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From Brawn to Brains
How Immigration Works for America

2010 ANNUAL REPORT
FEDERAL RESERVE BANK OF DALLAS

Mario Molina
Nobel laureate in chemistry
Mexico

Sergey Brin
Google cofounder
Russia

Gebisa Ejeta
Agricultural scientist
Ethiopia

Andy Grove
Intel founder
Hungary

Indra Nooyi
PepsiCo CEO
India

Henry Kissinger
U.S. secretary of state
Germany

Contents
Letter from the President 1 • From Brawn to Brains: How Immigration Works for America 4
Year in Review 18 • Management and Boards 20 • Senior Management 20 • Boards of Directors 22 • Officers and Advisory Councils 26
Financials 27 • Management’s Report 27 • Independent Auditors’ Report 28 • Financial Statements 30 • Notes to Financial Statements 33 • Volume of Operations 48

Letter from the

I

President

mmigration has played an

integral part in shaping the economic,
social and cultural development of this
country. From architecture and medicine
to technology and statesmanship,
immigrants have contributed to our
nation’s success.
The photos on the inside of the front
and back covers of this annual report
are but a few of America’s notable
immigrants. They are remarkable in
their contributions to science, technology,
business, government, literature, sports
and philanthropy.

(continued on next page)

Letter from the president • 2010 ANNUAL REPORT

1

W

inning the future will become

We have distinguished immigrants serving on the
Dallas Fed and regional banks’ boards of directors.

increasingly difficult unless we figure out a

Renu Khator—who joined the Federal Reserve Bank

practical way to allow greater access to foreign-

of Houston System’s first woman chancellor and the

born human capital that will contribute to

university. In addition to Renu, G.P. Singh (India)

American prosperity.

of Dallas board in January 2011—is the University
first Indian immigrant to lead a tier one U.S. research
and Jorge Bermudez (Cuba) are also successful firstgeneration immigrants. I am proud to have them on
our team.
As with these immigrants, the story of the Fisher
family spans cities, states, countries and continents.
My father hailed from Australia, and my mother, born
in South Africa, was the daughter of Norwegians.
When my parents first tried to enter this country
in 1939, they were redirected to living part-time in
Tijuana, Mexico, until gaining U.S. citizenship in
1947. I was born in Los Angeles in March 1949, the
felicitous byproduct of an otherwise fretful business
trip to Shanghai that ended abruptly as Mao’s forces
entered that city.
My family’s story is dramatic. But it is by no
means unique. Immigrants—as my parents could
attest—are drawn to this country from a variety of
places for a number of reasons. A common thread is
the opportunity to improve their lot and become part
of the American Dream. Whatever small contribution
my family has made to the development of the U.S. is
at least partially a testament to the value of immigrants and their labors.
Emma Lazarus’ oft-cited depiction in “The New
Colossus” —Lady Liberty’s poor and huddled masses
yearning to breathe free—no longer paints the whole

2

FEDERAL RESERVE BANK OF DALLAS • 2010 ANNUAL REPORT

picture. Skilled immigrants, including scientists, doc-

greater access to foreign-born human capital that will

tors, engineers and mathematicians, cross our bor-

contribute to American prosperity. America is still the

ders every year hoping to become part of the American

world’s economic powerhouse. But we can’t afford to

fabric. Instead of queuing up on Ellis Island, as many

rest on our laurels. Countries around the world are

of our ancestors did, they enter at airports and reside

recruiting our most-talented business leaders and

in cities all across the country. They are equipped,

scholars to manage their strongest companies and

trained and educated—often at American universi-

direct their greatest universities. Our economy will

ties—and ready to participate in our society.

continue to move up the value-added ladder and stay

In the well-researched and thought-provoking

ahead of the competition—including China and other

essay that follows, Dallas Fed Research Officer Pia

emerging powers—if we continue attracting the “best

Orrenius and Agnes Scott College Professor Madeline

and brightest.”

Zavodny describe how our economy has evolved from

In addition to the insightful piece on immigration,

“brawn and machines” to “brains and microchips.”

I encourage you to read our 2010 “Year in Review” on

The comparative advantage of the U.S. economy lies

page 18. It has been a year of change that included

in providing high-value-added services and brain-

passage of the Dodd–Frank Wall Street Reform and

intensive goods such as semiconductors and pharma-

Consumer Protection Act, rollout of the Treasury’s

ceuticals to the rest of the world.

all-electronic payment initiative and the planned

Skilled, highly educated immigrants are ready

transformation of our San Antonio Branch to a stan-

to power our mighty economic machine into the 21st

dard cash depot. Amid these changes, the men and

century and beyond. Unfortunately, we are often

women of the Dallas Fed continue to make significant

turning these workers away. In many cases, we

contributions to the Federal Reserve System and the

blatantly discard the returns on our own education

Eleventh District—an area that covers 360,000 square

investments. Consider this: Many skilled immigrants,

miles, populated by 27 million hard-working Texans,

sponsored by their U.S. employers, are waiting up to

Louisianans and New Mexicans. We remain committed

10 years for a green card allowing permanent legal

to keeping up with the changing nature of a globalized

residence. For many, this comes only after they have

economy, while serving the ever-increasing needs of

patiently waited for and received an elusive H-1B

our dynamic regional economy.

work visa. Rather than encouraging people to stay
and work, our immigration policy turns away some of
the most promising foreign talent, sending them home
to, in turn, compete against us.
Winning the future will become increasingly difficult unless we figure out a practical way to allow

Richard W. Fisher

Letter from the president • 2010 ANNUAL REPORT

3

The New Colossus Not like the brazen giant of Greek fame,

From Brawn to Brains

I

mmigrants help fuel the U.S. economy,

representing about one in every six workers.
Because of accelerated immigration and slowing
U.S. population growth, foreign-born workers
accounted for almost half of labor force growth
over the past 15 years.1 Public attention has focused mainly on the large number of low-skilled
immigrant workers, but the number of highskilled immigrants actually grew faster during the
period. Highly educated immigrants filled critical
jobs in the science, engineering, information technology and health care sectors as well as fostered
innovation and created high-tech businesses.

4

FEDERAL RESERVE BANK OF DALLAS • 2010 ANNUAL REPORT

With conquering limbs astride from land to land;

How Immigration Works for America
By Pia Orrenius and Madeline Zavodny
Future U.S. prosperity depends on having
a skilled workforce. This requires educating the
native-born population and continuing to attract the

recovery, U.S. workers may not see the need to
replenish the workforce with foreign labor.
Although dealing with the aftermath of

world’s best and brightest to the U.S. For decades,

the recession is important, it should not

the nation has been the world leader in attract-

stand in the way of creating policies that

ing skilled immigrants who, until recently, had few

lay the groundwork now for stronger

good alternatives. Today, other destination countries

economic growth tomorrow. Highly ed-

increasingly recognize the economic benefits of these

ucated immigrants help build the na-

workers and are designing policies to attract them,

tion’s human capital, which, together

even as the immigrants’ nations of origin seek ways

with physical capital and technological

to entice them to return home.

progress, forms the foundation of the

The U.S. immigration system, meanwhile, has

nation’s future. This report examines

not kept up. Piecemeal fixes have turned current law

historical perspectives on immigration,

into a web of outmoded, contradictory and ineffi-

who comes to the U.S. and why, the

cient quotas, rules and regulations. For example, the

economic and fiscal impacts of immigra-

number of high-skilled immigrant workers admitted

tion, the problems with current policy and

on temporary visas has doubled since 1996, but the

the arguments for immigration reform that

number of employment-based permanent-residence

prioritizes brains over brawn.

visas, or “green cards,” has remained the same. As
a result, the wait for employment-based green cards
extends more than a decade. It’s not known how

A Historical Perspective
Since the first arrivals, waves of immigrants

many high-skilled immigrants are turned away by

have shaped the nation. The Industrial Revolution

the broken system, but the U.S. risks falling behind

ushered in a period of rapid economic growth and

in the global race for talent if immigration laws are

high levels of immigration. By the time Emma Laza-

not reformed.

rus wrote her famous poem, “The New Colossus,”

Immigration legislation has been put on the

in 1883, the national image was not just of people

back burner while lawmakers have focused on the

remaking the nation but also of the nation remak-

recession, health care, tax policy and financial re-

ing the people. “Give me your tired, your poor, your

form. At the same time, the economic downturn has

huddled masses yearning to breathe free,” Lazarus

wracked U.S. labor markets and damped public sup-

wrote, as if coming to America changed the fate of

port for comprehensive immigration reform. Given

the “homeless” and “tempest-tossed.” To enter Amer-

the distressed housing market, high unemployment

ica was to go through the “golden door,” presumably

and sluggish job growth in a still-nascent economic

to a place where even the most common of men and

From Brawn to Brains: How Immigration Works FOR America • 2010 ANNUAL REPORT

5

Here at our sea-washed, sunset gates shall stand

women could find fortune.

T

Lazarus’ poem is rooted in the U.S. experience
during the late 19th and early 20th centuries. The
economy absorbed massive immigrant influxes. The
lure of economic opportunity was not lost on Europeans and Asians who struggled to survive at home.

echnology has done away with

much of the need for swaths of workers to

Once in the U.S., Europeans cultivated farmland in
the Midwest, Chinese laborers toiled on railroads in
the West and immigrants of all nationalities fueled
urban industrialization in the Northeast and Great

perform manual labor, and blue-collar

Lakes states. Before the 1880s, immigration to the

wages are falling.

largely unregulated. The movement of people to

United States—and throughout the world—was
the U.S. was limited more by migration costs than
by restrictive government regulation. Policies were
permissive by design, to settle and claim the West,
but also because economic growth was possible only
with more workers, and more workers led to greater
growth. Land was abundant, labor was scarce and
wages were rising.
How are things different today? To be sure,
the country no longer has a vast expanse of empty,
productive land. Agriculture and manufacturing,

Chart 1
Blue-Collar Work on the Decline
Percent
90

mainstays of the 19th-century U.S. economy, employ
a shrinking number of workers. Technology has done
away with much of the need for swaths of workers

84
78

80

Foreign born

to perform manual labor, and blue-collar wages are

Native born

falling. Meanwhile, the economy has shifted toward
the service sector.

70

These long-run trends have manifested them-

60

selves in the labor market in an important way: fewer

53

50

blue-collar workers. The proportion of native-born in-

40

37

dividuals employed in blue-collar occupations today is
less than half what it was in 1910, the historical peak

30

of U.S. immigration (Chart 1). Among immigrants,
who are disproportionately employed in blue-collar

20

occupations, the fraction working in these jobs has

10

fallen to 53 percent from 84 percent a century ago.2
0

1910

2009

NOTE: Percentage of workers age 25 and over in blue-collar occupations in 1910
and 2009.
SOURCES: 1910 census; 2009 American Community Survey.

These statistics highlight another important fact:
Immigrants’ and natives’ skill levels differ more today
than in 1910. The gap between the immigrant and
native blue-collar employment share has grown to 16

6

FEDERAL RESERVE BANK OF DALLAS • 2010 ANNUAL REPORT

A mighty woman with a torch, whose flame

percentage points, compared with 6 percentage points

ers in the U.S. lacking a high school degree (Chart

a century ago.

2). The immigrant shares among workers in the

The Changing U.S. Workforce: Where Immigrants Fit
One of the most dramatic transformations of the

middle of the education distribution—those who
graduated from high school or college—are
much lower at 12 percent and 14 per-

U.S. workforce in the post-war years has been its

cent, respectively. For workers with

rising educational attainment. In 1950, 64 percent

master’s degrees, the foreign-born

of U.S.-born workers lacked a high school diploma.

share rises to 16 percent; for those

Today, fewer than 10 percent have not completed

with professional degrees, such as

high school. This rapid rise in U.S. workers’ educa-

doctors and lawyers, it is 17 percent;

tion levels created an opening for low-skilled foreign

and among doctoral degree holders,

labor that was readily filled, both legally and illegally.

the share reaches 27 percent. Over-

Low-skilled immigrants are increasingly employed

all, 17 percent of workers age 25 and

in service jobs as well as disproportionately in the

older were foreign born in 2009 (dotted

traditional industries: agriculture, construction and

line on Chart 2). Immigrants, thus, are

manufacturing. Service industries where low-skilled

concentrated at the bottom and top of the

immigrants dominate include landscaping and build-

education distribution. Most U.S. workers are in the

ing maintenance, food preparation, personal care and

middle of the education distribution (Chart 3). Workers

service, transportation and health care.

with at least a high school diploma but not a bach-

All told, immigrants make up almost half of work-

Chart 2
Immigrant Workers Overrepresented at Extremes of the
Education Distribution

elor’s degree represent 57 percent of the workforce.

Chart 3
Most Workers Have High School but Not College Degree
(Labor force by education)

Percent
50

2.4%

1.4%

45
40

8.4%

35

10.2%

Less than high
school graduate
High school graduate,
some college

30
25

Bachelor's degree

20.5%

Master's degree

20

Share of foreign born
in the labor force

15

57.2%

Professional degree
Doctoral degree

10
5
0

Less than
high school
graduate

High school
graduate,
some college

Bachelor's
degree

Master's
degree

Professional
degree

Doctoral
degree

NOTE: Percentage of foreign and native workers age 25 and over in the U.S. labor
force by education.
SOURCE: 2009 American Community Survey.

NOTE: Percentage of foreign workers age 25 and over in the U.S. labor force by
education.
SOURCE: 2009 American Community Survey.

From Brawn to Brains: How Immigration Works FOR America • 2010 ANNUAL REPORT

7

Is the imprisoned lightning, and her name

A

High-Skilled Immigrants

lthough the U.S. tapped Western Europe for

skilled labor for over a century, rising education levels
in Asia, unrest in the Middle East and the collapse of

High-skilled immigrants tend to complement
high-skilled native-born workers by flowing into fastgrowing fields where native labor supply cannot keep
up.3 As a result, highly educated immigrants are overrepresented in some of the most skill-intensive occu-

the U.S.S.R. have generated new streams of skilled

pations (Chart 4). They make up 45 percent of medical

workers for U.S. employers.

for example. Immigrants also have a large presence in

scientists and 37 percent of computer programmers,
medicine, engineering, higher education, accounting

Of Note

Mexico–U.S. Migration in Structural Decline?
The housing crisis and recession produced
sharp declines in Mexico–U.S. migration. While
these demand-side factors influence the volume
of Mexican migrants, supply-side factors are
important too, especially in the long run. Labor
supply shocks caused by changes in the size of
birth cohorts explain as much as a third of U.S.
immigration from Mexico in recent decades.1
With Mexico in the midst of one of history’s
most dramatic demographic transitions, declining population growth there carries significant
implications for the future of Mexican immigration to the U.S.
From the late 1970s to 2010, fertility rates in
Mexico fell from 6.8 to 2.2 children per woman,
just above the “replacement rate” of 2.1 needed
for a country’s population to remain stable.2
Factors leading to declining fertility rates
include a large drop in infant mortality, rising
education levels and increased female laborforce participation.3 Public policy also had an
impact. The Mexican government launched an
aggressive family planning campaign in the
early 1970s, since expanded to include rural
areas. Population growth has slowed dramatically as a result.

