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The Federal Reserve Bank of San Francisco
from the boardroom
perspectives on a century of change
directors' perspectives
highlights of 1999
summary of operations
bank officers
boards of directors
financial statements
notes to financial statements
twelfth federal reserve district
The Federal Reserve Bank of San Francisco
The year just ended was the culmination of several years of preparation to ensure the banking system's
readiness for Y2K. In addition, it was a year in which we continued to respond efficiently and creatively
to our customers' needs. Handling these diverse demands required exceptional dedication from our
employees, and we thank them for their continued high level of achievement, professionalism, and
dedication.
It was also the year in which the entire Federal Reserve
System celebrated its 85th year of service. At the end of
1913, President Woodrow Wilson signed the Federal Reserve
Act, creating the Federal Reserve Banks that opened
throughout the country the following year.
The influence of the Federal Reserve is now felt far beyond
what the early founders could have imagined. Two of our
directors profiled in this Report are from states that did not
exist 85 years ago Alaska and Hawaii. In addition, the
Pacific Rim countries are now a significant focus of this
Bank.
Just this last summer, I, as president of the Federal Reserve
Bank of San Francisco, was part of a delegation that visited
central bankers in Japan and China. We were interested in
learning more about economic and financial developments in
their countries and gaining a better understanding of
banking conditions and financial sector reforms that are
taking place there. Information such as this, along with the
invaluable grassroots information on local economic
conditions provided to us by our directors, is key to the
formulation of a successful monetary policy.
From left (standing):
John F. Moore, First Vice President
We want to extend particular thanks and appreciation to
Nelson C. Rising, Deputy Chairman those directors and advisory council members who retired
Robert T. Parry, President
from Federal Reserve service at 1999 year end: on the
Portland Branch Board, Gary T. Duim (Vice Chairman
Retired, U.S. Bancorp, Portland, OR); on the Salt Lake City
Branch Board, Nancy S. Mortensen (Vice President
Marketing Services, Zions Cooperative Mercantile Institution,
Salt Lake City, UT); from the Seattle Branch Board, Tomio Moriguchi (Chairman and CEO, Uwajimaya,
Inc., Seattle, WA); and from the Twelfth District Advisory Council, its Chairman, Bailey (Biff) S. Barnard
(Senior Vice President, Allied Capital Corporation, San Francisco, CA).
Seated:
Gary G. Michael, Chairman
Gary G. Michael
Chairman
Robert T. Parry
President
The Federal Reserve Bank of San Francisco
by karen flamme
The Federal Reserve Bank of San Francisco, along with the rest
of the Federal Reserve System, celebrated its 85th anniversary
on November 16, 1999. It was on that day in 1914 that the San
Francisco office officially opened for business in rented quarters
at the rear of the Merchants National Bank. The staff consisted
of a couple dozen employees, many on loan from local banks.
They initially busied themselves receiving and counting gold
from member banks, recording capital stock subscriptions, and
issuing capital stock receipts. Things were to change rapidly in
the next few years as check collection began and as the Federal
Reserve Banks played a critical role in securing the funds
necessary to carry on World War I.
Prior to the establishment of the Federal
Reserve System, banking was marred by
periodic financial panics that contributed to bank failures, business bankruptcies, and
general economic depressions. Locally owned, independent banks flourished, many
with dangerously low reserves. In 1907 a particularly severe loss of confidence in the
stability of some banks caused yet another bank run and panic. It had become clear
to many that the country needed an "elastic" currency that could increase in volume when the demands
on banks necessitated it. Without that, there was no way for banks to bolster reserves when confronted
with exceptional demands.
Congress responded by creating the National Monetary Commission, chaired by
Senator Nelson W. Aldrich, to conduct a comprehensive study and recommend
necessary and desirable changes to the money and banking system of the United
States. This task was not an easy one. Nevertheless, within a couple of years,
reform plans began to emerge. There ensued lengthy debates with battle lines
generally being drawn between the progressives, primarily representing the small
town businessman and farmer, and the conservatives, mainly representing the
powerful eastern business and banking establishment.
Contentious arguments sprang up with each new proposal, but President
Woodrow Wilson and his advisers persevered in developing and securing
congressional passage of a monetary reform plan that became known as
the Federal Reserve Act and that was ultimately signed into law on
December 23, 1913. The Act stated that its purposes were "to provide for
the establishment of Federal reserve banks, to furnish an elastic
currency, to afford means of rediscounting commercial paper, to establish
a more effective supervision of banking in the United States, and for
other purposes." The Federal Reserve Act combined central with regional
power by dividing the country into 12 Federal Reserve districts, each
under the supervision of a Federal Reserve Bank. At the apex of the new
central banking system was the Federal Reserve Board in Washington, D.C., composed of the Secretary
of the Treasury, the Comptroller of the Currency, and five others appointed by the President for 10year
terms. (Later, the Banking Act of 1935 changed the composition of the Board and renamed it the Board
of Governors of the Federal Reserve System.)
All national banks in each district were required to join the Federal Reserve
and those state banks that so chose could also join. (At the end of 1913 the
U.S. had some 27,000 commercial banks more than twice as many state
banks as national ones.) Member banks were required to invest six percent
of their capital and surplus in their regional Reserve Bank. The Reserve
Bank, in turn, could make loans to member banks by rediscounting their
commercial paper, buy and sell government bonds, and issue a new
currency Federal Reserve notes.
The Act stipulated that a ninemember
board of directors representing the interests of banking, industry,
commerce, agriculture, and the general public would govern each
regional bank.
The summer of 1914 was a busy time for organizers of the Federal
Reserve Bank of San Francisco. Directors were selected for the
Twelfth District bank, office space was located, and a staff was
hurriedly assembled.
The opening date for all Reserve Banks was set for November 16,
1914, in order to make the reserve provisions of the Federal
Reserve Act effective even though it was clear that the banks wouldn't be ready for normal business
transactions that quickly. War had broken out in Europe four months before the banks were set to open,
and help from the banks was needed to alleviate the credit strain that was occurring.
When the doors first opened for business, it wasn't clear just what the business of Federal Reserve
Banks would entail. There were no precedents to guide the banks, and each bank had to work out its
own procedures.
In May of 1916 our Bank in San Francisco had 25 employees. The check
collection operation started in July 1916, and by the end of that year the
staff had more than doubled to about 60. In addition, U.S. participation in
World War I put a tremendous workload on the Federal Reserve Banks as
they carried out their role as fiscal agents of the government. The first
Liberty Loan was floated in 1917, and the volume of work and number of
employees increased rapidly. The Federal Reserve Banks actively
promoted the sale of the four Liberty Loans and the Victory Loan, which
were issued to raise funds to support the war effort.
