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2013 Annual Report | Federal Reserve Bank of Philadelphia

Message from the President
100 Years of Tradition and Transition

n December 23, 2013, the Federal Reserve

System marked 100 years from the signing
of the Federal Reserve Act by President

Woodrow Wilson. This began a centennial period
that will run through the 100th anniversary of when
the 12 Federal Reserve Banks opened for business on
November 16, 1914.
That is why “100 Years of Tradition and Transition”
is the subject of this year’s annual report. I have
often described the Federal Reserve as a uniquely
American form of a central bank — a decentralized
central bank. To understand how it came to be, there
is no better place to start than in Philadelphia, where
just a few blocks from our Bank building you can
find the vestiges of two earlier attempts at central
banking from the time this city was the nation’s
financial and political center.
The cover article provides an overview of the
100-year history of the Federal Reserve System,
including a comparison of our present structure with
the two prior attempts. In this year’s essay, “A Limited
Central Bank,” I take a step back and consider the
Federal Reserve’s essential role more broadly and how
the Fed might be improved to better fulfill that role.
The annual report includes a message from First Vice
President Blake Prichard on “A Century of Service”
and “Bank Highlights” of our accomplishments

Charles I. Plosser
President and Chief Executive Officer

during 2013. One of the past year’s highlights was
the Policy Forum in December, which focused on

2013 Annual Report| Federal Reserve Bank of Philadelphia

the “History of Central Banking in the United States.” We
were extraordinarily pleased to have former Chairman
Alan Greenspan and former Vice Chair Don Kohn, among
others, participate in the daylong event.
Our institution has been fortunate to have extraordinary
citizens who have served on the Bank’s board of
directors and advisory councils. As I look back at 2013,
I especially thank Jeremy Nowak, president of J Nowak
and Associates, LLC, who completed his second year as
chairman and his sixth year as a director. I also thank
Keith S. Campbell, chairman of Mannington Mills of
Salem, NJ, and R. Scott Smith, retired chairman and CEO
of Fulton Financial Corporation of Lancaster, PA, who also
completed their terms as directors.
James E. Nevels, founder and chairman of The
Swarthmore Group, completed his second year as
deputy chair and advanced to chairman in January
2014. Michael J. Angelakis, vice chairman and CFO of
Comcast Corp., was appointed deputy chairman. Three
other citizens joined the board in terms that began
January 2014: William S. Aichele, chairman and CEO of
Univest Corporation of Pennsylvania; Edward J. Graham,
president and CEO of South Jersey Industries; and Brian
M. McNeill, president and CEO of Southco Inc.
The Economic Advisory Council includes representatives
from diverse industries, manufacturers, and nonprofits
in the Third District. In 2013, we welcomed Ernest
Dianastasis, managing director and principal, Computer
Aid, Inc.; Chris Gheysens, president and CEO, Wawa, Inc.;
Patrick Magri, senior vice president of managed markets
and policy, Merck & Co., Inc.; and Michael Pearson,
president, Union Packaging, LLC, to serve three-year terms.
The Community Depository Institutions Advisory Council
(CDIAC) includes representatives from commercial
banks, thrift institutions, and credit unions in the Third
District. In 2013, members who joined were David E.
Gillan, chairman and CEO of County Bank, Rehoboth

Beach, DE; Thomas M. Petro, president and CEO of Fox
Chase Bancorp, Inc., Hatboro, PA; and Gregory A. Smith,
president and CEO of the Pennsylvania State Employees
Credit Union (PSECU), Harrisburg, PA. In addition, Dennis
D. Cirucci, president, CEO, and director of Alliance
Bancorp, Inc. and Alliance Bank, continued to represent
our District on the Federal Reserve Board’s CDIAC.
I also thank Bharat Masrani, president and CEO of
TD Bank, N.A., for his service as the Third District’s
representative to the Federal Advisory Council,
which meets quarterly with the Board of Governors
in Washington, D.C. His term ended in 2013, and we
welcomed Scott V. Fainor, president and CEO of National
Penn Bancshares, Inc. and National Penn Bank, as our
representative to the council for 2014.
Finally, I offer my sincere thanks to the talented and
dedicated employees at the Philadelphia Fed. The 100year history of our Bank is a story of the people who have
contributed to its success through their public service to
our many stakeholders. I especially would like to recognize Jeanne Rentezelas, who was promoted to senior vice
president and general counsel during 2013.
I would also be remiss if I did not acknowledge that this
is the last annual report that will feature Loretta Mester
as our Bank’s executive vice president and director of research. She has been the Bank’s director of research since
2000, and I have been extraordinarily fortunate to have
Loretta as my chief policy advisor since 2006. While we
will miss her here in Philadelphia, we are fortunate that
she will remain a colleague and a friend in her new role
as the 11th president and chief executive officer of the
Federal Reserve Bank of Cleveland, effective June 1, 2014.

Charles I. Plosser
President and Chief Executive Officer
May 2014

2013 Annual Report | Federal Reserve Bank of Philadelphia

Message from the First Vice President
A Century of Service

he Federal Reserve Act enacted 100 years ago

century of why an effective central bank is essential to the

established a central bank for the United States

long-term health of our economy.

economic stability, safe and sound practices at financial

On December 23, 1913, the Federal Reserve Act became

institutions, and efficient payment systems that support

law, and nearly a year later on November 16, 1914, all

economic activity. For those of us at the Fed, this is less

12 Reserve Banks simultaneously opened for business.

of a celebration and more of a reflection on how our

The Reserve Banks, under the supervision of the Board

actions have forged a new understanding during the past

of Governors in Washington, D.C., began to provide their

and assured a framework that would promote

Districts with a variety of services that have evolved over
time. There were coins and currency to be provided to
banks, checks to be cleared, and regional economies and
communities to be understood. Everything we do today
grew from the seed of these service obligations, adapting
to a changing and growing economy, and building a legacy
of service.
Much has changed in the past century. Checks peaked
and ebbed, and new payments emerged that were
unimaginable, even 50 years ago. The number of banks
has waxed and waned. Our economy was complex 100
years ago. Today, it is staggering in its complexity, with
moving parts modeled by powerful computers and
translated into discussions that form monetary policy.
Today, as in the past 100 years, the Federal Reserve is an
institution focused solely on the public interest, always promoting equal access to its services, striving to be efficient
and effective in performing our mandate, and demanding
the highest integrity in all that we do. I hope the learning
over our first century translates into a deeper understanding of lessons learned to help us be even more effective in
our second century of service to America. The “2013 Bank
D. Blake Prichard
First Vice President and Chief Operating Officer

Highlights” on the pages that follow provide clear examples
of how we continued to build on a century of service.

2013 Annual Report| Federal Reserve Bank of Philadelphia

2013 Bank highlights

Philadelphia Fed Policy Forum
conomists and staff in the Philadelphia Fed’s Research Department
hosted a number of conferences and workshops during 2013, including
the 10th Philadelphia Fed Policy Forum, which focused on “The History
of Central Banking in the United States.”

President Charles Plosser reflected on the history of central banking in the U.S.
and noted that the Federal Reserve’s decentralized structure was influenced
by the history of the First and Second Banks of the United States, two earlier attempts at central banking that were
founded blocks away from today’s Bank.
The biennial Policy Forum brought together more than 150 academics, policymakers, and market economists from
several countries. Among the many key players who participated in the event were former Federal Reserve Chairman
Alan Greenspan, former Vice Chairman Don Kohn, and noted author Allan H. Meltzer.

Vidya Shenoy Wins System’s Top Bank Supervision Award
idya Shenoy, manager in the Risk Assessment,

loan-level data each month

Data Analysis, and Research (RADAR) unit, was

on first-lien mortgages,

honored in June as one of five winners of the

home equity, credit cards,

William Taylor Award, which is presented annually to

and address matches

System employees who display excellence in the field of

from large bank holding

bank supervision. Shenoy was honored for her leadership

companies. Considered

in delivering the new loan-level FR Y-14M consumer credit

one of the most ambitious

data that enabled successful completion of the consumer

data collection efforts ever

credit loss estimates for the Dodd-Frank Act stress testing.

undertaken by the Fed, this initiative was launched and

This loan-level data collection initiative involves gathering

completed under tight, aggressive timelines.

Vidya Shenoy with former Chairman
Ben Bernanke

Vidya Shenoy
2013
Vidya Shenoy, a nine-year Bank employee who is with the
Risk Assessment, Data Analysis, and Research (RADAR) Group,
received the Taylor Award for her extraordinary leadership in
delivering the new loan-level Federal Reserve Y-14M consumer
credit data that enabled successful completion of the consumer

2013 Annual Report | Federal Reserve Bank of Philadelphia

The Bank Rolls Out The Federal Reserve and You Video to the Public
fter four years in the making, The Federal Re-

ulation, and the payments system. The video, available

serve and You video was rolled out to the public

on DVD and streaming on the Bank’s public website, was

in April 2013 by the Bank’s Community Devel-

designed as an informative and entertaining way to help

opment Studies and Education

anyone interested in learning more about the Federal

Department. The video offers a

Reserve System. But its biggest impact is expected to be

look inside the Federal Reserve

felt in high school classrooms nationwide as a new educa-

System and highlights the Fed’s

tional resource for high school teachers. Andrew Hill, eco-

role in the U.S. economy. More

nomic education advisor in CDS&E, noted that more than

than 70 video segments cover

15,000 DVDs were distributed and nearly 10,000 viewers

topics including the history

have seen the videos online in the first year. Keeping the

of central banking in the U.S.,

video as a digital project will make it easier to update

the mechanics of money and

segments as needed, he said.

banking, supervision and reg-

The Secret Life of Money
n March 2013, “The Secret Life of Money” made its debut on the

Discovery Channel. The documentary, hosted by Jacob Goldstein and
David Kestenbaum from NPR’s “Planet Money,” explained how money

is made, what gives it value, and how it ends up in your wallet. Highlights
included interviews and footage recorded in the Bank’s actual vaults.
Employees in the Cash Services Department specialize in handling huge
amounts of cash each business day. They follow rigorous procedures as
they process, distribute, and store currency in the Bank’s vault. All their
work is done behind the scenes, so it has rarely been seen by the public,
until now.
The Bank’s staff worked closely with the film’s producer and crew to
ensure the script and footage were accurate, without compromising
Bank security. Filming was completed in 2011, and production extended
into 2012, before the documentary aired in early 2013. Officials from the
Bureau of Engraving and Printing, the U.S. Mint in Philadelphia, the U.S.
Secret Service, and Dunbar armored carrier service also were featured in
the documentary.

2013 Annual Report| Federal Reserve Bank of Philadelphia

2013 Bank highlights

GDPplus Spices Up an Old Standard

GDPplus

ho can think of a more highly regard-

ed measure of economic activity than
gross domestic product (GDP)? The

quarterly indicator, which seeks to distill all goods
and services produced in the United States into a

single number, is known by everyone, from economists to news-hungry Americans. In November, the
Bank’s Real-Time Data Research Center launched a
new measurement using data from the U.S. Bureau

-4

-8

60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 11

of Economic Analysis (BEA) for estimates of GDP and

The new measure was proposed by economic researchers

gross domestic income (GDI). By using both GDP and GDI

Borağan Aruoba, Francis Diebold, Jeremy Nalewaik, Frank

data, GDPplus is designed to better estimate underlying

Schorfheide, and Dongho Song in their work “Improving

but unobserved economic activity.

GDP Measurement: A Measurement-Error Perspective.”
Aruoba, one of the paper’s authors, explained, “Econom-

Tom Stark, assistant director and manager of the

ic theory suggests that these two measures ought to be

Real-Time Data Research Center, was instrumental

identical, but in practice, they almost never are. What we

in overseeing this initiative. “We think analysts and

do in this project is to acknowledge that these two mea-

policymakers will use GDPplus as well as the BEA’s

sures are measures of the same underlying latent variable

estimates of GDP and GDI to improve their understanding

(true GDP) and use some statistical methods to obtain a

of the dynamics of the U.S. economy,” Stark said.

measure of this latent variable using these two measures.”

Facilities Management Department Wins TOBY Award
he Bank won The Outstanding Building of the Year (TOBY) award from the Building Owners and Managers

Association International (BOMA) in 2013. This competition selected the Bank as the top contender among the
many facilities that were nominated in the “Government Building” category and that rivaled other government

buildings in the region. The evaluation process for the award included a detailed look at all aspects of building operations and management, from green initiatives to tenant relations to community service.

2013 Annual Report | Federal Reserve Bank of Philadelphia

The Bank Presents
a Master Class
on Diversity Metrics

The Bank Partners with Cristo Rey
Philadelphia High School
he Bank entered into a new partnership to host four

s part of the Bank’s Office of Diversity

and Inclusion (D&I) initiatives, 41 D&I
practitioners gathered in Philadelphia

high school interns from the Cristo Rey Philadelphia
High School to further outreach efforts to majority-

minority and inner-city high

for a special program: “A Master Class on Diver-

schools. The four students

sity and Inclusion Metrics: Measuring What Mat-

worked part-time through

ters.” Master teachers Dr. Rohini Anand, senior

the school year in Human

vice president and global chief diversity officer

Resources and Financial

for Sodexo, and her colleague, Chad Johnson,

Management Services.

director of diversity/EEO systems and analytics,

These experiences not

led the forum. Sodexo, a leading provider of

only helped them develop

quality of life services with 420,000 employees

valuable skills but also

in 80 countries, was ranked No. 1 in Diversity-

exposed them to future

Inc.’s 2013 business index of Top Companies for

career opportunities within

Diversity and Inclusion.

the Bank.

Bank Hosts the Conference of Presidents
and the Conference of First Vice Presidents

n September, the Bank welcomed the Conference of
Presidents, the Conference of First Vice Presidents, and the
Financial Services Policy Committee, three Federal Reserve

System leadership conferences. President Charles Plosser
and First Vice President Blake Prichard, both cochairs of their
respective conferences, hosted the gathering. The more than
30 Fed presidents, first vice presidents, and other officers had
the opportunity to see Philadelphia’s historical roots of U.S.
central banking as well as our nation’s Independence Hall and
Congress Hall.

2013 Annual Report| Federal Reserve Bank of Philadelphia

2013 Bank highlights

Giving Back Year-Round
Throughout the year, many Bank staff members roll up their sleeves to participate in one
of the many volunteer initiatives sponsored by the Bank. Outreach to the community
comes in all shapes and sizes, from a single day of service to ongoing weekly programs. In
addition, many employees serve on the boards of area nonprofits.
Bank employees volunteered time and talent through PhillyFedCARES in a variety of
community service days. Events ranged from organizing the book inventory at a local
elementary school library to reading stories to K–3 students as part of the National
Education Association’s Read Across America Day. Another spring day was spent sprucing
up a playground at a local city park. Bank employees, families, and friends also turned
out for the 9-11 Heroes Run and fun walk in the fall. Some ran the 5K course while others
walked it, and some cheered on the sidelines as part of the Bank’s continuing support to
the local community.

The Fed Completes the System-wide Transition from Lotus Notes to Outlook
The Bank hosts the System’s Groupware Leadership Center (GLC), which provides e-mail services and other collaboration tools System-wide. In 2013, the GLC completed its work to migrate all employees in the Federal Reserve System to
new e-mail and collaboration services. Patrick Turner, assistant vice president of GLC, was the program manager who
directed the changeover, known as the Connect & Share project.

2013 Annual Report | Federal Reserve Bank of Philadelphia

Cash Services Introduces New $100 Note
The Bank’s Cash Services Department and the Public Affairs Department hosted a special event at the Franklin Institute that marked the
release of the new $100 note in early October. The city of Philadelphia, Ben Franklin’s adopted hometown, was one of five locations
nationwide selected by the Board of Governors and the U.S. Treasury
to roll out the new “Benjamins.” Michelle Scipione and Jake Lofton
appeared on morning television programs and then helped describe
the new note and its security features
to media members and the public at
the museum.

Windows into Our Past
The project started more than a year ago as a simple idea: The Bank wanted a visual history of the past 100 years as
a tribute to the contributions of Bank employees. The result was the Windows into Our Past display, a photo collage
in the Bank’s Eastburn Court. The project was the brainchild of two Bank employees: Dianne Hallowell, Graphic
Services, and Pat Lenar-Burns, Public Affairs, who worked with Bank volunteers in selecting the photographs. A similar
“Centennial Wall” exhibit was
installed in the third-floor lobby
with photos and artifacts from our
Bank’s 100 years. Also in the thirdfloor lobby, a series of original
photos and architectural drawings
pays tribute to 925 Chestnut
Street, the Bank’s home from 1918
to 1976.

2013 Annual Report| Federal Reserve Bank of Philadelphia

Image courtesy of the Woodrow Wilson Presidential Library and Museum, Staunton, VA

The Signing of the Federal Reserve Act by Wilbur G. Kurtz Sr.

2013 Annual Report | Federal Reserve Bank of Philadelphia

A Limited Central Bank
By Charles I. Plosser

s the Fed begins its 100th anniversary year, I believe it is entirely
appropriate to reflect on its history and its future. At the same time,
we need to reflect on what I believe is the Federal Reserve’s essential
role and how it might be improved as an institution to better fulfill that role.1

Douglass C. North was cowinner of the 1993 Nobel Prize

that governments establish their central banks with limits

in Economics for his work on the role that institutions

that constrain the actions of the central bank to one

play in economic growth. North argued that institu-

degree or another.

tions were deliberately devised to constrain interactions
among parties both public and private. In the spirit of

Yet, in recent years, we have seen many of the explicit

North’s work, one theme of this essay will focus on the

and implicit limits stretched. The Fed and many other

fact that the institutional structure of the central bank

central banks have taken extraordinary steps to address

matters. The central bank’s goals and objectives, its

a global financial crisis and the ensuing recession. These

framework for implementing policy, and its governance

steps have challenged the accepted boundaries of central

structure all affect its performance.

banking and have been both applauded and denounced.
For example, the Fed has adopted unconventional large-

Central banks have been around for a long time, but they

scale asset purchases to increase accommodation after it

have clearly evolved as economies and governments

reduced its conventional policy tool — the federal funds

have changed. Most countries today operate under a fiat

rate — to near zero. These asset purchases have led to

money regime, in which a nation’s currency has value

the creation of trillions of dollars of reserves in the bank-

because the government says it does. Central banks are

ing system and have greatly expanded the Fed’s balance

usually given the responsibility to protect and preserve

sheet. But the Fed has done more than just purchase lots

the value or purchasing power of the currency. In the

of assets; it has altered the composition of its balance

U.S., the Fed does so by buying or selling assets in order

sheet through the types of assets it has purchased. I have

to manage the growth of money and credit. The ability

spoken on a number of occasions about my concerns that

to buy and sell assets gives the Fed considerable power

these actions to purchase specific (non-Treasury) assets

to intervene in financial markets not only through the

amounted to a form of credit allocation, which targets

quantity of its transactions but also through the types of

specific industries, sectors, or firms. These credit policies

assets it can buy and sell. Thus, it is entirely appropriate

cross the boundary from monetary policy and venture

2013 Annual Report| Federal Reserve Bank of Philadelphia

into the realm of fiscal policy.4 I include in this category

the U.S. and the world were operating under a classical

the purchases of mortgage-backed securities (MBS) as

gold standard. Therefore, price stability was not among

well as emergency lending under Section 13(3) of the

the stated goals in the original Federal Reserve Act.

