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Land of

Opportunity?
Economic Mobility in the United States

2012 ANNUAL REPORT
FEDER AL RE SERVE BANK OF RICHMOND

Mission
As a regional Reserve Bank, we work within the
Federal Reserve System to foster the stability, integrity,
and efficiency of the nation’s monetary, financial, and
payments systems. In doing so, we inspire trust and
confidence in the U.S. financial system.

Vision
To be an innovative policy and services leader for
America’s economy.

Key Functions
We contribute to the formulation of monetary policy.
We supervise and regulate banks and financial holding
companies headquartered in the Fifth Federal Reserve
District. We process currency and electronic payments
for banks and provide financial services to the U.S.
Treasury. We also work with a wide variety of partners
to strengthen communities in the Fifth District.

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Message from the President. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 	2
Feature Essay:
Land of Opportunity? Economic Mobility in the United States. . . . . . . . . . . . . 	 4
Message from Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 	24
Fed Spotlight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 	26
Fifth District Economic Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 	30
Boards of Directors, Advisory Councils, and Officers. . . . . . . . . . . . . . . . . . . . . . 	35
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 	47

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MESSAGE FROM THE PRESIDENT

Human Capital and the American Dream

A

2006 documentary titled The One Percent
chronicled the growing gap in wealth
in the United States. Since that time, concerns about economic inequality have taken
a prominent spot in public discourse. While
rising inequality surely demands attention,
perhaps an even more important issue is
economic mobility.

Jeffrey M. Lacker
President

Most measures of inequality compare income distributions
from one point in time to another. In contrast, economic
mobility, by definition, concerns the likelihood of moving up
(or down) the income ladder. It is, in short, a more dynamic
way to look at economic outcomes. It is also one that strikes
a chord when we consider issues of social justice.
The widely shared ideal associated with the phrase “the
American dream” is not, I would argue, the promise of
prosperity, but the promise of opportunities to attain it.
To the extent that such opportunities have disappeared
or become vastly more difficult to seize, we fall short on
this fundamental dimension of fairness.
Economists consider two distinct types of economic mobility:
intragenerational and intergenerational. Intragenerational
mobility refers to how a person’s economic status changes
over the course of his lifetime. Intergenerational mobility is
the degree to which a person’s economic status as an adult
differs from his ancestors’ economic status.

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As Kartik Athreya and Jessie Romero note in the
feature essay of this year’s Annual Report, both types
of mobility seemed to decline in recent decades—
particularly for people at the top and bottom of
the income ladder. People in the middle remained
more likely to experience significant changes in their
fortunes, but people who were born to relatively rich
or poor families tended to stay in those segments
of the income distribution.
Why do we see such persistence at the extremes?
There are a number of reasons—most notably the
relative advantages and disadvantages that rich and
poor parents convey to their children. But, as Athreya
and Romero discuss, there can be little doubt that
the returns to skill acquisition have risen over time.
New technologies that have been developed and
implemented over the past several decades have
done more for the productivity of skilled workers
than for less-skilled workers. As a result, the value
of developing human capital has increased sharply.
This is evident in the widening gap between the earnings of workers with and without college degrees.
The compensation gap seems to suggest continuing the various public policies that promote higher
education. But research indicates that differences in
educational attainment alone do not fully account
for gaps in economic mobility, suggesting that
human capital embodies other important factors
as well. In fact, non-cognitive skills, such as work
ethic, the ability to follow instructions, motivation,
and patience may be just as important as cognitive skills in determining future success in the job
market. And there is considerable evidence that the
foundation for skill acquisition is laid very early in
life. Long-term research projects have shown that
high-quality early childhood education programs
can deliver quantitatively significant social returns,

including higher lifetime earnings. Early mastery of
some basic skills can make it easier to learn more
complex skills throughout life, and children who
fall behind early have difficulty catching up. This
indicates that greater investment in early childhood
education might be a more cost-effective way to
increase equality of opportunity, in the long run, than
increased subsidies for higher education.
Athreya and Romero are cautious, though, about the
policy implications of the research they survey. That’s
appropriate, in my view, because more research is
needed, and intuition alone is an insufficient and at
times misleading guide to policy choice. Changes in
economic opportunity are the result of a complex
array of fundamental forces, and ideas about how
to enhance opportunity have shifted over time. In
decades past, we poured resources into traditional
education—both K-12 and higher education—and yet
improvements in fundamental measures of mobility
have not been evident. This suggests to me that
returns to such strategies are diminishing and that
consideration of less-traditional strategies, such as
greater investment in early childhood education,
is warranted. New strategies should be grounded
in well-vetted research, however, and implementation should be guided by careful evaluation of
the effects on outcomes. Policy directions based
on such research have the best chance to achieve
sustained improvements in economic mobility.
Such an outcome would be truly consistent with
the American dream.

Jeffrey M. Lacker
President

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Land of

Opportunity?
Economic Mobility in the United States
By Kartik Athreya and Jessie Romero

T

he gap between people in the highest percentiles of earnings and wealth
distributions and the rest of society has grown significantly during the
past several decades, a fact that has led to considerable public discussion

about the nature of opportunities available in the United States. Often overlooked in
this debate, however, is the importance of economic mobility—the extent to which
people are able to move up and down the income
ladder—in determining what inequality implies for
opportunity. If mobility is high, for example, the level of
inequality at any point in time is not necessarily cause
for concern, since it’s possible that today’s poor will be
tomorrow’s rich. The potential for such upward mobility is the foundation of the American dream that has
lured generations of immigrants to the United States.
The dream endures today. Nearly half of Americans
aged 18–29 believe they will become rich at some point
in their lifetimes, according to a 2012 Gallup Poll. But the
odds are against them: In 2010 (the most recent year
for which the Internal Revenue Service has published
data), only about 5 percent of U.S. households earned
more than $150,000 per year, and about 1 percent
earned more than $350,000 per year. (See Figure 1).
Most of those people, moreover, were not born to poor
parents—especially not in recent years.

Understanding economic mobility is essential to
understanding how observed levels and patterns of
economic inequality relate to the implicit promise of
American life. But this is complicated. Mobility and
inequality are determined jointly by random chance,
by policy, and—most confounding of all for social scientists—by the deliberate actions of individuals or their
parents. Regarding the latter determinant, it is clear
that people differ according to their aptitude for various tasks, their appetite for risk, and their preferences
for work versus leisure, among other characteristics.
Both mobility and inequality thus will arise at least in
part because different people make different choices.
(See sidebar on page 15.)
This reality creates a challenge for economists seeking to understand the sources of observed levels of
mobility and inequality, and for policymakers who
hope to influence those levels. If everyone has the

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Figure 1: Thresholds for Selected Income Percentiles
THRESHOLDS FOR SELECTED INCOME PERCENTILES
$450,000
400,000
350,000

Top 1 percent

The gap between the
top 1 percent and all
other percentiles has
increased substantially.

Income

300,000
250,000
200,000

Top 5 percent

150,000

Top 10 percent

100,000

Top 25 percent

2010

2007

2004

2001

1998

1995

1992

1989

1986

50,000

Source: Internal Revenue Service
Note: An “income percentile threshold” is the lowest amount earned by a household in that
percentile. Income is “adjusted gross income,” which is income minus certain deductions.
Amounts are in current dollars.

same opportunities for movement, then differences
in income, wealth, or education must at least partially
reflect deliberate choices and not market structure. This
is not a setting in which many people would find efforts
to alter outcomes via policy compelling. In contrast, to
the extent that inequality continues across generations
because people do not have the same chances, then
inequality and immobility can be partially chalked up
to market structure. From a normative standpoint,
there thus might be support for policy interventions
that seek to equalize opportunities, rather than those
that would equalize outcomes.
One such intervention is greater investment in early
education. High-quality early-childhood education
equips children with the skills they need to succeed at
each subsequent stage of life, yet in the United States,
access to such education appears to strongly depend on
parents’ income. Children of poor parents are thus at a
disadvantage from the very beginning—a disadvantage

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from which it is very difficult to recover. But these children
are not the only ones who are affected; all else equal,
a more skilled workforce increases the productivity of
society as a whole. Enhancing early education opportunities for the initially disadvantaged could therefore lead
to better economic outcomes for everyone.
This essay will review both recent and longer-run
features of U.S. economic mobility, with a focus on
how those trends affect the interpretation of data
on income inequality. It then will discuss some of the
challenges and choices facing policymakers seeking
to alter observed outcomes.

Inequality in the United States
By nearly any measure, income inequality in the
United States is increasing.1 In particular, today’s rich
are both richer than their counterparts in the past
and richer relative to those around them. In 1979, the

Research suggests that early childhood
education is the most cost-effective way to
reduce the opportunity gap.

top 1 percent of households took home 7.4 percent of
total after-tax income in the United States. By 2007,
the share had more than doubled to 16.7 percent
(Congressional Budget Office 2011).2 At the same
time, the share of income earned by households
at all levels of the remaining distribution stayed
flat or declined. Those in the middle three quintiles
(fifths), for example, saw their share decrease from
51 percent to 43.9 percent. The picture looks the
same for pretax income; the share accruing to the
top 1 percent rose from 8.9 percent to 18.7 percent
(Congressional Budget Office 2011).3 These changes
are a result both of increasing concentration of all
types of income at the top of the distribution and a
shift in the composition of income toward business
income and capital gains (Congressional Budget
Office 2011). This compositional change also makes
incomes at the top of the distribution more volatile,
but the trend is clearly one of growing inequality.
(See Figure 2.)

Other research shows similar trends. Thomas Piketty
and Emmanuel Saez (2003) find that after remaining flat throughout the 1950s and 1960s, the share
of pretax income earned by the top 10 percent of
households increased from 31.5 percent in 1970 to
41.4 percent in 1998.4 As in the CBO’s analysis, this
increase was largely driven by those at the very top
of the distribution. While the income share for those
in the 90th through 99th percentiles increased from
23.7 percent to 26.9 percent, the share for those in the
very top percentile nearly doubled, from 7.8 percent
to 14.6 percent.5
The trend continued after the 2007–09 recession.
Although average real income for the top 1 percent
fell about three times more than for the remaining 99
percent, the decline was almost entirely due to the stock
market crash. As markets recovered in 2010, incomes
for the top 1 percent increased 11.6 percent, compared
to only 0.2 percent for all other households (Saez 2013).

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Figure 2: Income Distribution by Quintiles
The top quintile (fifth) of households account for about half of after-tax income
SHARE OF AFTER-TAX INCOME
60

18
16

40

12

 

Top 1 Percent
(right scale) 

10

30

8
Fourth Quintile

20

6

 
Third Quintile
 
Second Quintile

10

2009

2007

2005

2003

2001

1999

1997

1995

1993

1991

1989

2
1987

1985

1983

1979

The top 1 percent of
households account
for much of the gap
between the fourth
and top quintiles.

4

Bottom Quintile

1981

Percent

14

Top Quintile
 

Percent

50

Source: Congressional Budget Office
Note: Quintiles are displayed on the left scale; the top 1 percent is displayed on the right scale.
After-tax income is defined as market income (labor income, business income, capital gains,
capital income, and other income) net of transfer payments and taxes.

Income shares for the 90th–99th percentiles and the
top 1 percent continued to increase, to 29.1 percent
and 17.4 percent, respectively, in 2011 (Piketty and Saez
2003, updated data).
These data have garnered a great deal of attention
from economists, policymakers, and the public, but
do they shed light on what is actually happening to
individuals or households?

Mobility: A Central Force
Behind Inequality
An observation of inequality at any point in time is
only a snapshot; it does not shed light on how that
snapshot developed. For example, imagine three different worlds: In the first world, the first inhabitants flip
coins to determine not only their income, but also the
income of all future generations; each descendant earns
either $1,000 or $100,000 per year, depending on his

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ancestor’s original coin toss. In the second world, the
members of each new generation flip coins, but they
do so just once at birth to determine whether they will
earn $1,000 or $100,000 per year during their lifetimes.
In the third world, individuals get to flip a coin each
year to determine their income for that year.
The people in these worlds face very different lifetime
risks. The first world, which is akin to a caste system,
is very risky from the perspective of the first ancestor,
who is determining outcomes for an entire dynasty.
The second world also is risky since the die is cast for
one person’s entire life, but each of her descendants
gets a chance to flip the coin, making it unlikely that
bad luck will persist across many generations. The
third environment is the least risky since it is very
unlikely that an individual’s average annual income
over his lifetime would be significantly different than
$50,500, the average annual income he can expect
over many years.

Despite these differences, snapshots of these economies in any given year look the same. In each, about
half the population earns $1,000 per year, while the
other half earns $100,000. Clearly, then, inequality
data alone do not reveal the underlying prospects of
individuals. For this, one must study economic mobility.

Trends in Economic Mobility
Economists and policymakers generally are interested
in two types of mobility: intragenerational and intergenerational. Intragenerational mobility describes
how a given person’s economic status changes over
the course of his lifetime. Intergenerational mobility
reflects the degree to which a person’s economic
status as an adult differs from that of her parents
or ancestors. Status is usually measured by earnings (wage income), income (all sources of income,
including wages), or less frequently wealth (the value
of assets minus liabilities). Most research focuses on
relative intra- and intergenerational mobility, or how a
person’s status changes in comparison to others. But
it is also important to recognize that a person might
experience absolute mobility even in the absence of
relative mobility. She might occupy the same place in
the earnings distribution as her parents, remaining in
the same position relative to the rest of society, but
still have a higher standard of living than her parents
did, depending on the rate of economic growth.6
Intragenerational Earnings Mobility
Does the top of the income distribution comprise the
same people year in and year out, or do individuals
flow in and out of the highest percentiles over their
lifetimes? If intragenerational mobility is high, then any
snapshot of inequality will overstate the actual longterm inequality among individuals. For example, it is
possible that the large gap in recent years between
those in the top percentile and the rest of the distribution reflects an increase in the variation of annual
earnings due to stock options and large bonuses. If

that were the case, short-term inequality might be
high, but long-term inequality could be much lower,
reflecting high mobility.
In addition, in most modern societies, there is a clear
life-cycle pattern to earnings and income. Imagine
an extreme case where half the population earns
$1,000 during the first half of their lives and $100,000
during the second half, while the other half of the
population earns $100,000 early in life and $1,000
later. Income inequality would be high at a point in
time, but everybody has the same lifetime income.
Assuming that individuals could save and borrow to
smooth their consumption over time, the snapshot
of income inequality might not accurately reflect
people’s well-being since consumption inequality—a
truer, and harder to measure, barometer—would be
relatively low.
Anthony Shorrocks (1978) formalized these ideas by
developing an index in which mobility is defined as the
extent to which income inequality decreases over a
given timeframe. Wojciech Kopczuk, Emmanuel Saez,
and Jae Song (2010) calculate Shorrocks indices comparing inequality in annual earnings and in earnings
averaged over five years for workers between 1937 and
2004. They find that short-term (five-year) mobility
has not changed over the period, which implies that
greater volatility of short-term earnings is not the
source of observed higher inequality. Instead, higher
inequality is likely the result of increased variation
in lifetime earnings, including higher earnings at the
top of the distribution. The authors conclude that
mobility has not been sufficient to offset the rise in
inequality, and thus that short-term inequality likely
reflects lifetime inequality.
Kopczuk, Saez, and Song (2010) also find that longterm income mobility, from the beginning to the end
of working life, actually increased significantly for all
workers between 1942 and 1999. There is significant

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heterogeneity among groups of workers, however.
Although on average men are more upwardly mobile
than women, men’s mobility was stable or declining
during the sample period. Women’s mobility, however,
has increased greatly since the 1960s, as more women
have moved into higher-paying professions. Thus, the
increase in mobility for all workers has been driven by
the labor market experiences of women.
Heterogeneity in intragenerational mobility also is
apparent across the income distribution. Gerald Auten,
Geoffrey Gee, and Nicholas Turner (2013) find that
about 75 percent of taxpayers aged 35–40 who were
in the second, third, or fourth quintile in 1987 were in a
different quintile in 2007. (About 60 percent of those
who changed position moved up or down a single
quintile.) But they find greater persistence at the top
and bottom of the distribution: 43 percent of taxpayers in the bottom quintile were still there 20 years
later, and 46 percent of taxpayers in the top quintile
maintained their positions. The authors also find that
the very top earners tended to remain top earners:
From 1992 through 2006, between 60 percent and
70 percent of the top 1 percent in a given year were
in the top 1 percent in the following year.
Intergenerational Mobility
A commonly used measure of intergenerational mobility is the intergenerational elasticity of earnings (IGE).
The IGE describes in percentage terms how much
of the difference between the earnings of families
in one generation persists into the next generation,
typically by comparing the correlation of the earnings
of fathers and sons. For example, an IGE of 0.5 means
that a 10 percent difference between the income of
two fathers translates into a 5 percent difference in the
income of their sons. The smaller the IGE, the greater
the amount of mobility.
Important early studies of the United States and other
developed countries found a high degree of mobility,

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with an IGE of 0.2 or less (Becker and Tomes 1986).
Later research, however, found that data used in this
work featured biases that would lead to artificially low
measurements of the true level of earnings persistence.
(See Stokey [1996] for a review of this research.)
New and better data suggest that mobility in the
United States has been historically lower than initial
estimates implied, and that it has declined even
further in recent decades. Daniel Aaronson and
Bhashkar Mazumder (2008) construct a time series
of intergenerational elasticity from 1950 to 2000.
They find that mobility increased between 1950 and
1980—the IGE decreased from 0.40 to 0.32—but
decreased significantly during the 1980s and 1990s,
with the IGE reaching 0.58 by 2000.
Although exact international comparisons are not
possible, most research suggests that people in the
United States are somewhat less mobile than people
in Canada, Denmark, Finland, and Norway, where the
IGE is about 0.15 to 0.2. In Germany and Switzerland,
the IGE is about 0.3, and people in the United Kingdom
and France also are relatively immobile, with IGEs of
about 0.4 to 0.5 (Corak 2006).
While the IGE is a widely used statistic in work on intergenerational mobility, it only reflects average mobility
across the entire distribution of individuals; it does not
reveal anything about the direction of mobility or how
it varies across different groups. To learn more about
such mobility, Mazumder (2008) calculates transition
rates, the likelihood of moving from one point in the
distribution to another, across generations. He finds
that, as with intragenerational measures, the amount
of mobility varies significantly according to income.
For example, there is a great deal of “stickiness” at
the top and bottom of the distribution; people whose
parents are in the bottom quintile of income are more
likely to be in the bottom quintile themselves, and
those whose parents are in the top quintile are likely to

remain there. More than 60 percent of children whose
parents are in the bottom quintile will end up in the
bottom or second quintile, compared to 23.3 percent
of those whose parents are in the top quintile. Only
7.4 percent of people who reach the top quintile are
from families in the bottom quintile. (See Figure 3.)
There also are stark differences between black people
and white people and between men and women.
Whites appear to be more upwardly mobile and less
downwardly mobile than blacks. Mazumder (2008)
finds that about 24.9 percent of whites remain in the
bottom quintile, compared to 43.7 percent of blacks.
And 38.9 percent of whites remain in the top quintile,

compared to 21.3 percent of blacks. In addition, more
than twice as many whites as blacks experience the
“rags-to-riches” scenario of moving from the bottom
quintile to the top quintile, 10.6 percent compared to
4.1 percent. Mazumder also finds a large gender gap.
While 40.5 percent of women from families in the
lowest quintile remain there, only 27.2 percent of men
do. Conversely, 43.0 percent of men from families in
the top quintile remain in that quintile, compared to
31.9 percent of women. Men are thus more upwardly
mobile and less downwardly mobile than women. The
gender gap is trumped by the race gap, however: Both
black men and black women tend to be the most likely

Forty-three percent of men from
families in the top quintile remain there,
compared to 31.9 percent of women.

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Figure 3: Intergenerational Income Quintile Transition Rates

Income Quintiles as Adults
Top

100%

7.4

90

Fourth

15.2

Third

Second

17.8

21.7

12.5

37.8

80
19.3

19.6

70
Transition Rate

Bottom

22.3
24

60

20.4

50

22

21.6

26.9

21.5

40
23.6

30

16.8

20.2

20

The majority of
adolescents from the
top or bottom quintiles
remained in the same
quintile or adjacent
quintile as adults.