The Bank also expanded geographically in 1917. In order to give good
service to member banks throughout the District, the Spokane Branch was
opened on July 26, followed by the Seattle Branch on September 19 and
Portland on October 1. On April 1, 1918, the Salt Lake City Branch opened.
It was nearly two years later January 2, 1920 that the Los Angeles Branch opened its doors. By
May 1921 the District boasted a total staff of 1306 637 at the head office and 669 at the five branches.
At the end of 1923 the San Francisco staff moved out of temporary locations and into the Bank's newly
built headquarters at 400 Sansome Street, a location that it would occupy for the next 60 years. The
Spokane Branch was closed in 1938, but the other branches remain in service to the present time.
Since those early days of central banking, further legislation has been
enacted to clarify and supplement the Federal Reserve Act of 1913. Key laws
that have affected the Federal Reserve are the Banking Act of 1935; the
Employment Act of 1946; the 1970 amendments to the Bank Holding
Company Act; the International Banking Act of 1978; the Full Employment
and Balanced Growth Act of 1978; the Depository Institutions Deregulation
and Monetary Control Act of 1980; the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989; and the Federal Deposit Insurance
Corporation Improvement Act of 1991.
Today the Federal Reserve's duties fall into four general areas:
conducting the nation's monetary policy by influencing the money and
credit conditions in the economy in pursuit of full employment and
stable prices;
supervising and regulating banking institutions to ensure the safety and soundness of the nation's
banking and financial system and to protect the credit rights of consumers;
maintaining the stability of the financial system and containing systemic risk that may arise in
financial markets; and
providing certain financial services to the U.S. government, to the public, to financial institutions,
and to foreign official institutions, including playing a major role in operating the nation's
payments system.
The Federal Reserve System still operates as an independent agency of the United
States government. In keeping with the founding philosophy that ensures autonomy
and protects the central bank from shortterm partisan political pressures, its
operations are financed from its own resources. The entire System is subject to
congressional oversight and makes regular reports to Congress on its activities and
plans for monetary policy. However, the central bank's daytoday policy and
operational decisions do not require congressional or presidential approval.
The sevenmember Board of Governors in Washington, D.C., oversees the Federal Reserve System. Its
members are appointed by the President of the United States and confirmed by the Senate to serve 14
year terms, staggered so that one term expires each evennumbered year. The President designates a
Chairman and Vice Chairman from the Board to serve fouryear terms.
Each District Reserve Bank has a head office board of nine directors
chosen from outside the Bank. Three directors are chosen by and
represent banks that are members of the Federal Reserve System. The
other directors, selected by District member banks or the Board of
Governors, represent the general public.
Each of the Federal Reserve Bank of San Francisco's four branches Los
Angeles, Portland, Salt Lake City, and Seattle has its own sevenperson Board of Directors, four
appointed by the head office board and three by the Board of Governors.
These boards provide the Federal Reserve System with a wealth of grassroots information on economic
conditions throughout the Twelfth District. In addition, directors oversee the Reserve Bank operations,
select the Bank's president and first vice president, and advise the Bank's president and the Board of
Governors on the general direction of monetary policy by recommending the Bank's discount rate the
interest rate a Reserve Bank charges eligible financial institutions to borrow funds on a shortterm basis.
The discount rate, open market operations, and reserve requirements are the
three tools the Federal Reserve uses to conduct monetary policy. The
primary tool is open market operations, as managed by the Federal Open
Market Committee (FOMC). The FOMC is composed of the Board of Governors
and five of the 12 Federal Reserve Bank presidents. The president of the
Federal Reserve Bank of New York is a permanent member, and the other
presidents serve oneyear terms on a rotating basis. All 12 presidents
participate in every FOMC discussion, but only those serving as members
may vote. The actions taken by the FOMC regulate the amount of reserves
available to depository institutions, set ranges for the growth of the monetary aggregates, and direct
operations undertaken by the Federal Reserve in foreign exchange markets.
Responsibilities of the regional Reserve Banks have expanded considerably over the past 85 years, as
have the staffing levels. The way our work is done also has changed dramatically. While a banker in
1914 was well equipped to handle a day's work with adding machines, punched card tabulators,
typewriters, duplicating machines, and basic checkwriting equipment, today's banker operates in an
electronic world.
Reserve Banks provide banking services to both depository institutions and
the federal government. For depository institutions, the Fed maintains
reserve and clearing accounts and provides such payment services as
processing checks, electronically transferring funds, and distributing and
receiving currency and coin. Fedwire electronic transfers of funds and
securities in the District now average 118,400 per day, for a dollar volume
of $124 billion. Checkprocessing machinery, operating at speeds up to
100,000 checks per hour, handles approximately 8.9 million checks per day,
six days a week.
The Federal Reserve acts as the banker, or fiscal agent, for the federal government. It maintains the
U.S. Treasury Department's transaction accounts; pays Treasury checks; processes electronic
payments; conducts nationwide auctions of Treasury securities; and issues, services, and redeems U.S.
government securities.
As the banking system has grown, so has the supervisory and regulatory role of
the Federal Reserve. Fed personnel work in conjunction with other federal and
state financial authorities to ensure the financial soundness of financial institutions
and the fair and equitable treatment of consumers in their financial dealings.
From its beginning as the westernmost outpost of the Federal Reserve System, the
Twelfth District has grown to rank first in the size of its economy. Its 53.2 million
people account for 19.7 percent of the total U.S. population, and its $1.42 trillion
annual personal income accounts for 19.9 percent of the nation's total personal
income. And the District continues to grow.
In 1921 an employee writing in the Bank's employee publication reflected on the
Bank's first seven years of growth and predicted, "In the expansion and
development of the Federal Reserve System in the years to come there will be new
and interesting problems with which to wrestle. In their solution will come
opportunities for all thinking men of ability, energy, and vision." The author was
wrong about gender, but got the rest of it right.
The Federal Reserve Bank of San Francisco
warren k.k. luke | betsy lawer | a.w. clausen
warren k.k. luke
Head Office Director Warren K. K. Luke describes his family's bank Hawaii National Bank as a
community bank. It was founded in 1960 by his father K.J. Luke, whose ancestors came to Hawaii from
China in the 1870s and began then to establish deep roots in the Hawaiian community. Opening day of
the bank was record setting for the only federally chartered bank in Hawaii. By the 3 p.m. closing time,
the bank had $6.25 million in deposits, and now, some 40 years later, it has expanded to 13 offices. K.J.
