The Board of Governors of the Federal Reserve (the Board) is one component of the nation's central bank. See appendix 1 for a complete description of the Federal Reserve System.

Mission

The mission of the Board is to foster the stability, integrity, and efficiency of the nation's monetary, financial, and payment systems to promote optimal macroeconomic performance.

Values

The following values of the Board guide its organizational decisions and its employees' actions.

• Public interest. In its actions and policies, the Federal Reserve seeks to promote the public interest. It is accountable and responsive to the general public, the U. S. government, and the financial community.
  
  
• Integrity. The Federal Reserve adheres to the highest standards of integrity in its dealings with the public, the financial community, and its employees.
  
  
• Excellence. The conduct of monetary policy, responsibility for bank supervision, and maintenance of the payment system demand high-quality analysis, high- performance standards, and a secure, robust infrastructure. The pursuit of excellence drives recruitment, selection, and retention policies for Federal Reserve employees.
  
  
• Efficiency and effectiveness. In carrying out its functions, the Federal Reserve System is continually aware that its operations are supported primarily by public funds, and it recognizes its obligation to manage resources efficiently and effectively.
  
  
• Independence of views. The Federal Reserve values the regional nature of the System as well as the diversity of its employees; input from a variety of sources; and the independent professional judgment that is fostered by the System's highly valued regional structure. It relies on strong teamwork to mold independent viewpoints into coherent, effective policies.
  

Goals

The Federal Reserve Board has five primary goals with interrelated and mutually reinforcing elements:

1. Conduct monetary policy that promotes the achievement of maximum sustainable long-term growth and the price stability that fosters that goal.
   
   
2. Promote a safe, sound, competitive, and accessible banking system and stable financial markets.
   
   
3. Enforce the consumer financial services laws fully and fairly, protect and promote the rights of consumers under these laws, and encourage banks to meet the credit needs of consumers, including those in low- and moderate-income neighborhoods.
   
   
4. Foster the integrity, efficiency, and accessibility of U.S. payment and settlement systems.
   
   
5. Provide high-quality professional oversight of Reserve Banks.
   

Achievement of Goals and Objectives

The Board employs a comprehensive planning, budget formulation, and budget execution process to ensure the identification, prioritization, and accomplishment of goals and objectives. Planning is coordinated throughout the System by the Strategic Framework (discussed below). Monetary policy work is coordinated through the structure of the Federal Open Market Committee. Supervision and regulation policy is coordinated by the Strategic Plan Steering Committee. The budget and accounting systems are closely linked to ensure that expenses can be compared with plans. This process integrates strategic planning, allocation of resources among competing priorities, performance measurement, and ongoing review of the need for existing programs.

Background

In the face of accelerating change in the economy and banking system brought about by numerous factors--including globalization, technology, bank consolidation, and the evolution of payment systems--the Federal Reserve recognized the need for a more comprehensive planning framework. In 1995, a System Strategic Planning Coordinating Group was appointed, consisting of Board members, Reserve Bank presidents, and senior managers, representing the full range of the Federal Reserve's activities. This group produced an ";umbrella"; strategic framework under which the Board, the Reserve Banks, and the product offices produce their own more detailed plans and decision documents. This framework was the basis for the Board's first Government Performance and Results Act (GPRA) Planning Document, setting forth the mission, values, and goals of the System. The framework has remained essentially unchanged and is incorporated in this plan. Key assumptions and external and internal factors that could affect the achievement of those goals and objectives were reviewed and updated in 2003 as part of the biennial planning process and are discussed in the following section.

The Board's strategic planning effort recognizes key differences between government and private-sector strategic planning and results measurement. Private planning can use measures of costs and revenue derived from prices determined in competitive markets; the results of that planning are reflected in the ability of the private entity to prosper over time. The government does not have direct competition in certain areas and has a monopoly in others (monetary policy, for example), and establishing a proxy for costs and prices is extraordinarily difficult. Moreover, the results are judged relative to public policy objectives embodied in law, which often are not readily measurable. Nonetheless, the government should try to effectively accomplish its mission while creating the efficiencies that come from strategic planning, recognizing that analogies are just that. Thus, the Board's central planning objective is oriented toward achieving effectiveness and efficiency specific to the functions it serves.

In monetary policy, for example, the Federal Reserve exerts only partial and indirect influence on the economy. Because the Federal Reserve's performance therefore cannot be measured solely in terms of economic outcomes, the appropriate judgment must be whether our research technology is successful in anticipating problems and changes in the economy. In the bank supervision function, the mission of contributing to a viable, competitive, efficient banking system demands a sharing of risks between the central bank and private banks, which serve the crucial function of managing the risk of investing in illiquid loans. As a regulator, our job is to ensure that banks are allowed to take on appropriate degrees of risk in fulfilling their function in the economy, but not to the point that they impose risks to the financial system in general. Measures of our success would include whether the banking system is performing its functions and whether systemic risk is appropriately contained during periods of challenge to individual institutions or groups of institutions.

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Planning Considerations

Strategic Planning and the Budgeting Process

To enhance the focus on strategic priorities, in 1997 the Board restructured its budget and planning process to lengthen the planning and budgeting horizons and involve the Board more heavily in setting priorities. The Board adopted a four-year planning horizon and a two-year budget.

In developing plans and budgets under the strategic framework, the director of each Board division updates divisionwide plans, coordinating efforts with other directors and Reserve Banks as necessary. These plans and resulting resource requests are reviewed by the Committee on Board Affairs to make recommendations to the full Board. A Staff Planning Group and the Board's Program Analysis and Budget Section provide support to the committee during the planning process by identifying issues and providing analysis of the Board's budget options.

Planning Background

In 2003, working with the management of each division, the Staff Planning Group identified several ongoing factors that are reflected in this strategic plan:

1. Changes in Federal Reserve System structures (Financial Services and Federal Reserve Information Technology) require our attention in terms of oversight and governance issues, although direct effect on the current Board budget is minimal.
   
   
2. The need to sharpen our management model to
   • identify potential noncore activities,
   • streamline reporting channels,
   • develop improved performance metrics for each division and major Board function, and
   • provide comparative Boardwide management data to senior staff.
     
     
3. Continuing advances in automation and telecommunication technologies that will
   • reduce reaction time available to address systemic issues;
   • further change the complexity of financial products;
   • require and make possible enhanced systems for identifying, measuring, and pricing risk;
   • improve capabilities to gather, analyze, and share data;
   • require increased standardization of System supervision and regulation automation tools and databases and improved coordination of plans, strategies, actions, and information sharing with other domestic and foreign regulators; and
   • provide significant opportunities to improve communication with the public.
     
     
4. The need to monitor and manage risk associated with increasing security costs and "regulatory burden."
   
   
5. The need for actions and policies that attract and maintain a highly motivated, properly trained, and fairly compensated professional workforce.
   
   
6. The need for contingency plans related to disaster recovery and the safety of personnel and information because of continued security threats.
   
   
7. The current state of the U.S. and foreign economies and the need to manage diverse views on the effect of the federal deficit on Board operations and expenses.
   

Overarching Issues

In consultation with senior managers throughout the Board, six overarching issues affecting planning were identified.

1. Human Resources and Board Organization

   In the next few years, there may be major turnover in the senior management ranks of the Board. Numerous midlevel managers will also be eligible to retire. Continued emphasis on management succession planning is essential.
   
   Maintaining the quality of staff needed to manage the increasingly complex and technical work of the Board will be a challenge. Establishing appropriate salaries and retention incentives in highly competitive and specialized fields will be required. In addition to salary, other incentives, including improved benefits and workplace flexibility such as alternative work schedules and job-sharing have been helpful in attracting and retaining staff with critical skills. Improved training and development programs are being piloted with much success.

   As the type of work conducted by the Board changes, the skill sets of some employees will need to adapt. Opportunities to retrain existing staff for new work should be considered when appropriate. Technical positions in divisions throughout the Board are susceptible to this problem.

2. Financial Modernization and Reform

   The banking industry's trend toward concentration and the increased complexity of some banking organizations highlight the growing importance of sound risk management, internal controls, and market discipline. Specifically, risk measurement systems must be sufficiently robust to accurately measure banking risks, particularly as the degree of complexity increases. This fact has resulted in a challenge to bank supervisors to stay abreast of the evolution in bank risks and risk measurement, to encourage better risk management practices, and to develop techniques and methodologies to validate the effectiveness and accuracy of banks' risk measurement and management systems.

