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FEDERAL RESERVE BANK OF PHILADELPHIA
ANNUAL REPORT 2009

Out of Many...One
2009 Annual Report

FEDERAL RESERVE BANK OF PHILADELPHIA
Ten Independence Mall, Philadelphia, PA 19106
www.philadelphiafed.org

FEDERAL RESERVE BANK
OF PHILADELPHIA
Federal Reserve Bank of Philadelphia | 1

“Out of Many...One” is an appropriate theme

The Federal Reserve Bank of Philadelphia is one of

to describe the decentralized structure of the

12 regional Reserve Banks in the United States that,

Federal Reserve System and the Philadelphia

together with the Board of Governors in Washington,

Fed’s place in it. Out of 12 regional Reserve

D.C., make up the Federal Reserve System — the

Banks and the Board of Governors in

nation’s central bank. The System’s primary role is

Washington, D.C., we form one central bank.

to ensure a sound financial system and a healthy

The theme also underscores the idea that out

economy. The Philadelphia Fed serves the Third

of many regional perspectives, we set one

District, which is composed of eastern Pennsylvania,

monetary policy for the nation and out of many

southern New Jersey, and Delaware.

markets, we are one economy. As you read this
year’s annual report, you’ll see the many ways
the Philadelphia Fed played its part, one out
of many, to support the recovery of financial
markets and the national economy during 2009.

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2009 Annual Report

OUT OF MANY...ONE
President’s Message .....................................................................................................................2
Challenges and Changes..............................................................................................................5
The Importance of a Regional and Independent Federal Reserve...................................................8
Assessing the Strength of the Nation’s Banks .............................................................................22
Examining Banks, Serving the Nation’s Financial System .............................................................26
Providing Reliable Information on the Economy..........................................................................30
Supporting Consumers, Collaborating with Colleagues ..............................................................34
Reaching the End of an Era in Check Processing.........................................................................37
2009 Bank Highlights.................................................................................................................40
Board of Directors ......................................................................................................................44
Economic Advisory Council ........................................................................................................46
Senior Staff ................................................................................................................................47
Current Officers .........................................................................................................................48
Operating Statistics ....................................................................................................................49
Statement of Auditor Independence ..........................................................................................50
Financial Reports ........................................................................................................................51
Notes to Financial Statements ....................................................................................................58

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President’s Message
The theme of this year’s annual report, “Out of Many...One,” may sound familiar.
The Latin translation, “E Pluribus Unum,” is the motto found on the Great Seal of
the United States. It indicates that out of many states, a single nation emerged — a
nation founded just a few blocks from the Philadelphia Fed in Independence Hall.
In today’s dynamic economic environment, “Out of Many...One” is also particularly apt. It reflects the idea that out of many markets and sectors, we are one
economy. It also applies to our decentralized central bank structure: 12 regional
Reserve Banks around the nation and a Board of Governors in Washington form
one central bank — the Federal Reserve. Although individual Federal Reserve
policymakers have different perspectives and often articulate diverse views, they
work together to set one monetary policy for the nation.
Throughout last year, I talked about the need to preserve the foundational structure of the Federal Reserve as we consider financial regulatory reform. In this
year’s essay, “The Importance of a Regional and Independent Federal Reserve,”
I discuss how this decentralized structure and independence from short-term
political pressures help the Fed pursue the goals that
Congress has set for the central bank. Almost a century
ago, Congress established the structure of the Federal
Reserve to balance the interests of Main Street and Wall
Street, and to balance the power of the public sector in
Washington and the private sector throughout our great
and vast nation. These checks and balances remain just
as important today.
Other articles in this year’s annual report describe the
many ways people in our Bank have helped fulfill the
mission Congress has defined for the Fed: conducting
monetary policy, supervising financial institutions, supporting an efficient payment system, and serving as a
”bankers’ bank” to depository institutions and as the
bank of the U.S. government.

Charles I. Plosser

2 | Annual Report 2009 | www.philadelphiafed.org

One highlight of the year was the vital role played by
Philadelphia’s Supervision, Regulation and Credit (SRC)
Department during the Supervisory Capital Assessment
Program (SCAP), which was popularly known as the large
banks’ stress test. SCAP involved an in-depth analysis of
19 of the largest bank holding companies against a common set of assumptions. To my mind, the value was not
to focus solely on these largest institutions but to dem-

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onstrate the value of a macro-prudential approach that can be incorporated into
oversight of a broader class of financial institutions. (See page 22.)
Philadelphia’s SRC also supported the Fed in another important way during 2009
by helping bankers understand and follow new regulations and consumer compliance issues. On behalf of the Federal Reserve System, SRC produces the quarterly Consumer Compliance Outlook, a newsletter distributed to state member
banks and bank holding companies supervised by the Fed’s 12 Reserve Banks.
This newsletter also reaches interested credit unions, savings and loan institutions, law firms, and consulting firms. (See page 29.)
This annual report also tells how our Research Department contributed to a better understanding of economic trends during a tumultuous year. (See page 30.)
For instance, the Philadelphia Fed’s monthly Business Outlook Survey of Third
District manufacturers has been widely viewed as a gauge of the direction of
the national economy. Many economists and forecasters followed the index as it
turned positive at mid-year. The report also describes some of the department’s
other work, such as the Real-Time Data Research Center’s quarterly Survey of Professional Forecasters and the Aruoba-Diebold-Scotti business conditions index,
and the regional section’s state coincident indexes. Our staff economists also conduct research in varied subject areas, including monetary and regulatory policy,
banking and financial markets, payments, and the regional economy.
The Bank’s Community Affairs Department has worked to address the mortgage
crisis through its biennial “Reinventing Older Communities” conference and
through workshops with lenders and housing counselors. The department also
participated in the Fed’s Mortgage Outreach and Research Efforts (MORE) program. One of MORE’s goals is to improve data collection related to housing and
credit markets, which, in turn, will help us find ways to mitigate the impact of the
mortgage crisis on individuals and communities. (See page 34.)

To my mind, the
value was not to
focus solely on these
largest institutions
but to demonstrate
the value of a
macro-prudential
approach that can
be incorporated
into oversight of
a broader class of
financial institutions.

In addition, Community Affairs also engages in outreach, educational, and technical assistance activities to help financial institutions, community-based organizations, government entities, and the public understand and address financial
services issues affecting low- and moderate-income people and communities. It
also offers a number of economic education programs.
Our final story marks the end of an era as the Philadelphia Fed closed its check
processing operations in December 2009. (See page 37.) I want to express my
sincere gratitude to our Retail Payments staff, who worked diligently throughout
several consolidations in recent years as our economy shifted from paper to electronic check processing.

Federal Reserve Bank of Philadelphia | 3

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Board of Directors
On behalf of the entire Bank, I offer all of our directors my sincere thanks for
giving their time and perspectives in serving on the Board of Directors of the
Philadelphia Fed. Reserve Bank directors help keep this nation’s central bank connected with the concerns of Main Street, and they therefore play a key role in
providing balance in the conduct of monetary policy in the United States.
In particular, I thank William F. Hecht, retired president and CEO of PPL Corporation, and Garry L. Maddox, president and CEO of A. Pomerantz & Company,
who both completed their terms of service in 2009. I am grateful for their years
of distinguished service to the Federal Reserve Bank of Philadelphia and will miss
their valuable insights and wise counsel.
I am pleased that board member Charles P. Pizzi, president and CEO of Tasty
Baking Company, has been appointed chairman of the Board of Directors and
that Jeremy Nowak, president and CEO of The Reinvestment Fund, has been appointed deputy chairman. Their dedication and leadership will no doubt prove
invaluable to our Bank in the years ahead.
At the beginning of 2010, the Bank also welcomed its newest board members:
Deborah M. Fretz, president, CEO, and director of Sunoco Logistics, and James
E. Nevels, chairman of the Swarthmore Group. I look forward to the contributions of their experience and expertise. In addition, Aaron L. Groff, Jr., chairman,
president, and CEO of the Ephrata National Bank, one of the three bankers on
our nine-member board, was re-elected.

Closing Thoughts
I am proud to present this annual report and share how the Philadelphia Fed has
played one part, out of many, to help support the recovery of financial markets
and the national economy. The Philadelphia Fed, in cooperation with its 11 regional counterparts and the Board of Governors, has worked tirelessly to ensure
a sound financial system and an effective monetary policy. We will continue to
support, through a strong and independent central bank, a healthy and robust
American economy.
I look forward to working with you in the year ahead.

Charles I. Plosser
President and Chief Executive Officer
June 2010

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CHALLENGES AND CHANGES
by William H. Stone, Jr., First Vice President

Last year presented yet another set of challenges and changes for the Federal
Reserve Bank of Philadelphia. The aftermath of a global financial crisis, the ongoing restructuring of check processing within the Federal Reserve System, and the
continuing pursuit to remain innovative even through a period of turmoil — all
tested our resourcefulness and creativity. Yet, these challenges also created opportunities for our employees to make significant contributions to the Federal
Reserve System, Third District constituents, and the community at large.
The 2009 annual report includes articles that will describe many of these contributions, including several that I would like to highlight.

Check Consolidation
By the end of 2009, the Philadelphia Fed had reached the end of a seven-year
journey as the Federal Reserve adapted its operations to accommodate the ongoing shift from paper checks to electronic payments. For
the past few years, Philadelphia has served as one of
four main consolidation sites as the Fed reduced retail
payment operations from 45 sites in 2003 to a single
site for electronic check processing in Atlanta and a single site for paper check processing in Cleveland.
In 2009, Philadelphia staff completed the consolidation of the Baltimore branch’s check processing operations into Philadelphia’s operations, and in December,
our staff helped transfer all paper check processing for
much of the northeastern United States to the national
processing site in Cleveland.
Although this transition supports the Fed’s mission to
promote an efficient and reliable payment system, we
also recognize that this consolidation affects employees.
Consequently, we hired an outplacement firm to help
affected employees find new jobs — both inside and
outside the Bank. We appreciate the hard work of our
staff and their dedication to ensuring a smooth transition for our customers right up through the last day of
check processing here.

PhillyFedCARES
Philadelphia Fed employees have a strong spirit of
volunteerism, and our Bank has a long tradition of sup-

William H. Stone, Jr.

Federal Reserve Bank of Philadelphia | 5

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porting worthwhile causes. During 2009, we developed a strategic initiative to
coordinate and support Bank-wide volunteer efforts. This initiative, PhillyFedCARES, will initially help us focus on causes that aid in the welfare and education
of children throughout the Third District while continuing to support our current
charitable activities.
In January 2010, we conducted our first PhillyFedCARES Day of Service, in which
employees and their families worked together to spruce up a local elementary
school. Good citizens make good employees. I am proud to say that many of
our employees have gotten involved in PhillyFedCARES, contributing their time
and skills to the communities we serve.

Several years ago,
the Bank added
an important word,
innovator, to its
vision statement:
“The Federal Reserve
Bank of Philadelphia
will be widely
recognized as a
leader and
innovator in central
bank knowledge
and service.”

Innovation Forum
Several years ago, the Bank added an important word, innovator, to its vision
statement: “The Federal Reserve Bank of Philadelphia will be widely recognized
as a leader and innovator in central bank knowledge and service.” That role as
innovator requires an ongoing commitment by those involved in day-to-day operations to explore the innovations that can most directly improve our organization’s overall performance.
Therefore, in 2009, the Bank launched the Innovation Forum. This employee
forum creates a marketplace for ideas and gives employees the opportunity to
contribute to the creative process. Its goal is to cultivate ideas that will advance
the work of the Philadelphia Fed, building our business and providing opportunities for leadership, both in the Bank and in the Federal Reserve System.
In fact, our Innovation Forum has already prompted a new venture that the Philadelphia Fed will lead on behalf of the Federal Reserve: the Consumer and Securities Data Warehouse (CSDW) project. Issues pertaining to consumer credit
were central to the recent financial crisis, and the CSDW project will help the Fed
gather and analyze data about consumer credit as well as securities based on
consumer debt.
The project will build on lessons learned in the Fed’s ongoing Mortgage Outreach
and Research Efforts (MORE), which included collaborating on analyzing large,
robust data sets of consumer mortgage data. The CSDW should help us with
similar analyses of consumer credit data, which will help Fed researchers, supervisors, and policymakers study the overall markets.
The Innovation Forum also highlighted ongoing initiatives to ensure that our operations are “going green” wherever possible. In 2009, we implemented a pilot
program to cut our Reserve Bank’s energy consumption. We’ve installed more
energy-efficient lighting and have taken measures to ensure improved energy
efficiency in all major equipment.
In fact, our new off-site screening facility, which officially opened in December
2009, incorporates a number of environmentally sound features. The building,

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designed to enhance the security and safety of our employees and operations, is
topped with a “green” roof with living plants that absorb rainwater run-off and
insulate the building.

Cash Processing Upgrades
In the Cash Services Department, we completed a successful upgrade of our
high-speed currency sorters and software, which help us both improve our capabilities and reduce our costs.
This upgrade was instrumental to our cash business, a highly complex operation
with stringent controls and requirements. This new network helps extend the
useful life of our existing sorters and provides the technology platform for future
enhancements.

Video Conferencing
Nearly a decade ago, the Philadelphia Fed was tasked with evaluating the System’s
video conferencing service and implementing a strategy to enhance its value.
Today, Philadelphia manages a video conferencing network that reaches across
the nation to support the entire Federal Reserve System. In 2009, usage was up
almost 10 percent, to more than 2.5 million minutes — more than 40,000 hours
of video conferences — which saved participants time and travel to traditional
meetings.
The latest in video conferencing technology — telepresence — uses large screens
and specially configured rooms to allow meetings in which participants have all
the benefits of a face-to-face event. The video conferencing team first piloted
the technology at the Board of Governors in Washington and at the Richmond,
Dallas, and New York Feds. The team is now overseeing the installation of telepresence rooms in other Reserve Banks. One of the best outcomes is the greater
networking and exchange of ideas during these turbulent times, all without the
added travel.
As our technology continues to evolve, the team continues to look for new ways
to expand the service. Next, we will work to bring video conferencing right to
the desktop.

Summary
These are just a few of the highlights of a full year at the Philadelphia Fed. More
information about the Bank’s accomplishments can be found in the Bank Highlights section on pages 40-43.
Despite the challenges and changes we faced, the Philadelphia Fed’s 2009
achievements demonstrate our ability to leverage our strengths in order to contribute to the smooth functioning of the payment system and the economy and
to encourage and support our employees and constituencies even — or perhaps
especially — in tough economic times.

Federal Reserve Bank of Philadelphia | 7

OUT OF MANY...ONE

THE IMPORTANCE OF A REGIONAL AND
INDEPENDENT FEDERAL RESERVE

by Charles I. Plosser

In the aftermath of the global financial crisis and accompanying recession, some
people have asked whether the governance and structure of the Federal Reserve
System should be overhauled. In this essay, I explain why I believe the system that
Congress established nearly 100 years ago still serves the public interest and why
some proposed changes to its structure would pose serious risks to the health of
our economy.1

Proposals that
reshuffle the
regulatory landscape
and attempt to make
the Federal Reserve,
and thus monetary
policy, more political
miss the mark of
meaningful reform.

Over the past two years, the Fed has taken extraordinary and unprecedented actions to respond to the financial crisis. Now, as the economy begins to recover,
the debate has turned to ways to prevent the next crisis, and it is entirely appropriate that we address the critical issues of moral hazard and firms deemed too
big to fail. In doing so, though, we must guard against implementing regulatory
reforms that have unintended consequences. To avoid harming the economy, we
must refrain from undermining the Fed’s ability to achieve its congressional mandates of price stability with maximum employment and sustainable economic
growth, as well as the Fed’s ability to foster financial stability.
In particular, proposals that reshuffle the regulatory landscape and attempt to
make the Federal Reserve, and thus monetary policy, more political miss the mark
of meaningful reform. (See “A Way Toward Real Reform” on page 17.) In fact,
they would weaken the Fed’s independence and the prospects that the Fed can
carry out its mandates to achieve price stability and promote sustainable economic growth. Let me explain why.

Federal Reserve Structure and Governance
First, it is important to understand the structure and governance of the Federal
Reserve System, which has enhanced its effectiveness for nearly a century. The
structure is often misunderstood. Yet, I believe history helps us understand why
we have a regional and independent central bank.
Just blocks away from the Federal Reserve Bank of Philadelphia stand the historic
buildings that once housed the First and Second Banks of the United States. Both
This essay is based on several recent writings and speeches by the author, including the following:
Charles I. Plosser, “A Look Back Shows Valid Reasons for the Current System,” Philadelphia Inquirer,
August 16, 2009; Charles I. Plosser, “Demystifying the Federal Reserve,” speech at Lafayette College, Easton, PA, September 29, 2009; and Charles I. Plosser, “The Federal Reserve System: Balancing Independence and Accountability,” speech to the World Affairs Council, Philadelphia, February
17, 2010.

1

8 | Annual Report 2009 | www.philadelphiafed.org

Boundaries of the Federal Reserve Districts

BOSTON

M I N N E A PO L I S

C H I C A GO

SA N F R A N C I SC O

KANSAS CITY

ST. LOUIS

CLEVELAND

NE W YORK
PHILADELPHIA

WASHIN GTON , DC

RICHMOND

ATLANTA
DALLAS

failed because they became embroiled in politics and lacked the balance and
independence needed to serve our vast and diverse country. (See “The First and
Second Banks of the United States: The Historical Basis for a Decentralized Fed”
on pages 10-11.) When President Woodrow Wilson signed the Federal Reserve
Act into law in 1913, it included an ingenious compromise — a decentralized
central banking system.
The Fed’s unique structure helped overcome political and public opposition that
stemmed from fears that the central bank would be dominated either by political
interests in Washington or by financial interests in New York. Americans have long
been suspicious of the concentration of authority. A decentralized central bank allowed Congress to spread authority for central bank policy throughout the nation.
Congress established the Federal Reserve System by chartering 12 regional Reserve Banks, overseen by a Board of Governors in Washington, to provide checks
and balances — between centralization and decentralization, between the public
and private sectors, and between Wall Street and Main Street — all to ensure
that policy decisions are balanced and independent. (See “Federal Reserve System Structure and Governance: A Balance of Power” on pages 20-21.)
The regional structure of the Federal Reserve System also helps the Federal Open
Market Committee, or FOMC, to set more effective monetary policy. Congress
gave votes on the FOMC to the seven Governors in Washington, along with five
(continued on page 12)

Federal Reserve Bank of Philadelphia | 9

THE FIRST AND SECOND BANKS OF THE UNITED STATES:
THE HISTORICAL BASIS FOR A DECENTRALIZED FED
Those considering the future of the Federal Reserve
would do well to revisit the past. In Philadelphia’s
historic Old City, a short walk from the Philadelphia
Fed, you will find the vestiges of two earlier attempts
at a central bank.
Following
the Revolutionary War, the
Fol
newly
formed nation of the United
n
States sought a way to re-establish
commerce,
repay war debt, restore
com
the
th value of currency, and lower
infl
i ation. One of our Founding
Fathers — Alexander Hamilton, the first Secretary of the
Treasury
— devised a plan
T
to
t accomplish these goals. His
idea?
idea Create a national bank that
would issue paper money, provide a
safe place for public funds, offer banking facilities
for commercial transactions, and act as the government’s fiscal agent.

ing inflation. Furthermore, with no national bank,
the government had difficulty borrowing money
and making payments. Many people felt that the
solution to the country’s problems lay in establishing another national bank. After much debate and
opposition, Congress established the second Bank
of the United States (the Second Bank), which, like
its predecessor, had a 20-year charter. Opening in
1816, the Second Bank closed in 1836, when Congress failed to override President Andrew Jackson’s
veto of the reauthorization of the Second Bank.
Like the First Bank, the Second Bank was the victim
of a distrust of centralized power. More important,
both banks became entangled in politics and failed

First Bank of the United States

Many people opposed the idea. They believed that a
national bank was unconstitutional and would place
too much power in the hands of the federal government. Despite the opposition, Hamilton prevailed,
and Congress created the Bank of the United States
(often called the First Bank), granting it a 20-year
charter. Although not a central bank in the modern
sense, the First Bank was the nation’s first attempt
at central banking. It opened in 1791 and closed in
1811, when Congress failed to renew its charter.
However, by early 1815, much like at the end of the
Revolutionary War, the U.S. found itself heavily in
debt after fighting the War of 1812 and struggling
with soaring prices and devalued money from ris-

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to find the balance and independence necessary to serve our vast
and diverse country.*
It was almost 80 years before the nation was ready to try again.
By 1913, many Americans accepted
the fact that the nation needed a
central bank as a means of stabilizSecond Bank of the United States
ing the currency and the financial
system. The country had been rocked
with financial panics on a regular basis since the Civil
diverse, and the economic needs of its
War. The Panic of 1907 led Congress to establish a
different parts varied.
commission to consider ways to mitigate such financial crises.
When President Woodrow Wilson signed
ed
d
There were two competing views. The bankers,
mainly from New York, and some politicians in
Washington favored a strong central bank with the
power to issue currency and support the efficient
functioning of the payment system. This institution
was to be governed by the bankers themselves. The
Wall Street crowd at the time thought that this institution should be located in New York.
However, many Americans were suspicious of having such a strong central entity. In addition, many
citizens did not want to vest a lot of power in an
institution controlled so heavily by the “special interests” in New York — at the time referred to as the
“money trusts” — or in politically charged Washington. Moreover, the country was geographically

* For more information, see History of Central Banking, Federal
Reserve Bank of Philadelphia, 2009, and The First Bank of the
United States: A Chapter in the History of Central Banking, Federal Reserve Bank of Philadelphia, 2009.

the Federal Reserve Act into law in 1913, it included
an ingenious compromise — a decentralized central
banking system. This unique structure helped overcome political and public opposition that stemmed
from fears that this new central bank would be dominated either by political interests in Washington or
by financial interests in New York.
Over the years, the conduct of monetary policy has
changed, and most of the authority for setting policy
is now vested in the Federal Open Market Committee
(FOMC), which is made up of the seven members of
the Board of Governors and the presidents of the 12
Reserve Banks. This change was detailed in the Banking Act of 1935, which amended the Federal Reserve
Act and created the FOMC as we know it today.
Nearly a century ago, there were valid reasons for
creating an independent and decentralized central
bank, with a network of regional Reserve Banks,
rather than one based solely in the nation’s political
or financial capital. Those reasons remain valid today.

