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2009 ANNUAL REPORT
FEDERAL RESERVE BANK OF DALLAS

Reflections on the Financial Crisis:
Where Do We Go From Here?

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Contents
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Letter from the President
Reflections on the Financial Crisis:
Where Do We Go From Here?
Management and Boards
Senior Management
Boards of Directors
Officers and Advisory Councils
Financials
Management’s Report
Report of Independent Auditors
Financial Statements
Notes to Financial Statements
Volume of Operations

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y
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fr
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t

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Letter from the

President

uring the recent economic crisis, the
Federal Reserve deployed nearly every
resource at its disposal to restore the
financial system to working order and
guide the economy out of recession.

These efforts shaped news coverage—and public perception—of the central bank’s work. The media focused
on Washington’s activities, scrutinizing the details of
every initiative by the Federal Open Market Committee
(FOMC) and the Board of Governors. The commentary—a mix of the good, the bad and the ugly—centered primarily on the historic nature of our programs,
their potential market impacts and their reception by
the powerhouses of Washington and Wall Street.
The Federal Reserve System’s extraordinary efforts were not limited to the FOMC. As I frequently
remind the press and public, members of the committee rely on the dedicated staff of the Federal Reserve
Banks for the execution of each initiative. Without the
hard work of the regional Banks—including the men
and women of the Federal Reserve Bank of Dallas—we
might not have staved off economic collapse.
With financial markets drained of confidence and
liquidity, it became critical that lending to depository institutions be properly designed and flawlessly
executed. To aid in this effort, our staff continued to
maintain and refine the application used throughout
the Federal Reserve System for discount window lending operations—an important responsibility in a year
when the Dallas Fed saw a prodigious increase in the
number of loans extended.

2009 Annual Report • Letter from the President

FEDERAL RESERVE BANK OF DALLAS • 2009 Annual Report

In addition, the Dallas Fed played a key role in

significantly expanded their speaking engagements

many new programs and initiatives designed to assist

and participation in conferences across the country,

in the implementation of monetary policy, including

doing their best to contribute to the national dialogue

interest payments on reserves and enhancement of con-

on the Great Recession. Members of the Dallas Fed’s

trols that manage credit risk. The Dallas Fed also con-

Globalization and Monetary Policy Institute—our flag-

tributed to the detailed requirements and design of the

ship center for study of an increasingly interconnect-

proposed term deposit facility, one of several tools that

ed world economy and its effects on monetary policy—

may be used to support a smooth withdrawal of mon-

briefed the FOMC on global inflation dynamics.

etary policy accommodation at the appropriate time.
In response to the nation’s mortgage foreclosure
The Dallas Fed’s supervision and regulation

woes, the Bank collaborated with consumer and com-

team made a vital contribution to financial safety and

munity organizations to launch the Dallas–Fort Worth

soundness. Our experienced staff of bank examiners

Home Ownership Preservation Enterprise (HOPE)

refocused their tactics, paying heightened attention to

Partnership. Since its 2005 inception, the group has

risk. We established a support unit to coordinate re-

mobilized lenders and housing counselors for work-

sources, ensuring that the most experienced examin-

shops to assist thousands of homeowners in resolving

ers worked with financial institutions facing the most

their delinquent loans and avoiding foreclosure. The

severe challenges. We continued to beef up our sta-

success of those efforts led to the formation of the

tistical bank-risk assessments and extend their use

Greater Houston Foreclosure Prevention and Texas

to credit risk to help identify shaky institutions at the

Foreclosure Prevention task forces. The Bank joined

earliest possible sign. The breadth of knowledge ac-

with the Texas task force to run consumer awareness

crued by our bank supervisors, coupled with relatively

ads in movie theaters, alerting consumers to scams

favorable banking conditions in our district, put us at

and other fraudulent activities that might affect them.

the forefront in providing examiner assistance to other
Federal Reserve districts and government agencies.

Our public outreach initiatives provided our audiences with up-to-date information on the economic

Getting the Word Out
The financial crisis intensified the public’s need

landscape. To address the causes and effects of the
financial crisis and to promote better understanding

for insight and information—and mine, too. Our

of the recession, the Bank provided timely programs

research staff increased the frequency of regional, na-

to secondary educators and university and college

tional and international briefings to keep me apprised

faculty. This effort came in the form of conferences

of economic developments. In Dallas Fed publica-

and presentations at a variety of venues, including

tions, our economists produced articles on pressing

the Bank and branch offices, on school campuses and

issues—foreclosures, financial markets and our local

at national and state conferences. And we took the

economy’s battle with recession, to name a few. Highly

discussion to Main Street, organizing programs and

respected journals and news media around the world

hosting roundtable discussions with bankers and civic

cited many of our efforts. In addition, Bank staffers

leaders in communities in Texas, northern Louisiana

and southern New Mexico. Conferences on commu-

The Bank’s role in supporting the technology

nity development lending and entrepreneurship in the

infrastructure for the Federal Reserve System helped

changing economy provided constituents with impor-

maintain effective operations during the crisis. In

tant information at a time of economic upheaval.

addition to providing and supporting the application
used by all Reserve Banks for lending activities, the

Staying on Course
In addition to meeting the demands of the eco-

Bank provides the financial management system used
by all Reserve Banks for procurement, asset manage-

nomic downturn, we maintained customer service

ment and accounts payable. Bank staff fostered sig-

excellence in our financial services. To support the

nificant improvements in the Federal Reserve’s desk-

needs of the marketplace, we redistributed to other

top computing infrastructure, supporting the work

Reserve Banks nearly 700 million new notes ware-

of more than 20,000 employees across the System.

housed in our vaults on behalf of the Board of Gover-

In addition, we upgraded our telecommunications

nors and the U.S. Treasury. In 2009, the Dallas Fed

complex and hosted an 85 percent increase in secure

provided cash to more than 3,700 banks and branch-

conference calls for the System, supporting increased

es, circulating some 5.7 billion bills through our

demand for communication and collaboration.

vault doors. Our coin holdings increased almost 20
percent from the prior year as coin flowed back from

Suffice it to say that the staff of the Federal

circulation and other sources at an unprecedented

Reserve Bank of Dallas and its branches worked long

rate. During 2009, the Federal Reserve continued the

and hard, rising to the challenges presented in 2009.

consolidation of check processing functions. Dallas

Their hard work enabled the Federal Reserve to do

ceased processing paper checks as that business was

what it must do in times of economic turmoil—bring a

transferred to the Cleveland Reserve Bank, ending

sense of stability and calm to an economy wrought by

a function that had been conducted in Dallas since

contraction and panic. I speak for all my colleagues on

1915. This transition resulted in a significant down-

the FOMC and the constituents of the Eleventh District

sizing of our staff but was accomplished with minimal

when I say how grateful I am for a job well done.

customer impact.
In an ongoing initiative to help the U.S. Treasury
reduce costs, our Go Direct contact center in Dallas continued enrolling federal benefit recipients in
its electronic deposit program. The contact center
processed more than 690,000 enrollments in 2009, a

Richard W. Fisher

20 percent increase over 2008. Since 2004, the Dallas
Fed has processed almost 2.5 million enrollments. In
2009, we developed technology enhancements that
helped reduce enrollment times, providing a significant cost savings for the Treasury and the taxpayer.

2009 Annual Report • Letter from the President

FEDERAL RESERVE BANK OF DALLAS • 2009 Annual Report

Reflections on the Financial Crisis:
Where Do We Go From Here?
An Essay by Richard W. Fisher

he past two and a half years have

It is time to look back—to see what we have learned—

been challenging ones for the Federal

and to look forward to reshaping the policy environ-

Reserve. The financial market turmoil

ment, with an eye toward lessening the odds of future

that began in mid-2007 plunged the

financial crises.

U.S. economy into a stubborn down-

turn that raised fears of another Great Depression.

I come away from the past two years with four

Determined to avoid the monetary policy mistakes of

fundamental beliefs—all honed not only by my five

the 1930s, the Fed met the crisis head-on, taking a

years as a monetary policymaker but also by my

series of bold policy actions that lowered interest rates

decades of experience as a market operator. First, I

and funneled credit directly to the private sector.

am more convinced than ever that financial institutions and financial markets require a healthy dose of

By the end of 2009, we could breathe easier.

regulation to function efficiently. Second, I am more

Confidence in the banking industry is on the mend,

convinced than ever of the importance of regulatory

financial markets are returning to normalcy and the

and supervisory authority to the proper conduct of

economy is showing signs of recovery, however tepid.

monetary policy. Third, I am more convinced than ever

. th

ig h

o
lat

li
ca

io
t
a
r

Only by arriving at the right
regulatory calibration can we
adequately protect our
financial system.

structuring of the financial system. An approach that
scuttles such time-tested fundamentals as central
bank independence will do more harm than good. At
the same time, simply defending the status quo will
take us down the same path to crisis and recession.
We do not want to just do a better job cleaning up the
messes in the financial system. We want to avoid the
messes in the first place. Only by arriving at the right

that too-big-to-fail banks are dangerous and should

regulatory calibration can we adequately protect our

be contained, if not broken up. Fourth, I am more

financial system, and the economy that depends on

convinced than ever that central banks operate most

it, from a repeat of the severe boom-to-bust cycle we

effectively when insulated from political passions.

have just been through.

Taken together, these beliefs underscore the
necessity of a forward-looking, carefully crafted re-

2009 Annual Report • Reflections on the Financial Crisis: Where Do We Go From Here?

FEDERAL RESERVE BANK OF DALLAS • 2009 Annual Report

Booms, Bubbles and Busts

The goal should be not simply
more regulation but rules that
clamp down where they are
needed the most.

am a fierce advocate of free markets. The
now-fabled Invisible Hand directs producers to use scarce resources efficiently to
churn out an abundance of the goods
and services consumers want. We have

the magic of the market to thank for the creation of
America’s unmatched productive capacity and high
living standards. Too much regulation burdens economic activity. Even so, my previous incarnation as

contracting credit flows, declining economic activity

a financial market operator left no doubt in my mind

and sustained high unemployment. This reminds us

that markets do occasionally fail: Most notably, asset

of the vital role money and credit play in maintain-

prices overshoot during booms and bubbles and over-

ing a healthy economy. I liken it to the cardiovascular

correct during busts.

system. In an economy, the central bank is the heart,
money is the lifeblood, and financial markets are the

By itself, volatility is not sufficient justification

arteries and capillaries that provide critical sustenance

for regulation. However, market failures that roil

to the muscles—the makers of goods and services and

the financial system can have disastrous repercus-

creators of employment. A properly functioning cardio-

sions, setting off an adverse financial feedback loop of

vascular system fosters healthy growth; if that system
fails, the muscles atrophy and the body breaks down.

. . . w r in g i n g o ut t h e e co

n o m y ’s e

xcesse
s

When the financial system comes under stress,

Our prosperity requires that financial regulation

liquidity is restrained, creating a major blockage in

and supervision maintain the safety and soundness

the financial intermediation process. Credit stops

necessary for healthy economic growth. The mission

flowing to businesses and consumers, spreading the

of regulators is to ensure banks are sturdy—and to

contagion throughout the economy. That is what hap-

shut them down if they are not. We do not want our

pened in the most recent crisis. Elaborate statistical

zeal for restructuring the regulatory architecture to

models and complex securitization products created

obscure our fundamental belief in the power of the

the illusion of control over credit and liquidity risk

market mechanisms. We need to weigh costs and ben-

in the banking system. Misperceptions of risk and

efits of our regulatory apparatus to determine what

misplaced incentives led to misguided actions. As

needs to go and what needs to be added. The goal

market participants uncovered the truth—as they

should be not simply more regulation but rules that

always do, however late—confidence quickly gave way

clamp down where they are needed the most, such as

to fear and doubt. With uncertainty in full fever, cash

excessive risk-taking. An effective regulatory regime

was hoarded, counterparties viewed each other with

strives to corral the financial markets’ animal spirits

suspicion and no business appeared worthy of financ-

in a way that does not inhibit the vital work of under-

ing. The economy, starved of the lifeblood of capital,

writing prosperity but discourages straying into yet

weakened further.

another reckless escapade—a delicate balance indeed.

By now, I suspect many share my conviction regarding the need for improved financial regulation. We
are even hearing a different tune from those who only
a few years ago proclaimed the transcendent efficiency
of financial markets—what I refer to as “the elaborate
conceit of efficient market theory”—where today’s
prices are always right, markets are self-correcting
and regulation is best kept to a bare minimum.

An effective regulatory regime
strives to corral the financial
markets’ animal spirits in a way
that does not inhibit the vital
work of underwriting prosperity
but discourages straying into yet
another reckless escapade—a
delicate balance indeed.

2009 Annual Report • Reflections on the Financial Crisis: Where Do We Go From Here?

FEDERAL RESERVE BANK OF DALLAS • 2009 Annual Report

The Fed as Regulator

Effective monetary policy
depends on regulation that
ensures the soundness of
financial institutions.

he glamour of central banking lies
in monetary policy. The media take
note of every meeting of the Federal Open Market Committee, or
FOMC, and nearly every utterance

by its members. But making monetary policy decisions requires an intimate knowledge of the financial
system—the type of knowledge that only a hands-on
regulator can possess. To obtain that knowledge, we

monetary policy depends on regulation that ensures

rely upon our regulatory and supervisory responsibili-

the soundness of financial institutions.

ties—responsibilities we share with the Comptroller
of the Currency, the Federal Deposit Insurance Corp.,

To understand why, we start with how monetary

the Office of Thrift Supervision and state agencies,

policy influences economic activity and employ-

among others.

ment. Traditionally, the FOMC’s primary policy tool
is the federal funds rate—the interest rate that banks

In theory, the Fed’s monetary policy and regu-

charge one another for unsecured, overnight loans.

latory functions are separate. In practice, they are

Channeled through the financial system, changes in

anything but—rather, they have a symbiotic relation-

the federal funds rate affect private sector decisions

ship. They complement each other because effective

on how much to produce and how many workers will
be needed to do it.

