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The Federal Reserve Bank of San Francisco

1997 Annual Report
From the Boardroom
Trends in Twelfth District Banking
Banking Supervision Meets Industry Challenges
Transforming Federal Reserve Services
Executive Committee, Bank Officers, and Branch Officers
Highlights of 1997
Summary of Operations
Statement of Condition
Statement of Income
Statement of Changes in Capital
Boards of Directors
1997 Advisory Council on Small Business and Agriculture
Twelfth Federal Reserve District
Notes to Financial Statements
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.

Previous Annual Reports:
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995

Annual
Annual
Annual
Annual
Annual
Annual
Annual
Annual
Annual
Annual

Report
Report
Report
Report
Report
Report
Report
Report
Report
Report

This Report was produced by Karen Flamme. It was written by Elizabeth Laderman, Jennifer Martinez, Selma Meyerowitz,
Barbara Bennett, and Karen Flamme. Design and illustrations were created by Bill Rosenthal. Color photography by Paul Schulz
(somafoto@msn.com).

The Federal Reserve Bank of San Francisco

From the Boardroom
From left, Robert T. Parry, President; Judith M. Runstad, Chairman
(1997);and John F. Moore, First Vice President.

From left, Cynthia A. Parker, Deputy Chairman (1998); and Gary
G. Michael, Chairman (1998).
As we stand on the threshold of a new millennium, we in the Federal Reserve find ourselves looking forward to new, exciting
ways of doing business. In addition to continuing to provide traditional financial and payments services to our customers here in
the West, we are maximizing the potential of new technologies to improve and streamline our services.
We continually study trends shaping and transforming the banking industry and look for ways in which we can facilitate the
transition taking place from a paper­based payments mechanism to an electronic one. We see fundamental structural changes
in financial institutions, changes in the mix of products and services they offer, and new ways of delivering these services.
During 1997 the Board of Governors of the Federal Reserve System convened a committee under the direction of Vice Chair
Alice Rivlin to take a comprehensive look at how we fit into the changing payments mechanism and what our role should be.
The Committee concluded that, while Reserve Banks should continue to provide their traditional services, they should also play
an active, collaborative role in transforming the payments system.
This Annual Report looks at what trends we have observed during 1997 at financial institutions in our District, how our
supervisory processes have responded to these changes, and what initiatives the Federal Reserve System has undertaken with
regard to the payments system.
During the year we depend heavily on information and leadership from our directors with their special knowledge of areas and
industries throughout our District. It is invaluable as we formulate monetary policy and manage the nation�s financial system.
We thank all Twelfth District directors for their wise counsel and service during 1997.
In particular, we want to express our sincere thanks and appreciation to those directors who completed their terms of service
during 1997: on the Head Office Board, our Chairman of the Board, Judith M. Runstad (Partner, Foster, Pepper & Shefelman,
Seattle, WA) and Gerry B. Cameron (Chairman of the Board, U.S. Bancorp, Portland, OR); on the Los Angeles Branch Board,
Antonia Hernandez (President and General Counsel, Mexican American Legal Defense & Educational Fund, Los Angeles, CA) and
David L. Moore (President, Western Growers Association, Irvine, CA); on the Portland Branch Board, John D. Eskildsen
(President and CEO, Retired, U.S. National Bank of Oregon, Portland, OR); and on the Salt Lake City Branch Board, our
Chairman, Gerald R. Sherratt (President, Retired, Southern Utah University, Cedar City UT).

Gary G. Michael, Chairman

Robert T. Parry, President

The Federal Reserve Bank of San Francisco

Banking Looks Different
You can blame (or credit) the computer, but you can�t deny it � the face of banking is changing. The three
articles which follow look at these changes and focus on what they mean for the Federal Reserve, from three
different perspectives. Our Research department studies western banking � shifts in market structure, trends in
product mix and services, and new ways to deliver services. Banking Supervision reports on new techniques and
talents they have developed to respond to the increased sophistication of the financial industry. In the Operations
area the various Federal Reserve Banks are working in concert to streamline systems and to maximize
technological applications to benefit the nation�s payments system.

Trends in Twelfth District Banking
By Elizabeth Laderman and Jennifer Martinez
Recent trends shaping the banking industry over the past several years �
changes in market structure, alterations in the mix of products and
services banks offer, and innovations in delivery channels � continued in
full force in the Twelfth District in 1997.Recent trends shaping the banking
industry over the past several years � changes in market structure,
alterations in the mix of products and services banks offer, and
innovations in delivery channels � continued in full force in the Twelfth
District in 1997.

Changes in Market Structure
The banking industry in the Twelfth District remains dynamic, marked by both mergers and new entries. Notable mergers and
acquisitions in the District last year were First Bank System, Inc.�s (Minnesota) acquisition of U.S. Bancorp (Oregon) and
Washington Mutual, Inc.�s (Washington) acquisition of Great Western Bank (California). At the same time as mergers were
tending to consolidate the industry, the formation of new banks worked in the opposite direction. In 1997 there were 35 new
banks chartered in the District (including several by existing banking organizations), up from 26 in 1996 and 18 in 1995. On net,
the number of banks and thrifts (savings banks and savings and loans) in the District declined by 41 (about 5 percent) in 1997,
following a decline of 229 (about 22 percent) over the preceding five years.
The liberalization of branching laws is contributing to the increase in consolidation within bank holding companies. Last June
Hawaii became the final state in the District to allow interstate bank branching under the Riegle­Neal Interstate Banking and
Branching Efficiency Act. Texas and Montana are now the only states that do not permit interstate branching. Wells Fargo &
Company started the trend by making one of the first interstate consolidations in 1996. BankAmerica Corporation and First
Security Corporation followed in 1997, combining most of their separately chartered subsidiaries, some located outside of the
District, into one main bank. In addition, Keycorp, headquartered in Ohio, combined its Twelfth District banks with others into its
Cleveland lead bank in 1997. In late 1997 First Bank System, Inc., acquired U.S. Bancorp, took the U.S. Bancorp name, and
combined former U.S. Bancorp subsidiaries with its Minneapolis lead bank. Soon after acquiring Great Western Bank,
Washington Mutual consolidated the Great Western offices into Washington Mutual�s American Savings organization, renaming
the new entity Washington Mutual Bank, F.A. With the consolidation of affiliated banks and thrifts in different states, well over
half of the banking offices in the District are now part of interstate branching networks. In addition, the total number of bank
branches in the Twelfth District declined by 967 (about 10 percent) in 1997.