Federal Reserve Act, in support of the bailouts, most no-

Indeed, the primary objective in the preamble was to

tably of Bear Stearns and AIG. Regardless of the rationale

provide an “elastic currency.”

for these actions, one needs to consider the long-term
repercussions that such actions may have on the central

The gold standard had some desirable features. Domestic

bank as an institution.

and international legal commitments regarding convertibility were important disciplining devices that were

As we contemplate what the Fed of the future should

essential to the regime’s ability to deliver general price

look like, I will discuss whether constraints on its goals

stability. The gold standard was a de facto rule that most

might help limit the range of objectives it could use to

people understood, and it allowed markets to function

justify its actions. I will also consider restrictions on the

more efficiently because the price level was mostly

types of assets it can purchase to limit its interference

stable.

with market allocations of scarce capital and generally to
avoid engaging in actions that are best left to the fiscal

But the international gold standard began to unravel

authorities or the markets. I will also touch on gover-

and was abandoned during World War I.5 After the war,

nance and accountability of our institution and ways to

efforts to reestablish parity proved disruptive and costly

implement policies that limit discretion and improve

in both economic and political terms. Attempts to rees-

outcomes and accountability.

tablish a gold standard ultimately fell apart in the 1930s.
As a result, most of the world now operates under a fiat

Goals and Objectives

money regime, which has made price stability an import-

The Federal Reserve’s goals and objectives have evolved

ant priority for those central banks charged with ensuring

over time. When the Fed was first established in 1913,

the purchasing power of the currency.
Congress established the current set of monetary policy

‘When the Fed was first
established in 1913, the
U.S. and the world were
operating under a classical
gold standard. Therefore,
price stability was not
among the stated
goals in the original
Federal Reserve Act.’

goals in 1978. The amended Federal Reserve Act specifies
the Fed “shall maintain long run growth of the monetary
and credit aggregates commensurate with the economy’s long run potential to increase production, so as to
promote effectively the goals of maximum employment,
stable prices, and moderate long-term interest rates.”
Since moderate long-term interest rates generally result
when prices are stable and the economy is operating at
full employment, many have interpreted these goals as a
dual mandate with price stability and maximum employment as the focus.

2013 Annual Report | Federal Reserve Bank of Philadelphia

Let me point out that the instructions from Congress call

ment and high inflation. The economy paid the price in

for the Federal Open Market Committee (FOMC) to stress

the form of a deep recession, as the Fed sought to restore

the “long run growth” of money and credit commensu-

the credibility of its commitment to price stability.

rate with the economy’s “long run potential.” There are
many other things that Congress could have specified,

When establishing the longer-term goals and objectives

but it chose not to do so. The act doesn’t talk about

for any organization, and particularly one that serves

managing short-term credit allocation across sectors; it

the public, it is important that the goals be achievable.

doesn’t mention inflating housing prices
or other asset prices. It also doesn’t
mention reducing short-term fluctuations
in employment.
Many discussions about the Fed’s man-

‘We need to better align the
expectations of monetary policy with
what it is actually capable of achieving.’

date seem to forget the emphasis on
the long run. The public, and perhaps
even some within the Fed, have come to
accept as an axiom that monetary policy can and should

Assigning unachievable goals to organizations is a recipe

attempt to manage fluctuations in employment. Rather

for failure. For the Fed, it could mean a loss of public con-

than simply set a monetary environment “commensu-

fidence. I fear that the public has come to expect too

rate” with the “long run potential to increase produc-

much from its central bank and too much from monetary

tion,” these individuals seek policies that attempt to

policy, in particular. We need to heed the words of anoth-

manage fluctuations in employment over the short run.

er Nobel Prize winner, Milton Friedman. In his 1967 presidential address to the American Economic Association, he

The active pursuit of employment objectives has been and

said, “…we are in danger of assigning to monetary policy

continues to be problematic for the Fed. Most economists

a larger role than it can perform, in danger of asking it to

are dubious of the ability of monetary policy to predict-

accomplish tasks that it cannot achieve, and as a result,

ably and precisely control employment in the short run,

in danger of preventing it from making the contribution

and there is a strong consensus that, in the long run,

that it is capable of making.”6 In the 1970s, we saw the

monetary policy cannot determine employment. As the

truth in Friedman’s earlier admonitions. I think that over

FOMC noted in its statement on longer-run goals adopted

the past 40 years, with the exception of the Paul Volcker

in 2012, “the maximum level of employment is largely de-

era, we failed to heed this warning. We have assigned an

termined by nonmonetary factors that affect the structure

ever-expanding role for monetary policy, and we expect

and dynamics of the labor market.” In my view, focusing

our central bank to solve all manner of economic woes

on short-run control of employment weakens the credibil-

for which it is ill-suited to address. We need to better

ity and effectiveness of the Fed in achieving its price sta-

align the expectations of monetary policy with what it is

bility objective. We learned this lesson most dramatically

actually capable of achieving.

during the 1970s when, despite the extensive efforts to
reduce unemployment, the Fed essentially failed, and the

The so-called dual mandate has contributed to this ex-

nation experienced a prolonged period of high unemploy-

pansionary view of the powers of monetary policy. Even

2013 Annual Report| Federal Reserve Bank of Philadelphia

can be justified by shifting the
focus or rationale for action from

‘…we are in danger of assigning to

goal to goal.

monetary policy a larger role than it

I have concluded that it would be

can perform, in danger of asking it to

appropriate to redefine the Fed’s

accomplish tasks that it cannot achieve,

solely, or at least primarily, on

and as a result, in
danger of preventing
it from making the
contribution that
it is capable of
making.’
– Milton Friedman
1967

monetary policy goals to focus
price stability. I base this on two
facts: Monetary policy has very
limited ability to influence real
variables, such as employment.
And, in a regime with fiat currency,
only the central bank can ensure
price stability. Indeed, it is the
one goal that the central bank can
achieve over the longer run.

Governance and Central
Bank Independence
Even with a narrow mandate
to focus on price stability, the
institution must be well designed
if it is to be successful. To meet

even this narrow mandate, the central bank must have
though the 2012 statement of objectives acknowledged

a fair amount of independence from the political pro-

that it is inappropriate to set a fixed goal for employ-

cess so that it can set policy for the long run without the

ment and that maximum employment is influenced by

pressure to print money as a substitute for tough fiscal

many factors, the FOMC’s recent policy statements have

choices. Good governance requires a healthy degree of

increasingly given the impression that it wants to achieve

separation between those responsible for taxes and ex-

an employment goal as quickly as possible.

penditures and those responsible for printing money.

I believe that the aggressive pursuit of broad and

The original design of the Fed’s governance recognized the

expansive objectives is quite risky and could have very

importance of this independence. Consider its decentral-

undesirable repercussions down the road, including

ized, public-private structure, with Governors appointed

undermining the public’s confidence in the institution, its

by the U.S. President and confirmed by the Senate, and

legitimacy, and its independence. To put this in different

Fed presidents chosen by their boards of directors. This

terms, assigning multiple objectives for the central bank

design helps ensure a diversity of views and a more decen-

opens the door to highly discretionary policies, which

tralized governance structure that reduces the potential

2013 Annual Report | Federal Reserve Bank of Philadelphia

for abuses and capture by special interests or political

A third way to constrain central bank actions is to direct

agendas. It also reinforces the independence of monetary

the monetary authority to conduct policy in a systematic,

policymaking, which leads to better economic outcomes.

rule-like manner.9 It is often difficult for policymakers to

choose a systematic, rule-like approach that would tie

Implementing Policy and Limiting Discretion

their hands and thus limit their discretionary authority.

Such independence in a democracy also necessitates that

Yet, research has discussed the benefits of rule-like be-

the central bank remain accountable. Its activities also

havior for some time. Rules are transparent and there-

need to be constrained in a manner that limits its dis-

fore allow for simpler and more effective communication

cretionary authority. As I have already argued, a narrow

of policy decisions. Moreover, a large body of research

mandate is an important limiting factor on an expansion-

emphasizes the important role expectations play in deter-

ist view of the role and scope for monetary policy.

mining economic outcomes. When policy is set systematically, the public and financial market participants can

What other sorts of constraints are appropriate on the

form better expectations about policy. Policy is no longer

activities of central banks? I believe that monetary policy

a source of instability or uncertainty. While choosing an

and fiscal policy should have clear boundaries. Indepen-

appropriate rule is important, research shows that in a

dence is what Congress can and should grant the Fed,

wide variety of models simple, robust monetary policy

but, in exchange for such independence, the central bank

rules can produce outcomes close to those delivered by

should be constrained from conducting fiscal policy. As I

each model’s optimal policy rule.

have already mentioned, the Fed has ventured
into the realm of fiscal policy by its purchase
programs of assets that target specific industries
and individual firms. One way to circumscribe the

‘a narrow mandate is an important

range of activities a central bank can undertake is

limiting factor on an expansionist

to limit the assets it can buy and hold.
In its System Open Market Account, the Fed is
allowed to hold only U.S. government securi-

view of the role and scope for
monetary policy.’

ties and securities that are direct obligations of
or fully guaranteed by agencies of the United
States. But these restrictions still allowed the Fed to

Systematic policy can also help preserve a central bank’s

purchase large amounts of agency mortgage-backed

independence. When the public has a better under-

securities in its effort to boost the housing sector. My

standing of policymakers’ intentions, it is able to hold the

preference would be to limit Fed purchases to Treasury

central bank more accountable for its actions. And the

securities and return the Fed’s balance sheet to an

rule-like behavior helps to keep policy focused on the

all-Treasury portfolio. This would limit the ability of the

central bank’s objectives, limiting discretionary actions

Fed to engage in credit policies that target specific indus-

that may wander toward other agendas and goals.

tries. As I’ve already noted, such programs to allocate
credit rightfully belong in the realm of the fiscal authori-

Congress is not the appropriate body to determine the

ties — not the central bank.

form of such a rule. However, Congress could direct the

2013 Annual Report| Federal Reserve Bank of Philadelphia

monetary authority to communicate the broad guidelines

The Fed plays an important role as the lender of last re-

the authority will use to conduct policy. One way this

sort, offering liquidity to solvent firms in times of extreme

might work is to require the Fed to publicly describe how

financial stress to forestall contagion and mitigate systemic

it will systematically conduct policy in normal times —

risk. This liquidity is intended to help ensure that solvent

this might be incorporated into the semiannual Monetary

institutions facing temporary liquidity problems remain

Policy Report submitted to Congress. This would hold

solvent and that there is sufficient liquidity in the banking

the Fed accountable. If the FOMC chooses to deviate

system to meet the demand for currency. In this sense,

from the guidelines, it must then explain why and how it

liquidity lending is simply providing an “elastic currency.”

intends to return to its prescribed guidelines.
Thus, the role of lender of last resort is not to prop up
My sense is that the recent difficulty the Fed has faced

insolvent institutions. However, in some cases during the

in trying to offer clear and transparent guidance on its

crisis, the Fed played a role in the resolution of particular

current and future policy path stems from the fact that

insolvent firms that were deemed systemically important

policymakers still desire to maintain discretion in setting

financial firms. Subsequently, the Dodd-Frank Wall Street

monetary policy. Effective forward guidance, however,

Reform and Consumer Protection Act has limited some

requires commitment to behave in a particular way in the

of the lending actions the Fed can take with individual

future. But discretion is the antithesis of commitment

firms under Section 13(3). Nonetheless, by taking these

and undermines the effectiveness of forward guidance.

actions, the Fed has created expectations — perhaps

Given this tension, few should be surprised that the Fed

unrealistic ones — about what the Fed can and should do

has struggled with its communications.

to combat financial instability.

What is the answer? I see three: Simplify the goals.

Just as it is true for monetary policy, it is important to be

Constrain the tools. Make decisions more systematically.

clear about the Fed’s responsibilities for promoting finan-

All three steps can lead to clearer communications and a

cial stability. It is unrealistic to expect the central bank to

better understanding on the part of the public. Creating a

alleviate all systemic risk in financial markets. Expanding

stronger policymaking framework will ultimately produce

the Fed’s regulatory responsibilities too broadly increas-

better economic outcomes.

es the chances that there will be short-run conflicts
between its monetary policy goals and its supervisory

Financial Stability and
Monetary Policy

and regulatory goals. This should be avoided, as it could

Before concluding, I would like to say a few words about

price stability.

undermine the credibility of the Fed’s commitment to

the role that the central bank plays in promoting financial stability. Since the financial crisis, there has been

Similarly, the central bank should set boundaries and

an expansion of the Fed’s responsibilities for controlling

guidelines for its lending policy that it can credibly

macroprudential and systemic risk. Some have even

commit to follow. If the set of institutions having regular

called for an expansion of the monetary policy mandate

access to the Fed’s credit facilities is expanded too far, it

to include an explicit goal for financial stability. I think

will create moral hazard and distort the market mecha-

this would be a mistake.

nism for allocating credit. This can end up undermining
the very financial stability that it is supposed to promote.

2013 Annual Report | Federal Reserve Bank of Philadelphia

Emergencies can and do arise. If the Fed is asked
by the fiscal authorities to intervene by allocating
credit to particular firms or sectors of the economy, then the Treasury should take these assets
off of the Fed’s balance sheet in exchange for
Treasury securities. In 2009, I advocated that we
establish a new accord between the Treasury and
the Federal Reserve that protects the Fed in just
such a way.10 Such an arrangement would be similar to the Treasury-Fed Accord of 1951 that freed

‘What is the answer?
I see three:
• Simplify the goals.
• Constrain the tools.
• Make decisions more
systematically.’

the Fed from keeping the interest rate on longterm Treasury debt below 2.5 percent. It would
help ensure that when credit policies put taxpayer
funds at risk, they are the responsibility of the fiscal authority — not the Fed. A new accord would
also return control of the Fed’s balance sheet to
the Fed so that it can conduct independent monetary policy.

And third, by taking a highly discretionary approach to
monetary policy, policymakers increase the risks of finan-

Many observers think financial instability is endemic to

cial instability by making monetary policy uncertain. Such

the financial industry, and therefore, it must be controlled

uncertainty can lead markets to make unwise investment

through regulation and oversight. However, financial

decisions — witness the complaints of those who took

instability can also be a consequence of governments and

positions expecting the Fed to follow through with the

their policies, even those intended to reduce instability. I

taper decision in September 2013.

can think of three ways in which central bank policies can
increase the risks of financial instability. First, by rescuing

The Fed and other policymakers need to think more

firms or creating the expectation that creditors will be

about the way their policies might contribute to finan-

rescued, policymakers either implicitly or explicitly create

cial instability. I believe that it is important that the Fed

moral hazard and excessive risking-taking by financial

take steps to conduct its own policies and to help other

firms. For this moral hazard to exist, it doesn’t matter if

regulators reduce the contributions of such policies to

the taxpayer or the private sector provides the funds.

financial instability. The more limited role for the central

What matters is that creditors are protected, in part, if

bank I have described here can contribute to such efforts.

not entirely.

Conclusion
Second, by running credit policies, such as buying huge

The financial crisis and its aftermath have been challeng-

volumes of mortgage-backed securities that distort mar-

ing times for global economies and their institutions. The

ket signals or the allocation of capital, policymakers can

extraordinary actions taken by the Fed to combat the

sow the seeds of financial instability because of the distor-

crisis and the ensuing recession and to support recovery

tions that they create, which in time must be corrected.

have expanded the roles assigned to monetary policy.

2013 Annual Report| Federal Reserve Bank of Philadelphia

The public has come to expect too much from its central

•

And fourth, limit the boundaries of its lender-of-

bank. To remedy this situation, I believe it would be ap-

last-resort credit extension and ensure that it is

propriate to set four limits on the central bank:

conducted in a systematic fashion.

•

•
•

First, limit the Fed’s monetary policy goals to a

These steps would yield a more limited central bank. In

narrow mandate in which price stability is the sole,

doing so, they would help preserve the central bank’s

or at least the primary, objective.

independence, thereby improving the effectiveness of

Second, limit the types of assets that the Fed can

monetary policy, and, at the same time, they would make

hold on its balance sheet to Treasury securities.

it easier for the public to hold the Fed accountable for its

Third, limit the Fed’s discretion in monetary

policy decisions. These changes to the institution would

policymaking by requiring a systematic, rule-like

strengthen the Fed for its next 100 years.

approach.

Endnotes
1

This essay is based on a speech by the author, “A Limited Central
Bank,” presented at the Cato Institute’s 31st Annual Monetary Conference, November 14, 2013, in Washington, D.C. The views expressed
here are the author’s and not necessarily those of the Federal Reserve
System or the Federal Open Market Committee.

For more about Douglass C. North and his cowinner Robert W. Fogel
and the 1993 Nobel Memorial Prize in Economic Sciences, see Nobel
Media, “The Prize in Economics 1993 - Press Release,” (1993), www.
nobelprize.org/nobel_prizes/economic-sciences/laureates/1993/press.
html (accessed November 11, 2013). See also Douglass C. North, “Institutions,” Journal of Economic Perspectives, 5:1 (1991), pp. 97–112.

Countries can and do pursue different means of setting the value
of their currency, including pegging their monetary policy to that of
another country, but I will not concern myself with such issues in these
comments.

See Charles Plosser, “Ensuring Sound Monetary Policy in the Aftermath
of Crisis,” speech to the U.S. Monetary Policy Forum, The Initiative on
Global Markets, sponsored by the University of Chicago Booth School of
Business, New York, NY, February 27, 2009, and Charles Plosser, “Fiscal
Policy and Monetary Policy: Restoring the Boundaries,” a speech to the
same group, February 24, 2012.

