
(in millions)
30

December 31, 2008

December 31, 2007

2008 Annual Report

ASSETS
Gold certiﬁcates

423

428

Special drawing rights certiﬁcates

104

Coin

136

113

Items in process of collection

164

268

15,622

853

3,034

1,903

19,043

30,514

1,736

1,625

Central bank liquidity swaps

38,749

1,727

Interdistrict settlement account

16,708

—

168

176

312

262

Loans to depository institutions

104

System Open Market Account:
Securities purchased under agreements to resell
U.S. government, Federal agency, and governmentsponsored enterprise securities, net
Investments denominated in foreign currencies

Bank premises and equipment, net
Prepaid interest on Federal Reserve notes due from U.S. Treasury
Accrued interest receivable
Other assets
Total assets

96,252

38,101

39,263

32,223

LIABILITIES AND CAPITAL
Federal Reserve notes outstanding, net
System Open Market Account:
Securities sold under agreements to repurchase

3,350

1,800

49,963

446

456

200

—

741

Deposits:
Depository institutions
Other deposits
Deferred credit items
Interdistrict settlement account
Accrued beneﬁt costs
Other liabilities

93,148

35,519

Capital paid-in

1,552

1,291

Surplus (including accumulated other comprehensive loss of $16 million
and $17 million at December 31, 2008 and 2007, respectively)

1,552

1,291

Total liabilities

Total capital
Total liabilities and capital

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

3,104
$

96,252

2,582
$

38,101

Statements of Income and Comprehensive Income
(in millions)
For the year ended
December 31, 2008

For the year ended
December 31, 2007

Interest income:
Loans to depository institutions

132

System Open Market Account:

U.S. government, Federal agency, and government-sponsored
enterprise securities
Investments denominated in foreign currencies
Central bank liquidity swaps
Total interest income

1,000

1,609

252

1,501

1,710

—

Interest expense:
System Open Market Account:
Securities sold under agreements to repurchase
Depository institution deposits
Total interest expense
Net interest income

1,444

1,640

Non-interest income:
System Open Market Account:
U.S. government, Federal agency, and government-sponsored
enterprise securities gains, net
Foreign currency gains, net

151

—

132

Compensation received for services provided

Reimbursable services to government agencies

Other income

404

280

129

128

Total non-interest income

Operating expenses:
Salaries and other beneﬁts
Occupancy expense

Equipment expense

Assessments by the Board of Governors

Other expenses

Total operating expenses

271

284

Net income prior to distribution

1,577

1,636

Change in funded status of beneﬁt plans
Comprehensive income prior to distribution

1
$

1,578

1,641

Distribution of comprehensive income:
Dividends paid to member banks

Transferred to surplus and change in accumulated other comprehensive loss

261

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

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

1,232
$

1,578

66
204
1,371

1,641

Federal Reserve Bank of Cleveland

Securities purchased under agreements to resell

Statements of Changes in Capital
(in millions, except share data)

For the years ended December 31, 2008 and December 31, 2007
Surplus
Net Income
Retained

Capital Paid-In

Balance at January 1, 2007
(21.7 million shares)

2008 Annual Report

Net change in capital stock issued
(4.1 million shares)
Transferred to surplus and change
in accumulated other comprehensive loss
Balance at December 31, 2007
(25.8 million shares)

Net change in capital stock issued
(5.2 million shares)
Transferred to surplus and change
in accumulated other comprehensive loss
Balance at December 31, 2008
(31.0 million shares)

1,087

1,109

Accumulated Other
Comprehensive
Loss

(22)

Total Surplus

1,087

Total Capital

2,174

204

—

204

—

199

204

1,291

1,308

(17)

1,291

2,582

261

—

261

—

260

261

1,552

1,568

(16)

1,552

3,104

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

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

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

The FOMC, in the conduct of monetary policy, establishes policy regarding domestic open market operations, oversees these operations, and annually issues authorizations and directives to the FRBNY to execute transactions. The FRBNY is authorized and directed
by the FOMC to conduct operations in domestic markets, including the direct purchase and sale of securities of the U.S. government,
Federal agencies, and Government-sponsored enterprises (“GSEs”), the purchase of these securities under agreements to resell, the
sale of these securities under agreements to repurchase, and the lending of these securities. The FRBNY executes these transactions
at the direction of the FOMC and holds the resulting securities and agreements in the portfolio known as the System Open Market
Account (“SOMA”).

Although the Reserve Banks are separate legal entities, they collaborate in the delivery of certain services to achieve greater efficiency
and effectiveness. This collaboration takes the form of centralized operations and product or function offices that have responsibility
for the delivery of certain services on behalf of the Reserve Banks. Various operational and management models are used and are
supported by service agreements between the Reserve Banks providing the service and the other Reserve Banks. In some cases, costs
incurred by a Reserve Bank for services provided to other Reserve Banks are not shared; in other cases, the Reserve Banks reimburse
the other Reserve Banks for services provided to them.
Major services provided by the Bank on behalf of the System and for which the costs were not reimbursed by the other Reserve
Banks include National Check Adjustments, National Check Automation Services, Treasury Retail Services Technology, Check 21
Technology, Check Restructuring Projects, Retail Payments Office, Cash Technology, National Billing Operations, and Audit
Application Competency Center Services.

RECENT FINANCIAL STABILITY ACTIVITIES
The Federal Reserve has implemented a number of programs designed to support the liquidity of financial institutions and to foster
improved conditions in financial markets. These new programs, which are set forth below, have resulted in significant changes to the
Bank’s financial statements.
Expanded Open Market Operations and Support for Mortgage Related Securities
The Single-Tranche Open Market Operation Program, created on March 7, 2008, allows primary dealers to initiate a series of term
repurchase transactions that are expected to accumulate up to $100 billion in total. Under the provisions of the program, these
transactions are conducted as 28-day term repurchase agreements for which primary dealers pledge U.S. Treasury and agency
securities and agency Mortgage-Backed Securities (“MBS”) as collateral. The FRBNY can elect to increase the size of the term
repurchase program if conditions warrant. The repurchase transactions are reported as “System Open Market Account: Securities
purchased under agreements to resell” in the Statements of Condition.
The GSE and Agency Securities and MBS Purchase Program was announced on November 25, 2008. The primary goal of the
program is to provide support to the mortgage and housing markets and to foster improved conditions in financial markets. Under
this program, the FRBNY will purchase the direct obligations of housing-related GSEs and MBS backed by the Federal National
Mortgage Association (“Fannie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”), and the Government
National Mortgage Association (“Ginnie Mae”). Purchases of the direct obligations of housing-related GSEs began in November 2008
and purchases of GSE and agency MBS began in January 2009. There were no purchases of GSE and agency MBS during the period
ended December 31, 2008. The program was initially authorized to purchase up to $100 billion in GSE direct obligations and up to
$500 billion in GSE and agency MBS. In March 2009, the FOMC authorized FRBNY to purchase up to an additional $750 billion
of GSE and agency MBS and up to an additional $100 billion of GSE direct obligations.
The FRBNY holds the resulting securities and agreements in the SOMA portfolio and the activities of both programs are allocated
to the other Reserve Banks.
Central Bank Liquidity Swaps
The FOMC authorized the FRBNY to establish temporary reciprocal currency swap arrangements (central bank liquidity swaps)
with the European Central Bank and the Swiss National Bank on December 12, 2007, to help provide liquidity in U.S. dollars to
overseas markets. Subsequently, the FOMC authorized reciprocal currency swap arrangements with additional foreign central
banks. Such arrangements are now authorized with the following central banks: the Reserve Bank of Australia, the Banco Central do
Brasil, the Bank of Canada, Danmarks Nationalbank, the Bank of England, the European Central Bank, the Bank of Japan, the Bank
of Korea, the Banco de Mexico, the Reserve Bank of New Zealand, Norges Bank, the Monetary Authority of Singapore, Sveriges
Riksbank, and the Swiss National Bank. The activity related to the program is allocated to the other Reserve Banks. The maximum
amount of borrowing permissible under the swap arrangements varies by central bank. The central bank liquidity swap arrangements are authorized through October 30, 2009.
Lending to Depository Institutions
The temporary Term Auction Facility (“TAF”) program was created on December 12, 2007. The goal of the TAF is to help promote
the efficient dissemination of liquidity, which is achieved by the Reserve Banks injecting term funds through a broader range of counterparties and against a broader range of collateral than open market operations. Under the TAF program, Reserve Banks auction term
funds to depository institutions against a wide variety of collateral. All depository institutions that are judged to be in generally sound
financial condition by their Reserve Bank and that are eligible to borrow under the primary credit program are eligible to participate in
TAF auctions. All advances must be fully collateralized. The loans are reported as “Loans to depository institutions” in the Statements
of Condition.

Federal Reserve Bank of Cleveland

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 in order to counter disorderly conditions in exchange markets or to meet other needs specified
by the FOMC in carrying out the System’s central bank responsibilities. The FRBNY is authorized by the FOMC to hold balances of,
and to execute spot and forward foreign exchange and securities contracts for, fourteen foreign currencies and to invest such foreign
currency holdings, ensuring adequate liquidity is maintained. The FRBNY is also authorized and directed by the FOMC to maintain
reciprocal currency arrangements with fourteen central banks and to “warehouse” foreign currencies for the U.S. Treasury and
Exchange Stabilization Fund (“ESF”) through the Reserve Banks.