16.9
12.4

33.5
21.6

10

Bottom

18

Second

15.9

Third

Fourth

10.9

Top

Families’ Income Quintiles
Source: Mazumder (2008)
Note: The figure shows what percentages of adolescents from families in a given income quintile
remained in that quintile or transitioned to a different quintile as adults. For example, 33.5
percent of adolescents from families in the bottom quintile remained in the bottom quintile,
while 26.9 percent moved to the second quintile. Income data were gathered from 1979 through
1980 and again from 1997 through 2003.

to remain in the bottom quintile and the most likely to
fall out of the top quintile.7
Mobility of Immigrants
For centuries, the American dream has drawn immigrants to the United States, from the waves of German
and Irish immigrants in the late 1800s to the nearly 12
million Mexican immigrants who arrived during the
past four decades.8 But how likely is it that the dream
becomes a reality?
Decennial census data indicate that immigrants’ earnings increase rapidly after they arrive in the United
States; the earnings gap between them and their
native-born peers appears to shrink substantially over

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time. Comparing natives and immigrants with similar
work experience, Darren Lubotsky (2007) finds that the
positive earnings gap between natives and the cohort
of immigrants who came to the United States between
1965 and 1969 fell from 38 percent in the 1970 Census
to 16 percent in the 1980 Census, and vanished by the
1990 Census. The gap between natives and immigrants
who arrived in the late 1980s fell from 55 percent to 36
percent between the 1990 and 2000 censuses. This
mobility might be spurious, however. Up to one-third
of immigrants eventually return to their home countries; if these immigrants tend to be those with lower
earnings, then the apparent earnings growth actually
reflects fewer low earners in the data pool. Lubotsky
(2007) corrects for this “selective out-migration” by

studying longitudinal rather than cross-sectional data,
and finds that earnings growth is significantly lower.
In the cross-sectional data, immigrants’ relative earnings increase 20 percent during their first decade in
the United States and an additional 10 percent to 20
percent in each following decade. In the longitudinal
data, however, immigrants’ earnings grow between
12 percent and 15 percent during their first 15 years in
the country and then stagnate.
The mobility of the second generation also appears
to be decreasing. Throughout the 20th century, the
children of immigrants not only earned more than their
parents, but they also earned more on average than
the rest of the non-immigrant population, perhaps
reflecting some of the selection effects Lubotsky
(2007) observed. But that advantage is shrinking. In
1940, the second generation earned 17.8 percent more
than non-immigrants on average. In 1970, the difference was 14.6 percent, and by 2000, the difference
had fallen to 6.3 percent (Borjas 2006). The reason
might be a shift in the composition of immigrants.
There has long been significant heterogeneity in
earnings among immigrant groups, and in recent
times, immigrants from developed countries tend
to earn more than those from developing countries.
Immigrants from Germany earned 24.9 percent more
than non-immigrants in 1970 and their children earned
19.5 percent more in 2000, for example, while those
from Mexico earned 31.6 percent less in 1970 and their
children earned 14.6 percent less in 2000 (Borjas
2006).9 While wages in the second generation tend
to regress toward the mean, overall earnings show
significant persistence into the second generation.
Borjas (2006) finds that across all immigrant groups,
the intergenerational elasticity over the period 1970
to 2000 is 0.43. As the composition of immigrants
increasingly shifts toward people from less-developed
countries, who tend to have lower skills and levels of
education, the wage gap is likely to persist through
successive generations of immigrants (Haskins 2008).10

Irrespective of how quickly immigrants’ earnings
approach the earnings of natives, many immigrants still
improve their economic status significantly by immigrating to the United States. In this sense, the move to the
United States is a powerful form of economic mobility,
and the United States’ absorption of both legal and
illegal immigrants makes it an engine of global mobility.
This last point must be part of any meaningful assessment of the mobility offered by a society. Even a
calcified society, in which intergenerational or intragenerational mobility of natives is low, may be a source
of mobility for the world’s residents via its openness
to immigrants. Conversely, societies that promote
intergenerational mobility of natives through intensive
early intervention and generous social safety nets but
limit entry of immigrants—perhaps out of fear that they
will exploit the generous safety nets—might hinder
equality of opportunity in a global sense.11

What Generates Persistence?
The preceding discussion has highlighted empirical
findings on the persistence of economic outcomes
both within and across generations. But these findings
do not explain why persistence across generations
exists in the first place or why it might have increased.
As Aaronson and Mazumder (2008) note, intergenerational elasticities do not reflect causality. Instead,
measures like the IGE are simply omnibus measures
of everything correlated with parents’ income and
children’s future earnings—factors ranging from the
neighborhood where a child grew up to the availability
of health care, among many others.
Intuitively, parents’ decisions to invest in developing
their children’s skills, or “human capital,” are important.
Their willingness to make such investments stems in
large part from altruistic concern for their children.12 One
model that incorporates this dynamic was created by
Gary Solon (2004). He relates this investment decision

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In the 20th century, the children of
immigrants earned more on average
than their parents and more than the
rest of the non-immigrant population.

to the rate of return to human capital and to the progressivity of public investment in children’s human
capital, such as government provision of education and
health care. Solon’s model suggests several things: that
higher-income parents invest more in their children’s
human capital, that more progressive public investment
in children’s human capital partially crowds out parents’
investment, and that parents are likely to invest more
when the returns to human capital increase. The model
predicts that intergenerational mobility will decrease
during a period of increasing returns to human capital
because rich parents are able to invest more than poor
parents, and that mobility will increase during a period
of more progressive public investment.
Recent trends in intergenerational mobility do correspond to Solon’s predictions (Mazumder 2012).
The returns to college education dropped during the
1940s, remained steady for several decades, and then
began rising around 1980. These turning points in the

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returns to college education match the turning points
in intergenerational elasticity observed in Aaronson
and Mazumder (2008), as well as in other studies of
mobility trends.
In Solon’s (2004) model, the degree of progressivity of
public education is exogenous—that is, determined outside the model. Andrea Ichino, Loukas Karabarbounis,
and Enrico Moretti (2011) develop a model in which
the degree of progressivity is the outcome of sociopolitical forces. In their model, public education is an
insurance system that increases the future income of
children without much innate talent at the expense
of the future income of children with high innate
talent. Public education thus increases mobility. But
currently rich dynasties prefer low mobility for their
descendants (as will be discussed in more detail in the
following section), so in countries where rich dynasties
are more politically active, spending on public education will be lower.

THE ROLE OF CHOICE
Inequality and immobility partially reflect deliberate choices related to the fact that people differ in their
tolerance for risk or in their willingness to defer gratification (what economists call “time discounting”). But
these differences cannot be directly observed. Instead, economists must make inferences based on actual
outcomes, such as occupational choice, savings, and consumption.
Risk tolerance has a large impact on occupational choice, and thus on income and wealth. Beginning with
Frank Knight’s Risk, Uncertainty, and Profit (1921) and continuing in modern work since Richard Kihlstrom and
Jean-Jacques Laffont (1979), economists have modeled entrepreneurs as less risk averse than other people
and therefore more likely to undertake high-risk/high-return enterprises. To the extent that people genuinely
vary in risk aversion, this model suggests that the rich and the poor disproportionately will be those with
high risk tolerance, while those in the middle will be more risk averse. This is consistent with data that show a
disproportionate number of self-employed people at both ends of the earnings and wealth spectrums. They
also figure more prominently among households in financial distress (Sullivan, Warren, and Westbrook 2000).
Additional evidence for the role of risk tolerance in personal economic outcomes comes from Sam SchulhoferWohl (2011), who finds that risk-tolerant workers tend to have jobs more exposed to economy-wide or “aggregate” risk. Movements in these workers’ incomes thus tend to be more volatile even when they have insured
themselves against individual-level, or “idiosyncratic,” risks, such as job loss or illness. As a result, volatility
in their consumption of goods and services is not necessarily evidence of poor insurance possibilities in the
marketplace. Indeed, Schulhofer-Wohl (2012) finds that after correcting for this bias, U.S. households do not
appear to be bearing any significant uninsurable risk. (A variety of other research, however, has found that
certain types of shocks, such as a long-term disability, are clearly not fully insured.)
Observed inequality also might reflect different preferences for consumption in the present versus the future.
Per Krusell and Anthony Smith (1998) show, for example, that a model that includes variation in “impatience,”
or the willingness of households to borrow against future earnings, successfully matches observed wealth
inequality in the U.S. population. Emily Lawrance (1991) and Marco Cagetti (2003) also find that data on
consumption and wealth suggest the presence of significant differences in preferences, especially in riskaversion and time discounting. They find that less-skilled and less-wealthy individuals generally are less
patient—meaning they place a higher value on current versus future consumption—than their more-skilled
and wealthier counterparts. More recently, Lutz Hendricks (2007) has measured the extent of differences in
households’ discount factor by noticing that households vary a great deal in their wealth even though they
have and can expect to have very similar lifetime incomes.
Taken as a whole, economists’ work suggests that many of the observed differences in the way households
make decisions can be understood as arising from differences in risk tolerance or time discounting. A caveat,
however, is that a variety of difficult-to-model environmental forces might play a large role in generating
these differences. In a society with low life expectancy or a high violent crime rate, for example, individuals
might not be “choosing” to be impatient so much as making a rational decision to value current over future
consumption. Likewise, not attending college might indicate an individual with a high discount factor who
chose not to invest in K-12 education—or it might indicate a person facing strong institutional barriers to
attending college. It is important to keep such environmental factors in mind when interpreting any model
that includes heterogeneity in preferences.

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In the United States, spending on public education
mostly begins with kindergarten. But children face
differences even before they begin school that may
determine their future success. Mazumder (2008) finds
that educational attainment alone is not enough to
explain different mobility rates among black and white
children. Black and white people who have completed
the same number of years of school still have different
intergenerational mobility rates, particularly at the level
of high school completion and below. Other research
also has found that educational attainment can explain
less than half of the intergenerational transmission of
earnings (Bowles, Gintis, and Groves 2008).
What this research implies is that human capital embodies more than the number of years spent in school. For
example, adolescents who score higher on the Armed
Forces Qualifying Test (AFQT) are more likely to move
out of the bottom income quintile, and differences in
AFQT scores can explain nearly all of the black/white
mobility gap (Mazumder 2008).13 These test scores,
however, capture much more than innate intelligence or
academic achievment; non-cognitive skills such as work
ethic, the ability to follow instructions, motivation, and
patience also are essential to success on such standardized tests (Bowles, Gintis, and Groves 2008; Heckman
2008). In fact, these non-cognitive skills may be just
as important as cognitive skills in determining future
success in the labor market. For example, the General
Educational Development (GED) credential is supposed
to demonstrate cognitive equivalence between people
who have graduated from high school and people who
have dropped out and taken the GED exam instead. But
GED holders have much poorer labor market outcomes
than high school graduates despite obtaining equivalent
knowledge. The reason, James Heckman and other
economists have concluded, is that many students
who earn a GED lack the non-cognitive skills that would
have enabled them to complete high school—the same
skills that would help them succeed in the labor market
(Heckman, Humphries, and Mader 2010).

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Recognizing the importance of non-cognitive skills
begs an important question: How do children acquire
these skills? A consensus now exists that the foundation is laid very early in life, even from infancy. Skill
development is hierarchical; the early mastery of
basic emotional, social, and other non-cognitive skills
makes it easier to learn more complex cognitive skills
throughout life. And children who fall behind early
have difficulty catching up. Gaps in cognitive skills
that are important for adult outcomes are present
as early as age 5 and tend to persist into adulthood
(Heckman 2008).
The data suggest that poor and minority children
are much more likely to fall behind. A recent report
from the Brookings Institution (Sawhill, Winship, and
Grannis 2012) examines the likelihood of achieving
certain social and economic milestones on the path
to the middle class, defined in the report as having
a family income at least 300 percent of the poverty
level, or about $70,000 for a married couple with two
children. Only 48 percent of children from families
in the bottom income quintile are ready for school
at age 5, compared to 78 percent of children from
families in the top quintile.14 There also is a large
disparity in early childhood outcomes according to
race. Sixty-eight percent of white children are ready
for school at age 5, versus only 56 percent of black
children and 61 percent of Hispanic children. The
gap between white and black widens throughout
the lifespan. By age 11, 73 percent of white children
versus 52 percent of black children have basic reading
and math skills. By age 29, only 33 percent of black
people have successfully transitioned to adulthood
(defined by the authors as living independently and
having either a college degree or a family income
at least 250 percent of the poverty level), while
68 percent of white people reach this milestone.
Hispanic people fare somewhat better; 66 percent
achieve the age-11 milestone, and 47 percent reach
the age-29 milestone.

Educational attainment alone is not
enough to explain different mobility
rates for black people and white people.

Challenges for Policymakers
What is the role for public policy, if any, in addressing
economic inequality and mobility? Answering this
question requires asking several others: What would
policy try to achieve, and in particular, whose wellbeing would it attempt to enhance? Would the goal
be to improve opportunities for current cohorts or for
future generations? Would policy treat individuals at
different moments in time as discrete units, irrespective
of their ancestors, or would it emphasize dynasties
by taking into account how family members invest
in descendants?
From a policymaker’s point of view, mobility might
be inadequate as a measure of what a good society
should provide its members. First of all, there is a
tradeoff between mobility and predictability. Recall
the imaginary world resembling a caste system
described earlier. This setting is utterly immobile
and risky for each dynasty’s first member. But it is

perfectly safe for the members of each successive
generation since income is completely stable. In fact,
for a person whose ancestor flipped the $100,000 coin,
this world is not only safe, but also quite comfortable.
On the macro level, it is possible that the costs of
large fluctuations and risky income patterns outweigh
the benefits of high mobility and reduced inequality.
Peter Gottschalk and Enrico Spolaore (2002) study
a model in which there are large welfare gains from
greater mobility if aversion to inequality is the only
consideration. But if aversion to income fluctuations
is considered, those gains disappear. Of course, this
might not be of great consolation to a person whose
ancestor flipped the $1,000 coin.
In addition, a world in which mobility is high is one
where parents are of little consequence, despite
their desire or ability to position their children and
grandchildren for future success. Few parents would
want to live in a world where their investments in their

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Shocks to earnings, such as job losses,
are essential to explaining earnings
dispersion in the economy.

children have no influence beyond their lifetimes. The
flip side is that descendants of people who were not
altruistic or who made poor decisions would not be
as constrained by their ancestors’ actions.
Viewed in this light, what most people might agree on
is trying to promote individual productivity while limiting downward mobility. Broadly speaking, the former
goal involves ensuring preparedness at labor market
entry, while the latter involves insuring households
against low innate abilities, poor health, or job loss.
Knowing the extent to which these forces matter is
crucial for policy interventions to be effective. For
example, if workers were similarly prepared at the
time of entry into the labor market, and shocks in
working life were important, the question would be
how, if at all, to better insure workers, and not how to
alter educational investment decisions. Conversely,
if preparedness differed and shocks during working
life were unimportant, further insuring workers would

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yield little benefit. Instead, changes to the educational
system would be more effective.
Both factors are important, according to a recent line
of work exemplified by Mark Huggett, Gustavo Ventura,
and Amir Yaron (2011). They find that about 60 percent
of the observed disparity in lifetime earnings is due to
individual differences that exist before people enter
the labor market, and the remainder is due to shocks
that buffet them as they work, such as job losses. Their
research stresses that the observed evolution of earnings inequality over lifetimes is consistent with a simple
setting in which all workers accumulate skills through
experience and effort, but do so at substantially different rates that reflect their initial “learning” ability.
At the same time, their estimates clearly indicate that
a substantial portion of inequality is generated during
working life. This suggests that shocks to earnings are
essential to a successful theory of earnings dispersion
in the economy.

A critical point here is that the disparity in learning
ability likely arises not only from differences in innate
ability, but also from forces such as the quality of K-12
education and parental and cultural influences. These
forces are very different for children from poor versus
rich families—a dynamic that is magnified by a labor
market that demands increasing levels of skill.

Investing in Human Capital
For most people—all but a lucky few—labor is what
they can sell to generate income. They can increase
the value of their labor by acquiring greater skills, but
the value of their labor is only partially under their
control. It also depends on the supply and demand
for their skills in the marketplace.
The industrial revolution, for example, created factories
that made workers more productive and more valuable
without substantially increasing their skills. But the
information revolution has created a marketplace that
rewards personally acquired skills, such as computer
programming or mathematical analysis. In this new
environment, an individual’s innate ability and early
life education become critical because they largely
determine the levels of skills each person can develop
to “rent” to the marketplace.
Given the large earnings gap between workers with
and without college degrees, many policies aim to
increase college access, for example by increasing
federal subsidies for student loans. But it’s not clear
that college is the best focus for policymakers. The
observed disparity between high school and college
graduates applies to students who have graduated
from college already; those students who have not
yet enrolled might not necessarily receive the same
benefit, perhaps because they are not as well prepared.
For example, Lutz Hendricks and Oksana Leukhina
(2012) find in preliminary work that about 70 percent
of the lifetime earnings gap between high school and

college graduates results from ability selection rather
than from attaining the college degree per se. In other
words, the college graduates were likely to be better
earners even before entering college.
Intervening well before college could yield much higher
returns. As noted above, the skills learned early in life
prepare children to obtain more complex skills later in
life. Heckman and many other researchers have found
that the return on a dollar invested in human capital is
highest when the investment occurs at age 3, and that
children who receive high quality early education fare
much better on a variety of socioeconomic measures
(Heckman 2008).
The most cost-effective policy for increasing equality of
opportunity is thus likely to be one that shifts funding
away from universal college subsidies and toward early
childhood interventions. Elizabeth Caucutt and Krishna
Kumar (2003) find that a large increase in college subsidies with the goal of reducing the “enrollment gap”
leads to very inefficient use of education resources, with
little or no welfare gain, because more poorly prepared
students enroll and the dropout rate increases. In a model
of human capital transmission in which parents invest in
their children, Diego Restuccia and Carlos Urrutia (2004)
find that subsidies for investment in early education
are much more effective at mitigating persistence in
earnings than subsidies for college.
Investments in early childhood education can be viewed
as a form of insurance against the risk of being born
to poor parents, among other things. And while the
public provision of such insurance could yield a big
“bang for the buck” by enabling current generations
to invest more in the education of future generations,
one must also acknowledge the potential for moral
hazard. A public system that equalizes the educational
opportunities (or far more ambitiously, the home environments) of poor and rich children could reduce the
incentives of all parents to invest in children.15

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Greater public investment in early childhood education
cannot replace the advantages that some parents are
able to bestow upon their children, nor can it guarantee that all children will grow up to be prosperous.
But such investments could give more children the
necessary foundation for future acquisition of skills,
and ensure that large amounts of human capital are
not foregone simply because many children are born
to poor families. This foregone human capital is a loss
not only for the child, but also for society as a whole.
According to an influential line of research, long-run
economic growth depends on the amount of human
capital in a society.16 Unlike physical capital, which
exhibits decreasing returns to scale, human capital
might well exhibit increasing returns. Knowledge
leads to new ideas and new technologies, which lead
to higher productivity, thus raising per capita income
and living standards for society as a whole.
As this essay has discussed, economic inequality has
increased significantly in the United States in recent
years. At the same time, data suggest that economic
mobility also has decreased, particularly for those born
at the top and the bottom of the income distribution.
Many factors contribute to the attainment and persistence of economic status, including innate ability,
preferences for present versus future rewards, aversion

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to risk, and quite a bit of luck. But for nearly all people,
advancement depends critically on opportunities to
obtain human capital—and those opportunities are not
the same for children born to poor versus rich families. Policies that aim to equalize these opportunities,
particularly very early in life, appear to yield a very
high return on investment, although much remains to
be learned about the feasibility of implementing such
interventions on a large scale. Nonetheless, such efforts
have the potential to help the United States achieve a
more inclusive prosperity. n

Kartik Athreya is the group vice president for microeconomics and research communications, and Jessie Romero
is an economics writer in the Research Department at the
Federal Reserve Bank of Richmond. The authors would
like to thank Huberto Ennis, Arantxa Jarque, Marianna
Kudlyak, Karl Rhodes, and Aaron Steelman for valuable
discussions and insights.
The views expressed are those of the authors and not
necessarily those of the Federal Reserve Bank of Richmond
or the Federal Reserve System.

E ndnotes

1.	 Economists also study consumption inequality, or
differences in the amounts of goods and services
that households purchase. Consumption inequality might differ from income inequality because
of savings, taxes, or in-kind benefits such as food
stamps. Some recent research suggests consumption
inequality is much less pronounced than income
inequality (e.g., Meyer and Sullivan [2013]), although
other research finds that the trends in income and
consumption inequality are very similar (e.g., Aguiar
and Bils [2011]).
2.	 The CBO defines after-tax income as market income
(labor income, business income, capital gains,
capital income, and other income) plus government transfers (such as Social Security payments,
unemployment benefits, or in-kind transfers such
as food stamps) minus taxes paid.
3.	 Data are from the supplemental data tables posted
at www.cbo.gov/publication/43373.
4.	 In Piketty and Saez (2003), the unit of analysis is
a tax unit, defined as two married people living
together (with or without dependents) or a single
adult (with or without dependents). Their income
measure excludes capital gains.
5.	 Updated data are available at elsa.berkeley.edu/~saez/
TabFig2011prel.xls.
6.	 For example, see Easterlin (2000).
7.	 Isaacs (2008) finds similar differences in black and
white mobility.

9.	 Because the flow of immigrants from Mexico has
been substantially greater than the flow from developed countries, the average wage of first-generation
immigrants is still lower than the average wage of
their native-born peers.
10.	 Immigrant mobility matters not only for the prospects of the immigrants themselves, but also for
measured inequality in society as a whole. Imagine a
room in which everyone is six feet tall. If a group of
shorter people enter the room, measured inequality
in height will increase. In the context of immigration,
the arrival of a group with wealth, skills, or education significantly different from those of natives can
mechanically increase inequality at a point in time.
11.	 See, for example, Pritchett (2006).
12.	 For a thorough treatment, see Mulligan (1997).
13.	 The AFQT is administered by the military to determine qualification for enlistment. AFQT scores
have been widely used by economists as a measure
of pre-labor market skills.
14.	 The authors define “school-ready” as having acceptable pre-reading and math skills and behavior that
is generally school-appropriate.
15.	 See Chang and Kim (2012) and Seshadri and Yuki
(2004) for more on the “price of egalitarianism.”
16.	 Influential papers on “endogenous growth theory”
include Romer (1986) and Lucas (1988).