Luke is now chairman emeritus of the board, and daily operations are overseen by son Warren,
chairman and president, who has been an officer of the bank since 1972.
The similarities between father and son are striking both graduated from
Harvard University's Graduate School of Business, both started their
business careers in real estate development, both have four children, and
both are committed to maintaining a true community bank.
Because it is a small, local bank, Hawaii National Bank's prosperity is
directly linked to the prosperity of the Hawaiian economy, which has been
in a downward spiral for the past 10 years. Businesses have had to adjust
to this situation, and recently the decision was made to buy out
shareholders, go private, and make the bank familyowned to accomplish
its longterm goals. Warren Luke explains that keeping the bank accessible
to all its customers and developing strong personal relationships is a
critical adjunct to the technology that his bank also embraces. He believes
that these hard economic times bring out entrepreneurs who can benefit
from a strong relationship with a community banker.
It is this type of grassroots information on both the Hawaiian and Pacific Rim economies that Luke brings
to the Federal Reserve Bank of San Francisco as he serves his third term as the first director from
Hawaii.
Serving on the Fed board is but one of Luke's many public service commitments. He holds leadership
positions in numerous banking, educational, charitable, and community organizations on local, regional,
and national levels. In addition, he remains active in various aspects of real estate management and
development.
In the 10 years since Hawaii became a state and Hawaii National Bank opened its doors, the Luke family
has witnessed a lot of changes. In the early days business was often done on a handshake, and people
thought very hard before they filed for bankruptcy. Many of the local businesses that started soon after
the war are now being taken over by the next generation. These businesses must now make some
tough decisions about whether they can continue to operate as a closely held or family business. When
Luke talks to his customers about concerns such as these, he understands their situation because he has
gone through it himself. In fact, it is giving just that kind of service helping customers succeed in
business as well as in family relationships that is most rewarding to him as a banker.
betsy lawer
When Seattle Branch Director Betsy Lawer tells you she grew up in the family bank, she really means it.
At the time she was born, her parents lived in a second story apartment in the building that housed the
First National Bank of Anchorage, and she remembers chatting with (and dropping toys on) customers
as they entered the bank.
The bank was founded in 1922, and in 1941 Lawer's grandfather, Warren
N. Cuddy, bought a controlling interest and became the bank's president,
beginning a family legacy which would last into the next century. His son,
D. H. Cuddy, succeeded him and still serves as chairman of the board and
president of the bank. Granddaughter Betsy Lawer continues the family
enterprise as vice chairman and chief operating officer.
As the eldest of six, Lawer had the privilege as a child to accompany her
father on his Saturday morning customer calls to Alaska businessmen,
many of them independent souls who had built their own businesses. She
listened, learned, and developed a strong respect and admiration for the
personal aspects of banking.
She began working for the bank during summer vacations as soon as she
could, progressing through a wide variety of jobs.
Looking back, Lawer recalls Alaska's first oil lease sale in 1969 in Prudhoe Bay and the tremendous
impact it had on the future of the state. The sale netted over $900 million, and deposits on that sum
were loaded into bags and flown by chartered jet to New York City because its location in the Eastern
Standard Time zone allowed the money to earn an additional day's interest. First National Bank of
Anchorage aided in supervising the transaction, and Lawer, on her way back to college at Duke
University, was lucky enough to ride along in that chartered jet. She returned to college and promptly
changed her major to economics. Now, as a director of the Federal Reserve Bank of San Francisco, she
appreciates being able to apply her theoretical education in economics.
Lawer keeps her finger on the pulse of the community, both as a banker and as a community leader.
Her grandmother, a former chairman of the bank, headed the first United Way drive in Alaska, and
Lawer is proud to follow in her footsteps. As a community banker, she balances the diverse needs of the
populations served by the bank's 28 locations ranging from rural fishing villages to metropolitan cities.
In each case, understanding the customers' banking needs in order to provide them with the service and
technology they need to do business remains the bank's primary goal.
Lawer provides critical input to the Seattle Branch Board on Alaska's economy. Because Alaska's
economy is relatively small, small changes in it make a big difference, and its importance as an
international export hub is significant. She also uses the Fed as an important resource for advice and
counsel in operational areas.While the Alaskan economy and the customer base have changed
dramatically during her family's years with First National Bank of Anchorage, Lawer is proud that the
bank's guiding philosophy, as stated by her grandfather more than 50 years ago, is still intact. The goals
are: safeguard the depositors' money, serve the community in which the bank operates to the limits of
the bank's deposits, capital, and personnel; and provide the employees with adequate wages, the tools
to do their jobs, and a comfortable place to work. And, if you do that, a proper return is earned for the
shareholders.
a.w. clausen
A. W. Clausen has a long, distinguished career in banking. In 1970, at age 46, he was selected to head
Bank of America and over the next 20 years served as its president, chairman, and chief executive
officer. During the 1970s he also served terms as president and Twelfth District member of the Federal
Advisory Council (for the Board of Governors of the Federal Reserve) and as a director of the Federal
Reserve Bank of San Francisco. Clausen left Bank of America in 1981 to serve a term as president of
the World Bank, then returned to lead Bank of America. Now, in his retirement, Clausen remains an
involved participant in banking and business issues, particularly in the international arena.
Perhaps, surprisingly, it was the love of a young lady, not the love of
banking, that initially got him into the business. Clausen arrived in Los
Angeles in 1949 after graduating from the University of Minnesota law
school to "woo and pursue" his sweetheart. He took a job counting cash for
Bank of America at $180 per month and thus began what would turn out to
be a banking career and a marriage that would span the next 50 years.
In 1949, when Clausen joined Bank of America, college graduates,
especially those with an added law degree, were in short supply. He was
soon selected for the bank's twoyear management training program
rotating through a variety of assignments. He held several permanent
branch assignments and then was promoted to bank administration in the
corporate finance area. In 1963 he moved to San Francisco as head of the
corporate finance department in northern California. Seven years later he
was named president and chief executive officer.
During his career Clausen has seen the Federal Reserve both from the
inside as a director and Federal Advisory Council member and from
the outside as a customer. Clausen recalls his service on the Fed board
as a learning experience affording him the opportunity for a behindthe
scenes look at how the Fed operates and why it has certain rules and
regulations. He remembers being on the customer side of dealing with the
Fed during troubled financial times at B of A, and, as he reflects on those
times, he encourages the Fed to continue its assertiveness in bringing
discipline to the banking system. He also commends the Fed for having an increasingly enlightened view
of commercial banks and for adopting regulations that recognize the more competitive world in which
commercial banks operate today.
