Introduction
Overview of Federal Reserve System
The Federal Reserve System--the nation's central bank--consists of the Board of Governors in Washington, D.C., the 12 Federal Reserve Banks with their 24 branches distributed throughout the nation, the Federal Open Market Committee (FOMC), and three advisory councils--the Federal Advisory Council, the Consumer Advisory Council, and the Thrift Institutions Advisory Council. The System was created in 1913 by the Congress to establish a safe and flexible monetary and banking system. Over the years, the Congress has given the Federal Reserve more authority and responsibility for achieving broad national economic and financial objectives.
As the nation’s central bank, the Federal Reserve System has numerous, varied responsibilities, including:
- conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in the pursuit of maximum employment, stable prices, and moderate long-term interest rates;
- 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 financial services to depository institutions, the U.S. government, and foreign official institutions.
The Federal Reserve System plays a major role in the nation's payment system. The Federal Reserve Board issues currency to the Reserve Banks. The Reserve Banks distribute currency and coin; process Fedwire, automated clearinghouse, and securities transfers; and collect checks. In addition, the Reserve Banks serve as the fiscal agents of the United States and provide a variety of financial services for the Treasury, other government agencies, and other fiscal principals. For a fuller discussion of the Federal Reserve's responsibilities, see The Federal Reserve System: Purposes & Functions.
Summary of 2009 Income and Expenditures
In carrying out its responsibilities in 2009, the Federal Reserve System incurred $2.9 billion in net expenses. Total spending of $4.0 billion was offset by $1.1 billion in revenue from priced services, claims for reimbursement, and other income. Total 2009 expenses were $43.0 million, or 1.1 percent, less than the amount budgeted for 2009 (table I.1).
Total Reserve Bank income in 2009 was $54.5 billion. The major sources of income were interest earnings from the portfolio of U.S. government securities ($24.9 billion) and federal agency mortgage-backed securities ($20.4 billion) in the System Open Market Account. Earnings in excess of expenses, dividends, and surplus are transferred to the U.S. Treasury--in 2009, a total of $47.4 billion.1 (These net earnings are treated as receipts in the U.S. budget accounting system when received and as anticipated earnings projected by the Office of Management and Budget in the U.S. budget.)
Budgeted | Actual | Variance | ||
---|---|---|---|---|
Amount | Percent | |||
Reserve Banks | 3,086.2 | 3,142.5 | 56.4 | 1.8 |
Board | 366.7 | 396.8 | 30.1 | 8.2 |
Currency | 631.5 | 502.1 | -129.4 | -20.5 |
Total System expenses | 4,084.4 | 4,041.4 | -43.0 | -1.1 |
NOTE: Components may not sum to totals and may not yield percentages shown because of rounding.
Operational Areas
In 2009, the Federal Reserve System accounted for costs using the following categories: monetary and economic policy, supervision and regulation of financial institutions, services to financial institutions and the public, services to the U.S. Treasury and other government agencies, and System policy direction and oversight.
Monetary and Economic Policy
The monetary and economic policy operational area encompasses Federal Reserve actions to influence the availability and cost of money and credit in the pursuit of the nation's objectives of maximum employment, stable prices, and moderate long-term interest rates. In 2009, very difficult economic and financial conditions continued to pose unusual challenges for the conduct of monetary policy. To help Federal Reserve policymakers address these challenges, four of the regularly scheduled meetings of the Federal Open Market Committee (FOMC) that were held in 2009 were expanded so that all eight scheduled meetings lasted two days, and the FOMC held three additional meetings by conference call.To help stabilize financial markets and support the economy, the Board and the FOMC continued to operate a number of unusual credit and liquidity facilities in 2009. These facilities included the Term Auction Facility, liquidity swap arrangements with foreign central banks, the Primary Dealer Credit Facility, the Term Securities Lending Facility, the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Money Market Investor Funding Facility, the Commercial Paper Funding Facility, and the Term Asset-Backed Securities Loan Facility.
