Inspiring Confidence the Fed's Response to 9/11

11 / 9 annual report 2001 se to Respon ing Conﬁdence ing Inspir The Fed’s Fed’s The federal reserve bank of chicago

★ FEDERAL RESERVE BANK OF CHICAGO 2001 ANNUAL REPORT 53201-0361 60638 46241 Street 61607 rd 73 361 est est Dirksen Parkway W North Road Perimeter W Box Box East State Street eoria, Illinois 08) 924-890008) 317) 244 -7744 Indianapolis, Indiana P. O. Bedford Park,Bedford Illinois peoria facility 6100 indianapolis office indianapolis 8311 office milwaukee 304 Milwaukee,Wisconsin facility midway 4944 P (309) 633-5000 ( (7 (414) 276-2323 50321 48231-1059 ch 60690-0834 bran 1059 6880 834 est Fort Street 150 Rittenhouse Street Box Box Box Box South LaSalle Street W 312) 322-5322 313) 961- 515) 256 - 6100 P. O. Suite Detroit, Michigan des moines office 2200 Des Moines, Iowa head office office head 230 Chicago, Illinois detroit 160 P. O. ( ( ( additional information our mission

Testimony and Speeches Regarding 9 ⁄: Additional Information on Post-9 ⁄ The Federal Reserve Bank of Chicago ★ “The Condition of the Financial Markets,” FOMC Actions: is one of 12 regional Reserve Banks across Alan Greenspan, Federal Reserve Board, ★ Federal Open Market Committee statements the United States that, together with the Testimony before the Committee on Banking, and minutes. www.federalreserve.gov/fomc/. Board of Governors in Washington, D.C., Housing, and Urban Affairs, U.S. Senate, serve as the nation’s central bank.The role September 20, 2001. www.federalreserve.gov/ General Information on the Topics Covered of the Federal Reserve System, since its boarddocs/testimony/2001/. in this Report: establishment by an act of Congress passed ★ Fedpoints series:“How Currency Gets in 1913, has been to foster a strong economy, ★ “Monetary Policy and Economic Outlook,” into Circulation,” #1; “Repurchase and supported by a stable financial system. Alan Greenspan, Federal Reserve Board, Matched Sale Transactions,” #4; “Float,” #8; To this end, the Federal Reserve Bank of Testimony before the Joint Economic “Discount Window,” #10; “Federal Funds,” Chicago participates in the formulation and Committee, U.S. Congress, October 17, 2001. #15; “Commercial Paper,” #29; “Open implementation of national monetary policy, www.federalreserve.gov/boarddocs/ Market Operations,” #32; “Fedwire,” #43; supervises and regulates state-member banks, testimony/2001/. “Federal Open Market Committee,” #48. bank holding companies and foreign bank www.newyorkfed.org/pihome/fedpoint/ ★ “The September 11 Tragedy and the Response branches, and provides financial services to index.html. of the Financial Industry,”Alan Greenspan, depository institutions and the U.S. govern- Federal Reserve Board, October 23, 2001. In-depth Information on the Federal Reserve ment.Through its head office in Chicago, www.federalreserve.gov/boarddocs/ and Open Market Operations: branch in Detroit, regional offices in Des speeches/2001/. Moines, Indianapolis and Milwaukee, and ★ “Understanding Open Market Operations.” facility in Peoria, the Federal Reserve Bank ★ www.newyorkfed.org/pihome/addpub/ “Assessing the Impact of September 11,” of Chicago serves the Seventh Federal Reserve omo.html. Michael Moskow, Federal Reserve District, which includes major portions of Bank of Chicago, October 25, 2001. ★ “The Federal Reserve System: Purposes Illinois, Indiana, Michigan and Wisconsin, www.chicagofed.org/newsandevents/ and Functions.” www.federalreserve.gov/ plus all of Iowa. speeches/index.cfm#2001. pf/pf.htm. ★ “A Supervisory Perspective on Disaster our vision Recovery and Business Continuity,” ★ Roger Ferguson, Federal Reserve Board, Further the public interest by fostering a March 4, 2002. www.federalreserve.gov/ sound economy and stable financial system boarddocs/speeches/2002/. ★ Provide products and services of unmatched value to those we serve

★ Set the standard for excellence in the Federal Reserve System

★ Work together, value diversity, communicate openly, be creative and fair

★ Live by our core values of integrity, respect, responsibility and excellence

PRESIDENT’S MESSAGE 01 INSPIRING CONFIDENCE 03 THE YEAR IN REVIEW 23 DIRECTORS 28 MANAGEMENT COMMITTEE 32 BANK OFFICERS 34 ADVISORY COUNCILS 36 EXECUTIVE CHANGES 38 O PERATIONS VOLUMES 39 FINANCIAL STATEMENTS 43 FINANCIAL NOTES 46 From left: President and Chief Executive Officer michael moskow, Deputy Chairman robert darnall, Chairman arthur martinez, and First Vice President and Chief Operating Officer gordon werkema. MESSAGE FROM THE PRESIDENT

In the post-9/11 world in which we all live, “ground zero” has assumed a special significance. like millions of other people, i saw from a distance many tragic and unforgettable images of ground zero. but it wasn’t until last november that i viewed the area in person. it was an unforgettably sad and moving experience. i left ground zero with a more complete realization of the human loss, physical devastation and bravery of those caught in the attack and involved in the rescue efforts. while ground zero is the site of an american tragedy, i believe it has also become a symbol of something hopeful— the tenacity, enterprise and resolve of the american people. along with hundreds of millions of people across the world, iam confident the u.s. will continue to rebound stronger than ever.

The terrorists’ intentions may never be fully understood, but one of their goals—to disrupt our economy—was clear.The World Trade Center was an important symbol of our free-enterprise system, located in our nation’s financial center. In the aftermath of the attack, the risk of a cascading crisis in our financial system was very real. And yet, only a few short hours after the attacks, the financial system had begun to recover and resume operations. This quick recovery was due to the extraordinary efforts of many people from a wide range of public- and private-sector organizations. I’m proud of the Federal Reserve’s role in this effort, which was very much in keeping with our origins and the classic mission of a central bank. Congress created the Federal Reserve in 1914 in response to a series of financial crises. Since its very beginning, the Fed’s mission has included maintaining financial stability and containing systemic risk.

The Federal Reserve System’s response to 9/11 involved all of its diverse responsibilities—implementing monetary policy, providing financial services and supervising and regulating banks. As detailed in the following article, the Chicago Fed faced challenges in each of these areas. And like the rest of the Fed System, the Chicago Fed rose to these challenges. I’d like to thank Chicago Fed staff at all of our six offices for their outstanding efforts.And I’d like to make a special note of the extraordinary efforts of the New York Fed, which continued to operate despite its location just a few short blocks from Ground Zero. As Chairman Greenspan has pointed out, the crisis highlighted the advantages of our nation’s diversified and decentralized economic and financial structure. On a day-to-day basis, our nation’s financial system operates within a physical infrastructure. Without robust private-sector participation and effective supervisory oversight, local disasters affecting the infrastructure can spill over into the broader economy and increase systemic risk. At first glance, our financial system may seem duplicative or inefficient, encompassing banks, security firms, insurance companies and many other participants. But the competition encouraged by these many participants increases innovation and flexibility—qualities that were essential on 9/11.

INSPIRING CONFIDENCE9/11:★ THEINSPIRING FED’S CONFIDENCERESPONSE TO 9/11 1 MESSAGE FROM THE PRESIDENT

Similarly, the Fed’s regional structure, with its decentralized design and mixture of public and private features, may seem overly complex.Yet our structure fosters strong links to our customers and stakeholders; extends the geographical span of our operations, knowledge and resources; and encourages innovation.These advantages served the Fed well in meeting the challenge of 9/11. While our financial system recovered very quickly, the effect on the economy has been longer-lasting.The attack shook an already weak economy.The Federal Open Market Committee (FOMC) responded decisively, cutting the target for the federal 3 funds rate by 1 /4 percentage points during the final four months of 2001.These actions built on earlier policy moves during 2001 in which the target fed funds rate was reduced by 3 percentage points. Overall, the FOMC reduced the target fed funds rate 1 3 during 2001 from 6 /2 percent to 1 /4 percent—the lowest level in more than 40 years. Though the economy was weakened by the attack, our longer-term prospects continue to be favorable.The U.S. economy is increasingly resilient to shocks. Deregulated financial markets, more flexible labor markets and major advances in information technology all provide a foundation for solid economic growth.Another important factor has been increased globalization. It is perhaps a natural reaction to seek a reduced level of economic interaction among nations following 9/11. But we must not lose sight of the many economic benefits of globalization—for the U.S. as well as all other nations. Open markets and expanded trade are some of the best ways to increase economic growth, particularly in developing countries. Our nation has endured a tremendous tragedy. However, the resiliency and strength of our free-enterprise system, which served us so well after 9/11, will help us continue to prosper in the future.

The Chicago Fed had a successful year in 2001, as reflected in the recap of our accomplishments on pages 23-27.I’d like to extend my appreciation to our staff for their hard work and dedication and to our directors for their leadership and counsel. In particular, I’d like to thank three individuals who completed their service as directors: Richard Bell and Stephen Polk on our Detroit board, and Arthur Martinez on our Chicago board. A special note of gratitude to Arthur, who provided especially noteworthy service as chairman for two years and deputy chairman for three years, and will continue on as a director into part of 2002.

As we look forward, the events of 2001 have only strengthened our resolve at the Chicago Fed to accomplish our mission: to further the public interest by fostering a sound economy and stable financial system.

michael h. moskow president and chief executive officer march 26, 2002

2 FRBC 2001 ANNUAL REPORT Inspiring Conﬁdence The Fed’s Response to 9/11

★

Many responded to 9/11 with extraordinary and heroic acts.

Many others, however, responded in less visible and dramatic ways by doing their jobs well in difﬁcult circumstances, part of a collective effort that restored our nation’s stability.

The following article chronicles how the Chicago Fed’s staff responded on 9/11 and during the critical week after.

part i part ii part iii part iv

THE THE STABILIZING FOCUSING NEWS BREAKS BANK RESPONDS THE MARKETS ON THE ECONOMY TUESDAY, SEPTEMBER 11

The News Breaks

During a breakfast meeting with staff, President and CEO Michael Moskow is listening to an employee make a point when he sees First Vice President and COO Gordon Werkema signaling him from the doorway. Moskow excuses himself. Werkema informs him that a jet has crashed into the North Tower of the World Trade Center. Minutes later, a second plane crashes into the South Tower. Ter ror i sm is suspected.

Moskow and Werkema convene an The Committee tries to determine emergency meeting of the Bank’s leader- if staff is in danger. Employees at the ship team—the Management Committee. Chicago Office are particularly anxious As the meeting starts, the media reports because they are only one block away that a plane has crashed into the Pentagon. from one of the world’s tallest build- Fifteen minutes later, the South Tower ings, the Sears Tower.The Protection collapses.The meeting is hectic; informa- department reports that it has already tion is sketchy. People monitor events on increased security, particularly at the TV and get updates on their cell phones. Chicago and Detroit offices, which are more visible symbols of the Fed than the The Committee focuses on assessing other offices. the situation and making sure employees are safe at the Bank’s seven regional loca- The Committee decides to give staff tions. Closing is not an option, although who are not “mission-critical” the option the Bank can evacuate to a back-up site. to go home for that day. Other staff are asked to stay.While the Bank continues “The Fed has a crucial role to play operating at each office, a back-up site during an economic or financial crisis,” in Chicago is ready to go by 10 :30 a.m., notes Werkema.“Closing the Fed in those if needed (all times are CST). circumstances would be like shutting down the fire department because there are too many fires.”

4 FRBC 2001 ANNUAL REPORT “BREAKING NEWS: TWO PLANES CRASH INTO TOWERS 8:05 a.m.(CST) OF WORLD TRADE CENTER” — CNN, SEPTEMBER 11, 2001

AP/WIDE WORLD PHOTOS INSPIRING CONFIDENCE ★ THE FED’S RESPONSE TO 9/11 5 “BREAKING NEWS: AMERICAN FLIGHT 77 CRASHES 8:45 a.m. (CST) INTO PENTAGON” — CNN, SEPTEMBER 11, 2001

6 FRBC 2001 ANNUAL REPORT Situation in Washington, D.C.

In Washington, D.C., Jack Wixted, senior The Board’s S&Rdivision sets up a vice president in charge of Supervision “war room,” using the model established and Regulation (S&R) at the Chicago Fed, during Y2K planning.The Board arranges hears a muffled explosion in the distance for regular conference calls with the at about 8:45 a.m.Wixted, attending a Federal Reserve Banks to gather up-to- meeting at the Federal Reserve Board, date information on the banking system. runs to a rooftop terrace. He can see Despite Wixted’s absence, S&R staff smoke rising from the Pentagon, about in Chicago quickly arrange for a Seventh two miles from the Board building. District version of a war room. It’s essential Board staff, already in emergency mode, to gather high-quality information and scramble to evaluate the situation and avoid rumors.An S&R staffer in Chicago its implications for employees. writes in bold letters on a board in the war room:“Just the Facts.”