8.	 The number includes undocumented immigrants.
Since the 2007–09 recession, net migration from
Mexico has fallen to virtually zero. Between 2007
and 2011, the number of undocumented Mexican
immigrants in the United States declined by about 1
million (Passel, Cohn, and Gonzalez-Barrera 2012).

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“Consumption and Income Inequality in the U.S. since
the 1960s.” Paper presented at the Allied Social Science
Associations Annual Meeting, San Diego.
Mulligan, Casey B. 1997. Parental Priorities and Economic
Inequality. Chicago: University of Chicago Press.
Passel, Jeffrey, D’Vera Cohn, and Ana Gonzalez-Barrera.
April 2012. “Net Migration from Mexico Falls to Zero—and
Perhaps Less.” Pew Research Hispanic Center.
Piketty, Thomas, and Emmanuel Saez. February 2003.
“Income Inequality in the United States, 1913–1998.”
Quarterly Journal of Economics 118 (1): 1–39.

Schulhofer-Wohl, Sam. October 2011. “Heterogeneity and
Tests of Risk Sharing.” Journal of Political Economy 119
(5): 925–958.
Seshadri, Ananth, and Kazuhiro Yuki. October 2004. “Equity
and Efficiency Effects of Redistributive Policies.” Journal
of Monetary Economics 51 (7): 1415–1447.
Shorrocks, Anthony. December 1978. “Income Inequality
and Income Mobility.” Journal of Economic Theory 19 (2):
376–393.
Solon, Gary. 2004. “A Model of Intergenerational Mobility
Variation over Time and Place.” In Generational Income
Mobility in North American and Europe, edited by Miles Corak,
38–47. Cambridge, England: Cambridge University Press.
Stokey, Nancy L. 1996. “Shirtsleeves to Shirtsleeves: The
Economics of Social Mobility.” In Frontiers of Research in
Economic Theory: The Nancy L. Schwartz Memorial Lectures,
1983-1997, edited by Donald P. Jacobs, Ehud Kalai and
Morton I. Kamien, 210–241. Cambridge, England:
Cambridge University Press.
Sullivan, Teresa A., Elizabeth Warren, and Jay Lawrence
Westbrook. 2000. The Fragile Middle Class: Americans in
Debt. New Haven and London: Yale University Press.

Pritchett, Lant. 2006. Let Their People Come: Breaking the
Gridlock on Global Labor Mobility. Washington, D.C.: Center
for Global Development.

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MESSAGE FROM MANAGEMENT

Striking a Balance

T

he federal government deficit is a complex topic that has received a
tremendous amount of public discussion in the past year. Generally, the
cost of operating government organizations adds to the size of the deficit. In
contrast, the Federal Reserve System funded its own operations and provided
net payments of approximately $88.4 billion to the United States Treasury in
2012. The Fed’s income derives largely from interest on securities held as assets
on its balance sheet. Regardless of the amount of income earned, the System’s
officers and staff understand the importance of accomplishing our mission in
the most effective and efficient manner so we can return the maximum amount
of earnings to the Treasury each year.

Sarah G. Green
First Vice President and
Chief Operating Officer

As a regional Reserve Bank, the Richmond Fed’s mission is to serve the public by
fostering the stability, integrity, and efficiency of our nation’s monetary, financial,
and payments systems. We accomplish this mission by conducting monetary
policy, by supervising and regulating financial institutions, and by providing
payments services to financial institutions and serving as fiscal agent for the
Treasury. Effective performance of these roles supports economic growth in
the United States, and economic growth also helps reduce the deficit.
In 2012, our economists contributed research related to issues such as why the
unemployment rate has not fallen as quickly as in some previous economic
recoveries. This research helps us understand the extent to which persistently
high unemployment reflects a mismatch between skills available in the labor
force and skills needed by employers. This informs both monetary policy discussions and workforce development initiatives—efforts that are important to local,
regional, and national growth.
Another area of policy focus is “Too Big to Fail.” The Bank’s economists have
estimated the so-called “financial safety net,” which is the extent to which there
is implicit or explicit government willingness to intervene when an institution
is near failure. These estimates suggest that the federal financial safety net
covered 45 percent of the entire financial sector at the end of 1999. By 2011,
it had grown to as much as 57 percent. A large safety net creates potential

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incentives for financial institutions to take imprudent risks. The Bank has been actively involved in
research and discussions about ways to resolve
large institutions when they are near failure, along
with implementing supervisory policies to mitigate
the risk of failure. Stress tests of the largest financial
institutions performed in 2012 show that they are
now much better prepared than in 2007 to withstand
a shock to the financial system. Also, each of the
largest institutions has drafted a “living will,” or a
strategy for winding down its operations in the event
of financial failure without government assistance.
The Fifth District still has a number of community
and regional financial institutions that are in weak
condition, but during 2012, that number stabilized
and began to improve. To ensure the most effective
and efficient supervision of these institutions, we
undertook a rigorous review of this function. As a
result of that review, we are restructuring to add
field staff and to improve the quality of the exams
and the feedback to the community banks while
maintaining level costs.
Reserve Banks are responsible for providing currency
to financial institutions that in turn provide currency
to consumers and businesses. The Richmond Fed
operates the national Currency Technology Office,
which develops the currency-processing equipment
used at the 28 cash-processing sites throughout
the Federal Reserve System. Over the past several
years, this office rolled out an equipment upgrade
that resulted in productivity gains of 20 percent,
with estimated savings of $26.8 million from 2009
through 2012. To keep ahead of counterfeiters, we
worked with outside vendors to develop new sensors
that enable our machines to process 40 notes per
second while making approximately 50 decisions
about the authenticity and fitness of each note.

As fiscal agent for the Treasury in 2012, the Richmond
Fed transferred $590 billion in grant payments,
another $123 trillion in intergovernmental payments, and more than $75 billion in food stamp and
related payments. We are constantly seeking quality
improvements and cost savings in these operations.
On an average day, the Federal Reserve System
processes more than $4 trillion in Fedwire funds
and securities, Automated Clearinghouse (e.g.,
direct deposit) payments, and check payments. The
12 Reserve Banks have worked together to build
contingency processes that ensure the integrity
and resiliency of these services. During Hurricane
Sandy, for example, the Richmond Fed performed
critical back-up services for Fedwire funds transfers
and several other key payments functions. The Bank
also processed $92 million in emergency benefits
on smart cards to individuals in New York and New
Jersey who were affected by the storm.
Our quest to strike the best possible balance between
providing high-quality and cost-effective services
to financial institutions, the public, and the Treasury
is embraced on a daily basis by our officers and
staff. In 2012, we lived by our values to serve with
integrity, to lead with courage, and to perform with
excellence. Serving the public is both a responsibility
and a privilege, and we thank you for trusting us to
perform this service on your behalf.

Sarah G. Green
First Vice President and Chief Operating Officer

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FED SPOTLIGHT

Regional Information and
Analysis Inform Monetary Policy

T

he Federal Reserve Bank of Richmond gathers
economic information from all corners of the
Fifth District, which includes Maryland, Virginia, North
Carolina, South Carolina, Washington, D.C., and most
of West Virginia. The Bank is based in Richmond with
branch offices in Charlotte and Baltimore.
The Richmond Fed collects statistical and anecdotal
information through surveys and telephone interviews
as well as face-to-face discussions with people in board
meetings, industry roundtables, regional forums, formal presentations, and community events. Anecdotal
information sometimes confirms trends that the Bank’s
economists already have identified in economic data.
Other times, anecdotal information indicates trends
that have not been captured statistically. Either way,
successful monetary policy depends on analyzing hard
data and interpreting soft signals.
The best way to collect anecdotal information is to
go to the source—people throughout the District’s
economy—from industry representatives and smallbusiness owners to bankers, community leaders, and
workers. Eight times a year, in preparation for meetings of the Federal Open Market Committee (FOMC),
Richmond Fed President Jeffrey Lacker and his policy
advisors review this qualitative information along with
the quantitative data. The qualitative information then
flows, directly and indirectly, into policy discussions at
the FOMC, where committee members determine the
best course of action regarding the availability and cost
of money and credit—monetary policy—to promote longterm economic growth and price stability. Lacker was a
voting member of the FOMC in 2012, and he continues
to participate fully in the committee’s deliberations.

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How’s Business?
Wherever he goes, Lacker frequently asks this question.
In October 2008, for example, he was attending the
Richmond Folk Festival when he saw an acquaintance
who owns a furniture store.
“How’s business?” Lacker asked.
“Awful!” the store owner replied.
It was the week after Lehman Brothers failed. Customers
had vanished, even though store traffic had been strong
the previous weekend.
“We had seen a little data,” Lacker recalls, “but that
was the first serious inkling I had of the astounding
shock to consumer outlook that was caused by the
financial turmoil.”
This type of conversation helps clarify cause and effect.
“Otherwise, you see the data and you’re not sure why
consumers are cutting back,” Lacker says.
More recently, in April and May of 2012, the economy
slowed, but economists were not sure why. A member
of the Bank’s Charlotte Board reported that, although
he had ideas for new projects, he could not make the
math work. The director was particularly worried about
future tax rates and wage rates. At the time, the notion
that widespread uncertainty was restricting economic
growth was controversial. Since then, that idea has
become generally accepted. The board member helped
shape Lacker’s reasoning about how monetary policy
might—or might not—stimulate growth.
“You just don’t get the sense that reducing the rate
he (the board member) would have to pay on a bank

photo: jim strader

From the left: President Jeffrey
Lacker, First Vice President Sally
Green, and Assistant Vice President
Steve Malone learn about bucket
truck assembly from Brian Price,
facilities manager at Altec Industries’
plant in Daleville, Va.

loan would make a lot of difference,” Lacker says. “That
tells me there’s a good chance that the cure is beyond
monetary policy.”
The Bank’s oversight boards and advisory councils are
excellent sources of economic intelligence. Nine directors oversee the management of the Richmond Fed,
six elected by member banks and three appointed by
the Federal Reserve Board of Governors. The Bank’s
branch offices each have boards with seven members,
four appointed by the Richmond Board and three
appointed by the Board of Governors. The composition
of the boards reflects the District’s economic diversity. Members come from banking, housing, finance,
manufacturing, and health care, among other sectors.
Geographic diversity is important, as well, because
members bring economic news from their regions.
The Richmond Fed also listens carefully to its three
advisory councils. The Community Investment Council
brings to light emerging issues affecting low- and
moderate-income people in urban and rural areas.
The Community Depository Institutions Advisory
Council (CDIAC) provides information about lending
and other concerns. The CDIAC is mandated by the
Board of Governors to gather information about depository institutions with less than $10 billion in assets.
Representatives from each Reserve Bank’s CDIAC
form a council at the Board of Governors, which means
the group has the ear of Federal Reserve Chairman
Ben Bernanke. A third board, the Payments Advisory
Council, helps the Bank understand and respond to
the needs of its banking constituency.

The boards and councils often identify major economic
trends. For instance, Lacker notes that he first heard
about subprime lending problems years ago through
the Community Investment Council. The boards and
councils also helped confirm a geographic mismatch
in the workforce.
“We hear about this puzzle: that people who have a
hard time finding jobs don’t seem to be willing to move,”
Lacker says. “It’s striking. It gives you a vivid sense of
what’s behind the huge disparity in unemployment
rates across our District.”
In addition to input from board members, the Bank’s
regional economists regularly canvass business people
in all parts of the District, sometimes by telephone
or email. Individual responses are confidential, but
the Bank synthesizes this anecdotal information for
publication eight times a year—before each FOMC
meeting—in the Federal Reserve’s Beige Book.

Been There. Heard That.
Large quantities of economic information flow into the
Richmond Fed, but to really take the Fifth District’s
economic pulse, the Bank’s leaders and economists
must travel extensively.
Twice a year, for example, Lacker and First Vice President
Sally Green lead groups to regions within the District to
gain first-hand knowledge of local economies. In 2012,
these delegations visited the Roanoke, Va., metropolitan
area, and the Triad Region of North Carolina, which
includes Greensboro, Winston-Salem, and High Point.

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“We pick a particular region and learn as much as we
can about it before we go,” says Steve Malone, assistant
vice president for external affairs. The delegations gain
even deeper insights, however, by meeting with different people in the region, including business executives,
education officials, community leaders, students, workers,
and government representatives.
The delegations also visit factories, schools, and other
organizations to see what drives each local economy. The
three-day trip to the Triad Region, for example, included
a tour of furniture showrooms and a roundtable discussion about the furniture industry. Panelists discussed
how the recession had affected their companies and
how business had begun to improve. The delegation also
met with students in several Guilford County Technical
Center programs and at the Joint School of Nanoscience
and Nanoengineering, a collaborative venture between
North Carolina A&T State University and the University
of North Carolina at Greensboro. During a similar trip
to Roanoke, Va., the group convened a small-business
roundtable and toured Altec Industries, a company that
provides products and services to utilities and telecommunication companies.
In addition to these regional events, the Richmond Fed
held bankers’ forums in Maryland, West Virginia, and
Virginia, plus one for credit unions in Maryland. Malone
and his team also visited 73 banks and credit unions
and 10 trade associations. His group summarized what
they learned from these visits in reports that are part
of the pre-FOMC information that goes to Lacker and
his policy advisors. These reports include information
on loan demand. Currently, demand is tepid, but if
loan demand quickly gathered steam, given the high
level of reserves in the banking system, lending could
expand quickly. “That would be a red flag,” Lacker says.
“It would indicate we need to pay attention and think
about whether we need to contract the reserve supply to make sure we don’t get inflation pressures. So
far, we haven’t seen that, but we keep our eyes on it.”

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The Bank also reaches out to communities by working
with public and private partners on issues affecting lowand moderate-income people. The Bank’s Community
Development Division supports and organizes workshops and forums with community partners to address
important community and economic development
issues. The meetings also expose Bank officials to
diverse points of view on local economic conditions
throughout the Fifth District.
The Bank’s community development specialists also
work with colleagues across the Federal Reserve
System on significant economic development issues.
In 2012, for example, the Richmond Fed led a systemwide initiative, with the Atlanta and Kansas City
Feds, to study the problem of persistent unemployment. The Richmond Fed held several roundtables
on the topic throughout the Fifth District, bringing
together workforce representatives and employers
from different industries. These roundtables were
replicated by other Reserve Banks in their districts,
and the effort culminated this year in a national
conference at the Kansas City Fed and a policy briefing at the Federal Reserve Board of Governors. The
initiative revealed anecdotal evidence of a broken
labor-supply chain. In other words, what people
were studying in school and their desire to go to
college versus pursuing more technical training did
not match up well with existing jobs in some areas.
Roundtable participants also discussed other barriers to employment, such as transportation, drug
testing, and felony convictions.
The Regional View
The Regional Economics Division of the Bank’s Research
Department compiles a wide variety of data. The division’s surveys of manufacturing activity, service sector
activity, and agricultural credit conditions cover these
topics for the entire Fifth District. The regional group
also produces state-specific reports of overall business
activity in Maryland and the Carolinas.

photo: tamzin b. smith

Vice President Ann Macheras regularly shares her division’s
regional information and analysis at pre-FOMC meetings and
other gatherings of the Bank’s monetary policy advisors.

These surveys provide real-time information about
economic conditions and business expectations for the
next six months. Results are included in the regional
memo that informs Lacker and his policy advisors as
they discuss Fifth District conditions prior to FOMC
meetings. Survey results also are available to the public
at richmondfed.org/research/regional_economy/.
In addition to conducting surveys, regional economists
frequently visit communities throughout the District.
They absorb information at industry roundtables, the
Bank’s regional forums, workshops on special topics,
and economists’ presentations.
In 2012, the Regional Economics Division hosted regular
industry roundtables in Richmond, Charlotte, Baltimore,
Charleston W.Va., and Charleston, S.C., a total of 15
events. Three of these roundtables focused exclusively
on retailing, but the others included representatives
from sectors such as manufacturing, trade, real estate,
tourism, information technology, and health care.
These gatherings gave the Richmond Fed a closer
look at medium-run trends by providing a confidential forum where participants can freely discuss the
state of their industries. At an industry roundtable in
Baltimore, several members noted that their federal
contracts had shrunk. “This was at least a full year before
people were really focusing on it,” says Ann Macheras,
vice president of the Regional Economics Division.
Roundtable participants also discussed input price

spikes and clogged supply lines after the tsunami in
Japan. One textile company was unable to get a unique
blue dye that is made only in Japan. “We bring back
early signs of how these events affect our industries.
And since we meet with our contacts regularly, we
can monitor these developments over time and ask
follow-up questions,” Macheras says.
In 2012, the Regional Economics Division invited all the
Bank’s industry roundtable participants and all the Bank’s
advisory council members to a one-day conference on
the District’s economy. At other events, the division
focuses attention on special topics. In 2012, for example,
the division highlighted energy by bringing representatives and suppliers of coal and natural gas companies
together with executives of electric utilities and university
professors who study energy-related issues.
The regional economists also make presentations to a
wide array of groups throughout the District. At first
glance, these events may appear to be more about disseminating information than gathering information, but
the economists gain insight from audience participation
and the informal discussions that follow. In 2012, the
regional economists participated in roughly 196 events
including presentations, workshops, conferences, and
summits. “Almost anytime we are out of the Bank, we
are soaking up information,” Macheras says. The regional
economists aggregate this anecdotal information into
a “sentiment matrix” that accompanies the report they
produce for pre-FOMC discussions.
Informally gathered comments don’t provide definitive
evidence of trends, but observations from a diverse
array of sources add important perspective to monetary
policy deliberations. “We find out stuff that’s not going
to show in the data,” Lacker says. “The data don’t tell
you what people are expecting. Do they think things
are going to be great? Or do they think things are
going to continue to be flat?” n

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FIF TH DISTRICT ECONOMIC REPORT

Labor Markets and Residential Real
Estate Began Slow Recoveries in 2012

O

nce again in 2012, the Fifth District economy grew
slowly and inconsistently. The year started out well,
but conditions slumped in the summer months before
picking up again toward the end of the year. The most
promising news came in residential real estate, which
began a slow but steady recovery in the District and
the nation. In addition, although activity among area
businesses was volatile, by the end of the year most
industries had strengthened overall.
Labor Markets
Fifth District labor markets expanded in 2012, growing
1.5 percent with the addition of 209,600 net new jobs.
Employment growth exceeded that of 2011 (1.2 percent)
and 2010 (1.3 percent). Net hiring activity was promising
at the beginning of the year, but then flattened in the
spring and declined some during the summer before
picking up again in the fall. In fact, the overall job expansion fluctuated over months, across states, and among
industries. The summer slump in the District contrasted
somewhat with U.S. employment activity, which
improved more steadily over the year. Employment in
the United States grew 1.7 percent during 2012.
Among Fifth District jurisdictions, employment trends
in Maryland and South Carolina most closely resembled
the District’s overall employment performance. North
Carolina posted the strongest growth in 2012, with
employment increasing 2.3 percent. The Tarheel State’s
steady employment growth enabled it to contribute
more than 40 percent of net jobs gained in the District.
Virginia also experienced relatively steady job growth
throughout 2012. The worst performance in the District
was in West Virginia. Economic indicators are often
more volatile in West Virginia than in other District

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states, but 2012 was a troubling year for labor markets
in the Mountaineer State, which in previous years
seemed to weather the economic downturn better than
other states. Firms in West Virginia added only 1,400
jobs in 2012, with the worst performances in mining
and logging (a loss of 2,700 jobs) and manufacturing
(a loss of 1,200 jobs). There were reports throughout
the year of challenges in the coal mining industry due,
at least in part, to low natural gas prices and federal
regulatory policy.
The government sector struggled in the Fifth District
during 2012, adding only 13,700 jobs (0.5 percent),
while the private sector added more than 220,000
jobs. In fact, only two private sector industries performed worse than the government sector—mining,
logging, and construction lost more than 10,500 jobs,
and information services shed 6,000 jobs. Of the
10,500 jobs lost in mining, logging, and construction,
West Virginia mining layoffs accounted for 2,700 lost
jobs, but that was not the whole story. Construction
companies in North Carolina and Virginia together lost
(on net) more than 10,000 jobs in 2012. These losses
ran counter to national trends—U.S. construction
employment increased 1.8 percent, while mining and
logging employment expanded 3.2 percent. In fact,
the national construction industry posted consistent
year-over-year growth every month since May 2011, and
the mining and logging industry posted consistently
positive year-over-year growth since April 2010.
In the Fifth District, almost 75 percent of the net job
gain in 2012 was in professional and business services, education and health services, and leisure and
hospitality. More broadly, service-providing industries

FIGURE 1: Employment Growth by Sector
December 2011–December 2012

Total

1.5

Mining, Logging, and Construction

1.7

United States

-1.5

Manufacturing

1.2

0.7

Trade, Transportation, and Utilities

2.0

1.4

Information Services

Fifth District

2.2

-0.4

-2.5

1.4

Financial Activities

2.0

Professional and Business Services

3.0

2.1
2.2

Education and Health Services

3.0
3.0

Leisure and Hospitality
-0.2

Government

0.5

Other

1.0

-3

-2

-1

3.9

0

1

1.2

2

3

4

Percent Change
Sources: Bureau of Labor Statistics, Haver Analytics

accounted for almost all of the gain in 2012, with many
employment agencies reporting particularly strong
demand for skilled information technology professionals throughout the year. There were also numerous
reports in the District of manufacturers being unable
to fill vacancies for skilled positions.
News from the household employment survey was
also encouraging, but not overwhelmingly so. The
unemployment rate in the District dropped from 8.1
percent to 7.6 percent in 2012, while the labor force
increased 1.0 percent. This performance was similar to
the U.S. unemployment rate, which decreased from 8.5
percent to 7.8 percent while the national labor force
expanded 1.0 percent.