. . . keepi

n g ba n

k s on

t he s

tra ig

ht a

nd n

ar r

Changes in the federal funds rate directly and

led to massive writedowns, financial institutions were

indirectly influence the cost and availability of credit

in no position to make new loans because they faced

throughout the economy. Banks respond by adjusting

an immediate need to raise new capital. The cost of

the pricing and terms they offer to borrowers, affect-

that capital spiked just when banks needed it the

ing buying and investing decisions. Money and capital

most. The financial system crouched in a defensive

markets usually move in the same direction, pinching

stance, tightening its lending standards and charging

or swelling the flow of funds to larger businesses. In-

more for credit. Traditional Fed policy lost its potency.

terest rate changes affect the value of bonds, equities,

As the FOMC pushed the federal funds rate to the

real estate and other assets, the sources of consum-

lowest levels ever in 2008, the rates that matter most

ers’ and businesses’ wealth that often serve as collat-

for spurring economic recovery—the rates charged on

eral for loans. If interest rate movements are larger in

credit to businesses and households—rose signifi-

the U.S. than overseas, exchange rates may go up or

cantly, leaving the Fed to resort to extraordinary poli-

down, affecting international trade and capital flows.

cies to inject liquidity into the economy.

Financial regulation’s importance to monetary policy
centers on keeping these vital arteries open—a job
accomplished by establishing rules for sound banking
practices and making sure that banks follow them.
The gears linking Fed policy and the real economy operate smoothly and predictably when banks are
well capitalized—that is, when they have the financial
wherewithal to make loans. This allows the arteries of the system to be open and healthy and strong.
Troubles come when banks’ finances are shaky—
when the regulatory process has not kept banks
sound. Sick banks cannot lend and properly act as intermediators—and monetary policy actions lose their
capacity to influence the economy with accustomed

I think it is worth discussing an
expanded Fed regulatory role
in nonbank financial institutions.
This is where a great deal of
the reckless lending, perverse
incentives and, in some cases,
downright dishonesty took place
in the years leading up to the
financial crisis.

efficiency. This is what happened in the financial
crisis. Weakened by bad loans and investments that

2009 Annual Report • Reflections on the Financial Crisis: Where Do We Go From Here?

FEDERAL RESERVE BANK OF DALLAS • 2009 Annual Report

Keeping monetary and
regulatory policy together
reinforces accountability.

The past two years have highlighted the interconnections of monetary and regulatory policy, underscoring the need for the Fed to maintain a major
role in regulating and supervising firms across the
financial system. The central bank cannot conduct
monetary policy effectively without targeted and timely information on the health of the financial system.
We depend on our regulatory arm to provide in-depth,

real time. This was one of the harsh lessons learned

hands-on assessments to guide us as we perform our

from examining the entrails of Bear Stearns, Lehman

duty as the financial system’s lender of last resort—a

and AIG, over which we had no regulatory oversight at

duty that requires us to “know our customers,” as the

the time of their rupture.

old banking adage goes. We cannot perform that duty
or operate a discount window if we lack a firsthand

Only by staying abreast of developments in the

knowledge of our borrowers’ financial health. It is sim-

banking and financial system can the Fed acquire the

ply impossible to properly evaluate the condition of a

knowledge necessary to implement monetary policy

potentially troubled borrower with information gener-

effectively. And only then—with full responsibility and

ated by an outside agency, which might not give us

accountability for financial stability—can the Fed be

what we need or might not be sufficiently responsive in

fully effective in pursuing its dual mandate of stable
prices and full employment.

. . . craf t

ing th e

ri g h t

m ix o

f p ol

ic i e s

Keeping monetary and regulatory policy together

In my view, proposals to shrink the Fed’s regula-

reinforces accountability. At any given time, maintain-

tory and supervisory responsibilities are misguided. To

ing a healthy economy and sound banking system

keep with my cardiovascular analogy, I would argue

may require a purely regulatory response, a purely

that removing the Fed from supervision and regulation

monetary response or a combination of the two. The

of banks of all sizes and complexity—from community

appropriate mix may be unclear to an agency that has

banks to the most complex large financial institutions

but a single mission. If monetary and regulatory au-

(LFIs)—would be the equivalent of ripping out the pa-

thorities are separate, each side might justify inaction

tient’s heart. That would surely prevent another heart

when tough decisions are needed by claiming it as-

attack but would likely have serious health repercus-

sumed the other would act. By placing responsibility

sions. If we are to lower the chances of repeating the

for both monetary and regulatory policies under one

crisis we have just endured, the Fed must be deeply

authority, the blame game is no longer possible.

involved in financial supervision and regulation—so it
can recognize the signs of an economy that is over-

It is essential that the Fed not only maintain but

heating. The Fed must address the extreme fringe of

also enhance its role in banking and financial regula-

aggressive risk taking in a more preventive way, using

tion. I do not want a turf war with other regulators. In

all its available tools to prevent the next bubble from

fact, I see advantages to maintaining several overlap-

reaching critical mass. And—this is a crucial “and”—it

ping but separate regulatory approaches—different

will need to do a better job.

sets of eyes looking at the situation from different
perspectives. However, I think it is worth discussing
an expanded Fed regulatory role in nonbank financial
institutions—also known as the shadow banking system. This is where a great deal of the reckless lending,
perverse incentives and, in some cases, downright
dishonesty took place in the years leading up to the
financial crisis.

The Fed must be deeply involved
in financial supervision and
regulation—so it can recognize
the signs of an economy that is
overheating.

2009 Annual Report • Reflections on the Financial Crisis: Where Do We Go From Here?

FEDERAL RESERVE BANK OF DALLAS • 2009 Annual Report

Too-Dangerous-to-Permit

truly effective restructuring of
our regulatory regime will have to
neutralize the biggest threat to our
financial system’s stability—the
so-called too-big-to-fail, or TBTF,

banks. In the past two decades, the biggest banks

The existing rules and oversight
are not up to the acute
regulatory challenge imposed
by the biggest banks.

have grown significantly bigger. In 1990, the 10 largest U.S. banks had almost 25 percent of the industry’s assets. Their share grew to 44 percent in 2000

revised in a piecemeal fashion since. The existing rules

and almost 60 percent in 2009.

and oversight are not up to the acute regulatory challenge imposed by the biggest banks. First, these banks

Banking has become more concentrated at the

are sprawling and complex—so vast that their own

top because of laws that allow institutions to oper-

management teams may not fully understand their

ate nationwide and offer a broader range of financial

own risk exposures. If that is so, it would be futile to

services. However, some of this growth has occurred

expect that their regulators and creditors could untan-

because of the government guarantees—implicit as

gle all the threads, especially under rapidly changing

well as explicit—that allow big financial institutions

market conditions. Second, big banks may believe they

to grow faster by pursuing riskier strategies that yield

can act recklessly without fear of paying the ultimate

higher returns, at least in good times.

penalty. They and many of their creditors assume the
Fed and other government agencies will cushion the

The risks of the 21st century are no match for
a regulatory scheme put in place in the 1930s, then

fall and assume the damages, even if their troubles
stem from negligence or trickery. They have only to
look to recent experience to confirm that assumption.

. . . in s tit u

ti o n s o f

m o re m

anag e

a bl e

size

Some argue that bigness is not bad, per se. They

ment-sponsored advantage bestowed upon them. My

contend that the U.S. cannot maintain its competi-

preference is for a more prophylactic approach: an

tive edge on the global stage if it cedes LFI territory to

international accord to break up these institutions

other nations—an argument I consider hollow given

into ones of more manageable size—more manage-

the experience of the Japanese and others who came

able for both their executives and their regulatory

to regret seeking the distinction of having the world’s

supervisors. This cannot be done after the onset of an

biggest financial institutions. Big banks interact with

economic crisis, when the consequences of faltering

the economy and financial markets in a multitude of

TBTF institutions become a front-burner issue. By

ways, creating connections that transcend the limits

then, the mistakes have been made and cannot be

of industry and geography. Because of their deep and

reversed, and TBTF banks plod along among the living

wide connections to other banks and financial institu-

like zombies in science fiction films.

tions, a few really big banks can send tidal waves of
troubles through the financial system if they fail, lead-

The consequences are too dire. The time to break

ing to a downward spiral of bad loans and contracting

up TBTF banks is before the crisis—when the econo-

credit that destroys many jobs and businesses.

my is relatively healthy and they pose no immediate
dangers. That way, they will not be around to wreak

No government wants to take that risk. So in hard

havoc when the economy enters a period of stress.

times, regulators dutifully close smaller banks—the
FDIC shut down 25 banks in 2008 and 140 in 2009—
but tiptoe around big banks with shaky financial
foundations. Weak TBTF banks are propped up, even
if their capacity to lend has been seriously compromised. And so they sit in limbo, a potential obstacle to
monetary policy because of their power to obstruct the
channels that transmit Fed actions to the economy.
I have not been reticent about the dangers posed
by TBTF banks. To be sure, having a clearly articulated “resolution regime” would represent steps forward,
though I fear it might also provide false comfort—large
firms under special resolution authorities might be

The time to break up TBTF banks
is before the crisis—when the
economy is relatively healthy
and they pose no immediate
dangers. That way,
they will not be around to wreak
havoc when the economy
enters a period of stress.

viewed favorably by creditors, continuing the govern-

2009 Annual Report • Reflections on the Financial Crisis: Where Do We Go From Here?

FEDERAL RESERVE BANK OF DALLAS • 2009 Annual Report

Independence

A politicized central bank is a
crippled central bank.

entral banks must take a long-term
view of the economy and craft appropriate policy responses. When
the situation warrants, we must
have the leeway to raise interest

rates when others want cheap credit and rein in risky
financial practices when others want easy profits.

the financial system, and that authority is limited to

A Fed committed to wringing out the economy’s ex-

our mandated goals of sustainable employment growth

cesses and keeping banks on the straight and narrow

and price stability, along with the prerequisite objec-

is not going to win many popularity contests. Some of

tive of banking and financial stability. We are the only

those displeased by Fed decisions will seek to satisfy

business I know of that releases a public accounting

their desires by resorting to political pressure.

of its balance sheet every week—the H.4.1 release,
available on the Internet. Since Ben Bernanke took the
chair, we have ramped up our efforts to be as trans-

It is for that reason that Congress, nearly a
century ago, had the foresight to establish the Federal

parent as is prudent in the conduct of monetary poli-

Reserve System—a monetary authority, together with

cy. We now release more fulsome economic projections

a regulatory arm, set apart from the exigencies of the

and minutes of our meetings. At the semiannual testi-

day. While our tools and mission have evolved over

mony before Congress required under the Humphrey–

time, our independence has remained paramount to

Hawkins legislation, the Chairman fields questions

our efforts to pursue a steady course untainted by

from members of appropriate oversight committees,

political accommodation.

and we have responded favorably to those suggestions
that aid the Fed’s ability to fulfill its mission.

Independent does not mean unaccountable. The
However, Fed policymakers maintain distance

Fed has always been subject to appropriate oversight
and transparency. The Fed chairman and members of

from the political fray because board members serve

the Board of Governors are nominated by the presi-

staggered, 14-year terms, muting White House influ-

dent and confirmed by the Senate. Our statutory au-

ence. The regional bank presidents, who serve along-

thority includes a grant of certain powers to influence

side the governors on the FOMC, are further insulated
because they are hired and fired at the will of their

. . . in de

boards of directors. These nine-member boards are

pe nd e

entirely removed from the D.C. establishment, with

n ce h

as r

ema

i ne d

par

oun

the exception of the Board of Governors’ selection

In his entertaining book Lords of Finance, Liaquat

of three members. Needless to say, my fellow bank

Ahamed tells an interesting anecdote arising from

presidents and I, and our boards, represent the views

the German Reichsbank’s founding in the 1870s. At

of our constituents on Main Street—not those of the

the time, Otto von Bismarck received a warning from

Washington elite.

his confidant Gershon Bleichröder: “There would be
occasions when political considerations would have to

A Fed insulated from short-term, political im-

override purely economic judgments.” Bleichröder in-

pulses can focus on crafting the right mix of policies

formed Bismarck that “at such times too independent

for the economy in the long term. It has enough space

a central bank would be a nuisance.”

to make the tough calls—most notably, when interest
rates have to be pushed upward to slow the economy

Herr Bleichröder’s advice proved particularly un-

in flush times. Fed independence does not just matter

wise. Students of economic history are keenly aware of

for monetary policy. A central bank insulated from pol-

the political crisis that faced Germany after World War I

itics and accompanying lobbying can also be a tougher

and how it contributed to the debilitating hyperinflation

regulator, insisting on strict adherence to capital and

that nearly destroyed the German economy. I am sure

leverage requirements and prudent lending.

that most Germans who suffered through that difficult
period would have gladly seen the Reichsbank act a

Central bank independence has become the global

nuisance in the name of economic sanity.

standard. Nations around the world have come to
realize that successful central banks must be indepen-

Bleichröder’s mistake highlights an important

dent from political pressures. The European Cen-

fact: A politicized central bank is a crippled central

tral Bank—the monetary authority that governs the

bank. Leaders in Congress and the White House

nations of the European Union—was established in

would do well to recall the relevant historic precedents

1998 and guaranteed political independence by treaty.

as we emerge from this, the greatest financial crisis in

Banco de México’s insulation from political consider-

post-World War II history. Our nation’s monetary au-

ations has been codified in the country’s constitution.

thority must retain its separation from political pressures, or it will have no hope of operating effectively

Over the past few decades, numerous economic

and responsibly.

studies have shown that independent monetary
authorities are indeed associated with lower inflation
and higher, steadier economic growth. History tells
us what happens when central banks succumb to
the political demands of the day. The examples of the
havoc wrought by politicized central banks stretch
from ancient Rome to modern-day Zimbabwe, where
hyperinflation effectively destroyed the currency and
the nation’s economy.

