Full text of Annual Report of the Federal Reserve Bank of Philadelphia : Navigating Change : 2010 Annual Report

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2010 Annual Report

2010 Annual Report

Navigating Change

Message from the President..................................................................................................... 2
A Farewell to the Fed .............................................................................................................. 6
Accepting the Challenge ....................................................................................................... 10
The Scope and Responsibilities of Monetary Policy.................................................................. 12
Making History: Regulatory Reform Enacted . ......................................................................... 22
Keeping Credit Markets on the RADAR Screen ....................................................................... 26
Reaching Out in the Third District — and Beyond .................................................................. 30
2010 Bank Highlights............................................................................................................. 35
Board of Directors.................................................................................................................. 42
Economic Advisory Council..................................................................................................... 44
Management & Policy Committee . ........................................................................................ 45
Current Officers...................................................................................................................... 46
Operating Statistics................................................................................................................ 47
Statement of Auditor Independence........................................................................................ 48
Financial Reports.................................................................................................................... 49
Notes to Financial Statements................................................................................................ 57

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Federal Reserve Bank of Philadelphia

Message from the President
As the theme of this annual report indicates, 2010 marked a year of “Navigating Change” for the Philadelphia Fed and the Federal Reserve System. The
financial crisis and the recession led some people to question the role of the Federal Reserve and even the effectiveness of monetary policy in supporting the
nation’s economy.
In this year’s opening essay, “The Scope and Responsibilities of Monetary Policy,” I explain my concerns about assigning to monetary policy goals that it
cannot hope to achieve. In particular, I stress that monetary policy is not capable of achieving employment levels inconsistent with underlying economic fundamentals; it is not a good instrument for selectively bursting perceived bubbles in asset prices; nor is it an appropriate tool for allocating credit to particular
sectors or firms as a substitute for fiscal policy. In fact, expanding the reach and scope of monetary policy can undermine the Fed’s credibility and its effectiveness in achieving the one goal for which it is uniquely and ideally suited – price stability. Securing price stability, however, is not just an end unto itself,
but it is the most effective means by which monetary policy can promote maximum employment and sustainable growth over the longer term.
From a regulatory perspective, the most important change of 2010 was the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act. It
is the most substantial reform of the financial regulatory landscape since the 1930s. The Federal Reserve has already started intensive work on implementing
many of the law’s provisions, which involves, among other things, writing hundreds of new rules. The Fed has direct responsibility for writing more than 50
rules, and it will contribute to many others. Several key employees from the Philadelphia Fed have participated in this important work.
Effective regulation requires effective supervision. Accordingly, the act expands the Fed’s supervisory responsibilities and encourages a more macroprudential
approach, one where regulators seek to assess not only the risks to individual firms but risks to the entire financial system. The Fed continues to share responsibility for regulating institutions with the OCC, the FDIC, and state regulators. It also retains its responsibility for bank holding companies and is given
expanded responsibilities for thrift holding companies. Here in the Third District, that will include adding responsibility for 34 thrift holding companies, in
addition to the more than 100 bank holding companies and 20 state member banks. The first feature article in this report details the Philadelphia Fed’s role
in implementing regulatory reform.
Our second feature article describes Philadelphia’s leadership role in developing and launching a centralized database for the Federal Reserve System of
consumer credit and related securities. Known as RADAR, for Risk Assessment, Data Analysis, and Research, the database will primarily be used in the su-

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2010 Annual Report

pervision and regulation function and will improve the Fed’s ability to monitor and supervise risk-taking. It
will also help research economists and community development staffs understand economic and financial
behavior. It has already proven to be an excellent resource in the Fed’s efforts to identify emerging threats
that may pose systemic risk in the broader economy.
The final feature article highlights ways the Philadelphia Fed has navigated the changes of 2010. It describes the many ways in which the Bank communicates with its constituents throughout the Third District.
These include traditional approaches, such as the annual field meetings for the local banking communities,
now in their 66th year, but also new activities, such as specialized foreclosure workshops. The story also
details our efforts to reach out to legislative staffs, to inform them of the Fed’s mission and its role in the
nation’s economy.

Changes Within the Bank
In addition to the many ways we are navigating changes in the financial and regulatory world, last year the
Philadelphia Fed also experienced its own sea change. During 2010, we said farewell to several of our key
executives. First Vice President William Stone, Executive Vice President Richard Lang, and Vice President and
General Counsel Edward Mahon retired last year. All three of them were trusted colleagues. Their collective
experience, insight, and institutional knowledge have been invaluable to me during my tenure as president. I
offer Bill, Rick, and Ed my special thanks for a job well done and my warmest wishes for a long and healthy
retirement. This report includes a farewell message from Bill Stone, recalling his long career with the Philadelphia Fed and the many changes he witnessed.
I am pleased to report that the leadership transition has progressed smoothly, with Blake Prichard taking on
his new role as first vice president and chief operating officer of the Philadelphia Fed on January 1, 2011.
Blake is a talented executive with a deep knowledge of the Federal Reserve System and a strong commitCharles I. Plosser
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Federal Reserve Bank of Philadelphia

ment to its principles. The many leadership positions he has held over nearly 40 years with the Federal Reserve have prepared him well for his new responsibilities. During his nearly 20-year tenure at the Philadelphia Fed, he has helped manage some of the most complex projects undertaken by our Bank and
the Federal Reserve System. Blake has contributed a brief message to this annual report, which follows Bill Stone’s message. Our list of current officers also
notes other officer transitions in 2010.

Board of Directors
During these times of change, we are especially grateful for the advice and counsel of the business leaders who serve on our board of directors. I sincerely
thank all of them for their acumen and insights into the region’s economy.
Chairman Charles P. Pizzi, president and CEO of the Tasty Baking Company, and Deputy Chairman Jeremy Nowak, president and CEO of The Reinvestment
Fund, completed their first year in these leadership roles and both have been re-appointed to serve in 2011. Jeremy was also re-appointed to a new threeyear term as director. Keith S. Campbell, chairman of Mannington Mills, Inc., has been re-elected to a three-year term.
In addition, I welcome our newest board member, R. Scott Smith, Jr., chairman and CEO of Fulton Financial Corporation, and look forward to his contributions. I also want to thank Ted Cecala, former chairman and CEO of Wilmington Trust Corporation, for his service, which ended in 2010.
Scott Smith has served for the past three years as the Third District’s representative to the Federal Advisory Council. To that post, we have now appointed
Bharat Masrani, president and CEO of TD Bank, N.A., for 2011. We are pleased that he will serve as the District’s representative on the Federal Advisory
Council, which meets quarterly with the Board of Governors in Washington, D.C.

Our Advisory Councils
Finally, I also want to acknowledge the business and community leaders who participate on the Bank’s Economic Advisory Council. These representatives from
diverse industries as well as nonprofits and organized labor in the Third District provide information on business conditions in their industries and communities.
The council held its first meeting in September 2010 and will hold semi-annual meetings to add to the guidance we get from the Bank’s board of directors.
Late in 2010, the Federal Reserve Board of Governors asked each Federal Reserve Bank to establish another advisory council, the Community Depository
Institutions Advisory Council (CDIAC). These new councils will include representatives from commercial banks, thrift institutions, and credit unions from local
markets around each District. The Bank’s CDIAC had its inaugural meeting in March 2011, and we will bring you up to date on its activities in next year’s
annual report.

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2010 Annual Report

Conversations with the Bank’s board of directors, its advisory councils, and local business people are invaluable in developing a rich and comprehensive
picture of the region’s economy. These conversations with people who live and work within the communities that underpin our economy bring Main Street
perspectives to the national policy table. Such input is reflected in discussions at the Federal Open Market Committee (FOMC) as it sets policies that best
meet the needs of this geographically and economically diverse nation.

Closing Thoughts
In closing, I want to extend my gratitude to the talented and dedicated employees at the Philadelphia Fed. I am proud of their many contributions to the
Bank and the Federal Reserve System, especially as we continue to navigate the changes.
The one constant in this climate of change has been the steadfast mission of the Federal Reserve: to foster an environment of price stability that is supportive of maximum sustainable economic growth and employment. We remain dedicated to serving the financial institutions, businesses, and communities of
the Third District, as we have for nearly a century. As always, I look forward to working with you in the year ahead.

Charles I. Plosser
President and Chief Executive Officer
May 2011

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Federal Reserve Bank of Philadelphia

A Farewell to the Fed

				

By William H. Stone, Jr., First Vice President, Federal Reserve Bank of Philadelphia

In 2010, First Vice President and Chief Operating Officer Bill Stone announced his plans to retire from the Bank after nearly
40 years of service. In his final annual report message, he reflects upon his tenure at the Bank and shares his thoughts on
the future of the Federal Reserve.

From our offices, I can look out on Independence Mall, the National Constitution Center, and William Penn atop City Hall. Also, just a few blocks from
here stand the First and Second Bank of the United States, predecessors to
today’s Federal Reserve, which serve as a reminder of how central banking
has evolved over the centuries. I am honored to have had the opportunity
to contribute to an institution as prestigious as the Federal Reserve and to
have worked with so many talented and dedicated people.

Our region’s financial landscape also looks very different than it did four
decades ago. Our District, once dominated by a small number of regional
banks, changed as larger financial institutions outside our District acquired
local banks. Just as the banking industry has evolved, so too has the Philadelphia Fed. I stand in awe at the remarkable progress we have made as
an institution. Yet, throughout our history, one constant has remained: our
strong connection to the financial industry and the communities we serve.

Since joining the Philadelphia Fed in 1971, I have observed tremendous
changes in the financial industry, as well as in the Federal Reserve System.
We’ve seen how rapid technological advancements have indelibly changed
the way we do business, and we’ve witnessed an explosion in the number
and sophistication of financial products. When I began my career here,
many of the Bank’s operations were still being performed manually. Today,
we have more information on our mobile devices than we had on the massive mainframes of the 1970s.

The Evolution of a Central Bank

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The Philadelphia Fed and the Federal Reserve System have been through
extraordinary changes.
Perhaps the most widespread difference has been consumers’ steady shift
toward electronic payments. The Federal Reserve’s recently released study
of noncash payments indicates that more than three-quarters of all U.S.
noncash payments were made electronically in 2009. Since our last study

2010 Annual Report

three years ago, electronic payments have increased by 9.3 percent annually, while at the same time,
the number of checks processed decreased by 7.2 percent annually. Moreover, we observed a rapid
rise in the electronification of the clearing process, with roughly 96 percent of interbank checks now
cleared electronically, compared with only 43 percent in our last study.1
This sweeping shift in how people make payments was the catalyst that led the Fed to consolidate
its check processing operations to a single site for electronic check processing in Atlanta and a single
site for paper check processing in Cleveland. It is worth mentioning, however, that before the consolidation, Philadelphia’s check operation was, at one time, the largest in the System, processing over
a billion checks per year at its peak in the 1980s and 1990s.2 Another monumental change to our
organization was the passage of the Monetary Control Act (MCA) in 1980. Before then, the Fed had
provided services for free to member banks. 3 The law mandated that the Federal Reserve offer priced
services not only to member banks but also to any depository institution that wanted to use them. The
act also required all depository institutions to hold the same level of reserves and granted them equal
access to discount window lending.
Since the MCA required the Fed to sell its services in competition with private providers of payment
services, the Federal Reserve’s business expanded to include sales. We were able to build a broad

A summary report of the 2010 Federal Reserve Payments Study is available at www.frbservices.org. Detailed reports
on the individual studies will be available in early 2011.

1

2

Federal Reserve Bank of Philadelphia, 1989 Annual Report.

3

A member bank is any national bank or a state-chartered bank that chooses to join the Federal Reserve System.

William H. Stone, Jr.

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Federal Reserve Bank of Philadelphia

presence in the region based on our success in winning check business and
our reputation for quality service, which encouraged banks to do business
with us.

and the U.S. Secret Service over the last two decades to improve our currency’s security features. It has also greatly enhanced the automation of its
currency and coin operations.

I spent my first decade at this Bank visiting the CEOs of local financial
institutions to discuss business conditions and industry trends. These conversations enabled us to see the economy through the eyes of our financial
institutions and to better serve them, usually through adding new services
that catered to their unique needs.

Within the Federal Reserve System, our Bank’s leadership and expertise
have been recognized in many areas. We developed the first book-entry
system for marketable Treasury securities transactions for retail customers in the mid-1980s. We are the home of the Treasury Check Information
System (TCIS), which is the Treasury’s check processing and reconcilement
system. Through this program, we are tasked with tracking all government
checks issued and paid. We also run the Treasury’s collateral management
and monitoring business.

Many of the close relationships the Bank developed with District financial
institutions continue today. In fact, the Philadelphia Fed is one of only a
few Reserve Banks to host annual field meetings, at which Bank officers
travel throughout the Third District to meet with banking leaders and discuss the economy and the banking industry. In 2010, we marked the 65th
year of this outreach program, making these the oldest continual series of
field meetings in the Federal Reserve System.
One more point about the Monetary Control Act is that it paved the way
for the ongoing shift from paper to electronic check processing, ultimately
leading to the Check Clearing for the 21st Century Act in 2003. The Fed
proposed and supported the passage of this act, which improved the efficiency of check processing by allowing for the substitution of check images
in clearing and settlement. From a monetary policy perspective, the Fed
has made considerable progress in communicating its actions. Our move
from opacity to openness has helped us make strides toward clarifying our
objectives to the public. Sharing knowledge allows the Fed to contribute
to the economic vitality of the nation. In our cash operations, the Fed has
worked with the U.S. Treasury, the U.S. Bureau of Engraving and Printing,

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The Payment Cards Center, established just over 10 years ago, is another
example of how the Philadelphia Fed has earned a reputation for knowledge and expertise. The center provides insights into consumer credit and
payments through research, conferences, and publications.
Our Research Department is also well respected for its various datacollection efforts and for the rigorous economic research it produces.
Philadelphia’s intellectual output is widely published in top-tier academic
and scholarly journals. In addition, the Philadelphia Fed’s regional Business Outlook Survey is broadly recognized as an indicator of the national
economy.
Our public outreach efforts are second to none. Throughout each year, various departments hold workshops, seminars, and conferences to educate
our many constituencies on a range of topics, including the important
work of the Federal Reserve. Our Community Development area has a long

2010 Annual Report

history of focusing attention on community development issues and helping consumers improve their financial literacy.
In 2003, the Bank opened “Money in Motion,” our interactive financial and historical exhibit, to help educate the public
about money, finance, and the history of central banking in the
United States.
In recent years, new programs have given us even greater
outreach in our communities. We developed PhillyFedCARES to
coordinate and support our employees’ volunteer efforts. This
initiative strengthens our community ties and helps important
causes in the communities we serve.
Throughout its evolution, the Fed has played a vital role in
guiding the nation’s economy not only through extraordinary
changes but also through crises. From the savings and loan
crisis in the 1980s, to the tragedy of 9/11, to the more recent
Great Recession, the Federal Reserve has continued to support the country’s economy through some very difficult times.
Through our triumphs and challenges, we have continued to
grow and evolve. Much of what we have learned from these
events will help us shape better policy, more effective supervision and regulation, and a more efficient payments system.

Looking Toward the Future
Looking ahead, in the wake of the financial crisis and the enactment of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, the Fed and other regulatory agencies will
undergo some significant changes. Right now, the Fed and its

counterparts are working diligently to create the infrastructure that will implement this landmark legislation. In an era
in which the Federal Reserve is centralizing operations and
Reserve Banks are becoming more specialized in their activities, the Philadelphia Fed has carved out some important
niches. We make strong contributions to the System, and we
are particularly known for our expertise in retail and consumer credit, payment cards, and Treasury services.

Passing the Baton
I know that under the capable leadership of President
Plosser and my successor, Blake Prichard, our Bank will
continue its stellar work. I am confident that our Bank is
well positioned to face whatever challenges lie ahead. The
Philadelphia Fed – along with the entire Federal Reserve
System – is doing its part to ensure that our customers and
constituents remain confident in the integrity of our nation’s
central bank.

In Closing
I would be remiss if I did not close with an expression of
how tremendously rewarding my work at the Philadelphia
Fed has been. I have always been proud to work at the
Bank because of our employees’ shared commitment to
public service. As I close this chapter of my career, I want to
express my gratitude for having had the privilege of being
part of this great institution. I hope I have helped to build
something that will carry on a tradition of excellence for a
long time to come.

The Philadelphia
Fed makes strong
contributions to the
System, and we are
particularly known
for our expertise in
retail and consumer
credit, payment
cards, and Treasury
services.

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Federal Reserve Bank of Philadelphia

Accepting the Challenge
By D. Blake Prichard, First Vice President and Chief Operating Officer

Blake Prichard was appointed first vice president and chief operating officer of the Philadelphia Fed, effective January
1, 2011. Prior to assuming his new role, Prichard was executive vice president responsible for Retail Payments, Treasury
Services, Information Technology Services, and Customer Relations. He also provided oversight to the Federal Reserve
System’s Groupware Leadership Center, which provides national e-mail and related services.

The preceding letters from President Plosser and Bill Stone noted the many
forces of change that the Philadelphia Fed experienced in 2010. Among
them was Bill Stone’s retirement after 39 years with the Bank, including 23
years as first vice president. I am honored indeed to follow Bill in the role
of first vice president and chief operating officer.
Change is inevitable in every institution. Managing change is a fundamental management responsibility in every organization. We are indebted to
Bill Stone for his exceptional leadership and his commitment to preparing
others to fulfill their management responsibilities. Bill was the model of a
mission-focused executive, with a firm understanding of the public service
that Federal Reserve Bank employees provide. I have benefited from Bill’s
coaching and mentoring during my career. I know that many others within
our management team and many of our employees have benefited as well.

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We have an extraordinary depth of talent in our Bank, and I look forward
to working with all of the Bank’s employees as we continue to deliver the
best possible service.
The nation’s economy, financial institutions, businesses, and families are
still recovering from a deep recession. We have much to do before the
nation’s economic performance and the financial conditions of its citizens
and businesses are back to normal. Passage of the Dodd-Frank Wall Street
Reform and Consumer Protection Act last July has also meant new roles
and additional responsibilities for the Fed. It will require an innovative and
talented staff throughout the System, including those here in Philadelphia,
to figure out how best to carry out these assignments.
The Dodd-Frank Act has resulted in other changes at the Reserve Banks as

2010 Annual Report

well. Each Reserve Bank and the Board of Governors, as well as other
regulatory agencies, were required to establish an Office of Minority
and Women Inclusion (OMWI) and name a director by January 21,
2011. In response, the Philadelphia Fed has established an Office
of Diversity and Inclusion (ODI) and appointed Mary Ann Hood as
director, in addition to her ongoing roles as senior vice president of
the Human Resources Department and the Bank’s equal opportunity
officer. The new ODI will fulfill the requirements of Dodd-Frank while
also recognizing the ongoing commitment that our Bank has made
to diversity initiatives in recent years, including a formal Diversity
Council of Bank employees, an active diversity recruitment program,
and ongoing efforts to increase women- and minority-owned businesses within the Bank’s supplier ranks. All of these efforts to support
diversity make the Philadelphia Fed a stronger institution and better
able to support the diverse neighborhoods and communities that
make up the Third District.
In conclusion, all of us at the Bank are following in the footsteps
of some remarkable role models of public service. Yet, when I look
around at the terrific team of employees, I am confident that we have
the drive and determination to continue to deliver the best service
possible to our Third District constituents.

D. Blake Prichard

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Federal Reserve Bank of Philadelphia

The Scope and Responsibilities of Monetary Policy
By Charles I. Plosser

“…we are in danger of assigning to monetary policy a larger role than it can perform, in danger of
asking it to accomplish tasks that it cannot achieve, and, as a result, in danger of preventing it from
making the contribution that it is capable of making.”