When asked to comment on major changes in banking over the past 50 years, Clausen is quick to cite
paper processing as number one. He is proud that Bank of America was at the forefront of developing
the magnetic ink character recognition system for check handling, which had significant ramifications in
reducing float and speeding processing throughout the world.
Looking forward, Clausen is excited about the impact of the Internet and the possibilities it affords for
the future of banking, and he hopes the financial sector will not fight it, but will use it to its fullest
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The Federal Reserve Bank of San Francisco: Economic Research, Educational Resources, Communi…
the future of banking, and he hopes the financial sector will not fight it, but will use it to its fullest
advantage.
From his vantage point at the head of the world's largest commercial bank, Clausen faced challenges
and helped lead the vast growth and change in banking. He says he's very lucky to have had these
opportunities, and, when asked to pass along his secret of success, he quotes an inscription on a piece
of driftwood he treasures: "When all else fails, don't forget sheer dumb luck."
3/3
The Federal Reserve Bank of San Francisco
The primary focus of our Bank during 1999 was to ensure the banking system's operational readiness
for the transition to the year 2000. Our activities capped off a multiyear effort to prepare our internal
systems and to ensure the preparedness of financial institutions' systems that support the nation's
payments systems. As a regulator of financial institutions and the nation's money manager, our charter
directs us to ensure safety and soundness in the operations of financial institutions, to provide stability in
financial markets, and to maintain the smooth functioning of the nation's payments system.
Throughout the year we tested applications with the depository institutions that are our customers,
implemented updated systems, reviewed institutions' readiness plans, and regularly communicated our
progress to the public. We produced the brochure "How Is the Banking Industry Preparing for Y2K?" in
four languages and distributed it to more than 150,000 constituents, along with providing speakers on
the subject of Y2K readiness for 45 events and 22 seminars. Our Bank's credit and risk management
area prepared District financial institutions to obtain shortterm credit in the event of Y2Krelated
liquidity problems. We also devoted considerable resources to ensuring that adequate supplies of cash
would be available to meet the higher demand for currency expected in the days leading up to the
century rollover weekend.
Financial Services
The Bank did not allow its Y2K preparations to eclipse other critical, longstanding objectives. In our
financial services functions, we continued to focus on promoting electronic transactions and transitioning
customers from paperbased delivery of transaction information to electronic delivery. In addition, we
prepared for the Systemwide consolidation of two of our fiscal agency functions, TreasuryDirect and
Treasury Tax and Loan (TT&L), in 2000.
In another significant event, we received final approval from the
Board of Governors to establish a cash operations center in
Phoenix to meet the cash needs of the growing Arizona market.
We will break ground on that facility in the spring of 2000in
preparation for a September 2001 opening.
In the retail payments area, the Bank continued to promote
electronic payments and electronic collection of paperbased
payments by offering competitive and innovative services. The
Bank's Automatic Bill Payment (ABP) Program is a joint marketing
program that enables utilities, municipalities, and newspapers that
share common customers to coordinate direct payment
promotional efforts using a common enrollment form. The San
Francisco Bay Area ABP Program, which started in 1997, now
includes 14 billers and 30 financial institutions with a total of
222,000 enrollments.
Executive Committe
From left (standing):
Gordon R.G. Werkema,
Executive Vice President; John
F. Moore, First Vice President;
Jack H. Beebe, Senior Vice
President and Director of
Research
From left (seated):
Terry S. Schwakopf, Senior
Vice President; Robert T.
Parry, President
In addition, the Bank provided project leadership for the Treasury
Point of Sale Check Conversion project, which is testing the
feasibility and consumer acceptance of converting check
payments made at the point of sale to ACH debit transactions for
faster processing and speedier collection. By yearend, the U.S.
Patent Office had two payment terminals generating ACH debits,
and a number of other Treasury agencies were on track to
convert checks in 2000, including the Department of Veterans
Affairs Canteen Service, the Bureau of Printing and Engraving,
and the U.S. Customs Office.
Also, to promote electronic collection of checks, the Bank
expanded its pilot of "Deposit MICR" services, adding a sizable
financial institution with subsidiary banks in the Portland and
Seattle zones to its customer base. The Bank's pilot of deposit
MICR services includes the capture, sorting and imaging of transit
and "on us" checks, as well as "proof of deposit" type services
and item encoding. By enabling financial institutions to eliminate
back office operations associated with handling paper items, these
services make electronic check collection much more economical
for financial institutions, particularly when they also provide
images of paid items in their customers' monthly account
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statements in lieu of returning the physical items.
In order to provide higher levels of service and operate more efficiently through enhanced automation
platforms, we continued to lead the Enterprisewide Check Adjustments (EWA) project for the System.
This application is the largest distributed processing application in the Federal Reserve. It will provide
improved crossDistrict adjustments processing capabilities, as well as a platform for Webbased
submission and tracking of cases, resulting in better efficiency in back room operations and enhanced
services to both local and national customers.
Economic Research
The Bank contributes to the formulation of sound monetary and
regulatory policy through academic research on topics of policy
concern to the Federal Reserve, timely and highquality data
reporting, and outreach to increase the public's understanding of
the Federal Reserve as the nation's central bank.
Research efforts in 1999 were concentrated in three key areas:
structural change in the economy and the conduct of monetary
policy, financial crises in emergingmarket economies, and
financial services industry restructuring and supervisory policy.
The Bank's Center for Pacific Basin Monetary and Economic
Studies hosted an international conference on the theme
"Financial Crises in Emerging Markets." The event brought
together nearly 100 researchers and policymakers from foreign
central banks, international organizations, academia, and the
Federal Reserve to discuss the role of the financial sector in the
occurrence of banking and currency crises in emerging market
countries, particularly in Asia.
Banking Supervision and Regulation
In addition to handling successfully its Y2Krelated supervisory
responsibilities, the Bank's supervision function continued to focus
on emerging risks, particularly in the supervision of large,
complex banking organizations (LCBOs). In this regard, we
deepened our expertise in global bank supervision, the
supervision of new information technologies used in the delivery
of financial services, and credit risk modeling techniques used by
financial institutions. We also enhanced our Asia supervision
program and our reputation as a leading expert in Asia. We
continued to strengthen our safety and soundness and compliance
supervisory programs for regional and community banking
organizations by focusing on ongoing monitoring of, and outreach
to, our supervised entities. In this matter, we were able to
address emerging issues in a timely, cooperative manner.
Branch Operations
From left (standing):
Gordon R.G. Werkema,
Executive Vice President,
Northern Region; Raymond H.