Real Estate
A bright spot in the Fifth District economy came from
the slow but steady housing market recovery that
started in 2012.
According to the CoreLogic Information Solutions house
price index, home values in the District appreciated 4.7
percent in 2012, with year-over-year prices rising for
10 straight months—the first time that has happened
since 2007. This trend was true throughout the District;
by May, every state and the District of Columbia had
begun to experience year-over-year appreciation in
house prices that lasted through the year. In December,
every state and D.C. posted the strongest year-overyear house price growth since 2006.

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FIGURE 2: Change in U.S. House Prices by State
Change December 2011 to by State
Percent Change fromin U.S. House PricesDecember 2012

Percent Change from December 2011 to December 2012
8.8 – 20.2

6.7 – 8.7

4.5 – 6.6

3.5 – 4.4

0.1 – 3.4

-3.4 – 0.0

Sources: CoreLogic Information Solutions, Federal Reserve Bank of Richmond

The inventory of distressed home loans in the District
also shrank in 2012. The inventory of loans in foreclosure fell from 3.2 percent in the second quarter to 2.7
percent in the fourth quarter, even with documented
increases in the length of time that a mortgage spends
in foreclosure in most District states. It is also promising that only 0.65 percent of mortgages in the District
entered foreclosure in the fourth quarter, which was
the lowest foreclosure start rate in the District since the
fourth quarter of 2007. The share of mortgages with
payments more than 90 days past due declined from
3.2 percent in the fourth quarter of 2011 to 2.8 percent
in the third quarter of 2012. Unfortunately, the metric
edged up to 3.0 percent in the fourth quarter, which
was one of only two increases in that rate since the
end of 2009. These trends in delinquent mortgages

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2012 ANNUAL REPORT

were generally consistent, with most District states
posting drops in foreclosure starts, particularly in the
last two quarters of the year, and all states posting
declines in the 90-day delinquency rate until the
fourth quarter.
Throughout the year, there were increasing numbers
of anecdotes about lower inventory of new and existing homes, reduced days on market, increased traffic
and sales, and fewer foreclosures and short sales. The
reports were not consistent across every locality, and
every report was prefaced with observations that
housing activity was still sluggish from a historical
perspective, but the positive feeling emanating from
residential real estate professionals was widespread,
particularly toward the middle and end of 2012. The

photo: virginia port authority

Boosted by automotive imports
and exports, port activity in
the Fifth District was generally
strong throughout the year.

one exception was in construction, where positive
reports were slightly less prevalent. However, even in
residential construction, there were reports of activity
in areas that had not seen home building for several
years, and there were few, if any, reports of further
declines in residential construction.
Commercial real estate trends were not as clearly
upbeat as residential activity. By the end of the year,
the number of reports indicating improved conditions had increased, but reports continued to vary
by locality and by type of real estate. Absorption
and vacancy rates seemed to improve generally,
although vacancy rates remained elevated in many
areas. Government-related projects slowed throughout
the year, but private sector projects edged forward.
Retail leasing activity also seemed to be relatively
weak throughout the year.
Business Conditions
On the whole, business activity generally improved
in 2012, but progress varied over months and across
industries. Manufacturing output, like the rest of the
economy, expanded moderately in the early months of

the year, weakened a bit in the summer months, and
picked up again toward the end of the year. Compared
to other goods, auto parts manufacturing generated
the strongest reports, with conditions either improving beyond expectations or at least remaining flat
when demand for other products was declining. Many
manufacturers that reported weakening conditions
cited decreased government spending—including
defense spending—and economic problems in Europe
as reasons for the softening.
The Federal Reserve Bank of Richmond maintains a
composite manufacturing index based on the Bank’s
Fifth District Survey of Manufacturing Activity—available at richmondfed.org/research/regional_economy/.
The index is a diffusion index in which a positive reading
indicates that the number of firms reporting expansion exceeds the number reporting contraction. The
index hovered close to zero for much of the year, but
it was positive for more months than it was negative.
Despite the troubles in Europe, Fifth District port activity was generally strong, with exports outperforming
imports throughout the year. Autos and automotive

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2012 ANNUAL REPORT

parts boosted both imports and exports. Although
rising fuel prices often were cited as a challenge, most
port contacts maintained positive outlooks throughout
the year.
Overall, service sector firms in the District reported
generally improving conditions throughout 2012,
although the Federal Reserve Bank of Richmond service sector indexes—particularly the retail revenues
index—continued to be volatile. To view these indexes,
visit richmondfed.org/research/regional_economy/.
Banking Markets
In 2012, banks in the nation and the Fifth District
continued to face a challenging environment that
included distressed international markets, slow economic recovery, a low-rate environment, and elevated
reputational and operational risks. Despite these challenges, banking conditions showed signs of stabilization
with improved credit quality that allowed for reduced
loan-loss provisioning and increased earnings.
Balance sheets expanded modestly, driven by loan
growth, which moved into positive territory for the
first time since 2010. The median commercial bank
in the District posted annual loan growth of 0.48
percent compared to a post-recession low of -3.07
percent during 2011. Meanwhile, loan losses improved
by 42 basis points, warranting continued declines in
provisioning. This, in turn, helped generate a modest
increase in earnings, with a median return on average
assets of 0.57 percent for commercial banks in the
District. In fact, the share of unprofitable institutions
in the District fell from 25 percent to 16 percent during
the year. Despite this improvement, however, earnings performance still remained depressed relative to
historical trends, down 50 percent from prerecession
levels in large part due to low interest rates compressing net interest margins.

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Prolonged low interest rates put pressure on earnings,
but they had a positive effect on liquidity positions at
commercial banks. These higher liquidity ratios could
decrease when interest rates eventually rise. Aggregate
deposits at commercial banks in the District grew almost
$196 million (or 12.3 percent) from the beginning of the
recession, with the bulk of the growth centered on nonmaturity deposits. This flow of non-maturity deposits
into the banking system led to elevated core funding
ratios and reduced non-core funding dependency.
As in previous years since the recession, capital recovery in 2012 was mainly reliant on deleveraging the
asset side of the balance sheet. Overall capital levels
improved despite a slight downturn in the fourth quarter. Commercial banks ended the year with tier-one
leverage ratios at prerecession levels and risk-based
capital at levels not seen since the late 1990s.
The Bottom Line
Once again, economic growth in the Fifth District
was positive but somewhat disappointing. Given the
heavy federal government presence in the District—
especially the high concentrations of military spending—concerns about the effects of sequestration and
government budget cuts loomed large in 2012 and
continued to create concern in 2013. Even so, Fifth
District labor markets expanded for the second consecutive year, and residential real estate recorded its
best and most consistent performance since 2006.
In general, the outlook for most District industries
improved during 2012. n

BOARDS OF DIRECTORS, ADVISORY COUNCILS, AND OFFICERS

Federal Reserve Bank of Richmond Board of Directors . . . . . . . . . . . . . 	37
Baltimore Branch Board of Directors. . . . . . . . . . . . . . . . . . . . . . . . . 	38
Charlotte Branch Board of Directors. . . . . . . . . . . . . . . . . . . . . . . . . 	39
Community Depository Institutions Advisory Council . . . . . . . . . . . . . . 	40
Community Investment Council. . . . . . . . . . . . . . . . . . . . . . . . . . . . 	41
Payments Advisory Council . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 	42
Management Committee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 	44
Officers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 	45

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BOARDS OF DIRECTORS, ADVISORY COUNCILS, AND OFFICERS

Federal Reserve Bank of Richmond
Board of Directors

Community Depository Institutions
Advisory Council

The Bank’s board of directors oversees the management of the Bank and its Fifth District offices, provides
timely business and economic information, participates
in the formulation of national monetary and credit policies, and serves as a link between the Federal Reserve
System and the private sector. Six directors are elected
by banks in the Fifth District that are members of the
Federal Reserve System, and three are appointed by
the Board of Governors. Directors who are not bankers
appoint the Bank’s president and first vice president
with approval from the Board of Governors.

Created in 2011, the Bank’s Community Depository
Institutions Advisory Council advises the Bank’s
management and the Board of Governors on the
economy, lending conditions, and other issues from
the perspective of banks, thrifts, and credit unions with
total assets under $10 billion. The council’s members
are appointed by the Bank’s president.

The Bank’s board of directors annually appoints the
Fifth District’s representative to the Federal Advisory
Council, which consists of one member from each of
the 12 Federal Reserve Districts. The council meets
four times a year with the Board of Governors to
consult on business conditions and issues related to
the banking industry.
Baltimore and Charlotte Branches
Boards of Directors
The Bank’s Baltimore and Charlotte branches have
separate boards that oversee operations at their
respective locations and, like the Richmond Board,
contribute to policymaking and provide timely business and economic information about the District. Four
directors on each of these boards are appointed by
the Richmond directors, and three are appointed by
the Board of Governors.

Community Investment Council
Established in 2011, the Community Investment Council
advises the Bank’s management about emerging issues
and trends in communities across the Fifth District,
including low- and moderate-income neighborhoods
in urban and rural areas. The council’s members are
appointed by the Bank’s president.
Payments Advisory Council
Created in 1978, the Payments Advisory Council
serves as a forum for communication with financial
institutions about financial services provided by the
Federal Reserve. The council helps the Bank respond
to the evolving needs of its banking constituency.
Council members are appointed by the Bank’s first
vice president.
Listings of boards and councils include all members who served
during 2012.

THANK YOU
Thank you to those directors who have completed their service on our boards: Margaret E. McDermid,
who served as chairman of the Richmond Board, and Richard J. Morgan of the Richmond Board; and
Claude C. Lilly, who served as chairman of the Charlotte Board.
We also welcome our new directors: Brad E. Schwartz of the Richmond Board; and Elizabeth A. Fleming, John
S. Kreighbaum, and Paul E. Szurek of the Charlotte Board

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BOARD OF DIRECTORS, FEDERAL RESERVE BANK OF RICHMOND

From the left, front row: Wilbur E. Johnson, Margaret E. McDermid, Marshall O. Larsen, Russell C. Lindner, Richard J. Morgan;
back row: Patrick C. Graney, III, Linda D. Rabbitt, Edward L. Willingham, IV, Alan L. Brill
CHAIRMAN

Margaret E. McDermid
Senior Vice President and
Chief Information Officer
Dominion Resources, Inc.
Richmond, Virginia
DEPUTY CHAIRMAN

Linda D. Rabbitt
Chairman and Chief Executive Officer
Rand Construction Corporation
Washington, D.C.
Alan L. Brill
President and Chief Executive Officer
Capon Valley Bank
Wardensville, West Virginia
Patrick C. Graney, III
Maxum East Regional President
Maxum Petroleum
Belle, West Virginia

Edward L. Willingham, IV
President
First Citizens Bank and
First Citizens BancShares, Inc.
Raleigh, North Carolina

Wilbur E. Johnson
Managing Partner
Young Clement Rivers, LLP
Charleston, South Carolina
Marshall O. Larsen
Retired Chairman, President and
Chief Executive Officer
Goodrich Corporation
Charlotte, North Carolina
Russell C. Lindner
Chairman and Chief Executive Officer
The Forge Company
Washington, D.C.
Richard J. Morgan
Regional President
Sandy Spring Bank
Annapolis, Maryland

FEDERAL ADVISORY COUNCIL
REPRESENTATIVE

Richard D. Fairbank
Chairman and Chief Executive Officer
Capital One Financial Corporation
McLean, Virginia

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BOARD OF DIRECTORS, BALTIMORE BRANCH

From the left, front row: Samuel L. Ross, Jana Wheatley, Jenny G. Morgan;
back row: Stephen R. Sleigh, Anita G. Newcomb, William B. Grant, James T. Brady

Anita G. Newcomb
President and Managing Director
A.G. Newcomb & Company
Columbia, Maryland

CHAIRMAN

Jenny G. Morgan
President
basys, inc.
Linthicum, Maryland
James T. Brady
Managing Director – Mid-Atlantic
Ballantrae International, Ltd.
Ijamsville, Maryland
William B. Grant
Chairman, President and
Chief Executive Officer
First United Corporation and
First United Bank & Trust
Oakland, Maryland

Samuel L. Ross
Chief Executive Officer
Bon Secours Baltimore Health System
Baltimore, Maryland
Stephen R. Sleigh
Fund Director
IAM National Pension Fund
Washington, D.C.

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Jana Wheatley
President
Warwick Enterprises, Inc.
East New Market, Maryland

BOARD OF DIRECTORS, CHARLOTTE BRANCH

From the left, front row: David J. Zimmerman, Robert R. Hill, Jr., Lucia Z. Griffith, John S. Kreighbaum;
back row: Claude Z. Demby, Christopher J. Estes
CHAIRMAN

David J. Zimmerman
President
Southern Shows, Inc.
Charlotte, North Carolina
Claude Z. Demby
Chief Executive Officer
Noël Group, LLC
Zebulon, North Carolina
Christopher J. Estes
Executive Director
North Carolina Housing Coalition
Raleigh, North Carolina

Lucia Z. Griffith
Chief Executive Officer and Principal
METRO Landmarks
Charlotte, North Carolina
Robert R. Hill, Jr.
President and Chief Executive Officer
SCBT Financial Corporation
Columbia, South Carolina
John S. Kreighbaum
President and Chief Executive Officer
Carolina Premier Bank and
Premara Financial, Inc.
Charlotte, North Carolina

Claude C. Lilly*
Dean
College of Business and
Behavioral Science
Clemson University
Clemson, South Carolina

* Claude Lilly left the board in June 2012.

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COMMUNITY DEPOSITORY INSTITUTIONS ADVISORY COUNCIL

From the left: John R. Lane, Jan Roche, Michael L. Middleton, F. Michael Nelson, Kathleen Walsh Carr, G. William Beale, Charles H. Majors,
Kim D. Saunders, F. Edward Broadwell, Jr.
Chairman

Charles H. Majors*
Chairman and Chief Executive Officer
American National Bank and
American National Bankshares, Inc.
Danville, Virginia
G. William Beale
President and Chief Executive Officer
Union First Market Bank
Ruther Glen, Virginia
F. Edward Broadwell, Jr.
Chairman and Chief Executive Officer
HomeTrust Bank
Asheville, North Carolina

R. Wayne Hall
President and Chief Executive Officer
First Federal Savings & Loan and
First Financial Holdings, Inc.
Charleston, South Carolina
John R. Lane
President and Chief Executive Officer
Congressional Bank
Bethesda, Maryland
Michael L. Middleton
Chairman and Chief Executive Officer
Community Bank of Tri-County
Waldorf, Maryland
F. Michael Nelson
President and Chief Executive Officer
Pleasants County Bank
St. Mary’s, West Virginia

Kathleen Walsh Carr
President
Cardinal Bank/Washington
Washington, D.C.

Carl Ratcliff
President and Chief Executive Officer
ABNB Federal Credit Union
Chesapeake, Virginia
Jan Roche
President and Chief Executive Officer
State Department Federal Credit Union
Alexandria, Virginia
Kim D. Saunders
President and Chief Executive Officer
Mechanics & Farmers Bank
Durham, North Carolina
Gwen Thompson
President and Chief Executive Officer
Clover Community Bank and
Clover Community Bankshares, Inc.
Clover, South Carolina

*In 2012, Charles H. Majors served as the Fifth District’s representative on the Community Depository
Institutions Advisory Council at the Federal Reserve Board of Governors.

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COMMUNITY INVESTMENT COUNCIL

From the left: Chris Kukla, Clarence J. Snuggs, John Hamilton, Marlo Long, Mike Franklin, Mark Sissman, Michel Zajur,
Connie G. Nyholm, Samuel L. Erwin, R. Scott Woods
CHAIRMAN

Chris Kukla
Senior Counsel for Government Affairs
Center for Responsible Lending
Durham, North Carolina
Samuel L. Erwin
President and Chief Executive Officer
The Palmetto Bank and
Palmetto Bancshares, Inc.
Greenville, South Carolina
Mike Franklin
Owner
Franklin’s Brewery
Hyattsville, Maryland
Jonathan Gueverra
Chief Executive Officer
University of the District of Columbia
Community College
Washington, D.C.

John Hamilton
President
City First Enterprises
Washington, D.C.

Mark Sissman
President
Healthy Neighborhoods, Inc.
Baltimore, Maryland

Marlo Long
Vice President, Community
Development Specialist
BB&T Corporation
Charleston, West Virginia

Clarence J. Snuggs
Deputy Secretary
Maryland Department of Housing
and Community Development
Crownsville, Maryland

Sandra Mikush
Deputy Director
Mary Reynolds Babcock Foundation
Winston-Salem, North Carolina

R. Scott Woods
President and Chief Executive Officer
South Carolina Federal Credit Union
North Charleston, South Carolina

Connie G. Nyholm
Co-owner and Managing Partner
VIRginia International Raceway
Alton, Virginia

Michel Zajur
President and Chief Executive Officer
Virginia Hispanic Chamber of Commerce
Richmond, Virginia

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PAYMENTS ADVISORY COUNCIL

From the left, front row: Ronald L. Bowling, Gail Ball, David Willis, Kristi A. Eller; middle row: Allen Young, Rodney Epps, R. Lee Clark;
back row: Scott Jennings, Jeff W. Dick, Chad Harmon

Tanya A. Butts
Executive Vice President and
Chief Operating Officer
The South Financial Group
Lexington, South Carolina

CHAIRMAN

Martin W. Patterson
Senior Vice President,
Banking Operations
SunTrust Banks
Richmond, Virginia
Gail Ball
Senior Vice President,
Treasury Management Operations
Capital One Bank
Richmond, Virginia

Mitch Christensen
Executive Vice President,
Enterprise Payments Strategy
Wells Fargo & Company
Scottsdale, Arizona

Tim Dillow
Senior Vice President
BB&T Corporation
Wilson, North Carolina

Rodney Epps
Senior Vice President and
Chief Operating Officer
Industrial Bank of Washington
Washington, D.C.

Valerie Curtis
Vice President, Member Services
Coastal Federal Credit Union
Raleigh, North Carolina

Ronald L. Bowling
President and Chief
Executive Officer
First Peoples Bank
Mullens, West Virginia

R. Lee Clark
Executive Vice President, Operations
TowneBank
Suffolk, Virginia

Kristi A. Eller
Chief Information Officer /
Executive Vice President Operations
Yadkin Valley Bank and
Trust Company
Elkin, North Carolina

Daniel O. Cook, Jr.
Executive Vice President and
Chief Operating Officer
Arthur State Bank
Union, South Carolina

Matthew Boss
Checking and Debit Executive
Bank of America
Charlotte, North Carolina

Gerry Felton
Senior Vice President –
Operations Director
PNC Bank
Rocky Mount, North Carolina

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Jeff W. Dick
President and Chief Executive Officer
MainStreet Bank
Herndon, Virginia

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2012 ANNUAL REPORT

Janine George
Senior Vice President and
Director of Operations
Paragon Commercial Bank
Raleigh, North Carolina
Tina Giorgio
Senior Vice President
Sandy Spring Bank
Columbia, Maryland
A. Mitchell Godwin
Vice President
The Conway National Bank
Conway, South Carolina
Kenneth L. Greear
Executive Vice President
United Bank
Charleston, West Virginia
Leton L. Harding, Jr.
Executive Vice President
Powell Valley National Bank
Wise, Virginia

PAYMENTS ADVISORY COUNCIL

From the left, front row: Susan Haschen, A. Mitchell Godwin, Rick Rhoads; middle row: Gerry Felton, Tim Dillow, John Zazzera, Tina Giorgio,
Adrian S. Johnson; back row: Martin W. Patterson, Gayle Youngblood, E. Stephen Lilly

Chad Harmon
Senior Vice President –
Operations Manager
South Carolina Bank and Trust
Orangeburg, South Carolina

Adrian S. Johnson
Senior Vice President and
Chief Financial Officer
MECU of Baltimore, Inc.
Baltimore, Maryland

John Russ
President and Chief Executive Officer
Community FirstBank
of Charleston
Charleston, South Carolina

Susan Haschen
Vice President, Operations
Easton Bancorp, Inc.
Easton, Maryland

John J. King
President
MACHA – The Mid-Atlantic
Payments Association
Hanover, Maryland

Wanda S. Shade
Senior Vice President,
Retail Banking
Frederick County Bank
Frederick, Maryland

E. Stephen Lilly
Senior Vice President and
Chief Operating Officer
First Community Bancshares, Inc.
Bluefield, Virginia

Woody Shuler
Vice President, Finance
SRP Federal Credit Union
North Augusta, South Carolina

David Hines
Senior Vice President and Cashier
Community Bank of Parkersburg
Parkersburg, West Virginia
Rex Hockemeyer
Executive Vice President,
Director of Operations and IT
Union First Market Bankshares
Corporation
Ruther Glen, Virginia
Scott Jennings
Senior Vice President and
Chief Operating Officer
Summit Community Bank
Moorefield, West Virginia

Eileen M. Pirson
Group Vice President,
Central Operations Administration
M&T Bank
Amherst, New York
Rick Rhoads
Senior Vice President, E-Services
State Employees’ Credit Union
Raleigh, North Carolina

Samuel A. Vallandingham
Senior Vice President and
Chief Information Officer
The First State Bank
Barboursville, West Virginia
David Willis
Senior Vice President,
Debit Card and Funds Services
Navy Federal Credit Union
Vienna, Virginia

Allen Young
President and Chief
Executive Officer
SOCACHA – South Carolina
ACH Association
Columbia, South Carolina
Gayle Youngblood
Senior Operations Manager
State Employees Credit
Union of Maryland
Linthicum, Maryland
John Zazzera
Senior Vice President,
Head of Payment Operations
TD Bank
Mount Laurel, New Jersey

Note: The council’s membership
year runs from June 1 to May 31,
but this listing includes all
members who served during 2012.