These words are taken from the presidential address of the distinguished economist and Nobel Laureate Milton Friedman to the
Milton
American Economic Association in 1967.1 Although the message was delivered over 40 years ago, I believe Friedman’s caution
Friedman
is one well worth remembering, especially in this world where central banks have taken extraordinary actions in response to a
financial crisis and severe recession. I believe policymakers and the public need to step back from our focus on short-term fluctuations in economic conditions and to think more broadly about what monetary policy can and should do and in the process adjust our expectations of what we believe to be the
scope and responsibilities of our central bank.2
First, it may help to put Friedman’s words into context. His remarks were directed at an economics profession that had gravitated toward believing that
there was a stable and exploitable trade-off between inflation and unemployment, otherwise known as the Phillips curve. According to this view, policymakers should pick a point on the Phillips curve that balances the nation’s desire for low unemployment and low inflation. Friedman argued that this was a
false trade-off, and the experience in the U.S. in the decade that followed his remarks, often referred to as the Great Inflation, was a painful demonstration
of Friedman’s valuable insight. In particular, that episode illustrated quite dramatically and painfully that there was no stable relationship between inflation
and unemployment. We witnessed the dangers inherent in monetary policies that take low inflation for granted in a world of high unemployment or perceived large output gaps.3 Our experiences clearly showed that efforts to manage or stabilize the real economy in the short term were beyond the scope of
monetary policy, and if policymakers made aggressive attempts to do so, it would undermine the one contribution monetary policy could and should make
to economic stability – price stability.

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2010 Annual Report

Of course, monetary theory has advanced over the past four decades as economists have developed more sophisticated models and better empirical
methods to test the validity of these models. However, the proper scope of monetary policy remains an important issue of our day. In response to the
global financial crisis, central banks have been asked to use monetary policy and other central bank functions to deal with an increasing array of economic
challenges. These challenges include high unemployment, asset booms and busts, and the allocation and availability of credit.
I believe we have come to expect too much from monetary policy. Indeed, broadening monetary policy’s scope can actually diminish its effectiveness. When
monetary policy overreaches and fails to deliver desired, but unattainable, outcomes, its credibility is undermined. That makes it more difficult to deliver on the
one goal that monetary policy is actually capable of meeting. Moreover, when the central bank is asked to implement policies more appropriately assigned to
fiscal authorities, the independence of monetary policy from the political process is put at risk, which also undercuts the effectiveness of monetary policy.
In this year’s annual report essay, I discuss the appropriate scope of monetary
policy in dealing with real economic fluctuations, asset-price swings, and the
allocation of credit. My views are informed by Friedman’s caution that we
should be careful not to expect too much of monetary policy. If we recognize
the limits to what monetary policy can do effectively, we will be better able to
understand what monetary policy should do.

Monetary Policy and Real Economic Fluctuations
The U.S. Congress has established the broad objectives for monetary policy as
promoting “effectively the goals of maximum employment, stable prices and
moderate long-term interest rates.” This has typically been characterized as
the “dual mandate,” since if prices are stable and the economy is operating
at maximum employment, long-term nominal interest rates will generally be
moderate.

Most economists now
understand that in the
long run, monetary policy
determines only the level
of prices and not
the unemployment
rate or other real
variables.

Most economists now understand that in the long run, monetary policy determines only the level of prices and not the unemployment rate or other real
variables.4 In this sense, it is monetary policy that has ultimate responsibility
for the purchasing power of a nation’s fiat currency. In the long run, employ-

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Federal Reserve Bank of Philadelphia

ment depends on factors such as demographics, productivity, tax policy, and labor laws. Nevertheless, many economists believe that monetary policy can
sometimes temporarily stimulate real economic activity in the short run, albeit with considerable uncertainty as to the timing and magnitude, what economists call the “long and variable lag.” This type of activist monetary policy is actually quite difficult to do successfully for several reasons. First, any boost
to the real economy from stimulative monetary policy will eventually fade away as prices rise and the purchasing power of money erodes in response to
the policy. Even the temporary benefit can be mitigated, or completely negated, if inflation expectations rise in reaction to the monetary accommodation.
Moreover, a variety of shocks can simultaneously buffet the economy. Shocks can occur to specific sectors, such as a sharp drop in housing prices or a sharp
rise in the price of oil, or to specific regions. Some may be large and some may be small. Some may be positive and boost economic growth, while others
may be detrimental to growth. If monetary policy responds to one shock in an attempt to offset its possible effects, it may aggravate the effects of another
shock. Thus, monetary policy’s ability to neutralize the impact of shocks is actually quite limited.
In addition, successfully implementing such an economic stabilization policy requires predicting the state of the economy more than a year in advance and
anticipating the nature, timing, and likely impact of future shocks. The truth is that economists simply do not possess the knowledge to make such forecasts
with the degree of precision that would be needed to offset the economic shocks. Attempts to stabilize the economy will, more likely than not, end up providing stimulus when none is needed, or vice versa. It also risks distorting price signals and thus resource allocations, adding to instability. In most cases,
the effects of shocks to the economy simply have to play out over time as markets adjust to a new equilibrium. Monetary policy is likely to have little ability
to hasten that adjustment. For example, monetary policy cannot retrain a workforce or help reallocate jobs to lower unemployment. It cannot help keep
gasoline prices at low levels when the price of crude oil rises to high levels. And monetary policy cannot reverse the sharp decline in house prices when the
economy has significantly over-invested in housing. In all of these cases, monetary policy cannot eliminate the need for households or businesses to make
the necessary real adjustments when such shocks occur. Asking monetary policy to do what it cannot do with aggressive attempts at stabilization can actually increase economic instability rather than reduce it.
Let me be clear that this does not mean that monetary policy should be unresponsive to changes in broad economic conditions. Monetary policymakers
should set their policy instrument – the federal funds rate in the U.S. – consistent with controlling inflation over the intermediate term. So the target federal
funds rate will vary with economic conditions. But the goal in changing the funds rate target is to maintain low and stable inflation. This will foster the
conditions that enable households and businesses to make the necessary adjustments to return the economy to its sustainable growth path and to long-run
maximum employment. Monetary policy itself does not determine this path, nor should it attempt to do so.
For example, if an adverse productivity shock results in a substantial reduction in the outlook for economic growth, then real interest rates tend to fall.
As long as inflation is at an acceptable level, the appropriate monetary policy is to reduce the federal funds rate to facilitate the adjustment to lower real

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interest rates. Failure to do so could result in a misallocation of resources, a
steadily declining rate of inflation, and perhaps even deflation.
Conversely, when the outlook for economic growth is revised upward, real
market interest rates will tend to rise. Provided that inflation is at an acceptable level, appropriate policy would be to raise the federal funds rate. Failure
to do so would result in a misallocation of resources and, in this case, a rising
inflation rate.
In both cases, changes in the federal funds target are responding to economic
conditions in order to keep inflation low and stable and doing so in a systematic manner. Monetary policy is not trading off more inflation for less unemployment or vice versa. As I have already argued, the empirical and theoretical case for such a trade-off is tenuous at best. And the data to support the
view that central banks can favorably exploit such a potential trade-off are
even more dubious.
So what should monetary policy do? To strengthen the central bank’s commitment to price stability, I have long advocated that the Federal Reserve
adopt and clearly communicate an explicit numerical inflation objective
and publicly commit to achieving that objective over some specified time
period through a systematic approach to policy. It is one of the messages
of economic research over the last 40 years that policy is best conducted in
a rule-like manner. This systematic approach helps promote more effective
communication so that the public and the markets will understand and better
predict how policy will evolve as economic conditions change. This, in turn,
helps reduce economic volatility and makes policy more effective in achieving
its long-run goals.

Monetary
policymakers
should set their
policy instrument
– the federal
funds rate in the
U.S. – consistent
with controlling
inflation over the
intermediate term.

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Federal Reserve Bank of Philadelphia

Indeed, the Federal Reserve is one of the few central banks among the major industrialized countries that have not made such a public commitment to a
numerical inflation objective. I believe it is time we did. Such a commitment will help the public form its expectations about monetary policy, which would
enhance macroeconomic stability.

Monetary Policy and Asset Prices
Let me now turn to the role of monetary policy in the evolution of asset prices. Some argue that monetary policy can be a source of distorted asset prices.
But a systematic approach to achieving price stability would help monetary policymakers avoid exacerbating the effects of asset-price swings on the
economy. I think it is fair to say that no one takes issue with the view that asset prices are important in assessing the outlook for the economy and inflation. Movements in asset prices can provide useful information about the current and future state of the economy. Even when a central bank is operating
under an inflation target, asset prices are informative. Put another way, judgments about the inflationary stance of monetary policy should be informed by a
wide array of market signals, including asset-price movements.5
The broad view among many monetary policymakers is that asset prices should not be a direct focus of monetary policy. While asset prices may be relevant
in the normal course of monetary policymaking, the presumption is that such prices are responding efficiently and correctly to the underlying state of the
economy, including the stance of monetary or fiscal policy. The bottom line of this view was that monetary policy should not seek to actively burst perceived
asset bubbles. Instead, various forms of prudential regulation or supervision of financial institutions are likely better suited to addressing asset-price swings,
should such intervention be called for.
However, in light of the recent housing boom, its subsequent collapse, and the financial crisis that followed, some people have begun to rethink this position
concerning the scope of monetary policy and advocate an active role for monetary policy to restrain asset-price booms. They tend to believe that asset
prices are not always tied to market fundamentals. They worry that when asset values rise above their fundamental value for extended periods – that is,
when a so-called bubble forms – the result will be an over-investment in the over-valued asset. When the market corrects such a misalignment – as it
always does – the resulting reallocation of resources may depress economic activity in that sector and possibly the overall economy. Such boom-bust cycles
are, by definition, inefficient and disruptive. So, the argument goes, policy should endeavor to prevent or temper such patterns.
This argument for monetary policy to respond directly to a perceived mispricing of specific assets is controversial and in my view not persuasive. It requires
that policymakers know when an asset is over-priced relative to market fundamentals, which is no easy task. For example, equity values might appear high
relative to current profits, but if market participants expect profit growth to rise in the future, then high equity values may be justified.

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2010 Annual Report

Another challenge in addressing asset-price bubbles is that contrary to most of the models used to justify intervention, there are many assets, not just one.
And these assets have different characteristics. For example, equities are very different from real estate. Misalignments or bubble-like behavior may appear
in one asset class and not others and may vary even within a specific asset class. But monetary policy is a blunt instrument. How would policymakers have
gone about pricking a bubble in technology stocks in 1998 and 1999 without wreaking havoc on investments in other asset classes? After all, while the
NASDAQ grew at an annual rate of 81 percent in 1999, the NYSE composite index grew just 11 percent. What damage would have been done to other
stocks and other asset classes had monetary policy aggressively raised rates to dampen the tech boom. During the housing boom, some parts of the U.S.
housing market were experiencing rapid price appreciation while others were not. How do you use monetary policy to burst a bubble in Las Vegas real
estate, where house prices were appreciating at an annual rate of 45 percent by the end of 2004, without damaging the Detroit market, where prices were
increasing at an annual rate of less than 3 percent?
Ultimately, sound policymaking requires us to understand the limits
of what we know. I doubt we could find enough agreement among
policymakers or economists about the interpretation of asset-price
movements to allow for stable, rule-based policymaking. In the absence of such a clearly stated rule, we risk uncertainty about central
bank policy itself as well as its effect on the economy. That could
become a source of volatility in asset markets and, ultimately, in real
activity and inflation. Put more bluntly, asset prices are often volatile,
and creating expectations that monetary policy will intervene directly
to influence the price-setting mechanism seems more dangerous
for the orderly functioning of markets than helpful even in the rare
instances when a true and significant distortion may in fact exist.
Moreover, the moral hazard created by the belief that the central
bank would intervene if prices of a certain class of assets became
“misaligned” might, in fact, cause more inefficient pricing and more
instability, not less. Humility in policymaking requires that we respect
the limits of our knowledge and not overreach, particularly when it
involves overriding market signals with policy actions.

Federal Reserve System Assets
Treasury notes & bonds
Assets other than Treasuries, Agency debt, & MBS
Agency Debt
MBS
Treasury bills

Source: Table H.4.1 data compiled by Research Department, Federal Reserve Bank of Philadelphia

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Federal Reserve Bank of Philadelphia

Monetary Policy and Credit Allocation
Finally, let me address another issue that has loomed large during the financial crisis and where great caution is required going forward: the role of monetary policy in the allocation of credit. At various times during the crisis, the Federal Reserve and many other central banks around the world intervened
in various markets to facilitate intermediation. In many cases, these efforts were targeted to specific sectors of the economy – e.g., the Fed’s purchases of
mortgage-backed securities issued by the federal housing agencies – to specific types of firms or financial markets – e.g., the primary dealer credit facility
and the term asset-backed securities loan facility, or in some cases, to specific firms – e.g., the lending to Bear Stearns and to AIG.
Many of these efforts, especially earlier in the crisis, were justified on the grounds that central banks should act as “lender of last resort” in order to preserve
financial stability. The specific criteria for undertaking these actions could not help but be somewhat arbitrary as policymakers had little experience with
such a crisis, and little theory to guide them beyond Walter Bagehot’s dictum from the 1873 classic Lombard Street to limit systemic risk by “lending freely
at a penalty rate against good collateral.”6 In general, these actions, especially in the U.S., involved extensive use of the central bank’s balance sheet and
likely went far beyond what Bagehot would have imagined.
Even when it is appropriate for a central bank to function as a lender of last resort, in my view, such policy should follow a rule-like or systematic approach.
This suggests announcing in advance the criteria that will be used to lend and who will be eligible to participate. Economic and financial stability would be
best served by establishing such guidelines in advance and committing to following them in a crisis. That commitment is hard to deliver on, but institutional
constraints can help tie the hands of policymakers in ways that limit their discretion. Most central banks, including the Fed, have not developed such systematic plans and thus, during the crisis, behaved in a highly discretionary manner that generated moral hazard and volatility.
My purpose here is not to critique the myriad programs that were put in place or the varying degrees of moral hazard they created but to make a more general point: that these actions, for the most part, are better thought of as forms of fiscal policy, not monetary policy, because they involved allocating credit to
specific firms or industries and putting taxpayer dollars at risk. Moreover, asking monetary policy to do something that it should not do – engage in fiscal
policy – can be detrimental to the economy by undermining monetary policy’s effectiveness at fulfilling its ultimate responsibility: price stability.
A body of empirical research indicates that when central banks have a degree of independence in conducting monetary policy, more desirable economic
outcomes usually result. But such independence can be threatened when a central bank ventures into conducting fiscal policy, which, in the U.S., rightly
belongs with Congress and the executive branch of government. Having crossed the Rubicon into fiscal policy and engaged in actions to use its balance
sheet to support specific markets and firms, the Fed, I believe, is likely to come under pressure in the future to use its powers as a substitute for other fiscal
decisions. This is a dangerous precedent, and we should seek means to prevent such future actions.7

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2010 Annual Report

I have long argued for a clear, bright line to restore
the boundaries between monetary and fiscal policy,
leaving the latter to Congress and not the central
bank. For example, I have advocated the elimination
of Section 13(3) of the Federal Reserve Act, which
allowed the Fed to lend directly to “corporations, partnerships and individuals” under “unusual and exigent
circumstances.” The Dodd-Frank Wall Street Reform
and Consumer Protection Act sets limits on the Fed’s
use of Section 13(3), allowing the Board, in consultation with the Treasury, to provide liquidity to the
financial system, but not to aid a failing financial firm
or company.8 But I think more is needed. I have suggested that the System Open Market Account (SOMA)
portfolio, which is used to implement monetary policy
in the U.S., be restricted to short-term U.S. government securities. Before the financial crisis, U.S. Treasury securities constituted about 90 percent of the
Fed’s balance-sheet assets. Given that as of the end
of 2010, the Fed holds almost $1 trillion in agency
mortgage-backed securities (MBS) and agency debt
securities intended to support the housing sector, that
number is 41 percent. The sheer magnitude of the
mortgage-related securities demonstrates the degree to which monetary policy has engaged in supporting a particular sector of the economy through its
allocation of credit. It also points to the potential challenges the Fed faces as we remove our direct support of the housing sector. Decisions to grant subsidies to specific industries or firms must rest with Congress, not the central bank.

Asking monetary
policy to do something
that it should not do –
engage in fiscal policy
– can be detrimental
to the economy by
undermining monetary
policy’s effectiveness
at fulfilling its ultimate
responsibility: price
stability.

I have also advocated that the Fed and the Treasury reach an agreement whereby the Treasury takes the non-discount-window loans and other non-Treasury
assets from the Fed’s balance sheet in exchange for Treasury securities. I have further advocated that if, in the future, the fiscal authority wanted the central

www.philadelphiafed.org | 19

Federal Reserve Bank of Philadelphia

bank to engage in lending outside its normal operations and, importantly, should the Fed determine “unusual and exigent circumstances” warranted such
action, then any accumulation of nontraditional assets by the Fed would be exchanged for government securities. Such an accord would offer two major
benefits.9 First, it would transfer funding for the credit programs to the Treasury – which would issue Treasury securities to fund the programs – thus ensuring that credit policies that place taxpayer funds at risk are under the oversight of the fiscal authority. Second, it would preserve the Fed’s independence to
control its balance sheet and ensure that the full authority and responsibility for fiscal matters remained with the Treasury and Congress, where it rightfully
belongs.
There is a historical precedent for such an accord. In 1951, the Treasury and the Fed struck an accord that freed the Fed from pegging the interest rate on
long-term Treasury debt below 2.5 percent, which the Fed had done during and after World War II.10 By pegging long rates below 2.5 percent, the Fed was
committing to add reserves to the banking system when market interest rates began to rise without regard to its inflation goal. This inability to control its
own balance sheet was a fundamental problem for the credibility of the Fed in achieving its dual mandate. After considerable negotiations, the Treasury and
the Fed reached an accord that freed the Fed to set interest rates consistent with its long-term goals. This allowed the Fed to re-establish its independence
and to conduct monetary policy in accordance with its dual mandate.
Today, an accord to substitute Treasuries for non-Treasury debt on our balance sheet would similarly help ensure that the Fed will be able to implement its
policy decisions. After all, the time will soon come when the Fed will need to begin exiting from the extraordinarily accommodative monetary policy in order
to achieve its goals. With Treasuries back on the balance sheet, the Fed will be able to drain reserves in a timely fashion with minimal concerns about disrupting particular credit allocations or the pressures from special interests.

Conclusion
Like Milton Friedman in an earlier time, I too am concerned that we are in the process of assigning to monetary policy goals that it cannot hope to achieve.
Monetary policy is not going to be able to speed up the adjustments in labor markets or effectively burst perceived asset bubbles, and attempts to do so
may create more instability, not less. Nor should monetary policy be asked to perform credit allocation in support of particular sectors or firms. Expecting too much of monetary policy will undermine its ability to achieve the one thing that it is well-designed to do: ensuring long-term price stability. It is by
achieving this goal that monetary policy is best able to support full employment and sustainable growth over the longer term, which benefits all in society.
Although Friedman’s words were spoken more than four decades ago, policymakers would do well to heed his insights, which remain particularly relevant
for our times.

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2010 Annual Report

Endnotes
1

Milton Friedman, “The Role of Monetary Policy,” American Economic Review, 58:1 (March 1968), pp. 1-17.

2

This essay is based on a speech by the author, “The Scope and Responsibilities of Monetary Policy,” GIC 2011 Global Conference Series: Monetary Policy and Central Banking in the

Post-Crisis Environment, The Central Bank of Chile, January 17, 2011. The views expressed here are the author’s and not necessarily those of the Federal Reserve Board or the Federal
Open Market Committee.
3

Throughout the early 1960s, the inflation rate in the U.S. remained below 2 percent. By 1966, the rate had doubled. Despite evidence of increasing price pressures, the Federal Re-

serve was reluctant to tighten policy because many policymakers believed the economy was still not at full employment even though unemployment had fallen to 4.5 percent by mid1965. This delay proved quite costly. Inflation continued to rise, reaching 6 percent in early 1970 and peaking at over 12 percent in 1974.
4

There are some extreme cases. If the monetary authority engineers a hyperinflation, it is likely to have deleterious effects on output and employment.