The Crisis in New York

Meanwhile, at the New York Fed at “At that point we felt vulnerable,” about 9 a.m., Carl Vander Wilt, senior says Vander Wilt.“We thought a plane had vice president and chief financial officer hit somewhere close to the New York at the Chicago Fed, hears a distant, deep Fed, but we didn’t know where.” rumbling—the South Tower has The New York Fed building becomes collapsed.Vander Wilt, in New York for a a safe haven for hundreds of people out Fed meeting on discount window policy, on the street in the suffocating ash and stepped off the subway at the World Trade soot. Some feel their way along the Center just 23 minutes before the first building to find the entrance. New York attack.As Vander Wilt looks out the 10th- Fed staff begin to pass out face masks or floor window, a slowly rising curtain moistened paper towels to fellow employ- of ash and soot begin to block the sun. ees and fellow New Yorkers caught in the attack.

INSPIRING CONFIDENCE ★ THE FED’S RESPONSE TO 9/11 7 TUESDAY, SEPTEMBER 11

The Bank Responds

At approximately 9:30 a.m., the North Tower of the World Trade Center collapses.Ten square blocks in the heart of the nation’s financial center lie in ruins.The wholesale destruction in Manhattan has the potential to temporarily cripple the U.S. financial system. However, the extent of the damage to the financial system is still unclear. Obtaining up-to-date information and analysis is crucial. The Federal Reserve Board and the 12 Reserve Banks work in concert to gather and exchange information.

Throughout the morning, Chicago Fed on to the Board of Governors and Fed staff at all levels are in constant contact System groups during conference calls with banks and other key players in the scheduled throughout the day. economy. President Michael Moskow At the same time, the Bank’s talks to the CEOs of large banks as well Customer Support and Contact Center as other businesses. Financial Services is receiving dozens of calls from financial staff call their counterparts at commercial institutions seeking assurance that the banks; S&R employees contact banks Chicago Fed is still operating.The Bank they supervise. issues a press statement:“The Federal The Chicago Fed plays a key role in Reserve Bank of Chicago is open for evaluating the implications for the futures business and will continue to provide market.Although the markets are closed, services to financial institutions in the Bank staff exchange information with Seventh District.” contacts in the futures industry. In each of these areas, the Chicago Fed takes advantage of its network of established contacts to quickly reach the right person.This intelligence is passed

8 FRBC 2001 ANNUAL REPORT With the Protection manager out on Bank richard lamm, director of the financial pam kempken, check manager in business, Sergeant aldrow richardson markets and payment system risk unit, the Milwaukee Office, was one of many stepped up to coordinate the Detroit Branch’s kept in close touch with key players from employees in the Bank’s six offices who security response to 9/11. the derivatives exchanges and clearing helped process the backlog of checks organizations in Chicago. caused by the shutdown in air traffic.

INSPIRING CONFIDENCE ★ THE FED’S RESPONSE TO 9/11 9 susan kinney & robert villarreal kevin gearin, Detroit Branch supervisor, charlotte brown, funds transfer were two of the 44 staff members in the was one of many employees in Chicago and specialist in Electronic Payments, volunteered Customer Support and Contact Center who Detroit who ensured financial institutions to work until 11 p.m. on 9/11 to give banks answered hundreds of calls from bankers had access to cash on 9/11. more time to close their books. on 9/11.

10 FRBC 2001 ANNUAL REPORT Responding to Liquidity Concerns

Staff at the Chicago Fed and throughout Among those contacting Moskow the System work to get a handle on the is the CEO of a major company who extent of the problem. Liquidity is a major has to meet his payroll on September 13. concern.The attacks have disrupted the The company had invested funds in immense daily flow of payments and commercial paper scheduled to mature settlements in the U.S. Many of these on September 12. But with markets at transactions flow through banks and a virtual standstill, this routine operation brokerages in New York.The Fed’s task: is now fraught with uncertainty. Contain the disruption and prevent Roger Ferguson, vice chairman of it from spilling over into the rest of the Federal Reserve Board, convenes a the economy. conference call of the Federal Reserve A particular concern is the com- Bank presidents at 10:30 a.m. Ferguson is mercial paper market — a crucial source acting in the absence of Alan Greenspan, of liquidity for major corporations. Many who is trying to make his way back to the companies have trouble “rolling over” U.S. from a conference in Switzerland. their paper and turn to their lines of With the markets in a state of shock, credit at banks to cover the shortfalls. it is clear the discount window — a last Banks, dealing with their own liquidity resort for banks that need to borrow issues, struggle to meet the needs of from the Fed—will play an important their customers. role in providing liquidity. Following the conference call, the Board issues a brief statement:“The Federal Reserve System is open and operating.The discount window is available to meet liquidity needs.”

INSPIRING CONFIDENCE ★ THE FED’S RESPONSE TO 9/11 11 Keeping Payments Flowing

Throughout the day, the Bank also The Bank’s Chicago and Detroit cash, check and fedwire focuses on its payments services—cash, offices let financial institutions know 2001 dollar amounts check and electronic.The Fed’s imme- they have access to cash. Complicating Federal Reserve Bank of Chicago, in Trillions diate concern: preventing gridlock in the the process is hesitation on the part payments network, the central nervous of some armored carrier companies to 64.9 system of the financial sector. operate in Chicago on September 11 due to security concerns. The Fed’s large-dollar transfer service, Fedwire, is critical.The early reports on “What we told banks is,‘Forget Tuesday morning are positive—Fedwire is about the usual schedule for distributing running smoothly throughout the country, cash. If you need cash, we will provide except for some minor disruptions in it,’” says Lupe Garcia, assistant vice New York.The blockages in the financial president in the Cash department. One system are due to key private-sector firms bank requests an emergency shipment being incapacitated by the attack. Later of 1.2 million.The Chicago Fed makes in the day, the Fed extends its processing special arrangements to send it within hours for Fedwire from the normal hours. Overall, though, banks report 5:30 p.m. closing until 10 : 45 p.m. This only a moderate increase in ATM with- 1.5 gives banks directly affected by the attack drawals on September 11 and 12 .The .053 more time to close their books. fact that consumers can get cash deflates the potential for panic withdrawals. Currency Checks Funds The focus shifts to cash.“Once you Processed Processed Transferred know Fedwire is up during a crisis, cash rises to the top of the list,” notes COO Werkema.“During a time of uncertainty, people have a natural reaction to try to get cash. And if it’s not there, you have the potential for panic.”

12 FRBC 2001 ANNUAL REPORT Moving the Checks

a brief explanation Even as it monitors electronic payments the delays in collection.The inevitable of float and cash, the Fed faces a fast-approaching result is record levels of float.The move In providing check services, the crisis in check processing.The Fed System eliminates uncertainty and provides Fed normally credits the accounts annually processes more than 17 billion additional liquidity. of banks depositing checks checks, about one-third of the nation’s according to a fixed availability In Chicago, Assistant Vice President total volume.The Fed uses planes to schedule. If bad weather or some Mike Hoppe and other staff meet with other factor causes a delay, the move much of this volume, transporting bankers on Tuesday afternoon to explain Fed cannot collect payments from 43,000 pounds of checks by air among banks in a timely manner. So if the decision.“The mood was very 45 processing sites. At 8:25 a.m., the the Fed sticks to existing avail- somber,” Hoppe says.“People were still Federal Aviation Administration shuts ability schedules, it would credit in a state of shock and disbelief about banks for deposited checks before down air traffic indefinitely, leaving the the attacks.They were grateful we were it received the corresponding Fed to improvise. Fed staff throughout credit from the banks on which granting credits, but also really surprised. the country begin working on alternate the checks were drawn. Having One of the Fed’s goals is help make the credits in two different accounts ground transportation. payments system more efficient.This simultaneously causes float. The Fed has to decide how to handle wasn’t an efficient way to do things in potential massive “float”— check funds normal circumstances. But keeping the that are in the process of collection. In payments moving in this crisis was more the early afternoon, the Federal Reserve important than anything else.” announces it will continue providing credits based on existing schedules, despite

End of Day in New York

Carl Vander Wilt walks back to his hotel at about 6 p.m. after completing his final conference call at the New York Fed.“There was a thick layer of white ash and dust everywhere — about two inches on the ground,” Vander Wilt recalls.“I left a trail of footprints.The streets were deserted, except for police and military. I remember seeing a lone policeman in the distance, with his blue uniform standing out in the white-ash landscape.” AP/WIDE WORLD PHOTOS INSPIRING CONFIDENCE ★ THE FED’S RESPONSE TO 9/11 13 WEDNESDAY, SEPTEMBER 12 & THURSDAY, SEPTEMBER 13

Stabilizing the Markets

Following the chaotic events of September 11 , the Fed’s key challenge is to stabilize ﬁnancial markets.The Chicago Fed Loan department gears up for a record-breaking day on Wednesday morning. Already, loan staff dealt with a steady stream of calls on September 11.

We d ne s d ay turns out to be even busier.

daily loan volumes “What we had to do was very clear,” says In one case, a bank that urgently Federal Reserve System, in Billions Loan Officer Jerome Julian.“We knew we needs a loan cannot provide the usual had to make loans.And we knew we had collateral.The Bank switches to alterna- 45.6 to work within the Fed’s lending rules to tive arrangements to secure the loan, a be as accommodating as possible.” back-up process established as part of Y2K preparations.The loan is processed The Fed requires banks to pledge within hours. collateral, such as U.S. government securities, to receive loans. As a result of Y2K The Fed System provides a record planning, most banks have their collateral $45 billion in loans on Wednesday.The “pre-pledged” to the Fed so it will be week before the attack, daily lending 1 quickly available in an emergency. averaged less than /2 of one percent of that amount.The Chicago Fed provides “The entire Fed System uses the about $4.3 billion in loans on Wednesday, same online loan application system,” also a record amount. notes Katie Stembridge, a loan analyst. “When a bank calls, we pull up their file to check collateral and process the request.

2.7 The loan then needs to be approved by .19 .09 our loan officer.The entire process takes just a few minutes.” Sept. Sept. Sept. Sept. 5121926

14 FRBC 2001 ANNUAL REPORT Examiner paul decker worked with other New officer jerome julian directed the karen boykin, webmaster in the S&R staff to monitor the Seventh District’s record-breaking loan efforts following 9/11. Customer Relations and Support Office, banking situation. Loan Analyst katie stembridge volun- quickly provided information to bankers on teered to work until midnight on 9/11. the System’s financial services Web site.

INSPIRING CONFIDENCE ★ THE FED’S RESPONSE TO 9/11 15 Flooding the Market with Liquidity

getting the word out That same morning, the Open Market The Fed is also active on the interna- to customers Desk at the New York Fed begins another tional front. Soon after the attack, foreign With effective communications at a day’s work. It’s not a typical day.The banks located in the U.S. face a problem: premium, the System’s Customer New York Fed building is just a few They can’t obtain funding—specifically Relations and Support Office (CRSO) short blocks from the massive destruction dollars—due to the disruption in the plays a critical role. CRSO, responsible for the Fed’s nationwide at Ground Zero. And the Fed is facing financial markets. On September 12, customer support and marketing, unprecedented liquidity demands. the FOMC votes during a conference is managed at the Chicago Fed. call to establish or enlarge 30-day “swap The Desk will play a key role as Several improvements previously agreements” with the European Central it carries out open market operations— spearheaded by CRSO prove to Bank. Similar agreements are later be helpful. Account managers for the buying and selling of securities— approved for the Bank of Canada and each of the 50 largest banks using under the direction of the Federal Open the Bank of England.The swaps enable Fed services are already in place. Market Committee (FOMC).The Fed On the morning of 9/11, Chicago the foreign central banks to trade dollars begins to flood the financial system with Fed Senior Vice President Dick for an equivalent amount of foreign Anstee instructs the account man- record levels of liquidity by executing currency.The foreign central banks are agers to contact their bank on a repurchase agreements.These overnight regular basis. In addition, the Fed’s then able to quickly provide dollars to loans collaterallized with government national financial services Web site, foreign banks located in the U.S.The established in 1998, becomes a securities are used routinely in open swaps result in an additional $90 billion critical tool for quickly dissemin- market operations, but seldom top a few in liquidity. ating information to customers. billion dollars each day. “The Fed used every possible means On Wednesday, the Fed injects $38 to add liquidity—the discount window, billion, more than double the previous open market operations, float—and even record.Thursday, the Fed shatters that used swap lines in an innovative way mark with $70 billion.The next day, the to help foreign central banks provide Fed injects even more—$81 billion. liquidity to foreign banks in the U.S.,” In addition, the Fed does not offset says Curt Hunter, the Bank’s director of the float generated by check-processing research.“If you compare the financial delays.Typically, if check deliveries are system to a plumbing system—then there delayed, the Fed “soaks up” the float were a lot of pipes blocked after 9/11. through open market operations.The But the Fed flooded the system so liquid- Fed opts to let the float remain, pro- ity was temporarily available through viding additional liquidity.The result is existing, still-functioning pipelines.” $23 billion in float on September 12 and a daily average of $28 billion in float for the week ending September 19 .