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MANAGEMENT COMMITTEE

From the left, front row: Roland Costa, Jeffrey M. Lacker, Sarah G. Green; second row: Tammy H. Cummings, Janice E. Clatterbuck;
third row: Victor M. Brugh, II, Michael D. Stough, John A. Weinberg, David E. Beck, Michelle H. Gluck; back row: Claudia N. MacSwain,

Matthew A. Martin, Jennifer J. Burns

Janice E. Clatterbuck
Senior Vice President and
Chief Information Officer,
Corporate Support Services

Sarah G. Green
First Vice President and
Chief Operating Officer
David E. Beck
Senior Vice President and
Baltimore Regional Executive,
Treasury and Payments Services

Claudia N. MacSwain
Senior Vice President and
Chief Financial Officer,
Corporate Planning

Roland Costa
Senior Vice President,
Currency Technology Office

Jeffrey M. Lacker
President

Matthew A. Martin
Senior Vice President and
Charlotte Regional Executive,
Community Development and Outreach

Tammy H. Cummings
Senior Vice President, Human Resources,
and Director of Diversity and Inclusion

Victor M. Brugh, II
Medical Director
Jennifer J. Burns
Senior Vice President,
Supervision, Regulation and Credit

Michelle H. Gluck
Senior Vice President and General Counsel,
Legal, Civic Engagement, Corporate
Communications, and Government Affairs

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Michael D. Stough
Senior Vice President and General Auditor
John A. Weinberg
Senior Vice President and
Director of Research

OFFICERS

Kartik B. Athreya
Group Vice President

Dennis G. McDonald
Vice President

Kathleen R. Houghtaling
Assistant Vice President

Alexander T. Swartz
Assistant Vice President

Thomas A. Lubik
Group Vice President

James T. Nowlin
Vice President

Cathy I. Howdyshell
Assistant Vice President

Jeffrey K. Thomas
Assistant Vice President

Becky C. Bareford
Vice President

P.A.L. Nunley
Deputy General Counsel

John S. Insley, Jr.
Assistant Vice President

Sandra L. Tormoen
Assistant Vice President

William S. Cooper, Jr.
Vice President and
Deputy Director of
Diversity and Inclusion

Dennis P. Smith
Vice President and Deputy
General Counsel

Diane R. Knapp
Assistant Vice President

Lauren E. Ware
Assistant Vice President

D. Keith Larkin
Assistant Vice President

Karen J. Williams
Assistant Vice President

Kevin W. Fergusson
Vice President and
Medical Director
Constance B. Frudden
Vice President
Joan T. Garton
Vice President

Lisa T. Oliva
Vice President
Edward S. Prescott
Vice President
Arlene S. Saunders
Vice President

James W. Lucas
Assistant Vice President
Steve V. Malone
Assistant Vice President

H. Julie Yoo
Assistant Vice President

BALTIMORE BRANCH

Randal C. Manspile
Assistant Vice President

Steven T. Bareford
Assistant Vice President

Alexander L. Wolman
Vice President

Page W. Marchetti
Assistant Vice President
and Corporate Secretary

Amy L. Eschman
Assistant Vice President

Kimberly Zeuli
Vice President

Jonathan P. Martin
Assistant Vice President

Hattie R.C. Barley
Assistant Vice President

William R. McCorvey, Jr.
Assistant General Counsel

Granville Burruss
Assistant Vice President

Diane H. McDorman
Assistant Vice President

John B. Carter, Jr.
Assistant Vice President

Robert J. Minteer
Assistant Vice President

Christy R. Cleare
Assistant Vice President

Bennie R. Moore
Assistant Vice President

Cary B. Crabtree
Assistant Vice President

Johnnie E. Moore
Assistant Vice President

Jeffrey B. Deibel
Assistant Vice President

Barbara J. Moss
Assistant Vice President

Gregory A. Johnson
Vice President

Todd E. Dixon
Assistant Vice President

C. Kim Nguyen
Assistant Vice President

Mary S. Johnson
Vice President

Adam M. Drimer
Assistant Vice President

Edward B. Norfleet
Assistant Vice President

Malissa M. Ladd
Vice President

Ann S. Harrison
Assistant Vice President

Dennis H. Ott
Assistant Vice President

Ann B. Macheras
Vice President

James K. Hayes
Assistant Vice President

Pamela S. Rabaino
Assistant Vice President

Andrew S. McAllister
Vice President

Samuel Hayes, III
Assistant Vice President

Markus A. Summers
Assistant Vice President

Richard B. Gilbert
Vice President
A. Linwood Gill, III
Vice President
Howard S. Goldfine
Vice President
Anne C. Gossweiler
Vice President
Bruce E. Grinnell
Vice President
Mattison W. Harris
Vice President
Wendi Homza Hickman
Vice President
Andreas L. Hornstein
Vice President
Eugene W. Johnson, Jr.
Vice President

Michael L. Wilder
Vice President and Controller

Evangelos Sekeris
Assistant Vice President

CHARLOTTE BRANCH

Lisa A. White
Group Vice President
Marshal S. Auron
Vice President
Richard F. Westerkamp, Jr.
Vice President
Terry J. Wright
Vice President and Charlotte
Deputy Regional Executive
John A. Beebe
Vice President
Melissa M. Gill
Assistant Vice President
Kelly J. Stewart
Assistant Vice President

Listings include former
officers who served during
2012. We thank them for their
contributions to the Bank.

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F i na nc i a l STAT E M E N T S

Statement of Auditor Independence .  .

 .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .

 .  .  .  .  .

	49

 .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .

	50

Management’s Report on Internal Control Over Financial Reporting .  .
Independent Auditors’ Report.  .

	48

Financial Statements:
Statements of Condition as of December 31, 2012 and
December 31, 2011.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .

 .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .

Statements of Income and Comprehensive Income for the years ended
December 31, 2012 and December 31, 2011.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .

 .  .

	53

 .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .

	54

 .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .

	55

 .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .

	84

Statements of Changes in Capital for the years ended
December 31, 2012 and December 31, 2011.  .  .  .  .  .  .  .  .  .  .
Notes to Financial Statements. .
Abbreviations .  .

	52

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S T A T E M E N T O F A U D I T O R IN D E P E N D E NC E

The Board of Governors engaged Deloitte & Touche LLP (D&T) to audit the 2012
combined and individual financial statements of the Reserve Banks and those of the
consolidated LLC entities.1 In 2012, D&T also conducted audits of internal controls over
financial reporting for each of the Reserve Banks, Maiden Lane LLC, Maiden Lane III LLC,
and TALF LLC. Fees for D&T’s services totaled $7 million, of which $1 million was for
the audits of the consolidated LLC entities. To ensure auditor independence, the Board
requires that D&T be independent in all matters relating to the audits. Specifically, D&T
may not perform services for the Reserve Banks or others that would place it in a position of auditing its own work, making management decisions on behalf of the Reserve
Banks, or in any other way impairing its audit independence. In 2012, the Bank did not
engage D&T for any non-audit services.

1

	In addition, D&T audited the Office of Employee Benefits of the Federal Reserve System (OEB), the
Retirement Plan for Employees of the Federal Reserve System (System Plan), and the Thrift Plan for
Employees of the Federal Reserve System (Thrift Plan). The System Plan and the Thrift Plan provide
retirement benefits to employees of the Board, the Federal Reserve Banks, and the OEB.

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M ANA G E M E N T ’ S R E P O R T

Management’s Report on Internal Control Over Financial Reporting
March 14, 2013
To the Board of Directors:
The management of the Federal Reserve Bank of Richmond (Bank) is responsible for the preparation and
fair presentation of the Statements of Condition as of December 31, 2012 and 2011, 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 Bank is responsible for establishing and maintaining effective internal control
over financial reporting as it relates to the financial statements. The Bank’s internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external reporting purposes in accordance with the FAM. The
Bank’s internal control over financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions
and dispositions of the Bank’s assets; (ii) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with FAM, and that the Bank’s
receipts and expenditures are being made only in accordance with authorizations of its management
and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Bank’s assets that could have a material effect on its
financial statements.
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 Bank assessed its internal control over financial reporting 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 Bank
maintained effective internal control over financial reporting.

Federal Reserve Bank of Richmond

	

Jeffrey M. Lacker	

	
President	
		

Sarah G. Green	

Michael L. Wilder

First Vice President and	
Chief Operating Officer

Vice President and Controller

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IN D E P E N D E N T A U D I T O R S ’ R E P O R T

To the Board of Governors of the Federal Reserve System
and the Board of Directors of the Federal Reserve Bank of Richmond:
We have audited the accompanying financial statements of the Federal Reserve Bank of Richmond (“FRB
Richmond”), which are comprised of the statements of condition as of December 31, 2012 and 2011, and
the related statements of income and comprehensive income, and of changes in capital for the years
then ended, and the related notes to the financial statements. We also have audited the FRB Richmond’s
internal control over financial reporting as of December 31, 2012, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
Management’s Responsibility
The FRB Richmond’s management is responsible for the preparation and fair presentation of these
financial statements in accordance with accounting principles established by the Board of Governors of
the Federal Reserve System (the “Board”) as described in Note 3 to the financial statements. The Board has
determined that this basis of accounting is an acceptable basis for the preparation of the FRB Richmond’s
financial statements in the circumstances. The FRB Richmond’s management is also responsible for
the design, implementation, and maintenance of internal control relevant to the preparation and fair
presentation of financial statements that are free from material misstatement, whether due to fraud
or error. The FRB Richmond’s management is also responsible for its assertion of the effectiveness
of internal control over financial reporting, included in the accompanying Management’s Report on
Internal Control Over Financial Reporting.
Auditors’ Responsibility
Our responsibility is to express an opinion on these financial statements and an opinion on the FRB
Richmond’s internal control over financial reporting based on our audits. We conducted our audits of
the financial statements in accordance with auditing standards generally accepted in the United States
of America and in accordance with the auditing standards of the Public Company Accounting Oversight
Board (United States) (“PCAOB”) and we conducted our audit of internal control over financial reporting
in accordance with attestation standards established by the American Institute of Certified Public
Accountants and in accordance with the auditing standards of the PCAOB. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free from material misstatement and whether effective internal control over financial reporting was
maintained in all material respects.
An audit of the financial statements involves performing procedures to obtain audit evidence about the
amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s
judgment, including the assessment of the risks of material misstatement of the financial statements,
whether due to fraud or error. In making those risk assessments, the auditor considers internal control
relevant to the FRB Richmond’s preparation and fair presentation of the financial statements in order to
design audit procedures that are appropriate in the circumstances. An audit of the financial statements
also includes evaluating the appropriateness of accounting policies used and the reasonableness of
significant accounting estimates made by management, as well as evaluating the overall presentation
of the financial statements. An audit of internal control over financial reporting involves obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our audit opinions.

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IN D E P E N D E N T A U D I T O R S ’ R E P O R T

Definition of Internal Control Over Financial Reporting
The FRB Richmond’s internal control over financial reporting is a process designed by, or under the
supervision of, the FRB Richmond’s principal executive and principal financial officers, or persons
performing similar functions, and effected by the FRB Richmond’s board of directors, management,
and other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with the accounting
principles established by the Board. The FRB Richmond’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the FRB Richmond;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with the accounting principles established by the Board, and that
receipts and expenditures of the FRB Richmond are being made only in accordance with authorizations
of management and directors of the FRB Richmond; and (3) provide reasonable assurance regarding
prevention or timely detection and correction of unauthorized acquisition, use, or disposition of the FRB
Richmond’s assets that could have a material effect on the financial statements.
Inherent Limitations of Internal Control Over Financial Reporting
Because of the inherent limitations of internal control over financial reporting, including the possibility
of collusion or improper management override of controls, material misstatements due to error or fraud
may not be prevented or detected and corrected on a timely basis. Also, projections of any evaluation
of the effectiveness of the internal control over financial reporting to future periods are subject to the
risk that the controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Opinions
In our opinion, the financial statements referred to above present fairly, in all material respects, the
financial position of the FRB Richmond as of December 31, 2012 and 2011, and the results of its operations
for the years then ended in accordance with the basis of accounting described in Note 3 to the financial
statements. Also, in our opinion, the FRB Richmond maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2012, based on the criteria established
in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
Basis of Accounting
We draw attention to Note 3 to the financial statements, which describes the basis of accounting. The FRB
Richmond has prepared these financial statements in conformity with accounting principles established
by the Board, as set forth in the Financial Accounting Manual for Federal Reserve Banks, which is a basis of
accounting other than accounting principles generally accepted in the United States of America. The
effects on such financial statements of the differences between the accounting principles established
by the Board and accounting principles generally accepted in the United States of America are also
described in Note 3 to the financial statements. Our opinion is not modified with respect to this matter.

Deloitte & Touche LLP
March 14, 2013
Richmond, Virginia

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STAT E M E N T S O F C O N DI T I O N
(in millions)

As of December 31,

2012

2011

Assets
Gold certificates

$ 

890

$ 

872

Special drawing rights certificates

412

412

Coin

373

409

—

5

128,762

202,139

5,657

12,453

Loans to depository institutions
System Open Market Account:
	Treasury securities, net
(of which $650 and $1,746 is lent as of December 31, 2012 and 2011, respectively)
	Government-sponsored enterprise debt securities, net
(of which $50 and $147 is lent as of December 31, 2012 and 2011, respectively)
	Federal agency and government-sponsored enterprise mortgage-backed securities, net

67,636

97,965

	Foreign currency denominated assets, net

5,166

5,321

	Central bank liquidity swaps

1,839

20,469

2

—

1,348

2,279

346

333

	Other investments
Accrued interest receivable
Bank premises and equipment, net
Items in process of collection

—

5

Other assets

108

91

Total assets

$  212,539

$  342,753

$ 

$ 

Liabilities and Capital
Federal Reserve notes outstanding, net

91,659

83,711

System Open Market Account:
	Securities sold under agreements to repurchase

11,537

226

158

72,657

111,914

76

	Other liabilities

7,629

89

Deposits:
	Depository institutions
	Other deposits
Interest payable to depository institutions

10

13

296

Accrued benefit costs

249

Deferred credit items

—

20

Accrued interest on Federal Reserve notes

51

240

Interdistrict settlement account

28,388

123,650

Other liabilities

55

44

Total liabilities

201,047

331,625

Capital paid-in

5,746

5,564

Surplus (including accumulated other comprehensive loss of $77 and $49
at December 31, 2012 and 2011, respectively)

5,746

5,564

11,492

11,128

$  212,539

$  342,753

Total capital
Total liabilities and capital

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

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S T A T E M E N T S O F INC O M E AN D C O M P R E H E N S I V E INC O M E
(in millions)

For the years ended December 31,

2012

2011

Interest income
System Open Market Account:
	Treasury securities, net

$ 

	Government-sponsored enterprise debt securities, net

3,883

$ 

4,864

223

	Federal agency and government-sponsored enterprise mortgage-backed securities, net

351

2,677

4,403

	Foreign currency denominated assets, net

29

52

	Central bank liquidity swaps

50

7

6,862

9,677

11

5

227

268

Total interest income
Interest expense
System Open Market Account:
	Securities sold under agreements to repurchase
Deposits:
	Depository institutions
	Term Deposit Facility

—

274

6,624

9,403

1,073

Net interest income

1

238

Total interest expense

261

Non-interest income
System Open Market Account:
	Treasury securities gains, net
	Federal agency and government-sponsored enterprise mortgage-backed securities gains, net

23

1

(231)

34

Compensation received for service costs provided

19

19

Reimbursable services to government agencies

49

46

	Foreign currency translation (losses) gains, net

Other

4

5

937

Total non-interest income

366

Operating expenses
Salaries and benefits

367

335

Occupancy

50

48

Equipment

76

63

167

152

	Bureau of Consumer Financial Protection

78

51

	Office of Financial Research

—

Assessments:
	Board of Governors operating expenses and currency costs

Other

8

(133)

(110)

605

547

Net income before interest on Federal Reserve notes expense remitted to Treasury

6,956

9,222

Interest on Federal Reserve notes expense remitted to Treasury

6,414

8,749

542

473

Total operating expenses

Net income
Change in prior service costs related to benefit plans

(4)

(4)

Change in actuarial losses related to benefit plans

(24)

(14)

Total other comprehensive loss

(28)

(18)

Comprehensive income

$ 

514

$ 

455

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

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S T A T E M E N T S O F c h a n ges i n c a p i t a l
(in millions, except share data)

Surplus
For the years ended
December 31, 2012 and
December 31, 2011

Capital paid-in

Balance at December 31, 2010
(108,777,133 shares)

$ 

Net change in capital stock issued
(2,507,360 shares)

5,439

Net income
retained

$ 

5,470

125
—

473

	Other comprehensive loss

—

—

Dividends on capital stock

—

$ 

—

	Net income

Accumulated
other
comprehensive
loss

(31)

Total surplus

Total capital

$ 

$ 

5,439

10,878

—

—

125
473

Comprehensive income:

Net change in capital
$ 

Net change in capital stock issued
(3,634,516 shares)

5,564

(18)

(18)

—

(330)

(330)

143
$ 

473

(330)

125

Balance at December 31, 2011
(111,284,473 shares)

—
(18)
(18)

125

250

5,613

$ 

(49)

$ 

5,564

$ 

11,128

182

—

—

—

182

	Net income

—

542

—

542

542

	Other comprehensive loss

—

—

(28)

(28)

(28)

Dividends on capital stock

—

(332)

—

(332)

(332)

210

(28)

182

364

Comprehensive income:

Net change in capital

182

Balance at December 31, 2012
(114,918,989 shares)

$ 

5,746

$ 

5,823

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

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$ 

(77)

$ 

5,746

$ 

11,492

N O T E S T O F INANCIAL S T A T E M E N T S

1

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

2

OPERATIONS AND SERVICES
The Reserve Banks perform a variety of services and operations. These functions include participating in formulating and
conducting monetary policy; participating in the payment system, including large-dollar transfers of funds, automated
clearinghouse (ACH) operations, and check collection; distributing coin and currency; performing fiscal agency functions
for the U.S. Department of the Treasury (Treasury), certain federal agencies, and other entities; serving as the federal
government’s bank; providing short-term loans to depository institutions; providing loans to participants in programs
or facilities with broad-based eligibility in unusual and exigent circumstances; serving consumers and communities by
providing educational materials and information regarding financial consumer protection rights and laws and information
on community development programs and activities; and supervising bank holding companies, state member banks, savings and loan holding companies, U.S. offices of foreign banking organizations, and designated financial market utilities
pursuant to authority delegated by the Board of Governors. Certain services are provided to foreign and international
monetary authorities, primarily by the FRBNY.
The FOMC, in conducting monetary policy, establishes policy regarding domestic open market operations, oversees
these operations, and issues authorizations and directives to the FRBNY to execute transactions. The FOMC authorizes
and directs the FRBNY to conduct operations in domestic markets, including the direct purchase and sale of Treasury
securities, government-sponsored enterprise (GSE) debt securities, 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 and directed to lend the Treasury securities and federal agency and GSE
debt securities that are held in the SOMA.
To counter disorderly conditions in foreign exchange markets or to meet other needs specified by the FOMC to carry
out the System’s central bank responsibilities, the FOMC has authorized and directed the FRBNY to execute spot and
forward foreign exchange transactions in 14 foreign currencies, to hold balances in those currencies, and to invest such
foreign currency holdings, while maintaining adequate liquidity. The FOMC has also authorized the FRBNY to maintain

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reciprocal currency arrangements with the Bank of Canada and the Bank of Mexico in the maximum amounts of $2 billion
and $3 billion, respectively, and to warehouse foreign currencies for the Treasury and the Exchange Stabilization Fund.
Because of the global character of funding markets, the System has at times coordinated with other central banks
to provide temporary liquidity. In May 2010, the FOMC authorized and directed the FRBNY to establish temporary U.S.
dollar liquidity swap arrangements with the Bank of Canada, the Bank of England, the European Central Bank, the Bank of
Japan, and the Swiss National Bank through January 2011. Subsequently, the FOMC authorized and directed the FRBNY to
extend these arrangements through February 1, 2013. In December 2012, the FOMC authorized and directed the FRBNY to
extend these arrangements through February 1, 2014. In addition, in November 2011, as a contingency measure, the FOMC
authorized the FRBNY to establish temporary bilateral foreign currency liquidity swap arrangements with the Bank of
Canada, the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank so that liquidity can be provided to U.S. institutions in any of their currencies if necessary. In December 2012, the FOMC authorized
the FRBNY to extend these temporary bilateral foreign currency liquidity swap arrangements through February 1, 2014.
Although the Reserve Banks are separate legal entities, they collaborate on the delivery of certain services to
achieve greater efficiency and effectiveness. This collaboration takes the form of centralized operations and product
or function offices that have responsibility for the delivery of certain services on behalf of the Reserve Banks. Various
operational and management models are used and are supported by service agreements between the Reserve Banks.
In some cases, costs incurred by a Reserve Bank for services provided to other Reserve Banks are not shared; in other
cases, the Reserve Banks are reimbursed for costs incurred in providing services to other Reserve Banks. Major services
provided by the Bank on behalf of the System and for which the costs were not reimbursed by the other Reserve Banks
include Standard Cash Automation, Currency Technology Office, IT Transformation Initiatives, Enterprise-wide Security
Projects, Enterprise Security Operations Coordination, the Payroll Central Business Administration Function, Daylight
Overdraft Reporting and Pricing, and the National Procurement Office. Costs are, however, redistributed to the other
Reserve Banks for computing and support services the Bank provides for the System. The Bank’s total reimbursement
for these services was $295 million and $258 million for the years ended December 31, 2012 and 2011, respectively, and
is included in “Operating expenses: Other” on the Statements of Income and Comprehensive Income.