Lending to Primary Dealers
The Term Securities Lending Facility (“TSLF”) was created on March 11, 2008, to promote the liquidity in the financing markets
for U.S. Treasuries and other collateral. Under the TSLF, the FRBNY will lend up to an aggregate amount of $200 billion of
U.S. Treasury securities to primary dealers secured for a term of 28 days. Securities loans are collateralized by a pledge of other
securities, including federal agency debt, federal agency residential mortgage-backed securities, and non-agency AAA/Aaa-rated
private-label residential mortgage-backed securities, and are awarded to primary dealers through a competitive single-price auction.
The TSLF is authorized through October 30, 2009. The fees related to these securities lending transactions are reported as a
component of “Non-interest income: Other income” in the Statements of Income and Comprehensive Income.
The Term Securities Lending Facility Options Program (“TOP”), created on July 30, 2008, offers primary dealers the option to
draw upon short-term, fixed-rate TSLF loans in exchange for eligible collateral. The options are awarded through a competitive
auction. The program is intended to enhance the effectiveness of the TSLF by ensuring additional securities liquidity during periods
of heightened collateral market pressures, such as around quarter-end dates. TOP auction dates are determined by the FRBNY, and
the program authorization ends concurrently with the TSLF.

2008 Annual Report

Other Lending Facilities
The Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (“AMLF”), created on September 19, 2008,
is a lending facility that provides funding to U.S. depository institutions and bank holding companies to finance the purchase of
high-quality asset-backed commercial paper (“ABCP”) from money market mutual funds under certain conditions. The program
is intended to assist money market mutual funds that hold such paper to meet the demands for investor redemptions and to foster
liquidity in the ABCP market and money markets more generally. The Federal Reserve Bank of Boston (“FRBB”) administers the
AMLF and is authorized to extend these loans to eligible borrowers on behalf of the other Reserve Banks. All loans extended under
the AMLF are recorded as assets by the FRBB and, if the borrowing institution settles to a depository account in the Fourth Reserve
District, the funds are credited to the institution’s depository account and settled between the Banks through the interdistrict settlement account. The credit risk related to the AMLF is assumed by the FRBB. The FRBB is authorized to finance the purchase of
commercial paper through October 30, 2009.

SIGNIFICANT ACCOUNTING POLICIES
Accounting principles for entities with the unique powers and responsibilities of a nation’s central bank have not been formulated by
accounting standard-setting bodies. The Board of Governors has developed specialized accounting principles and practices that it
considers to be appropriate for the nature and function of a central bank. These accounting principles and practices are documented
in the Financial Accounting Manual for Federal Reserve Banks (“Financial Accounting Manual” or “FAM”), which is issued by the
Board of Governors. All of the Reserve Banks are required to adopt and apply accounting policies and practices that are consistent
with the FAM, and the financial statements have been prepared in accordance with the FAM.
Differences exist between the accounting principles and practices in the FAM and generally accepted accounting principles in the
United States (“GAAP”), primarily due to the unique nature of the Bank’s powers and responsibilities as part of the nation’s central
bank. The primary difference is the presentation of all SOMA securities holdings at amortized cost rather than using the fair value
presentation required by GAAP. U.S. government, Federal agency, and GSE securities, and investments denominated in foreign
currencies comprising the SOMA are recorded at cost, on a settlement-date basis, and are adjusted for amortization of premiums
or accretion of discounts on a straight-line basis. Amortized cost more appropriately reflects the Bank’s securities holdings given
the System’s unique responsibility to conduct monetary policy. Although the application of current market prices to the securities
holdings may result in values substantially above or below their carrying values, these unrealized changes in value would have no
direct effect on the quantity of reserves available to the banking system or on the prospects for future Bank earnings or capital. Both
the domestic and foreign components of the SOMA portfolio may involve transactions that result in gains or losses when holdings
are sold prior to maturity. Decisions regarding securities and foreign currency transactions, including their purchase and sale, are
motivated by monetary policy objectives rather than profit. Accordingly, fair values, earnings, and any gains or losses resulting from
the sale of such securities and currencies are incidental to the open market operations and do not motivate decisions related to policy
or open market activities.
In addition, the Bank has elected not to present a Statement of Cash Flows because the liquidity and cash position of the Bank
are not a primary concern given the Reserve Banks’ unique powers and responsibilities. Other information regarding the Bank’s
activities is provided in, or may be derived from, the Statements of Condition, Income and Comprehensive Income, and Changes in
Capital. There are no other significant differences between the policies outlined in the FAM and GAAP.
Preparing the financial statements in conformity with the FAM requires management to make certain estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of income and expenses during the reporting period. Actual results could differ from those
estimates. Certain amounts relating to the prior year have been reclassified to conform to the current-year presentation. Unique
accounts and significant accounting policies are explained below.

a. Gold and Special Drawing Rights Certificates
The Secretary of the U.S. Treasury is authorized to issue gold and special drawing rights (“SDR”) certificates to the Reserve Banks.
Payment for the gold certificates by the Reserve Banks is made by crediting equivalent amounts in dollars into the account established
for the U.S. Treasury. The gold certificates held by the Reserve Banks are required to be backed by the gold of the U.S. Treasury. The
U.S. Treasury may reacquire the gold certificates at any time and the Reserve Banks must deliver them to the U.S. Treasury. At such
time, the U.S. Treasury’s account is charged, and the Reserve Banks’ gold certificate accounts are reduced. The value of gold for
purposes of backing the gold certificates is set by law at $42 2/9 a fine troy ounce. The Board of Governors allocates the gold certificates among the Reserve Banks once a year based on the average Federal Reserve notes outstanding in each Reserve Bank.

SDR certificates are issued by the International Monetary Fund (the “Fund”) to its members in proportion to each member’s quota
in the Fund at the time of issuance. SDR certificates serve as a supplement to international monetary reserves and may be transferred
from one national monetary authority to another. Under the law providing for U.S. participation in the SDR system, the Secretary of
the U.S. Treasury is authorized to issue SDR certificates somewhat like gold certificates to the Reserve Banks. When SDR certificates
are issued to the Reserve Banks, equivalent amounts in dollars are credited to the account established for the U.S. Treasury, and the
Reserve Banks’ SDR certificate accounts are increased. The Reserve Banks are required to purchase SDR certificates, at the direction
of the U.S. Treasury, for the purpose of financing SDR acquisitions or for financing exchange stabilization operations. At the time
SDR transactions occur, the Board of Governors allocates SDR certificate transactions among the Reserve Banks based upon each
Reserve Bank’s Federal Reserve notes outstanding at the end of the preceding year. There were no SDR transactions in 2008 or 2007.

Outstanding loans are evaluated to determine whether an allowance for loan losses is required. The Bank has developed procedures
for assessing the adequacy of the allowance for loan losses that reflect the assessment of credit risk considering all available information. This assessment includes monitoring information obtained from banking supervisors, borrowers, and other sources to assess
the credit condition of the borrowers.
Loans are considered to be impaired when it is probable that the Bank will not receive principal and interest due in accordance with
the contractual terms of the loan agreement. The amount of the impairment is the difference between the recorded amount of the
loan and the amount expected to be collected after consideration of the fair value of the collateral. Recognition of interest income
is discontinued for any loans that are considered to be impaired. Cash payments made by borrowers on impaired loans are applied
to principal until the balance is reduced to zero; subsequent payments are recorded as recoveries of amounts previously charged off
and then to interest income.
c. Securities Purchased Under Agreements to Resell, Securities Sold Under Agreements to Repurchase, and
Securities Lending
The FRBNY may engage in tri-party purchases of securities under agreements to resell (“tri-party agreements”). Tri-party agreements are conducted with two commercial custodial banks that manage the clearing and settlement of collateral. Collateral is held
in excess of the contract amount. Acceptable collateral under tri-party agreements primarily includes U.S. government securities;
pass-through mortgage securities of Fannie Mae, Freddie Mac, and Ginnie Mae; STRIP securities of the U.S. government; and
“stripped” securities of other government agencies. The tri-party agreements are accounted for as financing transactions and the
associated interest income is accrued over the life of the agreement.
Securities sold under agreements to repurchase are accounted for as financing transactions, and the associated interest expense
is recognized over the life of the transaction. These transactions are reported at their contractual amounts in the Statements of
Condition and the related accrued interest payable is reported as a component of “Other liabilities.”
U.S. government securities held in the SOMA are lent to U.S. government securities dealers to facilitate the effective functioning of
the domestic securities market. Overnight securities lending transactions are fully collateralized by other U.S. government securities.
Term securities lending transactions are fully collateralized with investment-grade debt securities, collateral eligible for tri-party
repurchase agreements arranged by the Open Market Trading Desk, or both. The collateral taken in both overnight and term
securities lending transactions is in excess of the fair value of the securities loaned. The FRBNY charges the primary dealer a fee for
borrowing securities, and these fees are reported as a component of “Other income.”
Activity related to securities purchased under agreements to resell, securities sold under agreements to repurchase, and securities
lending is allocated to each of the Reserve Banks on a percentage basis derived from an annual settlement of the interdistrict settlement account.
d. U.S. Government, Federal Agency, and Government-Sponsored Enterprise Securities; Investments Denominated in
Foreign Currencies; and Warehousing Agreements
Interest income on U.S. government, Federal agency, and GSE securities and investments denominated in foreign currencies
comprising the SOMA is accrued on a straight-line basis. Gains and losses resulting from sales of securities are determined by
specific issue based on average cost. Foreign-currency-denominated assets are revalued daily at current foreign currency market
exchange rates in order to report these assets in U.S. dollars. Realized and unrealized gains and losses on investments denominated
in foreign currencies are reported as “Foreign currency gains, net” in the Statements of Income and Comprehensive Income.
Activity related to U.S. government, Federal agency, and GSE securities, including the premiums, discounts, and realized gains and
losses, is allocated to each Reserve Bank on a percentage basis derived from an annual settlement of the interdistrict settlement
account that occurs in April of each year. The settlement also equalizes Reserve Bank gold certificate holdings to Federal Reserve
notes outstanding in each District. Activity related to investments denominated in foreign currencies, including the premiums,
discounts, and realized and unrealized gains and losses, is allocated to each Reserve Bank based on the ratio of each Reserve Bank’s
capital and surplus to aggregate capital and surplus at the preceding December 31.
Warehousing is an arrangement under which the FOMC agrees to exchange, at the request of the U.S. Treasury, U.S. dollars for
foreign currencies held by the U.S. Treasury or ESF over a limited period of time. The purpose of the warehousing facility is to
supplement the U.S. dollar resources of the U.S. Treasury and ESF for financing purchases of foreign currencies and related
international operations.
Warehousing agreements are designated as held for trading purposes and are valued daily at current market exchange rates. Activity
related to these agreements is allocated to each Reserve Bank based on the ratio of each Reserve Bank’s capital and surplus to
aggregate capital and surplus at the preceding December 31.

