Full text of Annual Report of the Federal Reserve Bank of Cleveland : 2011 Annual Report

View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

federal reserve bank
of cleveland

Annual Report 2011
Maximum employment:
what we know (and don’t know) about

THE LABOR MARKET

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

Table of Contents

President’s Foreword

Maximum Employment: What We Know (and Don’t Know) About the Labor Market

Today’s Unemployment, In Depth

The Natural Rate of Unemployment Remains Around 6 Percent

Job Creation Has Slowed, but So Has Job Destruction

Wage Growth Remains Subdued

Finding Work Is Taking Longer than Ever

Excess Slack Exists in Today's Labor Market

2011 Innovation Update: Operations in Motion

Message from the First Vice President

The Consumer’s Fed

Officers and Consultants, Boards of Directors, and Advisory Councils

Financial Statements

The Federal Reserve System is responsible for formulating and implementing U.S.
monetary policy. It also supervises certain banks and other financial institutions 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).

Gregory L. Stefani
First Vice President and Chief Operating Officer
Sandra Pianalto
President and Chief Executive Officer
Alfred M. Rankin Jr.
Chairman, Board of Directors
Richard K. Smucker
Deputy Chairman, Board of Directors

The Federal Reserve has a dual mandate to promote stable
prices and maximum employment, and we take a balanced
approach in fulfilling these objectives. Early in 2010, and again
early last year, economic growth seemed poised to accelerate,
only to disappoint. At times, inflation appeared likely to move
either too far above or too far below our long-term objective of
2 percent. Needless to say, conducting monetary policy in this
environment remains quite challenging.
In last year’s annual report essay, I focused on the price stability
aspect of the Federal Reserve’s dual mandate. I explained why
price stability is essential to achieving maximum economic
growth. In this annual report essay, I consider economic
growth from another perspective—that of the labor market.
In my essay and in related articles by the Federal Reserve Bank
of Cleveland’s Research staff, we identify some of the salient
features of today’s employment situation. These insights
underpin my view that the current stance of monetary policy
puts us on the right path for meeting our dual mandate of
maximum employment and stable prices over the long term.
w

President’s Foreword
After four years of crisis, recession, and uncertainty, U.S. businesspeople
are expressing a sense of greater confidence and cautious optimism.
Yet our economy still faces some serious headwinds. Housing markets
remain in distress, state and local governments are still adjusting to
budget pressures, and European financial markets continue to pose
downside risks.

At the Federal Reserve Bank of Cleveland, 2011 was a year
of change and progress. The Office of Minority and Women
Inclusion made many strides in its first full year of operation.
As directed by Congress, the Office formalizes efforts that have
been underway at this Bank for several years: It is responsible
for all matters relating to diversity in management, employment,
and business activities.
In the fourth quarter, our Bank welcomed a new first vice
president and chief operating officer, Gregory Stefani. Beginning on page 22, Greg introduces the operations section of
this report: the 2011 Innovation Update. He explains that
although the Pittsburgh Branch of the Cleveland Fed will no
longer issue and redeem savings bonds in partnership with the
U.S. Treasury, the Bank continues to work with the Treasury to
provide wide-ranging, efficient electronic payments and debt
management services to benefit customers across the nation.

The officers and staff of the Federal Reserve Bank of Cleveland
are committed to serving our region and nation through the
Bank’s three major functions: monetary policy, supervision
and regulation, and financial services. In these efforts, we are
enriched by the guidance and insights provided by our boards
of directors in Cleveland, Pittsburgh, and Cincinnati, as well as
by our advisory councils across the District.
I especially want to thank the directors who completed their
terms of service on our boards in 2011. I am grateful to
Charlotte Martin, president and CEO of Great Lakes Bankers
Bank in Worthington, Ohio, who spent five years on our
Cincinnati board of directors before joining the Cleveland
board in 2009. Her contributions and counsel have been
noteworthy throughout her tenure on our boards.
James Anderson, retired president and advisor to the
Cincinnati Children’s Hospital Medical Center, stepped down
after six years of service as chairman of our Cincinnati board,
which is a significant commitment of time and talent. Jim’s
business expertise and deep history in medical services have
helped us better understand both the healthcare industry and
the economy of the southern part of our District, and we are
indebted to him for those contributions.
Also retiring from our Cincinnati board is Janet Reid, managing
partner and director of Global Novations, LLC in Cincinnati,
following two terms as a director. Janet brought us key guidance
on the service sector, both regionally and nationally. Her vision
and understanding of workplace trends has greatly enhanced
our view of the labor market.
Thanks also go to Sunil Wadhwani, chairman and co-founder
of iGATE Corporation in Pittsburgh, who served two terms as
a Pittsburgh director and chaired the Pittsburgh board for the
past three years. Sunil brought significant insights on emerging
technologies nationally and globally, and his energy and
commitment have been invaluable.

Howard W. Hanna III, chairman and CEO of Howard
Hanna Real Estate Services, also retired from our Pittsburgh
board after five years of service. His expertise in housing
markets helped guide us through a turbulent time for that
sector, and his boundless energy and optimism in spite of
those challenges were much appreciated.
Finally, I am grateful to James Rohr, chairman and CEO
of the PNC Financial Services Group, Pittsburgh, who ably
served as the Bank’s representative on the Federal Advisory
Council in 2011.
w

The employees of the Federal Reserve Bank of Cleveland
continue to advance our Bank’s vision of promoting financial
stability and prosperity in our neighborhoods, region, and
country. Whether by conducting research that contributes to
sound monetary policy, by supervising and regulating banks
to ensure they operate in a safe and sound manner, or by
providing financial services to banking institutions and the U.S.
government to help the payments system function smoothly
and efficiently, our employees embody the best characteristics
of a private entity serving the public interest.
As I enter my 10th year as president and CEO of the Federal
Reserve Bank of Cleveland, I am proud to lead an organization
devoted to excellence, thought leadership, and innovation.
I sincerely thank the Bank’s officers and staff for their efforts
in positioning our Bank for continued success.

Sandra Pianalto
President and Chief Executive Officer

Maximum employment:
what we know (and don’t know) about

THE LABOR MARKET
By Sandra Pianalto, President and CEO

Developing issues in the labor market are clouding the outlook for both the unemployment rate and the natural
rate of unemployment over the next few years. Both rates at their current levels clearly argue for providing
an accommodative monetary policy, as long as inflation remains consistent with the Federal Open Market
Committee’s price stability objective.
During the next few years, I expect that our economy will continue to grow, that unemployment will decline, and
that inflation will average about 2 percent. Monetary policy will need to be adjusted in response to incoming
data that may prompt economists to re-evaluate the outlook. In particular, I am closely watching developments
in several highly uncertain features of the labor market. These include trends in job matching, unemployment
durations, labor market participation, and wages.

THE DUAL MANDATE
The Federal Reserve Act mandates that monetary policy be set
to achieve stable prices over the long run as well as maximum
sustainable employment. I do not view these objectives as
competing with one another because over the longer run,
price stability is essential to achieving maximum sustainable
employment.
In last year’s Federal Reserve Bank of Cleveland annual report
essay, I wrote about inflation and monetary policy, suggesting
that the Federal Open Market Committee (FOMC) could
enhance its monetary policy framework by establishing a
specific numerical objective for its stable prices mandate. My
reasoning was that ultimately, inflation is a monetary phenomenon, and its trend can be controlled by the central bank.
Others supported that view as well, and in January 2012, the
FOMC established an objective for stable prices of 2 percent
inflation over the longer term. Over the past three years (which
is just enough time to include the offsetting high and low
inflation periods around the recession and recovery), inflation
has averaged 1.5 percent. I expect inflation to stay close to the
FOMC’s 2 percent objective over the next few years, in line
with projections from most professional forecasters. So I think
it is fair to say that the FOMC has been effectively fulfilling its
mandate for stable prices.
In its statement of longer-run objectives in January 2012,
the FOMC also acknowledged that “the maximum level of
employment is largely determined by nonmonetary factors.”
But these questions remain: how to put the concept of
“full employment” into practical use, and how monetary
policy should promote it.
The underperformance of the U.S. labor market is one of the
most defining aspects of the nation’s recovery from the financial
crisis and severe recession. More than 12.5 million people
are unemployed today, almost three years after the end of the
recession. That’s more than the number of people out of work
at the deepest points of any recession since World War II. As if
the sheer numbers are not grim enough, the average length of
unemployment spells also stands at a record high.
We clearly have not satisfied our maximum employment
mandate—the unemployment rate remains quite high, and
unemployment spells are still too long. So in this year’s essay,
I focus on the labor market in relation to monetary policy.

In my view, the FOMC’s highly accommodative monetary
policy has put the economy on a path toward achieving our
maximum employment objective. However, as is the case with
many policy issues, I have relatively more confidence in some
facets of today’s labor market and less confidence in others.
Because of these labor market “unknowns,” I want to keep an
open mind and be prepared to make policy adjustments if the
outlook changes.

THE “NATURAL RATE” AND TODAY’S
UNEMPLOYMENT
Let’s start with one aspect of the labor market that I am relatively
confident about: Today’s labor market is far from full employment. As intuitive as the term “full employment” might seem,
economists tend to think of the labor market from a broader
perspective, one that includes both labor demand and labor
supply. More often, we ask how low the unemployment rate could
go and stay steady if the economy had fully adjusted to any
disturbances (such as recessions). This level of unemployment
is the concept I refer to as the “natural rate of unemployment.”
In this framework, zero unemployment is just not possible
because people are always entering and returning to the
workforce, people are always leaving jobs and searching for new
ones, and some businesses fail or contract while others start up
or expand. Because it takes some time to search for a job, at any
given time there will be people who are looking for work and
thus unemployed. These labor market frictions are always present and keep the natural rate of unemployment above zero. I
find this concept of the natural rate fairly appealing and use it in
my thinking about labor market dynamics and monetary policy.
Unfortunately, putting a specific number on the concept of
the natural rate of unemployment is technically difficult, and
economists have different estimates for this rate. Moreover,
the natural rate of unemployment can shift up or down with
changes in demographics, technology, the skill level of the
labor force, and regulations, among other factors. In January
2012, FOMC participants had a range of estimates for the
natural rate of unemployment between 5 and 6 percent. My
staff and I currently estimate this rate at somewhere around
6 percent (see side essay, page 12). The difference between the
current unemployment rate of 8.1 percent and the natural rate
of 6 percent translates into roughly 3.5 million people. We
have a long way to go.

GETTING BACK TO THE NATURAL RATE
It seems remarkable that the unemployment rate should be this
high nearly three years after the trough of the recession. And yet,
I still don’t expect the unemployment rate to reach 6 percent
for another four years or so. Why is it going to take so long?

First, we fell into such a deep hole to begin with. We lost almost
9 million jobs during the recession (beyond the roughly
6.5 million people already unemployed). Since employment
began to recover, we have regained only about 3 million of the
lost jobs. Even if we continue to generate around 200,000 jobs
each month (the average gain in the first four months of 2012),
ongoing population growth implies that it would still be four
years before we reached 6 percent unemployment. And that
estimate assumes that the many people who stopped looking
for work in the recession will not return to the labor force. If
they do return, as they usually do when times get better, we
will need to create millions of additional jobs to get back to full
employment. So thus far, we have climbed only partway out
of a very deep hole.
Second, our economy is generating job openings very slowly.
Output growth has been weak over the recovery and looks
likely to stay moderate over the next several quarters. The only
real solution to the unemployment problem is to increase the
number of job openings through more growth in the economy.
Typically, our economy needs to grow at a rate of 2 percent
just to accommodate new people who join the workforce
and to keep the unemployment rate from rising. Unfortunately,
the economy grew at less than 2 percent in each of the first
three quarters of 2011 and then picked up to 3 percent in the
fourth quarter—still not enough total growth to see significant

progress on employment last year. This year’s growth started
out at 2.2 percent in the first quarter, which has produced only
moderate gains in job openings.
Finally, there are reasons to think our economy is matching
workers to job openings at a slower pace than in the past.
This matching process may be permanently slower and less
dynamic for several reasons. It could be that demand for more
specialized skills—those requiring higher levels of education
and training—makes it harder for employers to find candidates
who meet the necessary requirements. Businesses create and
destroy jobs all the time. This churning process causes some
unemployment but also creates new employment opportunities. There is some evidence that this churning process has
been slowing, and labor market adjustments have been slowing
along with it (see side essay, page 14).
In sum, we generated a lot of unemployment in the recession,
we are not generating job openings very quickly in the recovery,
and employers may be taking longer to fill the open positions
than they used to. While each of these three reasons helps to
explain why it may take quite some time to reach maximum
employment, none of them necessarily implies that the natural
rate of unemployment has increased, although it may have.
If there is any good news in all of this, it is that U.S. economic
history supports the prospect that workers will eventually shift
industries and get the training they need to meet the demands
of the workplace.

The only real solution to the
unemployment problem is to
increase the number of job
openings through more growth
in the economy.

OPEN LABOR MARKET QUESTIONS
While I have confidence in some aspects of the labor market,
I have less confidence in others. I am closely monitoring
several “unknowns” in the labor market where conditions are
historically unusual. How the labor market will perform over
the next few years deserves careful analysis.
One issue we are following closely at the Federal Reserve Bank
of Cleveland is the job-matching process, which is central to the
economic models we use to estimate the natural rate of unemployment. These estimates can shift up or down over time in
response to changes in the underlying trends in job-finding and
job-separation rates. The process of matching workers to jobs
appears to have slowed, but it is difficult to judge how much
of this change will prove to be permanent versus a transitory
response to our recent deep recession.
The slowdown in the job-finding rate (which would tend to
raise the natural rate of unemployment) has been partially offset by a decline in the job-separation rate (which acts to lower
the natural rate). While recent shifts in these rates over the
course of the recovery have implied only a small increase in the
natural rate of unemployment, further shifts in these rates could
more substantially raise or lower the natural rate. Even without
a shift in the natural rate, slower job-finding rates (offset by a
reduced job-separation rate) would still slow the economy’s
adjustment toward a lower unemployment rate (again, see side
essay, page 12).
A second aspect of labor market performance that is not so
clearly understood is whether the long spells of unemployment
that many individuals are experiencing—some exceeding two
years—will have lasting impacts on their employability and
lifetime earnings. We have reasons to be concerned about the
job-finding outlook for these individuals (see side essay, page
18). Although some people do find work after a year or more
of unemployment, a long unemployment spell does lessen
the likelihood of finding a job, and the number of people with
more than a year of unemployment is unprecedented. We also
know from previous experience that these individuals often
have reduced income levels for many years after they find
work again, perhaps because their skills are fundamentally less
valuable in their new work. If the adjustment of workers to new
sectors were to slow, productivity in turn would be adversely
affected. This is an important concern, given that productivity
is ultimately the source of economic prosperity.

A third, less-well-understood aspect of labor market conditions
is the reintegration back into the labor force of people who
have stopped looking for work and those who are currently
underemployed (see side essay, page 20). We know that a lot
of people have moved out of the full-time labor force, and we
know that long-term economic growth depends on their
return. But we don’t know the outcome if these individuals
were to re-enter the full-time labor force suddenly—it could,
for example, increase the challenges of those currently unemployed and cause the unemployment rate to decline more
slowly than currently projected.