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Federal Reserve Bank of Philadelphia | 11

(continued from page 9)

of the 12 presidents of the regional Reserve Banks. As the president of the Philadelphia Fed, I receive a lot of information about business and financial conditions
in the Third District, which includes Delaware, the southern half of New Jersey,
and the eastern two-thirds of Pennsylvania. I also reach out more broadly to contacts in the national and international business communities. In addition, here in
Philadelphia, our Research Department collects survey data from around the District and the nation and constructs indexes of economic activity. The results are
published in a number of publications. The most recognized and frequently cited
are our Business Outlook Survey, our Survey of Professional Forecasters, and our
coincident indexes for the 50 states. (See “Providing Reliable Information on the
Economy” on page 30.) I use all of this information, along with incoming data on
the national economy, when I prepare for meetings of the FOMC, held typically
every six to eight weeks in Washington.
At those FOMC meetings, I share what I have gathered as I express my views
about the economy, just as I hear the perspectives
of other Fed presidents and Governors. It is the aggregation of those diverse views on the state of the
economy and proposed policy actions that shape
the FOMC’s monetary policy decisions, so that our
nation’s monetary policy reflects the most up-todate and comprehensive picture of the economy.
The information from the Reserve Bank Districts,
in its detail and timeliness, is often invaluable in
understanding how our economy is evolving.2
In formulating policies, it is valuable to hear perspectives on the economy and policy from throughout the country — not just from Wall Street or
Washington, but also from Philadelphia and the
other Districts of our uniquely decentralized central bank. The diverse and independent voices that
are represented in the making of monetary policy
result in a stronger and more effective institution
and better policies. As the famous American journalist Walter Lippmann once said: “Where all men
think alike, no one thinks very much.”
By bringing an independent view and a regional
Main Street perspective to Washington, the 12
Reserve Bank presidents help maintain a balanced
and richer decision-making process, improving
policy and economic outcomes on behalf of the
entire country.
See the Federal Reserve Bank of Philadelphia’s booklet, “A
Day in the Life of the FOMC,” January 2008.

2

12 | Annual Report 2009 | www.philadelphiafed.org

Independence in a Decentralized System
Congress wanted a central bank that was both decentralized and independent
within government in order to shelter it from short-term political influences. To
help reinforce the central bank’s independence, Congress established the Fed to
be self-funding, meaning that the Fed receives no government appropriations
from Congress. In fact, the System turns over any excess earnings on its portfolio
of securities and loans above the cost of its operations to the U.S. Treasury. In
2009, that amounted to about $46 billion returned to the Treasury.
To further preserve the Fed’s political independence, Federal Reserve Bank employees, officers, and directors are generally restricted from engaging in political
activities.
However, independence does not mean that the central bank is unaccountable
for its policies, nor does it mean that the Federal Reserve sets its own goals.
Congress sets the Fed’s monetary policy goals. The Federal Reserve Act states
that the Fed should conduct monetary policy to “promote effectively the goals
of maximum employment, stable prices, and moderate long-term interest rates.”
Since moderate long-term interest rates generally result when prices are stable
and the economy is operating at full employment, it is often said that Congress
has given the Fed a dual mandate.

The Federal Reserve
Act states that the Fed
should conduct monetary
policy to “promote
effectively the goals of
maximum employment,
stable prices, and
moderate long-term
interest rates.”

What central bank independence means is that Congress has left the decisions
of how best to achieve this mandate to Fed policymakers, free from short-term
political interference. As former Fed Vice Chairman Alan Blinder has explained,
Congress knew the temptation to interfere with monetary policy was great and
that such interference would be detrimental to society. So, Congress tied its own
hands, just as Ulysses had himself tied to the mast of his ship as it sailed past the
beautiful and tempting, but deadly, Sirens.3
Many people may wonder why in a democratic society we leave monetary policy
decisions in the hands of nonelected policymakers who can act with independence. There are two very good reasons for this structural independence for the
central bank.
The first and most important reason is to separate the authority of those in
government responsible for making the decisions to spend and tax from those
responsible for printing the money. This lessens the temptation for the fiscal
authority to use the printing press to fund its public spending, which would substitute a hidden tax of future inflation for taxes or spending cuts.
This can be especially important when governments face huge deficits and may
be tempted to use the monetary printing press to improperly fund fiscal needs.

3
Alan S. Blinder, “Is Government Too Political?” Foreign Affairs, 76 (November/December 1997),
pp. 115-26.

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The fiscal authorities should not think of the central bank as a source of funds or
a piggy bank they can use simply to avoid the difficult choices of cutting spending
or raising taxes.
History is replete with examples in which central banks became agents for a nation’s fiscal policy or a means for a political party to remain in power. Just in the
20th century, think of the hyperinflation experiences in Germany and Hungary;
think of Italy before the euro; think of the numerous financial crises in Latin
America or the current economic chaos in Argentina and Zimbabwe, to name just
a few. The consequences of using the printing press as a substitute for spending
restraint are dire — higher inflation, currency crises, and economic instability.

The mere threat
that monetary policy
might become
politicized can damage
the nation’s credibility.
It can raise fears of
inflation that send
interest rates higher
and currencies falling.

Here in the U.S. there have also been periods where fiscal demands and monetary
policy became too intertwined. For example, in the late 1960s and early 1970s,
the Fed came under pressure from the Treasury and the administration to support
the funding of the Great Society programs and the Vietnam War. As a result, the
Fed became reluctant to raise interest rates to restrain inflationary pressures. This
failure of the Fed to exert its independence sowed the seeds of the Great Inflation
in the 1970s. As unemployment rose in response to the disruptions caused by the
oil shocks in that decade, the Fed remained reluctant to raise rates sufficiently in
the face of rising inflation. Thus, the failure to keep monetary policy sufficiently
independent led the Fed to forsake its mandate for price stability, which resulted
in more than a decade of economic instability.
More than ever before, we live today in a world of highly mobile capital and financial markets that are constantly assessing the credibility of governments and
their central banks to maintain price and economic stability. In such a world, the
mere threat that monetary policy might become politicized can damage the nation’s credibility. It can raise fears of inflation that send interest rates higher and
currencies falling.

A Long-Term Perspective
The second reason central bank independence is important is that monetary policy affects the economy with sometimes long and variable lags, but elected politicians, and even the public, often have shorter time horizons. Monetary policy
actions taken today will not have their full effect on the economy for at least
several quarters and perhaps as long as several years. That is why monetary policy
choices must focus on the intermediate to long term and anticipate what the
economy might look like over the next one to three years.
Moreover, there can be a conflict between what monetary policy may be able to
achieve over the short term versus its impact over the long term. For example,
sustained monetary policy easing, achieved by lowering interest rates, is often
perceived to have beneficial effects on employment and output in the near term.
Yet such effects are temporary at best and are highly unpredictable. Moreover,
in the long term such a policy is likely to result in higher rates of inflation and
higher nominal interest rates. On the other hand, a tightening of policy to re-

14 | Annual Report 2009 | www.philadelphiafed.org

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strain inflation will first show up in declines in employment and output; only later will those effects
be reversed and inflation fall. This pattern engenders an inflationary bias in policy if policymakers
become too short-term oriented. Delegating the
decision-making to an independent central bank
that can focus on long-term policy goals is a way
of limiting the temptation for short-term gains at
the expense of the future.
Independence will be even more important for the
Fed going forward. During the recent crisis, the
Fed took extraordinary measures. At some point,
however, the Fed must unwind this support, increase short-term interest rates, and drain some of
the money it has pumped into the economy during the recession. The Fed must have the independence to take these actions without short-term
political interference if it is to achieve Congress’s
dual mandate.
Instead of seeking to preserve or enhance the
central bank’s independence, however, some reform proposals would politicize the governance of
the 12 Reserve Banks by making the New York
Fed president, or even other Reserve Bank presidents, political appointees. Other proposals would
change the roles and responsibilities of the Fed.
Such changes would weaken the regional and decentralized structure of the Federal Reserve System and lead to a more centralized and political institution, which
would yield less effective policymaking. Were regional Reserve Bank presidents
to become political appointees, they would be more attuned to the political process in Washington that selected them, rather than having a public interest in
the broad economic health of the nation and the Reserve Districts in which they
reside.
Any shift in power in Washington and New York at the expense of the other
Reserve Banks would undermine the delicate balance of our uniquely decentralized central bank and lead to a central bank that is more interested in politics and
Wall Street than in the economic health of Main Street. Such a shift in the focus
of the central bank would be a loss for the country and our economic well-being.

Accountability and Transparency
Being independent, though, does not mean the Fed is unaccountable. The Fed
is ultimately accountable to Congress and the American people. Having been
granted the independence required to implement effective monetary policy on

Federal Reserve Bank of Philadelphia | 15

behalf of the country, the Fed has an obligation to explain its policy decisions to
the public. Communicating the Fed’s actions helps establish the central bank’s
credibility and reaffirm its commitment to achieving its mission, which in turn
generates better policymaking. Transparency allows Congress and the public to
better understand the Fed’s policy actions and to hold the Fed accountable for
the outcomes.

Recognizing that the
Federal Reserve is
ultimately accountable
to the American
people, the Fed has
steadily improved
transparency about its
actions in recent years.

Recognizing that the Federal Reserve is ultimately accountable to the American
people, the Fed has steadily improved transparency about its actions in recent
years. For example, the Federal Open Market Committee issues a statement after each meeting, detailed minutes three weeks later, and quarterly economic
projections of participants. Verbatim transcripts of FOMC meetings are available
after five years.4 The Fed Chairman testifies to Congress on monetary policy at
least twice each year and frequently appears before House and Senate committees to answer questions. In addition, Reserve Banks help increase transparency
by communicating economic and monetary policy objectives through educational
outreach, speeches by Bank officials, and discussions with the boards of directors
and local constituents.
Each year the Fed provides Congress and the public with detailed financial statements audited by an outside independent public accounting firm. The Fed also
publishes a balance sheet on a weekly basis and has recently added monthly and
quarterly data to increase its level of transparency.
I am keenly aware of the importance of transparency, so I fully support the Fed’s
efforts to improve and enhance its disclosures surrounding the unusual policy
programs we have implemented in response to the crisis. Failure to do so can
harm our credibility and reputation, undermining the public trust and the Fed’s
ability to achieve its objectives.
The Fed’s budget and operations are subject to considerable oversight. Internal
audit departments, which report directly to the Banks’ boards of directors, regularly audit the Reserve Banks’ operations. Staff at the Board of Governors also
oversees the Reserve Banks’ operations throughout the System. The Government
Accountability Office (GAO) also conducts frequent audits of many of the Fed’s
functions, including the financial services provided to the U.S. Treasury and other
government agencies, and the Fed’s supervisory and regulatory functions.5
What Congress correctly decided in 1978, though, is to exempt monetary policy
decisions, including open market and discount window operations, from GAO re(continued on page 18)

See the website of the Board of Governors of the Federal Reserve: www.federalreserve.gov/
monetarypolicy/fomc_historical.htm

4

For more information on GAO audits of Federal Reserve operations and exemptions, see Ben
Bernanke, “The Right Reform for the Fed,” Washington Post, November 27, 2009.

5

16 | Annual Report 2009 | www.philadelphiafed.org

For better or worse, our financial markets will be shaped
by the nature of financial regulatory reforms under consideration by lawmakers and policymakers around the world.
It is imperative that regulatory reform be the right reform — not a rash response to a crisis, but thoughtful,
intelligent reform that will best serve our nation’s financial
system and the American people. Here are some key ideas
that I believe will truly improve the strength and effectiveness of our nation’s regulatory system.*
Create a bankruptcy code for large nonbank financial
firms to solve the too-big-to-fail problem. In my view,
regulatory reform must begin with the recognition that no
firm is too big to fail. We must have in place a resolution
mechanism for the orderly failure of large and interconnected financial institutions that will address systemic risk
without requiring taxpayer support. I believe this can best
be accomplished by amending our bankruptcy code rather than by expanding the bank resolution process under
the FDIC Improvement Act (FDICIA) to nonbank financial
firms. The goal must be a system that ensures that managers, owners, and creditors all know that a firm on the
verge of failure will, in fact, be allowed to fail. In addition,
to foster market discipline and reduce moral hazard, we
must also limit regulatory discretion and the potential for
political interference. In my view, an amended bankruptcy
code could accomplish these goals.
Clarify the Federal Reserve’s umbrella supervision
role for financial holding companies. To reduce regulatory burdens, current law requires the Fed to rely on the
functional regulator for information about holding company subsidiaries. I believe Congress should clarify that the
Fed has umbrella supervisory powers and the responsibility to exercise them. Under the Gramm-Leach-Bliley Act,
the Fed has authority to examine and take action against
any financial holding company subsidiary that may pose a
material risk to the financial safety and soundness of an
insured depository affiliate or the payment system. Clarifying the Fed’s umbrella supervisory role would encourage
regulators to work together to examine systemic risks of
consolidated financial organizations. This thorough review

of each firm would help the Fed in its macro-prudential
mission to help ensure financial stability and the integrity
of the payment system.
Require a semi-annual Financial Stability Report for
Congress and the public. Similar to the Fed’s Monetary
Policy Report to the Congress, which is required under the
Federal Reserve Act, this report would improve the transparency and accountability of the Fed’s financial oversight
responsibilities, which would help ensure public trust and
credibility.
Integrate market discipline into our regulatory structure. Rather than relying solely on more regulations, we
need regulations that would strengthen market discipline.
For instance, rather than simply raising capital requirements, regulators should require financial firms to hold
contingent capital in the form of convertible debt that
would convert into equity in periods of financial stress.
Contingent capital would be less costly than simply raising capital requirements and would thus reduce incentives
for financial firms to evade the regulation. Perhaps most
important, it would also reduce the necessity of government rescues and bailouts. Moreover, the market price of
such debt would provide regulators with a signal about
the health of the firm and the market’s perception of risk.
These steps, which regulators could impose without legislation, would strengthen market discipline and improve
financial stability.
These are a few of the ideas I have discussed in the past
year. They would not require massive restructuring of our
regulatory agencies or the creation of new bureaucracies.
More important, they would truly reduce the probability
of a future crisis.

* See Charles I. Plosser, “Welcoming Remarks: Financial Interdependence in the World’s Post-Crisis Capital Markets,” speech at the 2010
Global Conference Series (Part III) presented by the Global Interdependence Center, Philadelphia, March 3, 2010, and Charles I. Plosser,
“The Federal Reserve System: Balancing Independence and Accountability,” speech at the World Affairs Council of Philadelphia, Philadelphia, February 17, 2010.

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A WAY TOWARD
REAL REFORM

Federal Reserve Bank of Philadelphia | 17

(continued from page 16)

Empirical research over
the past 30 years has
shown that countries
with independent central
banks have lower rates
of inflation, on average,
and generally better
economic performance.

view to avoid politicizing monetary policy and jeopardizing the independence of
the central bank. Recent proposals to remove this exemption for monetary policy
would allow any legislator to demand that the GAO audit the Fed’s monetary
policy decisions. To be clear, this “audit” does not refer to the usual accounting
sense of the term, since the Fed’s financial statements and controls are already
subject to extensive outside audits by the GAO and a public accounting firm.
Rather, this proposal is an attempt to reduce the independence of the central
bank and influence policy through the threat of a political action. The GAO could
be ordered to investigate a monetary policy decision whenever any member of
Congress opposes a decision to change interest rates. These “policy audits”
would undermine the Fed’s credibility as well as its ability to conduct monetary
policy in the best interests of the American public.
Such policy audits would also reverse a trend of the past three decades in which
many countries have increased the degree of independence of central bank monetary policymaking from short-term political influences. Empirical research over
the past 30 years has shown that countries with independent central banks have
lower rates of inflation, on average, and generally better economic performance.6

Reforms to Strengthen Independence and Transparency
Rather than seek ways to politicize the Fed, we should seek ways to ensure its
independence from short-term political pressures while reducing the temptation
to use the central bank as an inappropriate tool for conducting fiscal policy.
Several actions could be taken to support these goals. I would like to emphasize
two that I believe are particularly important.
First, the Federal Reserve should conduct monetary policy using a portfolio that
contains only Treasury securities, preferably concentrated in bills and short-term
coupon bonds. This would contribute to preserving the Fed’s independence by
limiting activities that could be perceived as crossing the line from monetary policy into the realm of fiscal policy. The Federal Reserve’s purchases of mortgagebacked securities were a direct intervention into housing finance and thus can
be viewed as a form of fiscal policy. In order to return the composition of the
Fed’s portfolio to all-Treasuries, I would support the Fed’s beginning to sell the
agency mortgage-backed securities from its portfolio as the economic recovery
gains strength and monetary policy begins to normalize. Returning to an all-Trea-

See, for example, Alberto Alesina and Lawrence H. Summers, “Central Bank Independence and
Macroeconomic Performance: Some Comparative Evidence,” Journal of Money, Credit and Banking, 25 (May 1993), pp. 151-62; and Alex Cukierman, “Central Bank Independence and Monetary
Policymaking Institutions – Past, Present, and Future,” European Journal of Political Economy, 24
(December 2008), pp. 722-36. This relationship appears to be less robust for developing countries.
See, for example, Iftekhar Hasan and Loretta J. Mester, “Central Bank Institutional Structure and
Effective Central Banking: Cross-Country Empirical Evidence,” Comparative Economic Studies, 50
(December 2008), pp. 620-45, and Christopher Crowe and Ellen Meade, “Central Bank Independence and Transparency: Evolution and Effectiveness,” European Journal of Political Economy, 24
(December 2008), pp. 763-77.

6

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18 | Annual Report 2009 | www.philadelphiafed.org

suries portfolio would promote
a clearer distinction between
monetary policy and fiscal policy
and help uphold the Fed’s independence.
The second suggestion is to
eliminate or curtail the Fed’s
13(3) lending authority.7 This
section of the Federal Reserve
Act allows the Fed to lend to
corporations, individuals, and
partnerships under “unusual
and exigent circumstances.”
I believe the fiscal authorities
should do emergency lending
and that the Fed be involved
only upon the written request of the Treasury. Any non-Treasury securities or
collateral acquired by the Fed under such lending should be promptly swapped
for Treasury securities to make it explicitly clear that the responsibility for fiscal policy lies with the Treasury and Congress, not with the Federal Reserve. To
codify this arrangement, I have advocated for a new Fed-Treasury Accord, similar
to the 1951 accord that restored Fed independence after World War II.8 This new
accord would eliminate the ability of the Fed to engage in bailouts of individual
firms or sectors and place such accountability where it rightly belongs — with the
fiscal authorities.

Conclusion
The most severe financial crisis since the Great Depression has prompted the call
for financial reforms. History tells us that crises invariably lead to reforms, and as
we struggle to find the right reforms to respond to this crisis, we should avoid
“quick fixes” that may have unintended consequences that impair the Federal
Reserve’s ability to achieve the monetary policy goals set by Congress.
Above all, we must preserve the independence and regional nature of our Federal
Reserve System against proposals that would threaten to politicize or centralize power. Failure to do so could impede the Fed’s ability to meet its objectives
for sound monetary policy to ensure price stability and maximum sustainable
economic growth. The Fed’s regional governance, independence, and current
responsibilities are all important for achieving these objectives.

For more information, see the Federal Reserve Act, Section 13: Powers of Federal Reserve Banks,
federalreserve.gov/aboutthefed/section13.htm.

7

See Charles I. Plosser, “Ensuring Sound Monetary Policy in the Aftermath of Crisis,” speech at the
U.S. Monetary Policy Forum, New York, February 27, 2009.

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Federal Reserve Bank of Philadelphia | 19

FEDERAL RESERVE SYSTEM STRUCTURE AND GOVERNANCE:
A BALANCE OF POWER
The Board of Governors of the Federal Reserve
Governance:
•

•

Seven Governors are appointed by the President

•

They serve 14-year terms to insulate them from

and confirmed by the Senate, and so are directly

short-term political pressures and to encourage

connected to the political process.

a long-term perspective on the economy and the

The Governors represent the public sector.

financial system.a
•

The Chairman and Vice Chairman of
the Board of Governors are appointed
by the President and confirmed by the
Senate to four-year terms.

Duties:
•

Oversees the 12 Federal Reserve Banks

•

Sets depository reserve requirements

and their budgets.
and approves requests for discount rate
changes made by the Reserve Banks.
•

Issues regulations on financial safety
and soundness and consumer protection.

•

Leads the Fed’s supervision and regulation of bank holding companies,
domestic and foreign operations of
financial holding companies, and statechartered banks that are members of
the Federal Reserve System. (Staffs at
the 12 Reserve Banks responsible for
supervising financial institutions in their
District operate under delegated authority from the Board of Governors.)

A Governor can finish out a previous appointee’s
term prior to serving his or her own full term.

a

20 | Annual Report 2009 | www.philadelphiafed.org

Governance:

Duties:

•

•

•

•

Each Reserve Bank’s stockholders are the member banks in its District.
Member banks pay in capital, but unlike traditional stock, these shares may not be sold or
traded and cannot be pledged as collateral.
Each Reserve Bank has a nine-member board of
directors selected from its District’s banks, businesses, and the public, in a nonpolitical process.
•
Three directors are elected to represent
member banks.
•
Three are elected by member banks to represent businesses and the public. By law,
they cannot be directors or officers of a
bank or bank holding company.
•
Three more nonbankers are appointed
by the Board of Governors, including the
chair and deputy chair.

•

•

The Reserve Banks distribute currency, act as bankers’
banks, and generally perform the functions of a central
bank, including serving as the federal government’s fiscal agent.
Each Reserve Bank operates in the public interest,
rather than for a profit motive. In fact, after paying
its expenses, the Federal Reserve System’s earnings are
turned over to the U.S. Treasury.
The directors of each Reserve Bank:
•
Vote to recommend discount window rates to
the Board of Governors.
•
Provide insight into regional economic business
conditions.
•
Approve the Reserve Bank’s budgets, strategies,
and plans; provide oversight to the Bank’s operations; and directly supervise the Bank’s internal
audit function, as do most corporate boards.b
•
Select the Reserve Bank president, subject to the
approval of the Board of Governors.

The Federal Open Market Committee
•

Congress reaffirmed the decentralized structure of the Federal Reserve in the Banking Act of 1935, as it restructured the Federal Open
Market Committee, the Fed’s main body for making monetary policy
decisions.

•

Congress gave votes on the FOMC to the seven Governors in Washington, along with five of the 12 presidents of the regional Reserve
Banks.

•

The president of the New York Fed always votes, along with four
presidents from among the rest whose votes rotate, so that voting
members always come from different parts of the country.

•

With seven Governors, the Board retains the majority of votes on the
FOMC, even though all 12 Reserve Bank presidents always participate
in the discussions at FOMC meetings.c

b
Since the Board of Governors oversees bank supervision and regulation, the Reserve
Bank directors have no direct input or responsibility for supervision or regulatory decisions.

At year-end 2009, there were two open seats on the Board of Governors. On
March 1, 2010, Vice Chairman Donald L. Kohn announced plans to retire, which
would create a third open seat.

c

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12 Federal Reserve Banks

Federal Reserve Bank of Philadelphia | 21

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ASSESSING THE STRENGTH
OF THE NATION’S BANKS
In early 2009, the Federal Reserve Bank of Philadelphia played an integral role
in conducting a comprehensive banking stress test to assess the strength of the
country’s largest banking organizations and to determine how well the financial
system was prepared to survive a challenging economic downturn.
Led by the Federal Reserve Board of Governors, this exhaustive effort enlisted
more than 150 examiners, economists, and analysts from the Fed and other federal bank supervisors to conduct the stress test, officially named the Supervisory
Capital Assessment Program (SCAP).
The 19 bank holding companies with assets of more than $100 billion were required to participate in this exercise. Collectively, these complex companies hold
two-thirds of the assets and more than half of the loans nationwide.