   Proposals by the Basel Committee on Banking Supervision to revise the Basel Capital Accord are designed to encourage more robust risk-measurement techniques, bring regulatory capital more in line with banks' internal risk-measurement systems, and give banks greater incentives to create enhanced risk-management systems.

   Basel II represents a shift in supervisory approach through greater reliance on internal risk measurement systems and market discipline. During the deployment and initial implementation of the Revised Capital Accords, banks and supervisors are expected to adapt and develop necessary systems and processes to conform with the new Accord. The largest and most complex U.S. banking organizations will be required to adopt Basel II. Implementing enhanced methods for measuring risk could have a profound effect on resources in the banking industry and in supervision.

   With the passage of the Gramm-Leach-Bliley Act (GLBA) in 1999, the financial services industry's already pronounced trend toward consolidation and business line convergence was given the legal framework to continue and expand. The GLBA expanded banking organizations' activities, allowed cross-industry affiliations in the financial services business, gave regulators the ability to modify permissible activities without new legislation, and put in place a prudential framework using financial holding companies, thus separating the safety net from new risk-taking. Cross-functional integration between businesses and skill sets and involvement in a broader array of activities has contributed to increased complexity in the banking industry that is concentrated in a smaller number of institutions. As new products are developed, issues surrounding ways that the financial institutions manage risk will include whether the institutions are taking account of consumer interests and complying with existing laws. Potential implications of the industry's trend toward concentration and complexity include the following:

• Increased concentration results in a greater potential for systemic risk consequences.
  
  
• The integration of investment banks into financial holding companies has resulted in heightened concerns about corporate governance, compliance issues, conflicts of interest, and increased reputation risks. The need for enhanced coordination of supervisory activities between various functional regulators and foreign supervisors will continue to intensify.
  
  
• Continued globalization results in the need for more international communication and coordination. The most sophisticated international operations take place in numerous locations, resulting in the need for multilateral coordination with respect to many large international organizations.
  
  
• Increased complexity and competition for market share will require increased vigilance to ensure that consumers' interests, including privacy, continue to be protected.
  


3. Assistance and Support to Foreign Governments, Central Banks, and International Organizations

   The Board is often asked to assist foreign governments and central banks to improve their central bank functions, including banking supervision, monetary policy and research, and the payment system. These efforts are frequently performed under the auspices of the International Monetary Fund, the World Bank, the Agency for International Development, the State Department, the U.S. Department of the Treasury, and other organizations. Funding for this technical assistance and training and the allocation of staff resources compete with other priorities, causing difficulties for some Board divisions. To continue providing appropriate and quality assistance, coordination and decisionmaking regarding overseas programs will remain an important priority.
   
   

4. Technology

   Just as technological advances, especially in computers and telecommunications, have changed the nature of the U.S. economy, they are playing a critical role at the Board. The Board will continue to make changes to its technology infrastructure to enable it to meet business needs and to manage costs. The Board will also be challenged to balance the pace of technological innovation with prudent risk management and to measure the costs and benefits of our technological investments.
   
   The volume of data gathered, stored, and analyzed has been growing in recent years. Improved access to data and the complexity of issues facing the Board are combining to increase demand for analysis and forecasts. Managing the Board's data and records in a timely and efficient manner will require increased investment in technology.

   This increased investment will also be used to improve technical cooperation and coordination with other financial regulators, government agencies, and depository institutions.
   
   

5. Communications

   The Board traditionally has taken a conservative approach to public affairs activities. This has changed recently with the growing perception that more can be done to explain the role of the System and the value that the public receives from our efforts. The Internet offers an opportunity to provide services and information to the public at a reduced cost. The focus on using the Internet as a primary channel to make information available to the public in a timely fashion should continue.
   
   

6. Facilities

   Maintaining adequate and secure facilities will be a challenge during the planning period. Increasing the number and quality of security staff, security improvements, and other actions needed to ensure employee safety at all of the Board's facilities will continue to require management attention.

   Working with the Board's Information Technology Contingency Officer, the Continuity of Operations Program (COOP) will manage and operate the Board's emergency operating facilities and relocation sites. Efforts to ensure the security and continuity of operations, including options for relocation; responses to potential chemical, biological, and radiological events; emergency responses and contingency testing practices; and additional surveillance and counterintelligence programs will be high-priority issues for the COOP staff during the next budget performance period.
   

Goal

Conduct monetary policy that promotes the achievement of maximum sustainable long-term growth and the price stability that fosters that goal.

This goal will be attained through the following five objectives.

1. Stay abreast of recent developments and prospects in the U.S. economy and financial markets, and in those abroad, so that monetary policy decisions will be well informed.
   
   
2. Enhance our knowledge of the structural and behavioral relationships in the macroeconomic and financial markets, and improve the quality of the data used to gauge economic performance, through developmental research activities.
   
   
3. Implement monetary policy effectively in rapidly changing economic circumstances and in an evolving financial market structure.
   
   
4. Contribute to the development of U.S. international policies and procedures, in cooperation with the U.S. Department of the Treasury and other agencies.
   
   
5. Promote understanding of Federal Reserve policy among other government policy officials and the general public.

Objective 1

Stay abreast of recent developments and prospects in the U.S. economy and financial markets, and in those abroad, so that monetary policy decisions will be well informed.

This objective will be pursued in part through the following actions:

• Staff will provide periodic briefings and written reports to policymakers, analyzing incoming economic data. Staff will also prepare ad hoc analyses, as needed, to address special questions.
  
  
• Staff will regularly provide formal, quantitative forecasts for use by policymakers.
  
  
• Policymakers and staff will utilize extensive contacts in the private sector to obtain timely information about tendencies in the economy and in financial markets. The Beige Book, summaries prepared by Reserve Bank staff, will be one source of such information.
  
  
• Policymakers and staff will maintain close contacts with officials in international organizations and at foreign official institutions to remain current on economic developments and policies abroad.

Objective 2

Enhance our knowledge of the structural and behavioral relationships in the macroeconomic and financial markets, and improve the quality of the data used to gauge economic performance, through developmental research activities.

This objective will be pursued in part through the following action:

• Staff will undertake research into the broad range of topics relevant to the conduct of monetary policy. In the period ahead, this research will focus especially on the consequences for the behavior of the economy of low rates of inflation, advancing technology, financial market innovation and deregulation, and globalization.

Objective 3

Implement monetary policy effectively in rapidly changing economic circumstances and in an evolving financial market structure.

This objective will be pursued in part through the following action:

• The Federal Open Market Committee will seek, through the operations of the Trading Desk at the Federal Reserve Bank of New York, to effect changes in money market conditions consistent with the longer-term objectives of policy.

Objective 4

Contribute to the development of U.S. international policies and procedures, in cooperation with the U.S. Department of the Treasury and other agencies.

This objective will be pursued in part through the following actions:

• The Board will seek to reduce risks to the U.S. economy and financial system from external shocks and to improve stability in domestic and international financial markets.
  
  
• The Board will provide leadership in the evolution of international institutions and arrangements in response to the changing shape of the world economy.
  
  
• Staff research will contribute to international efforts to understand the origins and consequences of, and develop effective responses to, international economic and financial disruptions.

Objective 5

Promote understanding of Federal Reserve policy among other government policy officials and the general public.

This objective will be pursued in part through the following actions:

• Twice a year, the Board will report formally to the Congress on its monetary policy plans. The Board will also seek to improve public understanding of economic developments and policy through congressional testimony, speeches, and other means.
  
  
• The Board will publish data on monetary and financial market developments and on industrial production and capacity utilization to inform the public about the environment in which the Federal Reserve is operating.
  

External Factors

• Independence. The Federal Reserve's independence within the government, a key element of which is its lack of dependence on the appropriations process, is critical in terms of its ability to formulate and implement monetary policy. Preserving this independence will be crucial to the proper discharge of its central banking responsibilities in the future. Important to this independence is responsible management of the resources used. Along these lines, the Board will continue to operate under both internal and external pressures for budget restraint, even as it performs its current and any expanded future responsibilities.
  
  
• Data access. The nation's financial system is growing more complex at an accelerating pace. The quantity of data, much of which is available over the Internet, is also growing. Investments in automation and security to enhance timely access to data will be critical during the planning period. Continued investment in efforts to maintain the quality of data will be required given innovations in financial markets and growth of activity outside of regulated sectors where data are provided on a consistent basis. Experiments utilizing data purchased from credit bureaus to analyze issues related to consumer and mortgage debt growth, debt service, delinquency, and bankruptcy will continue.
  