5

Research does offer some support for the predictive value of various asset-price movements for the future path of inflation; however, the evidence varies considerably across types of

assets and, in my view, is not overwhelmingly supportive.
6

Walter Bagehot, Lombard Street: A Description of the Money Market (New York: E.P. Dutton and Company, 1921). [Orig. pub. 1873]

7

See Charles I. Plosser, “Credible Commitments and Monetary Policy After the Crisis,” speech at the Swiss National Bank Monetary Policy Conference, Zurich, Switzerland, September

24, 2010.
8

See Charles I. Plosser, “The Federal Reserve System: Balancing Independence and Accountability,” speech at the World Affairs Council of Philadelphia, February 17, 2010.

9

For a discussion of such an accord in a different context, see J. Alfred Broaddus, Jr. and Marvin Goodfriend’s article, “What Assets Should the Federal Reserve Buy?” and Good-

friend’s article, “Why We Need an ‘Accord’ for Federal Reserve Credit Policy: A Note,” Federal Reserve Bank of Richmond Economic Quarterly (Winter 2001). Such an accord would
also be consistent with the recommendations made by the Group of Thirty’s Working Group on Financial Reform about the role of central banks in providing financial stability. See
“Financial Reform: A Framework for Financial Stability,” Group of Thirty, Washington, D.C. (2009).
10

For several articles about the 1951 Accord, see the Federal Reserve Bank of Richmond’s Economic Quarterly (Winter 2001).

www.philadelphiafed.org | 21

Federal Reserve Bank of Philadelphia

Making History: Regulatory Reform Enacted

In 1933, “King Kong” was taking movie theaters by storm. The New York Giants won the World Series. A couple of dollars
would fill up your gas tank. But money for the movies, a seat in the ballpark, or a Sunday drive was a luxury few could
afford during the depths of the Great Depression. Jobs were scarce and the unemployment rate reached 25 percent. Bank
runs and bank failures had disrupted the banking system and devastated the public’s confidence. President Franklin
Roosevelt responded by signing the Banking Act of 1933, which laid a solid foundation on which to rebuild the country’s
financial system.
In the years since, Congress has passed other legislation related to the
financial services industry – the Banking Act of 1935, the Monetary
Control Act of 1980, the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994, and the Gramm-Leach Bliley Act of 1999, to name a
few. But, arguably, since 1933, Congress has passed no other law as broad
in scope in direct response to a financial crisis – until 2010.
Enter the Dodd-Frank Wall Street Reform and Consumer Protection Act,
a comprehensive piece of legislation signed into law on July 21, 2010.
Congress passed the law to improve accountability and transparency in the
financial system and to protect consumers and investors from abusive practices in response to the worst financial crisis since the Great Depression.
At the Philadelphia Fed, President Charles Plosser led the Bank’s efforts
to address regulatory reform by sharing his ideas, through speeches and

22 | www.philadelphiafed.org

meetings with legislators, on how to achieve effective reform. As Congress
debated various reform measures, President Plosser spoke out on the importance of preserving the Fed’s independence and its regional structure,
which has served the nation’s economy and its banking system for almost
100 years.
Soon after the Dodd-Frank Act passed, the Federal Reserve set up Systemwide working groups to determine how the Fed should marshal its resources
to best meet its new responsibilities related to ensuring financial stability, conducting supervision and lending, managing systemic bank failures,
and improving consumer protection. Several officers from the Philadelphia
Reserve Bank participated in these groups.
Executive Vice President and Director of Research Loretta Mester served on

2010 Annual Report

the five-member Steering Committee. Robert Hunt, vice president and director of the Payment Cards Center, contributed to the System’s consumer
protection working group by assessing the potential market effects of
proposed rules. Vice President Mitchell Berlin, who oversees the Research
Department’s Banking and Financial Markets section, worked with the
resolution authority group, which looked at issues related to too big to fail.
Berlin was also a member of the work group evaluating alternative levels
of disclosure for the stress tests.

Significant Supervision Changes
Some of the most significant changes mandated for the Fed are in its supervision of banks and banking organizations. Dodd-Frank requires that
the Fed work with other regulatory agencies to recognize risks to overall
financial stability, not just individual firms.

Federal Reserve Initiatives Under Dodd-Frank*

Rulemakings
Process Development/Changes
Studies and Reports
Consultations with Other Agencies

Source: Federal Reserve Bank of Philadelphia, SRC Insights, First Quarter 2011

The Fed has always worked closely with federal and state agencies to supervise and regulate banks to ensure the safety and soundness of about
8,000 insured depository institutions nationwide. The Fed supervises about
850 state-chartered member banks and under the authority of the Bank
Holding Company Act of 1956, about 5,000 bank holding companies
(BHCs). The Philadelphia Fed will continue to supervise more than 100
BHCs and 20 state member banks.
Dodd-Frank shifts some supervisory responsibilities away from the Fed and
its fellow regulators, abolishes the Office of Thrift Supervision, and extends
the Fed’s responsibilities to include the supervision of thrift holding companies, also known as savings and loan holding companies.
For the Philadelphia Fed, this means responsibility for an additional 34

* Chart shows types of initiatives the Fed will implement under Dodd-Frank.

thrift holding companies, including oversight for the largest thrift holding
company in the country. To help manage the additional workload, Philadelphia is hiring more bank examiners.
Under Dodd-Frank, the Fed is also required to examine nonbank subsidiaries of holding companies if the subsidiary offers traditional bank services.
In fact, the law also requires commercial companies that own industrial
loan companies or industrial banks, which are not supervised by the Fed, to
have an “affirmative commitment” to serve as a source of strength for the
bank.

www.philadelphiafed.org | 23

Federal Reserve Bank of Philadelphia

The Government Accountability Office is taking a closer look at these commercial companies that own banks, yet aren’t subject to regulatory oversight to determine improvements.

ity. Congress created the bureau to consolidate consumer protection functions for financial services into one agency. Until Dodd-Frank, the Fed had
authority to write regulations to implement most federal consumer protection laws, such as the Truth in Lending Act (TILA).

Financial Stability Oversight Council
To address the issue of systemic risks, Dodd-Frank calls for the creation
of the Financial Stability Oversight Council. The council will consist of 10
voting members who are federal financial regulators, including the Federal
Reserve, plus an independent member from the insurance industry and five
nonvoting members.
The council’s work will be supported by the new Office of Financial Research. Housed within the Treasury, this unit will be staffed with economists, lawyers, and other specialists who will collect financial data and
conduct economic analyses.
In November 2010, Vice President Leonard Nakamura of Philadelphia’s
Research Department led a cross-department effort to create a financial
stability report and briefing process for the Bank’s senior management. The
report, which focuses on developments in consumer credit markets, is being shared with the Board of Governors’ Office of Financial Stability Policy
and Research. The analysis presented in the report is contributing to the
Board’s monitoring of systemic risk.

Under Dodd-Frank, the rulemaking authority for most of these laws will
transfer to the bureau effective July 21, 2011. The bureau will have authority over a vast array of consumer protection laws, including TILA, the Real
Estate Settlement Procedures Act (RESPA), the Equal Credit Opportunity
Act, the Truth in Savings Act, and the Fair Credit Reporting Act. Dodd-Frank
also directs the bureau to create a disclosure form that combines the existing mortgage disclosures under TILA and RESPA. This combined rule will
reduce the paperwork consumers receive in mortgage transactions and
help consumers better understand the costs of their mortgage and the cost
of loan-closing services. Dodd-Frank also directs the bureau to conduct
consumer testing of its disclosure forms to ensure that the information is
understood and to examine whether mandatory arbitration clauses in consumer contracts should be banned.
While most consumer protection rulemaking powers will transfer to the
bureau, authority for enforcing compliance with a few laws, including the
Community Reinvestment Act (CRA) and the Fair Housing Act, will remain
with the Fed and other existing federal agencies.

Consumer Financial Protection Bureau

Bureau’s Examination Authority

Dodd-Frank makes significant changes to the federal consumer protection
regulatory role by creating the Consumer Financial Protection Bureau. The
bureau will be housed within the Fed for purposes of funding its budget
but will be independent of the Fed in terms of its decision-making author-

The bureau will examine and supervise all banks, savings and loan associations, and credit unions with assets of $10 billion or more (approximately 103 institutions) to verify their compliance with federal consumer
protection laws and to investigate consumer complaints. The Philadelphia

24 | www.philadelphiafed.org

2010 Annual Report

Fed expects that consumer compliance examinations for only one of its
20 state-member banks will be transferred to the bureau. These institutions’ existing regulators, which include the Fed, will continue to supervise them for safety and soundness and will continue to conduct CRA
exams.
One of the most significant changes resulting from Dodd-Frank is that the
law requires the bureau to examine and supervise certain nonbanking institutions, including mortgage brokers, providers of foreclosure relief service,
payday lenders, providers of private education loans, and large providers of
consumer financial services. Currently, the Federal Trade Commission can
take action against these institutions for violating consumer protection laws
but does not examine them or investigate individual consumer complaints.

Rule-Writing Responsibilities
To meet their rule-writing responsibilities, the Fed and other regulatory
agencies will solicit views from the financial industry, academics, and others to ensure that the key issues relevant to Dodd-Frank are implemented.
The Fed is working with these agencies to write hundreds of new rules
– both mandatory and discretionary. The Fed has direct responsibility for
writing more than 50 rules.
The work is already under way. Julia Cheney, manager of research and
programming for the Payment Cards Center, has been assisting the Board
of Governors in Washington, D.C., in writing rules governing “reasonable
and proportional interchange fees” charged for debit transactions. Her primary focus has been on the fraud adjustment portion of the rule. Her work
ranges from assisting in the design of the surveys sent to market participants to evaluating the data received.

Conclusion
Throughout the Federal Reserve System, more than 300 staff members are
working on Dodd-Frank-related projects. The new law’s effectiveness will
depend on the interpretation and implementation. The Philadelphia Fed
will continue to contribute to this work, which will lead to a better understanding of financial firms and emerging risks, improved transparency and
accountability, and increased protections for consumers. The ultimate goal
is to improve the strength and effectiveness of the nation’s regulatory system and enhance financial stability.

Federal Reserve Initiatives Under Dodd-Frank*

Financial Stability and Systemic Risk
Banking Supervision (nonsystemic)
Consumer Protection
Payment, Clearing, Settlements
Derivatives and FR Governance,
Transparency, and Audit

Source: Federal Reserve Bank of Philadelphia, SRC Insights, First Quarter 2011
* Chart shows areas of focus for initiatives the Fed will implement under Dodd-Frank.

www.philadelphiafed.org | 25

Federal Reserve Bank of Philadelphia

Keeping Credit Markets on the RADAR Screen
What might have happened in the recent financial crisis and recession if regulators and researchers had had better and
timelier information about mortgage and credit markets? Could the data have helped prevent the spread of contagion
from the subprime mortgage market to the broader economy?
While there are no easy answers to those questions, they have prompted
the Philadelphia Fed to initiate a System-wide project to create a large and
comprehensive warehouse of data on consumer credit markets and provide
the ability to analyze the underlying securities that support consumer credit.
The objective is to provide tools that can help Federal Reserve analysts identify emerging threats to the financial system. Clearly, the recent recession
revealed that researchers need more detailed, better quality, real-time information, particularly on consumer credit behavior and markets.
In 2008, the Federal Reserve Bank of Philadelphia collaborated with the
Federal Reserve Bank of Kansas City to create an initial data warehouse
with more than 37 million active mortgages going back to 1992. The data
warehouse was instrumental in helping the Federal Reserve carry out several key responses to the crisis. For example, the Federal Reserve used the
data in designing the Supervisory Capital Assessment Program, commonly
known as the stress test, which determined how the nation’s largest banking organizations would fare in a severe or protracted economic downturn.
The data also helped analysts at the Federal Reserve estimate losses for
the government-sponsored enterprises Fannie Mae and Freddie Mac.

26 | www.philadelphiafed.org

The need for an even more comprehensive set of data was evident to
Larry Cordell of the Philadelphia Fed’s Supervision, Regulation and Credit
Department (SRC) while he was working with the initial data warehouse.
As Cordell studied the data, he had an idea: expand the information set
to include a much broader array of consumer credit data and also gather
information on pools of securities that are backed by these same credits.
So Cordell proposed that the Fed acquire additional consumer credit data
and then centralize the data into a high-tech data warehouse that could
be securely accessed throughout the Federal Reserve System. He also
proposed that the Federal Reserve Bank of Philadelphia set up a separate
securities evaluation capability to monitor securities markets and to assist
examiners in evaluating complex securities at banks to help improve bank
supervision. His innovative idea gained Bank-wide support and became
a strategic initiative of the Philadelphia Fed. The Bank again partnered
with the Kansas City Fed to set up the data warehouse part of the project.
Together, these two initiatives were named RADAR, shorthand for Risk Assessment, Data Analysis, and Research, when it was formally launched at
mid-year 2010.

2010 Annual Report

“We have added to the original mortgage database, and we
now have a set of databases with information on almost 180
million mortgage loans. We also added a database on consumer credit that includes over 40 million individuals, from
which personal identifying information has been removed.
And all of these data are available System-wide in a state-ofthe-art computing environment,” said Cordell. “In addition,
we built a securities evaluation capability that allows us to
conduct surveillance across entire classes of securities or perform evaluations of individual securities in bank portfolios.”
The project involved others in the Bank, as well. Frank Doto,
an assistant vice president in SRC, played a key role as
project leader, developing a budget, formulating a communications strategy, and obtaining approvals from the Bank’s
board of directors as well as the Board of Governors in Washington.
Bob Hunt, vice president and director of the Payment Cards
Center, set up a System-wide user group as well as a group
of data managers whose job is to ensure that the Reserve
Banks comply with the terms of the data contracts. He
worked with staff from Philadelphia’s Information Technology
Services Department to make sure that Bank staff could start
to work with the data while the larger warehouse was being
designed.

Clockwise from left: Bob Hunt, Larry Cordell, Frank Doto, MaiHoa Le, and
Vidya Shenoy

In addition, two of the Bank’s senior officers contributed oversight to the
project. Michael Collins, executive vice president and lending officer, was

the project’s sponsor, and he and Loretta Mester, executive vice president
and director of research, served on the Executive Steering Committee,
along with executives from the Board and the Kansas City Fed.

www.philadelphiafed.org | 27

Federal Reserve Bank of Philadelphia

This centralized data resource allows the Fed to evaluate consumer
behavior in credit markets, monitor risk-taking more effectively, and
better understand consumer credit trends. Cordell noted, “RADAR
offers data at a level of detail that was previously unavailable and is not
available anywhere else.” Moreover, Doto observed, “Centralizing these

data provides huge savings on the costs of contracts and computing
environments and allows for better quality control, data governance, and
leveraging of technical expertise and knowledge.”

Macroprudential Supervision, Micro-Market Insight
RADAR enables the Fed to examine data both more deeply and more
broadly. It assists in macroprudential supervision, which assesses the risk
to the entire financial system rather than to any one individual firm or sector. At the same time, it also helps the Fed develop insights into markets at
the micro level, allowing data to be broken down to individual securities or
loans in a specific region.
Although still relatively new, RADAR has already had a positive impact
on the Federal Reserve’s activities. This new data warehouse has not only
proven useful in helping users search for specific information, write reports,
and analyze research findings, it also informs policy briefings and helps
policymakers in addressing specific issues stemming from disruptions in
financial markets. In short, it has enhanced the effectiveness and productivity of examiners, economists, and community development staff who use
RADAR’s two major components, the Data Warehouse and the Securities
Evaluation Service (see the sidebar on the next page).

Seated front to back: Jeremy Brizzi, Onesime Epouhe, and Meredith
Williams. Standing left to right: Yilin Huang, Robert Dittmar, Michael
Hopkins, Saba Tesfaye, and Nicholas Arcidiacono.

28 | www.philadelphiafed.org

RADAR is also helping the Fed address the regulatory challenges it faces
in light of the Dodd-Frank Wall Street Reform and Consumer Protection
Act. This legislation calls for an improvement in the quantity and quality
of financial data. The Federal Reserve views RADAR as a prototype that
will extend to collaborative analysis of data for other markets and sectors
as well.

2010 Annual Report

Major Components of RADAR
RADAR Data Warehouse
The RADAR data warehouse provides direct, immediate access to a broad
array of U.S. consumer credit data, including credit cards, auto loans,
student loans, mortgages, and more. Its sophisticated technology allows
users to generate and view data by geography, demographics, time periods,
or loan status. It has many options for customizing the views of data,
including the ability to develop maps or charts for fast and meaningful
analysis. Although researchers are able to see all relevant loan data, any
personal identifying information is removed from individual loan files to
protect consumers’ privacy.
A business support team at the Philadelphia Fed helps ensure that the
data are high quality and answers questions from analysts around the
Federal Reserve System. These experts can also incorporate the best thinking from around the Fed on how to use data in the most meaningful ways.
A second technical team helps support the data warehouse, which is
housed at the Kansas City Fed, and helps provide technical assistance to
users of the data.
While the data warehouse is mainly used for bank surveillance purposes,
it has also proven useful in the Fed’s community development initiatives.
For example, researchers have been able to generate reports that provide a
detailed and specific snapshot of conditions in a region’s mortgage sector,
including delinquencies and foreclosures. This ability to dig deeper into the
data allows researchers to more easily spot patterns or trends, providing a
better understanding of a community’s or a region’s credit health.

RADAR Securities Evaluation Service
Before RADAR, examiners evaluated an institution’s assessment of any impairment or stresses on securities within its portfolio. Now, RADAR’s securities evaluation service brings an independent analysis to the examination
process. Through this service, bank examiners and market analysts throughout the System have access to a team of experts at the Philadelphia Fed
whose analysis and evaluation of securities can assist them in assessing
the securities positions of financial institutions. Complex securities, which
are often illiquid and opaque, can prove challenging to accurately evaluate.
But users of the service cite the team’s understanding and in-depth knowledge as invaluable in assessing these complex types of securities.
Enhanced surveillance capabilities provide an overall view of markets, as
well as analysis at the sector level or at the individual security level. Using
the securities assessment process, examiners can more accurately evaluate
a bank’s risk management practices.
This service integrates the information contained in the data warehouse with
risk models and securities evaluation software. In addition, the service allows
examiners access to modeling tools to create benchmarks against which to
compare banks’ own valuations of the securities they hold in their portfolios.
This way, examiners can help bank management refine their securities valuation process to better estimate credit risk and accurately reflect financials.

www.philadelphiafed.org | 29

Federal Reserve Bank of Philadelphia

Reaching Out in the Third District—and Beyond

From members of a building trade association in Newark, Delaware, to banking executives in Trenton, New Jersey. From
legislative staff in Williamsport, Pennsylvania, to business owners at the Philadelphia Navy Yard. In 2010, staff from the
Philadelphia Fed crisscrossed the Third District, developing and strengthening relationships with key stakeholders. They also
provided the information these stakeholders need in order to navigate through challenging economic times.

Bank staff also journeyed to Washington, D.C. to educate legislators involved in crafting new laws on financial regulatory reform. Although the
financial crisis had waned in 2010, the Bank’s outreach took on particular
importance as Congress, and others, questioned the Fed’s role and its mission, policies, and actions in the wake of the nation’s worst financial crisis
since the 1930s. Consequently, the Philadelphia Fed realized that it had
to do its part to educate legislators about the Federal Reserve’s roles and
responsibilities.

outward-facing programs together under one umbrella,” Tadeo said. “We
want to increase awareness of the many ways the Philadelphia Fed serves
the Third District and the resources that are available to our stakeholders.
Using all the connections we’ve made throughout the District allows us to
gather feedback, so that we can have an intelligent conversation about the
issues affecting banks, small and large businesses, our communities, and
our other key stakeholders.”

Reaching Out to Business Leaders
In early 2010, Milissa Tadeo took on a new role as senior vice president
for Corporate Affairs. The Bank created this new role to coordinate the
outreach efforts of the Public Affairs, Community Development Studies and
Education, and Financial Institutions Relations departments.

Luke Tilley, regional economic advisor, Corporate Affairs, sees the Bank’s
outreach activities as an opportunity for two-way communication. Tilley is
often called upon to give economic outlook speeches to business groups
and trade associations. Last year, he spoke to more than 30 groups.