See Ben S. Bernanke, “A Century of U.S. Central Banking: Goals, Frameworks, Accountability,” speech to the National Bureau of Economic
Research, Cambridge, MA, July 10, 2013; and Jeffrey M. Lacker, “Global
Interdependence and Central Banking,” speech to the Global Interdependence Center, Philadelphia, November 1, 2013.
See Milton Friedman, “The Role of Monetary Policy,” American Economic Review, 58:1 (March 1968), pp. 1–17.
See Daniel L. Thornton, “The Dual Mandate: Has the Fed Changed Its
Objective?” Federal Reserve Bank of St. Louis Review, 94 (March/April
2012), pp. 117–33.

See Plosser (2009) and Plosser (2012).

See Charles Plosser, “The Benefits of Systematic Monetary Policy,”
speech given to the National Association for Business Economics,
Washington Economic Policy Conference, Washington, D.C., March 3,
2008. Also see Finn E. Kydland and Edward C. Prescott, “Rules Rather
Than Discretion: The Inconsistency of Optimal Plans,” Journal of Political
Economy, 85 (June 1977), pp. 473–91.

See Plosser (2009).

2013 Annual Report | Federal Reserve Bank of Philadelphia

Federal Reserve System

100 Years of Tradition and Transition
the 20th century. When the Knickerbocker Trust Company
in New York City failed in 1907, it triggered runs on other
trust companies, as well as hundreds of bank failures, a
decrease in the money supply, and a deep recession. In
response, Congress set up the National Monetary Commission in 1908. The commission submitted a report to
Congress four years later that proposed a plan to create
a National Reserve Association of the United States. The
actual plan was never implemented; however, it sparked
a debate advocating a new central bank for the United
States: the Federal Reserve System. Incoming President
Wilson favored adding a central governmental board to
oversee the reserve banks.
Among the many proposals introduced to Congress in 1913,
Representative Carter Glass sponsored the key bill passed
by the House and finally by the Senate on December 19,
1913. Four days later, President Woodrow Wilson signed
the bill into law, creating the Federal Reserve System.
n 1913, Albert Einstein was working on his theory
of gravity, Richard Nixon was born, and Franklin D.
Roosevelt was sworn in as Assistant Secretary of the
Navy. It was also the year Woodrow Wilson took the oath
of office as the 28th President of the United States, intent
on advocating progressive reform and change. One of his
biggest reforms came on December 23, 1913, when he
signed the Federal Reserve Act into law. This landmark
legislation created the Federal Reserve System, the nation’s central bank.

In part, the Federal Reserve Act established the Reserve
Bank Organization Committee, in which the Secretary of
the Treasury, the Secretary of Agriculture, and the Comptroller of the Currency would divide the nation into no
fewer than eight and no more than 12 Federal Reserve
Districts. The committee was also charged with deciding
which cities would host a Federal Reserve Bank, how the
geographic boundaries of each Federal Reserve District
would be defined, and how the Reserve Banks would be
organized and supervised.

A Need for Stability

Between January and mid-February 1914, the committee
held meetings in 18 cities across the nation. Local business-

Why was a central bank needed? After the charter of
the Second Bank of the United States expired in 1836,
the United States endured a series of financial crises
throughout the 19th century and into the first decade of

men, bankers, farmers, and others made a case explaining
why their city or state should be chosen as a Reserve Bank
location. In April 1914, the committee submitted a report

2013 Annual Report| Federal Reserve Bank of Philadelphia

to Congress listing the cities it had selected for the Reserve
Banks, the same cities that host Reserve Banks today.
The Federal Reserve Act also provided an operating structure for the Reserve System: It created a Federal Reserve
Board in Washington, D.C., designed to oversee the operations of the Reserve Banks. The Board consisted of seven

members, including the Secretary of the Treasury and the
Comptroller of the Currency as ex officio members, as well
as five members appointed by the President of the United
States and confirmed by the Senate.
On November 16, 1914, all 12 regional Reserve Banks
opened for business. Like the First Bank and the Second

Panics and Crises
The Knickerbocker Trust Company, the second largest of its kind in New York, failed in October 1907, which led to runs on
other trust companies. Knickerbocker did not have enough cash on hand to meet depositors’ demand. Since there was
no deposit insurance in 1907 and no lender of last resort to turn to, the run triggered a panic that launched hundreds of
bank failures, a significant decrease in the money supply, and a deep recession. Financier J.P. Morgan formed a syndicate
with his fellow bankers to put sufficient liquidity into the economy to quell the panic. Congress then set up a federal commission to study the economy, which eventually led to the creation of the Federal Reserve System in 1913.
But before the Federal Reserve System was established, the United States faced another crisis in July 1914. European
investors, who owned more than 20 percent of American railroad stocks, started to sell these assets to secure a flow
of gold to Europe to help pay for World War I. This sell-off put a serious drain on the U.S. gold supply, weakening the
gold-backed dollar and making it hard for the U.S. to maintain the gold standard. Although Treasury Secretary William
McAdoo tried to push for the Federal Reserve Banks to open early, his attempt was thwarted. So he moved to close
Wall Street “to hamper British sales of American securities.” The stock market closed on July 31, 1914, and reopened on
December 12.

MINNEAPOLIS 9

CHICAGO 7
4 CLEVELAND

BOSTON
1
2 NEW YORK
3 PHILADELPHIA

12 SAN FRANCISCO

KANSAS CITY 10

8 ST. LOUIS

5 RICHMOND

6
ATLANTA
DALLAS 11

The Federal Reserve
Act is passed by
Congress and signed
by President Woodrow
Wilson.

1913

The 12 Federal
Reserve Banks open
for business.

1914

The Philadelphia
Fed opens in its first
headquarters at
406–408 Chestnut
Street.

Charles J. Rhoads
is named the first
governor of the
Federal Reserve Bank
of Philadelphia.

World War I creates difficult
economic conditions, but the
Federal Reserve System takes an
active role in marketing war debt
to the banks and general public
to raise funds for the war effort.

1914 1914 1914-18

2013 Annual Report | Federal Reserve Bank of Philadelphia

Bank of the United States, the Fed was initially given a
20-year charter. However, the McFadden Act of 1927 removed the 20-year limit. This helped the Federal Reserve
avoid the political battle over rechartering, which had
ended both previous attempts at a central bank.

Works of Glass (1858-1946)
Carter Glass, the son of a newspaperman, was born in
Lynchburg, VA. After attending school and working as

Off to a Rough Start

a printer’s apprentice, reporter, editor, and owner of a

With the nation’s economy still unsettled, the Roaring Twenties were largely remembered as a period of
economic prosperity and a rising stock market, despite
three recessions. Middle class and wealthier households
benefited from the boom, but not everyone shared in
the prosperity. During the decade, crop prices collapsed,
and as a result, many farmers defaulted on their mortgages. However, the Fed continued an accommodative
monetary policy throughout 1927. Then in 1928, the Fed
finally raised interest rates, but this proved to be too little
too late. It further aggravated the economic situation by
slowing down an already faltering economy. By 1929, the
stock market crash deepened the crisis and triggered the
Great Depression.

newspaper, he was elected to the state senate in 1899 and
served as a delegate to Virginia’s constitutional convention. After he was elected to the U.S. House of Representatives in 1902, he was appointed to the Committee on
Banking and Currency. During the Panic of 1907, Glass saw
the need to reduce, if not eliminate, the number of bank
panics and financial crises as well as develop the need for
a more elastic currency. Glass was Secretary
of the Treasury from
1918 to 1920 and
served in the Senate.
One of his biggest
accomplishments was
his work on the bill
that would become

President Herbert Hoover attempted to stimulate the
economy by urging Congress to pass the Reconstruction
Finance Corporation (RFC) Act of 1932. The RFC was
established to make loans to banks and other financial

Ellis P. Passmore is
named governor of
the Philadelphia Fed.

The Philadelphia Fed
moves to a larger
building at 925
Chestnut Street.

1918 1918

the Federal Reserve
Act of 1913.

George W. Norris is named governor
of the Philadelphia Fed. During his
tenure, he oversees the System’s
first open market operations in 1923
and issues discounts and advances
to avert monetary panic during the
stock market crash in 1929.

1920

Carter Glass

The McFadden
Act is passed and
creates significant
changes for the Fed.

The Black Tuesday
Wall Street Crash
sends the world into
an economic panic.

1927 1929

2013 Annual Report| Federal Reserve Bank of Philadelphia

institutions and to lend funds to railroads, many of which
could not meet their bond payments.

off workers. As incomes dwindled, many households
defaulted on loans, and bankruptcies escalated.

However, many people criticized Hoover, saying his
actions weren’t fast enough and didn’t go far enough to
stem the rise of bank failures and growing unemployment. Voters decided it was time for a change. Hoover
lost the presidential election in November 1932, and
voters sent Franklin D. Roosevelt to the White House.
Although other factors, including the collapse of international trade, contributed to the severe economic distress
in the United States, the breakdown of the banking
system was credited with being the major cause of the
Depression. Between 1930 and 1933, 9,000 banks failed
in the United States. These bank failures limited money
supply, which, in turn, led to a decline in spending on
goods and services. Firms lowered their prices and laid

Trust in banks evaporated. People withdrew their savings
from banks and began hoarding cash. Bank reserves
plunged, which resulted in tighter credit. In March 1933,
Roosevelt declared a bank holiday, in which all U.S.
banks were closed for four business days. After Congress
passed the Emergency Banking Act on March 9, the
Federal Reserve agreed to supply an unlimited amount
of emergency money to the banks that reopened. This
commitment by the Fed essentially created an early form
of deposit insurance. These measures went a long way
toward restoring the public’s confidence in banks. By the
end of March 1933, two-thirds of the money that had
been withdrawn in earlier bank runs and panics had been
redeposited in the nation’s banks.

In March 1933,
Roosevelt declared
a bank holiday, in
which all U.S. banks
were closed for four
business days.

However, the Fed did not respond aggressively; it continued its tight monetary policy for too long, and prices
started to fall, leading to widespread deflation. When
banks did close their doors, people lost their savings and
credit became scarce.
Congress passed many important pieces of legislation
in response to the Great Depression. The Banking Act
of 1933 created the Federal Deposit Insurance Corpora-

The Great Depression: U.S.
unemployment reaches 25%,
international trade drops more than
50%, thousands of banks and other
businesses fail, and tax revenue to the
federal government drops dramatically.

Congress passes the GlassSteagall Act to stem deflation,
expand the Fed’s ability to offer
rediscounts, and separate the
activities of commercial banks
and securities firms.

1929-39

1933

The Gold Reserve Act passes,
requiring all gold and gold
certificates held by the Federal
Reserve to be surrendered
to and vested in the U.S.
Department of the Treasury.

1934

The Banking Act of
1935 calls for changes
in the Federal Reserve’s
structure, including the
Federal Open Market
Committee.

1935

2013 Annual Report | Federal Reserve Bank of Philadelphia

tion (FDIC) as a temporary government agency with the
authority to provide deposit insurance to banks, initially
insuring bank deposits up to $2,500. This act, known as
the Glass-Steagall Act, separated investment banking
from commercial banking and established the Federal
Open Market Committee (FOMC). Although the Federal
Reserve Banks had set up an Open Market Investment
Committee in 1923, the Reserve Banks were not obligated
to carry out the committee’s recommendations. The 1933
law also gave the Federal Reserve Board the responsibility
for supervising bank holding companies.
The Banking Act of 1935 made the FDIC a permanent
government agency and increased the maximum amount
of insured deposits to $5,000. This law also further defined
the FOMC, giving the Committee its current structure: the
seven Governors on the Board of Governors and five of the
12 Reserve Bank presidents. One of the voting members is
always the president of the New York Fed; the other four
presidents serve one-year terms on a rotating basis. The
Reserve Banks are required to carry out the directions of
the FOMC, whose open market operations are centralized
at the Open Market Trading Desk at the New York Fed.
The 1935 law also changed the title of Reserve Bank heads
from governor to president and removed the Comptroller
of the Currency and the Secretary of the Treasury from
their positions on the Federal Reserve Board.

John S. Sinclair is
named president (he
is the first to assume
this title) of the
Philadelphia Fed.

World War II rages throughout
Europe, North Africa, and the South
Pacific.

Going to War
World War II carried the American economy out of the
Great Depression. Producing armaments and other
goods for the war kept the economy buzzing in the early
to mid-1940s. During this period, the Federal Reserve
acted at the Treasury’s request to keep rates low to help
finance the war. After 1945, when the war was over, the
Treasury wanted the Fed to continue to keep interest
rates low.
But the Federal Reserve Act did not specifically set goals
for monetary policy, stating instead that the Fed was required to furnish an “elastic currency.” In 1946, Congress
passed the Employment Act, which defines the goals of
monetary policy to include promoting “maximum employment, production, and purchasing power.”
In 1950, the Treasury pressed the Fed to maintain low
rates at the start of the Korean War. However, the central
bank was reluctant to do so. Finally, in 1951, the two parties signed the Treasury-Fed Accord, which acknowledged
the Fed’s independence in setting monetary policy.
The economy entered another recession in the mid1950s. Once recovery was underway, the Fed raised
interest rates above 3 percent to restrain inflation. But
its actions were not fast enough to keep inflation from

Alfred H. Williams is
named president of
the Philadelphia Fed.

1936 1939-45 1941

The Treasury-Federal Reserve Accord
declares the Fed’s independence in
conducting monetary policy.

1951

2013 Annual Report| Federal Reserve Bank of Philadelphia

reaching nearly 4 percent. When a second recession
began in mid-1957 and unemployment rose dramatically,
the Fed responded with a sharp drop in interest rates to
spur spending and employment.

Looking Out for the Consumer
In the 1960s and 1970s, Congress passed several important consumer protection laws, including the Truth in
Lending Act in 1968, which requires lenders to disclose
the cost of borrowing to consumers; the Equal Credit Opportunity Act in 1974, which combats discrimination in
consumer and business lending; and the Electronic Fund
Transfer Act in 1978, which provides protection for consumers in their electronic financial transactions. In 1977,
Congress passed the Community Reinvestment Act,
which encourages banks to meet the credit needs of all
segments in their communities. This act also established
a community affairs function at the Board of Governors
and at each Reserve Bank.
Congress also passed the Full Employment and Balanced Growth Act of 1978, otherwise known as the
Humphrey-Hawkins Act. This law expanded the goals of
the Employment Act of 1946 and required the Federal
Reserve’s chairman to testify to Congress twice each year
about the Fed’s objectives and plans for monetary policy.

Karl R. Bopp is named
president of the
Philadelphia Fed,
becoming one of the first
professional economists
to lead a Reserve Bank.

David P. Eastburn is
named president of
the Philadelphia Fed.

High inflation and high unemployment plagued the country during the 1970s; inflation climbed to about 6 percent
at the start of the decade. With inflation still above 4
percent by mid-1971, President Richard Nixon imposed
wage and price controls, which suppressed inflation for a
time. The Fed tightened monetary policy when inflation
rebounded following the end of the wage and price controls and a jump in oil prices during 1973–74.
Inflation rose to 12 percent in 1974, ushering in another
recession. The Fed eased monetary policy in 1974, and
the federal funds rate fell below 5 percent in early 1976.
Since the Fed was slow to raise short-term interest rates
during the rest of the decade, the Fed’s monetary policy
remained expansionary, and the Fed’s stated anti-inflation policy lost credibility.
Although the economy expanded during the 1970s, oil
prices jumped several times when oil-producing states
tightened supplies. Inflation climbed to 14 percent in 1979
when the revolution in Iran reduced oil supplies to the U.S.
President Jimmy Carter appointed Paul Volcker as chairman of the Federal Reserve Board of Governors in 1979,
and Volcker took decisive actions to curb inflation. Rather
than targeting a short-term interest rate, the Federal

The Community
Reinvestment Act
(CRA) is passed.

1958 1970 1977

The Full Employment and Balanced Growth Act
(commonly known as the Humphrey-Hawkins Act)
passes, requiring the Federal Reserve to provide
Congress with a semiannual report on the Fed’s
objectives and plans for monetary policy.

1978

2013 Annual Report | Federal Reserve Bank of Philadelphia

Reserve under Volcker focused on controlling the growth
of the money supply. This led to higher interest rates, but
it succeeded in reducing inflation and lowering interest
rates over time.

The Changing Fed
The Depository Institutions Deregulation and Monetary
Control Act of 1980 (MCA) changed the way the Fed
provides services. The law mandated that the Federal
Reserve offer payment services not only to member
banks but also to any depository institution that wanted
to use them and to charge all institutions (both member
and nonmember banks) an amount sufficient to cover
the cost of providing the service; the law also granted
depository institutions equal access to discount window
lending. In return, the MCA requires all banks to maintain
reserves with the Fed.
In the 1980s and 1990s, more deregulation came to the
banking industry. The Riegle-Neal Interstate Banking
and Branching Efficiency Act of 1994 allowed banks to
set up branches in other states. The Financial Services
Modernization Act of 1999, also called the Gramm-LeachBliley Act, repealed the requirement that investment and
commercial banking be separate, a provision that was
originally set forth in the Glass-Steagall Act of 1933.

After the world ushered in a new millennium, the terrorist attacks of September 11, 2001, forever changed life
in America. In the days and weeks that followed, the Fed
maintained financial stability and kept the economy moving by pumping liquidity into U.S. financial markets. The
Fed kept the payments system and banking operations as
close to normal as possible. The attacks also generated
new payment systems since all air transportation was
grounded for several days after 9/11. The Fed couldn’t
move checks from one part of the country to another by
air, so it stepped in to keep the financial system operational. The Fed credited the accounts of the banks receiving check payments and waited to debit the accounts of
the paying banks until planes began flying again.
The Fed asked Congress to enact a law that would allow a
substitute check to be legally acceptable for collection and
payment. And in 2003, Congress passed the Check Clearing for the 21st Century Act, commonly called Check 21.
This legislation, which went into effect in October 2004,
reduced the time it took banks to clear checks: An electronic image was sent instead of the actual paper check.
In 2007, the Fed had to face yet another financial crisis
and ensuing deep recession. This time, the Fed didn’t
waste time in taking extraordinary steps: It lowered

Edward G. Boehne is named president
of the Philadelphia Fed. During his
tenure, many Third District banks are
taken over by larger rivals and the
Federal Deposit Insurance Corporation
Improvement Act is passed in 1991.

Anthony Santomero is named
president of the Philadelphia Fed.
During his tenure, he oversees
the launch of both the Payment
Cards Center and the Money in
Motion exhibit.

1981

2000

Charles I. Plosser is named
president of the Philadelphia Fed.
During his tenure, he leads the
Bank through the global financial
crisis of 2008 and the ensuing
Great Recession.

