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2013
FEDER AL R ESERVE BANK OF RICHMOND
ANNUAL R EPORT

Should the Fed Have a Financial
Stability Mandate ?
Lessons from the Fed’s f irst 100 Years

Mission
As a regional Reserve Bank, we serve
the public by fostering the stability, integrity,
and efficiency of our nation’s monetary, financial,
and payments systems.

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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2013 annual report

Message from the President. .

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Feature Essay:
Should the Fed Have a Financial Stability Mandate? . .

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Message from Management. .
Fed Spotlight . .

Fifth District Economic Report . .

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Boards, Councils, Officers, and Senior Professionals
Financial Statements . .

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Message from the President

Crisis Lending by the Federal Reserve
Could Undermine Financial Stability

n 2007 and 2008, the United States was gripped by a financial crisis, to which the Fed
responded by making extensive use of its emergency-lending powers. This crisis came
a century after the Panic of 1907, the event that prompted the establishment of the
Federal Reserve in 1913. Now, as we mark the Fed’s centennial, and as many countries revisit
their central banks’ missions in light of the global financial crisis, it is fitting to examine the
Federal Reserve’s purpose and ask: what is the central bank’s role in promoting financial
stability? More specifically, is crisis lending an essential component of a stable financial
system? In this year’s essay, Renee Haltom and I argue that it is not—and that government
intervention might actually lead to more financial instability, not less.

PHOTO: MICHAEL BATTS

Chastened by the Great Depression, when it allowed one-third of
the nation’s banks to fail, the Fed in subsequent decades appeared
eager to expand its lending to troubled financial institutions, including nonbanks, during times of crisis. Beginning in 1970, the Fed,
in conjunction with other regulators, initiated a series of rescues
that protected the creditors of large, distressed firms: Penn Central
Transportation in 1970, Bank of the Commonwealth in 1972, Franklin
National Bank in 1974, Continental Illinois in 1984, and Long-Term
Capital Management in 1998, among others. The rescues continued
during the recent crisis with the creation of a variety of emergency
lending programs and support for a few select institutions and markets.
Many policymakers and observers have looked to history to justify
the Fed’s actions before and during the crisis, for example by claiming
that the Fed was created to promote financial stability. But as stated in
the preamble to the Federal Reserve Act of 1913, the explicit purpose
of the Fed was to “furnish an elastic currency.” At that time, it was difficult for banks to
respond to sudden increases in the demand for cash. As a result, interest rates were subject
to seasonal spikes, and bank panics were frequent because depositors sought to withdraw
funds before payments were suspended. But by lending directly to banks through the discount window, the Fed could help ensure that the supply of currency expanded in accord
with demand. The Fed’s founders designed the Fed to play a stabilizing role by improving
the general circulation of currency, not via the targeted channeling of funds to firms that
private markets had deemed less than creditworthy.

Jeffrey M. Lacker
President

Policymakers also described the central bank as the “lender of last resort,” an idea that
comes from the writings of Henry Thornton in the early 1800s and Walter Bagehot in the

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1870s regarding the Bank of England. In the 19th century, lending was the primary way
the central bank managed the stock of coins and banknotes in circulation. When Bagehot
advocated central bank lending during a crisis, he was advocating an expansion in the
supply of currency to meet the increase in demand. But the Fed’s emergency lending
programs during the crisis were not undertaken to increase the net supply of liquid assets
to the economy. Instead, they simply reallocated credit. In other words, the Fed’s lending
performed a fiscal function, not the monetary function Thornton and Bagehot had in mind.
As long as the Fed’s actions increase the stability of our financial system, one might ask, why
do modern misinterpretations of history matter? The answer is that the Fed’s interventions
by themselves can contribute to instability. Those who believe government backstops are
necessary subscribe to a view of the financial system as inherently fragile. But an alternative
view—and in my opinion a more plausible view—is that government policy actually induces
fragility. When the government expands its “safety net,” it conveys that market participants
can take excessive risks without bearing the full costs. On the margin, funding flows are
tilted toward markets that seem most likely to receive government support. The expectation of that support reduces the monitoring efforts of creditors in those markets, allowing
borrowers to take even greater risks. Then, when firms fail, government support is invoked
again—a cycle we saw play out during 2007 and 2008.
How do we end this cycle? As Haltom and I point out, more regulation is hardly a foolproof
way to counter moral hazard. Instead, we must realign the incentives that encourage excessive
risk-taking in the first place. One promising avenue is the creation of “living wills,” detailed plans
that describe how a large, complex financial firm could be wound down within the bankruptcy
code without government support. In addition, certain reforms of the bankruptcy code could
improve prospects for creating credible resolution plans. Even then, expectations of government
support may persist as long as there is the legislative authority to provide that support—which
argues for rescinding that authority, including the Fed’s emergency lending powers.
What lessons should be drawn from the Fed’s first 100 years? One option is to look at the
history of financial crises in this country and conclude that central bank intervention is
the necessary salve for the financial system’s inherent fragility. But as you read the essay, I
encourage you to consider instead that an overly broad interpretation of the Fed’s role in
fact undermines financial stability—and that the best contribution we can make during
the next 100 years is to provide monetary stability.

Jeffrey M. Lacker
President

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Should the Fed Have a
Financial Stability Mandate ?
Lessons from the Fed’s f irst 100 Years

The Fed has taken increasingly strong steps in its first 100 years in an attempt to ensure a stable financial
system – but many of these steps ultimately created more, not less, instability. The Fed took increasingly
strong actions because its financial stability responsibilities were poorly defined.

By Renee Haltom and Jeffrey M. Lacker

he year 2013 marked the 100th anniversary of the Federal Reserve
Act that created the Fed. The Act was passed to address recurrent
financial crises, so it is ironic that the Fed’s centennial nearly
coincided with the global financial crisis of 2007–08, the worst financial
crisis in generations.

Federal Reserve lending programs were prominent
during the crisis, and the Fed supervised important parts of the financial sector prior to the crisis.
Understandably, many policymakers and academics
have been asking whether changes to the Fed’s responsibilities and authorities are needed to create a more
stable financial system.
But what should the Fed’s role in financial stability be?
The broad context for this question is the movement
in the global central banking community toward more
formal financial stability mandates.1 These efforts have
tended to focus on prevention, namely looking for signs

of excessive risk-taking in an array of financial markets.
In the United States, the 2010 Dodd-Frank Wall Street
Reform and Consumer Protection Act enhanced the Fed’s
surveillance powers and imposed new constraints on
risk-taking in the financial sector, all aimed at reducing
the probability of the type of financial market turmoil
experienced during the recent crisis.2 One implication
of heightened responsibility for financial stability is that
a central bank should use all the tools at its disposal to
mitigate identified problems, for example, by curtailing
risk through targeted regulatory interventions, or even
using monetary policy tools to prevent the negative
effects that financial distress could have on central banks’
objectives for growth and inflation.

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GEORGE GRANTHAM BAIN COLLECTION, LIBRARY OF CONGRESS

before
the Fed
Bank Runs

Before the founding of the Fed, bank runs
were common due to legislative flaws in the
currency and banking system. Depositors
tried to get their money out before the bank
suspended cash withdrawals.

Many of the Fed’s past actions in the name of financial
stability, however, have come in the form of credit extension once crises are underway, as in the case of the Fed’s
extraordinary lending to firms and markets in 2007 and
2008. A financial stability mandate would seem to imply a
central bank obligation to intervene to alleviate potential
damage in cases of financial distress.
Is crisis lending necessary for a stable financial system?
Some observers have addressed this question by looking
to the history of the Federal Reserve. The 1913 legislation
creating the Fed grew out of the reaction to the Panic of
1907, an economic contraction in which many banks
experienced runs and suspended depositor withdrawals.
One central purpose of the Fed was to respond to such
panics, which has been said to justify the broad range of
Fed responses to modern financial crises.
Another common rationale for the Fed’s emergency
lending is the doctrine that a central bank should act as a
“lender of last resort,” an idea associated with the writings
of Walter Bagehot, the 19th century British economist.
Episodes in which the Fed failed to act aggressively as
lender of last resort—most notably during the wave
of bank failures at the outset of the Great Depression,
which the Fed did little to prevent—are often described
as demonstrating the necessity of crisis lending by
the central bank.

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This essay argues that these justifications for Fed crisis
lending are based on erroneous readings of history. The
Fed was originally designed and built to solve a monetary
problem, not a lending problem. That monetary problem
resulted from legislative restrictions that hindered the
banking system’s ability to issue currency and redistribute it as needed. Bagehot’s 19th century work, too, was
intended to encourage the Bank of England to provide
liquidity to illiquid but otherwise solvent firms during
panics. While this may sound similar to the Fed’s actions
in 2007 and 2008, Bagehot’s prescriptions had more to
do with providing monetary stability to the financial
system as a whole in the face of panics than allocating
credit to targeted sectors or firms as the Fed did during
the recent crisis. The Great Depression can be misread
as well. The Fed’s central failing was that it allowed the
money supply to fall precipitously, not that it didn’t prevent bank failures.
By contrast, when the Fed has used its lending tools to
promote financial stability by limiting creditor losses, the
results have been less than salutary. In a series of incidents
beginning in the 1970s, the Fed, in cooperation with the
Federal Deposit Insurance Corporation, intervened to
limit bank failures’ effect on creditors. Early interventions
were relatively small, but they established precedents
that led potential creditors to expect to be rescued in
future instances of financial distress, weakening their

1913

Federal Reserve Act

incentives to limit borrower risk-taking and vulnerability. Government-lending programs often appeared to
stabilize markets because they confirmed hopes of intervention, and so have been hailed as successes.3 But this
has come at the cost of moral hazard, greater risk-taking,
and greater instability down the road.
Tougher regulations may seem like a way to overcome the
moral hazard that results from the government’s safety net,
but that strategy has fallen short in the past. Regulations
can be helpful in containing risk, but they are fallible and
boost the incentive to move risk-taking outside of regulated sectors. Moreover, a mandate for the central bank
to prevent excessive risk-taking is likely to give rise to
expectations that it will respond if it fails in that objective
by ameliorating the effects with crisis lending. The implied
government safety net then encourages riskier behavior.
When the government steps in to protect creditors with
emergency lending, it continues the self-perpetuating cycle
of crisis, intervention, regulation, and regulatory bypass.
The result has been an ever-expanding government safety
net and an ever-expanding interpretation of the Fed’s role
in financial stability.
Recent regulatory reforms continue our journey down
this path. While the Dodd-Frank Act tried to improve
the handling of large failing financial institutions, the
capacity to use government resources to protect creditors

WOODROW WILSON PRESIDENTIAL LIBRARY AND MUSEUM

Following the Panic of 1907, the United
States took steps toward currency reform.
Ultimately, Congress created Federal Reserve
Banks that could expand or contract the
currency supply quickly to meet demand.
President Woodrow Wilson signed the
Federal Reserve Act on December 23, 1913.

remains. Instances of financial distress are inevitable,
but the anticipation of support is likely to turn them
into crises, eliciting ever-more rescues and preventative
regulation. A broad and ill-defined financial stability
mandate for the Fed would contribute to the cycle of crisis
and intervention by fostering the expectation that the Fed
will respond to financial instability with all the tools at
its disposal, including lending to protect the creditors of
large financial institutions.
There is a way to correct this course, however, and it
requires clarifying the Fed’s role in financial stability.
We need to break the cycle by which expectations of
intervention beget excessive risk-taking, which begets
distress and further interventions. The real lesson of the
Fed’s first 100 years is that the best contribution the Fed
can make to financial stability is to pursue its monetary
stability mandate faithfully and abstain from credit-market interventions that promote moral hazard. A careful
look at the Fed’s first 100 years sheds light on reforms that
would truly help ensure financial stability.

What problem were the Fed’s founders
trying to solve?
Today, the Fed’s primary goals are to achieve low, stable
inflation and healthy employment. But neither of these
goals is why the Fed was created. The Fed’s purpose in

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1913

“Currency Bill”

NEW YORK TIMES, PHOTOGRAPHY BY NEAL COX

Newspaper headlines referred to the
Federal Reserve Act as “the currency
bill” or “the currency law.” The Federal
Reserve was originally designed and
built to solve a monetary problem,
not a lending problem.

1913 was to help the monetary and banking system
overcome legislative flaws.
At times, the public would want to convert a substantial
amount of its bank deposits into currency. The fundamental problem was that it was costly and cumbersome
to increase the supply of currency for banks to meet the
demands of depositors. The architects of the Federal
Reserve Act often stated that the source of the problem
was two-fold.4 First, currency was issued by banks, not
the government, but all currency was required by the
National Banking Acts of 1863 and 1864 to be backed
by U.S. government bonds. To issue new currency, banks
would have to acquire new bonds and wait for new notes
to be printed and shipped by the Bureau of Engraving
and Printing, the agency that still prints currency today.
This cumbersome process meant the supply of currency
could not expand quickly.5
Second, the banking system was fragmented. Most U.S.
states prohibited banks from establishing branches.
When the Fed was founded, there were more than 27,000
banks; virtually every town had its own. Other countries,
such as Canada, had no branching restrictions, and this
allowed banks to diversify their portfolios. In the United
States, the health of many banks hinged on the local economy—often on the season’s production of a single crop.
Country banks kept deposits in city “correspondent”

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banks, which in turn kept deposits in the major money
center banks and clearinghouses that were mainly in New
York.6 When currency demand surged, country banks
would ask their correspondent banks for shipments of
banknotes, to be paid for from their reserve accounts. But
sometimes the demands on the money center institutions
were too great, and they refused withdrawal requests to
preserve cash for themselves. This resulted in suspensions
of payments to depositors, who rushed to be first in
line when suspension or failure was feared, resulting in
“bank runs.” A run on one institution sometimes led to
runs on others, resulting in what were known as broader
“financial panics.”
These two problems had serious consequences. The pressure on the currency supply during the autumn harvest
season meant interest rates were significantly higher in
the fall than the rest of the year, the equivalent today of
the Fed significantly tightening monetary policy every
Thanksgiving.7 Bank panics could be devastating to economic activity because they disrupted the ability to make
payments conveniently. Carter Glass, the senator from
Lynchburg, Va., who helped design the Federal Reserve,
said that panics, “affected not alone the financial institutions immediately involved, but the merchants whose
credits were suspended; the industries whose shops
were closed; the railroads whose cars were made idle;
the farmers whose crops rotted in the fields; the laborer

1914

Elastic Currency

Federal Reserve notes began to
circulate when the regional Reserve
Banks opened. Reserve Banks were
able to issue currency more quickly
than commercial banks, and that
ability helped prevent runs on banks,
which sometimes were caused by
unanticipated surges in demand for
cash. This note was issued by the
Richmond Fed in 1918.
LARRY CAIN, FEDERAL RESERVE BANK OF RICHMOND

who was deprived of his wage. No business enterprise, if
any individual, ever entirely escaped.”8 Prior to the Fed’s
founding, major panics occurred in 1873, 1884, 1890,
1893, and 1907, with many smaller panics and bank
failures in between. It was that last particularly disastrous panic in 1907 that finally galvanized the political
will—after more than three-quarters of a century without
a central bank—to create the Fed.
Congressmen, bankers, and economists all participated
in the debate over how to reform the banking system.
Discussions centered on laws pertaining to currency.
Who should issue it? What would back it? How would
oversupply be prevented to preserve its value? Some
factions wanted banks to issue currency against their
own general assets, sidestepping frictions in the U.S.
bond-backed system, but there was little agreement on
how to prevent over-issue. Others wanted to broaden
membership in the system of private clearinghouses
that had averted panics in the late 1800s by pooling
the reserves of members and issuing emergency credit.
However, many vehemently opposed the accompanying
centralization of institutional power. Dismantling restrictions on bank branching and consolidation was viewed
as clearly desirable but politically infeasible since farmers
and small bankers opposed it, and thus it received little
attention.9 After considerable debate over the balance
between centralized and regional powers, a federated sys-

tem of regional Reserve Banks was adopted. The Federal
Reserve Act was passed in 1913, and the Fed opened its
doors in November 1914.

Was the Fed created for
financial stability?
The preamble to the Act stated that the Fed was created
to “furnish an elastic currency.” This was to take place
primarily through loans from the Fed to commercial
banks. Banks facing a heightened short-term need for
currency could obtain it from their regional Reserve
Bank. In exchange, the banks would assign the Reserve
Bank some of their own assets at a discount that reflected
an implied interest rate—hence, the process was called
“rediscounting” the bank’s initial loan, and the Fed’s
lending was called the “discount window.”10
A crucial feature was that only a very specific, limited
set of assets were eligible for rediscounting. The Federal
Reserve Act reflected elements of “real bills,” a doctrine
dating to the early 18th century that held that banknotes
should be backed exclusively by loans that funded legitimate commercial activity, as opposed to speculative
investments.11 Currency issued via such lending would
be retired naturally when the economy no longer needed
it since the underlying loans would be repaid with the
sale of goods and services. In the context of the original

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1930s

More Bank Runs
NEW YORK WORLD-TELEGRAM, LIBRARY OF CONGRESS

During the first few years of the Great Depression,
the Federal Reserve reacted passively, allowing
one-third of the nation’s banks to fail and the
money supply to plummet. In March 1933, policemen struggled to control a nervous crowd in front
of Bowery Savings Bank in Manhattan.