If the adjustment of workers to new sectors
were to slow, productivity in turn would be
adversely affected. This is an important
concern, given that productivity is ultimately
the source of economic prosperity.
To assess this risk, my staff used a forecasting model to analyze
labor force participation and its trend. Based on past recovery
patterns, a pickup in participation would likely be associated
with better GDP growth. Historically, periods with stronger
GDP growth have been associated with people being drawn
into the labor force, and the higher GDP growth rates during
these periods have been sufficient to keep the unemployment
rate declining gradually. That finding would be an attractive
possibility. It suggests that there is an economic upside to the
re-entrance of a large number of people back into the labor
force. But precisely how the extraordinary number of people
out of the labor market or on reduced hours responds to
improving conditions represents an important unknown.
Finally, although wage growth looks to be moderate over the
next few years, it is critical to keep our eye on how wage patterns
develop. To date, larger gains seem isolated to narrow occupations with exceptionally strong demand relative to the number
of available workers. However, if demand grew beyond these
relatively focused occupations and skills without being easily
filled by unemployed workers, we could see broader pressure
on overall wage growth. At some point in each of the past
expansions, wages have headed higher, but at this point we do
not see convincing evidence that wage acceleration is looming.
Reports from our business contacts tend to emphasize subdued
wages, with little pressure on firms’ pricing decisions.

IMPLICATIONS FOR MONETARY POLICY

Maximum employment and stable prices are often discussed
as if they are completely independent of one another—in
other words, that monetary policy determines long-run
inflation, while nonmonetary factors drive the natural rate
of unemployment. Although this independence holds over
the longer term, over shorter periods it is quite likely that
inflation can affect labor market conditions and labor market
conditions can affect the inflation rate. For example, if
employers and employees expect higher inflation,
firms may raise prices and grant wage hikes. Or,
if wages are expected to hold steady, firms may
see little reason to raise prices.
Wages are prices, too—the price of labor.
Trends in wages are unusually persistent
and can strongly affect business pricing
decisions. I believe that wage trends
contain reliably useful information
about inflationary pressures over the
medium run. Wage growth is clearly
positive for the economy when accompanied by gains in labor productivity.
Absent those gains, sustained wage growth
can signal inflation pressures.
Subdued wage growth has already been playing
a critical role in restraining the growth in core
inflation during the past few years. Research at
my Bank notes a clear connection between high
unemployment periods associated with recessions
and slower wage growth. The recession brought down
wage growth from around 3.5 percent per year to less than
2 percent (see side essay, page 16). Following past recessions,
wage levels typically remained low for quite some time, which
has again been our current experience.
Because it implies little increase in the cost of producing goods
and providing services, a low and stable wage growth trend
should help to support a moderate inflation rate. Services are all
about the costs of labor—whether those services are provided
by a doctor, a hair stylist, an accountant, or a landscaper. Soft
wage growth figures have been a significant factor holding
down my inflation outlook.
With wages increasing only very slowly, and my outlook for
inflation to remain stable, why not ease monetary conditions
further to speed the decline in the unemployment rate? That
logic is too simple. The average inflation rate of 1.5 percent

during the past three years already reflects the moderate wage
growth during that period. But even with moderate wage
growth, there were episodes when the inflation rate rose above
the FOMC’s 2 percent long-term objective. Recent employment cost data show no trend toward even lower wage growth
despite the elevated unemployment rates, so my outlook builds
in continuing moderate wage growth rather than significantly
greater downward pressure on inflation.
This outlook has important connections to how
I see monetary policy. Given today’s relatively
high unemployment rate, I think monetary
policy should remain accommodative. My
outlook for unemployment and inflation
is consistent with the federal funds rate
staying low for some time. However,
further policy accommodation in the
context of my current outlook could result
in more upward pressure on inflation, putting
the FOMC’s objective for stable prices at risk.

TOWARD FULL EMPLOYMENT
My research staff and I will be following these
and other labor market issues, applying what
we learn to our forecasting process. Between
each FOMC meeting, we are also focused
on evaluating incoming data, confirming or
clarifying those data with business contacts
and others, and most important, updating my
economic outlook. Monetary policy is a forwardlooking endeavor, but it relies heavily on previous
economic relationships in the data and lessons learned
from both good and poor decisions.
The past has also taught me that as a general rule, it makes
sense for monetary policy to respond gradually to changes
in incoming information, particularly when economic and
financial conditions are unusually uncertain. Monetary policy
involves economic analysis, informed estimates, and many
judgment calls.
Americans have waited a painfully long time for a return to
normal levels of unemployment. I believe that monetary policy
is doing what it can to support progress toward maximum
employment while continuing to maintain long-run price stability, which itself is essential to maximum economic growth. I
remain committed to ensuring that we fulfill our dual mandate.

TODAY’S UNEMPLOYMENT, IN DEPTH
Cleveland Fed Research staff identifies some of the salient
features of today’s employment situation

The natural rate of unemployment remains around 6 percent
w

Job creation has slowed, but so has job destruction
w

Wage growth remains subdued
w

Finding work is taking longer than ever
w

Excess slack exists in today’s labor market

The natural rate
of unemployment
remains around
6 percent

Murat Tasci, Research Economist

Our research on workers losing and gaining jobs strongly suggests that the long-term unemployment rate has
not shifted permanently higher. Rather, labor markets are just adjusting more slowly because of lackluster
leading economic growth and low labor market turnover.
Some people think that the unemployment rate will permanently remain as high as it has been recently, arguing that
individuals are unemployed because their skills no longer
meet the needs of employers looking to hire—a “mismatch”
narrative. Other people think unemployment will eventually
move lower as the economy continues to recover. The narrative
here is that high unemployment mainly reflects the overall
weak recovery. These two stories for today’s elevated unemployment rate have very different implications for monetary policy.

Which story to believe—is the labor market just structurally
different than it used to be, with different skills in demand? Or
is it mainly a matter of weak labor demand?
To answer these questions, economists estimate the natural rate
of unemployment, compare it to the current level, and infer slack
from the difference in the two rates. However, measuring the
long-term trend of the unemployment rate that would occur
without further shocks to the economy is not a simple task.

Worker Flows and the Unemployment Rate
65

Percent

10
9

Job-finding-rate trend
(left axis)
Unemployment-rate trend
(right axis)
Job-separation-rate trend
(right axis)

25
1952

0
1958

1964

1970

1976

1982

1988

1994

2000

2006

2012

Notes: Shaded bars indicate recessions;
the job-finding and job-separation rates
were transformed to probabilities using
log transformation.
Sources: Bureau of Labor Statistics;
author’s calculations.

GDP Growth Rates at Different Parts of the Business Cycle
9 Percent

Decline during recession
First two years of recovery
Remainder of cycle

8
7
6
5

4
3
2
1
0

8
9
4
0
2
91
61
75 1980
8–4 3–5 7–5 960– 969–7 973–
1–8 0–
1
198 199
1
194 195 195
1

At the Federal Reserve Bank of Cleveland, we use the fact that
the unemployment rate can be expressed as a combination of
the flows of workers into and out of unemployment. Using this
relationship, the natural rate of unemployment is the product
of long-term trends in worker turnover.
The Great Recession did significantly affect the short-term
flows—job-separation rates increased, while job-finding ones
did the opposite. But this has not changed our estimates of
long-term trends in these flows or, thus, our view of the long-term
trend in the unemployment rate. The sharp rise in flows out of
unemployment and the decline in worker flows into employment are fully consistent with the depth of the recession and the
gradual recovery.
In our model, the long-term job-finding rate has declined
greatly over the past decade, but it has been offset by the longterm decline in the separation rate. This implies a relatively
stable long-term trend in the unemployment rate. Indeed, the
long-term trend in unemployment rates estimated from our
model has remained between 5.5 and 6 percent over the past
decade or so, even during the depths of the Great Recession.
The model interprets today’s elevated rate as temporary: It
reflects the prolonged aftereffects of the deep recession that
have stunted economic growth. Moreover, the model suggests
that the unemployment rate should move down over time and
converge to its natural rate in the long run as the effects of the
shocks that led to the recession diminish.

Sources: Bureau of Economic Analysis;
author’s calculations.

9
1
5
ge
200 07–0 Avera t–198
s
20
o
e, P
rag
e
v
A

If the natural rate of unemployment has not risen, why has the
labor market recovery been so sluggish?
First, the pace of job turnover has been slowing. A more
dynamic labor market speeds up the adjustment process,
moving the economy forward more quickly. However, worker
flows now stand at historic lows—and have been trending
down for several decades. Thus, the reshuffling process is not
as dynamic as it has been in the past, slowing the convergence
in the unemployment rate toward the long-term trend. This
low level of labor turnover explains, in part, the relatively
muted rebounds we have seen in labor markets over the past
three cycles.
Second, the overall strength of the recovery, as measured by
GDP growth, has been the weakest in the post–World War II
era. A weak economy leads to weak job creation and to slow
improvement in cyclical unemployment.
At this point, there is little evidence that the trends in labor
market flows will change markedly over the near term. It will
still take unemployed workers longer to find new jobs, and the
rate of people leaving their jobs will remain low. But the slack
that we see today in the labor market should be reduced if the
economy continues to make substantive progress.

Job creation has
slowed, but so has
job destruction
14
Guhan Venkatu, Economist

The pace of job creation and job destruction has fallen in recent decades. This might suggest a new normal of
slow employment growth during recoveries.
Although the pace of job gains has been slow during the current
recovery, in many ways the current trajectory is not all that
surprising. Other recent recoveries also proceeded slowly.
While all recoveries in the post–World War II period until
1990 had generated enough jobs in their first 12 months to
recover the jobs lost in the prior recession, no matter how
severe that recession had been, the 1990–91 recession broke
that pattern. And the term “jobless recovery” was introduced
to the American vocabulary.

Many wondered whether the underlying structure of the
U.S. economy had changed, possibly shifting from a more
manufacturing-intensive employment base to one dominated
by the service sector. Others implicated a move by employers
away from temporary layoffs toward more permanent workforce
reductions, consistent with the introduction of new technologies
into their operations. No consensus explanation has emerged,
but the sluggish employment growth that once seemed like a
peculiarity of the recovery in the 1990s now seems typical.

Payroll Employment
110

Index, 100 = business cycle peak

Average, post–WWII
business cycles before
1990a
1990
2001
2007

108
106
104
102
100
98
96

a. Average includes eight
cycles and is computed only
when at least four cycles are
available.

94
92
90
–18 –15 –12 –9

Source: Bureau of Labor
Statistics.

–6

–3

Months from business cycle trough

Gross Job Flows, Average Annual Rate as a Percentage of Total U.S. Employment
GROSS JOB FLOWS
Creation

Destruction

Reallocationa

NET JOB
GROWTH

Total

Startups

1980s

18.2

3.5

16.2

34.4

2.0

1990s

16.7

3.0

14.8

31.5

1.9

2000s

15.8

2.6

14.9

30.7

0.9

a. Reallocation is the sum of gross job creation
and destruction.
Source: John Haltiwanger, Ron Jarmin, and Javier
Miranda. 2011. “Historically Large Decline in Job
Creation from Startup and Existing Firms in the
2008–2009 Recession.” Kauffman Foundation,
Business Dynamics Statistics Briefing (March).

Jobs Created by New Businesses
5

Percent of private employment

4
3
2
1
Notes: Establishments less than one year
old; shaded bars indicate recessions.

0
1994

Source: Bureau of Labor Statistics.

1996

1998

2000

2002

2004

To be sure, all recoveries are unique. But is there something in
the way the U.S. labor market now functions that may make
employment recoveries more protracted than they once were?
One possibility is that the labor market simply isn’t as dynamic
as it used to be, slowing its recoveries.
The U.S. economy generates an almost staggering number of
new jobs every year—generally on the order of 15 to 20 percent
of existing employment, with a slightly smaller proportion
of jobs lost. However, this churning, as economists call it, has
slowed over time.
The Census Bureau shows a small but significant decline in
gross job gains since the 1980s. The United States has gone
from generating new jobs at an annual pace roughly equal to
about 18 percent of existing employment in the 1980s, to
17 percent by the 1990s, and then to less than 16 percent
during the 2000s. We also see this decline in dynamism of
job creation from new firms.
According to the Bureau, new-firm job creation followed a
pattern similar to the overall movement in gross job gains.

2006

2008

2010

In the 1980s, startups created jobs at an average rate of about
3.5 percent of existing employment, but the comparable
figures for the 1990s and 2000s were 3 and 2.6 percent,
respectively. Labor Department data show a similar and
sharper decline in jobs created by businesses less than a year
old. The number of jobs created by these new businesses fell
from 4.1 million in 1994 to 2.5 million in 2010.
This decline in job creation and job destruction is consistent
with the patterns of job-finding and job-separation rates
explored on pages 12–13 of this report. Both the job-finding
and job-separation rates of workers have also fallen over the
past several decades.
What is important to recall, however, is that this slowing in job
and worker flows does not mean a rise in the natural rate of
unemployment. Rather, it is consistent with a world where it
takes longer for the labor market to adjust back to full employment levels. And it may mean that we all need to get accustomed
to longer, slower employment recoveries.

Wage growth
remains subdued
Mark Schweitzer,
Senior Vice President and Director of Research
Kyle Fee,
Senior Research Analyst

Compensation has been growing moderately since the recession despite higher increases in the cost of benefits.
Wages, the largest subcomponent of compensation, have been growing more slowly, suggesting that they are
not putting much upward pressure on inflation.

Expanding wages are central to rising living standards, but only
when accompanied by rising productivity. Looking at wage
and productivity growth also reveals insights about inflationary
trends. Conceptually, when wage growth exceeds the growth
in the productivity of the workforce, it puts upward pressure
on other prices. This makes wage pressures a strong predictive
element for medium-term inflation forecasts. So what’s been
happening to wages and, more generally, overall compensation
(which includes the cost of employer-provided benefits)?
One measure that shows underlying compensation trends is
the Employment Cost Index, or ECI. The benefits of using the

ECI to inform policy decisions are threefold: construction,
volatility, and flexibility. The ECI is constructed as a price index
with a fixed set of occupations that represent the typical U.S.
workforce. Thus, it provides a consistent apples-to-apples
comparison of compensation patterns over time. In addition,
the ECI is less volatile and not subject to significant revisions,
as is the case with some other compensation measures. Finally,
the ECI’s total compensation series can be broken out into
wages/salaries and benefits. That makes it possible to disentangle the movements to determine what is driving overall
compensation growth.

Recent trends in the ECI point to subdued compensation
growth. Over the past year, total compensation for private
workers is up 2.1 percent, while wages and salaries are up
1.9 percent. A striking feature of the recent trend is that
compensation growth has consistently remained below
its prerecession levels. During the last business cycle, compensation growth was as high as 4 percent before it fell to
1.2 percent and then stabilized slightly above 2 percent,
where it has remained for the past seven quarters. In fact, this
pattern has occurred after each of the recessions in which ECI
data are available.

lower levels following each recession. During the last recession,
wage and salary growth fell from just below 4 percent to less
than 2 percent, and has remained there.
In sum, much of the recent upward movement in compensation
growth has been driven from benefits and not from wages and
salaries. Given recent productivity rates, which have averaged
2.2 percent over the expansion, it is hard to argue that there is any
meaningful inflationary pressure coming from wages.

A quick look at the split of compensation into its components highlights three points. First, wages have a much tighter
relationship with overall compensation growth than benefits.
Second, benefits growth can be subject to large movements
that may not be part of the business cycle, leading to some
prolonged shifts in the overall compensation series; this
appears to be the case currently. Third, wage growth has fallen
even more reliably after each recession and has remained at

Employment Cost Index (ECI)
16 Four-quarter growth rate

Benefits
Total compensation
Wages and salaries

14
12
10
8
6
4
2

Note: Shaded bars indicate recessions.

0
1980

Source: Bureau of Labor Statistics.

1984

1988

1992

1996

2000

2004

2008

2012

Finding work is
taking longer
than ever
18
Timothy Dunne, Vice President and Economist

The recession and weak recovery have greatly increased the share of long-term unemployed workers in the
U.S. labor force—with more than 30 percent remaining jobless for upward of a year. How the long-term
unemployed reintegrate into the labor market is one of big question marks in the wake of the Great Recession.
One of the deepest scars the Great Recession has left on the
American economy takes shape in the unemployment rate:
It has remained above 8 percent for almost three years.