“The scope and scale
were unprecedented.
The rigorous review
of loan portfolios,
investment securities,
trading positions, and
off-balance-sheet
commitments provided a window into our
largest institutions.”

SCAP’s purpose was to measure how much additional capital — if any — each institution would need to withstand potential losses under more adverse economic
conditions. SCAP employed both a baseline economic scenario and a hypothetically more adverse scenario in its assessment.
In fact, the Philadelphia Fed’s Research Department had a role in helping design
the severe economic scenarios for SCAP. Working with the Fed’s Board of Governors, Philadelphia used its quarterly Survey of Professional Forecasters to elicit
information about measures of uncertainty in the forecasters’ projections. It was
important to create a hypothetical “what if” forecast, which called for economic
conditions — growth, unemployment, and the housing market — to be severe
but plausible.
“The stress test was important in assuring the public that banks would remain
viable if economic conditions worsened. Public confidence plays such a vital role
in the banking system, and this test was critical to helping calm the markets and
restore public confidence,” said Michael E. Collins, executive vice president and
lending officer in the Supervision, Regulation and Credit Department (SRC).

Testing Process
Stress testing isn’t new to the banking industry. A bank’s management continually conducts stress tests based on its asset size, portfolio composition, and risk
characteristics to help establish effective internal risk systems. The testing process
should be integrated into the bank’s risk culture, yet remain flexible to adapt to
new and emerging issues. Its results should reveal the bank’s strengths and weaknesses in favorable and unfavorable economic conditions.

22 | Annual Report 2009 | www.philadelphiafed.org

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Although SCAP shares similarities with a bank’s internal stress test, this financial
exam was unique.
“The scope and scale were unprecedented. The rigorous review of loan portfolios, investment securities, trading positions, and off-balance-sheet commitments provided a window into our largest institutions, which are key players
in our financial system. The results will be important in assessing future capital
adequacy,” Collins said.

SRC’s Role
The Philadelphia Fed’s retail credit risk function within SRC dedicated six specialists to the SCAP tests. Todd Vermilyea, vice president of retail risk and bank
surveillance in SRC, oversaw Philadelphia’s efforts and helped manage multiple
challenges.
“We had to overcome significant data,
logistic, and deadline challenges to produce a comprehensive and consistent
set of results,” Vermilyea said of his
team.
The group — Vermilyea, Jose J. CanalsCerda, Ali Cannoni, Larry Cordell, Eddy
Hsiao, and Andrew Kish — each worked
on different teams and collaborated
with colleagues inside and outside the
Federal Reserve. They worked in tandem
with the Office of the Comptroller of
the Currency and the Federal Deposit
Insurance Corporation.

Challenges in Testing
In what may seem an unusual approach,
experienced examiners and staff were
assigned to evaluate firms for which
they possessed limited first-hand knowledge to make certain that outcomes
were unbiased. In this regard, CanalsCerda and Cordell were assigned to
analyze losses on retail credit products
for several firms.

Front to back: Todd Vermilyea, Larry Cordell, Eddy Hsiao, Jose Canals-Cerda, Andy Kish,
and Ali Cannoni

Federal Reserve Bank of Philadelphia | 23

“Independent views, ranging from economists’ loan loss models to examiners’
detailed conversations with bank managers, were a hallmark of this financial
examination,” Vermilyea said. These outside experts worked closely with on-site
examiners, who had detailed knowledge of each of the institutions. Collaboration among these groups was essential given the very tight time frame.
As they pored over hundreds of pages of bank reports, supervisors worked together in identifying weaknesses in models, obtaining missing information, and
recalculating over-optimistic assumptions. Their objective was to produce consistent results, a difficult task given the differences in the way the institutions
reported and presented their data.
The Philadelphia Fed took a lead role in analyzing off-balance-sheet positions.
Weaknesses in accounting for off-balance-sheet vehicles were being addressed
in a new set of Financial Accounting Standards set to take effect in 2010. Given
that the stress test forecast losses through 2010, the analysis of off-balance-sheet
exposures had to reflect both the institutions’ overall exposures and the impact
of these accounting changes. Andy Kish, who was on assignment at the Federal
Reserve Board of Governors during the stress test, designed a model to estimate
these off-balance-sheet losses. Kish worked closely with accounting expert Hsiao
to ensure that the model was consistent with the proposed changes in accounting rules.
Kish also assisted in the SCAP evaluation of credit card losses. Credit card loans
are concentrated in the country’s biggest banks and historically have much higher
loss rates, carrying more risk than auto or mortgage loans, he said.
“It was an invigorating time and meaningful work to understand the issues during
a low point in the financial market. The stress test was a key turning point in the
financial crisis, and the test’s outcome gave the market confidence,” Kish said.
Ali Cannoni, who joined the Bank’s retail risk function about three weeks before
the stress test began, was enthusiastic about her role. She previously spent almost two years in the Bank’s Financial Statistics Department, which honed her
skills in reviewing bank data and graphical analysis. And now she was tasked with
reviewing larger and more complex institutions.
“The banks’ data and the materials they submitted tell a story,” Cannoni explained. It was her job to keep track of the stories through every change to
multiple spreadsheets representing hundreds of billions of dollars in off-balancesheet positions.

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24 | Annual Report 2009 | www.philadelphiafed.org

Test Results
What did this stringent stress test reveal about the banking industry? The results
showed that 10 of the 19 institutions required $185 billion to ensure adequate
capital cushions to absorb losses if the economy were to deteriorate as the adverse hypothetical case suggested. They had 30 days to develop a plan to raise
capital (to be approved by supervisors) and were required to implement their
plans in six months.
When regulators released the results on May 7, 2009, they also reported that the
10 banks needing capital had already either raised or were contractually committed to raising $110 billion in capital, leaving $75 billion to be raised. By the November 2009 deadline, the 10 banks had increased their Tier 1 common equity
by more than $77 billion. They accomplished this primarily by issuing new common equity, converting existing preferred equity to common equity, and selling
businesses or portfolios of assets.

Future Implications
The banks’ actions to shore up their capital positions helped reassure the financial
markets. In March, Fed Governor Daniel K. Tarullo discussed the lessons learned
from last year’s stress test and how it fostered this reassurance. Most market participants accepted the test as credible, he said, adding that the result bolstered
confidence because it helped the market understand that our largest banks could
withstand severe economic conditions during a very uncertain time.

The results showed
that 10 of the 19
institutions required
$185 billion to ensure
adequate capital
cushions to absorb
losses if the economy
were to deteriorate
as the adverse
hypothetical case
suggested.

The stress test has also demonstrated the benefits of using benchmarking to
common standards, highlighted the value in collaborative efforts, and provided a
detailed view of the health of the banking system.
“The Federal Reserve System has indicated it will incorporate ideas from the
stress test’s cross-firm approach but will also retain the traditional supervisory
exam process, which relies on examiners’ insights at the firm level,” Collins said.
“Stress testing has evolved from focusing on narrow business lines to encompassing the broader business strategies of the institution,” he added. Collins
said that he has seen the value of employing a more holistic approach to the
supervisory process for the institutions in Philadelphia’s District.
What did Philadelphia learn from its role in the stress test? “We have integrated
the knowledge and wisdom gained from the stress test into our supervisory approach. Our experience also reinforced that we must continue investing in talented staff with the skills to monitor and mitigate the complex issues in our banking
system,” Collins said.

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Federal Reserve Bank of Philadelphia | 25

EXAMINING BANKS, SERVING THE NATION’S
FINANCIAL SYSTEM
The Philadelphia Fed’s bank examiners provide local knowledge and keen insight
that help the Federal Reserve achieve its goal of financial stability. They play a vital
role in ensuring that the banks in eastern Pennsylvania, southern New Jersey, and
Delaware are pursuing safe and sound business practices and complying with
regulations that protect consumers.
Some 160 staff members in the Bank’s Supervision, Regulation and Credit Department have supervisory responsibility for 130 bank holding companies and
state member banks in the Philadelphia Fed’s Third District. Their work helps the
Philadelphia Fed assess each bank’s risk management systems, financial condition,
compliance with laws and regulations, training programs, and internal controls.
Examiners possess unique knowledge of an individual institution’s operations,
an understanding of the firm’s management strategy, and an awareness of the
economic environment. And they use their business acumen to ensure that banks
build robust risk systems and comply with consumer laws, both of which promote a strong, safe, and sound financial system.
The examiners’ knowledge of the local economic environment and their familiarity with local financial institutions enhance their effectiveness as bank supervisors. For example, while commercial real estate values have presented a problem for banks nationally, markets differ widely across local areas. Understanding
these differences is critical to evaluating the condition of community banks that
operate primarily within a local market.
Similarly, understanding how a particular
bank manages its risk enables examiners
to better focus on key risks that may affect the bank’s consumer compliance and
financial soundness.
This local knowledge of a bank’s operations and its risk profile helps to identify business trends, underlying economic
risks, and emerging regulatory concerns.
Further, local insights about the banking
environment add to the mosaic of information that Philadelphia Fed President
Charles Plosser shares with colleagues
on the Federal Open Market Committee
(FOMC), the Federal Reserve’s main body
for monetary policymaking.
William Lang (left) and Michael Collins
26 | Annual Report 2009 | www.philadelphiafed.org

An important goal of the Federal Reserve’s bank supervision activities is to ensure that banking organizations can meet the credit
needs of communities. As the nation continues to recover from a
severe recession, many people have expressed concern about the
ability of small businesses and consumers to obtain credit.
Banks are the primary source of credit for small businesses, and
community banks play a particularly important role in extending credit to small businesses. In turn, small businesses play a
key role in economic growth and job creation. Yet, it remains
difficult for them to receive and renew credit in the current environment.
“We are working very hard to see that our banking organizations strengthen their financial condition and enhance their
management systems so they are able to operate in a safe and
sound manner while meeting the needs of businesses and consumers,” said William W. Lang, senior vice president and chief
examinations officer in the Supervision, Regulation and Credit
Department.
“Our examiners’ deep knowledge of our banking organizations
and the communities they serve helps us to be more effective in
accomplishing this task,” Lang said.
While businesses and consumers continue to face challenging
credit conditions, there have been some positive signs in the
tri-state region. During 2009, commercial banks based in the
Third District were able to increase their loans to small businesses. Many banks have increased their potential capacity to
lend by raising additional capital. In fact, Third District banks
raised $688.7 million in 2009 and $748 million in the first quarter of 2010.
Throughout the crisis, regulators have urged lenders to make
prudent decisions and continue lending to creditworthy borrowers. The Fed also accompanied this guidance with training
programs for its supervisory staff and state examiners and with
outreach to the broader banking community to ensure that supervisory policies and actions do not inadvertently curtail the
availability of credit to sound small business borrowers.

The 12 regional Federal Reserve Banks
play a key role as part of the nation’s
central bank by serving as lender of last
resort and making short-term loans to solvent financial institutions against acceptable collateral. Sometimes such loans are
needed simply because the ebb and flow
of business may bring more withdrawals
than deposits on a given day. In other
cases, emergency loans are needed, perhaps after flash floods in a small locale, or
major disasters such as Hurricane Katrina,
or even after the terrorist attacks of September 11, 2001. The Fed has also served
as lender of last resort when other interbank markets have stopped because of a
deep recession or financial crisis.
In 2009, the Philadelphia Fed was still
lending to banks through the discount
window far above pre-crisis levels. In
2009, the Philadelphia Fed’s discount
window made 1,295 loans to depository
institutions, including primary, secondary,
seasonal, and term auction facility loans.
Total cumulative daily loan value was
nearly $7.4 trillion, compared with 437
loans valued at $2.3 trillion in 2008.
In the first half of 2009, the discount window made 610 loans valued at $6 trillion,
followed by 685 loans valued at $1.3 trillion to end the year. In November 2009,
the Federal Reserve Board, recognizing
improvements in financial markets, reduced the maximum maturity of primary
credit loans at the discount window for
depository institutions to 28 days from
90 days, effective January 14, 2010, and
subsequently returned the term to the
traditional overnight lending as of March
18, 2010. The Term Auction Facility was
suspended in March 2010 because conditions in the wholesale funding markets
were improving.

Federal Reserve Bank of Philadelphia | 27

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DISCOUNT WINDOW
REFLECTS CHANGING
CREDIT CONDITIONS

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Ultimately, the challenge for banking supervision is the need to ensure safety and
soundness without dampening the competitive spirit. “I think it’s important to make
sure that when risks are taken, the bank has strong corporate governance in place
because even excellent supervision cannot supplant the bank’s overall management,” explained Executive Vice President and Lending Officer Michael E. Collins.

“So while many bank-

“Our goal is not to stop banks from taking any risk, since this would prevent
banks from serving their critical role in our economy. Balancing these objectives
appropriately requires skill, experience, and judgment,” Collins observed.

ers tell us that Federal

Evolving Environment for Examiners

Reserve examiners
are analytical and
tough, few tell us
that they are unfair
or uninformed about
what’s going on in
the local economy.”

The specialized knowledge of the Fed’s examiners is invaluable because it gives
the Fed a window into the nation’s economy, banking system, and financial markets. The depth and breadth of resources allows the Fed to see developing trends
and growing weaknesses that go beyond looking at firm-specific or geographic
issues and focus on imbalances building in the industry or the broader economy
that could affect these firms.
Collins, who began his career as a bank examiner at the Philadelphia Fed more
than 30 years ago, has witnessed sweeping changes toward this macro-prudential approach in supervisory practices. He noted that supervisory tactics now focus
on a continuous evaluation of a bank’s condition and rely more on stress tests
and the expanded use of market data and forward-looking assessments.
Examiners complete a rigorous training regimen focused on one of two distinct
disciplines: safety and soundness or consumer compliance. Specialized training
for each includes on-site instruction, classroom work, and several levels of competency tests spanning a three- to five-year period, depending on the examiner’s
intended specialty. Once employees receive an examiner’s commission, they embark on a continuous learning track to enhance their credentials. They also work
extensively with an experienced team of examiners before they advance to lead
a team on their own.
Although there is no one model or personality preferred for examiners, those who
hold this position share common goals and similar backgrounds. Some examiners
hold degrees in accounting, finance, or law, and all are expected to demonstrate
an ability to think critically, communicate effectively, and negotiate skillfully.
These analytical skills serve them well in the field. In fact, Federal Reserve Chairman Ben Bernanke said in a recent speech, “So while many bankers tell us that
Federal Reserve examiners are analytical and tough, few tell us that they are unfair or uninformed about what’s going on in the local economy. We believe that
this kind of response speaks to the effectiveness of our supervisory program for
community banks, and we take pride in the professionalism and quality of our
community bank examiners.”*
* Ben S. Bernanke, “Preserving a Role for Community Banking,” speech at the Independent Bankers of
America National Convention, Orlando, FL, March 20, 2010.

28 | Annual Report 2009 | www.philadelphiafed.org

|

|

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CONSUMER COMPLIANCE OUTLOOK:
AN AUTHORITATIVE SOURCE
FOR FINANCIAL INSTITUTIONS
In recent years, the Federal Reserve Bank of Philadelphia has recognized the need
for an authoritative source of information to help financial institutions comply
with consumer protection laws and regulations. In response, the Philadelphia
Fed’s Supervision, Regulation and Credit Department (SRC) launched Consumer
Compliance Outlook® in May 2008.
Why Philadelphia? The magazine traces its roots to Compliance Corner, a
section in the Bank’s SRC Insights that was devoted exclusively to consumer compliance issues. As the insert gained popularity and compliance issues continued
to become more important, SRC realized that a larger and more comprehensive
newsletter with nationwide distribution was needed.
“The timing of this publication was perfect. There was a wealth of things to write
about in the consumer compliance world. There was an audience, there was
a need, and we had the talent and expertise here in Philadelphia to serve that
need,” said Connie Wallgren, assistant vice president, SRC.
Although Outlook‘s roots lie in the Philadelphia Fed, the publication is a System-wide effort. Philadelphia chairs the publication’s Advisory Board, which also includes officers from the Minneapolis, Richmond, and San Francisco Federal Reserve Banks.
This collaborative effort has been very successful. Recently, the
System’s Consumer Compliance Management Group (CCMG),
consisting of Reserve Bank officers with responsibility for compliance, voted Outlook as the CCMG’s most successful initiative of
the last five years.
Now in its second year, Consumer Compliance Outlook has increased online subscriptions to more than 3,500 nationwide.
Since the second quarter of 2008, both electronic and hard-copy
subscriptions (which are sent to state member banks and bank
holding companies) have increased significantly. Banks, credit
unions, and savings and loan institutions make up 90 percent of
the magazine’s electronic readership. In addition, Outlook has
received several requests to reprint articles.
Ultimately, Outlook’s goal is “to help protect consumers by educating bankers about the compliance requirements for the consumer protection laws and regulations with which they must
comply,” explained Ken Benton, senior consumer regulations
specialist, SRC.
Standing: Ken Benton and Robin Myers.
Seated: Connie Wallgren

Federal Reserve Bank of Philadelphia | 29

t of Many...One | Out of Many...One | Out of Many...One | Out of Many...One

PROVIDING RELIABLE INFORMATION
ON THE ECONOMY
In 2009, policymakers, consumers, and other market participants sought reliable
information about the state of the economy. In particular, they were looking for
signs that the recovery from the severe recession was underway. The Research
Department’s surveys and indexes played a significant part in providing the needed economic information.

Business Outlook Survey
One main source of information was the Business Outlook Survey (BOS), a
monthly compilation that tracks developments in the Third District’s manufacturing sector by gathering information on such variables as new orders, shipments,
inventories, employment, prices paid and received, unfilled orders, and delivery
times.

The BOS’s more
timely measures of
activity in the local
manufacturing
sector often serve as
indicators of changes
in the national
economic picture.

According to Michael Trebing, senior economic analyst, the BOS’s closely watched
general activity index has generally dipped into negative territory and returned to
positive readings remarkably close to the start and end dates of past recessions.
The National Bureau of Economic Research (NBER) is the arbiter of such business
cycle dates; however, it makes those determinations with significant lags. The
BOS’s more timely measures of activity in the local manufacturing sector often
serve as indicators of changes in the national economic picture.
In the most recent recession, the BOS’s general activity index went below zero
in December 2007 — the date the NBER eventually marked as the start of the
current recession. The number reached zero in August 2009 and turned positive
again the following month. “The BOS is a serious barometer of both the regional
and the national economy,” said Trebing, who noted that on or near the third
Thursday of the month — the survey’s release date — he gets phone calls and
e-mail from analysts, economists, and forecasters from around the world.
Policymakers also watch the survey because it provides significant information
about the economy in the Third District and reflects conditions in the national
manufacturing sector. Why does a survey of manufacturing firm executives in
Delaware, southern New Jersey, and eastern Pennsylvania get so much attention? There are several key reasons:

30 | Annual Report 2009 | www.philadelphiafed.org

•

The manufacturing sector is more sensitive to changes in the business cycle,
and therefore, changes in this sector can serve as an indicator of cyclical fluctuations in the whole economy as they develop.

•

Also, manufacturers in this District are a diverse group, mirroring the nation’s
manufacturing sector, and many of these firms serve national markets or

| Out of Many...One | Out of Many...One | Out of Many...One | Out of Many
y...O

have plants in other parts of the country. In addition, some of the respondent
firms manufacture goods that are used as inputs for other firms that operate
in the national market.
•

Furthermore, data for the survey results are collected over the first two weeks
of the month, so the survey provides an early reading of that month’s manufacturing data. This early reading leads many analysts to use the BOS numbers to predict the results of the monthly Institute for Supply Management’s
(ISM) survey, which measures manufacturing activity at the national level.
The ISM survey is usually released about two weeks after the BOS.

About 10 years ago, the BOS began to include special questions on topics related
to current events in the economy, such as how the recession was affecting capacity utilization, or the economic impact of key events such as the September 11th
terrorist attacks and Hurricane Katrina.

Coincident Indexes
Market participants are not just interested in how the national economy is faring.
The economic fortunes of the individual states are also important when business
owners, government officials, or households make decisions.
To help track economic activity at
the state level, the Research Department’s regional section has
developed monthly coincident
indexes for each of the 50 states.
The indexes summarize current
economic conditions based on
four variables: nonfarm payroll employment, average hours
worked in manufacturing, the
unemployment rate, and wage
and salary disbursements. They
provide information about the
states’ individual business cycles,
which are not necessarily in sync
with the national business cycle.
Public interest in the coincident
indexes increased in 2009 as
users turned to these regional
Left to right: Keith Sill, Jason Novak, Tom Stark, and Mike Trebing
Federal Reserve Bank of Philadelphia | 31

indexes to gauge their states’ performance during the recession. The indexes
offered a look at the recession from different vantage points: Indexes for coastal
states with overheated housing markets showed substantial declines in economic
activity, while the Plains states had less severe downturns. While our indexes
suggest that some states are likely to have continued stress in 2010, they are
pointing to improved activity in several other states.
“The national economy and the statistics that track it are really just aggregations
of many smaller and unique economies. By studying the state coincident indexes,
an analyst can see important trends that may predict national movements,” said
Jason Novak, senior economic analyst.

The national economy
and the statistics that
track it are really just
aggregations of many
smaller and unique
economies. By studying
the state coincident
indexes, an analyst
can see important
trends that may predict
national movements.