8

FEDERAL RESERVE BANK OF DALLAS • 2010 ANNUAL REPORT

If this trend continues, Mexico’s population
will shift significantly toward older cohorts and
away from the younger generations who tend to
migrate. The youngest age group (ages 0–14) is
on track to represent 16 percent of the population in 2050, compared with 28 percent today.4
Older cohorts (ages 65 and up), by contrast, will
likely rise to 22 percent from 7 percent over the
same period. Current concerns about the inflow
of Mexican immigrants are likely to diminish
as the Mexican population ages and the share
of young workers in the labor force declines
dramatically.
Notes
1
“The Great Mexican Emigration,” by Gordon H.
Hanson and Craig McIntosh, Review of Economics
and Statistics, vol. 92, no. 4, 2010, pp. 798–810.
2
Data from “World Population Prospects: 2008
Revision,” Population Division, Department of Economic and Social Affairs, United Nations, 2008.
3
“Are Young Cohorts of Women Delaying First Birth
in Mexico?,” by Alfonso Miranda, Journal of Population Economics, vol. 19, no. 1, 2006, pp. 55–70.
4
See note 2.

Mother of Exiles. From her beacon-hand

and auditing, nursing and architecture. On average,
immigrants make up 15.5 percent of the high-skilled
labor force (dotted line on Chart 4).
Although the U.S. tapped Western Europe for
skilled labor for over a century, rising education levels
in Asia, unrest in the Middle East and the collapse of
the U.S.S.R. have generated new streams of skilled
workers for U.S. employers. Census data show 80 percent of workers in the U.S. who arrived from India have
at least a bachelor’s degree, followed by Taiwan, Japan,
Iran, the former U.S.S.R. and South Korea (Chart 5).4

Low-Skilled Immigrants
The least-educated workers come from Mexico,
Central America and the Caribbean. This is largely
a result of geographic proximity, continued demand
for low-skilled labor among U.S. employers and large

Chart 4
STEM, Health Care Occupations Rely on High-Skilled
Foreign Workers
Medical scientists
Computer software developers
Mathematicians
Chemists
Physicians
Computer systems analysts and computer scientists
Mechanical engineers
High school and college instructors
Dentists
Biological technicians
Pharmacists
Chemical engineers
Biological scientists
Economists, market researchers, survey researchers
Accountants and auditors
Registered nurses
Architects
Financial managers
Managers and administrators
Chief executives and public administrators
Sales-related
Actors, directors, producers
Veterinarians
Lawyers/judges
0

wage differentials. Research suggests a Mexican immigrant earns about 2.5 times as much (in purchasingpower-adjusted terms) in the U.S. as he would have
if he remained in his native country.5 For a Haitian
immigrant, earnings are as much as 10 times greater
in the U.S. than at home.6
Because immigration policy makes it hard for
low-skilled workers to be admitted to the U.S. unless they have a close relative here who can sponsor
them, many enter illegally. Estimates suggest there
are almost 8 million unauthorized immigrant workers
in the U.S. today, the great majority with less than
a high school education.7 As many as 80 percent of
Mexican immigrants initially arrived as unauthorized
immigrants.8

Immigration and the Economy: A Bigger Pie
Immigrants differ from natives; they tend to have
either a great deal more or a great deal less education than the average native, and they are clustered
in certain occupations. Another difference is language. About 32 percent of immigrants report that
they either do not speak English or do not speak it
well. Although immigrants may have fewer skills than
natives, being different isn’t bad.9 In fact, differences

Foreign born as
percentage of collegegraduate labor force

10

20
30
Percent

40

50

NOTES: Percentage of foreign-born workers age 25 and over with bachelor’s degree
or higher in selected occupations. STEM stands for science, technology, engineering
and mathematics.
SOURCE: 2009 American Community Survey.

Chart 5
Highest-Educated Immigrants Are From Asia, Iran,
Former U.S.S.R.
India
Taiwan
Japan
Iran
Former U.S.S.R.
South Korea
Philippines
China/Hong Kong
United Kingdom
Canada
Germany
Poland
Brazil
U.S. natives
Colombia
Italy
Peru
All immigrants
Vietnam
Cuba
Jamaica
Haiti
Ecuador
Dominican Republic
Honduras
Guatemala
El Salvador
Mexico

Bachelor’s degree and higher

High school graduate
and some college

Less than high school

0

20

40

Percent

60

80

100

NOTE: Composition of educational attainment among immigrants by country of origin.
SOURCE: 2009 American Community Survey.

From Brawn to Brains: How Immigration Works FOR America • 2010 ANNUAL REPORT

9

Glows world-wide welcome; her mild eyes command

are crucial. There would be no economic gains to
immigration for natives if immigrants were clones of

labor supply of skilled native women.10
One drawback of immigration’s economic effects

natives or, in economic jargon, perfect substitutes.

is uneven distribution of the gains. Employers, inves-

Differences can create complementarities, with im-

tors and complementary workers benefit while substi-

migrant workers making natives better off.

tutable workers lose out. These losses are concentrat-

How does immigration affect the economy? Its

ed at the low-wage end of the labor market because

first-order effect is boosting the number of available

so many immigrants are low-skilled. Although there

workers, increasing total output and gross domestic

is general belief that immigration has hurt low-skilled

product (GDP). Most of the gain in GDP accrues to

native workers, there is no consensus on the size of

immigrant workers in the form of their earnings, but

the impact.11

natives gain as well. Business owners benefit from

Estimates of the immigration-induced GDP in-

lower labor costs and a larger customer base. Natives

crease that accrues to natives—known as the “immi-

benefit from lower prices. In cases where immigrants

gration surplus”—are typically based on simulations

and natives are complements, lower prices can have

of macroeconomic models or back-of-the-envelope cal-

far-reaching effects. For example, research shows

culations. Standard competitive models produce small

the immigration-induced decline in the cost of child

estimates, between 0.1 and 0.3 percent of U.S. GDP.12

care and housekeeping has significantly increased the

The immigration surplus is larger if immigrants are

Of Note

States Fight Bright Flight
For years, a number of states, especially in the
Midwest and Northeast, have dealt with either
domestic net outmigration or brain drain, the
mass departure of young skilled workers for
other states. Net domestic emigration has been
a concern in California, Iowa, Connecticut, Kansas and Ohio. Illinois, Michigan and New York
have experienced especially high outmigration,
with more than 1.4 million residents leaving in
the past decade.
States have launched initiatives to combat
brain drain and skilled labor shortages. These
initiatives aim to retain and attract workers,
primarily in critical skill areas. They range from
boosting workforce skills through investment
in community colleges and apprenticeships,
such as Maryland’s Skills2Compete program, to
targeting high-tech job growth, as with Michi-

10

FEDERAL RESERVE BANK OF DALLAS • 2010 ANNUAL REPORT

gan’s 21st Century Jobs Fund. Other programs,
such as Vermont’s Next Generation Workforce
project, provide cash grants to businesses that
create critical-skills jobs.
Some states have even launched ambitious Internet-based campaigns that leverage
online networking to connect former residents
with job opportunities in advanced fields. With
names such as “Move Back to Nebraska” and
“You Belong in Connecticut,” these campaigns
seek to brand states with skilled-labor shortages as attractive places to “Stay, Work, Play”
(New Hampshire).
Though the success of these nascent initiatives remains to be seen, it is clear that many
states have felt the negative ramifications of
skilled-labor shortages and are working to stem
the flow.

The air-bridged harbor that twin cities frame.

complementary to natives and complementary to
capital. This is more likely to occur if immigrants are
highly skilled. High-skilled immigrants tend to attract
capital and work in occupations where native-born
labor is scarce, creating a larger immigration surplus.

High-Skilled Immigrants and Economic Growth
If high-skilled immigrants are also more innovative and entrepreneurial, the immigration surplus
is larger still. In this case, immigration can actually
boost productivity growth, leading to a higher long-run
rate of economic growth.13 Recent research provides

Chart 6
Immigrants Go Where the Jobs Are
Foreign-born population growth
.5
.4
.3

TN

.2

KY
DE

.1
0
–.1

AK

convincing empirical evidence that high-skilled immigrants play an important role in innovation and,
in certain sectors, entrepreneurship. Highly educated
immigrants receive patents at more than twice the rate
of highly educated natives. The difference has been
linked to immigrants’ overrepresentation in STEM (science, technology, engineering and mathematics) fields
and the growing number of immigrants entering on
employment-based and student visas.14 There is also

MI
–.2
HI

ME

–.1

NV

NE

AL
MS

MN
IN
OK
KS
IA
TX
VA WA
MO
MD
WY
WI
FL
PA
LA NJ
IL
ND
CT MA NH
OH
CA
NY
MT
RI
WV

–.3
–.4
–.2

SC

NC
GA
AR
UT
CO
SD
NM

ID

AZ

OR

VT
0
.1
State GDP growth

.2

NOTE: Coordinates indicate deviation from average foreign-born population growth
(vertical axis) and from average real state GDP growth (horizontal axis) from 1990 to
2009.
SOURCES: 1990 census; 2009 American Community Survey; Bureau of Economic
Analysis.

evidence of positive spillovers on natives, meaning that
immigrants not only raise innovation directly but also

labor shortages and speeding up wage convergence. A

boost overall patent activity, perhaps by attracting ad-

simple plot of foreign-born population growth against

ditional resources and boosting specialization.15

real GDP growth by state shows the great majority

High-skilled immigrants’ entrepreneurial activi-

of states clustered in the lower left and upper right

ties have been instrumental in the growth of the U.S.

quadrants, demonstrating that immigration and eco-

high-tech sector, for example. Immigrants founded

nomic activity are positively correlated (Chart 6).

16

25 percent of U.S. high-tech startups between 1995

Immigration also can lead to greater efficiency

and 2005. Immigrants have much higher rates of

if production is characterized by economies of scale.

business creation than natives and slightly higher

These can occur in a number of ways when the popu-

self-employment rates.

lation increases: Fixed costs per unit fall as produc-

17

18

tion rises; larger markets lead to a better division of

Efficiency Gains From Immigration

labor and greater specialization; higher production

Immigration can help the economy in a number

volume leads to more learning-by-doing; and a larger

of other ways, many that economists have not studied

population makes more investment in infrastructure

in-depth. Immigrants are more mobile than natives,

worthwhile. There is little empirical evidence quantify-

for example, responding more readily to regional

ing these gains.20

differences in economic opportunity. Foreign-born
19

workers are more likely than natives to move to where
the jobs are (and leave where jobs aren’t). In this way,
they increase labor market efficiency by alleviating

.3

Fiscal Impact of Immigration
Conventional estimates of the economic impact
of immigration on natives, discussed above, suggest

From Brawn to Brains: How Immigration Works FOR America • 2010 ANNUAL REPORT

11

“Keep ancient lands, your storied pomp!” cries she

L

it is a small fraction of GDP overall, but likely higher

immigrants. The net effect depends on

with education, the fiscal impact of an immigrant

each group’s relative share.

same is true for natives.

ow-skilled immigrants are a

if more immigrants are skilled. Estimates of the fiscal

net fiscal drain, but overall, immigration

impact of immigration are also more favorable the

need not be. High-skilled immigrants

gration’s fiscal impact is the difference between taxes

can offset the fiscal cost of low-skilled

greater the share of high-skilled immigrants. Immipaid by immigrants and the cost of government services they receive. Since income is so highly correlated
essentially depends on educational attainment. The
Estimates from 1996—the most recent comprehensive estimates available—indicate that immigrants
with less than a high school diploma cost $89,000
more than they contribute in taxes over their lifetimes, while immigrants with more than a high school
education contribute $105,000 more in taxes than
they use in public services.21 In other words, lowskilled immigrants are a net fiscal drain, but overall,
immigration need not be. High-skilled immigrants can
offset the fiscal cost of low-skilled immigrants. The net
effect depends on each group’s relative share.
Immigration’s adverse fiscal impacts are most
felt at the local level. State and local governments
meet many of the needs of low-skilled immigrants by
bearing the bulk of the cost of education and public
hospitals and part of the cost of public assistance programs, such as public health insurance (Medicaid and
the Children’s Health Insurance Program, or CHIP)
and traditional welfare (Temporary Assistance for
Needy Families, or TANF).
In 2010, about 31 percent of immigrant-headed
households participated in a major means-tested public assistance program, compared with 19 percent of
native-headed households.22 The difference is entirely
explained by Medicaid and CHIP participation, a consequence of the low rates of private health insurance
coverage among immigrant families.
Some policymakers argue that more immigration
can remedy the looming shortfalls in pay-as-you-go
programs, such as Social Security. Although a large
increase in immigration can extend trust fund solvency a few years, higher levels of immigration would

12

FEDERAL RESERVE BANK OF DALLAS • 2010 ANNUAL REPORT

With silent lips. “Give me your tired, your poor,

do little to reduce Social Security’s overall unfunded
liabilities, which are in the trillions.23
A more attainable goal may be to mitigate federal
budget deficits. An interesting 2000 study showed
that a selective immigration policy that admitted 1.6
million high-skilled immigrants age 40–44 years old

Chart 7
Second-Generation Education Outcomes a Big Improvement
Over Parents
(Individuals age 25 and over lacking a high school diploma)
Percent
60

annually into a hypothetical U.S.-style economy with a
50 percent debt-to-GDP ratio would have balanced the

50

budget within five years and eventually eliminated the
national debt.24 Balancing the budget via tax increases

First generation
Second generation
Third generation and higher

40

instead would have required a 4.4 percentage point
increase in income tax rates, according to that study.

30

The Second Generation

20

High-skilled immigrants, thus, can help the fiscal picture. But many immigrants have relatively low

10

education levels and impose significant fiscal costs.
One silver lining is that these costs dissipate in the
very long run as their descendants assimilate and
“pay back” the costs imposed by their predecessors.
Economic or educational assimilation is, therefore, a
very important piece of the immigration calculation.
Although many first-generation immigrants lack even
a high school degree, their descendants generally
reach typical U.S. education outcomes over time.
Patterns of educational attainment by generation
suggest immigrants’ children, the second generation,
show a large improvement over the first generation,
with the share lacking a high school degree declining steeply from 30 percent to 11 percent (Chart 7).
Improvements tend to continue but at a slower pace
in the third generation, with the exception of nonHispanic blacks, who appear to backslide in the third

0

Immigrants

Hispanic
immigrants

Non-Hispanic
Non-Hispanic
Non-Hispanic
white immigrants black immigrants Asian immigrants

SOURCE: 2009 American Community Survey.

