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The Federal Reserve Bank of San Francisco

1996 Annual Report

The Federal Reserve Bank of San Francisco is one of 12 regional Reserve Banks which, together with
the Board of Governors in Washington, D.C., comprise the nation's central bank.
As the nation's central bank, the Federal Reserve is responsible for making and carrying out our
nation's monetary policy. It also is a bank regulatory agency, a provider of wholesale priced banking
services, and the fiscal agent for the United States Treasury.
The Federal Reserve Bank of San Francisco serves the Twelfth Federal Reserve District, which
includes the nine western states­­Alaska, Arizona, California, Hawaii, Idaho, Nevada, Oregon, Utah,
and Washington­­Guam, American Samoa, and the Northern Mariana Islands.
To serve this expansive region, the San Francisco Reserve Bank has five offices: the headquarters
in San Francisco, and offices in Los Angeles, Portland, Salt Lake City, and Seattle. Each office
provides financial services to the public and banking institutions in its locale.

This Report was written and produced by Karen Flamme. Design and illustrations were created by Mark Hendricks. Layout was
completed by L. Dylan Frederick (dylan66@juno.com). Color photography by Paul Schulz (somafoto@msn.com). Textile by
Brenda Cooper (cooper1957@aol.com).

The Federal Reserve Bank of San Francisco

1996 Annual Report
From the Boardroom
From left, James A. Vohs, 1996 Deputy Chairman; Robert T. Parry, President; Judith M.
Runstad, Chairman; John F. Moore, First Vice President; and Gary G. Michael, 1997 Deputy
Chairman.

This Report takes a look at one of the innovative ways we are using to serve our customers. We in the Twelfth Federal Reserve
District have always felt a special challenge in finding efficient ways to serve constituents spread over 1.3 million square miles,
35 percent of the nation's area. In addition to covering these vast geographical expanses, we enjoy a diverse client base which
ranges from rural to urban locations, small to large institutions, with varying needs and opportunities for interaction with the
Federal Reserve. The World Wide Web gives us yet another vehicle for interacting with and providing timely information to
many of these people. It is a medium which lets us, and our customers, react quickly to changing events. The site can be
continually evolving and changing, making it a more dynamic medium than traditional publishing.
In a District as large and varied as this, we place a strong reliance on the input of our directors to keep us in tune with their
areas and industries as we perform the important tasks of formulating monetary policy and managing the nation's financial
system. We would like to thank all Twelfth District directors for their invaluable counsel and assessments of economic and
financial conditions throughout the West during 1996.
We want to express our sincere thanks and appreciation to those directors who completed their terms of service during 1996:
on the San Francisco Head Office Board, 1996 Deputy Chairman and immediate past Chairman of the Board, James A. Vohs
(Chairman, Retired, Kaiser Foundation Health Plan, Inc., and Kaiser Foundation Hospitals, Oakland, CA), and Richard L. Mount
(Chairman, President and CEO, Saratoga Bancorp, Saratoga, CA); on the Los Angeles Branch Board, Chairman, Anita E.
Landecker (Western Regional Vice President, Local Initiatives Support Corporation, Los Angeles, CA), William S. Randall
(President, Retired, the former First Interstate Bancorp, Los Angeles, CA), and Thomas L. Stevens, Jr. (President, Retired, Los
Angeles Trade­Technical College, Los Angeles, CA); on the Portland Branch Board, Chairman, Ross R. Runkel (Professor of Law,
Willamette University, Salem, OR), Cecil W. Drinkward (President and CEO, Hoffman Corporation, Portland, OR), Elizabeth
(Betsy) K. Johnson (President, TransWestern, Inc., Scappoose, OR), and Marvin R. O'Quinn (Chief Operating Officer, Providence
Portland Medical Center, Portland, OR); on the Salt Lake City Branch Board, Constance G. Hogland (Executive Director, Boise
Neighborhood Housing Services, Inc., Boise, Idaho); and, on the Seattle Branch Board, Chairman, George F. Russell, Jr.
(Chairman, Frank Russell Company, Tacoma, WA), and Thomas E. Cleveland (Chairman and CEO, Access Business Finance,
Bellevue, WA). We also note here, with much sadness, the untimely loss in 1996 of a good and gifted friend and counselor,
Seattle Branch Director Dr. William R. Wiley (Senior Vice President, Science and Technology Policy, Battelle Memorial Institute,
Richland, WA).

Robert T. Parry, President

Judith M. Runstad, Chairman

The Federal Reserve Bank of San Francisco
1996 Annual Report
Opening a New Office

No wet paint, no ribbon cutting,
no fanfare ­­ just the click of a
computer keystroke and it's open.

By Karen Flamme

"Open 24 Hours!"
It wasn't long ago that a sign announcing round­the­clock service was a pretty good indication that a business was willing to go
to extraordinary measures to meet its customers' needs. Since then, 24­hour, walk­in service has become commonplace in a
number of industries. Today, to keep ahead of, or even abreast of the competition, many businesses are taking a leap into
cyberspace and opening virtual offices that are accessible 24 hours a day, 365 days a year, to customers around the world. And
the best part is that customers can access these offices from the comfort of their homes, offices, or neighborhood coffeehouses.
In the spring of 1996, the Federal Reserve Bank of San Francisco opened just such an office on the World Wide Web.
Our address ­­ / ­­ leads customers to the entrance of the FedWest GateWay, a portal to information from and about the
Federal Reserve Bank of San Francisco. It's as accessible to a banker in downtown Los Angeles as it is to a rancher in eastern
Oregon, a teacher in Connecticut, or a student in Switzerland.
What's the magic that makes it possible?
The World Wide Web is, basically, a
system which allows easy access to, and
sharing of information on, the Internet­­
a gigantic, free computer network. A site
on the web, such as FedWest GateWay,
is a place where you can call up and
read, download, or interact with,
documents and graphics with the click of
a mouse. In addition, highlighted words
or phrases within documents serve as
links to web sites anywhere in the world.
The number of web users grows
exponentially. Suffice it to say they
number in the millions and reside in
virtually every country.
Using the "build it and they will come"
philosophy, we did, and you have.
Visitors to FedWest GateWay now
number about 4,000 a week­­a number
that is steadily growing­­and come to us
from around the world.
We are proud to say that FedWest
GateWay has been awarded a 4­star
rating by the Magellan guide, a directory
which rates and reviews Internet sites
for depth of content, ease of exploration,
and Internet appeal. It was featured in
the Bay Area on KRON­TV as the Web
Site of the Day, and was cited by a

In educating the public about the Federal Reserve System's purposes and functions
and role as fiscal agent for the United States Treasury, the Web is proving to be an
efficient and cost­effective way to reach constituents within our nine­state District
and beyond. In an era in which it is increasingly difficult to know who wants and
needs information about the economy, the Federal Reserve, and the services we
provide, the Web gives us a way to publish various kinds of information quickly and
inexpensively and let our customers choose what they need when they need it. It is
easily accessible, educational, and engaging, allowing users to receive information
nearly instantaneously, explore, select what they want, and communicate with us
whenever convenient. In addition, interactive features which let users give us
feedback allow us to learn from and about our public.
Information organization is one of the biggest challenges to web site developers. A
common complaint about the Internet is that there is so much information available
on it that it is difficult for users to find what they need quickly and efficiently. Our
clients want to navigate easily to the information they need without becoming
snared in a frustrating and time­consuming tangle of information overload.
To avoid the snares and tangles, FedWest GateWay is organized in sections,
grouping similar information together with similar usage patterns. Distinct graphics
and easy­to­follow menus provide overviews of the contents and guide users to
their destinations.
FedWest GateWay is currently arranged into seven sections: Inside the FRBSF,
Economic Research, Treasury Securities or Savings Bonds, Economics Education,
Banking and Finance in the West, Federal Reserve System, and Community Affairs.
Within each of these sections there are subsections which further define the
available choices and offer links to other relevant sites. At every point it is easy to
retrace your steps, back up to main menus, find out what's new on the site, access
the glossary, perform searches, and give feedback.

columnist in The Californian newspaper
as "one of the best designed web sites I
have ever come across."
Inside the FRBSF ­ What better than the Golden Gate Bridge and seal of the Twelfth Federal
Reserve District to let you know graphically you are entering a world of information about the
Federal Reserve Bank of San Francisco? Designed to entice the casual web browser, business
person, student, or job seeker, this section is broken into five categories.