Laurence, Senior Vice
PresidentinCharge, Portland;
Mark Mullinix, Senior Vice
PresidentinCharge, Los
Angeles
Seated:
Andrea P. Wolcott, Vice
PresidentinCharge, Salt Lake
City
In the Community Affairs area, the Bank continued to develop
innovative outreach programs and to promote partnerships
between financial institutions and community groups, focusing
particularly on increasing the availability of credit to tribal lands.
In this regard, the Bank convened and facilitated 25 meetings for bankers and tribal representatives on
various Indian reservations in the Pacific Northwest, Idaho, and Utah. These gatherings have resulted in
several financial institutions developing tribespecific partnerships with loan commitments for mortgage
and commercial lending on tribal lands.
2/2
The Federal Reserve Bank of San Francisco
Volume (in thousands)
1997
1998
1999
4,626,649
4,739,673
5,369,630
654,068
483,942
367,350
Custody Services
Cash Services
Currency notes paid into circulation
Food stamp coupons processed
Securities Services
Other Treasury original issues
105
76
63
Bookentry securities processed
751
673
527
Payments Services
Check Services
Commercial checks collected
2,313,792
2,312,860
2,312,940
Government checks processed
54,466
52,103
46,034
Return items processed
35,251
34,591
33,849
Electronic Payments Services
Wire transfers processed
24,058
26,622
27,088
Automated clearinghouse
transactions processed
428,564
499,527
574,872
478
463
647
86
77
130
Discounts & Advances
Total discounts & transactions*
Number of financial
institutions accommodated*
*Whole number (not in thousands)
1/1
The Federal Reserve Bank of San Francisco
as of december 31, 1999
Robert T. Parry
President and Chief Executive Officer
Barbara J. Beckman
Assistant Vice President
John F. Moore
First Vice President
and Chief Operating Officer
Thomas R. Burke
Assistant Vice President
Jack H. Beebe
Senior Vice President
and Director of Research
Sara K. Garrison
Senior Vice President
Michael J. Murray
Senior Vice President
Terry S. Schwakopf
Senior Vice President
Susan A. Sutherland
Senior Vice President
D. Kerry Webb
Senior Vice President
John H. Parrish
General Auditor
Jet Auer de Saram
Vice President and General Counsel
Elizabeth R. Masten
Vice President and
Secretary of the Board
Richard K. Cabral
Assistant Vice President
James J. Callahan
Assistant Vice President
Teresa M. Curran
Assistant Vice President
Lee C. Dwyer
Assistant Vice President
Alice Farrell
Assistant Vice President
Louis "Skip" George
Assistant Vice President
Todd A. Glissman
Assistant Vice President
Ellen M. Hamilton
Assistant Vice President
BeverleyAnn Hawkins
Assistant Vice President
Peter K. C. Hsieh
Assistant Vice President
Frederick T. Furlong
Vice President
Michael E. Johnson
Assistant Vice President
Reuven Glick
Vice President
Craig B. Knudsen
Assistant Vice President
John P. Judd
Vice President and
Associate Director of Research
Mark Levonian
Assistant Vice President
Donald R. Lieb
Vice President
Ronald E. Mitchell, Jr.
Vice President
Robert D. Mulford
Vice President and Counsel
Elizabeth M. O'Shea
Vice President
Deborah S. Smyth
Vice President
Michael J. Stan
Ellsworth E. Lund, Jr.
Assistant Vice President
Joy Hoffmann Molloy
Assistant Vice President
Darren S. Post
Assistant Vice President
Philip M. Ryan
Assistant Vice President
Daniel K. Shaw
Assistant Vice President
Gordon S. Tannura
Assistant Vice President
James J. Tenge
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James J. Tenge
Assistant Vice President
Sallie H. Weissinger
Vice President and
Director of Public Information
Dale L. Vaughn
Assistant Vice President
Patricia A. Welch
Vice President
Elizabeth L. Wood
Assistant Vice President
James M. Barnes
Director
Angela D'Alessandro
Examining Officer
(On loan to the Board)
Kenneth R. Binning
Director
Barbara A. Bennett
Strategic Planning Officer
Harold H. Blum
Director
Joseph P. Mattey
Research Officer
Eliot E. Giuili
Director
Gary P. Palmer
Banking Studies Officer
Andreas Hauer
Director
Glenn D. Rudebusch
Research Officer
John S. Hsiao
Director
Mark Spiegel
Research Officer
Ann Marie Kohlligian
Director
David W. Walker
Director
Kenneth M. Kinoshita
Associate General Counsel
Bharat Trehan
Research Officer
Roxana R. Tsougarakis
Financial Planning and Control Officer
Mary E. Wujek
Information and Technology
Services Officer
Bonnie R. Allen
Assistant Vice President
Los Angeles Branch
Mark Mullinix
Senior Vice President
Mark E. Koegel
Assistant Vice President
Robert G. Wiley
Vice President
Linda J. Westerschulte
Assistant Vice President
Roger W. Replogle
Director
Jose Alonso
Examining Officer
Marla E. Borowski
Assistant Vice President
Anthony P. Dazzo
Cash Services Officer
Robert C. Johnson
Assistant Vice President
L. Sherann Mack
Business Development and EPS Officer
Northern Region
Gordon R. G. Werkema
Executive Vice President
Portland Branch
Salt Lake City Branch
Raymond H. Laurence
Senior Vice President
Andrea P. Wolcott
Vice President
Sean J. Rodriguez
Vice President
Jed W. Bodily
Assistant Vice President
Mary E. Lee
Assistant Vice President
Gerald R. Dalling
Assistant Vice President
Robert D. Long
Assistant Vice President
Richard B. Hornsby
Assistant Vice President
Robin A. Rockwood
Assistant Vice President
Seattle Branch
Gale P. Ansell
Assistant Vice President
Mark A. Gould
Assistant Vice President
Lynn M. Jorgensen
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Lynn M. Jorgensen
Assistant Vice President
Jimmy F. Kamada
Assistant Vice President
Kenneth L. Peterson
Assistant Vice President
3/3
The Federal Reserve Bank of San Francisco
federal reserve bank of san francisco
Chairman and
Federal Reserve Agent
Gary G. Michael
Chairman and CEO
Albertson's Inc.
Boise, Idaho
Sheila D. Harris
Consultant
Harris Consulting
Litchfield Park, Arizona
Deputy Chairman
Nelson C. Rising
President and CEO
Catellus Development Corporation
San Francisco, California
Warren K. K. Luke
Chairman and CEO
Hawaii National Bank
Honolulu, Hawaii
Robert S. Attiyeh
Senior Vice President and CFO (Retired)
Consultant
Amgen, Inc.
