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Stability in a Crisis...

President’s Message
n last year’s annual report, I said we cannot take
prosperity for granted. On September 11, 2001, this
statement gained new meaning. As unimaginable events
unfolded before our eyes, we trusted in the organizational
design of the Federal Reserve System and the effectiveness
of our crisis management plans. The Fed’s actions following
the attacks illustrate just how this structure responds to a
national need. Now, more than ever before, the Fed is looked
upon as a bastion of stability.
Reflecting on 2001, we see a year of progress and
of challenges for the Federal Reserve Bank of Philadelphia.
Our progress was evident in the expansion of the Bank’s
role in both our Third District communities and in the
Federal Reserve System. Among our challenges were those
shared by all — an economic slowdown and a national crisis.
But above all, we remain committed to the long-term health
of our region’s and nation’s economies. In this year’s annual
report, we share insights from the various Philadelphia Fed
people who, in the aftermath of September 11, were
instrumental in our ability to maintain “Stability in a Crisis.”

Dr. Anthony M. Santomero
President

coordinate efforts to ensure financial stability.
Throughout the crisis, Fed operations continued.
Employees at the Philadelphia Fed did a tremendous job in
responding to a national tragedy. The dedication of
Philadelphia Fed employees allowed us to remain open and
operating in the aftermath of the attacks and ensured that
the payments system was functional throughout the crisis. I
commend all our Bank employees for their hard work and
long hours during this especially troubling time for our
nation.
Strategic Goals – 2002 and Beyond
Looking beyond the literal interpretation of our
roles, we must strive to build our capabilities and achieve
our goals. Doing so demands vision. At the Federal Reserve
Bank of Philadelphia, our vision is to be known as an

Federal Reserve Bank of Philadelphia/2001

Role of the Fed & Crisis Management
The Federal Reserve’s mission is to provide money
and credit conditions that foster maximum sustainable
economic and job growth in an environment of price stability.
This mission is achieved through three important and
intertwined functions: conducting the nation’s monetary
policy, supervising and regulating banking operations, and
providing and maintaining an effective and efficient
payments system. One issue, however, remains paramount
— maintaining public confidence in the nation’s financial
and economic system. This was never more evident than
on September 11.
Our response was a coordinated effort across all
three of our areas of responsibility. From keeping the
payments system operating, to providing access to credit, to
implementing monetary policy, the Fed proved vital in
upholding the integrity of our financial system. We were
able to simultaneously feel the pulse of financial activity
across the country, operate in multiple locations, and

1

Federal Reserve Bank of Philadelphia/2001
2

important center of central bank knowledge and capability.
on Credit, Reserves, and Risk Management) office, which
Our strategy for 2002 and beyond is to be a high quality
oversees discount window operating procedures on a Sysprovider of central bank knowledge and services with
tem-wide basis. We have also earned a central role in the
emphasis on efficiency, innovation, and strong financial
Fed’s technology initiatives through our Groupware Leadcontrols.
ership Center. This office coordinates desktop standards for
To achieve our goals, we must expand our knowlthe entire System.
edge of the broader financial services industry. Barriers into
The Philadelphia Fed held its inaugural Policy Fothis industry have been eliminated for many nonbank and
rum last fall. This effort brought together a group of highly
bank participants. With the emergence of new entrants, new
respected academics, policymakers, and market economists
vehicles for retail payments have
for a discussion of current macroOur
vision
is
to
be
emerged as well. The Payment
economic research and its impliCards Center was created to adbroadly recognized as cations for monetary policy. The
dress these issues and serve as a
event, which garnered extensive
an
important
center
of
source of knowledge and expertise
media coverage, was considered a
on this important segment of the
central bank know- tremendous success.
financial system. Established in
As the leader in check
ledge and capability.
early 2001, the Center provides
processing, the Philadelphia Fed
meaningful insights into the industry through an agenda of
actively seeks innovative solutions for improving its busiresearch and analysis, forums, and conferences that will enness. Our initiatives have included the development of check
courage a dialogue incorporating industry, academic, and
imaging to enhance the efficiency of the payments system,
public-sector perspectives.
as well as a pilot program of sophisticated techniques to
We must also continue to expand our outreach to
combat check fraud. Philadelphia also helps manage fedacademia, the financial services industry, and the community.
eral check payments. We are currently developing and manThis will be accomplished through monetary policy research,
aging checkbook software applications for the federal govincreased regional involvement, and Community and
ernment. In addition, we serve as a primary collection point
Consumer Affairs initiatives. Working with partners, we
for U.S. Treasury checks.
already have implemented a successful pilot financial literacy
program in a Delaware high school. Next, we plan to expand
The Road to Recovery
financial literacy throughout the region.
Looking forward, I see 2002 as a turnaround year
Furthering our outreach efforts in 2001, our Bank
for the economy. Thanks to the progress we have made in
had the privilege of hosting on separate occasions Chairman
recent years, the Greater Philadelphia region will recover
Alan Greenspan and Vice Chairman Roger Ferguson from
along with the nation. As I reported to you a year ago, acthe Board of Governors to speak to business leaders in our
tivity in our region has continued to expand in such key
District. Another notable visitor to speak at our Bank was
sectors as business services, construction, and tourism. We
Lawrence Lindsey, President Bush’s Assistant for Economic
also continue to build on our reputation as a center for pharPolicy, who offered insight on the effects of Bush’s tax cuts
maceutical research and production, health care, and higher
on the economy.
education. In both our region and the nation, we hope to
The Philadelphia Reserve Bank is committed to
see a healthy pace of sustained growth by year-end 2002.
enhancing its role as a prominent System leader. As a firstBut first, our challenge is to manage the current period of
tier Bank in terms of quality, efficiency, and controls, Philaeconomic weakness with an eye to the future. Our flexible
delphia is poised to be an integral part of the leadership
markets, entrepreneurial spirit, well-educated work force,
process. In 2001, we acquired the SCRRM (Subcommittee
and major advances in information technology provide a

sound foundation for the long-term growth of productivity,
employment, and standards of living. While consumer and
business behavior will significantly affect the progress of our
economy in the near-term, the longer-term prospects for the
U.S. economy remain sound.
Board of Directors
The thoughtful insights provided by our Board of
Directors allowed us to accomplish a great deal in 2001,
and we are truly grateful for their valuable contributions. I
am pleased to report that Charisse R. Lillie, partner at Ballard
Spahr Andrews & Ingersoll, has been re-appointed chairman of the Board of Directors, and Glenn A. Schaeffer, president of the Pennsylvania Building and Construction Trades
Council, has been re-appointed deputy chairman.
We offer our sincere thanks to those who completed
their terms of service on our Board of Directors: Rufus Fulton,
chairman, president, and CEO of Fulton Financial Corporation, and Howard Cosgrove, chairman and CEO of
Conectiv. Mr. Fulton has been appointed to represent the
Third District on the Federal Advisory Council during 2002.
We look forward to the insight and guidance of our
newest Board members: Walter E. Daller, Jr., chairman, president,
and CEO of Harleysville National Corporation, and P. Coleman
Townsend, Jr., chairman and CEO of Townsends, Inc.

Some Closing Thoughts
Philadelphia’s role in the monetary policy decisionmaking process became more pronounced in 2002, as our
Bank now votes on the Federal Open Market Committee
(FOMC). The FOMC consists of 12 Federal Reserve Bank
presidents and the seven members of the Board of Governors
and sets the course for monetary policy. While all Fed
presidents attend and contribute to the discussions, only
five vote. This is done on a rotating schedule of one-year
terms.
Last year was a testament to the Philadelphia Fed’s
strength and dedication to progress. Going forward, we
continue to expand our efforts to provide the Third District
community with the most up-to-date economic information
and research. As a responsible steward of the District’s
economic health, we maintain our focus on helping our
region to grow and prosper. Now, we move forward —
confident that our region’s economy, like our nation’s, is
enormously resilient.

Anthony M. Santomero
President
April 2002

3 Main Roles of the Federal Reserve

Supervising and Regulating Banking Operations
• Promotes the safety and soundness of District financial institutions
• Examines and supervises financial institutions in our geographic District
• Coordinates across Districts to also oversee all subsidiaries and parent holding companies
• Provides liquidity through discount window operations
Maintaining an Effective Payments System
• Effective operation of U.S. payments system essential to a healthy economy
• Largest component of Fed operations
• Central to people’s ability to make payments quickly and easily
• Philadelphia is largest check processing site in System, with an average of 5 million checks a night

Federal Reserve Bank of Philadelphia/2001

Conducting Monetary Policy
• Is the role most visible to the general public
• Refers to the Fed controlling money supply, regulating economy, and controlling inflation
• Set with consideration for current national economic conditions; not determined by fixed ideology
• Requires constant vigilance so economy flourishes and growth is sustained

3

Stability in a Crisis...

Overall Perspective

A

key element in the Federal Reserve’s mission is to main-

system has been disrupted. The Fed achieves this ambitious

tain the stability of the financial system and contain any

goal through a concerted effort among its Reserve Banks

systemic risk that may arise in financial markets. In

and the Board of Governors. The Districts comprise a nationwide network of both central-

times of economic crisis,

ized and decentralized operations,

the strength of the financial system
depends upon the effective response

The Fed is a 24-hour-a-

through which sophisticated link-

of the Federal Reserve System. In

day operation. Times of

ages ensure the safety and soundness of the entire system.

the following, First Vice President
Bill Stone discusses the Bank’s

crisis are no exception.

“We invest a tremendous amount of resources into our

crisis management efforts.

contingency planning efforts. These plans are frequently rePreparing for the Unexpected
“Federal Reserve Banks respond to a crisis situation exactly the way our original founders had envisioned.

assessed to ensure they are current, functional, and effectual. They are then tested and retested to guarantee the
continuity of our business.

We come to the aid of the country at crucial times and work

“Our experienced Philadelphia Fed staff has seen

hard to keep the payments system functioning. Prepared-

the Bank through financial crises and natural disasters and

ness for the unexpected is integral to our role in the economy.

is always prepared to take the necessary measures to uphold

“The Fed is a 24-hour-a-day operation. Times of

our infrastructure and sustain our operations. The near melt-

crisis are no exception. As a critical component of the struc-

down at Three Mile Island and Hurricane Agnes taught us

ture of the U.S. economy, the Fed stands prepared to supply

the importance of being prepared to preserve the integrity

liquidity and assist banking institutions when the financial

of the banking system. Though September 11 was something quite different, the procedures for contingency planning still applied. Our extensive preparation for Y2K also
benefited our efforts following the attacks. It was one reason the Federal Reserve was able to act quickly on September 11 – supplying needed funds for liquidity and assisting
banking institutions whose ability, or customers’ ability, to

Federal Reserve Bank of Philadelphia/2001

send and receive payments had been disrupted.

