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2009
ANNUAL REPORT

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).
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.

www.clevelandfed.org

FEDERAL RESERVE BANK of CLEVELAND

2009 Annual Report

Contents
President’s Foreword

Putting Systemic Risk on the Radar Screen

2009 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

47
48
49

Business Advisory Councils

Consumer Advisory Council

President’s Foreword
For central bankers, 2009 was a year of evaluating our progress in forestalling a financial
meltdown and preparing for better economic and financial market conditions in the
decade to come.

2 0 0 9 A N N U A L R E P O RT

As a corollary to that process, the U.S. Congress is deliberating on a major financial reform
package in 2010. Whatever reforms are enacted, we at the Federal Reserve Bank of
Cleveland believe that they should reflect our best understanding of economic theory,
the results of solid research, and the lessons we have learned firsthand by managing
through the crisis of the past two years.

F E D E R A L R E S E RV E B A N K O F C L E V E L A N D

Leading up to the crisis, financial supervisors were concentrating on the risk profiles of
the individual institutions they supervised. This entity-based approach to supervision
led to gaps in regulatory oversight, and the exposure of the broader financial system was
underestimated as well. The magnitude of the resulting crisis has chastened policymakers
and provided ample reason to consider how we can help prevent such a situation from
unfolding again.
Many thoughtful observers have proposed that greater attention be focused on identifying
a mechanism for macroprudential supervision, or what some refer to as systemic risk
supervision—that is, supervision with an eye toward minimizing risk to the entire
financial system. I support that effort wholeheartedly.
Tanny B. Crane, chairwoman;
Sandra Pianalto, president and
chief executive officer; and
Alfred M. Rankin Jr., deputy chairman.

A necessary first step is to accurately define systemic risk, and then to construct effective
measures to address it. This year’s annual report essay provides a road map to begin that
journey. We describe some of the factors that can render a financial organization system
ically important, explain some of the practical considerations supervisors will need to
take into account, and issue a call for greater transparency and ongoing public dialogue
about the state of the financial system.
Regardless of how the regulatory reform agenda works its way through Congress, I think
it is clear that the practice of banking supervision has to change. Banking supervisors
have to learn more about the risks taking place across the entire set of individual entities
within a banking organization. They have to become more alert to the connectedness
among financial institutions, and they must better understand how the macroeconomic
environment alters the context of a bank’s situation. Indeed, at the Federal Reserve
Bank of Cleveland, we are already adapting our thinking and practices to this new way
of doing business.

…

Our Bank’s boards of directors in Cleveland, Pittsburgh, and Cincinnati, as well as our
business and consumer advisory councils, have been instrumental in helping us remain
solidly on course in 2009. I am indebted to them for their dedicated service.
A huge debt of gratitude goes to Tanny Crane, president and chief executive officer of
Crane Group Company in Columbus, Ohio. Tanny retired from the Board of Directors
of the Federal Reserve Bank of Cleveland after having served as our chair from 2007 to
2009 and as deputy chair in 2006. She began her board service in 2003. In the past seven
years, she has participated in nearly all of the board’s committees, has been a tireless
advocate for our Bank, and has demonstrated a true passion for the work of the Federal
Reserve System. We have benefited greatly from her energy, insights, and support.
In addition, we are grateful for the leadership of Henry L. Meyer III, chairman and
CEO of KeyCorp in Cleveland, who served as our Bank’s representative on the Federal
Advisory Council in 2009 and will continue in that capacity in 2010.

…

Resilience, dedication, and professionalism have defined the efforts of more than 1,300
employees at our Cleveland, Cincinnati, and Pittsburgh offices during the past year. Our
officers and staff have been challenged to think as central bankers and to work collaboratively on complex policy issues across functional lines. Their innovation, learning, and
agility continue to grow as we execute our strategic vision of leadership in thought and
deed, external focus, and operational excellence. Their energy and commitment assure
me of the ongoing success of the Federal Reserve Bank of Cleveland.

S andra Pianalto
President and Chief Executive Officer

Putting Systemic Risk
on the Radar Screen

A s the nation ponders its response to the greatest financial

crisis in generations, plans for regulatory reform are everywhere. Proposals to break

up big financial companies, create a new agency for consumer protection, and lay out
additional rules for derivatives, insurance companies, and hedge funds—they’re all
on the table.
Many proposals call for enhanced supervision and regulation to combat systemic risk.
Some proposals would tie leverage restrictions, capital requirements, or deposit insurance to systemic risk. Federal Reserve Bank of Cleveland President Sandra Pianalto has
outlined three tiers of supervision with various levels and types of systemic significance.1

1. Pianalto (2009).

Regardless of the outcome of current regulatory reform deliberations, systemic risk and
systemic risk supervision seem destined to be a part of our new financial order.
But what exactly does systemic risk mean? Without a clear and comprehensive definition of systemic risk, and some way to measure it, no proposal can be fully implemented.
In this essay, we argue that policymakers must begin in earnest to define and measure
systemic risk. Without proper measures, one regulates, or governs, by anecdote rather
than by facts.2 Even reforms about which there is little controversy—such as the need
to supervise and regulate systemically important financial institutions diﬀerently—will
be limited or possibly counterproductive unless systemic risk is measured accurately.
Although quantifying systemic risk may sound esoteric and technical, we suggest that
it is easy enough to know where to begin and absolutely critical that we do so.

2. Stigler (1975).

2 0 0 9 A N N U A L R E P O RT

Without a clear and comprehensive
definition of systemic risk, and some
way to measure it, no proposal can
be fully implemented.

F E D E R A L R E S E RV E B A N K O F C L E V E L A N D

What
Is Systemic Risk
and How Should We
Measure It?

Let’s accept, from the outset, that there are several

plausible definitions of systemic risk, but any definition
must capture the idea that a significant fraction of a
financial market will be disrupted. Think about the classic
banking panic, where depositors rush to convert their bank accounts into cash. In fact,
scholars often emphasize the significant-fraction aspect by distinguishing between a run
on a single bank and a panic, which involves many banks.3 Today, the significant-fraction
idea means recognizing disruptions both inside and outside the banking system, including
disturbances at nonbank financial institutions and within financial markets more broadly.
A second concept that a systemic risk definition should embrace is that of contagion:
Problems at one financial institution may spread to others, just as a fire might spread
through a crowded tenement. The contagion may arise because one bank’s failure makes
people nervous about the safety of other banks, or because financial connections at one
bank lead directly to a second bank’s failure. In the recent crisis, the panic quite obviously
spread beyond banks. On September 16, 2008, the Reserve Primary Fund, a money
market fund that held Lehman Brothers commercial paper, “broke the buck,” meaning
it could no longer keep its net asset value at the standard one dollar. This alarming news
started a run on other money market mutual funds, leading to a near shutdown in the
commercial paper market, a major source of funding for nonfinancial businesses.4

The twin ideas of significant fraction and contagion can help make our definition of
systemic risk more concrete. The Commodity Futures Trading Commission defines
systemic risk as follows: “The risk that a default by one market participant will have
repercussions on other participants due to the interlocking nature of financial markets.
For example, Customer A’s default in X market may affect Intermediary B’s ability to fulfill
its obligations in markets X, Y, and Z.” 5 Alternatively, here is a definition offered by several
professors at New York University: “Systemic risk can be thought of as a widespread failure
of financial institutions or freezing up of capital markets that can substantially reduce the
supply of capital to the real economy” (emphasis ours in both definitions).6
These definitions suggest that we recognize two dimensions of systemic risk—one
looking at the risk lodged in a specific institution or market segment, and the other looking
at the overall risk in the financial system. At the economy-wide level, unacceptable systemic
risk is the risk that the financial system cannot perform its major functions, especially
those that support production, consumption, and employment. We can also see in these
definitions the beginning of the process of identifying systemically important firms—
those whose problems could, in certain circumstances, lead to widespread financial and
economic disruption.

3. G
orton (1985).
See also Warsh (2009).

4. Dwyer and Tkac (2009).

5. C
ommodity Futures Trading
Commission (2010).

6. A
charya, Philippon, Richardson, and
Roubini (2009).

Measuring Systemic Risk

Let’s say that we are satisfied, for now, that we know what
we are looking for. How will we detect systemic risk? The
first step is to recognize that it will likely have several defining characteristics, making it
impossible to measure on a single scale. Think of an airline cockpit with its intricate display
of outputs and dials. An experienced pilot watches several indicators of weather, location,
and flight status as well as the plane’s fuel gauge and oil pressure. Similarly, we expect that
a systemic risk supervisor would consider a broad set of indicators, some giving a marketwide view and others assessing particular firms.
Legislation defines the mission of most current financial supervisors in terms of the legal
entities they supervise: banks, broker–dealers, or insurance companies. The recent financial
crisis revealed several gaps. Even within the most comprehensively supervised banking
organizations—financial holding companies—it was difficult to assemble a comprehensive risk profile, let alone an adequate appreciation of the potential risks they might pose
to the financial system.7 But the crisis revealed that financial supervisors have to look even
more broadly at the companies they supervise—they have to look at the various ways in
which the firms are connected to one another and to how the financial markets themselves are functioning.
In the recent financial crisis, commercial banks as well as mortgage companies, broker–
dealers, and insurance companies all fell prey to the panic. Fundamentally, the crisis
revealed the instability of the “shadow banking” sector, where borrowing and lending
took place outside commercial banks through financial conduits, structured investment
vehicles, and financial product divisions of supposedly solid firms. And, as we learned
all too painfully, the shadow banking system was quite fragile and was connected to
the mainstream banking system in ways that were not fully understood. So as we seek
measures of systemic risk, we will have to cast a wide net.
The Federal Reserve Bank of Cleveland has stressed four factors—the four C’s—that
we believe are important for understanding systemic risk and for gauging its extent:
contagion, concentration, correlation, and context.8 Eventually, we will have to find
ways to quantify the first three and to contend with the fourth.

7. Th
is difficulty could be overcome
by clarifying the Federal Reserve’s
role as the consolidated supervisor
of financial holding companies.
A consolidated supervisor has the
authority to collect information
from all affiliates within a holding
company and to take supervisory
actions that enable it to manage
the consolidated risk of the entire
enterprise.

8. Th
omson (2009) and Haubrich and
Thomson (2009).

Contagion is a defining feature of systemic risk. How are different markets connected?
How can a shock in one market be transmitted to another? The recent financial panic,
for example, progressed quickly through the subprime mortgage market, money market
mutual funds, and on to the commercial paper market.
Concentration. Seasoned travelers know that bad weather at JFK or O’Hare—major
airline hubs—causes more delays than snow at airports in less-traveled cities like Akron or
Topeka. In the financial sphere, this means that the more business that is concentrated in
a few firms, the greater the systemic risk. Thus, problems at only a few major firms can
destabilize the entire industry.
Correlation puts too many eggs in one basket. When firms take on the same risk, they
can end up hobbled by the same shock. The problems of subprime mortgages infected
many financial institutions and investors who held large amounts of mortgage-backed
securities and collateralized debt obligations. Through the intricacies of structured finance,
even the AAA-rated tranches of securities became “economic catastrophe bonds” when
loans across the country began to sour and housing prices fell.9 A more subtle correlation
emerged as investors lost confidence in the ratings, making their “investment-grade”
bonds hard to sell. Once confidence in the ratings methodology for securitized assets

9. Coval, Jurek, and Stafford (2009).

eroded, investors became wary of familiar products far removed from subprime mortgages,
such as student and auto loans. Thanks to correlation, the panic spread.

2 0 0 9 A N N U A L R E P O RT

Context. When something happens is often as important as what happens. For example,
the hedge fund Amaranth Advisors LLC collapsed in September 2006 after a deep loss
in its derivatives investments, yet its failure did not have a systemic impact. In contrast,
the hedge fund Long-Term Capital Management, with losses only half as large, suffered
large capital losses and liquidity problems in fall 1998, right on the heels of the Asian crisis
and the Russian default, and its difficulties had a significant effect on broader markets.10
Similarly, the treatment of Drexel Burnham Lambert in 1990 was much different from the
assisted merger of Bear Stearns into JPMorgan Chase in early 2008, when the economic
crisis was unfolding.

F E D E R A L R E S E RV E B A N K O F C L E V E L A N D

10. Greenspan (1998).

The four C’s describe broad characteristics of firms and markets that should matter to a
systemic supervisor. Ultimately, having good metrics for the first three C’s—contagion,
concentration, and correlation—will prove quite helpful to financial supervisors. But
even now, with these guideposts, we can move to a more operational level for defining and
measuring systemic risk.
Professor Andrew Lo of MIT’s Sloan School of Management has suggested that systemic
supervisors should consider looking at leverage, liquidity, sensitivities, and implicit
guarantees associated with specific financial organizations. All of these are subject to
measurement, to varying degrees of precision.11

11. Lo (2009).

Financial Decoupling
Properly understanding the positions of firms requires
coming to grips with the recent practice of decoupling
legal and economic ownership rights.1 This possibility
became most famously apparent in the payments from
AIG to Goldman Sachs.2 AIG paid $7 billion (borrowed
from the Federal Reserve and the Treasury) to Goldman,
even though Goldman had earlier reported that it had
no exposure to AIG. Presumably, Goldman could do this
because its position was fully hedged—that is, offset by
gains on other contracts that would pay out if AIG could
not. How certain such a hedge actually was in the intense
days of September 2008 is another question, but this case
illustrates how derivatives and hedging make it difficult
to gauge the true exposure of any firm. In some sense,
the accounting and disclosure rules have not yet caught
up with marketplace practices.

that would require disclosure if it were held in traditional
instruments such as stocks. Indeed, the hedge fund Atticus
Capital told the Wall Street Journal that it routinely used
such strategies to keep its competitors in the dark.3 Lack
of disclosure makes it even harder to understand the links
and possible contagion between firms.

