The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
1
White Cascade, by
sculptor Alexander
Calder, hangs in the
Eastburn Court of the Federal
Reserve Bank of Philadelphia.
The 100-foot long mobile consists
of 14 aluminum discs connected
by stainless steel rods and rotates
clockwise. The 10-ton artwork
was installed in 1976, during construction of the building, which is
located on Independence Mall in
Center City Philadelphia.
W
2
A
At the Federal Reserve’s founding in
1913, Congressman Carter Glass
said that the Federal Reserve System
would be an “adventure in finance.” Definitions of adventure aside, the 20th century has been eventful for the
Federal Reserve Bank of Philadelphia, and as the century
approaches its close, we take a look back. Quotes in this
report are drawn from annual reports published by the Philadelphia Fed over the past 85 years; after each, the original
publication date appears in parentheses.
Executive Letters 4 • The Creation of the Federal Reserve 6 • Serving in Times of National Crisis 8
Echoes from Mid-Century 11 • Meeting the Needs of a Dynamic Economy 14 • Disappearing Banks 15
Regulating Banks in an Age of Consolidation 16 • Providing Payments Services in a Competitive Marketplace 18
Ensuring Growth and Stability 23 • Homes We Have Known 25 • Board of Directors 28 • Officers 30
Advisory Councils 32 • Operating Statistics 34 • Financial Reports 35
3
E
Executive Letters
More than any other year in recent memory, 1999 caused us to contemplate the future and the past. Here at
the Philadelphia Fed, we spent the year anticipating, and preparing for, the century date change. As we did,
we reflected on our 85-year history.
The Federal Reserve System was our nation’s third attempt at establishing a central bank. Ironically, one of
the secrets of its success is that it is a central bank that is not too centralized. The System is composed of 12
District banks and the Board of Governors in Washington, a structure that enables the Fed to incorporate
regional sensibilities into System-wide policy discussions.
Over the decades, the Fed has become an integral participant in the American economy. The Federal Reserve
helped organize the payments system, regulated financial institutions, and as it matured, executed monetary
policy to support our national prosperity. In the Third Federal Reserve District, the Bank strove to stay current
with changing economic conditions in the region and to help meet the financial needs of those who live and
work here. This remains our challenge in the new century.
The new year also brings me to a pivotal point: In May I will step down as president of the Federal Reserve
Bank of Philadelphia. I want to take this opportunity to thank those who have been indispensable to the
Bank’s success over the last 19 years. Thanks to my colleagues here at the Philadelphia Fed, in Washington,
and throughout the System. Thanks also to the financial, business, and civic communities, and to our ultimate
customers, consumers throughout the Third District. Your efforts, advice, and support have made my tenure
very rewarding.
President
I am pleased to report that midnight of December 31st passed quietly in the financial world. Computer systems
performed well, records were retained and updated on schedule, cash was available, and the banking public
remained confident that their funds were secure. Banks and their customers moved into the year 2000
virtually without a hitch, thanks to the excellent preparation of those at depository institutions and at the Fed.
Given the dire predictions of Y2K chaos that circulated early in the year, the banking community faced a dual
challenge. First, bankers had to be certain that their institutions were ready for the rollover. Then they had to
communicate to the public that the banking system would remain sound through the transition. Congratulations
to all of you whose months of diligent work made the rollover uneventful. The results affirm the confidence
demonstrated by the public in our nation’s financial system.
First Vice President
4
President Edward G. Boehne
(left)and First Vice President
William H. Stone at the Second
Bank of the United States,
Philadelphia.
5
THE CREATION OF THE FEDERAL RESERVE
The Nation’s Central Bank
The Federal Reserve is sometimes
In the new central bank, this concern was re-
described as the “bankers’ bank,” or
solved by balancing strong central authority with
the “federal government’s bank,”
broad regional representation. Early in the 20th
T
phrases that underscore the Fed’s integral role in
century, a compromise was crafted by President
the U.S. economy and hint at the reasons behind
Woodrow Wilson, Congressman Carter Glass, and
its creation. As the nation’s central bank, the
Senator Robert Owen. “The First and Second
Federal Reserve System ensures the reliable flow
Banks…became extinct because they had serious flaws –
of payments among banks, businesses, and
their powers were overly concentrated, their locations too
individuals and provides banking services for the
centralized, they were dominated by special interests, and
United States government. It also helps supervise they became snared in partisan politics…In contrast, the
and regulate the activities of commercial banks
Federal Reserve System that was born on December 23,
and bank holding companies. And the Fed is best
1913 has a regional structure, all sorts of checks and
known for its execution of monetary policy, using
balances, and a workable blend of public and private
its control of bank cash reserves to influence the
interests. In addition, it was carefully insulated from
supply of money and availability of credit in the
short-run politics.” (1988)
economy. All of these functions are directed
toward a single goal: to promote a sound currency
On November 14, 1914, the Federal Reserve
and foster sustained economic growth.
opened for business. In the next 30 years, it
would encounter two events that dramatically
The need for a central bank was recognized long
affected the history of the System and the nation:
before the Federal Reserve was established in
The Great Depression and World War II. These
1913; the concept had been tried – and had failed
events radically altered Americans’ expectations
– twice. Both the First Bank of the United States
of government and institutions. For the Fed, the
(1791-1811) and the Second Bank of the United
depression and the war changed the ways in
States (1816-1836) were created to give financial
which the central bank carried out its mission,
credibility to the young federal government and to transforming it from a passive entity into one that
avoid economic panics and depressions. Both
initiated decisive action to ensure growth and
were undone by states’ suspicion of ceding power
stability for the economy.
to a centralized institution.
6
The First Bank of the United States, today
The Second Bank of the United States, today
The Federal Reserve Bank of Philadelphia Charter
The Federal Reserve Bank of Philadelphia, in 1914
The Federal Reserve, the nation’s third central bank, began
operation in 1914. It consists of 12 District banks, each serving a specific geographic area,
overseen by a Board of Governors in Washington, D.C. In Philadelphia, headquarters for the Third
District, the Federal Reserve Bank was originally located at 406-408 Chestnut Street (above), near its
predecessors, the First Bank of the United States and the Second Bank of the United States. Though
the building no longer exists, all three locations are now part of Independence National Historical Park.
7
SERVING IN TIMES OF NATIONAL CRISIS
Facing the Depression
sion of a bank…Under present conditions the closing of
a bank by no means is proof of incompetent manage-
The depression that began with the
T
ment.” (1931)
stock market crash of 1929 was a
watershed event in banking. Many
The Philadelphia Fed and other Federal Reserve
financial institutions were swept away in the
Banks worked as regulators and consultants to
ensuing financial panic, hysteria swallowing well
help banks cope. “Nearly 2,000 visits were received
and poorly run institutions alike. “Excessive
from bank officers during 1931 and members of the
demands of frightened or disturbed depositors are
bank relations department made 1,800 visits to banks
difficult to control and may quickly result in the suspen-
of the district. These visits and the activities of the
8
bank examination department…reflected the bankers’
Great Depression were shocking, especially to people who
desire for advice in the handling of situations which had
had allowed themselves to believe that a ‘new era’ of
arisen outside of their usual operation.” (1931)
permanent prosperity had arrived…” (1949)
Economic distress quickly spread far beyond the
People looked to government for help, and after
financial system. Fortunes evaporated, businesses
his inauguration in 1933, President Franklin D.
failed, and unemployment soared. Americans’
Roosevelt acted swiftly: “…mere relief gave way to
faith in the economic system
was shaken. “The intensity and,
most of all, the duration of the
Though methods
have changed,
most Fed functions have not. From
the beginning, Federal Reserve services have included
bond sales, provision of loans
and currency, check clearance,
funds transfer, bank examination, and economic research.
From left: Bookkeeping and
Currency Counting (1918);
Two views of the Currency
Department (1951); World
War I Liberty Bond poster
(1917).