4

“On the morning of September 11, we had to take
immediate action. We knew we had to coordinate efforts
across all areas of responsibility. Later in this report, you will
learn specifically how each of our major functional areas
responded to the crisis.
“Our first order of business on September 11 was
to keep the payments system operating as close to normal as
possible. Cash and currency deliveries continued throughout the day, and special requests from any depository with

William H. Stone Jr.
First Vice President

an unexpected need were handled expeditiously. We accom-

of System efforts. We also received frequent bulletins and

modated banks by crediting them according to normal sched-

intelligence briefings from the FBI to allow us to procure

ules despite the fact that the airport shutdown kept us from

information in the timeliest manner possible.

moving checks by air and adhering to normal clearing sched-

“During the crisis, our priority was reassuring the

ules. Fedwire – our service that allows for electronic funds

public of the soundness of the banking system and provid-

transfer – stayed open late into the night. In addition, we

ing liquidity where necessary. On September 11, the Board

stood ready to hold open the Automated Clearing House,

of Governors issued a press release to reassure the financial

an electronic system used to process transfers for financial

services industry and the public that the Federal Reserve

institutions nationwide.

was open and operating and that the discount window was

“Another important component was ensuring

available to meet liquidity needs. In situations arising from

banks could meet the credit needs of their customers with-

the attacks, we encouraged financial institutions, where ap-

out undue concern about liquidity or capital positions. We

propriate, to provide their customers reasonable relief, such

increased bank reserve positions through both open mar-

as waiving late payment fees,

During the crisis, our

ket operations, which are the

extending loan terms, restructuring debt obligations, and

primary means of affecting the

priority was reassuring

easing credit terms. In con-

overall supply of reserves, and

the public of the sound-

junction with other federal

the discount window, the Fed’s

banking agencies, we also in-

lending function. Moreover, we

ness of the banking system

dicated our willingness to ac-

were able to maintain an open

and providing liquidity

commodate banks if in-

dialogue with customers
throughout the crisis. While we

creased extension of customer

where necessary.

were working to mitigate con-

credit caused a temporary decline in capital ratios.

cerns by contacting select District financial institutions,

“In anticipation of the potential economic
implications of the attacks, the Federal Open Market

tomer service area seeking assistance. Our close proximity

Committee took prompt action to ease monetary policy.

to New York also put us in a supporting role to provide lo-

In the three months following September 11, short-term

gistical support to the New York Fed. In fact, some New

interest rates were cut four times for a total of 175 basis

York Fed employees worked out of temporary offices in our

points.

facility.”

“While the Fed’s monetary policy actions were its
most publicized responses to the situation, our early actions

Controlling the Crisis

to keep payments moving and the banking system liquid

“While the Federal Reserve Bank of Philadelphia

were equally important for maintaining public confidence.

did its part to maintain stability in the region’s banking sys-

To those who have read economic history, the real story of

tem, plans were also unfolding on a national, System-wide

the aftermath of September 11 was the ability of the finan-

level. The Board of Governors held daily conference calls

cial system to remain functional and liquid without con-

with all 12 Federal Reserve Banks to aid in the coordination

cerns of crisis, panic, or lack of liquidity.”

Federal Reserve Bank of Philadelphia/2001

many of our customers were simultaneously calling our cus-

5

Federal Reserve Response to September 11

T

hese statistics illustrate the Fed’s

quick and effective response to the Sep-

tember 11 crisis. But beyond the numbers,

the clear message is that Fed business contin-

ued as usual. We remained open and operating in the aftermath of the attacks to ensure
the continuation of vital payment services including electronic transfers, check processing,
and currency distribution.

• On September 5, System discount
window borrowing totaled $195 million. On September 12, the day after the attack, it peaked at a record
$45.6 billion.

The Philadelphia Fed (shown above), along with the entire Federal
Reserve System, helped to maintain stability during the crisis.

• Also on September 12, the Open Market Desk at

liberalizing its rules for securities lending. In the

the Federal Reserve Bank of New York injected

strained, post-crisis marketplace, the Open Mar-

$38 billion in liquidity into the financial system.

ket Desk’s lending expanded from a pre-September daily average of approximately $1.5 billion to

Federal Reserve Bank of Philadelphia/2001

• To facilitate the functioning of financial markets

6

and provide liquidity in dollars, the Federal Re-

over $8 billion a day in the week following the
attacks.

serve established or expanded swap lines totaling
$90 billion with the European Central Bank, Bank
of Canada, and Bank of England.

• To further help the U.S. economy, following the
attacks the Fed eased monetary policy four times
during the remainder of 2001 for a total of 175

• The Open Market Desk facilitated the clearing
process in the government securities markets by

basis points – bringing the federal funds rate to a
40-year low of 1.75 percent.

Stability in a Crisis...

Checks

O

n a normal day, the Philadelphia Fed, the larg-

Fed. In these instances we participated in System-wide

est processor of checks in the Federal Reserve

conference calls to decide how we could offer mutual

System, clears approximately 5 million checks.

support.
“But the events of September 11 eclipsed any-

Although other forms of payments continue to make inroads
against checks, we are far from

thing by far. That day, of course,

achieving a checkless society.

the FAA grounded all flights in

So what happens when

the U.S., an unprecedented

there’s a crisis? Blake Prichard,

move. Although the Federal Re-

senior vice president, Retail Payment

serve and all the private check-

Services, talked about disruptions to

collection arrangements rely sig-

services and how the System and the

nificantly on both regional and

Philadelphia Fed handled the events

national air transportation, we

of September 11 and their after-

had no contingency plans for

math. Here’s his account.

that. So we instantly began to put
together plans to overcome such
a problem.”

“Several times in the
past, the Fed System has had to
respond to emergencies. These
problems involved individual Fed-

Planning
On September 11, with-

“On September 11,

eral Reserve Banks or their
Branches. For example, flooding
on the Mississippi, Missouri, and

out air transportation,
we had no choice but to
devise

a

system

of

ground transportation.

Hurricane Hugo impaired activ-

South Carolina, and the Char-

We made arrangements with all

Senior Vice President

7

the adjacent Districts to consophisticated network
of vehicles to move

tinue to move checks. Normally,
we would ship checks to a Fed
office only if those checks were

ity at both the Regional Check
Processing Center in Columbia,

move checks out of Philadelphia.

D. Blake Prichard

We put together a fairly

Branch of the Atlanta Fed was
knocked out for a time. Similarly,

We put together a fairly sophis-

Federal Reserve Bank of Philadelphia/2001

aged southern Florida, the Miami

had no choice but to devise a sys-

ticated network of vehicles to

the Chicago Fed in jeopardy.
When Hurricane Andrew rav-

without air transportation, we
tem of ground transportation.

Raccoon rivers put the St. Louis
Fed and the Des Moines office of

Transportation

checks out of Philadelphia.

going to be processed there: New
York’s checks would go to New
York for processing, and

lotte Branch of the Richmond

Baltimore’s to Baltimore. But because of the extraordi-

were unable to get anything to or beyond Chicago, and

nary circumstances, we loaded a big truck with checks

nothing was coming here from Chicago or further west.

for New York; Utica; Windsor Locks, Connecticut; and

This situation persisted from September 11 to the week-

Boston. We drove the truck to the New York Fed’s pro-

end, when air transportation resumed.”

cessing center in North Jersey and dropped off not only
New York’s checks but Utica’s as well. New York then

Processing an Avalanche of Checks

took care of getting checks to Utica, since Utica is part

“That weekend, with transportation more or less

of the New York Fed. Then we drove to Windsor Locks,

under control, our check operations area received an avalanche of checks. We’re

Connecticut, and gave

almost —but not quite

them both their own
checks plus Boston’s.

People worked incredible

The Connecticut pro-

amounts of overtime. In fact,

But we supplemented

cessing center took the

our unit worked continuously

our operations to ensure that we’d have

responsibility of moving
checks to Boston.
“At each stop,

through the weekend to keep

enough

up with the flood of checks.

manpower to process

Federal Reserve Bank of Philadelphia/2001

additional

we also loaded the truck

whatever volume came

with checks destined for

in. People worked in-

Philadelphia. In that way, we brought back all the checks

credible amounts of overtime. In fact, our unit worked

from New England and from the Second District (New

continuously through the weekend to keep up with the

York) for processing. That took care of the Northeast

flood of checks.
“Let me give you an order of magnitude for Phila-

corridor.

8

— a 24/7 operation.

“Simultaneously, we sent a truck to western

delphia: Our average daily volume is about 5 million

Pennsylvania and made arrangements with the Pittsburgh

checks, and we’re the single largest check processor in

Branch of the Cleveland Fed to ship all the checks that

the System. During the height of the crisis, we processed

belonged to its Cincinnati and Columbus offices. Like-

9.4 million checks a day. That’s close to 11.4 million ‘item

wise, we supplemented a truckload of checks for Balti-

passes’ because checks often have to go through the sorter

more with checks for all offices of the Richmond and

more than once. The dollar value was over $12 billion;

Atlanta Feds. Richmond then took care of forwarding

on a normal day we present about $6 billion in checks.”

the checks to their respective destinations, going as far
south as Florida.

Working with Our Customers

“Simply stated, we were collecting almost all of

“We worked closely with our local banks. The

our checks east of the Mississippi, though days later than

biggest banks didn’t want to get one big presentment on

normal. But at least checks were moving. However, we

Monday morning. So, we made courtesy shipments to

them throughout the weekend. PNC, Mellon, Citibank,

sure of liquidity went a long way toward allowing deposi-

and others got checks as they became available. Conse-

tors to manage their financial positions and helped to

quently, operations at those banks ran smoother.

avoid a ripple effect caused by other liquidity concerns.”

“In addition, the Federal Reserve System agreed
to accept checks from any financial institution. Normally,

Getting Back to Normal

the System clears about one-third of all checks written.

“Within a week of the crisis, check payments

But for a while, we were handling a significantly larger

were pretty much back to normal. The only area that

percentage. By doing this, the Fed provided significant

lagged was check adjustments. Under the best circumstances, adjustments

liquidity and predictability

usually lag processing by

to the banking industry.
Most banks were surprised

[The Fed’s] action provided

several weeks. So, of

by this action. Ultimately,

certainty of credit to finan-

course, the extraordinary

though, they realized it

cial institutions at a time when

circumstances of those
months meant longer

was the Fed being the Fed:
bringing stability during a

the larger payments system

crisis.

was under significant stress.

lags.
“Reflecting on

“In fact, through-

our response to the cri-

out the crisis, the Federal

sis, we clearly see the

Reserve Banks took the position of extending credit to

value of our strong national payments system. The Fed

check depositors regardless of the Fed’s ability to physi-

met the challenge and provided both the leadership and

cally collect checks. This action provided certainty of

the operational commitment to overcome adversity and

credit to financial institutions at a time when the larger

support the economy and the businesses that underlie

payments system was under significant stress. This mea-

each check payment.”