“The Federal Reserve Bank of Philadelphia has always had an active outreach function, but we felt we could strengthen it by bringing all of our

“The business professionals that I talk to are primarily interested in where
the economy is going. As a result of our discussions, I often bring their

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2010 Annual Report

comments and questions back to our Research Department and to the
Bank’s leadership. I also try to interest the business people I meet in participating in the various Research surveys,” Tilley said.
Sometimes, audience members who work for nonprofit organizations or
community associations are interested in establishing relationships with
the Bank’s Community Development Studies and Education Department.
Tilley facilitates these introductions as well.
In addition to Tilley’s outreach efforts, staff members in the Research Department also give presentations to groups of bankers, bank regulators, business
executives, and the media and use these forums to engage the business
community in a dialogue about the national and regional economy. In 2010,
Research staff made numerous presentations to these various groups.
Research staff also use these events as an opportunity to interest local
business leaders in participating in the department’s surveys. For example,
whether speaking to a Bankers’ Forum here at the Bank or an economic
outlook breakfast sponsored by Lincoln University and the Chester County
Chamber of Business and Industry, Tim Schiller, senior economic analyst,
finds that these outreach activities prove useful in generating contacts for
the Federal Reserve System’s Beige Book, which reports anecdotal information on current economic conditions in the 12 Federal Reserve Districts,
and the department’s various surveys, including its well-known Business
Outlook Survey of regional manufacturers.

Reaching Out to Legislators
Luke Tilley was also instrumental in the Bank’s outreach activities that
focused on reaching legislators and their staffs. In July 2010, President

Luke Tilley and Milissa Tadeo

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Federal Reserve Bank of Philadelphia

Charles Plosser and other Bank staff traveled to the Board of Governors
to meet with the Washington-based staffs of Third District legislators. “The
meeting gave us an opportunity to talk about who we are and what we
do, what’s common among Federal Reserve Banks, and what’s unique
about the Philadelphia Fed,” Tadeo said. “For example, the Philadelphia
Fed has the Payment Cards Center. So when legislative staffs start thinking
about consumer payment and credit issues, we can provide them with our
research findings and tell them what resources are available to them.”
Tilley, one of the presenters at that meeting, said that as the Dodd-Frank
legislation was being developed, the Federal Reserve was getting questions
about its mission and its role. “We wanted to make sure that federal legislators had accurate information, especially if they were going to be writing
and voting on legislation that concerns the Fed. For their part, they wanted
to be fully informed, as well,” Tilley said.
At the local level, Amy Lempert, community development advisor and outreach coordinator, Community Development Studies and Education, met
with the district office directors of the region’s legislators to introduce them
to what her department does and the resources and data available to them.
“Overall, they were delighted that we met with them. Many of them did not
know that we regularly convene meetings of community development leaders and lenders, nonprofits, and other stakeholders. From the Bank’s point
of view, we are making contact with people who have their finger on the
pulse of issues in a particular community. It’s a two-way street,” Lempert
said. “They often get questions from their constituents about programs of
the Federal Housing Administration or the Department of Housing and Urban
Development, and we can help direct them to those resources,” she added.

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Promoting Relationships with Financial Institutions
Anthony Scafide and Thomas Lombardo, assistant vice presidents in the
Bank’s Financial Institutions Relations Department, are responsible for establishing and maintaining relationships with approximately 250 financial
institutions and banking associations in the Third District. At the start of
each year, Scafide and Lombardo meet with the heads of the four banking
associations in the Third District. They share the Bank’s strategy with them
and seek their input about what is important to their membership. Once
those meetings are completed, they begin the process of meeting with the
leaders of Third District banking institutions. Last year was no exception.
“Our purpose is to maintain the Bank’s relationships with bankers. We rely
on them for their insight on economic, banking, and general business conditions. We meet with them face to face because we want to know what’s
on their minds. We bring the information we glean about banking, the
economy, regulatory issues, and other topics back to President Plosser and
the Bank’s senior management team.
“The bankers also use us as a portal into the Bank and the System. For
example, if they have a problem with one of their financial services, we can
help steer them to the information and resources they need,” Scafide said.
In October 2010, the Federal Reserve Board of Governors announced that
it was forming a Community Depository Institutions Advisory Council. The
Board requested that each Reserve Bank form a similar council. Scafide
and Lombardo helped the Philadelphia Fed identify 12 members to appoint
to this new council, which held its first meeting in 2011.

2010 Annual Report

Scafide and Lombardo were also instrumental in organizing the Bank’s annual field meetings. For the 65th year, the Bank’s senior management took
to the road to meet with the senior management of Third District financial
institutions and their boards of directors. “Directors, who are business people themselves, bring a local business perspective to discussions about the
financial services industry and the economy,” Lombardo said. The meetings
also offer the Fed the opportunity to exchange views about national and
regional economic conditions and the health of banks in the Third District,
as well as to hear bankers’ concerns about the issues affecting their businesses and their customers.
In addition to the activities of the Financial Institutions Relations staff, the
Bank’s Supervision, Regulation and Credit Department (SRC) also engages in
outreach with financial institutions. SRC’s activities take the form of Bankers’
Forums, Directors’ Workshops, online training for bank directors, CFO/CPA
Roundtables, and the Partnership for Progress program, which provides guidance to minority-owned and start-up financial institutions on current and
emerging issues. The primary purpose of these initiatives is to share information, knowledge, and experiences with the institutions the Bank supervises
in a nonexamination setting. Another goal is to receive feedback on banking
and regulatory matters that can help to inform public policy questions.

Community Development Studies and Education
Another key area under Tadeo’s direction is the Community Development
Studies and Education (CDS&E) Department, formerly known as Community
Affairs. Its mission is to support economic growth by promoting community
development and fair and impartial access to credit. The department accomplishes this through research, outreach, and meetings at which interested
parties can discuss current and emerging issues.

Anthony Scafide (left) and Tom Lombardo

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Federal Reserve Bank of Philadelphia

“The department’s number one objective last year was to reach out to the
counselors and other professionals who help people in foreclosure achieve
some equilibrium in their lives,” said Vice President Dede Myers, who heads
the department. To this end, CDS&E held its fourth biennial conference on
Reinventing Older Communities in May 2010. The conference focused on
rebuilding older communities in the wake of the foreclosure crisis and the
federal government’s economic stimulus programs. Over 400 people attended, including Federal Reserve Chairman Ben Bernanke, who joined the conference on Thursday, May 13. He toured the Philadelphia Navy Yard to see
how this former shipyard has been transformed into a 1,200-acre mixed-use
industrial park. The Chairman then attended a conference luncheon that
featured a discussion of economic and community development issues
between him and Jeremy Nowak, president and CEO of The Reinvestment
Fund and deputy chairman of the Philadelphia Fed’s board of directors.
In other activities last year, the department’s economic education staff
continued to offer several training programs for teachers, including “Keys
to Financial Success” and “Making Sense of Money and Banking.” In addition, these staff members also presented and hosted an exhibit booth at
the New Jersey Education Association’s annual conference and presented
on the Bank’s economics and children’s literature lessons at the National
Council for the Social Studies’ annual conference.

Amy Lempert (left) and Dede Myers

34 | www.philadelphiafed.org

Late in the year, the department began developing its first Community
Outlook Survey. CDS&E will conduct the survey quarterly and use the results to quantify what staff members hear in one-on-one meetings. Other
CDS&E activities last year included a workshop on reverse mortgages
and one on Pennsylvania’s affordable rental market, co-sponsored with
the Cleveland Fed.

2010 Annual Report

Federal Reserve Bank of Philadelphia

2010 Bank Highlights
Audit
The Audit Department co-sponsored a fraud prevention session with the Enterprise Risk Management Department to provide Bank management with useful
tips to identify potential fraud scenarios and specific actions that may help uncover such acts. The department also continued to provide support to other
Federal Reserve organizations, the audit profession, and the international audit community. Three staff members assisted staff at the Board of Governors by
participating in reviews of other Federal Reserve Districts, and one staff member assisted on an audit at the New York Fed. During 2010, the Bank’s general
auditor became a member of the Board of Governors of the Philadelphia Chapter of the Institute of Internal Auditors. In addition, a staff member shared
best practices with auditors at the Bank of Lithuania by observing an audit of the bank’s e-mail function and by presenting at an international auditing conference in Vilnius, the capital of Lithuania.

Cash Services
In 2010, the currency counting division installed the final software release for the upgrade of the high-speed currency processing machines. In addition,
Cash completed the installation of the second-generation currency authentication sensor. This was the first milestone of a multi-year strategic plan to upgrade all the electronic sensors that authenticate currency to keep pace with advancements in technology and the new designs of U.S. currency. Cash management continued to provide leadership on several System work groups to make improvements in training, business continuity, and fraud detection.

Community Development Studies and Education
The Community Affairs Department is now the Community Development Studies and Education Department. The new name better reflects the department’s
mission and recognizes its two functions: community development and economic education. In May 2010, the department hosted the fourth biennial community development conference, Rethink. Recover. Rebuild: Reinventing Older Communities. Federal Reserve Chairman Ben Bernanke visited the conference
and toured the Philadelphia Navy Yard as part of the program. The department continued its work on the longitudinal study of the effectiveness of homeownership counseling. Other department studies in 2010 covered such topics as the Federal Housing Administration’s loan portfolio, Neighborhood Stabilization Program efforts across the country, evidence of student achievement in the Bank’s personal finance curriculum, and the status of high school personal
financial education in the United States. The department’s researchers have responded to various requests to speak on these topics at System, professional,
and industry events. The department’s economic education staff reached 700 teachers with courses designed to help K-12 teachers understand economic
concepts, the Federal Reserve System, monetary policy, and personal financial education through its various courses, lesson plans, and conference presentations. The department continued to expand its community outreach efforts by visiting legislative staff in the District. Staff also developed a Community Outlook Survey, which monitors economic factors affecting low- and moderate-income households, and released the first quarterly results in early 2011.

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Federal Reserve Bank of Philadelphia

Enterprise Risk Management
Philadelphia’s ERM officer co-chaired the International Operational Risk Working Group’s conference and led a presentation on how central banks use heat
maps and other tools used in reporting. ERM staff provided leadership for the Bank’s Green Team, which promotes environmental conservation and sustainability. Also in 2010, the team sponsored an exposition on green products and services as well as an educational workshop on energy conservation for Bank
employees. In addition, ERM continues to lead the Bank’s innovation initiative, which is committed to encouraging and supporting employee ideas, ranging
from process improvement to new business opportunities.

Facilities Management
The Facilities Management Department continued to support the Bank’s green initiatives with the installation of a solar hot water heating system on the
roof and the initiation of a four-year project to replace the building’s lighting system with a highly efficient, intelligent system. The department also modernized the Bank’s emergency power distribution infrastructure, a project that provided the Bank with a more robust emergency power grid. The department
also completed a project to relocate three departments to the fifth floor of the Bank. The remaining area of the fifth floor is being prepared for possible use
by an outside tenant.

Financial Institutions Relations
In 2010, the Financial Institutions Relations staff met with senior executives at more than 90 percent of Third District financial institutions. Discussions centered on current business trends, credit conditions, fees, general regulatory issues, and other relevant matters, as well as the national and regional economy.
In addition, department staff actively participated in meetings of regional community banking associations to further strengthen relationships and gain
knowledge. The department’s staff also used the meetings with financial institution representatives to build a base for selecting future members of the recently formed Community Depository Institutions Advisory Council.

Financial Management Services
Staff in FMS chaired several System groups, including the COSO Coordinators Group, the Cost Accounting Group, the Enterprise Risk Management Group,
the Government Entity Accounting Reporting System Management Steering Group, and the Integrated Accounting System Enhancement Evaluation Work
Group. The Bank’s chief financial officer also acted as trustee chair for the Accounting Professional Education Program and hosted its 13th annual program
attended by some 75 FRS financial management and audit professionals. FMS worked on many departmental strategic and internal initiatives that supported both System and Bank goals and objectives. One of these objectives was to prepare the Private Sector Adjustment Factor module of the Capital Tracking
and Information Network budgeting application for use by all Reserve Banks. In 2010, the module was used on a voluntary basis. In 2011, it will be used in
tandem with the existing process and will be centralized in 2012.

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2010 Annual Report

Community Development Studies & Education’s
Reinventing Older Communities Conference
In May 2010, the Community Development Studies and Education Department hosted the
fourth biennial community development conference, Rethink. Recover. Rebuild: Reinventing Older Communities. More than 400 people from 22 states participated in the threeday event. On Thursday, May 13, Federal Reserve Chairman Ben Bernanke visited the conference and toured the Philadelphia Navy Yard, which is now home to a mixed-use office
complex, research laboratories, distribution facilities, and an industrial park (top left and
bottom left). After the tour, Chairman Bernanke joined Jeremy Nowak, president and CEO
of The Reinvestment Fund and deputy chair of the Bank’s board of directors, for a conversation on economic and community development issues. Nowak also moderated a panel
session that included Dudley Benoit, senior vice president, JPMorgan Chase Community
Development Banking (top right). Sandra Braunstein, director of the Board of Governors’
division of Consumer and Community Affairs, addressed the conference (middle left). Participants also had the opportunity to see Temple University’s Neighborhood Revitalization
Initiatives (bottom right).

www.philadelphiafed.org | 37

Federal Reserve Bank of Philadelphia

Financial Statistics
In 2010, Financial Statistics staff continued to provide superior analysis to ensure the accuracy and quality of incoming financial information used by Federal
Reserve policymakers responding to changing economic conditions. Members of the staff made important contributions to the Federal Reserve System’s Statistics and Reserves Technology Modernization Project, to the management and enhancement of existing technology applications and business processes, to
the Federal Reserve’s Census of Finance Companies, and to System-level training initiatives in the Statistics area.

Human Resources
In 2010, the Bank established the Office of Diversity and Inclusion to fulfill one of the provisions of the Dodd-Frank Act. In addition to supporting ongoing
diversity initiatives, the office is developing standards and procedures to ensure inclusion of minorities and women in all matters, including procurement activities to increase participation in our supplier ranks. Enhancements to Human Resources information systems included automation of the tuition reimbursement process and an improved performance review tool, ePerformance. The department also launched an upgraded recruiting software system to strengthen
recruitment practices and enhance the overall effectiveness of talent management processes. The Talent Management and Organizational Development
division held a three-day Education Fair highlighting the various learning and development opportunities available to all employees. Human Resources supported the local responsibilities related to implementing the System’s Enterprise Information Technology Strategies initiative.

Information Technology Services
IT Services managed many Bank projects, supporting most business lines, and provided significant support to initiatives for the Federal Reserve System and
the Treasury. The department implemented enhancements to the Treasury Check Information System (TCIS) and the Collateral Management System (CMS).
IT staff also provided software quality assurance services for major projects throughout the Federal Reserve System and designed and implemented a system
to host and enable a securities evaluation system related to the RADAR data warehouse (see the story on page 26). The department upgraded the Bank’s
local area network facilities. The Groupware Leadership Center, which provides System-wide e-mail and calendar services, delivered new and enhanced capabilities, and completed testing and certification of a new BlackBerry platform that provides enhanced resiliency. In addition, the GLC relocated core video
conferencing infrastructure components from an externally hosted site.

Law Enforcement
The Law Enforcement Department has now fully integrated the off-site screening facility that was opened in the fourth quarter of 2009. In 2010, all security
surveillance systems were completed and are now in use. In addition, the department completed a major modernization of the pedestrian-entry security portals. This effort has resulted in faster screening of Bank employees and visitors.

38 | www.philadelphiafed.org

2010 Annual Report

Legal
The Legal Department devoted significant time to analyzing the Dodd-Frank Wall Street Reform and Consumer Protection Act and assisting in its implementation at the Bank. Shortly after passage of the act, the Bank’s general counsel participated in a Town Hall meeting to educate the Bank’s officers and
employees on the scope of this expansive legislation. Department officers continued to provide legal support to initiatives at the System level, including the
System’s Groupware Leadership Center, the Workers’ Compensation Coalition, and a System-wide litigation project, among other collaborative legal efforts.

Payment Cards Center
The Payment Cards Center organized three important meetings in 2010. The first addressed payment card fraud and the technological options available
to mitigate those risks. The second focused on economic and regulatory developments in the market for prepaid cards. The third event celebrated the center’s 10-year anniversary. This conference brought together more than 100 representatives from industry, nonprofit organizations, regulatory agencies, and
academia to discuss the future of consumer credit and payments in the United States. In addition to conferences, center staff produced influential papers
on topics that included the triggers of mortgage default, the changing mix of payments used by consumers, and the use of consumer testing to inform the
regulation of overdraft fees. Center staff also participated in the Board’s ongoing rulemaking process for designing “reasonable and proportional” debit interchange fees and in the Federal Reserve System’s planning process for implementing portions of the Dodd-Frank Act.

Public Affairs
The Public Affairs Department supported the Bank’s outreach to communicate information about regulatory reform to key stakeholders. These activities
included the Bank president’s public speeches, meetings with legislative staffs as well as a briefing for the Joint Economic Committee of Congress, and
communications to other key constituents. In October, the department held a workshop on regulatory reform for journalists. The department also published
The Second Bank of the United States: A Chapter in the History of Central Banking, a booklet that will be used by teachers nationwide using the Bank’s
economic education programs. The department also helped promote the biennial Reinventing Older Communities conference for the Bank’s Community Development Studies and Education Department, including a visit by Chairman Bernanke as part of the event. Public Affairs also welcomed more than 25,226
people to the “Money in Motion” exhibit in 2010.

Research
In 2010, the Research Department led a cross-functional group in developing a financial stability report and briefing process. This report is being shared with
the Board of Governors’ Office of Financial Stability Policy and Research. In September, the department participated in the System’s conference on the DoddFrank Wall Street Reform and Consumer Protection Act. The research director served on the five-member Steering Committee, and another Research officer

www.philadelphiafed.org | 39

Federal Reserve Bank of Philadelphia

served on a working group for the conference. Other System projects that Research supported last year include the quantitative surveillance project on macro-financial risks, a working group on financial firm disclosures, and the Foreclosure Mitigation Task Force. Staff in the department’s Real-Time Data Research
Center worked with the Board of Governors to make changes to the quarterly Survey of Professional Forecasters to support bank examinations. In addition,
department staff continued to publish their research in top-tier academic journals in economics and finance and presented their work at high-profile conferences and workshops. Research library staff continued to coordinate the library management system shared by the Philadelphia, Dallas, Richmond, and St.
Louis Reserve Banks.

Retail Payments
The final phases of the Retail Payments check consolidation were completed in 2010. Philadelphia printed and distributed substitute checks until the end of
the third quarter and managed the workflows for Check 21 electronic files into the fourth quarter. The substitute check printing and distribution functions
were successfully moved to the Federal Reserve Bank of Cleveland and responsibility for managing electronic files was successfully moved to the Federal
Reserve Bank of Atlanta.

Supervision, Regulation and Credit
Supervision, Regulation and Credit (SRC) staff continued to improve supervision through enhanced analytics while maintaining core principles and applying a balanced approach to bank examinations. The Dodd-Frank Act ushered in a transitional phase for the Federal Reserve and SRC and expanded the
Fed’s overall responsibility. Three SRC officers took on high-profile assignments, assisting System efforts related to supervising large banks, assessing risk
management practices, and enhancing supervision operations. Department staff led an initiative to acquire and centralize large databases and make them
available to Federal Reserve staff. The result was RADAR (see the related story on page 26). SRC staff also made presentations at financial trade group conferences, in academic settings, and at individual outreach engagements. In addition, SRC hosted periodic outreach events such as the Bankers’ Forum, Directors’ Workshops, and the CFO/CPA Roundtable.

Treasury Services
In 2010, the Bank’s Treasury Services Department implemented important enhancements to the Collateral Management System, which it operates for the
entire Federal Reserve System. System improvements included the enhanced functionality of both the Automated Loan Deposit and the Term Deposit Facility. Additionally, the department successfully developed and tested enhancements to support the revised Board of Governors’ Payment System Risk policy.
The department also provided direction and expertise on collateral-related issues to the credit risk management community.