9
positive action by Government to move the flywheel of the
use of the Fed’s most powerful monetary tool,
economic machine off dead center…It soon resorted to
open market operations. Buying and selling
‘pump priming’…Most wanted security at the expense of
securities in the open market would enable the
the laissez-faire tradition.” (1949)
Fed to manage the flow of reserves to banks,
thereby influencing banks’ capacity to supply
To restore public confidence in banks, President
money and credit to the economy.
Roosevelt declared a nationwide bank holiday –
mandatory closure – in March of 1933 to
give banks and their nervous customers
time to catch their breath. Institutions were
required to receive Fed approval to reopen.
To further reassure savers, deposits were
When banks were ordered
closed in March 1933, about
guaranteed up to $2,500 by the newly
640 financial institutions were operating in the
established Federal Deposit Insurance
Third District. The Philadelphia Federal Reserve
Corporation.
authorized the reopening of 547 by the end of
the month and a total of 606 by year-end.
Reserve Banks were important sources of
capital during the depression, both providing funds for banks to lend and making
direct loans to commercial and industrial
applicants. In 1934, the Philadelphia Fed
approved $6.3 million in direct loans.
The passage of the Banking Act of 1935
also laid the groundwork for the Fed’s future
role in setting monetary policy. The act
gave the Board of Governors the power to
set reserve requirements for member banks
and required that boards at Federal Reserve
Banks meet every 14 days to reset the
discount rate, the interest charged on loans
to banks. Most important, the Banking Act
established the Federal Open Market
Committee. The FOMC, composed of the
seven Fed Governors and five of the 12
Reserve Bank presidents, was to direct the
10
ECHOES FROM MID-CENTURY
The advance of technology…the
T
one-tenth at the start of the century; about one-half owns
proper role of government in the
United States Savings Bonds; and one-twelfth of the
economy…the financial stability of
spending units holds corporate securities. These facts
the individual…and the astounding time in which
mean a wider participation and interest in the financial
they lived, these were all concerns of the people
problems of government, business and consumers...“
at the Federal Reserve Bank of Philadelphia in
1949. Their thoughts, recorded as the second
“To those of us who have lived through this half-
half of the 20th century was about to start, echo
century…and have gradually absorbed its material
ours, poised at the beginning of the 21st.
offerings into everyday living, the nature of the advance
that has been made since 1900 is seldom noticed as the
“The machine [computer] does not think; men have built
spectacular thing it really was.”
into it an extremely limited degree of judgement…Its
technical powers are huge, yet its capacities are completely
limited by the ability of its operators…”
“While government’s intervention seems to have solved
some pressing problems, it has created others…As each
economic group seeks security or advantage through
government support, and as government strives to
maintain a high level of employment by bolstering the
economy wherever weakness appears, the path of least
resistance is likely to be continual concession and compensation. It is easier to make competing upward adjustments than to face squarely the need for choosing among
alternatives…”
“Undoubtedly more people are concerned more about
finance now than was the case in 1900. It is no longer
‘high finance’ carried on by a select few. Today more than
two-thirds of the employed people pay a federal income
tax; in 1920 the proportion was only one-twelfth. Over
half the population owns life insurance, as against about
11
Supporting the War Effort
In both World Wars, and again during
[Federal Reserve] System having been made by this
hostilities in Korea, the Federal Reserve
Bank.” (1941) For governmental agencies such
assisted with the sale of government
as the War Production Board, the Philadelphia
bonds to raise funds in support of the nation’s
Fed’s Research and Statistics Department fur-
armed forces. The Fed’s Fiscal Agency Depart-
nished much-needed data on employment, in-
ment, which conducted the sale of bonds during
come, production, distribution, inventories,
World War II, expanded from 39 staff members to
prices, and banking.
I
586 within five months of the bombing of Pearl
Harbor. At the time, there were more than 1,400
In 1941 Congress enacted wide-ranging legislation
organizations authorized to sell bonds in the
directed toward several wartime economic goals:
Third District, and the Fed used its role as bond
transferring resources to defense industries,
liaison to broaden its relationships with banks and curbing inflation and profiteering, promoting
industries throughout the region.
civilian savings to finance defense spending, and
limiting the debt taken on by consumers, so it
During the First and Second World Wars, savings
would not dampen their spending when the war
bond sales were considered the most important
was over. To help enforce this legislation, the Fed
function of the banking system. Not only did
issued Regulation W, which set the terms under
they provide much-needed financing for defense
which consumers received credit.
and a way for workers to participate in the war
effort, bonds also provided a place for investing
Throughout World War II, the Fed anticipated the
rapidly rising income, income that could not be
return to a peacetime economy. “As many as eight
spent on scarce consumer goods.
million men and women may be released from the armed
forces. Unfinished contracts…will probably amount to
Just as it had provided direct industrial loans in
$60 billion. Immense quantities of Government
the aftermath of the depression, the Fed extended property will have to be removed before private plants can
credit to firms involved in defense work. The
prepare for peacetime operations…The job of reconver-
bank also advised bankers and contractors on the
sion which industry faces consists of two essential parts.
allocation and funding of defense production.
The first and less difficult is the reshaping of physical
The Philadelphia Fed was particularly active: “The
facilities and the reestablishment of assembly lines for the
volume of credit extended by this Bank directly or in
production of civilian goods. The second and more
participation with other banks…to industries primarily
difficult part…is merchandising – adapting products to
engaged in war work has increased over 80 percent, more
the market.” (1943)
than one-half of such loans now outstanding in the
12
In both World Wars,
bond sales raised monies
to support the armed forces
and gave civilians a patriotic vehicle for
saving and investment. Above: Soldiers
transport government payroll (1951).
13
MEETING THE NEEDS OF A DYNAMIC ECONOMY
The combined experiences of the
T
how the volume of member bank reserves influences the
Great Depression and World War
money supply.” (1949)
ment and the central bank. Economists’ thinking
Before the Fed could pursue this new activist
about the proper function of these institutions
role, one vestige of its wartime mission had to be
changed as well. Now, government was expected
eliminated. During the war, the Fed was respon-
to actively promote and sustain economic stabil-
sible for maintaining a ready market for U.S.
ity. The Fed was similarly charged. It was no
government securities at steady interest rates, a
longer enough simply to provide credit for com-
responsibility that prevented it from responding
merce. The central bank should use its control
fully to inflationary threats in the postwar
over the supply of money and credit to help
economy. In 1951, the U.S. Treasury agreed with
manage overall demand for goods and services, to
the Fed to free the central bank of its obligation
help the economy avoid the extremes of boom
to stabilize the government securities market so
and bust, enabling it to prosper. “At first, the
that it could more effectively promote stability in
principal goal of Federal Reserve policy was assuring a
the larger economy. This agreement made it
sufficiency of credit to meet the needs of
possible for the Fed to conduct monetary policy
business…Eventually attention shifted more toward
as it is known today, a function that has become
regulating the quantity of credit in order to maintain
its best-known. “When flexible rates are
stability. Along with this shift there developed a better
permissible…Federal Reserve authorities are free to
idea of the various factors that influence reserves and
follow policies of expansion, contraction, or neutrality as
II shifted people’s view of govern-
the situation warrants.” (1952)
For the next decade, the Fed set its influence
against prevailing economic winds, increasing
supplies of money and credit when the
economy slackened, trimming them when the
Record-high interest rates in 1981 created many challenges for
the Federal Reserve, one of which was to keep up with savers’
demand for high-yielding Treasury securities.