W

ith education playing such

a central role in immigrant integration
and with so many low-education
immigrants, the challenge facing U.S.
schools is formidable.

generation.
With education playing such a central role in immigrant integration and with so many low-education
immigrants, the challenge facing U.S. schools is formidable. In California, 50 percent of children enrolled
in K–12 schools are either immigrants or the children
of immigrants. In Texas, the share is 32 percent;
nationally, it is 22 percent. These children have advantages and disadvantages—they are likely to be bi-

From Brawn to Brains: How Immigration Works FOR America • 2010 ANNUAL REPORT

13

Your huddled masses yearning to breathe free,

Chart 8
Green Cards Go Mostly to Family, Humanitarian
Immigrants
Diversity
4%

lingual and have parents who want them to succeed,
but many are from families with limited resources.
Compounding the problem is that states and localities are confronting significant budget cuts in coming
years, cuts that will undoubtedly impact schools.

Refugees and asylees
15%

Implications for Immigration Policy
The benefits of immigration accrue from high-

Others
2%

Immediate family
45%

and low-skilled immigrants. Both tend to complement
the native workforce, bringing brains or brawn to
locations and occupations where there is a need. The

Employment
15%

Hispanic immigrant population in Louisiana jumped
nearly 20 percent following Hurricane Katrina, as
workers converged there to assist the cleanup and
Other family
19%

NOTE: Share of legal permanent residents by admission class (2005
through 2009).
SOURCE: Yearbook of Immigration Statistics, Department of Homeland
Security.

reconstruction.
High-skilled workers, however, come with more
benefits and fewer costs than low-skilled workers.
And their skills are key to the vitality and growth of
some of the nation’s most successful industries and to
research and development. In addition, many highskilled immigrants work in industries that produce
tradable goods or services, meaning companies can
employ their workers here or overseas. Google can
hire programmers to work in Mountain View, Calif.,
or in Guangzhou or Hyderabad or any of the other
49 non-U.S. cities in which it currently operates. If
it cannot get visas for its workers, it can just employ
them overseas.25 For all these reasons, the U.S. has
a lot to gain from rewriting U.S. immigration policy
to focus more on high-skilled and employment-based
immigration.
Existing policy is rooted in the 1965 amendments
to the Immigration and Nationality Act, which made
family reunification the primary objective. The U.S.
annually issues about 1.1 million green cards, allowing permanent legal residence. About 85 percent go
to family members of U.S. citizens or permanent legal
residents, people seeking humanitarian refuge and
“diversity immigrants,” who come from countries with
low rates of immigration to the United States (Chart
8).26 The remaining 15 percent go to people who are
immigrating for work reasons—but half of these are

14

FEDERAL RESERVE BANK OF DALLAS • 2010 ANNUAL REPORT

The wretched refuse of your teeming shore.

for workers’ spouses and children, meaning a mere
7 percent of green cards go to so-called principal
workers, most of whom are high-skilled. No other
major developed economy gives such a low priority to

Table 1
U.S. Lags Behind Other Nations in Share of Work-Based
Immigrants
Total number
(thousands)

Work
(percent)

Family
(percent)

Humanitarian
(percent)

Other
(percent)

South Korea		

195

81

17

0

2

programs in the past two decades to help compensate

Switzerland		

139

80

14

5

2

for the low number of employment-based green cards

Spain		

392

79

20

0

1

(Chart 9). The best known is the H-1B program, which

Italy		

425

65

31

3

1

admits about 131,000 workers in a typical year, many

Germany		

228

59

22

16

2

of them high-skilled Indians going to work in the

United Kingdom		

347

58

31

1

10

information technology sector. Another important

Australia		

206

42

51

6

1

temporary job-based measure is the Trade NAFTA

France		

168

34

52

7

8

(TN) visa, which brings in an additional 72,000 profes-

Canada		

247

25

62

13

0

sionals, mostly from Canada. The L1 program allows

United States		 1,107

7

73

15

5

employment-based immigration (Table 1).
The U.S. has created several temporary visa

27

multinational corporations’ intracompany transferees
(about 74,000), and the O1 program provides visas for
a small number of workers of “extraordinary ability.”
Unprecedented green card queues are a byprod-

			
Country		

NOTES: Only includes OECD countries. Work includes free-movement migrants.
Percentages may not add to 100 due to rounding.
SOURCE: International Migration Outlook 2010, Organization for Economic Cooperation and
Development.

uct of expanding temporary, but not permanent,
visas for high-skilled personnel. More than 1 million
high-skilled workers are waiting for an employmentbased green card, and untold numbers have given up
on waiting or even applying. For those in the queue,
their applications have been approved, but their green
cards won’t be available for years because of strict numerical limits on employment-based permanent visas.
There also are country-of-origin limits that restrict the
number of immigrants from populous nations such as
China and India.

Chart 9
Temporary Visas, Not Green Cards, Driving High-Skilled
Immigration
Thousands
450
400
350
300

Expanding employment-based immigration would
offer a host of benefits, including more high-skilled
and procyclical immigration. Employment-based immigration is demand driven, which means it declines
when the U.S. labor market weakens, as it did during
the recent recession. The high-tech boom of the late
1990s and the housing and financial boom of the mid2000s produced rapid expansion in visa issuance,
while the 2001 recession, subsequent jobless recovery and the recession that began in late 2007 were
all periods of visa declines. While temporary workbased visas responded to the business cycle, the total

O1
L1
TN
H-1B and H-1B1
Employment-based
green cards

250
200
150
100
50
0
1992

1996

2000

2004

2008

NOTE: Number of visas issued to high-skilled workers by visa type and fiscal year.
SOURCES: Statistical Yearbook of the Immigration and Naturalization Service; Yearbook of
Immigration Statistics, Department of Homeland Security; State Department visa office.

From Brawn to Brains: How Immigration Works FOR America • 2010 ANNUAL REPORT

15

Send these, the homeless, tempest-tost to me,

number of green cards issued has not changed much.

cal change already favor high-skilled workers, in a

Green card issuance barely budged in 2008 and 2009,

trend that goes back decades. Since the early 1970s,

during the worst recession in 80 years, despite the

the inflation-adjusted wages of only the most highly

more than 6 percent drop in employment nationwide

educated U.S. workers have consistently risen. Blue-

and steep rise in unemployment.

collar pay, particularly for men, has declined in real
terms. The nature of economic growth has shifted

Conclusion

from brawn and machines to brains and microchips.

Although immigration has played a fundamental

Immigration policy should reflect this change and be

role in shaping the U.S., it has always been contro-

a tool that helps secure the nation’s prosperity, now

versial. In the 19th century, natives agonized over the

and in the future.

German influx, then the Irish and then the Chinese.
In the 20th century, natives revolted against the

Orrenius is a research officer and senior economist

waves of southern and eastern Europeans. In the

at the Federal Reserve Bank of Dallas and Madeline

wake of the 1920–21 recession, lawmakers passed the most restrictive immigration act in the nation’s history,
the National Origins Act of 1924.
Clearly, recessions and immigration
do not mix well. Still, most of
the postwar period has
been devoted to loosening restrictions or
finding ways around
them.
Immigration laws
should be rewritten to focus on
economic priorities. These include leveraging
high-skilled immigration to build the nation’s human capital base, retain skilled jobs, foster research
and development, and bolster competitiveness. These
payoffs will take years to occur but require making
changes now. Other economic goals, such as making
inflows more cyclical, can be readily achieved with a
greater share of employment-based visas. Labor demand is naturally cyclical, and work-based immigration will decline in downturns and rise in expansions.
As global growth shifts increasingly to emerging markets, such as China and India, competition
for skilled workers will only increase. The share of
Chinese students educated abroad—most of them in
the critical STEM fields—who return to China to work
has doubled since 2001. Globalization and technologi-

16

FEDERAL RESERVE BANK OF DALLAS • 2010 ANNUAL REPORT

Zavodny is a professor of economics at Agnes Scott
College.

Notes
The authors thank Carlos Zarazaga and Jason Saving for comments
and Linda Bi for excellent research assistance. We also thank
Payton Odom for his contributions.
1
This report uses the terms foreign born and immigrant interchangeably to refer to individuals born abroad to foreign-born
parents and uses native born to refer to anyone born in the U.S. (or
born abroad to U.S. citizens).
2
The decennial census did not ask about education or income until
1940. We use data on workers’ occupations to proxy for the shares
of low-skilled (blue-collar) and high-skilled (white-collar) workers.
3
Since 1993, the number of U.S. citizens and permanent residents
enrolled in graduate studies in science and engineering (S&E)
has risen, although not as fast as the number of foreign students.
Foreign students who were doctoral graduates in S&E made up 33
percent of total graduates in 2007. See appendix Table 2-30 in “Science and Engineering Indicators 2010,” National Science Board,
Arlington, Va., 2010.
4
The former U.S.S.R. consists of Armenia, Azerbaijan, Belarus,
Estonia, Georgia, Kazakhstan, Kyrgyzstan, Latvia, Lithuania, Moldova,
Russia, Tajikistan, Turkmenistan, Ukraine and Uzbekistan.
5
“The Place Premium: Wage Differences for Identical Workers
Across the U.S. Border,” by Michael Clemens, Claudio Montenegro and Lant Pritchett, Center for Global Development, Working
Paper no. 148, July 2008, www.cgdev.org/content/publications/
detail/16352.
6
For a historical comparison with domestic migration, personal
income per capita was 2.4 times higher in New England than in
the South in 1929, 2.7 times higher in the mid-Atlantic states, and
2.2 times higher in the Midwest (authors’ calculations based on

I lift my lamp beside the golden door!” Emma Lazarus

Bureau of Economic Analysis data not adjusted for differences in
purchasing power).
7
“U.S. Unauthorized Immigration Flows Are Down Sharply Since
Mid-Decade,” by Jeffrey S. Passel and D’Vera Cohn, Pew Hispanic
Center report, September 2010, http://pewhispanic.org/files/
reports/126.pdf.
8
“Mexican Immigrants: How Many Come? How Many Leave?,” by
Jeffrey S. Passel and D’Vera Cohn, Pew Hispanic Center report,
July 2009, http://pewhispanic.org/files/reports/112.pdf.
9
Differences in English ability may create opportunities for nativeborn workers to move up the skill chain. See “Task Specialization,
Immigration and Wages,” by Giovanni Peri and Chad Sparber,
American Economic Journal: Applied Economics, vol. 1, no. 3, 2009,
pp. 135–69. As Peri and Sparber show, immigration appears to push
natives into jobs that require communication skills, an area where
natives have an advantage over immigrants with limited English
fluency.
“Low-Skilled Immigration and the Labor Supply of Highly Educated Women,” by Patricia Cortés and José Tessada, University of
Chicago Graduate School of Business, unpublished paper, 2009.
11
See “The Economic Analysis of Immigration,” by George J.
Borjas, in Handbook of Labor Economics, vol. 3, part 1, 1999, pp.
1697–1760; and “Is the New Immigration Really So Bad?,” by David
Card, Economic Journal, vol. 115, no. 507, 2005, pp. 300–23. Economists agree, however, that in the long run, wages are not affected
by immigration. This is because the capital stock should adjust
in the long run. If the number of workers increases as a result of
immigration, wages initially fall and returns to capital increase.
As the amount of capital increases in the long run in response to
higher returns to capital, the returns to capital and labor revert to
their initial levels.
12
See note 11, Borjas (1999), and “Immigration’s Economic Impact,”
by the Council of Economic Advisers, Washington, D.C.: Government Printing Office, June 2007.
13
The Theory of Economic Development, by Joseph Schumpeter,
Cambridge, Mass.: Harvard University Press, 1934; “A Model of
Growth Through Creative Destruction,” by Philippe Aghion and
Peter Howitt, Econometrica, vol. 60, no. 2, 1992, pp. 323–51.
14
“How Much Does Immigration Boost Innovation?,” by Jennifer
Hunt and Marjolaine Gauthier-Loiselle, American Economic Journal: Macroeconomics, vol. 2, no. 2, 2010, pp. 31–56; “The Supply
Side of Innovation: H-1B Visa Reforms and U.S. Ethnic Invention,”
by William R. Kerr and William F. Lincoln, Harvard Business School,
Working Paper no. 09-005, December 2008; “Which Immigrants Are
Most Innovative and Entrepreneurial? Distinctions by Entry Visa,”
by Jennifer Hunt, National Bureau of Economic Research, Working
Paper no. 14920, April 2009; “The Contribution of International
Graduate Students to U.S. Innovation,” by Gnanaraj Chellaraj, Keith
E. Maskus and Aaditya Mattoo, Review of International Economics,
10

vol. 16, no. 3, 2008, pp. 444–62.
15
See note 14, Hunt and Gauthier-Loiselle (2010).
16
Silicon Valley’s New Immigrant Entrepreneurs, by AnnaLee Saxenian, San Francisco: Public Policy Institute of California, 1999.
17
“America’s New Immigrant Entrepreneurs,” by Vivek Wadhwa,
AnnaLee Saxenian, Ben Rissing and Gary Gereffi, Duke Science,
Technology and Innovation Paper no. 23, January 2007, http://
people.ischool.berkeley.edu/~anno/Papers/Americas_new_
immigrant_entrepreneurs_I.pdf.
18
Estimates suggest immigrants are 30 percent more likely to start
a business. See “Estimating the Contribution of Immigrant Business
Owners to the U.S. Economy,” by Robert W. Fairlie, Small Business
Administration, Washington, D.C.: Government Printing Office,
November 2008. Immigrant self-employment rates are 11.3 percent
versus 9.1 percent for natives (authors’ calculations based on 2010
Current Population Survey data). This difference in self-employment is driven by less-educated immigrants, perhaps because of
their relatively poor labor market options.
19
See “Does Immigration Grease the Wheels of the Labor Market?,” by George J. Borjas, Brookings Papers on Economic Activity,
2001, pp. 69–119. Borjas estimates that the efficiency gains accruing to natives from a greater rate of regional wage convergence
are around $5 billion to $10 billion per year.
20
One recent study concludes that immigration raises total factor
productivity, perhaps by increasing task specialization. See “The
Effect of Immigration on Productivity: Evidence from U.S. States,”
by Giovanni Peri, National Bureau of Economic Research, Working
Paper no. 15507, November 2009.
21
The New Americans: Economic, Demographic and Fiscal Effects
of Immigration, James P. Smith and Barry Edmonston, ed., Washington, D.C.: National Academies Press, 1997.
22
Calculations are based on March 2010 Current Population
Survey. Major means-tested programs are TANF, Medicaid, CHIP,
Supplemental Security Income (SSI) and Supplemental Nutrition
Assistance Program (SNAP, or food stamps).
23
“The 2010 Annual Report of the Board of Trustees of the Federal
Old-Age and Survivors Insurance and Federal Disability Insurance
Trust Funds,” Washington, D.C.: U.S. Government Printing Office,
August 2010, www.ssa.gov/OACT/TR/2010/tr2010.pdf.
24
“Sustaining Fiscal Policy Through Immigration,” by Kjetil Storesletten, Journal of Political Economy, vol. 108, no. 2, 2000, pp. 300–23.
25
“Tech Recruiting Clashes With Immigration Rules,” by Matt
Richtel, New York Times, April 11, 2009.
26
Countries eligible for the diversity visa lottery include many African and European nations. Applicants from Ghana, Bangladesh and
Ethiopia were the top recipients of visas in the 2011 lottery.
27
Although the official H-1B cap is 85,000 visas (65,000 plus 20,000
for holders of U.S. advanced degrees), the nonprofit sector is
exempt from the cap.