The Federal
Reserve System
reaches a
milestone: a
century of service.

2006 2013

2013 Annual Report| Federal Reserve Bank of Philadelphia

Comparing U.S. Central Banks

1791-1811

1816-1836

1913-Present

First Bank
of the United States

Second Bank
of the United States

Federal Reserve System

Supervisory
Duties

Yes

Monetary
Policy

No, but it was large enough to affect
credit conditions nationwide.

Yes, but in the early years, the Fed did
not conduct monetary policy as we
know it today.

Branches

Yes

20-Year Charter

Yes, charter not renewed

Yes, the Fed originally had a 20-year
charter, but the McFadden Act of 1927
gave the central bank permanency.

Issues Currency

Yes

Stockholders

Yes, 20% was held by government;
80% by the public.

Yes, but only member banks hold stock,
not the public.

Stock

Publicly traded, held by foreign and
domestic investors

Federal Reserve System members of
national banks and state-chartered
banks receive nontradable stock in their
District Reserve Bank;
stock pays a fixed dividend of 6%.

Commercial
Bank
Operations

Yes, it accepted deposits from and
made loans to the public.

No, the Fed is a “bankers’ bank”; it
makes loans only to banks and holds
their deposits called reserves.

Competition
with State
Banks

None

Yes

None

Services to
Federal
Government

Served as the federal government’s
fiscal agent, received its revenues, held
its deposits, and made its payments

Serves as the federal government’s
fiscal agent, receives its revenues, holds
its deposits, and makes its payments

2013 Annual Report | Federal Reserve Bank of Philadelphia

short-term interest rates to near zero, established
special lending programs, expanded traditional
overnight loans through the discount window to 90
days, and supported the functioning of credit markets through open market purchases of long-term
securities for the Fed’s portfolio. In July 2010, Congress passed the Dodd-Frank Wall Street Reform and
Consumer Protection Act, which resulted in three
significant changes for the Federal Reserve.

Living History
First, Congress expanded the Fed’s regulatory role
by adding savings and loan holding companies to the
Fed’s supervisory activities. The Fed was also given
supervisory authority over systemically important
nonbank financial companies. Congress also created
the Financial Stability Oversight Council to conduct
surveillance and monitor risks to the financial system.
Second, Congress limited the Fed’s role under Section
13(3) of the Federal Reserve Act as lender of last resort in
unusual and exigent circumstances. During the financial
crisis, the Fed used this authority to make $182 billion
in loans to the American International Group (AIG) to
prevent it from filing for bankruptcy, which would have destabilized the global financial system because of AIG’s size.
Finally, Congress transferred the Fed’s authority to write
regulations for most federal consumer protection laws to
the newly created Consumer Financial Protection Bureau
(CFPB). Although Dodd-Frank funded the CFPB through
the Fed, the new bureau is independent of the Fed in
terms of its decision-making authority.
While rule-making authority for most consumer protection laws was transferred to the CFPB, the Fed and
federal agencies still had the authority to write regulations for certain federal laws, including the Community
Reinvestment Act (CRA), the National Flood Insurance
Act, and the Expedited Funds Availability Act. And the
Fed continues to be the consumer compliance regulator for state member banks with assets of less than $10

On December 16, 2013, more than 80 Federal Reserve Board officials
gathered in Washington, D.C., to commemorate the signing of the
Federal Reserve Act. Four Federal Reserve System Chairs whose
service has spanned 35 years were on hand; from left to right, Janet
Yellen (2014–ongoing), the first woman to be appointed Chair; Alan
Greenspan (1987–2006), Ben Bernanke (2006–14), and Paul Volcker
(1979–87).

billion. It also conducts limited consumer examinations of
state member banks with assets of more than $10 billion
to ensure compliance with laws that the bureau doesn’t
cover in its examinations.
These changes were only the latest the Fed has undergone
in the past 100 years. Yet, the economy and the banking
industry have also been shaped by changing times. The
financial services industry as a whole would be all but
unrecognizable to our forebears a hundred years ago. Unlike its predecessors, the Fed has weathered the political
storms of its day. It insulated itself from partisan politics,
but it is clearly accountable to Congress and the American people. Its decentralized structure has kept it close to
the economy on Main Streets throughout America. And
that has made it ready to tackle the challenges to come
as the Fed enters its second century of service as the
nation’s central bank.
For more information on the history of central banking, see
the ongoing series published by the Federal Reserve Bank of
Philadelphia (www.philadelphiafed.org/publications/economiceducation/). For more on the Federal Reserve System’s
centennial, see www.philadelphiafed.org/about-the-fed/
centennial/.

2013 Annual Report| Federal Reserve Bank of Philadelphia

2013 Board of Directors

Jeremy Nowak (a, d)
Chairman
President of J Nowak and Associates, LLC
Philadelphia, PA
James E. Nevels (a, c, d)
Deputy Chairman
Founder and Chairman, The Swarthmore Group
Philadelphia, PA
Michael J. Angelakis (a, b)
Vice Chairman and CFO, Comcast Corporation
Philadelphia, PA
Keith S. Campbell (a, b, d)
Chairman, Mannington Mills, Inc.
Salem, NJ
Patrick T. Harker (a, c)
President of the University of Delaware
Newark, DE
David R. Hunsicker (b)
Chairman, President, and CEO, New Tripoli Bank
New Tripoli, PA
Frederick C. “Ted” Peters II (a, b)
Chairman and CEO, Bryn Mawr Trust Company
Bryn Mawr, PA
R. Scott Smith Jr. (a, c)
Chairman and CEO, Fulton Financial Corporation
Lancaster, PA
Rosemary Turner (c), not pictured
President of the United Parcel Service’s
Chesapeake District
Philadelphia, PA

(a) Executive Committee
(b) Audit Committee
(c) Management & Budget Committee
(d) Nominating & Governance Committee

Left to right: Michael J. Angelakis, Jeremy Nowak, and James E. Nevels

2013 Annual Report | Federal Reserve Bank of Philadelphia

Left to right: Patrick T. Harker and R. Scott Smith Jr.

Left to right: Keith S. Campbell, David R. Hunsicker, and Frederick C. “Ted” Peters II

2013 Annual Report| Federal Reserve Bank of Philadelphia

Economic Advisory Council

Left to right: Kevin Flemming, Cheryl Feldman, Patrick Magri, Michael Araten, M. Shawn Puccio, Chris Gheysens, Ernest J. Dianastasis,
Thomas J. Doll, William Polacek, and Edward Graham. Not pictured: Teresa Bryce Bazemore, Michael Pearson

Michael Araten
President and CEO
Rodon Group and K’NEX Brands
Hatfield, PA
Teresa Bryce Bazemore
President
Radian Guaranty, Inc.
Philadelphia, PA
Ernest J. Dianastasis
Managing Director
ComputerAid, Inc.
Wilmington, DE
Thomas J. Doll
President, COO, and CFO
Subaru of America, Inc.
Cherry Hill, NJ

Cheryl Feldman
Executive Director
District 1199C Training &
Upgrading Fund
Philadelphia, PA

Patrick Magri
Senior Vice President,
Managed Markets & Policy
Merck & Co., Inc.
North Wales, PA

Kevin Flemming
President
Integrity Personnel
Allentown, PA

Michael Pearson
President
Union Packaging, LLC
Yeadon, PA

Chris Gheysens
President & CEO
Wawa, Inc.
Wawa, PA

William Polacek
President and CEO
JWF Industries
Johnstown, PA

Edward Graham
Chairman, President, and CEO
South Jersey Industries
Folsom, NJ

M. Shawn Puccio
Senior Vice President of Finance
Saint-Gobain Corporation
Valley Forge, PA

2013 Annual Report | Federal Reserve Bank of Philadelphia

Community Depository Institutions Advisory Council

Left to right: Gregory A. Smith, Gerard P. Cuddy, Evelyn F. Smalls, Stephen Cimo, Gerald L. Reeves, Glenn L. Wilson, Dennis D. Circucci,
Thomas M. Petro, and David E. Gillan. Not pictured: Lynda Messick, Vito S. Pantilione, Richard A. Grafmyre

Stephen Cimo
President and CEO
Delaware State Police Federal Credit
Union
Georgetown, DE
Dennis D. Cirucci
President, CEO, and Director
Alliance Bancorp Inc. of Pennsylvania
and Alliance Bank
Broomall, PA
Gerard P. Cuddy
President and CEO
Beneficial Bank
Philadelphia, PA
David E. Gillan
Chairman and CEO
County Bank
Rehoboth, DE

Richard A. Grafmyre
President and CEO
Jersey Shore State Bank
Jersey Shore, PA

Gerald L. Reeves
President, CEO, and Director
Sturdy Savings Bank
Stone Harbor, NJ

Lynda Messick
President and CEO
Community Bank Delaware
Lewes, DE

Evelyn F. Smalls
President and CEO
United Bank of Philadelphia
Philadelphia, PA

Vito S. Pantilione
President and CEO
Parke Bank
Sewell, NJ

Gregory A. Smith
President and CEO
Pennsylvania State Employees Credit
Union
Harrisburg, PA

Thomas M. Petro
President and CEO
Fox Chase Bancorp, Inc.
Hatboro, PA

Glenn L. Wilson
President and CEO
AmeriServ Financial, Inc.
Johnstown, PA

2013 Annual Report| Federal Reserve Bank of Philadelphia

2013 Annual Report | Federal Reserve Bank of Philadelphia

Management Committee
Charles I. Plosser
President and
Chief Executive Officer

Loretta J. Mester
Executive Vice President and
Director of Research

D. Blake Prichard
First Vice President and
Chief Operating Officer

Donna L. Franco
Senior Vice President and
Chief Financial Officer

William W. Lang
Executive Vice President and
Lending Officer
Supervision, Regulation & Credit

Terry E. Harris
Senior Vice President and
Chief Information Officer
Information Technology
Services

Mary Ann Hood
Senior Vice President and EEO
Officer, Human Resources
Director, Office of Diversity and
Inclusion
Arun K. Jain
Senior Vice President
Treasury and Financial Services

Milissa M. Tadeo
Senior Vice President
Corporate Affairs
Herbert E. Taylor
Vice President and
Corporate Secretary
Office of the Secretary

Jeanne R. Rentezelas
Senior Vice President and
General Counsel
Legal

other Bank Officers
Richard Sheaffer
Senior Vice President and
General Auditor
Audit
John D. Ackley
Vice President
Cash Services
Roc Armenter
Vice President and Economist
Research
Mitchell Berlin
Vice President and Economist
Research
Donna L. Brenner
Vice President
Enterprise Risk Management
Jennifer E. Cardy
Vice President
Financial Management Services
Larry Cordell
Vice President
Supervision, Regulation & Credit
Michael Dotsey
Vice President and
Senior Economic Policy Advisor
Research

Patrick M. Regan
Vice President
Information Technology Services

Michael T. Doyle
Assistant Vice President
Treasury Payments

Anthony T. Scafide Jr.
Assistant Vice President
Financial Institutions Relations

Michelle M. Scipione
Vice President
Treasury Services

Suzanne W. Furr
Assistant Vice President and
Assistant General Auditor
Audit

Stephen J. Smith
Assistant Vice President and
Counsel
Legal

Stephen G. Hart
Assistant Vice President
Human Resources

H. Robert Tillman
Assistant Vice President
Supervision, Regulation & Credit

Christopher Henderson
Assistant Vice President
Supervision, Regulation & Credit

Gail L. Todd
Assistant Vice President and
Credit Officer
Supervision, Regulation & Credit

Stanley Sienkiewicz
Vice President, Research Support
Research
Keith Sill
Vice President and Director
Real-Time Data Research Center
Research
Theresa Y. Singleton
Vice President and
Community Affairs Officer
Community Development Studies
and Education
Vish P. Viswanathan
Vice President and
Discount Officer
Supervision, Regulation & Credit
Constance H. Wallgren
Vice President and
Chief Examinations Officer
Supervision, Regulation & Credit

James S. Ely
Vice President
Public Affairs

James K. Welch
Vice President
Law Enforcement and Facilities
Management

Gregory Fanelli
Vice President
Information Technology Services

Joanne M. Branigan
Assistant Vice President
Supervision, Regulation & Credit

Charles Kirkland
Vice President
Financial Statistics

Brian Calderwood
Assistant Vice President
Groupware Leadership Center

Robert Hunt
Vice President and Director
Payment Cards Center

Paul Calem
Assistant Vice President
Supervision, Regulation & Credit

Alice Menzano
Vice President
Groupware Leadership Center

Kori Ann Connelly
Assistant Vice President and
Counsel
Legal

Leonard Nakamura
Vice President and Economist
Research
A. Reed Raymond III
Vice President and
Chief Administrative Officer
Supervision, Regulation & Credit

Maryann T. Connelly
Assistant Vice President and
Counsel
Legal
Frank J. Doto
Assistant Vice President
Supervision, Regulation & Credit

Includes promotions through January 2014

Christopher Ivanoski
Assistant Vice President
Facilities–Plant Operations
John P. Kelly
Assistant Vice President
Enterprise Risk Management
Thomas Lombardo
Assistant Vice President and
Assistant Secretary
Financial Institutions Relations
Keith Morales
Assistant Vice President and
Information Security Officer
Information Technology Services
Robert F. Mucerino
Assistant Vice President
Treasury Services
John J. Munera III
Assistant Vice President
Supervision, Regulation & Credit
Robin P. Myers
Assistant Vice President
Supervision, Regulation & Credit
Camille M. Ochman
Assistant Vice President
Cash Services
Wanda Preston
Assistant Vice President
Supervision, Regulation & Credit
Chellappan Ramasamy
Assistant Vice President
Supervision, Regulation & Credit
Gregory A. Ramick
Assistant Vice President
Cash Services

Patrick F. Turner
Assistant Vice President
Groupware Leadership Center
William T. Wisser
Assistant Vice President
Supervision, Regulation & Credit
Julia Cheney
Officer and Assistant Director
Payment Cards Center
Michael Costello
Business Technology Officer
Supervision, Regulation & Credit
Heather Derbyshire
Officer
Financial Statistics
Dawn Karlyn
Officer
Treasury Services
James Lofton
Officer
Cash Services
Pattie Scafide
Officer
Financial Management Services
Kim Taylor
Officer
Human Resources
Luke Tilley
Officer and Economic Advisor
Corporate Affairs
Linda Van Valkenburg
Officer
Information Technology Services

2013 Annual Report| Federal Reserve Bank of Philadelphia

2013 Annual Report | Federal Reserve Bank of Philadelphia

Statement of Auditor Independence

he Board of Governors engaged Deloitte & Touche LLP (D&T) to audit the 2013 combined and individual

financial statements of the Reserve Banks and those of the consolidated LLC entities.1 In 2013, D&T also
conducted audits of internal controls over financial reporting for each of the Reserve Banks. Fees for D&T’s

services totaled $7 million, of which $1 million was for the audits of the consolidated LLC entities. To ensure auditor
independence, the Board requires that D&T be independent in all matters relating to the audits. Specifically, D&T may
not perform services for the Reserve Banks or others that would place it in a position of auditing its own work, making
management decisions on behalf of the Reserve Banks, or in any other way impairing its audit independence. In 2013,
the Bank did not engage D&T for any non-audit services.
In addition, D&T audited the Office of Employee Benefits of the Federal Reserve System (OEB), the Retirement Plan for Employees of the Federal Reserve System (System Plan), and the Thrift Plan for Employees of the Federal Reserve System (Thrift Plan). The System Plan and the Thrift Plan provide
retirement benefits to employees of the Board, the Federal Reserve Banks, and the OEB.

2013 Annual Report| Federal Reserve Bank of Philadelphia

2013 Annual Report | Federal Reserve Bank of Philadelphia

Financial Statement contents

Management’s Report on Internal Control Over Financial Reporting

Independent Auditors’ Report

Abbreviations 42
Financial Statements:
Statements of Condition as of December 31, 2013 and December 31, 2012

Statements of Income and Comprehensive Income
for the years ended December 31, 2013 and December 31, 2012

Statements of Changes in Capital
for the years ended December 31, 2013 and December 31, 2012

Notes to Financial Statements

2013 Annual Report| Federal Reserve Bank of Philadelphia

management’s Report on Internal control over financial reporting

2013 Annual Report | Federal Reserve Bank of Philadelphia

Independent Auditors’ Report

Deloitte & Touche LLP
1700 Market Street
Philadelphia, PA 19102-3984
USA
Tel: +1 215 246 2300
Fax: +1 215 569 2441
www.deloitte.com

INDEPENDENT AUDITORS’ REPORT
To the Board of Governors of the Federal Reserve System
and the Board of Directors of the Federal Reserve Bank of Philadelphia:
We have audited the accompanying financial statements of the Federal Reserve Bank of Philadelphia
(“FRB Philadelphia”), which are comprised of the statements of condition as of December 31, 2013
and 2012, and the related statements of income and comprehensive income, and of changes in capital
for the years then ended, and the related notes to the financial statements. We also have audited the
FRB Philadelphia’s internal control over financial reporting as of December 31, 2013, based on
criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
Management’s Responsibility
The FRB Philadelphia’s management is responsible for the preparation and fair presentation of these
financial statements in accordance with accounting principles established by the Board of Governors
of the Federal Reserve System (the “Board”) as described in Note 3 to the financial statements. The
Board has determined that this basis of accounting is an acceptable basis for the preparation of the
FRB Philadelphia’s financial statements in the circumstances. The FRB Philadelphia’s management
is also responsible for the design, implementation, and maintenance of internal control relevant to the
preparation and fair presentation of financial statements that are free from material misstatement,
whether due to fraud or error. The FRB Philadelphia’s management is also responsible for its
assertion of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control Over Financial Reporting.
Auditors’ Responsibility
Our responsibility is to express an opinion on these financial statements and an opinion on the FRB
Philadelphia's internal control over financial reporting based on our audits. We conducted our audits
of the financial statements in accordance with auditing standards generally accepted in the United
States of America and in accordance with the auditing standards of the Public Company Accounting
Oversight Board (United States) (“PCAOB”) and we conducted our audit of internal control over
financial reporting in accordance with attestation standards established by the American Institute of
Certified Public Accountants and in accordance with the auditing standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free from material misstatement and whether effective internal control over
financial reporting was maintained in all material respects.
An audit of the financial statements involves performing procedures to obtain audit evidence about
the amounts and disclosures in the financial statements. The procedures selected depend on the
auditor’s judgment, including the assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. In making those risk assessments, the auditor considers

Member of
Deloitte Touche Tohmatsu Limited

2013 Annual Report| Federal Reserve Bank of Philadelphia

Independent Auditors’ Report — page 2

internal control relevant to the FRB Philadelphia’s preparation and fair presentation of the financial
statements in order to design audit procedures that are appropriate in the circumstances. An audit of
the financial statements also includes evaluating the appropriateness of accounting policies used and
the reasonableness of significant accounting estimates made by management, as well as evaluating the
overall presentation of the financial statements. An audit of internal control over financial reporting
involves obtaining an understanding of internal control over financial reporting, assessing the risk that
a material weakness exists, testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk, and performing such other procedures as we considered necessary
in the circumstances.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis
for our audit opinions.
Definition of Internal Control Over Financial Reporting
The FRB Philadelphia’s internal control over financial reporting is a process designed by, or under the
supervision of, the FRB Philadelphia’s principal executive and principal financial officers, or persons
performing similar functions, and effected by the FRB Philadelphia’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. The FRB Philadelphia’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
Philadelphia; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with the accounting principles established by the
Board, and that receipts and expenditures of the FRB Philadelphia are being made only in accordance
with authorizations of management and directors of the FRB Philadelphia; and (3) provide reasonable
assurance regarding prevention or timely detection and correction of unauthorized acquisition, use, or
disposition of the FRB Philadelphia’s assets that could have a material effect on the financial
statements.
Inherent Limitations of Internal Control Over Financial Reporting
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 and corrected 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.
Opinions
In our opinion, the financial statements referred to above present fairly, in all material respects, the
financial position of the FRB Philadelphia as of December 31, 2013 and 2012, and the results of its
operations for the years then ended in accordance with the basis of accounting described in Note 3 to
the financial statements. Also, in our opinion, the FRB Philadelphia maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2013, based on the
criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of
Sponsoring Organizations of the Treadway Commission.