The growth in the number of people experiencing long-term
unemployment raises several questions. Here are some of the
big ones:

Part of the reason for this stubbornly high rate is that over the
past two years, more than 30 percent of the unemployed have
been jobless for more than a year. This represents more than
4 million long-term unemployed—three times the number of
long-term unemployed seen in 2006 and 2007—and a much
higher level or proportion than seen in previous post–World
War II recessions.

Why has long-term unemployment risen?
One potential reason is demographics. In particular, older
workers have longer durations of unemployment, and the share
of older workers in the labor force has grown. But changes in
demographics explain only a small rise in the incidence of
long-term unemployment in the last business cycle.

Unemployed by Unemployment Duration
16

Millions of people

Unemployed for more than
51 weeks
Unemployed for
27 to 51 weeks
Unemployed for
15 to 26 weeks
Unemployed for less than
15 weeks

14
12
10
8
6
4
2
0

Sources: Current Population Survey;
author’s calculations, fourth quarter data
(not seasonally adjusted).

2005

2006

2007

2008

2009

2010

2011

Re-employment Rates by Unemployment Duration
35 Percent

Unemployed for less than
one year
Unemployed for more than
one year

30
25
20
15

10
5

Sources: Current Population Survey;
author’s calculations, fourth quarter data
(not seasonally adjusted).

0
2005

2006

2007

2008

2009

Another potential reason is the availability of unemployment
benefits. In 1983, unemployment benefits were capped at
42 weeks. In 2009, they were raised to 99 weeks. Several studies
have reported that increases in unemployment compensation
likely raised the unemployment rate over the past few years
because of the incentive for people to remain jobless. But these
studies also find that the increases have not been large enough
to explain much of today’s lengthy unemployment durations.
The most important reason for lengthy unemployment spells,
and perhaps the most obvious, is that the economy has grown
too slowly to create many new jobs. Economic growth since
the end of the recession has averaged only 2.5 percent—the
weakest post–World War II recovery on record—and has lent
little support to job creation. Re-employment rates (the proportion of the unemployed who find a job in a given month) have
stayed relatively low compared to pre-recession figures, greatly
lengthening unemployment spells.
Who are the long-term unemployed?
In a word, everybody. Men and women experience more or
less the same unemployment durations. Roughly 30 percent of
unemployed men and women in the last quarter of 2011 were
unemployed for a year or more. Somewhat surprisingly, this
pattern also holds true across education groups.
However, it is important to remember that education still
matters a lot in determining whether a person is unemployed.
For example, people without a high school degree had an
unemployment rate of nearly 14 percent at the end of 2011,
while those with a bachelor’s degree or higher had an unemployment rate of 4 percent.

2010

2011

Finally, long-term unemployment generally rises with
age. As mentioned previously, this reflects the fact that
re-employment rates are generally lower for older workers,
extending unemployment spells.
What are the broader implications of long-term
unemployment?
Long-term unemployment exacerbates the problems
inherent in unemployment itself—declines in income,
increasing probabilities of home foreclosure, loss of health
insurance, and so on. And extended spells of unemployment
can have even longer-term consequences; the long-term
unemployed generally suffer large and persistent losses in
wages when they do return to work.
Economists are concerned that the labor market skills of the
long-term unemployed either degrade as a person spends
more time in unemployment or are no longer well-suited to
the current job market. Down the road, economists will look
at whether re-employment rates of the long-term unemployed
stay low compared to those of the more recently unemployed.
If such a divergence occurs, this might be viewed as evidence of
“structural mismatch” in the labor market.
Moreover, spells of long-term unemployment can influence
more than labor market outcomes. Recent research shows
that the long-term unemployed have more health problems,
in large part because their economic prospects are diminished.
Clearly, the U.S. economy and the labor market in particular
will continue to live with the scarring effects of the Great
Recession well into the future.

Excess slack exists
in today’s labor
market
20
Daniel Hartley, Research Economist

To really understand what’s happening in the labor market, you need to look at more than the official
unemployment rate. A number of broader measures of labor utilization describe labor market conditions
more fully. What these alternative measures tell us is that there is a lot of slack in the labor market.
While economists use the unemployment rate as a standard
gauge of the labor market’s health, it is not a perfect measure.
It does not tell us if we are fully tapping the country’s pool of
available labor.
First, the standard definition of unemployed workers excludes
people who would like to work but have not actively searched
for a job over the prior four weeks. They are considered out of

the labor force and are sometimes referred to as discouraged
or marginally attached workers. However, it is important to
recognize that many people who become newly employed in
a month were not actually out of the labor force in the prior
month. So there is a significant amount of available labor in the
pool of individuals not in the labor force that could and would
enter the labor market if conditions improved.

Unemployment Rate
20

Percent

U-6, the broadest measure
of labor underutilization
U-3, the official
unemployment rate

5
Note: Shaded bars indicate
recessions.

0
1994

Source: Bureau of Labor Statistics.

1998

2002

2006

2010

Employment-to-Population Ratio
90

Percent

Employment-to-population
ratio, 25- to 54-year-olds

Employment-to-population
ratio, total

80
75
70

65
60
55
50
1970

Source: Bureau of Labor Statistics.

1975

1980

1985

1990

1995

2000

2005

2010

Second, people in part-time jobs who would like to work full
time are not captured in the standard definition. These people
are effectively underemployed, although not unemployed.
While the Bureau of Labor Statistics does not make adjustments to its official unemployment rate to incorporate these
situations, it does produce several alternative measures of labor
utilization that do incorporate them.

The employment-to-population ratio is another useful measure
for describing labor market conditions. This ratio measures
total employment relative to the adult population. Since the
start of the Great Recession, we have seen a large decline in
this ratio, falling by almost 5 percentage points. We are now
in territory last seen in the late 1970s and early 1980s, when
women’s labor force participation rates were much lower.

The unemployment rate known as U-6 (really!) is the broadest
measure of labor underutilization. It includes those workers
who would like a job but are no longer actively searching for
one, as well as people who are working part time but would
rather be working full time. This broad measure of labor underutilization rose from 8.2 percent in 2007 to 17 percent at its
peak in 2009, and has since fallen to 14.5 percent.

The employment-to-population ratio hasn’t budged much
from 58.5 percent since 2009. What this means is that the
recent employment growth has only kept up with the growth
in the adult population—holding the ratio roughly constant.

This means that right now, roughly 22.7 million Americans
want a job and do not have one or have a part-time job and
would like a full-time position. A comparatively low
12.5 million individuals are included in the official (U-3)
unemployment rate.
A look inside these numbers reveals that most of the difference
between the official unemployment rate and this alternative
definition is attributable to the part-time-worker category.
There are 7.8 million part-time workers who would prefer
and are available to work full time. Another 2.4 million people
are out of the labor force and would like a job but have not
searched in the prior four weeks.

Although we should not expect the employment-to-population
ratio to fully recover to its pre-Great Recession level because of
our aging workforce, we should expect some cyclical rebound.
The same patterns hold when looking at the employment-topopulation ratio for prime age workers (ages 25 to 54)—little
to no recovery.
The overarching conclusion is that all of these alternative
measures of labor utilization show high amounts of labor slack
in the economy. This sends a strong signal that we still have a
relatively long way to go before the labor market recovers.

2011 Innovation Update:
OPERATIONS IN MOTION

The Federal Reserve Bank of Cleveland continues to
transition from an organization previously grounded
in operating activities to one that is becoming increasingly
focused on knowledge-based contributions.

Gregory L. Stefani

To remain successful, organizations must proactively adapt
to a changing environment. The Federal Reserve Bank of
Cleveland is no different and is in a period of transition itself.
In December 2011, for example, we said goodbye to one
of the Bank’s longtime functions, Treasury Retail Securities
(TRS). Since 1985, the employees of our Bank’s Pittsburgh
Branch issued and redeemed savings bonds, served customers,
and provided Legacy Treasury Direct services, among other
responsibilities—and they did so with innovation, commitment, and integrity. We served as one of two locations in the
Federal Reserve System that provided TRS services until the
U.S. Treasury consolidated all TRS business lines into the
Federal Reserve Bank of Minneapolis in 2011. For all of the
exemplary customer service and dedication that our TRS
employees provided, I thank them.
Despite our Bank’s loss, western Pennsylvania remains an
important part of the Fourth Federal Reserve District, and our
work there will continue. Business and community leaders
from the area are vital contributors to our understanding of the
economic and financial climate of the region. We remain committed to the region and will continue to retain the Pittsburgh
Branch presence, although in a different building, to carry out
our responsibilities.

Message from the
First Vice President
This past November, I accepted the position of first vice
president and chief operating officer of the Federal Reserve
Bank of Cleveland. While I am new to the role, I am not new
to the Cleveland Fed—I have been with the organization for
nearly three decades and have formed many lasting relationships with employees and stakeholders during my time here.
I’ve also observed considerable change within the organization
throughout that period, especially over the past several years.

As we press on in 2012, I see the Cleveland Fed further evolving to meet the opportunities of the changing environment.
We continue to transition from an organization previously
grounded in operating activities to one that is becoming
increasingly focused on knowledge-based contributions.
Whether it includes providing innovative technology solutions
in payments and debt management for the U.S. Treasury and
other federal agencies, contributing to strategies and tools
that help promote financial stability, or advancing policies and
analysis that speed the recovery of the housing market and
ultimately promote economic growth, our organization will
continue to remain an active contributor to the overall mission
of the Federal Reserve System.

Gregory L. Stefani
First Vice President and Chief Operating Officer

24
Fielding customer phone calls is a
24-hour, seven-day-a-week job for
Pay.gov representatives, shown here
at the Cleveland Fed.

The Consumer’s Fed
For nearly a century, the employees of the Federal Reserve System

SERVING CUSTOMERS ACROSS THE NATION

have provided financial services to the U.S. Treasury, government

You may not recognize the names “eGovernment” or
“Treasury Retail Securities,” but you’ve probably heard of what
these Federal Reserve Bank of Cleveland functions support:
payments and debt management for the Treasury. And even if
those aspects of the financial system are off your radar screen,
eGov and TRS (as employees refer to them) most likely touch
you in some way.

agencies, and ultimately, the American public. With the evolution
of technology, payments systems, and consumer preferences, an inconspicuous relationship between Fed employees and you, the consumer,
was born—and you may not even know it.
Let’s start with the big picture: If the largest corporate entity
in the world is the United States (as many financial experts
attest), then the U.S. Treasury—the steward of the nation’s
economic and financial systems—is certainly one of the single
most important players in the global economy.
The Treasury’s operations reach virtually everyone, everywhere—from the U.S. economy to foreign governments and
central banks, world financial markets, and customers all around
the globe. An institution as large, complex, and influential as this
needs an agent to manage its bank accounts, collect and disburse
funds for the federal government, deliver efficient fiscal services,
and perform behind-the-scenes support for its daily operations.
This is where we, the Federal Reserve System, step in. While
we are known for monetary policy, much of our work focuses
on helping consumers find more efficient ways of accessing
government services—and how we accomplish this might
surprise you.

Services provided by these two functions have a broad
consumer reach. For instance, have you applied for a passport
recently? If so, an eGov employee processed that payment for
you. Do you watch TV? Someone in eGov facilitated your
favorite station’s licensing fee. Have you bought savings bonds
or secured an FHA home loan as a first-time borrower? Our
employees helped make those transactions possible, too—
and many others.
Recently, both eGov and TRS have undergone significant
enhancements, driven primarily by advancements in technology, the Treasury’s evolving needs, and shifting consumer
preferences. While these enhancements can change the way we
perform our services, our goal hasn’t changed: to make government more efficient while improving consumer experiences.
Whether we are processing student loans, nuclear regulatory
fees, or a donation to the Disaster Relief Fund, we always keep
in mind whom we ultimately serve — the American people.

A WELL-OILED MACHINE
The Federal Reserve Bank of Cleveland exclusively leads,
manages, and operates the eGov function. Housed and staffed
entirely within the Cleveland Fed, eGov is responsible for two
areas within the Treasury’s Collections and Cash Management Modernization (CCMM) initiative. One visible side is
Pay.gov, the Treasury’s online platform for nontax payments
made to federal agencies and one of the faces of the initiative
for Treasury customers. Working behind the scenes is the
Debit Gateway, the Treasury’s system for settling all check
and electronic (ACH) payments made to those agencies.
The Treasury’s goals for CCMM? To eliminate redundancy,
improve speed and efficiency, and ultimately save the Treasury
millions of dollars annually.
Technology must keep pace with shifts in consumer preferences. Whether you’re a military veteran or a college student
or both, you might find yourself rapidly abandoning cash and
checks in favor of paperless transactions. With Pay.gov, the
channel through which your VA medical care copayment or
student loan passes, you can directly pay fees, fines, and taxes,
as well as initiate other payments—such as purchasing
commemorative coins or a gift from a U.S. Embassy—online.
For more than a decade, customers have used Pay.gov to make
secure electronic payments to federal government agencies
directly from their bank accounts and credit and debit cards.

In 2011, Pay.gov processed a
47 percent higher transaction volume
than in 2010, and more significant
growth is anticipated.

25
Cleveland Fed technicians support the portal 24 hours a day,
seven days a week, and any customer—be it a hiker who needs
a back-country use permit or a small‑business owner with a
monthly SBA loan payment—can contact a member of the
support team directly for assistance in making online payments, resolving password issues, locating forms, or checking
on the status of a payment. eGov’s analysts and technicians
work with government agencies to ensure that all their transactions are processed quickly and accurately, while an
application security team protects their privacy.
In 2011, Pay.gov collected more than 80 million payment items
worth more than $88 billion for 162 government agencies,
including the Departments of Education and Veterans
Affairs, the Small Business Administration, the National Park
Service, Customs and Border Protection, and many more. The
portal processed a 47 percent higher transaction volume than
in 2010, and more significant growth is anticipated.

The Rise of Pay.gov
100 Billions of dollars
90

Number of transactions (millions)

Dollars

Transactions

50
40

30
20

2005

2006

2007

2008

2009

2010

2011

Source:Federal Reserve
Bank of Cleveland.

A GATEWAY TO GREATER EFFICIENCY

Unlike Pay.gov, the support provided by the Debit Gateway
is mostly invisible to its customers. Even so, it’s highly likely
that your IRS payment or national park cabin reservation fee,
to name just two, has passed—or will soon pass—through
the gateway.
By late 2013, every check and automated clearinghouse
(ACH) payment to the federal government is projected to
pass through the Debit Gateway. Payments can be made in
various ways, and the Debit Gateway determines the most
efficient way to collect the payment and what form it should
take, eventually streamlining all payments into a single system.
This system allows multiple types of payments to be processed
and settled quickly, economically, and on a much larger scale.
The Debit Gateway was launched in 2010 and became the
first new application implemented as part of the Treasury’s
strategic vision for the future of collections. The Cleveland
Fed's behind-the-scenes work on the platform has satisfied the
Treasury’s requirements for greater versatility and efficiency
by offering an extensive enterprise for settlement services (the
processes that ensure electronic payments reach their intended
destinations—one of which could be your bank account).
In 2011, the system processed more than 126 million transactions totaling $161 billion and some change—approximately
32 percent greater volume than in 2010, and accounting for
36 percent of total payments made to the U.S. government
that year. By 2013, the Debit Gateway is projected to process
72 percent of all payments to the federal government.

In 2011, the Debit Gateway processed
more than 126 million transactions
totaling $161 billion and some change—
approximately 32 percent greater
volume than in 2010.