Federal Reserve Bank of Cleveland

b. Loans to Depository Institutions
Loans are reported at their outstanding principal balances net of commitment fees. Interest income is recognized on an accrual
basis. Loan commitment fees are generally deferred and amortized on a straight-line basis over the commitment period, which is not
materially different from the interest method.

e. Central Bank Liquidity Swaps
At the initiation of each central bank liquidity swap transaction, the foreign central bank transfers a specified amount of its currency
to the FRBNY in exchange for U.S. dollars at the prevailing market exchange rate. Concurrent with this transaction, the FRBNY
and the foreign central bank agree to a second transaction that obligates the foreign central bank to return the U.S. dollars and the
FRBNY to return the foreign currency on a specified future date at the same exchange rate. The foreign currency amounts that the
FRBNY acquires are reported as “Central bank liquidity swaps” on the Statements of Condition. Because the swap transaction will
be unwound at the same exchange rate that was used in the initial transaction, the recorded value of the foreign currency amounts is
not affected by changes in the market exchange rate.

2008 Annual Report

The foreign central bank pays interest to the FRBNY based on the foreign currency amounts held by the FRBNY. The FRBNY
recognizes interest income during the term of the swap agreement and reports the interest income as a component of “Interest
income: Central bank liquidity swaps” in the Statements of Income and Comprehensive Income.
Activity related to these swap transactions, including the related interest income, is allocated to each Reserve Bank based on the
ratio of each Reserve Bank’s capital and surplus to aggregate capital and surplus at the preceding December 31. Similar to other
investments denominated in foreign currencies, the foreign currency holdings associated with these central bank liquidity swaps are
revalued at current foreign currency market exchange rates. Because the swap arrangement will be unwound at the same exchange
rate that was used in the initial transaction, the obligation to return the foreign currency is also revalued at current foreign currency
market exchange rates and is recorded in a currency exchange valuation account by the FRBNY. The revaluation method eliminates
the effects of the changes in the market exchange rate. As of December 31, 2008, the FRBNY began allocating this currency
exchange valuation account to the Bank and, as a result, the reported amount of central bank liquidity swaps reflects the Bank’s
allocated portion at the contract exchange rate.
f. Interdistrict Settlement Account
At the close of business each day, each Reserve Bank aggregates the payments due to or from other Reserve Banks. These payments
result from transactions between the Reserve Banks and transactions that involve depository institution accounts held by other
Reserve Banks, such as Fedwire funds and securities transfers and check and ACH transactions. The cumulative net amount due to
or from the other Reserve Banks is reflected in the “Interdistrict settlement account” in the Statements of Condition.
g. Bank Premises, Equipment, and Software
Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis
over the estimated useful lives of the assets, which range from two to fifty years. Major alterations, renovations, and improvements
are capitalized at cost as additions to the asset accounts and are depreciated over the remaining useful life of the asset or, if appropriate, over the unique useful life of the alteration, renovation, or improvement. Maintenance, repairs, and minor replacements are
charged to operating expense in the year incurred.
Costs incurred for software during the application development stage, whether developed internally or acquired for internal use, are
capitalized based on the cost of direct services and materials associated with designing, coding, installing, and testing the software.
Capitalized software costs are amortized on a straight-line basis over the estimated useful lives of the software applications, which
range from two to five years. Maintenance costs related to software are charged to expense in the year incurred.
Capitalized assets, including software, buildings, leasehold improvements, furniture, and equipment are impaired and an adjustment
is recorded when events or changes in circumstances indicate that the carrying amount of assets or asset groups is not recoverable
and significantly exceeds the assets’ fair value.
h. Federal Reserve Notes
Federal Reserve notes are the circulating currency of the United States. These notes are issued through the various Federal Reserve
agents (the chairman of the board of directors of each Reserve Bank and their designees) to the Reserve Banks upon deposit with
such agents of specified classes of collateral security, typically U.S. government securities. These notes are identified as issued to a
specific Reserve Bank. The Federal Reserve Act provides that the collateral security tendered by the Reserve Bank to the Federal
Reserve agent must be at least equal to the sum of the notes applied for by such Reserve Bank.
Assets eligible to be pledged as collateral security include all of the Bank’s assets. The collateral value is equal to the book value
of the collateral tendered with the exception of securities, for which the collateral value is equal to the par value of the securities
tendered. The par value of securities pledged for securities sold under agreements to repurchase is deducted.
The Board of Governors may, at any time, call upon a Reserve Bank for additional security to adequately collateralize the outstanding Federal Reserve notes. To satisfy the obligation to provide sufficient collateral for outstanding Federal Reserve notes, the Reserve
Banks have entered into an agreement that provides for certain assets of the Reserve Banks to be jointly pledged as collateral for the
Federal Reserve notes issued to all Reserve Banks. In the event that this collateral is insufficient, the Federal Reserve Act provides
that Federal Reserve notes become a first and paramount lien on all the assets of the Reserve Banks. Finally, Federal Reserve notes
are obligations of the United States government. At December 31, 2008 and 2007, all Federal Reserve notes issued to the Reserve
Banks were fully collateralized.
“Federal Reserve notes outstanding, net” in the Statements of Condition represents the Bank’s Federal Reserve notes outstanding,
reduced by the Bank’s currency holdings of $7,240 million and $7,130 million at December 31, 2008 and 2007, respectively.
i. Items in Process of Collection and Deferred Credit Items
“Items in process of collection” in the Statements of Condition primarily represents amounts attributable to checks that have been
deposited for collection and that, as of the balance sheet date, have not yet been presented to the paying bank. “Deferred credit
items” are the counterpart liability to items in process of collection, and the amounts in this account arise from deferring credit for
deposited items until the amounts are collected. The balances in both accounts can vary significantly.

j. Capital Paid-in
The Federal Reserve Act requires that each member bank subscribe to the capital stock of the Reserve Bank in an amount equal
to 6 percent of the capital and surplus of the member bank. These shares are nonvoting with a par value of $100 and may not be
transferred or hypothecated. As a member bank’s capital and surplus changes, its holdings of Reserve Bank stock must be adjusted.
Currently, only one-half of the subscription is paid-in and the remainder is subject to call. A member bank is liable for Reserve Bank
liabilities up to twice the par value of stock subscribed by it.
By law, each Reserve Bank is required to pay each member bank an annual dividend of 6 percent on the paid-in capital stock. This
cumulative dividend is paid semiannually. To reflect the Federal Reserve Act requirement that annual dividends be deducted from
net earnings, dividends are presented as a distribution of comprehensive income in the Statements of Income and Comprehensive
Income.