Federal Reserve Bank of Philadelphia/2001

Employees in the check-processing area of the Federal Reserve Bank of Philadelphia
worked overtime to keep the payments system functioning on and after September 11.

9

Stability in a Crisis...

Supervision, Regulation, & Credit

S

upervision and regulation are among the most

ful, this allows us to help banking organizations maintain

critical components of the banking system. The

safe and sound operations without undertaking undue

Supervision, Regulation, and Credit Department

risk.
“The need for crisis management skills comes

(SRC) supervises and regulates domestic and foreign operations for financial institutions in

into play when we as supervisors

eastern Pennsylvania, southern

do not have advanced warning

New Jersey, and Delaware, under

about potential problems and are

the jurisdiction of the Federal Re-

instead faced with an urgent cri-

serve Bank of Philadelphia and the

sis situation. This was the case on

Board of Governors.

September 11.

It is imperative for SRC to

“On that morning, when

maintain public confidence and nor-

we realized that these were ter-

mal operations at the Bank regard-

rorist attacks on America, SRC

less of existing circumstances. While

immediately began gauging the

this objective has been challenged in

impact on the financial services

past crisis situations, it had never been

industry. Some members of our

put to the test as on the days follow-

SRC’s primary function

committee on Credit, Reserves,

ing the September 11 terrorist attacks
on America.

is to ensure safety and

and Risk Management meeting at
the New York Fed, not far from

In the following, Senior Vice
President Michael E. Collins recounts

SRC staff were attending a Sub-

soundness in the fi-

SRC’s response to the crisis.

nancial

A Plan of Action

cluding

industry

in-

ground zero. Immediate telephone contact was made to determine if any employees had

“Historically, our super-

protecting

consumers, ensuring

Federal Reserve Bank of Philadelphia/2001
10

identifying and anticipating prob-

the accessibility of financial services, and

aging problem institutions is our

ers in SRC to determine a plan
of action. Our primary objectives
were 1) to manage the technical

lems before they become crises.
An essential ingredient in man-

safety of our staff, we organized a
conference call among key play-

visory and regulatory framework
has played an important role in

been affected. After ensuring the

providing liquidity to the
financial system.

aspects of the attacks on the
banking system and 2) to keep

ability to know what traits of an

people informed regarding the

emerging situation could cause

human aspects of the crisis.”

problems. When we are success-

Michael E. Collins
Senior Vice President and
Lending Officer

the Office of the Comptroller of the Currency sent mes-

Communication in a Crisis
“To gauge the impact of the crisis on the Third
District, we contacted select institutions around the re-

sages to New York via the Philadelphia Fed, as they were
unable to get through to New York.

gion to assess and evaluate their financial condition. This

“Acting as process facilitator proved a crucial

way we were able to identify any high-risk areas in the

aspect of SRC’s role on September 11. We called the

District and locate potential clearing or settlement bottle-

New York Fed on behalf of institutions in our District
that expected to re-

necks. In addition, we
immediately took action

Immediate and continuous

ceive funds from New
York banks. The New

to analyze the sufficiency of back-up sys-

dialogue

with

financial

York Fed then con-

tems. Our preparation

institutions communicated

tacted its institutions to
ascertain their ability to

for the century date
change proved helpful in
our analysis.
“Immediate

our willingness to accommodate special requests in this

conduct business. With
offices evacuated and
systems down, there

time of crisis.

and continuous dialogue

was uncertainty about

with financial institu-

the effective clearing

tions communicated our willingness to accommodate

and settlement of transactions. We were able to provide

special requests in this time of crisis. Issues related to

a source of information to our institutions regarding ac-

section 23A of the Federal Reserve Act, which covers

count activity. Meanwhile, our Credit Risk Management

transactions with affiliates including collateral require-

staff worked late into the night addressing settlement is-

ments, quickly began to emerge. The discount window

sues and completing transactions.”

staff was instructed to take an accommodative posture
to ensure adequate liquidity and assure institutions that

Lender of Last Resort
“In the days and weeks following the attacks as

quiries were coming in from financial institutions around

intelligence was gathered, we were in constant commu-

the District as banks became apprehensive about whether

nication with our institutions to impart real-time policy

their normal channels for funding would be available.

decisions. As lender of last resort, especially in times of

We acted promptly on these inquiries and gathered in-

crisis, it is our responsibility to lend to those with no ac-

telligence, which allowed us to preempt potential finan-

cess to credit. We communicated policy directives en-

cial difficulties.

couraging institutions to work with customers and not

“The crisis also warranted extensive communi-

allow the temporary breach of the stringent supervisory

cations among banking agencies, including all Federal

framework to impede service. Banks were assured that

Reserve Banks, and federal and state regulators. In fact,

temporarily inflated balance sheets or temporary declines

Federal Reserve Bank of Philadelphia/2001

we were open to lend. Also, lending and supervisory in-

11

in capital ratios would not trigger corrective action on our part
as regulators. The temporary
easing of credit terms and waiving of certain obligations provided the flexibility to ensure adequate liquidity to those institutions in need.”

Banking System
Investigation

“Once liquidity concerns were addressed, we turned
our attention to how the banking system might have been used

The Bank’s contingency planning team’s immediate action ensured
adequate liquidity to those institutions in need.

in the attack. Who was behind
the attacks? How were they
funded? These were the questions at the forefront of the
investigation. We received lists of names from law enforcement

Our Utmost Objective
“Engaging in proactive crisis management pre-

officials

sents us with a unique

which we circulated to

challenge. We are es-

financial institutions,

The temporary easing of

along with instructions

credit terms and waiving of

on how to notify the

certain obligations pro-

Federal Reserve Bank of Philadelphia/2001

proper authorities if a

12

sentially preparing for
an event we hope never
comes to fruition. But
crises do occur, some-

name from this list was

vided the flexibility to en-

times insignificant like

discovered on their ac-

sure adequate liquidity to

Y2K, sometimes devas-

counts.

tating like September
“This brings us

those institutions in need.

into the realm of money

11. Regardless of the issue, we must never lose

laundering, an area where I am certain we will see imme-

sight of the public nature of our work. Operating effi-

diate and far-reaching policy changes. Proposed legisla-

ciently, protecting the safety net, and keeping the confi-

tion would give the Treasury new powers to target for-

dence of our customers is achieved through maintaining

eign countries or banks deemed to present a major money-

the safety and soundness of our financial system. That is,

laundering threat.”

and always has been, our utmost objective.”

Stability in a Crisis...

SCRRM

Y

(Subcommittee on Credit, Reserves, & Risk Management)

ou may never have heard of SCRRM, the

“Shortly after the second tower collapsed, SCRRM

Subcommittee on Credit, Reserves, and Risk Management.

commandeered a conference phone and got to work. Despite

But this group played an important role on September 11, 2001,

problems with phone lines, we were able to reach the
conference bridge at the Minneapolis Fed. Minneapolis staff,

and for some weeks thereafter.
SCRRM assists Reserve

in turn, connected us with discount

Bank presidents in developing and

window and risk management staff

implementing policies for managing

at all Reserve Banks, as well as the

discount window credit, reserve

Board of Governors in Washington,

accounts, and payment system risk.

D.C.

SCRRM also coordinates these

collecting information about

functions across Reserve Banks to

developments in the financial

ensure consistent application of

system, particularly in the

policies across the Federal Reserve

interbank markets.

SCRRM

then

began

“It soon became apparent

System.

that there were major disruptions

Here’s an account of the
subcommittee’s

activities

to the financial system and that

on

September 11 and afterward from

SCRRM provides a

large overdrafts in their reserve

SCRRM Chairman Steve Meyer, vice
president and senior economic policy

forum for discussing and influencing
policy,

assessing

ing procedures to
achieve an appropriate degree of con-

ment system. SCRRM’s role in-

tacted Philadelphia Fed President

rized what SCRRM had learned.
He informed us that Reserve Bank

ity through the discount window.
They also increased risk in the pay-

“Around noon, we con-

Santomero by phone and summa-

by the terrorist attacks made it necessary for the Fed to provide liquid-

Focusing on Liquidity

sistency across the
System.

presidents and Federal Reserve
Board Vice Chairman Ferguson

cluded both supplying liquidity and

had been discussing the situation.

controlling risk.

He confirmed that the Federal

Stephen A. Meyer
SCRRM Chairman,
Vice President and
Senior Economic Policy Advisor

Federal Reserve Bank of Philadelphia/2001

tions to the financial system caused

institutions in their District to

risk, and coordinat-

York Fed – three blocks from the
World Trade Center. The disrup-

Bank to contact all large financial

collect information.”

SCRRM and its task forces happened to be meeting at the New

accounts as a result. SCRRM
instructed staff in each Reserve

advisor at the Philadelphia Fed.

“On September 11,

some financial institutions had

13

Reserve had made a commitment to provide necessary li-

“Returning to Philadelphia that afternoon allowed
us to participate in a 5:30 pm conference call with Federal

quidity to the banking system.
“In response, SCRRM instructed staff in each

Reserve officials from all parts of the country and all of the

Reserve Bank’s discount window function to ask financial

Fed’s functions. During that call, we learned the effects of

institutions to continue providing liquidity to their

the terrorist attacks were even more widespread than had

customers. The Fed, in turn, prepared to give those

been apparent from New York.”

institutions access to Federal Reserve credit, where
necessary, to ensure they had sufficient liquidity to meet
their customers’ needs. SCRRM also began planning

Following Up
“For the next week and a half, SCRRM members,
other staff in all Reserve

measures to control risks
associated with large

It soon became apparent that

management functions,

overdrafts and other
extensions of credit.
“At 4:30 pm Fed-

Banks’ credit and risk

there were major disruptions
to the financial system.

and staff at the Board of
Governors shared critical
information via late-after-

eral Reserve Vice Chairman Ferguson joined SCRRM’s System-wide conference call.

noon conference calls. We held those daily calls until mar-

During that call, Vice Chairman Ferguson endorsed

ket conditions returned to more-or-less normal.

SCRRM’s approach to controlling the risks associated with

“More recently, SCRRM has been reviewing

large overdrafts. SCRRM continued to monitor develop-

contingency plans and contributing to a variety of projects

ments until 6 pm.”

to ensure that the Fed will be able to function in any future
emergency. We hope those plans will never be used.”

Meeting the Next Day
“At 10 am on September 12,
many SCRRM members assembled
in my midtown Manhattan hotel

Federal Reserve Bank of Philadelphia/2001

room for another nationwide

14

conference call. We collected final
details on discount window loans and
overnight overdrafts from September
11, along with information about
market disruptions on September 12.
We also began planning how to deal
with continuing disruptions.

The staff of SCRRM’s administrative office holds a meeting at its Philadelphia headquarters.

Stability in a Crisis...