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2010 Annual Report

Payment Cards Center Marks Its 10th Anniversary
The idea of creating a center that focused on payment cards emerged in
planning sessions at the Philadelphia Fed in 1999. At that time, the largest
concentration of credit card receivables was held by banks located in the
Third District. Managing these accounts involved numerous ACH and wire
transactions between banks each day as well as millions of checks written
by consumers each month. These circumstances made the Bank an appropriate place to establish a center to foster the analysis of developments in
the markets for consumer credit and payments.
Anthony Santomero, the Bank’s president from 2000 to 2006, formally
established the Payment Cards Center in 2000. From the start, the center
defined its audience to include consumers and consumer groups, industry
participants, regulators and other policymakers, and academic researchers.
This interdisciplinary focus underlines how the center’s activities encourage
interaction with each constituency and explains why the Bank created the
center as an independent unit. Rather than duplicating efforts, the Bank
designed the center to facilitate collaboration across departments while
providing its own unique expertise.
The center’s basic agenda includes producing a regularly updated bibliography on consumer credit and payments, analytical discussion papers accessible to a wide audience, an internal workshop series, and conferences
focused on issues relevant to the credit and payment markets. The center’s
staff track emerging issues and assemble groups of experts to engage in
candid conversations. The staff then shares the lessons from these conversations with the public through the center’s publications.

Gradually, the center has expanded its horizons and introduced new lines
of inquiry, including a focus on consumer credit and payment issues that
have yet to receive significant attention in formal research and studies
of mobile payments and the application of payment cards to transit fare
systems. The center has also produced a series of papers documenting new
applications of prepaid cards, including government benefits, disaster relief,
and medical savings accounts.
Among its many other activities, the center and the Bank’s Research Department have co-sponsored a series of biennial research conferences
on topics in consumer credit and payments. Four conferences later, these
meetings are regarded as some of the best in this area of study. The center
has also established a visiting scholars program to benefit from the expertise of outstanding researchers and to assist them in their research.
Over the course of its first decade, the Payment Cards Center has organized or co-organized numerous conferences, and the center’s staff and
its visiting scholars have written well over 100 papers and published more
than 20 articles in journals and books. In addition, staff members have
participated in dozens of industry and policy events. Looking back, the Payment Cards Center has served its mission well: to promote a deeper understanding of the markets for consumer credit and payments. But as recent
events demonstrate, this is an ongoing task and perhaps more important
today than ever.

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Federal Reserve Bank of Philadelphia

Federal Reserve Bank of Philadelphia

Board of Directors
Charles P. Pizzi (a, c, d)
Chairman
President & CEO
Tasty Baking Company
Jeremy Nowak (a, b, d)
Deputy Chairman
President & CEO
The Reinvestment Fund
Michael F. Camardo (a, c)
Retired Executive Vice President
Lockheed Martin ITS

42 | www.philadelphiafed.org

Keith S. Campbell (a, c, d)
Chairman
Mannington Mills, Inc.

James E. Nevels (a,b)
Chairman
The Swarthmore Group

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

Frederick C. Peters II (a, b)
Chairman & CEO
Bryn Mawr Trust Company				
						

Deborah M. Fretz (a, c)
President & CEO					
Sunoco Logistics
Aaron L. Groff, Jr. (a, b, d)
Chairman, President, & CEO			
Ephrata National Bank

(a)
(b)
(c)
(d)

Executive Committee
Audit Committee
Management and Budget Committee
Nominating and Governance Committee

2010 Annual Report

BOD

Seated left to right: Aaron Groff, Jeremy Nowak, and Charles Pizzi. Standing left to right: Michael Camardo, Deborah Fretz,
Frederick Peters, and Keith Campbell. Not pictured: Ted Cecala and James Nevels
www.philadelphiafed.org | 43

Federal Reserve Bank of Philadelphia

Federal Reserve Bank of Philadelphia

Economic Advisory Council
Edward Coryell, Business Manager
Metropolitan Regional Council
of Philadelphia & Vicinity
Philadelphia, PA
John Dawkins, President and CEO
Jo-Dan Enterprises
Bala Cynwyd, PA

Daniel Falasca, Jr., President
Falasca Mechanical
Vineland, NJ
Kevin Flemming, President
Integrity Personnel
Allentown, PA

Robert Laskowski, M.D., MBA
President and CEO
Christiana Care Health System
Wilmington, DE

Sharmain Matlock-Turner
President and CEO
Urban Affairs Coalition
Philadelphia, PA

Rose Lee, President
Saint-Gobain Crystals
Valley Forge, PA

Robert (Bob) McMahon
Senior Vice President
U.S. Commercial Operations
Merck & Co., Inc.
North Wales, PA
RoseAnn B. Rosenthal
President and CEO
Ben Franklin Technology Partners of
Southeastern PA
Philadelphia, PA
Christopher Schell, President
Schell Brothers
Lewes, DE
Valerie Sill, President and CEO
DuPont Capital Management
Wilmington, DE

Seated left to right: Kevin Flemming, RoseAnn Rosenthal, Robert McMahon, John
Dawkins, Valerie Sill, and Rodman Ward. Standing, left to right: Robert Laskowski,
Christopher Schell, Daniel Falasca, and Edward Coryell. Not pictured: Sharmain MatlockTurner and Rose Lee.

44 | www.philadelphiafed.org

Rodman Ward, President and CEO
Corporation Service Company Inc.
Wilmington, DE

2010 Annual Report

Federal Reserve Bank of Philadelphia

Management & Policy Committee

Senior Staff

The Bank’s Management and Policy Committee is the senior group that advises the president and first vice president in managing the affairs of the Bank.
Seated left to right: First Vice President William H. Stone, Jr., Senior Vice President Mary Ann Hood, President Charles Plosser and Executive Vice President
Loretta Mester. Standing left to right: Senior Vice President Milissa Tadeo, Senior Vice President Arun Jain, Executive Vice President Blake Prichard, Executive Vice President Michael Collins, and Senior Vice President Donna Franco. Not pictured: Senior Vice President William Lang (on assignment at the Board of
Governors)
www.philadelphiafed.org | 45

Federal Reserve Bank of Philadelphia

Federal Reserve Bank of Philadelphia

Current Officers
Charles I. Plosser
President and CEO
D. Blake Prichard
First Vice President
Michael E. Collins
Executive Vice President and
Lending Officer
Supervision, Regulation and
Credit
Loretta J. Mester
Executive Vice President and
Director of Research
Donna L. Franco
Senior Vice President and
Chief Financial Officer
Terry E. Harris
Senior Vice President and
Chief Information Officer
Information Technology
Services
Mary Ann Hood
Senior Vice President, EEO
Officer, and Director,
Office of Diversity and
Inclusion
Human Resources
Arun K. Jain
Senior Vice President
Treasury and Financial
Services
William W. Lang
Senior Vice President and
Chief Examination Officer
Supervision, Regulation and
Credit
Milissa M. Tadeo
Senior Vice President
Corporate Affairs

46 | www.philadelphiafed.org

John D. Ackley
Vice President
Treasury Services
John G. Bell
Vice President
Financial Statistics
Mitchell S. Berlin
Vice President and Economist
Research
Robert J. Bucco
Vice President
Michael Dotsey
Vice President and Senior
Economic Policy Advisor
Research
James S. Ely
Vice President
Public Affairs
Robert Hunt
Vice President and Director
Payment Cards Center
Alice Kelley Menzano
Vice President
Information Technology
Services
Mary DeHaven Myers
Vice President and Community
Affairs Officer
Community Development
Studies and Education
Leonard Nakamura
Vice President and Economist
Research
James Nason
Vice President and Economist
Research

A. Reed Raymond, III
Vice President and Chief
Administrative Officer
Supervision, Regulation and
Credit
Patrick M. Regan
Vice President
Information Technology
Services
Jeanne R. Rentezelas
Vice President and General
Counsel
Legal
Michelle M. Scipione
Vice President
Cash Services
Richard A. Sheaffer
Vice President and General
Auditor
Audit
Herbert E. Taylor
Vice President and
Corporate Secretary
Office of the Secretary

Brian Calderwood
Assistant Vice President
Information Technology
Services

Elisabeth V. Levins
Assistant Vice President
Supervision, Regulation and
Credit

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

Jennifer E. Cardy
Assistant Vice President
Financial Management
Services

Thomas J. Lombardo
Assistant Vice President and
Assistant Secretary
Financial Institutions Relations

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

Maryann T. Connelly
Assistant Vice President and
Counsel
Legal

Robert F. Mucerino
Assistant Vice President
Treasury Services

Christopher Ivanoski
Facilities Officer
Facilities Management

Camille M. Ochman
Assistant Vice President
Cash Services

Keith Morales
Information Technology
Services Officer
Information Technology
Services

Cynthia L. Course
Assistant Vice President and
Assistant Secretary
Supervision, Regulation and
Credit
Frank J. Doto
Assistant Vice President
Supervision, Regulation and
Credit
Michael T. Doyle
Assistant Vice President
Treasury and Financial Services

Todd Vermilyea
Vice President
Supervision, Regulation and
Credit

Gregory Fanelli
Assistant Vice President
Information Technology
Services

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

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

James K. Welch
Vice President
Law Enforcement and Facilities
Management
Donna Brenner
Assistant Vice President
Enterprise Risk Management

Stephen G. Hart
Assistant Vice President
Human Resources
John P. Kelly
Assistant Vice President
Treasury Services

Anthony T. Scafide, Jr.
Assistant Vice President
Financial Institutions Relations
Keith Sill
Assistant Vice President and
Director, Real-Time Data
Research Center
Research
Stephen J. Smith
Assistant Vice President and
Counsel
Legal
Eric A. Sonnheim
Assistant Vice President
Supervision, Regulation and
Credit
H. Robert Tillman
Assistant Vice President
Supervision, Regulation and
Credit
Patrick F. Turner
Assistant Vice President
Information Technology
Services

Wanda Preston
Information Services and
Support Officer
Supervision, Regulation and
Credit
Gregory Ramick
Wholesale Product Office
Officer
Wholesale Product Office
Stanley Sienkiewicz
Research Support Officer
Research
Gail L. Todd
Credit Officer
Supervision, Regulation and
Credit

Includes promotions through
March 2011

2010 Annual Report

Federal Reserve Bank of Philadelphia

Operating Statistics		
In 2010, Philadelphia continued to be a major processor of cash in the Federal Reserve System, although the volume of currency processed decreased 11 percent due to
improvements in financial institutions’ cash-handling practices. These improvements enabled the Cash Department to reduce the number of currency-counting processing
shifts at the end of 2009. The actual dollar value of currency processed increased 5 percent due to a 10 percent increase in the volume of $20 notes processed. In 2010,
the volume of coin bags processed on-site decreased 17 percent, and the value of processed coin decreased 11 percent because coin-handling activity was redirected to the
off-site coin terminals.
In 2010, there was a significant decrease in discount window lending activity, both in the number of loans and the value of loans advanced by the Reserve Bank. The substantial year-over-year decrease in borrowing activity was influenced by stabilization in the financial markets. In addition, the Term Auction Facility special lending program
established in 2007 ended in the first quarter of 2010, and the primary credit reverted to overnight lending.
In 2010, Philadelphia’s Check 21 volumes remained flat in comparison to 2009. Philadelphia handled 1.2 billion Check 21 items for a dollar value of $1,877 billion. Check
21 dollar values handled decreased in 2010 by 15 percent in comparison to 2009. The final phases of the Retail Payments check consolidation were completed in 2010.
Philadelphia printed and distributed substitute checks until the end of the third quarter and managed the workflows for Check 21 electronic files until midway through the
fourth quarter. The substitute check printing and distribution functions were successfully transitioned from the Federal Reserve Bank of Philadelphia to the Federal Reserve
Bank of Cleveland, and responsibility for managing the workflows of Check 21 electronic files was successfully transitioned to the Federal Reserve Bank of Atlanta. These
events marked the completion of over 90 years of check processing by Philadelphia in the Federal Reserve System.

SERVICES TO DEPOSITORY INSTITUTIONS
		
Cash operations:
Currency processed
Coin paid and received On-site
Coin paid and received Off-site
		
Loans to depository institutions during the year
Commercial check services:
Check 21 received
Paper processed

2010 Volume

2010 Dollar Value

2009 Volume

1,523.5 million notes
379.0 thousand bags
1,205.7 thousand bags

$24.8 billion
$192.5 million
$917.0 million

1,702.7 million notes
459.0 thousand bags
1,015.6 thousand bags

525 loans

$62.5 billion

1,295 loans

1.2 billion checks
-

$1,877 billion
-

1.2 billion checks
182.1 million checks

2009 Dollar Value
$23.7 billion
$215.1 million
$867.8 million
$7,369.0 billion
$2,198.0 billion
$300.0 billion

www.philadelphiafed.org | 47

Federal Reserve Bank of Philadelphia

Statement of Auditor Independence

In 2010, the Board of Governors engaged Deloitte & Touche LLP (D&T) for the audits of the individual and combined financial statements of the Reserve
Banks and the consolidated financial statements of the limited liability companies (LLCs) that are associated with Federal Reserve actions to address the
financial crisis and are consolidated in the financial statements of the Federal Reserve Bank of New York. Fees for D&T’s services are estimated to be
$8.0 million, of which approximately $1.6 million were for the audits of the LLCs.* To ensure auditor independence, the Board of Governors requires that
D&T be independent in all matters relating to the audit. Specifically, D&T may not perform services for the Reserve Banks or others that would place it in
a position of auditing its own work, making management decisions on behalf of Reserve Banks, or in any other way impairing its audit independence. In
2010, the Bank did not engage D&T for any non-audit services.

* 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.

48 | www.philadelphiafed.org

Federal Reserve Bank of Philadelphia

2010 Annual Report

Financial Reports Contents

Management’s Report on Internal Control Over Financial Reporting.................................................................................................................................... 50
Independent Auditors’ Report............................................................................................................................................................................................. 51
Abbreviations..................................................................................................................................................................................................................... 53
Financial Statements:
Statements of Condition as of December 31, 2010 and December 31, 2009................................................................................................................ 54
Statements of Income and Comprehensive Income for the years ended December 31, 2010 and December 31, 2009................................................... 55
Statements of Changes in Capital for the years ended December 31, 2010 and December 31, 2009............................................................................ 56
Notes to Financial Statements ................................................................................................................................................................................... 57

2010 Annual Report | 49

Federal Reserve Bank of Philadelphia

Management’s Report on Internal Control Over Financial Reporting

March 22, 2011

To the Board of Directors
The management of the Federal Reserve Bank of Philadelphia (FRBP) is responsible for the preparation and fair presentation of the Statements of Condition as of December 31,
2010 and 2009, and the Statements of Income and Comprehensive Income and Statements of Changes in Capital for the years then ended (the Financial Statements). The Financial Statements have been prepared in conformity with the accounting principles, policies and practices established by the Board of Governors of the Federal Reserve System as set
forth in the Financial Accounting Manual for Federal Reserve Banks (FAM), and, as such, include some amounts that are based on management judgments and estimates. To our
knowledge, the Financial Statements are, in all material respects, fairly presented in conformity with the accounting principles, policies and practices documented in the FAM
and include all disclosures necessary for such fair presentation.
The management of the FRBP is responsible for establishing and maintaining effective internal control over financial reporting as it relates to the Financial Statements. Such internal control is designed to provide reasonable assurance to management and to the Board of Directors regarding the preparation of the Financial Statements in accordance with
the FAM. Internal control contains self-monitoring mechanisms, including, but not limited to, divisions of responsibility and a code of conduct. Once identified, any material
deficiencies in internal control are reported to management and appropriate corrective measures are implemented.
Even effective internal control, no matter how well designed, has inherent limitations, including the possibility of human error, and therefore can provide only reasonable assurance with respect to the preparation of reliable financial statements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The management of the FRBP assessed its internal control over financial reporting reflected in the Financial Statements, based upon the criteria established in the “Internal
Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, we believe that the FRBP maintained effective internal control over financial reporting as it relates to the Financial Statements.

Charles I. Plosser, President and Chief Executive Officer

50 | www.philadelphiafed.org

Donna L. Franco, Senior Vice President and Chief Financial Officer

Federal Reserve Bank of Philadelphia

Independent Auditors’ Report

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 (“FRBP”) as of December 31, 2010 and 2009 and the related
Statements of Income and Comprehensive Income, and of Changes in Capital for the years then ended, which have been prepared in conformity with accounting principles
established by the Board of Governors of the Federal Reserve System. We also have audited the internal control over financial reporting of the FRBP as of December 31,
2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The
FRBP’s management is responsible for these Financial Statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to
express an opinion on these Financial Statements and an opinion on the FRBP’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.
Member of
Deloitte Touche Tohmatsu

2010 Annual Report | 51

Federal Reserve Bank of Philadelphia

Independent Auditors’ Report

The FRBP’s internal control over financial reporting is a process designed by, or under the supervision of, the FRBP’s principal executive and principal financial officers, or
persons performing similar functions, and effected by the FRBP’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of Financial Statements for external purposes in accordance with the accounting principles established by the Board of
Governors of the Federal Reserve System. The FRBP’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the FRBP; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of Financial Statements in accordance with the accounting principles established by the Board of Governors of the Federal
Reserve System, and that receipts and expenditures of the FRBP are being made only in accordance with authorizations of management and directors of the FRBP; and (3)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the FRBP’s assets that could have a material effect
on the Financial Statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material
misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over
financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
As described in Note 4 to the Financial Statements, the FRBP has prepared these Financial Statements in conformity with accounting principles established by the Board of
Governors of the Federal Reserve System, as set forth in the Financial Accounting Manual for Federal Reserve Banks, which is a comprehensive basis of accounting other
than accounting principles generally accepted in the United States of America. The effects on such Financial Statements of the differences between the accounting principles
established by the Board of Governors of the Federal Reserve System and accounting principles generally accepted in the United States of America are also described in
Note 4.
In our opinion, such Financial Statements present fairly, in all material respects, the financial position of the FRBP as of December 31, 2010 and 2009, and the results of its
operations for the years then ended, on the basis of accounting described in Note 4. Also, in our opinion, the FRBP maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.