14
economy flew a little too high. “Monetary
policy is simply one way of holding demands
down so that prices don’t go up. It restrains
demands now [through tighter credit] so that they
DISAPPEARING
BANKS:
A LONG-TERM
PERSPECTIVE
may be better satisfied later …General monetary
controls are designed…to interfere as little as
possible in the detailed workings of the economy
– leaving it up to the market place to distribute
this overall supply.” (1960)
Consolidation is not
C
new to banking, a
fact that’s easy to
miss for those of us who have
witnessed only the most recent
By the late 1960s, it was clear that simple
wave. Of the banks in exist-
monetary policy prescriptions were not
ence in 1980, 43 percent had
enough. Military spending for the Viet-
merged by 1994, a total of
nam War and domestic spending for the
6,300. Consider the following
Great Society spurred demand that trig-
statistics, first published in the
gered inflation. Federal wage and price
1963 Annual Report of the
controls failed to restore order. And when
Federal Reserve Bank of
the subsequent Middle East oil embargo
Philadelphia:
drove worldwide oil prices skyward, the
rate of inflation followed. By the late
In 37 of the 42 years between
1970s, Americans felt the economy was
1920 and 1962, the number of
tearing apart as inflation spiraled upward.
banks in the United States declined. In the 1920s, many banks
The Fed took decisive action, dramatically
failed, and many avoided failure by
raising interest rates and reversing the
agreeing to be absorbed by more
inflationary spiral. The Fed’s action was
profitable institutions. From 1930
necessary but painful, sending the
to 1933, 9,000 institutions
economy into the deepest recession since
suspended operations or were
World War II had ended. Meanwhile,
liquidated, 2,000 more were
dramatic changes in the financial sector
consolidated or absorbed. And
signaled new challenges for the Federal
between 1952 and 1961, there
Reserve as a bank regulator and payments
were 1,500 bank mergers.
provider.
15
REGULATING BANKS IN AN AGE OF CONSOLIDATION
M
Market innovation and new
legislation have made the
past 25 years a time of
increasingly intense competition for banks.
Bankers have reconfigured what they do and how
they do it. They have restructured, rethought
functions, staked out new territories, and offered
nontraditional products. They have merged,
consolidated, and expanded, completely changing
the banking landscape. As a bank regulator, the
Federal Reserve has had to keep pace in this
rapidly evolving environment.
When mutual fund companies introduced the
money market mutual fund in the late 1970s,
consumers learned that banks need not be their
sole provider of financial services. Profitable
deposits were successfully siphoned away from
traditional savings accounts and certificates of
deposit. Banks responded with new products,
such as interest-bearing checking accounts and
money market deposit accounts, which were
legalized by the Monetary Control Act of 1980.
to survive. Smaller institutions were acquired by
larger ones, while some survivors pursued narrower market segments.
Throughout this period, the Fed was required to
verify the soundness of then-unfamiliar financial
practices, such as repurchase agreements, leveraged buyouts, and off-balance-sheet commitments.
“Deregulation has had a direct impact both on the volume
of our supervisory workload and its complexity. Following passage of Pennsylvania legislation that liberalized
rules on holding companies and branching, the number of
applications for mergers, acquisitions, and other purposes
made to this Bank almost tripled.” (1984)
Increasing competition and accelerating innovation in banking boiled over into some excesses. In
1993, Congress responded with the FDIC Improvement Act, which legislated more frequent
examinations for banks, deposit insurance premiums based on portfolio risk, and prompt corrective
action to reduce failures. “The competitive pressures
of the 1980s had pushed too many banks into unwise
excesses and, ultimately, failure. By 1990, a crisis
While banks struggled to hold off nontraditional atmosphere had developed, putting banks and their
competitors, state legislation intensified competi- regulators on the defensive. The turmoil in banking
tion within the banking industry by opening
rippled out into the economy, deepening the recession and
borders to banks from other areas. In the Third
slowing the process of recovery…With loan portfolios
District, Delaware encouraged the establishment shrinking, revenues declining, and the regulatory burden
of banks by out-of-state holding companies,
mounting, some questioned whether the banking industry
leading to the addition of 12 new banking institu- could survive. But bankers went to work, making the
tions in 1982 alone. Pennsylvania passed more
necessary adjustments, and their efforts paid off.” (1993)
liberal branching laws, smoothing the way for
statewide competition. Faced with stronger and
The forces that reshaped banking in the 1980s
more numerous competitors, many banks merged continue to push the industry toward consolida16
tion and product innovation. As the century
came to a close, passage of the landmark Financial Modernization Act of 1999 guaranteed that
more change and more challenges lay ahead for
banks and for the Fed as a regulator. To accommodate the increasing geographic scope and
functional complexity of financial institutions,
Fed regulatory personnel continue to develop
expertise in specialized content areas and share
this knowledge throughout the Federal Reserve
System.
Though the task of regulating banks is not as
straightforward as it once was, the Federal
Reserve’s approach remains the same: communicate and consult. It has been this way since the
Bank’s early days. “The bank examination department is not only concerned with the verification of assets
and liabilities of banks, it also stands ready and is
constantly being called upon to render assistance in the
improvement of methods and operating policies.” (1928)
The Fed has always preferred consultation to
issuing directives. In 1946, the Philadelphia Fed
introduced field conferences as a way of keeping
in touch with bankers throughout the Third
District. Initially a forum for the discussion of
postwar business, banking, and credit, the meetings proved so popular that they became an
annual event and continue to be an “off-the-record
forum for frank exchange of information and views
on…national business and credit trends, monetary policy,
consumer credit, operating ratios, and bank personnel.”
(1956) In the spring of 1999, the tradition
continued with field meetings in 10 locations,
from Haddonfield, NJ, to Dover, DE, to
Williamsport, PA.
Once the primary source
of information for
Federal Reserve bank
examiners, precise columns of
numerals in ledgers have given way
to complex calculations on computer spreadsheets. This evolution
has demanded increasing technical
and analytical skill on the part of
Supervision and Regulation staff.
17
PROVIDING PAYMENTS SERVICES IN A COMPETITIVE MARKETPLACE
The Monetary Control Act of 1980,
ducted from another – is a measure of payment
which made banks more competi-
inefficiency. “Before the establishment of the Federal
tive in the financial services market-
Reserve System, many hundreds of millions of dollars
T
place, radically altered the position of the Fed in
the marketplace as well. It transformed Reserve
Banks into competitive providers of banking
services. Prior to this, Reserve Banks had cleared
checks and completed wire transfers free of
charge and only for member institutions. When
the Monetary Control Act mandated that the Fed
offer services to any bank, thrift, or credit union
at market prices, Reserve Banks were suddenly
confronted with a host of new issues: how to
keep current customers and attract new ones;
how to market and price current products and
develop new ones; and how to improve service
and increase efficiency.
Like so many organizations, Reserve Banks met
the challenge of a more competitive marketplace
by drawing on its knowledge of and experience
with its core businesses. The Fed had been
established, fundamentally, to ensure the safe,
reliable flow of funds among individuals, businesses, and banks. Since 1914, the Fed had
supplied cash to banks, cleared checks, and
transferred funds in ways that reflected evolving
technology: by telegraph, telephone, and computer.
Early in its history, the Fed’s objective was to
improve the efficiency of check payments. Float
– dollars added to one account but not yet de18
of float were shown in the statements of the banks.
This was recognized as an evil and the Federal Reserve
checks to their destinations by the shortest route and has
System was expected to correct it. The method of
reduced the risk and float by the daily telegraphic
collecting checks followed by the system, known as transit
settlement of balances. It can be reduced further by the
operation, has shortened the time in transit by sending
development of county and regional clearings on a
Clearing checks has always been an important—labor-intensive
—Fed function. As the volume of paper drafts increased, the Check Department relied on technology to process them more quickly and efficiently. Today, just a
few people are needed to keep the 24-hour operation running smoothly.
Check clearing evolves: (top row, from left) 1918, 1940s, 1950s; (bottom row, from left) 1961 and two current views.
19
broader scale and the more widespread practice of sending checks, payable in
other districts, directly to those districts.” (1928)
During the 1940s, the Fed’s check processing system proved
valuable not only to the economy but to the war effort: “Should this
central clearing of checks slow down, the tempo of business in war plants
employing millions of war workers would be retarded…The department
which handles this seemingly unimportant household detail has now been
assigned the function of clearing ration checks, because it is recognized as an
efficient, labor-saving organization.” (1942)
The ongoing emphasis on efficiency has led payments operations to
become the most technologically advanced within the Federal
Reserve. Manual operations prevailed into the 1940s, but soon
gave way to punchcards read by tabulating machines. This equipment made it easier to process the Fed’s own payrolls and to keep a
running total of securities being held for member institutions. In
the 1930s, a weekend audit of securities held in the Federal Reserve vault typically kept 100 typists busy from Friday night until
Sunday.