Trends in Products and Services
Shifts in market structure are accompanied by ongoing changes in the mix of products and services that District banks offer.
The most important activities continue to involve credit­related services, such as derivatives, securities activities, and credit­
scored small business loans. But banks are also acting as brokers for consumer financial investments, offering, for example,
mutual funds and insurance. These activities are being added to and, to some degree, are displacing traditional bank products
such as deposits and relationship­based loans.
Derivatives contracts continue to be important risk­hedging tools for banks and bank customers. Total notional values for
interest rate contracts at western banks stood at $7 trillion as of the third quarter of 1997. Foreign exchange contracts were $1
trillion.
Modifications of the rules that apply to bank holding companies engaged in securities underwriting and dealing activities through
securities subsidiaries became effective on October 31, 1997. These modifications should improve operating efficiencies at such
subsidiaries and increase options for their customers. BankAmerica Corporation, currently the only Twelfth District bank holding
company with a securities subsidiary, expanded its securities brokerage and underwriting activities through the acquisition of
Robertson, Stephens & Company Group, L.L.C. in 1997. In addition, First Security Corporation has gained approval to engage in
these activities for the first time through the formation of a new securities subsidiary.

Credit scoring, a statistically based means of evaluating the expected repayment performance of a loan, is another relatively
new development. First used in consumer lending, credit scoring has the potential to benefit small business customers by
substantially decreasing the time, labor, and cost of reviewing small business loan applications, thus boosting small business
lending.
One of the strongest consumer trends in recent years is the shift of household financial assets out of deposits and into mutual
funds. Banks are recognizing this trend and devoting more of their own resources to selling mutual funds as their deposit
growth slows. In the Twelfth District, 23 percent of banks generated fee income from selling mutual funds and annuities in the
third quarter of 1997.
In addition to selling annuities, banks may also act as brokers in selling other types of insurance. Although most of these
policies are used for backing up credit repayment, a few California state­chartered banks are beginning to venture into more
traditional insurance products.

New Delivery Channels
New delivery systems for products and services are proliferating. For example, Internet banking continues to gain in popularity
as a channel for banking services. By the end of 1997 the number of banks with a Web presence had grown to 26 percent in the
District and 17 percent in the U.S. While some banks are moving toward providing business banking services through the
Internet, others report significant growth in PC banking outside the Internet. New developments such as electronic bill
presentment may increase the use of electronic banking: bills would be presented directly to consumers� personal computers,
with an electronic payment option appearing on the screen at the same time.
Banks also are developing highly automated telephone centers to help consumers handle many of their banking needs without
visiting a branch. Many bankers see the telephone center as a pivotal delivery channel because of the wide range of banking
services, as well as technical support, that will be provided.
Some banking organizations are beginning to shift away from traditional brick and mortar offices to lower cost �supermarket�
branches. These branches may offer the full range of teller transactions or may be more limited­service "banking centers.� In
the District, Wells Fargo Bank and Bank of America have increased their activity in this area substantially.

Conclusion
Today, a bank customer may log onto the Internet to inquire about her bank balance. Or, she may walk into a branch of her
bank while traveling in a different state and at the same location buy groceries and mutual funds. A small business customer
may receive a loan from a bank with far less paperwork than before, while a large business may turn to its commercial bank
for securities underwriting services rather than to an investment bank. If 1997 trends are any indication, these scenarios will
become more and more the norm in the future.

The Federal Reserve Bank of San Francisco

Banking Supervision Meets Industry Challenges
By Selma Meyerowitz
Fewer � but larger and more complex � banks, a broadening range of non­
traditional activities, a move toward PC banking, and other new ways to
deliver services to bank customers � these trends characterize an industry
that is evolving and becoming more complex each day. Banking Supervision
has responded to the industry�s increased complexity and sophistication by
developing new techniques and new talent in order to improve our process
and our people. The supervisory process is more dynamic, more integrated,
and more risk­focused. Supervision staff have developed new skills and
competencies, emphasizing teamwork and adaptability. And training and
technology � always important � are now being stressed even more.

its condition on a real­time basis.

The changes in the overall supervisory process are pervasive. As a start,
significantly more effort is now placed on ensuring that the process is risk­
focused. This involves tailoring the approach to the unique characteristics of
the individual organization. It also entails placing additional emphasis on
evaluating the organization�s risk management processes, and on assessing

The entire process begins with developing an understanding of the organization, including its strategy and risk profile. A
supervision plan and examination strategy which focus on the most important areas within the organization are then defined
and updated periodically. Examinations must be carefully coordinated to reduce unnecessary burden and to recognize that risks
or issues in a particular area may have implications for other areas of the organization. Furthermore, the focus is on assessing
the processes used to identify, monitor, and control risk, as opposed to detailed transaction testing. Although effective risk
management always has been central to the safety and soundness of banking, it is even more important now, given new
technologies and products, and the size and speed of financial transactions.
To facilitate the risk­focused process, each banking organization is assigned to a staff member who oversees the development,
implementation, and coordination of that institution�s supervisory program. These staff members establish lines of
communication with their assigned institutions, and coordinate closely with other regulators both in the U.S. and in other
countries. They also coordinate with their counterparts throughout the Federal Reserve System to identify and share emerging
issues and sound practices.
All facets of the supervisory process, including applications processing, compliance, international and domestic examinations,
and ongoing monitoring, are changing. For example, the applications process was streamlined for bank holding companies in
1997 when the Board of Governors made substantial changes to the implementing regulation. Furthermore, additional emphasis
is placed on incorporating macro information into the supervisory strategy. Staff members follow international developments, as
well as developments in the dynamic areas of trading, securities, and risk management. They also monitor applications of
digital technology in banking to assess developments in securitization, risk modeling, and credit quality. These analysts keep
the Bank properly positioned for evaluating evolving financial markets and the banking industry�s changing use of technology
and delivery channels.
The changes benefit the supervised organizations, as well as the Federal Reserve. The supervisory burden is reduced for well­
run organizations because on­site examinations are shorter and more focused. The process adds greater value overall since it
is more forward­looking. From the Federal Reserve Bank's standpoint, it makes better use of resources and facilitates earlier
identification and resolution of issues.
Clearly, superior performance depends on the talent of an organization, the quality of its people. Banking Supervision staff have
met the challenges of the changing environment by developing new technical skills in a variety of areas, such as risk
management, derivatives, and information technology. In addition, the competency model for staff performance is focused on
such skills as the ability to adapt, to coordinate, and to understand the big picture and how the individual pieces fit together.
Application of these competencies ensures that staff are able to provide effective supervision as the industry continues to
change.
Both training and technology are being aligned to support this changing process. Training programs are being revamped, and
training in risk assessment, management information systems, and internal controls has been expanded. More emphasis is
placed on the use of technology with initiatives that include automating parts of the examination process, improving
management information systems, and streamlining information access and storage.
In summary, we are striving to enhance our flexibility and adaptability in this rapidly changing environment. The right
supervisory techniques, talent, training, and technology are critical to effective supervision. Focusing on these areas ensures
that the Bank continues to meet the challenges of today�s dynamic environment and is prepared for tomorrow�s as well.