16 FRBC 2001 ANNUAL REPORT Monitoring the Banking System

Since early on September 11,S&R’s money wasn’t flowing. Some banks had stranded war room in Chicago serves as a coordi- too much money; some were short.The far from home nation point for gathering and passing on commercial paper market had collapsed. Like many Fed employees, Alan information about the region’s banking Commercial banks were under intense Greenspan is stranded far from home on 9/11. Greenspan, in pressure.There was a lot of apprehension situation.The Chicago Fed acts as an Switzerland for a central banking information clearinghouse—answering and uncertainty.We told banks,‘We’re conference, eventually hitches a questions from banks, conveying informa- here.We’re not going anywhere.Whatever ride home on a military cargo jet. tion to them, and passing on information we can do to support you, we’ll do it.’” to the Fed System.The Bank’s practice Decker, a pilot during the Vietnam of designating an examiner as a “single War, keeps a photo of his old F4 jet on point of contact” for a bank helps provide his desk.“When things got really hectic, clear lines of communication. I’d look over at the photo and think it Among the issues tracked by the could be worse. I have to admit I looked Fed: Are banks limiting access to lines of at that photo several times.” credit? And how exposed is the banking Decker ends his day on Thursday system to the industries most affected at about 8 p.m. by bringing pizza to the by the crisis, such as airlines, insurance staff he’s working with at a commercial and travel?

bank.“I wasn’t there to monitor their AP/WIDE WORLD PHOTOS Examiner Paul Decker, a 17-year activities,” notes Decker.“I just wanted The trip home for Chicago Fed veteran who has experienced a number to provide moral support as they finished S&R staffers Sherry Bormann of banking crises, notes,“We had never off another long day.” and Zoriana Kurzeja exemplifies seen anything like this.There were a host the experiences of many. In San Francisco on business when the of problems—all happening at once.The attack occurred, Bormann and Kurzeja begin the long drive to Chicago on September 12. “There was a gentleness in the country at that time,“ Bormann recalls. “It was a much kinder, gentler country that we crossed.”

INSPIRING CONFIDENCE ★ THE FED’S RESPONSE TO 9/11 17 FRIDAY, SEPTEMBER 14 – MONDAY, SEPTEMBER 17

Focusing on the Economy

By the end of the week, ﬁnancial markets are still shaky but more stable.The Fed increases its focus on the longer-term implications for the economy. Earlier in the week, on September 13,Moskow participates in an FOMC conference call.The Committee has a detailed discussion of banking and other ﬁnancial market conditions. Participants also discuss the outlook for opening the stock exchanges, closed since September 11 and scheduled to reopen on the 17 th.

2001 fed funds rate changes The Committee decides the situation is and construction.The team seeks infor- In Percent too uncertain for an immediate mone- mation on how businesses reacted to tary policy move, but that action will September 11 and if they have changed % be needed very soon. An FOMC call is their business plans. Seventh District 6.00 scheduled for Monday, September 17. contacts confirm that business activity 5.50 is at a standstill except for items such On Friday morning, Chicago Fed 5.00 as gas and groceries and services such Economist Rick Kaglic works on a as insurance. 4.50 special edition of the “Beige Book,” the

4.00 Fed’s summary of regional economic Moskow, an FOMC voting member 3.75 conditions based on anecdotal infor- in 2001, continues to call business con-

3.50 mation.The Federal Reserve Board has tacts in the region as he has throughout asked each Reserve Bank to help develop the week. Prior to the Monday FOMC 3.00 a post-9/11 “Beige Book.” meeting, he consults with Curt Hunter, 2.50 the head of Economic Research, about As they do for each of the eight 2.00 the state of the economy.Working with 1.75 annual editions of the “Beige Book,” Hunter, Moskow develops the key points Kaglic and a small team of associates Pre-9/11 Post -9/11 he wants to share at the meeting and contact up to 10 0 people working in evaluates how he should vote. the Seventh District in fields such as manufacturing, retail, finance, real estate

18 FRBC 2001 ANNUAL REPORT Economist rick kaglic helped track Analyst rich stefanich was one of carey wright, manager of Protection regional conditions for a special edition of several Statistics staff members who in Chicago, took the initiative to increase the “Beige Book” following 9/11. responded to special requests from the security immediately following the Federal Reserve Board to collect statistical 9/11 attacks. Many Protection staff worked information from banks following 9/11. 12- to 16-hour days following 9/11.

INSPIRING CONFIDENCE ★ THE FED’S RESPONSE TO 9/11 19 The Bank’s Midway facility broke a record for processing checks thanks to the efforts of staff such as Supervisor sonja hennings Getting the Checks Out and Senior Processor andrew hall.

On Friday afternoon, the Bank’s check On Friday afternoon, the dam breaks. staff are in a state of high alert. Planes are Checks start arriving in large numbers. now flying; employees know a deluge Staff have already agreed to work extend- of checks will inevitably follow. During ed hours over the weekend. Soon, every the last three days, the Fed System deliv- square foot of unoccupied space is covered ered roughly 75 percent of its normal with hundreds of bags of checks waiting check volume by cobbling together a to be processed.The incoming checks temporary truck-delivery network. But replace bags of processed checks that can the Fed still needs to move millions of now be shipped to the airport.The new checks by air. check work arrives in a steady flow. One of the pressure points in the “The trucks just kept coming,” System is the Bank’s check operation in remembers Senior Processor Andrew Chicago.The office serves as a “funnel Hall.“We started to wonder when they point” for Midwest check volume. In were going to stop. Right after you made addition, a number of large customers a dent and could see over a pile of checks, in Chicago temporarily shift their check more would come.” work to the Fed due to the crisis. By early Sunday morning, staff Just a week earlier, the check breathe a sigh of relief.The worst is operation had moved from downtown over. Midway staff processed more than Chicago to a more efficient space on six million checks over the weekend — the Southwest side of the city near a record for the Chicago check operation. Midway Airport. Staff spent a hectic “There were some high-fives, some week making the move.“We got to the tired high-fives,” says Hall.“We got more point where we had a good ‘just-moved- checks than I’ve ever seen.We all pushed in-the-house feeling,’ and then the hard.The newer people were helped by attacks came,” notes Check Supervisor the more experienced ones.We all pulled Sonja Hennings. together and got it done.”

20 FRBC 2001 ANNUAL REPORT orlanda hudson, check coordinator at the Detroit Branch, worked to assure check customers that their accounts would be charged and credited properly during the Responding with Monetary Policy week of 9/11.

On Monday, September 17, the FOMC However, the economy continues to starts its conference call at 6:30 a.m. struggle after 9/11.With people in shock The meeting is scheduled early so the and glued to their TVs, consumer spend- Fed can announce a decision before the ing growth falls sharply in September. stock markets reopen.The Committee Spending by consumers later recovers, faces an unusually uncertain outlook. buoyed in part by aggressive price discounting and low mortgage rates. Prior to September 11,the economy Business spending, on the other hand, was struggling, with some tentative signs declines as companies liquidate excess of improvement in the third quarter.The inventories and put capital spending plans shock of 9/11 will sap the strength of on hold. In addition, economies overseas an already weak economy.The question weaken, dampening the appetite for is how much and for how long.“The U.S. exports. In November, the National situation was very severe,” Moskow notes. Bureau of Economic Research announces “Activity had ground to a halt. Consumers that the economy entered into a recession weren’t going to stores. And some stores in March of 2001. weren’t reopening.There was a brief cessation in economic activity.” By year-end, there are some prelim- inary signs that the economy is reaching After observing a moment of bottom. An upturn during 2002 is a rea- silence in honor of the 9/11 victims, sonable prospect, although the outlook the Committee takes only 25 minutes is more uncertain than usual. Over the to take decisive action—it cuts the fed broader horizon, the prospects for the funds target by half a percentage point. economy remain bright. Factors such During the remainder of 2001, the as deregulated financial markets, more FOMC reduces the fed funds target by flexible labor markets and technology 1 an additional 1 /4 percentage points to advances have enhanced America’s ability 3 1 /4 percent—the lowest level in 40 years. to absorb shocks and provide a foundation These actions follow the Fed’s policy for solid economic growth. moves during the first eight months of the year, which reduced the fed funds 1 1 target from 6 /2 percent to 3 /2 percent.

INSPIRING CONFIDENCE ★ THE FED’S RESPONSE TO 9/11 21 The Situation Stabilizes

A little over a week after the attack, The crisis gives Chicago Fed staff an Speaking to staff at the gathering, financial markets are more stable. Discount enhanced understanding of the central Moskow notes that “our hearts, thoughts window borrowing and Fed float are back bank’s critical role.“I got a better idea and prayers go out to the victims of to normal levels; check operations and of how many people depend on us to this tragedy and their loved ones.” He other services are proceeding smoothly. get the money out on the street,” says thanks employees for their efforts during Customers and stakeholders give the Fed Check Supervisor Hennings.“Our job an emotional and stressful time for the high marks for its efforts. One commercial is to be a bank for banks.That’s what entire nation.“In times of crisis like bank takes a creative approach and sends a we tried to do and we succeeded.” this, a stable financial system is crucial thousand packages of LifeSavers™ candy and the Fed is called upon.The System As the crisis winds down, there is to each of the 45 Fed offices. and the Chicago Fed have been more more time to reflect. Like millions of than equal to the challenge.You have Looking back at the quick recovery other Americans, Chicago Fed staff come done an outstanding job.” of the financial system, Alan Greenspan together on September 14 to watch said,“…we are blessed with a financial the national memorial service on TV system that is creative, that is flexible, and honor the victims of the attack. that is innovative. Banks—including the Responding to the many examples of central bank—were there when they heroism throughout the nation, employees were needed and did what was required sing “God Bless America.” with dispatch.”

Lessons Learned

Each crisis provides a chance to improve.The Chicago Fed appoints a review team to look at the Bank’s response to 9/11. Similar reviews take place at the System level and at other Reserve Banks. Among the approved recommendations from the Chicago Fed review:

★ Streamline the crisis management ★ Take additional measures to ensure process to facilitate quicker decisions. the safety of employees in the post- ★ Develop a more formal crisis 9/11 environment. communication plan for external ★ Enhance business continuity planning and internal audiences. by increasing the involvement of each department.

22 FRBC 2001 ANNUAL REPORT BANKTHE ACCOMPLISHMENTS YEAR IN REVIEW

2001 Accomplishments

The Federal Reserve Bank of Chicago had another successful year in 2001, with significant accomplishments in its four functional areas: Economic Research, Supervision and Regulation (S&R), Financial Services, and Support Activities. In addition to responding to 9/11, the Bank’s notable accomplishments include assuming responsibility for the System’s Customer Relations and Support Office (CRSO), opening a check processing facility in Chicago, and developing a new Visitors Center.

The following long-term goals provided a broad strategic framework for 2001 activities:

1. Sharpen focus on customers and stakeholders.

2. Successfully execute Federal Reserve System leadership assignments.

3. Contribute to the discussion and development of public policy issues.

4. Continually improve operational efficiency.

5. Continue to prepare staff to meet the Bank’s evolving needs.

first quarter

★★★The Bank introduces the “Chicago Consumer and Community Affairs S&R reduces regulatory burden Fed National Activity Index,”a works with local organizations to by combining whenever possible monthly index that gauges current launch the “Housing Opportunities bank holding company inspections, and future economic activity. Partnership of Southeast Wisconsin,” safety and soundness exams and designed to promote housing oppor- specialty exams. ★ The Journal of Finance publishes tunities in the region. Nicola Cetorelli’s “Banking Market ★ Responding to customer feedback, Structure, Financial Dependence, ★ The Bank’s conference,“Chicago’s the Chicago Fed launches seminars and Growth: International Evidence Global Economic Connections,” for bankers that cover information from Industry Data,” one of 32 examines the effect of immigration, on a variety of financial services in Chicago Fed papers published foreign investment and trade on the a single session. or accepted for publication in city’s economy. ★ academic journals during 2001. S&R holds a training seminar ★ UseDirectPayment.com, developed for System examiners, one of the ★ The Bank expands its mentoring by the Chicago Fed to encourage initiatives it undertakes as the Fed’s program, tapping internal resources electronic bill payment, is expanded competency center on private to help staff develop their talents to banks and billers throughout the equity merchant banking. and skills. Seventh District.