One form of decoupling goes by the name of stealth
ownership, where large investors such as hedge funds
can use derivatives to take an economic interest in a firm

1. Hu and Black (2008).

Clearly, stealth ownership hides the connections needed
to assess contagion, correlation, and other aspects of
systemic risk. It can also make it hard to judge how a firm
will behave. Would investors seek to shut down a firm
losing money, hoping to stop the drain? Or would they
make more money from their derivatives if things
continue to go badly? Would regulators (or anyone) find
it harder to form a coherent picture, even with a mass
of data? “Connecting the dots” might not be easy.

2. Hu (2009).
3. Zuckerman (2007).

The four C’s—contagion, concentration, correlation, and context—
describe broad characteristics of firms and markets that should matter
to a systemic supervisor.

Leverage describes how much a firm borrows based on its size. Leverage is commonly defined as the value of a firm’s assets divided by its shareholders’ equity. The portion of assets
not financed with equity must be financed with debt. More leverage allows higher profits,
but leverage also means that a huge loss becomes more likely to bankrupt the firm, since
capital may be depleted and the debts must be repaid. The subtle ways leverage can affect
a firm might best be illustrated by AIG: The firm’s AAA rating allowed it to be quite highly
leveraged. But when AIG lost that rating, it had to put up more collateral for its derivative
positions—collateral it did not have—causing the crisis that led to its bailout.12 Leverage
may seem easy to measure, but it becomes complicated in practice. Even when measured
reasonably well, there is always the question: How much leverage is too much? And should
the nature of a firm’s assets and liabilities figure into the setting of a leverage limit?
Liquidity measures how easily an asset can be sold or how much its price drops if the asset
is sold quickly. If a firm needs cash, the safest asset in the world will be useless if no one
will buy it. At the firm level, a distinction is often made between insolvency and illiquidity.
For an insolvent firm, the value of its liabilities exceeds the value of its assets. An illiquid
firm, even though it may be solvent, cannot meet its short-term obligations with valuable
but hard-to-sell assets. Illiquidity can also create contagion. A desperate firm sells assets at
fire-sale prices, which reduces the market value of similar assets at other firms, under
mining market confidence in these firms. If the firms are forced to sell assets because of
that loss of confidence, the problem spirals out of control. As is the case with leverage,
financial analysts have put forward several liquidity measures. Supervisors will have to
determine which one is the best benchmark and how much liquidity to require in various
financial environments.
Sensitivities, which option traders call “the Greeks” (because they are usually denoted by
Greek letters in the textbooks), measure how asset values change with interest rates and
market conditions. This set of gauges is intended to describe how exposed and vulnerable
the firm is to different shocks or scenarios that may plausibly arise. Supervisors would find
it difficult to compute these measures based on regulatory reports, but sophisticated firms
should already be tracking these measures. Obviously, the more volatile a firm’s asset valuation, the more quickly its leverage and liquidity ratios are likely to change.
Implicit guarantees are a less obvious source of risk, but they make it difficult for both
firms and their supervisors to accurately gauge exposures. Both the firms themselves
and the government offer these guarantees, which further complicates matters. The poster
children for implicit firm guarantees were the structured investment vehicle and the
related asset-backed commercial paper vehicle. Structured investment vehicles were
legally structured as a way to remove assets from bank balance sheets, so had only
limited guarantees from the sponsoring bank. Nonetheless, after the crisis hit, many
banks provided recourse. On the government side, the recent crisis also provides
examples, most notably Fannie Mae and Freddie Mac.

12. Sjostrom (2009).

Making Measures Work

2 0 0 9 A N N UA L R E P O RT

Integrating these concepts into something that financial
supervisors can use requires another level of detail and, in
some cases, extra care. Supervisors who want an early signal that markets are getting dangerous should follow a broad set of measures (and develop a healthy skepticism about their
use). Supervisors seeking measures that signal actionable steps against individual firms
will have to exercise greater caution, however. Waiting for near-certainty could be costly
to market stability, but acting prematurely could needlessly harm the firm in question.

F E D E R A L R E S E RV E B A N K O F C L E V E L A N D

Several promising steps are being taken already to gauge both market risk and firm risk.
One direction is to construct an early warning system for systemic problems at the
broad market level.13 Sometimes this takes the form of a financial stress index such as the
Bloomberg Financial Conditions Index, which looks at a variety of interest rates and
prices (see figure 1).14 Other versions look at both prices and quantities, issuing a warning
when asset prices shoot up at the same time as total credit (see figure 2).15 Yet another
approach treats the entire economy as one big portfolio and looks at the “distance to
default,” or roughly how large a shock it takes to destabilize the system.16

13. For example, De Nicolo and Lucchetta
(2010). The Federal Reserve Bank of
Cleveland has also been working on
developing and piloting a model.
14. Bloomberg (2010). The Federal
Reserve Bank of Kansas City also
puts out a Financial Stress Index.
15. Borio and Drehman (2009).
16. Gray, Merton, and Bodie (2007).

FIGURE 1
Financial Stress Index and Inverse of the Financial Conditions Index
(0+=Stress)
12
10
8
6
4
2

Financial Stress Index
Financial Conditions Index
(inverse)

0
–2
1991

1993

1995

1997

1999

2001

2003

2005

2007

Sources: Federal Reserve Bank
of Kansas City; and Bloomberg.

2009

FIGURE 2
Real Home Price Index and Mortgage Credit as a Percentage of GDP
Index 100=Q1:1987
180

Ratio
1.2

160

1.0

140
120

0.8

FHFA Real Home Price Index
Mortgage Credit as
a Percentage of GDP

100

0.4

0.2

60
40
1976

0.6

1980

1984

1988

1992

1996

2000

2004

2008

Sources: Federal Housing
Finance Agency; Bureau of Labor
Statistics, Flow of Funds; and
Bureau of Economic Analysis.

Some proposed reforms— particularly those that would classify some firms
as being systemically important and subject them to enhanced supervision—
require a set of institution-specific systemic risk measures.
Some proposed reforms, however— particularly those that would classify some firms as
being systemically important and subject them to enhanced supervision—require a set of
institution-specific systemic risk measures. Going down this path means looking more
closely at individual firms, assessing which ones are either highly vulnerable or highly
dangerous. The vulnerable firms are those with a high chance of failing when the system
gets a shock.17 One way to identify these is to look for firms whose stock price plummets
when the overall market drops. Knowing a firm is sensitive to systemic risk is not the same
as knowing it is a likely source of contagion, however. To identify dangerous firms, we can
turn the question around and ask which firms will bring down the market.18 In the data,
this means looking at how much the market falls when the firm has a bad day.

17. Acharya, Pedersen, Philippon, and
Richardson (2009).

18. Adrian and Brunnermeier (2009).

Getting the details right is tricky and important: Nobody wants to close a bank, cap its
leverage, or lend it billions of dollars based on a bad measure of systemic risk. For instance,
what counts as a “big drop” in the market, and do you use stock prices, bond yields, or
derivatives? Not only can each give different results, but as market-based measures, each
reflects the market’s view of risk, which may not be grounded in reality.
Furthermore, using data from quiet times to infer behavior in crisis situations has its
perils. The space shuttle Challenger’s O-rings performed acceptably in cool conditions,
but failed dramatically in freezing temperatures.19 Long-Term Capital Management had a
sophisticated risk control system that indicated a well-hedged portfolio: Market shifts
would have offsetting effects on different assets, keeping the firm balanced. But when
the crisis came, the offsets didn’t work, all prices moved together, and the firm needed a
rescue. Clearly, it will take time to implement the systemic risk tools, to calibrate them in
different ways, and to learn how successful they can be over time. The work is certain to
be frustrating and contentious—and yet, it must be done.

19. An extended discussion is in
Tufte (1997).

Data Needs and Beyond

nowing a firm’s stock price in real time is straightforward.
K
It is quite another matter to observe a firm’s leverage, liquidity, sensitivity, and counterparty exposures on a nearly constant basis. This information
will be among the most important data the systemic supervisor will collect, particularly
in times of crisis, when the supervisor must quickly make tactical decisions about which
firms to save, recapitalize, or close. But many, if not most, firms consider details about their
portfolios and investment strategies as proprietary information, so supervisors should
anticipate that firms may look for ways to avoid disclosing it.
A start would be to collect basic aggregate information about the firm: assets under
management, leverage, portfolio holdings, counterparties, and investors. For commercial
banks, much of this information is already collected, but for firms in less-regulated areas,
such as hedge funds, it is not. According to Andrew J. Donohue, director of the Securities
and Exchange Commission’s Division of Investment Management, “It is not uncommon
that our first contact with a manager of a significant amount of assets is during an investi
gation by our Enforcement Division.” 20 Indeed, the exposures generated by AIG’s credit

20. Donohue (2009).

default swap contracts went unappreciated, even though the company was regulated as
both an insurance company and a thrift holding company.
Just as airline safety requires more than assessing the metal fatigue on jetliners—crew
rotation schedules, maintenance reviews, and air traffic patterns all matter as well—
financial market safety requires many coordinated pieces of information. Data about
individual firms build on knowledge of market structure and performance, such as clearing
and settlement practices, market volume, patterns of counterparty relationships, and
market liquidity. Clearly, supervisors will need to acquire some combination of firm- and
market-level data to assess the overall state of the system.
S everal proposals have been advanced to create a new
“information infrastructure” for the financial system. Fed
eral Reserve Board Governor Daniel K. Tarullo recently
provided a rationale for, and a set of principles to guide, an enhanced data collection
regime.21 As Tarullo notes, data collection can be costly, and data overload can create
problems for supervisors, so it pays to think carefully in advance about what information
needs to be collected.

2 0 0 9 A N N U A L R E P O RT

A New Information
Infrastructure?

F E D E R A L R E S E RV E B A N K O F C L E V E L A N D

21. Tarullo (2010a).

Can a Stock Option Predict Financial System Chaos?
Martín Saldías Zambrana, a visiting scholar at the
Federal Reserve Bank of Cleveland, takes what’s known
as a “contingent claims” approach in his proposal for a
forward-looking systemic risk indicator. In the simplest
terms, a contingent claim gives the holder the right to
something else depending on what happens in the future.
An option to buy a share of AIG at a certain price level
during a certain time period is a type of contingent claim,
for example.
Zambrana uses the option-based “distance-to-default”
measure developed by Moody’s KMV, a credit analysis
firm. Distance to default is a measure of the probability
that a firm will default, so we use the term “probability of
default” in this explanation. The measure uses estimates
of the market value of a firm’s assets, the volatility of
the asset value, and the bankruptcy threshold (that is, the
point at which the firm will become insolvent). These
estimates are typically backed out of observed accounting
data and the price of the firm’s traded equity using an
option pricing model.
Although it may sound skull-cracking— and indeed, this
process typically involves sophisticated mathematics and
analytic tools—it is a fairly straightforward procedure. The
probability-of-default measure can be constructed for any
firm if the minimum information requirements are met.

Zambrana computes probability of default both for a
traded index of European bank stocks (the index is called
DJ STOXX) and for each of the banks in the index. He then
constructs an index of the probability-of-default measures
using individual banks’ probability of default.
Zambrana’s innovation is to use a well-known fact in
finance: An option on a portfolio of stocks is not worth the
same amount as a portfolio of options on the individual
stocks in the portfolio. (That’s simply because the option
to buy or sell an entire portfolio of stocks does not come
with the same inherent flexibility as having an entire
portfolio of options to buy or sell stocks.) This means that
his two probability-of-default measures for the European
banking system will not be the same, except when there
is perfect correlation between the stocks in the portfolio.
Why is this important? A lesson learned from the demise
of the hedge fund Long-Term Capital Management and
from research by Andy Lo at MIT is that during periods
of financial distress, asset returns in the financial system
become more correlated. That makes increased correlation
in financial markets a handy indicator of increased systemic
risk. So tracking the differences between Zambrana’s two
probability-of-default measures for the European banking
system provides an indicator of increased systemic risk.

Knowing a firm’s stock price
in real time is straightforward.
It is quite another matter to observe
a firm’s leverage, liquidity, sensitivity,
and counterparty exposures on a
nearly constant basis.

The academics behind the Squam Lake proposal are primarily worried about counterparty risk and fire-sale risk.22 They would have large financial institutions report quarterly
on their asset positions and risk, and regulators would aggregate and release the data with a
delay (to allay confidentiality concerns). Regulators would “standardize the process used
to measure values and risk exposure” to allow for easier comparison across firms and greater
information sharing among different regulators. Whatever the advantages of the fragmented U.S. financial regulatory system, it does mean that sharing information among
agencies takes a concerted effort, particularly among regulators of different industries,
such as state insurance commissions, the Federal Reserve, the Securities and Exchange
Commission, and the Commodity Futures Trading Commission.
Tarullo and others note that data requirements are likely to be substantial. Some have
called for the creation of a new agency, such as a National Institute of Finance, to gather,
prepare, and house the required data.23 Federal Reserve Bank of Philadelphia economist
Leonard Nakamura proposes a U.S. financial regulatory database that would register every
direct claim against firms, households, or other legal entities and would include derivatives
contracts such as futures, options, and swaps.24 In his proposal, institutions that buy, sell,
or hold a registered asset would report their holdings and activities quarterly. Note that this
requirement is not restricted to large, or even financial, firms. Some have called for even
more frequent reporting—for instance, having financial institutions submit same-day
details of all transactions to a highly secure non-public database accessible to regulators.25
Reporting all of this information could be onerous, so it would probably make sense to
pilot the system on a smaller scale before expanding it, to compare costs and benefits.
Regular and timely reporting of a firm’s aggregate exposure to different counterparties,
with full details available by close of business in case of an authentic emergency, would
give a more manageable set of information for supervisors without imposing a burden
that would send firms scurrying to an offshore tax haven.