  
• Economic and financial globalization. Individual economies are becoming more open and links among the world's financial markets are becoming closer. These forces heighten the potential for economic shocks and systemic problems to move across national borders, in some circumstances, with great speed. As a result, there will be pressure for greater international consistency of policies, regulations, guidelines, and supervisory procedures.
  

Legislative Changes

Authorization by the Congress to pay interest on reserve balances and explicit interest on contractual clearing balances would help ensure that the level of such balances remains adequate, thereby promoting the continued smooth implementation of monetary policy. Also, coupled with legislation to permit increased flexibility in setting required reserve ratios, interest on reserves and clearing balances might permit reductions in reserve requirements and, possibly, their eventual elimination. These measures would help to increase efficiency in the financial system by largely removing the incentives for depository institutions to expend resources to avoid reserve requirements.

Performance Measures

The performance of monetary policy in relation to evolving economic and financial circumstances will continue to be reviewed by the Congress in the context of the Board's semiannual monetary policy report and the accompanying testimony. The Congress has not chosen to establish quantitative objectives for monetary policy in statute. Moreover, it is recognized that monetary policy has only a partial and indirect influence on economic performance.

Supervision and Regulation Function

Goals

Promote a safe, sound, competitive, and accessible banking system and stable financial markets.

Enforce the consumer financial services laws fully and fairly, protect and promote the rights of consumers under these laws, and encourage banks to meet the credit needs of consumers, including those in low- and moderate-income neighborhoods.

The safety and soundness goal will be attained through the following four objectives.


1. Promote overall financial stability, manage and contain systemic risk, and ensure that emerging financial problems are identified early and successfully resolved before they become crises.
   
   
2. Provide a safe, sound, competitive, and accessible banking system through comprehensive and effective supervision of U.S. banks, bank and financial holding companies, foreign banking organizations, and related entities.
   
   
3. Enhance efficiency and effectiveness, while remaining sensitive to the burden on supervised institutions, by addressing the supervision function's procedures, technology, resource allocation, and staffing issues.
   
   
4. Promote adherence by domestic and foreign banking organizations supervised by the Federal Reserve with applicable laws, rules, regulations, policies, and guidelines through a comprehensive and effective supervision program.
   
   
The community affairs goal will be attained through the following four objectives.


5. Maintain a strong consumer compliance supervision and complaint investigation program that protects consumers and reflects the rapidly changing financial services industry.
   
   
6. Implement statutes designed to inform and protect consumers that reflect congressional intent, while achieving the proper balance between consumer protection and industry costs.
   
   
7. Promote equal access to banking services.
   
   
8. Promote community development in historically underserved areas.
   

Objective 1

Promote overall financial stability, manage and contain systemic risk, and ensure that emerging financial problems are identified early and successfully resolved before they become crises.

This objective will be pursued in part through the following action:

• Maintain ability and capacity as a bank supervisor and a central bank to ensure that emerging financial threats can be identified early and successfully resolved
  

Discussion

Recognizing that capital requirements cannot substitute for effective risk management and internal controls in financial institutions, the Federal Reserve, along with other international and domestic supervisors, has placed increasing emphasis on risk-management practices. This focus has resulted in a series of instructions, policy statements, and examination manuals that stress the importance of managing all risks inherent in the business of banking, including market and credit risks, and liquidity, legal, international, and operational risks.

At the core of this focus are four basic elements of sound risk management: (1) active oversight roles by bank boards of directors and senior management; (2) adequate policies, limits, and procedures; (3) adequate risk measurement, monitoring, and management information systems; and (4) adequate internal controls and audits. Internal controls are receiving increased attention because breakdowns or absences of controls have been a contributing factor for many of the recent financial problems encountered by large financial institutions.

In recent years, sound practice guidance for examiners and financial institutions has covered trading activities, nontrading securities and derivative end-user activities, interest rate risk, private banking, and secondary market credit activities, among others. The dissemination of this guidance has clarified our expectations for the institutions we supervise, improved the quality of examinations in these areas, and led to improved practices by many institutions.

Objective 2

Provide a safe, sound, competitive, and accessible banking system through comprehensive and effective supervision of U.S. banks, bank and financial holding companies, foreign banking organizations, and related entities.

This objective will be pursued in part through the following actions:

• Focus supervisory efforts and resources on areas of highest risk to individual organizations and the financial system as a whole, and develop effective regulations to promote a safe and sound banking environment.
  
  
• Encourage banking organizations to develop sound risk-management practices, including strong internal controls, active boards of directors, and senior management oversight and accountability.
  
  
• Promote sound banking and effective supervisory practices among developed and emerging countries through ongoing coordination with international supervisory bodies and through training programs for international supervisors and bankers.
  

Discussion

As described in the Federal Reserve Act, a fundamental responsibility of the central bank is to establish more effective supervision of banking in the United States. Supervisors undertake many preventative measures during stable periods of economic expansion to ensure the safety and soundness of the banking system. However, to measure the effectiveness of past and current supervisory practices, the performance and stability of the banking system should be evaluated over a full economic cycle that reveals the soundness and resiliency of the banking system under stressful conditions.

One of the Federal Reserve's key strategies for maintaining effective supervision under both favorable and unfavorable banking conditions has been to focus supervision on areas of highest risk to individual organizations and the financial system as a whole. The risk-focused approach emphasizes pre-examination planning and prioritizes examination resources based on an organization's risk profile. This approach also places greater emphasis on evaluating the integrity of an institution's ongoing system for managing risk, rather than point-in-time transaction testing. The process promotes sound practices for managing risk at banking organizations by checking for strong internal controls, active boards of directors, and senior management oversight and accountability. Focusing resources on the areas of highest risk as well as testing an appropriate level of transactions to verify critical controls and processes makes this approach more effective and less burdensome, while accomplishing the secondary goal of using our scarce resources as efficiently as possible. In addition, pre-examination planning is made more comprehensive by integrating information from various functions of the Federal Reserve. The risk-focused approach has been coordinated with other banking regulators. Coordination is also being effected with other regulators to ensure that the Federal Reserve properly fulfills its role as an umbrella supervisor of bank holding companies.

This objective requires that the supervision staff understand and accommodate the effects of financial innovation and technology on the operations and risk profile of banking organizations and the payment system. Supervision staff must also ensure that supervisory programs accommodate prudent advances that benefit consumers and businesses or improve risk management. New technologies and financial innovation have changed the nature of banking products and services and opened advanced electronic delivery mechanisms that raise many important issues for supervisors. Devising appropriate supervisory responses in terms of sound practice guidance, interpretations, or new rulemakings to safeguard banks and payment systems has become more challenging. Regulators must ensure that supervisory responses provide a balance between allowing prudent risk taking by banking organizations and safeguarding against excessive practices or deteriorating credit conditions.

As part of this objective, the System must help improve international banking by refining and strengthening supervisory policies and practices and foreign banking organization (FBO) programs. The Federal Reserve continues to work with other supervisors through the Basel Supervisors Committee to promote standards and core principles for consolidated supervision. To this end the System will continue to provide education, training, and other resources to international supervisors who play a significant role in the U.S. or global economies.

Objective 3

Enhance efficiency and effectiveness, while remaining sensitive to the burden on supervised institutions, by addressing the supervision function's procedures, technology, resource allocation, and staffing issues.

This objective will be pursued in part through the following actions:

• Heighten the positive effect of market discipline on banking organizations by encouraging improved disclosures, accounting standards, risk measurement, and overall market transparency.
  
  
• Harness technology in carrying out responsibilities to improve supervisory efficiency and to reduce burden on banking organizations.
  
  
• Maintain an understanding of the effect of financial innovation and technology on the operations and risk profile of banking organizations and the payment system; ensure that supervisory programs accommodate prudent advances that benefit consumers and businesses or improve risk management.
  
  
• Refine or eliminate unnecessary or ineffective policies, procedures, regulations, or restrictions, and ensure that reforms are effectively implemented, consistent with safety and soundness of banking organizations.
  

Discussion

The Federal Reserve will conduct seamless supervision of state member banks, financial and bank holding companies, and FBOs through ongoing and improved coordination with state, federal, and foreign bank supervisors and appropriate state and federal functional supervisors. Planning for all aspects of supervising institutions is coordinated with the appropriate state bank supervisors, functional regulators, and the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency as necessary. Such efforts ensure that state banking organizations with operations that cross state boundaries, thereby involving multiple regulators, are not disadvantaged when compared with nationally chartered banks.