Survey of Professional Forecasters
The Real-Time Data Research Center in the Bank’s Research Department is
responsible for administering and compiling the results of the Survey of Professional Forecasters (SPF), a quarterly survey of forecasters from around the country. It’s the oldest quarterly survey of macroeconomic forecasters in the U.S.
The SPF asks participants to project the course of 24 economic variables, including gross domestic product (GDP), inflation, and unemployment. The survey also
asks its participants to indicate the degree of uncertainty in their projections:
Knowing the uncertainty of a forecast can sway an economic policy decision.
“For example, a projection of strong growth paired with a strong degree of certainty could lead to a decision that is radically different from one made when that
same forecast is paired with a strong degree of uncertainty,” said Thomas Stark,
assistant director and manager in the Real-Time Data Research Center.
In fact, in 2009, the Research Department, in conjunction with the Board of
Governors, added questions to the survey to elicit further information about
measures of uncertainty in the forecasters’ projections. As explained by Federal
Reserve Governor Daniel Tarullo in congressional testimony, the information
collected with these questions helped to provide the Federal Reserve System
with “better assessments of the likelihood of severe macroeconomic outcomes.”
The forecasts collected in the SPF were then used to help design the economic
scenarios for the Supervisory Capital Assessment Program, or stress test,
conducted by the Fed and other federal bank regulatory agencies in 2009. The
questions were so useful that the Philadelphia Fed decided to keep them in the
2010 surveys to help the Federal Reserve System in its banking supervision and
monetary policy work.
Like the other surveys and indexes produced by the Research Department, the
SPF can offer early signs of the economy’s direction. In fact, the SPF was hinting
that all was not right in the economy as early as 2006. “Late in 2006 the survey’s well-known measure of the risk of a downturn in real GDP — the anxious
index — began to signal increasing levels of risk,” said Stark. “This was a year

32 | Annual Report 2009 | www.philadelphiafed.org

Current and Future General Activity Indexes
(January 1995 to May 2010)

Aruoba-Diebold-Scotti
Business Conditions Index
In January 2009, the Real-Time Data Research
Center began publishing the ADS business
conditions index, which tracks real business
conditions using real-time data based on indicators such as weekly initial jobless claims,
monthly payroll employment, and quarterly
real GDP. Named for its developers (economists Boragan Aruoba, Frank Diebold, and
Chiara Scotti), the ADS summarizes economic conditions using a blend of high-frequency
and low-frequency information.
“We receive a large amount of data about
the economy over time — things like industrial production, retail sales, unemployment
data, and GDP. And these data come out
at different times — weekly, monthly, and
quarterly. The ADS summarizes a subset of
that mixed-frequency data to provide information on the state of the economy. It gives
us a snapshot of the economy in real time,”
said Keith Sill, assistant vice president and the
center’s director.

Summary
Together, the Business Outlook Survey, the
coincident indexes, the SPF, and the ADS —
along with the other surveys, indexes, and
analyses produced by the Research Department — contribute substantially to satisfying
the ongoing demand for current and forwardlooking information about the economy.

80

Diffusion Index*

60

Six-Month Forecast

40
20
0

Current Activity

-20
-40
-60

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

* Percentage of respondents indicating an increase minus percentage indicating
a decrease.

State Coincident Indexes: Three-Month Change
(March 2010)

Less than -1.0%
Between -0.6% and -1.0%
Between -0.1% and -0.5%
Unchanged
Between 0.1% and 0.5%
Between 0.6% and 1.0%
Greater than 1.0%

Survey of Professional Forecasters: Unemployment Rate
History, Forecast, and Ranges for the SPF of 2010:02
11

Level
(Range Covers 25 to 80 Percent Confidence)

10
9
8

SPF

7
6
5
4
2005

2006

2007

2008

2009

2010

2011

The vertical line marks the last historical quarter known by the panelists when they made their
projections. The survey’s consensus projection appears to the right of the vertical line. The
range is based on the survey’s historical forecast record over the period since 1985.

Aruoba-Diebold-Scotti Business Conditions Index
(1/1/2000 - 5/08/2010)
2.0
1.0
Business Conditions

ahead of the peak in the expansion and two
years ahead of the NBER’s December 1, 2008,
announcement that the peak had occurred
in December 2007. The index continued to
signal rising risk levels over the period leading
up to the beginning of the recession. More
recently, the anxious index has retreated to
levels that are consistent with the early stages
of a recovery.”

0.0
-1.0
-2.0
-3.0
-4.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

The ADS Index using the latest data available as of May 14, 2010. Blue shading indicates historical NBER-designated recessions. Tan shading indicates the recent recession, designated by the
NBER to have started in December 2007 but not yet designated by the NBER to have ended (as
of the date of creation of this figure). We end it in July 2009, which appears likely conditional
on information presently available, but we use tan as a reminder that our dating is not official.

Federal Reserve Bank of Philadelphia | 33

Ou
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SUPPORTING CONSUMERS,
COLLABORATING WITH COLLEAGUES
In 2009, the Federal Reserve System’s Conference of Presidents continued to
work on the Mortgage Outreach and Research Efforts (MORE). MORE’s goal is to
encourage a coordinated and collective understanding of mortgage delinquencies and foreclosures and their impact on communities.
Speaking at the December 10, 2009, Mortgage Foreclosure Policy Conference,
Federal Reserve Governor Elizabeth A. Duke said, “At the Board of Governors
in Washington, and at the regional Federal Reserve Banks across the country,
we are providing data and bringing together different parties from the private,
public, and nonprofit sectors to encourage strategies for refinance, loan modification, short sales, and other alternatives to prevent foreclosures.” The knowledge of many, brought together as one, can have considerable impact on the
nation’s response to the mortgage crisis.
Several Philadelphia Fed departments are supporting the MORE initiative.
Research; Supervision, Regulation and Credit; and the Payment Cards Center
(PCC), along with Community Affairs, have pooled their resources to develop research papers, host conferences, and provide information for the Bank’s website
to help consumers and communities affected by foreclosures.

Conference on “Understanding the Housing and Mortgage
Markets: What Data Do We Have? What Data Do We Need?”
This conference, co-sponsored by Community Affairs and the PCC, focused on
issues such as the types of data currently available and their shortcomings, the
data elements most critical for understanding the mortgage and housing markets,
and a range of other topics that must be considered in developing better
databases. Panelists included users of state and local data and government
officials who have been involved in efforts to improve the quality of these
data.
Although Community Affairs fosters public-private partnerships that result in increased affordable housing and community development, the
mortgage market was a new area of research for the PCC. But both areas
recognized the strong links between the mortgage crisis and other consumer credit markets and the value in collaborating on this joint project.
Harriet Newburger, community development research advisor, Community Affairs Department, explained the need for such an event: “The lack
of readily accessible data on the mortgage market negatively affected the
ability to predict how severe the mortgage crisis and its spillovers would
be. It has also hampered efforts to alleviate the effects of the crisis.”
Harriet Newburger (left)
and Erin Mierzwa

34 | Annual Report 2009 | www.philadelphiafed.org

Many of the lessons learned at this event have already contributed to changes in
the way the Federal Reserve System uses and shares mortgage-related data for
the purposes of risk assessment, foreclosure mitigation, and research.

Pennsylvania’s Lowest-Income Renters Have the Greatest Needs
Nearly 85 percent of Pennsylvania’s extremely low-income (ELI) renter households
spend more than 30 percent of their income on housing and 69 percent spend
more than 50 percent. There is also a severe shortage of affordable and available
rental housing across the state for ELI renters. These findings and more are reported in a study conducted last year by Erin Mierzwa, community development
specialist, Community Affairs, and Kathryn P. Nelson, an affordable housing consultant, along with Harriet Newburger, also in Community Affairs.
The study is particularly relevant because approximately 30 percent of all Pennsylvania households are renters with access to a limited supply of available and
affordable housing. The study provides local policymakers with solid data they
can use to help develop local rental housing strategies.

Concentrated Poverty and Atlantic City’s Future
In 2008, Community Affairs offices in the Federal Reserve System, including the
Philadelphia Fed, undertook a joint research project with the Brookings Institution’s Metropolitan Policy Program that examined 16 American communities
characterized by extreme poverty. The Philadelphia Fed’s part of this System-wide
study concentrated on several census tracts within Atlantic City, New Jersey. The
report highlighted the workforce paradox of plentiful jobs co-existing with high
rates of poverty and unemployment. The researchers also identified concerns that
residents have about their neighborhoods and their future status in Atlantic City.

Nearly 85 percent
of Pennsylvania’s
extremely lowincome (ELI) renter
households spend
more than 30 percent
of their income on
housing and 69
percent spend more
than 50 percent.

The larger System report piqued the Community Affairs staff’s interest in
Atlantic City and led them to take a closer look. The result was Atlantic City: Past
as Prologue, a fuller study that covers the growth and decline of Atlantic City
and the conditions in the city since casino gambling was legalized in 1978 as a
“unique tool of urban redevelopment.” The research team consisted of Harriet
Newburger and John Wackes, both in Community Affairs, and Anita Sands, ARI
Planning and Research, Inc.
A presentation of the study’s findings to Atlantic City officials and other interested parties has led to a number of initiatives, including collaboration between
the Atlantic City school system and Wells Fargo Bank on a program to promote
financial literacy (the bank chose Atlantic City as its East Coast site for rolling out

Federal Reserve Bank of Philadelphia | 35

the program) and development of a course at Atlantic City’s Stockton College
based on the report.

Other Efforts to Help Consumers
Community Affairs also hosted several events on the “Making Home Affordable”
loan program, foreclosure scams, and mortgage foreclosure diversion programs.
These meetings were organized by the department in conjunction with the
Greater Philadelphia Urban Affairs Coalition’s Foreclosure Prevention Task Force
and the Financial Education Network, a group of financial educators. The goal
of the meetings was to help housing, credit counseling, and other nonprofits,
financial institutions, and government agencies understand the programs that
are available to help borrowers avoid foreclosure.
In addition, the Federal Reserve Board of Governors developed “5 Tips,” a public
service campaign to give consumers the basic information they need to recognize
and avoid foreclosure prevention scams. The Philadelphia Fed supported the campaign by distributing tip sheets to all branches of the Free Library of Philadelphia;
offices of the Special Supplemental Nutrition Program for Women, Infants, and
Children; and military bases located in the Third District. The Bank also promoted
the tip sheets on its website and made copies available to employees.

BANKING ON COLLABORATION
In 2005, the Philadelphia Fed created the Program in Consumer
Credit and Payments (PCCP), an
interdepartmental initiative to analyze a broad range of issues related
to consumers’ use of payment instruments and credit. The program
is coordinated by the Payment Cards Center (PCC),
which combines its resources with those of the Research, Community Affairs, and Supervision, Regulation and Credit (SRC) departments. In light of the
financial crisis, there has not been a better time for
bank staff to work together to better understand and
address issues affecting millions of consumers.
In 2009, the PCCP launched a series of interactive web
pages on the Bank’s intranet to facilitate this collaboration. In addition to a calendar of events, the web
pages have a sortable library with links to papers, articles, speeches, and presentations. The pages also
allow members to recommend or discuss papers or
events, e-mail the entire PCCP member list, or query

other members. Collaborative tools such as these provide employees with the means to work together more
effectively and efficiently.
Another development was the creation of a consumer
credit data analysis function. This function is housed
in the PCC but supports researchers elsewhere in the
Bank who are working with large and complex micro
data sets on consumer credit and payments.
One outgrowth of the PCCP is an increase in published
research by staff from a number of departments and
an increase in joint programming on timely issues. For
example, in 2009, the PCC and the Community Affairs
Department organized a conference on data limitations that interfere with our understanding of mortgage and real estate markets and the efforts required
to overcome those limitations. The PCC and SRC cosponsored a workshop on advances in mortgage risk
models. In addition, the PCC and the Research Department held the fifth biennial conference on Recent
Developments in Consumer Credit and Payments.

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36 | Annual Report 2009 | www.philadelphiafed.org

REACHING THE END OF AN ERA
IN CHECK PROCESSING
On December 11, 2009, the Philadelphia Fed successfully completed its role in
the multi-year restructuring of paper check-processing operations within the
Federal Reserve System. As of that date, all paper check-processing operations
here migrated to the Cleveland Fed, ending nearly a century of processing paper
checks in Philadelphia.
In 2003, the Federal Reserve Banks announced plans to significantly reduce the
System’s 45 locations for processing checks, as consumers, businesses, and banks
grew less dependent on cancelled paper checks. The Check Clearing for the 21st
Century Act of 2003, popularly known as Check 21, promoted the greater use of
electronic processing of check images rather than the return of an actual check.
This legislation, plus greater use of electronic payments, led to a major reduction in
the number of paper checks processed throughout the industry. Today’s consumers are more apt to pay by debit or credit card for their “in person purchases” and
are increasingly relying on Internet purchases and online banking and bill paying.
In November 2008, the Federal Reserve accelerated the restructuring of its national check processing and announced it would consolidate to a single location
for paper check processing in Cleveland and a single location for electronic check
processing in Atlanta. On February 26, 2010, the Atlanta Fed moved its paper
check-processing operations to Cleveland to complete the restructuring.

Today’s consumers
are more apt to pay
by debit or credit card
for their “in person
purchases” and are
increasingly relying
on Internet purchases
and online banking
and bill paying.

For the past few years, Philadelphia had been one of four main consolidation sites
during the check-restructuring project. In 2006, the Bank completed
the first transition by assuming the check-processing operations of
the New York Fed’s main office. During 2008, Philadelphia assumed
check-processing operations from the New York Fed’s Utica, N.Y. office and the Boston Fed’s location in Windsor Locks, Conn. Finally,
Philadelphia consolidated the check-processing function of the Richmond Fed’s Baltimore branch in April 2009, before it began planning
to transfer operations to Cleveland.
Over the past decade, the Philadelphia Fed’s check-processing operations made major changes in workflow to handle an increasing number of electronic checks, including the addition of high-speed printers
for printing substitute checks. Philadelphia retains a small team to
convert electronic check images to print for depository institutions
in its territory that have not yet converted their operations to receive
check images electronically.

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Federal Reserve Bank of Philadelphia | 37

Through most of its check-processing history, the Philadelphia Fed was the largest and most innovative check-processing office. Philadelphia made major contributions to advance automated check-processing software developments and
offer value-added services to its customers. Check operations peaked in 1999
with an average daily check-processing volume exceeding 4.5 million checks,
representing more than $7 billion in value. At the time, the Federal Reserve
System cleared about a third of more than 42 billion checks written annually.

Check Processing in Philadelphia
1918

1910S
In 1917, the Bank reports a daily average of 37,500 checks, totaling $23.7 million. Checks are sorted by hand on tabletops.

1920S
By 1922, the Bank processes an average of 200,000 checks a day. In 1928, a
County Clearinghouse Plan features one-day check clearing to help eliminate
check-kiting in the areas outside the city clearinghouse zone.

1940S

1940

The Bank introduces the IBM 803, a mechanical sorting machine about the size of
an industrial washing machine and almost as noisy. In 1944, the Bank processes
more than 186 million checks, with about a quarter of the volume directly connected to the war effort.

1950S
The industry develops a magnetic ink character recognition (MICR) system for
encoding check data, so data could be read electronically.

1960S
In 1961, the Bank installs the first computer-controlled check processing system,
CHIPS (Check Handling Information Processing System). By 1964, the Bank is
processing 1 million checks a day.
1951

1954

1960

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38 | Annual Report 2009 | www.philadelphiafed.org

“We salute the hundreds of Federal Reserve Bank of Philadelphia employees and
officers who contributed to an efficient check-processing operation through the
years, and we especially thank the staff who served with distinction through this
challenging period of restructuring,” said Arun Jain, senior vice president, who
oversaw the department’s work.
The successful completion of check restructuring is the latest milestone on a
journey to provide the nation with an efficient payment system, as shown on the
accompanying timeline of nearly a century of check processing in Philadelphia.

1970S
In 1974, the Bank implements a regionalization plan to provide improved services to
distant Pennsylvania banks, with other banks handled by the City-Delaware-New Jersey region. By 1975, the Bank is processing approximately 2.5 million checks a day.

2009

1980S
In 1980, the Monetary Control Act requires the Fed to charge depository institutions for financial services, including check processing, which prompts the drive
for greater efficiencies. In 1984, the Bank installs five high-speed IBM 3890 MICR
readers/sorters, which are capable of sorting 2,000 checks a minute. Meanwhile,
businesses expand the use of automated clearinghouse (ACH) electronic payments.
2004

1990S
In 1993, nearly 90 percent of the nation’s payment transactions still involve
checks, but ACH and payment cards are growing quickly. By the mid-1990s, the
Bank is leading the Federal Reserve System’s efforts to standardize check-processing equipment and software platforms. It also converts from a District-unique
application to the centralized FedACH system for electronic payments.

2000S
In 2001, the Bank clears 1.4 billion checks out of a total of about 42 billion written that year. In 2006, Philadelphia assumes the role of a key consolidation site
for check-processing operations. On December 11, 2009, the Philadelphia Fed
sorts its last check as operations move to the Cleveland Fed.
1999
1964

1985

| Ou
Out
ut o
of
fM
Many...One
any...One | O
Out
u o
of
fM
Many...One
any....One | O
Out
ut o
of
fM
Many
any....One | Out of M an
ny...
Federal Reserve Bank of Philadelphia | 39

FEDERAL RESERVE BANK OF PHILADELPHIA

2009 BANK HIGHLIGHTS

Responsibility
Innovation
Strategies
Knowledge

2009 Audit Symposium
November 17 - 18, 2009
The New Jersey Room
Presented by the Audit Department

FEDERAL RESERVE BANK OF PHILADELPHIA

Audit
The Audit Department hosted a two-day symposium entitled “The R.I.S.K. Environment:
Responsibility, Innovation, Strategies, and Knowledge.” The symposium provided Bank
staff with continued professional development through information sharing and interaction with Bank, professional, and community leaders. Approximately 30 participants
heard speakers from the Bank, Cotton & Company, the Federal Bureau of Investigation,
and other Reserve Banks and Federal Reserve Information Technology. In addition, Philadelphia Fed director Ted Peters, chairman and chief executive officer, Bryn Mawr Trust
Company, discussed the role of the Audit Committee. The department also hosted a visiting senior information technology auditor from the Bank of Lithuania to observe an information technology audit in process. The visitor had attended the department’s Regional
Workshop on Internal Audit of Central Banks and Financial Sector Regulatory Authorities.
Since that time, the department has engaged in discussions regarding opportunities for
sharing best practices between the two Audit departments.
Cash Services
In 2009, the currency counting division completed a major upgrade to the eight highspeed currency-processing machines. This effort included both software and hardware
updates with many technological advances for throughput and efficiency. Each upgrade
required rigorous testing and significant retraining of staff and management. Also,
Cash led several work groups to improve operational planning in the areas of cash training, business continuity, and the receipt and destruction of contaminated currency.

AFFORDABILITY AND AVAILABILITY OF
RENTAL HOUSING IN PENNSYLVANIA
A Special Report by the Community Affairs Department

ATLANTIC CITY : PAST AS PROLOGUE
A Special Report by the Community Affairs Department

Community Affairs
TThe department continued to support the Federal Reserve System’s Mortgage Outreach
aand Research Efforts by hosting a conference for regulators and academic researchers
on data requirements for better understanding housing and credit markets. In addition,
o
department staff collaborated with staff at the Board of Governors to create a questiond
naire for all 12 Reserve Banks to survey recipients about their use of federal Neighborhood
n
SStabilization Program funds. Other accomplishments include the publication of Atlantic
City: Past as Prologue; The Affordability and Availability of Rental Housing in Pennsylvania;
C
aand Alternative Financial Service Providers and the Spatial Void Hypothesis: The Case of
New Jersey and Delaware. The department’s longitudinal study of the effectiveness of
N
homeownership counseling continued with 897 participants. The department’s economic
h
eeducation staff reached over 700 teachers with courses designed to help K-12 school
teachers understand economic concepts, the Federal Reserve System, monetary policy,
and personal financial education. Furthermore, economic education staff developed six
new lessons with the St. Louis Fed for use in the classroom.
Enterprise Risk Management
Philadelphia’s ERM officer provided System leadership by co-chairing the International Operational Risk Working Group conference and led presentations on risk reporting and business continuity. The department officer also made a presentation at a business continuity
program sponsored by the Center for Latin American Monetary Studies. In addition, the

40 | Annual Report 2009 | www.philadelphiafed.org

department introduced the Innovation Forum, a program designed to encourage employees to think innovatively and to share their ideas with the Bank population.
Facilities Management
The Facilities Management Department oversaw the completion of construction for the Bank’s off-site screening facility. The new building, which officially
opened in October 2009, is used for screening general delivery trucks, check
courier vehicles, and armored carriers before the vehicles proceed to the main
Bank building. The department also continued its efforts to make the Bank
more environmentally friendly, in particular through a pilot program to replace
all of the fluorescent light fixtures in the Bank with energy-efficient ones.
Financial Management Services (FMS)
Staff in FMS chaired several System groups, including the COSO Coordinators Group,
the Cost Accounting Group, the Enterprise Risk Management Group, and the Government Entity Accounting Reporting System Management Steering Group. FMS also acted
as trustee chair for the Accounting Professional Education Program. In her role as chair
of the Enterprise Risk Management Group, the Bank’s chief financial officer led an effort
to review and develop recommendations to enhance the System’s original enterprise risk
management framework, which was developed in 2004.
Financial Statistics
In 2009, Financial Statistics staff continued to provide superior analysis to ensure the accuracy and quality of incoming data used by Federal Reserve policymakers responding to
credit market disruptions and changing economic conditions. Many staff members made
important contributions to the Federal Reserve System’s Statistics and Reserves Technology
Modernization Project, to management and enhancement of existing technology applications and business processes, and to System-level training initiatives.
Human Resources
Human Resources continued its leadership of the strategic effort to implement
a talent management program. In 2009, work focused on educating employees about the new core competency model. To support the talent management
program, HR introduced a new e-performance module. HR developed an employment brand identity for the Bank by creating an onboarding Internet site
for use by potential new hires. The department also expanded its participation
in diversity recruiting fairs. All functions within HR supported the downsizing of
operations in Retail Payments by providing counseling services, outplacement support, job
search workshops, and other transition support services. HR partnered with other departments to develop a Bank-wide community service and volunteer initiative. The mission of
this effort, called PhillyFedCARES, is to recognize and publicize the individual and group
volunteer efforts of Bank employees.
Information Technology Services
IT Services managed scores of internal Bank projects, supporting most business lines, and
provided significant support to the Federal Reserve System and the Treasury. Major IT
leadership assignments included enhancements to collateral management systems, software quality assurance services for major projects throughout the Federal Reserve System,
and a proposal to rework the architecture of the Federal Reserve’s network infrastructure
(for voice, data, and video). A Bank-wide wireless system was implemented to comple-

Federal Reserve Bank of Philadelphia | 41

FEDERAL RESERVE BANK OF PHILADELPHIA

2009 BANK HIGHLIGHTS
ment the traditional local area network (LAN) connections. The Groupware Leadership
Center (GLC) actively supported the development and promotion of a national IT Services
strategic plan and deployed major new releases of collaboration technologies, including
e-mail and integrated instant messaging, team workplace sites, and enterprise social networking. An important new video conferencing technology called telepresence was piw
lloted at the Board of Governors and the Richmond, Dallas, and New York Feds. The video
cconferencing team is overseeing installation of telepresence rooms at other Reserve Banks.
LLaw Enforcement
TThe Law Enforcement Department has integrated the off-site screening facility into its
ssecurity operations. It has also completed a major renovation and technology upgrade of
tthe department’s control center and video surveillance security system.
LLegal
TThe Bank’s general counsel continued to chair the System’s Subcommittee of Ethics Officers, which provides information, guidance, and support to the ethics programs of all the
Reserve Banks. As chair, the general counsel worked with other Reserve Bank attorneys
on drafting new financial disclosure forms to be used by the presidents and economists
with regular and ongoing access to Class I FOMC information. The general counsel also
headed a work group of Reserve Bank attorneys that organized a training session open
to all Reserve Bank attorneys. A department officer continues to provide legal support to
the System’s Groupware Leadership Center. Another officer serves as the legal liaison to
the System’s Workers’ Compensation Coalition. A third officer is working with Board attorneys on a System-wide litigation project.
Payment Cards Center
The Payment Cards Center organized three important meetings in 2009. The first, cosponsored with the Bank’s Community Affairs Department, brought together participants
from the academic, government, nonprofit, and for-profit sectors to discuss the need for
better collection and dissemination of housing- and mortgage-related data for the purposes of supervision, mitigation, and state-of-the-art research. The second examined the
current state of the credit counseling industry as it attempts to respond to the financial crisis and the rapid growth of for-profit debt-settlement companies. The third, co-sponsored
with the Bank’s Research Department, brought together 75 scholars to discuss the latest
research on consumer credit and payments. In addition, the center welcomed a new
director in 2009.