The Changing
Face of Supervision

A world in which systemic risk is measured and managed
will require new skill sets and processes for regulators and,
quite possibly, new forms of supervision. Analyzing the
new information, searching for trends and vulnerabilities, and developing and refining
better measures of systemic risk will take teams of analysts drawn from various fields. Few
people will have the necessary expertise in network theory, risk analysis, and statistics, to
say nothing of the legal background, to process all of the information.

22. Squam Lake Working Group on
Financial Regulation (2009).

13
23. Mendelowitz and Liechty (2010).

24. Nakamura (2010).

25. Rowe (2009).

2 0 0 9 A N N U A L R E P O RT

Although regulatory reform legislation has not yet been enacted as of this writing, it is
quite clear that supervision must change. Systemic risk will be monitored in some fashion,
and the information collected will be incorporated into supervisory practices. Indeed, the
Federal Reserve has already made a number of changes in its practices and is contemplating additional ones. In response to the financial crisis, the Federal Reserve has found it
useful to create cross-functional teams of examiners, economists, and market and legal
experts. These teams were involved with the Supervisory Capital Assessment Program
(SCAP)—also known as the stress test—for the nation’s largest banks. The SCAP, an
nounced in February 2009, when confidence in the banking system was still very shaky,
has been widely regarded as successful in bolstering public confidence and in quelling
the turmoil in financial markets.26 The program has also had a profound effect on how
Federal Reserve officials are thinking about systemic risk supervision going forward.27

F E D E R A L R E S E RV E B A N K O F C L E V E L A N D

The SCAP demonstrated the value of conducting cross-firm, horizontal reviews of all
activities within holding companies that can create risk for the firm and the financial system. The Federal Reserve will be combining firm-specific data analysis and market-based
indicators to identify situations that may affect multiple firms. By using scenario analysis,
the Federal Reserve would be able to gauge the effect of possible market developments
on the capital, liquidity, and leverage positions of systemically important financial institutions. Eventually, more sophisticated modeling would attempt to link traditional and
enhanced supervisory information about a collection of financial institutions with marketbased stress indicators to build a more comprehensive picture of emerging systemic problems. Although supervisors will always use judgment in interpreting the results obtained
from such models, the modeling itself will require measures that quantify possible sources
of systemic risk.

26. Similar teams have been formed
to assess the effects of incentive
compensation on financial firms.
See Alvarez (2010).
27. Tarullo (2010b).

Bridges and Hedge Funds: Endogenous Risk
One reason to be careful about using measures of systemic
risk is that the wrong measure can make problems worse.
In a systemic context, some measures of risk can create
feedback loops that increase market instability. Construction engineers, outdoing even economists in the realm of
jargon, call this “synchronous lateral excitation,” an effect
seen in London’s Millennial Bridge, where pedestrians,
adjusting to small wobbles caused by wind, swayed in step,
reinforcing the swings and causing even bigger wobbles.1
This endogenous risk can show up in financial markets.
For example, if traders in a firm have a hard risk limit, a
small increase in volatility means they must reduce their
position. As traders in many firms do this, prices fall, and
the market price change leads to a higher measured level
of risk in the market, forcing traders to sell even more.

The lesson is that too naïve a measure of risk, when
implemented as a policy, may create the very thing it was
intended to prevent. Indeed, something quite similar most
likely occurred in one section of the hedge fund industry
in August 2007.2 Losses (or portfolio rebalances) probably
led at least one large fund employing a statistical arbitrage
strategy to sell, moving market prices enough to trigger
other funds following similar quantitative strategies to
deleverage in turn. The resulting movements were so
large relative to previous movements that one participant
described them in the lingo of quantitative risk management as “25-standard-deviation moves,” something
generally not expected before the collapse of the universe.3

1. Strogatz, Abrams, McRobie, Eckhardt, and Ott (2005).
2. Lo (2008).
3. Thal Larsen (2008).

Systemic risk will be monitored
in some fashion, and the information
collected will be incorporated into
supervisory practices.

A Call for Transparency
and Dialogue

e recent financial crisis should serve as a powerful
Th
reminder that financial markets are dynamic and will
adapt to changes in supervision and regulation. We should
anticipate that some market participants will look for ways to minimize the restrictions
placed on their activities by developing new financial instruments and legal structures, and
by expanding the use of implicit guarantees. Financial supervisors will need all the help
they can get to stay current with evolving conditions. For its part, the public will want its
own assurances that the supervisors are keeping a watchful eye.

In monetary policy, the public has many opportunities to observe the Federal Reserve’s
progress in achieving its dual mandate to promote stable prices and maximum sustainable
economic growth. The Federal Reserve’s monetary policy body, the Federal Open Market
Committee (FOMC), meets regularly and immediately publishes its policy decisions
and rationale. More information follows in meeting minutes, speeches by Fed officials,
and Congressional testimony, providing the public with a good understanding of how
inflation and unemployment can affect the Federal Reserve’s actions. Many highly sophisticated “Fed watchers” frequently comment on the FOMC’s strategy and actions, a situation
that enables the FOMC to recognize when its own views might differ markedly from those
of others. Over time, the FOMC has come to appreciate that a thoughtful communication
strategy is a useful component of the policymaking process itself, and that its dialogue
with the public leads to better policymaking.

Likewise, we think that supervisory efforts to limit systemic risk could benefit from the
credibility and accountability that would arise from an expanded public dialogue. Wall
Street gurus and others can criticize the measures of risk—or feel free to propose their own.
Pundits can bemoan the supervisors’ slow response to rising levels of risk—or their overreaction to noisy data. Public discourse about supervisory strategy and actions could help
market participants understand how supervisors are identifying and mitigating systemic
risk, and ultimately sharpen the tools and refine the gauges in the supervisors’ toolboxes.
More research, data collection, analysis, and practical experience are likely to considerably
improve supervisors’ ability to tie specific measures of systemic risk to requirements
for deposit insurance premiums, capital, liquidity, and leverage. In a very real sense, the
supervision of systemic risk stands at the early stages of an evolution that prudential
supervision has been undergoing for decades. Even as late as the 1970s, different federal
supervisors (primarily the Federal Reserve and the Comptroller’s Office of the Treasury)
had very different approaches to bank supervision. Attempts to provide a more standardized approach began in the Johnson administration, but progress was slow.28 In 1978,

28. Robertson (1995).

Congress formalized the convergence, creating the Federal Financial Institutions Exam
ination Council, which introduced the CAMEL system (for Capital, Assets, Management,
Earnings, and Liquidity).29 The system continued to evolve: Concerns that banks held too
little capital prompted supervisors to add a risk-based approach in 1988. That approach
did not account for market risk, so in 1997 supervisors added an S for Sensitivity to
market risk. As banks used securitization to further reduce capital, other changes were
implemented.30 The next step in that evolution could well be a similar system for macrostability ratings, such as the recent proposal by Gary Stern and Ron Feldman.31

29. Tarullo (2008).

30. Tarullo (2008).
31. Stern and Feldman (2009).

2 0 0 9 A N N U A L R E P O RT

In this essay, we have explained why we think it is important to learn more about systemic
risk measurement. We have shared some of our thinking about the topic and summarized
the thinking of others. But this one-way communication does not constitute dialogue. What
do you think about designing ways to measure systemic risk and a platform to manage it?
Take this as a request for public comment: Send your ideas to us at SystemicRisk@clev.frb.org.

F E D E R A L R E S E RV E B A N K O F C L E V E L A N D

References
Acharya, Viral V., Lasse H. Pedersen, Thomas Philippon, and
Matthew Richardson. 2009. “Regulating Systemic Risk.” In
Viral V. Acharya and Matthew Richardson, eds., Restoring Financial
Stability: How to Repair a Failed System. Hoboken, N.J.: Wiley.

Donohue, Andrew J. 2009. “Regulating Hedge Funds and Other
Private Investment Pools.” Testimony before the Subcommittee on
Securities, Insurance, and Investment of the U.S. Senate Committee on Banking, Housing, and Urban Affairs (July 15).

Acharya, Viral V., Thomas Philippon, Matthew Richardson, and
Nouriel Roubini. 2009. “A Bird’s-Eye View: The Financial Crisis
of 2007–2009.” In Viral V. Acharya and Matthew Richardson,
op. cit.

Dwyer, Gerald P., and Paula Tkac. 2009. “The Financial Crisis of
2008 in Fixed Income Markets.” Working Paper 2009–20. Federal
Reserve Bank of Atlanta (August).

Adrian, Tobias, and Markus Brunnermeier. 2009. “CoVar.” Staff
Report No. 348. Federal Reserve Bank of New York (August).
Alvarez, Scott G. 2010. “Incentive Compensation.” Testimony
before the House Committee on Financial Services (February 25).
Bloomberg Financial Conditions Index. 2010.
(www.bloomberg.com/apps/quote?ticker=BFCIUS%3AIND).

Borio, Claudio, and Matthias Drehman. 2009. “Assessing the Risk
of Banking Crises—Revisited.” Quarterly Review, Bank for Inter
national Settlements (March), 29–46.
Commodity Futures Trading Commission. 2010. “A Guide to the
Language of the Futures Industry.”
(www.cftc.gov/educationcenter/glossary/glossary_s.html).

Gorton, Gary. 1985. “Bank Suspension of Convertibility.” Journal
of Monetary Economics 15(2): 177–93.
Gray, Dale F., Robert C. Merton, and Zvi Bodie. 2007. “Contingent
Claims Approach to Measuring and Managing Sovereign Credit
Risk.” Journal of Investment Management 5(4): 5–28.
Greenspan, Alan. 1998. Testimony before the House Committee
on Banking and Financial Services at the Hearing on Hedge Fund
Operations (October 1).
Haubrich, Joseph G., and James B. Thomson. 2009. “Too Big to
Fail and the Definition of Systemic Significance.” Lombard Street
Journal 1 (15): 24–30.
Hu, Henry C. 2009. “Empty Creditors and the Crisis.” Wall Street
Journal (April 10).

Coval, Joshua, Jakub Jurek, and Erik Stafford. 2009. “The Economics
of Structured Finance.” Journal of Economic Perspectives
23(1): 3–25.

Hu, Henry C., and Bernard S. Black. 2008. “Equity and Debt
Decoupling and Empty Voting II: Importance and Extension.”
University of Pennsylvania Law Review 156: 625–739.

De Nicolo, Gianni, and Marcella Lucchetta. 2010. “Systemic Risks
and the Macroeconomy.” IMF Working Paper 10/29, International
Monetary Fund (February), 1–40.

Leland, Hayne, and Mark Rubinstein. 1988. “Comments on the
Market Crash: Six Months After.” Journal of Economic Perspectives
2(3): 45–50.

Lo, Andrew W. 2008. “What Happened to the Quants in August
2007?” In Hedge Funds: An Analytic Perspective. Princeton, N.J.:
Princeton University Press.
Lo, Andrew W. 2009. “The Feasibility of Systemic Risk Measurement.” Testimony written for the House Committee on Financial
Services (October 19).
Mendelowitz, Allan I., and John Liechty. 2010. “The National
Institute of Finance: Providing Financial Regulators with the Data
and Tools Needed to Safeguard our Financial System.” Testimony
before the Senate Subcommittee on Security, International Trade,
and Finance, Committee on Banking, Housing, and Urban Affairs
(February 10).
Nakamura, Leonard. 2010. “Durable Financial Regulation:
Monitoring Financial Instruments as a Counterpart to Regulating
Financial Institutions.” White Paper. Federal Reserve Bank of
Philadelphia (January 4).
Pianalto, Sandra. 2009. “Steps toward a New Financial Regulatory
Architecture.” Remarks, Ohio Bankers’ Day, April 1.
(www.clevelandfed.org/For_the_Public/News_and_Media/Speeches/
2009/Pianalto_20090401.cfm).

Robertson, Ross M. 1995. The Comptroller and Bank Supervision:
A Historical Appraisal. Washington DC: Office of the Comptroller
of the Currency, 213.
Rowe, David. 2009. “Twenty-first-century Supervision.” Risk
(December): 93.
Shiller, Robert J. 2005. Irrational Exuberance. Princeton, N.J.:
Princeton University Press, second edition.
Sjostrom, William K. 2009. “The AIG Bailout.” Washington and
Lee Law Review 66(3): 943–94.
Squam Lake Working Group on Financial Regulation. 2009. “A
New Information Infrastructure for Financial Markets.” Council
on Foreign Relations, Center for Geo-economic Studies, Working
Paper (February).
Stern, Gary H., and Ron Feldman. 2009. “Macrostability Ratings:
A Preliminary Proposal.” The Region. Federal Reserve Bank of
Minneapolis, 12–17.
Stigler, George J. 1975. “The Economist and the State,” in
The Citizen and the State: Essays on Regulation. Chicago: University
of Chicago Press, 50.
Strogatz, Steven H., Daniel M. Abrams, Allan McRobie, Bruno
Eckhardt, and Edward Ott. 2005. “Theoretical Mechanics: Crowd
Synchrony on the Millennium Bridge.” Nature 438 (November),
43–44.
Tarullo, Daniel K. 2008. “Banking on Basel: The Future of
International Financial Regulation.” Washington DC: Peterson
Institute, 30–31.