Late in the 1940s, check clearing became more streamlined with
the arrival of machines to proof, endorse, sort, and list checks.
Check collection and distribution, the responsibility of the Transportation Department, accelerated as horse-drawn wagons were
replaced by automobiles and airplanes. The Philadelphia Fed, the
first Federal Reserve Bank to set up its own transportation network, gradually expanded its coverage from Philadelphia’s near
suburbs to cities at the edges of the Third District, collecting,
clearing, and returning checks in ever shorter periods of time.
Computers arrived at the Philadelphia Fed in 1961, and by the end
of the decade, payroll, deposit ledger, group clearings, and automatic cash letter charges were all computer-based functions.
Automated Clearinghouse followed in 1974, reducing to just a few
seconds the time it took to transfer millions between accounts.
20
Though the geographic dimensions of the Third District have
not changed, technology has shrunk them by reducing the time it takes a check, a
service request, or a person to get from here to there. Clockwise, from top: A new
bank vehicle is put into service (1949); Collections Department (1950); Check transport
takes to the air (1950).
21
The Philadelphia Fed was
instrumental in the development of two computer-based
Federal Reserve services:
Treasury Direct and FedLine.
Treasury Direct, the Federal
Reserve’s computerized bookentry system for government
securities, was developed by
Philadelphia and the U.S.
Treasury. It began operation in
1986. FedLine, the network
that provides customers online access to all Fed services,
was first tested in Philadelphia
in 1987.
Despite the growing popularity of electronic
funds, cash remains the most immediate and
universal payment method, and it is cash that
generates considerable conversation when its
appearance changes. Witness the attention paid
to the recently redesigned $100, $50, and $20
bills, and to the 1999 introduction of quarters
representing each of the 50 states. This is nothing new. In 1929, the downsizing of currency was
a topic of note. “The replacement of the old series, or
large size paper money, kept certain departments of the
bank busily engaged over a large part of 1929.”
(1929)
Conversely, the 1969 withdrawal from circulation
of $1,000, $5,000, and $10,000 notes slipped by
almost unnoticed – perhaps because few people
ever saw them anyway. At the time, the $10 bill
was the most commonly used denomination.
22
Fed tellers determined the fitness of currency (bottom) by
sight and touch until the 1980s, when the task was taken
on by sophisticated bill counting equipment. Unfit currency
was burned at a local crematory until 1953, when the Fed
installed an incinerator (top).
ENSURING GROWTH AND STABILITY
The 1990s marked the longest
F
monetary stance was appropriate to get the economy
period of uninterrupted economic
moving, a more neutral stance is essential to sustain
growth in American history, an
growth. Lightening up on the monetary accelerator in a
achievement supported by the Federal Reserve’s
timely fashion is better than slamming on the brakes
deft application of monetary policy. As Philadel-
later.” (1993)
phia Fed President Edward G. Boehne explained,
“Monetary policy played a key role in helping to stimulate Though recent years have brought increasing
a durable expansion. Although a very accommodative
acknowledgment of the Fed’s role in the expansion of the 1990s, the central bank’s
most important contribution to it had
come almost a decade earlier. In the
early 1980s, the Fed laid the foundation for sustained prosperity when it
took dramatic action to end runaway
inflation. Bringing inflation under
control ultimately yielded low interest rates and financial market stability, which created incentives to
invest in new technologies and boost
productivity.
The research function
was added shortly after
the founding of the
Federal Reserve
System “…for the purpose of
collecting and interpreting such regional
and national data as were not obtained by
other agencies and for the assembling, in
usable form, of other available information.” (1929)
23
The key to the Fed’s successful monetary policy is
experiences to bear on discount rate deliberations
its focus on creating a financial environment that
every two weeks, they infuse Fed thinking with
fosters sustained growth. That is a task that
realistic perspectives and fresh insights.
requires equal measures of economic art and
science.
Over the years, the Philadelphia Fed has developed close relationships with many banking,
The Bank’s Research and Statistics Department
business, and community leaders across the
brings academic discipline to Fed policy delibera-
District whose contributions add significantly to
tions. The department conducts the monthly
the Fed’s ability to assess economic conditions
Business Outlook Survey, a widely recognized
and evaluate the need for policy action.
barometer of manufacturing in the Third District
and the nation. Its bi-monthly Business Review and
Anyone who witnessed the demise of the First
ongoing scholarly research projects apply theory
Bank of the United States, and then the Second,
to real-world situations.
two centuries ago would hardly have predicted the
success of the Federal Reserve. The Fed has been
The art of policymaking lies in the ability to
an integral part of the 20th century and contributed
discern the nuances of market behavior and to
to the financial stability and economic prosperity
anticipate the impact of trends that elude statisti-
we experienced as the century drew to a close.
cal analysis. That art is crucial to good
What began as an adventure in finance has be-
policymaking, and it comes to the Fed in a unique
come an economic institution – a steadying
way through the boards of directors at Reserve
influence on a system that has survived depres-
Banks. Reserve Banks’ boards of directors
sion, exuberance, and everything in between.
represent not only banking,
but business, industry,
agriculture, labor, and
community interests. As
board members bring their
Philadelphia Fed economists brief
President Edward G. Boehne. In
addition to advising officers and
boards, Fed economists share
information with member banks,
businesses, and the public.
24
Photo of Staff Policy
meeting
HOMES WE HAVE KNOWN
The Federal Reserve Bank of
T
Philadelphia has had three official
addresses in its 85 years, all in
Center City, all within a few blocks of each other.
When it opened for business in 1914, the Fed was
located at 406-408 Chestnut Street in an existing
The Fed’s first and second
homes: 406-408 Chestnut
Street (right), and 925
Chestnut Street (below)
building that had taken just 10 days to
prepare. When more room was needed,
the bank leased space in two buildings
nearby.
In 1918, the Philadelphia Fed moved into
925 Chestnut Street and over time acquired most of the block, which is why
the location was commonly known as
“10th and Chestnut.” The most notable
feature of this structure, previously home
to the Penn Mutual Insurance Company,
was a vault suspended in thick glass,
which made comings and goings completely visible from every angle, including
the floor below.
Executive offices were housed in 925
Chestnut, which was the oldest building
on the site and was originally known as
the Horner Building. A wing was added in
1925 when a neighboring hotel was torn
down. An adjacent structure, once home
to the Producers and Consumers Bank,
was purchased in 1925. Finally in 1932,
the Fed purchased and demolished the
Record Building, on the northeast corner
of 10th and Chestnut. This became the
25
site of a new structure designed by Paul Cret,
who had already designed the Benjamin Franklin
Bridge, the Rodin Museum, and the Barnes
Foundation Gallery. The new building opened in
1934; an addition was constructed in 1941. The
garden, visible from Chestnut Street, was added
in 1942, and two more floors were added in 1953.
Despite this expansion, the Fed had outgrown
10th and Chestnut by the 1970s and had dispatched employees to several other locations,
including the Keystone AAA Building at 20th and
Market, the Gimbel Building at 9th and Market,
and the Public Ledger Building at 6th and Chestnut. Construction on the bank’s current home on
Independence Mall, 6th and Arch Streets, began in
1971.
The Fed’s most recent move took place on July
10, 1976. Because the relocation involved the
transfer of billions of dollars, the date and time
of the move was a carefully guarded secret. At
midnight, a caravan of armored trucks threaded
along the five-block route, accompanied by 24
cars of Secret Service agents, with weapons
drawn. Philadelphia police and Federal Reserve
security guards lined the streets and watched from
rooftops. A helicopter hovered overhead. Five
hours later, without incident, the Fed was home
again.
The 1953 addition to 925 Chestnut: on paper (top left)
and after completion (top center). The Fed’s current home,
Sixth and Arch Streets today (top right, center) and
during construction in 1975 (bottom).