Cash & Customer Service

I

f events interfere with the supply of cash, the public and

than that, and it would not be unusual for us to stay open

the economy may suffer. Although the events of Septem-

until 6 pm or 7 pm to accept a deposit. Toward the week-

ber 11 didn’t have as great an impact on cash operations

end, we also announced that we would be open on Sat-

as they did on checks, Don Doros, executive vice president,

urday for emergency orders.”

offered comments on the Philadelphia Fed’s preparedness to meet a

Dealing with a

cash challenge.

Potential Problem

“One potential problem
“Late on the morning of

did surface. At one point, ar-

September 11, we held discus-

mored carriers said they would be

sions here at the Bank about how

pulling their trucks off the roads.

individual Reserve Banks were re-

This threat was troubling for at

sponding to events of that day.

least a couple of reasons. For one

Since Philadelphia had no evi-

thing, if a bank, in fact, needed

dence of any threat to its opera-

currency, it would lack the means

tions, we remained open.

of getting it. Another factor in-

“Our customer service
staff was kept busy answering

volved banks’ retail customers.
Even in this age of

phones. Most of our customers
seemed to have two main questions: Were we open? Was extra

riers to directly pick up deposits.
payment

cards,

cash is still an

cash available in the event that it
was needed? The answer to both

Some retailers use armored carPlus many of these stores don’t
have the facilities to keep and adequately protect large amounts of

important

part

cash.

questions was yes. As it turned
out, a few customers asked for
special orders, to meet unusually

“So you can see that not
of the economy.
Banks need cash to

sequent days, we received no spe-

tionship between the Fed and the
meet daily demand,

cial orders. We also told customers that we would stay open
longer than normal for pickup and

banks it serves, but it would also
disrupt the relationships between

and ATMs must be
kept stocked.

delivery of cash. Our norm is 3

banks and their customers. We
felt we had to address this situation.

pm. But we have some latitude to
accept and receive deposits later

would not only affect the rela-

“Requests for pickup or

Donald F. Doros
Executive Vice President

deposit of currency come to

Federal Reserve Bank of Philadelphia/2001

heavy demand at ATMs. On sub-

having armored trucks available

15

us directly from the armored carriers on behalf of

they wanted to know the status of Fedwire and check

the banks that have hired them. Consequently,

clearing. Another important part of the story is e-mail.
Philadelphia is in the process

we’ve developed a very
close relationship with the
various armored services.
“Because we’ve built
this close relationship over the
years, staff here at the Bank

We’re well prepared to
provide cash services
to our customers in an
emergency.

of taking over monitoring the
performance and supporting
the infrastructure of e-mail for
the Federal Reserve System.
But, thus far, the transition is
not complete. Nonetheless, we

called local carriers directly
and urged them to be responsive to their customers’

had our people on alert, and we had our back-up facility

needs. I’m happy to say that by mid-afternoon armored

ready. The good news is that we did not need to use it. E-

carriers were on the road, and luckily, this did not be-

mail service was maintained and proved to be an effec-

come a major complication.”

tive means of communicating throughout the Federal Reserve System as it did throughout the country. So, for

Maintaining Communication

“As events unfolded over the rest of the week,

that portion of the e-mail system we’re already managing, we did well.”

we kept up communications with our customers. Mostly,
Reviewing Procedures

“Of course, the events of September 11 have caused the Federal Reserve System to review its contingency plans. Although the System has a considerable
amount of contingency plans already, we now
have to make sure they’re adequate for these
new circumstances.
Federal Reserve Bank of Philadelphia/2001

“I think the message in all of this is

16

that we’re well prepared to provide cash services to our customers in an emergency. Our
operations stayed open, and we were in close
contact with our customers. And even
though there were no extraordinary demands
for currency, had there been, be assured that
we would have been able to meet them.”

Federal Reserve Bank employees in the cash vault prepare
bundles of currency for delivery to customers.

Stability in a Crisis...

Public Affairs

T

he Public Affairs Department helps to shape the

Switzerland.) In Richmond, the television media wanted

public’s understanding and perception of the Federal Re-

to know if the same architect who designed the World

serve through working with the local and national media.

Trade Towers had worked on their building. (Yes, it was.)

During a crisis, our role is to provide relevant, timely infor-

In Philadelphia, the question was if our president had

mation.

returned from giving a speech in New York the day before. (Yes, he and his staff returned on Monday.)
“Fifteen minutes after the second airplane

“Yet from San Francisco to Boston, all my pub-

crashed into the tower, the first call came into Public

lic affairs peers were dealing with many of the same ques-

Affairs. ‘The Fed hasn’t evacuated,’ the reporter yelled

tions: What impact will the attack have on the economy?

back to the newsroom. It was but the first of many media

How are checks be-

calls received in the hours and days following the terror-

ing transported if all

ist attacks.

airplanes

“My first response was to let reporters know that
we were open and operating and that the Federal Re-

are

grounded? Was there
plenty of cash?

serve System stood ready to supply liquidity to any finan-

“In Phila-

cial institution during this disruption in the markets. This

delphia, reporters

message went on our Bank’s web site immediately.

called about rumors

“My colleagues within the Fed Bank network

of alleged bank runs

and the Board of Governors quickly scheduled regular

— unfounded in our

communication through e-mail alerts and daily confer-

District. It became

ence calls. Fed Banks with operations that served the

important to convey

entire Fed network spoke on behalf of the System. For

that the Philadelphia Fed was prepared with plenty of

example, Atlanta, home to the check relay system, an-

cash, and the Fed stood ready to meet any nationwide

swered check inquiries; San Francisco acted as the source

unexpected cash demands.

for cash distribution questions, while Boston was contacted regarding retail payments.

Marilyn Wimp
Media Representative

“Our responses were closely coordinated to be
consistent. We had to speak with one clear voice.
“We also had to be mindful of having consistent

front-burner issues, sitting in on Vice Chairman

news reports nationwide. One low note was news from

Ferguson’s conference calls, and conferring with col-

the Justice Department that several Fed Banks might have

leagues. We followed the same clear crisis communica-

been targets for terrorists. One high note – literally –

tions guidelines that proved successful during Y2K. Indi-

came from the New York Fed, located in the heart of

vidual Fed Banks handled questions about their region

Wall Street, as it played John Philip Sousa music over its

but referred national matters to Washington.

outside speakers.

“Some reporters’ questions were very specific.

“From the Liberty Bell to the Golden Gate

For example, Washington press wanted to know the

Bridge, the Federal Reserve System spoke with one strong,

whereabouts of Chairman Greenspan. (He was safe in

clear, reassuring voice during the September 11 crisis.”

Federal Reserve Bank of Philadelphia/2001

“Days were filled talking to officers handling

17

Board of Directors
Robert Chappell (1)

Palsy of New Jersey, Cherry Hill

Charisse R. Lillie (6)

Federal Reserve Bank of Philadel-

Economic Development Council,

Chairman, Federal Reserve Bank of

phia Board of Directors member

Our Lady of Lourdes Medical Cen-

Philadelphia Board of Directors.

since 2000. Member Budget and

ter, Our Lady of Lourdes Founda-

Board member since 1996. Partner

Operations and Personnel Commit-

tion, and Cherry Hill Regional

in law firm of Ballard Spahr

tees. Chairman and Chief Execu-

Chamber of Commerce.

Andrews & Ingersoll, LLP. Mem-

tive Officer of Penn Mutual Life In-

ber of Labor and Employment Law

surance Company. Member Insur-

Rufus A. Fulton Jr. (4)

Group of firm’s litigation depart-

tions and Research and External

ance Federation of Pennsylvania.

Federal Reserve Bank of Philadelphia

ment. Chair of American Bar As-

Affairs Committees. President of

Sits on Taxation and Financial Ser-

Board of Directors member since

sociation Commission on Racial

Pennsylvania Building and Con-

vices Steering Committee for Ameri-

1999. Member Budget and Opera-

and Ethnic Diversity. Serves on

struction Trades Council in Har-

can Council of Life Insurance.

tions and Research and External Af-

numerous boards including Juvenile

risburg. Co-founder of the Capi-

Serves on boards of Glatfelter,

fairs Committees.

Chairman and

Law Center, Friends Select School,

tal Area Labor Management Com-

Quaker Chemical Corporation,

Chief Executive Officer of Fulton Fi-

The Franklin Institute, and Lead-

mittee. Member of Executive

South Chester Tube Company, and

nancial Corporation. Serves on ex-

ership, Inc.

Committee of Pennsylvania AFL-

Wharton Financial Institutions Cen-

ecutive committee of Pennsylvania

ter at University of Pennsylvania.

Bankers Association. Member of

Ronald J. Naples (7)

Economic Development through

American Bankers Council and

Federal Reserve Bank of Philadel-

Labor Management, Pennsylvania

Howard E. Cosgrove Jr. (2)

Bankers Roundtable. Serves on

phia Board of Directors member

Prevailing Wage Advisory Board,

Federal Reserve Bank of Philadel-

boards of Lancaster General Hospi-

since January 2001. Member Au-

and Keystone Commission on Edu-

phia Board of Directors member

tal, Boys’ Club of Lancaster Founda-

dit and Research and External Af-

cation and Employment in the 21st

since 1996. Member Budget and

tion, Lancaster Alliance, and

fairs Committees. Chairman and

Century.

Operations and Personnel Commit-

Burnham Corporation.

Chief Executive Officer of Quaker

Federal Reserve Bank of Philadelphia/2001

tees. Chairman, President, and

18

CIO, Governor’s Committee on

Chemical Corporation. Chairman

Robert J. Vanderslice (9)

Chief Executive Officer of

Frank Kaminski Jr. (5)

of the Board of the University of the

Federal Reserve Bank of Philadel-

Conectiv. Professional/civic affili-

Federal Reserve Bank of Philadel-

Arts. Serves on boards of Glatfelter,

phia Board of Directors member

ations include Edison Electric In-

phia Board of Directors member

Philadelphia Museum of Art,

since January 2001. Member Au-

stitute, University of Delaware,

since 2000. Member Audit and

Franklin Institute, American Red

dit and Personnel Committees.

Hagley Museum, and Delaware

Research and External Affairs

Cross (Southeastern Pennsylvania

President and Chief Operating Of-

Business Roundtable.

Committees. Chairman of Atlan-

Chapter), Foreign Policy Research

ficer of Pennsville National Bank,

tic Central Bankers Bank. Profes-

Institute, Rock School of the Penn-

Pennsville, New Jersey. Vice Presi-

Doris M. Damm (3)

sional affiliations include Pennsyl-

sylvania Ballet, and Friends’ Cen-

dent of Penn Bancshares, Inc. Pro-

Federal Reserve Bank of Philadel-

vania Bankers Association, Inde-

tral School.

fessional affiliations include Federal

phia Board of Directors member

pendent Bankers Association of

since January 2001. Member Au-

America, Pennsylvania Association

Glenn A. Schaeffer (8)

New Jersey Bankers Association,

dit and Personnel Committees.

of Community Bankers, and Bank-

Deputy Chairman of Federal Re-

Pennsville Economic Development

President and Chief Executive Of-

ers Bank Council.

serve Bank of Philadelphia Board

Coalition, Penns Grove Rotary

ficer of ACCU Staffing Services.

of Directors. Board member since

Club, and Salem County Chamber

Other affiliations include Cerebral

1998. Member Budget and Opera-

of Commerce.