Federal Reserve Act, only short-term paper arising from
commercial transactions or international trade was eligible for rediscounting.12
The Fed also was given authority to buy certain securities—assets eligible for rediscounting plus government
debt—through open market operations. The intent of
open market operations was to strengthen the Fed’s ability to control gold flows, but it also provided another tool
for expanding the supply of bank reserves and circulating
notes, and it would become more important later in the
Fed’s history.13 Open market purchases were made by
crediting banks’ reserve accounts and had the same effect
on the supply of monetary assets—Federal Reserve notes,
reserve balances with Federal Reserve Banks, and gold
coins and bullion—as discount window loans.
We would argue that the primary goal of the Fed’s founders was to achieve monetary stability. “Furnishing an
elastic currency” meant that the supply of monetary
assets would vary with fluctuations in demand. Instead of
interest rate spikes and withdrawal suspensions, swings in
the need for currency could be accommodated smoothly
and interest rate movements would be dampened. In
recent decades, the Fed generally has managed the money
supply through open market operations. Purchases and
sales are designed to keep a short-term interest rate—the
federal funds rate—at a target value set by the Federal

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Open Market Committee.14 Open market operations
have been the main tool of monetary policy and have
been used to manage the money supply to keep inflation
low and stable.
In 1914, monetary policy was conducted through direct
lending to banks. As a result, the distinction between monetary policy and credit allocation—when policymakers
choose certain firms or markets to receive credit over others—was blurred in the language the founders often used.
A careful reading of the debates over the Federal Reserve
Act makes clear, however, that the only intended type of
credit allocation was the one embodied in the real bills
doctrine. Federal Reserve lending was to channel credit
away from uses that would lead to “speculative excesses,”
such as call loans in the stock market, and toward more
productive uses, such as the “needs of commerce.”
The Fed has since abandoned the real bills doctrine, but
the central bank has engaged in a different type of credit
allocation: preventing losses for the creditors of specific
distressed financial institutions or asset markets. This
type of credit allocation is often conflated with the lending envisioned at the Fed’s founding because the tools are
the same. The original Federal Reserve Act was not wellsuited to this contemporary form of credit allocation,
however. The Act significantly limited the Fed’s ability
to support many types of financial entities because only

1930s

Multiple Bank Acts

member banks had access to the Fed’s discount window.
Nonmember banks were excluded, as were many other
types of financial institutions, including the trusts that
were at the center of the Panic of 1907. Moreover, it
would be surprising if the founders had included such
provisions; they generally opposed guarantee schemes for
fear they would encourage banks to take greater risks.15
Before the Fed’s creation, panics were simply an acute
manifestation of the broader monetary instability problem. With the latter perceived as solved by the Federal
Reserve Act, the Fed’s founders largely ignored the
question of whether the new system would adequately
prevent narrower instances of financial distress at individual banks. The hearings over the Glass-Owen bill that
became the Federal Reserve Act featured almost no discussion of whether the legislation sufficiently prevented
panics, the role of open market operations in providing
backstop liquidity, and whether the legislation’s restricted
discount window access would impair the Fed’s ability to
avert crises.16 Moreover, the Act included no provision
for relaxing lending standards to resolve panics. If firms
couldn’t obtain credit under the Fed’s strict collateralization rules—in a panic or otherwise—then they were
considered to be simply unworthy of credit.
All this indicates that the stabilizing role envisioned by
the founders was to provide for the general circulation

HARRIS AND EWING COLLECTION, LIBRARY OF CONGRESS

The federal government initiated a number
of banking reforms in the 1930s. This
photo shows President Franklin Roosevelt
joking with congressman Henry Steagall
before signing the Banking Act of 1935.
Senator Carter Glass is on the far left,
and Fed Chairman Marriner Eccles is on
the far right.

of currency, not to channel funds to targeted institutions
or markets in crises. In other words, it is more accurate
to say that the Fed was originally created and designed
to ensure monetary stability, not financial stability as the
latter term is now understood.

What about Bagehot and the central
bank as “the lender of last resort”?
If that’s the case, then where did the notion of “lender
of last resort” come from? The phrase is associated with
Bagehot, the classical economist, who in 1873 refined
the earlier work of Henry Thornton on the central bank
of England.17 Bagehot’s famous dictum on central bank
lending in a crisis is often paraphrased as, “lend freely
on good collateral at penalty interest rates.” Many people
have argued that this is what the Fed did during the recent
financial crisis.18
Bagehot is often misinterpreted, though, because our
current financial system is very different from the one he
confronted. In those days, the central bank’s loan to a bank
necessarily increased the money supply; once again, direct
lending and monetary policy were intertwined. Today, by
contrast, direct lending and monetary policy are separate
processes with separate objectives. Direct lending is conducted so as not to have any effect on the overall money
supply.19 In Bagehot’s time, central bank lending was

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1932

Emergency Lending

JONATHAN KINSER, SMITH CORONA CORP.

To meet a perceived need for business lending
during the Great Depression, Congress gave
the Fed authority to lend directly to businesses
in “unusual and exigent” circumstances via
section 13(3) of the Federal Reserve Act. The
largest of these loans provided $300,000 to
L.C. Smith & Corona Typewriters. After 1936, the
Fed did not exercise this emergency lending
authority again until 2008.

simply the primary way the money stock was managed.
What’s more, the Bank of England’s discount lending was
intermediated through “discount houses,” which effectively
prevented the Bank from knowing the identities of the
borrowing institutions, much less allocating credit based
on case-by-case analysis of their financial conditions and
interconnections within the financial system.20 Thus, when
Bagehot advocated central bank lending in a crisis, he was
advocating that the central bank expand the money supply
to meet the increase in demand.21
Moreover, Bagehot advocated crisis lending only under
a specific set of rules—only against good collateral and
at above-market interest rates to dissuade firms from
relying on central bank credit as a substitute for risk
management. Bagehot further advised the central bank to
allow insolvent firms to fail if they could not meet those
terms, even if their failures might shake market confidence, because the expectation of bailouts would only
encourage risk-taking and “rashness.” If failures threaten
to hurt other firms or the economy at large, Bagehot said
the central bank should continue to protect the money
stock through liberal lending without relaxing its criteria.
And importantly, he said, the central bank should make
these policies clear ahead of time to reassure the public
that currency will be available and to prevent firms from
expecting a central bank safety net to protect them from
bad investments.22

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The context in which Bagehot wrote is often omitted from
modern invocations. Bagehot began work on his famous
book Lombard Street in the autumn of 1870, during the
Franco-Prussian War. The French central bank already had
suspended payments, a move that threatened to heighten
gold demands on the Bank of England. Bagehot felt the
Bank of England needed to maintain a large stock of gold
to reassure markets that the currency supply would be
protected. In fact, much of Lombard Street was about that
need, not panics.23 However, he wrote, if the large gold stock
wasn’t enough to allay panic, the Bank of England should
follow the “brave plan” and lend liberally. Such lending
would be “brave” because the Bank of England was set up to
be accountable to stockholders, so the profit motive made it
naturally reluctant to lend in riskier times. Bagehot’s dictum
to “lend freely at a penalty rate” was intended to encourage
a risk-averse Bank of England to lend.
The Fed faces the opposite dilemma because it lends
taxpayer dollars. The Fed receives no appropriations from
Congress, but it remits all profits in excess of operational
costs to the U.S. Treasury, so taxpayers bear both profit
and losses from the Fed’s investments. The challenge for
the Fed is how to resist the temptation—and perhaps
political pressure—to over-lend.24 Singling out Bagehot’s
dictum about crises glosses over his emphasis on protecting the overall money stock in both normal and crisis
times and his vigilance regarding moral hazard.

1934

FDIC Coverage

The Fed’s lending during the 2007–08 financial crisis bore
little resemblance to what Bagehot had in mind. First, it
was not monetary in nature. For most of the crisis, the
Fed ensured that its unusual lending had no monetary
impact by sterilizing the effects on the money supply
(that is, simultaneously selling an equivalent amount
in Treasury securities). In fact, until interest rates were
effectively reduced to zero in late 2008, the Fed’s interest
rate targeting procedures made the supply of monetary
assets vary automatically with movements in demand,
without the need for special lending. When the Fed’s
balance sheet did grow in late 2008, it was primarily a
byproduct of its targeted lending to support the flow of
credit to particular markets, notably mortgage markets; it
did not emerge primarily from a desire to ease monetary
conditions.25 Much of the Fed’s crisis response was openly
about allocating credit to specific sectors and institutions perceived as being in trouble, not about managing
the money supply.
The Fed’s crisis response departed from Bagehot’s recommendations in other ways as well. The Fed provided
financing in connection with two arguably failing institutions, Bear Stearns and American International Group.
The Fed protected countless other creditors through
emergency lending to support asset prices. No pre-announced policy governing intervention was articulated
or followed. The Fed failed to charge penalty interest

FEDERAL DEPOSIT INSURANCE CORP.

In addition to dividing commercial and investment banking,
the Banking Act of 1933 (often called the Glass-Steagall
Act) created the Federal Deposit Insurance Corporation
(FDIC). In January 1934, the FDIC began insuring bank
deposits up to $2,500. Six months later, the FDIC doubled
its coverage limit to $5,000.

rates in some cases and took on credit risk by accepting
troubled and difficult-to-value securities as collateral.26
Bagehot and the traditional conception of a lender of last
resort thus provide scant support for the interventions
that the Fed undertook in the name of financial stability
during the recent crisis.

Would failure to lend have caused
another Great Depression?
Advocates of strong central bank actions to promote
financial stability often cite the Great Depression, when
the Fed reacted passively, allowing a third of the nation’s
banks to fail between 1930 and the banking holiday
of 1933. The Fed’s policy failure at the outset of the
Depression was a principal finding of Milton Friedman
and Anna Schwartz in their famous 1963 book, A
Monetary History of the United States. It prompted Ben
Bernanke, himself a scholar of the Depression, to tell
Friedman and Schwartz in 2002, “You’re right, we did it.
We’re very sorry. But thanks to you, we won’t do it again.”
The Fed has never repeated the mistake.
In the 1930s, the Fed could have lent to prevent bank
failures but did not. In part, this reluctance reflected
the real bills doctrine, which, under the circumstances,
encouraged Reserve Banks to be overly conservative.27

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1960s

Discount Window

FEDERAL RESERVE BANK OF NEW YORK

After 1951, the discount window became less important
for conducting monetary policy and was mostly used for
allocating credit to specific firms. In those days, the discount
window was a physical window at each Reserve Bank, as
shown in this 1960s photo from the New York Fed.

Reserve Banks also resisted conducting open market purchases because that would drive down interest rates and
lead to gold outflows, jeopardizing their ability to defend
the gold standard.28 The money supply contracted by a
third from 1929 to 1933, with a commensurate fall in the
overall price level. Friedman and Schwartz emphasized
the devastating impact of this dramatic and unanticipated
deflation. Loan defaults rose as borrowers struggled to
acquire the dollars they needed to repay debts.
Bank failures were less important than the collapse of the
money supply. For example, Canada had zero bank runs
or failures during the same time period, but it also had a
severe depression after its money supply declined by 13 percent.29 To be sure, bank failures hastened withdrawals and
reduced deposits, worsening the money supply decline. But
the Fed could have offset that by increasing bank reserves
through open market operations. Indeed, the contraction
slowed when open market operations were conducted in
the spring of 1932, and the contraction resumed when
the Fed reversed course later that year.30 Friedman and
Schwartz concluded that, “If [failures] had occurred to precisely the same extent without producing a drastic decline
in the stock of money, they would have been notable but
not crucial. If they had not occurred, but a correspondingly
sharp decline had been produced in the stock of money by
some other means, the contraction would have been at least
equally severe and probably even more so.”31

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The lesson, then, is that central banks should prevent
deflation, not necessarily bank failures. The Great
Depression was a failure of monetary stability, not
financial stability.

Why is too much lending risky?
After 1951, the Fed shifted the purpose of the discount window from being a tool for monetary policy to primarily one
for allocating credit to specific firms.32 A 1968 Fed report
noted that borrowing averaged less than 2 percent of total
Fed credit extended from the 1930s to the mid-1960s.33
The report explicitly adopted, seemingly for the first time,
the role of lender of last resort “when liquidity pressures
threaten to engulf whole classes of financial institutions.”
Though the report emphasized that the Fed’s function is not
to provide a “bail-out operation,” it provided great detail on
how existing laws might enable the Fed to extend credit to
nonmembers and nonbanks in emergencies.
The report was prescient because the Fed was called
to perform this function within two short years. In a
series of incidents, the Fed and other regulators began
intervening in ways that rescued the creditors of large,
distressed financial firms. After the Penn Central railroad defaulted on $82 million in paper obligations in
1970, the Fed indirectly supported securities markets by
encouraging banks to borrow from the Fed to purchase

1970

Penn Central Support

commercial paper. In 1972, the FDIC gave the $1.2 billion Bank of the Commonwealth a $60 million line of
credit that prevented its failure after rising interest rates
produced significant losses on municipal debt. After escalating losses in 1974, the Fed lent $1.7 billion to Franklin
National Bank, accepted deposits from its foreign branch
as collateral, and assumed $725 million of its foreign
exchange book. When the $40 billion bank Continental
Illinois was pulled under by bad loans in 1984, it was
able to borrow from the discount window even as it was
receiving a capital injection from the FDIC. The FDIC
committed to guaranteeing deposits even above the
statutory limit of $100,000, and it gave the bank and its
parent company a permanent capital infusion.34
These were among the largest examples of government
rescues, but there were many others. From 1985 through
1991, 530 discount window borrowers failed within three
years of borrowing from the Fed; 437 of them had the
lowest possible examiner rating, and 60 percent of them
had outstanding discount window loans when they failed.35
The Fed and the FDIC operated in concert. Fed lending
bought time for the FDIC to arrange for the institutions
to be sold or kept afloat with FDIC funds. Fed lending
also provided time for uninsured creditors—that is, those
who had not been explicitly promised support before the
trouble began—to exit without losses, increasing the cost

COLLECTION OF CRAIG ZENI

When Penn Central Transportation
defaulted on $82 million in commercial
paper, the Fed assured banks that it
would provide backstop funding for their
loans to commercial paper issuers. The
action conveyed that the Fed was willing
to support broader financial markets—
not just banks.

of the failure to the FDIC. Between 1986 and 1991, the
average size of troubled banks that the FDIC liquidated
without protection of uninsured creditors was $65 million, while the average size of banks whose uninsured
creditors were protected was $200 million.36
In the most well-known cases, the government’s stated
concern was not the welfare of a single institution’s creditors, but the possibility that, if the institution failed,
funding costs would rise for other market participants.37
In each case, the government intervened rather than
test the market’s ability to weather spillovers, and these
actions successfully quelled the immediate volatility. Note
that government intervention was unlikely to prevent
knowledge from spreading about a given firm’s trouble.
The primary spillover that was affected was the inference
investors drew about the government’s willingness to
intervene to support other market participants.
A strong case can be made that these interventions caused
greater instability down the road. When the government
defines in advance institutions that have access to its
liquidity, it can tax and regulate those firms accordingly,
offsetting moral hazard and constraining risk-taking.
By contrast, when the government suddenly expands
its safety net in the face of threats to firms and markets
that have not been taxed and regulated, or when it prolongs the life of insolvent firms, it conveys that market

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1984

Too Big to Fail?

BRANDON HARRIS PHOTOGRAPHY

The government rescue of Continental Illinois—
the largest U.S. bank to fail before 2008—gave
popular rise to the term “too big to fail” and
was followed by a string of government rescues. From 1985 to 1991, more than 500 banks
failed within three years of borrowing from the
discount window. Most of them had the lowest
possible examiner rating. Reforms in 1991
made bank bailouts harder but expanded the
Fed’s 13(3) authority.

participants can take excessive risks without bearing the
full costs. On the margin, funding flows to markets that
seem most likely to receive government support. The
expectation of that support reduces the monitoring efforts
of creditors, so those borrowers can take greater risks.
When firms fail, government support is invoked again.
As this narrative suggests, failures and the safety net have
grown successively larger. Richmond Fed researchers
calculate that, by 1999, approximately 45 percent of
the financial sector was either explicitly protected by
the government, or investors could reasonably expect
protection because of past statements and actions. The
protected portion rose to as much as 57 percent after
the government’s activities during the financial crisis.38
The size of the safety net suggests that moral hazard is a
significant presence in our financial system.