THE LIBRARY COMPANY OF PHILADELPHIA

A C H A P T E R I N T H E H I S TO RY O F C E N T R A L B A N K I N G

42 | Annual Report 2009 | www.philadelphiafed.org

Public Affairs
The Public Affairs Department published The First Bank of the United States: A Chapter in the History of Central Banking, a booklet that will be used by teachers using the
Bank’s economic education programs nationwide. The department also helped promote
Community Affairs’ work in support of the System’s Mortgage Outreach and Research
Efforts (MORE). In addition to gaining publicity in traditional media, the Public Affairs
team placed the Bank’s 2005 video, “Buried by Debt: The Dangers of Borrowing,” as
streaming video on the Bank’s website and on YouTube. The department also began a

multi-year project to redesign the Bank’s intranet to incorporate tighter integration with
the Groupware Leadership Center’s collaboration tools. Public Affairs also welcomed more
than 31,000 people to the “Money in Motion” exhibit in 2009.
Research
In January, the Research Department helped to organize a meeting on regulatory reform
that brought together academic experts on financial regulation with Federal Reserve presidents and Governors. The director of research spent four months at the Board of Governors as a visiting Reserve Bank officer in the Division of Monetary Affairs. Department
staff provided assistance to the city of Philadelphia and the Greater Philadelphia Chamber
of Commerce on budget and economic analysis, to the U.S. Bureau of Labor Statistics
and Statistics Canada on measuring rents and intangible assets, and to the European
Central Bank on conducting business surveys. The department appointed a full-time director for its Real-Time Data Research Center. The Survey of Professional Forecasters, which
is produced by the center, provided forecasts used in the Supervisory Capital Assessment
Program (the so-called stress test) and center staff worked with staff at the Board to add
questions to a survey that will aid in bank supervision. Research continued to produce a
number of business surveys, including the Business Outlook Survey, which is used as an
indicator of regional as well as national manufacturing activity. (See page 30.) The department sponsored the eighth Philadelphia Fed Policy Forum, and Research staff organized
several conferences that covered such topics as international trade, macroeconomics and
monetary economics, quantitative macroeconomics, and consumer credit and payments.

Policy Lessons from the
Economic and Financial Crisis
Friday, December 4, 2009

Second Bank of the United States— Philadelphia, PA
Photo by B. Krist for GPTMC

Retail Payments
Philadelphia’s Retail Payments Department successfully consolidated the check-processing
operations of the Richmond Fed’s Baltimore office to Philadelphia. The department then
completed the move of paper check-processing operations from Philadelphia to Cleveland
at year-end, ceasing check-sorting operations after more than 90 years of service. Highspeed printing of image replacement documents and shipping to thousands of endpoints
from Virginia to Maine continue.
Supervision, Regulation and Credit Department (SRC)
SRC provided active leadership in the Supervisory Capital Assessment Program (also called
stress test; see page 22). The department also collaborated with staff at the Board of Governors to develop additional questions for the Quinquennial Survey of Finance Companies
and supported the Board by providing quarterly briefings on the state of the credit card
market. In addition, two SRC officers assumed high-profile assignments and assisted System efforts pertaining to compliance and Treasury issues. Department staff held a series of
Directors’ Workshops, hosted its annual All-Staff Conference, and organized and hosted
the Partnership for Progress annual meeting, “Keeping Minority Institutions Viable.” The
department provides ongoing leadership for Consumer Compliance Outlook®, a consumer
protection publication for the Federal Reserve System, which saw a material rise in subscriptions in 2009.
Treasury Services
In 2009, the Bank’s Treasury Services Department provided guidance to the Federal Reserve System on collateral management issues and introduced important enhancements
to the Collateral Management System, including the daily pricing of collateral holdings.
The department also provided leadership in developing requirements for implementation
of the Payment System Risk (PSR) policies.

Compli

Consumer

First Quarter 2010

Inside

nce

Outlook®

Rules Regarding Overdraft Services:
Questions and Answers
By Alex Kunigenas, Compliance Risk Coordinator,
Federal Reserve Bank of San Francisco

CRA and Consumer Protection
Issues in Banking Applications .....2
Compliance Alert...........................4
An Overview of the Regulation Z
Rules Implementing the
CARD Act .......................................5
On the Docket ...............................8
News from Washington ..............10
Regulatory Calendar ...................23
Calendar of Events ......................24

INTRODUCTION
-L"CACK@CP

RFC$CBCP?J0CQCPTC1WQRCKFCJBGRQjPQR-SRJMMI*GTC
?SBGMAMLDCPCLAC-SRJMMI*GTCGQGLRCLBCBRM@C?LMLEMGLEQCPGCQMDRCJCAMLDCPCLACQDMASQCBQNCAGjA?JJWMLAMLQSKCPAMKNJG?LACGQQSCQ'L"CACKber, David Stein and Dana Miller, both with the Federal Reserve Board’s legal
staff, presented the new overdraft rules issued by the Board of Governors,
primarily covering changes to Regulation E but also touching on previously
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effective January 2010.
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?LBRPGEECPCB?QGELGjA?LRLSK@CPMDOSCQRGMLQ5FGJCK?LWMDRFCQCOSCQtions were addressed during the call, time and other practical considerations
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Outlook is providing an overview of the new Regulation E rule and answers to the most
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A federal reserve system
publication with a
focus on consumer
compliance issues

Applicability
The new overdraft service rules apply to consumer accounts only. As described
in §205.17(a) of Regulation E, “The term ‘overdraft service’ means a service
SLBCPUFGAF?jL?LAG?JGLQRGRSRGML?QQCQQCQ?DCCMPAF?PECML?consumer’s
account held by the institution for paying a transaction (including a check or
MRFCPGRCKUFCLRFCAMLQSKCPF?QGLQSDjAGCLRMPSL?T?GJ?@JCDSLBQGLRFC
?AAMSLRtCKNF?QGQ?BBCB2FCPCESJ?RGMLGBCLRGjCQRFPCCRWNCQMDQCPTGACQ
that are not considered “overdraft services,” including transfers from a line
MD APCBGR
 QSAF ?Q ? APCBGR A?PB ?AAMSLR
 FMKC COSGRW JGLC MD APCBGR
 MP ?L
overdraft line of credit; transfers from another account held by the consumer, such as a savings account; or a line of credit or other transaction exempt
from the Federal Reserve Board’s Regulation Z (12 C.F.R. §226) pursuant to
12 C.F.R. §226.3(d) (i.e., securities or commodities accounts).
Scope of Opt-In
Generally, the new rule prohibits an institution that holds a consumer’s accontinued on page 12

Federal Reserve Bank of Philadelphia | 43

FEDERAL RESERVE BANK OF PHILADELPHIA

BOARD OF DIRECTORS
William F. Hecht (1) (a, d)
Chairman
Retired Chairman, President & CEO
PPL Corporation
Charles P. Pizzi (2) (a, c, d)
Deputy Chairman
President & CEO
Tasty Baking Company
Michael F. Camardo (4) (a, c)
Retired Executive Vice President
Lockheed Martin ITS
Keith S. Campbell (5) (a, c)
Chairman
Mannington Mills, Inc.

Aaron L. Groff, Jr. (8) (a, b, d)
Chairman, President & CEO
Ephrata National Bank
Garry L. Maddox (9) (a, b, d)
President & CEO
A. Pomerantz & Company
Jeremy Nowak (6) (a, b)
President & CEO
The Reinvestment Fund
Frederick C. Peters II (7) (a, b)
President
Bryn Mawr Trust Company

(a) Executive Committee

Ted T. Cecala (3) (a, c)
Chairman & CEO
Wilmington Trust Corporation

(b) Audit Committee
(c) Management and Budget Committee
(d) Nominating and Governance Committee

of Ma
any...One | Out of Many...One | Out of Many...One | Out of Many...One |
44 | Annual Report 2009 | www.philadelphiafed.org

| Out of M any...One | Out of M any...One | Out of M any...One | Out of M any...
Federal Reserve Bank of Philadelphia | 45

FEDERAL RESERVE BANK OF PHILADELPHIA

ECONOMIC ADVISORY COUNCIL
Renee Amoore
President & CEO
The Amoore Group
King of Prussia, PA

Eric May
President & Owner
Pen-Fern Oil Co., Inc.
Dallas, PA

Daniel Blaschak
Treasurer
Blaschak Coal, Inc.
Mahanoy City, PA

Christopher Schell
President
Schell Brothers Construction
Lewes, DE

Edward Coryell
Business Manager
Metropolitan Regional Council
Philadelphia, PA

George Tsetsekos
Dean
Drexel University
Philadelphia, PA

James Hargadon
Executive Vice President & CFO
Oki Data Americas, Inc.
Mt. Laurel, NJ

Kenneth Tuckey
President
Tuckey Mechanical Services
Carlisle, PA

Alexander Hatala
CEO
Lourdes Health System
Camden, NJ

Mark Wagner
President & CEO
White Oak Mills, Inc.
Elizabethtown, PA

Kelly Johnston
Vice President
Government Affairs
Campbell Soup Company
Camden, NJ

David Wenger
President & CEO
Transport Decisions
Churchville, PA

Sharmain Matlock-Turner
CEO
Greater Philadelphia Urban
Affairs Coalition
Philadelphia, PA

46 | Annual Report 2009 | www.philadelphiafed.org

FEDERAL RESERVE BANK OF PHILADELPHIA

SENIOR STAFF

The Bank’s senior staff consists of Charles I. Plosser (1), President; William H. Stone, Jr.
(2), First Vice President; and other key senior officers: Michael E. Collins (6), Executive
Vice President and Lending Officer; Richard W. Lang (8), Executive Vice President;
Loretta J. Mester (4), Senior Vice President; D. Blake Prichard (10), Executive Vice
President; Donna Franco (11), Senior Vice President and Chief Financial Officer; Mary
Ann Hood (7), Senior Vice President; Arun Jain (5), Senior Vice President; William W.
Lang (9), Senior Vice President; and Milissa Tadeo (3), Senior Vice President.

Federal Reserve Bank of Philadelphia | 47

FEDERAL RESERVE BANK OF PHILADELPHIA

CURRENT OFFICERS
Charles I. Plosser
President and CEO
William H. Stone, Jr.
First Vice President
Michael E. Collins
Executive Vice President &
Lending Officer
Supervision, Regulation & Credit
Richard W. Lang
Executive Vice President
D. Blake Prichard
Executive Vice President
Donna L. Franco
Senior Vice President & Chief
Financial Officer
Mary Ann Hood
Senior Vice President & EEO
Officer
Human Resources
Arun K. Jain
Senior Vice President
Retail Payments
William W. Lang
Senior Vice President & Chief
Examinations Officer
Supervision, Regulation & Credit
Loretta J. Mester
Senior Vice President & Director
of Research
Milissa M. Tadeo
Senior Vice President
Cash Services & Treasury
Services
John D. Ackley
Vice President
Treasury Services

Edward M. Mahon
Vice President & General
Counsel
Legal

Shirley L. Coker
Assistant Vice President
& Counsel
Legal

Alice Kelley Menzano
Vice President
Information Technology Services

Maryann T. Connelly
Assistant Vice President &
Counsel
Legal

Mary DeHaven Myers
Vice President & Community
Affairs Officer
Community Affairs
James Nason
Vice President & Economist
Research

Eric A. Sonnheim
Assistant Vice President
Supervision, Regulation & Credit
Marie Tkaczyk
Assistant Vice President
Information Technology Services

Michael T. Doyle
Assistant Vice President
Retail Payments

Patrick F. Turner
Assistant Vice President
Information Technology Services

Patrick M. Regan
Vice President
Information Technology Services

Gregory Fanelli
Assistant Vice President
Information Technology Services

Constance H. Wallgren
Assistant Vice President
Supervision, Regulation & Credit

Michelle M. Scipione
Vice President
Cash Services

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

Christopher C. Henderson
Retail Risk Officer
Supervision, Regulation & Credit

A. Reed Raymond, III
Vice President & Chief
Administrative Officer
Supervision, Regulation & Credit

Richard A. Sheaffer
Vice President & General Auditor
Herbert E. Taylor
Vice President and
Corporate Secretary
Todd Vermilyea
Vice President
Supervision, Regulation & Credit
Vish P. Viswanathan
Vice President & Discount
Officer
Supervision, Regulation & Credit

John G. Bell
Vice President
Financial Statistics
Mitchell S. Berlin
Vice President & Economist
Research

Kei-Mu Yi
Vice President & Economist
Research

Robert J. Bucco
Vice President
Wholesale Product Office

Aileen C. Boer
Assistant Vice President
Research

Michael Dotsey
Vice President & Senior
Economic Policy Advisor
Research

Donna Brenner
Assistant Vice President
Enterprise Risk Management

48 | Annual Report 2009 | www.philadelphiafed.org

Stephen J. Smith
Assistant Vice President &
Counsel
Legal

Frank J. Doto
Assistant Vice President
Supervision, Regulation & Credit

James K. Welch
Vice President
Law Enforcement & Facilities
Management

James S. Ely
Vice President
Public Affairs

Cynthia L. Course
Assistant Vice President &
Assistant Secretary
Supervision, Regulation & Credit

Keith Sill
Assistant Vice President &
Director, Real-Time Data
Research Center
Research

Brian Calderwood
Assistant Vice President
Information Technology Services
Jennifer E. Cardy
Assistant Vice President
Financial Management Services

William L. Gaunt
Assistant Vice President
Supervision, Regulation & Credit
Stephen G. Hart
Assistant Vice President
Human Resources
Robert Hunt
Assistant Vice President &
Director,
Payment Cards Center
John P. Kelly
Assistant Vice President
Treasury Services
Elisabeth V. Levins
Assistant Vice President
Supervision, Regulation & Credit
Robert F. Mucerino
Assistant Vice President
Treasury Services
Leonard Nakamura
Assistant Vice President &
Economist
Research

Christopher Ivanoski
Facilities Officer
Facilities Management
Thomas J. Lombardo
Financial Services Industry
Relations Officer & Assistant
Secretary
Customer Relations
Keith Morales
Information Technology Services
Officer
Information Technology Services
Wanda Preston
Supervision, Regulation & Credit
Officer
Supervision, Regulation & Credit
Gregory Ramick
Wholesale Product Office
Officer
Wholesale Product Office
Gail L. Todd
Credit Officer
Supervision, Regulation & Credit

Camille M. Ochman
Assistant Vice President
Cash Services
Anthony T. Scafide, Jr.
Assistant Vice President
Customer Relations

Includes promotions through
March 2010

FEDERAL RESERVE BANK OF PHILADELPHIA

OPERATING STATISTICS
In 2009, Philadelphia’s total volume of commercial checks

delphia did not have any government check volume to

processed decreased 67 percent, and the dollar value of

report in 2009.

transactions decreased 73 percent. These decreases were
the result of the general decline in check processing in

In 2009, Philadelphia continued to be a major processor

the nation’s payment system due to the increased use of

of cash in the Federal Reserve System, although the vol-

Check 21 image exchange by financial institutions. As of

ume of currency processed decreased 5 percent because

December 11, 2009, Philadelphia’s paper check operation

of improvements in financial institutions’ cash-handling

was consolidated into the Cleveland check operation. This

practices. Because the Bank processed a greater propor-

marked the completion of over 90 years of paper check

tion of smaller denomination notes, the actual dollar value

processing by Philadelphia within the Federal Reserve

of currency processed decreased by a more significant

System. Philadelphia has now made the transition to a

margin (18 percent). In 2009, the volume of coin bags

substitute check print and distribution site for 2010.

processed on site increased 13 percent, and the value of
processed coin increased 15 percent because of an over-

The volume of commercial checks received as Check

abundance of coin in the District resulting from the 11th

21 electronic images increased 5 percent in 2009. The

year of the State Quarters program, during which the U.S.

total paper and electronic items processed declined

Territories were added to the program, and the issuance

nationwide due to continued declines in check writing.

of new commemorative coins.

At this stage, increases in electronic volume are the result
of more institutions, particularly credit unions and smaller

In 2009, discount window lending increased significantly,

community banks, using Check 21 image exchange rather

both in the number of loans and the value of loans ad-

than depositing paper checks. However, the overall Check

vanced by the Reserve Bank. The financial turbulence and

21 dollars processed in 2009 declined 12 percent because

the tightening of liquidity in the economy resulted in many

some large correspondent institutions with large dollar

depository institutions relying on the discount window as

value transactions exchanged images directly with other

a source of funds to meet their liquidity needs. In addi-

correspondents via clearinghouse arrangements.

tion to the normal lending programs (i.e., primary credit),
financial institutions also took advantage of the new lend-

In August 2008, all government check volume was con-

ing programs introduced by the Federal Reserve, such as

solidated at the St. Louis Reserve Bank. As a result, Phila-

the Term Auction Facility (TAF).

SERVICES TO DEPOSITORY INSTITUTIONS
2009 Volume

2009 Dollar Value

2008 Volume

2008 Dollar Value

Check services:
Commercial checks –
Paper processed
Check 21 received
U.S. government checks

182.1 million checks
1.2 billion checks
-

$300.0 billion
$2,198.0 billion
-

554.8 million checks
1.2 billion checks
40.9 million checks

$1,094.3 billion
$2,509.1 billion
$47.7 billion

Cash operations:
Currency processed
Coin paid and received

1,702.7 million notes
459.0 thousand bags

$23.7 billion
$215.1 million

1,793.2 million notes
404.9 thousand bags

$29.0 billion
$187.5 million

Loans to depository
institutions during the year

1,295 loans

$7,369.0 billion

437 loans

$2,264.8 billion

Federal Reserve Bank of Philadelphia | 49

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

50 | Annual Report 2009 | www.philadelphiafed.org

FEDERAL RESERVE BANK OF PHILADELPHIA

FINANCIAL REPORTS CONTENTS
Letter to Directors ......................................................................................................52
Report of Independent Auditors .................................................................................53
Statements of Condition .............................................................................................55
Statements of Income and Comprehensive Income ....................................................56
Statements of Changes in Capital................................................................................57
Notes to Financial Statements.....................................................................................58

Federal Reserve Bank of Philadelphia | 51

FEDERAL RESERVE BANK OF PHILADELPHIA

Letter to Directors

52 | Annual Report 2009 | www.philadelphiafed.org

FEDERAL RESERVE BANK OF PHILADELPHIA

Report of Independent Auditors

Deloitte & Touche LLP
1700 Market Street
Philadelphia, PA 19103-3984
USA
Tel: +1 215 246 2300
Fax: +1 215 569 2441
www.deloitte.com

INDEPENDENT AUDITORS’ REPORT
To the Board of Governors of the Federal Reserve System
and the Board of Directors of the Federal Reserve Bank of Philadelphia:

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

Federal Reserve Bank of Philadelphia | 53

FEDERAL RESERVE BANK OF PHILADELPHIA

Report of Independent Auditors

reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with the accounting principles established by the Board of Governors of
the Federal Reserve System, and that receipts and expenditures of FRB Philadelphia are being
made only in accordance with authorizations of management and directors of FRB Philadelphia;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of FRB Philadelphia’s assets that could have a material effect on
the financial statements.
Because of the inherent limitations of internal control over financial reporting, including
the possibility of collusion or improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods are
subject to the risk that the controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
As described in Note 4 to the financial statements, FRB Philadelphia has prepared these
financial statements in conformity with accounting principles established by the Board of
Governors of the Federal Reserve System, as set forth in the Financial Accounting Manual for
Federal Reserve Banks, which is a comprehensive basis of accounting other than accounting
principles generally accepted in the United States of America. The effects on such financial
statements of the differences between the accounting principles established by the Board of
Governors of the Federal Reserve System and accounting principles generally accepted in the
United States of America are also described in Note 4.
In our opinion, such financial statements present fairly, in all material respects, the
financial position of FRB Philadelphia as of December 31, 2009 and 2008, and the results of its
operations for the years then ended, on the basis of accounting described in Note 4. Also, in our
opinion, FRB Philadelphia maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2009, based on the criteria established in Internal Control
— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.