To promote economic recovery, the FOMC maintained a target range for the federal funds rate at the extraordinarily low level of 0 to 1/4 percent throughout the year. With the federal funds rate virtually at its lowest possible level, the FOMC engaged in large-scale purchases of Treasury securities, federal agency debt, and agency mortgage-backed securities in order to improve market functioning and provide additional stimulus to the economy. The various facilities and programs put in place by the Board and the FOMC resulted in a sizable expansion of the Federal Reserve’s balance sheet and the supply of bank reserves in 2009. The management and operations of these facilities and programs required substantial resources both at the Board and at the Federal Reserve Banks. Over 2009, the System worked to enhance the efficiency of the asset purchase programs. Initially, purchases of mortgage-backed securities (MBS) were conducted through four investment managers. The System moved to a single investment manager in late 2009, and staff at the the Trading Desk at the Federal Reserve Bank of New York assumed the investment management function for MBS near the completion of the purchase program in March 2010. To increase transparency regarding the credit and liquidity facilities and asset purchase programs, the Federal Reserve developed a public website with detailed information on all its programs and also implemented a monthly report to the Congress that provides regular updates on all the programs and quarterly updates of the Federal Reserve's financial statements.
As financial market conditions improved beginning in spring 2009 and continuing into 2010, the Federal Reserve gradually scaled back most forms of unusual liquidity provision. By April 2010, nearly all of the special liquidity facilities had been closed. The gradual reduction in liquidity facilities tended to shrink the size of the Federal Reserve's balance sheet, but that tendency was offset by the large-scale asset purchases and the associated increase in banking system reserves. Although the FOMC continued to anticipate that economic conditions were likely to warrant exceptionally low levels of the federal funds rate for an extended period, the Board and the FOMC carefully developed tools, including reverse repurchase agreements and term deposits, that the Federal Reserve will be able to use to reduce the supply of reserve deposits when it eventually becomes appropriate to begin withdrawing exceptional monetary policy accommodation. Initial tests of reverse repurchase agreement capabilities were conducted in late 2009, and planning for further tests of these transactions with an expanded set of counterparties is under way.
The Board and the FOMC base their monetary policy decisions on high-quality research and thorough analysis of economic and financial data. A vast amount of banking and financial data flows through the Reserve Banks to the Board, where the data are compiled and made available to the public. The research staffs at the Board and at the Banks use the data, along with information collected by other public and private institutions, to assess the state of the economy and the relationships between the financial markets and economic activity. Staff members provide background information to the Board of Governors and the FOMC by preparing detailed economic and financial analyses and projections for the domestic economy and international markets. The Board and the FOMC use these analyses and projections in setting reserve requirements, setting the discount rate (which affects the cost of borrowing), and conducting open market operations. Staff members also conduct longer-run economic studies on regional, national, and international issues.
Supervision and Regulation of Financial Institutions
The Federal Reserve plays a major role in the supervision and regulation of banks and bank holding companies. The Board of Governors adopts regulations to carry out statutory directives, and establishes System supervisory and regulatory policies. The Reserve Banks conduct on-site examinations and inspections of state member banks and bank holding companies; review applications for mergers, acquisitions, and changes in control from banks and bank holding companies; and take formal supervisory actions. In 2009, the Federal Reserve conducted 655 examinations of state member banks (some of them jointly with state agencies), 640 examinations of large bank holding companies, and 3,109 inspections of small, noncomplex bank holding companies; it acted on 633 proposals, representing 2,143 individual applications involving bank holding company formations and acquisitions, bank mergers, and other transactions.The Board also enforces compliance by state member banks and certain foreign banking organizations with federal laws protecting consumers who use credit and deposit accounts. During the reporting period from July 1, 2008, to June 30, 2009, the System conducted 282 consumer compliance examinations of its 782 state member banks and one foreign banking organization.2 During this period, the System also conducted 229 examinations of banks for their compliance with the Community Reinvestment Act.
The Board's supervisory responsibilities also extend to the foreign operations of U.S. banks and, under the International Banking Act, to the U.S. operations of foreign banks. Beyond these activities, the Federal Reserve System maintains continuous oversight of the banking industry to ensure the overall safety and soundness of the financial system. This broader responsibility is reflected in the System's presence in financial markets, through open market operations, and in its role as lender of last resort.