Is emergency lending necessary?
Our current financial system has changed dramatically
over the past century. Banks and trusts dominated the
landscape in 1913. The system now includes an interconnected web of banks and investment companies,
including mutual funds, private equity pools, hedge
funds, and others. These institutions operate with
opaque interconnections and on a global scale, and
they ultimately fund the bulk of economic activity.39

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They use an array of complex financial instruments,
and some perform bank-like functions in the sense
that they accept very short-term instruments that
function much like “deposits,” and use them to fund
longer-term investments.
A common argument given for preserving the Fed’s
emergency lending powers, despite the risks described
above, is that the government must retain some way to
provide backstop financial assistance to treat the fragilities inherent in banking.40 The essence of the financial
crisis, in this view, was that many investors declined to
roll over short-term, deposit-like investments in a process
resembling a bank run. As the shadow banking system
emerged over the past century, no official institution
emerged to create an “elastic currency” for it—that is, a
reliable supply of short-term credit instruments to fund
the shadow banking system.41 In this narrative, the Fed’s
special lending programs during the financial crisis of
2007–08 simply provided an elastic currency to protect
the needs of commerce. Many observers have described
the crisis as a classic banking panic.42
If the fragility we recently observed were due mostly to
inherent fragilities in banking, we should expect to see
similar financial crises with some consistency across countries over time. Yet history shows that the occurrence of
financial crises is very unevenly distributed. They were

1998

Rescuing LTCM

particularly prevalent during some periods but noticeably
less frequent in others. The 1920s and 1930s, for example,
and the period since 1973 have seen significantly more
frequent crises than the classical gold standard period
or the Bretton Woods era.43 And many countries have
experienced far fewer crises than the United States, a
fact documented in studies by Michael Bordo and Barry
Eichengreen, Carmen Reinhart and Kenneth Rogoff, and
Charles Calomiris and Stephen Haber.
Canada provides a particularly compelling example
of a country that is quite similar to the United States
but has avoided systemic banking panics altogether
since 1839, despite the lack of a central bank until the
mid-1930s. In the late 19th century, Canada allowed
bank branching and less-restrictive issuing of banknotes,
which made their banking system better able to respond
to regional economic shocks. These features afforded
Canadian banks an “elastic currency” with no central
bank. If needed, Canadian banks could shift reserves
between them, and the confidence that this would take
place seemed sufficient to ward off runs. The system was
concentrated enough that banks could monitor each
other’s operations to offset the moral hazard that might
otherwise arise from this private backstop.44
One reason we may not see crises consistently is that
financial institutions face a different set of incentives

FEDERAL RESERVE BANK OF NEW YORK

The Federal Reserve helped organize a
multibillion-dollar bailout of Long-Term Capital
Management (LTCM), a hedge fund whose
clients and creditors included the biggest
firms on Wall Street. Though the Fed did not
fund the bailout, the Fed convened leaders
of those firms on the 10th floor of the New
York Fed and urged them to devise a private
rescue plan.

across countries and time periods to fund themselves
with short-term debt. There are alternative funding
methods that aren’t as vulnerable to sudden demands
for withdrawals. If financial institutions choose to fund
themselves with short-term, demandable debt, they can
include provisions that make them more resilient, therefore reducing the incentive for runs.45 Many of these
safeguards already exist: contracts often include limits
on risk-taking, requirements for borrowers to maintain a
degree of liquidity, overcollateralization, and other mechanisms.46 Moreover, contractual provisions can explicitly
limit investors’ ability to flee suddenly, for example, by
requiring advance notice of withdrawals or allowing
borrowers to restrict investor liquidations. Indeed, many
financial entities outside the banking sector, such as
hedge funds, avoided financial stress by adopting such
measures prior to the crisis.47
Yet, leading up to the crisis, many financial institutions
chose funding structures that left them vulnerable to
sudden mass withdrawals. Why? Precedents established
over the previous four decades arguably convinced market participants of an implicit government commitment
to provide liquidity in the event of significant financial distress. Larger bank holding companies relied to
a greater extent on the short-term credit markets that
ended up receiving government support during the
crisis.48 As the crisis unfolded, beginning in the summer

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2008

Lehman Bankruptcy

KRISTY WIGGLESWORTH, ASSOCIATED PRESS

The financial crisis escalated quickly
after Lehman Brothers declared
bankruptcy in September 2008. The
federal government and the Federal
Reserve had rescued other large
financial firms, such as Bear Stearns,
but they allowed Lehman to fail.

of 2007, the Federal Reserve took actions that are likely
to have further influenced expectations regarding support. In August 2007, the Fed lowered the discount rate
and urged banks not to think of borrowing as a sign of
weakness. In December 2007, the Fed implemented the
Term Auction Facility in order to make credit available
on more favorable terms.
The effect of these policy decisions is often underappreciated. They likely dampened the willingness of troubled
institutions, such as Bear Stearns and Lehman Brothers,
to undertake costly actions to shore up their positions,
whether by raising capital, selling assets, or reducing
their reliance on short-term funding. These incentives
were further entrenched when the New York Fed funded
JPMorgan’s purchase of Bear Stearns in March 2008;
for example, credit rating agencies considered the government’s support of Bear Stearns in their decisions to
leave Lehman Brothers with high ratings just before its
collapse.49 When Lehman Brothers was allowed to fail in
September 2008, despite being a much larger institution
than Bear Stearns, these expectations were reevaluated
suddenly, spurring the most volatile days of the financial
crisis. Allowing Lehman to fail could have been the start
of a new, more credible precedent against bailouts; but
that same week, American International Group received
assistance from the New York Fed, further confusing
already volatile markets.

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After decades of expanding the financial safety net, the
precedents set during the crisis may have been the most
consequential of all.

Is there a better path to
financial stability?
The moral hazard that results from government support
is not a new revelation. Dating back to the 1930s, policymakers have acknowledged it with virtually every step
that expanded or reinterpreted the government’s reach.50
From the Depression to the bank failures of the 1970s and
1980s, major crises have prompted sweeping reforms to
constrain risk-taking and prevent future financial distress. Yet, at each turn, policymakers have been unwilling
to relinquish the ability to funnel credit to particular
markets and firms in perceived emergencies.51 One can
understand why, because such lending, by confirming
hopes for intervention, appears to stabilize markets, as it
did in 2007 and 2008. The approach instead has been to
retain that power and attempt to counter moral hazard
with enhanced supervision.
The most recent crisis was no exception. The 2010
Dodd-Frank Act tightened limits on risk-taking and
increased supervision, especially for “systemically
important” financial firms. Title I of the Act allows
regulators to constrain the activities of firms if their

2008

Expanding the Safety Net

managements are unable to create a credible plan for
their orderly wind-down in bankruptcy. Title II gives
the FDIC authority to facilitate a firm’s resolution if
unassisted failure would threaten financial stability.
Dodd-Frank prohibits the Fed from extending loans to
specific firms under section 13(3) of the Federal Reserve
Act, requiring instead that all 13(3) loans have “broadbased eligibility” and advance Treasury approval. The
preamble to the Dodd-Frank Act states that one of its
objectives is to end “too big to fail,” the term often used
to describe the government’s historical tendency for
bailouts of large, interconnected firms.52
Regulation, however, is far from foolproof as a way to
counter moral hazard. To be sure, safety and soundness
regulation is critically important given the size of the
financial safety net. But regulations tend to take the
current world as static, when in fact the world changes
quickly, especially in response to new regulations. The
emergence of the shadow banking system, for example,
was a response to risk-taking limits imposed on traditional banks. Surveillance helps but may not keep up with
innovation. In each past reform episode, policymakers
have hoped they had their arms around risk-taking, and
in the next episode, risk showed up in new places.
Thus, the real work of ensuring financial stability must
start with addressing the incentives that encourage exces-

STEVE MCCARTHER, FEDERAL RESERVE BANK OF RICHMOND

In October 2008, President George
W. Bush signed the Emergency
Economic Stabilization Act, which
temporarily bolstered FDIC insurance coverage from $100,000 to
$250,000. Then, in 2010, the federal
government permanently increased
deposit coverage to “at least
$250,000.”

sive risk-taking. Dodd-Frank does not accomplish this;
like past reforms, policymakers retained broad discretion
to conduct bailouts.53 An important difference between
resolution authority under Dodd-Frank’s Title II and
the normal bankruptcy code is that the former gives
the FDIC the ability to borrow from the Treasury to pay
creditors of a failed firm, and it gives the FDIC broad
discretion to determine which creditors to pay.54 Thus,
creditors still can reasonably expect government support
based on the government’s past actions, with the attendant deleterious effects on their incentives to monitor a
firm’s activities. Moreover, Dodd-Frank’s restrictions on
13(3) lending do not prevent bailouts. When large firms
are in trouble, it can be hard to distinguish between
market distress and firm distress, and a broad-based
lending program could be particularly attractive for a
distressed firm.
At the same time, Dodd-Frank provides one of the
most promising avenues for scaling back the perceived
government backstop. Title I requires large firms to
create “living wills,” detailed plans for how each firms’
operations could be rapidly wound down in an orderly
manner under the U.S. bankruptcy code without government assistance. The Fed and the FDIC can jointly
determine that a firm’s proposed plan is not credible. In
that case, if the firm does not revise the plan to regulators’ satisfaction, they can impose changes to the firm’s

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2010

Dodd-Frank Act

WHITE HOUSE PHOTO OFFICE

Responding to the financial crisis
of 2007–08, Congress passed the
Dodd-Frank Wall Street Reform and
Consumer Protection Act, the most
far-reaching reform of financial regulation since the Great Depression.
President Barack Obama signed the
Dodd-Frank Act on July 21, 2010.

structure and operations that would make the firm
resolvable without government assistance. Establishing
credible living wills will be hard work.55 However, they
currently provide the best hope for ending bailouts of
“too big to fail” firms because they prompt regulators
to create conditions under which they consistently prefer unassisted bankruptcy to bailouts. With a credible
alternative to bailouts available, investors would have
reason to expect that unassisted bankruptcy would be
the norm, and firms would have a strong incentive to
implement their own safeguards against runs.
In addition, certain reforms of the bankruptcy code
could improve prospects for credible resolution plans.
Currently, if a borrower files for bankruptcy, a provision
of the code known as the “automatic stay” prevents
creditors from seizing collateral or taking certain other
actions against the borrower. The borrower’s assets are
essentially frozen until bankruptcy courts can oversee
the development and adoption of a plan for the distribution of assets to creditors. Certain financial contracts,
such as repurchase agreements and some derivatives,
are exempt from this provision, and counterparties in
such contracts are entitled to immediately liquidate
their positions and seize collateral. Exemptions to the
automatic stay were added to the bankruptcy code
and enhanced in 2005 because it was felt that allowing
derivatives counterparties to liquidate their positions

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immediately would reduce the incentive for lenders
to run before bankruptcy is declared. The exemption
creates instability in other ways, however. It reduces
creditors’ risk, and so distorts incentives toward greater
use of exempted contracts, and diminishes the lender’s
incentive to monitor the firm. It presents the possibility
of additional market volatility after a failure as lenders
are liquidating their positions, and it can diminish the
value of the failed firm, both of which make it more
tempting for the government to rescue large firms.56
Reforming the bankruptcy code to limit these exemptions would enhance stability.57
If expectations of government intervention were to
persist, even with credible living wills and a better bankruptcy code, market participants would face dampened
incentive to avoid fragile arrangements. Those expectations are likely to persist as long as there is the legislative
authority to provide that support, such as the power to
use the Orderly Liquidation Fund to protect creditors in a
Title II FDIC resolution. This power will be unnecessary
and obsolete once credible living wills are in place. At that
point, repeal of Title II would enhance financial stability.
The Fed still possesses expansive authority to conduct
bailouts, however, since it can lend to various parties in
the broader financial system without special congressional approval. Rescinding section 13(3) entirely would be
a useful step toward establishing a credible commitment

2013

Centennial Commemoration

The Federal Reserve commemorated its 100th
anniversary in December 2013. To learn more
about lessons from its first 100 years, visit
www.federalreservehistory.org. This website
provides hundreds of photos, biographies,
and essays illuminating the events, people,
and purposes that have influenced Fed
decision-making for the past century.

to resolve failing financial institutions without rescuing
creditors. The same reasoning suggests imposing clearly
articulated restrictions on discount window lending,
strictly limiting it to good collateral at penalty interest
rates, as Bagehot suggested.58
The steps outlined above won’t eliminate instances of
financial distress. But optimal financial stability does
not mean the absence of financial firm failures and
creditor losses. Indeed, a well-functioning financial system must allow firms to fail, even if they are large and
interconnected. Financial stability
is to be found in the financial
system’s resilience to potential
triggering events—without
government assistance. The
steps described above may be
our best chance at achieving true
financial stability.
The Fed’s emergency lending
authority is anachronistic and
unnecessary for the Fed’s core
mission of providing monetary
stability. In a panic, open market operations are capable of
flooding the market with liquid
assets. For this reason, some

economists have argued that the discount window is
obsolete.59 Removing discretionary lending authority
would prevent future policymakers from feeling trapped
into lending by the effects of expectations of support.
A critical lesson from the Fed’s first 100 years is
that an overly broad interpretation of the Fed’s role
in financial stability in fact undermines financial stability,
contributing to a cycle of moral hazard, financial failures,
and rescues. The Fed already has the tools and mandate
it requires to provide monetary stability, which is its best
contribution to financial stability. ■

Renee Haltom is research publications
content manager, and Jeffrey M. Lacker
is president of the Federal Reserve
Bank of Richmond. The authors would
like to thank Huberto Ennis, Robert
Hetzel, and John Weinberg for valuable
feedback and insight.
The views expressed are those of the
authors and not necessarily those of
the Federal Reserve Bank of Richmond
or the Federal Reserve System.

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Notes and References

Endnotes
1.

For a summary, see Bank for International Settlements (2011).

There is clear support for a formal financial stability mandate in the
United States. A near-final version of the 2010 Dodd-Frank Act almost
took this step, stating that, “The Board of Governors shall identify,
measure, monitor, and mitigate risks to the financial stability of the
United States.” For unexplained reasons, the phrase was dropped in
conference. Some parties have even argued that a financial stability
mandate already exists by virtue of the Fed’s other mandates. For
example, see Bank for International Settlements (2011), Dudley
(2013b), Baxter (2013), and Tarullo (2012).

For a review of literature on the effectiveness of crisis lending programs, see Fleming (2012).

For example, see Warburg (1930, 12–13) and Glass (1922, 4–7).

Cagan (1963)

Keeping deposits in other banks also facilitated check clearing in the
days when physical checks traveled by horse and carriage. Reserves
allowed “correspondent” banks to immediately cash each other’s checks
by drawing down the correspondent’s reserve balance (Lacker, Walker,
and Weinberg 1999).

which would ensure its influence over other market rates, and therefore
gold flows. Policymakers at the Fed disagreed over whether open market
operations were contradictory to real bills (Meltzer 2003, 263–264).
14. Hetzel (2004)
15. Carter Glass, who coauthored the Glass-Owen bill that became the
Federal Reserve Act, was a well-known opponent of deposit insurance. Federal deposit insurance was nonetheless incorporated into
the Glass-Steagall Act of 1933 as an 11th-hour addition in exchange
for the support of Alabama Rep. Henry Steagall for the bill’s many
other provisions that Glass advocated. Steagall represented many
small banks that would be kept viable by deposit insurance in the
face of increasing bank branching and consolidation (Flood 1992;
Economides, Hubbard, and Palia 1996).
16. Wicker (2005, 78)
17. Thornton and Bagehot never actually used the phrase “lender of last
resort.” The first popular English usage was in 1932 in Art of Central
Banking by R.G. Hawtrey, although Sir Francis Baring in 1797 did refer
to the Bank of England as “the dernier resort,” a source of liquidity for
banks in a crisis (Humphrey 1989).
18. For example, see Madigan (2009) and Wolf (2014).

Miron (1986)

19. Discount window loans increase the supply of bank reserves, and in
normal times are offset to prevent downward pressures on the federal
funds rate, the FOMC’s targeted interest rate.

Glass (1922, 5–7)

20. Capie (2002, 311)

Sprague (1910, 249–251); Glass (1922, 5); Calomiris (1990); Wicker
(2005, 2–3). Alternatives to currency reform and the Fed were
discussed but did not gain traction. In addition to bank branching,
deposit insurance was considered, but large banks objected under
the argument that it would force them to subsidize the risk-taking of
small banks (Flood 1992). For more discussion on how the reform
debate evolved prior to the Federal Reserve Act, see Wicker (2005),
Warburg (1930, Chapter 1), and Willis (1923).

21. Goodfriend and King (1988)

10. To make the loan, the lending Reserve Bank would credit the borrowing
bank’s reserve account. The bank could then withdraw the reserves in
the form of currency (Federal Reserve notes) if so desired.
11. To be precise, the real bills doctrine said that if banks lent against only
sound, short-term paper, the money supply would automatically match
the needs of commerce. The doctrine has since been discredited for
ignoring the fact that inflation would itself create a greater demand
for currency to fund trade. See Humphrey (1982) for more discussion.
12. The Federal Reserve Act itself did not indicate that only “self-liquidating” loans were eligible, a defining component of real bills (Humphrey
1982). However, maturity limits were imposed, and the same month the
Fed opened, the Board clarified in its accompanying regulations that
notes funding permanent or fixed investments, like land and capital,
were ineligible for rediscounting. That exclusion was lifted in 1973,
though maturity limits remained (Hackley 1973, 35–37).
13. If the Fed created an artificial shortage of reserves through asset sales,
banks would be forced to borrow from the Fed at the discount rate,

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22. See Humphrey (1989) for more discussion on what Thornton and
Bagehot intended. Bordo (1990) reviews how well central banks have
adhered to these prescriptions throughout history.
23. Rockoff (1986)
24. This point is argued by Goodfriend (2012).
25. In an October 2009 speech, then-Chairman Ben Bernanke said,
“Although the Federal Reserve’s approach … entails substantial increases
in bank liquidity, it is motivated less by the desire to increase the liabilities of the Federal Reserve than by the need to address dysfunction
in specific credit markets. … For lack of a better term, I have called
this approach ‘credit easing.’”
26. Madigan (2009); GAO (2013b); Goodfriend (2012).
27. Richardson and Troost (2009)
28. Eichengreen (1992)
29. Friedman and Schwartz (1963, 352)
30. See essays about the Great Depression era on federalreservehistory.org.
31. Friedman and Schwartz (1963, 352)
32. Hackley (1973, 185–188)

33. Board of Governors (1968)
34. For more on these episodes, see Sprague (1986) and Carlson and
Wheelock (2013).
35. Schwartz (1992). The appendix in Sprague (1986) lists the 100 largest
banks that received FDIC assistance from the Depression through
1985. Continental Illinois and Franklin National were ranked first
and fourth, respectively.
36. FDIC (1997)
37. Sprague (1986) provides detailed insight on the internal discussions
that took place among regulators in these instances. The Fed was, more
often than not, in complete support. Sprague notes, “What were the
real reasons for doing the [bailouts]? Simply put, we were afraid not to.”