Reserve Relations Committee of

Federal Reserve Bank of Philadelphia/2001

19

Advisory Councils
Business Council
John K. Ball (1)
Chairman, President, & CEO
R.M. Shoemaker Co.
West Conshohocken, PA
Chloe R. Eichelberger*
Owner, President, & CEO
Chloe Eichelberger Textiles, Inc.
Middletown, PA
David J. Freschman (2)
President
Delaware Innovation Fund
Wilmington, DE
Daniel R. Hawbaker (3)
President
Glenn O. Hawbaker, Inc.
State College, PA

Federal Reserve Bank of Philadelphia/2001

* Not Pictured

20

Chairman
Janis Herschkowitz (4)
President & CEO
PRL, Inc. & Subsidiaries
Cornwall, PA
David C. Hileman (5)
Owner
Hilecrest Farms
Tyrone, PA
Sandra F. Holsonback (6)
Director
Small Business Development Center
Lehigh University
Bethlehem, PA
Warren B. Matthews, M.D. (7)
President
Wyncote Family Medicine
Wyncote, PA

Mitchell L. Morgan (8)
President
Morgan Properties
King of Prussia, PA
Audrey S. Oswell (9)
President & COO
Resorts Atlantic City
Atlantic City, NJ
Jay Windsor (10)
President
Lakeside Greenhouses, Inc.
Laurel, DE

9
7

8

3

1
6

5

2

7

3

2

9

8

5

6

11

1
4

10

Daniel L. Price Sr. (8)
President & CEO
Century Savings Bank
Bridgeton, NJ
Patrick M. Ryan*
President and CEO
The Yardville National Bank
Hamilton, NJ

Community Bank Council
Theodore D. Bessler*
President & CEO
Shore Community Bank
Toms River, NJ
Thomas J. Bisko (1)
President
The Quakertown National Bank
Quakertown, PA

John G. Gerlach (3)
President, CEO, & Director
Pocono Community Bank
Stroudsburg, PA

Chairman
Stephen C. Nelson (5)
President & CEO
Artisans’ Bank
Wilmington, DE
John W. Ord (6)
President & CEO
Peoples National Bank
Hallstead, PA
Frederick C. (Ted) Peters II (7)
President & CEO
The Bryn Mawr Trust Company
Bryn Mawr, PA

Thomas A. Vento (10)
President & CEO
Prudential Savings Bank, PASA
Philadelphia, PA
Wayne R. Weidner*
Chairman, President & CEO
National Penn Bancshares, Inc.
Boyertown, PA
Julie Wong (11)
President & CEO
First Asian Bank
Edison, NJ
* Not Pictured

Federal Reserve Bank of Philadelphia/2001

Thomas W. Cook (2)
Executive Vice President & CEO
The Bank of Landisburg
Landisburg, PA

Robert H. King (4)
President
Sterling Bank
Mount Laurel, NJ

Deputy Chairman
Kenneth R. Shoemaker (9)
President & CEO
Orrstown Bank
Shippensburg, PA

21

Credit Union Council
Paula Albanese (1)
President
Diamond State FCU
New Castle, DE

John LaRosa (5)
COO & Treasurer
Police and Fire FCU
Philadelphia, PA

James F. McCaw (7)
President & CEO
K of C FCU
Philadelphia, PA

Barbara Arrowsmith*
Manager
New Castle County Delaware
Employees FCU
New Castle, DE

Chairman
Lee T. MacMinn (6)
President & CEO
Freedom CU
Philadelphia, PA

Kipp Stecher (8)
President & CEO
AmeriChoice FCU
Mechanicsburg, PA
Judith M. Supplee (9)
President & CEO
Keystone FCU
Downingtown, PA

Jo Ann Broderick (2)
President
First Commonwealth FCU
Lehigh Valley, PA
L. Edward Brzozowski (3)
President
MON-OC FCU
Toms River, NJ

Federal Reserve Bank of Philadelphia/2001

Dennis Flickinger (4)
President & CEO
First Capital FCU
York, PA

22

4

8

3

7

6
1

* Not Pictured

9

2
5

Officers
Anthony M. Santomero
President
William H. Stone Jr.
First Vice President
Donald F. Doros
Executive Vice President
Richard W. Lang
Executive Vice President
Michael E. Collins
Senior Vice President
and Lending Officer
David D. Gathman
Senior Vice President and
Chief Financial Officer
Loretta J. Mester
Senior Vice President and
Director of Research
D. Blake Prichard
Senior Vice President
Retail Payment Services
Milissa M. Tadeo
Senior Vice President
Treasury Services and Customer
Services & Support
John G. Bell
Vice President
Financial Statistics
Robert J. Bucco
Vice President
Wholesale Payments
Product Office
Peter P. Burns
Vice President and Director
Payment Cards Center

Dean Croushore
Vice President and Economist
John J. Deibel
Vice President and
Chief Administrative Officer
Supervision, Regulation,
and Credit
Patrick L. Donahue
Vice President
Business Development

Herbert E. Taylor
Vice President and
Corporate Secretary

Ronald R. Sheldon
Assistant Vice President
Check Operations

Joanna H. Frodin
Vice President
Supervision, Regulation,
and Credit

Vish P. Viswanathan
Vice President and
Discount Officer
Supervision, Regulation,
and Credit

Marie Tkaczyk
Assistant Vice President
Information Technology Services

Faith P. Goldstein
Vice President
Public Affairs
Arun K. Jain
Vice President
Retail Payments Processing
Jerry Katz
Vice President
Human Resources
Henry T. Kern
Vice President
Cash Services
Thomas P. Lambinus
Vice President
Facilities Management and
Accounting Services
Edward M. Mahon
Vice President and
General Counsel
Stephen A. Meyer
Vice President and
Senior Economic Policy Advisor
Mary DeHaven Myers
Vice President and
Community Affairs Officer
A. Reed Raymond III
Vice President
Supervision, Regulation,
and Credit

Eileen P. Adezio
Assistant Vice President
Supervision, Regulation,
and Credit
Shirley L. Coker
Assistant Vice President
and Counsel
Donna L. Franco
Assistant Vice President
Accounting Services
William L. Gaunt
Assistant Vice President
Supervision, Regulation,
and Credit
Stephen G. Hart
Assistant Vice President
and Planning Officer
Business Planning and Analysis
Mary Ann Hood
Assistant Vice President
Human Resources
Howard M. James Jr.
Assistant Vice President
Supervision, Regulation,
and Credit
Alice Kelley Menzano
Assistant Vice President
Groupware Leadership Center
Information Technology
Services Department

Louis N. Sanfelice
Vice President
Supervision, Regulation,
and Credit

Camille M. Ochman
Assistant Vice President
Treasury Services

John B. Shaffer
Vice President and
General Auditor

Patrick M. Regan
Assistant Vice President and
Information Security Officer

Richard A. Sheaffer
Vice President
Treasury Services

Anthony T. Scafide Jr.
Assistant Vice President
Customer Services and Support

Officers list through December 31, 2001, plus 2002 promotions through March

Sharon N. Tomlinson
Assistant Vice President
Business Planning and Analysis
& Assistant Secretary
Richard Valente
Assistant Vice President and
Assistant General Auditor
Elisabeth Videira-Dzeng
Assistant Vice President
Supervision, Regulation,
and Credit
Bernard M. Wennemer
Assistant Vice President
Supervision, Regulation,
and Credit
Michael P. Zamulinsky
Assistant Vice President
Supervision, Regulation,
and Credit
Mitchell Berlin
Research Officer and Economist
Research Department
Donna L. Brenner
Budget Officer
John P. Kelly
Check Adjustments Officer
Linda K. Kirson
Office Automation
Support Officer
Joseph L. McCann
Administrative Services
and Security Officer
Edward Morrison
Operations Officer
Data Processing
Michelle Scipione
Cash Services Officer
Stephen J. Smith
Assistant Counsel
Anthony J. White
Financial Services Officer

Federal Reserve Bank of Philadelphia/2001

Theodore M. Crone
Vice President and Economist

William Evans Jr.
Vice President
Information Technology Services

23

Operating Statistics

T

otal commercial check volume increased 2

in the volume of currency processed were attributable to

percent while the dollar value of transactions increased

additional capacity resulting from the installation of two

31 percent. An increase in the number of high dollar

currency counting rooms. The substantial increase in coin

value Same Day Settlement deposits resulted in an increase

processed was the result of unusually large deposits from

in total dollar value of checks processed. A significant

one of our large cash customers.

increase in U.S. government check volume was experienced
in 2001 because of the issuance of a one-time income tax

While the number of loans to depository institutions in 2001

rebate.

was lower than in the previous year, the average size of the
In 2001, the Bank continued to be a major

loans was higher.

processor of cash in the Federal Reserve System. Increases

2001
Volume

2001
Dollar Value

2000
Volume

2000
Dollar Value

SERVICES TO DEPOSITORY INSTITUTIONS
Wire Transfer of Funds

8.2 million transfers

$27.3 trillion

7.7 million transfers

$25.3 trillion

Check processing:
U.S. Government
Commercial checks

40.9 million checks
1,339.8 million checks

$37.1 billion
$2,501.3 billion

31.1 million checks
1,314.5 million checks

$32.5 billion
$1,913.4 billion

Cash operations:
Currency processed
Coin processed

2,053.8 million notes
52.5 thousand bags

$36.8 billion
$29.9 million

1,659.0 million notes
19.7 thousand bags

$35.6 billion
$9.6 million

$503 million

183 loans

$545 million

48,000 transfers

$170 billion

47,000 transfers

$138 billion

6.4 million coupons

$34.3 million

6.3 million coupons

$31.3 million

Federal Reserve Bank of Philadelphia/2001

Loans to depository institutions

24

96 loans

SERVICES TO U.S. TREASURY
Electronic book-entry
transfers
Food coupons
processed

Note: Because of consolidation of Federal Reserve System ACH operations in 2001, ACH statistics are no longer shown here.