2013 Annual Report | Federal Reserve Bank of Philadelphia

Independent Auditors’ Report — page 3

Basis of Accounting
We draw attention to Note 3 to the financial statements, which describes the basis of accounting. The
FRB Philadelphia has prepared these financial statements in conformity with accounting principles
established by the Board, as set forth in the Financial Accounting Manual for Federal Reserve Banks,
which is a 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 and accounting principles generally accepted in the United States
of America are also described in Note 3 to the financial statements. Our opinion is not modified with
respect to this matter.

March 14, 2014

2013 Annual Report| Federal Reserve Bank of Philadelphia

Abbreviations

ACH

Automated clearinghouse

ASC

Accounting Standards Codification

ASU

Accounting Standards Update

BEP

Benefit Equalization Retirement Plan

Bureau

Bureau of Consumer Financial Protection

FAM

Financial Accounting Manual for Federal Reserve Banks

FASB

Financial Accounting Standards Board

FOMC

Federal Open Market Committee

FRBNY

Federal Reserve Bank of New York

GAAP

Accounting principles generally accepted in the United States of America

GSE

Government-sponsored enterprise

IMF

International Monetary Fund

MBS

Mortgage-backed securities

OFR

Office of Financial Research

SDR

Special drawing rights

SERP

Supplemental Retirement Plan for Select Officers of the Federal Reserve Banks

SOMA

System Open Market Account

TBA

To be announced

TDF

Term Deposit Facility

2013 Annual Report | Federal Reserve Bank of Philadelphia

STATEMENTS OF CONDITION
As of December 31, 2013 and December 31, 2012 (in millions)

2013
2012
ASSETS
Gold certificates
$
397
$
437
Special drawing rights certificates

210
210
Coin

123
141
Loans to depository institutions

-
2
System Open Market Account:
Treasury securities, net (of which $497 and $302 is lent

as of December 31, 2013 and 2012, respectively)
68,363 59,808

Government-sponsored enterprise debt securities, net

(of which $32 and $23 is lent as of December 31, 2013 and

2012, respectively)

1,713
2,627

Federal agency and government-sponsored enterprise

mortgage-backed securities, net
44,442 31,416

Foreign currency denominated investments, net

1,835
2,157

Central bank liquidity swaps

21
771

Accrued interest receivable

685
635

Other investments

-
1
Bank premises and equipment, net

87
87
Other assets

28
27

Total assets

$ 117,904

$ 98,319

LIABILITIES AND CAPITAL
Federal Reserve notes outstanding, net
$ 36,063
$ 43,262
System Open Market Account:
Securities sold under agreements to repurchase

9,154
3,543

Other liabilities

39
105
Deposits:
Depository institutions
48,568 30,547

Other deposits

21
17
Interest payable to depository institutions

2
4
Accrued benefit costs

104
115
Accrued remittances to Treasury

84
29
Interdistrict settlement account
19,721 16,451
Other liabilities

12
14

Total liabilities
113,768

Capital paid-in

2,068
Surplus (including accumulated other comprehensive loss of
$14 and $33 at December 31, 2013 and 2012, respectively)

2,068

Total capital

Total liabilities and capital

$ 117,904

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

4,136

94,087
2,116
2,116
4,232

$ 98,319

2013 Annual Report| Federal Reserve Bank of Philadelphia

STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the years ended December 31, 2013 and December 31, 2012 (in millions)

2013

2012

INTEREST INCOME
System Open Market Account:

Treasury securities, net
$ 1,549
$

Government-sponsored enterprise debt securities, net

Federal agency and government-sponsored enterprise

mortgage-backed securities, net

1,098

Foreign currency denominated assets, net

Central bank liquidity swaps

Other investments

Total interest income

2,723

INTEREST EXPENSE
System Open Market Account:

Securities sold under agreements to repurchase

2
Deposits:

Depository institutions
99

Term Deposit Facility

Total interest expense

1,550
88
1,051
12
21
1
2,723

5
91
1

102

Net interest income

2,621

NON-INTEREST INCOME (LOSS)
System Open Market Account:
Treasury securities gains, net

Federal agency and government-sponsored enterprise

mortgage-backed securities gains, net

Foreign currency translation losses, net

(98)
Compensation received for service costs provided

4
Reimbursable services to government agencies

39
Other
4

2,626

Total non-interest (loss) income

(50)

OPERATING EXPENSES
Salaries and benefits

124
Occupancy

16
Equipment

7
Other
51
Assessments:

Board of Governors operating expenses and currency costs

Bureau of Consumer Financial Protection

397

Total operating expenses

Net income before providing for remittances to Treasury

Earnings remittances to Treasury

322

288

2,249
2,189

2,735
2,812

442
8
(96)
2
39
2

112
14
9
46
76
31

Net income (loss)

Change in prior service costs related to benefit plans
Change in actuarial gains (losses) related to benefit plans

(77)

-
19

1
(9)

Total other comprehensive income (loss)

(8)

Comprehensive income (loss)

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

(85)

2013 Annual Report | Federal Reserve Bank of Philadelphia

STATEMENTS OF CHANGES IN CAPITAL
For the years ended December 31, 2013 and December 31, 2012 (in millions, except share data)

Surplus
Accumulated other

Capital
Net income
comprehensive
paid-in
retained
income (loss)
Total surplus

Balance at December 31, 2011
(46,662,518 shares)

$ 2,333

Net change in capital stock redeemed
(4,338,127 shares)

$ 2,358

$ 2,333

Comprehensive income:
Net loss

-
(77)
-
(77)
Other comprehensive loss

-
-
(8)
(8)

Dividends on capital stock

- (132)
- (132)

(77)
(8)
(132)

Net change in capital

(434)

Balance at December 31, 2012
(42,324,391 shares)

$ 2,116

(209)

$ 2,149

(48)

(8)
(33)

(217)

$ 2,116

(48)

Comprehensive income:
Net income

-
60
-
60
Other comprehensive income

-
-
19
19

Dividends on capital stock

- (127)
- (127)

60
19
(127)

(48)

Balance at December 31, 2013
(41,365,761 shares)

$ 2,068

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

(67)

$ 2,082

$ 4,232

Net change in capital

$ 4,666
(217)

(217)

(25)

Net change in capital stock redeemed
(958,630 shares)

(217)

Total capital

19
(14)

(48)

$ 2,068

(96)

$ 4,136

2013 Annual Report| Federal Reserve Bank of Philadelphia

Notes to Financial Statements

1. Structure
The Federal Reserve Bank of Philadelphia (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 Third Federal
Reserve District, which includes Delaware and portions of New Jersey and Pennsylvania.
In accordance with the Federal Reserve Act, supervision and control of the Bank is exercised by a board of directors. The
Federal Reserve Act specifies the composition of the board of directors for each of the Reserve Banks. Each board is composed of nine members serving three-year terms: three directors, including those designated as chairman and deputy
chairman, are appointed by the Board of Governors of the Federal Reserve System (Board of Governors) to represent
the public, and six directors are elected by member banks. Banks that are members of the System include all national
banks and any state-chartered banks that apply and are approved for membership. Member banks are divided into three
classes according to size. Member banks in each class elect one director representing member banks and one representing the public. In any election of directors, each member bank receives one vote, regardless of the number of shares of
Reserve Bank stock it holds.
In addition to the 12 Reserve Banks, the System also consists, in part, of the Board of Governors and the Federal Open
Market Committee (FOMC). The Board of Governors, an independent federal agency, is charged by the Federal Reserve
Act with a number of specific duties, including general supervision over the Reserve Banks. The FOMC is composed of
members of the Board of Governors, the president of the Federal Reserve Bank of New York (FRBNY), and, on a rotating
basis, four other Reserve Bank presidents.

2. Operations and Services
The Reserve Banks perform a variety of services and operations. These functions include participating in formulating and
conducting monetary policy; participating in the payment system, including large-dollar transfers of funds, automated
clearinghouse (ACH) operations, and check collection; distributing coin and currency; performing fiscal agency functions
for the U.S. Department of the Treasury (Treasury), certain federal agencies, and other entities; serving as the federal
government’s bank; providing short-term loans to depository institutions; providing loans to participants in programs
or facilities with broad-based eligibility in unusual and exigent circumstances; serving consumers and communities by
providing educational materials and information regarding financial consumer protection rights and laws and information
on community development programs and activities; and supervising bank holding companies, state member banks, savings and loan holding companies, U.S. offices of foreign banking organizations, and designated financial market utilities
pursuant to authority delegated by the Board of Governors. Certain services are provided to foreign and international
monetary authorities, primarily by the FRBNY.
The FOMC, in conducting monetary policy, establishes policy regarding domestic open market operations, oversees these
operations, and issues authorizations and directives to the FRBNY to execute transactions. The FOMC authorizes and
directs the FRBNY to conduct operations in domestic markets, including the direct purchase and sale of Treasury securities, government-sponsored enterprise (GSE) debt securities, and 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

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Notes to Financial Statements

repurchase. The FRBNY holds the resulting securities and agreements in a portfolio known as the System Open Market
Account (SOMA). The FRBNY is authorized and directed to lend the Treasury securities and GSE debt securities that are
held in the SOMA.
To counter disorderly conditions in foreign exchange markets or to meet other needs specified by the FOMC to carry out
the System’s central bank responsibilities, the FOMC has authorized and directed the FRBNY to execute spot and forward
foreign exchange transactions in 14 foreign currencies, to hold balances in those currencies, and to invest such foreign
currency holdings, while maintaining adequate liquidity. The FOMC has also authorized the FRBNY to maintain reciprocal currency arrangements with the Bank of Canada and the Bank of Mexico in the maximum amounts of $2 billion and
$3 billion, respectively, and to warehouse foreign currencies for the Treasury and the Exchange Stabilization Fund in the
maximum amount of $5 billion.
Because of the global character of bank funding markets, the System has at times coordinated with other central banks
to provide liquidity. The FOMC authorized and directed the FRBNY to establish temporary U.S. dollar liquidity swap lines
with the Bank of Canada, the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National
Bank. In addition, as a contingency measure, the FOMC authorized and directed the FRBNY to establish temporary
foreign currency liquidity swap arrangements with these five central banks to allow for the System to access liquidity, if
necessary, in any of the foreign central banks’ currencies. On October 31, 2013, the Federal Reserve and five other central
banks agreed to convert their existing temporary liquidity swap arrangements to standing agreements which will remain
in effect until further notice.
Although the Reserve Banks are separate legal entities, they collaborate on the delivery of certain services to achieve
greater efficiency and effectiveness. This collaboration takes the form of centralized operations and product or function
offices that have responsibility for the delivery of certain services on behalf of the Reserve Banks. Various operational
and management models are used and are supported by service agreements between the Reserve Banks. In some cases,
costs incurred by a Reserve Bank for services provided to other Reserve Banks are not shared; in other cases, the Reserve
Banks are reimbursed for costs incurred in providing services to other Reserve Banks. Major services provided by the
Bank on behalf of the System for which the costs were not reimbursed by the other Reserve Banks include Collateral
Management System, Groupware Leadership Center, and Video Conferencing Network.

3. Significant Accounting Policies
Accounting principles for entities with the unique powers and responsibilities of the 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. The financial statements have been prepared in accordance with the FAM.
Limited differences exist between the accounting principles and practices in the FAM and accounting principles generally
accepted in the United States of America (GAAP), due to the unique nature of the Bank’s powers and responsibilities as
part of the nation’s central bank and given the System’s unique responsibility to conduct monetary policy. The primary

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Notes to Financial Statements

differences are the presentation of all SOMA securities holdings at amortized cost, adjusted for credit impairment, if any,
and the recording of all SOMA securities on a settlement-date basis. Amortized cost, rather than the fair value presentation, more appropriately reflects the Bank’s securities holdings given the System’s unique responsibility to conduct
monetary policy. Although the application of fair value measurements to the securities holdings may result in values
substantially greater or less than their carrying values, these unrealized changes in value have no direct effect on the
quantity of reserves available to the banking system or on the ability of the Reserve Banks, as the central bank, to meet
their financial obligations and responsibilities. Both the domestic and foreign components of the SOMA portfolio may involve transactions that result in gains or losses when holdings are sold before maturity. Decisions regarding securities and
foreign currency transactions, including their purchase and sale, are motivated by monetary policy objectives rather than
profit. Accordingly, fair values, earnings, and gains or losses resulting from the sale of such securities and currencies are
incidental to open market operations and do not motivate decisions related to policy or open market activities. Accounting for these securities on a settlement-date basis, rather than the trade-date basis required by GAAP, better reflects the
timing of the transaction’s effect on the quantity of reserves in the banking system. The cost bases of Treasury securities,
GSE debt securities, and foreign government debt instruments are adjusted for amortization of premiums or accretion of
discounts on a straight-line basis, rather than using the interest method required by GAAP.
In addition, the Bank does not present a Statement of Cash Flows as required by GAAP because the liquidity and cash
position of the Bank are not a primary concern given the Reserve Banks’ unique powers and responsibilities as a central
bank. Other information regarding the Bank’s activities is provided in, or may be derived from, the Statements of Condition, Income and Comprehensive Income, and Changes in Capital, and the accompanying notes to the financial statements. Other than those described above, there are no 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.
In 2013, the description of certain line items presented in the Statements of Income and Comprehensive Income and the
Statements of Condition have been revised to better reflect the nature of these items. Amounts related to these line
items were not changed from the prior year, only the nomenclature for the line item was revised, as further noted below:
•
•

•

The line item, “Accrued interest on Federal Reserve notes” has been revised in the Statements of Condition to
“Accrued remittances to Treasury.”
The line item, “Net income before interest on Federal Reserve notes expense remitted to Treasury” has been revised in the Statements of Income and Comprehensive Income to “Net income before providing for remittances
to Treasury.”
The line item, “Interest on Federal Reserve notes expense remitted to Treasury” has been revised in the Statements of Income and Comprehensive Income to “Earnings remittances to Treasury.”

Certain amounts relating to the prior year have been reclassified in the Statements of Condition to conform to the cur-

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Notes to Financial Statements

rent year presentation. The amount reported as “System Open Market Account: Accrued interest receivable” for the year
ended December 31, 2012 ($635 million) was previously reported as a component of “System Open Market Account:
Foreign currency denominated assets, net” ($9 million) and “Accrued interest receivable” ($626 million). Significant accounts and accounting policies are explained below.
a. Consolidation
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) established the Bureau of Consumer Financial Protection (Bureau) as an independent bureau within the System that has supervisory authority over some
institutions previously supervised by the Reserve Banks in connection with those institutions’ compliance with consumer
protection statutes. Section 1017 of the Dodd-Frank Act provides that the financial statements of the Bureau are not to
be consolidated with those of the Board of Governors or the System. The Board of Governors funds the Bureau through
assessments on the Reserve Banks as required by the Dodd-Frank Act. Section 152 of the Dodd-Frank Act established the
Office of Financial Research (OFR) within the Treasury and required the Board of Governors to fund the OFR for the twoyear period ended July 21, 2012. The Reserve Banks reviewed the law and evaluated the design of and their relationships
to the Bureau and the OFR and determined that neither should be consolidated in the Bank’s financial statements.
b. Gold and Special Drawing Rights Certificates
The Secretary of the Treasury is authorized to issue gold certificates to the Reserve Banks. Upon authorization, the Reserve Banks acquire gold certificates by crediting equivalent amounts in dollars to the account established for the Treasury. The gold certificates held by the Reserve Banks are required to be backed by the gold owned by the Treasury. The
Treasury may reacquire the gold certificates at any time, and the Reserve Banks must deliver them to the Treasury. At
such time, the Treasury’s account is charged, and the Reserve Banks’ gold certificate accounts are reduced. The value of
gold for purposes of backing the gold certificates is set by law at $42 2/9 per fine troy ounce. Gold certificates are recorded by the Banks at original cost. The Board of Governors allocates the gold certificates among the Reserve Banks once
a year based on each Reserve Bank’s average Federal Reserve notes outstanding during the preceding twelve months.
Special drawing rights (SDR) 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. SDRs 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 certificate transactions occur, the Board of Governors allocates the
SDR certificates among the Reserve Banks based upon each Reserve Bank’s Federal Reserve notes outstanding at the end
of the preceding calendar year. SDR certificates are recorded by the Banks at original cost. There were no SDR certificate
transactions during the years ended December 31, 2013 and 2012.
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.