A CUSTOMER-FOCUSED CONSOLIDATION
Anyone familiar with savings bonds or Treasury bills is also
familiar with the other work the Federal Reserve does for the
Treasury—helping to facilitate the sale of retail securities to
individuals, institutions, and government agencies so the
federal government has enough money to operate: otherwise
known as debt management. From 1985 to 2011, TRS at the
Pittsburgh Branch of the Cleveland Fed was integral to this
work: It continually sought and implemented operational
efficiencies for the retail program to improve the overall
customer service experience.
The retail securities business is a customer-focused one, and
Pittsburgh Branch employees have historically been on the
front lines. Just in 2011, for example, the TRS operations
employees processed customer orders resulting in the issuance
of 1.2 million savings bonds, managed the flow of millions
of redeemed savings bonds, and, with impeccable quality
and accuracy, fielded 240,000 customer calls and serviced
thousands of transactions.
In 2011, the Pittsburgh Branch was one of only two offices
providing processing services for Treasury Retail Securities.
To focus on the electronic future, decrease program costs for
the Treasury, and reduce the expense to taxpayers, the two sites
were consolidated into one by the end of 2011, with the
Pittsburgh Branch transferring its work to the main office of the
Federal Reserve Bank of Minneapolis. In addition to lowering
program costs, the consolidation streamlined infrastructure
and reinforced a uniform customer experience for retail investors. Up until their final day of service for the Treasury, Fourth
District TRS employees maintained the highest level of dedication to the public by exceeding the Treasury’s service-level
objectives for operational and customer service commitments.

eGov employees at the Cleveland
Fed convene daily to collaborate
on Debit Gateway software updates.

comprehensive e-commerce strategy, which will include
expanded billing services as well as the development of
customer-focused online banking and mobile payments
applications.

IMPROVING CUSTOMER SERVICE—
NOW AND IN THE FUTURE
As the financial services industry grows progressively hightech (as of January 1, 2012, for example, you can no longer buy
paper savings bonds at financial institutions), the Treasury will
require even more agility, innovation, and responsiveness from
employees of the Federal Reserve and all of the other agencies
that support its vast operations. The Federal Reserve will
continue to play a critical role in developing and executing
the Treasury’s all-electronic initiative by collaborating on a

While planning for this next generation of fiscal support is
just getting underway, Cleveland Fed employees eagerly
look toward the future and what’s on the horizon: additional
opportunities to anticipate and serve the complex, everchanging needs of the Treasury and its customers, and
improve the experiences of consumers like you.

The Rise of the Debit Gateway
180

Billions of dollars

160

Number of transactions (millions)

Dollars

140

140
120

Transactions

100

120
100

40
20

20
0

2005

2006

2007

2008

2009

2010

2011

Source: Federal Reserve
Bank of Cleveland.

Officers and Consultants,
Boards of Directors,
and Advisory Councils

Officers and Consultants
As of December 31, 2011

Sandra Pianalto
President and Chief Executive Officer
Gregory L. Stefani
First Vice President
and Chief Operating Officer
Mark S. Sniderman
Executive Vice President
and Chief Policy Officer
Economic Research,
Community Development

William D. Fosnight
Senior Vice President
and General Counsel
Legal, Ethics Officer
David W. Hollis
Senior Vice President
District Human Resources, Office
of Minority and Women Inclusion,
Payroll, EEO Officer, Harassment/
Ombuds Programs

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

Peggy A. Velimesis
Senior Vice President
and Chief of Staff
Executive Information, Office of the
Corporate Secretary

Robert W. Price
Senior Vice President
Financial Services Policy Committee

Lisa M. Vidacs
Senior Vice President
Outreach, Community Relations,
Public Affairs

Mark E. Schweitzer
Senior Vice President
and Director of Research
Regional Economics,
Macroeconomic Policy, Money and
Payments, Banking and Finance
Susan M. Steinbrick
Senior Vice President
and General Auditor
Audit
Anthony Turcinov
Senior Vice President
Cash, Check, eGovernment,
Facilities, Law Enforcement,
Treasury Retail Securities

Douglas A. Banks
Vice President
Credit Risk Management,
Statistics and Analysis
Kelly A. Banks
Vice President
Community Relations, Learning
Center, Bankwide Public Programs
John B. Carlson
Vice President and Economist
Money, Financial Markets, and
Monetary Policy

Todd E. Clark
Vice President and Economist
Macroeconomic Policy

James B. Thomson
Vice President and Economist
Banking and Financial Markets

Cheryl L. Davis
Vice President and Corporate Secretary
Office of the Corporate Secretary

Henry P. Trolio
Vice President
Information Technology

Timothy Dunne
Vice President and Economist
Regional Economics

Michelle C. Vanderlip
Vice President
District Human Resources,
Human Resources Development

Joseph G. Haubrich
Vice President and Economist
Banking and Finance
Amy J. Heinl
Vice President
Treasury Retail Securities
LaVaughn M. Henry
Vice President
Cincinnati Senior Regional Officer,
Branch Board of Directors,
Community Outreach
Suzanne M. Howe
Vice President
eGovernment Operations, Treasury
Electronic Check Processing
Paul E. Kaboth
Vice President
and Community Affairs Officer
Community Development
Susan M. Kenney
Vice President
eGovernment Technical Support,
Pay.gov
Mark S. Meder
Vice President
Regional and Community
Banking and Thrift Holding
Company Supervision
Stephen J. Ong
Vice President
Risk Supervision and Policy
Development
Terrence J. Roth
Vice President
Financial Services Policy Committee
Robert B. Schaub
Vice President
Pittsburgh Senior Regional Officer,
Branch Board of Directors,
Community Outreach

Jeffrey R. Van Treese
Vice President
Check Operations
Nadine M. Wallman
Vice President
Large Bank Supervision,
Applications

Maria A. Bowlin
Assistant Vice President
Facilities
Tracy L. Conn
Assistant Vice President
Supervision and Regulation

Evelyn M. Magas
Assistant Vice President
Supervision and Regulation,
Business Process Management
Martha Maher
Assistant Vice President
Retail Payments Office,
Financial Services Policy Committee
Jerrold L. Newlon
Assistant Vice President
Large Bank Supervision
and Capital Review
Timothy M. Rachek
Assistant Vice President
Cash
Robin R. Ratliff
Assistant Vice President and
Assistant Corporate Secretary
Strategic Communications,
Office of the Corporate Secretary
John P. Robins
Consultant
Supervision and Regulation
Elizabeth J. Robinson
Assistant Vice President
Human Resources

Jeffrey G. Gacka
Assistant Vice President
Financial Support Services,
National Billing, Accounting

Thomas E. Schaadt
Assistant Vice President
Check Automation Services

George E. Guentner
Assistant Vice President
Information Technology

James P. Slivka
Assistant Vice President and
Assistant General Auditor
Audit

Felix Harshman
Assistant Vice President
Financial Support Services,
Expense Accounting/Budget

Diana C. Starks
Assistant Vice President
Diversity and Inclusion, Office of
Minority and Women Inclusion

Matthew D. Hite
Assistant Vice President
Enterprise Risk Management,
COSO

Jason E. Tarnowski
Assistant Vice President
Risk Supervision

Bryan S. Huddleston
Assistant Vice President
Community Bank Supervision

Michael Vangelos
Assistant Vice President
Information Security,
Business Continuity

Jill A. Krauza
Assistant Vice President
Treasury Retail Securities
Dean A. Longo
Consultant
Information Technology,
Infrastructure Support

Carolyn M. Williams
Assistant Vice President
Law Enforcement Unit

30
Boards of Directors
Federal Reserve Banks each have a main office board of nine directors. Directors supervise the Bank’s
budget and operations and make recommendations on the discount rate on primary credit. Those
directors who are not commercial bankers appoint the Bank’s president and first vice president,
subject to the Board of Governors’ approval.
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, 2011

Alfred M. Rankin Jr.
Chairman
Chairman, President,
and Chief Executive Officer
NACCO Industries, Inc.
Cleveland, Ohio
Richard K. Smucker
Deputy Chairman
Chief Executive Officer
The J.M. Smucker Company
Orrville, Ohio
Tilmon F. Brown
President and Chief Executive Officer
New Horizons Baking Company
Norwalk, Ohio
Christopher M. Connor
Chairman and Chief Executive Officer
The Sherwin–Williams Company
Cleveland, Ohio

Paul G. Greig
Chairman, President,
and Chief Executive Officer
FirstMerit Corporation
Akron, Ohio

Harold Keller
President
Ohio Capital Corporation
for Housing
Columbus, Ohio
Charlotte W. Martin
President and Chief Executive Officer
Great Lakes Bankers Bank
Worthington, Ohio
Susan Tomasky
Retired President
AEP Transmission
Columbus, Ohio

James E. Rohr
Federal Advisory Council
Representative
Chairman and Chief Executive Officer
The PNC Financial Services
Group, Inc.
Pittsburgh, Pennsylvania

C. Daniel DeLawder
Chairman and Chief Executive Officer
Park National Bank
Newark, Ohio

Harold Keller, Alfred M. Rankin Jr., Susan Tomasky, C. Daniel DeLawder, Tilmon F. Brown, Paul G. Greig, Richard K. Smucker, Charlotte W. Martin, Christopher M. Connor

Cincinnati Board of Directors
As of December 31, 2011

James M. Anderson
Chairman
Advisor to the President
Cincinnati Children’s Hospital
Medical Center
Cincinnati, Ohio
Donald E. Bloomer
President and Chief Executive Officer
Citizens National Bank
Somerset, Kentucky

Daniel B. Cunningham
President and Chief Executive Officer
The Long–Stanton Group
Cincinnati, Ohio

Janet B. Reid
Managing Partner and Director
Global Novations, LLC
Cincinnati, Ohio

Gregory B. Kenny
President and Chief Executive Officer
General Cable Corporation
Highland Heights, Kentucky

Peter S. Strange
Chairman
Messer, Inc.
Cincinnati, Ohio

Austin W. Keyser
Midwest Senior Field
Representative
AFL–CIO
McDermott, Ohio

Gregory B. Kenny, Austin W. Keyser, Peter S. Strange, Donald E. Bloomer, James M. Anderson, Daniel B. Cunningham, Janet B. Reid

Pittsburgh Board of Directors
As of December 31, 2011

Sunil T. Wadhwani
Chairman
Chairman and Co-founder
iGATE Corporation
Pittsburgh, Pennsylvania
Todd D. Brice
President and Chief Executive Officer
S&T Bancorp, Inc.
Indiana, Pennsylvania

Glenn R. Mahone
Partner and Attorney at Law
Reed Smith LLP
Pittsburgh, Pennsylvania

Grant Oliphant
President and Chief Executive Officer
The Pittsburgh Foundation
Pittsburgh, Pennsylvania

Petra Mitchell
President
Catalyst Connection
Pittsburgh, Pennsylvania

Robert A. Paul
Chairman and Chief Executive Officer
Ampco–Pittsburgh Corporation
Pittsburgh, Pennsylvania

Howard W. Hanna III
Chairman and Chief Executive Officer
Howard Hanna Real Estate Services
Pittsburgh, Pennsylvania

Robert A. Paul, Petra Mitchell, Grant Oliphant, Sunil T. Wadhwani, Howard W. Hanna III, Todd D. Brice, Glenn R. Mahone

Business Advisory Councils
As of December 31, 2011

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 Cincinnati, Cleveland, Dayton, Erie, Lexington, Pittsburgh, and Wheeling—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.

CINCINNATI

Charles H. Brown
Vice President of Accounting and Finance
Toyota Motor Engineering and
Manufacturing, North America, Inc.
Erlanger, Kentucky
Robert W. Buechner, Esq.
Shareholder
Buechner Haffer Meyers & Koenig
Cincinnati, Ohio
Calvin D. Buford
Partner, Corporate Development
Dinsmore & Shohl LLP
Cincinnati, Ohio
James E. Bushman
President and Chief Executive Officer
Cast-Fab Technologies, Inc.
Cincinnati, Ohio

CLEVELAND

Christopher C. Cole
Chief Executive Officer
Intelligrated
Mason, Ohio

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

Carol J. Frankenstein
President
BIO/START
Cincinnati, Ohio

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

Kay Geiger
Regional President
PNC Bank
Cincinnati, Ohio

Joseph L. Rippe
Principal
Rippe & Kingston
Cincinnati, Ohio

Terry Grundy
Director, Community Impact
United Way of Greater Cincinnati
Cincinnati, Ohio

Carl Satterwhite
President
RCF
Hamilton, Ohio

Jose Guerra
President
L5 Source
Cincinnati, Ohio

Cedric Beckett
President and Chief Executive Officer
Optimum Supply LLC
Cleveland, Ohio

Michael Keresman
Chief Executive Officer
Cardinal Commerce Corporation
Mentor, Ohio

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

Maryann Correnti
Chief Financial Officer
Heinen’s Fine Foods, Inc.
Warrensville Heights, Ohio

Gena Lovett
Director of Manufacturing, Forgings
Cleveland Works,
Alcoa Forgings and Extrusions
Cleveland, Ohio

David Megenhardt
Executive Director
United Labor Agency
Cleveland, Ohio

Gary Gajewski
Vice President, Finance
Moen Inc.
North Olmsted, Ohio
Christopher J. Hyland
Chief Financial Officer
Hyland Software Inc.
Westlake, Ohio

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

Michael J. Merle
President and Chief Executive Officer
Ray Fogg Building Methods Inc.
Cleveland, Ohio
Bob Patterson
Senior Vice President
and Chief Financial Officer
PolyOne Corporation
Avon Lake, Ohio

35
DAYTON

Bryan Bucklew
President and Chief Executive Officer
Greater Dayton Area
Hospital Association
Dayton, Ohio
Christopher Che
President and Chief Executive Officer
Hooven–Dayton Corporation
Dayton, Ohio
Bruce Feldman
President
Economy Linen & Towel Service
Dayton, Ohio

ERIE

Clemont Austin
President
E. E. Austin and Son, Inc.
Erie, Pennsylvania
Matthew Baldwin
Vice President
Baldwin Brothers, Inc.
Erie, Pennsylvania
Jim Berlin
Chief Executive Officer
Logistics Plus
Erie, Pennsylvania
Terrence W. Cavanaugh
President and Chief Executive Officer
Erie Insurance
Erie, Pennsylvania

Greg Johnson
Executive Director
Dayton Metro Housing Authority
Dayton, Ohio

Michael Shane
Chairman
Lastar, Inc.
Moraine, Ohio

Larry Klaben
President
Morris Furniture
Fairborn, Ohio

Greg Stout
Chief Financial and Operating Officer
Voss Auto Network
Dayton, Ohio

Phil Parker
President
Dayton Area Chamber of Commerce
Dayton, Ohio

Christopher Wallace
Senior Vice President,
Corporate Banking
PNC Bank
Dayton, Ohio

Jennell Ross
President
Bob Ross Dealerships
Centerville, Ohio

Gary L. Clark
Vice President and Chief
Administrative Officer
Snap-tite, Inc.
Erie, Pennsylvania
Joel Deuterman
President and Chief Executive Officer
Velocity Network
Erie, Pennsylvania
Martin Farrell
President
Infinity Resources, Inc.
Erie, Pennsylvania
William Hilbert Jr.
President
REDDOG Industries Inc.
Erie, Pennsylvania

Mark Walton
Vice President and CRA Manager
Fifth Third Bank
Dayton, Ohio

Marsha Marsh
Owner
Marsha Marsh Real Estate Services
Erie, Pennsylvania
Chris Scott
Vice President
Scott Enterprises
Erie, Pennsylvania
Tim Shuttleworth
President and Chief Executive Officer
Eriez Magnetics
Erie, Pennsylvania
Phil Tredway
President and Chief Executive Officer
Erie Molded Plastics, Inc.
Erie, Pennsylvania

LEXINGTON

William Farmer
President and Chief Executive Officer
United Way of the Bluegrass
Lexington, Kentucky