Our nation’s monetary authority
must retain its separation from
political pressures, or it will
have no hope of operating
effectively and responsibly.

2009 Annual Report • Reflections on the Financial Crisis: Where Do We Go From Here?

FEDERAL RESERVE BANK OF DALLAS • 2009 Annual Report

Addressing Our Critics

Public policy should promote
economic growth that is
sustainable rather than fleeting.

ome may argue that the Fed had its
chance and muffed it. They will say
we failed to act despite the ominous
signs that preceded these past two
years of economic woe—so we should

not have the broad authority and independence we
had leading up to the crisis.
that permeated our economic system. In all canI have been in outspoken agreement on the first

dor, we at the central bank should have seen these

point—that we at the Fed made mistakes. I have

problems coming and acted to defuse them. With the

stated many times that regulators at the Fed, and

benefit of hindsight, we see that our monetary policy

those at other agencies, were insufficiently vigilant

was too loose and our regulatory practices were not

about the risk exposures and overall financial mania

tight enough.

. . . a lo

n g-t e r

m vi e

w of

the

eco

no m

The Fed is taking the necessary steps to address

Public policy should promote economic growth

these concerns, recalibrating and repairing its regula-

that is sustainable rather than fleeting. After seeing

tory and supervisory apparatus to encompass more

our economy wrenched by an overheated housing

preventive and coordinated measures. We intend to

market sparked by loose credit, followed by a financial

move forward with this new and improved tool kit,

crisis in which the conduits of capital nearly froze up,

putting it to use in conjunction with the execution of

it is time to construct a financial system more condu-

sound monetary policy.

cive to a more comfortable and sustainable economic
temperature.

To our critics’ second point—that the Fed’s authority or independence should be reduced—I might

An independent Fed, equipped with the authority

refer them to the four convictions I laid out earlier in

to responsibly execute monetary policy and aided by a

this essay. Booms propelled by greed and busts born

strong supervisory and regulatory arm, is the most ef-

of fear are as old as time itself. As Charles Mackay

fective weapon we have to meet the need for increased

reminded us nearly 170 years ago in his book Memoirs

stability and contain the dangerous spillovers that

of Extraordinary Popular Delusions, “Men … think in

threaten the economy in periods of distress. Now that

herds; it will be seen that they go mad in herds.…” This

policymakers have pulled our economy back from the

quirk of human nature will always ignite the euphoria

abyss, it is time to apply the lessons we have learned

that fuels the ups and exacerbates the downs.

and put the Fed’s abilities to best use.

That is why we need a monetary policy that leans
against that propensity for financial bubbles. We
need regulatory and supervisory powers that lead to a
policy that ensures a sound financial system, capable
of most efficiently channeling central bank action to
the real economy. We need to keep our monetary and
regulatory authority united, so we can work together
in the interest of the entire financial system—not just
the interests of the largest institutions and those too
big to fail. And we need to ensure that this authority

Now that policymakers have
pulled our economy back from
the abyss, it is time to apply
the lessons we have learned
and put the Fed’s abilities
to best use.

is free from short-term political pressures.

2009 Annual Report • Reflections on the Financial Crisis: Where Do We Go From Here?

FEDERAL RESERVE BANK OF DALLAS • 2009 Annual Report

Management and Boards

Senior Management

(seated from left)

(standing)

Robert D. Hankins
Executive Vice President

Blake Hastings
Vice President in Charge,
San Antonio Branch

Helen E. Holcomb
First Vice President and
Chief Operating Officer
Richard W. Fisher
President and
Chief Executive Officer
Harvey Rosenblum
Executive Vice President and
Director of Research

Millard Sweatt
Senior Vice President,
General Counsel and Secretary
Robert Smith III
Senior Vice President in Charge,
Houston Branch
Robert W. Gilmer
Vice President in Charge,
El Paso Branch
Joanna O. Kolson
Senior Vice President
J. Tyrone Gholson
Senior Vice President
Meredith N. Black
Senior Vice President

2009 Annual Report • Senior Management

FEDERAL RESERVE BANK OF DALLAS • 2009 Annual Report

Boards of Directors
Dallas

Robert A. Estrada
Chairman,
Estrada Hinojosa and Co. Inc.

James T. Hackett
(Chairman)
Chairman, President
and CEO, Anadarko
Petroleum Corp.

Herbert D. Kelleher
(Deputy Chairman)
Founder and
Chairman Emeritus,
Southwest Airlines Co.

James B. Bexley
Professor of Finance,
Sam Houston State University

Pete Cook
CEO,
First National Bank
in Alamogordo

George F. Jones Jr.
CEO,
Texas Capital Bank

Margaret H. Jordan
President,
Dallas Medical Resource

Joe Kim King
CEO,
Brady National Bank

Myron E. Ullman III
Chairman and CEO,
J.C. Penney Co. Inc.

D. Kirk Edwards
(Chairman)
President,
MacLondon Royalty Co.

Cindy J. Ramos-Davidson
(Chairman Pro Tem)
President and CEO,
El Paso Hispanic
Chamber of Commerce

Laura M. Conniff
Qualifying Broker,
Mathers Realty Inc.

Robert E. McKnight Jr.
Partner,
McKnight Ranch Co. LLP

Larry L. Patton
President and CEO,
Bank of the West

Gerald J. Rubin
Chairman, President and CEO,
Helen of Troy Ltd.

El Paso

Martha I. Dickason
President,
DM Dickason Personnel
Services

Houston

Douglas L. Foshee
(Chairman)
Chairman, President and CEO,
El Paso Corp.

Kirk S. Hachigian
Chairman and CEO,
Cooper Industries Ltd.

Paul W. Hobby
(Chairman Pro Tem)
Chairman and CEO,
Alpheus Communications

Jodie L. Jiles
Managing Director,
RBC Capital Markets

Jorge A. Bermudez
President and CEO,
The Byebrook Group LLC

Paul B. Murphy Jr.
CEO and President,
Community Bancorp LLC

Ann B. Stern
Executive Vice President,
Texas Children’s Hospital

San Antonio

Steven R. Vandegrift
(Chairman)
Founder and President,
SRV Holdings

J. Dan Bates
(Chairman Pro Tem)
President,
Southwest Research Institute

Thomas E. Dobson
Chairman and CEO,
Whataburger Restaurants LP

Ygnacio D. Garza
Partner,
Long Chilton LLP

Ricardo Romo
President,
University of Texas at
San Antonio

G.P. Singh
President and CEO,
Gur Parsaad
Properties Ltd.

Guillermo F. Trevino
President,
Southern Distributing
2009 Annual Report • Boards of Directors

FEDERAL RESERVE BANK OF DALLAS • 2009 Annual Report

Officers

Eleventh District
Advisory Council

Federal Reserve Bank of Dallas
Dallas
Richard W. Fisher
President and CEO

E. Ann Worthy
Vice President

Dana S. Merritt
Human Resources Officer

Helen E. Holcomb
First Vice President and COO

Mark A. Wynne
Vice President and Director,
Globalization and Monetary Policy
Institute

Robert R. Moore
Research Officer

Mine K. Yücel
Vice President and Senior Economist

Allen E. Qualman
Operations Officer

Tommy E. Alsbrooks
Assistant Vice President

Kenneth J. Robinson
Research Officer

B. Joe Betsill Jr.
Assistant Vice President

William W. Shaffer Jr.
Information Technology Officer

Stephan D. Booker
Assistant Vice President

Jay Sudderth
Relationship Management Officer

Robert D. Hankins
Executive Vice President
Harvey Rosenblum
Executive Vice President and
Director of Research
Meredith N. Black
Senior Vice President
J. Tyrone Gholson
Senior Vice President
Joanna O. Kolson
Senior Vice President
Kenneth V. McKee
Senior Vice President
and General Auditor
Millard Sweatt
Senior Vice President,
General Counsel and Secretary
Earl Anderson
Vice President
Gloria V. Brown
Vice President
Diane M. de St. Germain
Vice President
John V. Duca
Vice President and Senior
Policy Advisor

Jeffery W. Gunther
Assistant Vice President
Richard J. Mase Jr.
Assistant Vice President
Alfreda B. Norman
Assistant Vice President
Dean A. Pankonien
Assistant Vice President
Lawrence G. Rex
Assistant Vice President
Margaret C. Schieffer
Assistant Vice President
Victor A. Schreck
Assistant Vice President
Gayle Teague
Assistant Vice President

Robert G. Feil
Vice President

Michael N. Turner
Assistant Vice President

KaSandra Goulding
Vice President

Marion E. White
Assistant Vice President

Kathy K. Johnsrud
Vice President

Hazel W. Adams
Credit Risk Systems Officer

Sherry M. Kidd
Vice President

Glenda Balfantz
Audit Officer

Evan F. Koenig
Vice President and Senior
Policy Advisor

V. Lynn Black
Relationship Management Officer

Harvey R. Mitchell III
Vice President
William C. Morse Jr.
Vice President
Sharon A. Sweeney
Vice President, Associate
General Counsel and
Associate Secretary
W. Arthur Tribble
Vice President and Associate Secretary
Robert L. Triplett III
Vice President

Pia M. Orrenius
Research Officer

El Paso
Robert W. Gilmer
Vice President in Charge
Javier R. Jimenez
Assistant Vice President

Houston
Robert Smith III
Senior Vice President in Charge
Daron D. Peschel
Vice President
Donald N. Bowers II
Assistant Vice President
Randy L. Steinley
Assistant Vice President
Michelle Treviño-Aguilar
Administrative Officer

San Antonio

Jerred G. Blanchard Jr.
Principal
Ernst and Young LLP
Houston
Crawford Brock
Owner
Stanley Korshak
Dallas
Jason M. King
Manager and Owner
King’s Premium Brand Ltd.
Chappell Hill, Texas
Frank Mihalopoulos
President
Corinth Properties
Dallas
Deborah Lawrence Rogers
Owner
Deborah's Farmstead
Fort Worth
Debby A. Weber
Sole Proprietor
Weber Design Associates
President
Hilltop Remodeling Inc.
Dallas

Federal Advisory
Council Member
Richard W. Evans Jr.
Chairman and CEO
Cullen/Frost Bankers Inc.
San Antonio

Blake Hastings
Vice President in Charge
D. Karen Diaz
Assistant Vice President

Claude H. Davis
Accounting Officer
Paul T. Elzner
Credit Risk and Reserves Officer
Karen M. Gist
Information Technology Officer
D. Kay Gribbin
Administrative Officer
Rob Jolley
Examining Officer

As of December 31, 2009

Management’s Report on Internal Control
Over Financial Reporting
April 21, 2010
To the Board of Directors of the
Federal Reserve Bank of Dallas:
The management of the Federal Reserve Bank of Dallas (“FRBD”) is responsible for the preparation
and fair presentation of the Statement of Condition, Statements of Income and Comprehensive
Income, and Statement of Changes in Capital as of December 31, 2009 (the “Financial Statements”).
The Financial Statements have been prepared in conformity with the accounting principles, policies,
and practices established by the Board of Governors of the Federal Reserve System as set forth in
the Financial Accounting Manual for the Federal Reserve Banks (“Manual”), and as such, include
some amounts that are based on management judgments and estimates. To our knowledge, the
Financial Statements are, in all material respects, fairly presented in conformity with the accounting
principles, policies, and practices documented in the Manual and include all disclosures necessary
for such fair presentation.
The management of the FRBD is responsible for establishing and maintaining effective internal
control over financial reporting as it relates to the Financial Statements. Such internal control is
designed to provide reasonable assurance to management and to the Board of Directors regarding
the preparation of the Financial Statements in accordance with the Manual. Internal control contains
self-monitoring mechanisms, including, but not limited to, divisions of responsibility and a code of
conduct. Once identified, any material deficiencies in internal control are reported to management
and appropriate corrective measures are implemented.
Even effective internal control, no matter how well designed, has inherent limitations, including the
possibility of human error, and therefore can provide only reasonable assurance with respect to the
preparation of reliable financial statements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The management of the FRBD assessed its internal control over financial reporting reflected in
the Financial Statements, based upon the criteria established in the Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this assessment, we believe that the FRBD maintained effective internal control over
financial reporting as it relates to the Financial Statements.

Federal Reserve Bank of Dallas

President

First Vice President

Chief Financial Officer

2009 Annual Report • Financials

FEDERAL RESERVE BANK OF DALLAS • 2009 Annual Report

Report of Independent Auditors
To the Board of Governors of the Federal
Reserve System and the Board of Directors
of the Federal Reserve Bank of Dallas:

We have audited the accompanying statements of condition of the Federal Reserve Bank of Dallas
(“FRB Dallas”) as of December 31, 2009 and 2008 and the related statements of income and
comprehensive income, and changes in capital for the years then ended, which have been prepared
in conformity with accounting principles established by the Board of Governors of the Federal
Reserve System. We also have audited the internal control over financial reporting of FRB Dallas
as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. FRB Dallas’s
management is responsible for these financial statements, for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on these financial statements and an opinion
on FRB Dallas’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with generally accepted auditing standards as established by
the Auditing Standards Board (United States) and in accordance with the auditing standards of the
Public Company Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement and whether effective internal control over financial reporting was maintained in
all material respects. Our audits of the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting included obtaining an understanding
of internal control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary in the circumstances.
We believe that our audits provide a reasonable basis for our opinions.
FRB Dallas’s internal control over financial reporting is a process designed by, or under the
supervision of, FRB Dallas’s principal executive and principal financial officers, or persons
performing similar functions, and effected by FRB Dallas’s board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with the accounting
principles established by the Board of Governors of the Federal Reserve System. FRB Dallas’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of FRB Dallas; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with the accounting principles established by
the Board of Governors of the Federal Reserve System, and that receipts and expenditures of FRB Dallas
are being made only in accordance with authorizations of management and directors of FRB Dallas; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of FRB Dallas’s assets that could have a material effect on the financial statements.