From Brawn to Brains: How Immigration Works FOR America • 2010 ANNUAL REPORT

17

T

Year in Review
he Federal Reserve Bank of Dallas, with branches

contact center—established at the Dallas Fed in 2004—helps

in Houston, San Antonio and El Paso, serves the Eleventh

the Treasury reduce the number of paper checks by enrolling

Federal Reserve District, made up of Texas, southern New

federal benefit recipients in direct deposit. In 2010, the contact

Mexico and northern Louisiana. This important region em-

center processed about 590,000 enrollments and has processed

ploys over 11 million workers and produces an economic

more than 3 million enrollments since its inception.

output greater than that of Mexico or Australia and, until
recently, India.

Go Direct is preparing for the U.S. Treasury’s all-electronic payment initiative—which will mandate the direct deposit

The regional economy emerged from recession during

of all non-tax-related federal benefit payments. The initiative

2010, posting 2.2 percent job growth and adding 241,000

is expected to save the Treasury approximately $300 mil-

jobs, more than any other Federal Reserve District. Economic

lion over the next five years. The contact center is projected

growth varied over the year; rapid job growth in late spring was

to process more than 5 million enrollments by the March 1,

followed by a weak third quarter, but by year’s end, employ-

2013, deadline.

ment was growing more consistently. Areas of the economy
that turned in especially strong growth included the energy
and service sectors. Encouragingly, hard-hit sectors such as

Banking Supervision
The Dallas Fed helps ensure the safety and soundness of

manufacturing and construction also began improving, though

financial insitutions through its lending programs and supervi-

problems in residential and commercial real estate remained

sory activities. Lending programs offered through the discount

evident.

window help relieve liquidity strains by providing a source of

The district faces a number of challenges, including
funding health and education spending in a difficult budget-

short-term funding to depository institutions.
As financial markets strengthened in 2010, the Bank’s

ary environment. Nevertheless, due to its favorable business

discount window continued to provide a ready backstop that

climate, diversified economy and entrepreneurial spirit, the

helped maintain market confidence by issuing 156 loans to-

Eleventh District likely will continue to outperform the nation.

taling approximately $3 billion. Additionally, discount window

Financial and Treasury Services
The Dallas Fed contributes to the district’s vibrant economy by ensuring an efficient, stable and secure payments
system. In 2010, the Bank provided cash services to more than

staff played an important role in the Federal Reserve System’s
new term deposit facility—a program through which Federal
Reserve Banks offer interest-bearing term deposits to eligible
institutions.
The Dallas Fed’s banking supervision and regulation activi-

4,000 financial institutions and branches. The Dallas Fed cir-

ties contributed to financial safety and soundness, both within

culated 5.8 million notes valued at more than $105 billion.

the Eleventh District and nationwide. At year-end 2010, the

To improve efficiency and reduce operating costs, the

Dallas Fed supervised 36 state member banks and 526 bank

Bank announced that a cash depot arrangement will replace

holding companies ranging from more than $50 billion to less

San Antonio cash services in 2011. Such a depot uses an

than $20 million in total assets.

off-site facility, usually operated by an armored carrier, as the

The Eleventh District banking system outperformed the

point of delivery and receipt for cash. Currency processing

rest of the nation in 2010, allowing the Dallas Fed to lend ex-

and storage is provided by another Fed location—in this case,

amination staff to other districts where unfavorable conditions

the Houston office.

required additional examination resources.

The Dallas Fed wound down its check services, transferring

The Dodd–Frank Wall Street Reform and Consumer Protec-

those operations to the Atlanta Fed. Every aspect of the transition

tion Act will bring new responsibilities to banking supervision

was completed on time and met or exceeded expectations.

in 2011, including supervisory responsibility for thrift holding

An important function of the Federal Reserve is providing
services to the U.S. Department of the Treasury. The Go Direct ®

18

FEDERAL RESERVE BANK OF DALLAS • 2010 ANNUAL REPORT

companies. The groundwork laid in 2010 has positioned the
Bank well to assume these responsibilities.

Research and Public Outreach

unbanked in Mexico. The staff also built and refined analytical

Through an array of publications, public programs and

tools used across the Federal Reserve System for monitoring

outreach efforts, the Dallas Fed provides valuable research and

the financial condition of banks and other financial institu-

insight to enhance public understanding of the global, national

tions, such as thrifts and credit unions.

and regional economies.
In 2010, the Bank expanded its web presence by adding

The Dallas Fed delivered an array of economic programs
and services to students and teachers throughout the district.

two new monthly research publications to the website—one

One of the year’s highlights was “Conversation with the Chair-

that provides a discussion of inflation developments (Behind

man,” which featured Ben Bernanke interacting with educators

the Numbers: PCE Inflation Update) and another that offers a

across the nation. This event was the result of an effort led by

snapshot of the regional economy (Texas Economic Indicators).

the Dallas and Cleveland Feds’ economic education functions.

The Dallas Fed organized a number of research confer-

The Federal Reserve’s response to the financial crisis con-

ences in 2010. “U.S. and Mexico Manufacturing: Common

tinued to be a primary focus for the Bank’s public programs.

Bonds” explored the role the U.S. plays in global manufac-

Program offerings were augmented by a new webcasting plat-

turing and how Mexico complements the U.S. through the

form, allowing the Bank to reach a broad audience across the

maquiladora industry. Another research conference explored

district and the nation effectively and efficiently. Live webcasts

the emerging and growing importance of the nanotechnology

were produced for bankers, teachers, and economic and com-

industry.

munity development audiences.

Staff economists published numerous research papers

As part of a Federal Reserve initiative to enhance com-

in major policy journals, including the American Economic

munication and feedback with community bankers, the Bank

Review: Papers and Proceedings, Economic Journal and Journal

established a Community Depository Institutions Advisory

of Monetary Economics. In addition, economists published a

Council, composed of 12 representatives from financial institu-

range of articles in Economic Letter and Southwest Economy on

tions of various sizes in the district. The council will provide

policy-related topics, including the housing and financial crisis,

senior Dallas Fed officials with grassroots information on

the role of the Fed’s term auction facility, the impact of too-

economic and banking conditions, regulatory policies and pay-

big-to-fail banks on monetary policy, the Texas Manufacturing

ments issues.

Outlook Survey and the macroeconomics of energy.
The Dallas Fed’s Globalization and Monetary Policy Insti-

As consumers and communities continued to recover from
the financial crisis, Bank staff collaborated with cities and civic

tute continues to contribute valuable insight into the effects

groups across the district to mitigate home foreclosures and

of global developments on America’s economy and monetary

promote neighborhood stabilization. The Bank also launched

policy. The institute circulated 27 new working papers in

the Dallas Fed Community Outlook Survey—a quarterly online

2010—bringing the total number to 67—and organized two

survey designed to assess the financial condition of low- and

conferences. In March, a conference to mark the 10th anni-

moderate-income individuals and communities.

versary of the euro was held jointly with the Peterson Institute

Throughout 2010, the Bank provided leadership and tech-

for International Economics, and in September, the institute

nical assistance for district partnerships and coalitions in the

organized a conference on “Microeconomic Sources of Real Ex-

areas of asset building, community development finance and

change Rate Behavior” jointly with the Center for International

access to capital—organizing four conferences, 15 workshops

Price Research at Vanderbilt University.

and roundtables, eight webcasts and national conference calls,

The Bank’s financial industry economists advocated and
implemented policies and practices for enhancing financial

reaching thousands of participants.
The staff of the Dallas Fed and its branches strive to pro-

system stability and performance. Policy articles covered topics

vide effective banking supervision and the high-quality finan-

ranging from the macroprudential regulation of credit cycles,

cial services, economic research and public outreach needed to

to loan modifications and financial recovery, to reaching the

foster a sound financial system and healthy economy.

year in Review • 2010 ANNUAL REPORT

19

Management and Boards

Senior Management

O

Richard W. Fisher
President
and Chief Executive Officer

Helen E. Holcomb
First Vice President
and Chief Operating 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
and OMWI Director

ur mission:

To serve the interests of the
American public by informing and
influencing our nation’s monetary
policy, fostering financial stability
and delivering quality services to
the United States government and
the financial institutions in our
region.

20

FEDERAL RESERVE BANK OF DALLAS • 2010 ANNUAL REPORT

Joanna O. Kolson
Senior Vice President

Kenneth V. McKee
Senior Vice President
and General Auditor

Robert Smith III
Senior Vice President in Charge,
Houston Branch

Millard Sweatt
Senior Vice President,
General Counsel and Secretary

Robert W. Gilmer
Vice President in Charge,
El Paso Branch

Blake Hastings
Vice President in Charge,
San Antonio Branch
SENIOR MANAGEMENT • 2010 ANNUAL REPORT

21

Boards of Directors
Dallas

22

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

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

George F. Jones Jr.
CEO,
Texas Capital Bank

Margaret H. Jordan
President and CEO,
Dallas Medical Resource

Joe Kim King
CEO,
Brady National Bank

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

FEDERAL RESERVE BANK OF DALLAS • 2010 ANNUAL REPORT

El Paso

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.

Martha I. Dickason
President,
dmDickason Personnel Services

Robert E. McKnight Jr.
Owner,
McKnight Ranch Co.

Larry L. Patton
President and CEO,
Bank of the West
BOARDS OF DIRECTORS • 2010 ANNUAL REPORT

23

Boards of Directors
Houston

Jorge A. Bermudez
President and CEO,
Byebrook Group LLC

24

FEDERAL RESERVE BANK OF DALLAS • 2010 ANNUAL REPORT

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

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

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

Jodie L. Jiles
Managing Director,
RBC Capital Markets

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

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

San Antonio

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

Ricardo Romo
(Chairman Pro Tem)
President,
University of Texas at San Antonio

Catherine M. Burzik
President and CEO,
Kinetic Concepts Inc.

Thomas E. Dobson
Chairman and CEO,
Whataburger Restaurants LP

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

Guillermo F. Trevino
President,
Southern Distributing Co.

Ygnacio D. Garza
Partner,
Long Chilton LLP

BOARDS OF DIRECTORS • 2010 ANNUAL REPORT

25

Officers
Eleventh District
Advisory Council

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

Robert L. Triplett III
Vice President

Pia M. Orrenius
Research Officer

Helen E. Holcomb
First Vice President and COO

E. Ann Worthy
Vice President

Allen E. Qualman
Operations Officer

Robert D. Hankins
Executive Vice President

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

Rita Riley
Principal Technology Architect

Mine Yücel
Vice President

Thomas F. Siems
Economic Outreach Senior Professional

Tommy E. Alsbrooks
Assistant Vice President

Jay Sudderth
Relationship Management Officer

Glenda S. Balfantz
Assistant Vice President and
Assistant General Auditor

El Paso

Stephan D. Booker
Assistant Vice President

Robert W. Gilmer
Vice President in Charge

Claude H. Davis
Assistant Vice President

Javier R. Jimenez
Assistant Vice President

Paul T. Elzner
Assistant Vice President

Houston

Richard J. Mase Jr.
Assistant Vice President

Robert Smith III
Senior Vice President in Charge

Dana S. Merritt
Assistant Vice President

Daron D. Peschel
Vice President

Alfreda B. Norman
Assistant Vice President

Donald N. Bowers II
Assistant Vice President

Dean A. Pankonien
Assistant Vice President

Randy L. Steinley
Assistant Vice President

Margaret C. Schieffer
Assistant Vice President

Michelle D. Treviño
Administrative Officer

Harvey Rosenblum
Executive Vice President and
Director of Research
Meredith N. Black
Senior Vice President
J. Tyrone Gholson
Senior Vice President
and OMWI Director
Joanna O. Kolson
Senior Vice President
Kenneth V. McKee
Senior Vice President
and General Auditor
Millard E. Sweatt
Senior Vice President,
General Counsel and Secretary
Earl Anderson
Vice President
Diane M. de St. Germain
Vice President
John V. Duca
Vice President and
Senior Policy Advisor
Robert G. Feil
Vice President
and Associate Secretary
Sherry Kidd Garvin
Vice President
KaSandra Goulding
Vice President
Jeffery W. Gunther
Vice President
Kathy K. Johnsrud
Vice President
Evan F. Koenig
Vice President and Senior
Policy Advisor
Harvey R. Mitchell III
Vice President
William C. Morse Jr.
Vice President
Sharon A. Sweeney
Vice President, Associate
General Counsel and
Associate Secretary

William W. Shaffer Jr.
Assistant Vice President
Gayle Teague
Assistant Vice President
Michael N. Turner
Assistant Vice President
Marion E. White
Assistant Vice President

Kenneth J. Robinson
Research Officer

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

Jerred G. Blanchard Jr.
Principal
Ernst and Young LLP
Houston
Crawford Brock
Owner
Stanley Korshak
Dallas
Frank Mihalopoulos
President
Corinth Properties
Dallas
Deborah Rogers
Owner
Deborah's Farmstead
Fort Worth
Gerald J. Rubin
Chairman, President and CEO
Helen of Troy
El Paso
Dale W. Tremblay
President and CEO
C.H. Guenther and Son Inc.
San Antonio
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

Hazel W. Adams
Credit Risk Systems Officer
Karen M. Gist
Information Technology Officer
D. Kay Gribbin
Administrative Officer
Rob Jolley
Examining Officer
Robert R. Moore
Research Officer

As of December 31, 2010
26

FEDERAL RESERVE BANK OF DALLAS • 2010 ANNUAL REPORT

Financials

Management’s Report on Internal Control
Over Financial Reporting
March 22, 2011
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 Statements of Condition as of December 31, 2010 and 2009, and the
Statements of Income and Comprehensive Income, and Statements of Changes in Capital for
the years then ended (the Financial Statements). The Financial Statements have been prepared
in conformity with the accounting principles, policies, and practices established by the Board
of Governors of the Federal Reserve System as set forth in the Financial Accounting Manual
for the Federal Reserve Banks (FAM), and as such, include some amounts that are based on
management judgments and estimates. To our knowledge, the Financial Statements are, in
all material respects, fairly presented in conformity with the accounting principles, policies
and practices documented in the FAM and include all disclosures necessary for such fair
presentation.
The management of the 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 FAM. 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

Financials • 2010 ANNUAL REPORT

27

Independent Auditors’ Report
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, 2010 and 2009 and the related Statements of Income
and Comprehensive Income, and of Changes in Capital for the years then ended, which have
been prepared in conformity with accounting principles established by the Board of Governors
of the Federal Reserve System. We also have audited the internal control over financial reporting
of the FRB Dallas as of December 31, 2010, based on criteria established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The 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 the 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.
The FRB Dallas’s internal control over financial reporting is a process designed by, or under the
supervision of, the FRB Dallas’s principal executive and principal financial officers, or persons
performing similar functions, and effected by the 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. The 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 the FRB Dallas; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of

28

FEDERAL RESERVE BANK OF DALLAS • 2010 ANNUAL REPORT

Independent Auditors’ Report (continued)

Financial Statements in accordance with the accounting principles established by the Board
of Governors of the Federal Reserve System, and that receipts and expenditures of the FRB
Dallas are being made only in accordance with authorizations of management and directors of
the FRB Dallas; and (3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the FRB Dallas’s assets that could have a
material effect on the Financial Statements.
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a timely basis. Also, projections
of any evaluation of the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As described in Note 4 to the Financial Statements, the FRB 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 the FRB Dallas as of December 31, 2010 and 2009, and the results of its operations
for the years then ended, on the basis of accounting described in Note 4. Also, in our opinion,
the FRB Dallas maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2010, based on the criteria established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.