Treasury Securities or Savings Bonds ­ The site's most popular area is introduced by a graphic of stately
columns whose clickable buttons lead visitors to information about Treasury Securities or Savings Bonds.
As fiscal agent of the United States Treasury, this Bank provides direct sales and service of marketable
Treasury securities.

Economic Research ­ Charts and graphs about the economy visually lead you into the three subsections
which comprise Economic Research.

Economics Education ­ This gate opens onto a blackboard symbolizing resources designed especially for
teachers and students.
Banking and Finance in the West ­ Here a ranch­style gate opens to a banc card
symbolizing the growing importance of electronic banking and finance. As the central bank for the
geographically largest and most populated district in the Federal Reserve System, the San Francisco Reserve
Bank has plenty to keep track of in the way of banking and finance. Feedback features on the Web let us find
out our customers' needs and wants and be responsive to them. This helps us fulfill our mission of keeping
the nation's payments system operating efficiently and safely. From local banks in Alaskan outposts to multi­
branch urban financial institutions, we are committed to providing information and services for and about our customers.
Community Affairs ­ Among its varied functions, the Federal Reserve produces newsletters, reports,
seminars, workshops, and conferences and encourages banks to work with community organizations to
promote local economic development.
Federal Reserve System ­ Basic information about what the Federal Reserve System is
and what it does, as well as other governmental resources, can be found at this location
on the site.

By the time you exit FedWest GateWay ­­ our virtual office ­­ we trust you will feel your visit was rewarding. We hope that you
found the information you came for; learned something new; communicated with us; were entertained; and will visit us at this
office again soon ­­ remember, it's open 24 hours.
It's only fitting that giving good customer service in the West would include using the most advanced technology, and the
entire Twelfth District is sure to benefit from currently emerging technologies. According to a recent study by the Bay Area
Economic Forum, "The San Francisco Bay Area is clearly at the cutting edge of the emerging knowledge­based economy in
the U.S. It leads all other regions in key indicators: the largest share of college and advanced degrees; more and better
research centers; more than double the average number of patents per employee; the largest share of high tech exports;
and three times the commercial Internet domains.
"There are also many exciting new Internet companies," the report continues. "One company is pioneering methods for
conducting cash transactions over the Internet in a secure way, and another is working with the larger banks to develop
standards for bank payments over the Internet.
"The Bay Area is also the birthplace of many of the fastest growing financial services companies in the U.S....due in part to
the fact that unprecedented links have been formed between the traditional banking community and the region's cutting­edge
information and computing services companies. The close proximity between the Bay Area's financial institutions and
information technology companies promotes partnering and cross­industry learning."
The Bay Area: Leading the Transition to a Knowledge­Based Economy
Published by the Bay Area Economic Forum, August 1996
http://netra1.abag.ca.gov/bayarea/commerce/baef.html

The Federal Reserve Bank of San Francisco
1996 Annual Report
Executive Committee, Officers,
and Branch Operations
Executive Committee
Bank Officers
Branch Officers
Los Angeles Branch
Northern Region
Portland Branch
Salt Lake City Branch
Seattle Branch
Branch Operations

Executive Committee
From left, Elizabeth K. Christensen, Senior Vice President; John F. Moore, First Vice President
and Chief Operating Officer; Robert T. Parry, President and Chief Executive Officer; Jack H.
Beebe, Senior Vice President and Director of Research; Terry S. Schwakopf, Senior Vice
President; and Gordon R. G. Werkema, Executive Vice President.

Bank Officers
As of December 31, 1996
Robert T. Parry
President and
Chief Executive Officer
John F. Moore
First Vice President and
Chief Operating Officer
Jack H. Beebe
Senior Vice President
and Director of Research

Susan A. Sutherland
Director
Kenneth M. Kinoshita
Associate General Counsel
Beatrice K. Ashburn
Assistant Vice President
Paige Birdsall
Assistant Vice President

Elizabeth K. Christensen
Senior Vice President

Sylvia A. Cunningham
Assistant Vice President

Sara K. Garrison
Senior Vice President

Gail A. Garvey
Assistant Vice President

Michael J. Murray
Senior Vice President

Elaine Geller
Assistant Vice President

Terry S. Schwakopf
Senior Vice President

Todd Glissman
Assistant Vice President

Laurence Washtien

John S. Hsiao

Senior Vice President

Assistant Vice President

D. Kerry Webb
Senior Vice President

Peter K. C. Hsieh
Assistant Vice President

S. Jean Hinrichs
General Auditor

Deborah S. Jackson­Duke
Assistant Vice President

Robert D. Mulford
Vice President,
General Counsel

Lelia M. Jones
Assistant Vice President
Craig B. Knudsen

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and Ethics Officer

Craig B. Knudsen
Assistant Vice President

Elizabeth R. Masten
Vice President and
Secretary of the Board

Ellsworth E. Lund, Jr.
Assistant Vice President

Barbara J. Contini
Vice President

Bonnie R. Allen
Assistant Vice President

Frederick T. Furlong
Vice President

Elizabeth M. O'Shea
Assistant Vice President

William K. Ginter
Vice President

Philip M. Ryan
Assistant Vice President

Reuven Glick
Vice President

W. Starr Seegmiller
Assistant Vice President

John P. Judd
Vice President and
Associate Director
of Research

James J. Tenge
Assistant Vice President

Ronald E. Mitchell, Jr.
Vice President
Susan Porterfield
Vice President

Thomas R. Thaanum
Assistant Vice President
David W. Walker
Assistant Vice President
Jim Callahan
Audit Officer

Douglas R. Shaw
Vice President
and Counsel

Angela D'Alessandro
Examining Officer

W. Gordon Smith
Vice President

Louis "Skip" George
District Security Officer

Sallie H. Weissinger
Vice President and
Director of Public Information

Beverley­Ann Hawkins
Automation Resources Officer

Patricia A. Welch
Vice President
James M. Barnes
Director
Kenneth R. Binning
Director
Harold H. Blum
Director
Nancy Emerson
Director

Michael E. Johnson
Applications Officer
Mark Levonian
Research Officer
Joy Hoffmann Molloy
Community Affairs Officer
Brian Motley
Research Officer
Gary P. Palmer
Financial Analysis Officer

Eliot E. Giuili
Director

Darren S. Post
Officer, ACH, Business Development
and Electronic Product Support

Donald R. Lieb
Director

Glenn D. Rudebusch
Research Officer

John Y. C. Lin
Director

Bharat Trehan
Research Officer
Elizabeth L. Wood
Systems Officer

Branch Officers
Los Angeles Branch
Mark Mullinix
Senior Vice President

Robert C. Johnson
Assistant Vice President

Sean J. Rodriguez
Vice President and
Assistant Branch Manager

Roger W. Replogle
Assistant Vice President

Darcy J. Coulter
Director
Nancy Olmstead
Director

Rachel A. Romero
Assistant Vice President
Dale L. Vaughan
Assistant Vice President
Marla E. Borowski
Officer, Custodies Services
fficers.html

2/3

Officer, Custodies Services
Linda Westerschulte
Officer, Personnel/FP&C

Northern Region
Gordon Werkema
Executive Vice President
Portland

Salt Lake City

Raymond H. Laurence
Senior Vice President

Andrea P. Wolcott
Vice President

Mary E. Lee
Assistant Vice President

Jed W. Bodily
Assistant Vice President

Robert D. Long
Assistant Vice President

Gerald R. Dalling
Assistant Vice President

Robin A. Rockwood
Assistant Vice President

Richard B. Hornsby
Assistant Vice President

Seattle

Thomas P. McGrath
Assistant Vice President

Gale P. Ansell
Assistant Vice President
Jimmy F. Kamada
Assistant Vice President
Kenneth L. Peterson
Assistant Vice President
Michael J. Stan
Assistant Vice President

Branch Operations
From left, Mark Mullinix, Senior Vice President, Los Angeles; Andrea P. Wolcott, Vice
President, Salt Lake City; Gordon R. G. Werkema, Executive Vice President, Northern Region;
and Raymond H. Laurence, Senior Vice President, Portland.