Report of Independent Auditors (continued)

Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods are
subject to the risk that the controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
As described in Note 4 to the financial statements, FRB Dallas has prepared these financial
statements in conformity with accounting principles established by the Board of Governors of the
Federal Reserve System, as set forth in the Financial Accounting Manual for Federal Reserve Banks,
which is a comprehensive basis of accounting other than accounting principles generally accepted
in the United States of America. The effects on such financial statements of the differences between
the accounting principles established by the Board of Governors of the Federal Reserve System and
accounting principles generally accepted in the United States of America are also described in Note 4.
In our opinion, such financial statements present fairly, in all material respects, the financial position
of FRB Dallas as of December 31, 2009 and 2008, and the results of its operations for the years then
ended, on the basis of accounting described in Note 4. Also, in our opinion, FRB Dallas maintained,
in all material respects, effective internal control over financial reporting as of December 31,
2009, based on the criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.

April 21, 2010

2009 Annual Report • Financials

FEDERAL RESERVE BANK OF DALLAS • 2009 Annual Report

Statements of Condition (in millions)
December 31, 2009
Assets
Gold certificates

621

December 31, 2008
$

636

Special drawing rights certificates

282

Coin

214

180

152

392

5,027

—

3,318

38,970

19,971

8,092

860

44,432

—

325

489

132

10,908

Items in process of collection
Loans to depository institutions
System Open Market Account:
Securities purchased under agreements to resell
Treasury securities, net
Government-sponsored enterprise debt securities, net
Federal agency and government-sponsored enterprise mortgagebacked securities, net
Investments denominated in foreign currencies
Central bank liquidity swaps
Accrued interest receivable
Interdistrict settlement account
Bank premises and equipment, net
Other assets

Total assets

610

261

—

11,155

276

278

94,416

53,371

49,642

35,121

Liabilities and Capital

Liabilities
Federal Reserve notes outstanding, net
System Open Market Account:
Securities sold under agreements to repurchase
Other liabilities

3,758

3,665

—

22,826

13,533

109

296

103

17,174

—

Deposits:
Depository institutions
Other deposits
Deferred credit items
Accrued interest on Federal Reserve notes
Interdistrict settlement account

103

93,710

52,829

Capital paid-in

353

271

Surplus (including accumulated other comprehensive loss of $18 million
and $15 million at December 31, 2009 and 2008, respectively)

353

271

706

542

Interest due to depository institutions
Accrued benefit costs
Other liabilities

Total liabilities
Capital

Total capital
Total liabilities and capital
The accompanying notes are an integral part of these financial statements.

94,416

53,371

Statements of Income and Comprehensive Income (in millions)
For the Years Ended
December 31, 2009

December 31, 2008

Interest Income
Loans to depository institutions

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

1
1,073
97

80
1,082
4

977

—

4
32
2,194

12
70
1,305

4
36
40
2,154

31
9
40
1,265

—

162

—

(3)
28
14
10
93

22
43
15
35
277

126
25
12
33
29
225
2,022

119
25
13
25
43
225
1,317

interest expense
System Open Market Account:
Securities sold under agreements to repurchase
Depository institutions deposits
Total interest expense
Net interest income
Non-Interest income (LOSS)
System Open Market Account:
Treasury securities gains
Federal agency and government-sponsored enterprise mortgagebacked securities gains, net
Foreign currency (losses) gains, net
Compensation received for services provided
Reimbursable services to government agencies
Other income
Total non-interest income
Operating expenses
Salaries and other benefits
Occupancy expense
Equipment expense
Assessments by the Board of Governors
Other expenses
Total operating expenses
Net income prior to distribution

(3)
2,019

—
1,317

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

(92)

1,920
2,019

1,392
1,317

2009 Annual Report • Financials

FEDERAL RESERVE BANK OF DALLAS • 2009 Annual Report

Statements of Changes in Capital for the Years Ended
December 31, 2009, and December 31, 2008 (in millions, except share data)
Surplus

Balance at January 1, 2008
(7,268,613 shares)

Capital
Paid-In

Net Income
Retained

Accumulated
Other
Comprehensive
Loss

363

378

(15)

Total
Surplus

Total
Capital

363

726

Net change in capital stock redeemed
(1,849,175 shares)

(92)

—

(92)

Transferred from surplus and change in
accumulated other comprehensive loss

—

(92)

—

(92)

Balance at December 31, 2008
(5,419,438 shares)

271

286

(15)

271

542

Net change in capital stock issued
(1,630,658 shares)

—

Transferred to surplus and change in
accumulated other comprehensive loss

—

(3)

Balance at December 31, 2009
(7,050,096 shares)

353

371

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

(18)

353

706

Notes to Financial Statements
1. STRUCTURE
The Federal Reserve Bank of Dallas (“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 and its branches in El
Paso, Houston, and San Antonio serve the Eleventh Federal Reserve
District, which includes Texas and portions of Louisiana and New
Mexico.
In accordance with the Federal Reserve Act, supervision and
control of the Bank is exercised by a board of directors. The Federal
Reserve Act specifies the composition of the board of directors for
each of the Reserve Banks. Each board is composed of nine members
serving three-year terms: three directors, including those designated
as chairman and deputy chairman, are appointed by the Board of
Governors of the Federal Reserve System (“Board of Governors”) to
represent the public, and six directors are elected by member banks.
Banks that are members of the System include all national banks and
any state-chartered banks that apply and are approved for membership. Member banks are divided into three classes according to size.
Member banks in each class elect one director representing member
banks and one representing the public. In any election of directors,
each member bank receives one vote, regardless of the number of
shares of Reserve Bank stock it holds.
In addition to the 12 Reserve Banks, the System also consists,
in part, of the Board of Governors and the Federal Open Market
Committee (“FOMC”). The Board of Governors, an independent federal agency, is charged by the Federal Reserve Act with a number of
specific duties, including general supervision over the Reserve Banks.
The FOMC is composed of members of the Board of Governors, the
president of the Federal Reserve Bank of New York (“FRBNY”), and, on
a rotating basis, four other Reserve Bank presidents.
2. OPERATIONS AND SERVICES
The Reserve Banks perform a variety of services and operations.
These functions include participating in formulating and conducting monetary policy; participating in the payments system, including
large-dollar transfers of funds, automated clearinghouse (“ACH”)
operations, and check collection; distributing coin and currency;
performing fiscal agency functions for the U.S. Department of the
Treasury (“Treasury”), certain federal agencies, and other entities;
serving as the federal government’s bank; providing short-term loans
to depository institutions; providing loans to individuals, partnerships,
and corporations in unusual and exigent circumstances; serving
consumers and communities by providing educational materials and
information regarding financial consumer protection rights and laws
and information on community development programs and activities; and supervising bank holding companies, state member banks,
and U.S. offices of foreign banking organizations. Certain services are
provided to foreign and international monetary authorities, primarily
by the FRBNY.

The FOMC, in conducting monetary policy, establishes policy
regarding domestic open market operations, oversees these operations, and annually issues authorizations and directives to the FRBNY
to execute transactions. The FOMC authorizes and directs the FRBNY
to conduct operations in domestic markets, including the direct purchase and sale of Treasury securities, federal agency and governmentsponsored enterprise (“GSE”) debt securities, federal agency and GSE
mortgage-backed securities (“MBS”), the purchase of these securities
under agreements to resell, and the sale of these securities under
agreements to repurchase. The FRBNY executes these transactions
at the direction of the FOMC and holds the resulting securities and
agreements in a portfolio known as the System Open Market Account
(“SOMA”). The FRBNY is authorized to lend the Treasury securities
and federal agency and GSE debt securities that are held in the SOMA.
In addition to authorizing and directing operations in the domestic
securities market, the FOMC authorizes the FRBNY to execute operations in foreign markets in order to counter disorderly conditions in
exchange markets or to meet other needs specified by the FOMC to
carry out the System’s central bank responsibilities. Specifically, the
FOMC authorizes and directs the FRBNY to hold balances of, and to
execute spot and forward foreign exchange and securities contracts
for, 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
(“FX swaps”) with two central banks and to “warehouse” foreign currencies for the Treasury and the Exchange Stabilization Fund (“ESF”).
The FRBNY is also authorized and directed by the FOMC to maintain
U.S. dollar currency liquidity swap arrangements with 14 central
banks. The FOMC has also authorized the FRBNY to maintain foreign
currency liquidity swap arrangements with four foreign central banks.
Although the Reserve Banks are separate legal entities, they collaborate in the delivery of certain services to achieve greater efficiency
and effectiveness. This collaboration takes the form of centralized
operations and product or function offices that have responsibility
for the delivery of certain services on behalf of the Reserve Banks.
Various operational and management models are used and are supported by service agreements between the Reserve Banks. In some
cases, costs incurred by a Reserve Bank for services provided to other
Reserve Banks are not shared; in other cases, the Reserve Banks are
reimbursed for costs incurred in providing services to other Reserve
Banks. Major services provided by the Bank on behalf of the System
and for which the costs were not reimbursed by the other Reserve
Banks include Check Automation Services; National Examination
Data System; Desktop Services Center; Payment Application
Modernization; Lawson Central Business Administration Function;
Accounts, Risk and Credit System; and Go Direct .

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.

Financials

FEDERAL RESERVE BANK OF DALLAS • 2009 Annual Report

Expanded Open Market Operations and Support for MortgageRelated Securities
The Single-Tranche Open Market Operation Program allows
primary dealers to initiate a series of 28-day term repurchase transactions while pledging Treasury securities, federal agency and GSE debt
securities, and federal agency and GSE MBS as collateral.
The federal agency and GSE Debt Securities and MBS Purchase
Program provides support to the mortgage and housing markets and
fosters improved conditions in financial markets. Under this program,
the FRBNY purchases housing-related GSE debt securities and federal
agency and GSE MBS. Purchases of housing-related GSE debt securities began in November 2008, and purchases of federal agency and
GSE MBS began in January 2009. The FRBNY is authorized to purchase up to $200 billion in fixed-rate, noncallable GSE debt securities
and up to $1.25 trillion in fixed-rate federal agency and GSE MBS. The
activities of both of these programs are allocated to the other Reserve
Banks.
Central Bank Liquidity Swaps
The FOMC authorized and directed the FRBNY to establish central bank liquidity swap arrangements, which may be structured as
either U.S. dollar liquidity or foreign currency liquidity swap arrangements.
U.S. dollar liquidity swap arrangements were authorized with 14
foreign central banks to provide liquidity in U.S. dollars to overseas
markets. Such arrangements were authorized with the following central banks: the Reserve Bank of Australia, the Banco Central do Brasil,
the Bank of Canada, Danmarks Nationalbank, the Bank of England,
the European Central Bank, the Bank of Japan, the Bank of Korea, the
Banco de México, the Reserve Bank of New Zealand, Norges Bank,
the Monetary Authority of Singapore, the Sveriges Riksbank, and the
Swiss National Bank. The maximum amount that could be drawn
under these swap arrangements varied by central bank. The authorization for these swap arrangements expired on February 1, 2010.
Foreign currency liquidity swap arrangements provided the
Reserve Banks with the capacity to offer foreign currency liquidity to
U.S. depository institutions. Such arrangements were authorized with
the Bank of England, the European Central Bank, the Bank of Japan,
and the Swiss National Bank. The maximum amount that could be
drawn under the swap arrangements varied by central bank. The authorization for these swap arrangements expired on February 1, 2010.
Lending to Depository Institutions
The Term Auction Facility (“TAF”) promotes the efficient dissemination of liquidity by providing term funds to depository institutions.
Under the TAF, Reserve Banks auction term funds to depository institutions against any collateral eligible to secure primary, secondary,
and seasonal credit less a margin, which is a reduction in the assigned
collateral value that is intended to provide the Banks additional credit
protection. All depository institutions that are considered to be in
generally sound financial condition by their Reserve Bank and that
are eligible to borrow under the primary credit program are eligible
to participate in TAF auctions. All loans must be collateralized to the
satisfaction of the Reserve Banks.

Lending to Primary Dealers
The Term Securities Lending Facility (“TSLF”) promoted liquidity in the financing markets for Treasury securities. Under the TSLF,
the FRBNY could lend up to an aggregate amount of $200 billion of
Treasury securities held in the SOMA to primary dealers secured for
a term of 28 days. Securities were lent to primary dealers through
a competitive single-price auction and were collateralized, less a
margin, by a pledge of other securities, including Treasury securities,
municipal securities, federal agency and GSE MBS, nonagency AAA/
Aaa-rated private-label residential MBS, and asset-backed securities
(“ABS”). The authorization for the TSLF expired on February 1, 2010.
The Term Securities Lending Facility Options Program (“TOP”)
offered primary dealers, through a competitive single-price auction, to
purchase an option to draw upon short-term, fixed-rate TSLF loans in
exchange for eligible collateral. The program enhanced the effectiveness of the TSLF by ensuring additional liquidity during periods of
heightened collateral market pressures, such as around quarter-end
dates. The program was suspended effective with the maturity of the
June 2009 TOP options, and the program authorization expired on
February 1, 2010.
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 program assisted money market
mutual funds that hold such paper to meet the demands for investor
redemptions and to foster liquidity in the ABCP market and money
markets more generally. The Federal Reserve Bank of Boston (“FRBB”)
administered the AMLF and was authorized to extend these loans to
eligible borrowers on behalf of the other Reserve Banks. All loans
extended under the AMLF were nonrecourse and were recorded as
assets by the FRBB, and if the borrowing institution settles to a depository account in the Eleventh Federal Reserve District, the funds were
credited to the depository institution account and settled between the
Reserve Banks through the interdistrict settlement account. The credit
risk related to the AMLF was assumed by the FRBB. The authorization
for the AMLF expired on February 1, 2010.
4. SIGNIFICANT ACCOUNTING POLICIES
Accounting principles for entities with the unique powers and
responsibilities of a nation’s central bank have not been formulated
by accounting standard-setting bodies. The Board of Governors has
developed specialized accounting principles and practices that it considers to be appropriate for the nature and function of a central bank.
These accounting principles and practices are documented in the
Financial Accounting Manual for Federal Reserve Banks (“Financial
Accounting Manual” or “FAM”), which is issued by the Board of
Governors. The Reserve Banks are required to adopt and apply
accounting policies and practices that are consistent with the FAM,
and the financial statements have been prepared in accordance with
the FAM.