Accumulated other comprehensive income is reported as a component of surplus in the Statements of Condition and the Statements
of Changes in Capital. The balance of accumulated other comprehensive income is comprised of expenses, gains, and losses related
to other postretirement benefit plans that, under accounting standards, are included in other comprehensive income, but excluded
from net income. Additional information regarding the classifications of accumulated other comprehensive income is provided in
Notes 12 and 13.
l. Interest on Federal Reserve Notes
The Board of Governors requires the Reserve Banks to transfer excess earnings to the U.S. Treasury as interest on Federal Reserve
notes after providing for the costs of operations, payment of dividends, and reservation of an amount necessary to equate surplus
with capital paid-in. This amount is reported as “Payments to U.S. Treasury as interest on Federal Reserve notes” in the Statements
of Income and Comprehensive Income and is reported as a liability, or as an asset if overpaid during the year, in the Statements of
Condition. Weekly payments to the U.S. Treasury may vary significantly.
In the event of losses or an increase in capital paid-in at a Reserve Bank, payments to the U.S. Treasury are suspended and earnings
are retained until the surplus is equal to the capital paid-in.
In the event of a decrease in capital paid-in, the excess surplus, after equating capital paid-in and surplus at December 31, is distributed to the U.S. Treasury in the following year.
m. Interest on Depository Institution Deposits
Beginning October 9, 2008, the Reserve Banks began paying interest to depository institutions on qualifying balances held at the
Banks. Authorization for payment of interest on these balances was granted by Title II of the Financial Services Regulatory Relief
Act of 2006, which had an effective date of 2011. Section 128 of the Emergency Economic Stabilization Act of 2008, enacted on
October 3, 2008, made that authority immediately effective. The interest rates paid on required reserve balances and excess balances
are based on an FOMC-established target range for the effective federal funds rate.
n. Income and Costs Related to U.S. Treasury Services
The Bank is required by the Federal Reserve Act to serve as fiscal agent and depository of the United States. By statute, the Department of the Treasury has appropriations to pay for these services. During the years ended December 31, 2008 and 2007, the Bank
was reimbursed for all services provided to the Department of the Treasury as its fiscal agent.
o. Compensation Received for Services Provided
The Federal Reserve Bank of Atlanta (“FRBA”) has overall responsibility for managing the Reserve Banks’ provision of check and
ACH services to depository institutions and, as a result, recognizes total System revenue for these services on its Statements of
Income and Comprehensive Income. Similarly, the FRBNY manages the Reserve Banks’ provision of Fedwire funds and securities
transfer services, and recognizes total System revenue for these services on its Statements of Income and Comprehensive Income.
The FRBA and FRBNY compensate the other Reserve Banks for the costs incurred to provide these services. The Bank reports this
compensation as “Compensation received for services provided” in the Statements of Income and Comprehensive Income.
p. Assessments by the Board of Governors
The Board of Governors assesses the Reserve Banks to fund its operations based on each Reserve Bank’s capital and surplus balances
as of December 31 of the prior year. The Board of Governors also assesses each Reserve Bank for the expenses incurred for the U.S.
Treasury to prepare and retire Federal Reserve notes based on each Reserve Bank’s share of the number of notes comprising the
System’s net liability for Federal Reserve notes on December 31 of the prior year.
q. Taxes
The Reserve Banks are exempt from federal, state, and local taxes, except for taxes on real property and, in some states, sales taxes
on construction-related materials. The Bank’s real property taxes were $2 million for each of the years ended December 31, 2008
and 2007, and are reported as a component of “Occupancy expense.”
r. Restructuring Charges
The Reserve Banks recognize restructuring charges for exit or disposal costs incurred as part of the closure of business activities in
a particular location, the relocation of business activities from one location to another, or a fundamental reorganization that affects
the nature of operations. Restructuring charges may include costs associated with employee separations, contract terminations, and
asset impairments. Expenses are recognized in the period in which the Bank commits to a formalized restructuring plan or executes
the specific actions contemplated in the plan and all criteria for financial statement recognition have been met.

Federal Reserve Bank of Cleveland

k. Surplus
The Board of Governors requires the Reserve Banks to maintain a surplus equal to the amount of capital paid-in as of December
31 of each year. This amount is intended to provide additional capital and reduce the possibility that the Reserve Banks will be
required to call on member banks for additional capital.

Note 14 describes the Bank’s restructuring initiatives and provides information about the costs and liabilities associated with
employee separations and contract terminations. The costs associated with the impairment of certain of the Bank’s assets are
discussed in Note 9. Costs and liabilities associated with enhanced pension benefits in connection with the restructuring activities
for all of the Reserve Banks are recorded on the books of the FRBNY.
s. Recently Issued Accounting Standards
In September 2006, FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which established a single authoritative definition of fair value and a framework for measuring fair value, and expands the required disclosures for assets and liabilities
measured at fair value. SFAS 157 was effective for fiscal years beginning after November 15, 2007, with early adoption permitted.
The Bank adopted SFAS 157 effective January 1, 2008. The provisions of this standard have no material effect on the Bank’s
financial statements.
38

2008 Annual Report

In February 2007, FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” including an
amendment of FASB Statement No. 115 (“SFAS 159”), which provides companies with an irrevocable option to elect fair value as
the measurement for selected financial assets, financial liabilities, unrecognized firm commitments, and written loan commitments that
are not subject to fair value under other accounting standards. There is a one-time election available to apply this standard to existing
financial instruments as of January 1, 2008; otherwise, the fair value option will be available for financial instruments on their initial
transaction date. SFAS 159 reduces the accounting complexity for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently, and it eliminates the operational complexities of applying hedge accounting. The Bank
adopted SFAS 159 effective January 1, 2008. The provisions of this standard have no material effect on the Bank’s financial statements.
In February 2008, FASB issued FASB Staff Position (“FSP”) FAS 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.” FSP FAS 140-3 requires that an initial transfer of a financial asset and a repurchase financing that was
entered into contemporaneously with, or in contemplation of, the initial transfer be evaluated together as a linked transaction under
SFAS 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” unless certain criteria are
met. FSP FAS 140-3 is effective for the Bank’s financial statements for the year beginning on January 1, 2009, and earlier adoption is
not permitted. The provisions of this standard will not have a material effect on the Bank’s financial statements.

LOANS
The loan amounts outstanding to depository institutions at December 31 were as follows (in millions):
2008

Primary, secondary, and seasonal credit

TAF

2007

15,575
Total loans to depository institutions

15,622

841
12

853

Loans to Depository Institutions
The Bank offers primary, secondary, and seasonal credit to eligible borrowers. Each program has its own interest rate. Interest is
accrued using the applicable interest rate established at least every fourteen days by the board of directors of the Bank, subject to
review and determination by the Board of Governors. Primary and secondary credits are extended on a short-term basis, typically
overnight, whereas seasonal credit may be extended for a period up to nine months.
Primary, secondary, and seasonal credit lending is collateralized to the satisfaction of the Bank to reduce credit risk. Assets eligible to
collateralize these loans include consumer, business, and real estate loans, U.S. Treasury securities, Federal agency securities, GSE
obligations, foreign sovereign debt obligations, municipal or corporate obligations, state and local government obligations, asset-backed
securities, corporate bonds, commercial paper, and bank-issued assets, such as certificates of deposit, bank notes, and deposit notes.
Collateral is assigned a lending value deemed appropriate by the Bank, which is typically fair value or face value reduced by a margin.
Depository institutions that are eligible to borrow under the Bank’s primary credit program are also eligible to participate in the
temporary TAF program. Under the TAF program, the Reserve Banks conduct auctions for a fixed amount of funds, with the interest
rate determined by the auction process, subject to a minimum bid rate. TAF loans are extended on a short-term basis, with terms of
either 28 or 84 days. All advances under the TAF must be fully collateralized. Assets eligible to collateralize TAF loans include the
complete list noted above for loans to depository institutions. Similar to the process used for primary, secondary, and seasonal credit,
a lending value is assigned to each asset accepted as collateral for TAF loans.
Loans to depository institutions are monitored on a daily basis to ensure that borrowers continue to meet eligibility requirements
for these programs. The financial condition of borrowers is monitored by the Bank and, if a borrower no longer qualifies for these
programs, the Bank will generally request full repayment of the outstanding loan or may convert the loan to a secondary credit loan.
Collateral levels are reviewed daily against outstanding obligations and borrowers that no longer have sufficient collateral to support
outstanding loans are required to provide additional collateral or to make partial or full repayment.

The maturity distribution of loans outstanding at December 31, 2008, was as follows (in millions):
Primary, secondary,
and seasonal credit

16 days to 90 days
Total loans

TAF

8,825

15,575

—

6,750

Allowance for Loan Losses
At December 31, 2008 and 2007, no loans were considered to be impaired and the Bank determined that no allowance for loan
losses was required.

6. U.S. GOVERNMENT, FEDERAL AGENCY, AND GOVERNMENT-SPONSORED ENTERPRISE SECURITIES;
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL; SECURITIES SOLD UNDER AGREEMENTS
TO REPURCHASE; AND SECURITIES LENDING
The FRBNY, on behalf of the Reserve Banks, holds securities bought outright in the SOMA. The Bank’s allocated share of SOMA
balances was approximately 3.792 percent and 4.092 percent at December 31, 2008 and 2007, respectively.
The Bank’s allocated share of U.S. government, Federal agency, and GSE securities, net held in the SOMA at December 31 was as
follows (in millions):
2008

2007

U.S. government securities:
Bills

699

9,324

Notes

12,695

16,442

Bonds

4,653

4,542

Federal agency and GSE securities
Total par value

747

—

18,794

30,308

Unamortized premiums

305

327

Unaccreted discounts

(56)

(121)

Total allocated to the Bank

19,043

30,514

At December 31, 2008 and 2007, the fair value of the U.S. government, Federal agency, and GSE securities allocated to the Bank,
excluding accrued interest, was $21,479 million and $31,803 million, respectively, as determined by reference to quoted prices
for identical securities.
The total of the U.S. government, Federal agency, and GSE securities, net held in the SOMA was $502,189 million and
$745,629 million at December 31, 2008 and 2007, respectively. At December 31, 2008 and 2007, the fair value of the U.S.
government, Federal agency, and GSE securities held in the SOMA, excluding accrued interest, was $566,427 million and
$777,141 million, respectively, as determined by reference to quoted prices for identical securities.
Although the fair value of security holdings can be substantially greater than or less than the recorded value at any point in time,
these unrealized gains or losses have no effect on the ability of the Reserve Banks, as central bank, to meet their financial obligations
and responsibilities and do not represent a risk to the Reserve Banks, their shareholders, or the public. The fair value is presented
solely for informational purposes.
Financial information related to securities purchased under agreements to resell and securities sold under agreements to repurchase
for the years ended December 31, 2008 and 2007, were as follows (in millions):
Securities purchased under
agreements to resell
2008

Securities sold under agreements
to repurchase

2007

2008

2007

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

3,034

1,903

Weighted average amount outstanding, during the year

3,680

1,435

Maximum month-end balance outstanding, during the year

4,512

2,108

Securities pledged, end of year

3,350

1,800

2,482

1,426

3,737

1,800

2,992

1,803

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

80,000

46,500

88,352

43,985

97,037

35,073

65,461

34,846

119,000

51,500

98,559

43,985

78,896

44,048

The contract amounts for securities purchased under agreements to resell and securities sold under agreements to repurchase
approximate fair value.