3

SIGNIFICANT ACCOUNTING POLICIES
Accounting principles for entities with the unique powers and responsibilities of the nation’s central bank have not been
formulated by accounting standard-setting bodies. The Board of Governors has developed specialized accounting principles and practices that it considers to be appropriate for the nature and function of a central bank. These accounting
principles and practices are documented in the Financial Accounting Manual for Federal Reserve Banks (FAM), which is
issued by the Board of Governors. The Reserve Banks are required to adopt and apply accounting policies and practices
that are consistent with the FAM 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 of America (GAAP), due to the unique nature of the Bank’s powers and responsibilities as part of the nation’s central bank and given the System’s unique responsibility to conduct monetary policy.
The primary differences are the presentation of all SOMA securities holdings at amortized cost and the recording of all
SOMA securities on a settlement-date basis. Amortized cost, rather than the fair value presentation, more appropriately
reflects the Bank’s securities holdings given the System’s unique responsibility to conduct monetary policy. Although
the application of fair value measurements to the securities holdings may result in values substantially greater or less
than their carrying values, these unrealized changes in value have no direct effect on the quantity of reserves available
to the banking system or on the ability of the Reserve Banks, as the central bank, to meet their financial obligations and
responsibilities. Both the domestic and foreign components of the SOMA portfolio may involve transactions that result
in gains or losses when holdings are sold before maturity. Decisions regarding securities and foreign currency transactions, including their purchase and sale, are motivated by monetary policy objectives rather than profit. Accordingly,
fair values, earnings, and gains or losses resulting from the sale of such securities and currencies are incidental to open
market operations and do not motivate decisions related to policy or open market activities. Accounting for these secu-

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N O T E S T O F INANCIAL S T A T E M E N T S

rities on a settlement-date basis, rather than the trade-date basis required by GAAP, better reflects the timing of the
transaction’s effect on the quantity of reserves in the banking system. The cost bases of Treasury securities, GSE debt
securities, and foreign government debt instruments are adjusted for amortization of premiums or accretion of discounts
on a straight-line basis, rather than using the interest method required by GAAP. SOMA securities holdings are evaluated
for credit impairment periodically.
In addition, the Bank does not present a Statement of Cash Flows as required by GAAP because the liquidity and cash
position of the Bank are not a primary concern given the Reserve Banks’ unique powers and responsibilities as a central
bank. Other information regarding the Bank’s activities is provided in, or may be derived from, the Statements of Condition,
Income and Comprehensive Income, and Changes in Capital, and the accompanying notes to the financial statements.
Other than those described above, there are no significant differences between the policies outlined in the FAM and GAAP.
Preparing the financial statements in conformity with the FAM requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of income and expenses during the reporting period.
Actual results could differ from those estimates.
Certain amounts relating to the prior year have been reclassified to conform to the current-year presentation. The
presentation of “Dividends on capital stock” and “Interest on Federal Reserve notes expense remitted to Treasury” in the
Statements of Income and Comprehensive Income for the year ended December 31, 2011 has been revised to conform to
the current-year presentation format. In addition, the presentation of “Comprehensive income” and “Dividends on capital
stock” in the Statements of Changes in Capital for the year ended December 31, 2011 have been revised to conform to
the current-year presentation format. The revised presentation of “Dividends on capital stock” and “Interest on Federal
Reserve notes expense remitted to Treasury” better reflects the nature of these items and results in a more consistent
treatment of the amounts presented in the Statements of Income and Comprehensive Income and the related balances
presented in the Statements of Condition. As a result of the change to report “Interest on Federal Reserve Notes expense
remitted to Treasury” as an expense, the amount reported as “Comprehensive income” for the year ended December 31,
2011 has been revised. Significant accounts and accounting policies are explained below.

a. Consolidation
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) established the Bureau
of Consumer Financial Protection (Bureau) as an independent bureau within the System that has supervisory authority
over some institutions previously supervised by the Reserve Banks in connection with those institutions’ compliance
with consumer protection statutes. Section 1017 of the Dodd-Frank Act provides that the financial statements of the
Bureau are not to be consolidated with those of the Board of Governors or the System. 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 Bank’s 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. Gold certificates
are recorded by the Banks at original cost. The Board of Governors allocates the gold certificates among the Reserve Banks
once a year based on each Reserve Bank’s average Federal Reserve notes outstanding during the preceding calendar year.
SDRs are issued by the International Monetary Fund (IMF) to its members in proportion to each member’s quota in
the IMF at the time of issuance. SDRs serve as a supplement to international monetary reserves and may be transferred
from one national monetary authority to another. Under the law providing for U.S. participation in the SDR system, the

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Secretary of the Treasury is authorized to issue SDR certificates to the Reserve Banks. When SDR certificates are issued
to the Reserve Banks, equivalent amounts in U.S. dollars are credited to the account established for the Treasury and the
Reserve Banks’ SDR certificate accounts are increased. The Reserve Banks are required to purchase SDR certificates, at
the direction of the Treasury, for the purpose of financing SDR acquisitions or for financing exchange stabilization operations. At the time SDR certificate transactions occur, the Board of Governors allocates the SDR certificates among the
Reserve Banks based upon each Reserve Bank’s Federal Reserve notes outstanding at the end of the preceding calendar
year. SDR certificates are recorded by the Banks at original cost. There were no SDR certificate transactions during the
years ended December 31, 2012 and 2011.

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 are due in accordance with the contractual terms of the loan agreement. Impaired loans are
evaluated to determine whether an allowance for loan loss is required. The Bank has developed procedures for assessing
the adequacy of any allowance for loan losses using all available information to identify incurred losses. This assessment includes monitoring information obtained from banking supervisors, borrowers, and other sources to assess the
credit condition of the borrowers and, as appropriate, evaluating collateral values. Generally, the Bank would discontinue
recognizing interest income on impaired loans until the borrower’s repayment performance demonstrates principal and
interest would be received in accordance with the terms of the loan agreement. If the Bank discontinues recording interest
on an impaired loan, cash payments are first applied to principal until the loan balance is reduced to zero; subsequent
payments are applied as recoveries of amounts previously deemed uncollectible, if any, and then as interest income.

e. Securities Purchased Under Agreements to Resell, Securities Sold Under Agreements to Repurchase,
and Securities Lending
The FRBNY may engage in purchases of securities with primary dealers under agreements to resell (repurchase transactions). These repurchase transactions are settled through a triparty arrangement. In a triparty arrangement, two
commercial custodial banks manage the collateral clearing, settlement, pricing, and pledging, and provide cash and
securities custodial services for and on behalf of the FRBNY and counterparty. The collateral pledged must exceed the
principal amount of the transaction by a margin determined by the FRBNY for each class and maturity of acceptable
collateral. Collateral designated by the FRBNY as acceptable under repurchase transactions primarily includes Treasury
securities (including Treasury Inflation-Protected Securities and Separate Trading of Registered Interest and Principal of
Securities Treasury securities); direct obligations of several federal and GSE-related agencies, including Federal National
Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac); and pass-through
MBS of Fannie Mae, Freddie Mac, and Government National Mortgage Association. The repurchase transactions are
accounted for as financing transactions with the associated interest income recognized over the life of the transaction.
These transactions are reported at their contractual amounts as “System Open Market Account: Securities purchased
under agreements to resell” and the related accrued interest receivable is reported as a component of “Other assets” in
the Statements of Condition.
The FRBNY may engage in sales of securities under agreements to repurchase (reverse repurchase transactions)
with primary dealers and selected money market funds. The list of eligible counterparties was expanded to include GSEs,
effective in July 2011, and bank and savings institutions, effective in December 2011. These reverse repurchase transactions may be executed through a triparty arrangement as an open market operation, 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,

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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. The amortized cost basis of securities lent continues to be reported as
“Treasury securities, net” and “Government-sponsored enterprise debt securities, net,” as appropriate, in the Statements
of Condition. 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 “Non-interest income: Other” in the Statements of Income and Comprehensive Income.
Activity related to securities purchased under agreements to resell, securities sold under agreements to repurchase,
and securities lending is allocated to each of the Reserve Banks on a percentage basis derived from an annual settlement
of the interdistrict settlement account that occurs in the second quarter of each year.

f. Treasury Securities; Government-Sponsored Enterprise Debt Securities; Federal Agency and
Government-Sponsored Enterprise Mortgage-Backed Securities; Foreign Currency Denominated Assets;
and Warehousing Agreements
Interest income on Treasury securities, GSE debt securities, and foreign currency denominated assets 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 or accreted over the term
of the security to stated maturity, and the amortization of premiums and accretion of discounts are accelerated when
principal payments are received. Gains and losses resulting from sales of securities are determined by specific issue based
on average cost. Treasury securities, GSE debt securities, and federal agency and GSE MBS are reported net of premiums
and discounts in the Statements of Condition and interest income on those securities is reported net of the amortization
of premiums and accretion of discounts in the Statements of Income and Comprehensive Income.
In addition to outright purchases of federal agency and GSE MBS that are held in the SOMA, the FRBNY enters into
dollar roll transactions (dollar rolls), which primarily involve an initial transaction to purchase or sell “to be announced”
(TBA) MBS for delivery in the current month combined with a simultaneous agreement to sell or purchase TBA MBS on
a specified future date. During the years ended December 31, 2012 and 2011, the FRBNY executed dollar rolls primarily
to facilitate settlement of outstanding purchases of federal agency and GSE MBS. The FRBNY accounts for dollar roll
transactions as purchases or sales on a settlement-date basis. In addition, TBA MBS transactions may be paired off or
assigned prior to settlement. Net gains (losses) resulting from dollar roll 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, which can include foreign currency deposits, securities purchased under
agreements to resell, and government debt instruments, are revalued daily at current foreign currency market exchange
rates in order to report these assets in U.S. dollars. Foreign currency translation gains and losses that result from the daily
revaluation of foreign currency denominated assets are reported as “Non-interest income: System Open Market Account:
Foreign currency translation (losses) 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 losses, is allocated to each Reserve Bank on a percentage basis derived from an
annual settlement of the interdistrict settlement account that occurs in the second quarter of each year. Activity related
to foreign currency denominated assets, including the premiums, discounts, and realized and unrealized gains and losses,
is allocated to each Reserve Bank based on the ratio of each Reserve Bank’s capital and surplus to the Reserve Banks’
aggregate capital and surplus at the preceding December 31.
Warehousing is an arrangement under which the FOMC has approved the exchange, at the request of the Treasury,
of U.S. dollars for foreign currencies held by the Treasury over a limited period. The purpose of the warehousing facility is

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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 the Reserve Banks’ aggregate capital and surplus at the preceding December 31.

g. Central Bank Liquidity Swaps
Central bank liquidity swaps, which are transacted between the FRBNY and a foreign central bank, can be structured as
either U.S. dollar 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 the Reserve Banks’ aggregate capital and surplus at the
preceding December 31. The foreign currency amounts associated with these central bank liquidity swap arrangements
are revalued daily at current foreign currency market exchange rates.
U.S. dollar liquidity swaps
At the initiation of each U.S. dollar liquidity swap transaction, the foreign central bank transfers a specified amount of
its currency to a restricted account for the FRBNY in exchange for U.S. dollars at the prevailing market exchange rate.
Concurrent with this transaction, the FRBNY and the foreign central bank agree to a second transaction that obligates
the foreign central bank to return the U.S. dollars and the FRBNY to return the foreign currency on a specified future
date at the same exchange rate as the initial transaction. The Bank’s allocated portion of the foreign currency amounts
that the FRBNY acquires are reported as “System Open Market Account: Central bank liquidity swaps” in the Statements
of Condition. Because the swap transaction will be unwound at the same U.S. dollar amount and exchange rate that
were used in the initial transaction, the recorded value of the foreign currency amounts is not affected by changes in
the market exchange rate.
The foreign central bank compensates the FRBNY based on the foreign currency amounts it holds for the FRBNY.
The Bank’s allocated portion of the amount of compensation received during the term of the swap transaction is
reported as “Interest income: System Open Market Account: Central bank liquidity swaps” in the Statements of Income
and Comprehensive Income.
Foreign currency liquidity swaps
The structure of foreign currency liquidity swap transactions involves the transfer by the FRBNY, at the prevailing market
exchange rate, of a specified amount of U.S. dollars to an account for the foreign central bank in exchange for its currency.
The foreign currency amount received would be reported as a liability by the Bank.

h. Bank Premises, Equipment, and Software
Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on a straightline basis over the estimated useful lives of the assets, which range from 2 to 50 years. Major alterations, renovations, and
improvements are capitalized at cost as additions to the asset accounts and are depreciated over the remaining useful
life of the asset or, if appropriate, over the unique useful life of the alteration, renovation, or improvement. Maintenance,
repairs, and minor replacements are charged to operating expense in the year incurred.
Costs incurred 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 operating expense in the year incurred.
Capitalized assets, including software, buildings, leasehold improvements, furniture, and equipment, are impaired
and an adjustment is recorded when events or changes in circumstances indicate that the carrying amount of assets or
asset groups is not recoverable and significantly exceeds the assets’ fair value.

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i. Interdistrict Settlement Account
At the close of business each day, each Reserve Bank aggregates the payments due to or from other Reserve Banks.
These payments result from transactions between the Reserve Banks and transactions that involve depository institution
accounts held by other Reserve Banks, such as Fedwire funds and securities transfers and check and ACH transactions.
The cumulative net amount due to or from the other Reserve Banks is reflected in the “Interdistrict settlement account”
in the Statements of Condition.
An annual settlement of the interdistrict settlement account occurs in the second quarter of each year. As a result
of the annual settlement, the balance in each Bank’s interdistrict settlement account is adjusted by an amount equal to
the average balance in the account during the previous twelve-month period ended March 31. An equal and offsetting
adjustment is made to each Bank’s allocated portion of SOMA assets and liabilities.

j. Federal Reserve Notes
Federal Reserve notes are the circulating currency of the United States. These notes, which are identified as issued to a
specific Reserve Bank, must be fully collateralized. All of the Bank’s assets are eligible to be pledged as collateral. The
collateral value is equal to the book value of the collateral tendered with the exception of securities, for which the collateral value is equal to the par value of the securities tendered. The par value of securities sold under agreements to
repurchase is deducted from the eligible collateral value.
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 $11,462 million and $10,670 million at December 31, 2012
and 2011, respectively.
At December 31, 2012 and 2011, all Federal Reserve notes issued to the Reserve Banks were fully collateralized. At
December 31, 2012, all gold certificates, all special drawing rights certificates, and $1,110 billion of domestic securities
held in the SOMA were pledged as collateral. At December 31, 2012, no investments denominated in foreign currencies
were pledged as collateral.

k. Deposits
Depository Institutions
Depository institutions’ deposits represent the reserve and service-related balances, such as required clearing balances,
in the accounts that depository institutions hold at the Bank. The interest rates paid on required reserve balances and
excess balances are determined by the Board of Governors, based on an FOMC-established target range for the federal
funds rate. Interest payable is reported as a component of “Interest payable to depository institutions” in the Statements
of Condition.
The Term Deposit Facility (TDF) consists of deposits with specific maturities held by eligible institutions at the
Reserve Banks. The Reserve Banks pay interest on these deposits at interest rates determined by auction. Interest payable is reported as a component of “Interest payable to depository institutions” in the Statements of Condition. There
were no deposits held by the Bank under the TDF at December 31, 2012 and 2011.
Other
Other deposits include the Bank’s allocated portion of foreign central bank and foreign government deposits held at
the FRBNY.

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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”
is 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.

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 non-voting, 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.

n. Surplus
The Board of Governors requires the Reserve Banks to maintain a surplus equal to the amount of capital paid-in. On a
daily basis, surplus is adjusted to equate the balance to capital paid-in. Accumulated other comprehensive income is
reported as a component of “Surplus” in the Statements of Condition and the Statements of Changes in Capital. Additional
information regarding the classifications of accumulated other comprehensive income is provided in Notes 9 and 10.

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 “Interest on Federal Reserve notes expense remitted
to Treasury” 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. See Note 12 for additional information on
interest on Federal Reserve notes.
If earnings during the year are not sufficient to provide for the costs of operations, payment of dividends, and equating surplus and capital paid-in, remittances to the Treasury are suspended. A deferred asset is recorded that represents
the amount of net earnings a Reserve Bank will need to realize before remittances to the Treasury resume. This deferred
asset is periodically reviewed for impairment.

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, 2012 and 2011, the Bank was reimbursed for all services provided to the Treasury
as its fiscal agent.

q. Compensation Received for Service Costs Provided
The Federal Reserve Bank of Atlanta has overall responsibility for managing the Reserve Banks’ provision of check and ACH
services to depository institutions, the FRBNY has overall responsibility for managing the Reserve Banks’ provision of Fedwire
funds and securities services, and the Federal Reserve Bank of Chicago has overall responsibility for managing the Reserve
Banks’ provision of electronic access services to depository institutions. The Reserve Bank that has overall responsibility
for managing these services recognizes the related total System revenue in its Statements of Income and Comprehensive
Income. The Bank is compensated for costs incurred to provide these services and reports this compensation as “Noninterest income: Compensation received for service costs provided” in its Statements of Income and Comprehensive Income.

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r. Assessments
The Board of Governors assesses the Reserve Banks to fund its operations, the operations of the Bureau and, for a twoyear period following the July 21, 2010 effective date of the Dodd-Frank Act, the OFR. These assessments are allocated
to each Reserve Bank based on each Reserve Bank’s capital and surplus balances. The Board of Governors also assesses
each Reserve Bank for expenses related to producing, issuing, and retiring Federal Reserve notes based on each Reserve
Bank’s share of the number of notes comprising the System’s net liability for Federal Reserve notes on December 31 of
the prior year.
During the period before the Bureau transfer date of July 21, 2011, there was no limit on the funding provided to the
Bureau and assessed to the Reserve Banks; the Board of Governors was required to 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. The Dodd-Frank Act requires that, after the transfer date, the Board of Governors fund the Bureau in
an amount not to exceed a fixed percentage of the total operating expenses of the System as reported in the Board of
Governors’ 2009 annual report, which totaled $4.98 billion. The fixed percentage of total 2009 operating expenses of the
System is 10 percent ($498.0 million) for 2011, 11 percent ($547.8 million) for 2012, and 12 percent ($597.6 million) for 2013.
After 2013, the amount will be adjusted in accordance with the provisions of the Dodd-Frank Act. The Bank’s assessment
for Bureau funding is reported as “Assessments: Bureau of Consumer Financial Protection” in the Statements of Income
and Comprehensive Income.
The Board of Governors assessed the Reserve Banks to fund the operations of the OFR for the two-year period
ended July 21, 2012, following enactment of the Dodd-Frank Act; thereafter, the OFR is funded by fees assessed on bank
holding companies and non-bank financial companies that meet the criteria specified in the Dodd-Frank Act.

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 $3 million for each of the years ended December 31, 2012 and 2011, 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 11 describes the Bank’s restructuring initiatives and provides information about the costs and liabilities associated with employee separations and contract terminations.
The Bank had no significant restructuring activities in 2012 and 2011.

u. Recently Issued Accounting Standards
In April 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-02,
Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring, which
clarifies accounting for troubled debt restructurings, specifically clarifying creditor concessions and financial difficulties
experienced by borrowers. This update is effective for the Bank for the year ended December 31, 2012, and did not have
a material effect on the Bank’s financial statements.
In April 2011, the FASB issued ASU 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control
for Repurchase Agreements, which reconsidered the effective control for repurchase agreements. This update prescribes
when the Bank may or may not recognize a sale upon the transfer of financial assets subject to repurchase agreements.
This determination is based, in part, on whether the Bank has maintained effective control over the transferred financial
assets. This update is effective for the Bank for the year ended December 31, 2012, and did not have a material effect on
the Bank’s financial statements.