Ann McBrayer
President
Kentucky Eagle, Inc.
Lexington, Kentucky

Paula Hanson
Director of Tax Services
Dean, Dorton, Ford
Lexington, Kentucky

Rebecca S. Mobley
Partner
Turf Town Properties, Inc.
Lexington, Kentucky

Ed Holmes
President
EHI Consultants
Lexington, Kentucky

P. G. Peeples Sr.
President and Chief Executive Officer
Urban League of Lexington–
Fayette County
Lexington, Kentucky

Glenn Leveridge
Market President
Central Bank
Winchester, Kentucky
David Magner
Vice President of Operations at Trane
Ingersoll Rand
Lexington, Kentucky
Wayne Masterman
Owner
Port Restaurants, LLC
Lexington, Kentucky

PITTSBURGH

Stephanie DiLeo
President
Homer City Automation
Homer City, Pennsylvania
John H. Dunn Jr.
President
J D Dunn Company
Sewickley, Pennsylvania
William Fink
President
Paragon Homes, Inc.
Pittsburgh, Pennsylvania
Robert Glimcher
President
Glimcher Group
Pittsburgh, Pennsylvania
Charles Hammel III
President
PITT OHIO
Pittsburgh, Pennsylvania

Robert Quick
President and Chief Executive Officer
Commerce Lexington
Lexington, Kentucky
Kevin Smith
President and Chief Executive Officer
Community Ventures Corporation
Lexington, Kentucky

Anthony M. Helfer
President
United Food and Commercial
Workers Local 23
Canonsburg, Pennsylvania
Kathryn Z. Kalber
President and Executive Director
Marcellus Shale Coalition
Canonsburg, Pennsylvania
John R. Laymon Jr.
President/Owner
JRL Enterprises Inc.
Pittsburgh, Pennsylvania
Dennis Meteny
President and Chief Executive Officer
Cygnus Manufacturing
Company LLC
Saxonburg, Pennsylvania
Stephanie Pashman
Chief Executive Officer
Three Rivers Workforce
Investment Board
Pittsburgh, Pennsylvania

David Switzer
Executive Director
Kentucky Thoroughbred
Association, Inc.
Lexington, Kentucky
John Taylor
President and Chief Executive Officer
American Founders Bank
Lexington, Kentucky
Kenneth Troske
Chair, Department of Economics
and Director, Center for Business and
Economics Research
University of Kentucky’s Gatton
College of Business and Economics
Lexington, Kentucky
Holly Wiedemann
President
AU Associates
Lexington, Kentucky

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

WHEELING

David H. McKinley
President and Managing Partner
McKinley Carter Wealth Services
Wheeling, West Virginia

Erikka Storch
Chief Financial Officer
Ohio Valley Steel Company
Wheeling, West Virginia

John L. Kalkreuth
President
Kalkreuth Roofing
and Sheet Metal, Inc.
Wheeling, West Virginia

Lee C. Paull IV
Executive Vice President and
Associate Broker
Paull Associates Insurance/
Real Estate
Wheeling, West Virginia

Ronald L. Violi
Principal
R & V Associates
Pittsburgh, Pennsylvania

Robert Kubovicz
President
United Electric
Wheeling, West Virginia

Richard Riesbeck
President
Riesbeck Food Markets
St. Clairsville, Ohio

Joel Mazur
President and Chief Executive Officer
Wheeling Corrugating Company
Wheeling, West Virginia

Jim Squibb
Chief Executive Officer
Beyond Marketing
Wheeling, West Virginia

John Clarke
Business Representative
International Brotherhood of
Electrical Workers Local #141
Wheeling, West Virginia

Community Depository Institutions Advisory Council
As of December 31, 2011

The Community Depository Institutions Advisory Council is composed of representatives from commercial banks, thrift institutions, and credit unions in the Fourth
Federal Reserve District.
Council members meet with the Bank president and senior officers at least twice yearly to provide information and insight from the perspective of community
depository institutions. These meetings provide anecdotal information that is useful in the formulation of supervisory and monetary policy direction.
The chair of each District Bank’s council also has the responsibility of reporting twice yearly to the Federal Reserve Board of Governors in Washington, DC.
Howard T. Boyle, II
Fourth District CDIAC
Representative
President and Chief Executive Officer
Hometown Bank
Kent, Ohio
Patrick Ferry
Senior Vice President
Members Heritage Federal
Credit Union
Lexington, Kentucky
Christine J. Kunnen
Chief Executive Officer
Cinfed Federal Credit Union
Cincinnati, Ohio
Paul M. Limbert
President and Chief Executive Officer
WesBanco Bank, Inc.
Wheeling, West Virginia

William C. Marsh
Chairman of the Board, President,
and Chief Executive Officer
Farmers National Bank
Emlenton, Pennsylvania
James O. Miller
President and Chief Executive Officer
The Citizens Banking Company
Sandusky, Ohio
Robert Oeler
President and Chief Executive Officer
Dollar Bank
Pittsburgh, Pennsylvania
Gary Soukenik
President and Chief Executive Officer
Seven Seventeen Credit Union
Warren, Ohio

Eddie Steiner
President and Chief Executive Officer
CSB Bancorp, Inc.
Millersburg, Ohio
Bick Weissenrieder
Chairman and Chief Executive Officer
Hocking Valley Bank
Athens, Ohio
Charlotte Zuschlag
President and Chief Executive Officer
ESB Financial Corporation
Ellwood City, Pennsylvania

Financial Statements

Auditor Independence
In 2011, the Board of Governors engaged Deloitte & Touche LLP (D&T) to audit the combined and individual financial statements of the
Reserve Banks and those of the consolidated LLC entities.1 In 2011, D&T also conducted audits of internal control over financial reporting
for each of the Reserve Banks and the consolidated LLC entities. Fees for D&T's services totaled $8 million, of which $2 million was for
the audits of the consolidated LLC entities. To ensure auditor independence, the Board of Governors requires that D&T be independent
in all matters relating to the audits. Specifically, D&T may not perform services for the Reserve Banks or others that would place it in a
position of auditing its own work, making management decisions on behalf of the Reserve Banks, or in any other way impairing its audit
independence. In 2011, the Bank did not engage D&T for any non-audit services.

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

Cleveland, OH 44101
216.579.2000
www.clevelandfed.org

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 (Bank) is responsible for the preparation and fair presentation of the
Statements of Condition as of December 31, 2011 and 2010, and the Statements of Income and Comprehensive Income, and
Statements of Changes in Capital for the years then ended (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 Federal Reserve Banks (FAM), 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 FAM and include all disclosures
necessary for such fair presentation.
The management of the Bank is responsible for establishing and maintaining effective internal control over financial reporting as it
relates to the financial statements. The Bank’s internal control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance
with the FAM. The Bank’s internal control over financial reporting includes those policies and procedures that (i) pertain to the
maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the Bank’s assets; (ii)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with FAM, and that the Bank’s receipts and expenditures are being made only in accordance with authorizations of its management
and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the Bank’s assets that could have a material effect on its financial statements.
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 Bank assessed its internal control over financial reporting 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 Bank maintained effective internal control over financial reporting.
Federal Reserve Bank of Cleveland
March 20, 2012

Sandra Pianalto
President &
Chief Executive Officer

Gregory L. Stefani
First Vice President &
Chief Operating Officer

Susan M. Steinbrick
Senior Vice President &
Chief Financial Officer

40
Independent Auditors’ Report
To the Board of Governors of the Federal Reserve System
and the Board of Directors of the Federal Reserve Bank of Cleveland:
We have audited the accompanying Statements of Condition of the Federal Reserve Bank of Cleveland (“FRB Cleveland”) as of
December 31, 2011 and 2010, and the related Statements of Income and Comprehensive Income, and of Changes in Capital for
the years then ended, which have been prepared in conformity with accounting principles established by the Board of Governors
of the Federal Reserve System. We also have audited the internal control over financial reporting of the FRB Cleveland as of
December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The FRB Cleveland’s management is responsible for these Financial Statements,
for maintaining effective internal control over financial reporting, and for its assertion of the effectiveness of internal control over
financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on these Financial Statements and an opinion on the FRB Cleveland’s internal control over
financial reporting based on our audits.
We conducted our audits in accordance with 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, as well as 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.
The FRB Cleveland’s internal control over financial reporting is a process designed by, or under the supervision of, the FRB Cleveland’s
principal executive and principal financial officers, or persons performing similar functions, and effected by the FRB Cleveland’s board
of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the

Member of
Deloitte Touche Tohmatsu Limited

preparation of Financial Statements for external purposes in accordance with the accounting principles established by the Board of
Governors of the Federal Reserve System. The FRB Cleveland’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the FRB Cleveland; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of Financial Statements in accordance with the accounting principles established by the Board of Governors of the Federal
Reserve System, and that receipts and expenditures of the FRB Cleveland are being made only in accordance with authorizations of
management and directors of the FRB Cleveland; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the FRB Cleveland’s assets that could have a material effect on the Financial Statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.
Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject
to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
As described in Note 4 to the Financial Statements, the FRB Cleveland has prepared these Financial Statements in conformity
with accounting principles established by the Board of Governors of the Federal Reserve System, as set forth in the Financial
Accounting Manual for Federal Reserve Banks, which is a comprehensive basis of accounting other than accounting principles
generally accepted in the United States of America. The effects on such Financial Statements of the differences between the
accounting principles established by the Board of Governors of the Federal Reserve System and accounting principles generally
accepted in the United States of America are also described in Note 4.
In our opinion, such Financial Statements present fairly, in all material respects, the financial position of the FRB Cleveland as of
December 31, 2011 and 2010, and the results of its operations for the years then ended, on the basis of accounting described in
Note 4. Also, in our opinion, the FRB Cleveland maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2011, based on the criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.

March 20, 2012

Abbreviations:

ACH

Automated clearinghouse

AMLF

Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility

ASC

Accounting Standards Codification

ASU

Accounting Standards Update

BEP

Benefit Equalization Retirement Plan

Bureau

Bureau of Consumer Financial Protection

FAM

Financial Accounting Manual for Federal Reserve Banks

FASB

Financial Accounting Standards Board

Fannie Mae

Federal National Mortgage Association

Freddie Mac

Federal Home Loan Mortgage Corporation

FOMC

Federal Open Market Committee

FRBA

Federal Reserve Bank of Atlanta

FRBNY

Federal Reserve Bank of New York

GAAP

Accounting principles generally accepted in the United States of America

GSE

Government-sponsored enterprise

IMF

International Monetary Fund

MBS

Mortgage-backed securities

OEB

Office of Employee Benefits of the Federal Reserve System

OFR

Office of Financial Research

SDR

Special drawing rights

SERP

Supplemental Retirement Plan for Select Officers of the Federal Reserve Banks

SOMA

System Open Market Account

STRIP

Separate Trading of Registered Interest and Principal of Securities

TAF

Term Auction Facility

TBA

To be announced

TDF

Term Deposit Facility

TIPS

Treasury Inflation-Protected Securities

TOP

Term Securities Lending Facility Options Program

TRS

Treasury Retail Securities

TSLF

Term Securities Lending Facility

Statements of Condition
As of December 31, 2011 and December 31, 2010 (in millions)
2011
2010
ASSETS
Gold certificates
$
450
$
463
Special drawing rights certificates
237
237
Coin 173 164
System Open Market Account:
Treasury securities, net
47,279
36,250
Government-sponsored enterprise debt securities, net
2,913
5,197
Federal agency and government-sponsored enterprise mortgage-backed securities, net
22,913
34,135
Foreign currency denominated assets, net
1,925
1,941
Central bank liquidity swaps
7,405
6
Accrued interest receivable
534
484
Bank premises and equipment, net
137
157
Items in process of collection
59
89
Other assets
28
27
Total assets
$
84,053
$
79,150
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
Interest payable to depository institutions
Accrued benefit costs
Deferred credit items
Accrued interest on Federal Reserve notes
Interdistrict settlement account
Other liabilities
Total liabilities

38,601

2,698
37

2,028
—

26,962
3
3
121
142
82
4,966
15
80,075

18,152
4
1
133
410
26
15,854
7
75,216

Capital paid-in
1,989
Surplus (including accumulated other comprehensive loss of $11 million
and $37 million at December 31, 2011 and 2010, respectively)
1,989
Total capital
3,978
Total liabilities and capital
$
84,053
$

1,967

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

45,046

1,967
3,934
79,150

Statements of Income and Comprehensive Income
For the years ended December 31, 2011 and December 31, 2010 (in millions)
2011

INTEREST INCOME
System Open Market Account:
Treasury securities, net
Government-sponsored enterprise debt securities, net
Federal agency and government-sponsored enterprise mortgage-backed securities, net
Foreign currency denominated assets, net
Central bank liquidity swaps
Total interest income
INTEREST EXPENSE
System Open Market Account:
Securities sold under agreements to repurchase
Deposits:
Depository institutions
Total interest expense
Net interest income

2010

1,213
89
1,115
18
3
2,438

937
125
1,595
17
1
2,675

55
56
2,382

41
44
2,631

NON-INTEREST INCOME
System Open Market Account:
Treasury securities gains, net
61
Federal agency and government-sponsored enterprise mortgage-backed securities gains, net
—
Foreign currency gains, net
11
Compensation received for service costs provided
25
Reimbursable services to government agencies
52
Other
4
Total non-interest income
153

—
29
41
27
46
4
147

OPERATING EXPENSES
Salaries and benefits
Occupancy
Equipment
Assessments:
Board of Governors operating expenses and currency costs
Bureau of Consumer Financial Protection
Office of Financial Research
Other
Total operating expenses

142
16
7

128
16
8

70
18
3
33
289

64
2
1
19
238

Net income prior to distribution

2,246

2,540

Change in prior service costs related to benefit plans
Change in actuarial gains (losses) related to benefit plans
Comprehensive income prior to distribution
$

19
7
2,272
$

(2)
(16)
2,522

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
$

118
$
22
2,132
2,272
$

115
57
2,350
2,522

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

Statements of Changes in Capital
For the years ended December 31, 2011 and December 31, 2010 (in millions, except share data)
Surplus

Capital paid-in
Balance at January 1, 2010
(38,208,062 shares)

Net change in capital stock issued
(1,142,322 shares)
Transferred to surplus and change in
accumulated other comprehensive loss
Balance at December 31, 2010
(39,350,384 shares)

Net change in capital stock issued
(422,697 shares)
Transferred from surplus and change in
accumulated other comprehensive loss
Balance at December 31, 2011
(39,773,081 shares)

1,910

Net income
retained
$

1,929

Accumulated
other
comprehensive
loss
$

(19)

Total surplus

Total capital

1,910

3,820

—

(18)

1,967

2,004

(37)

1,967

3,934

—

(4)

1,989

2,000

(11)

1,989

3,978

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

1. Structure
The Federal Reserve Bank of Cleveland (Bank) is part of the Federal Reserve System (System) and is one of the 12 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 payment 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 participants in programs or facilities with broad-based
eligibility 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, savings and loan holding companies, and U.S.
offices of foreign banking organizations pursuant to authority delegated by the Board of Governors. Certain services are
provided to foreign and international monetary authorities, primarily by the FRBNY.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), which was signed into law
and became effective on July 21, 2010, changed the scope of some services performed by the Reserve Banks. Among other
things, the Dodd-Frank Act established a Bureau of Consumer Financial Protection (Bureau) as an independent bureau within
the System that has supervisory authority over some institutions previously supervised by the Reserve Banks under delegated
authority from the Board of Governors in connection with those institutions’ compliance with consumer protection statutes;
limited the Reserve Banks’ authority to provide loans in unusual and exigent circumstances to lending programs or facilities with
broad-based eligibility or to designated financial market utilities; and vested the Board of Governors with all supervisory and
rule-writing authority for savings and loan holding companies.
The FOMC, in conducting monetary policy, establishes policy regarding domestic open market operations, oversees these operations, and 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, 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 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 conduct
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, 14 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 with the Bank of Canada and the Bank of Mexico in the maximum amounts of $2 billion and
$3 billion, respectively, and to warehouse foreign currencies for the Treasury and the Exchange Stabilization Fund.
Although the Reserve Banks are separate legal entities, they collaborate on 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 Treasury Retail Services Technology, Cash Technology, Financial
Services Policy Committee, and National Server Management Transition.