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Notes to 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 are due in accordance with the contractual terms of the loan agreement. Impaired loans are
evaluated to determine whether an allowance for loan loss is required. The Bank has developed procedures for assessing
the adequacy of any allowance for loan losses using all available information to identify incurred losses. This assessment
includes monitoring information obtained from banking supervisors, borrowers, and other sources to assess the credit
condition of the borrowers and, as appropriate, evaluating collateral values. Generally, the Bank would discontinue
recognizing interest income on impaired loans until the borrower’s repayment performance demonstrates principal and
interest would be received in accordance with the terms of the loan agreement. If the Bank discontinues recording interest on an impaired loan, cash payments are first applied to principal until the loan balance is reduced to zero; subsequent
payments are applied as recoveries of amounts previously deemed uncollectible, if any, and then as interest income.
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 FRBNY 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 Treasury Inflation-Protected Securities and Separate Trading of Registered Interest and Principal of Securities
Treasury securities); direct obligations of several federal and GSE-related agencies, including Federal National Mortgage
Association, Federal Home Loan Mortgage Corporation, and Federal Home Loan Banks; and pass-through federal agency
and GSE MBS. The repurchase transactions are accounted for as financing transactions with the associated interest income recognized over the life of the transaction. These transactions are reported at their contractual amounts as “System
Open Market Account: Securities purchased under agreements to resell” and the related accrued interest receivable is
reported as a component of “System Open Market Account: 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 with the set of expanded counterparties which includes banks, savings associations, GSEs, and domestic money market funds. These reverse repurchase transactions, when arranged as open market operations, are
settled 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.

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Notes to Financial Statements

Treasury securities and GSE debt securities held in the SOMA may be lent to primary dealers, typically overnight, to facilitate the effective functioning of the domestic securities markets. The amortized cost basis of securities lent continues to
be reported as “Treasury securities, net” and “Government-sponsored enterprise debt securities, net,” as appropriate, in
the Statements of Condition. Securities lending transactions are fully collateralized by Treasury securities that have fair
values in excess of the securities lent. The FRBNY charges the primary dealer a fee for borrowing securities, and these
fees are reported as a component of “Non-interest income (loss): Other” in the Statements of Income and Comprehensive Income.
Activity related to securities purchased under agreements to resell, securities sold under agreements to repurchase, and
securities lending is allocated to each of the Reserve Banks on a percentage basis derived from an annual settlement of
the interdistrict settlement account that occurs in the second quarter of each year.
f. Treasury Securities; Government-Sponsored Enterprise Debt Securities; Federal Agency and Government-Sponsored
Enterprise Mortgage-Backed Securities; Foreign Currency Denominated Assets; and Warehousing Agreements
Interest income on Treasury securities, GSE debt securities, and foreign currency denominated assets included in 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 or accreted over the term of the
security to stated maturity, and the amortization of premiums and accretion of discounts are accelerated when principal
payments are received. Gains and losses resulting from sales of securities are determined by specific issue based on average cost. Treasury securities, GSE debt securities, and federal agency and GSE MBS are reported net of premiums and
discounts in the Statements of Condition and interest income on those securities is reported net of the amortization of
premiums and accretion of discounts in the Statements of Income and Comprehensive Income.
In addition to outright purchases of federal agency and GSE MBS that are held in the SOMA, the FRBNY enters into dollar roll transactions (dollar rolls), which primarily involve an initial transaction to purchase or sell “to be announced”
(TBA) MBS for delivery in the current month combined with a simultaneous agreement to sell or purchase TBA MBS on
a specified future date. During the years ended December 31, 2013 and 2012, the FRBNY executed dollar rolls primarily
to facilitate settlement of outstanding purchases of federal agency and GSE MBS. The FRBNY accounts for dollar rolls as
purchases or sales on a settlement-date basis. In addition, TBA MBS transactions may be paired off or assigned prior to
settlement. Net gains (losses) resulting from these MBS transactions are reported as “Non-interest income (loss): System
Open Market Account: Federal agency and government-sponsored enterprise mortgage-backed securities gains (losses),
net” in the Statements of Income and Comprehensive Income.
Foreign currency denominated assets, which can include foreign currency deposits, securities purchased under agreements to resell, and government debt instruments, are revalued daily at current foreign currency market exchange rates
in order to report these assets in U.S. dollars. Foreign currency translation gains and losses that result from the daily
revaluation of foreign currency denominated assets are reported as “Non-interest income (loss): System Open Market
Account: Foreign currency translation gains (losses), net” in the Statements of Income and Comprehensive Income.
Because the FRBNY enters into commitments to buy Treasury securities, federal agency and GSE MBS, and foreign gov-

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Notes to Financial Statements

ernment debt instruments and records the related securities on a settlement-date basis in accordance with the FAM, the
related outstanding commitments are not reflected in the Statements of Condition.
Activity related to Treasury securities, GSE debt securities, and federal agency and GSE MBS, including the premiums,
discounts, and realized gains and losses, is allocated to each Reserve Bank on a percentage basis derived from an annual settlement of the interdistrict settlement account that occurs in the second quarter of each year. Activity related to
foreign currency denominated assets, including the premiums, discounts, and realized and unrealized gains and losses,
is allocated to each Reserve Bank based on the ratio of each Reserve Bank’s capital and surplus to the Reserve Banks’ aggregate capital and surplus at the preceding December 31.
Warehousing is an arrangement under which the FOMC has approved the exchange, at the request of the Treasury, of
U.S. dollars for foreign currencies held by the Treasury over a limited period. The purpose of the warehousing facility is
to supplement the U.S. dollar resources of the Treasury for financing purchases of foreign currencies and related international operations. Warehousing agreements are valued daily at current market exchange rates. Activity related to these
agreements is allocated to each Reserve Bank based on the ratio of each Reserve Bank’s capital and surplus to the Reserve
Banks’ aggregate capital and surplus at the preceding December 31.
g. Central Bank Liquidity Swaps
Central bank liquidity swaps, which are transacted between the FRBNY and a foreign central bank, can be structured as
either U.S. dollar or foreign currency liquidity swap arrangements.
Central bank liquidity swaps activity, including the related income and expense, is allocated to each Reserve Bank based
on the ratio of each Reserve Bank’s capital and surplus to the Reserve Banks’ aggregate capital and surplus at the preceding December 31. The foreign currency amounts associated with these central bank liquidity swap arrangements are
revalued daily at current foreign currency market exchange rates.
U.S. dollar liquidity swaps
At the initiation of each U.S. dollar liquidity swap transaction, the foreign central bank transfers a specified amount of
its currency to a restricted account for the FRBNY in exchange for U.S. dollars at the prevailing market exchange rate.
Concurrent with this transaction, the FRBNY and the foreign central bank agree to a second transaction that obligates the
foreign central bank to return the U.S. dollars and the FRBNY to return the foreign currency on a specified future date at
the same exchange rate as the initial transaction. The Bank’s allocated portion of the foreign currency amounts that the
FRBNY acquires are reported as “System Open Market Account: Central bank liquidity swaps” in the Statements of Condition. Because the swap transaction will be unwound at the same U.S. dollar amount and exchange rate that were used
in the initial transaction, the recorded value of the foreign currency amounts is not affected by changes in the market
exchange rate.
The foreign central bank compensates the FRBNY based on the amount outstanding and the rate under the swap agreement. The Bank’s allocated portion of the amount of compensation received during the term of the swap transaction is
reported as “Interest income: System Open Market Account: Central bank liquidity swaps” in the Statements of Income
and Comprehensive Income.

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Notes to Financial Statements

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. Bank Premises, Equipment, and Software
Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on a straightline 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 to acquire software are capitalized based on the purchase price. Costs incurred during the application
development stage to develop internal-use software are capitalized based on the cost of direct services and materials
associated with designing, coding, installing, and testing the software. Capitalized software costs are amortized on a
straight-line basis over the estimated useful lives of the software applications, which generally range from two to five
years. Maintenance costs related to software are charged to operating expense in the year incurred.
Capitalized assets, including software, buildings, leasehold improvements, furniture, and equipment, are impaired and
an adjustment is recorded when events or changes in circumstances indicate that the carrying amount of assets or asset
groups is not recoverable and significantly exceeds the assets’ fair value.
i. Interdistrict Settlement Account
At the close of business each day, each Reserve Bank aggregates the payments due to or from other Reserve Banks. These
payments result from transactions between the Reserve Banks and transactions that involve depository institution accounts held by other Reserve Banks, such as Fedwire funds and securities transfers and check and ACH transactions. The
cumulative net amount due to or from the other Reserve Banks is reflected in the “Interdistrict settlement account” in
the Statements of Condition.
An annual settlement of the interdistrict settlement account occurs in the second quarter of each year. As a result of
the annual settlement, the balance in each Bank’s interdistrict settlement account is adjusted by an amount equal to
the average balance in the account during the previous twelve-month period ended March 31. An equal and offsetting
adjustment is made to each Bank’s allocated portion of SOMA assets and liabilities.
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.

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Notes to Financial Statements

The Board of Governors may, at any time, call upon a Reserve Bank for additional security to adequately collateralize
outstanding Federal Reserve notes. To satisfy the obligation to provide sufficient collateral for outstanding Federal Reserve notes, the Reserve Banks have entered into an agreement that provides for certain assets of the Reserve Banks to
be jointly pledged as collateral for the Federal Reserve notes issued to all Reserve Banks. In the event that this collateral
is insufficient, the Federal Reserve Act provides that Federal Reserve notes become a first and paramount lien on all the
assets of the Reserve Banks. Finally, Federal Reserve notes are obligations of the United States government.
“Federal Reserve notes outstanding, net” in the Statements of Condition represents the Bank’s Federal Reserve notes
outstanding, reduced by the Bank’s currency holdings of $5,920 million and $4,304 million at December 31, 2013 and
2012, respectively.
At December 31, 2013 and 2012, all Federal Reserve notes outstanding, reduced by the Reserve Bank’s currency holdings,
were fully collateralized. At December 31, 2013, all gold certificates, all special drawing rights certificates, and $1,182
billion of domestic securities held in the SOMA were pledged as collateral. At December 31, 2013, 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 a component of “Interest payable to depository institutions” in the Statements of Condition.
The Term Deposit Facility (TDF) consists of deposits with specific maturities held by eligible institutions at the Reserve
Banks. The Reserve Banks pay interest on these deposits at interest rates determined by auction. Interest payable is
reported as a component of “Interest payable to depository institutions” in the Statements of Condition. There were no
deposits held by the Bank under the TDF at December 31, 2013 and 2012.
Other
Other deposits include the Bank’s allocated portion of foreign central bank and foreign government deposits held at the
FRBNY. Other deposits also include cash collateral and GSE deposits held by the Bank.
l. 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 six percent of the capital and surplus of the member bank. These shares are nonvoting, with a par value of $100,
and may not be transferred or hypothecated. As a member bank’s capital and surplus changes, its holdings of Reserve
Bank stock must be adjusted. Currently, only one-half of the subscription is paid in, and the remainder is subject to call.
A member bank is liable for Reserve Bank liabilities up to twice the par value of stock subscribed by it.
By law, each Reserve Bank is required to pay each member bank an annual dividend of six percent on the paid-in capital
stock. This cumulative dividend is paid semiannually.

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Notes to Financial Statements

m. Surplus
The Board of Governors requires the Reserve Banks to maintain a surplus equal to the amount of capital paid-in. On a
daily basis, surplus is adjusted to equate the balance to capital paid-in. Accumulated other comprehensive income is reported as a component of “Surplus” in the Statements of Condition and the Statements of Changes in Capital. Additional
information regarding the classifications of accumulated other comprehensive income is provided in Notes 9 and 10.
n. Remittances to Treasury
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. Currently, remittances to Treasury are made on a weekly basis. This amount is
reported as “Earnings remittances to Treasury” in the Statements of Income and Comprehensive Income. The amount
due to the Treasury is reported as “Accrued remittances to Treasury” in the Statements of Condition. See Note 12 for
additional information on interest on Federal Reserve notes.
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, remittances to the Treasury are suspended. A deferred asset is recorded that represents the
amount of net earnings a Reserve Bank will need to realize before remittances to the Treasury resume. This deferred asset is periodically reviewed for impairment.
o. 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, 2013 and 2012, the Bank was reimbursed for substantially all services provided to
the Treasury as its fiscal agent.
The Bank seeks reimbursement from the Treasury and other government agencies on behalf of all Reserve Banks of costs
of performing fiscal agency functions. Each Reserve Bank transfers its Treasury reimbursement receivable to the Bank.
The reimbursement receivable is reported in “Other assets” and totaled $2 million and $1 million at December 31, 2013
and 2012, respectively. The cost of unreimbursed Treasury services is reported in “Other expense” and was immaterial at
December 31, 2013 and 2012.
p. Compensation Received for Service Costs Provided
The Federal Reserve Bank of Atlanta has overall responsibility for managing the Reserve Banks’ provision of check and
ACH services to depository institutions, the FRBNY has overall responsibility for managing the Reserve Banks’ provision
of Fedwire funds and securities services, and the Federal Reserve Bank of Chicago has overall responsibility for managing
the Reserve Banks’ provision of electronic access services to depository institutions. The Reserve Bank that has overall
responsibility for managing these services recognizes the related total System revenue in its Statements of Income and
Comprehensive Income. The Bank is compensated for costs incurred to provide these services by the Reserve Banks
responsible for managing these services and reports this compensation as “Non-interest income (loss): Compensation
received for service costs provided” in its Statements of Income and Comprehensive Income.

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Notes to Financial Statements

q. Assessments
The Board of Governors assesses the Reserve Banks to fund its operations, the operations of the Bureau and, for a twoyear period following the July 21, 2010 effective date of the Dodd-Frank Act, the OFR. These assessments are allocated
to each Reserve Bank based on each Reserve Bank’s capital and surplus balances. The Board of Governors also assesses
each Reserve Bank for expenses related to producing, issuing, and retiring 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.
The Dodd-Frank Act requires that, after the transfer date of July 21, 2011, the Board of Governors fund the Bureau in an
amount not to exceed a fixed percentage of the total operating expenses of the System as reported in the Board of Governors’ 2009 annual report, which totaled $4.98 billion. The fixed percentage of total operating expenses of the System
for the years ended December 31, 2013 and 2012 was 12 percent ($597.6 million) and 11 percent ($547.8 million), respectively. After 2013, the amount will be adjusted in accordance with the provisions of the Dodd-Frank Act. The Bank’s
assessment for Bureau funding is reported as “Assessments: Bureau of Consumer Financial Protection” in the Statements
of Income and Comprehensive Income.
The Board of Governors assessed the Reserve Banks to fund the operations of the OFR for the two-year period ended
July 21, 2012, following enactment of the Dodd-Frank Act; thereafter, the OFR is funded by fees assessed on bank holding
companies and nonbank financial companies that meet the criteria specified in the Dodd-Frank Act.
r. Taxes
The Reserve Banks are exempt from federal, state, and local taxes, except for taxes on real property. The Bank’s real property taxes were $2 million for each of the years ended December 31, 2013 and 2012 and are reported as a component of
“Operating expenses: Occupancy” in the Statements of Income and Comprehensive Income.
s. 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 11 describes the Bank’s restructuring initiatives and provides information
about the costs and liabilities associated with employee separations and contract terminations.
t. Recently Issued Accounting Standards
In December 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-12,
Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications
of Items out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. This update
indefinitely deferred the requirements of ASU 2011-05, which required an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective net income line items. Subsequently, in
February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out

2013 Annual Report | Federal Reserve Bank of Philadelphia

Notes to Financial Statements

of Accumulated Other Comprehensive Income, which established an effective date for the requirements of ASU 2011-05
related to reporting of significant reclassification adjustments from accumulated other comprehensive income. This
update improves the transparency of changes in other comprehensive income and items reclassified out of accumulated
other comprehensive income in the financial statements. These presentation requirements of ASU 2011-05 and the required disclosures in ASU 2013-02 are effective for the Bank for the year ending December 31, 2013, and are reflected in
the Bank’s 2013 financial statements and Note 10.

4. Loans
Loans to Depository Institutions
The Bank offers primary, secondary, and seasonal loans to eligible borrowers, and each program has its own interest rate.
Interest is accrued using the applicable interest rate established at least every 14 days by the Bank’s board of directors,
subject to review and determination by the Board of Governors. Primary and secondary loans are extended on a shortterm basis, typically overnight, whereas seasonal loans may be extended for a period of up to nine months.
Primary, secondary, and seasonal loans are collateralized to the satisfaction of the Bank to reduce credit risk. Assets
eligible to collateralize these loans include consumer, business, and real estate loans; Treasury securities; GSE debt securities; foreign sovereign debt; municipal, corporate, and state and local government obligations; asset-backed securities;
corporate bonds; commercial paper; and bank-issued assets, such as certificates of deposit, bank notes, and deposit
notes. Collateral is assigned a lending value that is deemed appropriate by the Bank, which is typically fair value reduced
by a margin. Loans to depository institutions are monitored daily to ensure that borrowers continue to meet eligibility
requirements for these programs. If a borrower no longer qualifies for these programs, the Bank will generally request
full repayment of the outstanding loan or, for primary or seasonal loans, may convert the loan to a secondary credit
loan. Collateral levels are reviewed daily against outstanding obligations, and borrowers that no longer have sufficient
collateral to support outstanding loans are required to provide additional collateral or to make partial or full repayment.
The Bank had no loans outstanding as of December 31, 2013. Loans to depository institutions were $2 million as of December 31, 2012 with a remaining maturity within 15 days.
At December 31, 2013 and 2012, the Bank did not have any loans that were impaired, restructured, past due, or on nonaccrual status, and no allowance for loan losses was required. There were no impaired loans during the years ended
December 31, 2013 and 2012.

5. System Open Market Account
a. Domestic Securities Holdings
The FRBNY conducts domestic open market operations and, on behalf of the Reserve Banks, holds the resulting securities
in the SOMA.
During the years ended December 31, 2013 and 2012, the FRBNY continued the purchase of Treasury securities and federal agency and GSE MBS under the large-scale asset purchase programs authorized by the FOMC. In September 2011,
the FOMC announced that the Federal Reserve would reinvest principal payments from the SOMA portfolio holdings of
GSE debt securities and federal agency and GSE MBS in federal agency and GSE MBS. In June 2012, the FOMC announced

2013 Annual Report| Federal Reserve Bank of Philadelphia

Notes to Financial Statements

that it would continue the existing policy of reinvesting principal payments from the SOMA portfolio holdings of GSE debt
securities and federal agency and GSE MBS in federal agency and GSE MBS. In September 2012, the FOMC announced
that the Federal Reserve would purchase additional federal agency and GSE MBS at a pace of $40 billion per month. In
December 2012, the FOMC announced that the Federal Reserve would purchase longer-term Treasury securities initially
at a pace of $45 billion per month after its program to extend the average maturity of its holdings of Treasury securities
was completed at the end of 2012. In December 2012, the FOMC announced that the Federal Reserve would continue
the policy of rolling over maturing Treasury securities into new issues at auction.
During the year ended December 31, 2012, the FRBNY also continued the purchase and sale of SOMA portfolio holdings
under the maturity extension programs authorized by the FOMC. In September 2011, the FOMC announced that the Federal Reserve would extend the average maturity of the SOMA portfolio holdings of securities by purchasing $400 billion par
value of Treasury securities with maturities of six to thirty years and selling or redeeming an equal par amount of Treasury
securities with remaining maturities of three years or less by the end of June 2012. In June 2012, the FOMC announced
that the Federal Reserve would continue through the end of 2012 its program to extend the average maturity of securities
by purchasing $267 billion par value of Treasury securities with maturities of six to thirty years and selling or redeeming an
equal par amount of Treasury securities with maturities of three and a quarter years or less by the end of 2012.
The Bank’s allocated share of activity related to domestic open market operations was 2.897 percent and 3.306 percent
at December 31, 2013 and 2012, respectively.