Tarullo, Daniel K. 2010a. “Equipping Financial Regulators with
the Tools Necessary to Monitor Systemic Risk.” Testimony before
the Senate Subcommittee on Security, International Trade, and
Finance, Committee on Banking, Housing, and Urban Affairs
(February 12).
Tarullo, Daniel K. 2010b. “Lessons from the Crisis Stress Tests.”
Remarks at the Federal Reserve Board International Research
Forum on Monetary Policy. Washington DC (March 26).
Thal Larsen, Peter. 2008. “Goldman Pays the Price of Being Big.”
Financial Times (August 13).
Thomson, James B. 2009. “On Systemically Important Financial
Institutions and Progressive Systemic Mitigation.” Policy
Discussion Paper No. 27. Federal Reserve Bank of Cleveland
(August).
Tufte, Edward R. 1997. Visual Explanations. Cheshire, Conn.:
Graphics Press.
Warsh, Kevin. 2009. “The Panic of 2008.” Remarks, Council of
Institutional Investors, 2009 Spring Meeting, Washington DC,
April 6. (www.federalreserve.gov/newsevents/speech/warsh20090406a.
htm).
Zuckerman, Gregory. 2007. “Concentration Proves Winner at
Hedge Fund.” Wall Street Journal (May 14).

2 0 0 9 A N N U A L R E P O RT
F E D E R A L R E S E RV E B A N K O F C L E V E L A N D

2009 OPERATIONAL HIGHLIGHTS
As economic conditions began to stabilize in 2009, the Federal Reserve Bank of Cleveland enhanced its approach to
identifying and addressing critical issues with policy and supervisory implications for the Fourth District. The Bank also
continued to provide effective supervision of the District’s financial institutions and to maintain operational excellence
in serving the needs of the U.S. Treasury and the public.

The Bank’s “Power to the People: Regulation and Change” exhibit highlighted
the origins of U.S. regulatory agencies and the public’s important role in the
regulatory process.

Central Bank Operations

Although economic conditions gradually improved
during the year, many banks continued to struggle. The
Supervision and Regulation function responded to deteriorating banking conditions by
implementing new credit programs to help support a weakened financial market and stress
tests to evaluate capital adequacy at large Fourth District institutions. Under demanding
conditions, our banking supervisors met their responsibilities and contributed to System
initiatives that included operational, credit, and market/liquidity risk discussions.

Throughout the year, the Community Development function expanded its outreach efforts
to help support access to credit and capital for low- to moderate-income communities.
The group actively contributed to policy discussions about mortgage foreclosures,
vacant and abandoned properties, and Community Reinvestment Act reform and
provided insightful analysis on loan modification programs and Neighborhood Stabilization Program funds. In addition, the group collaborated with Research on a proposal
submitted to the Board of Governors that would use the Board’s existing rule-writing
authority to modify the Community Reinvestment Act. The annual Community Development Policy Summit focused on community stabilization strategies in transitional times.
The Research function worked closely with Banking Supervision and Community
Development colleagues to complete high-priority initiatives involving financial
stability, systemic risk, and mortgage foreclosures. At industry and Federal Reserve
System conferences, researchers presented the Bank’s framework for assessing and identi
fying systemic risks. Research also expanded its outreach activities to explain economic
conditions and the role of the Federal Reserve and to gain insights on emerging issues
through meetings with business, government, and civic leaders across the Fourth District.
Throughout the year, the staff maintained comprehensive support for the president’s
policy contributions to the Federal Open Market Committee.
The Bank’s Learning Center and Money Museum opened a special exhibit that explored
the origins of regulatory agencies in the United States, including the Federal Reserve
System, and the public’s important role in the regulatory process. “Power to the People:
Regulation and Change” was reprised in all Fourth District offices and displayed at the
Board of Governors in Washington DC.

Jeff Gatica, senior community affairs
advisor, moderates a session at the
2009 Community Development
Policy Summit.

2 0 0 9 A N N U A L R E P O RT
F E D E R A L R E S E RV E B A N K O F C L E V E L A N D

Treasury Retail Securities staff
earned the Chris Moore “Spirit of
Innovation” Award for creativity in
implementing new technology and
business processes to support the
U.S. Treasury.

Core Business Operations The Bank’s core business operations improved the effi
ciency and effectiveness of our nation’s payments systems.
The Check function successfully consolidated five additional paper check capture opera
tions into the Cleveland office in support of the System’s strategy of streamlining operations
while maintaining strong operational performance. The function met internal targets for
productivity and quality.
The Bank continued to provide critical services to the U.S. Treasury across several platforms.
The eGovernment function provided strong support for the U.S. Treasury’s Collections
and Cash Management Modernization initiative. The group received the highest possible
rating from the U.S. Treasury and met all internal cost targets. Two applications were
successfully prepared to process tenfold increases in ACH transactions for the Department
of Education’s student loan buy-back program. The Treasury Retail Securities function
received the highest possible rating from the Bureau of the Public Debt and met timeliness
and accuracy standards. The function automated a significant portion of the savings bonds
redemption process using 2D barcode technology, greatly increasing efficiency.
The Bank also worked to improve the efficiency and effectiveness of its own historic main
building. The Facilities function advanced the Bank’s commitment to operational excellence
by making the Bank “greener,” earning the Cleveland office an Energy Star certification.

…

To support all of these outcomes, the Bank continued its progress toward leadership in
thought and deed by effectively responding to the aftermath of financial turmoil. Through
out the year, Federal Reserve Bank of Cleveland officers and staff met with business
leaders, community groups, bankers, public officials, and educators in every major city in
the District to share the Bank’s key messages about the economy and the financial crisis.
The Bank expanded its outreach initiative by establishing a foundation for new business
advisory councils, developing creative approaches to reach new audiences through social
media outlets, and launching a new economic policy publication, Forefront.

The Bank launched a new
publication to showcase key
messages on critical economic
policy issues.

FInancial STatements as of and for
the Years Ended December 31, 2009 and 2008

Statement of Auditor Independence

Management’s Report on Internal Control Over Financial Reporting

Report of Independent Auditors

Comparative Financial Statements

Notes to Financial Statements

2 0 0 9 A N N U A L R E P O RT
F E D E R A L R E S E RV E B A N K O F C L E V E L A N D

Auditor Independence

In 2009, the Board of Governors engaged Deloitte & Touche LLP
(D&T) for the audits of the individual and combined financial
statements of the Reserve Banks and the consolidated financial statements of the limited liability
companies (LLCs) that are associated with Federal Reserve actions to address the financial crisis and
are consolidated in the financial statements of the Federal Reserve Bank of New York. Fees for D&T’s
services are estimated to be $9.6 million, of which approximately $2.0 million were for the audits of the
1
LLCs. 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 2009, the Bank did
not engage D&T for any non-audit services.

1. E
ach 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.

federal reserve bank of cleveland
Cleveland, OH 44101
216.579.2000

Management’s Report on
Internal Control Over Financial Reporting
To the Board of Directors of the Federal Reserve Bank of Cleveland:
The management of the Federal Reserve Bank of Cleveland (“FRBC”) is responsible for the preparation and fair
presentation of the Statements of Condition, Statements of Income and Comprehensive Income, and Statements
of Changes in Capital as of December 31, 2009 (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 as set forth in the Financial Accounting Manual for the Federal
Reserve Banks (“Manual”), and, as such, include some amounts that 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 FRBC 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 FRBC 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 FRBC maintained effective internal control over financial reporting as it relates to the Financial Statements.
Federal Reserve Bank of Cleveland
April 21, 2010

Sandra Pianalto
President & Chief Executive Officer

Gregory L. Stefani
Senior Vice President & Chief Financial Officer

Deloitte & Touche LLP
Suite 3300
127 Public Square
Cleveland, OH 44114-1291
USA
Tel: +1 216 589 1300
Fax: +1 216 589 1369
www.deloitte.com

Independent Auditors’ Report

2 0 0 9 A N N UA L R E P O RT

To the Board of Governors of the Federal Reserve System
and the Board of Directors of the Federal Reserve Bank of Cleveland:

F E D E R A L R E S E RV E B A N K O F C L E V E L A N D

We have audited the accompanying statements of condition of the Federal Reserve Bank of Cleveland (“FRB
Cleveland”) as of December 31, 2009 and 2008 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 FRB Cleveland as of December 31, 2009, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. 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 FRB Cleveland’s
internal control over financial reporting based on our audits.
We conducted our audits in accordance with generally accepted auditing standards as established by the Auditing
Standards Board (United States) and in accordance with the auditing standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement 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.
FRB Cleveland’s internal control over financial reporting is a process designed by, or under the supervision of,
FRB Cleveland’s principal executive and principal financial officers, or persons performing similar functions, and
effected by 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.

Member of
Deloitte Touche Tohmatsu

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 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 FRB Cleveland
are being made only in accordance with authorizations of management and directors of FRB Cleveland; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use,
or disposition of FRB Cleveland’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility 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, 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, such financial statements present fairly, in all material respects, the financial position of FRB
Cleveland as of December 31, 2009 and 2008, and the results of its operations for the years then ended, on the
basis of accounting described in Note 4. Also, in our opinion, FRB Cleveland maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2009, based on the criteria established
in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.

April 21, 2010

STATEMENTS OF CONDITION

2 0 0 9 A N N U A L R E P O RT

(in millions)

F E D E R A L R E S E RV E B A N K O F C L E V E L A N D

ASSETS
Gold certificates
Special drawing rights certificates
Coin
Items in process of collection
Prepaid interest on Federal Reserve notes
Loans to depository institutions
System Open Market Account:
Securities purchased under agreements to resell
Treasury securities, net
Government-sponsored enterprise debt securities, net
Federal agency and government-sponsored enterprise
mortgage-backed securities, net
Investments denominated in foreign currencies
Central bank liquidity swaps
Accrued interest receivable
Interdistrict settlement account
Bank premises and equipment, net
Other assets
Total assets
LIABILITIES AND CAPITAL
Federal Reserve notes outstanding, net
System Open Market Account:
Securities sold under agreements to repurchase
Other liabilities
Deposits:
Depository institutions
Other deposits
Deferred credit items
Accrued interest on Federal Reserve notes
Interdistrict settlement account
Interest due to depository institutions
Accrued benefit costs
Other liabilities
Total liabilities
Capital paid-in
Surplus (including accumulated other comprehensive loss of $19 million
and $16 million at December 31, 2009 and 2008, respectively)
Total capital
Total liabilities and capital

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

As of December 31, 2009 and December 31, 2008

2009
$

467
237
154
182
–
753

2008
$

423
104
136
164
19
15,622

–
31,842
6,612

3,034
18,256
787

36,305
1,861
757
499
–
162
24
79,855

–
1,736
38,749
312
16,708
168
34
96,252

37,387

39,263

3,071
24

3,350
–

15,198
4
422
23
19,789
2
108
7
76,035

49,963
4
456
–
–
7
96
9
93,148

1,910

1,552

1,910
3,820
79,855

1,552
3,104
96,252

STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(in millions)

For the years ended December 31, 2009 and December 31, 2008

INTEREST INCOME
Loans to depository institutions
System Open Market Account:
Securities purchased under agreements to resell
Treasury securities
Government-sponsored enterprise debt securities
Federal agency and government-sponsored enterprise
mortgage-backed securities
Investments denominated in foreign currencies
Central bank liquidity swaps
Total interest income

2009
$

2008
$

–
896
80

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

132
73
996
4

804
22
158
1,978

–
44
252
1,501

4
65
69
1,909

29
28
57
1,444

NON-INTEREST INCOME
System Open Market Account:
Treasury securities gains
Federal agency and government-sponsored enterprise
mortgage-backed securities gains, net
Foreign currency gains, net
Compensation received for services provided
Reimbursable services to government agencies
Other income
Total non-interest income

35
16
35
48
8
142

–
89
68
63
33
404

OPERATING EXPENSES
Salaries and other benefits
Occupancy expense
Equipment expense
Assessments by the Board of Governors
Other expenses
Total operating expenses

130
16
10
52
24
232

129
20
11
49
62
271

1,819

1,577

–

Net income prior to distribution
Change in funded status of benefit plans
Comprehensive income prior to distribution
Distribution of comprehensive income:
Dividends paid to member banks
Transferred to surplus and change in accumulated other comprehensive loss
Payments to Treasury as interest on Federal Reserve notes
Total distribution
The accompanying notes are an integral part of these financial statements.

$
$

(3)
1,816
100
358
1,358
1,816

151

$
$

1
1,578
85
261
1,232
1,578

STATEMENTS OF CHANGES IN CAPITAL
(in millions, except share data)

For the years ended December 31, 2009 and December 31, 2008

2 0 0 9 A N N U A L R E P O RT

Surplus

F E D E R A L R E S E RV E B A N K O F C L E V E L A N D

Balance at January 1, 2008
(25,821,394 shares)
Net change in capital stock issued
(5,220,514 shares)
Transferred to surplus and
change in accumulated other
comprehensive loss
Balance at December 31, 2008
(31,041,908 shares)
Net change in capital stock issued
(7,166,154 shares)
Transferred to surplus and
change in accumulated other
comprehensive loss
Balance at December 31, 2009
(38,208,062 shares)

Capital
paid-in

Net income
retained

$ 1,291

$ 1,308

261

–

260

$ 1,552

$ 1,568

358

–

361

$ 1,910

$ 1,929

Accumulated
other
comprehensive
loss
$

Total
surplus

Total
capital

$ 1,291

$ 2,582

–

261

$ 1,552

$ 3,104

(17)

(16)
–

–

358

(3)

358

(19)

$ 1,910

$ 3,820

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

N OTES TO F INANCIAL S TATEMENTS
1. Structure
The Federal Reserve Bank of Cleveland (“Bank”) is part of the Federal Reserve System (“System”) and is one of the twelve Federal 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. 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.
In addition to the 12 Reserve Banks, the System also consists, in part, of the Board of Governors and the Federal Open Market Committee
(“FOMC”). The Board of Governors, an independent federal agency, is charged by the Federal Reserve Act with a number of specific duties,
including general supervision over the Reserve Banks. The FOMC is composed of members of the Board of Governors, the president of the
Federal Reserve Bank of New York (“FRBNY”), and, on a rotating basis, four other Reserve Bank presidents.