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.
Large-Scale Asset Purchase Programs and Reinvestment of Principal Payments
On March 18, 2009, the FOMC authorized and directed the FRBNY to purchase $300 billion of longer-term Treasury securities
to help improve conditions in private credit markets. The FRBNY began the purchases of these Treasury securities in March 2009
and completed them in October 2009. On August 10, 2010, the FOMC announced that the Federal Reserve would maintain
the level of domestic securities holdings in the SOMA portfolio by reinvesting principal payments from GSE debt securities and
federal agency and GSE MBS in longer-term Treasury securities. On November 3, 2010, the FOMC announced its intention
to expand the SOMA portfolio holdings of longer-term Treasury securities by an additional $600 billion and completed these
purchases in June 2011. On June 22, 2011, the FOMC announced that the Federal Reserve would maintain its existing policy of
reinvesting principal payments from all domestic securities in Treasury securities. On September 21, 2011, the FOMC announced
that the Federal Reserve intends to purchase, by the end of June 2012, $400 billion par value of Treasury securities with remaining
maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less,
of which $133 billion has been purchased and $134 billion sold as of December 31, 2011. In addition, the FOMC announced
that it will maintain its existing policy of rolling over maturing Treasury securities at auction and, rather than reinvesting principal
payments from GSE debt securities and federal agency and GSE MBS in Treasury securities, such payments will be reinvested in
federal agency and GSE MBS.
The FOMC authorized and directed the FRBNY to purchase GSE debt securities and federal agency and GSE MBS, with a
goal to provide support to mortgage and housing markets and to foster improved conditions in financial markets more generally.
The FRBNY was authorized to purchase up to $175 billion in fixed-rate, non-callable GSE debt securities and $1.25 trillion in
fixed-rate federal agency and GSE MBS. Purchases of GSE debt securities began in November 2008, and purchases of federal
agency and GSE MBS began in January 2009. The FRBNY completed the purchases of GSE debt securities and federal agency
and GSE MBS in March 2010. The settlement of all federal agency and GSE MBS transactions was completed by August 2010.
As discussed above, on September 21, 2011, the FOMC announced that the Federal Reserve will begin to reinvest principal
payments from its holdings of GSE debt securities and federal agency and GSE MBS in federal agency and GSE MBS.
Central Bank Liquidity Swaps
The FOMC authorized and directed the FRBNY to establish central bank liquidity swap arrangements, which could be structured
as either U.S. dollar liquidity or foreign currency liquidity swap arrangements.
In May 2010, U.S. dollar liquidity swap arrangements were re-authorized with the Bank of Canada, the Bank of England, the
European Central Bank, the Bank of Japan, and the Swiss National Bank through January 2011. Subsequently, these arrangements
were extended through February 1, 2013. There is no specified limit to the amount that may be drawn by the Bank of England, the
European Central Bank, the Bank of Japan, and the Swiss National Bank under these swap arrangements; the Bank of Canada may
draw up to $30 billion under the swap arrangement with the FRBNY. In addition to the central bank liquidity swap arrangements,
the FOMC has authorized reciprocal currency arrangements with the Bank of Canada and the Bank of Mexico, as discussed in
Note 2.
Foreign currency liquidity swap arrangements were authorized with 4 foreign central banks and provided the Reserve Banks
with the capacity to offer foreign currency liquidity to U.S. depository institutions. The authorization for these swap arrangements
expired on February 1, 2010. In November 2011, as a contingency measure, the FOMC agreed to establish temporary bilateral
liquidity swap arrangements with the Bank of Canada, the Bank of England, the European Central Bank, the Bank of Japan, and
the Swiss National Bank so that liquidity can be provided in any of their currencies, if necessary. The swap lines are authorized until
February 1, 2013.

Lending to Depository Institutions
The Term Auction Facility (TAF) promoted the efficient dissemination of liquidity by providing term funds to depository
institutions. The last TAF auction was conducted on March 8, 2010, and the related loans matured on April 8, 2010.
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 on a secured basis for a term of 28 days. The authorization for the TSLF expired on February 1, 2010.
The Term Securities Lending Facility Options Program (TOP) offered primary dealers the opportunity to purchase an option
to draw upon short-term, fixed-rate TSLF loans in exchange for eligible collateral. The program was suspended effective with the
maturity of the June 2009 TOP options, and authorization for the program expired on February 1, 2010.
Other Lending Facilities
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 Federal Reserve Bank of Boston administered the AMLF and was authorized to extend these
loans to eligible borrowers on behalf of the other Reserve Banks. 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 (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 accounting principles generally accepted
in the United States of America (GAAP), due to the unique nature of the Bank’s powers and responsibilities as part of the nation’s
central bank and given the System’s unique responsibility to conduct monetary policy. The primary differences are the presentation
of all SOMA securities holdings at amortized cost and the recording of SOMA securities on a settlement-date basis. Amortized
cost, rather than the fair value presentation, more appropriately reflects the Bank’s securities holdings given the System’s unique
responsibility to conduct monetary policy. Although the application of fair value measurements to the securities holdings may
result in values substantially greater or less than 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 before
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 open market operations and do not motivate decisions related to policy or open market
activities. Accounting for these securities on a settlement-date basis, rather than the trade-date basis required by GAAP, better
reflects the timing of the transaction’s effect on the quantity of reserves in the banking system. The cost bases of Treasury securities,
GSE debt securities, and foreign government debt instruments are adjusted for amortization of premiums or accretion of discounts
on a straight-line basis, rather than using the interest method required by GAAP.
In addition, the Bank does not present a Statement of Cash Flows as required by GAAP because the liquidity and cash position
of the Bank are not a primary concern given the Reserve Banks’ unique powers and responsibilities as a central bank. 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, and the accompanying notes to the financial statements. There are no other
significant differences, other than those described above, 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. Unique accounts and significant accounting policies are explained below.
a.

Consolidation
The Dodd-Frank Act established the Bureau as an independent bureau within the System, and section 1017 of the Dodd-Frank
Act provides that the financial statements of the Bureau are not to be consolidated with those of the Board of Governors or the
System. Section 152 of the Dodd-Frank Act established the Office of Financial Research (OFR) within the Treasury. The Board
of Governors funds the Bureau and OFR through assessments on the Reserve Banks as required by the Dodd-Frank Act. The
Reserve Banks reviewed the law and evaluated the design of and their relationships to the Bureau and the OFR and determined
that neither should be consolidated in the Bank’s financial statements.

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. Upon
authorization, the Reserve Banks acquire gold certificates by crediting equivalent amounts in dollars to the account established
for the Treasury. The gold certificates held by the Reserve Banks are required to be backed by the gold owned by 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 at each Reserve Bank.
SDR certificates are issued by the International Monetary Fund (IMF) to its members in proportion to each member’s quota
in the IMF 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. SDRs are recorded by the Bank at original
cost. There were no SDR transactions during the years ended December 31, 2011 and 2010.

Coin
The amount reported as coin in the Statements of Condition represents the face value of all United States coin held by the Bank.
The Bank buys coin at face value from the U.S. Mint in order to fill depository institution orders.

Loans
Loans to depository institutions are reported at their outstanding principal balances, and interest income is recognized on an
accrual basis.
Loans are impaired when current information and events indicate that it is probable that the Bank will not receive the principal
and interest that are due in accordance with the contractual terms of the loan agreement. Impaired 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 identify incurred losses. 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. Generally, the Bank would discontinue recognizing interest income on impaired
loans until the borrower’s repayment performance demonstrates principal and interest would be received in accordance with the
terms 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.

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 settled through a triparty arrangement. In a triparty arrangement, two commercial custodial
banks manage the collateral clearing, settlement, pricing, and pledging, and provide cash and securities custodial services for and on
behalf of the Bank and counterparty. The collateral pledged must exceed the principal amount of the transaction by a margin determined by the FRBNY for each class and maturity of acceptable collateral. Collateral designated by the FRBNY as acceptable under
repurchase transactions primarily includes Treasury securities (including TIPS and STRIP Treasury securities); direct obligations
of several federal and GSE-related agencies, including Federal National Mortgage Association (Fannie Mae) and Federal Home
Loan Mortgage Corporation (Freddie Mac); and pass-through MBS of Fannie Mae, Freddie Mac, and Government National
Mortgage Association. The repurchase transactions are accounted for as financing transactions with the associated interest income
recognized over the life of the transaction.

The FRBNY may engage in sales of securities under agreements to repurchase (reverse repurchase transactions) with primary dealers and, beginning August 2010, with selected money market funds. The list of eligible counterparties was subsequently expanded
to include GSEs, effective in May 2011, and bank and savings institutions, effective in July 2011. These reverse repurchase transactions may be executed through a triparty arrangement as an open market operation, similar to repurchase transactions. Reverse
repurchase transactions may also be executed with foreign official and international account holders as part of a service offering.
Reverse repurchase agreements are collateralized by a pledge of an amount of Treasury securities, GSE debt securities, and federal
agency and GSE MBS that are held in the SOMA. 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 as “System Open Market Account: Securities sold under agreements to repurchase” and the related accrued interest
payable is reported as a component of “Other liabilities” in the Statements of Condition.
Treasury securities and GSE debt securities held in the SOMA may be lent to primary dealers to facilitate the effective functioning of
the domestic securities markets. The amortized cost basis of securities lent continues to be reported as “Treasury securities, net” or
“Government-sponsored enterprise debt securities, net,” as appropriate, in the Statements of Condition. Overnight securities lending
transactions are fully collateralized by Treasury securities that have fair values in excess of the securities lent. The FRBNY charges
the primary dealer a fee for borrowing securities, and these fees are reported as a component of “Non-interest income: Other” in the
Statements of Income and Comprehensive 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 the second quarter of each year.
f.

Treasury Securities; Government-Sponsored Enterprise Debt Securities; Federal Agency and Government-Sponsored
Enterprise Mortgage-Backed Securities; Foreign Currency Denominated Assets; and Warehousing Agreements
Interest income on Treasury securities, GSE debt securities, and foreign currency denominated assets 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 gains or losses associated with principal paydowns. Premiums
and discounts related to federal agency and GSE MBS are amortized over the term of the security to stated maturity, and the
amortization of premiums and accretion of discounts are accelerated when principal payments are received. Gains and losses
resulting from sales of securities are determined by specific issue based on average cost. Treasury securities, GSE debt securities,
and federal agency and GSE MBS are reported net of premiums and discounts in the Statements of Condition and interest
income on those securities is reported net of the amortization of premiums and accretion of discounts in the Statements of
Income and Comprehensive Income.
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 for
delivery in the current month combined with a simultaneous agreement to sell or purchase TBA MBS on a specified future date.
In 2010, the FRBNY also executed a limited number of TBA MBS coupon swap transactions, which involve a simultaneous
sale of a TBA MBS and purchase of another TBA MBS of a different coupon rate. During the year-ended December 31, 2010,
the FRBNY’s participation in the dollar roll and coupon swap markets furthered the MBS purchase program goals of providing
support to the mortgage and housing markets and of fostering improved conditions in financial markets more generally. During

the year-ended December 31, 2011, the FRBNY executed dollar rolls primarily to facilitate settlement. The FRBNY accounts
for outstanding commitments under dollar roll and coupon swaps as purchases or sales on a settlement-date basis. Net gains
resulting from dollar roll and coupon swap transactions are reported as “Non-interest income: System Open Market Account:
Federal agency and government-sponsored enterprise mortgage-backed securities gains, net” in the Statements of Income and
Comprehensive Income.
Foreign currency denominated assets, which can include foreign currency deposits, securities purchased under agreements to
resell, and government debt instruments, 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 foreign currency denominated assets are reported as
“Non-interest income: System Open Market Account: Foreign currency gains, net” in the Statements of Income and Comprehensive Income.
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 the second quarter of each year. Activity related to foreign currency denominated assets,
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 the Reserve Banks’ aggregate capital and surplus at the preceding December 31.
Warehousing is an arrangement under which the FOMC has approved the exchange, at the request of the Treasury, of U.S. dollars
for foreign currencies held by the Treasury over a limited period. The purpose of the warehousing facility is to supplement the U.S.
dollar resources of the Treasury 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 the Reserve
Banks’ aggregate capital and surplus at the preceding December 31.
g.

Central Bank Liquidity Swaps
Central bank liquidity swaps, which are transacted between the FRBNY and a foreign central bank, can be structured as either
U.S. dollar liquidity or foreign currency liquidity swap arrangements.
Central bank liquidity swaps activity, 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 the Reserve Banks’ aggregate capital and surplus at the preceding December 31.
The foreign currency amounts associated with these central bank liquidity swap arrangements are revalued daily 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 are reported as
“System Open Market Account: Central bank liquidity swaps” in 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 it holds for the FRBNY. The Bank’s
allocated portion of the amount of compensation received during the term of the swap transaction is reported as “Interest income:
System Open Market Account: Central bank liquidity swaps” in the Statements of Income and Comprehensive Income.
Foreign currency liquidity swaps
The structure of foreign currency liquidity swap transactions involves the transfer by the FRBNY, at the prevailing market
exchange rate, of 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.

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 2 to 50 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 generally range from two to five years. Maintenance costs related to software are charged to
operating 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.
i.

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.

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. All of the Bank’s assets are eligible to be pledged as collateral. 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 sold under agreements to repurchase is deducted from the eligible
collateral value.
The Board of Governors may, at any time, call upon a Reserve Bank for additional security to adequately collateralize 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.
“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 $9,085 million and $7,304 million at December 31, 2011 and 2010, respectively.
At December 31, 2011 and 2010, all Federal Reserve notes issued to the Reserve Banks were fully collateralized. At December 31,
2011, all gold certificates, all special drawing right certificates, and $1,018 billion of domestic securities held in the SOMA were
pledged as collateral. At December 31, 2011, no investments denominated in foreign currencies were pledged as collateral.

Deposits
Depository Institutions
Depository institutions’ deposits represent the reserve and service-related balances, such as required clearing balances, in the
accounts that depository institutions hold at the Bank. 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 federal funds rate. Interest payable is
reported as “Interest payable to depository institutions” in the Statements of Condition.

The Term Deposit Facility (TDF) consists of deposits with specific maturities held by eligible institutions at the Reserve Banks.
The Reserve Banks pay interest on these deposits at interest rates determined by auction. Interest payable is reported as “Interest
payable to depository institutions” in the Statements of Condition. There were no deposits held by the Bank under the TDF at
December 31, 2011 and 2010.
Other
Other deposits include foreign central bank and foreign government deposits held at the FRBNY that are allocated to the Bank.
l.

Items in Process of Collection and Deferred Credit Items
“Items in process of collection” 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” is 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.

m. 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 meet 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.
n.

Surplus
The Board of Governors requires the Reserve Banks to maintain a surplus equal to the amount of capital paid-in. On a daily basis,
surplus is adjusted to equate the balance to capital paid-in. Accumulated other comprehensive income is reported as a component of “Surplus” in the Statements of Condition and the Statements of Changes in Capital. Additional information regarding the
classifications of accumulated other comprehensive income is provided in Notes 12 and 13.

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 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 earnings during the year are not sufficient to provide for the costs of operations, payment of dividends, and equating surplus
and capital paid-in, payments to the Treasury are suspended. A deferred asset is recorded that represents the amount of net
earnings a Reserve Bank will need to realize before remittances to the Treasury resume. This deferred asset is periodically
reviewed for impairment.