Efforts to remove unnecessary banking restrictions consistent with safety, soundness, and consumer protection will continue. Procedures or regulations that initially serve an important safety and soundness or consumer safeguard purpose may become outdated. The rate of obsolescence has increased in recent years as the industry has reacted to rapid changes in the financial marketplace and as recent financial modernization legislation has passed.

It is critical that the System harness the benefits of technology when carrying out responsibilities to improve supervisory efficiency and effectiveness. Technological advances in developing and maintaining databases, in processing information, and in telecommunication have brought continued improvements to the process of bank supervision. By developing a comprehensive, common approach for developing and utilizing information systems and automated examination tools, the System can lower supervisory costs, improve consistency, and reduce the burden on banking organizations. To help accomplish this work we will continue to develop and improve the National Information Center as a central source of regulatory data. Investments to improve the access and ease of use of database-driven tools, such as the National Examination Data System and the Banking Organization National Desktop, will continue and access will be provided to other federal and state regulators.

Changes in the financial services industry and the implementation of the Gramm-Leach-Bliley Act will continue to require changes in the System's organizational structure so that it is sufficiently flexible to allocate well-trained resources in response to identified risk. An automated resource management tool has been implemented to facilitate better alignment of staff skills with job assignments, thereby promoting the best use of each Reserve Banks' resources at a national level. Finally, a set of qualitative performance measures or benchmarks that identify how efficiently resources are being allocated and employed throughout the System is being developed.

Objective 4

Promote adherence by domestic and foreign banking organizations supervised by the Federal Reserve with applicable laws, rules, regulations, policies, and guidelines through a comprehensive and effective supervision program.

This objective will be pursued in part through the following actions:

• Encourage the coordination of supervisory activities between various bank and functional regulators and foreign supervisors.
  
  
• Implement the bank holding company framework for incorporating consumer compliance risk into the overall risk profile for supervised institutions.
  
  
• Develop strategies to assess a supervised institution's overall adherence to applicable laws, rules, regulations, policies, and guidelines.
  
  
• Continue programs that promote understanding of supervision-related legislation.
  
  
• Ensure that supervision staff is appropriately trained to detect potential noncompliance with laws, regulations, and policies.
  

Discussion

Evolution in the banking industry has resulted in heightened concerns about regulatory issues, conflicts of interest, and increased reputational risks to financial institutions. The supervision and regulation function will work to promote greater understanding of and further supervised institutions' compliance with applicable banking laws, rules, regulations, policies, and guidelines. To ensure a comprehensive and effective supervision program, the Board will: encourage the coordination of supervisory activities between various bank and functional regulators and foreign supervisors; implement the bank holding company framework for incorporating compliance risk into the organization's overall risk profile; develop strategies to assess supervised institutions' overall adherence to applicable laws, rules, regulations, policies, and guidelines; continue programs that promote the understanding of supervision-related legislation within the System and in financial organizations; and ensure that supervision staff is appropriately trained to detect potential noncompliance with laws, regulations, and policies.

Objective 5

Maintain a strong consumer compliance supervision and complaint investigation program that protects consumers and reflects the rapidly changing financial services industry.

This objective will be pursued in part through the following action:

• Ensure that the consumer compliance supervision and consumer complaint investigation programs are of high quality and that they are consistent throughout the system.
  

Discussion

The Federal Reserve has the responsibility for enforcing a wide range of consumer protection laws and regulations governing financial transactions. Enforcement of these laws is handled primarily through regularly scheduled risk-focused consumer compliance examinations and through the System's investigation and resolution of consumer complaints against state member banks.

The Board continues to update the consumer compliance risk-focused supervision program to address industry changes. Outreach efforts focus on encouraging state member bank compliance with consumer protection laws and regulations. The Board is also reviewing the System's consumer complaint handling function and making changes to increase its efficiency and effectiveness.

Objective 6

Implement statutes designed to inform and protect consumers that reflect congressional intent, while achieving the proper balance between consumer protection and industry costs.

This objective will be pursued in part through the following actions:

• Review various consumer regulations for which the Board has rule-writing authority, including Regulation Z (Truth in Lending) and Regulation DD (Truth in Savings).
  
  
• Implement legislative revisions to the Fair Credit Reporting Act.
  

Discussion

The Board has rule-writing authority for implementing consumer financial services laws that apply to financial institutions, retailers, finance companies, and mortgage bankers, as well as other nonbank businesses. It is important to ensure that the regulations governing the provision of consumer financial products and services keep pace with the resulting increase in the complexity of the products and their pricing structures. Several Board regulations are targeted for reviews that will focus on simplifying and improving the information that consumers receive, consistent with the legislative purpose, without imposing unnecessary burden on the financial services industry.

Objective 7

Promote equal access to banking services.

This objective will be pursued in part through the following actions:

• Ensure fair access to financial services through vigorous enforcement of the Equal Credit Opportunity, Fair Housing, Community Reinvestment, and Home Mortgage Disclosure Acts; ensure the prudent drafting and interpretation of the regulations that implement these acts; and encourage state member bank involvement in community development activities.
  
  
• Investigate potential discrimination-related issues raised by compliance examinations or consumer complaints and refer these cases to the Department of Justice or the Department of Housing and Urban Development, as applicable.
  
  
• Review all Board-action banking applications that present fair lending issues, as well as those with adverse compliance ratings, adverse Community Reinvestment Act ratings, or applications subject to Community Reinvestment Act protests.
  

Discussion

The Board has rule-writing authority for drafting and interpreting the regulations implementing the Equal Credit Opportunity and Home Mortgage Disclosure Acts. The Board promotes equal access to credit through these rules as well as through the conduct of consumer compliance examinations, the investigation of consumer complaints alleging discrimination, and the outreach efforts designed to help the industry comply with fair lending laws and regulations.

The Federal Reserve also provides training and outreach programs as part of a wide range of activities designed to encourage financial institutions to lend in all segments of their community, including low- and moderate-income areas. Compliance with the Community Reinvestment Act (CRA) is assessed through examinations that focus on how well a financial institution meets community credit needs, (including the needs of low- and moderate-income areas), and through the review and analysis of adverse CRA or compliance-related issues noted during the processing of bank and bank holding company applications.

Objective 8

Promote community development in historically underserved areas.

This objective will be pursued in part through the following actions:

• Provide leadership through the community affairs program to further the understanding of financial service issues affecting low- and moderate-income persons and geographies.
  
  
• Conduct ongoing outreach and engage in educational and technical assistance targeting financial institutions, community organizations, government entities, and the public.
  
  
• Develop publications and products that highlight community reinvestment activities, feature successful community development programs, and highlight best practices.
  
  
• Participate in conferences, training sessions, and presentations that provide information and guidance on community investment and development opportunities.
  
  
• Use advisory services to provide technical information on community and economic development, including information on the investments by bank and bank holding company community development corporations, public private affordable housing development partnerships, small business lending, and financial education.

Discussion

Through its community affairs program, the Board promotes ongoing outreach and educational and technical assistance activities to help financial institutions, community-based organizations, government entities, and the public understand and address financial services issues affecting low- and moderate-income persons and geographies. This program encompasses a broad range of activities that:

• foster the active engagement of depository institutions in providing credit and other banking services to their entire communities, including traditionally underserved markets;
  
  
• encourage cooperation among community organizations, government agencies, financial institutions, and other community development practitioners to their mutual benefit;
  
  
• develop greater public awareness of the benefits and risks of financial services products and of the rights and responsibilities that derive from community investment and fair lending regulations; and
  
  
• promote a better understanding by policymakers, community leaders, and private-sector decisionmakers of the processes and resources that support successful community development programs and best practices of community development.
  

Environmental Factors

• Economic performance. During periodic downturns, the number of financial institutions requiring close supervision will increase. Systemic risk will increase, resulting in more frequent monitoring of those institutions for which the Federal Reserve has responsibility.
  
  
• Legislative and statutory initiatives. Legislation removing artificial barriers between commercial and investment banking or the limitations on commercial banking activities has had a profound effect on supervision and regulation activities. Passage of the GLBA in late 1999 significantly affected the work of the Federal Reserve, requiring additional training, interagency coordination, and automation activity.
  
  Legislation pertaining to consumer protection statutes will require working with interagency groups to prepare and implement regulations that reflect congressional intent and promote consumer protections. Extensive changes to practices and procedures required by the Fair and Accurate Credit Transactions Act of 2003 (FACT Act) and implementing regulations will require significant staff and industry training.
  