Limited differences exist between the accounting principles and
practices in the FAM and generally accepted accounting principles in
the United States (“GAAP”), primarily due to the unique nature of the
Bank’s powers and responsibilities as part of the nation’s central bank.
The primary difference is the presentation of all SOMA securities holdings at amortized cost rather than the fair value presentation required
by GAAP. Treasury securities, GSE debt securities, federal agency
and GSE MBS, and investments denominated in foreign currencies
comprising the SOMA are recorded at cost, on a settlement-date basis
rather than the trade-date basis required by GAAP. The cost basis of
Treasury securities, GSE debt securities, and foreign government debt
instruments is adjusted for amortization of premiums or accretion
of discounts on a straight-line basis. Amortized cost more appropriately reflects the Bank’s securities holdings given the System’s unique
responsibility to conduct monetary policy. Accounting for these
securities on a settlement-date basis more appropriately reflects the
timing of the transaction’s effect on the quantity of reserves in the
banking system. Although the application of fair value measurements
to the securities holdings may result in values substantially above or
below their carrying values, these unrealized changes in value have no
direct effect on the quantity of reserves available to the banking system or on the prospects for future Bank earnings or capital. Both the
domestic and foreign components of the SOMA portfolio may involve
transactions that result in gains or losses when holdings are sold prior
to maturity. Decisions regarding securities and foreign currency transactions, including their purchase and sale, are motivated by monetary
policy objectives rather than profit. Accordingly, fair values, earnings,
and gains or losses resulting from the sale of such securities and currencies are incidental to the open market operations and do not motivate decisions related to policy or open market activities.
In addition, the Bank has elected not to present a Statement of
Cash Flows because the liquidity and cash position of the Bank are
not a primary concern given the Reserve Banks’ unique powers and
responsibilities. Other information regarding the Bank’s activities is
provided in, or may be derived from, the Statements of Condition,
Income and Comprehensive Income, and Changes in Capital. There
are no other significant differences between the policies outlined in
the FAM and GAAP.
Preparing the financial statements in conformity with the FAM
requires management to make certain estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure
of contingent assets and liabilities at the date of the financial statements, and the reported amounts of income and expenses during
the reporting period. Actual results could differ from those estimates.
Certain amounts relating to the prior year have been reclassified to
conform to the current-year presentation. Unique accounts and significant accounting policies are explained below.
a. Gold and Special Drawing Rights Certificates
The Secretary of the Treasury is authorized to issue gold and special drawing rights (“SDR”) certificates to the Reserve Banks.

Payment for the gold certificates by the Reserve Banks is made by
crediting equivalent amounts in dollars into the account established
for the Treasury. The gold certificates held by the Reserve Banks are
required to be backed by the gold of the Treasury. The Treasury may
reacquire the gold certificates at any time, and the Reserve Banks must
deliver them to the Treasury. At such time, the Treasury’s account is
charged, and the Reserve Banks’ gold certificate accounts are reduced.
The value of gold for purposes of backing the gold certificates is set by
law at $42 2/9 per fine troy ounce. The Board of Governors allocates
the gold certificates among the Reserve Banks once a year based on
the average Federal Reserve notes outstanding in each Reserve Bank.
SDR certificates are issued by the International Monetary Fund
(the “Fund”) to its members in proportion to each member’s quota in
the Fund at the time of issuance. SDR certificates serve as a supplement to international monetary reserves and may be transferred from
one national monetary authority to another. Under the law providing
for U.S. participation in the SDR system, the Secretary of the Treasury
is authorized to issue SDR certificates to the Reserve Banks. When
SDR certificates are issued to the Reserve Banks, equivalent amounts
in U.S. dollars are credited to the account established for the Treasury
and the Reserve Banks’ SDR certificate accounts are increased. The
Reserve Banks are required to purchase SDR certificates, at the direction of the Treasury, for the purpose of financing SDR acquisitions
or for financing exchange stabilization operations. At the time SDR
transactions occur, the Board of Governors allocates SDR certificate
transactions among the Reserve Banks based upon each Reserve
Bank’s Federal Reserve notes outstanding at the end of the preceding year. There were no SDR transactions in 2008, and in 2009 the
Treasury issued $3 billion in SDR certificates to the Reserve Banks, of
which $184 million was allocated to the Bank.
b. Loans to Depository Institutions
Loans are reported at their outstanding principal balances, and
interest income is recognized on an accrual basis.
Loans are impaired when, based on current information and
events, it is probable that the Bank will not receive the principal or
interest that is due in accordance with the contractual terms of the
loan agreement. Loans are evaluated to determine whether an allowance for loan loss is required. The Bank has developed procedures
for assessing the adequacy of any allowance for loan losses using
all available information to reflect the assessment of credit risk. This
assessment includes monitoring information obtained from banking
supervisors, borrowers, and other sources to assess the credit condition of the borrowers and, as appropriate, evaluating collateral values
for each program. Generally, the Bank discontinues recognizing
interest income on impaired loans until the borrower’s repayment
performance demonstrates principal and interest will be received in
accordance with the term of the loan agreement. If the Bank discontinues recording interest on an impaired loan, cash payments are first
applied to principal until the loan balance is reduced to zero; subsequent payments are applied as recoveries of amounts previously
deemed uncollectible, if any, and then as interest income.

Financials

FEDERAL RESERVE BANK OF DALLAS • 2009 Annual Report

c. Securities Purchased Under Agreements to Resell, Securities
Sold Under Agreements to Repurchase, and Securities Lending
The FRBNY may engage in purchases of securities with primary
dealers under agreements to resell (“repurchase transactions”). These
repurchase transactions are typically executed through a tri-party
arrangement (“tri-party transactions”). Tri-party transactions are conducted with two commercial custodial banks that manage the clearing, settlement, and pledging of collateral. The collateral pledged must
exceed the principal amount of the transaction. Acceptable collateral
under tri-party repurchase transactions primarily includes Treasury
securities; pass-through mortgage securities of Fannie Mae, Freddie
Mac, and Ginnie Mae; STRIP Treasury securities; and “stripped” securities of federal agencies. The tri-party transactions are accounted for
as financing transactions with the associated interest income accrued
over the life of the transaction. Repurchase transactions are reported at their contractual amount as “System Open Market Account:
Securities purchased under agreements to resell” in the Statements of
Condition and the related accrued interest receivable is reported as a
component of “Accrued interest receivables.”
The FRBNY may engage in sales of securities with primary dealers
under agreements to repurchase (“reverse repurchase transactions”).
These reverse repurchase transactions may be executed through a
tri-party arrangement, similar to repurchase transactions. Reverse
repurchase transactions may also be executed with foreign official
and international accounts. Reverse repurchase transactions are
accounted for as financing transactions, and the associated interest
expense is recognized over the life of the transaction. These transactions are reported at their contractual amounts in the Statements of
Condition, and the related accrued interest payable is reported as a
component of “Other liabilities.”
Treasury securities and GSE debt securities held in the SOMA
are lent to primary dealers to facilitate the effective functioning of the
domestic securities market. Overnight securities lending transactions
are fully collateralized by other Treasury securities. TSLF transactions are fully collateralized with investment-grade debt securities,
collateral eligible for tri-party repurchase agreements arranged by the
FRBNY, or both. The collateral taken in both overnight and term securities lending transactions is in excess of the fair value of the securities
lent. The FRBNY charges the primary dealer a fee for borrowing securities, and these fees are reported as a component of “Other income.”
In addition, TOP fees are reported as a component of “Other income.”
Activity related to securities purchased under agreements to
resell, securities sold under agreements to repurchase, and securities
lending is allocated to each of the Reserve Banks on a percentage
basis derived from an annual settlement of the interdistrict settlement
account that occurs in April each year. The settlement also equalizes
Reserve Bank gold certificate holdings to Federal Reserve notes outstanding in each District.

d. Treasury Securities; Government-Sponsored Enterprise Debt
Securities; Federal Agency and Government-Sponsored Enterprise
Mortgage-Backed Securities; Investments Denominated in Foreign
Currencies; and Warehousing Agreements
Interest income on Treasury securities, GSE debt securities,
and investments denominated in foreign currencies comprising the
SOMA is accrued on a straight-line basis. Interest income on federal agency and GSE MBS is accrued using the interest method and
includes amortization of premiums, accretion of discounts, and paydown gains or losses. Paydown gains or losses result from scheduled
payment and prepayment of principal and represent the difference
between the principal amount and the carrying value of the related
security. Gains and losses resulting from sales of securities are determined by specific issue based on average cost.
In addition to outright purchases of federal agency and GSE MBS
that are held in the SOMA, the FRBNY enters into dollar roll transactions (“dollar rolls”), which primarily involve an initial transaction
to purchase or sell “to be announced” (“TBA”) MBS combined with
an agreement to sell or purchase TBA MBS on a specified future
date. The FRBNY’s participation in the dollar roll market furthers the
MBS Purchase Program goal of providing support to the mortgage
and housing markets and fostering improved conditions in financial
markets. The FRBNY accounts for outstanding commitments to
sell or purchase TBA MBS on a settlement-date basis. Based on the
terms of the FRBNY dollar roll transactions, transfers of MBS upon
settlement of the initial TBA MBS transactions are accounted for as
purchases or sales in accordance with FASB ASC Topic 860 (ASC
860), Accounting for Transfers of Financial Assets and Repurchase
Financing Transactions, (previously SFAS 140), and the related outstanding commitments are accounted for as sales or purchases upon
settlement.
Activity related to Treasury securities, GSE debt securities, and federal agency and GSE MBS, including the premiums, discounts, and realized gains and losses, is allocated to each Reserve Bank on a percentage
basis derived from an annual settlement of the interdistrict settlement
account that occurs in April of each year. The settlement also equalizes
Reserve Bank gold certificate holdings to Federal Reserve notes outstanding in each District. Activity related to investments denominated
in foreign currencies, including the premiums, discounts, and realized
and unrealized gains and losses, is allocated to each Reserve Bank
based on the ratio of each Reserve Bank’s capital and surplus to aggregate capital and surplus at the preceding December 31.
Foreign-currency-denominated assets are revalued daily at current
foreign currency market exchange rates in order to report these assets
in U.S. dollars. Realized and unrealized gains and losses on investments
denominated in foreign currencies are reported as “Foreign currency
gains or losses, net” in the Statements of Income and Comprehensive
Income.
Warehousing is an arrangement under which the FOMC agrees
to exchange, at the request of the Treasury, U.S. dollars for foreign currencies held by the Treasury or ESF over a limited period of time. The
purpose of the warehousing facility is to supplement the U.S. dollar
resources of the Treasury and ESF for financing purchases of foreign
currencies and related international operations.

Warehousing agreements are designated as held-for-trading purposes and are valued daily at current market exchange rates. Activity
related to these agreements is allocated to each Reserve Bank based on
the ratio of each Reserve Bank’s capital and surplus to aggregate capital
and surplus at the preceding December 31.
e. Central Bank Liquidity Swaps
Central bank liquidity swaps, which are transacted between the
FRBNY and a foreign central bank, may be structured as either U.S.
dollar liquidity or foreign currency liquidity swap arrangements.
Activity related to U.S. dollar and foreign currency swap transactions, including the related income and expense, is allocated to each
Reserve Bank based on the ratio of each Reserve Bank’s capital and
surplus to aggregate capital and surplus at the preceding December
31. Similar to investments denominated in foreign currencies, the
foreign currency amounts associated with these central bank liquidity
swap arrangements are revalued at current foreign currency market
exchange rates.
U.S. dollar liquidity swaps
At the initiation of each U.S. dollar liquidity swap transaction, the
foreign central bank transfers a specified amount of its currency to a
restricted account for the FRBNY in exchange for U.S. dollars at the
prevailing market exchange rate. Concurrent with this transaction,
the FRBNY and the foreign central bank agree to a second transaction
that obligates the foreign central bank to return the U.S. dollars and
the FRBNY to return the foreign currency on a specified future date at
the same exchange rate as the initial transaction. The Bank’s allocated
portion of the foreign currency amounts that the FRBNY acquires
is reported as “Central bank liquidity swaps” on the Statements of
Condition. Because the swap transaction will be unwound at the
same U.S. dollar amount and exchange rate that was used in the initial
transaction, the recorded value of the foreign currency amounts is not
affected by changes in the market exchange rate.
The foreign central bank compensates the FRBNY based on the
foreign currency amounts held for the FRBNY. The FRBNY recognizes
compensation during the term of the swap transaction and reports it
as “Interest income: Central bank liquidity swaps” in the Statements of
Income and Comprehensive Income.
Foreign currency liquidity swaps
At the initiation of each foreign currency liquidity swap transaction, the FRBNY will transfer, at the prevailing market exchange rate,
a specified amount of U.S. dollars to an account for the foreign central
bank in exchange for its currency. The foreign currency amount
received is reported as a liability by the Bank. Concurrent with this
transaction, the FRBNY and the foreign central bank agree to a second
transaction that obligates the FRBNY to return the foreign currency
and the foreign central bank to return the U.S. dollars on a specified
future date. The FRBNY compensates the foreign central bank based
on the foreign currency transferred to the FRBNY. For each foreign
currency swap transaction with a foreign central bank it is anticipated
that the FRBNY will enter into a corresponding transaction with a U.S.
depository institution in order to provide foreign currency liquidity