Services to Financial Institutions and the Public
The Federal Reserve System plays a central role in the nation's payment systems by ensuring that enough currency and coin are in circulation to meet the public's demand. The Federal Reserve Board orders new currency from the Bureau of Engraving and Printing, and the Reserve Banks order new coin from the U.S. Mint. The Federal Reserve Board pays for the printing and transportation of currency. The Federal Reserve Board issues currency to the Reserve Banks, and the Reserve Banks distribute currency and coin through depository institutions to meet public demand. The Reserve Banks also receive deposits of currency and coin from depository institutions; identify suspect counterfeit currency, which they forward to the U.S. Secret Service; and destroy currency that is unfit for circulation. In 2009, the Reserve Banks distributed approximately $664.4 billion in currency and $6.4 billion in coin to depository institutions. The Reserve Banks also received approximately $629.9 billion in currency and $6.3 billion in coin from depository institutions, and they destroyed $92.7 billion in unfit currency. In 2009, the cost of printing and transporting currency was $502.1 million.The Reserve Banks also play a central role in the nation's payment systems by collecting checks and providing a variety of electronic services for depository institutions. In 2009, the Banks collected approximately 8.6 billion commercial checks, with a total value of about $13.8 trillion. The Banks' automated clearinghouse (ACH) service allows depository institutions to send or receive credit transfers, such as direct payroll payments and corporate payments to vendors, and debit payment transactions authorized by consumers, such as payments of insurance premiums, mortgages, loans, and other bills from their accounts. In 2009, the Reserve Banks processed approximately 11.2 billion ACH transactions, valued at about $19.7 trillion. Approximately 11 percent of the transactions were for the federal government; the rest were for commercial establishments.
The Reserve Banks' Fedwire Funds Service allows participants to use their accounts at the Reserve Banks to transfer funds to other participants. In 2009, the Reserve Banks processed approximately 125 million Fedwire funds transfers, valued at approximately $631 trillion.
The Reserve Banks' National Settlement Service allows participants in private clearing arrangements to settle transactions through their Federal Reserve accounts. In 2009, approximately 41 local and national private arrangements, primarily check clearinghouse associations, used the National Settlement Service. The Reserve Banks processed more than 463,000 settlement entries for these arrangements, with a debit value of more than $16.5 trillion in 2009.
The Reserve Banks' Fedwire Securities Service provides securities services to participants, including the settlement of book-entry transfers of securities issued by the U.S. Treasury, federal government agencies, government-sponsored enterprises, and certain international organizations. In 2009, participants originated approximately 22 million transfers, valued at more than $301 trillion.
Services to the U.S. Treasury and Other Government Agencies
As fiscal agents and depositories for the federal government, the Federal Reserve Banks auction Treasury securities, process electronic and check payments for Treasury, collect funds owed to the federal government, maintain Treasury's bank account, and invest Treasury balances. The Reserve Banks also provide certain fiscal agency and depository services to other entities; these services are primarily related to book-entry securities. Treasury and other entities fully reimbursed the Reserve Banks for the costs of providing fiscal agency and depository services. In 2009, reimbursable expenses amounted to $450.3 million.The Reserve Banks auction, issue, maintain, and redeem securities, as well as operate the automated systems supporting paper U.S. savings bonds and book-entry marketable Treasury securities. In 2009, the Reserve Banks conducted 283 Treasury securities auctions and processed nearly 10 million Treasury securities transfers. The Reserve Banks also printed and mailed more than 20 million savings bonds. The Reserve Banks continued to support Treasury's efforts to improve the quality and efficiency of its securities services.
The Reserve Banks collect and disburse funds on behalf of the federal government. In 2009, the Reserve Banks processed 1.2 billion government ACH payments and 202.2 million Treasury check payments. The Reserve Banks continued to support Treasury's ongoing effort to convert paper checks to electronic payments through the Go Direct initiative. In 2009, more than 692,000 check payments were converted to direct deposit through this program. The Reserve Banks also operate Pay.gov, a Treasury program that allows the public to use the Internet to authorize and initiate payments to federal agencies. In 2009, Pay.gov processed transactions worth $64.9 billion.
The Reserve Banks provide cash-management services to the Treasury and maintain the Treasury's operating cash account. In 2009, the Reserve Banks continued to support Treasury's effort to modernize its financial management processes, with a focus on centralized government accounting and reporting. The Reserve Banks also managed several new and ongoing software development efforts in support of Treasury's objectives.
When permitted by federal statute or when required by the Secretary of the Treasury, the Reserve Banks provide fiscal agency and depository services to other domestic and international entities. Book-entry securities issuance and maintenance activities account for a significant amount of the work performed for these entities.
System Policy Direction and Oversight
This operational area encompasses activities by the Board of Governors in supervising Board and Reserve Bank programs. At the Reserve Bank level, the expenses for these activities are considered support and are therefore allocated across the other operational areas.Footnotes
- For more detailed information on the income and the distribution of income, refer to the Federal Reserve Banks Combined Financial Statements for 2009. Return to text
- The foreign banking organizations examined by the Federal Reserve are organizations that operate under section 25 or 25A of the Federal Reserve Act (Edge Act and agreement corporations) and state-chartered commercial lending companies owned or controlled by foreign banks. These institutions are typically not subject to the Community Reinvestment Act, and they typically engage in relatively few activities covered by consumer protection laws. Return to text