  
• Technology. The rapid pace of technological innovation, especially in telecommunications and electronic data processing, is having a profound effect on the economy and on U.S. financial services. The harnessing of technology will be central in the development of new financial services and channels of distribution in the private sector. Technology will likely pose challenges in all of the Federal Reserve's policy areas, including supervision and regulation. Technological innovation will also create opportunities by providing tools to improve the Board's efficiency across organizational units and functions.
  
  
• Innovation in the financial industry. Dramatic advances in information and telecommunication technologies have allowed banks to develop new and improved products and services and to deliver them over a broader geographic area with greater efficiency. Such innovations, by the banking industry and by financial markets in general, have increased the sophistication and complexity of bank lending, investing, trading, and funding. They have propelled growth in less traditional or newer fee-oriented banking activities, and in the process, altered the risk profiles of many banking organizations in fundamental ways. Practices that generate fee income, such as bounce protection programs, concerns about predatory lending practices, and the entry of nontraditional products into the market will continue to pose challenges to the interpretation and enforcement of consumer protection laws.
  
  
• Economic and financial globalization. Individual economies are becoming more open and links among the world's financial markets are becoming closer. These forces heighten the potential for economic shocks and systemic problems to move across national borders, in some circumstances, with great speed. As a result, there will be pressure for greater international consistency of policies, regulations, guidelines, and supervisory procedures.
  

Program Changes

In late 2003, the Board approved a major realignment of safety and soundness supervision staff to enhance oversight of supervisory risks and the risk-management processes of financial institutions, compliance with anti-money laundering policy, and System supervisory information technology initiatives.

Performance Measures

1. Identify and resolve supervisory and financial problems in a timely manner, working alone or in cooperation with other authorities, to minimize disruptions to the financial and payment systems and the economy more generally.
   
   
2. Minimize net losses to the Bank Insurance Fund (BIF) from state member banks consistent with trend data associated with prevailing economic conditions.
   
   
3. Complete financial institution examinations as required by statute and dictated by review of supervisory data and CAMELS ratings, experience, and an assessment of current risks to the financial industry.
   
   
4. Complete reports of examinations within established Federal Reserve timeframes.
   
   
5. Process applications within Board-established timeframes.
   
   
6. Conduct consumer compliance and CRA examinations in accordance with Board and statutory requirements.
   
   
7. Process consumer complaints in accordance with Board-established timeframes.
   
   
8. Review and update various consumer regulations for which the Board has rule-writing authority.
   
   
9. Promote equal access to banking services through various avenues.Promote community development in underserved areas through various avenues.
   

Payment System Policy and Oversight Function

Goals

Provide high-quality professional oversight of Reserve Banks.

Foster the integrity, efficiency, and accessibility of U.S. payment and settlement systems.

The oversight goal will be attained through the following objective.


1. Produce high-quality assessments of Federal Reserve Bank operations, projects, and initiatives to help Federal Reserve management foster and strengthen sound internal control systems and efficient and effective performance.
   
   
The policy goal will be attained through the following objectives.


2. Develop sound, effective policies and regulations that foster payment system integrity, efficiency, and accessibility. Support and assist the Board in overseeing U.S. dollar payment and securities settlement systems against relevant policy objectives and standards.
   
   
3. Conduct research and analysis that contributes to policy development and increases the Board's and others' understanding of payment system dynamics and risk.
   

Objective 1

Produce high-quality assessments of Federal Reserve Bank operations, projects, and initiatives to help Federal Reserve management foster and strengthen sound internal control systems and efficient and effective performance.

The Board will continue efforts to integrate its approach to Reserve Bank oversight across individual programs, strengthen off-site monitoring capabilities, and focus attentions primarily on strategic district and System initiatives and key processes and controls.

This objective will be pursued in part through the following actions:

• Oversee strategic infrastructure projects, including Reserve Bank check restructuring, cash distribution, and web-based application development. Board staff is overseeing the Reserve Banks' strategies to return to and sustain full cost recovery, including efforts to reduce costs and improve efficiency by restructuring their physical check processing infrastructure. In addition, Board staff is assessing ways to most efficiently distribute and process cash within the economy and to oversee the development of web-based applications to support the delivery of Reserve Bank financial services.
  
  
• Oversee implementation of the Reserve Banks' channel migration strategies. Board staff will continue to oversee the System's migration of its DOS-based Fedline electronic platform to a web-based channel for delivering financial service transactions and files to depository institutions. Board staff will continue to monitor efforts to build the infrastructure components and applications required to begin conversion of DOS-based Fedline customers to the new channel in 2004.
  

Objective 2

Develop sound, effective policies and regulations that foster payment system integrity, efficiency, and accessibility. Support and assist the Board in overseeing U.S. dollar payment and securities settlement systems against relevant policy objectives and standards.

This objective will be pursued in part through the following actions:

• Develop regulations implementing the Check Clearing for the 21st Century Act, also known as "Check 21" and monitor the development of associated industry standards. Check 21 was signed into law on October 28, 2003, and will become effective on October 28, 2004. Check 21 is designed to foster innovation in the payments system and to enhance its efficiency by reducing some of the legal impediments to check truncation. The law facilitates check truncation by creating a new negotiable instrument called a substitute check, which would permit banks to truncate original checks, to process check information electronically, and to deliver substitute checks to banks that want to continue receiving paper checks.
  
  
• Revise the Payments System Risk policy to incorporate international recommendations. Staff will recommend to the Board policy revisions to incorporate the Core Principles for Systemically Important Payment Systems and the Recommendations for Securities Settlement Systems, which are part of the Financial Stability Forum's Compendium of Standards that have been widely recognized and endorsed by U.S. authorities as integral to strengthening global financial stability. In addition, the policy revision will introduce a revised risk-management framework that reflects current industry and supervisory risk management approaches and extends the policy's scope to include Reserve Banks' payment and securities settlement services.
  

Objective 3

Conduct research and analysis that contributes to policy development and increases the Board's and others' understanding of payment system dynamics and risk.

This objective will be pursued in part through the following actions:

• Analyze 2004 retail payments data. Board staff will continue to work with the Reserve Banks' Retail Payments Office on two surveys intended to complement the noncash retail payment research that was conducted in 2001. As part of this research, data will be collected on the number and value of checks and other electronic payments in the United States for 2003. As evidenced in the earlier study, the U.S. check payments market has undergone significant changes in recent years. The data from the current study will update and enhance the Federal Reserve's, the industry's, and the public's understanding of recent trends in the U.S. retail payments system.
  
  
• Conduct further analysis on consumer payment behavior using data from retailers. The Board conducts ongoing research investigating consumer payment choice using data from retailers. These data allow investigation of the relationships among grocery store purchases, demographic information about areas in which the retailers are located, and payment instrument choices at the point of sale.
  

Environmental Factors

• Technology. The cost of technology will continue to decrease and the rate of technological change will continue to increase. In particular, the reliability and security of web-based applications and open architectures will continue to improve. System architectures and applications will comprise multiple hardware and software products, and the inter-operation of these products will become increasingly complex to manage and operate.
  
  
• Electronic payment alternatives. In addition to existing electronic payment alternatives, continued market innovation will result in new electronic payment methods, which will further influence the shift from paper to electronic payments.
  
  
• Changing demographics in Reserve Bank operations. The Reserve Banks are continuing to restructure their operations to provide payment and fiscal agency services in a cost-effective manner. This effort is likely to result in notable downsizing of Reserve Bank staff and a shift in the nature of certain Reserve Bank payment operations to a more centralized, consolidated processing environment.
  
  
• Staffing. The Board must attract and retain qualified professional staff with complex analytical skills and leading-edge technological skills to accomplish its oversight, policy development, and research-related activities. The Board also must explore creative training and development opportunities to better position staff to perform the complex quantitative and qualitative analyses required of them.
  

Performance Measures

1. Extent to which the Board completes all Reserve Bank reviews as scheduled; completes annual Reserve Bank examinations; and orders an external audit of Reserve Bank financial statements each year, as required by the Federal Reserve Act.
   
   
2. Extent to which issues raised by the Board regarding Reserve Bank operations, internal audit, or proposed or ongoing initiatives effect positive change within the Reserve Banks.
   
   
3. Extent to which the Board, working alone or in cooperation with other organizations, identifies significant operational or financial problems affecting the flow of large-value payments or book-entry securities transfers and resolves them in a way that minimizes disruption to the financial and payment systems specifically, and the economy more generally.
   
   
4. Forward final Check 21 regulations to the Board by summer 2004.
   
   
5. Request comment on revision to payment system risk policy as it applies to private-sector systems and incorporate recently adopted international standards in the second quarter of 2004; adopt final revised policy in 2005.
   