The Federal Reserve Bank of San Francisco

Transforming Federal Reserve Services
By Barbara Bennett
The revolutionary changes in computer and telecommunications technology
make it possible for financial services firms to operate on a nationwide basis
and offer a broad array of new and traditional services. Open networks like
the Internet are becoming a widely accepted way for U.S. households and
businesses to obtain these and other services. In this high­tech and highly
competitive environment, financial services firms increasingly are finding that
their customers demand instantaneous and interactive access to customer­
specific information.
Although the U.S. financial services industry still is heavily reliant on �brick
and mortar� and paper­based payments, things are changing, particularly in
the Twelfth District. A number of western institutions are leaders in the
establishment of a nationwide presence and in the development of online
delivery systems that offer customers up­to­the­minute information on the
status of their investments and transactions. As in the rest of the country,
western depository institutions are also reducing investment in physical
processing and delivery infrastructures by consolidating operations wherever possible and centralizing functions such as funds
management.
As a major provider of financial and payments services to depository institutions, the Fed is playing a pivotal role in this
transition from a paper­based infrastructure to an electronic one. The Rivlin Committee�s fundamental review of the Federal
Reserve�s role in the payments mechanism confirmed that, while Reserve Banks must continue to provide traditional
payments services for some time to come, they also must work in partnership with the industry to transform the payments
system.
To accomplish this transformation, Reserve Banks are engaged in three broad initiatives: developing a �common face� to
Reserve Bank services nationwide; streamlining back office systems to keep costs down and deliver new products and services
quickly and flexibly; and applying new technologies to add value and encourage more efficient payments practices.
Developing a Common Face
The emergence of depository institutions with nationwide branch networks makes it essential that Reserve Banks offer
standardized services and provide monitoring tools needed to facilitate management of these entities� operations on a
nationwide basis. Especially significant is the development of a new structure for reserve accounts to enable depository
institutions to maintain a single master account for all their Reserve Bank transactions. This new master/sub­account structure
became available in January 1998. It facilitates centralized funds management and offers depository institutions tools to monitor
transactions by business line, region of the country, and/or type of transaction.
To simplify depository institutions� service relationships with the Federal Reserve, moreover, in 1997 the Reserve Banks
developed national operating circulars for every service line, including checks, cash, ACH, securities services, funds transfer,
accounting, and credit. A common set of legal agreements and procedures make it easier for institutions that operate in more
than one District to standardize their use of Federal Reserve services. In addition, Reserve Banks have implemented a national
key account program that assigns to a designated national account manager responsibility for addressing many of these
institutions' service needs and resolving issues that may arise in coordinating services provided across Districts. In this District,
for example, Los Angeles Branch Vice President Sean Rodriguez has account management responsibilities for the region's two
largest customers: Bank of America and Wells Fargo Bank. For these two prominent interstate organizations, he manages
longer­term service initiatives and other matters on a Systemwide basis, ensuring that the Federal Reserve's services are
consistent with the strategic priorities and needs of these organizations.
Another important aspect of the effort to develop a common face for the Federal Reserve is the introduction of national products
in service lines that traditionally have accommodated wide variations in product offerings across Districts, including checks,
cash, and net settlement. In checks, Reserve Banks introduced an attractively­priced nationwide City Sort deposit in 1997 that
generally improves funds availability on City items by allowing customers to deposit at their local Fed office items drawn on City
endpoints anywhere in the country.
In cash services, in early 1998 uniform service levels and access standards are being implemented that are modeled after the
approach implemented in the Twelfth District. Our District is also pioneering a service that allows depository institutions to
coordinate currency ordering for their ATM networks on a nationwide basis. Also, in late 1998 an enhanced national net
settlement service will be available to depository institutions participating in private clearing arrangements. Designed to provide
a file­based, automated mechanism for handling settlements, including those that involve participants located in multiple Federal
Reserve Districts, this new service will improve finality and offer better risk management tools through source authentication,
automated linkages to the Federal Reserve�s Account Balance Monitoring System (ABMS), and timely information on the status
of settlement transactions.
Streamlining the Back Office
Many of these new services would not be possible without the strides Reserve Banks have made in streamlining back office
operations, including consolidating computer processing and centralizing major applications software for such systems as
accounting, funds transfer, and ACH. These efforts are crucial in the Federal Reserve�s drive to provide the most efficient

accounting, funds transfer, and ACH. These efforts are crucial in the Federal Reserve�s drive to provide the most efficient
services possible and to develop and deliver new services in the shortened time frames that the current and future financial
services environments require.
The recent centralization of ACH processing, for example, reduced by nearly half the cost of inter­District transactions and made
possible the introduction of flow processing and flexible delivery times, all of which make ACH more attractive as an alternative
to check payments for certain types of transactions. Likewise, centralization of the funds transfer software reduced costs and
permitted price reductions totaling 20 percent since 1996. Current efforts to establish a common check processing platform for
Reserve Banks and to implement an �enterprise­wide� automated adjustments system are expected to yield comparable
benefits in terms of operating efficiencies and enhanced check services.
Applying New Technologies, Transforming the Payments System
The application of information technology to existing processes is central to Reserve Banks� ability to streamline back office
operations. But far greater benefits from these technologies lie in their ability to deliver vast amounts of information more
quickly and in more useful and flexible forms than possible in a paper­based environment.
When used to create new information services and delivery channels, these technologies have the potential to redefine the very
nature of the payments mechanism. The Reserve Banks began to tap this potential some years ago with the introduction of
electronic check presentment services, which enable recipients to begin �check� processing well before they actually receive
the physical items, if they still receive the items at all. With the introduction more recently of digital image capture and retrieval
services and the forthcoming provision of national archive services, there is even greater opportunity to speed the conversion
of the check collection system from a paper­based process to an electronic one.
Depository institutions and their customers are beginning to see digital images as superior to the physical items in many
respects. With the Reserve Banks� ability to deliver CD­ROMs containing digital images of checks drawn on a specific account
number, depository institutions are able to meet corporate cash managers� demand for faster, more convenient, and more
useful access to information on their paid items. In addition, depository institutions are using Reserve Banks� digital image
services to reengineer their back offices, replacing microfilm technology and implementing retrieval systems that improve
customer service and research capabilities by providing online access to copies of items.
Reserve Banks are using digital technology to improve cash services, as well. The Twelfth District developed an application that
enables depository institutions to train their staffs in the authentication of the new series $50 and $100 notes. This interactive
software is currently available on CD­ROM and will be available on the Federal Reserve�s World Wide Web site.
Transactional applications are also being developed to tap the online delivery capabilities of digital technology. In early 1998 the
Twelfth District is piloting two important web applications: cash services and check image retrieval. The cash services module
will enable depository institutions to access Reserve Banks� cash ordering and deposit notification systems using web
technology. This will greatly enhance depository institutions� ability to manage ATM supply operations on a nationwide basis.
The image retrieval application will enable depository institutions to interactively query the Federal Reserve�s archive for
checks that meet criteria the institution specifies, including account number, processing date, dollar amount range, etc. The
system will then search the archive and return a list of checks that meet those criteria. By clicking on the specific check it would
like to view, the depository institution will be able to examine the front and back of the image and zoom in on endorsements
and other fields of interest. The images can be sent to a printer or saved on the institution�s desktop. This path­breaking
application clearly has the potential to change the way depository institutions offer checking account services by providing
instantaneous and interactive delivery of customer­specific information.
The evolution toward an electronic payments mechanism that is more convenient, efficient, secure, and reliable than the current
paper­based system is a challenge that requires the combined energies and cooperation of many parties, including financial
services firms, software developers, businesses, and the Federal Reserve. The initiatives in which the San Francisco Fed � and
all the Reserve Banks � are engaged represent a significant step forward in this transformation.