Federal Reserve Bank of Cleveland

Within 15 days

The maturity distribution of U.S. government, Federal agency, and GSE securities bought outright, securities purchased under
agreements to resell, and securities sold under agreements to repurchase that were allocated to the Bank at December 31, 2008,
was as follows (in millions):

Within 15 days

2008 Annual Report

U.S.
government
securities

Federal agency
and GSE
securities

(Par value)

16 days to 90 days

726

795

Subtotal: U.S
government,
Securities
Federal agency, purchased under
and GSE
agreements
securities
to resell

Securities
sold under
agreements to
repurchase

(Par value) (Contract amount) (Contract amount)

743

1,517

3,350

124

919

1,517

—
—

91 days to 1 year

2,401

2,438

—

Over 1 year to 5 years

6,573

431

7,004

—

Over 5 years to 10 years

3,690

138

3,828

—

Over 10 years
Total allocated to the Bank

3,862
$

18,047

—
$

747

3,862
$

18,794

—
$

3,034

—
$

3,350

At December 31, 2008 and 2007, U.S. government securities with par values of $180,765 million and $16,649 million, respectively,
were loaned from the SOMA, of which $6,855 million and $681 million, respectively, were allocated to the Bank.

7. INVESTMENTS DENOMINATED IN FOREIGN CURRENCIES
The FRBNY, on behalf of the Reserve Banks, holds foreign currency deposits with foreign central banks and with the Bank for
International Settlements and invests in foreign government debt instruments. These investments are guaranteed as to principal and
interest by the issuing foreign governments.
The Bank’s allocated share of investments denominated in foreign currencies was approximately 6.998 percent and 7.091 percent at
December 31, 2008 and 2007, respectively.
The Bank’s allocated share of investments denominated in foreign currencies, including accrued interest, valued at foreign currency
market exchange rates at December 31, was as follows (in millions):
2008

2007

Euro:
Foreign currency deposits

389

509

Securities purchased under agreements to resell

285

181

Government debt instruments

323

331

244

199

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

495
$

1,736

405
$

1,625

At December 31, 2008 and 2007, the fair value of investments denominated in foreign currencies, including accrued interest, allocated to the Bank was $1,751 million and $1,623 million, respectively. The fair value of government debt instruments was determined
by reference to quoted prices for identical securities. The cost basis of foreign currency deposits and securities purchased under
agreements to resell, adjusted for accrued interest, approximates fair value. Similar to the U.S. government, Federal agency, and GSE
securities discussed in Note 6, unrealized gains or losses have no effect on the ability of a Reserve Bank, as central bank, to meet its
financial obligations and responsibilities.
Total System investments denominated in foreign currencies were $24,804 million and $22,914 million at December 31, 2008 and
2007, respectively. At December 31, 2008 and 2007, the fair value of the total System investments denominated in foreign currencies,
including accrued interest, was $25,021 million and $22,892 million, respectively.

The maturity distribution of investments denominated in foreign currencies that were allocated to the Bank at December 31, 2008,
was as follows (in millions):

16 days to 90 days

Japanese yen

531

244

Total

775

126

91 days to 1 year

123

139

262

Over 1 year to 5 years

261

312

573

Total allocated to the Bank

997

739

1,736

At December 31, 2008 and 2007, the authorized warehousing facility was $5.0 billion, with no balance outstanding.
In connection with its foreign currency activities, the FRBNY may enter into transactions that contain varying degrees of offbalance-sheet market risk that result from their future settlement and counter-party credit risk. The FRBNY controls these risks
by obtaining credit approvals, establishing transaction limits, and performing daily monitoring procedures.

8. CENTRAL BANK LIQUIDITY SWAPS
Central bank liquidity swap arrangements are contractual agreements between two parties, the FRBNY and an authorized foreign
central bank, whereby the parties agree to exchange their currencies up to a prearranged maximum amount and for an agreedupon period of time. At the end of that period of time, the currencies are returned at the original contractual exchange rate and the
foreign central bank pays interest to the Federal Reserve at an agreed-upon rate. These arrangements give the authorized foreign
central bank temporary access to U.S. dollars. Drawings under the swap arrangements are initiated by the foreign central bank and
must be agreed to by the Federal Reserve.
The Bank’s allocated share of central bank liquidity swaps was approximately 6.998 percent and 7.091 percent at December 31,
2008 and 2007, respectively.
At December 31, 2008 and 2007, the total System amount of foreign currency held under central bank liquidity swaps was
$553,728 million and $24,353 million, respectively, of which $38,749 million and $1,727 million, respectively, was allocated to
the Bank.
The maturity distribution of central bank liquidity swaps that were allocated to the Bank at December 31 was as follows (in millions):

Within 15 days

Australian dollar

Danish krone
Euro
Japanese yen
Korean won

700

2008

2007

16 days
to 90 days

898

Total

1,598

—

1,050

—

10,565

9,824

20,389

1,439

3,351

5,236

8,587

—

724

—

Norwegian krone

154

422

576

—

Swedish krona

700

1,049

1,749

—

1,345

417

1,762

288

Swiss franc
UK pound
Total

8
$

16,823

2,306
$

21,926

2,314
$

38,749

—
$

1,727

Federal Reserve Bank of Cleveland

Within 15 days

Euro

9. BANK PREMISES, EQUIPMENT, AND SOFTWARE
Bank premises and equipment at December 31 were as follows (in millions):
2008

2007

Bank premises and equipment:
Land

Buildings

9
172

Building machinery and equipment

Furniture and equipment

305

309

Subtotal

(137)

Accumulated depreciation
2008 Annual Report

9
173

(133)

Bank premises and equipment, net

168

176

Depreciation expense, for the years ended December 31

The Bank leases space to outside tenants with remaining lease terms ranging from one to fifteen years. Rental income from such
leases was $1 million for each of the years ended December 31, 2008 and 2007, and is reported as a component of “Other income.”
Future minimum lease payments that the Bank will receive under noncancelable lease agreements in existence at December 31,
2008, are as follows (in millions):

2009

2010

2011

2012

2013

Thereafter

Total

The Bank has capitalized software assets, net of amortization, of $8 million and $26 million at December 31, 2008 and 2007,
respectively. Amortization expense was $18 million and $15 million for the years ended December 31, 2008 and 2007, respectively.
Capitalized software assets are reported as a component of “Other assets” and the related amortization is reported as a component
of “Other expenses.”
Assets impaired as a result of the Bank’s restructuring plan, as discussed in Note 14, include assets associated with legacy check
processing. Asset impairment losses of $3 million for the period ended December 31, 2007, were determined using fair values
based on quoted fair values or other valuation techniques and are reported as a component of “Other expenses.” The Bank had no
impairment losses in 2008.

10. COMMITMENTS AND CONTINGENCIES
In the normal course of its operation, the Bank enters into contractual commitments, normally with fixed expiration dates or termination provisions, at specific rates and for specific purposes.
At December 31, 2008, the Bank was obligated under a noncancelable lease for premises with a remaining term of less than one year.
Rental expense under operating leases for certain operating facilities and data processing and office equipment (including taxes,
insurance and maintenance when included in rent), net of sublease rentals, was $219 thousand and $349 thousand for the years
ended December 31, 2008 and 2007, respectively.
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, 2008, were not material.
At December 31, 2008, there were no material unrecorded unconditional purchase commitments or long-term obligations in excess
of one year.
Under the Insurance Agreement of the Federal Reserve Banks, each of the Reserve Banks has agreed to bear, on a per incident
basis, a pro rata share of losses in excess of one percent of the capital paid-in of the claiming Reserve Bank, up to 50 percent of the
total capital paid-in of all Reserve Banks. Losses are borne in the ratio of a Reserve Bank’s capital paid-in to the total capital paid-in
of all Reserve Banks at the beginning of the calendar year in which the loss is shared. No claims were outstanding under the agreement at December 31, 2008 or 2007.
The Bank is involved in certain legal actions and claims arising in the ordinary course of business. Although it is difficult to predict
the ultimate outcome of these actions, in management’s opinion, based on discussions with counsel, the aforementioned litigation
and claims will be resolved without material adverse effect on the financial position or results of operations of the Bank.