to that institution. No foreign currency liquidity swap transactions
occurred in 2008 or 2009.
f. Interdistrict Settlement Account
At the close of business each day, each Reserve Bank aggregates
the payments due to or from other Reserve Banks. These payments
result from transactions between the Reserve Banks and transactions
that involve depository institution accounts held by other Reserve
Banks, such as Fedwire funds and securities transfers and check
and ACH transactions. The cumulative net amount due to or from
the other Reserve Banks is reflected in the “Interdistrict settlement
account” in the Statements of Condition.
g. Bank Premises, Equipment, and Software
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is calculated on a straight-line basis over
the estimated useful lives of the assets, which range from two to 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 straightline basis over the estimated useful lives of the software applications,
which range from two to five years. Maintenance costs related to software are charged to expense in the year incurred.
Capitalized assets, including software, buildings, leasehold
improvements, furniture, and equipment, are impaired, and an adjustment is recorded when events or changes in circumstances indicate
that the carrying amount of assets or asset groups is not recoverable
and significantly exceeds the assets’ fair value.
h. Federal Reserve Notes
Federal Reserve notes are the circulating currency of the United
States. These notes, which are identified as issued to a specific Reserve
Bank, must be fully collateralized. Assets eligible to be pledged as collateral security include all of the Bank’s assets. The collateral value is
equal to the book value of the collateral tendered with the exception of
securities, for which the collateral value is equal to the par value of the
securities tendered. The par value of securities pledged for securities
sold under agreements to repurchase is deducted.
The Board of Governors may, at any time, call upon a Reserve
Bank for additional security to adequately collateralize the outstanding Federal Reserve notes. To satisfy the obligation to provide sufficient collateral for outstanding Federal Reserve notes, the Reserve
Banks have entered into an agreement that provides for certain assets
of the Reserve Banks to be jointly pledged as collateral for the Federal
Reserve notes issued to all Reserve Banks. In the event that this colFinancials

FEDERAL RESERVE BANK OF DALLAS • 2009 Annual Report

lateral is insufficient, the Federal Reserve Act provides that Federal
Reserve notes become a first and paramount lien on all the assets
of the Reserve Banks. Finally, Federal Reserve notes are obligations
of the United States government. At December 31, 2009 and 2008,
all Federal Reserve notes issued to the Reserve Banks were fully collateralized.
“Federal Reserve notes outstanding, net” in the Statements of
Condition represents the Bank’s Federal Reserve notes outstanding, reduced by the Bank’s currency holdings of $13,731 million and
$20,767 million at December 31, 2009 and 2008, respectively.
Other deposits represent amounts held in accounts at the Bank by
GSEs and foreign central banks and governments.
i. Items in Process of Collection and Deferred Credit Items
“Items in process of collection” in the Statements of Condition
primarily represents amounts attributable to checks that have been
deposited for collection and that, as of the balance sheet date, have
not yet been presented to the paying bank. “Deferred credit items” are
the counterpart liability to items in process of collection. The amounts
in this account arise from deferring credit for deposited items until
the amounts are collected. The balances in both accounts can vary
significantly.
j. Capital Paid-in
The Federal Reserve Act requires that each member bank subscribe to the capital stock of the Reserve Bank in an amount equal to 6
percent of the capital and surplus of the member bank. These shares
are nonvoting with a par value of $100 and may not be transferred or
hypothecated. As a member bank’s capital and surplus changes, its
holdings of Reserve Bank stock must be adjusted. Currently, only onehalf of the subscription is paid-in and the remainder is subject to call.
A member bank is liable for Reserve Bank liabilities up to twice the par
value of stock subscribed by it.
By law, each Reserve Bank is required to pay each member bank
an annual dividend of 6 percent on the paid-in capital stock. This
cumulative dividend is paid semiannually. To reflect the Federal
Reserve Act requirement that annual dividends be deducted from net
earnings, dividends are presented as a distribution of comprehensive
income in the Statements of Income and Comprehensive Income.
k. Surplus
The Board of Governors requires the Reserve Banks to maintain
a surplus equal to the amount of capital paid-in as of December 31
of each year. Accumulated other comprehensive income is reported
as a component of surplus in the Statements of Condition and the
Statements of Changes in Capital. The balance of accumulated other
comprehensive income is comprised of expenses, gains, and losses
related to other postretirement benefit plans that, under GAAP, are
included in other comprehensive income, but excluded from net
income. Additional information regarding the classifications of accumulated other comprehensive income is provided in Notes 12 and 13.

l. Interest on Federal Reserve Notes
The Board of Governors requires the Reserve Banks to transfer
excess earnings to the Treasury as interest on Federal Reserve notes
after providing for the costs of operations, payment of dividends, and
reservation of an amount necessary to equate surplus with capital
paid-in. This amount is reported as “Payments to U.S. Treasury as
interest on Federal Reserve notes” in the Statements of Income and
Comprehensive Income. The amount due to the Treasury is reported
as “Accrued interest on Federal Reserve notes” in the Statements
of Condition. If overpaid during the year, the amount is reported
as “Prepaid interest on Federal Reserve notes” in the Statements of
Condition. Payments are made weekly to the Treasury.
In the event of losses or an increase in capital paid-in at a Reserve
Bank, payments to the Treasury are suspended and earnings are
retained until the surplus is equal to the capital paid-in.
In the event of a decrease in capital paid-in, the excess surplus,
after equating capital paid-in and surplus at December 31, is distributed to the Treasury in the following year.
m. Interest on Depository Institution Deposits
On October 9, 2008, the Reserve Banks began paying interest
to depository institutions on qualifying balances held at the Banks.
The interest rates paid on required reserve balances and excess balances are determined by the Board of Governors, based on an FOMCestablished target range for the effective federal funds rate.
n. Income and Costs Related to Treasury Services
The Bank is required by the Federal Reserve Act to serve as fiscal
agent and depositary of the United States government. By statute,
the Department of the Treasury has appropriations to pay for these
services. During the years ended December 31, 2009 and 2008, the
Bank was reimbursed for all services provided to the Department of
the Treasury as its fiscal agent.
o. Compensation Received for Services Provided
The Federal Reserve Bank of Atlanta (“FRBA”) has overall responsibility for managing the Reserve Banks’ provision of check and ACH
services to depository institutions and, as a result, recognizes total
System revenue for these services on its Statements of Income and
Comprehensive Income. Similarly, the FRBNY manages the Reserve
Banks’ provision of Fedwire funds and securities services and recognizes total System revenue for these services on its Consolidated
Statements of Income and Comprehensive Income. The FRBA and
the FRBNY compensate the applicable Reserve Banks for the costs
incurred to provide these services. The Bank reports this compensation as “Compensation received for services provided” in the
Statements of Income and Comprehensive Income.
p. Assessments by the Board of Governors
The Board of Governors assesses the Reserve Banks to fund its
operations based on each Reserve Bank’s capital and surplus balances as of December 31 of the prior year. The Board of Governors also
assesses each Reserve Bank for the expenses incurred by the Treasury
to produce and retire Federal Reserve notes based on each Reserve

Bank’s share of the number of notes comprising the System’s net
liability for Federal Reserve notes on December 31 of the prior year.
q. Taxes
The Reserve Banks are exempt from federal, state, and local taxes,
except for taxes on real property. The Bank’s real property taxes were
$4 million for each of the years ended December 31, 2009 and 2008,
and are reported as a component of “Occupancy expense.”
r. Restructuring Charges
The Reserve Banks recognize restructuring charges for exit or
disposal costs incurred as part of the closure of business activities in
a particular location, the relocation of business activities from one
location to another, or a fundamental reorganization that affects
the nature of operations. Restructuring charges may include costs
associated with employee separations, contract terminations, and
asset impairments. Expenses are recognized in the period in which
the Bank commits to a formalized restructuring plan or executes the
specific actions contemplated in the plan and all criteria for financial
statement recognition have been met.
Note 14 describes the Bank’s restructuring initiatives and provides
information about the costs and liabilities associated with employee
separations and contract terminations. Costs and liabilities associated
with enhanced pension benefits in connection with the restructuring
activities for all of the Reserve Banks are recorded on the books of the
FRBNY.
s. Recently Issued Accounting Standards
In February 2008, FASB issued FSP SFAS 140-3, Accounting for
Transfers of Financial Assets and Repurchase Financing Transactions,
(codified in FASB ASC Topic 860 (ASC 860), Transfers and Servicing).
ASC 860 requires that an initial transfer of a financial asset and a
repurchase financing that was entered into contemporaneously with,
or in contemplation of, the initial transfer be evaluated together as a
linked transaction unless certain criteria are met. These provisions of
ASC 860 are effective for the Bank’s financial statements for the year
beginning on January 1, 2009, and have not had a material effect on
the Bank’s financial statements. The requirements of this standard
have been reflected in the accompanying footnotes.
In June 2009, FASB issued SFAS 166, Accounting for Transfers of
Financial Assets – an amendment to FASB Statement No. 140, (codified in ASC 860). The new guidance modifies existing guidance to
eliminate the scope exception for qualifying special purpose vehicles
(“SPVs”) and clarifies that the transferor must consider all arrangements of the transfer of financial assets when determining if the
transferor has surrendered control. These provisions of ASC 860 are
effective for the Bank’s financial statements for the year beginning on
January 1, 2010, and earlier adoption is prohibited. The adoption of
this standard is not expected to have a material effect on the Bank’s
financial statements.
In May 2009, FASB issued SFAS No. 165, Subsequent Events, (codified in FASB ASC Topic 855 (ASC 855), Subsequent Events), which
establishes general standards of accounting for and disclosing events
that occur after the balance sheet date but before financial statements

are issued or are available to be issued. ASC 855 sets forth (i) the
period after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that may occur
for potential recognition or disclosure in the financial statements; (ii)
the circumstances under which an entity should recognize events
or transactions occurring after the balance sheet date in its financial
statements; and (iii) the disclosures that an entity should make about
events or transactions that occurred after the balance sheet date,
including disclosure of the date through which an entity has evaluated
subsequent events and whether that represents the date the financial
statements were issued or were available to be issued. The Bank
adopted ASC 855 for the period ended December 31, 2009, and the
required disclosures are reflected in Note 15.
In June 2009, the FASB issued SFAS No. 168, The Statement of
Financial Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles, a replacement of SFAS No.
162, The Hierarchy of Generally Accepted Accounting Principles (SFAS
168). SFAS 168 establishes the FASB ASC as the source of authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements
in conformity with GAAP. The ASC does not change current GAAP,
but it introduces a new structure that organizes the authoritative standards by topic. SFAS 168 is effective for financial statements issued
for periods ending after September 15, 2009. As a result, both the ASC
and the legacy standard are referenced in the Bank’s financial statements and footnotes.
5. LOANS
The loan amounts outstanding at December 31 were as follows
(in millions):
2009
Primary, secondary, and seasonal credit

TAF
Total loans to depository institutions

2008
$

390
$

392

692
4,335

5,027

Loans to Depository Institutions
The Bank offers primary, secondary, and seasonal credit to eligible
borrowers. Each program has its own interest rate. Interest is accrued
using the applicable interest rate established at least every 14 days by
the board of directors of the Bank, subject to review and determination by the Board of Governors. Primary and secondary credit are
extended on a short-term basis, typically overnight, whereas seasonal
credit may be extended for a period of up to nine months.
Primary, secondary, and seasonal credit lending is collateralized
to the satisfaction of the Bank to reduce credit risk. Assets eligible to
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; ABS; corporate bonds; commercial paper; and bank-issued
assets, such as certificates of deposit, bank notes, and deposit notes.
Collateral is assigned a lending value that is deemed appropriate
Financials

FEDERAL RESERVE BANK OF DALLAS • 2009 Annual Report

by the Bank, which is typically fair value or face value reduced by a
margin.
Depository institutions that are eligible to borrow under the
Bank’s primary credit program are also eligible to participate in the
TAF program. Under the TAF program, the Reserve Banks conduct
auctions for a fixed amount of funds, with the interest rate determined
by the auction process, subject to a minimum bid rate. TAF loans
are extended on a short-term basis, with terms ranging from 28 to 84
days. All advances under the TAF program must be collateralized to
the satisfaction of the Bank. Assets eligible to collateralize TAF loans
include the complete list noted above for loans to depository institutions. Similar to the process used for primary, secondary, and seasonal
credit, a lending value is assigned to each asset that is accepted as collateral for TAF loans reduced by a margin.
Loans to depository institutions are monitored on a daily basis to
ensure that borrowers continue to meet eligibility requirements for
these programs. The financial condition of borrowers is monitored
by the Bank and, if a borrower no longer qualifies for these programs,
the Bank will generally request full repayment of the outstanding loan
or, for primary and seasonal credit lending, may convert the loan to a
secondary credit loan.
Collateral levels are reviewed daily against outstanding obligations, and borrowers that no longer have sufficient collateral to support outstanding loans are required to provide additional collateral or
to make partial or full repayment.
The remaining maturity distributions of loans outstanding at
December 31 were as follows (in millions):

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 4.835 percent and 4.148 percent at
December 31, 2009 and 2008, respectively.
The Bank’s allocated share of Treasury securities, GSE debt securities, and federal agency and GSE MBS, excluding accrued interest,
held in the SOMA at December 31 was as follows (in millions):
2009
Treasury Securities