The Federal Reserve Bank of San Francisco

Executive Committee, Bank Officers,
and Branch Officers
Executive Committee
Bank Officers
Branch Officers
Los Angeles Branch
Northern Region
Portland Branch
Salt Lake City Branch
Seattle Branch

Executive Committee
Robert T. Parry
President

Terry S. Schwakopf
Senior Vice President

John F. Moore
First Vice President

Elizabeth K. Christensen
Senior Vice President

Gordon R. G. Werkema
Executive Vice President

Jack H. Beebe
Senior Vice President and Director of Research

Bank Officers (as of December 31, 1997)
Robert T. Parry
President and
Chief Executive Officer

Douglas R. Shaw
Vice President
and Counsel

John F. Moore
First Vice President and
Chief Operating Officer

W. Gordon Smith
Vice President

Jack H. Beebe
Senior Vice President
and Director of Research
Elizabeth K. Christensen
Senior Vice President
Sara K. Garrison
Senior Vice President
Michael J. Murray
Senior Vice President
Terry S. Schwakopf
Senior Vice President
D. Kerry Webb
Senior Vice President
John Parrish
General Auditor
Barbara J. Contini
Vice President
Frederick T. Furlong
Vice President

Deborah M. Smyth
Assistant Vice President
Susan A. Sutherland
Assistant Vice President
Sallie H. Weissinger
Vice President and
Director of Public Information
Patricia A. Welch
Vice President
James M. Barnes
Director
Kenneth R. Binning
Director
Harold H. Blum
Director
Eliot E. Giuili
Director

Todd Glissman
Assistant Vice President
Beverley­Ann Hawkins
Assistant Vice President
Peter K. C. Hsieh
Assistant Vice President
Lelia M. Jones
Assistant Vice President
Kenneth M. Kinoshita
Associate General Counsel
Craig B. Knudsen
Assistant Vice President
Mark Levonian
Assistant Vice President
Ellsworth E. Lund, Jr.
Assistant Vice President
Elizabeth M. O'Shea
Assistant Vice President
Philip M. Ryan
Assistant Vice President
W. Starr Seegmiller
Assistant Vice President

John S. Hsaio
Director

Wendy Selbert
Assistant Vice President

William K. Ginter
Vice President

Ann Marie Kohlligian
Director

James J. Tenge
Assistant Vice President

Reuven Glick
Vice President

John Y. C. Lin
Director

Thomas R. Thaanum
Assistant Vice President

John P. Judd
Vice President and
Associate Director

Michael J. Stan
Director

David W. Walker
Assistant Vice President

Angela D'Alessandro
Financial Planning
and Control Officer
Lee Dwyer
Wholesale Payments and
Fiscal Services Officer
Ellen Hamilton
Audit Officer
Michael E. Johnson
Applications Officer
Joseph P. Mattey
Research Officer
Joy Hoffmann Molloy
Community Affairs Officer
Brian Motley
Research Officer
Gary P. Palmer
Financial Analysis Officer
Darren S. Post
ACH, Business Development,
and Customer Support Officer
Glenn D. Rudebusch
Research Officer
Dan Shaw
EUC, LAN/Administration
and Operations Officer
Mark Spiegel
Research Officer
Gordon Tannura
Support Function Officer
Bharat Trehan
Research Officer

Associate Director
of Research
Donald R. Lieb
Vice President
Elizabeth R. Masten
Vice President and
Secretary of the Board

Bonnie R. Allen
Assistant Vice President

Elizabeth L. Wood
Assistant Vice President

Sylvia A. Cunningham
Assistant Vice President

Barbara J. Beckman
District Procurement
Services Officer

Gail A. Garvey
Assistant Vice President

Ronald E. Mitchell, Jr.
Vice President

Elaine Geller
Assistant Vice President

Robert D. Mulford
Vice President,
General Counsel
and Ethics Officer

Louis "Skip" George
Assistant Vice President

Armen Beylerian
Information Technology Officer
Jim Callahan
Audit Officer

Susan Porterfield
Vice President

Branch Officers (as of December 31, 1997)
Los Angeles Branch
Mark Mullinix
Senior Vice President

Jimmy F. Kamada
Assistant Vice President

Sean J. Rodriguez
Vice President and
Assistant Branch Manager

Roger W. Replogle
Assistant Vice President

Darcy J. Coulter
Director
Marla Borowski
Assistant Vice President
Robert C. Johnson
Assistant Vice President

Dale L. Vaughn
Assistant Vice President
Linda Westerschulte
Assistant VicePresident
Mark E. Koegel
Payments Services Officer

Northern Region
Gordon Werkema
Executive Vice President

Portland Branch

Salt Lake City Branch

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 Branch

Thomas P. McGrath
Assistant Vice President

Gale P. Ansell
Assistant Vice President
Kenneth L. Peterson
Assistant Vice President
Mark Gould
Check Product Officer
Lynn Jorgensen
Human Resources/Check Officer