11. RETIREMENT AND THRIFT PLANS
Retirement Plans
The Bank currently offers three defined benefit retirement plans to its employees, based on length of service and level of
compensation. Substantially all of the Bank’s employees participate in the Retirement Plan for Employees of the Federal Reserve
System (“System Plan”). Employees at certain compensation levels participate in the Benefit Equalization Retirement Plan
(“BEP”) and certain Reserve Bank officers participate in the Supplemental Employee Retirement Plan (“SERP”).

The Bank’s projected benefit obligation, funded status, and net pension expenses for the BEP and the SERP at December 31, 2008
and 2007, and for the years then ended, were not material.
Thrift Plan
Employees of the Bank may also participate in the defined contribution Thrift Plan for Employees of the Federal Reserve System
(“Thrift Plan”). The Bank matches employee contributions based on a specified formula. For the years ended December 31, 2008
and 2007, the Bank matched 80 percent on the first 6 percent of employee contributions for employees with less than five years
of service and 100 percent on the first 6 percent of employee contributions for employees with five or more years of service. The
Bank’s Thrift Plan contributions totaled $4 million for each of the years ended December 31, 2008 and 2007, and are reported as a
component of “Salaries and other benefits” in the Statements of Income and Comprehensive Income. Beginning in 2009, the Bank
will match 100 percent of the first 6 percent of employee contributions from the date of hire and provide an automatic employer
contribution of 1 percent of eligible pay.

12. 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.
Following is a reconciliation of the beginning and ending balances of the benefit obligation (in millions):
2008

Accumulated postretirement beneﬁt obligation at January 1

Service cost-beneﬁts earned during the period

81.2

2007

3.5

79.2
3.9

Interest cost on accumulated beneﬁt obligation

5.3

5.0

Net actuarial gain

(0.8)

(4.0)

Curtailment gain

(0.2)

—

Contributions by plan participants

0.6

0.5

Beneﬁts paid

(3.8)

(3.6)

Medicare Part D subsidies

0.2

Accumulated postretirement beneﬁt obligation at December 31

86.0

81.2

At December 31, 2008 and 2007, the weighted-average discount rate assumptions used in developing the postretirement benefit
obligation were 6.00 percent and 6.25 percent, respectively.
Discount rates reflect yields available on high-quality corporate bonds that would generate the cash flows necessary to pay the plan’s
benefits when due.

Federal Reserve Bank of Cleveland

The System Plan provides retirement benefits to employees of the Federal Reserve Banks, the Board of Governors, and the Office
of Employee Benefits of the Federal Reserve Employee Benefits System. The FRBNY, on behalf of the System, recognizes the net
asset or net liability and costs associated with the System Plan in its financial statements. Costs associated with the System Plan are
not reimbursed by other participating employers.

Following is a reconciliation of the beginning and ending balance of the plan assets, the unfunded postretirement benefit obligation,
and the accrued postretirement benefit costs (in millions):
2008

Fair value of plan assets at January 1

Contributions by the employer

—

2007

3.0

—
2.9

0.6

0.5

Beneﬁts paid

(3.8)

(3.6)

Medicare Part D subsidies

0.2

Fair value of plan assets at December 31

—

2008 Annual Report

Contributions by plan participants

Unfunded obligation and accrued postretirement beneﬁt cost

86.0

81.2

3.8

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

Net actuarial loss
Total accumulated other comprehensive loss

(19.8)
$

(16.0)

5.7
(22.6)

(16.9)

Accrued postretirement benefit costs are reported as a component of “Accrued benefit costs” in the Statements of Condition.
For measurement purposes, the assumed health care cost trend rates at December 31 are as follows:
2008

2007

Health care cost trend rate assumed for next year

7.50%

8.00%

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

5.00%

2014

2013

Year that the rate reaches the ultimate trend rate

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, 2008 (in millions):
One percentage
point increase

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

Effect on accumulated postretirement beneﬁt obligation

1.5

One percentage
point decrease

11.6

(1.2)
(9.6)

The following is a summary of the components of net periodic postretirement benefit expense for the years ended December 31
(in millions):
2008

Service cost-beneﬁts earned during the period

3.5

2007

3.9

Interest cost on accumulated beneﬁt obligation

5.3

5.0

Amortization of prior service cost

(2.3)

Amortization of net actuarial loss
Net periodic postretirement beneﬁt expense

2.1
$

8.6

(2.3)

(0.8)

Estimated amounts that will be amortized from accumulated
other comprehensive loss into net periodic postretirement
beneﬁt expense in 2009 are shown below:
Prior service cost
Net actuarial loss
Total

1.5

3.6
$

10.2

Net postretirement benefit costs are actuarially determined using a January 1 measurement date. At January 1, 2008 and 2007,
the weighted-average discount rate assumptions used to determine net periodic postretirement benefit costs were 6.25 percent and
5.75 percent, respectively.
Net periodic postretirement benefit expense is reported as a component of “Salaries and other benefits” in the Statements of
Income and Comprehensive Income.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 established a prescription drug benefit under
Medicare (“Medicare Part D”) and a federal subsidy to sponsors of retiree health care benefit plans that provide benefits that are
at least actuarially equivalent to Medicare Part D. The benefits provided under the Bank’s plan to certain participants are at least
actuarially equivalent to the Medicare Part D prescription drug benefit. The estimated effects of the subsidy are reflected in
actuarial loss in the accumulated postretirement benefit obligation and net periodic postretirement benefit expense.

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

2009

Without subsidy

With subsidy

4.2

3.9

2010

4.6

4.3

2011

5.1

4.7

2012

5.4

4.9

2013
2014–2018
Total

5.7

5.3

35.3

32.2

60.3

55.3

Postemployment Benefits
The Bank offers benefits to former or inactive employees. Postemployment benefit costs are actuarially determined using a
December 31 measurement date and include the cost of medical and dental insurance, survivor income, disability benefits, and selfinsured workers’ compensation expenses. The accrued postemployment benefit costs recognized by the Bank at December 31, 2008
and 2007, were $8.0 million and $7.7 million, respectively. This cost is included as a component of “Accrued benefit costs” in the
Statements of Condition. Net periodic postemployment benefit expense included in 2008 and 2007 operating expenses were
$1.5 million and $1.0 million, respectively, and are recorded as a component of “Salaries and other benefits” in the Statements of
Income and Comprehensive Income.

13. ACCUMULATED OTHER COMPREHENSIVE INCOME AND OTHER COMPREHENSIVE INCOME
Following is a reconciliation of beginning and ending balances of accumulated other comprehensive loss (in millions):
Amount related to
postretirement
beneﬁts other
than pensions

Balance at January 1, 2007

(22)

Change in funded status of beneﬁt plans:
Net actuarial gain arising during the year

Amortization of prior service cost

(2)

Amortization of net actuarial loss

Change in funded status of beneﬁt plans–
other comprehensive income
Balance at December 31, 2007

5
$

(17)

Change in funded status of beneﬁt plans:
Net actuarial gain arising during the year

Amortization of prior service cost

(2)

Amortization of net actuarial loss

Change in funded status of beneﬁt plans–
other comprehensive income
Balance at December 31, 2008

1
$

(16)

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

Federal Reserve Bank of Cleveland

Federal Medicare Part D subsidy receipts were $0.2 million and $0.4 million in the years ended December 31, 2008 and 2007,
respectively. Expected receipts in 2009, related to benefits paid in the years ended December 31, 2008 and 2007, are $0.1 million.

14. BUSINESS RESTRUCTURING CHARGES
2008 Restructuring Plans
In 2008, the Reserve Banks announced the acceleration of their check restructuring initiatives to align the check processing infrastructure and operations with declining check processing volumes. The new infrastructure will involve consolidation of operations
into two regional Reserve Bank processing sites in Cleveland and Atlanta.
2007 Restructuring Plans
In 2007, the Reserve Banks announced a restructuring initiative to align the check processing infrastructure and operations with
declining check processing volumes. Additional announcements in 2007 related to restructuring plans associated with Electronic
Treasury Financial Services. This restructure was the result of the U.S. Treasury initiating a Collection and Cash Management
Modernization (CCMM) program.

2008 Annual Report

2006 and Prior Restructuring Costs
The Bank incurred restructuring charges prior to 2007 related to the restructuring of Check Operations.
Following is a summary of financial information related to the restructuring plans (in millions):
2006 and prior
Restructuring
plans

2007
Restructuring
plans

Total

Information related to restructuring plans
as of December 31, 2008:
Total expected costs related to restructuring activity

Expected completion date

—

2006

2.1

0.2

2010

Reconciliation of liability balances:
Balance at January 1, 2007

Employee separation costs
Payments
Balance at December 31, 2007

0.2

—

2.9

(0.2)

—

(0.2)

—

2.9

Employee separation costs

—

0.2

Adjustments

—

(1.0)

Payments

—

(1.1)

Balance at December 31, 2008

—

1.0

Employee separation costs are primarily severance costs for identified staff reductions associated with the announced restructuring plans. Separation costs that are provided under terms of ongoing benefit arrangements are recorded based on the accumulated
benefit earned by the employee. Separation costs that are provided under the terms of one-time benefit arrangements are generally
measured based on the expected benefit as of the termination date and recorded ratably over the period to termination. Restructuring
costs related to employee separations are reported as a component of “Salaries and other benefits” in the Statements of Income and
Comprehensive Income.
Adjustments to the accrued liability are primarily due to changes in the estimated restructuring costs and are shown as a component
of the appropriate expense category in the Statements of Income and Comprehensive Income.
Restructuring costs associated with the impairment of certain Bank assets, including software, buildings, leasehold improvements,
furniture, and equipment, are discussed in Note 9. Costs associated with enhanced pension benefits for all Reserve Banks are
recorded on the books of the FRBNY as discussed in Note 11.