Financial Report

Contents
Letter to Directors

27

Report of Independent Accountants

28

Report of Independent Accountants

29

Statements of Condition

30

Statements of Income

31

Statements of Changes in Capital

32

Notes to Financial Statements

Federal Reserve Bank of Philadelphia/2001

26

25

Federal Reserve Bank of Philadelphia/2001

LETTER TO DIRECTORS

26

REPOR
T OF INDEPENDENT ACC
OUNT
ANT
S
EPORT
CCOUNT
OUNTANT
ANTS

Federal Reserve Bank of Philadelphia/2001
27

Federal Reserve Bank of Philadelphia/2001

REPOR
T OF INDEPENDENT ACC
OUNT
ANT
S
EPORT
CCOUNT
OUNTANT
ANTS

28

STATEMENTS OF CONDITION
As of December 31, 2001 and December 31, 2000 (in millions)

ASSETS

2001

Gold certificates
Special drawing rights certificates
Coin
Items in process of collection
Loans to depository institutions
U.S. government and federal agency securities, net
Investments denominated in foreign currencies
Accrued interest receivable
Interdistrict settlement account
Bank premises and equipment, net
Other assets
Total assets

2000

$

454
83
44
526
—
23,071
481
234
—
70
91

$

414
83
52
384
2
21,596
486
251
1,353
72
91

$

25,054

$

24,784

$

21,773

$

23,114

LIABILITIES AND CAPITAL
Liabilities:
Federal Reserve notes outstanding, net
Deposits:
Depository institutions
Other deposits
Deferred credit items
Interest on Federal Reserve notes due U.S. Treasury
Interdistrict settlement account
Accrued benefit costs
Other liabilities
Total liabilities

Total capital
Total liabilities and capital

$

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

702
3
404
44
—
51
10

24,612

24,328

221
221

228
228

442

456

25,054

$

24,784

Federal Reserve Bank of Philadelphia/2001

Capital:
Capital paid-in
Surplus

413
2
100
29
2,239
51
5

29

STATEMENTS OF INCOME
For the years ended December 31, 2001 and December 31, 2000 (in millions)

2001
Interest income:
Interest on U.S. government and
federal agency securities
Interest on investments denominated
in foreign currencies

$

1,211
8

1,230

1,219

47
20
(47)
13
4

43
23
(44)
(3)
3

Total other operating income

37

22

Operating expenses:
Salaries and other benefits
Occupancy expense
Equipment expense
Cost of unreimbursed Treasury services
Assessments by Board of Governors
Other expenses

79
9
13
—
24
32

74
9
11
4
23
39

157

160

Other operating income:
Income from services
Reimbursable services to government agencies
Foreign currency losses, net
U.S. government securities gains (losses), net
Other income

Total operating expenses
Net income prior to distribution

Federal Reserve Bank of Philadelphia/2001

$

11

Total interest income

30

1,219

2000

Distribution of net income:
Dividends paid to member banks
Transferred to (from) surplus
Payments to U.S. Treasury as interest
on Federal Reserve notes
Total distribution

$

1,110

$

1,081

$

14
(7)

$

13
145

1,103
$

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

1,110

923
$

1,081

STATEMENTS OF CHANGES IN CAPITAL
for the years ended December 31, 2001 and December 31, 2000 (in millions)

Capital Paid-in
Balance at January 1, 2000
(4.0 million shares)
Net income transferred to surplus
Surplus transfer to the U.S. Treasury
Net change in capital stock issued
(0.6 million shares)
Balance at December 31, 2000
(4.6 million shares)
Transferred from surplus
Net change in capital stock redeemed
(0.2 million shares)
Balance at December 31, 2001
(4.4 million shares)

$

199
—
—

Surplus

$

29

$

228
—

221

$

—

$

(7)

$

200
145
(117)

Total Capital

228
(7)

29

$

—

$

221

399
145
(117)

456
(7)
(7)

$

442

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

Federal Reserve Bank of Philadelphia/2001
31

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION
The Federal Reserve Bank of Philadelphia (“Bank”) is part of the Federal Reserve System (“System”) created by
Congress under the Federal Reserve Act of 1913 (“Federal Reserve Act”) which established the central bank of the
United States. The System consists of the Board of Governors of the Federal Reserve System (“Board of Governors”) and twelve Federal Reserve Banks (“Reserve Banks”). The Reserve Banks are chartered by the federal
government and possess a unique set of governmental, corporate, and central bank characteristics. Other major
elements of the System are the Federal Open Market Committee (“FOMC”) and the Federal Advisory Council.
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.
Structure
The Bank in Philadelphia 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 are
exercised by a Board of Directors. Banks that are members of the System include all national banks and any state
chartered bank that applies and is approved for membership in the System.

Federal Reserve Bank of Philadelphia/2001

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, and six directors are elected by member
banks. Of the six elected by member banks, three represent the public and three represent member banks. 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.

32

2. OPERATIONS AND SERVICES
The System performs a variety of services and operations. Functions include: formulating and conducting monetary policy; participating actively in the payments mechanism, including large-dollar transfers of funds, automated
clearinghouse (“ACH”) operations and check processing; distributing coin and currency; performing fiscal agency
functions for the U.S. Treasury and certain federal agencies; serving as the federal government’s bank; providing
short-term loans to depository institutions; serving the consumer and the community by providing educational
materials and information regarding consumer laws; supervising bank holding companies and state member banks;
and administering other regulations of the Board of Governors. The Board of Governors’ operating costs are funded
through assessments on the Reserve Banks.
The FOMC establishes policy regarding open market operations, oversees these operations, and issues authorizations and directives to the FRBNY for its execution of transactions. Authorized transaction types include direct
purchase and sale of securities, matched sale-purchase transactions, the purchase of securities under agreements to
resell, and the lending of U.S. government securities. The FRBNY is also authorized by the FOMC to hold balances
of and to execute spot and forward foreign exchange and securities contracts in nine foreign currencies, maintain
reciprocal currency arrangements (“F/X swaps”) with various central banks, and “warehouse” foreign currencies
for the U.S. Treasury and Exchange Stabilization Fund (“ESF”) through the Reserve Banks.

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 the Financial Accounting Standards Board. The Board of Governors has developed specialized accounting principles and practices that it believes are appropriate for the significantly different nature and
function of a central bank as compared to the private sector. These accounting principles and practices are
documented in the Financial Accounting Manual for Federal Reserve Banks (“Financial Accounting Manual”),
which is issued by the Board of Governors. All Reserve Banks are required to adopt and apply accounting policies
and practices that are consistent with the Financial Accounting Manual.
The financial statements have been prepared in accordance with the Financial Accounting Manual. Differences
exist between the accounting principles and practices of the System and accounting principles generally accepted
in the United States of America (“GAAP”). The primary differences are the presentation of all security holdings
at amortized cost, rather than at the fair value presentation requirements of GAAP, and the accounting for matched
sale-purchase transactions as separate sales and purchases, rather than secured borrowings with pledged collateral,
as is generally required by GAAP. In addition, the Bank has elected not to present a Statement of Cash Flows. The
Statement of Cash Flows has not been included as the liquidity and cash position of the Bank are not of primary
concern to the users of these financial statements. Other information regarding the Bank’s activities is provided
in, or may be derived from, the Statements of Condition, Income, and Changes in Capital. Therefore, a Statement
of Cash Flows would not provide any additional useful information. There are no other significant differences
between the policies outlined in the Financial Accounting Manual and GAAP.
Effective January 2001, the System implemented procedures to eliminate the sharing of costs by Reserve Banks for
certain services a Reserve Bank may provide on behalf of the System. Data for 2001 reflects the adoption of this
policy. Major services provided for the System by this bank, for which the costs will not be redistributed to the other
Reserve Banks, include: Collateral Management System, Electronic Cash Letter development, Groupware Leadership Center, Office of Cash Fiscal Services, Treasury Direct Central Business Administration Function.
The preparation of the financial statements in conformity with the Financial Accounting Manual requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
income and expenses during the reporting period. Actual results could differ from those estimates. Certain amounts
relating to the prior year have been reclassified to conform to the current-year presentation. Unique accounts and
significant accounting policies are explained below.
Federal Reserve Bank of Philadelphia/2001

a. Gold Certificates
The Secretary of the Treasury is authorized to issue gold certificates to the Reserve Banks to monetize gold held by
the U.S. Treasury. Payment for the gold certificates by the Reserve Banks is made by crediting equivalent amounts
in dollars into the account established for the U.S. Treasury. These gold certificates held by the Reserve Banks are
required to be backed by the gold of the U.S. Treasury. The U.S. Treasury may reacquire the gold certificates at any
time and the Reserve Banks must deliver them to the U.S. Treasury. At such time, the U.S. Treasury’s account is
charged and the Reserve Banks’ gold certificate accounts are lowered. The value of gold for purposes of backing
the gold certificates is set by law at $42 2/9 a fine troy ounce. The Board of Governors allocates the gold certificates
among Reserve Banks once a year based upon average Federal Reserve notes outstanding in each District.

33

NOTES TO FINANCIAL STATEMENTS
b. Special Drawing Rights Certificates
Special drawing rights (“SDRs”) are issued by the International Monetary Fund (“Fund”) to its members in proportion
to each member’s quota in the Fund 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 United
States participation in the SDR system, the Secretary of the U.S. Treasury is authorized to issue SDR certificates,
somewhat like gold certificates, to the Reserve Banks. At such time, equivalent amounts in dollars are credited to the
account established for the U.S. Treasury, and the Reserve Banks’ SDR certificate accounts are increased. The Reserve
Banks are required to purchase SDRs, at the direction of the U.S. Treasury, for the purpose of financing SDR certificate
acquisitions or for financing exchange stabilization operations. At the time SDR transactions occur, the Board of
Governors allocates amounts among Reserve Banks based upon Federal Reserve notes outstanding in each District at
the end of the preceding year. There were no SDR transactions in 2001.
c. Loans to Depository Institutions
The Depository Institutions Deregulation and Monetary Control Act of 1980 provides that all depository institutions that
maintain reservable transaction accounts or nonpersonal time deposits, as defined in Regulation D issued by the Board
of Governors, have borrowing privileges at the discretion of the Reserve Banks. Borrowers execute certain lending
agreements and deposit sufficient collateral before credit is extended. Loans are evaluated for collectibility, and
currently all are considered collectible and fully collateralized. If any loans were deemed to be uncollectible, an
appropriate reserve would be established. Interest is accrued using the applicable discount rate established at least every
fourteen days by the Board of Directors of the Reserve Banks, subject to review by the Board of Governors. Reserve
Banks retain the option to impose a surcharge above the basic rate in certain circumstances.

Federal Reserve Bank of Philadelphia/2001

d. U.S. Government and Federal Agency Securities and Investments Denominated in Foreign Currencies
The FOMC has designated the FRBNY to execute open market transactions on its behalf and to hold the resulting
securities in the portfolio known as the System Open Market Account (“SOMA”). In addition to authorizing and
directing operations in the domestic securities market, the FOMC authorizes and directs the FRBNY to execute
operations in foreign markets for major currencies in order to counter disorderly conditions in exchange markets or to
meet other needs specified by the FOMC in carrying out the System’s central bank responsibilities. Such authorizations
are reviewed and approved annually by the FOMC.