2. Operations and Services
The Reserve Banks perform a variety of services and operations. These functions include participating in formulating and conducting monetary
policy; participating in the payments system, including large-dollar transfers of funds, automated clearinghouse (“ACH”) operations, and check
collection; distributing coin and currency; performing fiscal agency functions for the U.S. Department of the Treasury (“Treasury”), certain
Federal agencies, and other entities; serving as the federal government’s bank; providing short-term loans to depository institutions; providing
loans to individuals, partnerships, and corporations in unusual and exigent circumstances; serving consumers and communities by providing
educational materials and information regarding financial consumer protection rights and laws and information on community development
programs and activities; and supervising 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 conducting 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 FOMC authorizes and directs the FRBNY to conduct
operations in domestic markets, including the direct purchase and sale of Treasury securities, Federal agency and government-sponsored
enterprise (“GSE”) debt securities, Federal agency and GSE mortgage-backed securities (“MBS”), the purchase of these securities under agreements to resell, and the sale of these securities under agreements to repurchase. The FRBNY executes these transactions at the direction of the
FOMC and holds the resulting securities and agreements in a portfolio known as the System Open Market Account (“SOMA”). The FRBNY is
authorized to lend the Treasury securities and Federal agency and GSE debt securities that are held in the SOMA.
In addition to authorizing and directing operations in the domestic securities market, the FOMC authorizes 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 to carry out the
System’s central bank responsibilities. Specifically, the FOMC authorizes and directs the FRBNY 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, while maintaining
adequate liquidity. The FRBNY is authorized and directed by the FOMC to maintain reciprocal currency arrangements (“FX swaps”) with
two central banks and to “warehouse” foreign currencies for the Treasury and the Exchange Stabilization Fund (“ESF”). The FRBNY is also
authorized and directed by the FOMC to maintain U.S. dollar currency liquidity swap arrangements with fourteen central banks. The FOMC
has also authorized the FRBNY to maintain foreign currency liquidity swap arrangements with four foreign central banks.
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. In some cases, costs incurred by a Reserve Bank for services provided to other Reserve Banks are not shared;
in other cases, the Reserve Banks are reimbursed for costs incurred in providing services to other Reserve Banks. 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,
Retail Payments Office, Treasury Retail Services Technology, Cash Technology, Check Restructuring Projects, National Check Automation
Services, and National Billing Operations.

3. Financial Stability Activities
The Reserve Banks have implemented the following programs that support the liquidity of financial institutions and foster improved conditions
in financial markets.
Expanded Open Market Operations and Support for Mortgage Related-Securities
The Single-Tranche Open Market Operation Program allows primary dealers to initiate a series of 28-day term repurchase transactions while
pledging Treasury securities, Federal agency and GSE debt securities, and Federal agency and GSE MBS as collateral.
The Federal Agency and GSE Debt Securities and MBS Purchase Program provides support to the mortgage and housing markets and fosters
improved conditions in financial markets. Under this program, the FRBNY purchases housing-related GSE debt securities and Federal agency
and GSE MBS. Purchases of housing-related GSE debt securities began in November 2008 and purchases of Federal agency and GSE MBS began
in January 2009. The FRBNY is authorized to purchase up to $200 billion in fixed rate, non-callable GSE debt securities and up to $1.25 trillion
in fixed rate Federal agency and GSE MBS. The activities of both of these programs are allocated to the other Reserve Banks.
Central Bank Liquidity Swaps
The FOMC authorized and directed the FRBNY to establish central bank liquidity swap arrangements, which may be structured as either
U.S. dollar liquidity or foreign currency liquidity swap arrangements.
U.S. dollar liquidity swap arrangements were authorized with fourteen foreign central banks to provide liquidity in U.S. dollars to overseas
markets. Such arrangements were 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, the Sveriges Riksbank, and the Swiss National
Bank. The maximum amount that could be drawn under these swap arrangements varied by central bank. The authorization for these swap
arrangements expired on February 1, 2010.
Foreign currency liquidity swap arrangements provided the Reserve Banks with the capacity to offer foreign currency liquidity to U.S. depository
institutions. Such arrangements were authorized with the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss
National Bank. The maximum amount that could be drawn under the swap arrangements varied by central bank. The authorization for these
swap arrangements expired on February 1, 2010.
Lending to Depository Institutions
The Term Auction Facility (“TAF”) promotes the efficient dissemination of liquidity by providing term funds to depository institutions. Under
the TAF, Reserve Banks auction term funds to depository institutions against any collateral eligible to secure primary, secondary, and seasonal
credit less a margin, which is a reduction in the assigned collateral value that is intended to provide the Banks additional credit protection. All
depository institutions that are considered 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 loans must be collateralized to the satisfaction of the Reserve
Banks.

Lending to Primary Dealers
The Term Securities Lending Facility (“TSLF”) promoted liquidity in the financing markets for Treasury securities. Under the TSLF, the FRBNY
could lend up to an aggregate amount of $200 billion of Treasury securities held in the SOMA to primary dealers secured for a term of 28 days.
Securities were lent to primary dealers through a competitive single-price auction and were collateralized, less a margin, by a pledge of other
securities, including Treasury securities, municipal securities, Federal agency and GSE MBS, non-agency AAA/Aaa-rated private-label residential
MBS, and asset-backed securities (“ABS”). The authorization for the TSLF expired on February 1, 2010.
The Term Securities Lending Facility Options Program (“TOP”) offered primary dealers, through a competitive single-price auction, to purchase
an option to draw upon short-term, fixed-rate TSLF loans in exchange for eligible collateral. The program enhanced the effectiveness of the
TSLF by ensuring additional liquidity during periods of heightened collateral market pressures, such as around quarter-end dates. The program
was suspended effective with the maturity of the June 2009 TOP options and the program authorization expired on February 1, 2010.

2 0 0 9 A N N U A L R E P O RT

Other Lending Facilities

F E D E R A L R E S E RV E B A N K O F C L E V E L A N D

The Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (“AMLF”) provided funding to depository institutions
and bank holding companies to finance the purchase of eligible high-quality asset-backed commercial paper (“ABCP”) from money market
mutual funds. The program assisted 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”) administered the AMLF and
was authorized to extend these loans to eligible borrowers on behalf of the other Reserve Banks. All loans extended under the AMLF were nonrecourse and were recorded as assets by the FRBB, and if the borrowing institution settles to a depository account in the Fourth Federal Reserve
District, the funds were credited to the depository institution account and settled between the Reserve Banks through the interdistrict settlement account. The credit risk related to the AMLF was assumed by the FRBB. The authorization for the AMLF expired on February 1, 2010.

4. 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. 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.
Limited 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 the fair value presentation required by GAAP.
Treasury securities, GSE debt securities, Federal agency and GSE MBS, and investments denominated in foreign currencies comprising the
SOMA are recorded at cost, on a settlement-date basis rather than the trade-date basis required by GAAP. The cost basis of Treasury securities,
GSE debt securities, and foreign government debt instruments is adjusted for amortization of premiums or accretion of discounts on a straightline basis. Amortized cost more appropriately reflects the Bank’s securities holdings given the System’s unique responsibility to conduct monetary policy. Accounting for these securities on a settlement-date basis more appropriately reflects the timing of the transaction’s effect on the
quantity of reserves in the banking system. Although the application of fair value measurements to the securities holdings may result in values
substantially above or below their carrying values, these unrealized changes in value 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 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 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
Treasury. The gold certificates held by the Reserve Banks are required to be backed by the gold of the Treasury. The Treasury may reacquire
the gold certificates at any time and the Reserve Banks must deliver them to the Treasury. At such time, the 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 per 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 Treasury
is authorized to issue SDR certificates to the Reserve Banks. When SDR certificates are issued to the Reserve Banks, equivalent amounts
in U.S. dollars are credited to the account established for the Treasury and the Reserve Banks’ SDR certificate accounts are increased. The
Reserve Banks are required to purchase SDR certificates, at the direction of the 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, and in 2009 the Treasury issued $3 billion in SDR certificates to the Reserve Banks, of which
$133 million was allocated to the Bank.
b. Loans to Depository Institutions
Loans are reported at their outstanding principal balances and interest income is recognized on an accrual basis.
Loans are impaired when, based on current information and events, it is probable that the Bank will not receive the principal or interest that
is due in accordance with the contractual terms of the loan agreement. Loans are evaluated to determine whether an allowance for loan loss
is required. The Bank has developed procedures for assessing the adequacy of any allowance for loan losses using all available information to
reflect the assessment of credit risk. This assessment includes monitoring information obtained from banking supervisors, borrowers, and
other sources to assess the credit condition of the borrowers and, as appropriate, evaluating collateral values for each program. Generally,
the Bank discontinues recognizing interest income on impaired loans until the borrower’s repayment performance demonstrates principal
and interest will be received in accordance with the term of the loan agreement. If the Bank discontinues recording interest on an impaired
loan, cash payments are first applied to principal until the loan balance is reduced to zero; subsequent payments are applied as recoveries of
amounts previously deemed uncollectible, if any, and then as interest income.
c. Securities Purchased Under Agreements to Resell, Securities Sold Under Agreements to Repurchase, and Securities Lending
The FRBNY may engage in purchases of securities with primary dealers under agreements to resell (“repurchase transactions”). These
repurchase transactions are typically executed through a tri-party arrangement (“tri-party transactions”). Tri-party transactions are conducted
with two commercial custodial banks that manage the clearing, settlement, and pledging of collateral. The collateral pledged must exceed
the principal amount of the transaction. Acceptable collateral under tri-party repurchase transactions primarily includes Treasury securities;
pass-through mortgage securities of Fannie Mae, Freddie Mac, and Ginnie Mae; STRIP Treasury securities; and “stripped” securities of
Federal agencies. The tri-party transactions are accounted for as financing transactions with the associated interest income accrued over
the life of the transaction. Repurchase transactions are reported at their contractual amount as “System Open Market Account: Securities
purchased under agreements to resell” in the Statements of Condition and the related accrued interest receivable is reported as a component
of “Accrued interest receivable.”
The FRBNY may engage in sales of securities with primary dealers under agreements to repurchase (“reverse repurchase transactions”). These
reverse repurchase transactions may be executed through a tri-party arrangement, similar to repurchase transactions. Reverse repurchase
transactions may also be executed with foreign official and international accounts. Reverse repurchase transactions 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.”
Treasury securities and GSE debt securities held in the SOMA are lent to primary dealers to facilitate the effective functioning of the
domestic securities market. Overnight securities lending transactions are fully collateralized by other Treasury securities. TSLF transactions
are fully collateralized with investment-grade debt securities, collateral eligible for tri-party repurchase agreements arranged by the FRBNY,
or both. The collateral taken in both overnight and term securities lending transactions is in excess of the fair value of the securities lent.
The FRBNY charges the primary dealer a fee for borrowing securities, and these fees are reported as a component of “Other income.” In
addition, TOP 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
that occurs in April each year. The settlement also equalizes Reserve Bank gold certificate holdings to Federal Reserve notes outstanding in
each District.
d. Treasury Securities; Government-Sponsored Enterprise Debt Securities; Federal Agency and Government-Sponsored Enterprise
Mortgage-Backed Securities; Investments Denominated in Foreign Currencies; and Warehousing Agreements
Interest income on Treasury securities, GSE debt securities, and investments denominated in foreign currencies comprising the SOMA
is accrued on a straight-line basis. Interest income on Federal agency and GSE MBS is accrued using the interest method and includes
amortization of premiums, accretion of discounts, and paydown gains or losses. Paydown gains or losses result from scheduled payment and
prepayment of principal and represent the difference between the principal amount and the carrying value of the related security. Gains and
losses resulting from sales of securities are determined by specific issue based on average cost.

In addition to outright purchases of Federal agency and GSE MBS that are held in the SOMA, the FRBNY enters into dollar roll transactions
(“dollar rolls”), which primarily involve an initial transaction to purchase or sell “to be announced” (“TBA”) MBS combined with an
agreement to sell or purchase TBA MBS on a specified future date. The FRBNY’s participation in the dollar roll market furthers the MBS
Purchase Program goal of providing support to the mortgage and housing markets and fostering improved conditions in financial markets.
The FRBNY accounts for outstanding commitments to sell or purchase TBA MBS on a settlement-date basis. Based on the terms of the FRBNY
dollar roll transactions, transfers of MBS upon settlement of the initial TBA MBS transactions are accounted for as purchases or sales in
accordance with FASB ASC Topic 860 (ASC 860), Accounting for Transfers of Financial Assets and Repurchase Financing Transactions,
(previously SFAS 140), and the related outstanding commitments are accounted for as sales or purchases upon settlement.