   
6. Monitor and ensure the full collateralization of Federal Reserve notes as defined by the Federal Reserve Act.
   
   
7. Include payments-related questions in the 2004 Michigan Survey; produce research results in 2005.
   
   
8. Produce research results from the depository institution check survey by the end of 2004; publish Bulletin article in 2005.
   
   
9. Extent to which the Board (through its oversight committees) is informed of important developments and issues in a timely and effective manner.
   
   
10. Respond timely to requests for policy interpretations, deviations, and exception requests from the Reserve Banks.
    

Internal Board Support

Goal

Foster the integrity, efficiency, and effectiveness of Board programs.

This goal will be attained through the following six objectives.

1. Oversee a planning and budget process that clearly identifies the Board's mission, results in concise plans for the effective accomplishment of operations, transmits to the staff the information needed to attain objectives efficiently, and allows the public to measure our accomplishments.
   
   
2. Develop appropriate policies, oversight mechanisms, and measurement criteria to ensure that the recruiting, training, and retention of staff meet Board needs.
   
   
3. Establish, encourage, and enforce a climate of fair and equitable treatment for all employees regardless of race, creed, color, national origin, age, or sex.
   
   
4. Provide financial management support needed for sound business decisions.
   
   
5. Provide cost-effective secure information resource management services to Board divisions, support divisional distributed processing requirements, and provide analysis on information technology issues to the Board, Reserve Banks, other financial regulatory institutions, and central banks.
   
   
6. Efficiently provide safe, modern, and secure facilities and necessary support activities conducive to efficient and effective Board operations.

Objective 1

Oversee a planning and budget process that clearly identifies the Board's mission, results in concise plans for the effective accomplishment of operations, transmits to the staff the information needed to attain objectives efficiently, and allows the public to measure our accomplishments.

This objective will be pursued in part through the following actions:

• In cooperation with individual divisions, review, evaluate, and revise as needed the objectives and goals developed during the 2004-05 planning process to prepare for the future.
  
  
• Prepare portions of the Annual Report and the Annual Report: Budget Review to be published on the Board's public web site and forwarded to the Congress.
  
  
• Revise the Board's planning and budget process to better incorporate voluntary compliance with the GPRA, to achieve more streamlined operations, and to reduce administrative costs while maintaining service levels. (The last objective may be achieved by revising procedures to eliminate unnecessary steps and by better automating remaining steps.)
  
  
• Provide management with information, data, and procedures to facilitate planning, budgeting, and financial decisionmaking, as well as procurement of goods and services, which result in effective and efficient Board operations.
  
  
• Utilize enhanced internal communications practices to promote information sharing, encourage effective management communications, and broaden awareness of goals and objectives.
  

Discussion

Unlike most other government agencies, the Board's budget is not subject to the congressional appropriations process or to review by the administration through the Office of Management and Budget. Rather, the Board establishes its budget formulation procedures, conducts strategic planning to identify changes to its critical activities and the proper amount and allocation of resources to support its mission, approves its budget, and provides various reports and budget testimony to the Congress.

The Board, like the framers of the Federal Reserve Act, considers the continuance of its budgetary independence directly relevant to the Board's independence in managing monetary policy. To maintain budgetary independence, the Board believes that it must demonstrate effective and efficient use of its financial resources. Resource management begins with a clear mission statement, identification of goals, and a review of factors that might affect the long-term attainment of the goals and of possible responses to those factors. With the establishment of objectives to attain those goals and identification of the resources needed to accomplish them, the Board develops the budget necessary to implement the strategic plan.

Objective 2

Develop appropriate policies, oversight mechanisms, and measurement criteria to ensure that the recruiting, training, and retention of staff meet Board needs.

This objective will be pursued in part through the following actions:

• Ensure that the Board's compensation systems continue to reward and motivate employees as desired.
  
  
• Ensure that appropriate processes exist to facilitate Boardwide succession planning that minimizes disruption and maximizes knowledge transfer.
  

Discussion

Management of human resources will be one of the most essential tasks facing the Board through the planning period. Changing requirements associated with technology, communications, demographics, employee needs and expectations, performance measurement, and market rates of pay are among the factors that will cause the Board to focus more carefully on steps to attract, retain, and train staff to meet increasingly complex requirements.

Objective 3

Establish, encourage, and enforce a climate of fair and equitable treatment for all employees regardless of race, creed, color, national origin, age, or sex.

This objective will be pursued in part through the following actions:

• Develop, implement, and ensure compliance with policies, practices, and procedures which foster fair and equitable treatment of all staff.
  
  
• Monitor Board EEO training and awareness activities (including disability and sexual harassment awareness training, and EEO training for officers, managers, and supervisors), career development, recruitment, outreach, and intern programs.
  
  
• Design and implement a new EEO web-based training program.
  
  
• Support special interest groups and sponsor ongoing programs and awareness activities.
  

Discussion

The Board of Governors is committed to the hiring, development, compensation, and promotion of staff based on an individual's qualifications, abilities, and job performance. The policy of the Board is to promote equal opportunity in every aspect of employment.

The Board's policies and practices address the issue of equal treatment in employment practices and hiring initiatives for all employees, and include targeted initiatives for women, people of color, and those with disabilities. The Board's view emphasizes that equal employment opportunity is part of effective management, as well as a legal requirement, because it focuses on using the talents of all human capital. The Board's Equal Employment Opportunity (EEO) Program Director continuously reviews the success criteria for accomplishing the Board's EEO objectives; validates Board practices, programs, and procedures against those objectives; and continuously monitors results and discusses issues with division directors and their oversight committees, and with employees in order to establish and maintain an equitable and fair environment in which all employees can attain their full potential.

Objective 4

Provide financial management support needed for sound business decisions

This objective will be pursued in part through the following actions:

• Manage the Board's financial resources according to generally accepted accounting principles.
  
  
• Contract for an outside audit of the Board's financial statements.
  
  
• Reduce risk consistent with prudent use of resources, by participating in an enterprise risk management system.
  

Discussion

The Board's financial management system must continue to provide high-quality, timely data that managers need in order to make decisions between competing priorities, operational procedures, and investments. The current budget and accounting systems are closely linked to one another and to payroll and benefits, information technology, and procurement systems that generate critical data. The data must be timely and easily available to all managers. The data must also provide information about the costs of major Board programs, such as monetary policy, for decisions by the Board as well as for performance measurement. The Management Division provides regular analyses of the information to the Board and its managers.

Objective 5

Provide cost-effective secure information resource management services to Board divisions, support divisional distributed processing requirements, and provide analysis on information technology issues to the Board, the Reserve Banks, other financial regulatory institutions, and central banks.

This objective will be pursued in part through the following actions:

• Customer Projects
  Staff will provide timely, quality support for customer projects. Such projects are designed and funded by the client and include development and maintenance resources. For the 2004-05 budget period, 77 percent of IT's labor budget falls into this category. Costs are billed through transfer pricing (a user charge system).
  
  
• Infrastructure Projects
  Investments in the IT infrastructure that are undertaken on behalf of all Board organizations. Examples include information security, disaster recovery, technical training programs, and e-mail and Internet services. For the 2004-05 budget period, 16 percent of IT's labor budget falls into this category.
  
  
• General and Administrative (G&;A)
  Activities required to manage the division and respond to requests from government agencies and the Inspector General. G&;A items include expenses for officers, secretaries, and administrative costs to support the division's internal control structure. Although these activities and costs are derived from customer and Board requirements, they compete with requests from other divisions in the budget process. The division's G&;A cost for 2004-05 is 7 percent of the labor budget, as IT continues to reduce the division's secretarial and administrative support staff, abolish obsolete job families, and move vacant positions to cost centers where customer demand is urgent.
  

Changes in technology have significantly altered the issues facing the Board in the monetary policy and supervision and regulation areas. Fortunately, the very advances in technology that have caused these adjustments have also enhanced our capacity for real-time surveillance. Nevertheless, obtaining the required benefits from technology requires continuous investment in a mix of mainframe and distributed processing equipment; communications capability, including appropriate bandwidth; and a well-trained and motivated staff. Investments in human capital and technology must be made carefully to ensure that the results are timely and effective. The infrastructure for maintaining these investments must be efficient and effective in meeting the diverse needs of the organization. The infrastructure must provide security for data, software, communications, and the redundancy needed for rapid recovery of operations at other facilities. Finally, the work at the Board must be carefully synchronized and coordinated with that at the Reserve Banks and frequently with other agencies, particularly in support of large databases and software required for the supervision and regulation function.