34

Matched sale-purchase transactions are accounted for as separate sale and purchase transactions. Matched sale-purchase transactions are transactions in which the FRBNY sells a security and buys it back at the rate specified at the
commencement of the transaction.
The FRBNY has sole authorization by the FOMC to lend U.S. government securities held in the SOMA to U.S.
government securities dealers and to banks participating in U.S. government securities clearing arrangements on behalf
of the System, in order to facilitate the effective functioning of the domestic securities market. These securities-lending
transactions are fully collateralized by other U.S. government securities. FOMC policy requires FRBNY to take possession of collateral in excess of the market values of the securities loaned. The market values of the collateral and the
securities loaned are monitored by FRBNY on a daily basis, with additional collateral obtained as necessary. The
securities loaned continue to be accounted for in the SOMA.

Foreign exchange (“F/X”) contracts are contractual agreements between two parties to exchange specified currencies, at a specified price, on a specified date. Spot foreign contracts normally settle two days after the trade date,
whereas the settlement date on forward contracts is negotiated between the contracting parties, but will extend
beyond two days from the trade date. The FRBNY generally enters into spot contracts, with any forward contracts
generally limited to the second leg of a swap/warehousing transaction.
The FRBNY, on behalf of the Reserve Banks, maintains renewable, short-term F/X swap arrangements with two
authorized foreign central banks. The parties agree to exchange their currencies up to a pre-arranged maximum
amount and for an agreed upon period of time (up to twelve months), at an agreed upon interest rate. These
arrangements give the FOMC temporary access to foreign currencies that it may need for intervention operations
to support the dollar and give the partner foreign central bank temporary access to dollars it may need to support its
own currency. Drawings under the F/X swap arrangements can be initiated by either the FRBNY or the partner
foreign central bank, and must be agreed to by the drawee. The F/X swaps are structured so that the party initiating
the transaction (the drawer) bears the exchange rate risk upon maturity. The FRBNY will generally invest the
foreign currency received under an F/X swap in interest-bearing instruments.
Warehousing is an arrangement under which the FOMC agrees to exchange, at the request of the Treasury, U.S.
dollars for foreign currencies held by the Treasury or ESF over a limited period of time. The purpose of the
warehousing facility is to supplement the U.S. dollar resources of the Treasury and ESF for financing purchases of
foreign currencies and related international operations.
In connection with its foreign currency activities, the FRBNY, on behalf of the Reserve Banks, may enter into
contracts which contain varying degrees of off-balance sheet market risk, because they represent contractual
commitments involving future settlement and counter-party credit risk. The FRBNY controls credit risk by
obtaining credit approvals, establishing transaction limits, and performing daily monitoring procedures.

U.S. government and federal agency securities and investments denominated in foreign currencies comprising the
SOMA are recorded at cost, on a settlement-date basis, and adjusted for amortization of premiums or accretion of
discounts on a straight-line basis. Interest income is accrued on a straight-line basis and is reported as “Interest on
U.S. government and federal agency securities” or “Interest on investments denominated in foreign currencies,” as
appropriate. Income earned on securities lending transactions is reported as a component of “Other income.” Gains
and losses resulting from sales of securities are determined by specific issues based on average cost. Gains and losses

Federal Reserve Bank of Philadelphia/2001

While the application of current market prices to the securities currently held in the SOMA portfolio and investments denominated in foreign currencies may result in values substantially above or below their carrying values,
these unrealized changes in value would have no direct effect on the quantity of reserves available to the banking
system or on the prospects for future Reserve Bank earnings or capital. Both the domestic and foreign components
of the SOMA portfolio from time to time involve transactions that can result in gains or losses when holdings are sold
prior to maturity. However, decisions regarding the securities and foreign currencies transactions, including their
purchase and sale, are motivated by monetary policy objectives rather than profit. Accordingly, earnings and any
gains or losses resulting from the sale of such currencies and securities are incidental to the open market operations
and do not motivate its activities or policy decisions.

35

NOTES TO FINANCIAL STATEMENTS
on the sales of U.S. government and federal agency securities are reported as “U.S. government securities gains
(losses), net.” Foreign-currency-denominated assets are revalued daily at current market exchange rates in order
to report these assets in U.S. dollars. Realized and unrealized gains and losses on investments denominated in
foreign currencies are reported as “Foreign currency losses, net.” Foreign currencies held through F/X swaps, when
initiated by the counter-party, and warehousing arrangements are revalued daily, with the unrealized gain or loss
reported by the FRBNY as a component of “Other assets” or “Other liabilities,” as appropriate.
Balances of U.S. government and federal agency securities bought outright, securities loaned, investments denominated in foreign currency, interest income, securities lending fee income, amortization of premiums and discounts
on securities bought outright, gains and losses on sales of securities, and realized and unrealized gains and losses on
investments denominated in foreign currencies, excluding those held under an F/X swap arrangement, are allocated to each Reserve Bank. Income from securities lending transactions undertaken by the FRBNY are also
allocated to each Reserve Bank. Securities purchased under agreements to resell and unrealized gains and losses
on the revaluation of foreign currency holdings under F/X swaps and warehousing arrangements are allocated to
the FRBNY and not to other Reserve Banks.
Statement of Financial Accounting Standards No. 133, as amended and interpreted, became effective on January
1, 2001. For the periods presented, the Reserve Banks had no derivative instruments required to be accounted for
under the standard.

Federal Reserve Bank of Philadelphia/2001

e. Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on a
straight-line basis over estimated useful lives of assets ranging from 2 to 50 years. New assets, major alterations,
renovations and improvements are capitalized at cost as additions to the asset accounts. Maintenance, repairs and
minor replacements are charged to operations in the year incurred. Internally-developed software is capitalized
based on the cost of direct materials and services and those indirect costs associated with developing, implementing,
or testing software.

36

f. Interdistrict Settlement Account
At the close of business each day, all Reserve Banks and branches assemble the payments due to or from other
Reserve Banks and branches as a result of transactions involving accounts residing in other Districts that occurred
during the day’s operations. Such transactions may include funds settlement, check clearing and ACH operations,
and allocations of shared expenses. The cumulative net amount due to or from other Reserve Banks is reported as
the “Interdistrict settlement account.”
g. Federal Reserve Notes
Federal Reserve notes are the circulating currency of the United States. These notes are issued through the various
Federal Reserve agents to the Reserve Banks upon deposit with such Agents of certain classes of collateral security,
typically U.S. government securities. These notes are identified as issued to a specific Reserve Bank. The Federal
Reserve Act provides that the collateral security tendered by the Reserve Bank to the Federal Reserve Agent must
be equal to the sum of the notes applied for by such Reserve Bank. In accordance with the Federal Reserve Act,
gold certificates, special drawing rights certificates, U.S. government and federal agency securities, triparty agree-

ments, loans to depository institutions, and investments denominated in foreign currencies are pledged as collateral
for net Federal Reserve notes outstanding. The collateral value is equal to the book value of the collateral tendered,
with the exception of securities, whose collateral value is equal to the par value of the securities tendered. The
Board of Governors may, at any time, call upon a Reserve Bank for additional security to adequately collateralize
the Federal Reserve notes. The Reserve Banks have entered into an agreement which provides for certain assets of
the Reserve Banks to be jointly pledged as collateral for the Federal Reserve notes of all Reserve Banks in order to
satisfy their obligation of providing sufficient collateral for outstanding Federal Reserve notes. 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, as obligations of the United States, Federal Reserve notes are
backed by the full faith and credit of the United States government.
The “Federal Reserve notes outstanding, net” account represents Federal Reserve notes reduced by currency held
in the vaults of the Bank of $6,562 million, and $8,706 million at December 31, 2001 and 2000, respectively.
h. Capital Paid-in
The Federal Reserve Act requires that each member bank subscribe to the capital stock of the Reserve Bank in an
amount equal to 6 percent of the capital and surplus of the member bank. As a member bank’s capital and surplus
changes, its holdings of the Reserve Bank’s stock must be adjusted. Member banks are those state-chartered banks
that apply and are approved for membership in the System and all national banks. Currently, only one-half of the
subscription is paid-in and the remainder is subject to call. These shares are nonvoting with a par value of $100.
They may not be transferred or hypothecated. By law, each member bank is entitled to receive an annual dividend
of 6 percent on the paid-in capital stock. This cumulative dividend is paid semiannually. A member bank is liable
for Reserve Bank liabilities up to twice the par value of stock subscribed by it.
i. Surplus
The Board of Governors requires Reserve Banks to maintain a surplus equal to the amount of capital paid-in as of
December 31. This amount is intended to provide additional capital and reduce the possibility that the Reserve
Banks would be required to call on member banks for additional capital. Reserve Banks are required by the Board
of Governors to transfer to the U.S. Treasury excess earnings, after providing for the costs of operations, payment of
dividends, and reservation of an amount necessary to equate surplus with capital paid-in.

In the event of losses or a substantial increase in capital, payments to the U.S. Treasury are suspended until such
losses are recovered through subsequent earnings. Weekly payments to the U.S. Treasury may vary significantly.

Federal Reserve Bank of Philadelphia/2001

The Consolidated Appropriations Act of 2000 (Public Law 106-113, Section 302) directed the Reserve Banks to
transfer to the U.S. Treasury additional surplus funds of $3,752 million during the Federal Government’s 2000 fiscal
year. Federal Reserve Bank of Philadelphia transferred $117 million to the U.S. Treasury. Reserve Banks were not
permitted to replenish surplus for these amounts during fiscal year 2000, which ended September 30, 2000; however,
the surplus was replenished by December 31, 2000.

37

NOTES TO FINANCIAL STATEMENTS
j. Income and Costs related to Treasury Services
The Bank is required by the Federal Reserve Act to serve as fiscal agent and depository of the United States. By
statute, the Department of the Treasury is permitted, but not required, to pay for these services. The costs of
providing fiscal agency and depository services to the Treasury Department that have been billed but will not be
paid are reported as the “Cost of unreimbursed Treasury services.”
Beginning January 1, 1998, the reimbursement process for all Reserve Banks was centralized at the Bank that
included the transfer of each Reserve Bank’s Treasury reimbursement receivable to the Bank. The centralized
portion of the Bank’s reimbursement receivable, reported in “Other assets,” totaled $70 million and $71 million at
December 31, 2001 and 2000, respectively. The centralized portion of the Bank’s Costs of unreimbursed Treasury
services totaled $77 thousand and $4 million for the years ended December 31, 2001 and 2000, respectively.
Enhancement to the Treasury billing process implemented January 1, 2001 resulted in a significant decrease in the
amount of unreimbursed costs.
k. Taxes
The Reserve Banks are exempt from federal, state, and local taxes, except for taxes on real property, which are
reported as a component of “Occupancy expense.”