March 22, 2011

Financials • 2010 ANNUAL REPORT

29

Statements of Condition (in millions)
December 31, 2010

December 31, 2009

$

$

Assets
Gold certificates

652

621

Special drawing rights certificates

282

282

Coin

239

214

21

33

—

392

44,802

38,970

6,423

8,092

42,188

44,432

358

325

1

132

Accrued interest receivable

597

610

Bank premises and equipment, net

270

276

37

37

Items in process of collection
Loans:
Depository institutions
System Open Market Account:
Treasury securities, net
Government-sponsored enterprise debt securities, net
Federal agency and government-sponsored enterprise mortgage-backed
securities, net
Foreign currency denominated assets, net
Central bank liquidity swaps

Other assets
Total assets

$

95,870

$

94,416

$

64,174

$

49,642

Liabilities and Capital
Liabilities
Federal Reserve notes outstanding, net
System Open Market Account:
2,507

3,758

—

29

25,112

22,826

1

1

3

2

Accrued benefit costs

105

103

Deferred credit items

73

109

Accrued interest on Federal Reserve notes

69

51

3,007

17,174

15

15

95,066

93,710

402

353

402

353

804

706

Securities sold under agreements to repurchase
Other liabilities
Deposits:
Depository institutions
Other deposits
Interest payable to depository institutions

Interdistrict settlement account
Other liabilities
Total liabilities
Capital
Capital paid-in
Surplus (including accumulated other comprehensive loss of $14 million
and $18 million at December 31, 2010 and 2009, respectively)
Total capital
Total liabilities and capital

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

30

FEDERAL RESERVE BANK OF DALLAS • 2010 ANNUAL REPORT

$

95,870

$

94,416

Statements of Income and Comprehensive Income (in millions)
For the Years Ended
December 31, 2010
December 31, 2009
Interest Income
Loans:
Depository institutions

$

1

$

10

System Open Market Account:
Securities purchased under agreements to resell
Treasury securities, net
Government-sponsored enterprise debt securities, net
Federal agency and government-sponsored enterprise mortgage-backed
securities, net
Foreign currency denominated assets, net
Central bank liquidity swaps
Total interest income

—

1

1,155

1,073

154

97

1,965

977

3

4

—

32

3,278

2,194

4

4

51

36

interest expense
System Open Market Account:
Securities sold under agreements to repurchase
Deposits:
Depository institutions

55

40

3,223

2,154

System Open Market Account:
Federal agency and government-sponsored enterprise mortgage-backed
securities gains, net
Foreign currency gains (losses), net

35

44

8

(3)

Compensation received for service costs provided

13

28

Reimbursable services to government agencies

14

14

Total interest expense
Net interest income
Non-Interest income (LOSS)

Other income
Total non-interest income

4

10

74

93

Operating expenses
125

126

Occupancy

23

25

Equipment

10

12

48

33

1

—

30

29

Salaries and benefits

Assessments:
Board of Governors operating expenses and currency costs
Bureau of Consumer Financial Protection and
Office of Financial Research
Other
Total operating expenses
Net income prior to distribution

225
2,022

4

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

237
3,060

(3)

$

3,064

$

2,019

$

24

$

17

Distribution of Comprehensive income
Dividends paid to member banks
Transferred to surplus and change in accumulated other
comprehensive loss
Payments to Treasury as interest on Federal Reserve notes
Total distribution

$

49

82

2,991

1,920

3,064

$

2,019

The accompanying notes are an integral part of these financial statements.
Financials • 2010 ANNUAL REPORT

31

Statements of Changes in Capital for the Years Ended
December 31, 2010, and December 31, 2009 (in millions, except share data)
Surplus

Balance at January 1, 2009
(5,419,438 shares)

Capital
Paid-In

Net Income
Retained

Accumulated
Other
Comprehensive
Loss

$

$

$

271

286

(15)

Total
Surplus

Total
Capital

$

$

271

542

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

82

—

—

—

82

Transferred to surplus and change in
accumulated other comprehensive loss

—

85

(3)

82

82

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

$

353

$

371

$

(18)

$

353

$

706

Net change in capital stock issued
(986,886 shares)

49

—

—

—

49

Transferred to surplus and change in
accumulated other comprehensive loss

—

45

4

49

49

Balance at December 31, 2010
(8,036,982 shares)

$

402

$

416

$

(14)

$

402

$

804

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

Federal Reserve Bank of Dallas
Abbreviations:
ABCP
ACH
AMLF
ASC
BEP
Bureau
Dodd–Frank Act
ESF
FAM
FASB
Fannie Mae
Freddie Mac
FOMC
FRBA
FRBNY
GAAP

32

Asset-backed commercial paper
Automated clearinghouse
Asset-Backed Commercial Paper Money
Market Mutual Fund Liquidity Facility
Accounting Standards Codification
Benefit Equalization Retirement Plan
Bureau of Consumer Financial Protection
The Dodd–Frank Wall Street Reform
and Consumer Protection Act of 2010
Exchange Stabilization Fund
Financial Accounting Manual
for Federal Reserve Banks
Financial Accounting Standards Board
Federal National Mortgage Association
Federal Home Loan
Mortgage Corporation
Federal Open Market Committee
Federal Reserve Bank of Atlanta
(as applicable)
Federal Reserve Bank of New York
(as applicable)
Accounting principles generally
accepted in the United States of America

FEDERAL RESERVE BANK OF DALLAS • 2010 ANNUAL REPORT

GSE
IMF
MBS
OEB
OFR
SDR
SERP
SFAS
SOMA
STRIPS
TAF
TBA
TDF
TIPS
TOP
TSLF

Government-sponsored enterprise
International Monetary Fund
Mortgage-backed securities
Office of Employee Benefits of the
Federal Reserve System
Office of Financial Research
Special drawing rights
Supplemental Retirement Plan for Select
Officers of the Federal Reserve Banks
Statement of Financial Accounting
Standards
System Open Market Account
Separate Trading of Registered Interest
and Principal of Securities
Term Auction Facility
To be announced
Term Deposit Facility
Treasury Inflation-Protected Securities
Term Securities Lending Facility
Options Program
Term Securities Lending Facility

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 serves 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 Dodd–Frank Wall Street Reform and Consumer Protection
Act of 2010 (Dodd–Frank Act), which was signed into law and
became effective on July 21, 2010, changed the scope of some
services performed by the Reserve Banks. Among other things,
the Dodd–Frank Act establishes a Bureau of Consumer Financial
Protection (Bureau) as an independent bureau within the Federal
Reserve System that will have supervisory authority over some
institutions previously supervised by the Reserve Banks under delegated authority from the Board of Governors in connection with
those institutions’ compliance with consumer protection statutes;
limits the Reserve Banks’ authority to provide loans in unusual
and exigent circumstances to lending programs or facilities with
broad-based eligibility; and vests the Board of Governors with all
supervisory and rule-writing authority for savings and loan holding companies.
The FOMC, in conducting monetary policy, establishes policy regarding domestic open market operations, oversees these
operations, and issues authorizations and directives to the FRBNY
to execute transactions. The FOMC authorizes and directs the
FRBNY to conduct operations in domestic markets, including the
direct purchase and sale of Treasury securities, federal agency and
government-sponsored enterprise (GSE) debt securities, federal
agency and GSE mortgage-backed securities (MBS), the purchase
of these securities under agreements to resell, and the sale of these
securities under agreements to repurchase. The FRBNY holds the
resulting securities and agreements in a portfolio known as the
System Open Market Account (SOMA). The FRBNY is authorized
to lend the Treasury securities and federal agency and GSE debt
securities that are held in the SOMA.
In addition to authorizing and directing operations in the
domestic securities market, the FOMC authorizes the FRBNY to
conduct operations in foreign markets in order to counter disorderly conditions in exchange markets or to meet other needs
specified by the FOMC to carry out the System’s central bank
responsibilities. Specifically, the FOMC authorizes and directs
the FRBNY to hold balances of, and to execute spot and forward
foreign exchange and securities contracts for, 14 foreign currencies and to invest such foreign currency holdings, while maintaining adequate liquidity. The FRBNY is authorized and directed by
the FOMC to maintain reciprocal currency arrangements with
the Bank of Canada and the Bank of Mexico and to “warehouse”
foreign currencies for the Treasury and the Exchange Stabilization
Fund (ESF).
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

Financials • 2010 ANNUAL REPORT

33

costs were not reimbursed by the other Reserve Banks include
Check Automation Services; National Examination Data System;
Desktop Services Center; 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.
Large-Scale Asset Purchase Programs
The FOMC authorized and directed the FRBNY to purchase $300
billion of longer-term Treasury securities to help improve conditions
in private credit markets. The FRBNY began the purchases of these
Treasury securities in March 2009 and completed them in October
2009. On August 10, 2010, the FOMC announced that the Federal
Reserve will maintain the level of domestic securities holdings in the
SOMA portfolio by reinvesting principal payments from GSE debt
securities and federal agency and GSE MBS in longer-term Treasury
securities. On November 3, 2010, the FOMC announced its intention
to expand the SOMA portfolio holdings of longer-term Treasury securities by an additional $600 billion by June 2011. The FOMC will regularly review the pace of these securities purchases and the overall size
of the asset purchase program and will adjust the program as needed
to best foster maximum employment and price stability.
The FOMC authorized and directed the FRBNY to purchase
GSE debt securities and federal agency and GSE MBS, with a goal
to provide support to mortgage and housing markets and to foster improved conditions in financial markets more generally. The
FRBNY was authorized to purchase up to $175 billion in fixed-rate,
non-callable GSE debt securities and $1.25 trillion in fixed-rate federal agency and GSE MBS. Purchases of GSE debt securities began
in November 2008, and purchases of federal agency and GSE MBS
began in January 2009. The FRBNY completed the purchases of GSE
debt securities and federal agency and GSE MBS in March 2010.
The settlement of all federal agency and GSE MBS transactions was
completed by August 2010.
Central Bank Liquidity Swaps
The FOMC authorized and directed the FRBNY to establish
central bank liquidity swap arrangements, which could be structured as either U.S. dollar liquidity or foreign currency liquidity
swap arrangements. U.S. dollar liquidity swap arrangements were
authorized with 14 foreign central banks to provide liquidity in
U.S. dollars to overseas markets. The authorization for these swap
arrangements expired on February 1, 2010. In May 2010, U.S. dollar liquidity swap arrangements were reestablished with the Bank
of Canada, the Bank of England, the European Central Bank, the
Bank of Japan, and the Swiss National Bank; these arrangements
will expire on August 1, 2011.
Foreign currency liquidity swap arrangements provided the
Reserve Banks with the capacity to offer foreign currency liquidity
to U.S. depository institutions. The authorization for these swap
arrangements expired on February 1, 2010.

34

FEDERAL RESERVE BANK OF DALLAS • 2010 ANNUAL REPORT

Lending to Depository Institutions
The Term Auction Facility (TAF) promoted the efficient dissemination of liquidity by providing term funds to depository institutions. The last TAF auction was conducted on March 8, 2010, and
the related loans matured on April 8, 2010.
Lending to Primary Dealers
The Term Securities Lending Facility (TSLF) promoted liquidity in the financing markets for Treasury securities. Under the
TSLF, the FRBNY could lend up to an aggregate amount of $200
billion of Treasury securities held in the SOMA to primary dealers
on a secured basis for a term of 28 days. The authorization for the
TSLF expired on February 1, 2010.
The Term Securities Lending Facility Options Program (TOP)
offered primary dealers the opportunity to purchase an option
to draw upon short-term, fixed-rate TSLF loans in exchange for
eligible collateral. The program was suspended effective with the
maturity of the June 2009 TOP options, and authorization for the
program expired on February 1, 2010.
Other Lending Facilities
The Asset-Backed Commercial Paper Money Market Mutual
Fund Liquidity Facility (AMLF) provided funding to depository
institutions and bank holding companies to finance the purchase of
eligible high-quality asset-backed commercial paper (ABCP) from
money market mutual funds. The Federal Reserve Bank of Boston
administered the AMLF and was authorized to extend these loans to
eligible borrowers on behalf of the other Reserve Banks. The authorization for the AMLF expired on February 1, 2010.
4. SIGNIFICANT ACCOUNTING POLICIES
Accounting principles for entities with the unique powers and
responsibilities of a nation’s central bank have not been formulated
by accounting standard-setting bodies. The Board of Governors has
developed specialized accounting principles and practices that it
considers to be appropriate for the nature and function of a central
bank. These accounting principles and practices are documented in
the Financial Accounting Manual for Federal Reserve Banks (FAM),
which is issued by the Board of Governors. The Reserve Banks are
required to adopt and apply accounting policies and practices that
are consistent with the FAM, and the financial statements have been
prepared in accordance with the FAM.
Limited differences exist between the accounting principles and
practices in the FAM and accounting principles generally accepted
in the United States (GAAP), due to the unique nature of the Bank’s
powers and responsibilities as part of the nation’s central bank and
given the System’s unique responsibility to conduct monetary policy.
The primary differences are the presentation of all SOMA securities
holdings at amortized cost and the recording of such securities on a
settlement-date basis. The cost basis of Treasury securities, GSE debt
securities, and foreign government debt instruments is adjusted for
amortization of premiums or accretion of discounts on a straightline basis, rather than using the interest method required by GAAP.
Amortized cost, rather than the fair value presentation, more appropriately reflects the Bank’s securities holdings given the System’s
unique responsibility to conduct monetary policy. Accounting for

these securities on a settlement-date basis, rather than the trade-date
basis required by GAAP, 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 greater or less than their
carrying values, these unrealized changes in value have no direct
effect on the quantity of reserves available to the banking system or on
the prospects for future Bank earnings or capital. Both the domestic
and foreign components of the SOMA portfolio may involve transactions that result in gains or losses when holdings are sold before
maturity. Decisions regarding securities and foreign currency transactions, including their purchase and sale, are motivated by monetary
policy objectives rather than profit. Accordingly, fair values, earnings,
and gains or losses resulting from the sale of such securities and currencies are incidental to open market operations and do not motivate
decisions related to policy or open market activities.
In addition, the Bank does not present a Statement of Cash Flows
as required by GAAP because the liquidity and cash position of the
Bank are not a primary concern given the Reserve Banks’ unique
powers and responsibilities. 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. Unique accounts and significant accounting policies are
explained below.