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 or losses, net” in the Statements of Income and Comprehensive Income.
Warehousing is an arrangement under which the FOMC agrees to exchange, at the request of the Treasury, U.S. dollars for foreign currencies
held by the Treasury or ESF over a limited period of time. The purpose of the warehousing facility is to supplement the U.S. dollar resources
of the Treasury and ESF for financing purchases of foreign currencies and related international operations.
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.
e. Central Bank Liquidity Swaps

Central bank liquidity swaps, which are transacted between the FRBNY and a foreign central bank, may be structured as either U.S. dollar
liquidity or foreign currency liquidity swap arrangements.

F E D E R A L R E S E RV E B A N K O F C L E V E L A N D

2 0 0 9 A N N U A L R E P O RT

Activity related to Treasury securities, GSE debt securities, and Federal agency and GSE MBS, 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.

Activity related to U.S. dollar and foreign currency swap transactions, including the related income and expense, 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 investments denominated in foreign currencies, the foreign currency amounts associated with these central bank liquidity swap arrangements are revalued at current foreign currency market exchange rates.
U.S. dollar liquidity swaps
At the initiation of each U.S. dollar liquidity swap transaction, the foreign central bank transfers a specified amount of its currency to a
restricted account for 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 as the initial transaction. The Bank’s allocated
portion of the foreign currency amounts that the FRBNY acquires is reported as “Central bank liquidity swaps” on the Statements of Condition. Because the swap transaction will be unwound at the same U.S. dollar amount and exchange rate that were used in the initial transaction,
the recorded value of the foreign currency amounts is not affected by changes in the market exchange rate.
The foreign central bank compensates the FRBNY based on the foreign currency amounts held for the FRBNY. The FRBNY recognizes
compensation during the term of the swap transaction and reports it as “Interest income: Central bank liquidity swaps” in the Statements of
Income and Comprehensive Income.
Foreign currency liquidity swaps
At the initiation of each foreign currency liquidity swap transaction, the FRBNY will transfer, at the prevailing market exchange rate, a specified
amount of U.S. dollars to an account for the foreign central bank in exchange for its currency. The foreign currency amount received would be
reported as a liability by the Bank. Concurrent with this transaction, the FRBNY and the foreign central bank agree to a second transaction
that obligates the FRBNY to return the foreign currency and the foreign central bank to return the U.S. dollars on a specified future date.
The FRBNY compensates the foreign central bank based on the foreign currency transferred to the FRBNY. For each foreign currency swap
transaction with a foreign central bank it is anticipated that the FRBNY will enter into a corresponding transaction with a U.S. depository
institution in order to provide foreign currency liquidity to that institution. No foreign currency liquidity swap transactions occurred in
2008 or 2009.
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 purchase cost and 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, which are identified as issued to a specific Reserve Bank,
must be fully collateralized. 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, 2009 and 2008, 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 $7,535 million and $7,240 million at December 31, 2009 and 2008, 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. 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.
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. 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 GAAP, 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 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. The amount due to the Treasury is reported as “Accrued interest on Federal Reserve notes” in the Statements of Condition. If
overpaid during the year, the amount is reported as “Prepaid interest on Federal Reserve notes” in the Statements of Condition. Payments
are made weekly to the Treasury.
In the event of losses or an increase in capital paid-in at a Reserve Bank, payments to the 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 Treasury in the following year.

m. Interest on Depository Institution Deposits
On October 9, 2008, the Reserve Banks began paying interest to depository institutions on qualifying balances held at the Banks. The interest
rates paid on required reserve balances and excess balances are determined by the Board of Governors, based on an FOMC-established
target range for the effective federal funds rate.
n. Income and Costs Related to Treasury Services
The Bank is required by the Federal Reserve Act to serve as fiscal agent and depositary of the United States Government. By statute, the
Department of the Treasury has appropriations to pay for these services. During the years ended December 31, 2009 and 2008, the Bank
was reimbursed for all services provided to the Department of the Treasury as its fiscal agent.
o. Compensation Received for Services Provided

2 0 0 9 A N N U A L R E P O RT

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 services and recognizes
total System revenue for these services on its Consolidated Statements of Income and Comprehensive Income. The FRBA and the FRBNY
compensate the applicable 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.

F E D E R A L R E S E RV E B A N K O F C L E V E L A N D

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 by the Treasury to
produce 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. The Bank’s real property taxes were
$2 million for each of the years ended December 31, 2009 and 2008, 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.
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.
The Bank had no significant restructuring activities in 2008 and 2009.
s. Recently Issued Accounting Standards
In February 2008, FASB issued FSP SFAS 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions,
(codified in FASB ASC Topic 860 (ASC 860), Transfers and Servicing). ASC 860 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 unless certain criteria are met. These provisions of ASC 860 are effective for the Bank’s consolidated financial statements
for the year beginning on January 1, 2009, and have not had a material effect on the Bank’s financial statements. The requirements of this
standard have been reflected in the accompanying footnotes.
In June 2009, FASB issued SFAS 166, Accounting for Transfers of Financial Assets—an amendment to FASB Statement No. 140, (codified
in ASC 860). The new guidance modifies existing guidance to eliminate the scope exception for qualifying special purpose vehicles (“SPVs”)
and clarifies that the transferor must consider all arrangements of the transfer of financial assets when determining if the transferor has
surrendered control. These provisions of ASC 860 are effective for the Bank’s financial statements for the year beginning on January 1, 2010,
and earlier adoption is prohibited. The adoption of this standard is not expected to have a material effect on the Bank’s financial statements.
In May 2009, FASB issued SFAS No. 165, Subsequent Events, (codified in FASB ASC Topic 855 (ASC 855), Subsequent Events), which
establishes general standards of accounting for and disclosing events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. ASC 855 sets forth (i) the period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (ii) the circum
stances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and
(iii) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date, including disclosure
of the date through which an entity has evaluated subsequent events and whether that represents the date the financial statements were
issued or were available to be issued. The Bank adopted ASC 855 for the period ended December 31, 2009, and the required disclosures are
reflected in Note 15.

In June 2009, the FASB issued SFAS No. 168, The Statement of Financial Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles, a replacement of SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (SFAS
168). SFAS 168 establishes the FASB ASC as the source of authoritative accounting principles recognized by the FASB to be applied by
non-governmental entities in the preparation of financial statements in conformity with GAAP. The ASC does not change current GAAP,
but it introduces a new structure that organizes the authoritative standards by topic. SFAS 168 is effective for financial statements issued for
periods ending after September 15, 2009. As a result, both the ASC and the legacy standard are referenced in the Bank’s financial statements
and footnotes.

5. Loans
The loan amounts outstanding at December 31 were as follows (in millions):
2009
Primary, secondary, and seasonal credit
TAF
Loans to depository institutions

$
$

1
752
753

2008
$
$

47
15,575
15,622

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 credit are extended on a short-term basis, typically overnight, whereas seasonal credit may be
extended for a period of 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 collater
alize these loans include consumer, business, and real estate loans; Treasury securities; GSE debt securities; foreign sovereign debt; municipal,
corporate, and state and local government obligations; ABS; corporate bonds; commercial paper; and bank-issued assets, such as certificates
of deposit, bank notes, and deposit notes. Collateral is assigned a lending value that is 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 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 ranging from 28 to 84 days. All advances under
the TAF program must be collateralized to the satisfaction of the Bank. 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 that is accepted as collateral for TAF loans reduced by a margin.
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, for primary and seasonal credit lending, 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 remaining maturity distributions of loans outstanding at December 31were as follows (in millions):
2009
Primary, secondary,
and seasonal credit
Within 15 days
16 days to 90 days
Total loans

$
$

TAF

–
1
1

$
$

752
–
752

2008
Primary, secondary,
and seasonal credit
Within 15 days
16 days to 90 days
Total loans

$
$

47
–
47

TAF
$
$

8,825
6,750
15,575

Allowance for Loan Loss
At December 31, 2009 and 2008, the Bank did not have any impaired loans and no allowance for loan losses was required.

6. Treasury Securities; Government-Sponsored Enterprise Debt Securities; Federal Agency and GovernmentSponsored Enterprise Mortgage-Backed 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 3.951 percent and 3.792 percent at December 31, 2009 and 2008, respectively.
The Bank’s allocated share of Treasury securities, GSE debt securities, and Federal agency and GSE MBS, excluding accrued interest, held in the
SOMA at December 31 was as follows (in millions):
2009
Treasury Securities

2 0 0 9 A N N U A L R E P O RT

Bills

F E D E R A L R E S E RV E B A N K O F C L E V E L A N D

Par
Unamortized premiums
Unaccreted discounts
Total amortized cost

Fair Value

Notes

728
–
–
728

728

Total Treasury
securities

Bonds

22,453
259
(39)
22,673

7,500
966
(25)
8,441

23,035

9,115

GSE debt
securities

30,681
1,225
(64)
31,842

32,878

Federal agency
and GSE MBS

6,316
297
(1)
6,612

35,888
478
(61)
36,305

6,615

36,122

2008
Treasury Securities
Bills

Par
Unamortized premiums
Unaccreted discounts
Total amortized cost

Fair Value

Notes

699
–
–
699

699

Total Treasury
securities

Bonds

12,695
10
(32)
12,673

4,653
254
(23)
4,884

13,564

6,425

GSE debt
securities

18,047
264
(55)
18,256

20,688

Federal agency
and GSE MBS

747
41
(1)
787

–
–
–
–

791

–

The total of the Treasury securities, GSE debt securities, and Federal agency and GSE MBS, net, excluding accrued interest held in the SOMA
at December 31 was as follows (in millions):
2009
Treasury Securities

Amortized Cost
Fair Value

Bills

Notes

Bonds

Total Treasury
securities

GSE debt
securities

Federal agency
and GSE MBS

18,423
18,423

$ 573,877
583,040

$ 213,672
230,717

$ 805,972
832,180

$ 167,362
167,444

$ 918,927
914,290

GSE debt
securities

Federal agency
and GSE MBS

2008
Treasury Securities

Amortized Cost
Fair Value

Bills

Notes

Bonds

Total Treasury
securities

18,422
18,422

$ 334,217
357,709

$ 128,810
169,433

$ 481,449
545,564

20,740
20,863

–
–

The fair value amounts in the above tables are presented solely for informational purposes. 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 the central bank, to meet their financial obligations and responsibilities. Fair value was determined by reference to quoted
market values for identical securities, except for Federal agency and GSE MBS for which fair values were determined using a model-based
approach based on observable inputs for similar securities.
The fair value of the fixed-rate Treasury securities, GSE debt securities, and Federal agency and GSE MBS in the SOMA’s holdings is subject to
market risk, arising from movements in market variables, such as interest rates and securities prices. The fair value of Federal agency and GSE
MBS is also affected by the rate of prepayments of mortgage loans underlying the securities.

The following table provides additional information on the amortized cost and fair values of the Federal agency and GSE MBS portfolio at
December 31, 2009 (in millions):

Distribution of MBS
holdings by coupon rate
Allocated to the Bank:
4.0%
4.5%
5.0%
5.5%
6.0%
Other 1
Total
System total:
4.0%
4.5%
5.0%
5.5%
6.0%
Other 1
Total

Amortized cost
$

Fair value

6,721
17,160
7,721
4,084
502
117
36,305

6,548
17,053
7,760
4,132
510
119
$ 36,122

$ 170,119
434,352
195,418
103,379
12,710
2,949
$ 918,927

$ 165,740
431,646
196,411
104,583
12,901
3,009
$ 914,290

1 Represents less than one percent of the total portfolio

Financial information related to securities purchased under agreements to resell and securities sold under agreements to repurchase for the
years ended December 31, 2009 and 2008, was as follows (in millions):
Securities purchased
under agreements to
resell
2009
Allocated to the Bank:
Contract amount outstanding, end of year
Average daily amount outstanding, during the year
Maximum month-end balance outstanding, during the year
Securities pledged, end of year
System total:
Contract amount outstanding, end of year
Average daily amount outstanding, during the year
Maximum month-end balance outstanding, during the year
Securities pledged, end of year

Securities sold
under agreements to
repurchase

2008

2009

2008

–
137
–

3,034
3,317
4,512

3,071
2,647
3,071
3,076

3,350
2,127
3,737
2,992

–
3,616
–

80,000
86,227
119,000

77,732
67,837
77,732
77,860

88,352
55,169
98,559
78,896

The Bank has revised its disclosure of securities purchased under agreements to resell and securities sold under agreements to repurchase from
a weighted average calculation, disclosed in 2008, to the simple daily average calculation, disclosed above. The previously reported System total
2008 weighted average amount outstanding for securities purchased under agreements to resell was $97,037 million, of which $3,680 million
was allocated to the Bank. The previously reported System total 2008 weighted average amount outstanding for securities sold under agreements to repurchase was $65,461 million, of which $2,482 million was allocated to the Bank.
The contract amounts for securities purchased under agreements to resell and securities sold under agreements to repurchase approximate fair
value.