INSPIRING CONFIDENCE ★ THE FED’S RESPONSE TO 9/11 23 THE YEAR IN REVIEW

VISITORS CENTER OPENS The Bank opens a 5,500 square-foot To introduce the Center more Visitors Center in July as part of an broadly, the Bank hosts a series of ongoing effort to reach out to the sneak previews for media, employ- public. The Center explains in an ees, and other audiences. The official engaging, hands-on way the role of public opening attracts 600 people. a central bank and the evolution of The outreach effort also provides money and banking. In an opening an opportunity to unveil the Bank’s ceremony, Chairman Alan Greenspan new public art collection, “Images dedicates the Center in honor of of the Seventh District.” Together, Nancy Goodman, who played a key the art collection and Visitors Center role in the Bank’s outreach efforts represent the Bank’s strong commit- for three decades. ment to public outreach.

second quarter

★ William Conrad, first vice president ★★The Chicago Fed is selected to S&R’s technology lab, a unique ★ The Chicago Fed is selected to and chief operating officer, retires lead the System’s initiative regarding regulatory resource, holds one of implement, for the Fed System, a after 42 years of service and is Electronic Bill Presentment and 35 training sessions for Federal Web-based application for devel- succeeded by Gordon Werkema, Payment (EBPP), which includes Reserve and other examiners oping budgets on a central server. formerly executive vice president making strategic recommendations on how to evaluate information ★ at the San Francisco Reserve Bank. to the Fed System. technology risk. S&Rcreates a new risk-analysis unit, which proactively identifies ★ Economic Research initiates an ★ S&R hosts a meeting with ★ The “Conference on Bank risks facing District banks and ongoing series of papers and public banking, insurance and securities Structure and Competition,” allocates supervisory resources to forums examining the Midwest’s regulators, part of an ongoing generally regarded as the nation’s address them. infrastructure and long-term effort to build relationships with leading conference on financial growth prospects. financial supervisors. public-policy issues, focuses on the financial safety net.

24 FRBC 2001 ANNUAL REPORT CRSO ESTABLISHED The Chicago Fed is selected to lead During 2001, CRSO focuses on: the System’s Customer Relations restructuring the National Account and Support Office (CRSO). The new Program, which supports the System’s office is successfully established at largest customers; developing national the Chicago Fed in June. CRSO marketing campaigns for several manages several national financial products; piloting new FedLine for services functions—sales and mar- the Web applications; and developing keting, national accounts, customer a national strategy for managing support, and electronic distribution customer relationships. channels. The overall goal for CRSO is to help ensure consistency and excellence in financial services to customers nationwide.

third quarter

★ The Des Moines Office sets a ★★★The Bank publishes “Productivity The Chicago Fed continues to State and local policymakers, System record for the fewest check- Growth in the 1990s:Technology, play a leading role in executive academics, and urban real-estate processing errors during a three- Utilization, or Adjustment?,” by education and development for professionals attend a Bank confer- month period.The Office goes on Susanto Basu, John Fernald and the System, organizing a highly ence examining the prospects of to lead the System in the fewest Mathew Shapiro, one of 26 work- successful Leadership Conference large central cities such as Chicago. errors per 100,000 checks for all ing papers produced by Economic for Fed senior officers. In addition, ★ of 2001. Research during the year. it hosts a special conference for The Bank surveys all staff as part of “alumni,” who have attended an ongoing effort to build a stronger ★★The Customer Call Center imple- The Chicago and Detroit Cash previous Leadership Conferences. culture and engage employees.As ments interactive voice response departments implement new soft- results are shared, employees form and web applications, providing ware used to account for thousands ★ S&R holds a conference on work groups to develop plans to customers with better information of daily cash transactions. “de novo” (start-up) banks, one strengthen their connection to work. and more flexible options. of a series of outreach efforts on regulatory issues.

INSPIRING CONFIDENCE ★ THE FED’S RESPONSE TO 9/11 25 THE YEAR IN REVIEW

NEW CHECK FACILITY COMPLETED The Chicago check operation successfully moves in September to a new location on the Southwest side of the city near Midway Airport. The move to a new 55,000 square-foot space, completed on schedule and within budget, enables the Bank to provide more flexible and convenient service to customers. Among the advantages: staff can process checks more quickly in the new facility. This enables the Bank to provide customers with new deposit options.

fourth quarter

★★Bankers and policymakers attend The “Big Problem with Small ★ The Bank signs up the 1,174th ★ The Chicago Fed’s Audit function “International Money Transfers,” a Change,” a book co-authored by depository institution submitting receives a Commitment to Quality Chicago Fed conference examining Chicago Fed Economist Francois its statistical reports via the Internet. Improvement Award from the remittances and their use by the Velde, is described in The Economist Institute of Internal Auditors. ★  “unbanked” population. as “a fascinating new history S R chairs the System task force of money.” charged with studying the busi- ★ The Indianapolis Office ranks ★ The Bank comments on options ness value of technology investment first in the Fed System for the being considered by the Federal ★ The Chicago Fed moves forward for the Fed’s supervisory function. highest number of check items Reserve Board to reduce risk to on a System-wide check modern- handled per work hour and the the payments system, one of a series ization initiative with four offices ★ Economic Research brings together lowest unit costs. of public-comment responses on successfully converting to a new, regulators and participants from the ★ complex policy issues during 2001. standard check-adjustment system financial industry and academia to The Bank supervises 19 9 state by year-end. evaluate the complexities involved member banks and 988 bank ★ More than 12,000 visitors tour with resolving problems at large, holding companies, the largest the Chicago Fed during 2001. ★ The Bank completes diversity complex banking organizations. number in the Fed System. training for all of its managers as well as all new employees.

26 FRBC 2001 ANNUAL REPORT BANK SUPPORTS COMMUNITY Bank staff gather in June to help build a playground for a day-care center on the West Side of Chicago. Such community-based efforts took place throughout 2001 and inten- sified following September 11. Like millions of other Americans, Chicago Fed staff reach out to help those affected by the 9/11 attacks. Employees organize fund-raising efforts and take part in blood drives held at the Bank’s offices. Overall, staff from each of the Bank’s six offices participate in roughly 40 community service projects during 2001. Among the other 2001 activities: collecting food, clothing, toys and child-care items for those in need; teaching economics-related topics to hundreds of students via Junior Achievement; and assisting low-income families in preparing tax returns through the Tax Counseling Project.

looking to the future

Given the rapidly evolving eco- 1. Carry out System responsibilities nomic and financial environment, for leading CRSO. the Bank will face new challenges during 2002 in developing 2. Build on progress as a System  monetary policy, providing financial S R expert on internet and services, and supervising banks. wireless banking; large, complex While continuing to focus on its banking organizations; and private varied ongoing responsibilities, the equity merchant banking. Chicago Fed has identified four 3. Contribute to System policy on high-priority goals for 2002: emerging financial services.

4. Achieve superior performance in financial services.

INSPIRING CONFIDENCE ★ THE FED’S RESPONSE TO 9/11 27 FEDERAL RESERVE BANK OF CHICAGO BOARD OF DIRECTORS

jack b. evans President The Hall-Perrine Foundation Chairman Cedar Rapids, Iowa arthur c. martinez Retired Chairman and Chief Executive Officer Sears, Roebuck and Co. Deputy Chairman Hoffman Estates, Illinois robert j. darnall Chairman Prime Advantage Chicago Chicago, Illinois connie e. evans President and Chief Executive Officer WSEP Ventures Chicago, Illinois

28 FRBC 2001 ANNUAL REPORT robert r. yohanan Managing Director and Chief Executive Officer First Bank & Trust Evanston, Illinois

williama.osborn Chairman and Chief Executive Officer Northern Trust Corp. and Northern Trust Co. Chicago, Illinois

w. james farrell Chairman and james h. keyes Chief Executive Officer Illinois Tool Works, Inc. Chairman and Glenview, Illinois Chief Executive Officer Johnson Controls, Inc. Milwaukee,Wisconsin alan r. tubbs President Maquoketa State Bank and Ohnward Bancshares Maquoketa, Iowa

INSPIRING CONFIDENCE ★ THE FED’S RESPONSE TO 9/11 29 DETROIT BRANCH BOARD OF DIRECTORS

richard m. bell Retired President and Chairman Chief Executive Officer timothy d. leuliette The First National Bank of Three Rivers President and Three Rivers, Michigan Chief Executive Officer Metaldyne Plymouth, Michigan

irma b. elder President Elder Ford stephen r. polk Troy, Michigan Chairman and Chief Executive Officer R.L. Polk & Co. Southfield, Michigan

30 FRBC 2001 ANNUAL REPORT edsel b. ford 11 Director Ford Motor Company mark t. gaffney Dearborn, Michigan President Michigan AFL-CIO Lansing, Michigan

david j. wagner Chairman Fifth Third Bank Grand Rapids, Michigan Two new directors joined the Detroit board in :

Robert E. Churchill (left), chairman and chief executive officer, Citizens National Bank, Cheboygan, Michigan, replaced Richard Bell, whose term expired on December 3, 200.

Irvin D. Reid (right), president,Wayne State University, Detroit, Michigan, replaced Steven Polk, whose term expired on December 3, 200.

INSPIRING CONFIDENCE ★ THE FED’S RESPONSE TO 9/11 31 FEDERAL RESERVE BANK OF CHICAGO MANAGEMENT COMMITTEE

Federal Reserve Bank of Chicago Management Committee (from left): michael moskow, gordon werkema, carl vander wilt, and jerome john.

Federal Reserve Bank of Chicago Management Committee continued (from left): john wixted, angela robinson, barbara benson, charles furbee, and richard anstee.

32 FRBC 2001 ANNUAL REPORT Federal Reserve Bank of Chicago Management Committee continued (from left): glenn hansen, brianegan,williamgram, cynthia castillo, and nate wuerffel.

Federal Reserve Bank of Chicago Management Committee continued (from left): karen kane, william barouski, edward green, and william hunter.

INSPIRING CONFIDENCE ★ THE FED’S RESPONSE TO 9/11 33 FEDERAL RESERVE BANK OF CHICAGO OFFICERS

central bank activities*

Michael H. Moskow economic research Microeconomic Compliance/Community President and and programs Policy Research Reinvestment Act Chief Executive Officer William C. Hunter Daniel G. Sullivan Douglas J. Kasl Senior Vice President Vice President and Vice President and Gordon Werkema and Director of Economic Advisor Division Leader First Vice President and Research Chief Operating Officer Paula R.Worthington Sheryn E. Bormann Edward J. Green Research Officer and Director Senior Policy Advisor Economic Advisor Richard D. Chelsvig Jean L.Valerius Statistics Regional Director– Vice President and Wisconsin Senior Policy Advisor Angela D. Robinson Vice President Michael R. Jarrell Regional Economic and Director of Regional Director– Programs Research Statistics Indiana and Michigan and EEO Officer William A.Testa Martha L. Muhs Vice President and Loretta C.Ardaugh Regional Director–Iowa Economic Advisor Statistical Reports Arthur J. Zaino Officer Regional Director– Financial Markets Illinois Regulation and supervision Payments Issues and regulation Global Supervision Douglas D. Evanoff John J.Wixted, Jr. James W.Nelson Vice President and Senior Vice President Vice President and Economic Advisor Division Leader Administration Elijah Brewer III A. Raymond Bacon Assistant Vice President James A. Bluemle Director and Economic Advisor Vice President and Division Leader Adrian B. D’Silva James T. Moser Director Research Officer and Kathleen E. Benson Economic Advisor Director Mark H. Kawa Supervisory Director Robert R. Bliss Catherine M. Bourke Senior Economist and Director Ralph A. Livesay Economic Advisor Supervisory Director Bank and Bank Holding Michael E. Plaskett Robert DeYoung Company Supervision Senior Economist and Supervisory Director Economic Advisor Richard C. Cahill Vice President and Risk Analysis David A. Marshall Division Leader Catharine M. Lemieux Senior Economist and Vice President Economic Advisor Robert A. Bechaz Regional Director– Philip G. Jackson Macroeconomic Illinois Director Policy Research Jeffrey A. Jensen Technology Supervision Charles L. Evans Regional Director–Iowa and Operations Vice President and William H. Lossie Economic Advisor Supervisory Director David E. Ritter Resource Group Vice President and Spencer D. Krane Division Leader Vice President and Joseph J.Turk Economic Advisor Regional Director– Gregory J. Bartnicki Director Anne Marie L. Gonczy Indiana and Michigan Assistant Vice President Karen Whalen-Ward Frederick L. Miller and Economic Advisor Regional Director– Director William A. Strauss Wisconsin Senior Economist and Economic Advisor *Includes directors and senior economists and economic advisors.