Research Officer

The Federal Reserve Bank of San Francisco

Highlights of 1997
By Karen Flamme
As the payments system of the country evolves technologically, regional Reserve Banks respond to the needs of their
constituencies and look for innovative ways to achieve efficiencies, through both technology and an integration of Federal
Reserve services across Districts.
The District Business Development office in Portland served as the national logistics coordinator for the important Rivlin study
conducted during 1997, planning five national forums and eight regional meetings held in our District. During these meetings
representatives of financial institutions were invited to discuss five hypothetical scenarios for the future role of the Federal
Reserve in retail payments services. These alternatives ranged from exiting check collection and ACH services altogether to
adopting a leadership role in spurring innovation and market acceptance of new payments services and products.
With information from these sessions, as well as from internal studies, the Rivlin Committee reached two major conclusions:
first, it is important for the Federal Reserve to remain a provider of check collection and ACH services with the goal of
enhancing the efficiency, effectiveness, and convenience of both systems, while ensuring access for all depository institutions;
and second, the Federal Reserve should play a more active role, working closely with providers and users of the payments
system, both to enhance the efficiency of check and ACH services and to help evolve strategies for moving to the next
generation of payment instruments.
To further encourage the transition from paper to electronic payments, the District conducted a highly successful ACH Direct
Payment campaign targeted initially at utility customers in portions of the San Francisco Bay Area, encouraging them to pay
their utility bills through automatic deduction. The program was a partnership between our Bank, Western Payments Alliance,
the utilities, and their financial institutions. More than 100,000 sign­ups were received, exceeding expectations based on similar
projects in other Districts. Additional campaigns are planned for the Pacific Northwest and Southern California areas in 1998.
A variety of check imaging services were made available Districtwide during 1997. And our customers can now go to a page on
the Bank�s web site at / and browse through our check product offerings.
To remind us of our roots and the ever­present demand for currency, in spring 1997 the Bank opened a stellar exhibition of
American Currency in the lobby of the San Francisco headquarters. Featuring a premiere collection of historical currency, the
exhibition is a resource for educators, numismatists, and the public through our tour program, as well as on a walk­in basis. A
web version of the exhibition will be on­line by mid­1998.
Economic Research
Establishing and implementing the nation�s monetary policy is one of the primary functions of Reserve Banks. Ongoing
research is essential to providing a strong foundation for supporting this Bank�s monetary policy recommendations. Research
conducted during 1997 focused on various policy­related issues. Among them were studies examining the merits of alternative
policy rules for targeting inflation; the effects on economic performance of policies to reduce inflation; and the key features of
the different policy regimes in place under Federal Reserve Chairmen Burns, Volcker, and Greenspan.
Several articles were written on labor markets. Staff economists examined job insecurity in the U.S. and the effects of welfare
reform, health insurance, and family structure on the labor force. The banking unit studied financial modernization, including
implications for efficiency, risk, and profitability in banking. Other research dealt with consolidation in banking and examining
evidence on contagion effects from bank mergers, as well as the effect of bank mergers on the pricing of retail deposits and
interstate banking in the District.
The Bank continued to serve as a focal point for analysis of Pacific Basin issues through the activities of our Pacific Basin
Center. Research staff examined the causes and lessons of the 1997 East Asian financial crisis. International studies analyzed
monetary policy issues in selected countries, including Korea, New Zealand, and Singapore. Research staff also looked at the
implications of trade agreements and of budget and trade imbalances in the region. The department co­hosted an academic
conference with the Center for Economic Policy Research at Stanford University. The conference featured papers by eminent
academic and System economists on �Recent Developments in Macroeconomics.
The department also hosted a conference with the American Committee on Asian Economic Studies on �Financial Liberalization
and Development in the Pacific Basin.
Banking Supervision and Regulation
Risk­focused initiatives were the hallmark of activities in the Supervision and Regulation area during 1997. Risk­based
functional reviews were implemented at the District�s largest institutions, procedures were developed and tested for conducting
risk­focused compliance examinations, and mergers and acquisitions regulations were revised to speed the applications process
for organizations that are well­managed and well­capitalized.
Federal Reserve Banks have primary responsibility for supervising all bank holding companies, their nonbank and foreign
subsidiaries; state member banks and their foreign branches and subsidiaries; Edge Act and agreement corporations through
which U.S. banking organizations conduct operations abroad; and U.S. activities of foreign banking organizations.
At year­end there were 60 state member banks in the District. There were also 203 holding companies with assets of 511
billion, 103 agencies and branches of foreign banks, 17 Edge and Agreement corporation offices, and 40 representative offices.
Overall applications activity declined by 39, approximately 13 percent, compared to the same period in 1996. This was partially

Overall applications activity declined by 39, approximately 13 percent, compared to the same period in 1996. This was partially
offset by an increase in bank acquisitions, continuing the industry�s trend of expansion and consolidation. Applications to form
bank holding companies increased by 9 (from 26 to 35).
Community Affairs expanded its role of providing outreach and education on community reinvestment topics. Staff hosted a
series of training sessions for Community Reinvestment Act (CRA) officers throughout the District to introduce them to local
community reinvestment opportunities and provide education on technical CRA aspects. A conference announced
recommendations of the San Francisco Mortgage Credit Partnership task forces, which had been convened to identify barriers
that exist for low­income borrowers in the home purchase process. In addition, staff provided a week of intensive hands­on
credit training for 60 community development professionals and community lenders in partnership with the University of
Washington at the National Community Development Lending School.
In Hawaii, meetings were held to assist in the creation of a micro­loan pool for low­income entrepreneurs. To complement that
effort, meetings were also held with representatives of local community­based organizations, a local bank, and the Department
of Rehabilitation to discuss self­employment opportunities for people with disabilities.

The Federal Reserve Bank of San Francisco

Summary of Operations
Volume (in thousands)
1995

1996

1997

4,212,494

4,298,035

4,317,704

753,589

748,535

654,068

Other Treasury original issues

201

125

105

Book­entry securities processed

894

829

751

2,082,513

2,188,856

2,313,792

Government checks processed

67,148

61,741

54,466

Return items processed

30,569

32,767

35,251

20,146

22,113

24,058

525,549

404,974

428,564

482

461

478

66

83

86

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

Statement of Condition
(in millions)
Dec. 31, 1997

Dec. 31, 1996

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

$ 1,420

$ 1,067

1,241

957

69

74

2,210

1,873

335

15

54,604

33,393

3,270

2,631

517

301

Prepaid statutory surplus transfer to the U.S. Treasury

0

N/A

Interdistrict settlement account

0

23,441

218

220

56

23

$ 63,940

$ 63,995

$ 54,617

$ 56,905

3,676

3,612

Other deposits

32

22

Deferred credit items

1,893

1,575

55

49

1,658

0

Accrued benefit cost

70

70

Other liabilities

14

17

$ 62,015

$ 62,250

Investments denominated
in foreign currencies
Accrued interest receivable

Bank premises and equipment, net
Other assets

Total Assets

Liabilities and Capital

Liabilities
Federal Reserve notes outstanding, net
Deposits
Depository institutions

Statutory surplus transfer
due U.S. Treasury

Interdistrict settlement account

Total liabilities

Capital
Capital paid­in

980

880

Surplus

945

865

1,925

1,745

$ 63,940

$ 63,995

Total capital

Total liabilities and capital

The Federal Reserve Bank of San Francisco

Statement of Income
(in millions)
for the years ended
Dec. 31, 1997

Dec. 31, 1996

Interest income:
Interest on U.S. government securities

$ 2,877

$1,967

70

61

1

1

2,948

2,029

Income from services

85

82

Reimbursable services to government
agencies

19

18

(497)

(228)

2

3

6

6

(385)

(119)

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

147

143

Occupancy expense

16

16

Equipment expense

19

19

5

5

82

58

86

70

355

308

1,599

2,043

0

(6)