April 21, 2010

54 | Annual Report 2009 | www.philadelphiafed.org

FEDERAL RESERVE BANK OF PHILADELPHIA

Statements of Condition

As of December 31, 2009 and December 31, 2008 (in millions)

2009

2008

ASSETS
Gold certificates
Special drawing rights certificates
Coin
Items in process of collection
Prepaid interest on Federal Reserve notes
Loans to depository institutions
System Open Market Account:
Securities purchased under agreements to resell
Treasury securities, net
Government-sponsored enterprise debt securities, net
Federal agency and government-sponsored enterprise
mortgage-backed securities, net
Investments denominated in foreign currencies
Central bank liquidity swaps
Accrued interest receivable
Interdistrict settlement account
Bank premises and equipment, net
Other assets
Total assets

$

450
210
165
51
284
1,735

$

453
83
137
237
38,629

12,504
2,596

3,493
21,021
905

14,256
2,776
1,128
197
35,084
92
53

2,438
54,424
377
85
56

$

71,581

$

122,338

$

32,831

$

36,205

LIABILITIES AND CAPITAL
Federal Reserve notes outstanding, net
System Open Market Account:
Securities sold under agreements to repurchase
Other liabilities
Deposits:
Depository institutions
Other deposits
Deferred credit items
Accrued interest on Federal Reserve notes
Interdistrict settlement account
Interest due to depository institutions
Accrued benefit costs
Other liabilities
Total liabilities
Capital paid-in
Surplus (including accumulated other comprehensive loss of $30 million
and $24 million at December 31, 2009 and 2008, respectively)
Total capital
Total liabilities and capital

$

1,206
9

3,858
-

31,597
5
220
3
93
13

10,565
4
515
7
66,458
2
79
15

65,977

117,708

2,802

2,315

2,802

2,315

5,604

4,630

71,581

$

122,338

The accompanying notes are an integral part of these financial statements.
Federal Reserve Bank of Philadelphia | 55

FEDERAL RESERVE BANK OF PHILADELPHIA

Statements of Income and Comprehensive Income
For the years ended December 31, 2009 and December 31, 2008 (in millions)
INTEREST INCOME
Loans to depository institutions
System Open Market Account:
Securities purchased under agreements to resell
Treasury securities
Government-sponsored enterprise debt securities
Federal agency and government-sponsored enterprise
mortgage-backed securities
Investments denominated in foreign currencies
Central bank liquidity swaps

2009
$

2008
60

$

55

1
488
39

83
1,120
5

356
32
231

62
356

1,207

1,681

3
46

32
9

Total interest expense

49

41

Net interest income

1,158

1,640

-

166

5
29
26
32
7

135
40
32
37

99

410

104
13
11
72
28

101
12
13
66
38

228

230

1,029

1,820

(6)

(5)

Total interest income
INTEREST EXPENSE
System Open Market Account:
Securities sold under agreements to repurchase
Depository institution deposits

NON-INTEREST INCOME:
System Open Market Account:
Treasury securities gains
Federal agency and government-sponsored enterprise
mortgage-backed securities gains, net
Foreign currency gains, net
Compensation received for services provided
Reimbursable services to government agencies
Other income
Total non-interest income
OPERATING EXPENSES:
Salaries and other benefits
Occupancy expense
Equipment expense
Assessments by the Board of Governors
Other expenses
Total operating expenses
Net income prior to distribution
Change in funded status of benefit plans
Comprehensive income prior to distribution
Distribution of comprehensive income:
Dividends paid to member banks
Transferred to surplus and change in accumulated other
comprehensive loss
Payments to Treasury as interest on Federal Reserve notes
Total distribution
The accompanying notes are an integral part of these financial statements.
56 | Annual Report 2009 | www.philadelphiafed.org

$

1,023

$

1,815

$

151

$

127

487
385
$

1,023

502
1,186
$

1,815

FEDERAL RESERVE BANK OF PHILADELPHIA

Statements of Changes in Capital

For the years ended December 31, 2009 and December 31, 2008 (in millions, except share data)
Surplus

Balance at January 1, 2008
(36,266,586 shares)

Capital
paid-In

Net income
retained

$ 1,813

$ 1,832

502

Accumulated
other
comprehensive
loss

Total
capital

(19)

$ 1,813

-

-

-

502

-

507

(5)

502

502

Balance at December 31, 2008
(46,301,161 shares)

$ 2,315

$ 2,339

(24)

$ 2,315

Net change in capital stock
issued (9,737,906 shares)

487

-

-

-

487

-

493

(6)

487

487

$ 2,802

$ 2,832

(30)

$ 2,802

Net change in capital stock
issued (10,034,575 shares)
Transferred to surplus and
change in accumulated other
comprehensive loss

Transferred to surplus and
change in accumulated other
comprehensive loss
Balance at December 31, 2009
(56,039,067 shares)

$

Total
surplus

$

$

$

$

$

3,626

4,630

5,604

The accompanying notes are an integral part of these financial statements.
Federal Reserve Bank of Philadelphia | 57

FEDERAL RESERVE BANK OF PHILADELPHIA

Notes To Financial Statements

1. STRUCTURE
The Federal Reserve Bank of Philadelphia (“Bank”) is part of the Federal Reserve System (“System”) and is
one of the twelve Federal Reserve Banks (“Reserve Banks”) created by Congress under the Federal Reserve
Act of 1913 (“Federal Reserve Act”), which established the central bank of the United States. The Reserve
Banks are chartered by the federal government and possess a unique set of governmental, corporate, and
central bank characteristics. The Bank serves the Third Federal Reserve District, which includes Delaware and
portions of New Jersey and Pennsylvania.
In accordance with the Federal Reserve Act, supervision and control of the Bank is exercised by a board of
directors. The Federal Reserve Act specifies the composition of the board of directors for each of the Reserve
Banks. Each board is composed of nine members serving three-year terms: three directors, including those
designated as chairman and deputy chairman, are appointed by the Board of Governors of the Federal Reserve System (“Board of Governors”) to represent the public, and six directors are elected by member banks.
Banks that are members of the System include all national banks and any state-chartered banks that apply
and are approved for membership. Member banks are divided into three classes according to size. Member
banks in each class elect one director representing member banks and one representing the public. In any
election of directors, each member bank receives one vote, regardless of the number of shares of Reserve
Bank stock it holds.
In addition to the 12 Reserve Banks, the System also consists, in part, of the Board of Governors and the
Federal Open Market Committee (“FOMC”). The Board of Governors, an independent federal agency, is
charged by the Federal Reserve Act with a number of specific duties, including general supervision over the
Reserve Banks. The FOMC is composed of members of the Board of Governors, the president of the Federal
Reserve Bank of New York (“FRBNY”), and, on a rotating basis, four other Reserve Bank presidents.

2. OPERATIONS AND SERVICES
The Reserve Banks perform a variety of services and operations. These functions include participating in
formulating and conducting monetary policy; participating in the payments system, including large-dollar
transfers of funds, automated clearinghouse (“ACH”) operations, and check collection; distributing coin and
currency; performing fiscal agency functions for the U.S. Department of the Treasury (“Treasury”), certain
Federal agencies, and other entities; serving as the federal government’s bank; providing short-term loans to
depository institutions; providing loans to individuals, partnerships, and corporations in unusual and exigent
circumstances; serving consumers and communities by providing educational materials and information regarding financial consumer protection rights and laws and information on community development programs
and activities; and supervising bank holding companies, state member banks, and U.S. offices of foreign
banking organizations. Certain services are provided to foreign and international monetary authorities, primarily by the FRBNY.
The FOMC, in conducting monetary policy, establishes policy regarding domestic open market operations,
oversees these operations, and annually issues authorizations and directives to the FRBNY to execute transac-

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FEDERAL RESERVE BANK OF PHILADELPHIA

Notes To Financial Statements

tions. The FOMC authorizes and directs the FRBNY to conduct operations in domestic markets, including the
direct purchase and sale of Treasury securities, Federal agency and government-sponsored enterprise (“GSE”)
debt securities, Federal agency and GSE mortgage-backed securities (“MBS”), the purchase of these securities under agreements to resell, and the sale of these securities under agreements to repurchase. The FRBNY
executes these transactions at the direction of the FOMC and holds the resulting securities and agreements
in a portfolio known as the System Open Market Account (“SOMA”). The FRBNY is authorized to lend the
Treasury securities and Federal agency and GSE debt securities that are held in the SOMA.
In addition to authorizing and directing operations in the domestic securities market, the FOMC authorizes
the FRBNY to execute operations in foreign markets in order to counter disorderly conditions in exchange
markets or to meet other needs specified by the FOMC to carry out the System’s central bank responsibilities. Specifically, the FOMC authorizes and directs the FRBNY to hold balances of, and to execute spot and
forward foreign exchange and securities contracts for, fourteen foreign currencies and to invest such foreign
currency holdings, while maintaining adequate liquidity. The FRBNY is authorized and directed by the FOMC
to maintain reciprocal currency arrangements (“FX swaps”) with two central banks and to “warehouse” foreign currencies for the Treasury and the Exchange Stabilization Fund (“ESF”). The FRBNY is also authorized
and directed by the FOMC to maintain U.S. dollar currency liquidity swap arrangements with fourteen central
banks. The FOMC has also authorized the FRBNY to maintain foreign currency liquidity swap arrangements
with four foreign central banks.
Although the Reserve Banks are separate legal entities, they collaborate in the delivery of certain services to
achieve greater efficiency and effectiveness. This collaboration takes the form of centralized operations and
product or function offices that have responsibility for the delivery of certain services on behalf of the Reserve
Banks. Various operational and management models are used and are supported by service agreements
between the Reserve Banks. In some cases, costs incurred by a Reserve Bank for services provided to other
Reserve Banks are not shared; in other cases, the Reserve Banks are reimbursed for costs incurred in providing
services to other Reserve Banks. Major services provided by the Bank on behalf of the System and for which
the costs were not reimbursed by the other Reserve Banks include Collateral Management System, Electronic
Cash Letter System, Groupware Leadership Center, Treasury Check Information Services Central Business Administration Function, and Treasury Direct Central Business Administration Function.

3. FINANCIAL STABILITY ACTIVITIES
The Reserve Banks have implemented the following programs that support the liquidity of financial institutions and foster improved conditions in financial markets.
Expanded Open Market Operations and Support for Mortgage-Related Securities
The Single-Tranche Open Market Operation Program allows primary dealers to initiate a series of 28-day term
repurchase transactions while pledging Treasury securities, Federal agency and GSE debt securities, and Federal agency and GSE MBS as collateral.
The Federal Agency and GSE Debt Securities and MBS Purchase Program provides support to the mortgage

Federal Reserve Bank of Philadelphia | 59

FEDERAL RESERVE BANK OF PHILADELPHIA

Notes To Financial Statements

and housing markets and fosters improved conditions in financial markets. Under this program, the FRBNY
purchases housing-related GSE debt securities and Federal agency and GSE MBS. Purchases of housingrelated GSE debt securities began in November 2008 and purchases of Federal agency and GSE MBS began
in January 2009. The FRBNY is authorized to purchase up to $200 billion in fixed rate, non-callable GSE debt
securities and up to $1.25 trillion in fixed rate Federal agency and GSE MBS. The activities of both of these
programs are allocated to the other Reserve Banks.
Central Bank Liquidity Swaps
The FOMC authorized and directed the FRBNY to establish central bank liquidity swap arrangements, which
may be structured as either U.S. dollar liquidity or foreign currency liquidity swap arrangements.
U.S. dollar liquidity swap arrangements were authorized with fourteen foreign central banks to provide liquidity in U.S. dollars to overseas markets. Such arrangements were authorized with the following central banks:
the Reserve Bank of Australia, the Banco Central do Brasil, the Bank of Canada, Danmarks Nationalbank, the
Bank of England, the European Central Bank, the Bank of Japan, the Bank of Korea, the Banco de Mexico,
the Reserve Bank of New Zealand, Norges Bank, the Monetary Authority of Singapore, the Sveriges Riksbank,
and the Swiss National Bank. The maximum amount that could be drawn under these swap arrangements
varied by central bank. The authorization for these swap arrangements expired on February 1, 2010.
Foreign currency liquidity swap arrangements provided the Reserve Banks with the capacity to offer foreign
currency liquidity to U.S. depository institutions. Such arrangements were authorized with the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank. The maximum amount
that could be drawn under the swap arrangements varied by central bank. The authorization for these swap
arrangements expired on February 1, 2010.
Lending to Depository Institutions
The Term Auction Facility (“TAF”) promotes the efficient dissemination of liquidity by providing term funds to
depository institutions. Under the TAF, Reserve Banks auction term funds to depository institutions against
any collateral eligible to secure primary, secondary, and seasonal credit less a margin, which is a reduction in
the assigned collateral value that is intended to provide the Banks additional credit protection. All depository
institutions that are considered to be in generally sound financial condition by their Reserve Bank and that are
eligible to borrow under the primary credit program are eligible to participate in TAF auctions. All loans must
be collateralized to the satisfaction of the Reserve Banks.
Lending to Primary Dealers
The Term Securities Lending Facility (“TSLF”) promoted liquidity in the financing markets for Treasury securities. Under the TSLF, the FRBNY could lend up to an aggregate amount of $200 billion of Treasury securities
held in the SOMA to primary dealers secured for a term of 28 days. Securities were lent to primary dealers
through a competitive single-price auction and were collateralized, less a margin, by a pledge of other securities, including Treasury securities, municipal securities, Federal agency and GSE MBS, non-agency AAA/
Aaa-rated private-label residential MBS, and asset-backed securities (“ABS”). The authorization for the TSLF
expired on February 1, 2010.

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FEDERAL RESERVE BANK OF PHILADELPHIA

Notes To Financial Statements

The Term Securities Lending Facility Options Program (“TOP”) offered primary dealers, through a competitive
single-price auction, to purchase an option to draw upon short-term, fixed-rate TSLF loans in exchange for
eligible collateral. The program enhanced the effectiveness of the TSLF by ensuring additional liquidity during
periods of heightened collateral market pressures, such as around quarter-end dates. The program was suspended effective with the maturity of the June 2009 TOP options and the program authorization expired on
February 1, 2010.
Other Lending Facilities
The Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (“AMLF”) provided funding
to depository institutions and bank holding companies to finance the purchase of eligible high-quality assetbacked commercial paper (“ABCP”) from money market mutual funds. The program assisted money market
mutual funds that hold such paper to meet the demands for investor redemptions and to foster liquidity in
the ABCP market and money markets more generally. The Federal Reserve Bank of Boston (“FRBB”) administered the AMLF and was authorized to extend these loans to eligible borrowers on behalf of the other Reserve Banks. All loans extended under the AMLF were non-recourse and were recorded as assets by the FRBB
and if the borrowing institution settles to a depository account in the Third Federal Reserve District, the funds
were credited to the depository institution account and settled between the Reserve Banks through the interdistrict settlement account. The credit risk related to the AMLF was assumed by the FRBB. The authorization
for the AMLF expired on February 1, 2010.

4. SIGNIFICANT ACCOUNTING POLICIES
Accounting principles for entities with the unique powers and responsibilities of a nation’s central bank have
not been formulated by accounting standard-setting bodies. The Board of Governors has developed specialized accounting principles and practices that it considers to be appropriate for the nature and function of a
central bank. These accounting principles and practices are documented in the Financial Accounting Manual
for Federal Reserve Banks (“Financial Accounting Manual” or “FAM”), which is issued by the Board of Governors. The Reserve Banks are required to adopt and apply accounting policies and practices that are consistent
with the FAM and the financial statements have been prepared in accordance with the FAM.
Limited differences exist between the accounting principles and practices in the FAM and generally accepted
accounting principles in the United States (“GAAP”), primarily due to the unique nature of the Bank’s powers and responsibilities as part of the nation’s central bank. The primary difference is the presentation of all
SOMA securities holdings at amortized cost rather than the fair value presentation required by GAAP. Treasury securities, GSE debt securities, Federal agency and GSE MBS, and investments denominated in foreign
currencies comprising the SOMA are recorded at cost, on a settlement-date basis rather than the trade-date
basis required by GAAP. The cost basis of Treasury securities, GSE debt securities, and foreign government
debt instruments is adjusted for amortization of premiums or accretion of discounts on a straight-line basis.
Amortized cost more appropriately reflects the Bank’s securities holdings given the System’s unique responsibility to conduct monetary policy. Accounting for these securities on a settlement-date basis more appropriately reflects the timing of the transaction’s effect on the quantity of reserves in the banking system. Although the application of fair value measurements to the securities holdings may result in values substantially

Federal Reserve Bank of Philadelphia | 61

FEDERAL RESERVE BANK OF PHILADELPHIA

Notes To Financial Statements

above or below their carrying values, these unrealized changes in value have no direct effect on the quantity
of reserves available to the banking system or on the prospects for future Bank earnings or capital. Both
the domestic and foreign components of the SOMA portfolio may involve transactions that result in gains or
losses when holdings are sold prior to maturity. Decisions regarding securities and foreign currency transactions, including their purchase and sale, are motivated by monetary policy objectives rather than profit. Accordingly, fair values, earnings, and gains or losses resulting from the sale of such securities and currencies
are incidental to the open market operations and do not motivate decisions related to policy or open market
activities.
In addition, the Bank has elected not to present a Statement of Cash Flows because the liquidity and cash
position of the Bank are not a primary concern given the Reserve Banks’ unique powers and responsibilities.
Other information regarding the Bank’s activities is provided in, or may be derived from, the Statements of
Condition, Income and Comprehensive Income, and Changes in Capital. There are no other significant differences between the policies outlined in the FAM and GAAP.
Preparing the financial statements in conformity with the FAM requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Certain amounts relating to
the prior year have been reclassified to conform to current-year presentation. Unique accounts and significant accounting policies are explained below.
A. GOLD AND SPECIAL DRAWING RIGHTS CERTIFICATES
The Secretary of the Treasury is authorized to issue gold and special drawing rights (“SDR”) certificates to the
Reserve Banks.
Payment for the gold certificates by the Reserve Banks is made by crediting equivalent amounts in dollars
into the account established for the Treasury. The gold certificates held by the Reserve Banks are required
to be backed by the gold of the Treasury. The Treasury may reacquire the gold certificates at any time and
the Reserve Banks must deliver them to the Treasury. At such time, the Treasury’s account is charged, and
the Reserve Banks’ gold certificate accounts are reduced. The value of gold for purposes of backing the gold
certificates is set by law at $42 2/9 per fine troy ounce. The Board of Governors allocates the gold certificates
among the Reserve Banks once a year based on the average Federal Reserve notes outstanding in each Reserve Bank.
SDR certificates are issued by the International Monetary Fund (the “Fund”) to its members in proportion to
each member’s quota in the Fund at the time of issuance. SDR certificates serve as a supplement to international monetary reserves and may be transferred from one national monetary authority to another. Under
the law providing for U.S. participation in the SDR system, the Secretary of the Treasury is authorized to issue SDR certificates to the Reserve Banks. When SDR certificates are issued to the Reserve Banks, equivalent
amounts in U.S. dollars are credited to the account established for the Treasury and the Reserve Banks’ SDR
certificate accounts are increased. The Reserve Banks are required to purchase SDR certificates, at the direc-

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FEDERAL RESERVE BANK OF PHILADELPHIA

Notes To Financial Statements

tion of the Treasury, for the purpose of financing SDR acquisitions or for financing exchange stabilization
operations. At the time SDR transactions occur, the Board of Governors allocates SDR certificate transactions
among the Reserve Banks based upon each Reserve Bank’s Federal Reserve notes outstanding at the end of
the preceding year. There were no SDR transactions in 2008, and in 2009 the Treasury issued $3 billion in
SDR certificates to the Reserve Banks, of which $127 million was allocated to the Bank.
B. LOANS TO DEPOSITORY INSTITUTIONS
Loans are reported at their outstanding principal balances and interest income is recognized on an accrual basis.
Loans are impaired when, based on current information and events, it is probable that the Bank will not
receive the principal or interest that is due in accordance with the contractual terms of the loan agreement.
Loans are evaluated to determine whether an allowance for loan loss is required. The Bank has developed
procedures for assessing the adequacy of any allowance for loan losses using all available information to reflect the assessment of credit risk. This assessment includes monitoring information obtained from banking
supervisors, borrowers, and other sources to assess the credit condition of the borrowers and, as appropriate,
evaluating collateral values for each program. Generally, the Bank discontinues recognizing interest income
on impaired loans until the borrower’s repayment performance demonstrates principal and interest will be
received in accordance with the term of the loan agreement. If the Bank discontinues recording interest on
an impaired loan, cash payments are first applied to principal until the loan balance is reduced to zero; subsequent payments are applied as recoveries of amounts previously deemed uncollectible, if any, and then as
interest income.
C. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL, SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE, AND SECURITIES LENDING
The FRBNY may engage in purchases of securities with primary dealers under agreements to resell (“repurchase transactions”). These repurchase transactions are typically executed through a tri-party arrangement
(“tri-party transactions”). Tri-party transactions are conducted with two commercial custodial banks that
manage the clearing, settlement, and pledging of collateral. The collateral pledged must exceed the principal
amount of the transaction. Acceptable collateral under tri-party repurchase transactions primarily includes
Treasury securities; pass-through mortgage securities of Fannie Mae, Freddie Mac, and Ginnie Mae; STRIP
Treasury securities; and “stripped” securities of Federal agencies. The tri-party transactions are accounted
for as financing transactions with the associated interest income accrued over the life of the transaction.
Repurchase transactions are reported at their contractual amount as “System Open Market Account: Securities purchased under agreements to resell” in the Statements of Condition and the related accrued interest
receivable is reported as a component of “Accrued interest receivables.”
The FRBNY may engage in sales of securities with primary dealers under agreements to repurchase (“reverse
repurchase transactions”). These reverse repurchase transactions may be executed through a tri-party arrangement, similar to repurchase transactions. Reverse repurchase transactions may also be executed with
foreign official and international accounts. Reverse repurchase transactions are accounted for as financing
transactions, and the associated interest expense is recognized over the life of the transaction. These trans-

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FEDERAL RESERVE BANK OF PHILADELPHIA

Notes To Financial Statements

actions are reported at their contractual amounts in the Statements of Condition and the related accrued
interest payable is reported as a component of “Other liabilities.”
Treasury securities and GSE debt securities held in the SOMA are lent to primary dealers to facilitate the effective functioning of the domestic securities market. Overnight securities lending transactions are fully collateralized by other Treasury securities. TSLF transactions are fully collateralized with investment-grade debt securities, collateral eligible for tri-party repurchase agreements arranged by the FRBNY, or both. The collateral
taken in both overnight and term securities lending transactions is in excess of the fair value of the securities
lent. The FRBNY charges the primary dealer a fee for borrowing securities, and these fees are reported as a
component of “Other income.” In addition, TOP fees are reported as a component of “Other income.”
Activity related to securities purchased under agreements to resell, securities sold under agreements to repurchase, and securities lending is allocated to each of the Reserve Banks on a percentage basis derived from an
annual settlement of the interdistrict settlement account that occurs in April each year. The settlement also
equalizes Reserve Bank gold certificate holdings to Federal Reserve notes outstanding in each District.
D. TREASURY SECURITIES; GOVERNMENT-SPONSORED ENTERPRISE DEBT SECURITIES; FEDERAL
AGENCY AND GOVERNMENT-SPONSORED ENTERPRISE MORTGAGE-BACKED SECURITIES;
INVESTMENTS DENOMINATED IN FOREIGN CURRENCIES; AND WAREHOUSING AGREEMENTS
Interest income on Treasury securities, GSE debt securities, and investments denominated in foreign currencies comprising the SOMA is accrued on a straight-line basis. Interest income on Federal agency and GSE
MBS is accrued using the interest method and includes amortization of premiums, accretion of discounts, and
paydown gains or losses. Paydown gains or losses result from scheduled payment and prepayment of principal and represent the difference between the principal amount and the carrying value of the related security.
Gains and losses resulting from sales of securities are determined by specific issue based on average cost.
In addition to outright purchases of Federal agency and GSE MBS that are held in the SOMA, the FRBNY enters
into dollar roll transactions (“dollar rolls”), which primarily involve an initial transaction to purchase or sell “to
be announced” (“TBA”) MBS combined with an agreement to sell or purchase TBA MBS on a specified future
date. The FRBNY’s participation in the dollar roll market furthers the MBS Purchase Program goal of providing
support to the mortgage and housing markets and fostering improved conditions in financial markets. The
FRBNY accounts for outstanding commitments to sell or purchase TBA MBS on a settlement-date basis. Based
on the terms of the FRBNY dollar roll transactions, transfers of MBS upon settlement of the initial TBA MBS
transactions are accounted for as purchases or sales in accordance with FASB ASC Topic 860 (ASC 860), Accounting for Transfers of Financial Assets and Repurchase Financing Transactions, (previously SFAS 140), and
the related outstanding commitments are accounted for as sales or purchases upon settlement.
Activity related to Treasury securities, GSE debt securities, and Federal agency and GSE MBS, including the
premiums, discounts, and realized gains and losses, is allocated to each Reserve Bank on a percentage basis
derived from an annual settlement of the interdistrict settlement account that occurs in April of each year.
The settlement also equalizes Reserve Bank gold certificate holdings to Federal Reserve notes outstanding in
each District. Activity related to investments denominated in foreign currencies, including the premiums, dis-

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FEDERAL RESERVE BANK OF PHILADELPHIA

Notes To Financial Statements

counts, and realized and unrealized gains and losses, is allocated to each Reserve Bank based on the ratio of
each Reserve Bank’s capital and surplus to aggregate capital and surplus at the preceding December 31.
Foreign-currency-denominated assets are revalued daily at current foreign currency market exchange rates
in order to report these assets in U.S. dollars. Realized and unrealized gains and losses on investments denominated in foreign currencies are reported as “Foreign currency gains or losses, net” in the Statements of
Income and Comprehensive Income.
Warehousing is an arrangement under which the FOMC agrees to exchange, at the request of the Treasury,
U.S. dollars for foreign currencies held by the Treasury or ESF over a limited period of time. The purpose of
the warehousing facility is to supplement the U.S. dollar resources of the Treasury and ESF for financing purchases of foreign currencies and related international operations.
Warehousing agreements are designated as held-for-trading purposes and are valued daily at current market
exchange rates. Activity related to these agreements is allocated to each Reserve Bank based on the ratio of
each Reserve Bank’s capital and surplus to aggregate capital and surplus at the preceding December 31.
E. CENTRAL BANK LIQUIDITY SWAPS
Central bank liquidity swaps, which are transacted between the FRBNY and a foreign central bank, may be
structured as either U.S. dollar liquidity or foreign currency liquidity swap arrangements.
Activity related to U.S. dollar and foreign currency swap transactions, including the related income and expense, is allocated to each Reserve Bank based on the ratio of each Reserve Bank’s capital and surplus to aggregate capital and surplus at the preceding December 31. Similar to investments denominated in foreign
currencies, the foreign currency amounts associated with these central bank liquidity swap arrangements are
revalued at current foreign currency market exchange rates.
U.S. dollar liquidity swaps
At the initiation of each U.S. dollar liquidity swap transaction, the foreign central bank transfers a specified
amount of its currency to a restricted account for the FRBNY in exchange for U.S. dollars at the prevailing
market exchange rate. Concurrent with this transaction, the FRBNY and the foreign central bank agree to
a second transaction that obligates the foreign central bank to return the U.S. dollars and the FRBNY to return the foreign currency on a specified future date at the same exchange rate as the initial transaction. The
Bank’s allocated portion of the foreign currency amounts that the FRBNY acquires is reported as “Central
bank liquidity swaps” on the Statements of Condition. Because the swap transaction will be unwound at the
same U.S. dollar amount and exchange rate that were used in the initial transaction, the recorded value of
the foreign currency amounts is not affected by changes in the market exchange rate.
The foreign central bank compensates the FRBNY based on the foreign currency amounts held for the FRBNY.
The FRBNY recognizes compensation during the term of the swap transaction and reports it as “Interest income: Central bank liquidity swaps” in the Statements of Income and Comprehensive Income.