34 FRBC 2001 ANNUAL REPORT services to depository institutions support functions customer relations financial services branch operations community and information financial and support office and cash operations corporate affairs technology services management services, Charles W.Furbee accounting, loans, Richard P.Anstee Senior Vice President Cash Operations Karen Kane William A. Barouski payment system risk Senior Vice President Senior Vice President Senior Vice President and reserves and Jerome D. Nicolas financial markets William A. Barouski Check, Electronic Vice President and Fiscal Services Consumer and Business Technology Carl E.Vander Wilt Senior Vice President Guadalupe Garcia Community Affairs Thomas G. Ciesielski Frank S. McKenna Senior Vice President and Valerie J.Van Meter Assistant Vice President Vice President Alicia Williams Vice President Chief Financial Officer Vice President Vice President Yvonne H. Detroit Branch James L. Buziecki Jeffrey S.Anderson Loans, Accounting, Payment Montgomery Assistant Vice President Vice President Brian D. Egan Corporate System Risk and Reserves Vice President Vice President Communications Jeffery B. Marcus Kathrine Kielma Gerard J. Nick Mary H. Sherburne Assistant Vice President Assistant Vice President Patrick A. Garrean G. Douglas Tillett Vice President Vice President Assistant Vice President Corporate Ira R. Zilist Jerome E. Julian Daniel F.Reimann Communications Officer Eve M. Boboch Linda S. McDonald Assistant Vice President Loans and Reserves Assistant Vice President and Vice President Assistant Vice President Assistant Vice President Officer Beverly A. Schatte James R. Holland Human Capital Cynthia L. Rasche Michael Blanks Robert A. Lyon Administrative Officer Corporate Brenda D. Ladipo Assistant Vice President Building Advisor Communications Assistant Vice President Construction Officer Strategic Marketing James M. Rudny Officer and Assistant Sara Ungari and Customer Service Assistant Vice President Donna M. Dziak Vice President Information Security Accounting Officer Kathleen H.Williams Operations Officer Lysette R. Bailey Regional Offices Vice President corporate and Assistant Vice President Financial and Des Moines Office support services Management Services Rosemarie V.Gould L. Edward Ketchmark Network Services Ellen J. Bromagen Administrative Officer Jerome F. John Assistant Vice President Senior Vice President R. Steve Crain Assistant Vice President Indianapolis Office Assistant Vice President Joan Mielke Facilities Management, Donna M.Yates Operations Officer Assistant Vice President General Services Business Resumption, and Protection Asset Management, Jeffrey R.Van Treese office of the Kristi L. Zimmermann Budget and Facilities general auditor Operations Officer Vice President Anthony J.Tempelman Glenn C. Hansen Milwaukee Office Michael Carano Assistant Vice President General Auditor Michael J. Hoppe Assistant Vice President Assistant Vice President legal department Robert M. Casey William J. O’Connor Assistant General Auditor Leatrice S. Mack Assistant Vice President William H. Gram Marketing Officer Senior Vice President Joseph B. Green Assistant Vice President Peoria Facility human resource and General Counsel Tyler K. Smith services Elizabeth A. Knospe Assistant Vice President Barbara D. Benson Vice President and Associate General Counsel Vice President As of December ,  Deidre A. Gehant Yu r ii Skorin Assistant Vice President Vice President and Associate General Counsel Margaret K. Koenigs Assistant Vice President Anna M.Voytovich Vice President and Richard F.Opalinski Associate General Counsel Assistant Vice President

INSPIRING CONFIDENCE ★ THE FED’S RESPONSE TO 9/11 35 ADVISORY COUNCILS

federal advisory John Challenger Ritch LeGrand Michigan Linda Little Charles Sanger council Challenger, Gray LeGrand & Company Gary M. Burkhardt Bank Illinois Bank Calumet seventh district & Christmas, Inc. Sioux City, Iowa Century Bank & Trust Champaign, Illinois Hammond, Indiana Chicago, Illinois representative Karen Lennon Coldwater, Michigan Diane McCluskey Deborah Schneider Alan G. McNally Sheila Cochran SomerCor 504, Inc. Richard M. Carncross Independent First Midwest Bank, N.A. Chairman and Chief Milwaukee County Chicago, Illinois Signature Bank Bankers’ Bank Joliet, Illinois Labor Council, Springfield, Illinois Executive Officer Jeffrey Padden Bad Axe, Michigan Larry Stewart AFL-CIO Harris Bankcorp, Inc. Public Policy John McEvoy AMCORE Chicago, Illinois Milwaukee,Wisconsin David S. Hickman Associates, Inc. United Bank & Trust Metro Bank N.A. Financial, Inc. Carl Gallman Lansing, Michigan Tecumseh, Michigan East Moline, Iowa Rockford, Illinois advisory council on International Mike McKenzie Barbara Yeates-Peryer agriculture, labor, Association John R. Kluck community bank First Capital Bank Cole Taylor Bank and small business of Machinists & First National Bank council Peoria, Illinois Chicago, Illinois Aerospace Workers Gaylord, Michigan Sandra Batie Illinois Michigan State Westchester, Illinois Joseph F.Salas Randall Ross Indiana First Mid-Illinois University Thomas Hargrove Kenne P.Bristo CSB Bank Bank & Trust H. Matthew Ayers East Lansing, Michigan United Steelworkers Liberty Federal Bank Capac, Michigan Hinsdale, Illinois Mattoon, Illinois State Bank of Lizton Michael Charles of America Lizton, Indiana Fusilier East Chicago, Indiana Roger DeVries Wisconsin Jerald Sarnes The Havana Steven Bailey Fusilier Family Farm Matthew Harper Milledgeville State Bank Paul Adamski National Bank First Bank of Berne & Greenhouse Pioneer Hi-Bred Milledgeville, Illinois The Pineries Havana, Illinois Berne, Indiana Manchester, Michigan International, Inc. Barbara J. Kuhl Stevens Point,Wisconsin Lynn Bierlein Connie Greig Des Moines, Iowa First Busey Corp. Mike Falbo Donald Schlorff Busey Bank Salin Bank and Trust Little Acorn Ranch Dennis Williams Urbana, Illinois State Financial Bank Urbana, Illinois Indianapolis, Indiana Estherville, Iowa United Auto Workers Richard K. McCord Hales Corners,Wisconsin Debbie L. Cox Ron Heck Des Plaines, Illinois Illinois National Bancorp Richard Hansen Chicago Metropolitan Springfield, Illinois Irwin Union Checkers, Inc. David Newby Johnson Bank Donna Adam Bank & Trust Perry, Iowa Wisconsin State Racine,Wisconsin Indiana Manufacturers Bank Columbus, Indiana Mark Legan AFL-CIO Philip G. Holland Chicago, Illinois Milwaukee,Wisconsin Brent Clifton Steven D. Flowers Legan Livestock Ixonia State Bank John Collins Bank One and Grain Robert Crawford, Jr. Grabill Bank Ixonia,Wisconsin Grabill, Indiana Mid-States Corporate Indianapolis, Indiana Coatesville, Indiana Brook Furniture Federal Credit Union David Kopperud Dee Ann Hammel Jerome Rowe Rental, Inc. Michael L. Cox Peoples State Bank Warrenville, Illinois Arlington First Merchants First Federal Farmers Cooperative Wausau,Wisconsin John Dabrowski Savings Bank Grain Co. Heights, Illinois Corporation Muncie, Indiana Devon Bank Huntington, Indiana Dalton City, Illinois Thomas Crosby customer advisory Chicago, Illinois Stan V.Hart Gary Steiner American National/ Chuck Crow groups The Insurance Exchange Community Bank Thomas Darovic Te rre Haute First Wisconsin Farm Bureau Central Illinois Superior Bank, FSB National Bank Mondovi,Wisconsin Crestwood, Illinois Noblesville, Indiana Sally Boers Oak Brook Terrace, Te rre Haute, Indiana Ralph Deger Michael Kubacki Leland Strom Southside Trust & Illinois Bushman Equipment, Inc. Lake City Bank Rita Hyden Strom Farm Savings Bank Butler,Wisconsin Warsaw, Indiana Edward Furticella Union Bank and Trust Elgin, Illinois Peoria, Illinois Peoples Bank SB North Vernon, Indiana David Fisher Te r r y Tucker Iowa Munster, Indiana Onthank Company Craig Becker Sherri Jones Maple Leaf Farms, Inc. Southeast National Larry Gardner Phillips Federal Milford, Indiana Des Moines, Iowa David M. Bradley First Federal Savings Bank of Moline 1st Source Bank Credit Union George Franco Leigh Tuckey, Partner Bank of Iowa Davenport, Illinois South Bend, Indiana Fort Wayne, Indiana National Financial LeighBert Farms Fort Dodge, Iowa Mitch Borneman Savannah Hannah Jim Miller Lancaster,Wisconsin Corporation (NFC) Milwaukee,Wisconsin Michael Bauer Heritage Bank Financial Federal Trust Greenfield Banking J. Edward Yanos Quad City Bank & of Central Illinois Chicago Ridge, Illinois Company Yo landa Gomez-Stupka Yanos Farms Trust Company Tr ivoli, Illinois Greenfield, Indiana National Native Ron Hunt Cambridge City, Indiana Bettendorf, Iowa American Business Steve Danko American Rebecca Morgan Margaret Blackshere Alliance Elizabeth Garst Soy Capital Bank Chartered Bank Lincoln Federal Illinois State Federation Bingham Farms, Raccoon Valley Decatur, Illinois Schaumburg, Illinois Savings Bank Plainfield, Indiana of Labor & Congress of Michigan State Bank Pete Jain Mary Kosar Industrial Organization Adel, Iowa Citizens Equity NLSB Robert J. Ralston Chicago, Illinois Jan Hayhow Michigania, Inc. Richard Waller Federal Credit Union New Lenox, Illinois Lafayette Bank Peoria, Illinois & Trust Company J. Michael Borden Lansing, Michigan Security National Bank Richard Marra Lafayette, Indiana Hufcor Inc. Sioux City, Iowa Michael King Metro Federal Janesville,Wisconsin Christopher LaMothe Indiana Chamber Peoples Bank of Macon Credit Union Glenn Raver Carl Camden of Commerce Macon, Illinois Arlington Heights, Union Bank and Trust Kelly Services, Inc. Indianapolis, Indiana Wilbur R. Lancaster Illinois Greensburg, Indiana Troy, Michigan Union Planters Bank Brian D. Payne Steven Reynolds Decatur, Illinois National City Bank Farmers Bank Frankfort Springfield, Illinois Frankfort, Indiana

36 FRBC 2001 ANNUAL REPORT Iowa Northern Michigan Western Michigan Detroit Metropolitan Melissa Brickley Bill Pierson Steve Anderson Dennis P.Angner Don Baldwin Gordon Bade Capital Area School American One FCU First American Bank Isabella Bank & Trust Sturgis Bank & Trust Capac State Bank Employees CU Jackson, Michigan Lansing, Michigan Clive, Iowa Mt. Pleasant, Michigan Sturgis, Michigan Capac, Michigan Gaye Saucedo Daniel G.Augustine Nikki Cole Joanne Brady Aleta Bame Cathy Burnham Detroit Federal Security National Bank State Savings Bank First National Bank Metrobank Credit Union One Employees CU Sioux City, Iowa of Frankfort Three Rivers, Michigan Farmington Hills, Ferndale, Michigan Southfield, Michigan Frankfort, Michigan Michigan Randy Bergman Linda Comps-Klinge Debbie Burley Mark Schuiling Bankers Trust Jan Davison State Bank of Caledonia Peggy Bachli Community Choice CU Dow Chemical Des Moines, Iowa Commercial Bank Caledonia, Michigan Bank of Ann Arbor Redford Township, Employees CU Ithaca, Michigan Ann Arbor, Michigan Michigan Midland, Michigan Barrie Christman Mike Diamond Principal Bank Susan A. Eno State Bank of Caledonia Richard Bauer Jennifer Childs Melanie Simeone Des Moines, Iowa Citizens National Bank Caledonia, Michigan Fidelity Bank American One FCU Community Choice CU Cheboygan, Michigan Birmingham, Michigan Jackson, Michigan Livonia, Michigan Leann Cook Cindy Dwyer First Federal Savings Sally Gapinski Hillsdale County Daniel Brown Linda Clark Tracie Smitterberg of Alpena First National Bank National Bank Sterling Bank & Trust Kellogg FCU Detroit Federal St. Charles, Michigan of Gaylord Hillsdale, Michigan Southfield, Michigan Battle Creek, Michigan Employees CU Gaylord, Michigan Southfield, Michigan Jerry Fannon Marianne Essing Paul Fuller Tim Collia Lincoln Savings Bank Marilyne Joy Byron Center State Bank Republic Bank Education Lisa Tyrell Reinbeck, Iowa Charlevoix State Bank Byron Center, Michigan Lansing, Michigan Community CU T&C FCU Charlevoix, Michigan Kalamazoo, Michigan Bloomfield Hills, Dale C. Froehlich Linda Grouleau Joseph Hallman Michigan Community State Bank Bill Kirsten Eaton Federal Citizens State Bank Lynda Connell Ankeny, Iowa First National Bank Savings Bank New Baltimore, First Resource FCU Angelica Young of Gaylord Charlotte, Michigan Michigan St. Joseph, Michigan First Resource FCU Jim Hubinger Gaylord, Michigan St. Joseph, Michigan First Federal Savings Joan Heffelbower Sue Harmon Mark Emeret of Apena Sandra Koenig Hastings City Bank Onsted State Bank Capital Area School Wisconsin Employees CU St. Charles, Michigan First Federal Savings Hastings, Michigan Onsted, Michigan Te rry Anderegg of Alpena Lansing, Michigan Randy Johnson D. Scott Hines Bruce Hoppenworth Mutual Savings Bank St. Charles, Michigan Commercial Trust First National Bank Citizens First Linda Hall Milwaukee,Wisconsin Community Choice CU & Savings Bank Sharla Leach Three Rivers, Michigan Savings Bank Susan Baker Storm Lake, Iowa Alden State Bank Port Huron, Michigan Livonia, Michigan Jaylen T. Johnson St. Francis Bank Alden, Michigan Vicki Kieliszewski Southern Michigan Laird Kellie Vicki Hawkins Milwaukee,Wisconsin Huron National Bank Sue Meredith Bank & Trust Lapeer County Dort FCU Flint, Michigan Dennis Conerton Rogers City, Michigan Honor State Bank Coldwater, Michigan Bank & Trust Co. Blackhawk State Bank Honor, Michigan Lapeer, Michigan Paulette Kierzek Linda Kaminski Linda Hess Beloit,Wisconsin Huron National Bank Susan Norris Kalamazoo County Stephen M. Mazurek Security FCU Flint, Michigan Robert W.Fouch Rogers City, Michigan First National Bank State Bank Bank of Lenawee Wisconsin Corporate of Gaylord Schoolcraft, Michigan Adrian, Michigan Nelson Klavitter Judith Hillock Central Credit Union Gaylord, Michigan Dubuque Bank & Trust Kyle Kunnen Karmen McMillan Research FCU Muskego,Wisconsin Warren, Michigan Dubuque, Iowa Victoria Sager Grand Bank Citizens First Gail Groleau Central State Bank Grand Rapids, Savings Bank Sandra Koenig Jeff Jackson Anchor Bank Beulah, Michigan Michigan Port Huron, Michigan First Federal Savings Michigan State Madison,Wisconsin of Alpena Nancy Sorensen Sharon Mrozek Mike McMinn University CU East Lansing, Michigan Wer ner Kant St. Charles, Michigan West Shore Bank Alliance Banking Metrobank Educators Credit Union Scottsville, Michigan Company Farmington Hills, Judy Lynch Michelle Jensen Racine,Wisconsin New Buffalo, Michigan Michigan Isabella Bank & Trust Kenneth Sterling First Resource CU St. Joseph, Michigan Richard Kostner Mt. Pleasant, Michigan First Community Bank Brad Slagh Kendall Rieman Associated Data Services Harbor Springs, Byron Center State Bank Thumb National Bank Victor Quinn Jaquetta Jones Green Bay,Wisconsin Michigan Byron Center, Michigan Pigeon, Michigan Quad City Bank & Trust Capital Area School Employees CU Bret Melhouse Bettendorf, Iowa Kathy Taskey Debra Smith Benjamin Schott Firstar Bank First National Bank Hillsdale County Thumb National Bank Lansing, Michigan Marti T. Rodamaker Milwaukee,Wisconsin of Gaylord National Bank Pigeon, Michigan First Citizens Lynne Kindy Gaylord, Michigan Hillsdale, Michigan James Mingey National Bank Vonda Zuhlke Team One CU Saginaw, Michigan M&I Data Services Mason City, Iowa Janie Williamson Emily Stafford Tr i-County Bank Milwaukee,Wisconsin Huron Community Bank Hastings City Bank Brown City, Michigan MaryAnn Schaffer Carol Lapinski East Tawas, Michigan Hastings, Michigan Ronald L. Slater Community State Bank Michigan State Michigan Credit Unions University CU Bankers Bank St. Charles, Michigan Kathleen Vogt Wendell Stoeffler Madison,Wisconsin Community State Bank Ionia County Tim Benecke East Lansing, Michigan Robert A. Steen St. Charles, Michigan National Bank Dow Chemical Thomas M. Smith Bridge Community Bank Michele Myrick Ionia, Michigan Employees CU E&A CU Johnson Bank Mechanicsville, Iowa Debra Woodland Midland, Michigan Kenosha,Wisconsin Commercial Bank Jerry Van Blarcom Marysville, Michigan Ithaca, Michigan Southern Michigan Steve Brewer Te r r y Pearson Mara Todorvic Bank & Trust Capital Area School Capital Area School Bank One Data Services Coldwater, Michigan Employees CU Employees CU Milwaukee,Wisconsin Lansing, Michigan Lansing, Michigan