The Federal Reserve Bank of San Francisco
1996 Annual Report
Highlights of 1996
Keeping the nation's payments system operating smoothly and efficiently continues to be a challenge to the regional Reserve
Banks as the needs of our customers change and expand rapidly. We are developing new technologies and customized
solutions to creatively tailor the banking services we offer to depository institutions and the federal government. There were
several notable milestones in 1996.
It's our job to make sure there is enough coin and currency in circulation to meet the public's demand. In fact, the warehousing,
shipping, processing, and handling of currency are major functions of the Reserve Banks. This was an especially notable
challenge in 1996 as we introduced the redesigned $100 bill to the public in March. The redesigned bills include new or modified
features to improve security and stay ahead of counterfeiters and advances in technology which make it easier to reproduce
currency. A seamless introduction of the new currency into the money stream was essential.
We began storing the new notes at all of our five offices as early as January to make sure we had enough on hand to release
the end of March. But before that, in the third quarter of 1995, we held 20 customer education seminars in seven states
throughout the Twelfth District. In addition to the seminars, we distributed information kits; circulated an informational video
with reasons for the redesign, circulation plans, and recognizable features of the redesigned currency; and staffed an
information desk to assist customers with any questions regarding the new currency.
To facilitate the smooth rollover of $100s in foreign markets, Extended Custodial Inventories (ECIs) were established and
managed by the Federal Reserve Bank of New York in London, Frankfurt, and Zurich. These ECIs strategically stockpiled
inventories in key markets and geographic redistribution centers to minimize inventory limitations imposed by flight schedules
and in­transit insurance ceilings.
Were we successful? Currently, approximately 60 percent of all $100s flowing back to our Bank are the newly designed notes,
and they now make up 32.7 percent of the 2.6 billion notes in circulation.
But all transactions are not handled in cash. In fact, check volume, contrary to forecasters' predictions, continues to increase,
and handling paper checks and the related movement of funds remain costly and labor intensive. Approximately 63 billion
checks are written each year in the United States, a number which is expected to continue to grow over the next several years.
Converting these paper checks to electronic data is one way to expedite check clearing. Electronic Check Presentment (ECP),
for example, provides financial institutions with an electronic file of check data in advance of the delivery of the physical checks
from the Federal Reserve, allowing earlier identification of fraud, decreased clearing times, and reduced reliance on
transportation.
During 1996, the Bank introduced check imaging as a complement to such electronic products as ECP. Check imaging takes a
digital picture of a check and saves it in digital, computer­file form for retrieval when needed. This process, in essence, turns a
paper check into an electronic "picture" which is easier to organize, distribute, store, and access. ECP, together with check
images, allows banks and their cash management customers to address fraud and risk concerns up to 12 hours earlier than if
they had to wait for the arrival of physical checks. Retrieving check images from computer storage systems also speeds
response time in handling customer balance inquiries, requests for check clearing information, and requests for check copies,
resulting in operational efficiencies and improved customer service. The Bank's check image product line is flexible and can be
easily customized to meet a variety of needs.
Electronic funds transfer is a faster and more secure method of payment than either
cash or check. The automated clearing house (ACH) is an electronic funds transfer
system. This nationwide network processes electronically originated credit and debit
transfers such as direct deposit payroll payments and corporate payments to
contractors and vendors. During 1996 the Federal Reserve System converted to a
new centralized ACH application software, Fed ACH. This software enabled us to
significantly reduce fees and provide depository institutions with greater control over
how they access, process, and settle ACH transactions. Because ACH transactions
are processed from one central computer site within the Federal Reserve System,
items no longer have to be transmitted from one Federal Reserve district to another.
In addition, customers have expanded file delivery options and enhanced on­line
access. This means they can have greater processing flexibility and provide their customers with time­critical ACH payments
more quickly.
The Federal Reserve also holds U.S. government securities in safekeeping as book entries ­­electronic records rather than
paper certificates­­for depository institutions. During 1996, the Federal Reserve Bank of San Francisco also installed new
software in this service. This software, which is referred to as NBES (New Book­Entry System), provides for centralized
computer processing at a single site with standardized services to depository institutions. NBES offers an increased number of
accounts available to users; improved contingency and disaster recovery capabilities; quick wire transfers for all transactions;
and enhanced reporting features.
Operational controls in the Los Angeles Branch Cash area received an unusual amount of scrutiny in 1996. As a result of an
internal compliance team's findings of errors in a Los Angeles Cash administrative report, the General Accounting Office
reviewed the department's statistical reporting processes and noted possible concerns regarding the integrity of cash accounting
and financial controls. By year­end, results of an internal audit, a Board of Governors examination, an unannounced vault

count, and an independent, external accounting firm's review all pointed to the soundness of our operational controls and the
integrity of our overall cash operation.

Economic Research
Research during 1996 addressed policy­related issues, including U.S. monetary policy, international topics, and the effects of
banking industry restructuring. Staff published extensively both in Bank publications and outside academic journals.
Monetary policy studies covered such topics as the effect of policy on the economy, indicators of future inflation, and the way in
which the Fed sets the stance of monetary policy in response to economic developments. International topics included monetary
policy targets in the United Kingdom, New Zealand, and Japan; exchange rate risk and trade flows; and exchange rate
exposure and crises. Banking studies looked at efficiency, the pricing of financial services, and the availability of credit. This
research formed the basis for extensive briefings of senior management on monetary and regulatory policy, as well as
economic developments in the western United States and the Pacific Basin.
Furthering the Bank's ongoing efforts to promote cooperation and share research among Pacific Basin countries, our Center for
Pacific Basin Monetary and Economic Studies held a conference, "Managing Capital Flows and Exchange Rates: Lessons from the
Pacific Basin." The department also co­hosted an academic conference with the Center for Economic Policy Research at
Stanford University. Papers at that conference examined the measurement and management of monetary policy.

Banking Supervision and Regulation
The supervision and regulation function in 1996 was significantly affected by rapid changes in the industry brought on by
increased industry consolidation, interstate branching and banking, and the development of electronic banking products and
services. Specific emphasis was placed on risk management, concentrating on increasing the value of the supervisory process
and ensuring its efficiency and effectiveness for our customers.
To achieve delivery of a more effective, risk­focused, and seamless supervisory approach, the Consumer Compliance and
Community Affairs and Bank Supervision and Regulation departments were merged into one division.
At year­end there were 62 state member banks in the District. There were also 210 holding companies with assets totaling $522
billion, 120 branches and agencies of foreign banks, 8 Edge and Agreement corporation offices, and 40 representative offices.
Overall applications activity declined as the total number of applications filed during 1996 reached 291 as compared to 310 in
1995. This level, while slightly reduced from the prior year's activity, continues to reflect the expansion and consolidation of the
industry. Applications to form bank holding companies declined from 54 during 1995 to 26 in 1996, and merger applications by
state member banks declined by half in 1996.
The Twelfth District continued to provide guidance and direction on community reinvestment throughout the nine Western
states. Community Affairs co­sponsored, with the American Bankers' Association and the Small Business Administration, the
1996 National Community Development Lending Conference. Later in the year, the unit sponsored its annual Community
Reinvestment conference, entitled "The New CRA: Focus on the Future." It also sponsored two one­day small business lending
conferences and a conference on electronic banking and its implications for consumers, and facilitated numerous other
meetings. Staff also coordinated a series of seven public meetings on the proposed merger between First Interstate Bank of
California and Wells Fargo Bank, with approximately 550 individuals providing their comments on CRA activity of these banks.
In the area of community development, the Bank provided leadership to the Association of Reinvestment Consortia for Housing,
and consulted with Seattle­based banks on the formation of the Seattle Small Business Lenders Association's "One Stop Capital
Shop." To assist banks in identifying local investment opportunities, the unit held bi­monthly roundtables in Boise, Las Vegas,
Los Angeles, Salt Lake City, San Francisco, and Seattle.