Bills

Notes

Bonds

891

$ 27,479

$ 9,179

$ 37,549

$ 7,730

$ 43,921

Unamortized
premiums

—

316

1,183

1,499

363

586

Unaccreted
discounts

—

(48)

(30)

(78)

(1)

(75)

891

$ 27,747

$ 10,332

$ 38,970

$ 8,092

$ 44,432

891

$ 28,191

$ 11,155

$ 40,237

$ 8,096

$ 44,207

Par

Total amortized
cost
Fair value

2009

2008

Primary, Secondary,
and Seasonal Credit
$

390

Total loans

390

Primary, Secondary,
and Seasonal Credit
16 days to 90 days
Total loans

160

TAF
$

532
$

692

Bills

2,010
2,325

4,335

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

Federal
Total
Agency
Treasury GSE Debt and GSE
Securities Securities MBS

Notes

Bonds

764

$ 13,887

$ 5,091

$ 19,742

Unamortized
premiums

—

278

290

—

Unaccreted
discounts

—

(35)

(26)

(61)

(1)

—

764

$ 13,864

$ 5,343

$ 19,971

860

—

764

$ 14,838

$ 7,029

$ 22,631

865

—

Par

2008

Treasury Securities

TAF

Within 15 days

Federal
Total
Agency
Treasury GSE Debt and GSE
Securities Securities MBS

Total amortized
cost
Fair value

817

—

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):

Distribution of MBS
Holdings by Coupon Rate
4.0%

Treasury Securities
Federal
Total
Agency
Treasury GSE Debt and GSE
Securities Securities MBS

Notes

Bonds

Amortized cost

$ 18,423

$ 573,877

$ 213,672

$ 805,972

$ 167,362

$ 918,927

Fair value

$ 18,423

$ 583,040

$ 230,717

$ 832,180

$ 167,444

$ 914,290

Fair Value

Allocated to the Bank:

2009

Bills

Amortized Cost

8,225

8,014

4.5%

21,002

20,870

5.0%

9,449

9,497

5.5%

4,998

5,057

6.0%

615

624

Other 1

143

145

Total

44,432

44,207

170,119

165,740

System total:
4.0%

2008
Treasury Securities
Federal
Total
Agency
Treasury GSE Debt and GSE
Securities Securities MBS

Bills

Notes

Bonds

Amortized cost

$ 18,422

$ 334,217

$ 128,810

$ 481,449

$ 20,740

—

Fair value

$ 18,422

$ 357,709

$ 169,433

$ 545,564

$ 20,863

—

434,352

431,646

5.0%

195,418

196,411

5.5%

103,379

104,583

6.0%

12,710

12,901

2,949

3,009

Other 1
Total
1

The fair value amounts in the above tables are presented solely
for informational purposes. Although the fair value of security holdings can be substantially greater than or less than the recorded value
at any point in time, these unrealized gains or losses have no effect
on the ability of the Reserve Banks, as the central bank, to meet their
financial obligations and responsibilities. Fair value was determined
by reference to quoted market values for identical securities, except
for federal agency and GSE MBS for which fair values were determined using a model-based approach based on observable inputs for
similar securities.
The fair value of the fixed-rate Treasury securities, GSE debt
securities, and federal agency and GSE MBS in the SOMA’s holdings
is subject to market risk, arising from movements in market variables,
such as interest rates and securities prices. The fair value of federal
agency and GSE MBS is also affected by the rate of prepayments of
mortgage loans underlying the securities.
The following table provides additional information on the amortized cost and fair values of the federal agency and GSE MBS portfolio
at December 31, 2009 (in millions):

4.5%

918,927

914,290

Represents less than one percent of the total portfolio.

Financial information related to securities purchased under
agreements to resell and securities sold under agreements to repurchase for the years ended December 31, 2009 and 2008, was as follows (in millions):
Securities Purchased
Under Agreements to
Resell

Securities Sold Under
Agreements to
Repurchase

2009

2008

2009

2008

—

$ 3,318

$ 3,758

$ 3,665

Average daily amount
outstanding, during
the year

150

3,615

3,136

2,317

Maximum month-end
balance outstanding,
during the year

—

4,936

3,758

4,088

Securities pledged, end
of the year

—

3,765

3,273

—

$ 80,000

$ 77,732

$ 88,352

Average daily amount
outstanding, during
the year

3,616

86,227

67,837

55,169

Maximum month-end
balance outstanding,
during the year

—

119,000

77,732

98,559

Securities pledged, end
of the year

—

77,860

78,896

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

System total:
Contract amount outstanding, end of the year

Financials

FEDERAL RESERVE BANK OF DALLAS • 2009 Annual Report

The Bank has revised its disclosure of securities purchased under
agreements to resell and securities sold under agreements to repurchase from a weighted average calculation, disclosed in 2008, to the
simple daily average calculation, disclosed above. The previously
reported System total 2008 weighted average amount outstanding for
securities purchased under agreements to resell was $97,037 million,
of which $4,025 million was allocated to the Bank. The previously
reported System total 2008 weighted average amount outstanding for
securities sold under agreements to repurchase was $65,461 million,
of which $2,715 million was allocated to the Bank.
The contract amounts for securities purchased under agreements
to resell and securities sold under agreements to repurchase approximate fair value.
The remaining maturity distribution of Treasury securities, GSE
debt securities, federal agency and GSE MBS bought outright, securities purchased under agreements to resell, and securities sold
under agreements to repurchase that were allocated to the Bank at
December 31, 2009, was as follows (in millions):

Within 15
days

Treasury
Securities
(Par value)

GSE Debt
Securities
(Par value)

Federal
Agency and
GSE MBS
(Par value)

Securities
Purchased
Under
Agreements
to Resell
(Contract
amount)

562

—

Securities
Sold Under
Agreements
to
Repurchase
(Contract
amount)

3,758

16 days to
90 days

1,395

147

—

91 days to
1 year

2,455

1,041

—

Over 1 year
to 5 years

15,805

4,806

—

Over 5 years
to 10 years

10,333

1,634

—

6,999

43,919

—

7,730

$ 43,921

Over 10
years
Total
allocated to
the Bank

$ 37,549

—

3,758

Federal agency and GSE MBS are reported at stated maturity in
the table above. The estimated weighted average life of these securities at December 31, 2009, which differs from the stated maturity
primarily because it factors in prepayment assumptions, is approximately 6.4 years.
At December 31, 2009 and 2008, Treasury securities and GSE debt
securities with par values of $21,610 million and $180,765 million,
respectively, were loaned from the SOMA, of which $1,045 million
and $7,498 million, respectively, were allocated to the Bank.

At December 31, 2009, the total of other investments was $5
million, of which the Bank’s allocated share was immaterial. Other
investments consist of cash and short-term investments related to the
federal agency and GSE MBS portfolio.
At December 31, 2009, the total of other liabilities was $601 million, of which $29 million was allocated to the Bank. These other liabilities, which are related to purchases of federal agency and GSE MBS,
arise from the failure of a seller to deliver securities to the FRBNY on
the settlement date. Although the Bank has ownership of and records
its investments in the MBS as of the contractual settlement date, it is
not obligated to make payment until the securities are delivered, and
the amount reported as other liabilities represents the Bank’s obligation to pay for the securities when delivered.
The FRBNY enters into commitments to buy federal agency and
GSE MBS and records the related MBS on a settlement-date basis. As
of December 31, 2009, the total purchase price of the federal agency
and GSE MBS under outstanding commitments was $160,099 million, of which $32,838 million was related to dollar roll transactions.
The amount of outstanding commitments allocated to the Bank
was $7,741 million, of which $1,588 million was related to dollar roll
transactions. These commitments, which had contractual settlement
dates extending through March 2010, are primarily for the purchase
of TBA MBS for which the number and identity of the pools that will
be delivered to fulfill the commitment are unknown at the time of the
trade. These commitments are subject to market and counterparty
risks that result from their future settlement. As of December 31, 2009,
the fair value of federal agency and GSE MBS under outstanding commitments was $158,868 million, of which $7,681 million was allocated
to the Bank. During the year ended December 31, 2009, the Reserve
Banks recorded net gains from dollar roll related sales of $879 million,
of which $44 million was allocated to the Bank. These net gains are
reported as “Non-Interest Income (Loss): Federal agency and government-sponsored enterprise mortgage-backed securities gains, net” in
the Statements of Income and Comprehensive Income.
7. INVESTMENTS DENOMINATED IN FOREIGN CURRENCIES
The FRBNY, on behalf of the Reserve Banks, holds foreign currency deposits with foreign central banks and with the Bank for
International Settlements and invests in foreign government debt
instruments. These investments are guaranteed as to principal and
interest by the issuing foreign governments. In addition, the FRBNY
enters into transactions to purchase foreign-currency-denominated
government-debt securities under agreements to resell for which the
accepted collateral is the debt instruments issued by the governments
of Belgium, France, Germany, Italy, the Netherlands, and Spain.
The Bank’s allocated share of investments denominated in foreign
currencies was approximately 1.286 percent and 1.970 percent at
December 31, 2009 and 2008, respectively.

The Bank’s allocated share of investments denominated in foreign
currencies, including accrued interest, valued at amortized cost and
foreign currency market exchange rates at December 31, was as follows (in millions):
2009

2008

Euro:
Foreign currency deposits

110

Securities purchased under agreements
to resell

Government debt instruments

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

89
$

325

139
$

489

At December 31, 2009 and 2008, the fair value of investments
denominated in foreign currencies, including accrued interest, allocated to the Bank was $328 million and $493 million, respectively.
The fair value of government debt instruments was determined by
reference to quoted prices for identical securities. The cost basis of
foreign currency deposits and securities purchased under agreements
to resell, adjusted for accrued interest, approximates fair value. Similar
to the Treasury securities, GSE debt securities, and federal agency
and GSE MBS discussed in Note 6, unrealized gains or losses have no
effect on the ability of a Reserve Bank, as the central bank, to meet its
financial obligations and responsibilities. The fair value is presented
solely for informational purposes.
Total Reserve Bank investments denominated in foreign currencies were $25,272 million and $24,804 million at December 31, 2009
and 2008, respectively. At December 31, 2009 and 2008, the fair value
of the total Reserve Bank investments denominated in foreign currencies, including accrued interest, was $25,480 million and $25,021
million, respectively.

The remaining maturity distribution of investments denominated
in foreign currencies that were allocated to the Bank at December 31,
2009, was as follows (in millions):
Japanese
Yen

Euro
Within 15 days

Total
$

125

16 days to 90 days

91 days to 1 year

Over 1 year to 5 years

101

Total allocated to the Bank

192

133

325

At December 31, 2009 and 2008, the authorized warehousing
facility was $5.0 billion, with no balance outstanding.
In connection with its foreign currency activities, the FRBNY may
enter into transactions that contain varying degrees of off-balancesheet market risk that result from their future settlement and counterparty credit risk. The FRBNY controls these risks by obtaining credit
approvals, establishing transaction limits, receiving collateral in some
cases, and performing daily monitoring procedures.
8. CENTRAL BANK LIQUIDITY SWAPS
U.S. Dollar Liquidity Swaps
The Bank’s allocated share of U.S. dollar liquidity swaps was
approximately 1.286 percent and 1.970 percent at December 31, 2009
and 2008, respectively.
At December 31, 2009 and 2008, the total Reserve Bank amount
of foreign currency held under U.S. dollar liquidity swaps was $10,272
million and $553,728 million, respectively, of which $132 million and
$10,908 million, respectively, was allocated to the Bank.
The remaining maturity distribution of U.S. dollar liquidity swaps
that were allocated to the Bank at December 31 was as follows (in
millions):
2009
Within 15 16 days to
days
90 days

Total

Within 15 16 days to
days
90 days

— $

—

Danish krone

—

296

Euro

—

2,974

2,765

5,739

—

943

1,474

2,417

Korean won

—

204

Mexican peso

—

Norwegian krone

—

119

162

Swedish krona

—

197

295

492

Swiss franc

—

379

117

496

U.K. pound

—

649

652

Japanese yen

Total

132 $

— $

132

197 $

253 $

Total

— $

Australian dollar

2008

450

— —

$ 4,736 $ 6,172 $ 10,908

Financials

FEDERAL RESERVE BANK OF DALLAS • 2009 Annual Report

Foreign Currency Liquidity Swaps
There were no transactions related to the foreign currency liquidity swaps during the years ended December 31, 2008 and 2009.
9. BANK PREMISES, EQUIPMENT, AND SOFTWARE
Bank premises and equipment at December 31 were as follows
(in millions):
2009

2008

Bank premises and equipment:
Land

Buildings
Building machinery and equipment

229

226

Construction in progress

Furniture and equipment

Subtotal
Accumulated depreciation

401

(125)

(123)

Bank premises and equipment, net

276

278

Depreciation expense, for the years ended
December 31

The Bank leases space to outside tenants with remaining lease
terms ranging from six to eight years. Rental income from such leases
was $3 million and $2 million for the years ended December 31, 2009
and 2008, respectively, and is reported as a component of “Other
income” in the Statements of Income and Comprehensive Income.
Future minimum lease payments that the Bank will receive under
noncancelable lease agreements in existence at December 31, 2009,
are as follows (in thousands):
2010
2011
2012
2013
2014
Thereafter
Total

1,176
1,178
1,178
1,178
1,178
2,173
8,061

The Bank had capitalized software assets, net of amortization, of
$3 million for each of the years ended December 31, 2009 and 2008.
Amortization expense was $2 million for each of the years ended
December 31, 2009 and 2008. Capitalized software assets are reported as a component of “Other assets” in the Statements of Condition
and the related amortization is reported as a component of “Other
expenses” in the Statements of Income and Comprehensive Income.