Thousand Oaks, California
John V. Rindlaub
President, Northwest Banking
Bank of America
Seattle, Washington
E. Lynn Caswell
Chairman and CEO
Pacific Community Banking Group
Laguna Hills, California
George M. Scalise
President
Semiconductor Industry Association
San Jose, California
Krestine Corbin
President and CEO
Sierra Machinery, Inc.
Sparks, Nevada
Federal Advisory Council Member
Walter A. Dods, Jr.
Chairman and CEO
BancWest Corporation
Honolulu, Hawaii
los angeles branch
Chairman of the Board
Lonnie Kane
President
Karen Kane, Inc.
Los Angeles, California
Linda Griego
President and CEO
Los Angeles Community Development Bank
Los Angeles, California
Lori R. Gay
President
Los Angeles Neighborhood Housing Services,
Inc.
Los Angeles, California
William D. Jones
Chairman, President, and CEO
CityLink Investment Corporation
San Diego, California
John H. Gleason
Executive Vice President
Del Webb Corporation
Phoenix, Arizona
Liam E. McGee
President
Bank of America Southern California
Los Angeles, California
Russell Goldsmith
Chairman and CEO
City National Bank
Beverly Hills, California
portland branch
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Chairman of the Board
Nancy Wilgenbusch
President
Marylhurst University
Marylhurst, Oregon
Karla S. Chambers
Vice President and CoOwner
Stahlbush Island Farms, Inc.
Corvallis, Oregon
Phyllis A. Bell
President
Oregon Coast Aquarium
Newport, Oregon
Christian R. Rasmussen
Executive Vice President
U.S. Bancorp Business Banking Group
Portland, Oregon
Patrick Borunda
Director
Oweesta Fund
First Nations Development Institute
Yacolt, Washington
Guy L. Williams
President and CEO
Security Bank
Coos Bay, Oregon
Martin Brantley
President and General Manager
Oregon's 12KPTV
Portland, Oregon
salt lake city branch
Chairman of the Board
Barbara L. Wilson
Idaho and Regional Vice President
U.S. WEST
Boise, Idaho
Curtis D. Harris
Chairman, President and CEO
Barnes Banking Co.
Kaysville, Utah
H. Roger Boyer
Chairman
The Boyer Company
Salt Lake City, Utah
Jon M. Huntsman, Jr.
Vice Chairman
Huntsman Corporation
Salt Lake City, Utah
R. D. Cash
Chairman, President and CEO
Questar Corporation
Salt Lake City, Utah
J. Pat McMurray
President
First Security Bank, N.A.
Boise, Idaho
Maria Garciaz
Executive Director
Salt Lake Neighborhood
Housing Services, Inc.
Salt Lake City, Utah
seattle branch
Chairman of the Board
Richard R. Sonstelie
Chairman of the Board
Puget Sound Energy, Inc.
Bellevue, Washington
Mary E. Pugh
President
Pugh Capital Management, Inc.
Seattle, Washington
Boyd E. Givan
Senior Vice President and CFO (Retired)
The Boeing Company
Seattle, Washington
Helen M. Rockey
President and CEO
Just for Feet, Inc.
Seattle, Washington
James C. Hawkanson
Managing Director and CEO
The Commerce Bank of Washington, N.A.
Seattle, Washington
Peter H. Van Oppen
Chairman and CEO
Advanced Digital Information Corporation
Redmond, Washington
Betsy Lawer
Vice Chair and COO
First National Bank of Anchorage
Anchorage, Alaska
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The Federal Reserve Bank of San Francisco
December 31, 1999
To: PricewaterhouseCoopers LLP
The management of the Federal Reserve Bank of San Francisco (FRBSF) is responsible for the
preparation and fair presentation of the Statement of Financial Condition, Statement of Income, and
Statement of Changes in Capital as of December 31, 1999 (the "Financial Statements"). The Financial
Statements have been prepared in conformity with the accounting principles, policies, and practices
established by the Board of Governors of the Federal Reserve System and as set forth in the Financial
Accounting Manual for the Federal Reserve Banks, and as such, include amounts, some of which are
based on judgments and estimates of management.
The management of the FRBSF is responsible for maintaining an effective process of internal controls
over financial reporting including the safeguarding of assets as they relate to the Financial Statements.
Such internal controls are designed to provide reasonable assurance to management and to the Board
of Directors regarding the preparation of reliable Financial Statements. This process of internal controls
contains selfmonitoring mechanisms, including, but not limited to, divisions of responsibility and a code
of conduct. Once identified, any material deficiencies in the process of internal controls are reported to
management, and appropriate corrective measures are implemented.
Even an effective process of internal controls, no matter how well designed, has inherent limitations,
including the possibility of human error, and therefore can provide only reasonable assurance with
respect to the preparation of reliable financial statements.
The management of the FRBSF assessed its process of internal controls over financial reporting
including the safeguarding of assets reflected in the Financial Statements, based upon the criteria
established in the "Internal Control Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on this assessment, the management of the
FRBSF believes that the FRBSF maintained an effective process of internal controls over financial
reporting including the safeguarding of assets as they relate to the Financial Statements.
Federal Reserve Bank of San Francisco
by
Robert T. Parry
President
by
John F. Moore
First Vice President
To the Board of Directors of the
Federal Reserve Bank of San Francisco
We have examined management's assertion that the Federal Reserve Bank of San Francisco ("the
Bank") maintained effective internal control over financial reporting and the safeguarding of assets as
they relate to the financial statements as of December 31, 1999, included in the accompanying
Management's Assertion.
Our examination was made in accordance with standards established by the American Institute of
Certified Public Accountants, and accordingly, included obtaining an understanding of the internal control
over financial reporting, testing, and evaluating the design and operating effectiveness of the internal
control, and such other procedures as we considered necessary in the circumstances. We believe that
our examination provides a reasonable basis for our opinion.