26
27
D
Directors
Pictured in the Board Room 1999: Philadelphia
Fed Board Chairman Joan Carter (left) and Deputy
Chairman Charisse R. Lillie. Ms. Carter is President & COO, UM Holdings Ltd., Haddonfield, NJ;
Ms. Lillie is a partner at Ballard Spahr Andrews &
Ingersoll, Philadelphia, PA.
Pictured in the Board Room 1918: The first Philadelphia Board of Directors: (seated, from left) George W. F. Gaunt, Edwin S. Stuart,
William H. Peck, George W. Norris; (standing, from left) Deputy Chairman George M. LaMonte, Chairman Richard L. Austin, Governor
Charles J. Rhoads, Alba B. Johnson, and M. J. Murphy.
28
Pictured in the Eastburn Court from left: J. Richard Jones, President and CEO, Insignia/ESG Jackson-Cross, Philadelphia, PA; Rufus A. Fulton, Jr., Chairman,
President and CEO, Fulton Financial Corporation, Lancaster, PA; and Howard E. Cosgrove, Chairman and CEO, Conectiv, Wilmington, DE.
Pictured in the vault area from left: Glenn A. Schaeffer, President, Pennsylvania Building and Construction Trades Council, Harrisburg, PA; David B. Lee,
President & CEO, Omega Bank, National Association, State College, PA; Harry Elwell, III, President and CEO, First National Bank of Absecon, Absecon,NJ;
and Robert D. Burris, President & CEO, Burris Foods, Inc., Milford, DE.
29
O
Officers
In 1999, there was one promotion in our official staff. Howard
M. James became Assistant Vice President in the Supervision,
Regulation, and Credit Department.
John B. Shaffer
Vice President and General Auditor
Herbert E. Taylor
Vice President and Secretary
Edward G. Boehne
President
Theodore M. Crone
Vice President and Economist
Vish P. Viswanathan
Vice President and
Cash/Fiscal Product Officer
William H. Stone, Jr.
First Vice President
John J. Deibel
Vice President
Eileen P. Adezio
Assistant Vice President
Donald F. Doros
Executive Vice President
Patrick L. Donahue
Vice President
John G. Bell
Assistant Vice President
William A. Bonifield, Jr.
Senior Vice President and Manager
Cash/Fiscal Product Office
William Evans, Jr.
Vice President
Shirley L. Coker
Assistant Vice President and Counsel
Joanna H. Frodin
Vice President
Dean Croushore
Assistant Vice President
and Economist
Michael E. Collins
Senior Vice President
and Lending Officer
Richard W. Lang
Senior Vice President and
Director of Research
Arun K. Jain
Vice President
Jerry Katz
Vice President
Ronald B. Lankford
Senior Vice President
Henry T. Kern
Vice President
D. Blake Prichard
Senior Vice President
Edward M. Mahon
Vice President and General Counsel
Milissa M. Tadeo
Senior Vice President
Loretta J. Mester
Vice President and Economist
J. Warren Bowman, Jr.
Vice President
Stephen A. Meyer
Vice President and
Associate Director of Research
Robert J. Bucco
Vice President
Gerard A. Callanan
Vice President and Discount Officer
30
Donna L. Franco
Budget Officer and
Assistant Secretary
William L. Gaunt
Assistant Vice President
John V. Heelan
International Examinations Officer
Mary Ann Hood
Assistant Vice President
Howard M. James, Jr.
Assistant Vice President
Alan L. Kiel
Assistant Vice President
Mary DeHaven Myers
Vice President and
Community Affairs Officer
Linda K. Kirson
Treasury Services Officer
Louis N. Sanfelice
Vice President
Thomas P. Lambinus
Assistant Vice President
Joseph L. McCann
Administrative Services Officer
and Security Officer
Executive Area, Federal Reserve Bank of Philadelphia
Alice J. Menzano
Assistant Vice President and
Cash/Fiscal Product Officer
Edward Morrison
Operations Officer
Camille M. Ochman
Assistant Vice President
A. Reed Raymond, III
Assistant Vice President and
Examination Review Officer
Patrick M. Regan
Assistant Vice President and
Information Security Officer
Richard A. Sheaffer
Assistant Vice President
Ronald R. Sheldon
Assistant Vice President
Stephen J. Smith
Assistant Counsel
Marie Tkaczyk
Assistant Vice President
Sharon N. Tomlinson
Assistant Vice President and
Planning Officer and
Assistant Secretary
Richard A. Valente
Assistant General Auditor
Elisabeth C. Videira-Dzeng
International Examinations Officer
Bernard M. Wennemer
Assistant Vice President
Anthony J. White
Financial Services Officer
Michael P. Zamulinsky
Assistant Vice President
31
A
Advisory Councils
Community Bank Council
Chairman
Jay M. Ford, President & CEO
Crest Savings Bank, SLA, Wildwood Crest, NJ
Deputy Chairman
Gerald A. Nau, President & CEO
Great Valley Savings Bank, Reading, PA
Theodore D. Bessler, President & CEO
Shore Community Bank, Toms River, NJ
Stephen C. Nelson, President & CEO
Artisans’ Bank, Wilmington, DE
Daniel L. Price, Sr., President & CEO
Century Savings Bank, Bridgeton, NJ
Theodore H. Reich, Chairman & President
Jersey Shore State Bank, Williamsport, PA
Thomas F. Robinson, President & CEO
Malvern Federal Savings Bank, Paoli, PA
Kenneth R. Shoemaker, President & CEO
Orrstown Bank, Shippensburg, PA
John R. Stranford, President & CEO
Third Federal Savings Bank, Newtown, PA
Thomas A. Vento, President & CEO
Prudential Savings Bank PASA, Philadelphia, PA
W. Jack Wallie, President & CEO
East Stroudsburg Savings Association, Stroudsburg, PA
Robert C. Wheeler, Chairman
Grange National Bank, Tunkhannock, PA
32
Community Bank Council (from left): Thomas A. Vento, Kenneth R.
Shoemaker, Jay M. Ford, Stephen C. Nelson, Theodore D. Bessler
Credit Union Council
Chairman
William J. Lavage, President & CEO
Service First FCU, Danville, PA
Deputy Chairman
John D. Buchinski, President & CEO
Wheatland FCU, Lancaster, PA
Margaret B. Coan, Executive Vice President
K of C FCU, Philadelphia, PA
James E. Everhart, Jr., Manager
Louviers FCU, Newark, DE
Virginia M. Fifer, CEO & Manager
Atlantic City Electric Company Employees FCU,
Mays Landing, NJ
Anthony R. Hinds, CEO
DPL FCU, Newark, DE
John P. Kebles, CEO
Choice One FCU, Wilkes-Barre, PA
David G. Keffer, CEO & Manager
Cornerstone FCU, Carlisle, PA
Paul J. Ladd, CEO & Manager
Garden State FCU, Moorestown, NJ
Lee T. MacMinn, President & CEO
Freedom Credit Union, Philadelphia,
PA
Ignacio I. Morales, Manager
Borinquen FCU, Philadelphia, PA
Credit Union Council (from left): William J. Lavage, John D. Buchinski, Lee T. MacMinn,
Anthony R. Hinds, Ignacio I. Morales, Margaret B. Coan, Paul J. Ladd, David G. Keffer
Steven D. Schlundt, President & CEO
Atlantic City Firemen’s FCU, Northfield, NJ
Deputy Chairman
Thomas K. Leidy, President & Chairman
Leidy’s, Inc., Souderton, PA
Small Business & Agriculture Council
Cary S. Borish, Co-President
Marathon Grill, Philadelphia, PA
Chairman
Joan R. Henderson, President
J.R. Henderson & Associates, Lancaster, PA
Peter Bylone, Manager
Vineland Produce Auction, Vineland, NJ
Della L. Clark, President
The Enterprise Center, Philadelphia, PA
Dennis E. Duffy, President
Duffy, Dolcy & McManus, Absecon, NJ
Daniel R. Hawbaker, President
Glenn O. Hawbaker, Inc., State College, PA
Janis Herschkowitz, President & CEO
PRL, Inc., & Subsidiaries, Cornwall, PA
David C. Hileman, Owner
Hilecrest Farms, Tyrone, PA
Small Business & Agriculture Council (from left): Dennis E. Duffy,
David C. Hileman, Joan R. Henderson, Thomas K. Leidy, Daniel
R. Hawbaker, Janis Herschkowitz, Peter Bylone
Philip B. Mitman, Owner
Bixler’s Jewelers, Easton, PA
Jay Windsor, President
Lakeside Greenhouses, Inc., Laurel, DE
33
O
Operating Statistics
The trend toward electronic payments and con-
decline in our electronic book-entry transfers reflects
solidation in the banking industry produced some
a national pattern of bank mergers, consolidations,
dramatic shifts in our business volumes in 1999.
and interstate branching that is shifting volumes
Because of the ongoing campaign to sign up
among Federal Reserve Districts.
recipients of U.S. government payments for direct
deposit, the volume of government ACH pay-
Our gains in commercial checks processed and
ments we process continued to rise, and the
the decline in our commercial ACH payments
number of government checks we process contin- processed are the result of bank consolidations
ued to decline.
and mergers in our District.