INSPIRING CONFIDENCE ★ THE FED’S RESPONSE TO 9/11 37 EXECUTIVE CHANGES

directors At year-end 2001 the following appointments officers and elections to terms beginning in 2002 Members of the Federal Reserve Bank of were announced: The Bank’s board of directors acted on the Chicago’s boards of directors are selected to following promotions during 2001: represent a cross section of the Seventh – Robert J. Darnall designated chairman. – Anna M.Voytovich to vice president and District economy, including consumers, – W. J ames Farrell designated deputy chairman. industry, agriculture, the service sector, labor associate general counsel, Legal. – Robert E. Churchill appointed to a three- and commercial banks of various sizes. – Eve M. Boboch to assistant vice president, year term as Branch director. Financial Services. The Chicago board consists of nine members. – Irvin D. Reid appointed to a three-year – Deirdre A. Gehant to assistant vice presi- Member banks elect three bankers and three term as Branch director. dent, Human Resource Services. nonbankers.The Board of Governors appoints three additional nonbankers and designates advisory councils New officers appointed by the board in the Reserve Bank chair and deputy chair 2001 were: from among its three appointees. The Federal Advisory Council, which meets quarterly to discuss business and financial – Gordon Werkema to first vice president. The Detroit Branch has a seven-member conditions with the Board of Governors in – Spencer D. Krane to vice president and board of directors.The Board of Governors Washington, D.C., is comprised of one banker economic advisor, Economic Research. appoints three nonbankers and the Chicago from each of the 12 Federal Reserve Districts. Reserve Bank board appoints four additional Each year the Chicago Reserve Bank’s board – Catharine M. Lemieux to vice president, directors.The Branch board selects its own of directors selects a representative to this Supervision and Regulation. chair each year, with the approval of the group. Alan G. McNally, chairman and chief – G. Douglas Tillett to vice president, Chicago board. All Reserve Bank and Branch executive officer, Harris Bankcorp, Inc., was Corporate Communications. directors serve three-year terms, with a two- re-appointed to serve a one-year term begin- – James L. Buziecki to assistant vice president, , . term maximum. ning January 1 2002 Information Technology Services. Director appointments and elections at the Members of the Community Bank Council – Kathrine Kielma to assistant vice president, Chicago Reserve Bank and its Detroit served the first year of their terms in 2001. Customer Relations and Support Office. Branch effective in 2001 were: Members of the Advisory Council on – Daniel F. Reimann to assistant vice president, Agriculture, Labor and Small Business, served Customer Relations and Support Office. – Arthur C. Martinez redesignated chairman. . the second year of their terms in 2001 The – Michael Blanks to building construction – Robert J. Darnall redesignated deputy councils provide a vital communication link officer, Detroit Branch. chairman. between the Bank and these important sectors. – Jerome E. Julian to loans and reserves – W. James Farrell appointed to a three- officer, Loans. year term. – Joan Mielke to operations officer, Financial – William A. Osborn elected to complete and Management Services. two-years of an unexpired term. – Beverly A. Schatte to operations officer, – Jack B. Evans re-elected to a second Customer Relations and Support Office. three-year term. – Sara Ungari to accounting officer, – Robert R.Yohanan re-elected to a second Accounting. three-year term. – Timothy D. Leuliette re-appointed to a William C. Conrad, first vice president, retired second three-year term as a Branch director after 42 years of service. David R. Allardice, and re-designated Branch chairman. senior vice president and branch manager, retired after 27 years of service.

38 FRBC 2001 ANNUAL REPORT OPERATIONS VOLUMES

DOLLAR AMOUNT NUMBER OF ITEMS

2001 2000 2001 2000

CHECK & ELECTRONIC PAYMENTS Checks, NOWs, & Share Drafts Processed 1.5 Trillion 1.7 Trillion 2.3 Billion 2.3 Billion Fine Sort & Packaged Checks Handled 16.8 Billion 21.1 Billion 29.9 Million 40.0 Million U.S. Government Checks Processed 42.4 Billion 37.5 Billion 43.8 Million 35.9 Million Automated Clearing House (ACH) Items Processed 2.6 Trillion 2.5 Trillion 920.5 Million 869.8 Million Transfer of Funds 64.9 Trillion 57.0 Trillion 22.3 Million 20.7 Million

CASH OPERATIONS Currency Received and Counted 52.9 Billion 51.0 Billion 3.2 Billion 3.1 Billion Unfit Currency Destroyed 7.3 Billion 9.5 Billion 639.8 Million 731.3 Million Coin Bags Received and Processed 1.6 Billion 1.3 Billion 2.8 Million 3.5 Million

SECURITIES SERVICES FOR DEPOSITORY INSTITUTIONS Safekeeping Balance December 3: Definitive Securities 135.9 Billion 124.5 Billion 5.4 Thousand 6.4 Thousand Book Entry Securities 284.6 Billion 277.9 Billion — — Purchase & Sale 1.3 Billion 1.6 Billion 2.5 Thousand 5.2 Thousand Book Entry Government Securities 4.1 Trillion 3.8 Trillion 837.8 Thousand 709.0 Thousand

LOANS TO DEPOSITORY INSTITUTIONS Total Loans Made During Year 15.6 Billion 7.9 Billion 0.7 Thousand 2.1 Thousand

SERVICES TO U.S. TREASURY AND GOVERNMENT AGENCIES Food Stamps Redeemed 364.2 Million 640.2 Million 76.4 Million 127.4 Million Sell Direct Transactions Processed 683.0 Million 655.8 Million 15.0 Thousand 16.4 Thousand

INSPIRING CONFIDENCE ★ THE FED’S RESPONSE TO 9/11 39 2001 FINANCIAL REPORTS

management assertion february 2002 TO THE BOARD OF DIRECTORS OF THE FEDERAL RESERVE BANK OF CHICAGO

The management of the Federal Reserve Bank of Chicago (FRBC) is responsible for the preparation and fair presentation of the Statement of Financial Condition, Statement of Income, and Statement of Changes in Capital as of December 31, 2001 (the “Financial Statements”).The Financial Statements have been prepared in conformity with the accounting principles, policies, and practices established by the Board of Governors of the Federal Reserve System and as set forth in the Financial Accounting Manual for the Federal Reserve Banks, and as such, include amounts, some of which are based on judgments and estimates of management. The management of the FRBC is responsible for maintaining an effective process of internal controls over financial reporting including the safeguarding of assets as they relate to the Financial Statements. Such internal controls are designed to provide reasonable assurance to management and to the Board of Directors regarding the preparation of reliable Financial Statements.This process of internal controls contains self-monitoring mechanisms, including, but not limited to, divisions of responsibility and a code of conduct. Once identified, any material deficiencies in the process of internal controls are reported to management, and appropriate corrective measures are implemented. Even an effective process of internal controls, no matter how well designed, has inherent limitations, including the possibility of human error, and therefore can provide only reasonable assurance with respect to the preparation of reliable Financial Statements. The management of the FRBC assessed its process of internal controls over financial reporting including the safeguarding of assets reflected in the Financial Statements, based upon the criteria established in the “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, the management of the FRBC believes that the FRBC maintained an effective process of internal controls over financial reporting including the safeguarding of assets as they relate to the Financial Statements.

federal reserve bank of chicago

michael moskow gordon werkema president first vice president and chief executive officer and chief operating officer

40 FRBC 2001 ANNUAL REPORT 2001 FINANCIAL REPORTS

PricewaterhouseCoopers LLP One North Wacker Chicago, IL 60606 Telephone (312) 298-2000

report of independent accountants TO THE BOARD OF DIRECTORS OF THE FEDERAL RESERVE BANK OF CHICAGO

We have examined management’s assertion that the Federal Reserve Bank of Chicago (“FRBC”) maintained effective internal control over financial reporting and the safeguarding of assets as they relate to the Financial Statements as of December 31, 2001, included in the accompanying Management’s Assertion. The assertion is the responsibilty of FRBC’s management. Our responsibility is to express an opinion on the assertions based on our examination. Our examination was made in accordance with standards established by the American Institute of Certified Public Accountants, and accordingly, included obtaining an understanding of the internal control over financial reporting, testing, and evaluating the design and operating effectiveness of the internal control, and such other procedures as we considered necessary in the circumstances.We believe that our examination provides a reasonable basis for our opinion. Because of inherent limitations in any internal control, misstatements due to error or fraud may occur and not be detected. Also, projections of any evaluation of the internal control over financial reporting to future periods are subject to the risk that the internal control may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management’s assertion that the FRBC maintained effective internal control over financial reporting and over the safeguarding of assets as they relate to the Financial Statements as of December 31, 2001, is fairly stated, in all material respects, based upon criteria described in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission.

march 4, 2002

INSPIRING CONFIDENCE ★ THE FED’S RESPONSE TO 9/11 41 2001 FINANCIAL REPORTS

PricewaterhouseCoopers LLP One North Wacker Chicago, IL 60606 Telephone (312) 298-2000

report of independent accountants TO THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM AND THE BOARD OF DIRECTORS OF THE FEDERAL RESERVE BANK OF CHICAGO

We have audited the accompanying statements of condition of The Federal Reserve Bank of Chicago (the “Bank”) as of December 31, 2001 and 2000, and the related statements of income and changes in capital for the years then ended.These financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America.Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 3, the financial statements were prepared in conformity with the accounting principles, policies, and practices established by the Board of Governors of the Federal Reserve System.These principles, policies, and practices, which were designed to meet the specialized accounting and reporting needs of The Federal Reserve System, are set forth in the “Financial Accounting Manual for Federal Reserve Banks” and constitute a comprehensive basis of accounting other than accounting principles generally accepted in the United States of America. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Bank as of December 31, 2001 and 2000, and results of its operations for the years then ended, on the basis of accounting described in Note 3.