The Federal Reserve Bank of San Francisco

1996 Annual Report
Summary of Operations
Volume (in thousands)
1994

1995

1996

4,212,494

4,298,035

4,317,704

694,306

753,589

748,535

Other Treasury original issues

216

201

125

Book­entry securities processed

805

894

829

2,269,690

2,082,513

2,188,856

Government checks processed

69,567

67,148

61,741

Return items processed

29,941

30,569

32,767

19,507

20,146

22,113

459,032

525,549

404,974

587

482

461

56

66

83

Custody Services
Cash Services
Currency notes paid into circulation
Food stamp coupons processed
Securities Services

Payments Services
Check Services
Commercial checks collected

Electronic Payments Services
Wire transfers processed
Automated clearinghouse
transactions processed

Discounts and Advances
Total discounts and advances*
Number of financial
institutions accommodated*

*Whole number (not in thousands)

The Federal Reserve Bank of San Francisco
1996 Annual Report
Statement of Condition

(in millions)
Dec. 31, 1996

Dec. 31, 1995

Assets
Gold certificates
Special drawing rights certificates
Coin
Items in process of collection
Loans to depository institutions
U.S. government and
federal agency securities, net
Investments denominated
in foreign currencies
Accrued interest receivable
Interdistrict settlement account
Bank premises and equipment, net
Other assets
Total assets

$ 1,067

$ 1,036

957

977

74

37

1,873

574

15

103

33,393

30,308

2,631

2,935

301

308

23,441

5,351

220

206

23

26

$ 63,995

$ 41,861

$ 56,905

$ 35,901

3,612

4,188

Liabilities and Capital
Liabilities:
Federal Reserve notes outstanding, net
Deposits:
Depository institutions
Other deposits
Deferred credit items
Statutory surplus transfer
due U.S. Treasury
Interest on Federal Reserve notes
due U.S. Treasury
Accrued benefit cost
Other liabilities

22

20

1,575

533

49

0

0

54

70

69

17

12

62,250

40,777

Capital paid­in

880

542

Surplus

865

542

1,745

1,084

$ 63,995

$ 41,861

Total liabilities
Capital:

Total capital
Total liabilities and capital
The accompanying notes are an integral part of these financial statements.

The Federal Reserve Bank of San Francisco

1996 Annual Report
Statement of Income

(in millions)
for the years ended
Dec. 31, 1996

Dec. 31, 1995

Interest income:
Interest on U.S. government securities

$ 1,967

$ 1,979

61

109

1

1

2,029

2,089

Income from services

82

76

Reimbursable services to government
agencies

18

18

(228)

140

3

0

3

5

(122)

239

143

139

Occupancy expense

16

15

Equipment expense

19

17

5

6

58

52

67

56

308

285

1,599

2,043

0

(6)

$ 1,599

$ 2,037

$ 41

$ 32

338

30

852

1,975

Interest on foreign currencies
Interest on loans to depository institutions
Total interst income
Other operating income:

Foreign currency gains (losses), net
Government securities gains, net
Other income
Total other operating income
(loss)
Operating expenses:
Salaries and other benefits

Cost of unreimbursed Treasury services
Assessments by Board of Governors
Other expenses
Total operating expenses
Income before cumulative effect of accounting
change
Cumulative effect of change in accounting
principle
Net income prior to distribution
Distribution of net income:
Dividends paid to member banks
Transferred to surplus
Payments to U.S. Treasury as interest on
Federal Reserve notes

Payments to U.S. Treasury as required by
statute

368
$ 1,599

$ 2,037

The Federal Reserve Bank of San Francisco

1996 Annual Report
Statement of Changes in Capital
For the years ended December 31, 1996 and December 31, 1995
(in millions)
Capital Paid-in

Surplus

Total Capital

$ 512

$ 512

$ 1,024

30

30

Balance at January 1, 1995
(10,244,349 shares)
Net income transferred to surplus
Net change in capital stock issued
(588,751 shares)

$ 30

$ 30

Balance at December 31, 1995
$ 542

$ 1,084

Net income transferred to surplus

(10,833,100 shares)

$ 542

338

338

Statutory surplus transfer to the U.S.
Treasury

(15)

(15)

Net change in capital stock issued
(6,760,353 shares)

$ 338

$ 338

Balance at December 31, 1996
(17,593,453 shares)

$ 880

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

$ 865

$ 1,745

The Federal Reserve Bank of San Francisco

1996 Annual Report
Boards of Directors
San Francisco
Los Angeles
Portland
Salt Lake City
Seattle

San Francisco Board of Directors
Chairman and Federal Reserve Agent
Judith M. Runstad
Partner
Foster, Pepper & Shefelman
Seattle, Washington

Deputy Chairman
Gary G. Michael
Chairman and CEO
Albertson's Inc.
Boise, Idaho

Robert S. Attiyeh
Senior Vice President and
Chief Financial Officer
Amgen, Inc.
Thousand Oaks, California

Gerry B. Cameron
Chairman and CEO
U.S. Bancorp
Portland, Oregon

E. Lynn Caswell
Vice Chairman
Monarch Bancorp
Laguna Hills, California

Krestine M. Corbin
President and CEO
Sierra Machinery, Inc.
Sparks, Nevada

Warren K. K. Luke
Vice Chairman, President
and CEO
Hawaii National Bank
Honolulu, Hawaii

Cynthia A. Parker
Executive Director
Anchorage Neighborhood
Housing Services, Inc.
Anchorage, Alaska

Stanley T. Skinner
Chairman and CEO
Pacific Gas and Electric Co.
San Francisco, California

Federal Advisory
Council Member
William F. Zuendt
President and COO
Wells Fargo & Company
San Francisco, California

Los Angeles Board of Directors
Chairman of the Board
Anne Ledford Evans
Chairman
Evans Hotels
San Diego, California
Lori R. Gay
President
Los Angeles Neighborhood
Housing Services, Inc.
Los Angeles, California

Stephen G. Carpenter
Chairman of the Board
and CEO
California United Bank
Encino, California
Antonia Hernandez
President and General Counsel
Mexican American Legal
Defense and Educational Fund
(MALDEF)
Los Angeles, California

Liam E. McGee
Group Executive Vice President
Bank of America
Los Angeles, California

David Lewis Moore
President
Western Growers Association
Irvine, California
Vacant Position

Portland Branch Board of Directors
Chairman of the Board
Carol A. Whipple
Proprietor
Rocking C Ranch
Elkton, Oregon

Phyllis A. Bell
President
Oregon Coast Aquarium
Newport, Oregon

Patrick Borunda
Executive Director
Oregon Native American Business & Entrepreneurial
Network (ONABEN)
Portland, Oregon

Martin Brantley
President and General Manager
KPTV­12,
Oregon Television, Inc.
Portland, Oregon

John David Eskildsen
President and CEO
U.S. National Bank of Oregon
Portland, Oregon

Nancy Wilgenbusch
President
Marylhurst College
Marylhurst, Oregon

Thomas Cook Young
Chairman, President and CEO
Northwest National Bank
Vancouver, Washington

Salt Lake City Branch Board of Directors
Chairman of the Board
Gerald R. Sherratt
President
Southern Utah University
Cedar City, Utah

R. D. Cash
Chairman, President
and CEO
Questar Corporation
Salt Lake City, Utah

Richard E. Davis
President and CEO
Salt Lake Convention and Visitors Bureau
Salt Lake City, Utah

Maria Garciaz
Executive Director
Salt Lake Neighborhood Housing
Services, Inc.
Salt Lake City, Utah

J. Pat McMurray
President
First Security of Idaho
Boise, Idaho

Nancy Mortensen
Vice President, Marketing
Zions Cooperative Mercantile
Institution
Salt Lake City, Utah

Roy C. Nelson
President
Bank of Utah
Ogden, Utah

Seattle Branch Board of Directors

Chairman of the Board
Richard R. Sonstelie
Chairman and CEO
Puget Sound Energy, Inc.
Bellevue, Washington