Income and Costs Related to Treasury Services
When directed by the Secretary of the Treasury, the Bank is required by the Federal Reserve Act to serve as fiscal agent and depositary of the United States Government. By statute, the Treasury has appropriations to pay for these services. During the years ended
December 31, 2011 and 2010, the Bank was reimbursed for all services provided to the Treasury as its fiscal agent.

Compensation Received for Service Costs Provided
The Federal Reserve Bank of Atlanta (FRBA) has overall responsibility for managing the Reserve Banks’ provision of check and
ACH services to depository institutions and, as a result, recognizes total System revenue for these services in 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 in 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 “Non-interest income: Compensation received for service costs provided” in the Statements of Income and
Comprehensive Income.

54
r.

Assessments
The Board of Governors assesses the Reserve Banks to fund its operations, the operations of the Bureau and, for a two-year period
following the July 21, 2010, effective date of the Dodd-Frank Act, the OFR. These assessments are allocated to each Reserve Bank
based on each Reserve Bank’s capital and surplus balances as of December 31 of the prior year for the Board of Governors’ operations and as of the most recent quarter for the Bureau and OFR operations. 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.
During the period prior to the Bureau transfer date of July 21, 2011, there was no limit on the funding provided to the Bureau
and assessed to the Reserve Banks; the Board of Governors was required to provide the amount estimated by the Secretary of
the Treasury needed to carry out the authorities granted to the Bureau under the Dodd-Frank Act and other federal law. The
Dodd-Frank Act requires that, after the transfer date, the Board of Governors fund the Bureau in an amount not to exceed a
fixed percentage of the total operating expenses of the System as reported in the Board of Governors’ 2009 annual report, which
totaled $4.98 billion. The fixed percentage of total 2009 operating expenses of the System is 10 percent ($498.0 million) for
2011, 11 percent ($547.8 million) for 2012, and 12 percent ($597.6 million) for 2013. After 2013, the amount will be adjusted
in accordance with the provisions of the Dodd-Frank Act. The Bank’s assessment for Bureau funding is reported as “Assessments:
Bureau of Consumer Financial Protection” in the Statements of Income and Comprehensive Income.
The Board of Governors assesses the Reserve Banks to fund the operations of the OFR for the two-year period following enactment
of the Dodd-Frank Act; thereafter, the OFR will be funded by fees assessed on bank holding companies and nonbank financial
companies that meet the criteria specified in the Dodd-Frank Act.

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, 2011 and 2010, and are reported as a component of “Operating expenses:
Occupancy” in the Statements of Income and Comprehensive Income.

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 Bank 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. Costs and liabilities associated with enhanced postretirement
benefits are discussed in Note 12.

Recently Issued Accounting Standards
In July 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-20,
Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, which
requires additional disclosures about the allowance for credit losses and the credit quality of loan portfolios. The additional
disclosures include a rollforward of the allowance for credit losses on a disaggregated basis and more information, by type of
receivable, on credit quality indicators, including the amount of certain past-due receivables and troubled debt restructurings
and significant purchases and sales. The adoption of this update is effective for the Bank for the year ended December 31, 2011,
and did not have a material effect on the Bank’s financial statements.
In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a
Troubled Debt Restructuring, which clarifies accounting for troubled debt restructurings, specifically clarifying creditor concessions
and financial difficulties experienced by borrowers. This update is effective for the Bank for the year ended December 31, 2012,
and is not expected to have a material effect on the Bank’s financial statements.
In April 2011, the FASB issued ASU 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase
Agreements, which reconsidered the effective control for repurchase agreements. This update prescribes when the Bank may or
may not recognize a sale upon the transfer of financial assets subject to repurchase agreements. This determination is based, in
part, on whether the Bank has maintained effective control over the transferred financial assets. This update is effective for the
Bank for the year ended December 31, 2012, and is not expected to have a material effect on the Bank’s financial statements.
In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, which
requires a reporting entity to present the total of comprehensive income, the components of net income and the components
of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but
consecutive statements. This update eliminates the option to present the components of other comprehensive income as part
of the statement of shareholders’ equity. The update is intended to improve the comparability, consistency, and transparency of
financial reporting and to increase the prominence of items by presenting the components reported in other comprehensive
income. The Bank has adopted the update in this ASU effective for the year ended December 31, 2011, and the required
presentation is reflected in the Bank’s financial statements.
In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.
This update will require a reporting entity to present enhanced disclosures for financial instruments and derivative instruments
that are offset or subject to master netting agreements or similar such agreements. This update is effective for the Bank for the
year ended December 31, 2013, and is not expected to have a material effect on the Bank’s financial statements.
In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments
to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in Accounting Standards Update No.
2011-05. This update indefinitely defers the requirements of ASU 2011-05 related to presentation of reclassification adjustments.

5. Loans
The Bank had no loans outstanding at December 31, 2011 and 2010.
Loans to Depository Institutions
The Bank offers primary, secondary, and seasonal loans to eligible borrowers, and each program has its own interest rate. Interest is
accrued using the applicable interest rate established at least every 14 days by the Bank’s board of directors, subject to review and
determination by the Board of Governors. Primary and secondary loans are extended on a short-term basis, typically overnight,
whereas seasonal loans may be extended for a period of up to nine months.

Primary, secondary, and seasonal loans are collateralized to the satisfaction of the Bank to reduce credit risk. Assets eligible to
collateralize 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; asset-backed securities; corporate bonds;
commercial paper; and bank-issued assets, such as certificates of deposit, bank notes, and deposit notes. Collateral is assigned a
lending value that is deemed appropriate by the Bank, which is typically fair value reduced by a margin. Loans to depository institutions are monitored daily 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 or seasonal loans, 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.
Allowance for Loan Loss
At December 31, 2011 and 2010, the Bank did not have any impaired loans and no allowance for loan losses was required. There
were no impaired loans during the years ended December 31, 2011 and 2010.

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 2.701 percent and 3.398 percent at December 31, 2011 and
2010, respectively.
The Bank’s allocated share of 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):
2011
Unamortized
premiums

Par
Bills

498

—

Unaccreted
discounts
$

—

Total amortized
cost
$

498

Fair value
$

498

Notes

34,747

724

(33)

35,438

37,531

Bonds

9,688

1,657

(2)

11,343

13,741

Total Treasury securities

44,933

2,381

(35)

47,279

51,770

GSE debt securities

2,809

104

—

2,913

3,086

Federal agency and GSE MBS

22,627

314

(28)

22,913

24,189

2010
Unamortized
premiums

Par
Bills

626

—

Unaccreted
discounts
$

—

Total amortized
cost
$

626

Fair value
$

626

Notes

26,273

477

(26)

26,724

27,340

Bonds

7,807

1,112

(19)

8,900

9,845

Total Treasury securities

34,706

1,589

(45)

36,250

37,811

GSE debt securities

5,010

188

(1)

5,197

5,327

Federal agency and GSE MBS

33,709

479

(53)

34,135

34,859

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):
2011

2010

Amortized cost
Bills

Fair value

18,423

Amortized cost
$

Fair value

18,422

Notes

1,311,917

1,389,429

786,575

804,703

Bonds

419,937

508,694

261,955

289,757

Total Treasury securities

1,750,277

1,916,546

1,066,952

1,112,882

GSE debt securities

107,828

114,238

152,972

156,780

Federal agency and GSE MBS

848,258

895,495

1,004,695

1,026,003

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. The fair value of
federal agency and GSE MBS was determined using a model-based approach that considers observable inputs for similar securities;
fair value for all other SOMA security holdings was determined by reference to quoted prices for identical 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 expected 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 (in millions):
2011
Distribution of MBS holdings by coupon rate

Amortized cost

Allocated to the Bank:
3.0%

2010
Fair value
$

Amortized cost
$

—

Fair value
$

—

3.5%

524

531

4.0%

4,362

4,586

5,697

5,722

4.5%

10,979

11,647

16,909

17,287

5.0%

4,930

5,204

7,863

8,071

5.5%

1,804

1,892

3,164

3,257

6.0%

247

260

438

454

6.5%

Total

22,913

1,313

24,189

1,336

34,135

—

34,859

Total SOMA:
3.0%

—

3.5%

19,415

19,660

341

352

4.0%

161,481

169,763

167,675

168,403

4.5%

406,465

431,171

497,672

508,798

5.0%

182,497

192,664

231,420

237,545

5.5%

66,795

70,064

93,119

95,873

6.0%

9,152

9,616

12,910

13,376

6.5%
Total

1,140
$

848,258

1,221
$

895,495

1,558
$

1,004,695

1,656
$

1,026,003

There were no transactions related to securities purchased under agreements to resell during the years ended December 31, 2011
and 2010. Financial information related to securities sold under agreements to repurchase for the years ended December 31 was as
follows (in millions):
2011

2010

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

2,698

2,028

Average daily amount outstanding, during the year

2,066

2,079

Maximum balance outstanding, during the year

3,363

3,071

Securities pledged (par value), end of year

2,325

1,483

Securities pledged (market value), end of year

2,698

2,028

Total SOMA:
Contract amount outstanding, end of year

99,900

Average daily amount outstanding, during the year

59,703

72,227

58,476

Maximum balance outstanding, during the year

124,512

77,732

Securities pledged (par value), end of year

86,089

43,642

Securities pledged (market value), end of year

99,900

59,703

The contract amounts for securities sold under agreements to repurchase approximate fair value. FRBNY executes transactions
for the purchase of securities under agreements to resell primarily to temporarily add reserve balances to the banking system.
Conversely, transactions to sell securities under agreements to repurchase are executed to temporarily drain reserve balances
from the banking system and as part of a service offering to foreign official and international account holders.
The remaining maturity distribution of Treasury securities, GSE debt securities, federal agency and GSE MBS bought outright, and
securities sold under agreements to repurchase that were allocated to the Bank at December 31, 2011, was as follows (in millions):
Within
15 days
Treasury securities
(par value)
GSE debt securities
(par value)
Federal agency and GSE MBS
(par value)1
Securities sold under
agreements to repurchase
(contract amount)
1

16 days
to 90 days

439

732

91 days
to 1 year
$

Over 1 year
to 5 years

2,428

17,550

Over 5 years
to 10 years
$

17,555

Over 10
years
$

Total

6,229

44,933

136

532

1,637

374

2,809

—

22,626

22,627

2,698

—

2,698

The par amount shown for Federal agency and GSE MBS is the remaining principal balance of the underlying mortgages.

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, 2011, which differs from the stated maturity primarily because it factors in scheduled payments and
prepayment assumptions, is approximately 2.4 years.

The amortized cost and par value of Treasury securities and GSE debt securities that were loaned from the SOMA at December 31
was as follows (in millions):
Allocated to the Bank
Amortized cost
2011
Treasury securities
GSE debt securities

Par value
2010

408
34

2011
769
57

2010
378
33

750
55

Total SOMA
Amortized cost
Treasury securities
GSE debt securities

2011
15,121
1,276

Par value
2010
22,627
1,686

2011
13,978
1,216

2010
22,081
1,610

The FRBNY enters into commitments to buy Treasury and GSE debt securities and records the related securities on a settlementdate basis. As of December 31, 2011, the total purchase price of the Treasury securities under outstanding commitments was
$3,200 million. The total purchase price of outstanding commitments allocated to the Bank was $86 million. These commitments
had contractual settlement dates extending through January 3, 2012. As of December 31, 2011, the fair value of Treasury securities
under outstanding purchase commitments was $3,208 million, of which $87 million was allocated to the Bank.
The FRBNY enters into commitments to buy and sell federal agency and GSE MBS and records the related securities on a
settlement-date basis. As of December 31, 2011, the total purchase price of the federal agency and GSE MBS under outstanding
purchase commitments was $41,503 million, of which $513 million was related to dollar roll transactions. The total purchase
price of outstanding purchase commitments allocated to the Bank was $1,121 million, of which $14 million was related to dollar
roll transactions. As of December 31, 2011, the total sales price of the federal agency and GSE MBS under outstanding sales
commitments was $4,430 million, all of which was related to dollar roll transactions. The total sales price of outstanding sales
commitments allocated to the Bank was $120 million, all of which was related to dollar roll transactions. These commitments,
which had contractual settlement dates extending through February 2012, are for the purchase and sale 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.
As of December 31, 2011, the fair value of federal agency and GSE MBS purchases and sales, net under outstanding commitments
was $41,873 million and $4,473 million, respectively, of which $1,131 million and $121 million, respectively, was allocated to the
Bank. These commitments are subject to varying degrees of off-balance-sheet market risk and counterparty credit risk that result
from their future settlement. The FRBNY requires the posting of cash collateral for commitments as part of the risk management
practices used to mitigate the counterparty credit risk.
Other liabilities, which are related to federal agency and GSE MBS purchases and sales, includes the FRBNY’s obligation to
return cash margin posted by counterparties as collateral under commitments to purchase and sell federal agency and GSE MBS.
In addition, other liabilities includes obligations that arise from the failure of a seller to deliver securities to the FRBNY on the
settlement date. Although FRBNY 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 included in other liabilities represents
the FRBNY’s obligation to pay for the securities when delivered. The amount of other liabilities allocated to the Bank and held in
the SOMA at December 31 was as follows (in millions):

Cash margin
Obligations from MBS transaction fails
Total

Allocated to the Bank
2011
$
34
3
$
37

$
$

Total SOMA
2011
1,271
97
1,368

During the years ended December 31, 2011 and 2010, the Reserve Banks recorded net gains from federal agency and GSE MBS
transactions of $10 million and $782 million, respectively, of which $262 thousand and $29 million, respectively, were 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.

Information about transactions related to Treasury securities, GSE debt securities, and federal agency and GSE MBS during the
year ended December 31, 2011, is summarized as follows (in millions):
Allocated to the Bank
Bills
Balance December 31, 2010

Purchases1
Sales

626

26,724

8,900

36,250

GSE debt
securities
$

Federal agency
and GSE MBS

5,197

34,135

22,098

4,716

33,752

—

1,138

—

(3,720)

—

(3,720)

—

(6,938)

(1,930)

—

(8,868)

(1,289)

(5,661)

—

(127)

(143)

(270)

(49)

(93)

—

(128)

(7,705)

(2,161)

(9,994)

(946)

(6,606)

Realized gains, net2

Amortization of premiums
and discounts
Inflation adjustment on
inflation-indexed securities
Annual reallocation adjustment

Balance December 31, 2011

Total Treasury
securities

Bonds

6,938

Principal payments and
maturities

Notes

498

35,438

11,343

47,279

2,913

22,913

6,938

21,605

3,734

32,277

—

1,106

Supplemental information par value of transactions:
Purchases
Proceeds from sales

—

(3,642)

—

(3,642)

—

Total SOMA
Bills
Balance December 31, 2010

Purchases1
Sales

Realized gains, net

Principal payments and
maturities
Amortization of premiums
and discounts
Inflation adjustment on
inflation-indexed securities
Balance December 31, 2011

Notes

18,422

786,575

Total Treasury
securities

Bonds
$

261,955

$ 1,066,952

GSE debt
securities
$

Federal agency
and GSE MBS

152,972

$ 1,004,695

239,487

731,252

161,876

1,132,615

—

42,145

—

(137,734)

—

(137,734)

—

2,258

—

2,258

—

(239,494)

(67,273)

—

(306,767)

(43,466)

(195,413)

(4,445)

(4,985)

(9,422)

(1,678)

(3,169)

—

1,284

1,091

2,375

18,423

$ 1,311,917

419,937

$ 1,750,277

107,828

—
$

848,258

—

239,494

127,802

$ 1,081,174

—

40,955

—

(134,829)

Supplemental information par value of transactions:
Purchases
Proceeds from sales

—

713,878
(134,829)

—

Purchases and sales are reported on a settlement-date basis and include payments and receipts related to principal, premiums, discounts, and inflation
compensation included in the basis of inflation-indexed securities. The amount reported as sales also includes realized gains, net.