52. The phrase “too big to fail” was made popular after the failure of
Continental Illinois, when Comptroller of the Currency C.T. Conover
explicitly stated that regulators were unlikely to allow the nation’s 11
largest multinational banks to fail. Congressman Stewart McKinney
responded, “let us not bandy words. We have [created] a new kind
of bank. It is called too big to fail. TBTF, and it is a wonderful bank.”
53. Of too big to fail, Bernanke stated in a March 2013 press conference,
“I never meant to imply that the problem was solved and gone. It is
not solved and gone; it’s still here ...”
54. Pellerin and Walter (2012)
55. Lacker (2013b)

39. Pozsar, Adrian, Ashcraft, and Boesky (2010)

56. The Government Accountability Office notes that approximately 80
percent of Lehman’s derivative counterparties terminated their contracts
after the firm filed for bankruptcy, exacerbating Lehman’s losses and
leading to run-like behavior in money market mutual funds and other
markets (GAO 2013a, 45–46).

40. Dudley (2013a)

57. Roe (2011); Duffie and Skeel (2012)

41. Gorton (2010); Gorton and Metrick (2013)

58. One example of an attempt to prevent government lending to insolvent
firms is the “Prompt Corrective Action” provision of the Federal Deposit
Insurance Act. PCA imposes increasingly aggressive restrictions on
banks as their capital levels fall, although capital levels may not be
sufficient as a measure of solvency because lags in the recognition
of losses mean that the book value of capital is a backward-looking
measure that can overstate the net worth of a bank. PCA has failed to
limit the cost to the FDIC of failed banks, and regulators are considering changes (GAO 2011).

38. Marshall, Pellerin, and Walter (2013)

42. See Bernanke (2013b), Gorton (2010), and the Federal Open Market
Committee meeting transcripts from 2008, among others.
43. Bordo, Eichengreen, Klingebiel, and Martinez-Peria (2001)
44. Bordo, Redish, and Rockoff (1996); Williamson (1989)
45. Wallace (1988); Green and Lin (2003); Ennis and Keister (2010)
46. Bernanke (2012)

59. See Goodfriend and King (1988); Schwartz (1992).

47. Aragon (2007); Zuckerman (2008)
48. GAO (2013b)
49. In a September 2009 House subcommittee hearing, Moody’s chairman
and CEO Raymond McDaniel said, “An important part of our analysis
was based on a review of governmental support that had been applied
to Bear Stearns earlier in the year. Frankly, an important part of our
analysis was that a line had been drawn under the number five firm
in the market, and number four would likely be supported as well.”
50. Moral hazard was acknowledged during the debates surrounding
deposit insurance (Flood 1992), the Board’s apparent adoption of
the lender of last resort role (Board 1968), the first time the Fed
purchased mortgage-related securities in 1971 (Haltom and Sharp
2014), the bailouts of the 1970s and 1980s (Sprague 1986), and the
actions during the financial crisis that motivated the Dodd-Frank
Act—among other instances.
51. A notable example was 1991’s Federal Deposit Insurance Corporation
Improvement Act. FDICIA limited the FDIC’s ability to rescue firms
and limited the Fed’s ability to lend to insolvent ones. However, FDICIA
loosened collateral requirements for the Fed’s 13(3) emergency lending
facility, granting what former Fed Chairman Alan Greenspan in 2010
called “virtually unlimited authority to the Board to lend in ‘unusual
and exigent circumstances.’”

References
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Carlson, Mark A., and David C. Wheelock. February 2013 (Revised). “The
Lender of Last Resort: Lessons from the Fed’s First 100 Years.” Federal
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Insurance, and Liquidity.” Journal of Political Economy 91 (3): 401–419.
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Prerequisite for an Effective Monetary Policy.” Remarks at the Andrew
Crockett Memorial Lecture, Bank for International Settlements 2013
Annual General Meeting, Basel, Switzerland.

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Hackley, Howard. 1973. Lending Functions of the Federal Reserve Banks:
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Haltom, Renee, and Robert Sharp. April 2014. “The First Time the Fed
Bought GSE Debt.” Federal Reserve Bank of Richmond Economic Brief.
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Federal Reserve Bank of Richmond Economic Review, 3–13.
Humphrey, Thomas M. March/April 1989. “Lender of Last Resort: The Concept
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After the Crisis.” Speech to Franklin & Marshall College, Lancaster, Pa.

Richardson, Gary, and William Troost. 2009. “Monetary Intervention
Mitigated Banking Panics During the Great Depression: QuasiExperimental Evidence from a Federal Reserve District Border,
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Sprague, Irving H. 1986. Bailout: An Insider’s Account of Bank Failures and
Rescues. Washington D.C.: Beard Books.
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Lacker, Jeffrey M. April 9, 2013b. “Ending ‘Too Big To Fail’ Is Going to
Be Hard Work.” Speech to the Global Society of Fellows Conference,
University of Richmond, Richmond, Va.

Stein, Jeremy C. February 7, 2013. “Overheating in Credit Markets: Origins,
Measurement, and Policy Responses.” Speech to the “Restoring Household
Financial Stability after the Great Recession: Why Household Balance
Sheets Matter” Research Symposium, Federal Reserve Bank of St. Louis,
St. Louis, Mo.

Lacker, Jeffrey M. November 1, 2013c. “Global Interdependence and Central
Banking.” Speech to the Global Interdependence Center, The Union
League of Philadelphia, Philadelphia, Pa.

Tarullo, Daniel K. May 2, 2012. “Regulatory Reform Since the Financial
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2013 annual report

Message from Management

Embracing Regional and National Roles

joined the Federal Reserve Bank of Richmond last June and wish to convey what a
privilege it is to work with such a committed group of central bankers in this, the centennial year of the Federal Reserve. I also would like to congratulate my predecessor,
Sally Green, on her mid-2013 retirement and her many contributions as first vice president
and chief operating officer of this Bank and in other key roles during her 36-year career
with the Federal Reserve System.

PHOTO: MICHAEL BATTS

One of the enduring strengths of the System is its regional structure,
which contributes to banking supervision, payments services, and
monetary policymaking in a variety of ways. Most importantly, the
regional structure ensures that diverse views are brought to bear on
issues that are critical to the nation’s economy and the Federal Reserve’s
central banking mission. The preceding pages of this annual report
are a prime example. The essay by President Jeffrey M. Lacker and
Research Publications Content Manager Renee Haltom questions the
System’s increasing role in financial stability. They make a good case
for ending crisis lending and focusing on monetary stability, but there
are economists at other Reserve Banks who might disagree. This is one
example of our ability to discuss and deliberate freely, which is perhaps
the greatest strength of our regional structure.

Mark L. Mullinix
First Vice President and
Chief Operating Officer

Notwithstanding our differences of opinion on some economic and
policy issues, Reserve Banks have joined together to deliver services
to financial institutions more efficiently and to centralize common support services across
the System. Our aim for some time has been to present a consistent national face to our
customers in product offerings and support services. As a result, our organization today
is designed to provide national leadership and direction to our payments services and to
meet our obligations as fiscal agents for the U.S. Treasury Department. Reserve Banks also
are sharing banking supervision expertise and key national support services. By leveraging
the benefits of technology and by sharing the talents of staff across the System, Reserve
Banks are increasing their ability to build value and gain efficiencies.
At the Richmond Fed, we have the privilege of hosting and providing leadership to business
operations for four nationally provided support services: Centralized Payroll Operations,
the National Procurement Office, the Currency Technology Office, and Federal Reserve
Information Technology (FRIT). Each of these national support functions operates and
performs essential services for Reserve Banks. The payroll group provides payroll services
to the Reserve Banks’ employees, while the national procurement group leverages the
combined buying power of Reserve Banks.

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2013 annual report

The Richmond Fed plays a significant technology role in the Federal Reserve System. The
Currency Technology Office is responsible for providing the equipment, software, and
support for the Reserve Banks’ currency-processing equipment and the currency sensors
that reside on those machines. The currency-technology team has provided this centralized
service to Reserve Banks for more than three decades. Today, the team gives the Reserve
Banks an efficient and highly effective platform to process and authenticate more than
34 billion pieces of U.S. currency annually as they support and distribute more than $1.3
trillion in currency circulating globally.
Another major technology responsibility rests with FRIT, a group that is led in Richmond
by the Federal Reserve System’s chief information officer. FRIT is responsible for providing
enterprise information technology architecture and standards, enterprise information
security policy and assurance, computing and network operations, project services, and enduser services to all the Reserve Banks and their national product and support offices. FRIT
also provides services to the Federal Reserve’s Board of Governors and the U.S. Treasury.
Although not a national support function, another role we are proud to have taken is
coordinating the federalreservehistory.org site on behalf of the Federal Reserve System.
This site commemorates the Federal Reserve’s centennial by allowing scholars and the
general public to access archives, essays, biographical information, and other facts about
our nation’s central bank. We will continue to work with colleagues at other Reserve Banks
and the Board of Governors to add content, so I encourage you to visit and revisit the site
to learn more about the Fed’s first 100 years.
In 2013, the Federal Reserve Bank of Richmond continued to deliver on commitments we
believe are vital to our region, our nation, and the communities we serve. The Fed’s regional
structure has proven flexible in meeting the needs of customers and improving the overall
effectiveness of our operations. One hundred years after our founding, the Richmond Fed
remains committed to maximizing its contributions to both the Fifth District and the
Federal Reserve System.

Mark L. Mullinix
First Vice President and Chief Operating Officer

federal reserve bank of richmond

2013 annual report

Fed Spotlight

Delving into Workforce Development

uring the 2007–09 recession and ongoing recovery, the Federal Reserve employed a variety of
monetary policy tools in an effort to promote
economic growth and reduce unemployment, but unemployment has decreased only slowly.
As president of the Federal Reserve Bank of Richmond,
Jeffrey Lacker has argued against various aspects of these
expansionary monetary policies. One reason is that at
least some portion of persistent long-term unemployment can be attributed to nonmonetary factors, such as
structural shifts in the labor market. And one of those
structural changes is an apparent mismatch between the
skills that employers seek and the skills (human capital)
that unemployed workers possess.
In a 2012 speech to business and community leaders in
Greensboro, N.C., Lacker suggested that investments in
building human capital could be more effective in the
long run than highly accommodative monetary policy.
“While perhaps not a quick resolution to the current
unemployment problem, I believe such investments
are likely to yield greater benefits for both workers and
the economy as a whole than efforts aimed at providing
short-term stimulus,” he said. “Improvement in the skill
level of the workforce eventually leads to both higher
productivity and wages.”
Lacker’s speech, “Technology, Unemployment and
Workforce Development in a Rapidly Changing World,”
can be found at www.richmondfed.org/press_room/
speeches/president_jeff_lacker /2012/lacker_speech
_20120507.cfm. Also, the Bank’s most recent thinking
on using monetary stimulus to reduce unemployment
can be found in “Labor Market Conditions and Policy,”
an essay in the Bank’s “Our Perspective” series at
www.richmondfed.org/research/our_perspective/labormarkets/index.cfm.

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2013 annual report

Regional Perspectives
Workforce development has been an important topic of
research and discussion throughout the Federal Reserve
System in recent years. In 2010, then-Fed Chairman Ben
Bernanke highlighted the issue in a speech to members
of Virginia’s Community College Workforce Alliance at
a conference co-sponsored by the Richmond Fed.
“As the labor market recovers, innovative workforce
development programs can play important roles in
anticipating future job market demands and by helping
workers improve their skills to meet the requirements of
businesses as they adopt more advanced technologies,”
Bernanke said. “Although forecasting future job opportunities can be difficult, … the Bureau of Labor Statistics
anticipates that the demand for workers in health-related
occupations will continue to outpace demand in many
other industries. According to the Bureau, many of the
prospective opportunities in health, as well as others
expected to be added in transportation and administrative areas, do not require a full four-year degree.
Community colleges have responded to these specific
training needs by offering condensed courses in medical
billing and training to become a pharmacy technician.”
Bernanke’s speech, “Fostering Workforce Development,”
is available at www.federalreserve.gov/newsevents/
speech/bernanke20100609a.htm.
In the two years following Bernanke’s speech, the
Richmond Fed collaborated with eight other Reserve
Banks and the Board of Governors to gather regional
perspectives on the causes of long-term unemployment—particularly in low- and moderate-income
communities—and to identify promising workforce
development strategies. At forums throughout the United
States, the Reserve Banks collected a large quantity of
anecdotal evidence that indicates a mismatch between
worker skills and job requirements.

PHOTO: CHRIS RECORD, CENTRAL PIEDMONT COMMUNITY COLLEGE

An apprentice sponsored by Siemens Energy works in the computer-integrated machining lab at Central Piedmont
Community College.

The Richmond Fed hosted a meeting in West Virginia,
for example, where hospital administrators said that
many job applicants with other workforce experience
lacked the “hard” skills—particularly basic computer
knowledge—required to fill vacant health care positions.
Younger employees, on the other hand, were said to be
“distracted by technology, often ignoring policies about
cell phone and social media usage during work hours.”
This comment was part of a broader discussion on a
nationwide shortage of “soft” skills, such as professionalism and punctuality.
These and many other regional insights appear in the
Board of Governors’ final report, “A Perspective from
Main Street: Long-Term Unemployment and Workforce
Development.” It is available at www.federalreserve.
gov/communitydev / long-term-unemployment-andworkforce-development.htm.

The Board of Governors completed the report in 2012,
but the Richmond Fed has continued to seek regional
information about workforce development throughout
the Fifth Federal Reserve District. In November 2013,
workforce development was high on the agenda when
a delegation of Bank leaders and economists visited
Charlotte, N.C. They participated in two roundtables:
one about developing innovators, entrepreneurs, and
professionals and one about other workforce training
programs in the area. They also toured a Siemens Energy
facility, where 15 apprentices are enrolled in a two-year
program run by Central Piedmont Community College.
Siemens pays for their education and hires them when
they complete the program.
“It is exciting to see the growing number of high schools
and community colleges that are partnering with businesses to offer vocational training and apprenticeship

federal reserve bank of richmond

2013 annual report

PHOTO: KEITH MARTIN

Richmond Fed volunteer Steve McCarther (right) mentors Dominique Rivers in the Bank’s
Lunch Buddies program.

programs,” Lacker said in a speech to community leaders
on the following day. Providing students with more
information about such programs also might reduce
the high school dropout rate. Nationally, more than
20 percent of high school students do not graduate in
four years, and many of those students never graduate
at all. That measure climbs to more than 40 percent in
some large urban school districts. “If the only reason
to graduate from high school is to enroll in college,
then students who do not wish to attend college, or
perceive large barriers to doing so, might not see much
value in graduating,” Lacker added. “For these students, learning about viable career and educational
alternatives could improve their appreciation of the
value of finishing high school.” This speech, “Starting
Early in Workforce Development,” is available at www.
richmondfed.org/press_room/speeches/president_jeff_
lacker/2013/lacker_speech_20131105.cfm.

Richmond Initiatives
In 2013, the Richmond Fed formed an internal workforce development group to study the topic in a more
systematic way and to identify immediate and future
opportunities for the Bank to make a bigger difference
in the Fifth District communities it serves.

federal reserve bank of richmond

2013 annual report

The interdisciplinary team surveyed the most prominent academic research, reviewed government policies
and programs, studied existing workforce development
initiatives, and inventoried the Bank’s current efforts to
address the problem.
The group defined workforce development to include the
entire range of human capital acquisition. The research
served mostly internal purposes, but it identified three
areas for public policy consideration.
• Early intervention: The value of this approach is
well-established in early childhood studies, but the
team suggested that the concept also applies later in
life. For example, young workers who develop flexible
skills (the ability to adapt to new technologies and
environments) might be protected from long-term
unemployment even when their job-specific skills
become obsolete.
• Better information: The group recommended providing better information to help students and their
families understand the economic consequences of
dropping out of high school and the potential risks
and rewards associated with enrolling in a four-year
college versus other types of higher education and

The Bank also provides economic education resources,
such as an online course it is designing to help students make well-informed decisions about which path
to pursue after high school. Instead of a one-size-fits-all,
four-year-college prescription, the course provides a
series of exploratory lessons that culminate in an individualized plan for each student.
The Bank also supports community colleges and other
workforce development organizations throughout the
Fifth District by providing labor force information
and analysis and by convening events where leaders of
community colleges and other workforce development
organizations share ideas and best practices.
This is a preview of an online course the Bank is developing
to help students plan for “life after high school.”

training. An Economic Brief on this topic can be found
at www.richmondfed.org/publications/research/
economic_brief/2013/eb_13-06.cfm.
• Greater role for community colleges: The team noted
that community colleges are especially well-positioned
to assist with college and workforce preparedness.
Community colleges provide a cost-effective way for
students who are uncertain about going to college or
not fully prepared for college to evaluate their chances
of earning a bachelor’s degree. Community colleges also
have the ability to help workers develop flexible skills
that apply to rapidly changing industries such as health
care and advanced manufacturing.
The Richmond Fed’s workforce development group found
that many of the Bank’s current efforts align well with
one or more of these public policy areas. For example, working through the Bank’s new Office of Civic
Engagement, as well as on their own, many employees
already invest their time and talent in early intervention
and dropout prevention. They mentor at-risk students
in public schools and volunteer at a variety of nonprofit
organizations such as Smart Beginnings, the Virginia
Early Childhood Foundation, Big Brothers Big Sisters,
and Boys and Girls Clubs of America.