Treasury’s account is charged, and the Reserve Banks’ gold certificate accounts are reduced. The value of gold for purposes of backing the gold certificates is set by law at $42 2/9 per fine troy ounce.
The Board of Governors allocates the gold certificates among the
Reserve Banks once a year based on the average Federal Reserve
notes outstanding at each Reserve Bank.
SDR certificates are issued by the International Monetary Fund
(IMF) to its members in proportion to each member’s quota in the
IMF at the time of issuance. SDR certificates serve as a supplement
to international monetary reserves and may be transferred from one
national monetary authority to another. Under the law providing for
U.S. participation in the SDR system, the Secretary of the Treasury is
authorized to issue SDR certificates to the Reserve Banks. When SDR
certificates are issued to the Reserve Banks, equivalent amounts in
U.S. dollars are credited to the account established for the Treasury,
and the Reserve Banks’ SDR certificate accounts are increased.
The Reserve Banks are required to purchase SDR certificates, at
the direction of the Treasury, for the purpose of financing SDR
acquisitions or for financing exchange stabilization operations. At
the time SDR transactions occur, the Board of Governors allocates
SDR certificate transactions among the Reserve Banks based upon
each Reserve Bank’s Federal Reserve notes outstanding at the end
of the preceding year. SDRs are recorded by the Bank at original
cost. In 2009, the Treasury issued $3 billion in SDR certificates to
the Reserve Banks, of which $184 million was allocated to the Bank.
There were no SDR transactions in 2010.

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

d. Loans
Loans to depository institutions are reported at their outstanding
principal balances, and interest income is recognized on an accrual
basis.
Loans are impaired when current information and events indicate that it is probable that the Bank will not receive the principal
and interest that is due in accordance with the contractual terms
of the loan agreement. Impaired loans are evaluated to determine
whether an allowance for loan loss is required. The Bank has developed procedures for assessing the adequacy of any allowance for
loan losses using all available information to identify incurred losses.
This assessment includes monitoring information obtained from
banking supervisors, borrowers, and other sources to assess the
credit condition of the borrowers and, as appropriate, evaluating
collateral values. Generally, the Bank would discontinue recognizing
interest income on impaired loans until the borrower’s repayment
performance demonstrates principal and interest would be received
in accordance with the terms of the loan agreement. If the Bank
discontinues recording interest on an impaired loan, cash payments
are first applied to principal until the loan balance is reduced to zero;
subsequent payments are applied as recoveries of amounts previously deemed uncollectible, if any, and then as interest income.

b. Gold and Special Drawing Rights Certificates
The Secretary of the Treasury is authorized to issue gold and
special drawing rights (SDR) certificates to the Reserve Banks.
Upon authorization, the Reserve Banks acquire gold certificates by
crediting equivalent amounts in dollars to the account established
for the Treasury. The gold certificates held by the Reserve Banks
are required to be backed by the gold owned by the Treasury. The
Treasury may reacquire the gold certificates at any time, and the
Reserve Banks must deliver them to the Treasury. At such time, the

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

Financials • 2010 ANNUAL REPORT

35

e. Securities Purchased Under Agreements to Resell, Securities
Sold Under Agreements to Repurchase, and Securities Lending
The FRBNY may engage in purchases of securities with primary dealers under agreements to resell (repurchase transactions).
These repurchase transactions are settled through a tri-party
arrangement. In a tri-party arrangement, two commercial custodial banks manage the collateral clearing, settlement, pricing,
and pledging and provide cash and securities custodial services
for and on behalf of the Bank and counterparty. The collateral
pledged must exceed the principal amount of the transaction by
a margin determined by the FRBNY for each class and maturity
of acceptable collateral. Collateral designated by the FRBNY as
acceptable under repurchase transactions primarily includes
Treasury securities (including TIPS and STRIPS Treasury securities); direct obligations of several federal agency and GSE-related
agencies, including Fannie Mae and Freddie Mac; and passthrough MBS of Fannie Mae, Freddie Mac, and Ginnie Mae. The
repurchase transactions are accounted for as financing transactions with the associated interest income recognized 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,” and the related accrued
interest receivable is reported as a component of “Accrued interest receivable” in the Statements of Condition.
The FRBNY may engage in sales of securities under agreements
to repurchase (reverse repurchase transactions) with primary
dealers and, beginning August 2010, with selected money market
funds, as an open market operation. 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
account holders as part of a service offering. Reverse repurchase
agreements are collateralized by a pledge of an amount of Treasury
securities, GSE debt securities, and federal agency and GSE MBS
that are held in the SOMA. Reverse repurchase transactions are
accounted for as financing transactions, and the associated interest expense is recognized over the life of the transaction. These
transactions are reported at their contractual amounts as “System
Open Market Account: Securities sold under agreements to repurchase” and the related accrued interest payable is reported as a
component of “Other liabilities” in the Statements of Condition.
Treasury securities and GSE debt securities held in the SOMA
may be lent to primary dealers to facilitate the effective functioning of the domestic securities markets. Overnight securities lending transactions are fully collateralized by Treasury securities that
have fair values in excess of the securities lent. The FRBNY charges
the primary dealer a fee for borrowing securities, and these fees
are reported as a component of “Other income” in the Statements
of Income and Comprehensive Income.
Activity related to securities purchased under agreements to
resell, securities sold under agreements to repurchase, and securities lending is allocated to each of the Reserve Banks on a percentage basis derived from an annual settlement of the interdistrict
settlement account that occurs in April each year.

36

FEDERAL RESERVE BANK OF DALLAS • 2010 ANNUAL REPORT

f. Treasury Securities; Government-Sponsored Enterprise Debt
Securities; Federal Agency and Government-Sponsored Enterprise
Mortgage-Backed Securities; Foreign Currency Denominated
Assets; and Warehousing Agreements
Interest income on Treasury securities, GSE debt securities,
and foreign currency denominated assets comprising the SOMA is
accrued on a straight-line basis. Interest income on federal agency
and GSE MBS is accrued using the interest method and includes
amortization of premiums, accretion of discounts, and gains or
losses associated with principal paydowns. Premiums and discounts related to federal agency and GSE MBS are amortized over
the term of the security to stated maturity, and the amortization of
premiums and accretion of discounts are accelerated when principal payments are received. Paydown gains and losses represent the
difference between the principal amount paid and the amortized
cost basis of the related security. Gains and losses resulting from
sales of securities are determined by specific issue based on average
cost. Treasury securities, GSE debt securities, and federal agency
and GSE MBS are reported net of premiums and discounts on the
Statements of Condition, and interest income on those securities is
reported net of the amortization of premiums and accretion of discounts on the Statements of Income and Comprehensive Income.
In addition to outright purchases of federal agency and GSE
MBS that are held in the SOMA, the FRBNY entered into dollar
roll transactions (dollar rolls), which primarily involve an initial
transaction to purchase or sell “to be announced” (TBA) MBS
for delivery in the current month combined with a simultaneous
agreement to sell or purchase TBA MBS on a specified future date.
The FRBNY also executed a limited number of TBA MBS coupon
swap transactions, which involve a simultaneous sale of a TBA MBS
and purchase of another TBA MBS of a different coupon rate. The
FRBNY’s participation in the dollar roll and coupon swap markets
furthers the MBS purchase program goal of providing support to
the mortgage and housing markets and fostering improved conditions in financial markets more generally. The FRBNY accounts
for outstanding commitments under dollar roll and coupon swaps
on a settlement-date basis. Based on the terms of the FRBNY dollar roll and coupon swap 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), Transfers and Servicing, and the related outstanding commitments are accounted for as sales or purchases upon settlement.
Net gains resulting from dollar roll and coupon swap transactions
are reported as “Non-interest income (loss): System Open Market
Account: Federal agency and government-sponsored enterprise
mortgage-backed securities gains, net” in the Statements of Income
and Comprehensive Income.
Foreign currency denominated assets are revalued daily at current foreign currency market exchange rates in order to report these
assets in U.S. dollars. Realized and unrealized gains and losses on
foreign currency denominated assets are reported as “Foreign
currency gains (losses), net” in the Statements of Income and
Comprehensive Income.
Activity related to Treasury securities, GSE debt securities, and
federal agency and GSE MBS, including the premiums, discounts,

and realized gains and losses, is allocated to each Reserve Bank
on a percentage basis derived from an annual settlement of the
interdistrict settlement account that occurs in April of each year.
Activity related to foreign currency denominated assets, including the premiums, discounts, and realized and unrealized gains
and losses, is allocated to each Reserve Bank based on the ratio of
each Reserve Bank’s capital and surplus to aggregate capital and
surplus at the preceding December 31.
Warehousing is an arrangement under which the FOMC has
approved the exchange, at the request of the Treasury, of U.S.
dollars for foreign currencies held by the Treasury over a limited period of time. The purpose of the warehousing facility is to
supplement the U.S. dollar resources of the Treasury for financing
purchases of foreign currencies and related international operations. Warehousing agreements are designated as held-for-trading
purposes and are valued daily at current market exchange rates.
Activity related to these agreements is allocated to each Reserve
Bank based on the ratio of each Reserve Bank’s capital and surplus
to aggregate capital and surplus at the preceding December 31.
g. Central Bank Liquidity Swaps
Central bank liquidity swaps, which are transacted between
the FRBNY and a foreign central bank, can be structured as either
U.S. dollar liquidity or foreign currency liquidity swap arrangements.
Central bank liquidity swaps activity, including the related
income and expense, is allocated to each Reserve Bank based on
the ratio of each Reserve Bank’s capital and surplus to aggregate
capital and surplus at the preceding December 31. The foreign
currency amounts associated with these central bank liquidity
swap arrangements are revalued at current foreign currency market exchange rates.
U.S. dollar liquidity swaps
At the initiation of each U.S. dollar liquidity swap transaction,
the foreign central bank transfers a specified amount of its currency to a restricted account for the FRBNY in exchange for U.S.
dollars at the prevailing market exchange rate. Concurrent with
this transaction, the FRBNY and the foreign central bank agree
to a second transaction that obligates the foreign central bank
to return the U.S. dollars and the FRBNY to return the foreign
currency on a specified future date at the same exchange rate as
the initial transaction. The Bank’s allocated portion of the foreign
currency amounts that the FRBNY acquires is reported as “Central
bank liquidity swaps” on the Statements of Condition. Because the
swap transaction will be unwound at the same U.S. dollar amount
and exchange rate that were used in the initial transaction, the
recorded value of the foreign currency amounts is not affected by
changes in the market exchange rate.
The foreign central bank compensates the FRBNY based on
the foreign currency amounts it holds 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
The structure of foreign currency liquidity swap transactions
involves the transfer by the FRBNY, at the prevailing market exchange
rate of a specified amount of U.S. dollars to an account for the foreign
central bank in exchange for its currency. The foreign currency
amount received would be reported as a liability by the Bank.
h. 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.
i. Bank Premises, Equipment, and Software
Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on a straight-line
basis over the estimated useful lives of the assets, which range from
2 to 50 years. Major alterations, renovations, and improvements are
capitalized at cost as additions to the asset accounts and are depreciated over the remaining useful life of the asset or, if appropriate, over
the unique useful life of the alteration, renovation, or improvement.
Maintenance, repairs, and minor replacements are charged to operating expense in the year incurred.
Costs incurred for software during the application development
stage, whether developed internally or acquired for internal use, are
capitalized based on the purchase cost and the cost of direct services and materials associated with designing, coding, installing, and
testing the software. Capitalized software costs are amortized on a
straight-line basis over the estimated useful lives of the software applications, which generally range from two to five years. Maintenance
costs related to software are charged to 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.
j. Federal Reserve Notes
Federal Reserve notes are the circulating currency of the
United States. These notes, which are identified as issued to a specific Reserve Bank, must be fully collateralized. All of the Bank’s
assets are eligible to be pledged as collateral. The collateral value
is equal to the book value of the collateral tendered with the exception of securities, for which the collateral value is equal to the par
value of the securities tendered. The par value of securities sold
under agreements to repurchase is deducted from the eligible collateral value.
The Board of Governors may, at any time, call upon a Reserve
Bank for additional security to adequately collateralize outstanding Federal Reserve notes. To satisfy the obligation to provide
sufficient collateral for outstanding Federal Reserve notes, the
Reserve Banks have entered into an agreement that provides for

Financials • 2010 ANNUAL REPORT

37

certain assets of the Reserve Banks to be jointly pledged as collateral for the Federal Reserve notes issued to all Reserve Banks. In
the event that this collateral is insufficient, the Federal Reserve Act
provides that Federal Reserve notes become a first and paramount
lien on all the assets of the Reserve Banks. Finally, Federal Reserve
notes are obligations of the United States government.
“Federal Reserve notes outstanding, net” in the Statements of
Condition represents the Bank’s Federal Reserve notes outstanding, reduced by the Bank’s currency holdings of $11,980 million
and $13,731 million at December 31, 2010 and 2009, respectively.
At December 31, 2010 and 2009, all Federal Reserve notes
issued to the Reserve Banks were fully collateralized. At December
31, 2010, all gold certificates, all special drawing right certificates,
and $925 billion of domestic securities held in the SOMA were
pledged as collateral. At December 31, 2010, no investments
denominated in foreign currencies were pledged as collateral.
k. Deposits
Depository Institutions
Depository institutions deposits represent the reserve and
service-related balances in the accounts that depository institutions hold at the Bank. The interest rates paid on required reserve
balances and excess balances are determined by the Board of
Governors, based on an FOMC-established target range for the
federal funds rate. Interest payable is reported as “Interest payable
to depository institutions” on the Statements of Condition.
The Term Deposit Facility (TDF) consists of deposits with
specific maturities held by eligible institutions at the Reserve
Banks. The Reserve Banks pay interest on these deposits at interest rates determined by auction. Interest payable is reported as
“Interest payable to depository institutions” on the Statements
of Condition. There were no deposits held by the Bank under the
TDF at December 31, 2010.
Other
Other deposits include foreign central bank and foreign government deposits held at the FRBNY that are allocated to the Bank.
l. Items in Process of Collection and Deferred Credit Items
“Items in process of collection” primarily represents amounts
attributable to checks that have been deposited for collection and
that, as of the balance sheet date, have not yet been presented
to the paying bank. “Deferred credit items” 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.
m. Capital Paid-in
The Federal Reserve Act requires that each member bank subscribe to the capital stock of the Reserve Bank in an amount equal
to 6 percent of the capital and surplus of the member bank. These
shares are nonvoting with a par value of $100 and may not be
transferred or hypothecated. As a member bank’s capital and surplus changes, its holdings of Reserve Bank stock must be adjusted.
Currently, only one-half of the subscription is paid in and the