The remaining maturity distribution of Treasury securities, GSE debt securities, Federal agency and GSE MBS bought outright, securities
purchased under agreements to resell, and securities sold under agreements to repurchase that were allocated to the Bank at December 31,
2009, was as follows (in millions):

2 0 0 9 A N N U A L R E P O RT

F E D E R A L R E S E RV E B A N K O F C L E V E L A N D

Within 15 days
16 days to 90 days
91 days to 1 year
Over 1 year to 5 years
Over 5 years to 10 years
Over 10 years
Total allocated to the Bank

Treasury
securities
(Par value)

GSE debt
securities
(Par value)

Federal
agency and
GSE MBS
(Par value)

459
1,140
2,006
12,914
8,443
5,719
$ 30,681

3
120
850
3,927
1,335
81
6,316

Securities
sold under
agreements
to repurchase
(Contract
amount)

–
–
–
–
1
35,887
$ 35,888

3,071
–
–
–
–
–
3,071

Federal agency and GSE MBS are reported at stated maturity in the table above. The estimated weighted average life of these securities at
December 31, 2009, which differs from the stated maturity primarily because it factors in prepayment assumptions, is approximately 6.4 years.
At December 31, 2009 and 2008, Treasury securities and GSE debt securities with par values of $21,610 million and $180,765 million, respectively, were loaned from the SOMA, of which $854 million and $6,855 million, respectively, were allocated to the Bank.
At December 31, 2009, the total of other investments was $5 million, of which the Bank’s allocated share was immaterial. Other investments
consist of cash and short-term investments related to the Federal agency and GSE MBS portfolio.
At December 31, 2009, the total of other liabilities was $601 million, of which $24 million was allocated to the Bank. These other liabilities,
which are related to purchases of Federal agency and GSE MBS, arise from the failure of a seller to deliver securities to the FRBNY on the settlement date. Although the Bank has ownership of and records its investments in the MBS as of the contractual settlement date, it is not obligated
to make payment until the securities are delivered, and the amount reported as other liabilities represents the Bank’s obligation to pay for the
securities when delivered.
The FRBNY enters into commitments to buy Federal agency and GSE MBS and records the related MBS on a settlement-date basis. As of
December 31, 2009, the total purchase price of the Federal agency and GSE MBS under outstanding commitments was $160,099 million, of
which $32,838 million was related to dollar roll transactions. The amount of outstanding commitments allocated to the Bank was $6,325 million,
of which $1,297 million was related to dollar roll transactions. These commitments, which had contractual settlement dates extending through
March 2010, are primarily for the purchase of TBA MBS for which the number and identity of the pools that will be delivered to fulfill the commitment are unknown at the time of the trade. These commitments are subject to market and counterparty risks that result from their future
settlement. As of December 31, 2009, the fair value of Federal agency and GSE MBS under outstanding commitments was $158,868 million, of
which $6,277 million was allocated to the Bank. During the year ended December 31, 2009, the Reserve Banks recorded net gains from dollar
roll related sales of $879 million, of which $35 million was allocated to the Bank. These net gains are reported as “Non-Interest Income: Federal
agency and government-sponsored enterprise mortgage-backed securities gains, net” in the Statements of Income and Comprehensive Income.

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. In addition, the FRBNY enters into transactions to purchase foreign-currency-denominated government-debt securities
under agreements to resell for which the accepted collateral is the debt instruments issued by the governments of Belgium, France, Germany,
Italy, the Netherlands, and Spain.
The Bank’s allocated share of investments denominated in foreign currencies was approximately 7.364 percent and 6.998 percent at
December 31, 2009 and 2008, respectively.
The Bank’s allocated share of investments denominated in foreign currencies, including accrued interest, valued at amortized cost and foreign
currency market exchange rates at December 31, was as follows (in millions):
2009
Euro:
Foreign currency deposits
Securities purchased under agreements to resell
Government debt instruments
Japanese yen:
Foreign currency deposits
Government debt instruments
Total allocated to the Bank

545
191
363
251
511
1,861

2008
$

389
285
323
244
495
1,736

At December 31, 2009 and 2008, the fair value of investments denominated in foreign currencies, including accrued interest, allocated to
the Bank was $1,876 million and $1,751 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 Treasury securities, GSE debt securities, and Federal agency and GSE MBS discussed
in Note 6, unrealized gains or losses have no effect on the ability of a Reserve Bank, as the central bank, to meet its financial obligations and
responsibilities. The fair value is presented solely for informational purposes.
Total Reserve Bank investments denominated in foreign currencies were $25,272 million and $24,804 million at December 31, 2009 and 2008,
respectively. At December 31, 2009 and 2008, the fair value of the total Reserve Bank investments denominated in foreign currencies, including
accrued interest, was $25,480 million and $25,021 million, respectively.
The remaining maturity distribution of investments denominated in foreign currencies that were allocated to the Bank at December 31, 2009,
was as follows (in millions):
Euro

Within 15 days
16 days to 90 days
91 days to 1 year
Over 1 year to 5 years
Total allocated to the Bank

447
185
177
290
1,099

Japanese yen
$

267
34
174
287
762

Total
$

714
219
351
577
1,861

At December 31, 2009 and 2008, 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 off-balance-sheet
market risk that result from their future settlement and counterparty credit risk. The FRBNY controls these risks by obtaining credit approvals,
establishing transaction limits, receiving collateral in some cases, and performing daily monitoring procedures.

8. Central Bank Liquidity Swaps
U.S. Dollar Liquidity Swaps
The Bank’s allocated share of U.S. dollar liquidity swaps was approximately 7.364 percent and 6.998 percent at December 31, 2009 and 2008,
respectively.
At December 31, 2009 and 2008, the total Reserve Bank amount of foreign currency held under U.S. dollar liquidity swaps was $10,272 million
and $553,728 million, respectively, of which $757 million and $38,749 million, respectively, was allocated to the Bank.
The remaining maturity distribution of U.S. dollar liquidity swaps that were allocated to the Bank at December 31 was as follows (in millions):
2009

2008

Within
15 days

Australian dollar
Danish krone
Euro
Japanese yen
Korean won
Mexican peso
Norwegian krone
Swedish krona
Swiss franc
U.K. pound
Total

–
–
479
40
–
238
–
–
–
–
757

Within
15 days
$

700
–
10,565
3,351
–
–
154
700
1,345
8
$ 16,823

16 days
to 90 days
$

898
1,050
9,824
5,236
724
–
422
1,049
417
2,306
$ 21,926

Total
$

1,598
1,050
20,389
8,587
724
–
576
1,749
1,762
2,314
$ 38,749

Foreign Currency Liquidity Swaps
There were no transactions related to the foreign currency liquidity swaps during the years ended December 31, 2008 and 2009.

9. Bank Premises, Equipment, and Software
Bank premises and equipment at December 31 were as follows (in millions):
2009
Bank premises and equipment:
Land
Buildings
Building machinery and equipment
Furniture and equipment
Subtotal

2 0 0 9 A N N U A L R E P O RT

Accumulated depreciation

F E D E R A L R E S E RV E B A N K O F C L E V E L A N D

10
171
60
53
294

2008
$

(132)

9
173
60
63
305
(137)

Bank premises and equipment, net

162

168

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, 2009 and 2008, and is reported as a component of “Other income” in the Statements of
Income and Comprehensive Income. Future minimum lease payments that the Bank will receive under noncancelable lease agreements in
existence at December 31, 2009, are as follows (in millions):

2010
2011
2012
2013
2014
Thereafter
Total

2
1
2
2
1
6
14

The Bank had capitalized software assets, net of amortization, of $6 million and $8 million at December 31, 2009 and 2008, respectively. Amortization expense was $3 million and $18 million for the years ended December 31, 2009 and 2008, respectively. Capitalized software assets are
reported as a component of “Other assets” in the Statements of Condition and the related amortization is reported as a component of “Other
expenses” in the Statements of Income and Comprehensive Income.

10. Commitments and Contingencies
In the normal course of its operations the Bank enters into contractual commitments, normally with fixed expiration dates or termination
provisions, at specific rates and for specific purposes.
At December 31, 2009, 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, data processing and office equipment (including taxes, insurance, and
maintenance when included in rent), net of sublease rentals, was $300 thousand and $219 thousand for the years ended December 31, 2009
and 2008, respectively.
Future minimum rental payments under noncancelable operating leases, net of sublease rentals, with terms of one year or more, at
December 31, 2009, were not material.
At December 31, 2009, there were no material unrecorded unconditional purchase commitments or 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, 2009 or 2008.
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 employees of the Reserve Banks, Board of Governors, and Office of Employee Benefits of the Federal Reserve System
(“OEB”) participate in the Retirement Plan for Employees of the Federal Reserve System (“System Plan”). In addition, employees at certain compensation levels participate in the Benefit Equalization Retirement Plan (“BEP”) and certain Reserve Bank officers participate in the
Supplemental Retirement Plan for Select Officers of the Federal Reserve Bank (“SERP”).

The System Plan provides retirement benefits to employees of the Federal Reserve Banks, the Board of Governors, and OEB. 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.
The Bank’s projected benefit obligation, funded status, and net pension expenses for the BEP and the SERP at December 31, 2009 and 2008,
and for the years then ended, were not material.
Thrift Plan
Employees of the Bank 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 year ended December 31, 2008, and for the first three months of
the year ended December 31, 2009, the Bank matched 80 percent of the first 6 percent of employee contributions for employees with less than
five years of service and 100 percent of the first 6 percent of employee contributions for employees with five or more years of service. Effective
April 1, 2009, the Bank matches 100 percent of the first 6 percent of employee contributions from the date of hire and provides an automatic
employer contribution of one percent of eligible pay. The Bank’s Thrift Plan contributions totaled $5 million and $4 million for the years ended
December 31, 2009 and 2008, respectively, and are reported as a component of “Salaries and other benefits” in the Statements of Income and
Comprehensive Income.

12. Postretirement Benefits Other Than Retirement Plans And Postemployment Benefits
Postretirement Benefits Other Than Retirement Plans
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):
2009
Accumulated postretirement benefit obligation at January 1
Service cost benefits earned during the period
Interest cost on accumulated benefit obligation
Net actuarial loss (gain)
Curtailment gain
Contributions by plan participants
Benefits paid
Medicare Part D subsidies
Accumulated postretirement benefit obligation at December 31

86.0
3.6
5.2
2.5
–
0.6
(4.5)
0.3
93.7

2008
$

81.2
3.5
5.3
(0.8)
(0.2)
0.6
(3.8)
0.2
86.0

At December 31, 2009 and 2008, the weighted-average discount rate assumptions used in developing the postretirement benefit obligation
were 5.75 percent and 6.00 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.
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):
2009
Fair value of plan assets at January 1
Contributions by the employer
Contributions by plan participants
Benefits paid
Medicare Part D subsidies

Fair value of plan assets at December 31

Unfunded obligation and accrued postretirement benefit cost
Amounts included in accumulated other comprehensive loss
are shown below:
Prior service cost
Net actuarial loss
Total accumulated other comprehensive loss

2008
$

–
3.0
0.6
(3.8)
0.2

–

93.7

86.0

1.5
(20.8)
(19.3)

3.8
(19.8)
(16.0)

–
3.6
0.6
(4.5)
0.3

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:
Health care cost trend rate assumed for next year
Rate to which the cost trend rate is assumed to decline
(the ultimate trend rate)
Year that the rate reaches the ultimate trend rate

2009

2008

7.50%

5.00%
2015

5.00%
2014

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, 2009 (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
12.7

One percentage
point decrease

(1.2)
(10.5)

2 0 0 9 A N N U A L R E P O RT

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

F E D E R A L R E S E RV E B A N K O F C L E V E L A N D

2009
Service cost for benefits earned during the period
Interest cost on accumulated benefit obligation
Amortization of prior service cost
Amortization of net actuarial loss
Net periodic postretirement benefit expense

3.6
5.2
(2.3)
1.4
7.9

Estimated amounts that will be amortized from accumulated
other comprehensive loss into net periodic postretirement
benefit expense in 2010 are shown below:
Prior service cost
$
Net actuarial loss
Total
$

(1.4)
1.6
0.2

2008
$

3.5
5.3
(2.3)
2.1
8.6

Net postretirement benefit costs are actuarially determined using a January 1 measurement date. At January 1, 2009 and 2008, the weightedaverage discount rate assumptions used to determine net periodic postretirement benefit costs were 6.00 percent and 6.25 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.
Federal Medicare Part D subsidy receipts were $0.3 million and $0.2 million in the years ended December 31, 2009 and 2008, respectively.
Expected receipts in 2010, related to benefits paid in the years ended December 31, 2009 and 2008, are $0.1 million.
Following is a summary of expected postretirement benefit payments (in millions):
Without subsidy

With subsidy

2010
2011
2012
2013
2014
2015–2019

4.5
5.0
5.4
5.8
6.2
38.6

4.2
4.6
4.9
5.3
5.7
35.1

Total

65.5

59.8

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 self-insured workers’ compensation expenses. The accrued postemployment benefit costs recognized by the Bank at December 31, 2009 and 2008, were $12.7 million and
$8.0 million, respectively. This cost is included as a component of “Accrued benefit costs” in the Statements of Condition. Net periodic post
employment benefit expense included in 2009 and 2008 operating expenses were $6.1 million and $1.5 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 retirement plans

Balance at January 1, 2008
Change in funded status of benefit plans:
Net actuarial gain arising during the year
Amortization of prior service cost
Amortization of net actuarial loss
Change in funded status of benefit plans—
other comprehensive loss
Balance at December 31, 2008
Change in funded status of benefit plans:
Net actuarial loss arising during the year
Amortization of prior service cost
Amortization of net actuarial loss
Change in funded status of benefit plans—
other comprehensive loss
Balance at December 31, 2009

(17)
1
(2)
2
1
(16)

(2)
(2)
1
(3)
(19)

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

14. Business Restructuring Charges
2007 and Prior Restructuring Plans
The Bank incurred various restructuring charges prior to 2008 related to the restructuring of Check Operations and Electronic Treasury
Financial Services.
Following is a summary of financial information related to the restructuring plans (in millions):
2007 and prior
restructuring plans

Information related to restructuring plans
as of December 31, 2009:
Total expected costs related to restructuring activity
Expected completion date
Reconciliation of liability balances:
Balance at January 1, 2008
Employee separation costs
Adjustments
Payments
Balance at December 31, 2008
Payments
Balance at December 31, 2009

$
$

2.1
2010
2.9
0.2
(1.0)
(1.1)
1.0
(0.9)
0.1

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.
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
There were no subsequent events that require adjustments to or disclosures in the financial statements as of December 31, 2009. Subsequent
events were evaluated through April 21, 2010, which is the date that the Bank issued the financial statements.