Connecting the Dots
In recent years, workforce development has become a
greater area of emphasis in several areas of the Richmond
Fed, including research, outreach, community development, economic education, and civic engagement. These
departments have developed initiatives independently
over the years, but in 2013, the Bank started making a
more concerted effort to connect its workforce development dots and to look for the most effective areas of
emphasis in human capital policy.
The Bank will continue to provide information designed to
help students and their families weigh the risks and rewards
of various education decisions. The Richmond Fed will
continue to engage with community colleges and other organizations in the realm of human capital policy to exchange
ideas and best practices. And the Bank will continue to
explore the role of early investments in human capital.
Speaking to the Council for Economic Education in
October 2013, Lacker said that early interventions “could
help ensure that future choices about how much to invest
in a student’s human capital aren’t limited by family background and that more people have the opportunity to
achieve their potential.” This speech, “Human Capital
Investment as a Major Financial Decision,” is available at
www.richmondfed.org/press_room/speeches/president
_jeff_lacker/2013/lacker_speech_20131004.cfm. ■

federal reserve bank of richmond

2013 annual report

Fifth District Economic Report

Fifth District Continues to Experience
Slow, Steady Economic Growth

he year 2013 marked the continuation of slow,
steady growth in the Fifth District and throughout the nation. Private sector firms hired at
a modest pace, while government employment and
purchasing continued to be a drag on the economy. The
housing recovery persisted, and there were increased,
although still somewhat scattered, reports of new investment and construction in residential and commercial
real estate. In general, businesses reported expanded
activity and increased sales, but the environment continued to be somewhat volatile and unpredictable,
particularly for retailers. In addition, the pace of the
recovery varied considerably by region within the Fifth
District. Urban areas generally outperformed rural
areas, and certain parts of West Virginia continued to
suffer from the contraction of coal mining.

Labor Markets
Much like the overall economy, labor markets in the
Fifth District grew slowly and steadily. On net, firms
in the Fifth District added 170,200 jobs (1.2 percent),
which was slightly below the 205,800 jobs added in
2012 but above net job creation during the five previous
years. The District also underperformed the United
States, where payroll employment grew 1.7 percent.
The biggest contributions to the District’s net job gain
came from education and health services (43,100 jobs),
leisure and hospitality (41,900 jobs), trade, transportation, and utilities (35,600 jobs), and professional and
business services (19,400 jobs). Other industries saw
sizeable percentage growth in employment, such as natural resources/mining/construction (2.1 percent) and
finance (1.5 percent). The only segments that posted
job declines in 2013 were the information industry,
which shed 2,100 jobs (0.9 percent) and the government
sector, which cut 1,200 jobs (0.0 percent).

federal reserve bank of richmond

Year-over-year employment gains in the District were
evident across all five states and the District of Columbia.
North Carolina experienced the sharpest absolute gain—
85,600 new jobs, while South Carolina saw the highest
percentage increase—2.5 percent growth.
District-wide trends included the expansion of payrolls
in education and health services, financial services, and
the trade, transportation, and utilities segment. In addition, federal government payrolls contracted in every
jurisdiction across the District. Other industries varied
widely in different states. For example, professional and
business services in North Carolina added 27,600 net
new jobs (5.1 percent) while that industry lost 16,500
net jobs (2.4 percent) in Virginia.
In the household employment survey, however, there
were more consistent trends across states. Notably, both
the unemployment rate and the labor force participation rate fell during 2013 in every state in the District.
The unemployment rate for the District fell from 7.4
percent in December 2012 to 6.2 percent in December
2013, remaining below the national rate of 6.7 percent at
the end of the year. Again, the greatest improvement in
unemployment rates occurred in the Carolinas, where
the North Carolina rate dropped from 8.9 percent to
6.9 percent and the South Carolina rate fell from 8.3
percent to 6.6 percent. Unfortunately, labor force participation also dropped in the District—from 63.9 percent
in December 2012 to 62.7 percent in December 2013, as
every District state posted sharp declines. Participation
also fell in the United States to 62.8 percent by the end
of 2013. Still, the number of unemployed people in the
District decreased over the year by more than the number of people in the labor force decreased, indicating
(along with the results of the establishment survey)
some real improvement in labor markets.

2013 annual report

FIGURE 1: Declines in Unemployment Rates and Labor Force
Participation Rates in 2013
Year-over-Year Decline in Unemployment Rate
-2.5

-2.0

-1.5

-1.0

-0.5

0.0

Circles represent relative size
of each jurisdiction's labor force

-0.5
VA

(Mouse over circles to view 11 years of data)

-1.0
WV

MD
-1.5

-2.0
DC
-2.5

Year-over-Year Decline in Participation Rate

0.0

Source: Bureau of Labor Statistics, Haver Analytics

Real Estate
Housing markets across the Fifth District continued
along the recovery trend they established in 2012.
According to the CoreLogic Information Solutions
house price index, year-over-year house price growth
has been consistently positive in the District since
February 2012, with an acceleration in 2013 that
resulted in 5.7 percent appreciation from December
2012 to December 2013. The house price rebound was
evident across states, with almost every state posting
consistent year-over-year appreciation since at least
May 2012. (West Virginia had two months—July and
August—with year-over-year house price declines, but
West Virginia house price growth is generally more
volatile than that of other states in the District.) Reports
from real estate agents across the District also indicated
stronger demand and pricing for homes than they had
seen in a while. The share of mortgages in delinquency
and foreclosure was also lower in District states at the
end of 2013 than at the end of 2012.

Early in 2013, reports of low inventories were limited
to the Washington, D.C., area, although some contacts
in other areas remarked on inventory declines. As 2013
progressed, however, more and more real estate agents
across the District reported low inventories and multiple offers on homes. In addition, there were increasing
numbers of reports on new construction for the first
time in years, and builders in some markets bemoaned
shortages in lots and in residential building materials.
The issuance of residential building permits, although
a volatile measure, continued to trend upward. For the
whole year, real estate agents reported rising foot traffic, fewer days on the market, increased sales (except
perhaps in the most expensive bracket), and higher
selling-to-asking price ratios.
There were also more reports of construction in
commercial real estate, particularly in multifamily
and, toward the end of the year, in industrial real
estate. Reports of construction in the office and retail

federal reserve bank of richmond

2013 annual report

FIGURE 2: Change in Fifth District House Prices
Percent Change from December 2012 to December 2013
(Mouse over states to view 14 years of data)

Maryland: 6.2%
District of Columbia: 7.4%
West Virginia: 2.1%
Virginia: 5.7%

North Carolina: 4.4%

South Carolina: 7.6%

Source: CoreLogic Information Solutions

segments were more scattered, but even in those segments, contacts reported increased lending activity,
declining vacancy rates, firming rental rates, and fewer
concessions from landlords. In many markets, there
were reports of particular tightening in the availability of
class-A office space. Multifamily activity was the strongest, although it seemed to slow toward the end of the
year, and more than a few contacts expressed concern
regarding overbuilding in that segment.

Business Conditions
Manufacturing activity has been volatile, but it generally
ended the year stronger. The Federal Reserve Bank of
Richmond maintains a composite manufacturing index
based on the Bank’s Fifth District Survey of Manufacturing
Activity. It is a diffusion index, meaning that a positive
reading indicates that the share of firms reporting expan-

federal reserve bank of richmond

2013 annual report

sion exceeds the share of firms reporting contraction. This
index was at or above zero for the last five months of the
year and was well above zero for three of those five months.
It was driven up by reports of increases in shipments
and in the volume of new orders. (The manufacturing
index is available at www.richmondfed.org/research/
regional_economy/surveys_of_business_conditions/
manufacturing.) Although reports indicated that growth
continued to vary by industry, by region, and by manufacturer, there were some overall trends in 2013. Auto and
auto parts manufacturing continued to be strong, as did
lumber production, furniture and flooring manufacturing,
and other manufacturing firms that stood to benefit from
improvements in residential real estate markets. However,
there were reports of an inability to raise prices, which
squeezed margins for some manufacturers. Furthermore,
there continued to be cuts in government spending and
considerable uncertainty around government contracts

Twice a year, several of the Bank’s
leaders and economists visit
regions within the Fifth District to
gain first-hand knowledge of local
economies. In 2013, delegations
from the Bank visited Baltimore,
Maryland, and Charlotte, North
Carolina. They gained insight about
each metropolitan area by meeting
with business executives, education officials, community leaders,
students, workers, and government officials. More information
about these regional forums is
available at www.richmondfed.
org/press_room/our_news/2013/
baltimore_tour_20130705.cfm (for Baltimore)
and at www.richmondfed.org/press_room/
our_news/2013/char_reg_recap_20131212.cfm
(for Charlotte).

that negatively impacted certain manufacturers, although
some of those same firms noted strength in their nongovernment business.
A few manufacturers during the year reported that although
domestic demand remained too weak to enable strong
growth, exports to Europe, Latin America, and Asia helped
boost their sales. Over the year, port contacts indicated that
port activity in both exports and imports was generally strong,
with export growth somewhat outpacing import growth.
Anecdotes indicated that coal exports were not as strong
as in 2012. In general, the southern part of West Virginia
continued to suffer from a decline in coal mining, while
the northern part of the state benefitted from expansion in
natural gas drilling.
Retail activity continued to be volatile in 2013, according to both the retail revenues index generated from

PHOTO: LARRY CAIN

Regional Forums

President Jeffrey Lacker (left) listens to
Louisa Taylor, a student at Johnson C. Smith
University in Charlotte. To view a brief video
about the 2013 regional forums, please go
to http://bcove.me/e7ueknfp.

the Richmond Fed’s Service Sector Survey and to comments and anecdotes from contacts across the District.
(The service sector survey and the retail revenues
index are available at www.richmondfed.org/research/
regional_economy/surveys_of_business_conditions/
service_sector/index.cfm.) However, there were some
comments during the middle of the year that certain
retailers faced “less of a roller coaster” in 2013 than in
other recent years. Auto and truck sales continued to
be strong, while furniture and home goods sales continued to benefit from the improvement in residential
real estate. There was conjecture among some retailers
that consumers were buying bigger-ticket items and not
spending money on clothing, electronics, or other smaller
items. The major concerns among smaller retailers in
the District were the effect of the rise in online sales on
brick-and-mortar stores, the increased inability to predict
traffic and sales from week to week, and implementation

federal reserve bank of richmond

2013 annual report

of the Affordable Care Act. Reports on the nonretail service sector were more steadily positive than in the retail
sector. The nonretail revenues diffusion index spent most
of 2013 above zero, indicating that more firms reported
increased revenues than reported decreased revenues.

Banking Markets
Throughout 2013, Fifth District banks experienced modest improvements in condition. The overall banking
environment was tempered by ongoing slow growth, low
overall interest rates, and slowing residential mortgage
demand during the second half of 2013. In spite of these
challenges, continued improvements to asset quality
contributed to increased earnings and capital for the year.
Balance sheets of Fifth District banks reflected tepid but
improving growth during 2013. Median commercial
bank loan growth increased from 0.48 percent in 2012 to
2 percent in 2013, despite the negative effect that rising
interest rates had on mortgage lending during the second
half of the year. This growth was primarily driven by the
commercial real estate and commercial-industrial categories. Of particular note is that year-over-year loan growth
remained positive for five consecutive quarters, the longest period since 2009. While loan growth increased,
median nonperforming loans and loan losses declined 37
percent and 42 percent, respectively. Continued improvement in asset quality allowed banks to further reduce
loan-loss provisions, which contributed to an increase in
the median return on average assets from 0.57 percent
in 2012 to 0.66 percent in 2013. Overall, 89.7 percent
of Fifth District banks were profitable in 2013, up from
83.2 percent in 2012. Although earnings showed some
improvement in 2013, the low interest rate environment
continued to hamper banks through compressed net
interest margins, leading to earnings performance that
remained considerably below pre-recession levels.

federal reserve bank of richmond

2013 annual report

Capital levels remained strong in the District despite a
full year of risk-weighted asset growth, a reversal of the
trend from the previous three years. While risk-weighted
assets increased, earnings improved, providing a boost
to capital positions. Liquidity remained solid for Fifth
District banks even though noncore funding increased
slightly during the second half of the year, primarily due
to an increase in short-term borrowing. Despite this
increase, overall reliance on noncore funding remained
low as banks continued to fund growth largely from core
deposits. Although such deposits have been the primary
funding source over the past several years, an eventual
shift in the rate environment could result in changes to
bank-funding strategies.

Summary
The Fifth District experienced another year of slow,
steady economic growth in 2013. Business conditions
were somewhat unpredictable and volatile during the
year, but most industries reported improved sales and
revenues, and employment grew at a modest pace. In
addition, the gradual residential real estate recovery
continued, and in some segments there were hints of
recovery in commercial real estate as well. Although the
rebound in growth following the 2007–09 recession has
not been as strong as the nation or District might have
hoped, the slow recovery continued in 2013. ■

Boards, Councils, Officers,
and Senior Professionals

Federal Reserve Bank of Richmond Board of Directors. . . . . . . . . . . . . . . . . .

Baltimore Branch Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Charlotte Branch Board of Directors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Community Depository Institutions Advisory Council . . . . . . . . . . . . . . . . . .

Community Investment Council. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Payments Advisory Council. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Management Committee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Officers and Senior Professionals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

federal reserve bank of richmond

2013 annual report

Boards of Directors and Advisory Councils

Federal Reserve Bank of Richmond
Board of Directors

Community Depository
Institutions Advisory Council

The Bank’s board of directors oversees 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 members and titles as of
December 31, 2013, unless otherwise noted.

THANK YOU
Thank you to those directors who have completed their service: Alan L. Brill and Patrick C. Graney, III of
the Richmond Board; James T. Brady, William B. Grant, and Jana Wheatley of the Baltimore Board; and
David J. Zimmerman of the Charlotte Board.
The Bank also welcomes four new directors: Margaret G. Lewis, C. Richard Miller, Jr., and
Charles R. Patton have joined the Richmond Board, and Richard Bernstein and Mary Ann Scully have
joined the Baltimore Board.

federal reserve bank of richmond

2013 annual report

Board of Directors, Federal Reserve Bank of Richmond

From the left: Wilbur E. Johnson, Russell C. Lindner, Linda D. Rabbitt, Marshall O. Larsen, Patrick C. Graney, III, Brad E. Schwartz,
Margaret G. Lewis, Edward L. Willingham, IV, Alan L. Brill

CHAIRMAN

Linda D. Rabbitt

Chairman and Chief Executive Officer
Rand Construction Corporation
Washington, D.C.
DEPUTY CHAIRMAN

Russell C. Lindner

Chairman and Chief Executive Officer
The Forge Company
Washington, D.C.

Alan L. Brill

President and Chief Executive Officer
Capon Valley Bank
Wardensville, West Virginia

Patrick C. Graney, III
Chairman
One Stop
Charleston, West Virginia

Wilbur E. Johnson

Managing Partner
Young Clement Rivers, LLP
Charleston, South Carolina

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

Marshall O. Larsen

Retired Chairman, President,
and Chief Executive Officer
Goodrich Corporation
Charlotte, North Carolina

Margaret G. Lewis
President
HCA Capital Division
Richmond, Virginia

Brad E. Schwartz

Chief Executive Officer
Monarch Financial Holdings, Inc.
and Monarch Bank
Chesapeake, Virginia

FEDERAL ADVISORY COUNCIL
REPRESENTATIVE

Kelly S. King

Chairman and Chief Executive Officer
BB&T Corporation
Winston-Salem, North Carolina

federal reserve bank of richmond

2013 annual report

Board of Directors, Baltimore Branch

From the left: Anita G. Newcomb, Richard Bernstein, Stephen R. Sleigh, Christopher J. Estes, Jenny G. Morgan, William B. Grant, Samuel L. Ross

William B. Grant

CHAIRMAN

Jenny G. Morgan

Chairman, President,
and Chief Executive Officer
First United Corporation
and First United Bank & Trust
Oakland, Maryland

President and Chief Executive Officer
basys, inc.
Linthicum, Maryland

Richard Bernstein

Anita G. Newcomb

President and Chief Executive Officer
LWRC International, LLC
Cambridge, Maryland

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

Christopher J. Estes

President and Chief Executive Officer
National Housing Conference
Washington, D.C.

federal reserve bank of richmond

2013 annual report

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.

Board of Directors, Charlotte Branch

From the left: Claude Z. Demby, Paul E. Szurek, Elizabeth A. Fleming, David J. Zimmerman, Lucia Z. Griffith, John S. Kreighbaum,
Robert R. Hill, Jr.

CHAIRMAN

David J. Zimmerman

President
Southern Shows, Inc.
Charlotte, North Carolina

Claude Z. Demby

Chief Executive Officer
Noël Group, LLC
Zebulon, North Carolina

Robert R. Hill, Jr.