2013 Annual Report | Federal Reserve Bank of Philadelphia

Notes to Financial Statements

The Bank’s allocated share of Treasury securities, GSE debt securities, and federal agency and GSE MBS, net, excluding
accrued interest, held in the SOMA at December 31 was as follows (in millions):

Par

Notes
$
Bonds

2013
Unamortized
premiums

42,518
$
21,480

Unaccreted
discounts

967
$
3,724

Total Treasury securities
$ 63,998
$ 4,691

GSE debt securities
$
1,658
$
55

Federal agency and GSE MBS
$ 43,176
$ 1,297

Par

Notes
Bonds

Total amortized
cost

(165)
$ 43,320
(161) 25,043

(326)

(31)

$ 68,363
$

1,713

$ 44,442

2012

Unamortized
premiums

36,707
$
18,372

Unaccreted
discounts

1,075
$
3,681

Total Treasury securities
$ 55,079
$ 4,756

GSE debt securities
$
2,538
$
89

Federal agency and GSE MBS
$ 30,633
$
806

Total amortized
cost

(23)
$ 37,759
(4) 22,049

(27)

(23)

$ 59,808
$

2,627

$ 31,416

The FRBNY enters into transactions for the purchase of securities under agreements to resell and transactions to sell securities under agreements to repurchase as part of its monetary policy activities. In addition, transactions to sell securities under
agreements to repurchase are entered into as part of a service offering to foreign official and international account holders.
There were no material transactions related to securities purchased under agreements to resell during the years ended
December 31, 2013 and 2012. Financial information related to securities sold under agreements to repurchase for the
years ended December 31 was as follows (in millions):

Allocated to the Bank
Total SOMA

2013
2012
2013
2012

Contract amount outstanding, end of year
$ 9,154 $
3,543
$ 315,924
$ 107,188
Average daily amount outstanding, during the year
2,997
3,069 99,681 91,898
Maximum balance outstanding, during the year
9,154
4,051 315,924 122,541
Securities pledged (par value), end of year
8,995
3,092 310,452 93,547
Securities pledged (market value), end of year
9,124
3,543 314,901 107,188

2013 Annual Report| Federal Reserve Bank of Philadelphia

Notes to Financial Statements

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, 2013 and 2012
was as follows (in millions):

Within
15 days

16 days
to 90 days

91 days
to 1 year

Over 1 year Over 5 years
to 5 years to 10 years

Over
10 years

Total

December 31, 2013:
Treasury securities
(par value)
$
-
$
9
$
5
$ 22,117
$ 25,054
$ 16,813
$ 63,998
GSE debt securities
(par value)
67 219 251 1,051
2
68 1,658
Federal agency and GSE
MBS (par value)1

-
-
-
-
74 43,102 43,176
Securities sold under
agreements to repurchase
(contract amount)
9,154
-
-
-
-
- 9,154

December 31, 2012:
Treasury securities
(par value)
$
-
$
-
$
1
$ 12,512
$ 28,509
$ 14,057
$ 55,079
GSE debt securities
(par value)

52
92 502 1,746
68
78 2,538
Federal agency and GSE
MBS (par value)1

-
-
-
-
78 30,555 30,633
Securities sold under
agreements to repurchase
(contract amount)
3,543
-
-
-
-
- 3,543

1
The par amount shown for federal agency and GSE MBS is the remaining principal balance of the securities.

Federal agency and GSE MBS are reported at stated maturity in the table above. The estimated weighted average life of
these securities, which differs from the stated maturity primarily because it factors in scheduled payments and prepayment assumptions, was approximately 6.5 and 3.3 years as of December 31, 2013 and 2012, respectively.
The amortized cost and par value of Treasury securities and GSE debt securities that were loaned from the SOMA at December 31 was as follows (in millions):

Allocated to the Bank
Total SOMA

2013
2012
2013
2012
Treasury securities (amortized cost)
Treasury securities (par value)
GSE debt securities (amortized cost)
GSE debt securities (par value)

497
$
448
32
31

302
$ 17,153
$ 9,139
280 15,447 8,460
23 1,099
697
22 1,055
676

2013 Annual Report | Federal Reserve Bank of Philadelphia

Notes to Financial Statements

The FRBNY enters into commitments to buy and sell Treasury securities and records the related securities on a settlement-date basis. As of December 31, 2013, there were no outstanding commitments.
The FRBNY enters into commitments to buy and sell federal agency and GSE MBS and records the related securities on
a settlement-date basis. As of December 31, 2013, the total purchase price of the federal agency and GSE MBS under
outstanding purchase commitments was $59,350 million, of which $479 million was related to dollar rolls. The total
purchase price of outstanding purchase commitments allocated to the Bank was $1,720 million, of which $14 million was
related to dollar rolls. As of December 31, 2013, there were no outstanding sales commitments for federal agency and
GSE MBS. These commitments, which had contractual settlement dates extending through February 2014, are for the
purchase of TBA MBS for which the number and identity of the pools that will be delivered to fulfill the commitment are
unknown at the time of the trade. These commitments are subject to varying degrees of off-balance-sheet market risk
and counterparty credit risk that result from their future settlement. The FRBNY requires the posting of cash collateral for
commitments as part of the risk management practices used to mitigate the counterparty credit risk.
Other investments consist of cash and short-term investments related to the federal agency and GSE MBS portfolio.
Other liabilities, which are related to federal agency and GSE MBS purchases and sales, includes the FRBNY’s obligation
to return cash margin posted by counterparties as collateral under commitments to purchase and sell federal agency and
GSE MBS. In addition, other liabilities includes obligations that arise from the failure of a seller to deliver securities to the
FRBNY on the settlement date. Although the FRBNY has ownership of and records its investments in the MBS as of the
contractual settlement date, it is not obligated to make payment until the securities are delivered, and the amount included in other liabilities represents the FRBNY’s obligation to pay for the securities when delivered. The amount of other
investments and other liabilities allocated to the Bank and held in the SOMA at December 31 was as follows (in millions):

Allocated to the Bank
2013

Other investments

Total SOMA

2012
$

2013
$

2012
$

Other liabilities:
Cash margin
$
38
$ 102
$ 1,320
$ 3,092
Obligations from MBS transaction fails

1
3
11
85

Total other liabilities

105

$ 1,331

$ 3,177

Accrued interest receivable on domestic securities holdings was $23,405 million and $18,924 million as of December
31, 2013 and 2012, respectively, of which $678 million and $626 million, respectively, was allocated to the Bank. These
amounts are reported as a component of “System Open Market Account: Accrued interest receivable” in the Statements
of Condition.

2013 Annual Report| Federal Reserve Bank of Philadelphia

Notes to Financial Statements

Information about transactions related to Treasury securities, GSE debt securities, and federal agency and GSE MBS during
the years ended December 31, 2013 and 2012, is summarized as follows (in millions):

Allocated to the Bank

Federal

Total Treasury GSE debt agency and

Bills
Notes
Bonds
securities
securities GSE MBS

Balance at December 31, 2011
$ 631 $ 44,942
$ 14,385
$ 59,958 $ 3,694 $ 29,058
Purchases1 4,011 13,316 8,818 26,145
- 14,387
Sales1
- (16,949) (391) (17,340)
-

Realized gains, net2
-
400
42
442
-

Principal payments and maturities (4,620) (2,263)
- (6,883) (910) (10,804)

Amortization of premiums and accretion

of discounts, net
- (183) (251) (434)
(38) (174)

Inflation adjustment on inflation-indexed

securities
-
21
35
56
-

Annual reallocation adjustment4
(22) (1,525) (589) (2,136) (119) (1,051)

Balance at December 31, 2012
$
Purchases1
Sales1

Realized gains, net2

Principal payments and maturities

Amortization of premiums and accretion

of discounts, net

Inflation adjustment on inflation-indexed

securities

Annual reallocation adjustment4

- $ 37,759
$ 22,049
$ 59,808 $ 2,627 $ 31,416
- 10,822 6,235 17,057
- 26,256
-
-
-
-
-
-
-
-
-
-
-
-
-
- (586) (8,303)
-

(181)

(286)

(467)

(24) (211)

-
8
19
27
- (5,088) (2,974) (8,062)

-
(304) (4,716)

Balance at December 31, 2013
$
- $ 43,320
$ 25,043
$ 68,363 $ 1,713 $ 44,442

Year-ended December 31, 2012

Supplemental information - par value of transactions:
Purchases3
$ 4,011 $ 12,815
$ 6,852
$ 23,678 $
- $ 13,777
Sales3
- (16,443) (303) (16,746)
-

Year-ended December 31, 2013

Supplemental information - par value of transactions:
Purchases3
$
- $ 10,744
$ 5,572
$ 16,316 $
- $ 25,424
Sales3
-
-
-
-
-

Purchases and sales may include payments and receipts related to principal, premiums, discounts, and inflation compensation adjustments to the basis
of inflation-indexed securities. The amount reported as sales includes the realized gains and losses on such transactions. Purchases and sales exclude
MBS TBA transactions that are settled on a net basis.

Realized gains, net offset the amount of realized gains and losses included in the reported sales amount.

3
Includes inflation compensation.
2

Reflects the annual adjustment to the Bank’s allocated portion of the related SOMA securities that results from the annual settlement of the interdistrict settlement account, as discussed in Note 3i.

2013 Annual Report | Federal Reserve Bank of Philadelphia

Notes to Financial Statements

Total SOMA

Bills
Notes
Bonds

Total Treasury
securities

Federal
GSE debt agency and
securities GSE MBS

Balance at December 31, 2011
$ 18,423 $ 1,311,917 $ 419,937 $ 1,750,277 $ 107,828 $ 848,258
Purchases1 118,886 397,999 263,991
780,876
- 431,487
Sales1
- (507,420) (11,727) (519,147)
-

Realized gains, net2
-
12,003
1,252
13,255
-

Principal payments and maturities (137,314) (67,463)
- (204,777) (27,211) (324,181)

Amortization of premiums and

accretion of discounts, net
5
(5,460) (7,531)
(12,986) (1,138)
(5,243)

Inflation adjustment on

inflation-indexed securities
-
643
1,047
1,690
-
Balance at December 31, 2012
$
Purchases1
Sales1

Realized gains, net2

Principal payments and maturities

Amortization of premiums and

accretion of discounts, net

Inflation adjustment on

inflation-indexed securities

- $ 1,142,219 $ 666,969 $ 1,809,188 $ 79,479 $ 950,321
- 358,656 206,208
564,864
- 864,537
-
-
-
-
-
-
-
-
-
-
-
(21)
-
(21) (19,562) (273,990)
-
-

(6,024) (9,503)
285

645

(15,527)

(795)

(7,008)

930

Balance at December 31, 2013
$
- $ 1,495,115 $ 864,319 $ 2,359,434 $ 59,122 $ 1,533,860

Year-ended December 31, 2012

Supplemental information - par value of transactions:
Purchases3
$ 118,892 $ 383,106 $ 205,115 $ 707,113 $
- $ 413,160
Sales3
- (492,234) (9,094) (501,328)
-

Year-ended December 31, 2013

Supplemental information - par value of transactions:
Purchases3
$
- $ 356,766 $ 184,956 $ 541,722 $
- $ 837,490
Sales3

-
-
-
-
-

2
Realized gains, net offset the amount of realized gains and losses included in the reported sales amount.

3
Includes inflation compensation.
1

2013 Annual Report| Federal Reserve Bank of Philadelphia

Notes to Financial Statements

b. Foreign Currency Denominated Investments
The FRBNY conducts foreign currency operations and, on behalf of the Reserve Banks, holds the resulting foreign currency
denominated assets in the SOMA.
The FRBNY holds foreign currency deposits with foreign central banks and the Bank for International Settlements and invests in foreign government debt instruments of Germany, France, and Japan. These foreign government debt instruments
are guaranteed as to principal and interest by the issuing foreign governments. In addition, the FRBNY enters into transactions to purchase Euro-denominated government debt securities under agreements to resell for which the accepted collateral is the debt instruments issued by the governments of Belgium, France, Germany, Italy, the Netherlands, and Spain.
The Bank’s allocated share of activity related to foreign currency operations was 7.735 percent and 8.674 percent at December 31, 2013 and 2012, respectively.
Information about foreign currency denominated investments valued at amortized cost and foreign currency market
exchange rates at December 31 was as follows (in millions):

Allocated to Bank
2013

2012

Total SOMA
2013

2012

Euro:

Foreign currency deposits
$
582
$
774
$ 7,530
$

Securities purchased under agreements to resell
197
57
2,549

German government debt instruments
185
185
2,396

French government debt instruments
186
210
2,397

Japanese yen:

Foreign currency deposits
227
308
2,927

Japanese government debt instruments
458
623
5,925

Total

1,835

2,157

$ 23,724

8,925
659
2,133
2,421
3,553
7,182

$ 24,873

Accrued interest receivable on foreign currency denominated assets was $88 million and $99 million as of December 31,
2013 and 2012, respectively, of which $7 million and $9 million, respectively, was allocated to the Bank. These amounts are
reported as a component of “System Open Market Account: Accrued interest receivable” in the Statements of Condition.

2013 Annual Report | Federal Reserve Bank of Philadelphia

Notes to Financial Statements

The remaining maturity distribution of foreign currency denominated investments that were allocated to the Bank at
December 31, 2013 and 2012, was as follows (in millions):

Within 15
days

16 days to
90 days

91 days to
1 year

Over 1 year to
5 years

Total

December 31, 2013:

Euro
$
544
$
140
$
167
$
299
$

Japanese yen

241
29
145
270

1,150
685

Total
$
785
$
169
$
312
$
569
$

December 31, 2012:

Euro
$
572
$
149
$
187
$
318
$

Japanese yen

330
43
185
373

1,835

2,157

Total

902

192

372

691

1,226
931

There were no foreign exchange contracts related to open market operations outstanding as of December 31, 2013.
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, 2013, there were no outstanding commitments to purchase foreign government debt instruments. During 2013, there were purchases, sales, and maturities of foreign government debt instruments of $3,539 million, $0, and $3,431 million, respectively, of which $279 million, $0, and $270 million, respectively,
were allocated to the Bank.
In connection with its foreign currency activities, the FRBNY may enter into transactions that are subject to varying degrees of off-balance-sheet market risk and counterparty credit risk that result from their future settlement. The FRBNY
controls these risks by obtaining credit approvals, establishing transaction limits, receiving collateral in some cases, and
performing daily monitoring procedures.
At December 31, 2013 and 2012, there was no balance outstanding under the authorized warehousing facility.
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, 2013 and 2012.
c. Central Bank Liquidity Swaps
U.S. Dollar Liquidity Swaps
The Bank’s allocated share of U.S. dollar liquidity swaps was approximately 7.735 percent and 8.674 percent at December
31, 2013 and 2012, respectively.
The total foreign currency held under U.S. dollar liquidity swaps in the SOMA at December 31, 2013 and 2012, was $272
million and $8,889 million, respectively, of which $21 million and $771 million, respectively, was allocated to the Bank.

2013 Annual Report| Federal Reserve Bank of Philadelphia

Notes to Financial Statements

The remaining maturity distribution of U.S. dollar liquidity swaps that were allocated to the Bank at December 31 was as
follows (in millions):

2013
Within
15 days

Euro

Total

2012

16 days to
90 days Total

Within
15 days

16 days to
90 days

Total

$ 12

$ 21

$ 151

$ 620

$ 771

$ 12

$ 21

$ 151

$ 620

$ 771

Foreign Currency Liquidity Swaps
There were no transactions related to the foreign currency liquidity swaps during the years ended December 31, 2013
and 2012.
d. Fair Value of SOMA Assets
The fair value amounts below are presented solely for informational purposes. Although the fair value of SOMA security
holdings can be substantially greater than or less than the recorded value at any point in time, these unrealized gains
or losses have no effect on the ability of the Reserve Banks, as the central bank, to meet their financial obligations and
responsibilities.
The fair value of the Treasury securities, GSE debt securities, federal agency and GSE MBS, and foreign government debt
instruments in the SOMA’s holdings is subject to market risk, arising from movements in market variables such as interest
rates and credit risk. The fair value of federal agency and GSE MBS is also affected by the expected rate of prepayments
of mortgage loans underlying the securities. The fair value of foreign government debt instruments is also affected by
currency risk. Based on evaluations performed as of December 31, 2013, there are no credit impairments of SOMA securities holdings.