Because of inherent limitations in any internal control, misstatements due to error or fraud may occur
and not be detected. Also, projections of any evaluation of the internal control over financial reporting
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and not be detected. Also, projections of any evaluation of the internal control over financial reporting to
future periods are subject to the risk that the internal control may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assertion that the Bank maintained effective internal control over financial
reporting and over the safeguarding of assets as they relate to the financial statements as of December
31, 1999, is fairly stated, in all material respects, based upon criteria described in " Internal Control
Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
San Francisco, California
March 3, 2000
Report of Independent Accountants
To the Board of Directors of The Federal Reserve System
and the Board of Directors of the Federal Reserve Bank of San Francisco
We have audited the accompanying statements of condition of The Federal Reserve Bank of San
Francisco (the "Bank") as of December 31, 1999 and 1998, and the related statements of income and
changes in capital for the years then ended. These financial statements are the responsibility of the
Bank's management. Our responsibility is to express an opinion on the financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 3, the financial statements were prepared in conformity with the accounting
principles, policies, and practices established by the Board of Governors of The Federal Reserve
System. These principles, policies, and practices, which were designed to meet the specialized
accounting and reporting needs of The Federal Reserve System, are set forth in the "Financial
Accounting Manual for Federal Reserve Banks" and constitute a comprehensive basis of accounting other
than accounting principles generally accepted in the United States.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
financial position of the Bank as of December 31, 1999 and 1998, and results of its operations for the
years then ended, on the basis of accounting described in Note 3.
San Francisco, CA
March 3, 2000
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The Federal Reserve Bank of San Francisco
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, Arizona,
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 large
dollar 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
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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 in the United States ("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 present a Statement of Cash Flows or a Statement
of Comprehensive Income. The Statement of Cash Flows has not been included as the liquidity
and cash position of the Bank are not of primary concern to the users of these financial
statements. The Statement of Comprehensive Income, which comprises net income plus or minus
certain adjustments, such as the fair value adjustment for securities, has not been included
because as stated above the securities are recorded at amortized cost and there are no other
adjustments in the determination of Comprehensive Income applicable to the Bank. 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 or a
Statement of Comprehensive Income 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.
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 accounts are 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.
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 accounts
are 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.
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.
The Board of Governors established a Special Liquidity Facility (SLF) to make discount window
credit readily available to depository institutions in sound financial condition around the century
date change (October 1, 1999, to April 7, 2000) in order to meet unusual liquidity demands and to
allow institutions to confidently commit to supplying loans to other institutions and businesses
during this period. Under the SLF, collateral requirements are unchanged from normal discount
window activity and loans are made at a rate of 150 basis points above FOMC's target federal
funds rate.
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
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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.
Effective April 26, 1999, FRBNY was given the sole authorization 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 FRBNY 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 FRBNY on a daily basis,
with additional collateral obtained as necessary. The securities loaned continue to be accounted
for in the SOMA. Prior to April 26, 1999 all Reserve Banks were authorized to engage in such
lending activity.
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 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 and federal
agency 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 (Losses), 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 Gains (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
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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. Effective April 26, 1999, income from
securities lending transactions undertaken by FRBNY was also allocated to each Reserve Bank.
Securities purchased under agreements to resell 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.
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.
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."
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, 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. The Reserve Banks have
entered into an agreement which provides for certain assets of the Reserve Banks to be jointly
pledged as collateral for the Federal Reserve notes of all Reserve Banks in order to satisfy their
obligation of providing sufficient collateral for outstanding Federal Reserve notes. 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 Bank of $20,956 million, and $17,310 million at December 31,
1999 and 1998, respectively.
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 change, 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.
Surplus
The Board of Governors requires Reserve Banks to maintain a surplus equal to the amount of
capital paidin as of December 31. 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.
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 ended on
September 30, 1998 and 1997, 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 were not permitted to replenish
surplus for these amounts during this time. Payments to the U.S. Treasury made after September
30, 1998, represent payment of interest on Federal Reserve notes outstanding.
The Consolidated Appropriations Act of 1999 (Public Law 106113, Section 302) directed the
Reserve Banks to transfer to the U.S Treasury additional surplus funds of $3,752 million during
the Federal Government's 2000 fiscal year. The Reserve Banks will make this payment prior to
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the Federal Government's 2000 fiscal year. The Reserve Banks will make this payment prior to
September 30, 2000.
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 may vary
significantly.
Income and Cost related to 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."
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 10.752% and 12.589% at December 31, 1999 and 1998, respectively.
The Bank's allocated share of securities held in the SOMA at December 31, that were bought
outright, were as follows (in millions):
1999
1998
Par value :
Federal agency
$ 19
$ 42
Bills
18,979
24,519
Notes
23,489
23,654
Bonds
8,922
8,746
51,409
56,961
U.S. government
Total par value
Unamortized premiums
Unaccreted discounts
Total allocated to Bank
978
930
(359)
(403)
$ 52,028
$ 57,488
Total SOMA securities bought outright were $483,902 million and $456,667 million at December
31, 1999 and 1998, respectively.
The maturities of U.S. government and federal agency securities bought outright, which were
allocated to the Bank at December 31, 1999, were as follows (in millions):
Par Value
Maturities of Securities Held
U.S.
Federal
Government
Agency
Securities Obligations
Total
Within 15 days
$ 498
$
$ 498
16 days to 90 days
9,883
3
9,886
91 days to 1 year
15,038
2
15,040
Over 1 year to 5 years
13,351
1
13,352
Over 5 years to 10 years
5,495
13
5,508
Over 10 years
7,125
7,125
$ 51,390
$ 19
$ 51,409
Total
At December 31, 1999 and 1998, matched salepurchase transactions involving U.S. government
securities with par values of $39,182 million and $20,927 million, respectively, were outstanding,
of which $4,213 million and $2,634 million were allocated to the Bank. Matched salepurchase
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The Federal Reserve Bank of San Francisco: Economic Research, Educational Resources, Communi…
of which $4,213 million and $2,634 million were allocated to the Bank. Matched salepurchase
transactions are generally overnight arrangements.
At December 31, 1998, U.S. government securities with par value of $35 million were loaned by
the Bank.
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 16.324% and 18.064% at December 31, 1999 and 1998,
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):
1999
1998
German Marks
Foreign currency deposits
$
$ 1,888
429
Foreign currency deposits
707
Government debt instruments including agreements
to resell
414
53
120
1,453
1,119
8
18
$ 2,635
$ 3,574
Government debt instruments including agreements
to resell
European Union Euro:
Japanese Yen
Foreign currency deposits
Government debt instruments including agreements
to resell
Accrued interest
Total
Total investments denominated in foreign currencies were $16,140 million and $19,769 million at
December 31, 1999 and 1998, respectively.
The 1998 balance includes $15 million in unearned interest collected on certain foreign currency
holdings that is allocated solely to the FRBNY.
The maturities of investments denominated in foreign currencies which were allocated to the Bank
at December 31, 1999, were as follows (in millions):
Maturities of Investments Denominated in Foreign Currencies
Within 1 year
$ 2,460
Over 1 year to 5 years
81
Over 5 years to 10 years
94
Over 10 years
Total
$ 2,635
At December 31, 1999 and 1998, there were no open foreign exchange contracts or outstanding
F/X swaps.