38

FEDERAL RESERVE BANK OF DALLAS • 2010 ANNUAL REPORT

remainder is subject to call. A member bank is liable for Reserve
Bank liabilities up to twice the par value of stock subscribed by it.
By law, each Reserve Bank is required to pay each member
bank an annual dividend of 6 percent on the paid-in capital
stock. This cumulative dividend is paid semiannually. To meet
the Federal Reserve Act requirement that annual dividends be
deducted from net earnings, dividends are presented as a distribution of comprehensive income in the Statements of Income and
Comprehensive Income.
n. Surplus
The Board of Governors requires the Reserve Banks to maintain a surplus equal to the amount of capital paid-in 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. Additional
information regarding the classifications of accumulated other
comprehensive income is provided in Notes 12 and 13.
o. Interest on Federal Reserve Notes
The Board of Governors requires the Reserve Banks to transfer
excess earnings to the Treasury as interest on Federal Reserve notes
after providing for the costs of operations, payment of dividends,
and reservation of an amount necessary to equate surplus with
capital paid-in. This amount is reported as “Payments to Treasury
as interest on Federal Reserve notes” in the Statements of Income
and Comprehensive Income. The amount due to the Treasury
is reported as “Accrued interest on Federal Reserve notes” in the
Statements of Condition.
If earnings during the year are not sufficient to provide for the
costs of operations, payment of dividends, and equating surplus and
capital paid-in, payments to the Treasury are suspended. A deferred
asset is recorded that represents the amount of net earnings a
Reserve Bank will need to realize before remittances to Treasury
resume. This deferred asset is periodically reviewed for impairment.
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.
p. Income and Costs Related to Treasury Services
When directed by the Secretary of the Treasury, the Bank
is required by the Federal Reserve Act to serve as fiscal agent
and depositary of the United States government. By statute, the
Treasury has appropriations to pay for these services. During the
years ended December 31, 2010 and 2009, the Bank was reimbursed for all services provided to the Treasury as its fiscal agent.
q. Compensation Received for Service Costs Provided
The Federal Reserve Bank of Atlanta (FRBA) has overall
responsibility for managing the Reserve Banks’ provision of check
and ACH services to depository institutions and, as a result, recognizes total System revenue for these services 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 service costs provided” in the Statements of Income and
Comprehensive Income.
r. Assessments
The Board of Governors assesses the Reserve Banks to fund its
operations and the operations of the Bureau and, for a two-year
period, the OFR. These assessments are allocated to each Reserve
Bank based on each Reserve Bank’s capital and surplus balances
as of December 31 of the prior year for the Board of Governor’s
operations and as of the most recent quarter for the Bureau and
OFR operations. The Board of Governors also assesses each Reserve
Bank for the expenses incurred by the Treasury to produce and
retire Federal Reserve notes based on each Reserve Bank’s share of
the number of notes comprising the System’s net liability for Federal
Reserve notes on December 31 of the prior year.
During the period prior to the Bureau transfer date of July 21,
2011, there is no fixed limit on the funding that can be provided to
the Bureau and that is assessed to the Reserve Banks; the Board of
Governors must provide the amount estimated by the Secretary
of the Treasury needed to carry out the authorities granted to
the Bureau under the Dodd–Frank Act and other federal law.
After the transfer date, the Dodd–Frank Act requires the Board of
Governors to fund the Bureau in an amount not to exceed a fixed
percentage of the total operating expenses of the Federal Reserve
System as reported in the Board of Governors’ 2009 annual report.
The fixed percentage of total operating expenses of the System is
10 percent for 2011, 11 percent for 2012, and 12 percent for 2013.
After 2013, the amount will be adjusted in accordance with the
provisions of the Dodd–Frank Act.
The Board of Governors assesses the Reserve Banks to fund
the operations of the OFR for the two-year period following enactment of the Dodd–Frank Act; thereafter, the OFR will be funded by
fees assessed on certain bank holding companies.
s. 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 $3 million and $4 million for the years ended December
31, 2010 and 2009, respectively, and are reported as a component
of “Operating expenses: Occupancy” in the Statements of Income
and Comprehensive Income.
t. Restructuring Charges
The Reserve Banks recognize restructuring charges for exit or
disposal costs incurred as part of the closure of business activities in a particular location, the relocation of business activities
from one location to another, or a fundamental reorganization
that affects the nature of operations. Restructuring charges may
include costs associated with employee separations, contract
terminations, and asset impairments. Expenses are recognized in
the period in which the Bank commits to a formalized restructuring plan or executes the specific actions contemplated in the plan
and all criteria for financial statement recognition have been met.

Note 14 describes the Bank’s restructuring initiatives and provides information about the costs and liabilities associated with
employee separations and contract terminations. The costs associated with the impairment of certain Bank assets are discussed
in Note 9. Costs and liabilities associated with enhanced pension
benefits in connection with the restructuring activities for all of the
Reserve Banks are recorded on the books of the FRBNY.
u. Recently Issued Accounting Standards
In June 2009, FASB issued Statement of Financial Accounting
Standards (SFAS) 166, Accounting for Transfers of Financial
Assets—an amendment to FASB Statement No. 140, (codified in
ASC 860). The new standard revises the criteria for recognizing
transfers of financial assets as sales and clarifies that the transferor must consider all arrangements when determining if the
transferor has surrendered control. The adoption of this accounting guidance was effective for the Bank for the year beginning on
January 1, 2010, and did not have a material effect on the Bank’s
financial statements.
In July 2010, the FASB issued Accounting Standards Update
2010–20, Receivables (Topic 310), which requires additional disclosures about the allowance for credit losses and the credit quality of loan portfolios. The additional disclosures include a rollforward of the allowance for credit losses on a disaggregated basis
and more information, by type of receivable, on credit quality
indicators, including the amount of certain past due receivables
and troubled debt restructurings and significant purchases and
sales. The adoption of this accounting guidance is effective for the
Bank on December 31, 2011, and is not expected to have a material
effect on the Bank’s financial statements.
5. LOANS
Loans outstanding at December 31, 2010 and 2009, were as
follows (in millions):

2010
Primary, secondary, and seasonal credit

$

TAF

2009

—

$

390

—

Total loans to depository institutions

$

2

$

—

392

Loans to Depository Institutions
The Bank offers primary, secondary, and seasonal credit to
eligible borrowers, and each program has its own interest rate.
Interest is accrued using the applicable interest rate established
at least every 14 days by the Bank’s board of directors, subject to
review and determination by the Board of Governors. Primary
and secondary 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 gov-

Financials • 2010 ANNUAL REPORT

39

ernment obligations; asset-backed securities; corporate bonds;
commercial paper; and bank-issued assets, such as certificates
of deposit, bank notes, and deposit notes. Collateral is assigned
a lending value that is deemed appropriate by the Bank, which is
typically fair value reduced by a margin.
Depository institutions that are eligible to borrow under the
Bank’s primary credit program were eligible to participate in the
TAF program. Under the TAF program, the Reserve Banks conducted auctions for a fixed amount of funds, with the interest rate
determined by the auction process, subject to a minimum bid
rate. TAF loans were extended on a short-term basis, with terms
ranging from 28 to 84 days. All advances under the TAF program
were collateralized to the satisfaction of the Bank. All TAF loan
principal and accrued interest was fully repaid.
Loans to depository institutions are monitored daily to ensure
that borrowers continue to meet eligibility requirements for these
programs. The financial condition of borrowers is monitored by
the Bank and, if a borrower no longer qualifies for these programs,
the Bank will generally request full repayment of the outstanding
loan or, for primary or seasonal 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.
Allowance for loan loss
At December 31, 2010 and 2009, the Bank did not have any
impaired loans and no allowance for loan losses was required.
There were no impaired loans during the years ended December
31, 2010 and 2009.
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 4.199 percent and 4.835 percent at
December 31, 2010 and 2009, 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):

2010
Total
Unamortized Unaccredited amortized
premiums
discounts
cost

Par
Bills

$

773

$

—

$

—

$

773

Fair
value
$

773

Notes

32,471

590

(32)

33,029

33,790

Bonds

9,649

1,375

(24)

11,000

12,167

Total Treasury $ 42,893
securities

$

1,965

$

(56)

$ 44,802

$ 46,730

GSE debt
securities

$ 6,192

$

232

$

(1)

$ 6,423

$ 6,583

Federal
agency and
GSE MBS

$ 41,660

$

593

$

(65)

$ 42,188

$ 43,082

2009
Total
Unamortized Unaccredited amortized
premiums
discounts
cost

Par
Bills

$

891

$

—

$

—

$

891

Fair
value
$

891

Notes

27,479

316

(48)

27,747

28,191

Bonds

9,179

1,183

(30)

10,332

11,155

Total Treasury $ 37,549
securities

$

1,499

$

(78)

$ 38,970

$ 40,237

GSE debt
securities

$ 7,730

$

363

$

(1)

$ 8,092

$ 8,096

Federal
agency and
GSE MBS

$ 43,921

$

586

$

(75)

$ 44,432

$ 44,207

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):
2010
Amortized
cost
Bills

$

18,422

2009
Fair
value

$

18,422

Amortized
cost
$

18,423

Fair
value
$

18,423

Notes

786,575

804,703

573,877

583,040

Bonds

261,955

289,757

213,672

230,717

Total Treasury
securities

$ 1,066,952

$ 1,112,882

$ 805,972

$ 832,180

GSE debt
securities

$ 152,972

$ 156,780

$ 167,362

$ 167,444

Federal agency
and GSE MBS

$ 1,004,695

$ 1,026,003

$ 918,927

$ 914,290

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

40

FEDERAL RESERVE BANK OF DALLAS • 2010 ANNUAL REPORT

no effect on the ability of the Reserve Banks, as the central bank,
to meet their financial obligations and responsibilities. The fair
value of federal agency and GSE MBS was determined using a
model-based approach that considers observable inputs for similar securities; fair value for all other SOMA security holdings was
determined by reference to quoted prices for identical securities.
The fair value of the fixed-rate Treasury securities, GSE debt
securities, and federal agency and GSE MBS in the SOMA’s holdings is subject to market risk, arising from movements in market
variables, such as interest rates and securities prices. The fair
value of federal agency and GSE MBS is also affected by the 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, 2010 and 2009 (in millions):
Distribution of MBS
holdings by coupon
rate
Allocated to the Bank:
3.5%

2010
Amortized
Fair
cost
value

2009
Amortized
Fair
cost
value

$

$

14

$

15

18

$

17

4.0%

7,041

7,071

8,225

8,014

4.5%

20,897

21,365

21,002

20,870

5.0%

9,718

9,974

9,449

9,497

5.5%

3,910

4,026

4,998

5,057

6.0%

542

562

615

624

6.5%

66

69

125

128

43,082

$ 44,432

$ 44,207

Total

$

42,188

$

SOMA:
3.5%

$

341

$

352

$

363

$

365

4.0%

167,675

168,403

170,119

165,740

4.5%

497,672

508,798

434,352

431,646

5.0%

231,420

237,545

195,418

196,411

5.5%

93,119

95,873

103,379

104,583

6.0%

12,910

13,376

12,710

12,901

6.5%
Total

1,558

1,656

2,586

2,644

$1,004,695

$ 1,026,003

$ 918,927

$ 914,290

Financial information related to securities purchased under
agreements to resell and securities sold under agreements to repurchase for the years ended December 31 was as follows (in millions):

Securities Purchased
Under Agreements to
Resell
2010

2009

Securities Sold
Under
Agreements to
Repurchase
2010

2009

—

$ 2,507

$ 3,758

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

$

—

$

Average daily amount
outstanding, during
the year

—

150

2,561

3,136

Maximum balance
outstanding, during
the year

—

3,318

3,758

3,758

Securities pledged (par
value), end of the year

—

—

1,833

3,765

—

$ 59,703

$ 77,732

3,616

58,476

67,837

—

80,000

77,732

89,525

—

—

43,642

77,860

SOMA:

Contract amount
outstanding, end of
the year

$

—

Average daily amount
outstanding, during
the year
Maximum balance
outstanding, during
the year
Securities pledged (par
value), end of the year

$

The contract amounts for securities purchased under agreements to resell and securities sold under agreements to repurchase approximate fair value. The FRBNY executes transactions
for the purchase of securities under agreements to resell primarily to temporarily add reserve balances to the banking system.
Conversely, transactions to sell securities under agreements to
repurchase are executed primarily to temporarily drain reserve
balances from the banking system.

Financials • 2010 ANNUAL REPORT

41

The remaining maturity distribution of Treasury securities,
GSE debt securities, federal agency and GSE MBS bought outright,
and securities sold under agreements to repurchase that were
allocated to the Bank at December 31, 2010, was as follows (in
millions):
Over 5
years
to 10
years

16 days 91 days Over 1
Within to 90
to 1
year to
15 days days
year
5 years

Treasury
securities
(par value)

Over 10
years

Total

$ 412 $ 1,042 $ 2,278 $ 18,459 $ 14,023 $ 6,679 $ 42,893

GSE debt
securities
(par value)

47

581

1,197

2,983

1,285

99 $ 6,192

Federal
agency and
GSE MBS
(par value)

—

—

—

1

1

41,658 $ 41,660

Securities
sold under
agreements
to repurchase
(contract
amount)

2,507

—

—

—

—

— $ 2,507

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, 2010, which differs from the stated maturity
primarily because the weighted average life factors in prepayment
assumptions, is approximately 4.2 years.
The par value of Treasury and GSE debt securities that were
loaned from the SOMA at December 31, was as follows (in millions):
Allocated to the Bank
2010
Treasury securities

$

927

GSE debt securities

SOMA

2009
$

2010

991

68

54

$

2009

22,081

$

1,610

Other liabilities

42

1,108

SOMA

2010

2009

2010

2009

—

29

—

601

FEDERAL RESERVE BANK OF DALLAS • 2010 ANNUAL REPORT

7. FOREIGN CURRENCY DENOMINATED ASSETS
The FRBNY holds foreign currency deposits with foreign central
banks and the Bank for International Settlements and invests in
foreign government debt instruments. These foreign government
debt instruments are guaranteed as to principal and interest by the
issuing foreign governments. In addition, the FRBNY enters into
transactions to purchase euro-denominated government debt securities under agreements to resell for which the accepted collateral is
the debt instruments issued by the governments of Belgium, France,
Germany, Italy, the Netherlands, and Spain.
The Bank’s allocated share of foreign currency denominated assets was approximately 1.375 percent and 1.286 percent at
December 31, 2010 and 2009, respectively.
The Bank’s allocated share of foreign currency denominated
assets, including accrued interest, valued at amortized cost and
foreign currency market exchange rates at December 31, was as follows (in millions):

20,502

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 amount of other liabilities allocated to the Bank and held in the SOMA at December 31, was as
follows (in millions):
Allocated to the Bank

The FRBNY enters into commitments to buy Treasury and GSE
debt securities and records the related securities on a settlementdate basis. There were no commitments to buy Treasury and GSE
debt securities as of December 31, 2010. These commitments had
contractual settlement dates extending through January 4, 2011.
The FRBNY enters into commitments to buy federal agency and
GSE MBS and records the related MBS on a settlement-date basis.
During the years ended December 31, 2010 and 2009, the
Reserve Banks recorded net gains from dollar roll and coupon
swap related transactions of $782 million and $879 million,
respectively, of which $35 million and $44 million, respectively,
was allocated to the Bank. These net gains are reported as “Noninterest income (loss): Federal agency and government-sponsored enterprise mortgage-backed securities gains, net” in the
Statements of Income and Comprehensive Income.
There were no commitments to buy or sell federal agency or
GSE MBS as of December 31, 2010.