Objective 6

Efficiently provide safe, modern, secure facilities and necessary support activities conducive to efficient and effective Board operations.

This objective will be pursued in part through the following actions:

• Continue to provide a work environment that is safe and conducive to the high level of productivity that is necessary for Board staff to accomplish assigned tasks.
  
  
• Protect and provide a safe and secure environment for staff and others on Board property.
  
  
• Train staff to recognize security problems and be able to evacuate or move to safe havens as necessary.
  
  
• Establish and provision relocation sites.
  

Discussion

The Board will upgrade the infrastructure (including electrical work, plumbing, and safety) of its current facilities. The plan to replace and upgrade capital equipment in the physical plant will be updated and current projects will be completed. Emergency planning will continue. To provide for the safety of employees and for continuity of operations, actions to evaluate and, where necessary, enhance the security of facilities are a priority.

Environmental Factors

• Staffing. At a time when a significant portion of the Board staff is, or will soon be, eligible to retire, outside compensation issues are making it more difficult to recruit. Limits on salary are adding to pressure for better benefits. Technology is changing and with it the requirements and job content of many positions, resulting in increasing needs for staff training. Increased costs for salaries and benefits are only partially offset by improved productivity resulting from automation. This is resulting in continuous pressure to find more efficient ways to perform operations and to eliminate lower-priority work. At the Board, nearly 75 percent of expense is associated with staffing; thus, the requirement to be more efficient is generally translated into staff reductions in lower-priority work.
  
  
• Security. The Board takes the safety and security of its staff and facilities extremely seriously. It is likely that actions necessary to mitigate security threats will continue to require more resources than in the past and will have a negative effect on day-to-day productivity.
  
  
• Leadership. With significant changes in the scope and complexity of the Board's mission, developing and maintaining leadership is critical. The Board is spending significant time and resources to ensure that current and future leadership is capable of meeting challenges.
  

Performance Measures

1. Maintain budgetary independence.
   
   
2. Complete a comprehensive review of the Board's Performance Management Program and implement any desired changes.
   
   
3. Develop sufficient internal and external pools of qualified, diverse candidates with appropriate skills for all position postings.
   
   
4. Provide appropriate feedback to division directors via annual management reports.
   
   
5. Report measurable participation in EEO-sponsored training and awareness, career development, recruitment, outreach, and intern programs.
   
   
6. Establish a high quality and useful web-based training program.
   
   
7. Receive an unqualified opinion for the Board's annual financial audit, and internal controls and compliance with laws and regulations are appropriate.
   
   
8. Enhance Boardwide physical security and capacity for disaster recovery to reduce the time needed to resume normal operations.
   
   
9. Complete the Martin Building Sprinkler project, analyze the feasibility study of renovating the Martin Building, and develop a long-range space plan for accommodating the Board's workforce.
   
   
10. Complete the transition to an armed security force, including the development and implementation of appropriate institutional structures or organizations, policies, and procedures.
    

Disseminating Goals and Objectives and Holding Managers Accountable for Results

Five standing committees, each comprising up to three Board members, administer the activities of the Federal Reserve Board. These committees include: the Committee on Consumer and Community Affairs, the Committee on Economic Affairs, the Committee on Federal Reserve Bank Affairs, the Committee on Supervisory and Regulatory Affairs, and the Committee on Board Affairs. The standing committees, in conjunction with the division directors, determine any adjustments to strategic goals and review and adjust priorities to help establish resource levels. The Committee on Board Affairs oversees the planning and budget process, which includes preparation of the Board's Government Performance Results Act (GPRA) materials.

The Board's goals and objectives are communicated to staff by division directors and by the strategic plan. Managers and staff are held accountable for meeting objectives which support these goals through the Board's performance management program, which ties base compensation and a modest amount of variable pay to achievement of specific objectives. The Board's goals and objectives are also shown on the Board's web site where the Strategic Plan is posted for employees.

The Board maintains a vigorous Public Affairs Program and Publications Program to assist the public in understanding the actions, regulations, and rules of the Board. In addition, an extensive collection of educational materials, many dealing with consumer affairs issues, is created to assist the public. Increased emphasis on e-government and the electronic availability of data and reports has led to changes in the Board's distribution of information. Electronic distribution of Board materials, using the Board's public web site, helps to ensure the efficient dissemination, on a timely basis, of this information to the public.

The Board voluntarily complies with the GPRA and distributes the resulting reports, such as the Strategic Plan, the Performance Budget, and the Performance Report, on the Board's public web site under Annual Reports to the Congress.

Program Evaluations

The activities of the Board are critical to the economic well-being of the country. The Federal Reserve affects the lives of American citizens through its monetary policy actions, supervision and regulation activities, consumer affairs regulation, and payment systems policies and oversight activities. These effects are significant, ongoing, and highly visible. It is essential that the analyses performed by staff to influence policy decisions be reviewed at later dates to determine whether the desired effect was achieved and if the benefits of the activity outweighed its costs. The effectiveness of Board programs is subject to review by the Office of the Inspector General, which provides copies of its reports to the Congress. Many functions of the Board are also subject to review by the General Accounting Office.

The Federal Reserve's conduct of monetary policy is evaluated frequently through a number of ways. First, the Federal Reserve Act, as amended, requires the Board of Governors to report to the Congress semiannually on the conduct of monetary policy. The Chairman of the Board of Governors presents testimony to Senate and House committees on these reports. More generally, Federal Reserve policymakers testify frequently before congressional committees on monetary policy and other Federal Reserve responsibilities, and from time to time congressional hearings include evaluations of monetary policy by academic and other experts from outside the Federal Reserve. As a matter of critical national importance, national and business newspapers and magazines report on and analyze monetary policy decisions and their effects on a daily basis.

Supervision and Regulation

As part of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), the Inspector General of the Federal Reserve is required to review any failure of a state member bank that results in a material loss to the Bank Insurance Fund (BIF). The purpose of this review is to identify the cause of the failure, determine whether supervision was in accordance with policy standards, and, if so, whether policies and standards are in need of revision.

The effectiveness of the Consumer Affairs subfunction is subject to review by the Office of the Inspector General. In addition, the effectiveness of this function is evaluated based on metrics regarding resolution of complaints logged by consumers against member banks.

Payment System Policy and Oversight Function

The effectiveness of the Payment System Policy and Oversight Function is subject to review by the Office of the Inspector General and the General Accounting Office. In addition, the effectiveness of this function is evaluated based on feedback received from the Reserve Banks, financial industry, the Congress, and others, and the extent to which staff's research is accepted and cited by others. Another factor in evaluating the effectiveness of these functions is the extent to which staff brings to the attention of the Board members issues that may hamper the Reserve Banks' ability to comply with the Monetary Control Act.

Internal Board Support

The effectiveness of Board support programs is subject to review from various management sources. Financial operations are reviewed annually by an outside independent auditor. Information technology activities are subject to competitive pressures because operating divisions may use allocated resources to purchase support from the Division of Information Technology or outside vendors, or provide the support themselves. The human resource operations are evaluated by management based on the ability of the operating divisions to attract and retain the high-quality staff required for Board operations. All of these activities are subject to review by the Office of the Inspector General.

Interagency Coordination of Cross-Cutting Issues

While many aspects of the Board's mission are unique to the organization, the Board does not operate in a vacuum. To coordinate its activities, the staff works closely with a broad variety of organizations and individuals on a daily basis. Regular meetings with senior officials from the U.S. Department of the Treasury, regulatory agencies such as the Securities and Exchange Commission, and other executive branch agencies help ensure consistency of purpose and coordination of actions. One area of the Board's mission, supervision and regulation of financial institutions, is shared with other regulatory agencies. As required by the Government Performance and Results Act (GPRA), and in conformance with past practice, the Board has worked closely with other federal agencies to consider plans and strategies for programs such as bank supervision that transcend the jurisdiction of each agency. Coordination of activities with the U.S. Department of the Treasury and other agencies is evident throughout both the strategic and performance plans. Given the degree of similarity in missions and the existence of the Federal Financial Institutions Examination Council (FFIEC), the most formal effort has occurred with the other depository institution regulatory agencies (Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency, and Office of Thrift Supervision). The FFIEC promotes uniformity in the supervision of financial institutions by the five federal regulatory agencies. The FFIEC was established in 1979 pursuant to title X of the Financial Institutions Regulatory and Interest Rate Control Act of 1978. It is a formal interagency body empowered to prescribe uniform principles, standards, and report forms for the federal examination of financial institutions and to make recommendations to promote uniformity in the supervision of financial institutions. In addition, the council provides uniform examiner training and has taken a lead in developing standardized software needed for major data collection programs to support the requirements of the Home Mortgage Disclosure Act (HMDA) and the Community Reinvestment Act (CRA). These actions have eliminated redundancy and lowered costs and, in the case of the HMDA and the CRA, have significantly lowered compliance costs while enhancing public access to the data.