At December 31, 1999 and 1998, the warehousing facility was $5,000 million with nothing
outstanding.
6. Bank Premises and Equipment
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A summary of bank premises and equipment at December 31 is as follows (in millions):
1999
1998
Bank premises and equipment
Land
Buildings
Building machinery and equipment
$ 23
$ 23
163
154
37
35
Construction in progress
3
5
Furniture and equipment
135
133
361
350
(140)
(131)
Accumulated depreciation
Bank premises and equipment, net
$ 221
$ 219
Depreciation expense was $19 million and $17 million for the years ended December 31, 1999 and
1998, respectively.
The Bank leases unused space to outside tenants. Those leases have terms ranging from 1 to 8
years. Rental income from such leases was $1 million for each year ended December 31, 1999
and 1998. Future minimum lease payments under agreements in existence at December 31, 1999,
were (in millions):
2000
$ 1.0
2001
1.0
2002
0.9
2003
1.0
2004
0.2
Thereafter
0.4
$ 4.5
7. Commitments and Contingencies
At December 31, 1999, the Bank was obligated under noncancelable leases for premises and
equipment with terms ranging from 1 to approximately 3 years. 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 $738 thousand and $589 thousand for the years ended
December 31, 1999 and 1998, 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, 1999, were not material.
Under the Insurance Agreement of the Federal Reserve Banks dated as of March 2, 1999, 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 paidin of the claiming Reserve Bank, up to 50% of the total capital
paidin of all Reserve Banks. Losses are borne in the ratio that a Reserve Bank's capital paidin
bears to the total capital paidin 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,
1999 or 1998.
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 Federal Reserve System ("System Plan") and the Benefit
Equalization Retirement Plan ("BEP"). The System Plan is a multiemployer plan with contributions
fully funded by participating employers. No separate accounting is maintained of assets
contributed by the participating employers. The Bank's projected benefit obligation and net
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The Federal Reserve Bank of San Francisco: Economic Research, Educational Resources, Communi…
contributed by the participating employers. The Bank's projected benefit obligation and net
pension costs for the BEP at December 31, 1999 and 1998, and for the years then ended, are not
material.
Thrift Plan
Employees of the Bank may also participate in the defined contribution Thrift Plan for Employees
of the Federal Reserve System ("Thrift Plan"). The Bank's Thrift Plan contributions totaled $5
million for each year ended December 31, 1999 and 1998, 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 retirement plans, employees who have met certain age and length of
service requirements are eligible for both medical benefits and life insurance coverage during
retirement.
The Bank funds benefits payable under the medical and life insurance plans as due and,
accordingly, has no plan assets. Net postretirement benefit cost is actuarially determined using a
January 1 measurement date.
Following is a reconciliation of beginning and ending balances of the benefit obligation (in
millions):
1999
Accumulated postretirement benefit obligation at January 1
1998
$ 33.1
$ 32.1
Service cost benefits earned during the period
0.8
0.7
Interest cost of accumulated benefit obligation
1.9
2.0
(5.0)
(0.3)
Actuarial gain
Contributions by plan participants
Benefits paid
Accumulated postretirement benefit obligation at December 31
0.2
0.2
(1.2)
(1.6)
$ 29.8
$ 33.1
Following is a reconciliation of the beginning and ending balance of the plan assets, the unfunded
postretirement benefit obligation, and the accrued postretirement benefit cost (in millions):
1999
Fair value of plan assets at January 1
Actual return on plan assets
1998
$
$
Contributions by the employer
1.0
1.4
Contributions by plan participants
0.2
0.2
(1.2)
(1.6)
$
$
Benefits paid
Fair value of plan assets at December 31
Unfunded postretirement benefit obligation
$ 29.8
$ 33.1
Unrecognized prior service cost
14.3
15.9
Unrecognized net actuarial gain
15.7
11.1
$ 59.8
$ 60.1
Accrued postretirement benefit cost
Accrued postretirement benefit cost is reported as a component of "Accrued benefit cost."
The weightedaverage assumption used in developing the postretirement benefit obligation as of
December 31, 1999 and 1998, was 7.5% and 6.25%, respectively.
For measurement purposes, an 8.75% annual rate of increase in the cost of covered health care
benefits was assumed for 2000. Ultimately, the health care cost trend rate is expected to
decrease gradually to 5.50% by 2006, and remain at that level thereafter.
Assumed health care cost trend rates have a significant effect on the amounts reported for health
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care plans. A one percentage point change in assumed health care cost trend rates would have
the following effects for the year ended December 31, 1999 (in millions):
1 Percentage Point 1 Percentage Point
Increase
Decrease
Effect on aggregate of service and interest cost
components of net periodic postretirement
benefit cost
Effect on accumulated postretirement
benefit obligation
$ 0.2
$ (0.2)
1.9
(1.8)
The following is a summary of the components of net periodic postretirement benefit cost for the
years ended December 31 (in millions):
1999
Service costbenefits earned during the period
Interest cost of accumulated benefit obligation
$ 0.8
1998
$ 0.6
1.9
2.0
Amortization of prior service cost
(1.6)
(1.6)
Recognized net actuarial gain
(0.5)
(0.6)
Net periodic postretirement benefit cost
$ 0.6
$ 0.4
Net periodic postretirement benefit cost is reported as a component of "Salaries and other
benefits."
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, 1999 and 1998, were $10 million and $9 million,
respectively. This cost is included as a component of "Accrued benefit cost." Net periodic
postemployment benefit costs included in 1999 and 1998 operating expenses were $2 million for
each year.
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The Federal Reserve Bank of San Francisco
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 San Francisco Office
nine western states Alaska,
P.O. Box 7702
Arizona, California, Hawaii, Idaho,
San Francisco, California 94120
Nevada, Oregon, Utah, and
Washington Guam, American Samoa, and the Northern Mariana Islands.
Portland Branch
P.O. Box 3436
Portland, Oregon 97208
To serve this expansive region, the San Francisco Reserve Bank has five offices: our headquarters in San
Francisco and offices in Los Angeles, Portland, Salt Lake City, and Seattle. Each office provides financial
services to the banking institutions in its locale.
Los Angeles Branch
Salt Lake City Branch
Seattle Branch
P.O. Box 2207, Terminal Annex P.O. Box 30780
P.O. Box 3567, Terminal Annex
Los Angeles, CA 90051
Salt Lake City, Utah 84130 Seattle, Washington 98124
This Report was produced and written by Karen Flamme.
Design and illustrations were created by William Rosenthal.
Color photography by Paul Schulz.
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