John V. Rindlaub
Chairman
Seafirst Bank
Seattle, Washington

Boyd E. Givan
Senior Vice President and CFO
The Boeing Company
Seattle, Washington

Constance L. Proctor
Partner
Alston, Courtnage, MacAulay &
Proctor
Seattle, Washington

Betsy Lawer
Vice Chair and COO
First National Bank of Anchorage
Anchorage, Alaska

Tomio Moriguchi
Chairman and CEO
Uwajimaya, Inc.
Seattle, Washington

Helen M. Rockey
President and CEO
Brooks Sports, Inc.
Bothell, Washington

The Federal Reserve Bank of San Francisco

1996 Annual Report
1997 Advisory Council
on Small Business and Agriculture
Chairman
Bailey S. Barnard
Allied Capital
San Francisco, California

Vice Chairman
Karla S. Chambers
Vice President
Stahlbush Island Farms, Inc.
Corvallis, Oregon

Members
Don M. "Duff" Willey
President
Willey Motors, Inc.
Bountiful, Utah

Lawrence S. Okinaga
Partner
Carlsmith Ball Wichman Case & Ichiki
Honolulu, Hawaii

Paula R. Collins
Chief Executive Officer
WDG Ventures, Inc.
San Francisco, California

Barry Baszile
President
Baszile Metals Service
Los Angeles, California

Jerry D. Caulder
Chairman and CEO
Mycogen Corporation
San Diego, California

Peter H. Parra
Board of Supervisors
Fifth District, County of Kern
Bakersfield, California

Walter F. Payne, Jr.
President and CEO
Blue Diamond Growers
Sacramento, California

Richard S. Walden
President
Farmers Investment Co.
Sahuarita, Arizona

Peter H. van Oppen
Chairman and CEO
Advanced Digital Information Corporation
Redmond, Washington

Bob L. Vice
President and CEO
California Farm
Bureau Federation
Sacramento, California

The Federal Reserve Bank of San Francisco

1996 Annual Report
Twelfth Federal Reserve District
San Francisco Office
P.O. Box 7702
San Francisco, CA 94120
Los Angeles Branch
P.O. Box 2077, Terminal
Annex
Los Angeles, CA 90051
Portland Branch
P.O. Box 3436,
Portland, OR 97208
Salt Lake City Branch
P.O. Box 30780
Salt Lake City, UT 84125
Seattle Branch
P.O. Box 3567, Terminal
Annex
Seattle, WA 98124

The Federal Reserve Bank of San Francisco

1996 Annual Report
Notes to Financial Statements
1. Organization:
The Federal Reserve Bank of San Francisco ("Bank") is part of the Federal Reserve System ("System") created by
Congress under the Federal Reserve Act of 1913 ("Federal Reserve Act") which established the central bank of the United
States. The System consists of the Board of Governors of the Federal Reserve System ("Board of Governors") and
twelve Federal Reserve Banks ("Reserve Banks"). The Reserve Banks are chartered by the federal government and
possess a unique set of governmental, corporate, and central bank characteristics. Other major elements of the System
are the Federal Open Market Committee ("FOMC") and the Federal Advisory Council. The Reserve Banks are exempt
from federal, state, and local taxes, except for taxes on real property.
Structure:
The Bank and its branches in Los Angeles, California, Portland, Oregon, Salt Lake City, Utah, and Seattle, Washington
serve the Twelfth Federal Reserve District that includes Alaska, California, Hawaii, Idaho, Nevada, Oregon, Utah,
Washington, and the commonwealths or territories of American Samoa, Guam, and the Northern Mariana Islands. In
accordance with the Federal Reserve Act, supervision and control of the Bank is exercised by a Board of Directors
chosen partly by nomination and election by member banks and partly by the Board of Governors. Banks that are
members of the System include all national banks and any state chartered bank that applies and is approved for
membership in the System.
Board of Directors:
The Federal Reserve Act specifies the composition of Bank boards of directors. Each board is composed of nine members
serving three­year terms: three directors, including those designated as Chairman and Deputy Chairman, are appointed
by the Board of Governors and six directors are elected by member banks. Of the six elected by member banks, three
represent the public and three represent member banks. Member banks are divided into three classes according to size.
Member banks in each class elect one director representing member banks and one representing the public. In any
election of directors, each member bank receives one vote, regardless of the number of shares of Reserve Bank stock it
holds.
2. Operations and Services:
The System performs a variety of services and operations. Functions include: formulating and conducting monetary
policy; participating actively in the payments mechanism, including large­dollar transfers of funds, automated clearing
house operations and check processing; distribution of coin and currency; fiscal agency functions for the U. S. Treasury
and certain federal agencies; serving as the federal government's bank; providing short­term loans to depository
institutions; serving the consumer and the community by providing educational materials and information regarding
consumer laws; supervising bank holding companies and state member banks; and administering other regulations of
the Board of Governors. The Board of Governors' operating costs are funded through assessments on the Reserve
Banks.
3. Significant Accounting Policies:
Specialized accounting principles for entities with the unique powers and responsibilities of the nation's central bank have
not been formulated by the Financial Accounting Standards Board. The Board of Governors has developed specialized
accounting principles and practices that it believes are appropriate for the significantly different nature and function of a
central bank as compared to the private sector. These accounting principles and practices are generally documented in
the "Financial Accounting Manual for Federal Reserve Banks" (the "Financial Accounting Manual"), which is published by
the Board of Governors. All Reserve Banks are required to adopt and apply accounting policies and practices that are
consistent with the Financial Accounting Manual. The financial statements have been prepared in accordance with the
Financial Accounting Manual. Differences exist between the policies of the Reserve Banks and generally accepted
accounting principles ("GAAP"). The primary differences are the presentation of all security holdings at amortized cost
rather than at the fair value presentation requirements of GAAP, and the accounting for matched sale­purchase
transactions as separate sales and purchases, rather than secured borrowings with pledged collateral, as is required by
GAAP. Accounting policies and practices for U. S. government and federal agency securities and investments
denominated in foreign currencies are further described in note 3(d). In addition, the Bank has elected not to include a
Statement of Cash Flows, as the liquidity and cash position of the Bank are not of primary concern to users of these
financial statements. Other information regarding the Bank's activities is provided in, or may be derived from, the
Statements of Condition, Income, and Changes in Capital. Therefore, a Statement of Cash Flows would not provide any
additional useful information. There are no other significant differences between the policies outlined in the Financial
Accounting Manual and GAAP. The preparation of the financial statements in conformity with the Financial Accounting
Manual requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Unique
accounts and significant accounting policies are explained below.
a. Gold Certificates
The Secretary of the Treasury is authorized to issue gold certificates to the Reserve Banks to monetize
gold held by the U. S. Treasury. Payment for the gold certificates by the Reserve Banks is made by