In connection with the GPRA, a coordinating committee of the depository institution regulatory agencies was created to address and report on issues of mutual concern. The interagency working group has been meeting since June 1997 to work on issues related to those general goals and objectives that cross agency functions, programs, and activities. The results of the interagency coordination, whether effected through the FFIEC, the coordinating group, or interaction between staff, have been positive and have yielded better plans, creating substantial benefits to the public.

The goals and objectives of the Board have been developed keeping in mind feedback regularly received from the public, the Congress, industry groups, federal and state regulators, academics, and others. The Board relies heavily on advisory and working committees to provide input on a wide variety of issues. These committees include: the Federal Advisory Council, which provides input on economic and banking matters; the Consumer Advisory Council, which provides input on consumer protection matters; the Thrift Institutions Advisory Council, which provides input on the needs and problems of thrift institutions; and Federal Reserve Bank advisory committees, which provide advice to Reserve Banks on agriculture and small business matters. The Board also consults regularly with a broad variety of banking and financial service industry groups. Strategic initiatives are developed and implemented in close coordination with other federal and state banking regulatory agencies through participation in the FFIEC and with state banking regulators through regular consultations.

Appendix 1

The Federal Reserve: The Nation's Central Bank

The Federal Reserve System is the central bank of the United States, established by the Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded, and today the Federal Reserve's duties fall into five general areas.

1. Conducting the nation's monetary policy by influencing money and credit conditions in the economy in pursuit of maximum employment and stable prices
   
   
2. Supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking system, maintaining the stability of the financial system, and containing systemic risk that may arise in financial markets
   
   
3. Protecting the credit rights of consumers, and encouraging banks to meet the credit needs of consumers, including those in low- and moderate-income neighborhoods
   
   
4. Playing a major role in operating the nation's payment systems
   
   
5. Providing certain financial services to the U.S. government, the public, financial institutions, and foreign official institutions

The Federal Reserve System was created by passage of the Federal Reserve Act, which President Woodrow Wilson 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."

Soon after the creation of the Federal Reserve, it became clear that the act had broader implications for national economic and financial policy. As time has passed, further legislation has clarified and supplemented the original purposes. Key laws affecting the Federal Reserve have been 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; the Federal Deposit Insurance Corporation Improvement Act of 1991; the Gramm-Leach-Bliley Act of 1999; and the Check Clearing for the 21st Century Act of 2003. The Congress defined the primary objectives of national economic policy in the Employment Act of 1946 and in an amendment to the Federal Reserve Act in 1977. These objectives include economic growth in line with the economy's potential to expand; a high level of employment; stable prices (that is, stability in the purchasing power of the dollar); and moderate long-term interest rates. Major financial services reform legislation, incorporated in the Gramm-Leach-Bliley Act, reflects changes in the nature of the industry and the economy in general. Both the legislation and the underlying changes that had been occurring will continue to have a significant effect on the operations and workload of the Federal Reserve.

Since the late 1960s, the number of federal laws intended to protect consumers in credit and other financial transactions has been growing. The Congress has assigned the Federal Reserve the duty of implementing these laws to ensure that consumers receive comprehensive information and fair treatment. Thus, consumer protection laws such as the 1968 Truth in Lending Act, the Community Reinvestment Act of 1977, the Expedited Funds Availability Act of 1987, the Truth in Savings Act of 1991, the Fair and Accurate Credit Transactions Act of 2003, and others have given the Federal Reserve rule-writing, compliance, and consumer education responsibilities.

The Federal Reserve System is an independent central bank, but only in the sense that its decisions do not have to be ratified by the President or anyone else in the executive branch of government. The entire System is subject to oversight by the Congress because the Constitution gives to the Congress the power to coin money and set its value--and that power was delegated to the Federal Reserve by the Federal Reserve Act. The Federal Reserve works within the framework of the overall objectives of economic and financial policy established by the government; therefore, the description of the System as "independent within the government" is more accurate than "independent."

Board of Governors

The Board of Governors of the Federal Reserve System was established as a federal government agency. It is made up of seven members appointed by the President of the United States and confirmed by the U.S. Senate. The full term of a Board member is fourteen years; the appointments are staggered so that one term expires on January 31 of each even-numbered year. The Chairman and the Vice Chairman of the Board are also appointed by the President and confirmed by the Senate. The nominees to these posts must already be members of the Board or must be simultaneously appointed to the Board. The terms for these positions are four years.

Structure of the System

The System was structured by the Congress to give the Federal Reserve a broad perspective on the economy and on economic activity in all parts of the nation. The Federal Reserve is a federal system, composed of a central governmental agency--the Board of Governors in Washington, D.C.--and twelve regional Federal Reserve Banks located throughout the nation. These components share responsibility for supervising and regulating certain financial institutions and activities, for providing banking services to depository institutions and to the federal government, and for ensuring that consumers receive adequate information and fair treatment in their business with the banking system.

A major component of the System is the Federal Open Market Committee (FOMC), which is made up of the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and presidents of four other Federal Reserve Banks, who serve on a rotating basis. The FOMC is charged under law with overseeing open market operations, the principal tool of monetary policy. The FOMC also directs operations undertaken by the Federal Reserve in foreign exchange markets.

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Appendix 2

Management Issues

The latest strategic planning exercise did not identify material changes in the mission or goals of the Board. There was a strengthening of programs to manage and develop human capital, and increased emphasis on information and physical security.

Because of the complexity, scope, and volume of its responsibilities, a highly qualified and trained staff is necessary to accomplish the Board's mission. The Board has developed programs to provide the salary and benefits needed to compete in the market for a diverse, highly skilled workforce and training programs to maintain required skills in a dynamic, financial, and regulatory environment. The Board also requires the ability to gather, store, retrieve, and analyze large quantities of complex economic and financial data. This requires modern automation and telecommunications capabilities and a supporting infrastructure. The Board emphasizes the need to ensure that appropriate resources are devoted to maintain this infrastructure.

The Board is organized along division lines with specific functions. The divisions conducting the basic programs and activities of the Board are described below:

Monetary Policy Function

The Division of Research and Statistics

• develops and presents economic and financial data to the Board, the Federal Open Market Committee (FOMC), and other System officials as background for the formulation and conduct of monetary, regulatory, and supervisory policies; and
  
• fosters a broader understanding of issues relating to economic policy by providing leadership in economic and statistical research and by supplying data and analyses for public release.

  Note: Portions of this division, focused on microeconomic policy, support the Supervision and Regulation function.

The Division of Monetary Affairs

• supports the Board and the FOMC in the formulation of monetary policy and its implementation through open market operations, the discount window, and reserve requirements.

The Division of International Finance

• provides the Board, the FOMC, and other System officials with assessments of current and prospective international, economic, and financial developments;
  
  
• evaluates and forecasts major economic and financial developments abroad, developments in foreign exchange and other international asset markets, and U.S. international transactions; and
  
  
• prepares economic data and analyses for public release.

Supervision and Regulation Function

The Division of Banking Supervision and Regulation

• informs the Board of current and prospective developments in bank supervision and banking structure,
  
  
• coordinates the System's bank supervision and examination activities,
  
  
• processes applications required to form or expand bank holding companies or make other changes in banking structure, and
  
  
• administers certain regulations.

The Division of Consumer and Community Affairs

• provides support needed for the Board to accomplish its federal consumer protection responsibilities.

The Legal Division

• provides legal advice and services to the Board to meet its responsibilities under bank supervisory statutes and regulations.

  Note: This function supports Supervision and Regulation, Research and Statistics, and overhead.

Payment System Policy and Oversight Function

The Division of Reserve Bank Operations and Payment Systems

• oversees the efficiency and effectiveness of, and adequacy of controls over, Reserve Bank financial services; fiscal agency services; and certain significant Reserve Bank support functions, such as information technology, human resources, financial and cost accounting, operating and capital budgets, facilities management, and internal audit; and
  
  
• develops and recommends to the Board policies and regulations that foster the efficiency and integrity of the U.S. payment system, and works collaboratively with other central banks and international organizations to improve the payment system more broadly.
  

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