Paul E. Szurek

John S. Kreighbaum

Elizabeth A. Fleming

President and Chief Executive Officer
SCBT Financial Corporation
Columbia, South Carolina

President and Chief Executive Officer
Carolina Premier Bank
and Premara Financial, Inc.
Charlotte, North Carolina

Chief Financial Officer
Biltmore Farms, LLC
Asheville, North Carolina

President
Converse College
Spartanburg, South Carolina

Lucia Z. Griffith

Chief Executive Officer and Principal
METRO Landmarks
Charlotte, North Carolina

federal reserve bank of richmond

2013 annual report

Community Depository Institutions Advisory Council

From the left: John R. Lane, R. Wayne Hall, Kathleen Walsh Carr, Michael L. Middleton, Charles H. Majors, Robert A. DeAlmeida,
Kim D. Saunders, Frank W. Wilkinson, Millard C. Ratcliff, Jr., Jan Roche, G. William Beale

CHAIRMAN

Charles H. Majors *

Kathleen Walsh Carr

Millard C. Ratcliff, Jr.

R. Wayne Hall

Gwen Thompson

President
Cardinal Bank/Washington
Washington, D.C.

Chairman and Chief Executive Officer
American National Bank and
American National Bankshares, Inc.
Danville, Virginia

President
First Federal Savings & Loan and
First Financial Holdings, Inc.
Charleston, S.C.

VICE CHAIRMAN

Jan Roche

President and Chief Executive Officer
State Department Federal Credit Union
Alexandria, Virginia

John R. Lane

President and Chief Executive Officer
Congressional Bank
Bethesda, Maryland

Robert A. DeAlmeida

President and Chief Executive Officer
Hamilton Bank and
Hamilton Bancorp, Inc.
Towson, Maryland

Michael L. Middleton

Chairman and Chief Executive Officer
Community Bank of Tri-County
Waldorf, Maryland

G. William Beale

President and Chief Executive Officer
ABNB Federal Credit Union
Chesapeake, Virginia
President and Chief Executive Officer
Clover Community Bank
Clover, South Carolina

Kim D. Saunders

President and Chief Executive Officer
Mechanics & Farmers Bank
Durham, North Carolina

Frank W. Wilkinson

President and Chief Executive Officer
First Century Bank
Bluefield, West Virginia

President and Chief Executive Officer
Union First Market Bank
Ruther Glen, Virginia
* In 2013, Charles H. Majors served as the Fifth District’s representative on the Community Depository
Institutions Advisory Council at the Federal Reserve’s Board of Governors.

federal reserve bank of richmond

2013 annual report

Community Investment Council

From the left: Sandra Mikush, Kent Spellman, Chris Kukla, Michel Zajur, Samuel L. Erwin, R. Scott Woods, Chuck Martin, Deborah Hooper,
Mark Sissman, George Rothman, John Hamilton

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

Christopher J. Estes

President and Chief Executive Officer
National Housing Conference
Washington, D.C.

Mike Franklin

Owner
Franklin’s Brewery
Hyattsville, Maryland

John Hamilton

Mark Sissman

Deborah Hooper

Kent Spellman

Chuck Martin

R. Scott Woods

President
City First Enterprises
Washington, D.C.

President
Greensboro Chamber of Commerce
Greensboro, North Carolina

Administrative Vice President and
Regional Community Reinvestment Officer
M&T Bank
Baltimore, Maryland

Sandra Mikush

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

President
Healthy Neighborhoods, Inc.
Baltimore, Maryland

Executive Director
WV Community Development Hub
Stonewood, West Virginia

President and Chief Executive Officer
South Carolina Federal Credit Union
North Charleston, South Carolina

Michel Zajur

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

George Rothman

President and Chief Executive Officer
Manna, Inc.
Washington, D.C.

federal reserve bank of richmond

2013 annual report

Payments Advisory Council

From the left: Kim L. Bunn, Rodney Epps, Chris Tolomeo, Gayle Youngblood, Martin W. Patterson, Woody Shuler, Gail Ball, A. Mitchell Godwin,
John Zazzera, Adrian S. Johnson
CHAIRMAN

Martin W. Patterson
Senior Vice President,
Banking Operations
SunTrust Banks
Richmond, Virginia

William E. Albert

Kim L. Bunn

Senior Vice President and
Operations Executive
Bank of America
Jacksonville, Florida

Mitch Christensen

Senior Vice President
First Century Bank
Bluefield, West Virginia

Executive Vice President,
Innovation and Payments Strategy
Wells Fargo & Company
Scottsdale, Arizona

Gail Ball

R. Lee Clark

Senior Vice President,
Treasury Management
Operations
Capital One Bank
Richmond, Virginia

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

Executive Vice President,
Operations
TowneBank
Suffolk, Virginia

Daniel O. Cook, Jr.

Executive Vice President and
Chief Operating Officer
Arthur State Bank
Union, South Carolina

Jeff W. Dick

President and
Chief Executive Officer
MainStreet Bank
Herndon, Virginia

federal reserve bank of richmond

2013 annual report

Tim Dillow

Tina Giorgio

Kristi A. Eller

A. Mitchell Godwin

Senior Vice President
BB&T Corporation
Wilson, North Carolina

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

Rodney Epps

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

Gerry Felton

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

Janine George

Senior Vice President and
Director of Operations
Paragon Commercial Bank
Raleigh, North Carolina

Senior Vice President
Sandy Spring Bank
Columbia, Maryland

Vice President
The Conway National Bank
Conway, South Carolina

Leton L. Harding, Jr.

Executive Vice President
Powell Valley National Bank
Wise, Virginia

Chad Harmon

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

Susan Haschen

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

Payments Advisory Council

From the left: William E. Albert, Janine George, Ronald L. Bowling, Rick Rhoads, E. Stephen Lilly, R. Lee Clark, Chad Harmon, Scott Jennings,
David Willis, Susan G. Riel

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
Ruther Glen, Virginia

Jamin M. Hujik

Executive Vice President
CresCom Bank
Charleston, South Carolina

Scott Jennings

Senior Vice President and
Chief Operating Officer
Summit Community Bank
Moorefield, West Virginia

E. Stephen Lilly

Woody Shuler

Executive Vice President and
Chief Operating Officer
First Community Bank
Bluefield, Virginia

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

Chris Tolomeo

Eileen M. Pirson

Senior Vice President,
Banking Services
M&T Bank
Buffalo, New York

Group Vice President,
Central Operations
Administration
M&T Bank
Amherst, New York

Rick Rhoads

Samuel A. Vallandingham

Senior Vice President, E-Services
State Employees’ Credit Union
Raleigh, North Carolina

Susan G. Riel

Senior Executive Vice President
and Chief Operating Officer
EagleBank
Bethesda, Maryland

President
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
Assistant Vice President,
Product Management
State Employees Credit
Union of Maryland
Linthicum, Maryland

John Zazzera

Senior Vice President,
Head of Payment Operations
TD Bank
Mount Laurel, New Jersey

Adrian S. Johnson

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

Note: The council’s membership year runs from June 1 to May 31,
but this listing includes all members who served during 2013.

federal reserve bank of richmond

2013 annual report

Management Committee

From the left, bottom six: Roland Costa, Mark L. Mullinix, Jennifer J. Burns, Jeffrey M. Lacker, Claudia N. MacSwain, Michael D. Stough;
top five: Janice E. Clatterbuck, John A. Weinberg, Michelle H. Gluck, David E. Beck, Matthew A. Martin

Jeffrey M. Lacker
President

Matthew A. Martin

Roland Costa

Michael D. Stough

Michelle H. Gluck

John A. Weinberg

Senior Vice President and
Chief Information Officer

Mark L. Mullinix

First Vice President and
Chief Operating Officer

Senior Vice President,
Currency Technology

David E. Beck

Senior Vice President and
Baltimore Regional Executive

Senior Vice President and
General Counsel

Jennifer J. Burns

Claudia N. MacSwain

Senior Vice President,
Supervision, Regulation, and Credit

federal reserve bank of richmond

Janice E. Clatterbuck

Senior Vice President and
Chief Financial Officer

2013 annual report

Senior Vice President and
Charlotte Regional Executive

Senior Vice President and
General Auditor

Senior Vice President and
Director of Research

Officers

Senior Professionals

Kartik B. Athreya

Alexander L. Wolman

Bennie R. Moore

RESEARCH

Thomas A. Lubik

Hattie R.C. Barley

Johnnie E. Moore

Research Advisor

Becky C. Bareford

Christy R. Cleare

C. Kim Nguyen

Senior Economist

William S. Cooper, Jr.

Cary B. Crabtree

Dennis H. Ott

Research Advisor

Bary M. Dalton

Christopher J. Palumbo

Senior Advisor

Vice President and
Medical Director

Jeffrey B. Deibel

Brent M. Stanton

Constance B. Frudden

Todd E. Dixon

Markus A. Summers

Vice President

Assistant Vice President

Joan T. Garton

Adam M. Drimer

Vice President

Assistant Vice President

Alexander T. Swartz

Richard B. Gilbert

Rebecca Goldberg

Vice President

Assistant Vice President

Jeffrey K. Thomas

Howard S. Goldfine

Ann S. Harrison

Vice President

Assistant Vice President

Sandra L. Tormoen

Anne C. Gossweiler

James R. Hart

James Trotta

Vice President

Assistant Vice President

Bruce E. Grinnell

James K. Hayes

Assistant Vice President

Lauren E. Ware

Vice President

Mattison W. Harris

Samuel Hayes, III

Vice President

Assistant Vice President

Karen J. Williams

Gregory A. Johnson

Kathleen R. Houghtaling H. Julie Yoo

Mary S. Johnson

Cathy I. Howdyshell

Vice President

Assistant Vice President

BALTIMORE BRANCH

Malissa M. Ladd

John S. Insley, Jr.

Vice President

Assistant Vice President

Steven T. Bareford

Ann B. Macheras

Diane R. Knapp

Assistant Vice President

CHARLOTTE BRANCH

Andrew S. McAllister

D. Keith Larkin

Lisa A. White

James T. Nowlin

Steve V. Malone

Marshal S. Auron

P.A.L. Nunley

Randal C. Manspile

John A. Beebe

Lisa T. Oliva

Page W. Marchetti

Richard F. Westerkamp, Jr.

Group Vice President
Group Vice President
Vice President

Vice President and
Deputy Director of
Diversity and Inclusion

Kevin W. Fergusson

Vice President

Vice President
Vice President
Vice President

Deputy General Counsel
Vice President

Edward S. Prescott

Vice President

Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President

Assistant Vice President

Assistant Vice President
Assistant Vice President
Assistant Vice President

Assistant Vice President and
Corporate Secretary

Jonathan P. Martin

Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President

Assistant Vice President

Group Vice President
Vice President
Vice President
Vice President

Vice President and Charlotte
Deputy Regional Executive

Vice President and
Deputy General Counsel

Diane H. McDorman

Melissa M. Gill

Michael L. Wilder

Robert J. Minteer

Kelly J. Stewart

Dennis P. Smith

Vice President and Controller

Assistant Vice President
Assistant Vice President

Borys M. Grochulski
Robert L. Hetzel
Andreas L. Hornstein
Raymond E. Owens, III
Policy Advisor

Gary Richardson

Federal Reserve System
Historian

Pierre-Daniel G. Sarte
Senior Advisor

John R. Walter
Policy Advisor

Zhu Wang

Senior Economist

Roy H. Webb
Policy Advisor

SUPERVISION, REGULATION,
AND CREDIT

Azamat Abdymomunov
Senior Financial Economist

Eliana Balla

Senior Financial Economist

Jeffrey R. Gerlach

Senior Financial Economist

D. Keith Maglinger

Large Bank Principal Examiner

Jiang Bin Peng

Senior Financial Economist

Stanley F. Poszywak

Risk and Policy Team Leader

Todd M. Ryan

Large Bank Principal Examiner

Steven D. Sanderford

Large Bank Principal Examiner

Phillip C. Watts

Central Point of Contact, BB&T

Terry J. Wright

Assistant Vice President

Vice President

Huberto Ennis

Assistant Vice President
Assistant Vice President

Listings include officers, senior professionals, and titles as of December 31, 2013

federal reserve bank of richmond

2013 annual report

federal reserve bank of richmond

2013 annual report

Financial Statements

Statement of Auditor Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Management’s Report on Internal Control Over Financial Reporting

. . . .

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

Statements of Condition as of December 31, 2013, and
December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Statements of Income and Comprehensive Income for the years ended
December 31, 2013, and December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Statements of Changes in Capital for the years ended
December 31, 2013, and December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Independent Auditors’ Report
Financial Statements

federal reserve bank of richmond

2013 annual report

Statement of Auditor Independence

The Board of Governors engaged Deloitte & Touche LLP (D&T) to audit the 2013
combined and individual financial statements of the Reserve Banks and those of
the consolidated LLC entities.1 In 2013, D&T also conducted audits of internal controls over financial reporting for each of the Reserve Banks. 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 of Governors 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 2013, the Bank did
not engage D&T for any non-audit services.

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 of Governors, the Federal Reserve Banks, and the OEB.

federal reserve bank of richmond

2013 annual report

Management’s Report

Management’s Report on Internal Control Over Financial Reporting
March 14, 2014

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, 2013 and 2012, 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 (1992) 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

Mark L. Mullinix

Claudia N. MacSwain

First Vice President and
Chief Operating Officer

Senior Vice President and
Chief Financial Officer

federal reserve bank of richmond

2013 annual report

Independent Auditors’ Report

To the Board of Governors of the Federal Reserve System
and the Board of Directors of the Federal Reserve Bank of 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, 2013 and 2012, 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, 2013, based on criteria established in Internal Control—Integrated Framework
(1992) 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.

federal reserve bank of richmond

2013 annual report

independent auditors’ report

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, 2013 and 2012, 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, 2013, based on the criteria established in Internal Control — Integrated Framework (1992)
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, 2014
Richmond, Virginia

federal reserve bank of richmond

2013 annual report

Statements of Condition
(in millions)

As of December 31,

2013

2012

Assets
Gold certificates

856

890

Special drawing rights certificates

412

Coin

335

373

—

146,712

128,762

3,676

5,657

95,377

67,636

4,982

5,145

1,839

1,474

1,369

Loans to depository institutions
System Open Market Account:
Treasury securities, net (of which $1,067 and $650 is lent as of December 31, 2013 and
2012, respectively)
Government-sponsored enterprise debt securities, net
(of which $68 and $50 is lent as of December 31, 2013 and 2012, respectively)
Federal agency and government-sponsored enterprise mortgage-backed securities, net
Foreign currency denominated investments, net
Central bank liquidity swaps
Accrued interest receivable

—

Bank premises and equipment, net

Other investments

353

346

Other assets

122

108

Total assets

254,357

212,539

95,718

91,659

Liabilities and Capital
Federal Reserve notes outstanding, net
System Open Market Account:
Securities sold under agreements to repurchase

19,645

7,629

226

94,182

72,657

113

Accrued benefit costs

263

296

Accrued remittances to Treasury

192

Other liabilities
Deposits:
Depository institutions
Other deposits
Interest payable to depository institutions

Interdistrict settlement account

32,634

28,388

Other liabilities

Total liabilities

242,885

201,047

Capital paid-in

5,736

5,746

Surplus (including accumulated other comprehensive loss of $26 and $77
at December 31, 2013 and 2012, respectively)

5,736

5,746

11,472

11,492

Total capital
Total liabilities and capital

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

federal reserve bank of richmond

2013 annual report

254,357

212,539

Statements of Income and Comprehensive Income
(in millions)

For the years ended December 31,

2013

2012

Interest income
System Open Market Account:
Treasury securities, net

3,328

Government-sponsored enterprise debt securities, net
Federal agency and government-sponsored enterprise mortgage-backed securities, net
Foreign currency denominated assets, net
Central bank liquidity swaps
Total interest income

3,883

141

223

2,359

2,677

5,853

6,862

215

227

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

219

238

5,634

6,624

—

1,073

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

Foreign currency translation losses, net

(264)

(231)

Compensation received for service costs provided

Reimbursable services to government agencies

Other

Total non-interest (loss) income

(187)

937

403

367

Occupancy

Equipment

(159)

(133)

Board of Governors operating expenses and currency costs

184

167

Bureau of Consumer Financial Protection

118

667

605

Net income before providing for remittances to Treasury

4,780

6,956

Earnings remittances to Treasury

4,496

6,414

284

542

Operating expenses
Salaries and benefits

Other
Assessments:

Total operating expenses

Net income
Change in prior service costs related to benefit plans

(4)

Change in actuarial losses related to benefit plans

(24)

Total other comprehensive income (loss)

(28)

Comprehensive income

335

514

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

federal reserve bank of richmond

2013 annual report

Statements of Changes in Capital
(in millions, except share data)

Surplus
For the years ended
December 31, 2013, and
December 31, 2012

Capital
paid—in

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

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

Net income
retained

5,564

5,613

182

—

Net income

—

542

Other comprehensive loss

—

Accumulated
other
comprehensive
loss

(49)

Total surplus

5,564

Total capital

11,128

—

182

Comprehensive income:

Dividends on capital stock

—

Net change in capital

(332)

182

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

Net change in capital stock redeemed
(196,231 shares)

5,746

210
$

(10)

5,823

—

542

(28)

—

(332)

182

364

(28)
$

(77)

5,746

—

284

—

284

—

11,492
(10)

Comprehensive income:
Net income

—

Other comprehensive income

—

Dividends on capital stock
Net change in capital
Balance at December 31, 2013
(114,722,758 shares)

—

(345)

—

(345)

(10)

(61)

(10)

(20)

5,736

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

federal reserve bank of richmond

284

2013 annual report

5,762

(26)

5,736

11,472

Notes to Financial Statements

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.