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Notes To Financial Statements

Foreign currency liquidity swaps
At the initiation of each foreign currency liquidity swap transaction, the FRBNY will transfer, at the prevailing market exchange rate, a specified amount of U.S. dollars to an account for the foreign central bank in
exchange for its currency. The foreign currency amount received would be reported as a liability by the Bank.
Concurrent with this transaction, the FRBNY and the foreign central bank agree to a second transaction that
obligates the FRBNY to return the foreign currency and the foreign central bank to return the U.S. dollars
on a specified future date. The FRBNY compensates the foreign central bank based on the foreign currency
transferred to the FRBNY. For each foreign currency swap transaction with a foreign central bank it is anticipated that the FRBNY will enter into a corresponding transaction with a U.S. depository institution in order to
provide foreign currency liquidity to that institution. No foreign currency liquidity swap transactions occurred
in 2008 or 2009.
F. INTERDISTRICT SETTLEMENT ACCOUNT
At the close of business each day, each Reserve Bank aggregates the payments due to or from other Reserve
Banks. These payments result from transactions between the Reserve Banks and transactions that involve depository institution accounts held by other Reserve Banks, such as Fedwire funds and securities transfers and
check and ACH transactions. The cumulative net amount due to or from the other Reserve Banks is reflected
in the “Interdistrict settlement account” in the Statements of Condition.
G. BANK PREMISES, EQUIPMENT, AND SOFTWARE
Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on
a straight-line basis over the estimated useful lives of the assets, which range from two to fifty years. Major
alterations, renovations, and improvements are capitalized at cost as additions to the asset accounts and are
depreciated over the remaining useful life of the asset or, if appropriate, over the unique useful life of the
alteration, renovation, or improvement. Maintenance, repairs, and minor replacements are charged to operating expense in the year incurred.
Costs incurred for software during the application development stage, whether developed internally or acquired for internal use, are capitalized based on the purchase cost and the cost of direct services and materials associated with designing, coding, installing, and testing the software. Capitalized software costs are amortized on a straight-line basis over the estimated useful lives of the software applications, which range from
two to five years. Maintenance costs related to software are charged to expense in the year incurred.
Capitalized assets, including software, buildings, leasehold improvements, furniture, and equipment, are
impaired and an adjustment is recorded when events or changes in circumstances indicate that the carrying
amount of assets or asset groups is not recoverable and significantly exceeds the assets’ fair value.
H. FEDERAL RESERVE NOTES
Federal Reserve notes are the circulating currency of the United States. These notes, which are identified as
issued to a specific Reserve Bank, must be fully collateralized. Assets eligible to be pledged as collateral secu-

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FEDERAL RESERVE BANK OF PHILADELPHIA

Notes To Financial Statements

rity include all of the Bank’s assets. The collateral value is equal to the book value of the collateral tendered
with the exception of securities, for which the collateral value is equal to the par value of the securities tendered. The par value of securities pledged for securities sold under agreements to repurchase is deducted.
The Board of Governors may, at any time, call upon a Reserve Bank for additional security to adequately
collateralize the outstanding Federal Reserve notes. To satisfy the obligation to provide sufficient collateral
for outstanding Federal Reserve notes, the Reserve Banks have entered into an agreement that provides for
certain assets of the Reserve Banks to be jointly pledged as collateral for the Federal Reserve notes issued to
all Reserve Banks. In the event that this collateral is insufficient, the Federal Reserve Act provides that Federal
Reserve notes become a first and paramount lien on all the assets of the Reserve Banks. Finally, Federal Reserve notes are obligations of the United States government. At December 31, 2009 and 2008, all Federal
Reserve notes issued to the Reserve Banks were fully collateralized.
“Federal Reserve notes outstanding, net” in the Statements of Condition represents the Bank’s Federal Reserve notes outstanding, reduced by the Bank’s currency holdings of $5,591 million and $5,013 million at
December 31, 2009 and 2008, respectively.
I. ITEMS IN PROCESS OF COLLECTION AND DEFERRED CREDIT ITEMS
“Items in process of collection” in the Statements of Condition primarily represents amounts attributable
to checks that have been deposited for collection and that, as of the balance sheet date, have not yet been
presented to the paying bank. “Deferred credit items” are the counterpart liability to items in process of collection. The amounts in this account arise from deferring credit for deposited items until the amounts are collected. The balances in both accounts can vary significantly.
J. CAPITAL PAID-IN
The Federal Reserve Act requires that each member bank subscribe to the capital stock of the Reserve Bank
in an amount equal to 6 percent of the capital and surplus of the member bank. These shares are nonvoting
with a par value of $100 and may not be transferred or hypothecated. As a member bank’s capital and surplus changes, its holdings of Reserve Bank stock must be adjusted. Currently, only one-half of the subscription is paid-in and the remainder is subject to call. A member bank is liable for Reserve Bank liabilities up to
twice the par value of stock subscribed by it.
By law, each Reserve Bank is required to pay each member bank an annual dividend of 6 percent on the
paid-in capital stock. This cumulative dividend is paid semiannually. To reflect the Federal Reserve Act requirement that annual dividends be deducted from net earnings, dividends are presented as a distribution of
comprehensive income in the Statements of Income and Comprehensive Income.
K. SURPLUS
The Board of Governors requires the Reserve Banks to maintain a surplus equal to the amount of capital
paid-in as of December 31 of each year. Accumulated other comprehensive income is reported as a com-

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FEDERAL RESERVE BANK OF PHILADELPHIA

Notes To Financial Statements

ponent of surplus in the Statements of Condition and the Statements of Changes in Capital. The balance
of accumulated other comprehensive income is comprised of expenses, gains, and losses related to other
postretirement benefit plans that, under GAAP, are included in other comprehensive income, but excluded
from net income. Additional information regarding the classifications of accumulated other comprehensive
income is provided in Notes 12 and 13.
L. INTEREST ON FEDERAL RESERVE NOTES
The Board of Governors requires the Reserve Banks to transfer excess earnings to the Treasury as interest on
Federal Reserve notes after providing for the costs of operations, payment of dividends, and reservation of
an amount necessary to equate surplus with capital paid-in. This amount is reported as “Payments to U.S.
Treasury as interest on Federal Reserve notes” in the Statements of Income and Comprehensive Income. The
amount due to the Treasury is reported as “Accrued interest on Federal Reserve notes” in the Statements of
Condition. If overpaid during the year, the amount is reported as “Prepaid interest on Federal Reserve notes”
in the Statements of Condition. Payments are made weekly to the Treasury.
In the event of losses or an increase in capital paid-in at a Reserve Bank, payments to the Treasury are suspended and earnings are retained until the surplus is equal to the capital paid-in.
In the event of a decrease in capital paid-in, the excess surplus, after equating capital paid-in and surplus at
December 31, is distributed to the Treasury in the following year.
M. INTEREST ON DEPOSITORY INSTITUTION DEPOSITS
On October 9, 2008, the Reserve Banks began paying interest to depository institutions on qualifying balances
held at the Banks. The interest rates paid on required reserve balances and excess balances are determined by
the Board of Governors, based on an FOMC-established target range for the effective federal funds rate.
N. INCOME AND COSTS RELATED TO TREASURY SERVICES
The Bank is required by the Federal Reserve Act to serve as fiscal agent and depositary of the United States
Government. By statute, the Department of the Treasury has appropriations to pay for these services. During the years ended December 31, 2009 and 2008, the Bank was reimbursed for substantially all services provided to the Department of the Treasury as its fiscal agent.
The Treasury and other government agencies reimbursement process for all Reserve Banks is centralized at
the Bank. Each Reserve Bank transfers its Treasury reimbursement receivable to the Bank. The reimbursement
receivable is reported in “Other assets” and totaled $30 million and $34 million at December 31, 2009 and
2008, respectively. There was no cost of unreimbursed Treasury services at December 31, 2009. The cost of
unreimbursed Treasury services is reported in “Other expense” and was immaterial at December 31, 2008.

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FEDERAL RESERVE BANK OF PHILADELPHIA

Notes To Financial Statements

O. COMPENSATION RECEIVED FOR SERVICES PROVIDED
The Federal Reserve Bank of Atlanta (“FRBA”) has overall responsibility for managing the Reserve Banks’ provision of check and ACH services to depository institutions and, as a result, recognizes total System revenue
for these services on its Statements of Income and Comprehensive Income. Similarly, the FRBNY manages
the Reserve Banks’ provision of Fedwire funds and securities services and recognizes total System revenue
for these services on its Consolidated Statements of Income and Comprehensive Income. The FRBA and the
FRBNY compensate the applicable Reserve Banks for the costs incurred to provide these services. The Bank
reports this compensation as “Compensation received for services provided” in the Statements of Income
and Comprehensive Income.
P. ASSESSMENTS BY THE BOARD OF GOVERNORS
The Board of Governors assesses the Reserve Banks to fund its operations based on each Reserve Bank’s
capital and surplus balances as of December 31 of the prior year. The Board of Governors also assesses each
Reserve Bank for the expenses incurred by the Treasury to produce and retire Federal Reserve notes based
on each Reserve Bank’s share of the number of notes comprising the System’s net liability for Federal Reserve
notes on December 31 of the prior year.
Q. TAXES
The Reserve Banks are exempt from federal, state, and local taxes, except for taxes on real property. The
Bank’s real property taxes were $2 million for each of the years ended December 31, 2009 and 2008 and are
reported as a component of “Occupancy expense.”
R. RESTRUCTURING CHARGES
The Reserve Banks recognize restructuring charges for exit or disposal costs incurred as part of the closure of
business activities in a particular location, the relocation of business activities from one location to another,
or a fundamental reorganization that affects the nature of operations. Restructuring charges may include
costs associated with employee separations, contract terminations, and asset impairments. Expenses are recognized in the period in which the Bank commits to a formalized restructuring plan or executes the specific
actions contemplated in the plan and all criteria for financial statement recognition have been met.
Note 14 describes the Bank’s restructuring initiatives and provides information about the costs and liabilities associated with employee separations and contract terminations. Costs and liabilities associated with
enhanced pension benefits in connection with the restructuring activities for all of the Reserve Banks are recorded on the books of the FRBNY.
The Bank had no significant restructuring activities in 2009.

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FEDERAL RESERVE BANK OF PHILADELPHIA

Notes To Financial Statements

S. RECENTLY ISSUED ACCOUNTING STANDARDS
In February 2008, FASB issued FSP SFAS 140-3, Accounting for Transfers of Financial Assets and Repurchase
Financing Transactions (codified in FASB ASC Topic 860 (ASC 860), Transfers and Servicing). ASC 860 requires
that an initial transfer of a financial asset and a repurchase financing that was entered into contemporaneously with, or in contemplation of, the initial transfer be evaluated together as a linked transaction unless
certain criteria are met. These provisions of ASC 860 are effective for the Bank’s financial statements for the
year beginning on January 1, 2009 and have not had a material effect on the Bank’s financial statement. The
requirements of this standard have been reflected in the accompanying footnotes.
In June 2009, FASB issued SFAS 166, Accounting for Transfers of Financial Assets – an amendment to FASB
Statement No. 140, (codified in ASC 860). The new guidance modifies existing guidance to eliminate the
scope exception for qualifying special purpose vehicles (“SPVs”) and clarifies that the transferor must consider
all arrangements of the transfer of financial assets when determining if the transferor has surrendered control. These provisions of ASC 860 are effective for the Bank’s financial statements for the year beginning on
January 1, 2010, and earlier adoption is prohibited. The adoption of this standard is not expected to have a
material effect on the Bank’s financial statements.
In May 2009, FASB issued SFAS No. 165, Subsequent Events (codified in FASB ASC Topic 855 (ASC 855),
Subsequent Events), which establishes general standards of accounting for and disclosing events that occur
after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855
sets forth (i) the period after the balance sheet date during which management of a reporting entity should
evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (ii) the circumstances under which an entity should recognize events or transactions occurring after
the balance sheet date in its financial statements; and (iii) the disclosures that an entity should make about
events or transactions that occurred after the balance sheet date, including disclosure of the date through
which an entity has evaluated subsequent events and whether that represents the date the financial statements were issued or were available to be issued. The Bank adopted ASC 855 for the period ended December 31, 2009 and the required disclosures are reflected in Note 15.
In June 2009, the FASB issued SFAS No. 168, “The Statement of Financial Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of SFAS No. 162, “The
Hierarchy of Generally Accepted Accounting Principles” (SFAS 168). SFAS 168 establishes the FASB ASC as
the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental
entities in the preparation of financial statements in conformity with GAAP. The ASC does not change current GAAP, but it introduces a new structure that organizes the authoritative standards by topic. SFAS 168 is
effective for financial statements issued for periods ending after September 15, 2009. As a result, both the
ASC and the legacy standard are referenced in the Bank’s financial statements and footnotes.

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FEDERAL RESERVE BANK OF PHILADELPHIA

Notes To Financial Statements

5. LOANS
The loan amounts outstanding at December 31 were as follows (in millions):
2009

2008

Primary, secondary, and seasonal credit
TAF

$

122
1,613

$

329
38,300

Loans to depository institutions

$

1,735

$

38,629

Loans to depository institutions
The Bank offers primary, secondary, and seasonal credit to eligible borrowers. Each program has its own
interest rate. Interest is accrued using the applicable interest rate established at least every fourteen days by
the board of directors of the Bank, subject to review and determination by the Board of Governors. Primary
and secondary credit are extended on a short-term basis, typically overnight, whereas seasonal credit may be
extended for a period of up to nine months.
Primary, secondary, and seasonal credit lending is collateralized to the satisfaction of the Bank to reduce credit risk. Assets eligible to collateralize these loans include consumer, business, and real estate loans; Treasury
securities; GSE debt securities; foreign sovereign debt; municipal, corporate, and state and local government
obligations; ABS; corporate bonds; commercial paper; and bank-issued assets, such as certificates of deposit,
bank notes, and deposit notes. Collateral is assigned a lending value that is deemed appropriate by the Bank,
which is typically fair value or face value reduced by a margin.
Depository institutions that are eligible to borrow under the Bank’s primary credit program are also eligible
to participate in the TAF program. Under the TAF program, the Reserve Banks conduct auctions for a fixed
amount of funds, with the interest rate determined by the auction process, subject to a minimum bid rate.
TAF loans are extended on a short-term basis, with terms ranging from 28 to 84 days. All advances under
the TAF program must be collateralized to the satisfaction of the Bank. Assets eligible to collateralize TAF
loans include the complete list noted above for loans to depository institutions. Similar to the process used
for primary, secondary, and seasonal credit, a lending value is assigned to each asset that is accepted as collateral for TAF loans reduced by a margin.
Loans to depository institutions are monitored on a daily basis to ensure that borrowers continue to meet eligibility requirements for these programs. The financial condition of borrowers is monitored by the Bank and,
if a borrower no longer qualifies for these programs, the Bank will generally request full repayment of the
outstanding loan or, for primary and seasonal credit lending, may convert the loan to a secondary credit loan.
Collateral levels are reviewed daily against outstanding obligations and borrowers that no longer have sufficient collateral to support outstanding loans are required to provide additional collateral or to make partial or
full repayment.

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FEDERAL RESERVE BANK OF PHILADELPHIA

Notes To Financial Statements

The remaining maturity distributions of loans outstanding at December 31 were as follows (in millions):
2009

2008

Primary, secondary,
and seasonal credit

Primary, secondary,
and seasonal credit

TAF

TAF

Within 15 days
16 days to 90 days

$

118
4

$

1,613
-

$

319
10

$

7,550
30,750

Total loans

$

122

$

1,613

$

329

$ 38,300

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

6. TREASURY SECURITIES; GOVERNMENT-SPONSORED ENTERPRISE DEBT SECURITIES;
FEDERAL AGENCY AND GOVERNMENT-SPONSORED ENTERPRISE MORTGAGE-BACKED
SECURITIES; SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL; SECURITIES SOLD
UNDER AGREEMENTS TO REPURCHASE; AND SECURITIES LENDING
The FRBNY, on behalf of the Reserve Banks, holds securities bought outright in the SOMA. The Bank’s allocated share of SOMA balances was approximately 1.551 percent and 4.366 percent at December 31, 2009
and 2008, respectively.
The Bank’s allocated share of Treasury securities, GSE debt securities, and Federal agency and GSE MBS, excluding accrued interest, held in the SOMA at December 31 was as follows (in millions):
2009
Treasury securities
Federal
Bills

Notes

Bonds

Total Treasury

GSE debt

agency and

securities

securities

GSE MBS

Par
$
Unamortized premiums
Unaccreted discounts

286
-

$

8,817
101
(15)

$

2,945
380
(10)

$ 12,048
481
(25)

$

2,480
116
-

$ 14,092
188
(24)

Total amortized cost $

286

$

8,903

$

3,315

$ 12,504

$

2,596

$ 14,256

286

$

9,045

$

3,579

$ 12,910

$

2,598

$ 14,184

Fair Value

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$

FEDERAL RESERVE BANK OF PHILADELPHIA

Notes To Financial Statements

2008
Treasury securities
Federal
Bills

Notes

Total Treasury

GSE debt

agency and

securities

securities

GSE MBS

Bonds

Par
$
Unamortized premiums
Unaccreted discounts

804
-

$ 14,617
12
(37)

$

5,358
294
(27)

$ 20,779
306
(64)

$

861
45
(1)

$

-

Total amortized cost $

804

$ 14,592

$

5,625

$ 21,021

$

905

$

-

804

$ 15,618

$

7,398

$ 23,820

$

911

$

-

Fair Value

$

The total of the Treasury securities, GSE debt securities, and Federal agency and GSE MBS, net, excluding accrued interest held in the SOMA at December 31 was as follows (in millions):
2009
Treasury securities
Federal
Bills

Amortized Cost
Fair Value

$ 18,423
18,423

Notes

$ 573,877
583,040

Bonds

$ 213,672
230,717

Total Treasury

GSE debt

agency and

securities

securities

GSE MBS

$ 805,972
832,180

$ 167,362
167,444

$ 918,927
914,290

2008
Treasury securities
Federal
Bills

Amortized Cost
Fair Value

$ 18,422
18,422

Notes

$ 334,217
357,709

Bonds

$ 128,810
169,433

Total Treasury

GSE debt

agency and

securities

securities

GSE MBS

$ 481,449
545,564

$ 20,740
20,863

$

-

The fair value amounts in the above tables are presented solely for informational purposes. Although the fair
value of security holdings can be substantially greater than or less than the recorded value at any point in time,
these unrealized gains or losses have no effect on the ability of the Reserve Banks, as the central bank, to meet
their financial obligations and responsibilities. Fair value was determined by reference to quoted market values
for identical securities, except for Federal agency and GSE MBS for which fair values were determined using a
model-based approach based on observable inputs for similar securities.