2010

2009

Euro:
Foreign currency deposits

$

97

$

95

Securities purchased under agreements
to resell

34

33

Government debt instruments

64

64

53

44

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

110
$

358

89
$

325

At December 31, 2010 and 2009, the fair value of foreign currency denominated assets, including accrued interest, allocated
to the Bank was $360 million and $328 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 foreign currency denominated assets were
$26,049 million and $25,272 million at December 31, 2010 and 2009,
respectively. At December 31, 2010 and 2009, the fair value of the
total Reserve Bank foreign currency denominated assets, including
accrued interest, was $26,213 million and $25,480 million, respectively.
The remaining maturity distribution of foreign currency denominated assets that were allocated to the Bank at December 31, 2010,
was as follows (in millions):

lion and $10,272 million, respectively, of which $1 million and
$132 million, respectively, was allocated to the Bank. All of the U.S.
dollar liquidity swaps outstanding at December 31, 2010, were
transacted with the European Central Bank and had remaining
maturity distributions of less than 15 days.
Foreign Currency Liquidity Swaps
There were no transactions related to the foreign currency liquidity swaps during the years ended December 31, 2010 and 2009.
9. BANK PREMISES, EQUIPMENT, AND SOFTWARE
Bank premises and equipment at December 31 were as follows
(in millions):

2010

Euro

Within 15
days

16 days to
90 days

Total
allocated
91 days to Over 1 year
to the
1 year
to 5 years
Bank

$

$

$

Japanese yen
Total allocated
to the bank

75
56

$

131

41
8

$

49

28

$

33
$

61

$

51

$

195

66

$

163

117

$

358

Bank premises and equipment:
Land and land improvements

$

63

Buildings
Building machinery and equipment

8. CENTRAL BANK LIQUIDITY SWAPS
U.S. Dollar Liquidity Swaps
The Bank’s allocated share of U.S. dollar liquidity swaps was
approximately 1.375 percent and 1.286 percent at December 31,
2010 and 2009, respectively.
The total foreign currency held under U.S. dollar liquidity
swaps in the SOMA at December 31, 2010 and 2009, was $75 mil-

$

63

229

229

44

44

Construction in progress

4

1

Furniture and equipment

66

64

Subtotal
Accumulated depreciation

At December 31, 2010 and 2009, the authorized warehousing
facility was $5.0 billion, with no balance outstanding.
There were no transactions related to the authorized reciprocal
currency arrangements with the Bank of Canada and the Bank of
Mexico during the years ended December 31, 2010 and 2009.
There were no foreign exchange contracts outstanding as of
December 31, 2010.
The FRBNY enters into commitments to buy foreign government debt instruments and records the related securities on a settlement-date basis. As of December 31, 2010, there were $209 million of outstanding commitments to purchase euro-denominated
government debt instruments, of which $3 million was allocated to
the Bank. These securities settled on January 4, 2011, and replaced
euro-denominated government debt instruments held in the SOMA
that matured on that date.
In connection with its foreign currency activities, the FRBNY
may enter into transactions that are subject to varying degrees of
off-balance-sheet market risk and counterparty credit risk that
result from their future settlement. The FRBNY controls these
risks by obtaining credit approvals, establishing transaction limits,
receiving collateral in some cases, and performing daily monitoring
procedures.

2009

406

401

(136)

(125)

Bank premises and equipment, net

$

270

$

276

Depreciation expense, for the years ended
December 31

$

14

$

17

The Bank leases space to outside tenants with remaining lease
terms ranging from 5 to 7 years. Rental income from such leases
was $2 million and $3 million for the years ended December 31,
2010 and 2009, 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, 2010, are as follows (in thousands):
2011
2012
2013
2014
2015
Thereafter
Total

$

$

1,428
1,462
1,462
1,462
1,269
1,553
8,636

The Bank had capitalized software assets, net of amortization, of $2 million and $3 million at December 31, 2010 and 2009,
respectively. Amortization expense was $2 million for each of
the years ended December 31, 2010 and 2009. Capitalized software assets are reported as a component of “Other assets” in the
Statements of Condition, and the related amortization is reported
as a component of “Operating expenses: Other” in the Statements
of Income and Comprehensive Income.

Financials • 2010 ANNUAL REPORT

43

10. COMMITMENTS AND CONTINGENCIES
Conducting its operations, the Bank enters into contractual
commitments, normally with fixed expiration dates or termination
provisions, at specific rates and for specific purposes.
At December 31, 2010, the Bank was obligated under noncancelable leases for premises and equipment with remaining terms
ranging from 1 to approximately 5 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 $258 thousand and $231 thousand for the years ended December 31, 2010 and 2009, respectively.
Certain of the Bank’s leases have options to renew.
Future minimum rental payments under noncancelable operating leases, net of sublease rentals, with terms of one year or more, at
December 31, 2010, were not material.
At December 31, 2010, 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 share of certain losses in excess of 1 percent of the capital
paid-in of the claiming Reserve Bank, up to 50 percent of the total
capital paid-in of all Reserve Banks. Losses are borne in the ratio
of a Reserve Bank’s capital paid-in to the total capital paid-in of all
Reserve Banks at the beginning of the calendar year in which the
loss is shared. No claims were outstanding under the agreement at
December 31, 2010 or 2009.
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). In
addition, under the Dodd–Frank Act, employees of the Bureau
can elect to participate in the System Plan. There were no Bureau
participants in the System Plan as of December 31, 2010.
The System Plan provides retirement benefits to employees of
the Federal Reserve Banks, Board of Governors, and OEB and in
the future will provide retirement benefits to certain employees of
the Bureau. The FRBNY, on behalf of the System, recognizes the
net asset or net liability and costs associated with the System Plan
in its consolidated financial statements. During the years ended
December 31, 2010 and 2009, costs associated with the System
Plan were not reimbursed by other participating employers.

44

FEDERAL RESERVE BANK OF DALLAS • 2010 ANNUAL REPORT

The Bank’s projected benefit obligation, funded status, and net
pension expenses for the BEP and the SERP at December 31, 2010
and 2009, 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. 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. 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. The
Bank’s Thrift Plan contributions totaled $5 million and $4 million
for the years ended December 31, 2010 and 2009, respectively,
and are reported as a component of “Salaries and benefits” in the
Statements of Income and Comprehensive Income.
12. POSTRETIREMENT BENEFITS OTHER THAN RETIREMENT PLANS
AND POSTEMPLOYMENT BENEFITS
Postretirement Benefits Other Than Retirement Plans
In addition to the Bank’s retirement plans, employees who
have met certain age and length-of-service requirements are eligible for both medical benefits and life insurance coverage during
retirement.
The Bank funds benefits payable under the medical and life
insurance plans as due and, accordingly, has no plan assets.
Following is a reconciliation of the beginning and ending balances of the benefit obligation (in millions):
2010
Accumulated postretirement benefit
obligation at January 1

$

92.1

2009
$

83.8

Service cost-benefits earned during
the period

3.7

3.0

Interest cost on accumulated benefit
obligation

5.3

5.0

(3.3)

3.5

1.4

1.3

(6.0)

(4.8)

0.3

0.3

Net actuarial (gain) loss
Contributions by plan participants
Benefits paid
Medicare Part D subsidies
Accumulated postretirement
benefit obligation at December 31

$

93.5

$

92.1

At December 31, 2010 and 2009, the weighted-average discount
rate assumptions used in developing the postretirement benefit
obligation were 5.25 percent and 5.75 percent, respectively.
Discount rates reflect yields available on high-quality corporate bonds that would generate the cash flows necessary to pay the
plan’s benefits when due.
Following is a reconciliation of the beginning and ending balance of the plan assets, the unfunded postretirement benefit obligation, and the accrued postretirement benefit costs (in millions):
2010
Fair value of plan assets at January 1

$

—

2009
$

—

Contributions by the employer

4.3

3.2

Contributions by plan participants

1.4

1.3

(6.0)

(4.8)

0.3

0.3

Benefits paid
Medicare Part D subsidies
Fair value of plan assets at December 31

$

Unfunded obligation and accrued
postretirement benefit cost

—

$ 93.5

$

Net actuarial loss
Total accumulated other comprehensive loss

$

1.2

$ 92.1

$

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

$

$

1.6

12.3

1.5

(15.1)

(19.6)

$ (13.9)

$ (18.1)

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:
2010

2009

Health care cost trend rate assumed for
next year

8.00%

7.50%

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

5.00%

5.00%

Year that the rate reaches the ultimate trend
rate

2017

2015

(1.3)

(10.2)

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

—

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

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, 2010 (in millions):

2010
Service cost-benefits earned during the
period

$

2009

3.7

$

3.0

Interest cost on accumulated benefit
obligation

5.3

5.0

Amortization of prior service cost

(0.3)

(0.4)

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

1.2

1.1

9.9

8.7

—

(0.2)

$

9.9

$

$

(0.2)

8.5

Estimated amounts that will be amortized from
accumulated other comprehensive loss into
net periodic postretirement benefit expense
(credit) in 2011 are shown below:
Prior service cost
Net actuarial loss
Total

0.8
$

0.6

Net postretirement benefit costs are actuarially determined
using a January 1 measurement date. At January 1, 2010 and 2009,
the weighted-average discount rate assumptions used to determine net periodic postretirement benefit costs were 5.75 percent
and 6.00 percent, respectively.
Net periodic postretirement benefit expense is reported as a
component of “Salaries and benefits” in the Statements of Income
and Comprehensive Income.
A curtailment gain associated with restructuring programs that
are described in Note 14 was recognized in net income in the year
ended December 31, 2009, related to employees who terminated
employment during 2009.

Financials • 2010 ANNUAL REPORT

45

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 $0.3 million
and $0.4 million in the years ended December 31, 2010 and 2009,
respectively. Expected receipts in 2011, related to benefits paid in
the years ended December 31, 2010 and 2009, are $0.1 million.
Following is a summary of expected postretirement benefit
payments (in millions):

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, 2009

$

(15)

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

(4)

Amortization of net actuarial loss

1

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

(3)
$

(18)

Change in funded status of benefit plans:
Without Subsidy
2011

$

4.5

With Subsidy
$

4.2

2012

4.8

4.5

2013

5.1

4.7

2014

5.6

5.1

2015

6.0

5.5

2016–2020
Total

35.1
$

61.1

31.3
$

55.3

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, 2010 and 2009, were $8 million and
$9 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 2010 and 2009
operating expenses were $1 million and $3 million, respectively,
and are recorded as a component of “Salaries and benefits” in the
Statements of Income and Comprehensive Income.

46

FEDERAL RESERVE BANK OF DALLAS • 2010 ANNUAL REPORT

Net actuarial gain arising during the year

3

Amortization of net actuarial loss

1

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

4
$

(14)

Additional detail regarding the classification of accumulated
other comprehensive loss is included in Note 12.
14. BUSINESS RESTRUCTURING CHARGES
In 2010, the Reserve Banks announced the consolidation of
some of their currency processing operations. As a result of this
initiative, currency processing operations performed by the San
Antonio Branch will be consolidated into the Houston Branch.
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.
Before 2009, 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 consolidated operations into
two regional Reserve Bank processing sites: one in Cleveland, for
paper check processing, and one in Atlanta, for electronic check
processing.

Following is a summary of financial information related to the
restructuring plans (in millions):
2010
2009
2008 and Prior
Restructuring Restructuring Restructuring
Plans
Plans
Plans

Total

Information related to
restructuring plans as
of December 31, 2010:
Total expected
costs related to
restructuring activity

$

Estimated future
costs related to
restructuring activity
Expected
completion date

2.4

$

1.0

$

2.9

0.9

—

—

2011

2010

2009

$

6.3

0.9

Reconciliation of
liability balances:
Balance at
January 1, 2009

$

—

$­	

—

$

2.5

$

2.5

Employee separation
costs

—

1.0

—

1.0

Adjustments

—

—

(0.2)

(0.2)

Payments

—

—

(2.0)

(2.0)

Balance at
December 31, 2009

$

—

$

1.0

Employee separation
costs

1.4

0.1

Adjustments

—

Payments

—

Balance at
December 31, 2010

$

1.4

$

$

0.3

$

1.5

(0.2)

—

(0.2)

(0.7)

(0.3)

(1.0)

$

—

$

15. SUBSEQUENT EVENTS
There were no subsequent events that require adjustments to
or disclosures in the financial statements as of December 31, 2010.
Subsequent events were evaluated through March 22, 2011, which
is the date that the Bank issued the financial statements.

1.3

—

0.2

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 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.

1.6

Financials • 2010 ANNUAL REPORT

47

In 2010, 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 $8.0 million, of which approximately $1.6 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 2010, 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)

2010

2009

2010

2009

Federal Reserve notes processed

2,819,488

2,772,001

52,863

51,151

Currency received from circulation

2,926,159

2,930,894

52,905

51,736

Coin received from circulation

1,535,617

599,886

163

100

—

70,699

—

59,496

731,060

844,594

773,039

885,536

156*

594*

3,132

29,574

SERVICES TO DEPOSITORY INSTITUTIONS
CASH SERVICES

CHECK PROCESSING
Commercial—processed
Check 21 Substitute Check—processed
LOANS
Advances made

* Individual loans, not in thousands.

48

FEDERAL RESERVE BANK OF DALLAS • 2010 ANNUAL REPORT

Isabel Allende
Writer
Chile

David Ho
AIDS researcher
Taiwan

Martina Navratilova
Tennis player
Czechoslovakia

Zalmay Khalilzad
U.S. ambassador
Afghanistan

Fareed Zakaria
Journalist
India

About the Dallas Fed

Federal Reserve Bank of Dallas

Carol Dirks

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 360,000 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.

2200 North Pearl Street, Dallas, TX 75201

Publications Director

214-922-6000

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

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

San Antonio Branch
126 East Nueva Street, San Antonio, TX 78204

Elias Zerhouni
NIH director
Algeria

Michael Weiss
Editor

Jennifer Afflerbach
Associate Editor

Gene Autry
Art Director and Photographer

Ellah Piña
Chart Production

210-978-1200

Photo Credits

Website

Isabel Allende: Lori Barra
Fareed Zakaria: James Kegley

www.dallasfed.org