10. COMMITMENTS AND CONTINGENCIES
In the normal course of its operations, the Bank enters into contractual commitments, normally with fixed expiration dates or termination provisions, at specific rates and for specific purposes.
At December 31, 2009, the Bank was obligated under noncancelable leases for premises and equipment with remaining terms ranging from one to approximately two years. These leases provide for
increased rental payments based upon increases in real estate taxes,
operating costs, or selected price indices.
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 $231 thousand and $235 thousand for the
years ended December 31, 2009 and 2008, respectively. Certain of the
Bank’s leases have options to renew.
Future minimum rental payments under noncancelable operating leases and capital leases, net of sublease rentals, with terms of one
year or more, at December 31, 2009, were not material.
At December 31, 2009, there were no material unrecorded unconditional purchase commitments or obligations in excess of one year.
Under the Insurance Agreement of the Federal Reserve Banks,
each of the Reserve Banks has agreed to bear, on a per incident basis,
a pro rata share of losses in excess of 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, 2009 or 2008.
11. RETIREMENT AND THRIFT PLANS
Retirement Plans
The Bank currently offers three defined benefit retirement plans
to its employees, based on length of service and level of compensation. Substantially all of the employees of the Reserve Banks, Board
of Governors, and Office of Employee Benefits of the Federal Reserve
System (“OEB”) participate in the Retirement Plan for Employees of
the Federal Reserve System (“System Plan”). In addition, employees
at certain compensation levels participate in the Benefit Equalization
Retirement Plan (“BEP”), and certain Reserve Bank officers participate
in the Supplemental Retirement Plan for Select Officers of the Federal
Reserve Bank (“SERP”).
The System Plan provides retirement benefits to employees of the
Federal Reserve Banks, the Board of Governors, and OEB. The FRBNY,
on behalf of the System, recognizes the net asset or net liability and
costs associated with the System Plan in its financial statements.
Costs associated with the System Plan are not reimbursed by other
participating employers.
The Bank’s projected benefit obligation, funded status, and net
pension expenses for the BEP and the SERP at December 31, 2009
and 2008, and for the years then ended, were not material.

Thrift Plan
Employees of the Bank participate in the defined contribution
Thrift Plan for Employees of the Federal Reserve System (“Thrift
Plan”). The Bank matches employee contributions based on a specified formula. For the year ended December 31, 2008, and for the
first three months of the year ended December 31, 2009, the Bank
matched 80 percent of the first 6 percent of employee contributions
for employees with less than five years of service and 100 percent of
the first 6 percent of employee contributions for employees with five
or more years of service. Effective April 1, 2009, the Bank matches 100
percent of the first 6 percent of employee contributions from the date
of hire and provides an automatic employer contribution of 1 percent
of eligible pay. The Bank’s Thrift Plan contributions totaled $4 million
for each of the years ended December 31, 2009 and 2008, respectively,
and are reported as a component of “Salaries and other benefits” in
the Statements of Income and Comprehensive Income.
12. POSTRETIREMENT BENEFITS OTHER THAN Retirement Plans
AND POSTEMPLOYMENT BENEFITS

Discount rates reflect yields available on high-quality corporate
bonds that would generate the cash flows necessary to pay the plan’s
benefits when due.
Following is a reconciliation of the beginning and ending balance
of the plan assets, the unfunded postretirement benefit obligation, and
the accrued postretirement benefit costs (in millions):
2009
Fair value of plan assets at January 1

2009
Accumulated postretirement benefit
obligation at January 1

83.8

77.8

Service cost-benefits earned during the
period

3.0

3.1

Interest cost on accumulated benefit
obligation

5.0

Net actuarial loss

3.5

2.7

—

(1.5)

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

1.3

1.2

(4.8)

(4.7)

0.3

0.2

92.1

2008
$

—

3.2

3.3

Contributions by plan participants

1.3

1.2

(4.8)

(4.7)

Benefits paid
Medicare Part D subsidies

0.3
—

0.2

Fair value of plan assets at December 31

Unfunded obligation and accrued
postretirement benefit cost

$ 92.1

$ 83.8

—

Amounts included in accumulated other
comprehensive loss are shown below:
Net actuarial loss
Deferred curtailment gain
Total accumulated other comprehensive loss

1.5
(19.6)
—

$ (18.1)

1.9
(17.2)
0.2

$ (15.1)

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

2008
$

—

Contributions by the employer

Prior service cost

Postretirement Benefits Other Than Retirement Plans
In addition to the Bank’s retirement plans, employees who have
met certain age and length-of-service requirements are eligible for
both medical benefits and life insurance coverage during retirement.
The Bank funds benefits payable under the medical and life insurance plans as due and, accordingly, has no plan assets.
Following is a reconciliation of the beginning and ending balances
of the benefit obligation (in millions):

2009

2008

Health care cost trend rate assumed for next
year

7.50%

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

5.00%

Year that the rate reaches the ultimate trend
rate

2015

2014

83.8

At December 31, 2009 and 2008, the weighted-average discount
rate assumptions used in developing the postretirement benefit obligation were 5.75 percent and 6.00 percent, respectively.

Financials

FEDERAL RESERVE BANK OF DALLAS • 2009 Annual Report

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, 2009 (in millions):

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

One
Percentage
Point
Increase

One
Percentage
Point
Decrease

1.4

12.0

(1.1)

(10.0)

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

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 gain in the accumulated postretirement benefit obligation and net periodic postretirement benefit
expense.
Federal Medicare Part D subsidy receipts were $0.4 million and
$0.2 million in the years ended December 31, 2009 and 2008, respectively. Expected receipts in 2010, related to benefits paid in the years
ended December 31, 2009 and 2008, are not material.
Following is a summary of expected postretirement benefit payments (in millions):
Without Subsidy

2009
Service cost-benefits earned during the
period

3.0

2010

3.1

2011

4.9

4.5

2012

5.3

4.8

5.7

5.2

Interest cost on accumulated benefit
obligation

5.0

2013

Amortization of prior service cost

(0.4)

(0.5)

2014

1.1

1.3

2015–2019

8.7

8.9

Total

(0.2)

—

Amortization of net actuarial loss
Total periodic expense
Curtailment gain
Net periodic postretirement benefit expense

8.5

Net actuarial loss
Total

(0.3)
1.5

4.4

4.1

6.1

5.6

36.9

33.1

63.3

57.3

8.9

Estimated amounts that will be amortized from
accumulated other comprehensive loss into
net periodic postretirement benefit expense
(credit) in 2010 are shown below:
Prior service cost

With Subsidy

2008

1.2

Net postretirement benefit costs are actuarially determined using
a January 1 measurement date. At January 1, 2009 and 2008, the
weighted-average discount rate assumptions used to determine net
periodic postretirement benefit costs were 6.00 percent and 6.25
percent, respectively.
Net periodic postretirement benefit expense is reported as a component of “Salaries and other benefits” in the Statements of Income
and Comprehensive Income.
A net curtailment gain associated with restructuring programs
that are described in Note 14 was recognized in net income in the
year ended December 31, 2009, related to employees who terminated
employment during 2009. A deferred curtailment gain was recorded
in 2008 as a component of accumulated other comprehensive loss;
the gain will be recognized in net income in future years when the
related employees terminate employment.

Postemployment Benefits
The Bank offers benefits to former or inactive employees.
Postemployment benefit costs are actuarially determined and include
the cost of medical and dental insurance, survivor income, disability benefits, and self-insured workers’ compensation expenses. The
accrued postemployment benefit costs recognized by the Bank at
December 31, 2009 and 2008, were $9 million and $6 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 2009 and 2008 operating expenses were $3 million and $162 thousand, respectively, and are recorded as a component of “Salaries and other benefits” in the Statements of Income and
Comprehensive Income.

13. ACCUMULATED OTHER COMPREHENSIVE INCOME AND OTHER
COMPREHENSIVE INCOME
Following is a reconciliation of beginning and ending balances of
accumulated other comprehensive loss (in millions):
Amount Related to
Postretirement
Benefits Other Than
Retirement Plans
Balance at January 1, 2008

Amortization of net actuarial loss

(1)

Estimated future costs related
to restructuring activity

Balance at December 31, 2008

—
$

(15)

Net actuarial loss arising during the year

Amortization of net actuarial loss

Change in funded status of benefit plans—other
comprehensive loss
Balance at December 31, 2009

(4)

Expected completion date

1.0

2.9

1.1

5.0

—

0.1

2007

2009

2010

—

2.5

—

2.5

(0.2)

—

(0.2)

2.5

—

Reconciliation of liability
balances:
Balance at January 1, 2008

Change in funded status of benefit plans:

Total

Information related to
restructuring plans as of
December 31, 2009:
Total expected costs related to
restructuring activity

Change in funded status of benefit plans—other
comprehensive loss

2007 and Prior
2008
2009
Restructuring Restructuring Restructuring
Plans
Plans
Plans

(15)

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

Following is a summary of financial information related to the
restructuring plans (in millions):

Employee separation costs
Payments

0.2

(3)

Balance at December 31, 2008

(18)

Employee separation costs

—

1.0

Adjustments

—

(0.2)

—

(0.2)

Payments

—

(2.0)

—

(2.0)

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

Balance at December 31, 2009

—

0.3

1.0

2.5

1.3

14. BUSINESS RESTRUCTURING CHARGES
2007 and Prior Restructuring Plans
The Bank incurred various restructuring charges prior to 2008
related to restructuring to streamline its Houston operations and
reduce costs.
2008 Restructuring Plans
In 2008, the Reserve Banks announced the acceleration of their check
restructuring initiatives to align the check processing infrastructure and
operations with declining check processing volumes. The new infrastructure consolidates operations into two regional Reserve Bank processing
sites: in Cleveland, for paper check processing, and Atlanta, for electronic
check processing.
2009 Restructuring Plans
In 2009, the Bank announced that in 2010 it will eliminate its
check print-site function, which is the only remaining check operation
performed by the Bank.

Employee separation costs are primarily severance costs for
identified staff reductions associated with the announced restructuring plans. Separation costs that are provided under terms of ongoing
benefit arrangements are recorded based on the accumulated benefit
earned by the employee. Separation costs that are provided under
the terms of one-time benefit arrangements are generally measured
based on the expected benefit as of the termination date and recorded
ratably over the period to termination. Restructuring costs related to
employee separations are reported as a component of “Salaries and
other benefits” in the Statements of Income and Comprehensive
Income.
Adjustments to the accrued liability are primarily due to changes
in the estimated restructuring costs and are shown as a component
of the appropriate expense category in the Statements of Income and
Comprehensive Income.
Costs associated with enhanced pension benefits for all Reserve
Banks are recorded on the books of the FRBNY as discussed in Note 11.
15. SUBSEQUENT EVENTS
There were no subsequent events that require adjustments to
or disclosures in the financial statements as of December 31, 2009.
Subsequent events were evaluated through April 21, 2010, which is
the date that the Bank issued the financial statements.

Financials

FEDERAL RESERVE BANK OF DALLAS • 2009 Annual Report

In 2009, the Board of Governors engaged Deloitte & Touche LLP (D&T) for the audits of the individual and combined financial
statements of the Reserve Banks and the consolidated financial statements of the limited liability companies (LLCs) that are associated
with Federal Reserve actions to address the financial crisis and are consolidated in the financial statements of the Federal Reserve Bank
of New York. Fees for D&T’s services are estimated to be $9.6 million, of which approximately $2.0 million were for the audits of the
LLCs.1 To ensure auditor independence, the Board of Governors requires that D&T be independent in all matters relating to the audit.
Specifically, D&T may not perform services for the Reserve Banks or others that would place it in a position of auditing its own work,
making management decisions on behalf of Reserve Banks, or in any other way impairing its audit independence. In 2009, the Bank
did not engage D&T for any non-audit services.
1

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

Volume of Operations
(UNAUDITED)
Number of Items Handled
(Thousands)

Dollar Amount
(Millions)

2009

2008

2009

2008

Federal Reserve notes processed

2,772,001

2,916,096

51,151

53,842

Currency received from circulation

2,930,894

3,054,127

51,736

54,254

599,886

630,008

100

101

70,699

430,837

59,496

520,098

SERVICES TO DEPOSITORY INSTITUTIONS
CASH SERVICES

Coin received from circulation
CHECK PROCESSING
Commercial—processed
Commercial—fine sorted
Check 21 Substitute Check—processed

—

2,131

—

789

844,594

243,347

885,536

370,976

594*

273*

29,574

30,272

LOANS
Advances made

* Individual loans, not in thousands.

About the Dallas Fed
The Federal Reserve Bank of Dallas is one of 12 regional Federal Reserve Banks in the United States.
Together with the Board of Governors in Washington, D.C., these organizations form the Federal Reserve
System and function as the nation’s central bank. The System’s basic purpose is to provide a flow of money
and credit that will foster orderly economic growth and a stable dollar. In addition, Federal Reserve Banks
supervise banks and bank holding companies and provide certain financial services to the banking industry,
the federal government and the public.
The Federal Reserve Bank of Dallas has served the financial institutions in the Eleventh District since
1914. The district encompasses 350,000 square miles and comprises the state of Texas, northern Louisiana
and southern New Mexico. The three branch offices of the Dallas Fed are in El Paso, Houston and San Antonio.

Federal Reserve Bank of Dallas

Gloria V. Brown

2200 North Pearl Street

Vice President, Public Affairs

Dallas, TX 75201
214-922-6000

El Paso Branch
301 East Main Street
El Paso, TX 79901
915-521-5200

Carol Dirks
Publications Director

Jennifer Afflerbach
Editor

Gene Autry
Art Director and Photographer

Houston Branch
1801 Allen Parkway
Houston, TX 77019
713-483-3000

San Antonio Branch
126 East Nueva Street
San Antonio, TX 78204
210-978-1200

Website
www.dallasfed.org

Full text of Annual Report of the Federal Reserve Bank of Dallas : 2009 Annual Report : Reflections on the Financial Crisis: Where Do We Go From Here?

FRASER