$ 2,208

$ 1,599

$ 56

$ 41

100

338

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

0

852

2,052

368

$ 2,208

$ 1,599

statute

The Federal Reserve Bank of San Francisco

Statement of Changes in Capital
For the years ended December 31, 1996 and December 31, 1997
(in millions)
Capital Paid­in

Surplus

Total Capital

$ 542

$ 542

$ 1,084

338

338

Balance at January 1, 1996
(10,833,100 shares)
Net income transferred to (from) surplus
Statuatory surplus transfer to the U.S.
Treasury
Net change in capital stock issused
(6,760,353 shares)

$ 338

$ 338

Balance at December 31, 1996
$ 865

$ 1,745

Net income transferred to (from) surplus

(10,833,100 shares)

$ 880

100

100

Statutory surplus transfer to the U.S.
Treasury

(20)

(20)

Net change in capital stock issued
(redeemed)
(2,000,851 shares)

$ 338

$ 338

Balance at December 31, 1997
(19,594,304 shares)

$ 980

$ 945

$ 1,925

These statements are prepared by Bank management. Copies of full and final financial statements, complete with footnotes, are
available by contacting the Bank's Public Information Department at 415­974­2163.

The Federal Reserve Bank of San Francisco

1998 Board of Directors
Federal Reserve Bank of San Francisco
Los Angeles Branch
Portland Branch
Salt Lake City Branch
Seattle Branch

Federal Reserve Bank of San Francisco
Chairman of the Board and
Federal Reserve Agent
Gary G. Michael
Chairman and CEO
Albertson's, Inc.
Boise, Idaho

Warren K. K. Luke
Vice Chairman, President and CEO
Hawaii National Bank
Honolulu, Hawaii
John V. Rindlaub
Group Executive Vice President
Bank of America N.W. Group
Seattle, Washington

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

Nelson C. Rising
President and CEO
Catellus Development Corporation
San Francisco, California

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

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

E. Lynn Caswell
Chairman and CEO
Pacific Community Banking Group
Laguna Hills, California
Krestine Corbin
President and CEO
Sierra Machinery, Inc.
Sparks, Nevada

Federal Advisory Council Member
David A. Coulter
Chairman and CEO
BankAmerica Corporation
San Francisco, California

Los Angeles Branch
Chairman of the Board
Anne Ledford Evans
Chairman
Evans Hotels
San Diego, California
Stephen G. Carpenter
Director
California United Bank
Encino, California
Lori R. Gay
President
Los Angeles Neighborhood
Housing Services, Inc.
Los Angeles, California

Linda Griego
Managing General Partner
Engine Co. No. 28
Los Angeles, California
Lonnie Kane
President
Karen Kane, Inc.
Los Angeles, California
Liam E. McGee
Group Executive Vice President
Bank of America
Los Angeles, California

John H. Gleason
Senior Vice President
Del Webb Corporation
Phoenix, Arizona

Portland Branch
Chairman of the Board
Carol A. Whipple
Proprietor

Gary T. Duim
Vice Chairman
U.S. Bancorp

Proprietor
Rocking C Ranch
Elkton, Oregon
Phyllis A. Bell
President
Oregon Coast Aquarium
Newport, Oregon
Patrick Borunda
Executive Director
ONABEN ­­ A Native American
Business Network
Portland, Oregon

U.S. Bancorp
Portland, Oregon
Nancy Wilgenbusch
President
Marylhurst College
Marylhurst, Oregon
Thomas Cook Young
Chairman, President and CEO
Northwest National Bank
Vancouver, Washington

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

Salt Lake City Branch
Chairman of the Board
Richard E. Davis
President and CEO
Salt Lake Convention and
Visitors Bureau
Salt Lake City, Utah
R. D. Cash
Chairman, President and CEO
Questar Corporation
Salt Lake City, Utah
Maria Garciaz
Executive Director
Salt Lake Neighborhood
Housing Services, Inc.
Salt Lake City, Utah

Nancy Mortensen
Vice President­Marketing
Zions Cooperative
Mercantile Institution
Salt Lake City, Utah
Roy C. Nelson
President
Bank of Utah
Ogden, Utah
Barbara L. Wilson
Regional Vice President
U.S. WEST
Boise, Idaho

J. Pat McMurray
President
First Security Bank, N.A.
Boise, Idaho

Seattle Branch
Chairman of the Board
Richard R. Sonstelie
Chairman of the Board
Puget Sound Energy, Inc.
Bellevue, Washington
Boyd E. Givan
Senior Vice President and CFO
The Boeing Company
Seattle, Washington
James C. Hawkanson
Managing Director and CEO
The Commerce Bank of
Washington, N.A.
Seattle, Washington
Betsy Lawer
Vice Chair and COO
First National Bank of Anchorage
Anchorage, Alaska

Tomio Moriguchi
Chairman and CEO
Uwajimaya, Inc.
Seattle, Washington
Constance Leigh Proctor
Partner
Alston, Courtnage, Proctor
& Bassetti, LLP
Seattle, Washington
Helen M. Rockey
President and CEO
Brooks Sports, Inc.
Bothell, Washington

The Federal Reserve Bank of San Francisco

1998 Advisory Council

Chairman
Bailey S. "Biff" Barnard
Senior Vice President
Allied Capital Corporation
San Francisco, California

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

Members

Barbara Bry
Co­Founder and Director
ATCOM/INFO
San Diego, California

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

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

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

Paul Ecke III
Chairman and CEO
Paul Ecke Ranch
Encinitas, California

Bob L. Vice
President
BLV, Agribusiness Consultants
Fallbrook, California

Ed P. Mayne
President
Utah AFL­CIO
Salt Lake City, Utah

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

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

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

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

Denice A. Young, C.P.A.
President
Young Real Estate Services
Torrance, California