march 4, 2002 chicago, illinois

42 FRBC 2001 ANNUAL REPORT 2001 FINANCIAL STATEMENTS

STATEMENTS OF CONDITION (in Millions)

As of December , 2001 2000

ASSETS Gold Certificates $ 1,028 $ 1,064 Special Drawing Rights Certificates 212 212 Coin 117 114 Items in Process of Collection 526 1,119 Loans to Depository Institutions 15 25 U.S. Government and Federal Agency Securities, Net 63,617 62,020 Investments Denominated in Foreign Currencies 1,333 1,409 Accrued Interest Receivable 646 722 Interdistrict Settlement Account 6,071 — Bank Premises and Equipment, Net 136 135 Other Assets 48 37 Total Assets $ 73,749 $ 66,857

LIABILITIES AND CAPITAL Liabilities: Federal Reserve Notes Outstanding, Net $ 68,119 $ 61,206 Deposits Depository Institutions 3,498 2,796 Other Deposits 44 Deferred Credit Items 386 575 Interest on Federal Reserve Notes Due U.S.Treasury 43 132 Interdistrict Settlement Account — 770 Accrued Benefit Cost 88 85 Other Liabilities 25 25 Total Liabilities $ 72,163 $ 65,593

Capital: Capital Paid-In 793 632 Surplus 793 632 Total Capital $ 1,586 $ 1,264 Total Liabilities and Capital $ 73,749 $ 66,857

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

INSPIRING CONFIDENCE ★ THE FED’S RESPONSE TO 9/11 43 2001 FINANCIAL STATEMENTS

STATEMENTS OF INCOME (in Millions)

For the years ended December , 2001 2000

INTEREST INCOME Interest on U.S. Government and Federal Agency Securities $3,403 $ 3,545 Interest on Investments Denominated in Foreign Currencies 30 24 Interest on Loans to Depository Institutions 26 Total Interest Income $ 3,435 3,575

OTHER OPERATING INCOME (LOSS) Income From Services $ 110 $ 98 Reimbursable Services to Government Agencies 11 20 Foreign Currency Losses, Net (131) (127) U.S. Government Securities Gains (Losses), Net 36 (9) Other Income 13 9 Total Other Operating Income (Loss) $39$ (9)

OPERATING EXPENSES Salaries and Other Benefits $ 157 $ 141 Occupancy Expense 20 19 Equipment Expense 21 19 Cost of Unreimbursed Treasury Services —1 Assessments by Board of Governors 65 66 Other Expenses 80 101 Total Operating Expenses $ 343 $ 347 Net Income Prior to Distribution $ 3,131 $ 3,219

DISTRIBUTION OF NET INCOME Dividends Paid to Member Banks $ 43 $ 36 Transferred to Surplus 162 391 Payments to U.S.Treasury as Interest on Federal Reserve Notes 2,926 2,792 Total Distribution $ 3,131 $ 3,219

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

44 FRBC 2001 ANNUAL REPORT 2001 FINANCIAL STATEMENTS

STATEMENTS OF CHANGES IN CAPITAL (in Millions)

For the years ended December ,  and December ,  CAPITAL PAID-IN SURPLUS TOTAL CAPITAL

Balance at January 1, 2000 (11.6 Million Shares) $ 578 $ 578 $ 1,156 Net Income Transferred to Surplus – 391 391 Surplus Transfer to the U.S.Treasury – (337) (337) Net Change in Capital Stock Issued (1.0 Million Shares) 54 – 54

Balance at December 31, 2000 (12.6 Million Shares) $ 632 $ 632 $ 1,264 Net Income Transferred to Surplus – 161 161 Net Change in Capital Stock Issued (3.2 Million Shares) 161 – 161

Balance at December 31, 2001 (15.9 Million Shares) $ 793 $ 793 $ 1,586

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

INSPIRING CONFIDENCE ★ THE FED’S RESPONSE TO 9/11 45 NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION Board of Directors Board of Governors.The Board of The Federal Reserve Bank of Chicago The Federal Reserve Act specifies the Governors’ operating costs are funded (“Bank”) is part of the Federal Reserve composition of the board of directors for through assessments on the Reserve Banks. System (“System”) created by Congress each of the Reserve Banks. Each board The FOMC establishes policy regarding under the Federal Reserve Act of 1913 is composed of nine members serving open market operations, oversees these (“Federal Reserve Act”) which estab- three-year terms: three directors, including operations, and issues authorizations and lished the central bank of the United those designated as Chairman and Deputy directives to the FRBNY for its execution States.The System consists of the Board Chairman, are appointed by the Board of transactions. Authorized transaction of Governors of the Federal Reserve of Governors, and six directors are elect- types include direct purchase and sale System (“Board of Governors”) and ed by member banks. Of the six elected of securities, matched sale-purchase trans- twelve Federal Reserve Banks (“Reserve by member banks, three represent the actions, the purchase of securities under Banks”).The Reserve Banks are char- public and three represent member banks. agreements to resell, and the lending of tered by the federal government and Member banks are divided into three U.S. government securities.The FRBNY possess a unique set of governmental, classes according to size. Member banks in is also authorized by the FOMC to corporate, and central bank characteristics. each class elect one director representing hold balances of and to execute spot and Other major elements of the System are member banks and one representing the forward foreign exchange and securities the Federal Open Market Committee public. In any election of directors, each contracts in nine foreign currencies, main- (“FOMC”) and the Federal Advisory member bank receives one vote, regard- tain reciprocal currency arrangements Council.The FOMC is composed of less of the number of shares of Reserve (“F/X swaps”) with various central banks, members of the Board of Governors, the Bank stock it holds. and “warehouse” foreign currencies for the president of the Federal Reserve Bank of U.S. Treasury and Exchange Stabilization New York (“FRBNY”) and,on a rotating 2. OPERATIONS AND SERVICES Fund (“ESF”) through the Reserve Banks. basis, four other Reserve Bank presidents. The System performs a variety of services and operations. Functions include: formu- 3. SIGNIFICANT ACCOUNTING POLICIES Structure lating and conducting monetary policy; Accounting principles for entities with The Bank and its branch in Detroit, participating actively in the payments the unique powers and responsibilities of Michigan, serve the Seventh Federal mechanism, including large-dollar trans- the nation’s central bank have not been Reserve District, which includes Iowa fers of funds, automated clearinghouse formulated by the Financial Accounting and portions of Michigan, Illinois, (“ACH”) operations and check process- Standards Board.The Board of Governors Wisconsin and Indiana. In accordance ing; distributing of coin and currency; has developed specialized accounting with the Federal Reserve Act, supervision performing fiscal agency functions for the principles and practices that it believes and control of the Bank is exercised U.S.Treasury and certain federal agencies; are appropriate for the significantly differ- by a Board of Directors. Banks that serving as the federal government’s bank; ent nature and function of a central bank are members of the System include all providing short-term loans to depository as compared to the private sector.These national banks and any state chartered institutions; serving the consumer and accounting principles and practices are bank that applies and is approved for the community by providing educational documented in the Financial Accounting membership in the System. materials and information regarding Manual for Federal Reserve Banks (“Financial consumer laws; supervising bank holding Accounting Manual”), which is issued companies, and state member banks; and by the Board of Governors. All Reserve administering other regulations of the

46 FRBC 2001 ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS

Banks are required to adopt and apply System by this bank, for which the costs gold certificates among Reserve Banks accounting policies and practices will not be redistributed to the other once a year based upon Federal Reserve that are consistent with the Financial Reserve Banks, include national business notes outstanding in each District. Accounting Manual. development and customer support. The financial statements have been The preparation of the financial state- B. Special Drawing Rights Certificates prepared in accordance with the Financial ments in conformity with the Financial Special drawing rights (“SDRs”) are Accounting Manual. Differences exist Accounting Manual requires management issued by the International Monetary Fund between the accounting principles and to make certain estimates and assumptions (“Fund”) to its members in proportion to practices of the System and accounting that affect the reported amounts of assets each member’s quota in the Fund at the principles generally accepted in the United and liabilities and disclosure of contin- time of issuance. SDRs serve as a supple- States of America (“GAAP”).The primary gent assets and liabilities at the date of the ment to international monetary reserves differences are the presentation of all financial statements and the reported and may be transferred from one national security holdings at amortized cost, rather amounts of income and expenses during monetary authority to another. Under the than at the fair value presentation require- the reporting period.Actual results could law providing for United States partici- ments of GAAP,and the accounting for differ from those estimates. Certain pation in the SDR system, the Secretary matched sale-purchase transactions as amounts relating to the prior year of the U.S.Treasury is authorized to issue separate sales and purchases, rather than have been reclassified to conform to SDR certificates, somewhat like gold secured borrowings with pledged collat- the current-year presentation. Unique certificates, to the Reserve Banks. At eral, as is generally required by GAAP. accounts and significant accounting such time, equivalent amounts in dollars In addition, the Bank has elected not to policies are explained below. are credited to the account established for present a Statement of Cash Flows.The the U.S.Treasury, and the Reserve Banks’ Statement of Cash Flows has not been A. Gold Certificates SDR certificate accounts are increased. included as the liquidity and cash posi- The Secretary of the Treasury is author- The Reserve Banks are required to tion of the Bank are not of primary ized to issue gold certificates to the purchase SDRs, at the direction of the concern to the users of these financial Reserve Banks to monetize gold held U.S. Treasury, for the purpose of financ- statements. Other information regarding by the U.S.Treasury. Payment for the ing SDR certificate acquisitions or for the Bank’s activities is provided in, or gold certificates by the Reserve Banks is financing exchange stabilization oper- may be derived from, the Statements made by crediting equivalent amounts in ations. At the time SDR transactions of Condition, Income, and Changes in dollars into the account established for occur, the Board of Governors allocates Capital.Therefore, a Statement of Cash the U.S.Treasury.These gold certificates amounts among Reserve Banks based upon Flows would not provide any additional held by the Reserve Banks are required Federal Reserve notes outstanding in each useful information.There are no other to be backed by the gold of the U.S. District at the end of the preceding year. significant differences between the policies Treasury.The U.S.Treasury may reacquire There were no SDR transactions in 2001. outlined in the Financial Accounting the gold certificates at any time and the Manual and GAAP. Reserve Banks must deliver them to C. Loans to Depository Institutions Effective January 2001,the System the U.S.Treasury.At such time, the U.S. The Depository Institutions Deregulation implemented procedures to eliminate Treasury’s account is charged and the and Monetary Control Act of 1980 pro- the sharing of costs by Reserve Banks Reserve Banks’ gold certificate accounts vides that all depository institutions that for certain services a Reserve Bank may are lowered.The value of gold for pur- maintain reservable transaction accounts provide on behalf of the System. Data poses of backing the gold certificates is or nonpersonal time deposits, as defined 2 for 2001 reflects the adoption of this set by law at 42 /9 a fine troy ounce. in Regulation D issued by the Board policy. Major services provided for the The Board of Governors allocates the

INSPIRING CONFIDENCE ★ THE FED’S RESPONSE TO 9/11 47 NOTES TO FINANCIAL STATEMENTS

of Governors, have borrowing privileges buys it back at the rate specified at the for an agreed upon period of time (up at the discretion of the Reserve Banks. commencement of the transaction. to twelve months), at an agreed upon Borrowers execute certain lending agree- The FRBNY has sole authorization interest rate.These arrangements give ments and deposit sufficient collateral by the FOMC to lend U.S. government the FOMC temporary access to foreign before credit is extended. Loans are securities held in the SOMA to U.S. currencies that it may need for inter- evaluated for collectibility, and currently government securities dealers and to vention operations to support the dollar all are considered collectible and fully banks participating in U.S. government and give the partner foreign central bank collateralized. If any loans were deemed securities clearing arrangements on behalf temporary access to dollars it may need to be uncollectible, an appropriate reserve of the system, in order to facilitate the to support its own currency. Drawings would be established. Interest is accrued effective functioning of the domestic under the F/X swap arrangements can using the applicable discount rate estab- securities market.These securities-lending be initiated by either the FRBNY or lished at least every fourteen days by transactions are fully collateralized by the partner foreign central bank, and the Board of Directors of the Reserve other U.S. government securities. FOMC must be agreed to by the drawee.The Banks, subject to review by the Board policy requires FRBNY to take posses- F/X swaps are structured so that the party of Governors. Reserve Banks retain the sion of collateral in excess of the market initiating the transaction (the drawer) bears option to impose a surcharge above the values of the securities loaned.The market the exchange rate risk upon maturity. basic rate in certain circumstances. values of the collateral and the securities The FRBNY will generally invest the loaned are monitored by FRBNY on foreign currency received under an F/X D. U.S. Government and Federal Agency a daily basis, with additional collateral swap in interest-bearing instruments. Securities and Investments Denominated obtained as necessary.The securities Warehousing is an arrangement under in Foreign Currencies loaned continue to be accounted for which the FOMC agrees to exchange, The FOMC has designated the FRBNY in the SOMA. at the request of the Treasury, U.S. dollars to execute open market transactions on Foreign exchange (“F/X”) contracts for foreign currencies held by the Treasury its behalf and to hold the resulting secu- are contractual agreements between two or ESF over a limited period of time.The rities in the portfolio known as the System parties to exchange specified currencies, purpose of the warehousing facility is Open Market Account (“SOMA”). In at a specified price, on a specified date. to supplement the U.S. dollar resources addition to authorizing and directing Spot foreign contracts normally settle of the Treasury and ESF for financing operations in the domestic securities two days after the trade date, whereas purchases of foreign currencies and related market, the FOMC authorizes and directs the settlement date on forward contracts international operations. the FRBNY to execute operations in is negotiated between the contracting In connection with its foreign cur- foreign markets for major currencies in parties, but will extend beyond two rency activities, the FRBNY,on behalf order to counter disorderly conditions days from the trade date.The FRBNY of the Reserve Banks, may enter into in exchange markets or to meet other generally enters into spot contracts, contracts which contain varying degrees needs specified by the FOMC in carrying with any forward contracts generally of off-balance sheet market risk, because out the System’s central bank responsibil- limited to the second leg of a swap/ they represent contractual commitments ities. Such authorizations are reviewed warehousing transaction. involving future settlement and counter- and approved annually by the FOMC. The FRBNY,on behalf of the Reserve party credit risk.The FRBNY controls Matched sale-purchase transactions Banks, maintains renewable, short-term credit risk by obtaining credit approvals, are accounted for as separate sale and F/X swap arrangements with two author- establishing transaction limits, and per- purchase transactions. Matched sale-pur- ized foreign central banks.The parties forming daily monitoring procedures. chase transactions are transactions in agree to exchange their currencies up which the FRBNY sells a security and to a pre-arranged maximum amount and