2013 Annual Report | Federal Reserve Bank of Philadelphia

Notes to Financial Statements

The following table presents the amortized cost and fair value of and cumulative unrealized gains (losses) on the Treasury
securities, GSE debt securities, and federal agency and GSE MBS, net held in the SOMA at December 31 (in millions):

Allocated to the Bank

2013
2012

Cumulative
Cumulative

Amortized
unrealized
Amortized
unrealized

cost
Fair value gains (losses)
cost
Fair value
gains

Treasury securities:

Notes
Bonds

Total Treasury securities

GSE debt securities
Federal agency and GSE MBS

43,320 $ 43,432 $
25,043 24,406

112
$
(637)

37,759 $
22,049

40,105
25,162

$ 2,346
3,113

68,363 $ 67,838

(525)

59,808 $

65,267

$ 5,459

1,713
44,442

90
(1,109)

2,627
31,416

2,810
32,859

93,851 $

100,936

1,803
43,333

Total domestic SOMA
portfolio securities holdings $ 114,518 $ 112,974 $ (1,544)
$

Memorandum - Commitments for:
Purchases of Treasury securities $
- $
- $
- $
Purchases of Federal agency
and GSE MBS

1,720
1,713
(7)
Sales of Federal agency and
GSE MBS

-
-
-

- $
3,908
-

$ 7,085

- $
3,914

183
1,443

Total SOMA

2013
2012

Cumulative
Cumulative

Amortized
unrealized
Amortized
unrealized

cost
Fair value gains (losses)
cost
Fair value
gains

Treasury securities:
Notes
$ 1,495,115 $ 1,499,000 $ 3,885
$ 1,142,219 $ 1,213,177 $ 70,958
Bonds 864,319 842,336 (21,983)
666,969
761,138 94,169

Total Treasury securities

$ 2,359,434 $ 2,341,336 $ (18,098)

$ 1,809,188 $ 1,974,315

GSE debt securities
59,122 62,236
3,114
Federal agency and GSE MBS 1,533,860 1,495,572 (38,288)

79,479
950,321

$ 165,127

85,004 5,525
993,990 43,669

Total domestic SOMA
portfolio securities holdings $ 3,952,416 $ 3,899,144 $ (53,272)
$ 2,838,988 $ 3,053,309

Memorandum - Commitments for:
Purchases of Treasury securities $
- $
- $
-
$
- $
-
Purchases of Federal agency and
GSE MBS

59,350 59,129
(221)
118,215
118,397
Sales of Federal agency and
GSE MBS

-
-
-
-
-

$ 214,321
$

182

2013 Annual Report| Federal Reserve Bank of Philadelphia

Notes to Financial Statements

The fair value of Treasury securities and GSE debt securities was determined using pricing services that provide market
consensus prices based on indicative quotes from various market participants. The fair value of federal agency and GSE
MBS was determined using a pricing service that utilizes a model-based approach that considers observable inputs for
similar securities.
At December 31, 2013 and 2012, the fair value of foreign currency denominated investments was $23,802 million and
$25,042 million, respectively, of which $1,841 million and $2,172 million, respectively, was allocated to the Bank. The
fair value of government debt instruments was determined using pricing services that provide market consensus prices
based on indicative quotes from various market participants. The fair value of foreign currency deposits and securities
purchased under agreements to resell was determined by reference to market interest rates.
The cost basis of securities purchased under agreements to resell, securities sold under agreements to repurchase, and
other investments held in the SOMA approximate fair value.
The following table provides additional information on the amortized cost and fair values of the federal agency and GSE
MBS portfolio at December 31 (in millions):

2013

2012

Distribution of MBS holdings by coupon rate

Amortized cost

Fair value

Amortized cost

Fair value

Allocated to the Bank:
2.0%
$
411
$
392
$
28
$
2.5%
3,588
3,432
1,242
3.0%
15,119
14,032
5,310
3.5%
10,132
9,804
5,937
4.0%
6,672
6,696
4,554
4.5%
5,384
5,664
8,677
5.0%
2,413
2,549
4,136
5.5%
623
658
1,321
6.0%
88
93
186
6.5%
12
13
25

Total
$
44,442
$ 43,333
$ 31,416
$

Total SOMA:
2.0%
$
14,191
$ 13,529
$
845
$
2.5%
123,832 118,458 37,562
3.0%
521,809 484,275 160,613
3.5%
349,689 338,357 179,587
4.0%
230,256 231,113 137,758
4.5%
185,825 195,481 262,484
5.0%
83,290
87,968 125,107
5.5%
21,496
22,718 39,970
6.0%
3,052
3,225
5,642
6.5%
420
448
753

Total

$ 1,533,860

$ 1,495,572

$ 950,321

28
1,248
5,347
6,108
4,825
9,328
4,371
1,382
195
27
32,859
846
37,766
161,757
184,752
145,955
282,181
132,214
41,819
5,888
812

$ 993,990

2013 Annual Report | Federal Reserve Bank of Philadelphia

Notes to Financial Statements

Because SOMA securities are recorded at amortized cost, the change in the cumulative unrealized gains (losses) is not reported in the Statements of Income and Comprehensive Income. The following tables present the realized gains (losses)
and the change in the cumulative unrealized gains (losses), presented as “Fair Value changes unrealized gains (losses),” of
the domestic securities holdings during the years ended December 31, 2013 and 2012 (in millions):

Allocated to Bank

2013
2012

Total portfolio
Fair value changes
Total portfolio Fair value changes

holdings realized
unrealized
holdings realized
unrealized
gains1 losses gains1 losses
Treasury securities
GSE debt securities
Federal agency and GSE MBS

-
$
-
1

(5,286)
$
(71)
(2,396)

442
$
-
8

Total
$
1
$
(7,753)
$
450

(53)
(30)
(116)
(199)

Total SOMA
2013

2012

Total portfolio
Fair value changes
Total portfolio Fair value changes

holdings realized
unrealized
holdings realized
unrealized
gains1 losses gains1 losses
Treasury securities
GSE debt securities
Federal agency and GSE MBS

-
$ (183,225)
$
-
(2,411)
51
(81,957)

Total
$
51
$ (267,593)

13,255
$
-
241

(1,142)
(885)
(3,568)

13,496

(5,595)

Total portfolio holdings realized gains (losses) are reported in “Non-interest income (loss): System Open Market Account” in the Statements of
Income and Comprehensive Income.

The amount of change in unrealized gains position, net, related to foreign currency denominated assets was a decrease
of $90 million and an increase of $3 million for the years ended December 31, 2013 and 2012, respectively, of which $7
million and $206 thousand, respectively, were allocated to the Bank.
Accounting Standards Codification (ASC) Topic 820 (ASC 820) defines fair value as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
ASC 820 establishes a three-level fair value hierarchy that distinguishes between assumptions developed using market
data obtained from independent sources (observable inputs) and the Bank’s assumptions developed using the best information available in the circumstances (unobservable inputs). The three levels established by ASC 820 are described
as follows:

2013 Annual Report| Federal Reserve Bank of Philadelphia

Notes to Financial Statements
•

Level 1 – Valuation is based on quoted prices for identical instruments traded in active markets.

•

Level 2 – Valuation is based on quoted prices for similar instruments in active markets, quoted prices for identical
or similar instruments in markets that are not active, and model-based valuation techniques for which all significant
assumptions are observable in the market.

•

Level 3 – Valuation is based on model-based techniques that use significant inputs and assumptions not observable
in the market. These unobservable inputs and assumptions reflect the Bank’s estimates of inputs and assumptions
that market participants would use in pricing the assets and liabilities. Valuation techniques include the use of option
pricing models, discounted cash flow models, and similar techniques.

Treasury securities, GSE debt securities, Federal agency and GSE MBS, and foreign government debt instruments are classified as Level 2 within the ASC 820 hierarchy because the fair values are based on indicative quotes and other observable
inputs obtained from independent pricing services. The fair value hierarchy level of SOMA financial assets is not necessarily an indication of the risk associated with those assets.

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

2013

2012

Bank premises and equipment:
Land and land improvements
$
8
$
Buildings

113
Building machinery and equipment

25
Construction in progress

1
Furniture and equipment

Subtotal

200
(113)

8
107
23
2
55
195

Accumulated depreciation

(108)

Bank premises and equipment, net

Depreciation expense, for the years ended December 31

2013 Annual Report | Federal Reserve Bank of Philadelphia

Notes to Financial Statements

The Bank leases space to outside tenants with remaining lease terms ranging from 4 to 11 years. Rental income from
such leases was $2 million for each of the years ended December 31, 2013 and 2012 and is reported as a component
of “Non-interest income: Other” in the Statements of Income and Comprehensive Income. Future minimum lease payments that the Bank will receive under noncancelable lease agreements in existence at December 31, 2013, are as follows
(in millions):

2014
2015
2016
2017
2018
Thereafter

Total

2
2
2
2
2
7

The Bank had capitalized software assets, net of amortization, of $6 million and $7 million at December 31, 2013 and 2012,
respectively. Amortization expense was $2 million for each of the years ended December 31, 2013 and 2012. 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.

7. Commitments and Contingencies
In 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, 2013, the Bank was obligated under noncancelable leases for premises and equipment with remaining
terms ranging from 2 to approximately 6 years. These leases provide for increased lease payments based upon increases
in real estate taxes, operating costs, or selected price indexes.
Rental expense under operating leases for certain operating facilities, warehouses, and data processing and office equipment (including taxes, insurance, and maintenance when included in rent), net of sublease rentals, was $1 million for
each of the years ended December 31, 2013 and 2012. Certain of the Bank’s leases have options to renew. The Bank has
no capital leases.
Future minimum lease payments under noncancelable operating leases, net of sublease rentals, with remaining terms of
one year or more, at December 31, 2013, are as follows (in thousands):

Operating leases

2014

2015

2016

2017

2018

Thereafter

Future minimum lease payments

554
484
469
480
492
41

$ 2,520

2013 Annual Report| Federal Reserve Bank of Philadelphia

Notes to Financial Statements

At December 31, 2013, there were no material unrecorded unconditional purchase commitments or obligations in excess
of one year.
Under the Insurance Agreement of the Reserve Banks, each of the Reserve Banks has agreed to bear, on a per-incident
basis, a share of certain losses in excess of 1 percent of the capital paid-in of the claiming Reserve Bank, up to 50 percent
of the total capital paid-in of all Reserve Banks. Losses are borne in the ratio of a Reserve Bank’s capital paid-in to the
total capital paid-in of all Reserve Banks at the beginning of the calendar year in which the loss is shared. No claims were
outstanding under the agreement at December 31, 2013 and 2012.
The Bank is involved in certain legal actions and claims arising in the ordinary course of business. Although it is difficult
to predict the ultimate outcome of these actions, in management’s opinion, based on discussions with counsel, the legal
actions and claims will be resolved without material adverse effect on the financial position or results of operations of
the Bank.

8. 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 participate in the Retirement Plan for Employees of the Federal Reserve System
(System Plan). Under the Dodd-Frank Act, newly hired Bureau employees are eligible to participate in the System Plan.
In addition, employees at certain compensation levels participate in the Benefit Equalization Retirement Plan (BEP) and
certain Reserve Bank officers participate in the Supplemental Retirement Plan for Select Officers of the Federal Reserve
Banks (SERP).
The 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, 2013 and 2012, certain costs associated with
the System Plan were reimbursed by the Bureau.
The Bank’s projected benefit obligation, funded status, and net pension expenses for the BEP and the SERP at December
31, 2013 and 2012, and for the years then ended, were not material.
Thrift Plan
Employees of the Bank participate in the defined contribution Thrift Plan for Employees of the Federal Reserve System
(Thrift Plan). The Bank matches 100 percent of the first six percent of employee contributions from the date of hire and
provides an automatic employer contribution of one percent of eligible pay. The Bank’s Thrift Plan contributions totaled
$5 million for each of the years ended December 31, 2013 and 2012 and are reported as a component of “Operating
expenses: Salaries and benefits” in the Statements of Income and Comprehensive Income.

2013 Annual Report | Federal Reserve Bank of Philadelphia

Notes to Financial Statements

9. 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 and life insurance benefits 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):

2013

2012

Accumulated postretirement benefit obligation at January 1
$ 103.6
$
Service cost benefits earned during the period

3.3
Interest cost on accumulated benefit obligation

3.9
Net actuarial (gain) loss
(16.3)
Contributions by plan participants

1.9
Benefits paid
(5.9)
Medicare Part D subsidies

0.4
Plan amendments

0.4

Accumulated postretirement benefit obligation at December 31

91.3

89.5
2.8
4.1
10.9
1.9
(6.0)
0.4
103.6

At December 31, 2013 and 2012, the weighted-average discount rate assumptions used in developing the postretirement
benefit obligation were 4.79 percent and 3.75 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. Beginning in 2013, the System Plan discount rate assumption setting convention
changed from rounding the rate to the nearest 25 basis points to using an unrounded rate.
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):

2013

2012

Fair value of plan assets at January 1
$
-
$
Contributions by the employer

3.6
Contributions by plan participants

1.9
Benefits paid
(5.9)
Medicare Part D subsidies

0.4

3.7
1.9
(6.0)
0.4

Fair value of plan assets at December 31
$
-
$

Unfunded obligation and accrued postretirement benefit cost
$ 91.3
$

Amounts included in accumulated other comprehensive loss
are shown below:

Prior service cost
$ (1.2)
$
Net actuarial loss
(13.2)

(1.2)
(32.3)

(33.5)

Total accumulated other comprehensive loss

$ (14.4)

103.6

2013 Annual Report| Federal Reserve Bank of Philadelphia

Notes to Financial Statements

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:

2013

2012

Health-care cost trend rate assumed for next year
7.00 %
7.00 %
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 2019 2018
Assumed health-care cost trend rates have a significant effect on the amounts reported for health-care plans. A one
percentage point change in assumed health-care cost trend rates would have the following effects for the year ended
December 31, 2013 (in millions):

One percentage
point increase

One percentage
point decrease

Effect on aggregate of service and interest cost components
of net periodic postretirement benefit costs
$
0.1
$
Effect on accumulated postretirement benefit obligation
0.7

(0.4)
(4.9)

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

2013

Service cost-benefits earned during the period
$
Interest cost on accumulated benefit obligation
Amortization of prior service cost
Amortization of net actuarial loss

Net periodic postretirement benefit expense

2012

3.3
$
3.9
0.4
2.9
10.5

2.7
4.1
0.6
2.2
9.6

Estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic postretirement
benefit expense in 2014 are shown below:

Prior service cost
$
Net actuarial loss

Total

0.6
0.6
1.2

2013 Annual Report | Federal Reserve Bank of Philadelphia

Notes to Financial Statements

Net postretirement benefit costs are actuarially determined using a January 1 measurement date. At January 1, 2013 and
2012, the weighted-average discount rate assumptions used to determine net periodic postretirement benefit costs were
3.75 percent and 4.50 percent, respectively.
Net periodic postretirement benefit expense is reported as a component of “Operating expenses: Salaries and benefits”
in the Statements of Income and Comprehensive Income.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 established a prescription drug benefit
under Medicare (Medicare Part D) and a federal subsidy to sponsors of retiree health-care benefit plans that provide
benefits that are at least actuarially equivalent to Medicare Part D. The benefits provided under the Bank’s plan to certain
participants are at least actuarially equivalent to the Medicare Part D prescription drug benefit. The estimated effects of
the subsidy are reflected in actuarial loss in the accumulated postretirement benefit obligation and net periodic postretirement benefit expense.
Federal Medicare Part D subsidy receipts were $331 thousand and $350 thousand in the years ended December 31, 2013
and 2012, respectively. Expected receipts in 2014, related to benefits paid in the years ended December 31, 2013 and
2012, are $292 thousand.
Following is a summary of expected postretirement benefit payments (in millions):

Without subsidy

2014
$

2015

2016

2017

2018

2019 - 2023

Total
$

With subsidy

4.7
$
5.1
5.4
5.8
6.1
34.5

4.3
4.6
5.0
5.3
5.5
31.2

61.6

55.9

Postemployment Benefits
The Bank offers benefits to former or inactive employees. Postemployment benefit costs are actuarially determined using
a December 31 measurement date and include the cost of medical, dental, and vision insurance; survivor income; disability benefits; and self-insured workers’ compensation expenses. The accrued postemployment benefit costs recognized by
the Bank at December 31, 2013 and 2012, were $7.2 million and $6.4 million, respectively. This cost is included as a component of “Accrued benefit costs” in the Statements of Condition. Net periodic postemployment benefit expense (credit)
included in 2013 and 2012 operating expenses were $1.6 million and $(98) thousand, respectively, and are recorded as
a component of “Operating expenses: Salaries and benefits” in the Statements of Income and Comprehensive Income.

2013 Annual Report| Federal Reserve Bank of Philadelphia

Notes to Financial Statements

10. Accumulated Other Comprehensive Income And Other Comprehensive
Income
Following is a reconciliation of beginning and ending balances of accumulated other comprehensive income (loss) as of
December 31 (in millions):

2013
2012

Amount related to
Amount related to

postretirement
postretirement

benefits other than
benefits other than

retirement plans
retirement plans

Balance at January 1
$ (33.5)
$
Change in funded status of benefit plans:
Prior service costs arising during the year
(0.4)
Amortization of prior service cost
0.4 1

(25.4)
0.6 1

Change in prior service costs related to benefit plans
-

0.6

Net actuarial gain (loss) arising during the year
16.2
(10.9)
Amortization of net actuarial loss
2.9 1
2.2 1

Change in actuarial gain (losses) related to benefit plans
19.1

Change in funded status of benefit plans - other comprehensive income (loss)
19.1
Balance at December 31

(14.4)

(8.7)
(8.1)
(33.5)

Reclassification is reported as a component of “Operating Expenses: Salaries and benefits” in the Statements of Income and Comprehensive Income.

Additional detail regarding the classification of accumulated other comprehensive loss is included in Note 9.

11. Business Restructuring Charges
The Bank had no material business restructuring charges in 2013. The Bank had no business restructuring charges in 2012.
In years prior to 2012, 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 paper and electronic check processing at the Federal Reserve Bank of Atlanta. The Bank’s liability balance for the
check restructuring as of December 31, 2013 and 2012, and the related activity during the years then ended, were not
material.

2013 Annual Report | Federal Reserve Bank of Philadelphia

Notes to Financial Statements

12. Distribution of Comprehensive Income
In accordance with Board policy, Reserve Banks remit excess earnings, after providing for dividends and the amount necessary to equate surplus with capital paid-in, to the U.S. Treasury as earnings remittances to Treasury. The following table
presents the distribution of the Bank’s comprehensive income in accordance with the Board’s policy for the years ended
December 31 (in millions):

Dividends on capital stock
Transfer from surplus - amount required to equate surplus with capital paid-in
Earnings remittances to Treasury

Total distribution

2013

2012

127
$
(48)
2,189

132
(217)
2,812

2,268

2,727

During each of the years ended December 31, 2013 and 2012, the Bank recorded a reduction in the amount of capital
paid-in and a corresponding reduction of surplus, which is presented in the above table as “Transfer from surplus –
amount required to equate surplus with capital paid-in. The reduction of surplus resulted in an equivalent increase in
“Earnings remittances to Treasury” and a reduction in “Comprehensive loss” for each of the years ended December 31,
2013 and 2012.

13. Subsequent Events
There were no subsequent events that require adjustments to or disclosures in the financial statements as of December
31, 2013. Subsequent events were evaluated through March 14, 2014, which is the date that the financial statements
were available to be issued.

2013 Annual Report| Federal Reserve Bank of Philadelphia

Full text of Annual Report of the Federal Reserve Bank of Philadelphia : 100 Years of Tradition and Transition : 2013 Annual Report

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