The Federal Reserve Bank of San Francisco

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

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 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.
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, which 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.
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 the board of directors for each of the Reserve Banks. 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
clearinghouse 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.
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 purchase and
sale of securities, matched sale­purchase transactions, the purchase of securities under agreements to resell, and the
lending of U.S. government securities. Additionally, the FRBNY is authorized by the FOMC to hold balances of and to
execute spot and forward foreign exchange and securities contracts in fourteen foreign currencies, maintain reciprocal
currency arrangements ("F/X swaps") with various central banks, and "warehouse" foreign currencies for the U.S.
Treasury and Exchange Stabilization Fund ("ESF") through the Reserve Banks.
3. Significant Accounting Policies: Accounting principles for entities with the unique powers and responsibilities of the
nation's central bank have not been formulated by 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 documented in the "Financial Accounting Manual for Federal Reserve Banks" ("Financial Accounting
Manual"), which is issued 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 accounting principles and
practices of the System 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. 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 certain 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
crediting equivalent amounts in dollars into the account established for the U.S. Treasury. These gold
certificates held by the Reserve Banks 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 at the end of the preceding
year.
b. Special Drawing Rights Certificates
Special drawing rights ("SDRs") are issued by the International Monetary Fund ("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. The Board of Governors allocates each SDR transaction among
Reserve Banks based upon Federal Reserve notes outstanding in each District at the end of the preceding
year.
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 basis and is charged at the applicable 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 the basic rate in
certain circumstances.
d. U. S. Government and Federal Agency Securities and Investments Denominated in Foreign Currencies
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"). 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 in order to counter disorderly
conditions in exchange markets or other needs specified by the FOMC in carrying out the System's central
bank responsibilities.
Purchases of securities under agreements to resell and matched sale­purchase transactions are accounted
for as separate sale and purchase transactions. Purchases under agreements to resell are transactions in
which the FRBNY purchases a security and sells it back at the rate specified at the commencement of the
transaction. Matched sale­purchase transactions are transactions in which the FRBNY sells a security and
buys it back at the rate specified at the commencement of the transaction.
Reserve Banks are authorized by the FOMC to lend U.S. government securities held in the SOMA to U.S.
government securities dealers and to banks participating in U.S. government securities clearing
arrangements, in order to facilitate the effective functioning of the domestic securities market. These
securities­lending transactions are fully collateralized by other U.S. government securities. FOMC policy
requires the lending Reserve Bank to take possession of collateral in amounts in excess of the market
values of the securities loaned. The market values of the collateral and the securities loaned are monitored
by the lending Reserve Bank on a daily basis, with additional collateral obtained as necessary. The
securities loaned continue to be accounted for in the SOMA.
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. The FRBNY generally enters into spot
contracts, with any forward contracts generally limited to the second leg of a swap/warehousing
transaction.
The FRBNY, on behalf of the Reserve Banks, maintains renewable, short­term F/X swap arrangements with
authorized foreign central banks. The parties agree to exchange their currencies up to a prearranged
maximum amount and for an agreed upon period of time (up to twelve months), at an agreed upon
interest rate. These arrangements give the FOMC temporary access to foreign currencies that it may need
for intervention operations to support the dollar and give the partner foreign central bank temporary
access to dollars it may need to support its own currency. Drawings under the F/X swap arrangements can
be initiated by either the FRBNY or the partner foreign central bank, and must be agreed to by the drawee.
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.
Warehousing is an arrangement under which the FOMC agrees to exchange, at the request of the Treasury,
U.S. dollars for foreign currencies held by the Treasury or ESF over a limited period of time. The purpose
of the warehousing facility is to supplement the U.S. dollar resources of the Treasury and ESF for financing

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.
In connection with its foreign currency activities, the FRBNY, on behalf of the Reserve Banks, may enter
into contracts which contain varying degrees of off­balance sheet market risk, because they represent
contractual commitments involving future settlement, and counter­party credit risk. The FRBNY controls
credit risk by obtaining credit approvals, establishing transaction limits, and performing daily monitoring
procedures.
While the application of current market prices to the securities currently held in the SOMA portfolio and
investments denominated in foreign currencies may result in values substantially above or below their
carrying values, these unrealized changes in value would have no direct effect on the quantity of reserves
available to the banking system or on the prospects for future Reserve Bank earnings or capital. Both the
domestic and foreign components of the SOMA portfolio from time to time involve transactions that can
result in gains or losses when holdings are sold prior to maturity. However, decisions regarding the
securities and foreign currencies transactions, 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 currencies and securities are incidental to the open market operations and do not motivate
its activities or policy decisions.
U.S. government and federal agency securities and investments denominated in foreign currencies
comprising the SOMA are recorded at cost, on a settlement­date basis, and adjusted for amortization of
premiums or accretion of discounts on a straight­line basis. Interest income is accrued on a straight­line
basis and is reported as "Interest on U.S. government securities" or "Interest on foreign currencies," as
appropriate. Income earned on securities lending transactions is reported as a component of "Other
income." Gains and losses resulting from sales of securities are determined by specific issues based on
average cost. Gains and losses on the sales of U.S. government and federal agency securities are reported
as Government securities gains, net. Foreign currency denominated assets are revalued monthly at current
market exchange rates in order to report these assets in U.S. dollars. Realized and unrealized gains and
losses on investments denominated in foreign currencies are reported as Foreign currency (losses), net.
Foreign currencies held through F/X swaps, when initiated by the counter party, and warehousing
arrangements are revalued monthly, with the unrealized gain or loss reported by the FRBNY as a
component of "Other assets" or "Other liabilities," as appropriate.
Balances of U.S. government and federal agencies securities bought outright, investments denominated in
foreign currency, interest income, amortization of premiums and discounts on securities bought outright,
gains and losses on sales of securities, and realized and unrealized gains and losses on investments
denominated in foreign currencies, excluding those held under an F/X swap arrangement, are allocated to
each Reserve Bank. Securities purchased under agreements to resell and the related premiums, discounts
and income, and unrealized gains and losses on the revaluation of foreign currency holdings under F/X
swaps and warehousing arrangements are allocated to the FRBNY and not to other Reserve Banks. Income
from securities lending transactions is recognized only by the lending Reserve Bank.
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.
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 clearing
and automated clearinghouse ("ACH") operations, and allocations of shared expenses. The cumulative net
amount due to or from 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. In accordance with the Federal Reserve Act, gold certificates, special drawing rights
certificates, U.S. government and agency securities, loans allowed under Section 13, and investments
denominated in foreign currencies are pledged as collateral for net Federal Reserve notes outstanding. The
collateral value is equal to the book value of the collateral tendered, with the exception of securities,
whose 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 Federal Reserve 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 $18 billion, and $14 billion at December 31, 1997 and 1996,
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 1998 and 1997 (which began on October 1, 1997 and
1996, respectively). In addition, the legislation directed the Reserve Banks to transfer to the U.S. Treasury
additional surplus funds of $107 million and $106 million during fiscal years 1998 and 1997, respectively.
Reserve Banks are not permitted to replenish surplus for these amounts during this time. The Reserve
Banks made these transfers on October 1, 1997 and October 1, 1996, respectively. The Bank's share of
these transfers is reported on the Statement of Changes in Capital as "Statutory surplus transfer to the
U.S. Treasury."
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. Taxes
The Reserve Banks are exempt from federal, state, and local taxes, except for taxes on real property,
which are reported as a component of "Occupancy expense."
4. U. S. Government and Federal Agency Securities: Securities bought outright and held under agreements to resell are
held in the SOMA at the FRBNY. An undivided interest in SOMA activity, with the exception of securities held under
agreements to resell and the related premiums, discounts and income, is allocated to each Reserve Bank on a
percentage basis derived from an annual settlement of interdistrict clearings. The settlement, performed in April of each
year, equalizes Reserve Bank gold certificate holdings to Federal Reserve notes outstanding. The Bank's allocated share
of SOMA balances was approximately 12.582% and 8.470% at December 31, 1997 and 1996, respectively.
Total SOMA securities bought outright were $434,001 million and 394,261million at December 31, 1997 and 1996
respectively.
The Bank's allocated share of securities held in the SOMA at December 31, that were bought outright, were as follows (in
millions):
Par value:

1997

1996

$ 86

$ 188

Bills

24,801

16,147

Notes

21,918

12,783

Bonds

7,474

4,179

54,279

33,297

780

396

(455)

(300)

Federal agency
U.S. government:

Total par value
Unamortized premiums
Unaccreted discounts

Total allocated to Bank

$ 54,604

$ 33,393

The maturities of U.S. government and federal agency securities bought outright, which were allocated to the Bank at
December 31, 1997, were as follows (in millions):

Maturities of Securities Held
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

Par value
U.S. Government Federal Agency
Total
Securities
Obligations
$ 1,630
$ 0 $ 1,630
12,034
8
12,042
17,348
24
17,372
11,956
19
11,975
5,147
32
5,179
3
6,081
6,078
$ 54,193
$ 86 $ 54,279

At December 31, 1997 and 1996, matched sale­purchase transactions involving U.S. government securities with par
values of $17 billion and $15 billion, respectively, were outstanding, of which $2 billion and $1 billion were allocated to
the Bank. Matched sale­purchase transactions are generally overnight arrangements.
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 held 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 foreign­currency­denominated assets, the related interest income, and
realized and unrealized foreign currency gains and losses, with the exception of unrealized gains and losses on F/X
swaps and warehousing transactions. This allocation is based on the ratio of each Reserve Bank's 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 19.180% and 13.656% at December 31, 1997 and 1996, respectively.
The Bank's allocated share of investments denominated in foreign currencies, valued at current exchange rates at
December 31, were as follows (in millions):
1997

1996

$
1,586

$
1,400

617

379

Foreign currency deposits

110

87

Government debt instruments including agreements to
resell

940

753

17

12

$
3,270

$
2,631

German Marks:
Foreign currency deposits
Government debt instruments including agreements to
resell
Japanese Yen:

Accrued interest
Total

Total investments denominated in foreign currencies were $17 billion and $19 billion at December 31, 1997 and 1996,
respectively. The unearned interest balances that were allocated solely to FRBNY were $3 million for 1997 and $5 million
for 1996.
The maturities of investments denominated in foreign currencies which were allocated to the Bank at December 31,
1997, were as follows (in millions):
Maturities of Investments Denominated in Foreign Currencies
Within 1 year

1997
$ 3,216

Over 1 year to 5 years

14

Over 5 years to 10 years

40

Total

$ 3,270

At December 31, 1997 and 1996, the Bank had no open foreign exchange contracts.
At December 31, 1997 and 1996, the warehousing facility was $ 20 billion, with nothing outstanding.
6. Bank Premises and Equipment:

6. Bank Premises and Equipment:
A summary of bank premises and equipment at December 31 is as follows (in millions):
1997 1996
Bank premises and equipment:
Land
Buildings
Building machinery and equipment
Construction in progress
Furniture and equipment

Accumulated depreciation
Bank premises and equipment, net

$ 23
150
35
1
128
337

$ 23
145
35
2
124
329

(119) (109)
$ 218 $ 220

Depreciation expense was $16 million each year for the years ended December 31, 1997 and 1996, respectively.
The Bank leases unused space to outside tenants. These leases have terms ranging from 1 to 10 years. Rental income
from such leases was $1 million each year for the years ended December 31, 1997 and 1996. Future minimum lease
payments under agreements in existence at December 31, 1997, were (in millions):
1998

$1

1999

1

2000

1

2001

1

2002

1

Thereafter

4
$9

7. Commitments and Contingencies:
At December 31, 1997, 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 $438
thousand and $459 thousand for the years ended December 31, 1997 and 1996, 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, 1997, were (in thousands):
Operating

Capital

1998

$ 357

$0

1999

89

0

2000

0

0

2001

0

0

2002

0

0

Thereafter

0

0

$ 446

$0

Amount representing interest

(0)

Present value of net minimum
lease payments

$446

There were no other commitments and long­term obligations in excess of one year at December 31, 1997.
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 the total capital and surplus of all Reserve Banks. Losses are borne in the ratio that a Reserve
Bank's capital bears to the total capital of all Reserve Banks at the beginning of the calendar year in which the loss is
shared. No claims were outstanding under such agreement at December 31, 1997 or 1996.
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

and level of compensation. Substantially all of the Bank's employees participate in the Retirement Plan for
Employees of the Federal Reserve System ("System Plan") and the Benefit Equalization Retirement Plan
("BEP").
The System Plan is a multi­employer plan. Contributions to the System Plan 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. It is the System's policy to fund the pension liability as accrued. No contributions by the Bank
were required to the System Plan during 1997 or 1996.
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, 1997 and
1996, and for the years 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 ("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 20% limit. 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 each year for the years ended December 31, 1997 and 1996, respectively, and are reported 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 as of December 31 (in
millions).
1997

1996

$ 22

$ 22

Accumulated postretirement benefit obligation:
Retirees and covered spouses
Actives eligible to retire

2

3

Other actives and disableds

9

10

33

35

11

11

Total accumulated postretirement benefit
obligation
Unrecognized net gain (loss)
Unrecognized prior service cost
Accrued postretirement benefit cost

17

16

$ 61

$ 62

Accrued postretirement benefit cost is reported as a component of "Accrued benefit cost."
The assumptions used in developing the postretirement benefit obligation are as follows:

Discount rate
Rate of increase in health
Rate of increase in health

1997
7.00%
9.00%
5.00%

1996
7.25%
9.50%
5.50%

The ultimate health care cost rate is expected to be achieved in 2005.
The following is a summary of the components of net periodic postretirement cost for the years ended
December 31 (in millions).

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

1997 1996
$1
$1
2
2
(2)
(2)
$1

$1

Net periodic postretirement cost is reported 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, 1997 and 1996, by approximately $ 3

accumulated postretirement benefit obligation at December 31, 1997 and 1996, by approximately $ 3
million and $4 million, respectively, and would change the aggregate service and interest cost components
of net periodic postretirement benefit cost for the years ended December 31, 1997 and 1996, by
approximately $333 thousand and $300 thousand, respectively.
Postemployment benefits:
The Bank offers benefits to former or inactive employees. Postemployment benefit costs are actuarially
determined and include the cost of medical and dental insurance, survivor income, and disability benefits.
Costs were projected using the same discount rate and health care trend rates as were used for projecting
postretirement costs. The accrued postemployment benefit costs recognized by the Bank at
December 31, 1997 and 1996, were $ 8 million and $8 million, respectively. This cost is included as a
component of "Accrued benefit cost." Net periodic postemployment benefit costs included in both 1997 and
1996 operating expenses was $2 million and $2 million, respectively.