The decline in food coupons reflects state govern-
We began outsourcing some coin processing in
ments’ shift from paper coupons to electronic debit
1998, and as a result, the volume of coin pro-
cards as a means of distributing benefits. The sharp
cessed in the Bank continued to decline in 1999.
1999
Volume
1999
Dollar Value
1998
Volume
1998
Dollar Value
$22.7 trillion
7.9 million transfers
$23.2 trillion
245.2 million
109.3 million
$300.4 billion
$268.5 billion
220.2 million items
136.4 million items
$269.7 billion
$391.1 billion
Check processing:
U.S. Government
All other
32.3 million
1,124.4 million
$33.7 billion
$1,723.6 billion
37.3 million checks
909.5 million checks
$38.2 billion
$1,338.4 billion
Cash operations:
Currency processed
Coin processed
1,575.8 million
21.9 thousand bags
$30.1 billion
$10.3 million
1,360.4 million notes
55.1 thousand bags
$21.4 billion
$6.5 million
219
$365 million
212 loans
$314 million
40,500
$241 million
1.5 million transfers
$19.9 trillion
18.6 million coupons
$99.0 million
91.6 million coupons
$484.3 million
SERVICES TO DEPOSITORY INSTITUTIONS
Wire Transfer of Funds
7.7 million transfers
ACH:
Government
Commercial
Loans to depository
institutions
SERVICES TO U.S. TREASURY
Electronic book-entry
transfers
Food coupons
processed
34
FINANCIAL REPORTS
FEDERAL
RESERVE BANK OF
PHILADELPHIA
January 14, 2000
To the Board of Directors of the Federal Reserve Bank of Philadelphia:
The management of the Federal Reserve Bank of Philadelphia is responsible for the preparation
and fair presentation of the Statement of Financial Condition, Statement of Income, and Statement of
Changes in Capital as of December 31, 1999 (the “Financial Statements”). The Financial Statements
have been prepared in conformity with the accounting principles, policies, and practices established by
the Board of Governors of the Federal Reserve System and as set forth in the Financial Accounting
Manual for the Federal Reserve Banks, and as such, include amounts, some of which are based on
judgments and estimates of management.
The management of the Federal Reserve Bank of Philadelphia is responsible for maintaining an
effective process of internal controls over financial reporting including the safeguarding of assets as they
relate to the Financial Statements. Such internal controls are designed to provide reasonable assurance
to management and to the Board of Directors regarding the preparation of reliable Financial Statements.
This process of internal controls contains self-monitoring mechanisms, including, but not limited to,
divisions of responsibility and a code of conduct. Once identified, any material deficiencies in the
process of internal controls are reported to management, and appropriate corrective measures are
implemented.
Even an effective process of internal controls, no matter how well designed, has inherent
limitations, including the possibility of human error, and therefore can provide only reasonable
assurance with respect to the preparation of reliable financial statements.
The management of the Federal Reserve Bank of Philadelphia assessed its process of internal
controls over financial reporting including the safeguarding of assets reflected in the Financial
Statements, based upon the criteria established in the “Internal Control ~ Integrated Framework” issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this
assessment, the management of the Federal Reserve Bank of Philadelphia believes that the Federal
Reserve Bank of Philadelphia maintained an effective process of internal controls over financial
reporting including the safeguarding of assets as they relate to the Financial Statements.
By
Edward G. Boehne, President
By
kJsA ^7
Z
__________
William H. Stone, First Vice “President
Ronald B. Lankford, Chief Financial Officer
PrICWATeRHOUsEQoPERS
PricewaterhouseCoopers LLP
2400 Eleven Penn Center
Philadelphia PA 19103-2962
Telephone (215) 963 8000
Facsimile (215)963 8700
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of the
Federal Reserve Bank of Philadelphia
We have examined management’s assertion that the Federal Reserve Bank of Philadelphia
(“FRB Philadelphia”) maintained effective internal control over financial reporting and the
safeguarding of assets as they relate to the Financial Statements as of December 31, 1999,
included in the accompanying Management’s Assertion.
Our examination was made in accordance with standards established by the American
Institute of Certified Public Accountants, and accordingly, included obtaining an
understanding of the internal control over financial reporting, testing, and evaluating the
design and operating effectiveness of the internal control, and such other procedures as we
considered necessary in the circumstances. We believe that our examination provides a
reasonable basis for our opinion.
Because of inherent limitations in any internal control, misstatements due to error or fraud
may occur and not be detected. Also, projections of any evaluation of the internal control
over financial reporting to future periods are subject to the risk that the internal control may
become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
In our opimon, management’s assertion that the FRB Philadelphia maintained effective
internal control over financial reporting and over the safeguarding of assets as they relate to
the Financial Statements as of December 31, 1999, is fairly stated, in all material respects,
based upon criteria described in “ Internal Control - Integrated Framework” issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
March 3, 2000
PrIC^VAFeRHOUs^OOPERS
i
PricewaterhouseCoopers LLP
2400 Eleven Penn Center
Philadelphia PA 19103-2962
Telephone (215) 963 8000
Facsimile (215) 963 8700
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Governors of The Federal Reserve System
and the Board of Directors of The Federal Reserve Bank of Philadelphia
We have audited the accompanying statements of condition of The Federal Reserve Bank of
Philadelphia (the “Bank”) as of December 31, 1999 and 1998, and the related statements of
income and changes in capital for the years then ended. These financial statements are the
responsibility of the Bank’s management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United
States. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 3, the financial statements were prepared in conformity with the accounting
principles, policies, and practices established by the Board of Governors of The Federal Reserve
System. These principles, policies, and practices, which were designed to meet the specialized
accounting and reporting needs of The Federal Reserve System, are set forth in the “Financial
Accounting Manual for Federal Reserve Banks” and constitute a comprehensive basis of
accounting other than accounting principles generally accepted in the United States.
In our opinion, the financial statements referred to above present fairly, in all material respects,
the financial position of the Bank as of December 31, 1999 and 1998, and results of its operations
for the years then ended, on the basis of accounting described in Note 3.
March 3, 2000
FEDERAL RESERVE BANK OF PHILADELPHIA
STATEMENTS OF CONDITION
(in millions)
As of December 31,
1998
1999
ASSETS
Gold certificates
Special drawing rights certificates
Coin
Items in process of collection
Loans to depository institutions
U.S. government and federal agency securities, net
$
$
323
282
23
266
13,277
1,035
125
2,181
73
112
479
146
8,761
72
81
Investments denominated in foreign currencies
Accrued interest receivable
Interdistrict settlement account
Bank premises and equipment, net
Other assets
Total assets
319
187
8
282
1
14,494
$
24,830
$
17,697
$
23,437
$
16,456
LIABILITIES AND CAPITAL
Liabilities:
Lederal Reserve notes outstanding, net
Deposits:
Depository institutions
Other deposits
Deferred credit items
Surplus transfer due U.S. Treasury
Accrued benefit cost
Other liabilities
Total liabilities
Capital:
Capital paid-in
Surplus
Total capital
Total liabilities and capital
$
592
1
326
433
8
242
15
51
9
147
50
8
24,431
17,344
199
200
176
177
399
353
24,830
The accompanying notes are an integral part of these financial statements.