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In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets
and Liabilities. This update will require a reporting entity to present enhanced disclosures for financial instruments and
derivative instruments that are offset or subject to master netting agreements or similar such agreements. This update
is effective for the Bank for the year ending December 31, 2013, and is not expected to have a material effect on the
Bank’s financial statements.
In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date
for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in
Accounting Standards Update No. 2011-05. This update indefinitely deferred the requirements of ASU 2011-05, which
required an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on
the respective net income line items. Subsequently, in February 2013, the FASB issued ASU 2013-02, Comprehensive Income
(Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which established an
effective date for the requirements of ASU 2011-05 related to reporting of significant reclassification adjustments from
accumulated other comprehensive income. These presentation requirements of ASU 2011-05 are effective for the Bank
for the year ending December 31, 2013, and will be reflected in the Bank’s 2013 financial statements.
In January 2013, the FASB issued ASU 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about
Offsetting Assets and Liabilities. This update clarifies that the scope of ASU 2011-11 applies to derivatives accounted for
in accordance with Topic 815. This update is effective for the Bank for the year ending December 31, 2013, and is not
expected to have a material effect on the Bank’s financial statements.

4

LOANS
Loans to Depository Institutions
The Bank offers primary, secondary, and seasonal loans to eligible borrowers, and each program has its own interest rate.
Interest is accrued using the applicable interest rate established at least every 14 days by the Bank’s board of directors,
subject to review and determination by the Board of Governors. Primary and secondary loans are extended on a shortterm basis, typically overnight, whereas seasonal loans may be extended for a period of up to nine months.
Primary, secondary, and seasonal loans are collateralized to the satisfaction of the Bank to reduce credit risk. Assets
eligible to collateralize these loans include consumer, business, and real estate loans; Treasury securities; GSE debt securities; foreign sovereign debt; municipal, corporate, and state and local government obligations; asset-backed securities;
corporate bonds; commercial paper; and bank-issued assets, such as certificates of deposit, bank notes, and deposit
notes. Collateral is assigned a lending value that is deemed appropriate by the Bank, which is typically fair value reduced
by a margin. Loans to depository institutions are monitored daily to ensure that borrowers continue to meet eligibility
requirements for these programs. 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 loans, may convert the loan to a secondary credit loan. Collateral levels are reviewed daily against outstanding
obligations, and borrowers that no longer have sufficient collateral to support outstanding loans are required to provide
additional collateral or to make partial or full repayment.
The Bank had no loans outstanding as of December 31, 2012. Loans to depository institutions were $5 million for
December 31, 2011, with a remaining maturity within 15 days.
At December 31, 2012 and 2011, the Bank did not have any loans that were impaired, past due, or on non-accrual
status, and no allowance for loan losses was required. There were no impaired loans during the years ended December 31,
2012 and 2011.

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5

SYSTEM OPEN MARKET ACCOUNT
a. Domestic Securities Holdings
The FRBNY conducts domestic open market operations and, on behalf of the Reserve Banks, holds the resulting securities in the SOMA.
During the years ended December 31, 2012 and 2011, the FRBNY continued the purchase of Treasury securities and
federal agency and GSE MBS under the large-scale asset purchase programs authorized by the FOMC. In August 2010,
the FOMC announced that the Federal Reserve would 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. In November 2010, the FOMC announced its intention to expand the SOMA portfolio holdings of
longer-term Treasury securities by an additional $600 billion and completed these purchases in June 2011. In September
2011, the FOMC announced that the Federal Reserve would reinvest principal payments from the SOMA portfolio holdings of GSE debt securities and federal agency and GSE MBS in federal agency and GSE MBS. In June 2012, the FOMC
announced that it would continue the existing policy of reinvesting principal payments from the SOMA portfolio holdings
of GSE debt securities and federal agency and GSE MBS in federal agency and GSE MBS, and suspended the policy of
rolling over maturing Treasury securities into new issues at auction. In September 2012, the FOMC announced that the
Federal Reserve would purchase additional federal agency and GSE MBS at a pace of $40 billion per month and maintain its existing policy of reinvesting principal payments from its holdings of agency debt and federal agency and GSE
MBS in federal agency and GSE MBS. In December 2012, the FOMC announced that the Federal Reserve would purchase
longer-term Treasury securities at a pace of $45 billion per month after its program to extend the average maturity of
its holdings of Treasury securities is completed at the end of 2012.
During the years ended December 31, 2012 and 2011, the FRBNY also continued the purchase and sale of SOMA portfolio holdings under the maturity extension programs authorized by the FOMC. In September 2011, the FOMC announced
that the Federal Reserve would extend the average maturity of the SOMA portfolio holdings of securities by purchasing
$400 billion par value of Treasury securities with maturities of six to thirty years and selling or redeeming an equal par
amount of Treasury securities with remaining maturities of three years or less by the end of June 2012. In June 2012, the
FOMC announced that the Federal Reserve would continue through the end of 2012 its program to extend the average
maturity of securities by purchasing $267 billion par value of Treasury securities with maturities of six to thirty years and
selling or redeeming an equal par amount of Treasury securities with maturities of three and a quarter years or less by
the end of 2012. In September 2012, the FOMC announced it would continue its program to extend the average maturity
of its holdings of securities as announced in June 2012.
The Bank’s allocated share of activity related to domestic open market operations was 7.117 percent and 11.549
percent at December 31, 2012 and 2011, respectively.

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The Bank’s allocated share of Treasury securities, GSE debt securities, and federal agency and GSE MBS, net, excluding accrued interest, held in the SOMA at December 31 was as follows (in millions):
2012
Unamortized
premiums

Par

Bills

$ 

—

$ 

Unaccreted
discounts

—

$ 

Total
amortized cost

—

$ 

—

Notes

79,029

2,315

(51)

81,293

Bonds

39,553

7,926

(10)

47,469

Total Treasury securities

$ 

118,582

$ 

10,241

$ 

(61)

$ 

128,762

GSE debt securities

$ 

5,465

$ 

193

$ 

(1)

$ 

5,657

Federal agency and GSE MBS

$ 

65,952

$ 

1,734

$ 

(50)

$ 

67,636

2011
Unamortized
premiums

Par

Bills

$ 

2,128

$ 

Unaccreted
discounts

—

$ 

Total
amortized cost

—

$ 

2,128

Notes

148,560

3,095

(142)

151,513

Bonds

41,424

7,085

(11)

48,498

Total Treasury securities

$ 

192,112

$ 

10,180

$ 

(153)

$ 

202,139

GSE debt securities

$ 

12,010

$ 

445

$ 

(2)

$ 

12,453

Federal agency and GSE MBS

$ 

96,744

$ 

1,341

$ 

(120)

$ 

97,965

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 to temporarily drain reserve balances from the banking system and as part of a service offering to foreign
official and international account holders.
There were no material transactions related to securities purchased under agreements to resell during the years
ended December 31, 2012 and 2011. Financial information related to securities sold under agreements to repurchase for
the years ended December 31 was as follows (in millions):
Allocated to the Bank
2012

Contract amount outstanding, end of year

7,683

8,315

91,898

72,227

11,537

14,380

122,541

124,512

Securities pledged (par value), end of year

6,658

9,942

93,547

86,089

Securities pledged (market value), end of year

7,629

11,537

107,188

99,900

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$ 

2011

$  107,188

Maximum balance outstanding, during the year

7,629

Total SOMA
2012

11,537

Average daily amount outstanding, during the year

$ 

2011

$ 

99,900

N O T E S T O F INANCIAL S T A T E M E N T S

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, 2012 and
2011, was as follows (in millions):
Within 15
days

16 days to
90 days

91 days to
1 year

Over 1 year
to 5 years

Over 5 years
to 10 years

Over 10
years

Total

$ 

$ 

1

$  26,937

$  61,379

$  30,265

$  118,582

December 31, 2012:
Treasury securities
(par value)

$ 

—

GSE debt securities
(par value)

—

111

199

1,082

3,760

146

167

5,465

—

—

—

—

169

65,783

65,952

7,629

—

—

—

—

—

7,629

3,131

$  10,383

$  75,034

$  75,058

$  26,630

$  192,112

288

580

2,275

6,999

1,597

271

12,010

—

—

—

2

4

96,738

96,744

11,537

—

—

—

—

—

11,537

Federal agency
and GSE MBS
(par value)1
Securities sold
under agreements
to repurchase
(contract amount)
December 31, 2011:
Treasury securities
(par value)

$ 

1,876

GSE debt securities
(par value)
Federal agency
and GSE MBS
(par value)1
Securities sold
under agreements
to repurchase
(contract amount)
1

$ 

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

Federal agency and GSE MBS are reported at stated maturity in the table above. The estimated weighted average life of
these securities, which differs from the stated maturity primarily because it factors in scheduled payments and prepayment assumptions, was approximately 3.3 and 2.4 years as of December 31, 2012 and 2011, respectively.
The amortized cost and par value of Treasury securities and GSE debt securities that were loaned from the SOMA
at December 31 was as follows (in millions):
Allocated to the Bank
2012

Treasury securities (amortized cost)
Treasury securities (par value)

$ 

Total SOMA

2011

650

$ 

2012

1,746

$ 

2011

9,139

$ 

15,121

602

1,614

8,460

13,978

GSE debt securities (amortized cost)

50

147

697

1,276

GSE debt securities (par value)

48

140

676

1,216

67
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2012 ANNUAL REPORT

N O T E S T O F INANCIAL S T A T E M E N T S

The FRBNY enters into commitments to buy and sell Treasury securities and records the related securities on a settlementdate basis. As of December 31, 2012, there were no outstanding commitments.
The FRBNY enters into commitments to buy and sell federal agency and GSE MBS and records the related securities
on a settlement-date basis. As of December 31, 2012, the total purchase price of the federal agency and GSE MBS under
outstanding purchase commitments was $118,215 million, of which $10,164 million was related to dollar roll transactions.
The total purchase price of outstanding purchase commitments allocated to the Bank was $8,414 million, of which $723
million was related to dollar roll transactions. As of December 31, 2012, there were no outstanding sales commitments for
federal agency and GSE MBS. These commitments, which had contractual settlement dates extending through February
2013, are for the purchase of TBA MBS for which the number and identity of the pools that will be delivered to fulfill the
commitment are unknown at the time of the trade. These commitments are subject to varying degrees of off-balancesheet market risk and counterparty credit risk that result from their future settlement. The FRBNY requires the posting of
cash collateral for commitments as part of the risk management practices used to mitigate the counterparty credit risk.
Other investments consist of cash and short-term investments related to the federal agency and GSE MBS portfolio.
Other liabilities, which are related to federal agency and GSE MBS purchases and sales, includes the FRBNY’s obligation
to return cash margin posted by counterparties as collateral under commitments to purchase and sell federal agency
and GSE MBS. In addition, other liabilities includes obligations that arise from the failure of a seller to deliver securities
to the FRBNY on the settlement date. Although the FRBNY has ownership of and records its investments in the MBS as
of the contractual settlement date, it is not obligated to make payment until the securities are delivered, and the amount
included in other liabilities represents the FRBNY’s obligation to pay for the securities when delivered. The amount of other
investments and other liabilities allocated to the Bank and held in the SOMA at December 31 was as follows (in millions):
Allocated to the Bank
2012

Other investments

Total SOMA

2011

2012

2011

$ 

2

$ 

—

$ 

23

$ 

—

$ 

220

$ 

147

$ 

3,092

$ 

1,271

Other liabilities:
Cash margin
Obligations from MBS transaction fails
Total other liabilities

$ 

68
Federal Reserve Bank of Richmond

6

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2012 ANNUAL REPORT

226

11
$ 

158

85
$ 

3,177

97
$ 

1,368

N O T E S T O F INANCIAL S T A T E M E N T S

Information about transactions related to Treasury securities, GSE debt securities, and federal agency and GSE MBS
during the years ended December 31, 2012 and 2011, is summarized as follows (in millions):
Allocated to the Bank

Notes

Bonds

Total
Treasury
securities

GSE debt
securities

Federal
agency and
GSE MBS

2,098

$  89,583

$  29,833

$  121,514

$  17,422

$  114,424

27,550

83,913

18,616

130,079

—

4,867

(15,907)

—

—

—

—

Bills

Balance December 31, 2010

$ 

Purchases

1

Sales

—

Realized gains, net2

—

1

Principal payments and maturities

(15,907)
261

(27,551)

Amortization of premiums and
accretion of discounts, net

(7,744)

—
—

261
(35,295)

(4,993)

(22,480)

(1,085)

(193)

(364)

1

$ 

Purchases

1

148

126

274

—

—

1,771

497

2,298

217

1,518

2,128

$  151,513

$  48,498

$  202,139

$  12,453

$  97,965

11,448

Balance December 31, 2011

(574)

30

Annual reallocation adjustment

4

(512)

—

Inflation adjustment on
inflation-indexed securities

34,201

22,158

67,807

—

35,265

(957)

(43,543)

—

—

102

1,073

—

—

Sales

—

Realized gains, net2

—

1

Principal payments and maturities

(42,586)
971

(12,760)

Amortization of premiums and
accretion of discounts, net

(6,010)

—

—

(459)

(621)

—

Inflation adjustment on
inflation-indexed securities

50

81

(816)

Annual reallocation adjustment

4

Balance December 31, 2012

—

$ 

—

(56,386)
$  81,294

(21,793)

(18,770)

(2,326)

(26,290)

(1,080)

(97)

(417)

131

—

(78,995)

—

(4,373)

$  47,468

$  128,762

$ 

5,657

$  14,695

$  124,158

$ 

(38,887)
$  67,636

—

Year-ended December 31, 2011
Supplemental information—par value of transactions:
Purchases3
Sales

3

$  27,551

$  81,912

—

(15,571)

—

(15,571)

$ 

4,730

—

—

—

$  33,808

—

—

Year-ended December 31, 2012
Supplemental information—par value of transactions:
Purchases3
Sales

3

$11,449
—

$  32,835
(41,355)

$  17,246
(741)

$  61,530
(42,096)

$ 

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

1

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

2

	Includes inflation compensation

3

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

4

69
Federal Reserve Bank of Richmond

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2012 ANNUAL REPORT

N O T E S T O F INANCIAL S T A T E M E N T S

Total SOMA

Bills

Bonds

Total
Treasury
securities

GSE debt
securities

Federal
agency and
GSE MBS

$  18,422

Balance December 31, 2010

Notes

$  786,575

$ 261,955

$  1,066,952

$  152,972

$  1,004,695

731,252

161,876

1,132,615

—

42,145

—

—

—

—

239,487

Purchases

1

—

Sales1

(137,734)

—

Realized gains, net

2

Principal payments and
maturities

—

2,258

—

(67,273)

(239,494)

(137,734)
2,258

—

(306,767)

(43,466)

(195,413)

(4,985)

(9,422)

(1,678)

(3,169)

1,284

1,091

2,375

—

$  18,423

$ 1,311,917

$ 419,937

$  1,750,277

$  107,828

118,886

397,999

263,991

780,876

—

431,487

Amortization of premiums and
accretion of discounts, net

8

(4,445)

Inflation adjustment on
inflation-indexed securities

—

Balance December 31, 2011
Purchases1

—
$ 

848,258

Sales

—

(507,420)

(11,727)

(519,147)

—

—

Realized gains, net2

—

12,003

1,252

13,255

—

—

1

Principal payments and
maturities

(137,314)

(67,462)

—

(204,776)

(27,211)

(324,181)

Amortization of premiums and
accretion of discounts, net

5

(5,461)

(7,531)

(12,987)

(1,138)

(5,243)

Inflation adjustment on
inflation-indexed securities

—

643

1,047

1,690

—

$1,142,219

$ 666,969

$  1,809,188

$ 

79,479

$ 

950,321

$ 127,802

$  1,081,174

$ 

—

$ 

40,955

Balance December 31, 2012

$ 

—

—

Year-ended December 31, 2011
Supplemental information—par value of transactions:
$ 239,494

Purchases3

$  713,878

—

Sales3

(134,829)

—

(134,829)

—

—

Year-ended December 31, 2012
Supplemental information—par value of transactions:
$ 118,892

Purchases3

$  383,106

—

Sales

3

(492,234)

$ 205,115
(9,094)

$ 

707,113
(501,328)

$ 

—
—

$ 

413,160
—

1

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

2

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

	Includes inflation compensation

3

70
Federal Reserve Bank of Richmond

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2012 ANNUAL REPORT

N O T E S T O F INANCIAL S T A T E M E N T S

b. Foreign Currency Denominated Assets
The FRBNY conducts foreign currency operations and, on behalf of the Reserve Banks, holds the resulting foreign currency denominated assets in the SOMA.
The FRBNY holds foreign currency deposits with foreign central banks and the Bank for International Settlements
and invests in foreign government debt instruments of Germany, France, and Japan. These foreign government debt
instruments are guaranteed as to principal and interest by the issuing foreign governments. In addition, the FRBNY
enters into transactions to purchase Euro-denominated government debt securities under agreements to resell for
which the accepted collateral is the debt instruments issued by the governments of Belgium, France, Germany, Italy, the
Netherlands, and Spain.
The Bank’s allocated share of activity related to foreign currency operations was 20.685 percent and 20.505 percent
at December 31, 2012 and 2011, respectively.
Information about 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):
Allocated to Bank
2012

Total SOMA

2011

2012

2011

Euro:
Foreign currency deposits

$ 

1,846

$ 

1,921

$ 

8,925

$ 

9,367

Securities purchased under agreements to resell

136

—

659

—

German government debt instruments

451

386

2,178

1,884

French government debt instruments

511

540

2,470

2,635

735

817

3,553

3,986

1,487

1,657

7,187

8,078

5,321

$  24,972

$  25,950

Japanese yen:
Foreign currency deposits
Japanese government debt instruments
Total allocated to the Bank 

$ 

5,166

$ 

The remaining maturity distribution of foreign currency denominated assets that were allocated to the Bank at December
31, 2012 and 2011, was as follows (in millions):
Within
15 days

16 days to
90 days

91 days to
1 year

$ 

$ 

Over 1 year
to 5 years

Total

December 31, 2012:
Euro
Japanese yen
Total

$  1,366
786

357

773

$  2,944

443

102

448

$ 

891

2,222

$  2,152

$ 

459

$ 

891

$  1,664

$  5,166

$  1,097

$ 

601

$ 

434

$ 

December 31, 2011:
Euro
Japanese yen
Total

$  1,954

$ 

715

$  2,847

136

857

645

836

2,474

737

$  1,079

$  1,551

$  5,321

There were no foreign exchange contracts related to open market operations outstanding as of December 31, 2012.

71
Federal Reserve Bank of Richmond

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2012 ANNUAL REPORT

N O T E S T O F INANCIAL S T A T E M E N T S

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, 2012, there were no outstanding commitments to purchase foreign
government debt instruments. During 2012, there were purchases, sales, and maturities of foreign government debt
instruments of $4,959 million, $0, and $4,840 million, respectively, of which $1,025 million, $0, and $1,000 million,
respectively, were allocated to the Bank.
In connection with its foreign currency activities, the FRBNY may enter into transactions that are subject to varying
degrees of off-balance-sheet market risk and counterparty credit risk that result from their future settlement. The FRBNY
controls these risks by obtaining credit approvals, establishing transaction limits, receiving collateral in some cases, and
performing daily monitoring procedures.
At December 31, 2012 and 2011, 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, 2012 and 2011.

c. Central Bank Liquidity Swaps
U.S. Dollar Liquidity Swaps
The Bank’s allocated share of U.S. dollar liquidity swaps was approximately 20.685 percent and 20.505 percent at
December 31, 2012 and 2011, respectively.
The total foreign currency held under U.S. dollar liquidity swaps in the SOMA at December 31, 2012 and 2011, was
$8,889 million and $99,823 million, respectively, of which $1,839 million and $20,469 million, respectively, was allocated
to the Bank.
The remaining maturity distribution of U.S. dollar liquidity swaps that were allocated to the Bank at December 31
was as follows (in millions):
2012

2011

Within 15
days

 Total

$ 

Euro

16 days to
90 days

Within 15
days

16 days to
90 days

 Total

360

$  1,479

$  1,839

$  7,045

$  10,474

$  17,519

Japanese yen

—

—

—

1,853

1,016

2,869

Swiss franc

—

—

—

65

16

81

360

$  1,479

$  1,839

$  8,963

$  11,506

$  20,469

Total

$ 

Foreign Currency Liquidity Swaps
There were no transactions related to the foreign currency liquidity swaps during the years ended December 31, 2012
and 2011.