Adjustments for realized gains, net is required because these amounts do not affect the reported amount of the related securities. Excludes gains and
losses that result from net settled MBS TBA transactions.

Reflects the annual adjustment to the Bank’s allocated portion of the related SOMA securities that results from the annual settlement of the interdistrict
settlement account, as discussed in Note 4f.

—

7. Foreign Currency Denominated Assets
The FRBNY holds foreign currency deposits with foreign central banks and the Bank for International Settlements and invests
in foreign government debt instruments of Germany, France, and Japan. These foreign government debt instruments are guaranteed as to principal and interest by the issuing foreign governments. In addition, the FRBNY enters into transactions to purchase
Euro-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 foreign currency denominated assets was approximately 7.418 percent and 7.451 percent at
December 31, 2011 and 2010, respectively.
The Bank’s allocated share of foreign currency denominated assets, including accrued interest, valued at amortized cost and foreign
currency market exchange rates at December 31 was as follows (in millions):
2011

2010

Euro:
Foreign currency deposits

695

Securities purchased under agreements to resell

526

—

184

German government debt instruments

140

138

French government debt instruments

195

205

Foreign currency deposits

296

289

Japanese government debt instruments

599

Japanese yen:

Total allocated to the Bank

1,925

1,941

At December 31, 2011 and 2010, the fair value of foreign currency denominated assets, including accrued interest, allocated to
the Bank was $1,937 million and $1,953 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 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 foreign currency denominated assets were $25,950 million and $26,049 million at December 31, 2011 and
2010, respectively. At December 31, 2011 and 2010, the fair value of the total Reserve Bank foreign currency denominated assets,
including accrued interest, was $26,116 million and $26,213 million, respectively.
The remaining maturity distribution of foreign currency denominated assets that were allocated to the Bank at December 31, 2011,
was as follows (in millions):
Within
15 days
Euro

Japanese yen
Total

397

16 days
to 90 days
$

310
$

707

218

91 days to
1 year
$

49
$

267

157

Over 1 year
to 5 years
$

233
$

390

258

Total
$

303
$

561

1,030
895

1,925

At December 31, 2011 and 2010, the authorized warehousing facility was $5 billion, with no balance outstanding.
There were no transactions related to the authorized reciprocal currency arrangements with the Bank of Canada and the Bank
of Mexico during the years ended December 31, 2011 and 2010.
There were no foreign exchange contracts related to open market operations outstanding as of December 31, 2011.

The FRBNY enters into commitments to buy foreign government debt instruments and records the related securities on a
settlement-date basis. As of December 31, 2011, there were $216 million of outstanding commitments to purchase Eurodenominated government debt instruments, of which $16 million was allocated to the Bank. These securities settled on
January 4, 2012, and replaced Euro-denominated government debt instruments held in the SOMA that matured on that date.
As of December 31, 2011, the fair value of Euro-denominated government debt instruments under outstanding commitments
was $216 million, of which $16 million was allocated to the Bank.

In connection with its foreign currency activities, the FRBNY may enter into transactions that are subject to varying degrees of
off-balance-sheet market risk and counterparty credit risk that result from their future settlement. 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 7.418 percent and 7.451 percent at December 31, 2011
and 2010, respectively.
The total foreign currency held under U.S. dollar liquidity swaps in the SOMA at December 31, 2011 and 2010, was $99,823
million and $75 million, respectively, of which $7,405 million and $6 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):
2011
Within 15 days
Euro

Japanese yen
Swiss franc
Total

2,549

2010

16 days to 90 days
$

Total

3,789

Within 15 days

6,338

670

368

1,038

—

3,243

4,162

7,405

Foreign Currency Liquidity Swaps
There were no transactions related to the foreign currency liquidity swaps during the years ended December 31, 2011 and 2010.

9. Bank Premises, Equipment, and Software
Bank premises and equipment at December 31 were as follows (in millions):
2011

2010

Bank premises and equipment:
Land and land improvements

Buildings

175

172

Building machinery and equipment

Furniture and equipment

292

298

(155)

(141)

Subtotal
Accumulated depreciation
Bank premises and equipment, net

137

157

Depreciation expense, for the years ended December 31

The Bank leases space to outside tenants with remaining lease terms ranging from one to thirteen years. Rental income from such
leases was $2 million for each of the years ended December 31, 2011 and 2010, and is reported as a component of “Non-interest
income: Other” 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, 2011, are as follows (in millions):
2012

2013

2014

2015

2016

Thereafter

Total

The Bank had capitalized software assets, net of amortization, of $12 million and $9 million at December 31, 2011 and 2010,
respectively. Amortization expense was $2 million for each of the years ended December 31, 2011 and 2010. 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 “Operating expenses: Other” in the Statements of Income and Comprehensive Income.
As a result of the Bank’s restructuring plan discussed in Note 14, the Bank has determined that it will vacate the Pittsburgh branch
facility. The Bank recorded an impairment loss of $12 million during the year ended December 31, 2011, to adjust the recorded
amount of related building and land, building machinery and equipment, and land improvements to fair value. Fair values were
based on appraisals and other valuation techniques. A portion of the impairment loss in the amount of $10 million is reported as
a component of “Operating expenses: Other” and the remaining amount of $2 million is reported as a component of “Operating
expenses: Occupancy” in the Statements of Income and Comprehensive Income. The Bank had no impairment losses in 2010.

10. Commitments and Contingencies
Conducting 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, 2011, the Bank was obligated under a noncancelable lease for premises and equipment with a remaining term
of one year. The lease provides for increased rental payments based upon increases in real estate taxes, operating costs, or selected
price indexes.
Rental expense under operating leases for certain operating facilities, warehouses, and data processing and office equipment
(including taxes, insurance, and maintenance when included in rent), net of sublease rentals, was $358 thousand and
$355 thousand for the years ended December 31, 2011 and 2010, respectively.
Future minimum rental payments under noncancelable operating leases, net of sublease rentals, with terms of one year or more,
at December 31, 2011, were not material.
At December 31, 2011, there were no material unrecorded unconditional purchase commitments or obligations in excess of
one year.
Under the Insurance Agreement of the Reserve Banks, each of the Reserve Banks has agreed to bear, on a per incident basis,
a share of certain losses in excess of 1 percent of the capital paid-in of the claiming Reserve Bank, up to 50 percent of the total
capital paid-in of all Reserve Banks. Losses are borne in the ratio of a Reserve 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, 2011 and 2010.
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 legal actions 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). Under the
Dodd-Frank Act, newly hired Bureau employees are eligible to participate in the System Plan and transferees from other governmental organizations can elect to participate in the 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 Banks (SERP).
The System Plan provides retirement benefits to employees of the Reserve Banks, Board of Governors, OEB, and certain employees
of the Bureau. The FRBNY, on behalf of the System, recognizes the net asset or net liability and costs associated with the System
Plan in its consolidated financial statements. During the year ended December 31, 2011, certain costs associated with the System
Plan were reimbursed by the Bureau. During the year ended December 31, 2010, costs associated with the System Plan were 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, 2011
and 2010, 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 100 percent of the first 6 percent of employee contributions from the date of hire and provides an
automatic employer contribution of 1 percent of eligible pay. The Bank’s Thrift Plan contributions totaled $5 million for each of
the years ended December 31, 2011 and 2010, and are reported as a component of “Operating expenses: Salaries and 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):
2011
Accumulated postretirement benefit obligation at January 1

2010

117.7

93.7

Service cost benefits earned during the period

5.8

4.2

Interest cost on accumulated benefit obligation

6.5

5.5

Net actuarial loss

4.5

18.0

Curtailment gain

(6.9)

—

0.9

0.7

(5.0)

(4.7)

0.3

(19.4)

—

Contributions by plan participants
Benefits paid
Medicare Part D subsidies
Plan amendments
Accumulated postretirement benefit obligation at December 31

104.4

117.7

At December 31, 2011 and 2010, the weighted-average discount rate assumptions used in developing the postretirement benefit
obligation were 4.50 percent and 5.25 percent, respectively.
Discount rates reflect yields available on high-quality corporate bonds that would generate the cash flows necessary to pay the
plan’s benefits when due.
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):
2011
Fair value of plan assets at January 1

2010
—

—

Contributions by the employer

3.8

3.7

Contributions by plan participants

0.9

0.7

Benefits paid

(5.0)

(4.7)

Medicare Part D subsidies

0.3

Fair value of plan assets at December 31

Unfunded obligation and accrued postretirement benefit cost

—

104.4

117.7

19.4

0.1

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

Net actuarial loss
Total accumulated other comprehensive loss

(31.0)
$

(11.6)

(37.1)
$

(37.0)

Accrued postretirement benefit costs are reported as a component of “Accrued benefit costs” in the Statements of Condition.
For measurement purposes, the assumed health-care cost trend rates at December 31 are as follows:
2011

2010

Health-care cost trend rate assumed for next year

7.50%

8.00%

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

5.00%

2017

Year that the rate reaches the ultimate trend rate

Assumed health-care cost trend rates have a significant effect on the amounts reported for health-care plans. A 1 percentage point
change in assumed health-care cost trend rates would have the following effects for the year ended December 31, 2011 (in millions):
1 percentage
point increase
Effect on aggregate of service and interest cost components
of net periodic postretirement benefit costs
Effect on accumulated postretirement benefit obligation

2.3
15.0

1 percentage
point decrease
$

(1.9)
(12.2)

The following is a summary of the components of net periodic postretirement benefit expense for the years ended
December 31 (in millions):
2011
Service cost-benefits earned during the period

Interest cost on accumulated benefit obligation

2010
5.8

4.2

6.5

5.5

Amortization of prior service cost

—

(1.4)

Amortization of net actuarial loss

3.6

1.7

Net periodic postretirement benefit expense

15.9

10.0

Estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic postretirement benefit
expense in 2012 are shown below:
Prior service cost

Net actuarial loss

(3.6)
2.1

Total

(1.5)

Net postretirement benefit costs are actuarially determined using a January 1 measurement date. At January 1, 2011 and 2010,
the weighted-average discount rate assumptions used to determine net periodic postretirement benefit costs were 5.25 percent
and 5.75 percent, respectively.
Net periodic postretirement benefit expense is reported as a component of “Operating expenses: Salaries and benefits” in the
Statements of Income and Comprehensive Income.
A curtailment gain associated with restructuring programs that are described in Note 14 was recognized in net income in the
year ended December 31, 2011, related to employees who terminated employment during 2011.
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 $343 thousand and $259 thousand for the years ended December 31, 2011
and 2010, respectively. Expected receipts in 2012, related to benefits paid in the years ended December 31, 2011 and 2010, are
$79 thousand.
Following is a summary of expected postretirement benefit payments (in millions):
Without subsidy
2012

5.6

With subsidy
$

5.2

2013

5.7

5.3

2014

5.9

5.5

2015

6.0

5.5

2016

6.4

5.9

35.6

31.6

2017–2021
Total

65.2

59.0

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, 2011 and 2010, were $13.9 million and $12.1 million, respectively. This cost is included as a component of
“Accrued benefit costs” in the Statements of Condition. Net periodic postemployment benefit expense included in 2011 and
2010 operating expenses were $3.6 million and $0.9 million, respectively, and are recorded as a component of “Operating
expenses: Salaries and benefits” in the Statements of Income and Comprehensive Income.

67
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, 2010

(19)

Change in funded status of benefit plans:
Amortization of prior service cost

(2)

Change in prior service costs related to benefit plans

(2)

Net actuarial loss arising during the year

(18)

Amortization of net actuarial loss

Change in actuarial loss related to benefit plans

(16)

Change in funded status of benefit plans–
other comprehensive loss
Balance at December 31, 2010

(18)
$

(37)

Change in funded status of benefit plans:
Prior service costs arising during the year

Change in prior service costs related to benefit plans

Net actuarial gain arising during the year

Amortization of net actuarial loss

Change in actuarial gain related to benefit plans

Change in funded status of benefit plans–
other comprehensive loss
Balance at December 31, 2011

26
$

(11)

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

14. Business Restructuring Charges
In 2011, the U.S. Treasury announced a restructuring initiative to consolidate the Treasury Retail Securities (TRS) operations
located in the Bank’s Pittsburgh branch into the Federal Reserve Bank of Minneapolis. In coordination with the TRS restructuring
in Pittsburgh, the Bank announced the restructuring of support and overhead functions at the branch and the sale of the Pittsburgh
branch facility. Additional announcements in 2011 included the consolidation of paper check processing into the Federal Reserve
Bank of Atlanta.

The Bank had no business restructuring charges in 2010.
Additional announcements prior to 2010 included restructuring plans associated with Check Operations and Electronic Treasury
Financial Services.
Following is a summary of financial information related to the restructuring plans (in millions):

2011
restructuring
plans

2009 and prior
restructuring
plans

Total

Information related to restructuring
plans as of December 31, 2011:

Total expected costs related to
restructuring activity

Expected completion date

10.0

2011

2.1

12.1

0.1

2010

Reconciliation of liability balances:

Balance at January 1, 2010

Adjustments
Balance at December 31, 2010

—

—
$

—

0.1
(0.1)

—

(0.1)
$

—

Employee separation costs

10.9

—

10.9

Adjustments

(0.8)

—

(0.8)

Payments

(4.0)

—

(4.0)

Balance at December 31, 2011

6.1

—

6.1

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 “Operating expenses: Salaries and benefits” in the Statements of
Income and Comprehensive Income.
Adjustments to the accrued liability are primarily due to changes in the estimated restructuring costs and are shown as a component
of the appropriate expense category in the Statements of Income and Comprehensive Income.
Restructuring costs associated with the impairment of certain Bank assets, including software, buildings, leasehold improvements,
furniture, and equipment, are discussed in Note 9. Costs associated with enhanced pension benefits for all Reserve Banks are
recorded on the books of the FRBNY as discussed in Note 11. Costs associated with enhanced postretirement benefits are disclosed
in Note 12.

15. Subsequent Events
There were no subsequent events that require adjustments to or disclosures in the financial statements as of December 31, 2011.
Subsequent events were evaluated through March 20, 2012, which is the date that the Bank issued the financial statements.

Acknowledgments
EXECUTIVE EDITOR

ESSAY AUTHORS

ADVISORY PANEL

Robin Ratliff

Timothy Dunne

Suzanne Howe

Assistant Vice President,
Public Affairs

Vice President and Economist

Vice President, eGovernment
Operations and Treasury
Electronic Check Processing

EDITOR
Doug Campbell
MANAGING EDITOR
Amy Koehnen

Kyle Fee
Senior Research Analyst

Daniel Hartley
Research Economist

Vice President, eGovernment
Technical Support and Pay.gov

Mark Schweitzer

Dan Littman

Senior Vice President
and Director of Research

Murat Tasci
MANAGING DESIGNER
Michael Galka
DESIGNER
Natalie Bashkin
WEB DESIGNER

Susan Kenney

Economist

Mark Sniderman

Research Economist

Executive Vice President
and Chief Policy Officer

Guhan Venkatu

Lisa Vidacs

Economist

Senior Vice President,
Public Affairs and Outreach

THE CONSUMER’S FED
AUTHOR

PORTRAIT PHOTOGRAPHY

Abigail Zemrock

Chris Pappas Photography, Inc.

Natalie Karrs

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.

Follow the Cleveland Fed on

Cleveland

www.clevelandfed.org

1455 East Sixth Street
Cleveland, OH 44114
216.579.2000

Cincinnati

150 East Fourth Street
Cincinnati, OH 45202
513.721.4787

Pittsburgh

717 Grant Street
Pittsburgh, PA 15129
412.261.7800

Full text of Annual Report of the Federal Reserve Bank of Cleveland : 2011 Annual Report

FRASER