15. SUBSEQUENT EVENTS
In February 2009, the System announced the extension through October 30, 2009, of liquidity programs that were previously
scheduled to expire on April 30, 2009. The extension pertains to the Asset-Backed Commercial Paper Money Market Mutual Fund
Liquidity Facility and the Term Securities Lending Facility. In addition, the temporary reciprocal currency arrangements (swap
lines) between the Federal Reserve and other central banks were extended to October 30, 2009.

■■■

Ofﬁcers and Consultants

Boards of Directors:
Cleveland

Cincinnati

Pittsburgh

Business Advisory Councils

Consumer Advisory Council

Ofﬁcers and Consultants
As of December 31, 2008

Sandra Pianalto
President and Chief Executive Officer
R. Chris Moore
First Vice President and Chief Operating Officer

2008 Annual Report

Mark S. Sniderman
Executive Vice President and Chief Policy Officer
Economic Research, Policy Analysis,
Public Affairs, Community Development
■■■

Douglas A. Banks
Vice President
Credit Risk Management, Statistics and Analysis
Kelly A. Banks
Vice President
Community Relations, Learning Center,
Bankwide Public Programs
Ruth M. Clevenger
Vice President and Community Affairs Officer
Community Development

Lawrence Cuy
Senior Vice President
Treasury Retail Securities, eGovernment,
Information Technology

Cheryl L. Davis
Vice President and Corporate Secretary
Ofﬁce of the President, Advisory Councils,
Executive Information

Stephen H. Jenkins
Senior Vice President
Supervision and Regulation, Credit Risk
Management, Statistics and Analysis

William D. Fosnight
Vice President and Associate General Counsel
Legal

Robert W. Price
Senior Vice President
Retail Payments Ofﬁce, National Check Automation and
Operations, National Product Development

Amy J. Heinl
Vice President
Treasury Retail Securities

Susan G. Schueller
Senior Vice President and General Auditor
Audit

Barbara B. Henshaw
Vice President
Cincinnati Location Ofﬁcer, Branch Board
of Directors and Community Outreach,
Protection, Business Continuity

Mark E. Schweitzer
Senior Vice President and Director of Research
Regional Economics, Macroeconomic Policy,
Money and Payments, Banking and Finance

Suzanne M. Howe
Vice President
eGovernment Operations, Treasury Electronic
Check Processing

Gregory L. Stefani
Senior Vice President and Chief Financial Officer
Financial Management, Risk Management,
Strategy and Performance, National Billing

Jon C. Jeswald
Vice President
National Check Automation and Operations,
Retail Payments Ofﬁce

Anthony Turcinov
Senior Vice President
Facilities, District Check Operations and Adjustments,
Information Security, Business Continuity

Susan M. Kenney
Vice President
eGovernment Technical Support, Pay.gov

Peggy A. Velimesis
Senior Vice President
District Human Resources, Internal
Communications, Payroll, EEO Ofﬁcer,
Harassment/Ombuds Programs
Lisa M. Vidacs
Senior Vice President
Cash, Protection
Andrew W. Watts
Senior Vice President and General Counsel
Legal, Ethics Ofﬁcer

Mark S. Meder
Vice President
Financial Management Services,
Strategic Management
Stephen J. Ong
Vice President
Banking Supervision and Policy Development
Terrence J. Roth
Vice President
National Product Development, Retail Payments Ofﬁce,
Check Products

Joseph G. Haubrich
Consultant and Economist
Banking and Finance

Elizabeth J. Robinson
Assistant Vice President
Human Resources

Robert B. Schaub
Vice President
Pittsburgh Location Ofﬁcer, Branch Board of
Directors and Community Outreach, Protection,
Business Continuity

Bryan S. Huddleston
Assistant Vice President
Supervision and Regulation, Consumer Affairs

Thomas E. Schaadt
Assistant Vice President
Check Automation Services

Paul E. Kaboth
Assistant Vice President
Supervision and Regulation,
Community Supervision

Jerome J. Schwing
Assistant Vice President
Check Operations

James B. Thomson
Vice President and Economist
Ofﬁce of Policy Analysis, Policy Development,
Project Management, Payments System Research
Henry P. Trolio
Vice President
Information Technology
Michelle C. Vanderlip
Vice President
District Human Resources,
Human Resources Development
Jeffrey R. Van Treese
Vice President
Check Operations
Nadine M. Wallman
Vice President
Supervision and Regulation, Applications
■■■
Tracy L. Conn
Assistant Vice President
Supervision and Regulation
Jeffrey G. Gacka
Assistant Vice President
Financial Management Services, National Billing,
Accounting
Stephen J. Geers
Assistant Vice President
Depository Institutions Relationship Management
Patrick J. Geyer
Assistant Vice President
Cash
George E. Guentner
Assistant Vice President
Information Technology
Felix Harshman
Assistant Vice President
Financial Management Services,
Expense Accounting/Budget

Kenneth E. Kennard
Assistant Vice President
Protection
Jill A. Krauza
Assistant Vice President
Treasury Retail Securities
Dean A. Longo
Consultant
Information Technology, Infrastructure Support
Evelyn M. Magas
Assistant Vice President
Supervision and Regulation, Support Services
Martha Maher
Assistant Vice President
Retail Payments Ofﬁce
Jerrold L. Newlon
Assistant Vice President
Supervision and Regulation
Anthony V. Notaro
Assistant Vice President
Facilities
Timothy M. Rachek
Assistant Vice President
Check Adjustments
James W. Rakowsky
Assistant Vice President
Cleveland Facilities
Robin R. Ratliff
Assistant Vice President
and Assistant Corporate Secretary
Communications and Design,
Ofﬁce of the Corporate Secretary
John P. Robins
Consultant
Supervision and Regulation

James P. Slivka
Assistant Vice President and Assistant
General Auditor
Audit
Diana C. Starks
Assistant Vice President
Executive/Corporate Information Management,
Diversity
Janine M. Valvoda
Assistant Vice President
and Chief Culture Officer
Michael Vangelos
Assistant Vice President
Information Security, Business Continuity

Federal Reserve Bank of Cleveland

James G. Savage
Vice President and Public Information Officer
Public Affairs

Federal Reserve Banks each have a main office board of nine directors. Directors
supervise the Bank’s budget and operations, make recommendations on the
discount rate on primary credit and, with the Board of Governors’ approval,
appoint the Bank’s president and first vice president.
In addition, directors provide the Federal Reserve System with a wealth of
information on economic conditions. This information is used by the Federal
Open Market Committee and the Board of Governors in reaching decisions
about monetary policy.
■■■
Class A directors are elected by and represent Fourth District member banks.
Class B directors are also elected by Fourth District member banks and represent
diverse industries within the District. Class C directors are selected by the Board
of Governors and also represent the wide range of businesses and industries in the
Fourth District. Two Class C directors are designated as chairman and deputy
chairman of the board.
■■■
The Cincinnati and Pittsburgh branch offices each have a board of seven directors
who are appointed by the Board of Directors of the Federal Reserve Bank of
Cleveland and the Board of Governors.
■■■
Terms for all directors are generally limited to two three-year terms to ensure that
the individuals who serve the Federal Reserve System represent a diversity of
backgrounds and experience.

Cleveland
Board of Directors
As of December 31, 2008

Tanny B. Crane
Chairwoman
President and Chief Executive Officer
Crane Group Company
Columbus, Ohio

Les C. Vinney
Senior Advisor and Immediate Past President
and Chief Executive Officer
STERIS Corporation
Mentor, Ohio

Alfred M. Rankin Jr.
Deputy Chairman
Chairman, President, and Chief Executive Officer
NACCO Industries, Inc.
Cleveland, Ohio

Bick Weissenrieder
Chairman and Chief Executive Officer
Hocking Valley Bank
Athens, Ohio
51

Federal Reserve Bank of Cleveland

C. Daniel DeLawder
Chairman and Chief Executive Officer
Park National Bank
Newark, Ohio
V. Ann Hailey
Retired Executive Vice President,
Corporate Development
Limited Brands
Columbus, Ohio
Roy W. Haley
Chairman and Chief Executive Officer
WESCO International, Inc.
Pittsburgh, Pennsylvania
James E. Rohr
Chairman and Chief Executive Officer
The PNC Financial Services Group, Inc.
Pittsburgh, Pennsylvania

Henry L. Meyer III
Federal Advisory Council Representative
Chairman and Chief Executive Officer
KeyCorp
Cleveland, Ohio

Les C. Vinney, C. Daniel DeLawder, Alfred M. Rankin Jr., Bick Weissenrieder, Tanny B. Crane, Roy W. Haley, V. Ann Hailey, and James E. Rohr.