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FEDERAL RESERVE BANK OF PHILADELPHIA

Notes To Financial Statements

The fair value of the fixed-rate Treasury securities, GSE debt securities, and Federal agency and GSE MBS in
the SOMA’s holdings is subject to market risk, arising from movements in market variables, such as interest
rates and securities prices. The fair value of Federal agency and GSE MBS is also affected by the rate of prepayments and delinquencies of mortgage loans underlying the securities.
The following table provides additional information on the amortized cost and fair values of the Federal agency and GSE MBS portfolio at December 31, 2009 (in millions):
Distribution of MBS
holdings by coupon rate
Allocated to the Bank:
4.0%
4.5%
5.0%
5.5%
6.0%
Other1
Total
System total:
4.0%
4.5%
5.0%
5.5%
6.0%
Other1
Total
1

Amortized cost
$

2,639
6,738
3,032
1,604
197
46

$

2,571
6,697
3,047
1,622
200
47

$

14,256

$

14,184

$

170,119
434,352
195,418
103,379
12,710
2,949

$

165,740
431,646
196,411
104,583
12,901
3,009

$

918,927

$

914,290

Represents less than one percent of the total portfolio

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Fair value

FEDERAL RESERVE BANK OF PHILADELPHIA

Notes To Financial Statements

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

Allocated to the Bank:
Contract amount outstanding, end of year
$
Average daily amount outstanding, during the year
Maximum month-end balance outstanding,
during the year
Securities pledged, end of year
System total:
Contract amount outstanding, end of year
$
Average daily amount outstanding, during the year
Maximum month-end balance outstanding,
during the year
Securities pledged, end of year

Securities sold under
agreements to repurchase

2008

158

$

3,493
3,774

2009

$

2008

1,206
1,644

$

3,858
2,416

-

5,196

3,352
1,208

4,303
3,445

3,616

$ 80,000
86,227

$ 77,732
67,837

$ 88,352
55,169

-

119,000

77,732
77,860

98,559
78,896

The Bank has revised its disclosure of securities purchased under agreements to resell and securities sold
under agreements to repurchase from a weighted average calculation, disclosed in 2008, to the simple daily
average calculation, disclosed above. The previously reported System total 2008 weighted average amount
outstanding for securities purchased under agreements to resell was $97,037 million of which $4,237 million
was allocated to the Bank. The previously reported System total 2008 weighted average amount outstanding
for securities sold under agreements to repurchase was $65,461 million of which $2,858 million was allocated to the Bank.
The contract amounts for securities purchased under agreements to resell and securities sold under agreements to repurchase approximate fair value.

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FEDERAL RESERVE BANK OF PHILADELPHIA

Notes To Financial Statements

The remaining maturity distribution of Treasury securities, GSE debt securities, Federal agency and GSE MBS
bought outright, securities purchased under agreements to resell, and securities sold under agreements to
repurchase that were allocated to the Bank at December 31, 2009 was as follows (in millions):

Treasury
securities
(Par value)

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 allocated to the Bank

$

GSE debt
securities
(Par value)

Securities
purchased under
Securities sold
Federal agency agreements to under agreements
and GSE MBS resell (Contract
to repurchase
(Par value)
amount)
(Contract amount)

180
447
788
5,071
3,316
2,246

$

1
47
334
1,542
524
32

$

14,092

$

-

$

1,206
-

$ 12,048

$

2,480

$

14,092

$

-

$

1,206

Federal agency and GSE MBS are reported at stated maturity in the table above. The estimated weighted average life of these securities at December 31, 2009, which differs from the stated maturity primarily because
it factors in prepayment assumptions, is approximately 6.4 years.
At December 31, 2009 and 2008, Treasury securities and GSE debt securities with par values of $21,610 million and $180,765 million, respectively, were loaned from the SOMA, of which $335 million and $7,892 million, respectively, were allocated to the Bank.
At December 31, 2009, the total of other investments was $5 million, of which the Bank’s allocated share
was immaterial. Other investments consist of cash and short-term investments related to the Federal agency
and GSE MBS portfolio.
At December 31, 2009, the total of other liabilities was $601 million, of which $9 million was allocated to the
Bank. These other liabilities, which are related to purchases of Federal agency and GSE MBS, arise from the
failure of a seller to deliver securities to the FRBNY on the settlement date. Although the Bank has ownership
of and records its investments in the MBS securities as of the contractual settlement date, it is not obligated
to make payment until the securities are delivered, and the amount reported as other liabilities represents the
Bank’s obligation to pay for the securities when delivered.
The FRBNY enters into commitments to buy Federal agency and GSE MBS and records the related MBS on
a settlement-date basis. As of December 31, 2009, the total purchase price of the Federal agency and GSE
MBS under outstanding commitments was $160,099 million, of which $32,838 million was related to dollar roll transactions. The amount of outstanding commitments allocated to the Bank was $2,484 million,
of which $509 million was related to dollar roll transactions. These commitments, which had contractual
settlement dates extending through March 2010, are primarily for the purchase of TBA MBS for which the

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FEDERAL RESERVE BANK OF PHILADELPHIA

Notes To Financial Statements

number and identity of the pools that will be delivered to fulfill the commitment are unknown at the time
of the trade. These commitments are subject to market and counterparty risks that result from their future
settlement. As of December 31, 2009, the fair value of Federal agency and GSE MBS under outstanding commitments was $158,868 million, of which $2,465 million was allocated to the Bank. During the year ended
December 31, 2009, the Reserve Banks recorded net gains from dollar roll related sales of $879 million, of
which $5 million was allocated to the Bank. These net gains are reported as “Non-Interest Income: Federal
agency and government-sponsored enterprise mortgage-backed securities gains, net” in the Statements of
Income and Comprehensive Income.

7. INVESTMENTS DENOMINATED IN FOREIGN CURRENCIES
The FRBNY, on behalf of the Reserve Banks, holds foreign currency deposits with foreign central banks and
with the Bank for International Settlements and invests in foreign government debt instruments. These investments are guaranteed as to principal and interest by the issuing foreign governments. In addition, the
FRBNY enters into transactions to purchase foreign-currency-denominated government-debt securities under
agreements to resell for which the accepted collateral is the debt instruments issued by the governments of
Belgium, France, Germany, Italy, the Netherlands, and Spain.
The Bank’s allocated share of investments denominated in foreign currencies was approximately 10.984 percent and 9.829 percent at December 31, 2009 and 2008, respectively.
The Bank’s allocated share of investments denominated in foreign currencies, including accrued interest,
valued at amortized cost and foreign currency market exchange rates at December 31, was as follows (in millions):
2009
Euro:
Foreign currency deposits
Securities purchased under agreements to resell
Government debt instruments
Japanese yen:
Foreign currency deposits
Government debt instruments
Total allocated to the Bank

$

812
285
542

2008

$

547
401
453

374
763

342
695

$ 2,776

$ 2,438

At December 31, 2009 and 2008, the fair value of investments denominated in foreign currencies, including
accrued interest, allocated to the Bank was $2,799 million and $2,459 million, respectively. The fair value of
government debt instruments was determined by reference to quoted prices for identical securities. The cost
basis of foreign currency deposits and securities purchased under agreements to resell, adjusted for accrued

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FEDERAL RESERVE BANK OF PHILADELPHIA

Notes To Financial Statements

interest, approximates fair value. Similar to the Treasury securities, GSE debt securities, and Federal agency
and GSE MBS discussed in Note 6, unrealized gains or losses have no effect on the ability of a Reserve Bank,
as the central bank, to meet its financial obligations and responsibilities. The fair value is presented solely for
informational purposes.
Total Reserve Bank investments denominated in foreign currencies were $25,272 million and $24,804 million
at December 31, 2009 and 2008, respectively. At December 31, 2009 and 2008, the fair value of the total
Reserve Bank investments denominated in foreign currencies, including accrued interest, was $25,480 million
and $25,021 million, respectively.
The remaining maturity distribution of investments denominated in foreign currencies that were allocated to
the Bank at December 31, 2009 was as follows (in millions):
Euro
Within 15 days
16 days to 90 days
91 days to 1 year
Over 1 year to 5 years
Total allocated to the Bank

Japanese yen

Total

$

666
275
265
433

$

398
51
260
428

$

1,064
326
525
861

$

1,639

$

1,137

$

2,776

At December 31, 2009 and 2008, the authorized warehousing facility was $5 billion, with no balance outstanding.
In connection with its foreign currency activities, the FRBNY may enter into transactions that contain varying
degrees of off-balance-sheet market risk that result from their future settlement and counterparty credit risk.
The FRBNY controls these risks by obtaining credit approvals, establishing transaction limits, receiving collateral in some cases, and performing daily monitoring procedures.

8. CENTRAL BANK LIQUIDITY SWAPS
U.S. Dollar Liquidity Swaps
The Bank’s allocated share of U.S. dollar liquidity swaps was approximately 10.984 percent and 9.829 percent
at December 31, 2009 and 2008, respectively.
At December 31, 2009 and 2008, the total Reserve Bank amount of foreign currency held under U.S. dollar
liquidity swaps was $10,272 million and $553,728 million, respectively, of which $1,128 million and $54,424
million, respectively, was allocated to the Bank.

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FEDERAL RESERVE BANK OF PHILADELPHIA

Notes To Financial Statements

The remaining maturity distribution of U.S. dollar liquidity swaps that were allocated to the Bank at December 31 was as follows (in millions):
2009
Within
15 days
Australian dollar
Danish krone
Euro
Japanese yen
Korean won
Mexican peso
Norwegian krone
Swedish krona
Swiss franc
U.K. pound
Total

16 days to
90 days

2008
Within
15 days

Total

$

715
60
353
-

$

-

$

715
60
353
-

$

1,128

$

-

$

1,128

$

983
14,838
4,707
216
983
1,889
12

$ 23,628

16 days to
90 days
$

1,261
1,475
13,798
7,354
1,017
592
1,474
585
3,240

$ 30,796

Total
$

2,244
1,475
28,636
12,061
1,017
808
2,457
2,474
3,252

$ 54,424

Foreign Currency Liquidity Swaps
There were no transactions related to the foreign currency liquidity swaps during the years ended December
31, 2008 and 2009.

9. BANK PREMISES, EQUIPMENT, AND SOFTWARE
Bank premises and equipment at December 31 were as follows (in millions):
2009
Bank premises and equipment:
Land
Buildings
Building machinery and equipment
Construction in progress
Furniture and equipment
Subtotal
Accumulated depreciation

$

Bank premises and equipment, net
Depreciation expense, for the years ended December 31

8
102
16
1
70
197
(105)

2008
$

$92
$

11

7
92
15
1
68
183
(98)
$85

$

11

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FEDERAL RESERVE BANK OF PHILADELPHIA

Notes To Financial Statements

The Bank leases space to an outside tenant with a remaining lease term of one year. Rental income from
such leases was $1 million for each of the years ended December 31, 2009 and 2008 and is reported as a
component of “Other income” in the Statements of Income and Comprehensive Income. Future minimum
lease payments that the Bank will receive under the noncancelable lease agreement in existence at December
31, 2009 are $2 million for the year 2010.
The Bank had capitalized software assets, net of amortization, of $6 million and $5 million at December 31,
2009 and 2008, respectively. Amortization expense was $2 million for each of the years ended December
31, 2009 and 2008. Capitalized software assets are reported as a component of “Other assets” in the Statements of Condition and the related amortization is reported as a component of “Other expenses” in the
Statements of Income and Comprehensive Income.

10. COMMITMENTS AND CONTINGENCIES
In the normal course of its operations the Bank enters into contractual commitments, normally with fixed expiration dates or termination provisions, at specific rates and for specific purposes.
At December 31, 2009, the Bank was obligated under noncancelable leases for premises and equipment
with remaining terms ranging from 1 to approximately 10 years. One equipment lease provides for increased
rental payments based upon increases in operating quantity.
Rental expense under operating leases for certain operating facilities, warehouses, and data processing and
office equipment (including taxes, insurance, and maintenance when included in rent), net of sublease rentals, was $1 million for each of the years ended December 31, 2009 and 2008. Certain of the Bank’s leases
have options to renew. The Bank has no capital leases.
Future minimum rental payments under noncancelable operating leases, net of sublease rentals, with remaining terms of one year or more, at December 31, 2009 are as follows (in thousands):
Operating leases
2010
2011
2012
2013
2014
Thereafter

$

503
478
484
433
445
1,938

Future minimum rental payments

$ 4,281

At December 31, 2009, there were no material unrecorded unconditional purchase commitments or obligations in excess of one year.

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FEDERAL RESERVE BANK OF PHILADELPHIA

Notes To Financial Statements

Under the Insurance Agreement of the Federal Reserve Banks, each of the Reserve Banks has agreed to bear,
on a per incident basis, a pro rata share of losses in excess of one percent of the capital paid-in of the claiming Reserve Bank, up to 50 percent of the total capital paid-in of all Reserve Banks. Losses are borne in the
ratio of a Reserve Bank’s capital paid-in to the total capital paid-in of all Reserve Banks at the beginning of the
calendar year in which the loss is shared. No claims were outstanding under the agreement at December 31,
2009 or 2008.
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.

11. RETIREMENT AND THRIFT PLANS
Retirement Plans
The Bank currently offers three defined benefit retirement plans to its employees, based on length of service
and level of compensation. Substantially all of the employees of the Reserve Banks, Board of Governors, and
Office of Employee Benefits of the Federal Reserve System (“OEB”) participate in the Retirement Plan for Employees of the Federal Reserve System (“System Plan”). In addition, employees at certain compensation levels
participate in the Benefit Equalization Retirement Plan (“BEP”) and certain Reserve Bank officers participate in
the Supplemental Retirement Plan for Select Officers of the Federal Reserve Bank (“SERP”).
The System Plan provides retirement benefits to employees of the Federal Reserve Banks, the Board of Governors, and OEB. The FRBNY, on behalf of the System, recognizes the net asset or net liability and costs associated with the System Plan in its financial statements. Costs associated with the System Plan are not reimbursed by other participating employers.
The Bank’s projected benefit obligation, funded status, and net pension expenses for the BEP and the SERP at
December 31, 2009 and 2008, and for the years then ended, were not material.
Thrift Plan
Employees of the Bank participate in the defined contribution Thrift Plan for Employees of the Federal Reserve
System (“Thrift Plan”). The Bank matches employee contributions based on a specified formula. For the year
ended December 31, 2008 and for the first three months of the year ended December 31, 2009, the Bank
matched 80 percent of the first 6 percent of employee contributions for employees with less than five years
of service and 100 percent of the first 6 percent of employee contributions for employees with five or more
years of service. Effective April 1, 2009, the Bank matches 100 percent of the first 6 percent of employee
contributions from the date of hire and provided an automatic employer contribution of one percent of eligible pay. The Bank’s Thrift Plan contributions totaled $4 million and $3 million for the years ended December 31, 2009 and 2008, respectively, and are reported as a component of “Salaries and other benefits” in the
Statements of Income and Comprehensive Income.

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FEDERAL RESERVE BANK OF PHILADELPHIA

Notes To Financial Statements

12. POSTRETIREMENT BENEFITS OTHER THAN RETIREMENT PLANS AND POSTEMPLOYMENT
BENEFITS
Postretirement Benefits Other Than Retirement Plans
In addition to the Bank’s retirement plans, employees who have met certain age and length-of-service requirements are eligible for both medical benefits and life insurance coverage during retirement.
The Bank funds benefits payable under the medical and life insurance plans as due and, accordingly, has no
plan assets.
Following is a reconciliation of the beginning and ending balances of the benefit obligation (in millions):
2009

2008

Accumulated postretirement benefit obligation at January 1
Service cost benefits earned during the period
Interest cost on accumulated benefit obligation
Net actuarial loss
Curtailment gain
Contributions by plan participants
Benefits paid
Medicare Part D subsidies
Plan amendments

$

72.5
1.8
4.4
3.4
1.3
(4.6)
0.4
4.5

$

62.9
2.0
4.2
8.7
(2.4)
1.4
(4.6)
0.3
-

Accumulated postretirement benefit obligation at December 31

$

83.7

$

72.5

At December 31, 2009 and 2008, the weighted-average discount rate assumptions used in developing the
postretirement benefit obligation were 5.75 percent and 6.00 percent, respectively.
Discount rates reflect yields available on high-quality corporate bonds that would generate the cash flows
necessary to pay the plan’s benefits when due.

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FEDERAL RESERVE BANK OF PHILADELPHIA

Notes To Financial Statements

Following is a reconciliation of the beginning and ending balance of the plan assets, the unfunded postretirement benefit obligation, and the accrued postretirement benefit costs (in millions):
2009

2008

Fair value of plan assets at January 1
Contributions by the employer
Contributions by plan participants
Benefits paid
Medicare Part D subsidies

$

2.9
1.3
(4.6)
0.4

$

2.9
1.4
(4.6)
0.3

Fair value of plan assets at December 31

$

-

$

-

Unfunded obligation and accrued postretirement benefit cost

$

83.7

$

72.5

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

$

(3.4)
(26.6)
-

$

2.3
(26.3)
0.4

Total accumulated other comprehensive loss

$

(30.0)

$

(23.6)

Accrued postretirement benefit costs are reported as a component of “Accrued benefit costs” in the Statements of Condition.
For measurement purposes, the assumed health care cost trend rates at December 31 are as follows:
2009
Health care cost trend rate assumed for next year
Rate to which the cost trend rate is assumed to decline
(the ultimate trend rate)
Year that the rate reaches the ultimate trend rate

2008

7.50%

7.50%

5.00%
2015

5.00%
2014

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FEDERAL RESERVE BANK OF PHILADELPHIA

Notes To Financial Statements

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, 2009 (in millions):
One percentage
point increase
Effect on aggregate of service and interest cost components
of net periodic postretirement benefit costs
Effect on accumulated postretirement benefit obligation

$

0.6

One percentage
point decrease

$

(0.1)
(1.9)

The following is a summary of the components of net periodic postretirement benefit expense for the years
ended December 31 (in millions):
2009

2008

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

$1.8
4.4
(1.2)
3.0

$2.0
4.2
(1.3)
2.9

Total periodic expense
Curtailment (gain)/loss

8.0
(0.4)

7.8
0.1

Net periodic postretirement benefit expense

$7.6

$7.9

Estimated amounts that will be amortized from accumulated other comprehensive loss
into net periodic postretirememt benefit expense in 2010 are shown below:
Prior service cost
Net actuarial loss
Total

$(0.1)
2.9
$2.8

Net postretirement benefit costs are actuarially determined using a January 1 measurement date. At January
1, 2009 and 2008, the weighted-average discount rate assumptions used to determine net periodic postretirement benefit costs were 6.00 percent and 6.25 percent, respectively.

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FEDERAL RESERVE BANK OF PHILADELPHIA

Notes To Financial Statements

Net periodic postretirement benefit expense is reported as a component of “Salaries and other benefits” in
the Statements of Income and Comprehensive Income. A net curtailment gain/loss associated with restructuring programs that are described in Note 14 was recognized in net income in the year ended December 31,
2009, related to employees who terminated employment during 2009. A deferred curtailment gain was recorded in 2008 as a component of accumulated other comprehensive loss; the gain will be recognized in net
income in future years when the related employees terminate employment.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 established a prescription drug
benefit under Medicare (“Medicare Part D”) and a federal subsidy to sponsors of retiree health care benefit
plans that provide benefits that are at least actuarially equivalent to Medicare Part D. The benefits provided
under the Bank’s plan to certain participants are at least actuarially equivalent to the Medicare Part D prescription drug benefit. The estimated effects of the subsidy are reflected in actuarial loss in the accumulated
postretirement benefit obligation and net periodic postretirement benefit expense.
Federal Medicare Part D subsidy receipts were $0.6 million and $0.3 million in the years ended December 31,
2009 and 2008, respectively. Expected receipts in 2010, related to benefits paid in the years ended December 31, 2009 and 2008, are $0.1 million.
Following is a summary of expected postretirement benefit payments (in millions):

2010
2011
2012
2013
2014
2015 - 2019
Total

Without subsidy

With subsidy

$

4.8
5.3
5.6
6.0
6.3
36.1

$

4.4
4.8
5.1
5.4
5.7
32.3

$

64.1

$

57.7

Postemployment Benefits
The Bank offers benefits to former or inactive employees. Postemployment benefit costs are actuarially determined using a December 31 measurement date and include the cost of medical and dental insurance,
survivor income, and disability benefits. Postemployment benefit costs are actuarially determined and include
the cost of medical and dental insurance, survivor income, disability benefits, and self-insured workers’ compensation expenses. The accrued postemployment benefit costs recognized by the Bank at December 31,
2009 and 2008 were $7 million and $5 million, respectively. This cost is included as a component of “Accrued benefit costs” in the Statements of Condition. Net periodic postemployment benefit expense included
in 2009 and 2008 operating expenses were $3.3 million and $0.4 million, respectively, and are recorded as a
component of “Salaries and other benefits” in the Statements of Income and Comprehensive Income.

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FEDERAL RESERVE BANK OF PHILADELPHIA

Notes To Financial Statements

13. ACCUMULATED OTHER COMPREHENSIVE INCOME AND OTHER COMPREHENSIVE
INCOME
Following is a reconciliation of beginning and ending balances of accumulated other comprehensive loss (in
millions):
Amount related to postretirement
benefits other than pensions
Balance at January 1, 2008
Change in funded status of benefit plans:
Net actuarial loss arising during the year
Amortization of prior service cost
Amortization of net actuarial loss

$

(7)
(1)
3

Change in funded status of benefit plans - other comprehensive loss
Balance at December 31, 2008

(19)

(5)
$

(24)

Change in funded status of benefit plans:
Prior service costs arising during the year
Net actuarial loss arising during the year
Amortization of prior service cost
Amortization of net actuarial loss

(5)
(3)
(1)
3

Change in funded status of benefit plans - other comprehensive loss

(6)

Balance at December 31, 2009

$

(30)

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

14. BUSINESS RESTRUCTURING CHARGES
2008 Restructuring Plans
In 2008, the Reserve Banks announced the acceleration of their check restructuring initiatives to align the
check processing infrastructure and operations with declining check processing volumes. The new infrastructure consolidates operations into two regional Reserve Bank processing sites; in Cleveland, for paper check
processing, and Atlanta, for electronic check processing.

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FEDERAL RESERVE BANK OF PHILADELPHIA

Notes To Financial Statements

Following is a summary of financial information related to the restructuring plans (in millions):
2008 restructuring plans
Information related to restructuring plans as of December 31, 2009:
Total expected costs related to restructuring activity
Expected completion date

$

3.7
2009

$

2.8
0.3
(0.2)

Balance at December 31, 2008
Other costs
Adjustments
Payments

$

2.9
0.2
0.6
(1.4)

Balance at December 31, 2009

$

2.3

Reconciliation of liability balances:
Balance at January 1, 2008
Employee separation costs
Other costs
Adjustments

Employee separation costs are primarily severance costs for identified staff reductions associated with the
announced restructuring plans. Separation costs that are provided under terms of ongoing benefit arrangements are recorded based on the accumulated benefit earned by the employee. Separation costs that are
provided under the terms of one-time benefit arrangements are generally measured based on the expected
benefit as of the termination date and recorded ratably over the period to termination. Restructuring costs
related to employee separations are reported as a component of “Salaries and other benefits” in the Statements of Income and Comprehensive Income.
Other costs include retention benefits and outplacement services and are shown as a component of “Salaries
and other benefits” and “Other expenses” in the Statements of Income and Comprehensive Income.
Adjustments to the accrued liability are primarily due to changes in the estimated restructuring costs and are
shown as a component of the appropriate expense category in the Statements of Income and Comprehensive
Income. Costs associated with enhanced pension benefits for all Reserve Banks are recorded on the books of
the FRBNY as discussed in Note 11.

15. SUBSEQUENT EVENTS
There were no subsequent events that require adjustments to or disclosures in the financial statements as of
December 31, 2009. Subsequent events were evaluated through April 21, 2010, which is the date that the
Bank issued the financial statements.

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