$
17,697
FEDERAL RESERVE BANK OF PHILADELPHIA
STATEMENTS OF INCOME
(in millions)
For the years ended December 31,
1999
1998
Interest income:
Interest on U.S. government and federal agency securities
Interest on foreign currencies
$
Total interest income
Other operating income:
Income from services
Reimbursable services to government agencies
Foreign currency gains (losses), net
U.S. government securities gains (losses), net
Other income
Total other operating income
Operating expenses:
Salaries and other benefits
Occupancy expense
Equipment expense
Cost of unreimbursed Treasury services
Assessments by Board of Governors
Other expenses
Total operating expenses
Net income prior to distribution
814
7
$
804
23
821
827
41
25
(15)
(1)
3
40
24
98
1
4
53
167
71
8
11
4
23
34
68
8
10
4
22
43
151
155
$
723
$
839
$
12
23
688
$
16
(96)
385
Distribution of net income:
Dividends paid to member banks
Transferred to (from) surplus
Payments to U.S. Treasury as interest on Federal Reserve notes
Payments to U.S. Treasury as required by statute
Total distribution
534
-
$
723
The accompanying notes are an integral part of these financial statements.
$
839
FEDERAL RESERVE BANK OF PHILADELPHIA
STATEMENTS OF CHANGES IN CAPITAL
for the years ended December 31, 1999 and December 31, 1998
(in millions)
Capital
Paid-in_____
Balance at January 1, 1998
(5.7 million shares)
Net income transferred (from) surplus
Net change in capital stock
(redeemed) (2.2 million shares)
Balance at December 31, 1998
(3.5 million shares)
Net income transferred to surplus
Net change in capital stock issued
(0.5 million shares)
Balance at December 31, 1999
(4.0 million shares)
$
284
_____ Surplus____
$
-
Total
_____ Capital
273
(96)
$
-
(108)
557
(96)
(108)
$
176
23
$
177
23
-
$
353
23
23
$
199
$
200
$
399
The accompanying notes are an integral part of these financial statements.
FEDERAL RESERVE BANK OF PHILADELPHIA
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 a
portion of New Jersey and Pennsylvania. In accordance with the Federal Reserve Act,
supervision and control of the Bank is exercised by a board of directors. 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.
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.
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 largedollar transfers of funds, automated clearinghouse operations and check processing; distribution
of coin and currency; 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.
4
Continued
FEDERAL RESERVE BANK OF PHILADELPHIA
NOTES TO FINANCIAL STATEMENTS, Continued
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. Additionally, the FRBNY is authorized by the FOMC to hold balances of
and to execute spot and forward foreign exchange and securities contracts in fourteen 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 generally
accepted accounting principles in the United States ("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 required by
GAAP. In addition, the Bank has elected not to present a Statement of Cash Flows or a Statement
of Comprehensive Income. 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. The Statement of Comprehensive Income, which comprises net income plus or minus
certain adjustments, such as the fair value adjustment for securities, has not been included
because as stated above the securities are recorded at amortized cost and there are no other
adjustments in the determination of Comprehensive Income applicable to the Bank. 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 or a
Statement of Comprehensive Income would not provide any additional useful information. There
are no other significant differences between the policies outlined in the Financial Accounting
Manual and GAAP.
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
5
FEDERAL RESERVE BANK OF PHILADELPHIA
NOTES TO FINANCIAL STATEMENTS, Continued
financial statements and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates. Unique accounts and significant
accounting policies are explained below.
a. 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 Federal Reserve notes
outstanding in each District at the end of the preceding year.
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. The Board of Governors allocates each SDR transaction among Reserve
Banks based upon Federal Reserve notes outstanding in each District at the end of the
preceding year.
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 recorded on the accrual basis and is charged at the
6
FEDERAL RESERVE BANK OF PHILADELPHIA
NOTES TO FINANCIAL STATEMENTS, Continued
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. However, Reserve
Banks retain the option to impose a surcharge above the basic rate in certain
circumstances.
The Board of Governors established a Special Liquidity Facility (SLF) to make discount
window credit readily available to depository institutions in sound financial condition
around the century date change (October 1, 1999, to April 7, 2000) in order to meet
unusual liquidity demands and to allow institutions to confidently commit to supplying
loans to other institutions and businesses during this period. Under the SLF, collateral
requirements are unchanged from normal discount window activity and loans are made at
a rate of 150 basis points above FOMC’s target federal funds rate.
d. U.S. Government and Federal Agency Securities and Investments Denominated in Foreign
Currencies
The FOMC has designated the FRB NY 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 other needs specified by the FOMC in carrying out the System's
central bank responsibilities.
Purchases of securities under agreements to resell and matched sale-purchase transactions are
accounted for as separate sale and purchase transactions. Purchases under agreements to
resell are transactions in which the FRBNY purchases a security and sells it back at the
rate specified at the commencement of the transaction.
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.
Effective April 26, 1999, FRBNY was given the 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, in order to
facilitate the effective functioning of the domestic securities market. These securitieslending transactions are fully collateralized by other U.S. government securities. FOMC
policy requires FRBNY to take possession of collateral in amounts 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.
Prior to April 26, 1999, all Reserve Banks were authorized to engage in such lending
activity.
7
FEDERAL RESERVE BANK OF PHILADELPHIA
NOTES TO FINANCIAL STATEMENTS, Continued
Foreign exchange 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 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.
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
8
FEDERAL RESERVE BANK OF PHILADELPHIA
NOTES TO FINANCIAL STATEMENTS, Continued
are incidental to the open market operations and do not motivate its activities or policy
decisions.
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 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 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 monthly 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 gains (losses), net.” Foreign currencies held through F/X swaps, when
initiated by the counter party, and warehousing arrangements are revalued monthly, 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 agencies securities bought outright, investments
denominated in foreign currency, interest 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. Effective April 26, 1999, income from securities lending transactions
undertaken by FRBNY was 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
FRBNY and not to other Reserve Banks.
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.
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
9
FEDERAL RESERVE BANK OF PHILADELPHIA
NOTES TO FINANCIAL STATEMENTS, Continued
accounts residing in other Districts that occurred during the day’s operations. Such
transactions may include funds settlement, check clearing and automated clearinghouse
("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 agency securities, loans, 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 cash held in the vaults of the Bank of $7,493 million, and $1,978 million at
December 31, 1999 and 1998, 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% 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% 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.
10
FEDERAL RESERVE BANK OF PHILADELPHIA
NOTES TO FINANCIAL STATEMENTS, Continued
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.
The Omnibus Budget Reconciliation Act of 1993 (Public Law 103-66, Section 3002) codified
the existing Board surplus policies as statutory surplus transfers, rather than as payments
of interest on Federal Reserve notes, for federal government fiscal years 1998 and 1997
(which ended on September 30, 1998 and 1997, respectively). In addition, the legislation
directed the Reserve Banks to transfer to the U.S. Treasury additional surplus funds of
$107 million and $106 million during fiscal years 1998 and 1997, respectively. Reserve
Banks were not permitted to replenish surplus for these amounts during this time.
Payments to the U.S. Treasury made after September 30, 1998, represent payment of interest
on Federal Reserve notes outstanding.
The Consolidated Appropriations Act of 1999 (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. The Reserve Banks will make
this payment prior to September 30, 2000.
In the event of losses, 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.
Income and Cost 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 $65 million and $96 million at December 31,1999 and
11
FEDERAL RESERVE BANK OF PHILADELPHIA
NOTES TO FINANCIAL STATEMENTS, Continued
1998, respectively. The centralized portion of the Bank’s Costs of unreimbursed
Treasury services in both 1999 and 1998 totaled $3 million.
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 and held under agreements to resell 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 approximately
2.995% and 2.907% at December 31, 1999 and 1998, respectively.