Cincinnati
Board of Directors
As of December 31, 2008

2008 Annual Report

James M. Anderson
Chairman
President and Chief Executive Officer
Cincinnati Children’s Hospital Medical Center
Cincinnati, Ohio
Daniel B. Cunningham
President and Chief Executive Officer
Long–Stanton Manufacturing Companies
Cincinnati, Ohio
Glenn D. Leveridge
President,Winchester Market
Central Bank and Trust Company
Winchester, Kentucky

Paul R. Poston
Director, Great Lakes District
NeighborWorks® America
Cincinnati, Ohio
Janet B. Reid
Principal Partner
Global Lead Management Consulting
Cincinnati, Ohio
Peter S. Strange
Chairman and Chief Executive Officer
Messer Construction Company
Cincinnati, Ohio

Charlotte W. Martin
President and Chief Executive Officer
Great Lakes Bankers Bank
Gahanna, Ohio

Paul R. Poston, Charlotte W. Martin, Peter S. Strange, Daniel B. Cunningham, Glenn D. Leveridge, Janet B. Reid, and James M. Anderson.

As of December 31, 2008

Sunil T. Wadhwani
Chairman
Co-chairman
iGATE Corporation
Pittsburgh, Pennsylvania
Todd D. Brice
Chief Executive Officer
S&T Bancorp, Inc.
Indiana, Pennsylvania
Howard W. Hanna III
Chairman and Chief Executive Officer
Howard Hanna Real Estate Services
Pittsburgh, Pennsylvania

Glenn R. Mahone
Partner and Attorney at Law
Reed Smith LLP
Pittsburgh, Pennsylvania
Robert A. Paul
Chairman and Chief Executive Officer
Ampco–Pittsburgh Corporation
Pittsburgh, Pennsylvania
Georgiana N. Riley
President and Chief Executive Officer
TIGG Corporation
Oakdale, Pennsylvania

Margaret Irvine Weir
President
NexTier Bank
Butler, Pennsylvania

Howard W. Hanna III, Sunil T. Wadhwani, Margaret Irvine Weir, Glenn R. Mahone, Todd D. Brice, Georgiana N. Riley, and Robert A. Paul.

Federal Reserve Bank of Cleveland

Pittsburgh
Board of Directors

2008 Annual Report

Business
Advisory Councils

Business Advisory Council members are a diverse group of Fourth District businesspeople who
advise the president and senior officers on current business conditions.

As of December 31, 2008

Each council—in Cleveland, Cincinnati, and Pittsburgh—meets with senior Bank leaders
at least twice yearly. These meetings provide anecdotal information that is useful in the
consideration of monetary policy direction and economic research activities.

Cleveland

Cincinnati

Pittsburgh

Gerald E. Henn
President and Founder
Henn Corporation
Warren, Ohio

Ross A. Anderson
SeniorVice President – Finance
and Chief Financial Officer
Milacron Inc.
Cincinnati, Ohio

Eric Bruce
Chief Executive Officer
TriLogic Corporation
Canonsburg, Pennsylvania

Christopher J. Hyland
Chief Financial Officer
Hyland Software Inc.
Westlake, Ohio
Gary A. Lesjak
Chief Financial Officer
The Shamrock Companies Inc.
Westlake, Ohio
Gena Lovett
Plant Manager
Cleveland Works
Alcoa Forged and Cast Products
Cleveland, Ohio

Cynthia O. Booth
President and Chief Executive Officer
COBCO Enterprises
Cincinnati, Ohio
Charles H. Brown
Vice President of Accounting and Finance
Toyota Motor Manufacturing North America Inc.
Erlanger, Kentucky
Calvin D. Buford
Partner, Corporate Development
Dinsmore & Shohl LLP
Cincinnati, Ohio

Rodger W. McKain
Vice President, Government Programs
Rolls-Royce Fuel Cell Systems (U.S.) Inc.
North Canton, Ohio

James E. Bushman
President and Chief Executive Officer
Cast-Fab Technologies Inc.
Cincinnati, Ohio

Kevin M. McMullen
Chairman and Chief Executive Officer
OMNOVA Solutions Inc.
Fairlawn, Ohio

Richard O. Coleman
Chief Executive Officer
NextLevel Transportation Services LLC
Cincinnati, Ohio

Michael J. Merle
President and Chief Executive Officer
Ray Fogg Building Methods Inc.
Cleveland, Ohio

Jerry A. Foster
President
Diversiﬁed Tool & Development
Richmond, Kentucky

Frederick D. Pond
President
Ridge Tool Company
Elyria, Ohio

Carol J. Frankenstein
President
BIO/START
Cincinnati, Ohio

Scott E. Rickert
President and Co-founder
Nanoﬁlm, Corporate Headquarters
Valley View, Ohio

Jim Huff
Chief Executive Officer
HUFF Commercial Group
Ft. Mitchell, Kentucky

Jack H. Schron Jr.
President and Chief Executive Officer
Jergens Inc.
Cleveland, Ohio

Vivian J. Llambi
President
Vivian Llambi & Associates Inc.
Cincinnati, Ohio

Steven J. Williams
President and Chief Executive Officer
Elsons International Inc.
Cleveland, Ohio

Rebecca S. Mobley
Partner
TurfTown Properties Inc.
Lexington, Kentucky
Jon R. Moeller
Vice President and Treasurer
The Procter & Gamble Company
Cincinnati, Ohio
Joseph L. Rippe
Principal
Rippe & Kingston Co. psc
Cincinnati, Ohio

R. Yvonne Campos
President
Campos Inc.
Pittsburgh, Pennsylvania
Jay Cleveland Jr.
President
Cleveland Brothers Equipment Co. Inc.
Murrysville, Pennsylvania
Dawn Fuchs
President
Weavertown Environmental Group
Carnegie, Pennsylvania
Charles Hammell III
President
PITT Ohio Express
Pittsburgh, Pennsylvania
Eric Hoover
President
Excalibur Machine Company Inc.
Conneaut Lake, Pennsylvania
John L. Kalkreuth
President
Kalkreuth Rooﬁng and Sheet Metal Inc.
Wheeling, West Virginia
Scott D. Leib
President
Applied Systems Associates Inc.
Murrysville, Pennsylvania
Marion P. Lewis
Chief Executive Officer
Tachyon Solutions
Sewickley, Pennsylvania
Steven C. Price
Chief Executive Officer
Solenture Inc.
Pittsburgh, Pennsylvania
Stephen V. Snavely
Chairman and Chief Executive Officer
Snavely Forest Products Inc.
Pittsburgh, Pennsylvania
Mark A. Snyder
Corporate Secretary
Snyder Associated Companies Inc.
Kittanning, Pennsylvania

As of December 31, 2008

The Federal Reserve System’s Consumer Advisory Council advises the Federal Reserve’s
Board of Governors on the exercise of the Board’s responsibilities under various consumer
financial services laws and on other related matters.
The council membership represents interests of consumers, communities, and the financial
services industry. Members are appointed by the Board of Governors and serve three-year
terms. The council meetings, held three times a year in Washington DC, are open to the public.
The following members represent the Fourth Federal Reserve District on the Consumer
Advisory Council:
55

Tony T. Brown
President and Chief Executive Officer
Uptown Consortium Inc.
Cincinnati, Ohio
Kathleen Engel
Associate Professor of Law
Cleveland–Marshall College of Law
Cleveland, Ohio

Louise J. Gissendaner
Akron City President and Director of
Community Development
Fifth Third Bank
Cleveland, Ohio
Edna Sawady
Consultant
Market Innovations, Inc.
New York, New York
(formerly Cleveland, Ohio)

Edna Sawady, Kathleen Engel, Louise J. Gissendaner, and Tony T. Brown.

Federal Reserve Bank of Cleveland

Consumer
Advisory Council

Acknowledgments
Managing Editor
Robin Ratliff, Assistant Vice President and Assistant
Corporate Secretary

Editor
Amy Koehnen, Communications and Design

Managing Designer
Michael Galka, Manager, Communications and Design

Designer
Natalie Bashkin, Communications and Design

Essay Writer
Doug Campbell, Communications and Design

Special Contributors
Jean Burson, Policy Advisor, Office of Policy Analysis
Yuliya Demyanyk, Economist, Research
O. Emre Ergungor, Economist, Research
Thomas Fitzpatrick, Economist, Office of Policy Analysis
Mary Helen Petrus, Manager, Community Development
Francisca Richter, Economist, Community Development
Guhan Venkatu, Economist, Research

Portrait Photography
Chris Pappas Photography, Inc.

This Annual Report was prepared by the Public
Affairs and Research departments of the Federal
Reserve Bank of Cleveland.
For additional copies, contact the Research Library,
Federal Reserve Bank of Cleveland, PO Box 6387,
Cleveland, OH 44101, or call 216.579.2052.
The Annual Report is also available electronically
through the Federal Reserve Bank of Cleveland's
website, www.c1eve1andfed.org.
We invite your comments and questions. Please email
us at editor@clev.frb.org.

F SC

Mixed Sources
Product group from well-managed

forests and other controlled sources

:;;:s~~:s~ S~~~~~h~P~~~~~ii002546

www.clevelandfed.org

Cleveland:

Cincinnati:

Pittsburgh:

1455 East Sixth Street
Cleveland, OH 44114
216.579.2000

150 East Fourth Street
Cincinnati, OH 45202
513.721.4787

717 Grant Street
Pittsburgh, PA 15129
412.261.7800

A n n u a l R epo r t
20 08

www.clevelandfed.org

FEDERAL RESERVE BANK of CLEVELAND

Full text of Annual Report of the Federal Reserve Bank of Cleveland : 2008 Annual Report

FRASER