4. U.S. GOVERNMENT AND FEDERAL AGENCY SECURITIES
Securities bought outright are held in the SOMA at the FRBNY. An undivided interest in SOMA activity, with the
exception of securities held under agreements to resell and the related premiums, discounts and income, is allocated to each Reserve Bank on a percentage basis derived from an annual settlement of interdistrict clearings. The
settlement, performed in April of each year, equalizes Reserve Bank gold certificate holdings to Federal Reserve
notes outstanding. The Bank’s allocated share of SOMA balances was 4.107 percent and 4.165 percent at December 31, 2001 and 2000, respectively.
The Bank’s allocated share of securities held in the SOMA at December 31, that were bought outright, were as
follows (in millions):

Federal Reserve Bank of Philadelphia/2001

Par value:

38

2001

Federal agency
U.S. government:
Bills
Notes
Bonds
Total par value
Unamortized premiums
Unaccreted discounts

$

.4

Total allocated to Bank

$ 23,071.3

2000
$

7,478.5
10,923.2
4,257.8
22,659.9
464.2
(52.8)

5.4
7,444.7
10,003.5
3,864.5
21,318.1
405.5
(127.8)

$

21,595.8

Total SOMA securities bought outright were $561,701 million and $518,501 million at December 31, 2001 and 2000,
respectively.
The maturity distribution of U.S. government and federal agency securities bought outright, which were allocated
to the Bank at December 31, 2001, were as follows (in millions):
Par value

Maturities of Securities Held
Within 15 days
16 days to 90 days
91 days to 1 year
Over 1 year to 5 years
Over 5 years to 10 years
Over 10 years
Total

U.S. Government
Securities
$

Federal Agency
Obligations

Total

438.9
5,115.6
5,365.4
6,290.8
2,190.8
3,258.0

$

—
—
—
0.4
—
—

$

438.9
5,115.6
5,365.4
6,291.2
2,190.8
3,258.0

$ 22,659.5

$

0.4

$ 22,659.9

At December 31, 2001 and 2000, matched sale-purchase transactions involving U.S. government securities with par
values of $23,188 million and $21,112 million, respectively, were outstanding, of which $952 million and $879 million
were allocated to the Bank. Matched sale-purchase transactions are generally overnight arrangements.
At December 31, 2001 and 2000, U.S. government securities with par values of $7,345 million and $2,086 million,
respectively, were loaned from the SOMA, of which $302 million and $87 million were allocated to the Bank.

Each Reserve Bank is allocated a share of foreign-currency-denominated assets, the related interest income, and
realized and unrealized foreign currency gains and losses, with the exception of unrealized gains and losses on F/X
swaps and warehousing transactions. This allocation is based on the ratio of each Reserve Bank’s capital and surplus
to aggregate capital and surplus at the preceding December 31. The Bank’s allocated share of investments
denominated in foreign currencies was approximately 3.305 percent and 3.101 percent at December 31, 2001 and
2000, respectively.

Federal Reserve Bank of Philadelphia/2001

5. INVESTMENTS DENOMINATED IN FOREIGN CURRENCIES
The FRBNY, on behalf of the Reserve Banks, holds foreign currency deposits with foreign central banks and the
Bank for International Settlements, and invests in foreign government debt instruments. Foreign government debt
instruments held include both securities bought outright and securities held under agreements to resell. These
investments are guaranteed as to principal and interest by the foreign governments.

39

NOTES TO FINANCIAL STATEMENTS
The Bank’s allocated share of investments denominated in foreign currencies, valued at current exchange rates at
December 31, was as follows (in millions):
2001
European Union Euro:
Foreign currency deposits
Government debt instruments including
Agreements to resell
Japanese Yen:
Foreign currency deposits
Government debt instruments including
Agreements to resell
Accrued interest
Total

$

$

2000

152

$

144

89

85

62

85

176
2

170
2

481

$

486

Total investments denominated in foreign currencies were $14,559 million and $15,670 million at December 31,
2001 and 2000, respectively.
The maturity distribution of investments denominated in foreign currencies which were allocated to the Bank
at December 31, 2001, was as follows (in millions):
Maturities of Investments Denominated in Foreign Currencies
Within 1 year
Over 1 year to 5 years
Over 5 years to 10 years

Federal Reserve Bank of Philadelphia/2001

Total

40

$

453
13
15
$

481

At December 31, 2001 and 2000, there were no open foreign exchange contracts or outstanding F/X swaps.
At December 31, 2001 and 2000, the warehousing facility was $5 billion, with zero outstanding.

6. BANK PREMISES AND EQUIPMENT
A summary of bank premises and equipment at December 31 is as follows (in millions):
2001
Bank premises and equipment:
Land
Buildings
Building machinery and equipment
Construction in progress
Furniture and equipment

$

$

137.5
(67.8)

Accumulated depreciation
Bank premises and equipment, net

2.5
65.8
9.6
.5
59.1

2000

$

69.7

2.4
63.9
9.1
1.8
56.8
134.0
(62.5)

$

71.5

Depreciation expense was $9 million and $8 million for the years ended December 31, 2001 and 2000, respectively.
The Bank leases unused space to an outside tenant. This lease has a term of two years. Rental income from such
lease was $1 million for both years ended December 31, 2001 and 2000. Future minimum lease payments under the
noncancelable agreement in existence at December 31, 2001 were $3 million for years 2002 through 2003.

7. COMMITMENTS AND CONTINGENCIES
At December 31, 2001, the Bank was obligated under noncancelable leases for premises and equipment with
remaining terms ranging from 1 to approximately 2 years. These leases provide for increased rentals based upon
increases in real estate taxes, operating costs or selected price indices.

Future minimum rental payments under noncancelable operating leases with terms of one year or more, at December 31, 2001, were $534 thousand for the years 2002 through 2003.
At December 31, 2001, the Bank has no other commitments and long-term obligations in excess of one year.

Federal Reserve Bank of Philadelphia/2001

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 $658
thousand and $554 thousand for the years ended December 31, 2001 and 2000, respectively. Certain of the Bank’s
leases have options to renew. The Bank has no capital leases.

41

NOTES TO FINANCIAL STATEMENTS
Under the Insurance Agreement of the Federal Reserve Banks dated as of March 2, 1999, each of the Reserve Banks has
agreed to bear, on a per incident basis, a pro rata share of losses in excess of 1 percent of the capital paid-in of the claiming Reserve Bank, up to 50 percent of the total capital paid-in of all Reserve Banks. Losses are borne in the ratio that a
Reserve Bank’s capital paid-in bears 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 such agreement at December 31, 2001 or 2000.
The Bank is involved in certain legal actions and claims arising in the ordinary course of business. Although it is difficult
to predict the ultimate outcome of these actions, in management’s opinion, based on discussions with counsel, the
aforementioned litigation and claims will be resolved without material adverse effect on the financial position or results
of operations of the Bank.

8. RETIREMENT AND THRIFT PLANS
Retirement Plans
The Bank currently offers two defined benefit retirement plans to its employees, based on length of service and level of
compensation. Substantially all of the Bank’s employees participate in the Retirement Plan for Employees of the Federal
Reserve System (“System Plan”) and the Benefit Equalization Retirement Plan (“BEP”). The System Plan is a multiemployer plan with contributions fully funded by participating employers. No separate accounting is maintained of
assets contributed by the participating employers. The Bank’s projected benefit obligation and net pension costs for the
BEP at December 31, 2001 and 2000, and for the years then ended, are not material.
Thrift Plan
Employees of the Bank may also participate in the defined contribution Thrift Plan for Employees of the Federal Reserve
System (“Thrift Plan”). The Bank’s Thrift Plan contributions totaled $3 million and $2 million for the years ended
December 31, 2001 and 2000, respectively, and are reported as a component of “Salaries and other benefits.”

Federal Reserve Bank of Philadelphia/2001

9. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS AND POSTEMPLOYMENT BENEFITS

42

Postretirement Benefits Other Than Pensions
In addition to the Bank’s retirement plans, employees who have met certain age and length of service requirements are
eligible for both medical benefits and life insurance coverage during retirement.
The Bank funds benefits payable under the medical and life insurance plans as due and, accordingly, has no plan assets.
Net postretirement benefit costs are actuarially determined using a January 1 measurement date.

Following is a reconciliation of beginning and ending balances of the benefit obligation (in millions):

2001
Accumulated postretirement benefit obligation
at January 1
Service cost-benefits earned during the period
Interest cost of accumulated benefit obligation
Actuarial loss
Contributions by plan participants
Benefits paid
Plan amendments, acquisitions, foreign currency
exchange rate changes, business combinations,
divestitures, curtailments, settlements, special
termination benefits
Accumulated postretirement benefit obligation at December 31

$

33.4
0.7
2.4
2.1
0.3
(1.5)

2000

$

(0.2)
$

37.2

30.3
0.6
2.2
1.5
0.2
(1.4)

—
$

33.4

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):

2001

2000

$

—
—
1.2
0.3
(1.5)

$

—
—
1.2
0.2
(1.4)

Fair value of plan assets at December 31

$

—

$

—

Unfunded postretirement benefit obligation
Unrecognized prior service cost
Unrecognized net actuarial gain (loss)

$

37.2
16.0
(8.9)

$

33.4
17.6
(7.0)

Accrued postretirement benefit costs

$

44.3

$

44.0

Accrued postretirement benefit costs are reported as a component of “Accrued benefit costs.”

Federal Reserve Bank of Philadelphia/2001

Fair value of plan assets at January 1
Actual return on plan assets
Contributions by the employer
Contributions by plan participants
Benefits paid

43

NOTES TO FINANCIAL STATEMENTS
At December 31, 2001 and 2000, the weighted average discount rate assumptions used in developing the benefit
obligation were 7.0 percent and 7.5 percent, respectively.
For measurement purposes, a 10.0 percent annual rate of increase in the cost of covered health care benefits was
assumed for 2002. Ultimately, the health care cost trend rate is expected to decrease gradually to 5.0 percent by
2008, and remain at that level thereafter.
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, 2001 (in millions):

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

1 Percentage
Point Increase

1 Percentage
Point Decrease

$

$

0.2
2.4

(0.3)
(3.5)

The following is a summary of the components of net periodic postretirement benefit costs for the years ended
December 31 (in millions):
2001

2000

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

$

0.7
2.4
(1.8)
0.2

$

0.6
2.2
(1.8)
0.1

Net periodic postretirement benefit costs

$

1.5

$

1.1

Federal Reserve Bank of Philadelphia/2001

Net periodic postretirement benefit costs are reported as a component of “Salaries and other benefits.”

44

Postemployment Benefits
The Bank offers benefits to former or inactive employees. Postemployment benefit costs are actuarially determined
and include the cost of medical and dental insurance, survivor income, and disability benefits. Costs were projected
using the same discount rate and health care trend rates as were used for projecting postretirement costs. The
accrued postemployment benefit costs recognized by the Bank at both December 31, 2001 and 2000, were $7
million. This cost is included as a component of “Accrued benefit costs.” Net periodic postemployment benefit costs
included in both 2001 and 2000 operating expenses were $1 million.