The Bank's allocated share of securities held in the SOMA at December 31, that were bought outright,
were as follows (in millions):
1999
Par value:
Federal agency
U.S. government:
Bills
Notes
Bonds
Total par value
Unamortized premiums
Unaccreted discounts
Total allocated to Bank
1998
5
$
$
5,287
6,544
2,485
14,321
273
(100)
$
14.494
10
5,662
5,463
2,020
13,155
215
(93)
$
13,277
Total SOMA securities bought outright were $483,902 million and $456,667 million at December 31,
1999 and 1998, respectively.
12
FEDERAL RESERVE BANK OF PHILADELPHIA
NOTES TO FINANCIAL STATEMENTS, Continued
The maturities of U.S. government and federal agency securities bought outright, which were
allocated to the Bank at December 31, 1999, 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
$
139
2,753
4,189
3,719
1,531
1,985
$
14,316
Federal Agency
Obligations
$
T otal
$
139
2,754
4,190
3,719
1,534
1,985
$
14,321
1
1
3
$
5
At December 31, 1999, and 1998, matched sale-purchase transactions involving U.S. government
securities with par values of $39,182 million and $20,927 million, respectively, were outstanding,
of which $1,174 million and $608 million were allocated to the Bank. Matched sale-purchase
transactions are generally overnight arrangements.
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.
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 2.965% and 5.229% at December 31, 1999 and 1998, respectively.
13
FEDERAL RESERVE BANK OF PHILADELPHIA
NOTES TO FINANCIAL STATEMENTS, Continued
The Bank’s allocated share of investments denominated in foreign currencies, valued at current
exchange rates at December 31, were as follows (in millions):
1998
1999
German Marks:
Foreign currency deposits
Government debt instruments including
agreements to resell
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
$
$
124
-
Total
$
547
129
-
75
-
10
35
264
1
324
5
479
$
1,035
Total investments denominated in foreign currencies were $16,140 million and $19,769 million at
December 31, 1999 and 1998, respectively. The 1998 balance includes $15 million in unearned
interest collected on certain foreign currency holdings that is allocated solely to the FRBNY.
The maturities of investments denominated in foreign currencies which were allocated to the Bank at
December 31, 1999, were 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
Total
$
~$
447
15
17
479
At December 31, 1999 and 1998, there were no open foreign exchange contracts or outstanding F/X
swaps.
At December 31, 1999 and 1998, the warehousing facility was $5,000 million with nothing
outstanding.
14
FEDERAL RESERVE BANK OF PHILADELPHIA
NOTES TO FINANCIAL STATEMENTS, Continued
6.
Bank Premises and Equipment:
A summary of bank premises and equipment at December 31 is as follows (in millions):
1998
1999
Bank premises and equipment:
Land
Buildings
Building machinery and equipment
Construction in progress
Furniture and equipment
$
2
63
9
54
128
(56)
Accumulated depreciation
$
2
62
9
52
125
(52)
Bank premises and equipment, net
Depreciation expense was $8 million for each of the years ended December 31, 1999 and 1998.
The Bank leases unused space to outside tenants. Those leases have terms ranging from 1 to 3 years.
Rental income from such leases was $1 million and $2 million for the years ended December 31,
1999 and 1998, respectively. Future minimum lease payments under agreements in existence at
December 31, 1999, were $4 million for the years 2000 through 2002.
7. Commitments and Contingencies:
At December 31, 1999, the Bank was obligated under noncancelable leases for premises and
equipment with terms ranging from 1 to approximately 4 years. These leases provide for
increased rentals based upon increases in real estate taxes, operating costs or selected price
indices.
Rental expense under operating leases for certain operating facilities, warehouses, and data
processing and office equipment (including taxes, insurance and maintenance when included in
rent), net of sublease rentals, was $590 thousand and $576 thousand for the years ended
December 31, 1999 and 1998, respectively. Certain of the Bank’s leases have options to renew.
The Bank has no capital leases.
Future minimum rental payments under noncancelable operating leases with terms of one year or
more, at December 31, 1999, were $1 million for the years 2000 through 2003.
15
FEDERAL RESERVE BANK OF PHILADELPHIA
NOTES TO FINANCIAL STATEMENTS, Continued
At December 31, 1999, the Bank has no other significant commitments or long-term obligations in
excess of one year.
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% of the capital paid-in of the claiming Reserve Bank, up to 50% 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, 1999 or 1998.
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 multi-employer 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, 1999 and 1998, 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 $2
million for each of the years ended December 31, 1999 and 1998 and are reported as a component
of “Salaries and other benefits.”
9. Postretirement Benefits Other Than Pensions and Postemployment Benefits:
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.
16
FEDERAL RESERVE BANK OF PHILADELPHIA
NOTES TO FINANCIAL STATEMENTS, Continued
The Bank funds benefits payable under the medical and life insurance plans as due and, accordingly,
has no plan assets. Net postretirement benefit cost is actuarially determined using a January 1
measurement date.
Following is a reconciliation of beginning and ending balances of the benefit obligation (in millions):
Accumulated postretirement benefit obligation at January 1
Service cost-benefits earned during the period
Interest cost of accumulated benefit obligation
Actuarial (gain)/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
$
$
1999
35.3
0.7
2.1
(6.7)
0.1
(1.2)
30.3
$
$
1998
33.8
0.9
2.3
6.7
0.2
(1.0)
(7.6)
35.3
Following is a reconciliation of the beginning and ending balance of the plan assets, the unfunded
postretirement benefit obligation, and the accrued postretirement benefit cost (in millions):
1998
1999
Fair value of plan assets at January 1
Actual return on plan assets
Contributions by the employer
Contributions by plan participants
Benefits paid
Fair value of plan assets at December 31
Unfunded postretirement benefit obligation
Unrecognized prior service cost
Unrecognized net actuarial (loss)
Accrued postretirement benefit cost
$
$
$
$
1.1
0.1
(1.2)
30.3
19.4
(5-6)
44.1
$
$
$
$
0.8
0.2
(1.0)
35.3
21.3
(12.8)
43.8
Accrued postretirement benefit cost is reported as a component of “Accrued benefit cost.”
The weighted-average assumption used in developing the postretirement benefit obligation as of
December 31, 1999 and 1998 was 7.5% and 6.25%, respectively.
17
FEDERAL RESERVE BANK OF PHILADELPHIA
NOTES TO FINANCIAL STATEMENTS, Continued
For measurement purposes, an 8.75% annual rate of increase in the cost of covered health care
benefits was assumed for 2000. Ultimately, the health care cost trend rate is expected to decrease
gradually to 5.50% by 2006, 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, 1999 (in millions):
1 Percentage
Point Increase
Effect on aggregate of service and interest cost components
of net periodic postretirement benefit cost
Effect on accumulated postretirement benefit obligation
$
0.1
1.4
1 Percentage
Point Decrease
(0.1)
(1.3)
$
The following is a summary of the components of net periodic postretirement benefit cost for the
years ended December 31 (in millions):
1999
Service cost-benefits earned during the period
Interest cost of accumulated benefit obligation
Amortization of prior service cost
Recognized net actuarial loss
Net periodic postretirement benefit cost
$
$
1998
0.7
2.1
(1.8)
0.4
1.4
$
$
0.9
2.3
(1.5)
0.3
2.0
Net periodic postretirement benefit cost is reported as a component of “Salaries and other benefits.”
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, 1999 and 1998, were $6 million. This cost is
included as a component of “Accrued benefit cost.” Net periodic postemployment benefit costs
included in both 1999 and 1998 operating expenses were $1 million.
18
Text: PAMELA J. FORSYTHE, Forsythe Communications • Copy Editor: SARAH BURKE
Art Director: RONALD B. WILLIAMS • Design & Layout: DIANNE HALLOWELL
Photography: THOMAS TOOHEY BROWN, H. MARK WEIDMAN, and the FEDERAL RESERVE ARCHIVES
Printing: Federal Reserve Bank of Philadelphia Printing Department, COSMO J. CORVAGLIA, Manager, ROBERT C. BURNS, Supervisor
Web site: www.phil.frb.org
35
Ten Independence Mall, Philadelphia, PA 19106
36
@FedFRASER