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, and 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 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 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 in the maximum amount of $5 billion.
Because of the global character of bank funding markets, the System has at times coordinated with other central banks to
provide liquidity. The FOMC authorized and directed the FRBNY to establish temporary U.S. dollar liquidity swap lines with

federal reserve bank of richmond

2013 annual report

Notes to Financial Statements

the Bank of Canada, the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank. In
addition, as a contingency measure, the FOMC authorized and directed the FRBNY to establish temporary foreign currency
liquidity swap arrangements with these five central banks to allow for the System to access liquidity, if necessary, in any of the
foreign central banks’ currencies. On October 31, 2013, the Federal Reserve and five other central banks agreed to convert
their existing temporary liquidity swap arrangements to standing agreements that will remain in effect until further notice.
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 for which
the costs were not reimbursed by the other Reserve Banks include Standard Cash Automation, Currency Technology Offiice, 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 $335 million and $295 million for the years ended December 31, 2013 and
2012, respectively, and is included in “Operating expenses: Other” on the Statements of Income and Comprehensive Income.

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. 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, adjusted for credit impairment, if any, 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 securities 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.
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

federal reserve bank of richmond

2013 annual report

Notes to Financial Statements

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.
In 2013, the description of certain line items presented in the Statements of Income and Comprehensive Income and the
Statements of Condition have been revised to better reflect the nature of these items. Amounts related to these line items were
not changed from the prior year, only the nomenclature for the line item was revised, as further noted below:
• The line item, “Accrued interest on Federal Reserve notes,” has been revised in the Statements of Condition to “Accrued
remittances to Treasury.”
• The line item, “Net income before interest on Federal Reserve notes expense remitted to Treasury,” has been revised in
the Statements of Income and Comprehensive Income to “Net income before providing for remittances to Treasury.”
• The line item, “Interest on Federal Reserve notes expense remitted to Treasury,” has been revised in the Statements of
Income and Comprehensive Income to “Earnings remittances to Treasury.”
Certain amounts relating to the prior year have been reclassified in the Statements of Condition to conform to the current
year presentation. The amount reported as “System Open Market Account: Accrued interest receivable” for the year ended
December 31, 2012, ($1,369 million) was previously reported as a component of “System Open Market Account: Foreign
currency denominated assets, net” ($21 million) and “Accrued interest receivable” ($1,348 million).
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. The Board of Governors funds the Bureau through assessments on the Reserve Banks as required by the Dodd-Frank Act. Section 152 of the Dodd-Frank Act established the Office of
Financial Research (OFR) within the Treasury and required the Board of Governors to fund the OFR for the two-year period
ended July 21, 2012. 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 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 twelve months.
Special drawing rights (SDR) 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 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

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Notes to Financial Statements

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, 2013 and 2012.
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 tri-party arrangement. In a tri-party arrangement, two commercial custodial
banks manage the collateral clearing, settlement, pricing, and pledging, and provide cash and securities custodial services for
and on behalf of the 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, Federal Home Loan Mortgage
Corporation, and Federal Home Loan Banks; and pass-through federal agency and GSE MBS. 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 “System Open Market Account:
Accrued interest receivable” in the Statements of Condition.
The FRBNY may engage in sales of securities under agreements to repurchase (reverse repurchase transactions) with
primary dealers and with the set of expanded counterparties which includes banks, savings associations, GSEs, and domestic
money market funds. These reverse repurchase transactions, when arranged as open market operations, are settled through a
tri-party arrangement, similar to repurchase transactions. Reverse repurchase transactions may also be executed with foreign
official and international account holders as part of a service offering. Reverse repurchase agreements are collateralized by a
pledge of an amount of Treasury securities, GSE debt securities, and federal agency and GSE MBS that are held in the SOMA.
Reverse repurchase transactions are accounted for as financing transactions, and the associated interest expense is recognized
over the life of the transaction. These transactions are reported at their contractual amounts as “System Open Market Account:
Securities sold under agreements to repurchase” and the related accrued interest payable is reported as a component of “Other
liabilities” in the Statements of Condition.

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Notes to Financial Statements

Treasury securities and GSE debt securities held in the SOMA may be lent to primary dealers, typically overnight, 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. 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 (loss) 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 GovernmentSponsored Enterprise Mortgage-Backed Securities; Foreign Currency Denominated Assets; and Warehousing
Agreements
Interest income on Treasury securities, GSE debt securities, and foreign currency denominated assets included in 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, 2013 and 2012, the FRBNY executed dollar rolls primarily to facilitate
settlement of outstanding purchases of federal agency and GSE MBS. The FRBNY accounts for dollar rolls 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 resulting from these MBS transactions are reported as “Non-interest (loss) 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 (loss) income: System Open Market Account: Foreign
currency translation losses, net” in the Statements of Income and Comprehensive Income.
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.
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 to
supplement the U.S. dollar resources of the Treasury for financing purchases of foreign currencies and related international

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Notes to Financial Statements

operations. Warehousing agreements 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 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 amount outstanding and the rate under the swap
agreement. 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 straight-line
basis over the estimated useful lives of the assets, which range from 2 to 50 years. Major alterations, renovations, and improvements are capitalized at cost as additions to the asset accounts and are depreciated over the remaining useful life of the asset
or, if appropriate, over the unique useful life of the alteration, renovation, or improvement. Maintenance, repairs, and minor
replacements are charged to operating expense in the year incurred.
Costs incurred to acquire software are capitalized based on the purchase price. Costs incurred during the application
development stage to develop internal-use software are capitalized based on 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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Notes to Financial Statements

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 12-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 $8,774 million and $11,462 million at December 31, 2013 and 2012,
respectively.
At December 31, 2013 and 2012, all Federal Reserve notes outstanding, reduced by the Reserve Bank’s currency holdings,
were fully collateralized. At December 31, 2013, all gold certificates, all special drawing rights certificates, and $1,182 billion
of domestic securities held in the SOMA were pledged as collateral. At December 31, 2013, no investments denominated in
foreign currencies were pledged as collateral.
k. Deposits
Depository Institutions
Depository institutions’ deposits represent the reserve and service-related balances in the accounts that depository institutions
hold at the Bank. The interest rates paid on required reserve balances and excess balances are determined by the Board of
Governors, based on an FOMC-established target range for the federal funds rate. Interest payable is reported as 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, 2013 and 2012.
Other
Other deposits include the Bank’s allocated portion of foreign central bank and foreign government deposits held at the FRBNY.
l. Capital Paid-in
The Federal Reserve Act requires that each member bank subscribe to the capital stock of the Reserve Bank in an amount
equal to 6 percent of the capital and surplus of the member bank. These shares are nonvoting, with a par value of $100, and
may not be transferred or hypothecated. As a member bank’s capital and surplus changes, its holdings of Reserve Bank stock

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Notes to Financial Statements

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.
m. 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.
n. Remittances to Treasury
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. Currently, remittances to the Treasury are made on a weekly basis. This amount is reported as
“Earnings remittances to Treasury” in the Statements of Income and Comprehensive Income. The amount due to the Treasury
is reported as “Accrued remittances to Treasury” 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.
o. 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, 2013 and 2012, the Bank was reimbursed for all services provided to the Treasury as its fiscal agent.
p. 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 by the Reserve Banks responsible for managing these
services and reports this compensation as “Non-interest (loss) income: Compensation received for service costs provided” in
its Statements of Income and Comprehensive Income.
q. Assessments
The Board of Governors assesses the Reserve Banks to fund its operations, the operations of the Bureau and, for a two-year
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.
The Dodd-Frank Act requires that, after the transfer date of July 21, 2011, 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 operating expenses of the System for the years
ended December 31, 2013 and 2012, was 12 percent ($597.6 million) and 11 percent ($547.8 million), respectively. After 2013, the

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Notes to Financial Statements

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 nonbank financial companies that meet the criteria specified in the Dodd-Frank Act.
r. 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, 2013 and 2012, and are reported as a component of “Operating
expenses: Occupancy” in the Statements of Income and Comprehensive Income.
s. 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.
The Bank had no significant restructuring activities in 2013 and 2012.
t. Recently Issued Accounting Standards
In December 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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. This update improves the
transparency of changes in other comprehensive income and items reclassified out of accumulated other comprehensive
income in the financial statements. These presentation requirements of ASU 2011-05 and the required disclosures in ASU
2013-02 are effective for the Bank for the year ending December 31, 2013, and are reflected in the Bank’s 2013 financial
statements and Note 10.

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 short-term 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. If a

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Notes to Financial Statements

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.
Loans to depository institutions were $550 thousand as of December 31, 2013, with a remaining maturity within 15 days.
The Bank had no loans outstanding as of December 31, 2012.
At December 31, 2013 and 2012, the Bank did not have any loans that were impaired, restructured, 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, 2013 and 2012.

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, 2013 and 2012, 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 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. 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. In December 2012, the
FOMC announced that the Federal Reserve would purchase longer-term Treasury securities initially at a pace of $45 billion
per month after its program to extend the average maturity of its holdings of Treasury securities was completed at the end of
2012. In December 2012, the FOMC announced that the Federal Reserve would continue the policy of rolling over maturing
Treasury securities into new issues at auction.
During the year ended December 31, 2012, 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 6 to 30 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 6 to 30 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.
The Bank’s allocated share of activity related to domestic open market operations was 6.218 percent and 7.117 percent at
December 31, 2013 and 2012, respectively.

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Notes to Financial Statements

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):
2013
Unamortized
premiums

Par

Notes

Bonds

91,246

Unaccreted
discounts

2,076

46,098

Total
amortized cost

(354)

7,993

92,968

(347)

Total Treasury securities

137,344

10,069

GSE debt securities

3,558

118

Federal agency and GSE MBS

92,659

2,785

53,744

(701)

146,712

—

3,676

(67)

95,377

2012
Unamortized
premiums

Par

Notes

Bonds

79,029

Unaccreted
discounts

2,315

39,553

Total
amortized cost

(51)

7,926

81,293

(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

The FRBNY enters into transactions for the purchase of securities under agreements to resell and transactions to sell securities under agreements to repurchase as part of its monetary policy activities. In addition, transactions to sell securities under
agreements to repurchase are entered into 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, 2013 and 2012. 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
2013

Contract amount outstanding, end of year
Average daily amount outstanding, during the year

19,645

Total SOMA

2012

7,629

2013

2012

315,924

107,188

6,439

7,683

99,681

91,898

Maximum balance outstanding, during the year

19,645

11,537

315,924

122,541

Securities pledged (par value), end of year

19,304

6,658

310,452

93,547

Securities pledged (market value), end of year

19,581

7,629

314,901

107,188

federal reserve bank of richmond

2013 annual report

Notes to Financial Statements

The remaining maturity distribution of Treasury securities, GSE debt securities, federal agency and GSE MBS bought
outright, and securities sold under agreements to repurchase that were allocated to the Bank at December 31, 2013 and 2012,
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

$ 47,464

$ 53,768

$ 36,082

$ 137,344

December 31, 2013:
Treasury securities
(par value)

—

GSE debt securities
(par value)

144

470

539

2,255

146

3,558

—

158

92,501

92,659

19,645

—

19,645

$ 26,937

$ 61,379

$ 30,265

$ 118,582

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

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

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

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 6.5 and 3.3 years as of December 31, 2013 and 2012, 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
2013

Treasury securities (amortized cost)

2012

1,067

Treasury securities (par value)

Total SOMA

2013

650

17,153

2012

9,139

961

602

15,447

8,460

GSE debt securities (amortized cost)

1,099

697

GSE debt securities (par value)

1,055

676

federal reserve bank of richmond

2013 annual report

Notes to Financial Statements

The FRBNY enters into commitments to buy and sell Treasury securities and records the related securities on a settlement-date basis. As of December 31, 2013, 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, 2013, the total purchase price of the federal agency and GSE MBS under outstanding purchase commitments was $59,350 million, of which $479 million was related to dollar rolls. The total purchase
price of outstanding purchase commitments allocated to the Bank was $3,690 million, of which $30 million was related to
dollar rolls. As of December 31, 2013, there were no outstanding sales commitments for federal agency and GSE MBS. These
commitments, which had contractual settlement dates extending through February 2014, 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-balance-sheet 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
2013

Other investments

Total SOMA

2012

2013

2012

—

220

1,320

3,092

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

1
$

6
$

226

11
$

1,331

85
$

3,177

Accrued interest receivable on domestic securities holdings was $23,405 million and $18,924 million as of December 31, 2013
and 2012, respectively, of which $1,455 million and $1,348 million, respectively, was allocated to the Bank. These amounts
are reported as a component of “System Open Market Account: Accrued interest receivable” in the Statements of Condition.

federal reserve bank of richmond

2013 annual report

Notes to Financial Statements

Information about transactions related to Treasury securities, GSE debt securities, and federal agency and GSE MBS
during the years ended December 31, 2013 and 2012, is summarized as follows (in millions):
Allocated to the Bank

Bills

Balance at December 31, 2011

Purchases1

Notes

2,128

$ 151,513
34,201

Principal payments and maturities

Inflation adjustment on
inflation-indexed securities

Balance at December 31, 2012

Sales

—

35,265

(43,543)

—

(56,386)
$

81,294

1,073

—
(621)

—

Purchases1

67,807

(459)

(816)

Annual reallocation adjustment

$ 202,139

—

12,453

—

97,965

—

(18,770)

(2,326)

(26,290)

(1,080)

(97)

(417)

131

(21,793)
$

Federal
agency and
GSE MBS

48,498

102

(6,010)

GSE debt
securities

22,158
(957)

971

(12,760)

Amortization of premiums and
accretion of discounts, net

(42,586)

—

Realized gains, net

Bonds

11,448
—

Sales1

Total
Treasury
securities

—

(78,995)

—

(4,373)
$

5,657

(38,887)

47,468

$ 128,762

—

23,249

13,396

36,645

—

56,417

—

Realized gains, net

—

Principal payments and maturities

—

(1)

—

(1)

(1,259)

(17,839)

Amortization of premiums and
accretion of discounts, net

—

(390)

(613)

(1,003)

(52)

(454)

—

Inflation adjustment on
inflation-indexed securities

—

Annual reallocation adjustment

Balance at December 31, 2013

—

(11,202)

—

67,636

(6,547)

—

(17,749)

—

(670)

(10,383)

92,968

53,744

$ 146,712

3,676

95,377

32,835

17,246

—

33,808

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

Purchases3

11,449
—

Sales

(41,355)

(741)

61,530
(42,096)

—

Year-ended December 31, 2013
Supplemental information—par value of transactions:
$

Purchases3

—

23,080

—

Sales3

—

11,969

35,049

—

54,627
—

Purchases and sales 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.

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

Includes inflation compensation.