March 22, 2011

52 | www.philadelphiafed.org

Federal Reserve Bank of Philadelphia

Abbreviations

ACH

Automated clearinghouse

GSE

Government-sponsored enterprise

AMLF

Asset-Backed Commercial Paper Money Market

IMF

International Monetary Fund

Mutual Fund Liquidity Facility

MBS

Mortgage-backed securities

ASC

Accounting Standards Codification

OEB

Office of Employee Benefits of the Federal Reserve

BEP

Benefit Equalization Retirement Plan

Bureau

Bureau of Consumer Financial Protection

OFR

Office of Financial Research

Dodd-Frank Act

The Dodd-Frank Wall Street Reform and Consumer

SDR

Special drawing rights

Protection Act of 2010

SERP

Supplemental Retirement Plan for Select Officers of

FAM

System

Financial Accounting Manual for Federal Reserve

the Federal Reserve Banks

Banks

SOMA

System Open Market Account

Fannie Mae

Federal National Mortgage Association

STRIP

Separate Trading of Registered Interest and Principal

FASB

Financial Accounting Standards Board

FOMC

Federal Open Market Committee

TAF

Term Auction Facility

FRBA

Federal Reserve Bank of Atlanta

TBA

To be announced

FRBNY

Federal Reserve Bank of New York

TDF

Term Deposit Facility

Freddie Mac

Federal Home Loan Mortgage Corporation

TIPS

Treasury Inflation-Protected Securities

GAAP

Accounting principles generally accepted in the

TOP

Term Securities Lending Facility Options Program

United States of America

TSLF

Term Securities Lending Facility

Ginnie Mae

of Securities

Government National Mortgage Association

2010 Annual Report | 53

Federal Reserve Bank of Philadelphia

Statements of Condition

- As of December 31, 2010 and December 31, 2009 (in millions)

		

2010

ASSETS		

Gold certificates
$
Special drawing rights certificates
Coin 				
Items in process of collection
Loans: Depository institutions
System Open Market Account:		
Treasury securities, net		
Government-sponsored enterprise debt securities, net
Federal agency and government-sponsored enterprise mortgage-backed securities, net
Foreign currency denominated assets, net
Central bank liquidity swaps		
Accrued interest receivable		
Bank premises and equipment, net
Deferred asset - interest on Federal Reserve notes 		
Interdistrict settlement account		
Other assets 		
		 Total assets
			

$

2009

404
$
210
172
74 		
- 		
24,916
3,572
23,463 		
2,847 		
8 		
332 		
89 		
- 		
12,748 		
29 		

450
210
165
51
1,735
12,504
2,596
14,256
2,776
1,128
197
92
284
35,084
53

68,864

$

71,581

Federal Reserve notes outstanding, net
$
System Open Market Account:		
Securities sold under agreements to repurchase
Other liabilities
Deposits:		
Depository institutions
Other deposits
Interest payable to depository institutions
Accrued benefit costs
Deferred credit items
Accrued interest on Federal Reserve notes
Other liabilities

40,533

$

32,831

21,083
5
3
94 		
271
334
9

31,597
5
3
93
220
13

		 Total liabilities
			
Capital paid-in
Surplus (including accumulated other comprehensive loss of $24 million and
$30 million at December 31, 2010 and 2009, respectively)

63,726

65,977

2,569

2,802

2,569

2,802

5,138

5,604

LIABILITIES AND CAPITAL		

		

Total capital

		
			

Total liabilities and capital

The accompanying notes are an integral part of these financial statements.
54 | www.philadelphiafed.org

$

1,394
-

68,864

1,206
9

$

71,581

Statements of Income and Comprehensive Income

Federal Reserve Bank of Philadelphia

- For the years ended December 31, 2010 and December 31, 2009 (in millions)

		

INTEREST INCOME

Loans: 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
Foreign currency denominated assets, net
Central bank liquidity swaps
Total interest income
			

INTEREST EXPENSE

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

2010

2009
1

$

-		
557 		
74 		
945
24 		
1 		
1,602

60
1
488
39
356
32
231
1,207

2 		
82 		

3
46

84 		

49

1,518 		

1,158

System Open Market Account:			
Federal agency and government-sponsored enterprise mortgage-backed securities gains, net
15
Foreign currency gains, net		
61 		
Compensation received for service costs provided
7
Reimbursable services to government agencies		
34 		
4
Other income 		

5
29
26
32
7

Total interest expense
Net interest income		
			

NON-INTEREST INCOME		

Total non-interest income
			

121 		

99

Salaries and benefits
Occupancy 		
Equipment
		
Assessments:		
Board of Governors operating expenses and currency costs
Bureau of Consumer Financial Protection and Office of Financial Research
Other 			

103 		
14
9

104
13
11

78
5
31

72
28

Total operating expenses
			
Net income prior to distribution
			
Change in funded status of benefit plans

240

228

OPERATING EXPENSES		

Comprehensive income prior to distribution
$
			
Distribution of comprehensive income:		
Dividends paid to member banks
$
Transferred to (from) surplus and change in accumulated other comprehensive loss
Payments to Treasury as interest on Federal Reserve notes

1,399 		

1,029

6 		

(6)

1,405

$

1,023

171
$
(233)		
1,467

151
487
385

Total distribution
$
1,405
			

$

1,023

The accompanying notes are an integral part of these financial statements.
2010 Annual Report | 55

Federal Reserve Bank of Philadelphia

Statements of Changes in Capital

- For the years ended December 31, 2010 and December 31, 2009 (in millions, except share data)

			

Surplus

				
			
Net income
		
Capital paid-in
retained
Balance at January 1, 2009 (46,301,161 shares)

$

Net change in capital stock issued (9,737,906 shares)
Transferred to surplus and change in accumulated other comprehensive loss		
Balance at December 31, 2009 (56,039,067 shares)

$

2,315

Accumulated other
comprehensive		
loss 	
Total surplus

$ 2,339

$

(24)

$

2,315

Total capital
$

4,630

487 		

- 		

- 		

- 		

487

- 		

493 		

(6)		

487 		

487

2,802

$

2,832

$

(30)

$

2,802

$

5,604

Net change in capital stock redeemed (4,654,911 shares)		

(233)		

- 		

- 		

- 		

(233)

Transferred from surplus and change in accumulated other comprehensive loss		

- 		

(239)		

6 		

(233)		

(233)

2,569

5,138

Balance at December 31, 2010 (51,384,156 shares)

The accompanying notes are an integral part of these financial statements.
56 | www.philadelphiafed.org

$

2,569

$

2,593

$

(24)

$

$

Federal Reserve Bank of Philadelphia

Notes to Financial Statements

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

2. Operations and Services
The Reserve Banks perform a variety of services and operations. These functions include participating in formulating and conducting monetary policy; participating in the payment system, including large-dollar transfers of funds, automated clearinghouse (ACH) operations, and check collection; distributing coin
and currency; performing fiscal agency functions for the U.S. Department of the Treasury (Treasury), certain Federal agencies, and other entities; serving as
the federal government’s bank; providing short-term loans to depository institutions; providing loans to 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.

2010 Annual Report | 57

Federal Reserve Bank of Philadelphia

Notes to Financial Statements

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

58 | www.philadelphiafed.org

Federal Reserve Bank of Philadelphia

Notes to Financial Statements

3. Financial Stability Activities
The Reserve Banks have implemented the following programs that support the liquidity of financial institutions and foster improved conditions in financial
markets.
Large-Scale Asset Purchase Programs
The FOMC authorized and directed the FRBNY to purchase $300 billion of longer-term Treasury securities to help improve conditions in private credit markets. The FRBNY began the purchases of these Treasury securities in March 2009 and completed them in October 2009. On August 10, 2010, the FOMC
announced that the Federal Reserve will maintain the level of domestic securities holdings in the SOMA portfolio by reinvesting principal payments from GSE
debt securities and Federal agency and GSE MBS in longer-term Treasury securities. On November 3, 2010, the FOMC announced its intention to expand
the SOMA portfolio holdings of longer-term Treasury securities by an additional $600 billion by June 2011. The FOMC will regularly review the pace of these
securities purchases and the overall size of the asset purchase program and will adjust the program as needed to best foster maximum employment and
price stability.
The FOMC authorized and directed the FRBNY to purchase GSE debt securities and Federal agency and GSE MBS, with a goal to provide support to mortgage and housing markets and to foster improved conditions in financial markets more generally. The FRBNY was authorized to purchase up to $175 billion in fixed-rate, non-callable GSE debt securities and $1.25 trillion in fixed-rate Federal agency and GSE MBS. Purchases of GSE debt securities began in
November 2008, and purchases of Federal agency and GSE MBS began in January 2009. The FRBNY completed the purchases of GSE debt securities and
Federal agency and GSE MBS in March 2010. The settlement of all Federal agency and GSE MBS transactions was completed by August 2010.
Central Bank Liquidity Swaps
The FOMC authorized and directed the FRBNY to establish central bank liquidity swap arrangements, which could be structured as either U.S. dollar liquidity
or foreign currency liquidity swap arrangements. U.S. dollar liquidity swap arrangements were authorized with 14 foreign central banks to provide liquidity
in U.S. dollars to overseas markets. The authorization for these swap arrangements expired on February 1, 2010. In May 2010, U.S. dollar liquidity swap arrangements were reestablished with the Bank of Canada, the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank;
these arrangements will expire on August 1, 2011.
Foreign currency liquidity swap arrangements provided the Reserve Banks with the capacity to offer foreign currency liquidity to U.S. depository institutions.
The authorization for these swap arrangements expired on February 1, 2010.

2010 Annual Report | 59

Federal Reserve Bank of Philadelphia

Notes to Financial Statements

Lending to Depository Institutions
The Term Auction Facility (TAF) promoted the efficient dissemination of liquidity by providing term funds to depository institutions. The last TAF auction was
conducted on March 8, 2010, and the related loans matured on April 8, 2010.
Lending to Primary Dealers
The Term Securities Lending Facility (TSLF) promoted liquidity in the financing markets for Treasury securities. Under the TSLF, the FRBNY could lend up to an
aggregate amount of $200 billion of Treasury securities held in the SOMA to primary dealers on a secured basis for a term of 28 days. The authorization for
the TSLF expired on February 1, 2010.
The Term Securities Lending Facility Options Program (TOP) offered primary dealers the opportunity to purchase an option to draw upon short-term, fixedrate TSLF loans in exchange for eligible collateral. The program was suspended effective with the maturity of the June 2009 TOP options, and authorization
for the program expired on February 1, 2010.
Other Lending Facilities
The Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) provided funding to depository institutions and bank holding
companies to finance the purchase of eligible high-quality asset-backed commercial paper from money market mutual funds. The Federal Reserve Bank of
Boston administered the AMLF and was authorized to extend these loans to eligible borrowers on behalf of the other Reserve Banks. The authorization for
the AMLF expired on February 1, 2010.

4. Significant Accounting Policies
Accounting principles for entities with the unique powers and responsibilities of a nation’s central bank have not been formulated by accounting standardsetting bodies. The Board of Governors has developed specialized accounting principles and practices that it considers to be appropriate for the nature and
function of a central bank. These accounting principles and practices are documented in the Financial Accounting Manual for Federal Reserve Banks (FAM),
which is issued by the Board of Governors. The Reserve Banks are required to adopt and apply accounting policies and practices that are consistent with the
FAM and the financial statements have been prepared in accordance with the FAM.
Limited differences exist between the accounting principles and practices in the FAM and accounting principles generally accepted in the United States
(GAAP), due to the unique nature of the Bank’s powers and responsibilities as part of the nation’s central bank and given the System’s unique responsibility
to conduct monetary policy. The primary differences are the presentation of all SOMA securities holdings at amortized cost and the recording of such securi-

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Notes to Financial Statements

ties on a settlement-date basis. The cost basis of Treasury securities, GSE debt securities, and foreign government debt instruments is adjusted for amortization of premiums or accretion of discounts on a straight-line basis, rather than using the interest method required by GAAP. Amortized cost, rather than
the fair value presentation, more appropriately reflects the Bank’s securities holdings given the System’s unique responsibility to conduct monetary policy.
Accounting for these securities on a settlement-date basis, rather than the trade-date basis required by GAAP, more appropriately reflects the timing of the
transaction’s effect on the quantity of reserves in the banking system. Although the application of fair value measurements to the securities holdings may
result in values substantially greater or less than their carrying values, these unrealized changes in value have no direct effect on the quantity of reserves
available to the banking system or on the prospects for future Bank earnings or capital. Both the domestic and foreign components of the SOMA portfolio
may involve transactions that result in gains or losses when holdings are sold before maturity. Decisions regarding securities and foreign currency transactions, including their purchase and sale, are motivated by monetary policy objectives rather than profit. Accordingly, fair values, earnings, and gains or losses
resulting from the sale of such securities and currencies are incidental to open market operations and do not motivate decisions related to policy or open
market activities.
In addition, the Bank does not present a Statement of Cash Flows as required by GAAP because the liquidity and cash position of the Bank are not a primary concern given the Reserve Banks’ unique powers and responsibilities. Other information regarding the Bank’s activities is provided in, or may be derived
from, the Statements of Condition, Income and Comprehensive Income, and Changes in Capital. There are no other significant differences between the policies outlined in the FAM and GAAP.
Preparing the financial statements in conformity with the FAM requires management to make certain estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Unique accounts and significant accounting policies are
explained below.
a. Consolidation
The Dodd-Frank Act established the Bureau as an independent bureau within the Federal Reserve System, and section 1017 of the Dodd-Frank Act provides
that the financial statements of the Bureau are not to be consolidated with those of the Board of Governors or the Federal Reserve System. Section 152
of the Dodd-Frank Act established the Office of Financial Research (OFR) within the Treasury. The Board of Governors funds the Bureau and OFR through
assessments on the Reserve Banks as required by the Dodd-Frank Act. The Reserve Banks reviewed the law and evaluated the design of and their relationships to the Bureau and the OFR and determined that neither should be consolidated in the Reserve Banks’ combined financial statements.

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Notes to Financial Statements

b. Gold and Special Drawing Rights Certificates
The Secretary of the Treasury is authorized to issue gold and special drawing rights (SDR) certificates to the Reserve Banks. Upon authorization, the Reserve Banks acquire gold certificates by crediting equivalent amounts in dollars to the account established for the Treasury. The gold certificates held by the
Reserve Banks are required to be backed by the gold owned by the Treasury. The Treasury may reacquire the gold certificates at any time and the Reserve
Banks must deliver them to the Treasury. At such time, the Treasury’s account is charged, and the Reserve Banks’ gold certificate accounts are reduced. The
value of gold for purposes of backing the gold certificates is set by law at $42 2/9 per fine troy ounce. The Board of Governors allocates the gold certificates
among the Reserve Banks once a year based on the average Federal Reserve notes outstanding at each Reserve Bank.
SDR certificates are issued by the International Monetary Fund (IMF) to its members in proportion to each member’s quota in the IMF at the time of issuance. SDR certificates serve as a supplement to international monetary reserves and may be transferred from one national monetary authority to another.
Under the law providing for U.S. participation in the SDR system, the Secretary of the Treasury is authorized to issue SDR certificates to the Reserve Banks.
When SDR certificates are issued to the Reserve Banks, equivalent amounts in U.S. dollars are credited to the account established for the Treasury and the
Reserve Banks’ SDR certificate accounts are increased. The Reserve Banks are required to purchase SDR certificates, at the direction of the Treasury, for the
purpose of financing SDR acquisitions or for financing exchange stabilization operations. At the time SDR transactions occur, the Board of Governors allocates SDR certificate transactions among the Reserve Banks based upon each Reserve Bank’s Federal Reserve notes outstanding at the end of the preceding
year. SDRs are recorded by the Bank at original cost. In 2009, the Treasury issued $3 billion in SDR certificates to the Reserve Banks, of which $127 million
was allocated to the Bank. There were no SDR transactions in 2010.
c. Coin
The amount reported as coin in the Statements of Condition represents the face value of all United States coin held by the Bank. The Bank buys coin at face
value from the U.S. Mint in order to fill depository institution orders.
d. Loans
Loans to depository institutions are reported at their outstanding principal balances, and interest income is recognized on an accrual basis.
Loans are impaired when current information and events indicate that it is probable that the Bank will not receive the principal and interest that is due in
accordance with the contractual terms of the loan agreement. Impaired loans are evaluated to determine whether an allowance for loan loss is required.
The Bank has developed procedures for assessing the adequacy of any allowance for loan losses using all available information to identify incurred losses.
This assessment includes monitoring information obtained from banking supervisors, borrowers, and other sources to assess the credit condition of the
borrowers and, as appropriate, evaluating collateral values. Generally, the Bank would discontinue recognizing interest income on impaired loans until the

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Notes to Financial Statements

borrower’s repayment performance demonstrates principal and interest would be received in accordance with the terms of the loan agreement. If the Bank
discontinues recording interest on an impaired loan, cash payments are first applied to principal until the loan balance is reduced to zero; subsequent payments are applied as recoveries of amounts previously deemed uncollectible, if any, and then as interest income.
e. Securities Purchased Under Agreements to Resell, Securities Sold Under Agreements to Repurchase, and Securities Lending
The FRBNY may engage in purchases of securities with primary dealers under agreements to resell (repurchase transactions). These repurchase transactions
are settled through a tri-party arrangement. In a tri-party arrangement, two commercial custodial banks manage the collateral clearing, settlement, pricing,
and pledging, and provide cash and securities custodial services for and on behalf of the Bank and counterparty. The collateral pledged must exceed the
principal amount of the transaction by a margin determined by the FRBNY for each class and maturity of acceptable collateral. Collateral designated by the
FRBNY as acceptable under repurchase transactions primarily includes Treasury securities (including TIPS and STRIP Treasury securities); direct obligations of
several Federal agency and GSE-related agencies, including Fannie Mae and Freddie Mac; and pass-through MBS of Fannie Mae, Freddie Mac, and Ginnie
Mae. The repurchase transactions are accounted for as financing transactions with the associated interest income recognized over the life of the transaction.
Repurchase transactions are reported at their contractual amount as “System Open Market Account: Securities purchased under agreements to resell,” and
the related accrued interest receivable is reported as a component of “Accrued interest receivable” in the Statements of Condition.
The FRBNY may engage in sales of securities under agreements to repurchase (reverse repurchase transactions) with primary dealers and, beginning August
2010, with selected money market funds, as an open market operation. These reverse repurchase transactions may be executed through a tri-party arrangement, similar to repurchase transactions. Reverse repurchase transactions may also be executed with foreign official and international account holders as
part of a service offering. Reverse repurchase agreements are collateralized by a pledge of an amount of Treasury securities, GSE debt securities, and Federal
agency and GSE MBS that are held in the SOMA. Reverse repurchase transactions are accounted for as financing transactions, and the associated interest
expense is recognized over the life of the transaction. These transactions are reported at their contractual amounts as “System Open Market Account: Securities sold under agreements to repurchase” and the related accrued interest payable is reported as a component of “Other liabilities” in the Statements of
Condition.
Treasury securities and GSE debt securities held in the SOMA may be lent to primary dealers to facilitate the effective functioning of the domestic securities
markets. Overnight securities lending transactions are fully collateralized by Treasury securities that have fair values in excess of the securities lent. The FRBNY charges the primary dealer a fee for borrowing securities, and these fees are reported as a component of “Other income” in the Statements of Income
and Comprehensive Income.
Activity related to securities purchased under agreements to resell, securities sold under agreements to repurchase, and securities lending is allocated to

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Notes to Financial Statements

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.
f. Treasury Securities; Government-Sponsored Enterprise Debt Securities; Federal Agency and Government-Sponsored Enterprise Mortgage-Backed Securities; Foreign Currency Denominated Assets; and Warehousing Agreements
Interest income on Treasury securities, GSE debt securities, and foreign currency denominated assets comprising the SOMA is accrued on a straight-line basis.
Interest income on Federal agency and GSE MBS is accrued using the interest method and includes amortization of premiums, accretion of discounts, and
gains or losses associated with principal paydowns. Premiums and discounts related to Federal agency and GSE MBS are amortized over the term of the security to stated maturity, and the amortization of premiums and accretion of discounts are accelerated when principal payments are received. Paydown gains
and losses represent the difference between the principal amount paid and the amortized cost basis of the related security. Gains and losses resulting from
sales of securities are determined by specific issue based on average cost. Treasury securities, GSE debt securities, and Federal agency and GSE MBS are reported net of premiums and discounts on the Statements of Condition and interest income on those securities is reported net of the amortization of premiums
and accretion of discounts on the Statements of Income and Comprehensive Income.
In addition to outright purchases of Federal agency and GSE MBS that are held in the SOMA, the FRBNY entered into dollar roll transactions (dollar rolls),
which primarily involve an initial transaction to purchase or sell “to be announced” (TBA) MBS for delivery in the current month combined with a simultaneous agreement to sell or purchase TBA MBS on a specified future date. The FRBNY also executed a limited number of TBA MBS coupon swap transactions,
which involve a simultaneous sale of a TBA MBS and purchase of another TBA MBS of a different coupon rate. The FRBNY’s participation in the dollar roll
and coupon swap markets furthers the MBS purchase program goal of providing support to the mortgage and housing markets and fostering improved
conditions in financial markets more generally. The FRBNY accounts for outstanding commitments under dollar roll and coupon swaps on a settlement-date
basis. Based on the terms of the FRBNY dollar roll and coupon swap transactions, transfers of MBS upon settlement of the initial TBA MBS transactions are
accounted for as purchases or sales in accordance with FASB ASC Topic 860 (ASC 860), Transfers and Servicing, and the related outstanding commitments
are accounted for as sales or purchases upon settlement. Net gains resulting from dollar roll and coupon swap transactions are reported as “Non-interest
income: System Open Market Account: Federal agency and government-sponsored enterprise mortgage-backed securities gains, net” in the Statements of
Income and Comprehensive Income.
Foreign currency denominated assets are revalued daily at current foreign currency market exchange rates in order to report these assets in U.S. dollars. Realized and unrealized gains and losses on foreign currency denominated assets are reported as “Foreign currency gains, net” in the Statements of Income
and Comprehensive Income.
Activity related to Treasury securities, GSE debt securities, and Federal agency and GSE MBS, including the premiums, discounts, and realized gains and

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Notes to Financial Statements

losses, is allocated to each Reserve Bank on a percentage basis derived from an annual settlement of the interdistrict settlement account that occurs in April
of each year. Activity related to foreign currency denominated assets, including the premiums, discounts, and realized and unrealized gains and losses, is
allocated to each Reserve Bank based on the ratio of each Reserve Bank’s capital and surplus to aggregate capital and surplus at the preceding December 31.
Warehousing is an arrangement under which the FOMC has approved the exchange, at the request of the Treasury, of U.S. dollars for foreign currencies held
by the Treasury over a limited period of time. The purpose of the warehousing facility is to supplement the U.S. dollar resources of the Treasury for financing
purchases of foreign currencies and related international operations. Warehousing agreements are designated as held-for-trading purposes and are valued
daily at current market exchange rates. Activity related to these agreements is allocated to each Reserve Bank based on the ratio of each Reserve Bank’s
capital and surplus to aggregate capital and surplus at the preceding December 31.
g. Central Bank Liquidity Swaps
Central bank liquidity swaps, which are transacted between the FRBNY and a foreign central bank, can be structured as either U.S. dollar liquidity or foreign
currency liquidity swap arrangements.
Central bank liquidity swaps activity, including the related income and expense, is allocated to each Reserve Bank based on the ratio of each Reserve Bank’s
capital and surplus to aggregate capital and surplus at the preceding December 31. The foreign currency amounts associated with these central bank liquidity swap arrangements are revalued at current foreign currency market exchange rates.