Officers and Consultants
As of December 31, 2009

Sandra Pianalto

President and
Chief Executive Officer

Mark S. Sniderman

2 0 0 9 A N N U A L R E P O RT

Executive Vice President and
Chief Policy Officer
Economic Research,
Policy Analysis, Public Affairs,
Community Development

F E D E R A L R E S E RV E B A N K O F C L E V E L A N D

Lawrence Cuy

Senior Vice President
Treasury Retail Securities,
eGovernment,
Information Technology

Stephen H. Jenkins

Senior Vice President
Supervision and Regulation,
Credit Risk Management,
Statistics and Analysis

Robert W. Price

Senior Vice President
Financial Services
Policy Committee

Susan G. Schueller
Senior Vice President
Audit

Mark E. Schweitzer

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

Gregory L. Stefani

Senior Vice President and
Chief Financial Officer
Financial Management,
Risk Management,
Strategy and Performance,
National Billing

Anthony Turcinov

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

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

Douglas A. Banks

Stephen J. Ong

Kelly A. Banks

Terrence J. Roth

Vice President
Credit Risk Management,
Statistics and Analysis
Vice President
Community Relations,
Learning Center,
Bankwide Public Programs

John B. Carlson

Vice President and Economist
Money, Financial Markets,
and Monetary Policy

Ruth M. Clevenger

Vice President and
Community Affairs Officer
Community Development

Cheryl L. Davis

Vice President
Banking Supervision
and Policy Development
Vice President
Financial Services
Policy Committee

James G. Savage

Vice President and
Public Information Officer
Public Affairs

Robert B. Schaub

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

Vice President and
Corporate Secretary
Office of the President,
Advisory Councils,
Executive Information

Susan M. Steinbrick

William D. Fosnight

Vice President and Economist
Office of Policy Analysis,
Policy Development,
Project Management,
Payments System Research

Vice President and
Associate General Counsel
Legal

Joseph G. Haubrich

Vice President and Economist
Banking and Finance

Amy J. Heinl

Vice President
Treasury Retail Securities

LaVaughn M. Henry

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

Suzanne M. Howe

Vice President
eGovernment Operations,
Treasury Electronic Check
Processing

Susan M. Kenney

Vice President
eGovernment Technical Support,
Pay.gov

Mark S. Meder

Vice President
Financial Management Services,
Strategic Management

Vice President and
General Auditor
Audit

James B. Thomson

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

Jerrold L. Newlon

Jeffrey G. Gacka

Anthony V. Notaro

Assistant Vice President
Supervision and Regulation
Assistant Vice President
Financial Management Services,
National Billing, Accounting

Patrick J. Geyer

Assistant Vice President
Cash

George E. Guentner
Assistant Vice President
Information Technology

Felix Harshman

Assistant Vice President
Supervision and Regulation
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
Financial Management Services,
Expense Accounting/Budget

Assistant Vice President and
Assistant Corporate Secretary
Communications and Design,
Office of the Corporate Secretary

Bryan S. Huddleston

John P. Robins

Assistant Vice President
Supervision and Regulation,
Consumer Affairs

Paul E. Kaboth

Assistant Vice President
Supervision and Regulation,
Community Supervision

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,
Financial Services
Policy Committee

Todd J. Morgano

Assistant Vice President
Public Affairs

Consultant
Supervision and Regulation

Elizabeth J. Robinson
Assistant Vice President
Human Resources

Thomas E. Schaadt

Assistant Vice President
Check Automation Services

James P. Slivka

Assistant Vice President
and Assistant General Auditor
Audit

Diana C. Starks

Assistant Vice President
Executive/Corporate Information
Management, Diversity

Michael Vangelos

Assistant Vice President
Information Security,
Business Continuity

2 0 0 9 A N N U A L R E P O RT
F E D E R A L R E S E RV E B A N K O F C L E V E L A N D

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 Governors and the Board of Directors of the Federal Reserve Bank of Cleveland.
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, 2009

Tanny B. Crane

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

Alfred M. Rankin Jr.

Deputy Chairman
Chairman, President, and
Chief Executive Officer
NACCO Industries, Inc.
Cleveland, Ohio

Tilmon F. Brown

Charlotte W. Martin

C. Daniel DeLawder

James E. Rohr

President and
Chief Executive Officer
New Horizons Baking Company
Norwalk, Ohio
Chairman and
Chief Executive Officer
Park National Bank
Newark, Ohio

Roy W. Haley

Chairman and
Chief Executive Officer
WESCO International, Inc.
Pittsburgh, Pennsylvania

President and
Chief Executive Officer
Great Lakes Bankers Bank
Gahanna, Ohio

Les C. Vinney

Senior Advisor and
Immediate Past President and
Chief Executive Officer
STERIS Corporation
Mentor, Ohio

Chairman and
Chief Executive Officer
The PNC Financial Services
Group, Inc.
Pittsburgh, Pennsylvania

Susan Tomasky
President
AEP Transmission
Columbus, Ohio

Henry L. Meyer III

Federal Advisory Council
Representative
Chairman and
Chief Executive Officer
KeyCorp
Cleveland, Ohio

(back) Roy W. Haley, C. Daniel DeLawder, Les C. Vinney, and James E. Rohr.
(front) Tilmon F. Brown, Susan Tomasky, Charlotte W. Martin, Tanny B. Crane, and Alfred M. Rankin Jr.

Cincinnati
Board of Directors
As of December 31, 2009

James M. Anderson

Chairman
President and
Chief Executive Officer
Cincinnati Children’s
Hospital Medical Center
Cincinnati, Ohio

Donald E. Bloomer

Gregory B. Kenney

Janet B. Reid

Daniel B. Cunningham

Paul R. Poston

Peter S. Strange

President and
Chief Executive Officer
Citizens National Bank
Somerset, Kentucky

President and
Chief Executive Officer
Long–Stanton
Manufacturing Companies
Cincinnati, Ohio

President and
Chief Executive Officer
General Cable Corporation
Highland Heights, Kentucky
Director, Great Lakes District
NeighborWorks® America
Cincinnati, Ohio

Principal Partner
Global Lead Management
Consulting
Cincinnati, Ohio
Chairman and
Chief Executive Officer
Messer Construction Company
Cincinnati, Ohio

Gregory B. Kenney, Janet B. Reid, Donald E. Bloomer, Paul R. Poston, James M. Anderson, Daniel B. Cunningham, and Peter S. Strange.

Pittsburgh
Board of Directors
As of December 31, 2009

Sunil T. Wadhwani

Chairman
Co-chairman
iGATE Corporation
Pittsburgh, Pennsylvania

Todd D. Brice

Margaret Irvine Weir

Petra Mitchell

Howard W. Hanna III

Glenn R. Mahone

Robert A. Paul

Chief Executive Officer
S&T Bancorp, Inc.
Indiana, Pennsylvania
Chairman and
Chief Executive Officer
Howard Hanna
Real Estate Services
Pittsburgh, Pennsylvania

President
NexTier Bank
Butler, Pennsylvania

Partner and Attorney at Law
Reed Smith LLP
Pittsburgh, Pennsylvania

President
Catalyst Connection
Pittsburgh, Pennsylvania
Chairman and
Chief Executive Officer
Ampco–Pittsburgh Corporation
Pittsburgh, Pennsylvania

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

Business Advisory Councils
As of December 31, 2009
Business Advisory Council members are a diverse group of Fourth District businesspeople who advise the president and senior officers on current business conditions.
Each council—in Cleveland, Cincinnati, Lexington, 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

Gena Lovett

Gary Gajewski

Rodger W. McKain

President and
Chief Executive Officer
Optimum Supply LLC
Cleveland, Ohio

2 0 0 9 A N N U A L R E P O RT

Vice President, Finance
Moen Inc.
North Olmsted, Ohio

Gerald E. Henn

President and Founder
Henn Corporation
Warren, Ohio

Christopher J. Hyland
Chief Financial Officer
Hyland Software Inc.
Westlake, Ohio

50
F E D E R A L R E S E RV E B A N K O F C L E V E L A N D

Cedric Beckett

Gary A. Lesjak

Chief Financial Officer
The Shamrock Companies Inc.
Westlake, Ohio

Site/Plant Manager
Cleveland Works
Alcoa Forging and Extrusions
Cleveland, Ohio
Vice President,
Government Programs
Rolls-Royce Fuel Cell Systems
(U.S.) Inc.
North Canton, Ohio

Kevin M. McMullen

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

Michael J. Merle

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

Frederick D. Pond
President
Ridge Tool Company
Elyria, Ohio

Scott E. Rickert

President and Co-founder
Nanofilm, Corporate Headquarters
Valley View, Ohio

Jack H. Schron Jr.

President and
Chief Executive Officer
Jergens Inc.
Cleveland, Ohio

Steven J. Williams

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

Bob Patterson

Senior Vice President and
Chief Financial Officer
PolyOne Corporation
Avon Lake, Ohio

Cincinnati

Ross A. Anderson

James E. Bushman

Cynthia O. Booth

Richard O. Coleman

Senior Vice President–Finance
and Chief Financial Officer
Milacron Inc.
Cincinnati, Ohio
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

President and
Chief Executive Officer
Cast-Fab Technologies Inc.
Cincinnati, Ohio
Chief Executive Officer
NextLevel Transportation
Services LLC
Cincinnati, Ohio

Jerry A. Foster

President
Diversified Tool & Development
Richmond, Kentucky

Carol J. Frankenstein
President
BIO/START
Cincinnati, Ohio

Jim Huff

Chief Executive Officer
HUFF Commercial Group
Ft. Mitchell, Kentucky

Vivian J. Llambi

President
Vivian Llambi & Associates Inc.
Cincinnati, Ohio

Rebecca S. Mobley

Partner
Turf Town 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

Lexington

Paula Hanson

Ann McBrayer

Ed Holmes

P.G. Peeples Sr.

Certified Public Accountant
Dean, Dorton, Ford
Lexington, Kentucky
President
EHI Consultants
Lexington, Kentucky

Glenn Leveridge

Market President
Central Bank
Winchester, Kentucky

David Magner

General Manager
Lexington Operations,
Trane Commercial Systems
Lexington, Kentucky

Pittsburgh

President
Kentucky Eagle Inc.
Lexington, Kentucky

John Taylor

Robert Quick

Dr. Kenneth Troske

President and
Chief Executive Officer
Commerce Lexington
Lexington, Kentucky

Kevin Smith

President and
Chief Executive Officer
Community Ventures Corporation
Lexington, Kentucky

Eric A. Hoover

Jay Cleveland Jr.

John R. Laymon 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

Executive Director
Kentucky Thoroughbred
Association Inc.
Lexington, Kentucky

President and
Chief Executive Officer
Urban League of
Lexington–Fayette County
Lexington, Kentucky

Eric Bruce

Chief Executive Officer
TriLogic Corporation
Canonsburg, Pennsylvania

David Switzer

President
Excalibur Machine Company Inc.
Conneaut Lake, Pennsylvania
President/Owner
JRL Enterprises Inc.
Pittsburgh, Pennsylvania

Marion P. Lewis

Chief Executive Officer
Tachyon Solutions
Sewickley, Pennsylvania

Dominique E. Schinabeck
Chairwoman and President
ACUTRONIC USA Inc.
Pittsburgh, Pennsylvania

President and
Chief Executive Officer
American Founders Bank
Lexington, Kentucky
Director
Center for Business and
Economic Research, University
of Kentucky’s Gatton College
of Business and Economics
Lexington, Kentucky

Holly Wiedemann
President
AU Associates
Lexington, Kentucky

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

Thomas N. Walker III
President
T.N. Walker Inc.
Pittsburgh, Pennsylvania

Doris Carson Williams
President and
Chief Executive Officer
African American
Chamber of Commerce
of Western Pennsylvania
Pittsburgh, Pennsylvania

Consumer Advisory Council
As of December 31, 2009
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:

Kathleen Engel

Louise J. Gissendaner
Akron City President and
Director of Community
Development
Fifth Third Bank
Cleveland, Ohio

2 0 0 9 A N N UA L R E P O RT

Professor of Law
Suffolk University Law School
Boston, Massachusetts
(formerly Cleveland, Ohio)

F E D E R A L R E S E RV E B A N K O F C L E V E L A N D

Edna Sawady, Louise J. Gissendaner, and Kathleen Engel.

Edna Sawady

Economic Inclusion Consultant
New York, New York
(formerly Cleveland, Ohio)

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

Editors
Doug Campbell and
Michele Lachman
Strategic Communications

Managing Designer
Michael Galka
Manager,
Strategic Communications

Essay Writer
Joseph G. Haubrich
Vice President and Economist,
Research

Special Contributors
Mark Sniderman
Executive Vice President and
Chief Policy Officer
Timothy Bianco
Research Assistant

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 216.579.2050.
We invite your comments and questions. Please email us at editor@clev.frb.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

Full text of Annual Report of the Federal Reserve Bank of Cleveland : 2009 Annual Report

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