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

72
Federal Reserve Bank of Richmond

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2012 ANNUAL REPORT

N O T E S T O F INANCIAL S T A T E M E N T S

The following tables present the amortized cost and fair value of the Treasury securities, GSE debt securities, federal
agency and GSE MBS, and foreign currency denominated assets, net, held in the SOMA at December 31 (in millions):
Allocated to the Bank
2012

Amortized
cost

2011

Fair value

Fair value
greater than
amortized
cost

Amortized
cost

$ 

$ 

Fair value

Fair value
greater than
amortized
cost

Treasury securities:
Bills

$ 

—

$ 

—

—

2,128

$ 

2,128

$ 

—

Notes

81,293

86,344

5,051

151,513

160,465

8,952

Bonds

47,469

54,171

6,702

48,498

58,749

10,251

GSE debt securities

5,657

6,050

393

12,453

13,193

740

Federal agency and
GSE MBS

67,636

70,744

3,108

97,965

103,421

5,456

Foreign currency
denominated assets

5,166

5,200

34

5,321

5,355

34

$  207,221

$  222,509

$  15,288

$  317,878

$  343,311

$  25,433

$ 

$ 

$ 

$ 

$ 

$ 

Total SOMA portfolio
securities holdings
Memorandum—
Commitments for:
Purchases of Treasury
securities
Purchases of Federal
agency and GSE MBS

—

—

—

370

370

—

8,414

8,427

13

4,793

4,836

43

Sales of Federal agency
and GSE MBS

—

—

—

512

517

5

Purchases of foreign
govern­ment debt
instruments

—

—

—

44

44

—

73
Federal Reserve Bank of Richmond

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2012 ANNUAL REPORT

N O T E S T O F INANCIAL S T A T E M E N T S

Total SOMA
2012

Amortized
cost

2011

Fair value

Fair value
greater than
amortized
cost

Amortized
cost

Fair value

Fair value
greater than
amortized
cost

Treasury securities:
Bills

$ 

—

$ 

—

$ 

—

$ 

18,423

$ 

18,423

$ 

—

Notes

1,142,219

1,213,177

70,958

1,311,917

1,389,429

77,512

Bonds

666,969

761,138

94,169

419,937

508,694

88,757

GSE debt securities

79,479

85,004

5,525

107,828

114,238

6,410

Federal agency and
GSE MBS

950,321

993,990

43,669

848,258

895,495

47,237

Foreign currency
denominated assets

24,972

25,141

169

25,950

26,116

166

$ 2,863,960

$ 3,078,450

$  214,490

$ 2,732,313

$ 2,952,395

$  220,082

$ 

$ 

$ 

$ 

$ 

Total SOMA portfolio
securities holdings
Memorandum—
Commitments for:
Purchases of Treasury
securities

$ 

Purchases of Federal
agency and GSE MBS

—

—

—

3,200

3,208

8

118,215

118,397

182

41,503

41,873

370

Sales of Federal agency
and GSE MBS

—

—

—

4,430

4,473

43

Purchases of foreign
government debt
instruments

—

—

—

216

216

—

The fair value of Treasury securities, GSE debt securities, and foreign government debt instruments was determined using
pricing services that provide market consensus prices based on indicative quotes from various market participants. The
fair value of federal agency and GSE MBS was determined using a pricing service that utilizes a model-based approach
that considers observable inputs for similar securities. The cost basis of foreign currency deposits adjusted for accrued
interest approximates fair value. The contract amount for euro-denominated securities sold under agreements to repurchase approximates fair value.
The cost basis of securities purchased under agreements to resell, securities sold under agreements to repurchase,
and other investments held in the SOMA approximate fair value.
Because the FRBNY enters into commitments to buy Treasury securities, federal agency and GSE MBS, and foreign
government debt instruments and records the related securities on a settlement-date basis in accordance with the FAM,
the related outstanding commitments are not reflected in the Statements of Condition.

74
Federal Reserve Bank of Richmond

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2012 ANNUAL REPORT

N O T E S T O F INANCIAL S T A T E M E N T S

The following tables provide additional information on the amortized cost and fair values of the federal agency and
GSE MBS portfolio at December 31 (in millions):
2012
Distribution of MBS holdings
by coupon rate

2011

Amortized cost

Fair value

Amortized cost

Fair value

Allocated to the Bank:
2.0%

$ 

60

$ 

60

$ 

—

$ 

—

2.5%

2,673

2,688

—

—

3.0%

11,431

11,513

152

154

3.5%

12,781

13,149

2,242

2,271

4.0%

9,805

10,388

18,649

19,606

4.5%

18,681

20,083

46,943

49,796

5.0%

8,904

9,410

21,076

22,251

5.5%

2,845

2,976

7,714

8,092

6.0%

402

419

1,057

1,110

6.5%

54

58

132

141
$  103,421

Total

$ 

67,636

$ 

70,744

$ 

97,965

$ 

845

$ 

846

$ 

—

Total SOMA:
2.0%

$ 

—

2.5%

37,562

37,766

—

—

3.0%

160,613

161,757

1,313

1,336

3.5%

179,587

184,752

19,415

19,660

4.0%

137,758

145,955

161,481

169,763

4.5%

262,484

282,181

406,465

431,171

5.0%

125,107

132,213

182,497

192,664

5.5%

39,970

41,819

66,795

70,064

6.0%

5,642

5,888

9,152

9,616

6.5%

753

813

1,140

1,221

848,258

$  895,495

Total

$ 

950,321

$ 

993,990

$ 

75
Federal Reserve Bank of Richmond

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2012 ANNUAL REPORT

N O T E S T O F INANCIAL S T A T E M E N T S

The following tables present the realized gains and the change in the unrealized gain position of the domestic securities
holdings during the year ended December 31, 2012 (in millions):
Allocated to the Bank
Total portfolio holdings
realized gains1

Treasury securities

$ 

Total SOMA

Fair value changes in
unrealized gains2

1,073

$ 

Total portfolio holdings
realized gains1

(654)

$ 

13,255

Fair value changes in
unrealized gains2

$ 

(1,142)

GSE debt securities

—

(76)

—

(885)

Federal agency
and GSE MBS

23

(188)

241

(3,568)

13,496

$  (5,595)

Total

$ 

1,096

$ 

(918)

$ 

1

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

2

Because SOMA securities are recorded at amortized cost, unrealized gains (losses) are not reported in the Statements of Income and
Comprehensive Income.

The amount of change in unrealized gains, net, related to foreign currency denominated assets was an increase of
$3 million for the year ended December 31, 2012, of which $1 million was allocated to the Bank.
Accounting Standards Codification (ASC) Topic 820 (ASC 820) defines fair value as the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement
date. ASC 820 establishes a three-level fair value hierarchy that distinguishes between assumptions developed using
market data obtained from independent sources (observable inputs) and the Bank’s assumptions developed using the
best information available in the circumstances (unobservable inputs). The three levels established by ASC 820 are
described as follows:
•	 Level 1 – Valuation is based on quoted prices for identical instruments traded in active markets.
•	 Level 2 – Valuation is based on quoted prices for similar instruments in active markets, quoted prices for identical
or similar instruments in markets that are not active, and model-based valuation techniques for which all significant
assumptions are observable in the market.
•	 Level 3 – Valuation is based on model-based techniques that use significant inputs and assumptions not observable
in the market. These unobservable inputs and assumptions reflect the Bank’s estimates of inputs and assumptions
that market participants would use in pricing the assets and liabilities. Valuation techniques include the use of
option pricing models, discounted cash flow models, and similar techniques.
The following table presents the classification of SOMA financial assets at fair value as of December 31 by ASC 820
hierarchy (in millions):
2012

2011

Level 2

Level 2

$  1,974,315

$  1,916,546

85,004

114,237

993,990

895,495

12,003

12,762

$  3,065,312

$  2,939,040

Assets:
Treasury securities
GSE debt securities
Federal agency and GSE MBS
Foreign government debt instruments
Total assets

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The SOMA financial assets are classified as Level 2 in the table above because the fair values are based on indicative
quotes and other observable inputs obtained from independent pricing services that, in accordance with ASC 820, are
consistent with the criteria for Level 2 inputs. Although information consistent with the criteria for Level 1 classification
may exist for some portion of the SOMA assets, all securities in each asset class were valued using the inputs that are
most applicable to the securities in the asset class. The inputs used for valuing the SOMA financial assets are not necessarily an indication of the risk associated with those assets.

6

BANK PREMISES, EQUIPMENT, AND SOFTWARE
Bank premises and equipment at December 31 were as follows (in millions):
2012

2011

Bank premises and equipment: 
Land and land improvements

$ 

48

Buildings

$ 

48

238
79

Building machinery and equipment

234
76

Construction in progress

4

2

Furniture and equipment

336

296

705

656

(359)

(323)

Subtotal
Accumulated depreciation
Bank premises and equipment, net

$ 

346

$ 

333

Depreciation expense, for the years
ended December 31

$ 

58

$ 

50

Bank premises and equipment at December 31 included the following amounts for capitalized leases (in millions):
2012

Leased premises and equipment under
capital leases

$ 

Accumulated depreciation

2011

33

$ 

(20)

24
(13)

Leased premises and equipment
under capital leases, net

$ 

13

$ 

11

Depreciation expense related to
leased premises and equipment
under capital leases

$ 

7

$ 

5

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The Bank leases space to outside tenants with remaining lease terms ranging from one to six years. Rental income from
such leases was $1 million for each of the years ended December 31, 2012 and 2011, respectively, and is reported as a
component of “Non-interest income: Other” in the Statements of Income and Comprehensive Income. Future minimum
lease payments that the Bank will receive under non-cancelable lease agreements in existence at December 31, 2012,
are as follows (in millions):
2013

$ 

1.3

2014

1.4

2015

1.3

2016

1.4

2017

0.6

Total

$ 

6.0

The Bank had capitalized software assets, net of amortization, of $39 million and $35 million at December 31, 2012 and
2011, respectively. Amortization expense was $16 million and $13 million for the years ended December 31, 2012 and 2011,
respectively. Capitalized software assets are reported as a component of “Other assets” in the Statements of Condition
and the related amortization is reported as a component of “Operating expenses: Other” in the Statements of Income
and Comprehensive Income.

7

COMMITMENTS AND CONTINGENCIES
In conducting its operations, the Bank enters into contractual commitments, normally with fixed expiration dates or
termination provisions, at specific rates and for specific purposes.
At December 31, 2012, the Bank was obligated under non-cancelable leases for premises and equipment with
remaining terms ranging from two to approximately three years.
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 $445
thousand and $360 thousand for the years ended December 31, 2012 and 2011, respectively. Certain of the Bank’s leases
have options to renew.
Future minimum rental payments under non-cancelable operating leases, net of sublease rentals, with terms of one
year or more, at December 31, 2012, were not material.
At December 31, 2012, there were no material unrecorded unconditional purchase commitments or obligations in
excess of one year.
Under the Insurance Agreement of the Reserve Banks, each of the Reserve Banks has agreed to bear, on a per
incident basis, a share of certain losses in excess of one percent of the capital paid-in of the claiming Reserve Bank, up
to 50 percent of the total capital paid-in of all Reserve Banks. Losses are borne in the ratio of a Reserve Bank’s capital
paid-in to the total capital paid-in of all Reserve Banks at the beginning of the calendar year in which the loss is shared.
No claims were outstanding under the agreement at December 31, 2012 and 2011.
The Bank is involved in certain legal actions and claims arising in the ordinary course of business. Although it is
difficult to predict the ultimate outcome of these actions, in management’s opinion, based on discussions with counsel,
the legal actions and claims will be resolved without material adverse effect on the financial position or results of operations of the Bank.

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8

RETIREMENT AND THRIFT PLANS
Retirement Plans
The Bank currently offers three defined benefit retirement plans to its employees, based on length of service and level
of compensation. Substantially all of the employees of the Reserve Banks, Board of Governors, and Office of Employee
Benefits of the Federal Reserve System (OEB) participate in the Retirement Plan for Employees of the Federal Reserve
System (System Plan). Under the Dodd-Frank Act, newly hired Bureau employees are eligible to participate in the System
Plan and transferees from other governmental organizations can elect to participate in the System Plan. In addition,
employees at certain compensation levels participate in the Benefit Equalization Retirement Plan (BEP) and certain Reserve
Bank officers participate in the Supplemental Retirement Plan for Select Officers of the Federal Reserve Banks (SERP).
The System Plan provides retirement benefits to employees of the Reserve Banks, Board of Governors, OEB, and
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, 2012 and
2011, certain costs associated with the System Plan were reimbursed by the Bureau.
The Bank’s projected benefit obligation, funded status, and net pension expenses for the BEP and the SERP at
December 31, 2012 and 2011, and for the years then ended, were not material.

Thrift Plan
Employees of the Bank participate in the defined contribution Thrift Plan for Employees of the Federal Reserve System
(Thrift Plan). The Bank matches 100 percent of the first six percent of employee contributions from the date of hire and
provides an automatic employer contribution of one percent of eligible pay. The Bank’s Thrift Plan contributions totaled
$15 million and $14 million for the years ended December 31, 2012 and 2011, respectively, and are reported as a component
of “Operating expenses: Salaries and benefits” in the Statements of Income and Comprehensive Income.

9

POSTRETIREMENT BENEFITS OTHER THAN RETIREMENT PLANS
AND POSTEMPLOYMENT BENEFITS
Postretirement Benefits Other Than Retirement Plans
In addition to the Bank’s retirement plans, employees who have met certain age and length-of-service requirements are
eligible for both medical and life insurance benefits during retirement.
The Bank funds benefits payable under the medical and life insurance plans as due and, accordingly, has no plan assets.
Following is a reconciliation of the beginning and ending balances of the benefit obligation (in millions):
2012

Accumulated postretirement benefit obligation at January 1

$ 

2011

221.9

$ 

193.0

Service cost benefits earned during the period

11.0

8.6

Interest cost on accumulated benefit obligation

10.3

10.4

Net actuarial loss

29.7

17.9

Special termination benefits loss

0.1

—

Contributions by plan participants

2.7

2.7

(11.2)

(10.5)

0.7

0.7

—

(0.9)

Benefits paid
Medicare Part D subsidies
Plan amendments
Accumulated postretirement benefit obligation at December 31

$ 

265.2

$ 

221.9

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At December 31, 2012 and 2011, the weighted-average discount rate assumptions used in developing the postretirement
benefit obligation were 3.75 percent and 4.50 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):
2012

Fair value of plan assets at January 1

$ 

2011

—

$ 

—

Contributions by the employer

7.8

7.1

Contributions by plan participants

2.7

2.7

(11.2)

(10.5)

0.7

0.7

Benefits paid
Medicare Part D subsidies
Fair value of plan assets at December 31

$ 

—

$ 

—

Unfunded obligation and accrued postretirement benefit cost

$ 

265.2

$ 

221.9

$ 

13.0

$ 

17.2

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

(90.3)

Total accumulated other comprehensive loss

(77.3)

$ 

(66.2)
$ 

(49.0)

Accrued postretirement benefit costs are reported as a component of “Accrued benefit costs” in the Statements of Condition.
For measurement purposes, the assumed health-care cost trend rates at December 31 are as follows:
2012

2011

Health-care cost trend rate assumed for next year

7.00%

7.50%

Rate to which the cost trend rate is assumed to decline
(the ultimate trend rate)

5.00%

5.00%

Year that the rate reaches the ultimate trend rate

2018

2017

Assumed health-care cost trend rates have a significant effect on the amounts reported for health-care plans. A one
percentage point change in assumed health-care cost trend rates would have the following effects for the year ended
December 31, 2012 (in millions):
One percentage point
increase

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

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$ 

One percentage point
decrease

4.3

$  (3.4)

46.1

(37.1)

N O T E S T O F INANCIAL S T A T E M E N T S

The following is a summary of the components of net periodic postretirement benefit expense for the years ended
December 31 (in millions):
2012

Service cost benefits earned during the period

$ 

2011

11.0

$ 

8.6

Interest cost on accumulated benefit obligation

10.3

10.4

Amortization of prior service cost

(4.2)

(4.3)

Amortization of net actuarial loss

5.6

Net periodic postretirement benefit expense

$ 

18.8

0.1

Special termination benefits loss

4.1

22.7

Total periodic expense

—

22.8

$ 

18.8

Estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic postretirement
benefit expense in 2013 are shown below:

Prior service cost

$ 

(4.0)

Net actuarial loss
Total

8.0
$ 

4.0

Net postretirement benefit costs are actuarially determined using a January 1 measurement date. At January 1, 2012 and
2011, the weighted-average discount rate assumptions used to determine net periodic postretirement benefit costs were
4.50 percent and 5.25 percent, respectively.
Net periodic postretirement benefit expense is reported as a component of “Operating expenses: Salaries and
benefits” in the Statements of Income and Comprehensive Income.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 established a prescription drug
benefit under Medicare (Medicare Part D) and a federal subsidy to sponsors of retiree health-care benefit plans that
provide benefits that are at least actuarially equivalent to Medicare Part D. The benefits provided under the Bank’s plan
to certain participants are at least actuarially equivalent to the Medicare Part D prescription drug benefit. The estimated
effects of the subsidy are reflected in actuarial loss in the accumulated postretirement benefit obligation and net periodic
postretirement benefit expense.
Federal Medicare Part D subsidy receipts were $546 thousand and $512 thousand in the years ended December
31, 2012 and 2011, respectively. Expected receipts in 2013, related to benefits paid in the years ended December 31, 2012
and 2011, are $432 thousand.
Following is a summary of expected postretirement benefit payments (in millions):
Without subsidy

2013

$ 

9.9

With subsidy

$ 

9.2

2014

10.4

9.6

2015

11.1

10.3

2016

11.8

10.8

2017

12.6

11.5

2018–2022

77.2

70.0

$  133.0

$  121.4

Total

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Postemployment Benefits
The Bank offers benefits to former or inactive employees. Postemployment benefit costs are actuarially determined and
include the cost of medical and dental insurance, survivor income, disability benefits, and self-insured workers’ compensation expenses. The accrued postemployment benefit costs recognized by the Bank at December 31, 2012 and 2011,
were $23 million and $20 million, respectively. This cost is included as a component of “Accrued benefit costs” in the
Statements of Condition. Net periodic postemployment benefit expense included in 2012 and 2011 operating expenses
were $5 million and $4 million, respectively, and are recorded as a component of “Operating expenses: Salaries and
benefits” in the Statements of Income and Comprehensive Income.

10

ACCUMULATED OTHER COMPREHENSIVE INCOME
AND OTHER COMPREHENSIVE INCOME
Following is a reconciliation of beginning and ending balances of accumulated other comprehensive loss as of December
31 (in millions):
2012

Balance at January 1

2011

Amount related to
postretirement benefits other
than retirement plans

Amount related to
postretirement benefits other
than retirement plans

$ 

(49)

$ 

(31)

Change in funded status of benefit plans:
Amortization of prior service cost

(4)

(4)

Change in prior service costs related to benefit plans

(4)

(4)

(30)

(18)

6

4

(24)

(14)

(28)

(18)

Net actuarial loss arising during the year
Amortization of net actuarial loss
Change in actuarial losses related to benefit plans
Change in funded status of benefit plans—
other comprehensive loss
Balance at December 31

$ 

(77)

$ 

(49)

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

11

BUSINESS RESTRUCTURING CHARGES
The Bank had no business restructuring charges in 2012 or 2011.
In years prior to 2011, the Reserve Banks announced restructuring programs associated with the U.S. Treasury’s
Collections and Cash Management Modernization (CCRM) initiative. As of December 31, 2012 and 2011, the remaining
liability related to these restructuring programs was not material.

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12

DISTRIBUTION OF COMPREHENSIVE INCOME
In accordance with Board policy, Reserve Banks remit excess earnings, after providing for dividends and the amount
necessary to equate surplus with capital paid-in, to the U.S. Treasury as interest on Federal Reserve notes. The following
table presents the distribution of the Bank’s comprehensive income in accordance with the Board’s policy for the years
ended December 31 (in millions):
2012

Dividends on capital stock

$ 

Transfer to surplus—amount required to equate surplus with capital paid-in
Interest on Federal Reserve notes expense remitted to Treasury
Total distribution

13

332

2011

$ 

330

182

125

6,414

8,749

$  6,928

$  9,204

SUBSEQUENT EVENTS
There were no subsequent events that require adjustments to or disclosures in the financial statements as of December
31, 2012. Subsequent events were evaluated through March 14, 2013, which is the date that the Bank issued the financial
statements.

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A B B R E V IA T I O N S

ACH Automated clearinghouse
ASC Accounting Standards Codification
ASU Accounting Standards Update
BEP Benefit Equalization Retirement Plan
Bureau Bureau of Consumer Financial Protection
FAM Financial Accounting Manual for Federal Reserve Banks
FASB Financial Accounting Standards Board
Fannie Mae Federal National Mortgage Association
Freddie Mac Federal Home Loan Mortgage Corporation
FOMC Federal Open Market Committee
FRBNY Federal Reserve Bank of New York
GAAP Accounting principles generally accepted in the United States of America
GSE Government-sponsored enterprise
IMF International Monetary Fund
MBS Mortgage-backed securities
OEB Office of Employee Benefits of the Federal Reserve System
OFR Office of Financial Research
SDR Special drawing rights
SERP Supplemental Retirement Plan for Select Officers of the Federal Reserve Banks
SOMA System Open Market Account
TBA To be announced
TDF Term Deposit Facility

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The Federal Reserve Bank of Richmond 2012 Annual Report
was produced by the Research Department, Publications Division.
Managing Editor: Karl Rhodes
Design: MillerCox Design, Inc.
Photography: Larry Cain
Printing: Federal Reserve Bank of Richmond
Special thanks to Susan Maxey, Jessica Romero,
Tim Sablik, and Sonya Ravindranath Waddell.
The Annual Report is also available on the
Federal Reserve Bank of Richmond’s Web site,
www.richmondfed.org.

F edera l R eser v e B a n k o f R i c h m o n d

|

2012 ANNUAL REPORT

fifth federal reserve
district offices
Richmond
701 East Byrd Street
Richmond, Virginia 23219
(804) 697-8000
Baltimore
502 South Sharp Street
Baltimore, Maryland 21201
(410) 576-3300
Charlotte
530 East Trade Street
Charlotte, North Carolina 28202
(704) 358-2100

FEDERAL RESERVE BANK
OF RICHMOND
Richmond Baltimore Charlotte

www.richmondfed.org