U.S. dollar liquidity swaps
At the initiation of each U.S. dollar liquidity swap transaction, the foreign central bank transfers a specified amount of its currency to a restricted account for
the FRBNY in exchange for U.S. dollars at the prevailing market exchange rate. Concurrent with this transaction, the FRBNY and the foreign central bank
agree to a second transaction that obligates the foreign central bank to return the U.S. dollars and the FRBNY to return the foreign currency on a specified
future date at the same exchange rate as the initial transaction. The Bank’s allocated portion of the foreign currency amounts that the FRBNY acquires is
reported as “Central bank liquidity swaps” on the Statements of Condition. Because the swap transaction will be unwound at the same U.S. dollar amount
and exchange rate that were used in the initial transaction, the recorded value of the foreign currency amounts is not affected by changes in the market exchange rate.
The foreign central bank compensates the FRBNY based on the foreign currency amounts it holds for the FRBNY. The FRBNY recognizes compensation
during the term of the swap transaction and reports it as “Interest income: Central bank liquidity swaps” in the Statements of Income and Comprehensive
Income.

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Notes to Financial Statements

Foreign currency liquidity swaps
The structure of foreign currency liquidity swap transactions involves the transfer by the FRBNY, at the prevailing market exchange rate, of a specified
amount of U.S. dollars to an account for the foreign central bank in exchange for its currency. The foreign currency amount received would be reported as a
liability by the Bank.
h. Interdistrict Settlement Account
At the close of business each day, each Reserve Bank aggregates the payments due to or from other Reserve Banks. These payments result from transactions between the Reserve Banks and transactions that involve depository institution accounts held by other Reserve Banks, such as Fedwire funds and
securities transfers and check and ACH transactions. The cumulative net amount due to or from the other Reserve Banks is reflected in the “Interdistrict
settlement account” in the Statements of Condition.
i. Bank Premises, Equipment, and Software
Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful
lives of the assets, which range from 2 to 50 years. Major alterations, renovations, and improvements are capitalized at cost as additions to the asset accounts and are depreciated over the remaining useful life of the asset or, if appropriate, over the unique useful life of the alteration, renovation, or improvement. Maintenance, repairs, and minor replacements are charged to operating expense in the year incurred.
Costs incurred for software during the application development stage, whether developed internally or acquired for internal use, are capitalized based on the
purchase cost and the cost of direct services and materials associated with designing, coding, installing, and testing the software. Capitalized software costs
are amortized on a straight-line basis over the estimated useful lives of the software applications, which generally range from two to five years. Maintenance
costs related to software are charged to expense in the year incurred.
Capitalized assets, including software, buildings, leasehold improvements, furniture, and equipment, are impaired and an adjustment is recorded when events
or changes in circumstances indicate that the carrying amount of assets or asset groups is not recoverable and significantly exceeds the assets’ fair value.
j. Federal Reserve Notes
Federal Reserve notes are the circulating currency of the United States. These notes, which are identified as issued to a specific Reserve Bank, must be fully
collateralized. All of the Bank’s assets are eligible to be pledged as collateral. The collateral value is equal to the book value of the collateral tendered with
the exception of securities, for which the collateral value is equal to the par value of the securities tendered. The par value of securities sold under agreements to repurchase is deducted from the eligible collateral value.

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Notes to Financial Statements

The Board of Governors may, at any time, call upon a Reserve Bank for additional security to adequately collateralize outstanding Federal Reserve notes. To
satisfy the obligation to provide sufficient collateral for outstanding Federal Reserve notes, the Reserve Banks have entered into an agreement that provides
for certain assets of the Reserve Banks to be jointly pledged as collateral for the Federal Reserve notes issued to all Reserve Banks. In the event that this collateral is insufficient, the Federal Reserve Act provides that Federal Reserve notes become a first and paramount lien on all the assets of the Reserve Banks.
Finally, Federal Reserve notes are obligations of the United States government.
“Federal Reserve notes outstanding, net” in the Statements of Condition represents the Bank’s Federal Reserve notes outstanding, reduced by the Bank’s
currency holdings of $4,826 million and $5,591 million at December 31, 2010 and 2009, respectively.
At December 31, 2010 and 2009, all Federal Reserve notes issued to the Reserve Banks were fully collateralized. At December 31, 2010, all gold certificates, all special drawing right certificates, and $925 billion of domestic securities held in the SOMA were pledged as collateral. At December 31, 2010, no
investments denominated in foreign currencies were pledged as collateral.
k. Deposits
Depository institutions
Depository institutions deposits represent the reserve and service-related balances in the accounts that depository institutions hold at the Bank. The interest
rates paid on required reserve balances and excess balances are determined by the Board of Governors, based on an FOMC-established target range for the
federal funds rate. Interest payable is reported as “Interest payable to depository institutions” on the Statements of Condition.
The Term Deposit Facility (TDF) consists of deposits with specific maturities held by eligible institutions at the Reserve Banks. The Reserve Banks pay interest
on these deposits at interest rates determined by auction. Interest payable is reported as “Interest payable to depository institutions” on the Statements of
Condition. There were no deposits held by the Bank under the TDF at December 31, 2010.

Other
Other deposits include foreign central bank and foreign government deposits held at the FRBNY that are allocated to the Bank.
l. Items in Process of Collection and Deferred Credit Items
“Items in process of collection” primarily represents amounts attributable to checks that have been deposited for collection and that, as of the balance sheet
date, have not yet been presented to the paying bank. “Deferred credit items” are the counterpart liability to items in process of collection. The amounts in
this account arise from deferring credit for deposited items until the amounts are collected. The balances in both accounts can vary significantly.

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Federal Reserve Bank of Philadelphia

Notes to Financial Statements

m. Capital Paid-in
The Federal Reserve Act requires that each member bank subscribe to the capital stock of the Reserve Bank in an amount equal to 6 percent of the capital
and surplus of the member bank. These shares are nonvoting with a par value of $100 and may not be transferred or hypothecated. As a member bank’s
capital and surplus changes, its holdings of Reserve Bank stock must be adjusted. Currently, only one-half of the subscription is paid in and the remainder is
subject to call. A member bank is liable for Reserve Bank liabilities up to twice the par value of stock subscribed by it.
By law, each Reserve Bank is required to pay each member bank an annual dividend of 6 percent on the paid-in capital stock. This cumulative dividend is
paid semiannually. To meet the Federal Reserve Act requirement that annual dividends be deducted from net earnings, dividends are presented as a distribution of comprehensive income in the Statements of Income and Comprehensive Income.
n. Surplus
The Board of Governors requires the Reserve Banks to maintain a surplus equal to the amount of capital paid-in as of December 31 of each year. Accumulated other comprehensive income is reported as a component of “Surplus” in the Statements of Condition and the Statements of Changes in Capital. Additional information regarding the classifications of accumulated other comprehensive income is provided in Notes 12 and 13.
o. Interest on Federal Reserve Notes
The Board of Governors requires the Reserve Banks to transfer excess earnings to the Treasury as interest on Federal Reserve notes after providing for the
costs of operations, payment of dividends, and reservation of an amount necessary to equate surplus with capital paid-in. This amount is reported as “Payments to Treasury as interest on Federal Reserve notes” in the Statements of Income and Comprehensive Income. The amount due to the Treasury is reported as “Accrued interest on Federal Reserve notes” in the Statements of Condition.
If earnings during the year are not sufficient to provide for the costs of operations, payment of dividends, and equating surplus and capital paid-in, payments to the Treasury are suspended. A deferred asset is recorded that represents the amount of net earnings a Reserve Bank will need to realize before
remittances to Treasury resume. This deferred asset is periodically reviewed for impairment. The deferred asset is reported as “Deferred asset – interest on
Federal Reserve notes” on the Statements of Condition. As of December 31, 2010, no impairment existed.
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.

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Notes to Financial Statements

p. Income and Costs Related to Treasury Services
When directed by the Secretary of the Treasury, the Bank is required by the Federal Reserve Act to serve as fiscal agent and depositary of the United States
Government. By statute, the Treasury has appropriations to pay for these services. During the years ended December 31, 2010 and 2009, the Bank was reimbursed for all services provided to the Treasury as its fiscal agent.
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 $2 million and $30 million at December
31, 2010 and 2009, respectively. The cost of unreimbursed Treasury services is reported as “Operating expenses: Other” and was none for years ended December 31, 2010 and 2009.
q. Compensation Received for Service Costs Provided
The Federal Reserve Bank of Atlanta (FRBA) has overall responsibility for managing the Reserve Banks’ provision of check and ACH services to depository institutions and, as a result, recognizes total System revenue for these services on its Statements of Income and Comprehensive Income. Similarly, the FRBNY
manages the Reserve Banks’ provision of Fedwire funds and securities services and recognizes total System revenue for these services on its Consolidated
Statements of Income and Comprehensive Income. The FRBA and the FRBNY compensate the applicable Reserve Banks for the costs incurred to provide these
services. The Bank reports this compensation as “Compensation received for service costs provided” in the Statements of Income and Comprehensive Income.
r. Assessments
The Board of Governors assesses the Reserve Banks to fund its operations and the operations of the Bureau and, for a two-year period, OFR. These assessments are allocated to each Reserve Bank based on each Reserve Bank’s capital and surplus balances as of December 31 of the prior year for the Board of
Governor’s operations and as of the most recent quarter for the Bureau and OFR operations. The Board of Governors also assesses each Reserve Bank for
the expenses incurred by the Treasury to produce and retire Federal Reserve notes based on each Reserve Bank’s share of the number of notes comprising
the System’s net liability for Federal Reserve notes on December 31 of the prior year.
During the period prior to the Bureau transfer date of July 21, 2011, there is no fixed limit on the funding that can be provided to the Bureau and that is assessed to the Reserve Banks; the Board of Governors must provide the amount estimated by the Secretary of the Treasury needed to carry out the authorities
granted to the Bureau under the Dodd-Frank Act and other federal law. After the transfer date, the Dodd-Frank Act requires the Board of Governors to fund
the Bureau in an amount not to exceed a fixed percentage of the total operating expenses of the Federal Reserve System as reported in the Board of Governors’ 2009 annual report. The fixed percentage of total operating expenses of the System is 10% for 2011, 11% for 2012, and 12% for 2013. After 2013,
the amount will be adjusted in accordance with the provisions of the Dodd-Frank Act.

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Notes to Financial Statements

The Board of Governors assesses the Reserve Banks to fund the operations of the OFR for the two-year period following enactment of the Dodd-Frank Act;
thereafter, the OFR will be funded by fees assessed on certain bank holding companies.
s. Taxes
The Reserve Banks are exempt from federal, state, and local taxes, except for taxes on real property. The Bank’s real property taxes were $2 million for each
of the years ended December 31, 2010 and 2009 and are reported as a component of “Operating expenses: Occupancy” in the Statements of Income and
Comprehensive Income.
t. Restructuring Charges
The Reserve Banks recognize restructuring charges for exit or disposal costs incurred as part of the closure of business activities in a particular location, the
relocation of business activities from one location to another, or a fundamental reorganization that affects the nature of operations. Restructuring charges
may include costs associated with employee separations, contract terminations, and asset impairments. Expenses are recognized in the period in which the
Bank commits to a formalized restructuring plan or executes the specific actions contemplated in the plan and all criteria for financial statement recognition
have been met.
Note 14 describes the Bank’s restructuring initiatives and provides information about the costs and liabilities associated with employee separations and contract terminations. 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 2010 and 2009.
u. Recently Issued Accounting Standards
In June 2009, FASB issued Statement of Financial Accounting Standards 166, Accounting for Transfers of Financial Assets – an amendment to FASB Statement No. 140, (codified in ASC 860). The new standard revises the criteria for recognizing transfers of financial assets as sales and clarifies that the transferor must consider all arrangements when determining if the transferor has surrendered control. The adoption of this accounting guidance was effective for
the Bank for the year beginning on January 1, 2010, and did not have a material effect on the Bank’s financial statements.
In July 2010, the FASB issued Accounting Standards Update 2010-20, Receivables (Topic 310), which requires additional disclosures about the allowance
for credit losses and the credit quality of loan portfolios. The additional disclosures include a rollforward of the allowance for credit losses on a disaggregated basis and more information, by type of receivable, on credit quality indicators, including the amount of certain past due receivables and troubled debt

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Notes to Financial Statements

restructurings and significant purchases and sales. The adoption of this accounting guidance is effective for the Bank on December 31, 2011, and is not
expected to have a material effect on the Bank’s financial statements.

5. Loans
The Bank had no loans outstanding at December 31, 2010. Total loans outstanding at December 31, 2009, were as follows (in millions):
		

2009 Total

Primary, secondary, and seasonal credit
TAF		
		

Loans to depository institutions

$

122
1,613

$ 1,735

Loans to Depository Institutions
The Bank offers primary, secondary, and seasonal credit to eligible borrowers and each program has its own interest rate. Interest is accrued using the applicable interest rate established at least every 14 days by the Bank’s board of directors, subject to review and determination by the Board of Governors.
Primary and secondary credit are extended on a short-term basis, typically overnight, whereas seasonal credit may be extended for a period of up to nine
months.
Primary, secondary, and seasonal credit lending is collateralized to the satisfaction of the Bank to reduce credit risk. Assets eligible to collateralize these
loans include consumer, business, and real estate loans; Treasury securities; GSE debt securities; foreign sovereign debt; municipal, corporate, and state and
local government obligations; asset-backed securities; corporate bonds; commercial paper; and bank-issued assets, such as certificates of deposit, bank
notes, and deposit notes. Collateral is assigned a lending value that is deemed appropriate by the Bank, which is typically fair value reduced by a margin.
Depository institutions that are eligible to borrow under the Bank’s primary credit program were eligible to participate in the TAF program. Under the TAF
program, the Reserve Banks conducted auctions for a fixed amount of funds, with the interest rate determined by the auction process, subject to a minimum
bid rate. TAF loans were extended on a short-term basis, with terms ranging from 28 to 84 days. All advances under the TAF program were collateralized to
the satisfaction of the Bank. All TAF loan principal and accrued interest was fully repaid.

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Notes to Financial Statements

Loans to depository institutions are monitored daily to ensure that borrowers continue to meet eligibility requirements for these programs. The financial
condition of borrowers is monitored by the Bank and, if a borrower no longer qualifies for these programs, the Bank will generally request full repayment of
the outstanding loan or, for primary or seasonal credit lending, may convert the loan to a secondary credit loan.
Collateral levels are reviewed daily against outstanding obligations and borrowers that no longer have sufficient collateral to support outstanding loans are
required to provide additional collateral or to make partial or full repayment.
At December 31, 2010 and 2009, the Bank did not have any impaired loans and no allowance for loan losses was required. There were no impaired loans
during the years ended December 31, 2010 and 2009.

6. Treasury Securities; Government-Sponsored Enterprise Debt Securities; Federal Agency and GovernmentSponsored Enterprise Mortgage-Backed Securities; Securities Purchased Under Agreements to Resell;
Securities Sold Under Agreements to Repurchase; and Securities Lending
The FRBNY, on behalf of the Reserve Banks, holds securities bought outright in the SOMA. The Bank’s allocated share of SOMA balances was approximately
2.335 percent and 1.551 percent at December 31, 2010 and 2009, respectively.
The Bank’s allocated share of Treasury securities, GSE debt securities, and Federal agency and GSE MBS, excluding accrued interest, held in the SOMA at December 31 was as follows (in millions):
				
2010				
						
		
Par
Unamortized premiums
Unaccreted discounts
Total amortized cost
Fair value
Bills
Notes
Bonds

$

430
$
18,058		
5,366		

$
328 		
765		

Total Treasury securities
$ 23,854
$ 1,093
$
						
GSE debt securities
$ 3,444
$
129
$
							
Federal agency and GSE MBS
$ 23,169
$
330
$
						

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$
430
$
430
(18)		 18,368 		 18,792
(13)		 6,118		 6,767
(31)

$ 24,916

$ 25,989

(1)

$ 3,572

$

(36)

$ 23,463

$ 23,960

3,661

Federal Reserve Bank of Philadelphia

Notes to Financial Statements

				
				
		
Par
Unamortized premiums
Bills		
$
Notes
Bonds		

286
$
8,817		
2,945		

2009				
Unaccreted discounts

$
101		
380 		

Total amortized cost

Fair value

$
286
$
(15)		 8,903		
(10)		 3,315		

Total Treasury securities
$ 12,048
$
481
$
(25)
								
GSE debt securities
$ 2,480
$
116
$
								
Federal agency and GSE MBS
$ 14,092
$
188
$
(24)

286
9,045
3,579

$ 12,504

$ 12,910

$ 2,596

$

$ 14,256

$ 14,184

2,598

The total of the Treasury securities, GSE debt securities, and Federal agency and GSE MBS, net, excluding accrued interest, held in the SOMA at December 31
was as follows (in millions):
2010
2009
		

Amortized cost

Bills
$
Notes 		
Bonds		

18,422
$
786,575 		
261,955 		

Fair value

18,422
$
804,703		
289,757 		

Total Treasury securities
$ 1,066,952
$ 1,112,882
							
GSE debt securities
$
152,972
$
156,780
					
Federal agency and GSE MBS
$ 1,004,695
$ 1,026,003

Fair value

Amortized cost
18,423
$
573,877		
213,672 		

18,423
583,040
230,717

$

805,972

$

832,180

$

167,362

$

167,444

$

918,927

$

914,290

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

2010 Annual Report | 73

Federal Reserve Bank of Philadelphia

Notes to Financial Statements

approach that considers observable inputs for similar securities; fair value for all other SOMA security holdings was determined by reference to quoted prices
for identical securities.
The fair value of the fixed-rate Treasury securities, GSE debt securities, and Federal agency and GSE MBS in the SOMA’s holdings is subject to market risk,
arising from movements in market variables, such as interest rates and securities prices. The fair value of Federal agency and GSE MBS is also affected by
the rate of prepayments of mortgage loans underlying the securities.
The following table provides additional information on the amortized cost and fair values of the Federal agency and GSE MBS portfolio at December 31,
2010 and 2009 (in millions):
2010

2009

Distribution of MBS holdings by coupon rate		Amortized cost		

Fair value		Amortized cost		

Allocated to the Bank:								
3.5%
$
8
$
8
$
6
$
4.0%		
3,916 		
3,933 		
2,639 		
4.5%		
11,622 		
11,882 		
6,738 		
5.0%		
5,404 		
5,547 		
3,032 		
5.5%		
2,175 		
2,239 		
1,604 		
6.0%		
302 		
312 		
197 		
6.5%		
36 		
39 		
40 		