gold held by the U. S. Treasury. Payment for the gold certificates by the Reserve Banks is made by
crediting equivalent amounts in dollars into the account established for the U. S. Treasury. These gold
certificates held by the System are required to be backed by the gold of the U. S. Treasury. The U. S.
Treasury may reacquire the gold certificates at any time and the Reserve Banks must deliver them to the
U. S. Treasury. At such time, the U. S. Treasury's account is charged and the Reserve Banks' gold
certificate account is lowered. The value of gold for purposes of backing the gold certificates is set by law
at $42 2/9 a fine troy ounce. The Board of Governors allocates the gold certificates among Reserve Banks
once a year based upon Federal Reserve notes outstanding in each district.
b. Special Drawing Rights Certificates
Special drawing rights ("SDRs") are issued by the International Monetary Fund ("the Fund") to its members
in proportion to each member's quota in the Fund at the time of issuance. SDRs serve as a supplement to
international monetary reserves and may be transferred from one national monetary authority to another.
Under the law providing for United States participation in the SDR system, the Secretary of the U. S.
Treasury is authorized to issue SDR certificates, somewhat like gold certificates, to the Reserve Banks. At
such time, equivalent amounts in dollars are credited to the account established for the U. S. Treasury, and
the Reserve Banks' SDR certificate account is increased. The Reserve Banks are required to purchase
SDRs, at the direction of the U.S. Treasury, for the purpose of financing SDR certificate acquisitions or for
financing exchange stabilization operations.
c. Loans to Depository Institutions
The Depository Institutions Deregulation and Monetary Control Act of 1980 provides that all depository
institutions that maintain reservable transaction accounts or nonpersonal time deposits, as defined in
Regulation D issued by the Board of Governors, have borrowing privileges at the discretion of the Reserve
Banks. Borrowers execute certain lending agreements and deposit sufficient collateral before credit is
extended. Loans are evaluated for collectibility, and currently all are considered collectible and fully
collateralized. If any loans were deemed to be uncollectible, an appropriate reserve would be established.
Interest is recorded on the accrual method and is charged at the discount rate established at least every
fourteen days by the Board of Directors of the Reserve Banks, subject to review by the Board of
Governors. However, Reserve Banks retain the option to impose a surcharge above that rate in certain
circumstances.
d. U. S. Government and Federal Agency Securities and Investments Denominated in Foreign Currencies
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. The FOMC has
designated the FRBNY to execute open market transactions on its behalf and to hold the resulting securities
in the portfolio known as the System Open Market Account ("SOMA"). The FOMC establishes policy
regarding open market operations, oversees these operations, and issues authorizations and directives to
the FRBNY for its execution of transactions. Authorized transaction types include direct purchases and sales
of securities, matched sale­purchase transactions, and the purchase of securities under agreements to
resell. These transactions are conducted in U.S. government and federal agency securities. All balances
and related income arising from these transactions, other than securities purchased under agreements to
resell, are participated, or designated, to each Reserve Bank.
Specifically, the FRBNY provides or absorbs reserve deposits of depository institutions by purchasing or
selling government securities, respectively, in the open market. While the application of current market
prices to the securities currently held by the Reserve Banks may result in values substantially above or
below their carrying values, these unrealized changes in value would have no necessary effect on the
quantity of reserves available to the banking system or on the prospects for future Reserve Bank earnings
or capital.
Matched sale­purchase transactions are generally overnight transactions in which the FRBNY sells a
security and buys it back the next day at the rate specified at the commencement of the transaction. These
transactions are accounted for as separate sale and purchase transactions. At December 31, 1996, and
December 31, 1995, matched sale­purchase transactions involving U.S. government securities with par
values of $ 15 billion and $ 12 billion, respectively, were outstanding.
In addition to authorizing and directing operations in the domestic securities market, the FOMC authorizes
and directs the FRBNY to execute operations in foreign markets for major currencies and, to the extent
possible, invest the resulting balances. The portfolio for each foreign currency shall generally have an
average duration of no more than eighteen months. Balances and changes in balances of investments
denominated in foreign currencies arise from transactions to counter disorderly conditions in exchange
markets and other needs specified by the FOMC in carrying out the System's central bank responsibilities.
Although the portfolios of U.S. government and federal agency securities and investments denominated in
foreign currencies generate interest income and transactions can result in gains or losses when holdings
are sold prior to maturity, decisions regarding these securities and investments, including their purchase
and sale, are motivated by monetary policy objectives rather than profit. Accordingly, earnings and any
gains or losses resulting from the sale of such securities and investments are incidental to the open market
and foreign currency operations and do not motivate activities or policy decisions.
IIn accordance with the Federal Reserve Act, and as further explained in note 3(g), all domestic securities
and investments denominated in foreign currencies held by the Bank are pledged as collateral for net
Federal Reserve notes outstanding.
e. Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is calculated
on a straight­line basis over estimated useful lives of assets ranging from 2 to 50 years. New assets, major
alterations, renovations and improvements are capitalized at cost as additions to the asset accounts.
Maintenance, repairs and minor replacements are charged to operations in the year incurred.

Maintenance, repairs and minor replacements are charged to operations in the year incurred.
f. Interdistrict Settlement Account
At the close of business each day, all Reserve Banks and branches assemble the payments due to or from
other Reserve Banks and branches as a result of transactions involving accounts residing in other Districts
that occurred during the day's operations. Such transactions may include funds settlement, check and
automated clearinghouse ("ACH") clearing operations, and allocations of shared expenses. The cumulative
net amount owed from or due to other Reserve Banks is reported as the "Interdistrict settlement account."
g. Federal Reserve Notes
Federal Reserve notes are the circulating currency of the United States. These notes are issued through
the various Federal Reserve agents to the Reserve Banks upon deposit with such agents of certain classes
of collateral security, typically U. S. government securities. These notes are identified as issued to a
specific Reserve Bank. The Federal Reserve Act provides that the collateral security tendered by the
Reserve Bank to the Federal Reserve agent must be equal to the sum of the notes applied for by such
Reserve Bank. The collateral value is equal to the par value of the securities tendered. The Board of
Governors may, at any time, call upon a Reserve Bank for additional security to adequately collateralize
the Federal Reserve notes. To satisfy its obligation to provide sufficient collateral for its outstanding Federal
Reserve notes, the Reserve Banks have entered into an agreement that provides that certain assets of the
Reserve Banks are jointly pledged as collateral for the Federal Reserve notes of all Reserve Banks. In the
event that this collateral is insufficient, the Act provides that Federal Reserve notes become a first and
paramount lien on all the assets of the Reserve Banks. Finally, as obligations of the United States, Federal
Reserve notes are backed by the full faith and credit of the United States government. The "Federal
Reserve notes outstanding, net" account represents Federal Reserve notes reduced by cash held in the
vaults of the Reserve Banks of $14 billion, and $11 billion at December 31, 1996 and December 31, 1995,
respectively.
h. Capital Paid­in
The Federal Reserve Act requires that each member bank subscribe to the capital stock of the Reserve
Bank in an amount equal to 6% of the capital and surplus of the member bank. As a member bank's
capital and surplus changes, its holdings of the Reserve Bank's stock must be adjusted. Member banks are
those state­chartered banks that apply and are approved for membership in the System and all national
banks. Currently, only one­half of the subscription is paid­in and the remainder is subject to call. These
shares are nonvoting with a par value of $100. They may not be transferred or hypothecated. By law, each
member bank is entitled to receive an annual dividend of 6% on the paid­in capital stock. This cumulative
dividend is paid semiannually. A member bank is liable for Reserve Bank liabilities up to twice the par
value of stock subscribed by it.
i. Surplus
The Board of Governors requires Reserve Banks to maintain a surplus equal to the amount of capital paid­
in as of December 31 of the prior year. This amount is intended to provide additional capital and reduce
the possibility that the Reserve Banks would be required to call on member banks for additional capital.
Reserve Banks are required by the Board of Governors to transfer to the U.S. Treasury excess earnings,
after providing for the costs of operations, payment of dividends, and reservation of an amount necessary
to equate surplus with capital paid­in. Prior to October 1, 1996, this payment represented payment of
interest on Federal Reserve notes outstanding.
The Omnibus Budget Reconciliation Act of 1993 (Public Law 103­66, Section 3002) codified the existing
Board surplus policies as statutory surplus transfers, rather than as payments of interest on Federal
Reserve notes, for federal government fiscal years 1997 (which began on October 1, 1996) and 1998. In
addition, the legislation directs the Reserve Banks to transfer to the U.S. Treasury additional surplus funds
of $106 million and $107 million during fiscal years 1997 and 1998, respectively. Reserve Banks are not
permitted to replenish surplus for these amounts during this time. The Reserve Banks transferred $106
million to the U.S. Treasury on October 1, 1996. The Bank transferred $15 million from surplus on October
1, 1996, as its share of this payment.
In the event of losses, payments to the U. S. Treasury are suspended until such losses are recovered
through subsequent earnings. Weekly payments to the U. S. Treasury vary significantly.
j. Cost of Unreimbursed Treasury Services
The Bank is required by the Federal Reserve Act to serve as fiscal agent and depository of the United
States. By statute, the Department of the Treasury is permitted, but not required, to pay for these
services. The costs of providing fiscal agency and depository services to the Treasury Department that
have been billed but will not be paid are reported as the "Cost of unreimbursed Treasury services."
k. Accounting Change
Effective January 1, 1995, the Financial Accounting Manual was changed to require the Bank to use the
accrual method of accounting to recognize the obligation to provide benefits to former or inactive
employees, consistent with the requirements of Statement of Financial Accounting Standards ("SFAS") No.
112, "Employers' Accounting for Postemployment Benefits." Prior to 1995, the Bank recognized costs for
postemployment benefits when paid. The cumulative effect of this change in accounting for benefits was
recognized by the Bank as a one­time charge to expense of $6 million. Additionally, the Bank recognized
an increase in 1995 operating expenses of approximately $1 million as a result of the change in accounting
for these costs.
Effective January 1, 1995, the Bank also began accruing a liability for employees' rights to receive
compensation for future absences consistent with SFAS No. 43, "Accounting for Compensated Absences."
Prior to 1995, the Bank recognized these costs when paid. The cumulative effect of this change in
accounting for compensated absences was recognized by the Bank as a one­time charge to expense of