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.

federal reserve bank of richmond

2013 annual report

Notes to Financial Statements

Total SOMA

Bills

Balance at December 31, 2011

Purchases1

Notes

Total
Treasury
securities

Bonds

18,423

$ 1,311,917

419,937

$ 1,750,277

118,886

397,999

263,991

780,876

GSE debt
securities

107,828

Federal
agency and
GSE MBS

—

848,258
431,487

Sales1

—

(507,420)

(11,727)

(519,147)

—

Realized gains, net2

—

12,003

1,252

13,255

—

Principal payments and
maturities

(137,314)

(67,462)

—

(204,776)

(27,211)

(324,181)

(7,531)

(12,987)

(1,138)

(5,243)

1,047

1,690

666,969

$ 1,809,188

Amortization of premiums and
accretion of discounts, net

Inflation adjustment on
inflation-indexed securities

—

643

—

$ 1,142,219

—

358,656

206,208

564,864

—

864,537

—

Balance at December 31, 2012
Purchases

Sales1

(5,461)

—
$

79,479

—
$

950,321

—

Principal payments and
maturities

—

(21)

—

(21)

(19,562)

(273,990)

Amortization of premiums and
accretion of discounts, net

—

(6,024)

(15,527)

(795)

(7,008)

Inflation adjustment on
inflation-indexed securities

—

285

—

$ 1,495,115

Realized gains, net

Balance at December 31, 2013

(9,503)
645

930

864,319

$ 2,359,434

205,115

—

59,122

$ 1,533,860

—

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

118,892

—

Sales

383,106
(492,234)

(9,094)

707,113
(501,328)

—

413,160
—

Year-ended December 31, 2013
Supplemental information—par value of transactions:
Purchases3
Sales3

—
—

356,766
—

184,956

541,722

—

837,490
—

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

Includes inflation compensation.

federal reserve bank of richmond

2013 annual report

Notes to Financial Statements

b. Foreign Currency Denominated Investments
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 21.001 percent and 20.685 percent at
December 31, 2013 and 2012, respectively.
Information about foreign currency denominated investments valued at amortized cost and foreign currency market
exchange rates at December 31 was as follows (in millions):
Allocated to Bank
2013

Total SOMA

2012

2013

2012

Euro:
Foreign currency deposits

1,581

1,846

7,530

8,925

Securities purchased under agreements to resell

535

136

2,549

659

German government debt instruments

503

441

2,396

2,133

French government debt instruments

504

501

2,397

2,421

615

735

2,927

3,553

1,244

1,486

5,925

7,182

Japanese yen:
Foreign currency deposits
Japanese government debt instruments
Total

4,982

5,145

23,724

24,873

Accrued interest receivable on foreign currency denominated assets was $88 million and $99 million as of December
31, 2013 and 2012, respectively, of which $18 million and $21 million, respectively, was allocated to the Bank. These amounts
are reported as a component of “System Open Market Account: Accrued interest receivable” in the Statements of Condition.
The remaining maturity distribution of foreign currency denominated investments that were allocated to the Bank at
December 31, 2013 and 2012, 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, 2013:
Euro

$ 1,478

Japanese yen
Total

654

378
80

$ 2,132

$ 1,363

458

357

813

$ 3,123

393

454

732

1,859

847

$ 1,545

$ 4,982

445

December 31, 2012:
Euro
Japanese yen
Total

federal reserve bank of richmond

786
$ 2,149

102
$

459

2013 annual report

759

$ 2,924

442

891

2,221

887

$ 1,650

$ 5,145

Notes to Financial Statements

There were no foreign exchange contracts related to open market operations outstanding as of December 31, 2013.
As of December 31, 2013, there were no outstanding commitments to purchase foreign government debt instruments.
During 2013, there were purchases, sales, and maturities of foreign government debt instruments of $3,539 million, $0, and
$3,431 million, respectively, of which $742 million, $0, and $719 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, 2013 and 2012, there was no balance outstanding under the authorized warehousing facility.
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, 2013 and 2012.
c. Central Bank Liquidity Swaps
U.S. Dollar Liquidity Swaps
The Bank’s allocated share of U.S. dollar liquidity swaps was approximately 21.001 percent and 20.685 percent at December 31,
2013 and 2012, respectively.
The total foreign currency held under U.S. dollar liquidity swaps in the SOMA at December 31, 2013 and 2012, was $272
million and $8,889 million, respectively, of which $57 million and $1,839 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):
2013

Euro

2012

Within 15
days

16 days to
90 days

Total

Within 15
days

16 days to
90 days

360

1,479

Total

1,839

Foreign Currency Liquidity Swaps
There were no transactions related to the foreign currency liquidity swaps during the years ended December 31, 2013 and 2012.
d. Fair Value of SOMA Assets
The fair value amounts are presented 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 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 also affected by currency
risk. Based on evaluations performed as of December 31, 2013, there are no credit impairments of SOMA securities holdings.

federal reserve bank of richmond

2013 annual report

Notes to Financial Statements

The following table presents the amortized cost and fair value of and cumulative unrealized gains (losses) on the Treasury
securities, GSE debt securities, and federal agency and GSE MBS, net held in the SOMA at December 31 (in millions):
Allocated to the Bank
2013

2012

Amortized
cost

Fair value

Notes

$ 92,968

$ 93,209

Bonds

53,744

52,377

Cumulative
unrealized
gains
(losses)

Amortized
cost

Fair value

$ 81,293

$ 86,344

(1,367)

47,469

54,171

6,702

(1,126)

$ 128,762

$ 140,515

$ 11,753

5,657

6,050

393

(2,381)

67,636

70,744

3,108

(3,313)

$ 202,055

$ 217,309

$ 15,254

Cumulative
unrealized
gains

Treasury securities:

Total Treasury securities

$ 146,712

$ 145,586

GSE debt securities

3,676

3,870

Federal agency and
GSE MBS

95,377

92,996

$ 245,765

$ 242,452

Total domestic SOMA portfolio
securities holdings

241

194

5,051

Memorandum—
Commitments for:
Purchases of Treasury
securities

—

Purchases of Federal agency
and GSE MBS
Sales of Federal agency
and GSE MBS

federal reserve bank of richmond

—

3,690

3,677

—

2013 annual report

—
(13)
—

—

8,414

8,427

—

Notes to Financial Statements

Total SOMA
2013

2012
Cumulative
unrealized
gains
(losses)

Amortized
cost

Fair value

Notes

$ 1,495,115

$ 1,499,000

Bonds

864,319

842,336

$ 2,359,434

$ 2,341,336

GSE debt securities

59,122

62,236

Federal agency and
GSE MBS

1,533,860

1,495,572

$ 3,952,416

$ 3,899,144

Amortized
cost

Fair value

Cumulative
unrealized
gains

Treasury securities:

Total Treasury securities

Total domestic SOMA portfolio
securities holdings

$ 1,142,219

$ 1,213,177

(21,983)

3,885

666,969

761,138

70,958

(18,098)

$ 1,809,188

$ 1,974,315

3,114

79,479

85,004

5,525

(38,288)

950,321

993,990

43,669

(53,272)

$ 2,838,988

$ 3,053,309

214,321

—

94,169
$

165,127

Memorandum—
Commitments for:
Purchases of Treasury
securities
Purchases of Federal agency
and GSE MBS
Sales of Federal agency
and GSE MBS

—

59,350

59,129

—

—
(221)
—

—

118,215

118,397

182

—

The fair value of Treasury securities and GSE debt securities 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.
At December 31, 2013 and 2012, the fair value of foreign currency denominated investments was $23,802 million and
$25,042 million, respectively, of which $4,999 million and $5,180 million, respectively, was allocated to the Bank. The fair
value of 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 foreign currency deposits and securities purchased under
agreements to resell was determined by reference to market interest rates.
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.

federal reserve bank of richmond

2013 annual report

Notes to Financial Statements

The following table provides additional information on the amortized cost and fair values of the federal agency and GSE
MBS portfolio at December 31 (in millions):
2013
Distribution of MBS holdings
by coupon rate

2012

Amortized cost

Fair value

Amortized cost

Fair value

Allocated to the Bank:
2.0%

882

841

2.5%

7,700

7,366

2,673

2,688

3.0%

32,447

30,113

11,431

11,513

3.5%

21,744

21,039

12,781

13,149

4.0%

14,317

14,371

9,805

10,388

4.5%

11,555

12,155

18,681

20,083

5.0%

5,179

5,470

8,904

9,410

5.5%

1,337

1,413

2,845

2,976

6.0%

190

200

402

419

6.5%

Total

95,377

92,996

67,636

70,744

14,191

13,529

845

846

Total SOMA:
2.0%
2.5%

123,832

118,458

37,562

37,766

3.0%

521,809

484,275

160,613

161,757

3.5%

349,689

338,357

179,587

184,752

4.0%

230,256

231,113

137,758

145,955

4.5%

185,825

195,481

262,484

282,181

5.0%

83,290

87,968

125,107

132,213

5.5%

21,496

22,718

39,970

41,819

6.0%

3,051

3,225

5,642

5,888

6.5%

421

448

753

813

Total

federal reserve bank of richmond

1,533,860

1,495,572

2013 annual report

950,321

993,990

Notes to Financial Statements

Because SOMA securities are recorded at amortized cost, the change in the cumulative unrealized gains (losses) is not
reported in the Statements of Income and Comprehensive Income. The following tables present the realized gains and the
change in the cumulative unrealized losses, presented as “Fair value changes unrealized losses,” of the domestic securities
holdings during the years ended December 31, 2013 and 2012 (in millions):
Allocated to Bank
2013

Treasury securities

Total portfolio holdings
realized gains1

$ (11,342)

GSE debt securities

—

(154)

—

(76)

Federal agency
and GSE MBS

(5,144)

(188)

$ (16,640)

Fair value changes
unrealized losses

—

Total

2012
Fair value changes
unrealized losses

Total portfolio holdings
realized gains1

1,073

1,096

(654)

(918)

Total SOMA
2013
Total portfolio holdings
realized gains1

Treasury securities

Total portfolio holdings
realized gains1

—

$ (183,225)

—

(2,411)

—

(885)

Federal agency
and GSE MBS

(81,957)

241

(3,568)

$ (267,593)

Fair value changes
unrealized losses

GSE debt securities

Total

2012
Fair value changes
unrealized losses

13,255

13,496

(1,142)

(5,595)

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

The amount of change in unrealized gains position, net, related to foreign currency denominated assets was a decrease of $90
million and an increase of $3 million for the years ended December 31, 2013 and 2012, respectively, of which $19 million and
$1 million, respectively, were 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.

federal reserve bank of richmond

2013 annual report

Notes to Financial Statements

Treasury securities, GSE debt securities, Federal agency and GSE MBS, and foreign government debt instruments are
classified as Level 2 within the ASC 820 hierarchy because the fair values are based on indicative quotes and other observable
inputs obtained from independent pricing services. The fair value hierarchy level of SOMA financial assets is not necessarily
an indication of the risk associated with those assets.

Bank Premises, Equipment, and Software
Bank premises and equipment at December 31 were as follows (in millions):
2013

2012

Bank premises and equipment:
Land and land improvements

Buildings

244

238

Construction in progress

Furniture and equipment

353

336

731

705

(378)

(359)

Building machinery and equipment

Subtotal
Accumulated depreciation
Bank premises and equipment, net

353

346

Depreciation expense, for the years ended
December 31

Bank premises and equipment at December 31 included the following amounts for capitalized leases (in millions):
2013

Leased premises and equipment
under capital leases

Accumulated depreciation

2012

(18)

33
(20)

Leased premises and equipment
under capital leases, net

Depreciation expense related to leased
premises and equipment under capital
leases, for the years ended December 31

federal reserve bank of richmond

2013 annual report

Notes to Financial Statements

The Bank leases space to outside tenants with remaining lease terms ranging from one to five years. Rental income from
such leases was $1.5 million and $1.4 million for the years ended December 31, 2013 and 2012, respectively, and is reported
as a component of “Non-interest (loss) income: Other” in the Statements of Income and Comprehensive Income. Future
minimum lease payments that the Bank will receive under noncancelable lease agreements in existence at December 31, 2013,
are as follows (in thousands):
2014

976

2015

818

2016

762

2017

316

2018

Total

$ 2,928

The Bank had capitalized software assets, net of amortization, of $35 million and $39 million at December 31, 2013 and 2012,
respectively. Amortization expense was $18 million and $16 million for the years ended December 31, 2013 and 2012, 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.

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, 2013, the Bank was obligated under noncancelable leases for premises and equipment with remaining
terms of approximately two 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 $423 thousand and $445
thousand for the years ended December 31, 2013 and 2012, respectively. Certain of the Bank’s leases have options to renew.
Future minimum lease payments under noncancelable operating leases, net of sublease rentals, with terms of one year
or more, at December 31, 2013, were not material.
At December 31, 2013, 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 1 percent of the capital paid-in of the claiming Reserve Bank, up to 50 percent of the
total capital paid-in of all Reserve Banks. Losses are borne in the ratio of a Reserve Bank’s capital paid-in to the total capital
paid-in of all Reserve Banks at the beginning of the calendar year in which the loss is shared. No claims were outstanding
under the agreement at December 31, 2013 and 2012.
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.

federal reserve bank of richmond

2013 annual report

Notes to Financial Statements

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 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. 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 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, 2013 and 2012, 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, 2013 and 2012, 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 6 percent of employee contributions from the date of hire and provides an
automatic employer contribution of 1 percent of eligible pay. The Bank’s Thrift Plan contributions totaled $16 million and
$15 million for the years ended December 31, 2013 and 2012, respectively, and are reported as a component of “Operating
expenses: Salaries and benefits” in the Statements of Income and Comprehensive Income.

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):
2013

Accumulated postretirement benefit obligation at January 1

2012

265.2

221.9

Service cost benefits earned during the period

14.1

11.0

Interest cost on accumulated benefit obligation

10.1

10.3

(47.3)

29.7

Net actuarial (gain) loss
Special termination benefits loss

—

Contributions by plan participants
Benefits paid
Medicare Part D subsidies
Plan amendments
Accumulated postretirement benefit obligation at December 31

federal reserve bank of richmond

2013 annual report

0.1

2.9

2.7

(11.7)

(11.2)

0.7

(0.8)

—

233.2

265.2

Notes to Financial Statements

At December 31, 2013 and 2012, the weighted-average discount rate assumptions used in developing the postretirement
benefit obligation were 4.79 percent and 3.75 percent, respectively.
Discount rates reflect yields available on high-quality corporate bonds that would generate the cash flows necessary to
pay the plan’s benefits when due. Beginning in 2013, the System Plan discount rate assumption setting convention changed
from rounding the rate to the nearest 25 basis points to using an unrounded rate.
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):
2013

Fair value of plan assets at January 1

2012

—

Contributions by the employer

—

8.1

Contributions by plan participants
Benefits paid

7.8

2.9

2.7

(11.7)

(11.2)

0.7

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

—

Unfunded obligation and accrued postretirement benefit cost

233.2

265.2

9.6

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

Net actuarial loss

(35.4)

Total accumulated other comprehensive loss

13.0
(90.3)

(25.8)

(77.3)

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:
2013

2012

Health-care cost trend rate assumed for next year

7.00%

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

5.00%

Year that the rate reaches the ultimate trend rate

2019

2018

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, 2013
(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

One percentage point
decrease

5.3

35.1

federal reserve bank of richmond

(4.1)
(28.7)

2013 annual report

Notes to Financial Statements

The following is a summary of the components of net periodic postretirement benefit expense for the years ended
December 31 (in millions):
2013

Service cost-benefits earned during the period

2012

14.1

11.0

Interest cost on accumulated benefit obligation

10.1

10.3

Amortization of prior service cost

(4.2)

Amortization of net actuarial loss

7.7

5.6

27.7

22.7

—

0.1

Total periodic expense
Special termination benefits loss
Net periodic postretirement benefit expense

27.7

22.8

Estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic postretirement benefit
expense in 2014 are shown below:

Prior service cost

(4.0)

Net actuarial loss
Total

1.5
$

(2.5)

Net postretirement benefit costs are actuarially determined using a January 1 measurement date. At January 1, 2013 and 2012,
the weighted-average discount rate assumptions used to determine net periodic postretirement benefit costs were 3.75 percent
and 4.50 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 $525 thousand and $546 thousand in the years ended December 31, 2013 and 2012,
respectively. Expected receipts in 2014, related to benefits paid in the years ended December 31, 2013 and 2012, are $485 thousand.
Following is a summary of expected postretirement benefit payments (in millions):
Without subsidy

2014

9.6

With subsidy

9.0

2015

10.4

9.6

2016

11.0

10.1

2017

11.9

10.9

2018

12.9

11.9

2019–2023

79.6

72.7

$ 135.4

$ 124.2

Total

federal reserve bank of richmond

2013 annual report

Notes to Financial Statements

Postemployment Benefits
The Bank offers benefits to former or inactive employees. Postemployment benefit costs are actuarially determined using a
December 31 measurement date and include the cost of medical, dental, and vision insurance; survivor income; disability
benefits; and self-insured workers’ compensation expenses. The accrued postemployment benefit costs recognized by the
Bank at December 31, 2013 and 2012, were $22 million and $23 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 2013 and
2012 operating expenses were $2 million and $5 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):
2013

2012

Amount related to
postretirement benefits other
than retirement plans

Balance at January 1

(77)

(49)

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

(4)1

Change in prior service costs related to benefit plans

(4)

Net actuarial gain (loss) arising during the year

(30)

(24)

(28)

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
1

(26)

(77)

Reclassification is reported as a component of “Operating Expenses: Salaries and benefits” in the Statements of Income
and Comprehensive Income.

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 2013 or 2012.

federal reserve bank of richmond

2013 annual report

Notes to Financial Statements

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 earnings remittances to Treasury. 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):
2013

Dividends on capital stock

Transfer (from) to surplus—amount required to equate surplus with capital paid-in
Earnings remittances to Treasury
Total distribution

345
(10)

2012

332
182

4,496

6,414

$ 4,831

$ 6,928

During the year ended December 31, 2013, the Bank recorded a reduction in the amount of capital paid-in and a corresponding reduction of surplus, which is presented in the above table as “Transfer from surplus – amount required to equate surplus
with capital paid-in.” The reduction of surplus resulted in an equivalent increase in “Earnings remittances to Treasury” and a
reduction in “Comprehensive income” for the year ended December 31, 2013.

13 Subsequent Events
There were no subsequent events that require adjustments to or disclosures in the financial statements as of December 31,
2013. Subsequent events were evaluated through March 14, 2014, which is the date that the financial statements were available
to be issued.

federal reserve bank of richmond

2013 annual report

The Federal Reserve Bank of Richmond 2013 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 Anne Davlin, Lisa Kenney, Amanda Kramer,
Urvi Neelakantan, and Sonya Ravindranath Waddell.
The Annual Report also is available on the Bank’s website,
www.richmondfed.org.

federal reserve bank of richmond

2013 annual report

FIFTH FEDERAL RESERVE
DISTRICT OFFICES
Richmond
701 East Byrd Street
Richmond, Virginia 23219
(804) 697-8000

FEDERAL RESERVE BANK
OF RICHMOND
Richmond Baltimore Charlotte

www.richmondfed.org

Baltimore
502 South Sharp Street
Baltimore, Maryland 21201
(410) 576-3300

Charlotte
530 East Trade Street
Charlotte, North Carolina 28202
(704) 358-2100

Full text of Annual Report of the Federal Reserve Bank of Richmond : 2013 Annual Report : Should the Fed Have a Financial Stability Mandate? Lessons from the Fed's First 100 Years

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