6
2,571
6,697
3,047
1,622
200
41

		 Total
$
23,463
$
23,960
$
								
SOMA:								
3.5%
$
341
$
352
$
4.0%		
167,675 		
168,403 		
4.5%		
497,672 		
508,798 		
5.0%		
231,420 		
237,545 		
5.5%		
93,119 		
95,873 		
6.0%		
12,910 		
13,376 		
6.5%		
1,558 		
1,656 		

$

14,184

363
$
170,119 		
434,352 		
195,418 		
103,379 		
12,710 		
2,586 		

365
165,740
431,646
196,411
104,583
12,901
2,644

		

918,927

914,290

Total

74 | www.philadelphiafed.org

$ 1,004,695

$

1,026,003

$

14,256

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, was as follows (in millions):
Securities purchased under
agreements to resell
		

2010

2009

Securities sold under
agreements to repurchase		
2010

2009

Allocated to the Bank:						
Contract amount outstanding, end of year
$
$
$
1,394
$
Average daily amount outstanding, during the year
- 		
158 		
1,235 		
Maximum balance outstanding, during the year
- 		
3,493 		
1,573 		
Securities pledged (par value), end of year						
1,019 		
								
SOMA:								
Contract amount outstanding, end of year
$
$
$ 59,703
$
Average daily amount outstanding, during the year		
- 		
3,616 		
58,476 		
Maximum balance outstanding, during the year		
- 		 80,000 		
77,732 		
Securities pledged (par value), end of year						
43,642 		

1,206
1,644
3,909
1,208

77,732
67,837
89,525
77,860

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

2010 Annual Report | 75

Federal Reserve Bank of Philadelphia

Notes to Financial Statements

The remaining maturity distribution of Treasury securities, GSE debt securities, Federal agency and GSE MBS bought outright, and securities sold under
agreements to repurchase that were allocated to the Bank at December 31, 2010 was as follows (in millions):
Within 15 days
		
Treasury securities
(par value)
$
GSE debt securities
(par value)
Federal agency and GSE MBS
(par value)		
Securities sold under agreements
to repurchase
(contract amount)

229

16 days
to 90 days

$

91 days
to 1 year

579

$

1,267

Over 1 year
to 5 years

Over 5 years
to 10 years

$ 10,265

$

26 		

323 		

666 		

1,659 		

- 		

- 		

- 		

1,394 		

- 		

- 		

7,799

Over 10 years

$

715 		

3,715

Total

$ 23,854

55 		

3,444

1 		

- 		 23,168 		

23,169

- 		

- 		

- 		

1,394

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

76 | www.philadelphiafed.org

$

516
$
38		

2009

SOMA		
2010

318
$ 22,081
17 		 1,610

2009
$ 20,502
1,108

Federal Reserve Bank of Philadelphia

Notes to Financial Statements

Other liabilities, which are related to purchases of Federal agency and GSE MBS, arise from the failure of a seller to deliver securities to the FRBNY on the
settlement date. Although the Bank has ownership of and records its investments in the MBS as of the contractual settlement date, it is not obligated to
make payment until the securities are delivered, and the amount reported as other liabilities represents the Bank’s obligation to pay for the securities when
delivered. The amount of other liabilities allocated to the Bank and held in the SOMA at December 31, was as follows (in millions):
Allocated to the Bank
2010
Other liabilities

$

-

SOMA		

2009
$

9

2010
$

2009
-

$

601

The FRBNY enters into commitments to buy Treasury and GSE debt securities and records the related securities on a settlement-date basis. There were no
commitments to buy Treasury and GSE debt securities as of December 31, 2010.
The FRBNY enters into commitments to buy Federal agency and GSE MBS and records the related MBS on a settlement-date basis. There were no commitments to buy or sell Federal agency or GSE MBS as of December 31, 2010.
During the years ended December 31, 2010 and 2009, the Reserve Banks recorded net gains from dollar roll and coupon swap related transactions of $782
million and $879 million, respectively, of which $15 million and $5 million, respectively, was allocated to the Bank. These net gains are reported as “Noninterest income: Federal agency and government-sponsored enterprise mortgage-backed securities gains, net” in the Statements of Income and Comprehensive Income.

7. Foreign Currency Denominated Assets
The FRBNY holds foreign currency deposits with foreign central banks and the Bank for International Settlements and invests in foreign government debt
instruments. These foreign government debt instruments are guaranteed as to principal and interest by the issuing foreign governments. In addition, the
FRBNY enters into transactions to purchase Euro-denominated government debt securities under agreements to resell for which the accepted collateral is
the debt instruments issued by the governments of Belgium, France, Germany, Italy, the Netherlands, and Spain.

2010 Annual Report | 77

Federal Reserve Bank of Philadelphia

Notes to Financial Statements

The Bank’s allocated share of foreign currency denominated assets was approximately 10.928 percent and 10.984 percent at December 31, 2010 and 2009,
respectively.
The Bank’s allocated share of foreign currency denominated assets, including accrued interest, valued at amortized cost and foreign currency market exchange rates at December 31, was as follows (in millions):
2010
2009
Euro:				
		
Foreign currency deposits
$
771
$
812
		
Securities purchased under agreements to resell		
270 		
285
		
Government debt instruments		
503 		
542
				
Japanese yen:				
		
Foreign currency deposits		
424 		
374
		
Government debt instruments		
879 		
763
				
		
Total allocated to the Bank 	
$
2,847
$
2,776

At December 31, 2010 and 2009, the fair value of foreign currency denominated assets, including accrued interest, allocated to the Bank was $2,865 million
and $2,799 million, respectively. The fair value of government debt instruments was determined by reference to quoted prices for identical securities. The cost
basis of foreign currency deposits and securities purchased under agreements to resell, adjusted for accrued interest, approximates fair value. Similar to the
Treasury securities, GSE debt securities, and Federal agency and GSE MBS discussed in Note 6, unrealized gains or losses have no effect on the ability of a Reserve Bank, as the central bank, to meet its financial obligations and responsibilities. The fair value is presented solely for informational purposes.
Total Reserve Bank foreign currency denominated assets were $26,049 million and $25,272 million at December 31, 2010 and 2009, respectively. At December 31, 2010 and 2009, the fair value of the total Reserve Bank foreign currency denominated assets, including accrued interest, was $26,213 million
and $25,480 million, respectively.

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Federal Reserve Bank of Philadelphia

Notes to Financial Statements

The remaining maturity distribution of foreign currency denominated assets that were allocated to the Bank at December 31, 2010, was as follows (in millions):
					
Total allocated to
Within 15 days
16 days to 90 days
91 days to 1 year
Over 1 year to 5 years	 the Bank
Euro
$
Japanese yen		
Total allocated to the Bank

$

593
$
448 		
1,041

$

328
$
61 		

221
$
267 		

402
$
527 		

1,544
1,303

389

488

929

2,847

$

$

$

At December 31, 2010 and 2009, the authorized warehousing facility was $5 billion, with no balance outstanding.
There were no transactions related to the authorized reciprocal currency arrangements with the Bank of Canada and the Bank of Mexico during the years
ended December 31, 2010 and 2009.
There were no foreign exchange contracts outstanding as of December 31, 2010.
The FRBNY enters into commitments to buy foreign government debt instruments and records the related securities on a settlement-date basis. As of December 31, 2010, there were $209 million of outstanding commitments to purchase Euro-denominated government debt instruments, of which $23 million
was allocated to the Bank. These securities settled on January 4, 2011, and replaced Euro-denominated government debt instruments held in the SOMA
that matured on that date.
In connection with its foreign currency activities, the FRBNY may enter into transactions that are subject to varying degrees of off-balance-sheet market risk
and counterparty credit risk that result from their future settlement. The FRBNY controls these risks by obtaining credit approvals, establishing transaction
limits, receiving collateral in some cases, and performing daily monitoring procedures.

8. Central Bank Liquidity Swaps
U.S. Dollar Liquidity Swaps
The Bank’s allocated share of U.S. dollar liquidity swaps was approximately 10.928 percent and 10.984 percent at December 31, 2010 and 2009, respectively.

2010 Annual Report | 79

Federal Reserve Bank of Philadelphia

Notes to Financial Statements

The total foreign currency held under U.S. dollar liquidity swaps in the SOMA at December 31, 2010 and 2009, was $75 million and $10,272 million, respectively, of which $8 million and $1,128 million, respectively, was allocated to the Bank. All of the U.S. dollar liquidity swaps outstanding at December 31,
2010 were transacted with the European Central Bank and had remaining maturity distributions of less than 15 days.
Foreign Currency Liquidity Swaps
There were no transactions related to the foreign currency liquidity swaps during the years ended December 31, 2010 and 2009.

9. Bank Premises, Equipment, and Software
Bank premises and equipment at December 31 were as follows (in millions):
2010

2009

Bank premises and equipment: 			
		 Land and land improvements
$
8
$
		 Buildings
102 		
		 Building machinery and equipment
17 		
		 Construction in progress
1 		
		 Furniture and equipment
62 		

8
102
16
1
70

190 		

197

(101)		

(105)

		

Subtotal

Accumulated depreciation
Bank premises and equipment, net
		

Depreciation expense, for the years ended December 31

$

89

$

92

$

10

$

11

The Bank leases space to an outside tenant with a remaining lease term of one year. Rental income from such lease was $2 million and $1 million for the
years ended December 31, 2010 and 2009, respectively, and is reported as a component of “Other income” in the Statements of Income and Comprehen-

80 | www.philadelphiafed.org

Federal Reserve Bank of Philadelphia

Notes to Financial Statements

sive Income. Future minimum lease payments that the Bank will receive under the noncancelable lease agreement in existence at December 31, 2010 are
$3 million for the year 2011.
The Bank had capitalized software assets, net of amortization, of $6 million at December 31, 2010 and 2009. Amortization expense was $2 million for each
of the years ended December 31, 2010 and 2009. Capitalized software assets are reported as a component of “Other assets” in the Statements of Condition and the related amortization is reported as a component of “Operating expenses: Other” in the Statements of Income and Comprehensive Income.

10. Commitments and Contingencies
Conducting its operations, the Bank enters into contractual commitments, normally with fixed expiration dates or termination provisions, at specific rates
and for specific purposes.
At December 31, 2010, the Bank was obligated under noncancelable leases for premises and equipment with remaining terms ranging from 2 to approximately 9 years. One 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, 2010 and 2009. 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, 2010, are as follows (in thousands):
Operating leases
2011
$
2012		
2013		
2014		
2015		
Thereafter		
		
		 Future minimum rental payments
$

607
613
434
445
457
1,481
4,037

2010 Annual Report | 81

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 share of certain
losses in excess of 1 percent of the capital paid-in of the claiming Reserve Bank, up to 50 percent of the total capital paid-in of all Reserve Banks. Losses
are borne in the ratio of a Reserve Bank’s capital paid-in to the total capital paid-in of all Reserve Banks at the beginning of the calendar year in which the
loss is shared. No claims were outstanding under the agreement at December 31, 2010 or 2009.
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). In addition, under the Dodd-Frank Act, employees of the Bureau can elect to participate in the System Plan. There were no Bureau participants in
the System Plan as of December 31, 2010.
The System Plan provides retirement benefits to employees of the Federal Reserve Banks, Board of Governors, and OEB and in the future will provide retirement benefits to certain employees of the Bureau. The FRBNY, on behalf of the System, recognizes the net asset or net liability and costs associated with the
System Plan in its consolidated financial statements. During the years ended December 31, 2010 and 2009, costs associated with the System Plan were not
reimbursed by other participating employers.
The Bank’s projected benefit obligation, funded status, and net pension expenses for the BEP and the SERP at December 31, 2010 and 2009, and for the
years then ended, were not material.
Thrift Plan
Employees of the Bank participate in the defined contribution Thrift Plan for Employees of the Federal Reserve System (Thrift Plan). The Bank matches em-

82 | www.philadelphiafed.org

Federal Reserve Bank of Philadelphia

Notes to Financial Statements

ployee contributions based on a specified formula. Effective April 1, 2009, the Bank matches 100 percent of the first 6 percent of employee contributions from
the date of hire and provides an automatic employer contribution of 1 percent of eligible pay. For the first three months of the year ended December 31, 2009,
the Bank matched 80 percent of the first 6 percent of employee contributions for employees with less than five years of service and 100 percent of the first 6
percent of employee contributions for employees with five or more years of service. The Bank’s Thrift Plan contributions totaled $4 million for each of the years
ended December 31, 2010 and 2009 and are reported as a component of “Salaries and benefits” in the Statements of Income and Comprehensive Income.

12. Postretirement Benefits Other Than Retirement Plans and Postemployment Benefits
Postretirement Benefits Other Than Retirement Plans
In addition to the Bank’s retirement plans, employees who have met certain age and length-of-service requirements are eligible for both medical benefits
and life insurance coverage during retirement.
The Bank funds benefits payable under the medical and life insurance plans as due and, accordingly, has no plan assets.
Following is a reconciliation of the beginning and ending balances of the benefit obligation (in millions):
2010
Accumulated postretirement benefit obligation at January 1
Service cost benefits earned during the period
Interest cost on accumulated benefit obligation
Net actuarial loss (gain)
Contributions by plan participants
Benefits paid
Medicare Part D subsidies
Plan amendments
		

Accumulated postretirement benefit obligation at December 31

2009

$

83.7
$
2.2 		
4.6 		
(2.4)		
1.6 		
(5.9)		
0.5 		
(1.3)		

72.5
1.8
4.4
3.4
1.3
(4.6)
0.4
4.5

$

83.0

83.7

$

2010 Annual Report | 83

Federal Reserve Bank of Philadelphia

Notes to Financial Statements

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

Fair value of plan assets at December 31

$

$

2009
$
3.8 		
1.6 		
(5.9)		
0.5 		
-

$

2.9
1.3
(4.6)
0.4
-

Unfunded obligation and accrued postretirement benefit cost
$
83.0
$
83.7
			
Amounts included in accumulated other comprehensive loss are shown below:					
Prior service cost
$
(2.2)
$
(3.4)
Net actuarial loss
(21.8)		
(26.6)
		

Total accumulated other comprehensive loss

$

(24.0)

$

Accrued postretirement benefit costs are reported as a component of “Accrued benefit costs” in the Statements of Condition.

84 | www.philadelphiafed.org

(30.0)

Federal Reserve Bank of Philadelphia

Notes to Financial Statements

For measurement purposes, the assumed health care cost trend rates at December 31 are as follows:

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		

2010

2009

8.00%		
5.00%		
2017		

7.50%
5.00%
2015

Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A 1 percentage point change in assumed
health care cost trend rates would have the following effects for the year ended December 31, 2010 (in millions):
1 percentage point
increase
Effect on aggregate of service and interest cost components of net
		
periodic postretirement benefit costs
$
Effect on accumulated postretirement benefit obligation		

1 percentage point
decrease

$
0.6 		

(0.2)
(1.9)

The following is a summary of the components of net periodic postretirement benefit expense for the years ended December 31 (in millions):
2010
Service cost-benefits earned during the period
$
Interest cost on accumulated benefit obligation		
Amortization of prior service cost		
Amortization of net actuarial loss		

2009

2.2
$
4.6 		
- 		
2.4 		

1.8
4.4
(1.2)
3.0

Total periodic expense		

9.2 		

8.0

Curtailment gain		

- 		

(0.4)

		

		

Net periodic postretirement benefit expense

$

9.2

$

7.6

2010 Annual Report | 85

Federal Reserve Bank of Philadelphia

Notes to Financial Statements

Estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic postretirement benefit expense in 2011 are shown below:
			
		
Prior service cost
$
0.3 		
Net actuarial loss		
1.9 		
		

Total

$

2.2 		

Net postretirement benefit costs are actuarially determined using a January 1 measurement date. At January 1, 2010 and 2009, the weighted-average discount rate assumptions used to determine net periodic postretirement benefit costs were 5.75 percent and 6.00 percent, respectively.
Net periodic postretirement benefit expense is reported as a component of “Salaries and benefits” in the Statements of Income and Comprehensive Income.
A curtailment gain associated with restructuring programs that are described in Note 14 was recognized in net income in the year ended December 31, 2009,
related to employees who terminated employment during 2009.
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 $0.3 million and $0.6 million in the years ended December 31, 2010 and 2009, respectively. Expected receipts
in 2011, related to benefits paid in the years ended December 31, 2010 and 2009, are $0.2 million.
Following is a summary of expected postretirement benefit payments (in millions):
Without subsidy
2011
$
2012		
2013		
2014		
2015		
2016 - 2020		
				
		 Total
$
86 | www.philadelphiafed.org

With subsidy

4.6
$
4.9 		
5.3 		
5.7 		
6.0 		
34.7 		

4.2
4.5
4.8
5.1
5.4
30.7

61.2

54.7

$

Federal Reserve Bank of Philadelphia

Notes to Financial Statements

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. The accrued postemployment benefit costs recognized by the
Bank was $7.1 million at December 31, 2010 and 2009. This cost is included as a component of “Accrued benefit costs” in the Statements of Condition.
Net periodic postemployment benefit expense included in 2010 and 2009 operating expenses were $1.7 million and $3.3 million, respectively, and are recorded as a component of “Salaries and benefits” in the Statements of Income and Comprehensive Income.

13. Accumulated Other Comprehensive Income And Other Comprehensive Income
Following is a reconciliation of beginning and ending balances of accumulated other comprehensive loss (in millions):
Amount related to postretirement benefits other than retirement plans
Balance at January 1, 2009
$
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		
		
Amortization of deferred curtailment gain		

(23.6)

Change in funded status of benefit plans - other comprehensive loss		

(6.4)

Balance at December 31, 2009

(4.5)
(3.3)
(1.2)
3.0
(0.4)

$

(30.0)

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

1.3
2.4
(0.1)
2.4

Change in funded status of benefit plans - other comprehensive loss		

6.0

Balance at December 31, 2010

$

(24.0)

2010 Annual Report | 87

Federal Reserve Bank of Philadelphia

Notes to Financial Statements

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

14. Business Restructuring Charges
The Bank had no business restructuring charges in 2010 or 2009.
Before 2009, the Reserve Banks announced the acceleration of their check restructuring initiatives to align the check processing infrastructure and operations with declining check processing volumes. The new infrastructure consolidated operations into two regional Reserve Bank processing sites; one in
Cleveland, for paper check processing, and one in Atlanta, for electronic check processing.
Following is a summary of financial information related to the restructuring plans (in millions):
2008 and prior restructuring plans

Information related to restructuring plans as of December 31, 2010:
Total expected costs related to restructuring activity
$
Expected completion date		
Reconciliation of liability balances:
Balance at January 1, 2009
		
Other costs
		
Adjustments
		
Payments

3.4
2009

$

2.9
0.2
0.6
(1.4)

Balance at December 31, 2009
$
		
Adjustments		
		
Payments		

2.3
(0.3)
(1.9)

Balance at December 31, 2010

88 | www.philadelphiafed.org

$

0.1

Federal Reserve Bank of Philadelphia

Notes to Financial Statements

Employee separation costs are primarily severance costs for identified staff reductions associated with the announced restructuring plans. Separation costs
that are provided under terms of ongoing benefit arrangements are recorded based on the accumulated benefit earned by the employee. Separation costs
that are provided under the terms of one-time benefit arrangements are generally measured based on the expected benefit as of the termination date and
recorded ratably over the period to termination. Restructuring costs related to employee separations are reported as a component of “Salaries and benefits”
in the Statements of Income and Comprehensive Income.
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.

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

2010 Annual Report | 89

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The Federal Reserve Bank of Philadelphia is one of 12 regional
Reserve Banks in the United States that, together with the Board
of Governors in Washington, D.C., make up the Federal Reserve
System — the nation’s central bank. The System’s primary role is
to ensure a sound financial system and a healthy economy. The
Philadelphia Fed serves the Third District, which is composed of
eastern Pennsylvania, southern New Jersey, and Delaware.