accounting for compensated absences was recognized by the Bank as a one­time charge to expense of
$350 thousand. Ongoing operating expenses for the year ended December 31, 1995, were not materially
affected by the change in accounting for these costs.
4. U. S. Government and Federal Agency Securities:
U.S. government and federal agency securities represent the Bank's designated interest in securities bought outright,
which are held in the SOMA at the FRBNY. The Bank's designated interest is derived from an annual settlement,
performed in April of each year, of interdistrict clearings and equalization among the Reserve Banks of gold certificate
holdings to Federal Reserve notes outstanding. The Bank's designated interest in securities bought outright was
approximately 8.470% and 7.937% at December 31, 1996 and December 31, 1995, respectively.
U.S. government and federal agency securities are recorded at cost on a settlement­date basis, adjusted for the
amortization of premiums and accretion of discounts. Gains and losses resulting from sales of securities are determined
for each specific issue based on average cost. Interest income is recorded on the accrual method. Interest income and
gains and losses on the sale of these securities are allocated to the Bank based on its designated interest in the total
portfolio and are reported as "Interest on U.S. government securities" and "Government securities gains, net",
respectively.
Total U.S. government and federal agency securities bought outright, which are held in the SOMA, and the Bank's
designated interest at December 31, 1996 and December 31, 1995, were as follows (in millions):
December 31, 1996

December 31, 1995

Total bought
outright

Designated
to Bank

Total bought
outright

Designated
to Bank

$ 2,225

$ 188

$ 2,634

$ 209

Bills

190,646

16,147

183,116

14,533

Notes

150,922

12,783

151,013

11,986

Bonds

49,339

4,179

44,069

3,498

393,132

33,297

380,832

30,226

Par value:
Federal agency
U.S. Government:

Total par value
Unamortized premiums
Unaccreted discounts

4,677

396

4,508

358

(3,548)

(300)

(3,477)

(276)

$ 394,261

$ 33,393

$ 381,863

$ 30,308

The maturities of U.S. government and federal agency securities bought outright, which are held in the SOMA, at
December 31, 1996, were as follows (in millions):
Par value, December 31, 1996
Maturities of
Securities Held

U.S. Government
Securities

Federal Agency
Obligations

Total

Within 15 days

$ 7,875

$ 450

$ 8,325

89,036

541

89,577

16 days to 90 days
91 days to 1 year

122,780

232

123,012

Over 1 year to 5 years

95,608

520

96,128

Over 5 years to 10 yrs

33,782

457

34,239

Over 10 years

41,826

25

41,851

$ 390,907

$ 2,225

$ 393,132

Total

The maturities of U.S. government and federal agency securities bought outright, which are designated to the Bank, at
December 31, 1996, were as follows (in millions):
Par value, December 31, 1996
Maturities of
Securities Held

U.S. Government
Securities

Federal Agency
Obligations

Total

Within 15 days

$ 667

$ 38

$ 705

16 days to 90 days

7,541

46

7,587

10,399

19

10,418

Over 1 year to 5 years

8,098

44

8,142

Over 5 years to 10 yrs

2,861

39

2,900

Over 10 years

3,543

2

3,545

$ 33,109

$ 188

$ 33,297

91 days to 1 year

Total

Total

$ 33,109

$ 188

$ 33,297

5. Investments Denominated in Foreign Currencies:
The FRBNY, on behalf of the Reserve Banks, holds foreign currency deposits with foreign central banks and the Bank for
International Settlements and invests in foreign government debt instruments. Foreign government debt instruments
include both securities bought outright and securities held under agreements to resell. These investments are guaranteed
as to principal and interest by the foreign governments. Each Reserve Bank is allocated a share of foreign­currency­
denominated assets based upon the ratio of its capital and surplus to aggregate capital and surplus at the preceding
December 31. The Bank's allocated share of investments denominated in foreign currencies was approximately 13.656%
and 13.906% at December 31, 1996 and December 31, 1995, respectively.
Investments denominated in foreign currencies are recorded at cost on a settlement date basis, adjusted for
amortization of premiums and accretion of discounts. Foreign currency­denominated assets of the Reserve Banks are
revalued monthly at current market exchange rates in order to report these assets in U.S. dollars. Gains and losses
resulting from sales of securities are determined using the average cost method. Interest income is recorded on the
accrual basis. Realized and unrealized foreign currency gains and losses and interest income are allocated to the Bank
based on its designated interest in the total portfolio and are reported as "Foreign currency gains (losses), net", and
"Interest on foreign currencies", respectively.
Total investments denominated in foreign currencies, valued at current exchange rates at December 31, 1996 and
December 31, 1995, and the Bank's designated share, were as follows (in millions):
December 31, 1996

December 31, 1995

Total foreign
currencies

Designated
to Bank

Total foreign
currencies

Designated
to Bank

$ 10,253

$ 1,400

$ 12,329

$ 1,715

2,777

379

1,186

165

637

87

739

103

5,515

753

6,130

852

­­­

­­­

602

84

87

12

118

16

$ 19,269

$ 2,631

$ 21,104

$ 2,935

German Marks:
Foreign currency deposits
Government debt instruments
including agreements to resell
Japanese Yen:
Foreign currency deposits
Government debt instruments
including agreements to resell
Mexican Pesos:
Foreign currency swap
Accrued interest
Total foreign currencies

The FRBNY is authorized by the FOMC to hold balances of and to execute spot and forward foreign exchange contracts to
receive or to deliver the currencies of fourteen foreign countries. Foreign exchange contracts are contractual agreements
between two parties to exchange specified currencies, at a specified price, on a specified date. Spot foreign contracts
normally settle two days after the trade date, whereas the settlement date on forward contracts is negotiated between
the contracting parties, but will extend beyond two days from the trade date. FRBNY generally enters into spot contracts,
with any forward contracts generally limited to the second leg of a swap/warehousing transaction. Foreign exchange
contracts involve off­balance­sheet market risk for the future settlement of currencies and counterparty credit risk. The
FRBNY controls credit risk by obtaining credit approvals, establishing transaction limits, and performing daily monitoring
procedures. As of December 31, 1996 and December 31, 1995, the FRBNY had no open foreign exchange contracts
except as noted below.
At the direction of the FOMC, the FRBNY is authorized to maintain reciprocal currency arrangements ("F/X swaps") for
periods up to a maximum of 12 months with various foreign central banks. An F/X swap is a renewable, short­term
reciprocal currency arrangement, generally for up to one year, between two parties, the FRBNY, on behalf of the
Reserve Banks, and an authorized foreign central bank, who agree to exchange their currencies up to a prearranged
maximum amount and for an agreed upon period of time, at an agreed upon interest rate. These arrangements give the
Federal Reserve temporary access to the foreign currencies that it needs for intervention operations to support the dollar
and give the partner foreign central bank temporary access to dollars it needs to support its own currencies. Drawings
under the F/X swap arrangements can be initiated by either the FRBNY or the partner foreign central bank.
The F/X swaps are structured so that the party initiating the transaction (the drawer) bears the exchange rate risk upon
maturity. The FRBNY will generally invest the foreign currency received under an F/X swap in interest­bearing
instruments. Interest income on the resulting foreign currency holdings is accrued and reported as "Interest on foreign
currencies." Unrealized gains and losses on revaluation of the resulting currency holdings are reported by the FRBNY as
a component of "Other assets" or "Other liabilities," since there is no exchange rate risk to the FRBNY at the maturity of
the F/X swap. As of December 31, 1996, there were no open F/X swaps. As of December 31, 1995, there was an open
F/X swap of $650 million which was drawn at the direction of the Bank of Mexico.
The FOMC has an agreement to "warehouse" foreign currencies for the U.S. Treasury and the Exchange Stabilization
Fund ("ESF"). This is an arrangement under which the FOMC agrees to exchange, at the request of the Treasury, U.S.
dollars for foreign currencies held by the Treasury or ESF over a limited period of time. The purpose of the warehousing
facility is to supplement the U.S. dollar resources of the Treasury and ESF for financing purchases of foreign currencies
and related international operations. This facility was $20 billion, with nothing outstanding, as of December 31, 1996 and
December 31, 1995.
6. Bank Premises and Equipment:

6. Bank Premises and Equipment:
A summary of bank premises and equipment at December 31, 1996 and December 31, 1995 is as follows (in millions):
December 31, 1996

December 31, 1995

Bank premises and equipment:
Land
Buildings
Building machinery & equipment
Construction in progress
Furniture and equipment

Less: Accumulated depreciation
Bank premises and equipment, net

$ 23

$ 23

145

139

35

35

2

2

124

115

329

314

109

108

$ 220

$ 206

Depreciation expense was $16 million and $15 million for the years ended December 31, 1996 and December 31, 1995,
respectively.
The Bank leases unused space to outside tenants. These leases have terms ranging from 1 to 2 years. Rental income
from such leases was $1 million and $2 million for the years ended December 31, 1996 and December 31, 1995,
respectively. Future minimum lease payments under agreements in existence at December 31, 1996, are not material.
7. Commitments and Contingencies:
At December 31, 1996, the Bank was obligated under noncancelable leases for premises and equipment with terms of
approximately 1 year. These leases provide for increased rentals based upon increases in real estate taxes, operating
costs or selected price indices.
Rental expense under operating leases for certain operating facilities, warehouses, and data processing and office
equipment (including taxes, insurance and maintenance when included in rent), net of sublease rentals, was $459
thousand and $1 million for the years ended December 31, 1996 and December 31, 1995, respectively. Certain of the
Bank's leases have options to renew. Future minimum rental payments under noncancelable operating leases and capital
leases, net of sublease rentals, with terms of one year or more, at December 31, 1996, are not material.
There were no other material commitments and long­term obligations in excess of one year at December 31, 1996.
Under the Insurance Agreement of the Federal Reserve Banks dated as of June 7, 1994, each of the Reserve Banks has
agreed to bear on a per incident basis, a pro rata share of losses in excess of 1% of the capital of the claiming Reserve
Bank, up to 50% of total capital and surplus of all Reserve Banks. No claims were outstanding under such agreement at
December 31, 1996 or December 31, 1995.
The Bank is involved in certain legal actions and claims arising in the ordinary course of business. Although it is difficult
to predict the ultimate outcome of these actions, in management's opinion, based on discussions with counsel, the
aforementioned litigation and claims will be resolved without material adverse effect on the financial position or results of
operations of the Bank.
8. Retirement and Thrift Plans:
Retirement plans:
The Bank currently offers two defined benefit retirement plans to its employees, based on length of service and level of
compensation. Substantially all of the Bank's employees participate in the Retirement Plan for Employees of the System
(the "System Plan") and the Benefit Equalization Retirement Plan (the "BEP"). These plans cover employees of the 12
Reserve Banks, the Board of Governors, and the Plan Administrative Office.
The System Plan is a multi­employer plan. Contributions are actuarially determined and fully funded by participating
employers at amounts prescribed by the Plan Administrator (with the exception of a mandatory contribution of 7% of
salary by certain employees of the Board of Governors that participate in the plan). No separate accounting is
maintained of assets contributed by the participating employers, and net pension cost allocated to the Bank for the
period is the Bank's required contribution for the period. No contributions to the System Plan were required during 1996
or 1995.
The BEP is an unfunded plan that was established January 1, 1996. Net pension cost for the period is actuarially
determined and is based on the same economic and mortality assumptions used for the System plan. The Bank's
projected benefit obligation and net pension costs for the BEP at December 31, 1996 and for the year then ended are not
material.
Thrift Plan:
Employees of the Bank may also participate in the Thrift Plan for Employees of the Federal Reserve System (the "Thrift
Plan"). The Thrift Plan is a defined contribution plan. Under the Thrift Plan, employees may contribute a percentage of
their salaries up to a maximum 19% limit as prescribed by the Internal Revenue Service. Matching contributions by the
Bank are based on a fixed percentage of each employee's basic contribution. Currently, the Bank matches 80% of the
first 6% of salary contributed by the employee. The Bank's Thrift Plan contributions totaled $5 million and $4 million for
the years ended December 31, 1996 and December 31, 1995, respectively, and are reflected on the Statement of
Income as a component of "Salaries and other benefits."

9. Postretirement Benefits Other Than Pensions and Postemployment Benefits:
Postretirement benefits other than pensions:
In addition to the Bank's defined benefit retirement plans, employees who have met certain age and length of service
requirements are eligible for both medical benefits and life insurance coverage during retirement. The retiree medical
plan is contributory and provides benefits to retirees, their covered dependents, and beneficiaries. The life insurance
plan is noncontributory and covers retirees only.
The Bank funds benefits payable under the medical and life insurance plans as due. Net postretirement benefit cost is
actuarially determined, using a January 1 measurement date. The following is a reconciliation between the plan's funded
status and the amounts recognized in the Bank's balance sheet as of December 31, 1996 and December 31, 1995 (in
millions):
December 31,
1996

December 31,
1995

$ 22

$ 22

Accumulated postretirement benefit obligation:
Retirees and covered spouses
Actives eligible to retire
Other actives and disableds
Total accumulated postretirement benefit
obligation

3

3

10

10

35

35

Unrecognized net gain

11

9

Unrecognized prior service cost

16

17

$ 62

$ 61

Accrued postretirement benefit cost
The assumptions used in developing the postretirement benefit obligation are as follows:

1996

1995

Discount rate

7.25 %

7.00 %

Rate of increase in health care costs ­ initial

9.50 %

10.00 %

Rate of increase in health care costs ­ ultimate

5.50 %

5.50 %

The ultimate health care cost rate is expected to be achieved in 2004.
The following is a summary of the components of net periodic postretirement cost for the years ended December 31,
1996 and December 31, 1995 (in millions).

Service cost
Interest cost of accumulated benefit obligation
Net amortization and deferral
Net periodic postretirement cost

1996

1995

$1

$1

2

2

(2)

(2)

$1

$1

These costs are reflected on the Statement of Income as a component of "Salaries and other benefits."
Changing the assumed health care cost trend rates by one percentage point in each year would change the accumulated
postretirement benefit obligation at December 31, 1996 and December 31, 1995, by approximately $4 million and $3
million , respectively, and would change the aggregate service and interest cost components of net periodic
postretirement benefit cost for both of the years ended December 31, 1996 and December 31, 1995, by approximately
$300 thousand.
Postemployment benefits:
The Bank began using the accrual method of accounting to recognize the obligation to provide benefits to former or
inactive employees, consistent with SFAS No. 112 "Employers Accounting for Postemployment Benefits," effective
January 1, 1995. Benefits include medical and dental insurance, survivor income and disability benefits. Costs were
projected using the same discount rate and the same health care trend rates as were used for projecting postretirement
costs. The accrued postemployment benefit costs recognized by the Bank at December 31, 1996 and December 31,
1995, was $8 million and $7 million, respectively. This cost is included as a component of "Accrued benefit cost" on the
Statement of Condition. Net periodic postemployment benefit costs included in both 1996 and 1995 operating expenses
was $2 million.