48 FRBC 2001 ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS

While the application of current government and federal agency securities E. Bank Premises and Equipment market prices to the securities currently are reported as “U.S. government securities Bank premises and equipment are stated held in the SOMA portfolio and invest- gains (losses), net.” Foreign-currency- at cost less accumulated depreciation. ments denominated in foreign currencies denominated assets are revalued daily at Depreciation is calculated on a straight- may result in values substantially above current market exchange rates in order line basis over estimated useful lives of or below their carrying values, these un- to report these assets in U.S. dollars. assets ranging from 2 to 50 years. New realized changes in value would have no Realized and unrealized gains and losses assets, major alterations, renovations and direct effect on the quantity of reserves on investments denominated in foreign improvements are capitalized at cost as available to the banking system or on the currencies are reported as “Foreign currency additions to the asset accounts. Main- prospects for future Reserve Bank earnings losses, net.” Foreign currencies held tenance, repairs and minor replacements or capital. Both the domestic and foreign through F/X swaps, when initiated by are charged to operations in the year components of the SOMA portfolio from the counter-party, and warehousing incurred. Internally developed software time to time involve transactions that arrangements are revalued daily, with the is capitalized based on the cost of direct can result in gains or losses when hold- unrealized gain or loss reported by the materials and services and those indirect ings are sold prior to maturity. However, FRBNY as a component of “Other assets” costs associated with developing, imple- decisions regarding the securities and or “Other liabilities,” as appropriate. menting, or testing software. foreign currencies transactions, including Balances of U.S. government and their purchase and sale, are motivated federal agencies securities bought F. Interdistrict Settlement Account by monetary policy objectives rather outright, securities loaned, investments At the close of business each day, all than profit. Accordingly, earnings and denominated in foreign currency, interest Reserve Banks and branches assemble the any gains or losses resulting from the income, securities lending fee income, payments due to or from other Reserve sale of such currencies and securities amortization of premiums and discounts Banks and branches as a result of trans- are incidental to the open market oper- on securities bought outright, gains and actions involving accounts residing in ations and do not motivate its activities losses on sales of securities, and realized other Districts that occurred during the or policy decisions. and unrealized gains and losses on invest- day’s operations. Such transactions may U.S. government and federal agency ments denominated in foreign currencies, include funds settlement, check clearing securities and investments denominated in excluding those held under an F/X and ACH operations, and allocations foreign currencies comprising the SOMA swap arrangement, are allocated to each of shared expenses.The cumulative net are recorded at cost, on a settlement- Reserve Bank. Securities purchased amount due to or from other Reserve date basis, and adjusted for amortization under agreements to resell and unrealized Banks is reported as the “Interdistrict of premiums or accretion of discounts gains and losses on the revaluation of settlement account.” on a straight-line basis. Interest income foreign currency holdings under F/X is accrued on a straight-line basis and is swaps and warehousing arrangements G.Federal Reserve Notes reported as “Interest on U.S. government are allocated to the FRBNY and not to Federal Reserve notes are the circulating and federal agency securities” or “Interest other Reserve Banks. currency of the United States.These notes on investments denominated in foreign Statement of Financial Accounting are issued through the various Federal currencies,” as appropriate. Income Standards No. 133, as amended and Reserve agents to the Reserve Banks earned on securities lending transactions interpreted, became effective on January 1, upon deposit with such Agents of certain is reported as a component of “Other 2001.For the periods presented, the classes of collateral security, typically U.S. income.” Gains and losses resulting from Reserve Banks had no derivative instru- government securities.These notes are sales of securities are determined by ments required to be accounted for under identified as issued to a specific Reserve specific issues based on average cost. the standard. Bank.The Federal Reserve Act provides Gains and losses on the sales of U.S.

INSPIRING CONFIDENCE ★ THE FED’S RESPONSE TO 9/11 49 NOTES TO FINANCIAL STATEMENTS

that the collateral security tendered by H.Capital Paid-in to the U.S.Treasury additional surplus the Reserve Bank to the Federal Reserve The Federal Reserve Act requires that funds of 3,752 million during the Federal Agent must be equal to the sum of the each member bank subscribe to the Government’s 2000 fiscal year. Federal notes applied for by such Reserve Bank. capital stock of the Reserve Bank in an Reserve Bank of Chicago transferred In accordance with the Federal Reserve amount equal to 6 percent of the capital 337 million to the U.S.Treasury. Reserve Act, gold certificates, special drawing and surplus of the member bank. As Banks were not permitted to replenish the rights certificates, U.S. government and a member bank’s capital and surplus surplus for these amounts during fiscal year federal agency securities, triparty agree- changes, its holdings of the Reserve Bank’s 2000, which ended September 30, 2000; ments, loans to depository institutions, stock must be adjusted. Member banks however, the surplus was replenished by and investments denominated in foreign are those state-chartered banks that apply December 31, 2000. currencies are pledged as collateral for and are approved for membership in the In the event of losses or a substantial net Federal Reserve notes outstanding. System and all national banks. Currently, increase in capital, payments to the U.S. The collateral value is equal to the book only one-half of the subscription is paid- Treasury are suspended until such losses value of the collateral tendered, with the in and the remainder is subject to call. are recovered through subsequent earnings. exception of securities, whose collateral These shares are nonvoting with a par Weekly payments to the U.S.Treasury value is equal to the par value of the secu- value of 10 0.They may not be transferred may vary significantly. rities tendered.The Board of Governors or hypothecated. By law, each member may, at any time, call upon a Reserve bank is entitled to receive an annual J. Income and Costs related to Treasury Services Bank for additional security to adequately dividend of 6 percent on the paid-in collateralize the Federal Reserve notes. capital stock.This cumulative dividend is The Bank is required by the Federal The Reserve Banks have entered into paid semiannually.A member bank is liable Reserve Act to serve as fiscal agent an agreement which provides for certain for Reserve Bank liabilities up to twice and depository of the United States. By assets of the Reserve Banks to be jointly the par value of stock subscribed by it. statute, the Department of the Treasury is pledged as collateral for the Federal permitted, but not required, to pay for Reserve notes of all Reserve Banks I. Surplus these services.The costs of providing in order to satisfy their obligation of The Board of Governors requires fiscal agency and depository services to providing sufficient collateral for out- Reserve Banks to maintain a surplus equal the Treasury Department that have been standing Federal Reserve notes. In the to the amount of capital paid-in as of billed but not paid are immaterial and event that this collateral is insufficient, December .This amount is intended included in “Other expenses.” the Federal Reserve Act provides that to provide additional capital and reduce K. Taxes Federal Reserve notes become a first and the possibility that the Reserve Banks paramount lien on all the assets of the would be required to call on member The Reserve Banks are exempt from Reserve Banks. Finally, as obligations of banks for additional capital. Reserve Banks federal, state, and local taxes, except for the United States, Federal Reserve notes are required by the Board of Governors taxes on real property, which are reported are backed by the full faith and credit of to transfer to the U.S.Treasury excess as a component of “Occupancy expense.” the United States government. earnings, after providing for the costs The “Federal Reserve notes out- of operations, payment of dividends, standing, net” account represents Federal and reservation of an amount necessary Reserve notes reduced by currency held to equate surplus with capital paid-in. in the vaults of the Bank of 6,424 million, The Consolidated Appropriations Act and 9,479 million at December 31, 2001 of 2000 (Public Law 106 -113, Section 302) and 2000,respectively. directed the Reserve Banks to transfer

50 FRBC 2001 ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS

4. U.S. GOVERNMENT AND FEDERAL The maturity distribution of U.S. and securities held under agreements AGENCY SECURITIES government and federal agency securities to resell.These investments are guaran- Securities bought outright are held in bought outright, which were allocated to teed as to principal and interest by the the SOMA at the FRBNY.An undivided the Bank at December 31, 2001,were as foreign governments. interest in SOMA activity, with the follows (in millions): Each Reserve Bank is allocated a share exception of securities held under agree- of foreign-currency-denominated assets, ments to resell and the related premiums, PAR VALUE the related interest income, and realized U.S. Federal discounts and income, is allocated to Maturities of Govt. Agency and unrealized foreign currency gains and each Reserve Bank on a percentage basis Securities Held Securities Obligations Total losses, with the exception of unrealized derived from an annual settlement of Within 15 Days $ 1,210 – $ 1,210 gains and losses on F/X swaps and ware- interdistrict clearings.The settlement, 16 Days to 90 Days 14,106 – 14,106 housing transactions.This allocation is performed in April of each year, equalizes 91 Days to 1 Year 14,795 – 14,795 based on the ratio of each Reserve Bank’s Reserve Bank gold certificate holdings to Over 1 Year capital and surplus to aggregate capital Federal Reserve notes outstanding.The to 5 Years 17,346 $ 1 17,347 and surplus at the preceding December 31. Bank’s allocated share of SOMA balances Over 5 Years The Bank’s allocated share of invest- was approximately 11. 326 percent and to 10 Years 6,041 – 6,041 ments denominated in foreign currencies 11. 9 61 percent at December 31, 2001 and Over 10 Years 8,983 – 8,983 was approximately 9.158 percent and 2000,respectively. Total $62,481 $ 1 $ 62,482 8.994 percent at December 31, 2001 and The Bank’s allocated share of securities 2000,respectively. held in the SOMA at December 31, At December 31, 2001, and 2000, The Bank’s allocated share of invest- that were bought outright, were as follows matched sale-purchase transactions ments denominated in foreign currencies, (in millions): involving U.S. government securities valued at current exchange rates at with par values of 23,188 million and December 31,were as follows (in millions): 2001 2000  PAR VALUE 21,112 million, respectively, were out-  2001 2000 Federal Agency $1$16 standing, of which 2,626 million and European Union Euro: 2,525 million were allocated to the U.S. Government: Foreign Currency Bills 20,621 21,380 Bank. Matched sale-purchase transactions Deposits $ 420 $ 417 are generally overnight arrangements. Notes 30,120 28,729 Government Debt At December 31, 2001 and 2000, Instruments Including Bonds 11,740 11,098 U.S. government securities with par values Agreements to Resell 247 244 Total Par Value $ 62,482 $ 61,223 of 7,345 million and 2,086 million, Japanese Yen: Unamortized Premiums 1,280 1,164 respectively, were loaned from the SOMA, Foreign Currency Deposits 173 248 Unaccreted Discounts (145) (367) of which 832 million and 250 million were allocated to the Bank. Government Debt Total Allocated to Bank $ 63,617 $ 62,020 Instruments Including Agreements to Resell 487 494 Total SOMA securities bought out- 5. INVESTMENTS DENOMINATED IN Accrued Interest 66 right were 561,701 million and 518,501 FOREIGN CURRENCIES Total $1,333 $ 1,409 million at December 31, 2001 and 2000, The FRBNY,on behalf of the Reserve respectively. Banks, holds foreign currency deposits with foreign central banks and the Bank Total investments denominated in for International Settlements and invests foreign currencies were 14,559 million in foreign government debt instruments. and 15,670 million at December 31, 2001 Foreign government debt instruments held and 2000,respectively. include both securities bought outright

INSPIRING CONFIDENCE ★ THE FED’S RESPONSE TO 9/11 51 NOTES TO FINANCIAL STATEMENTS

The maturity distribution of invest- Depreciation expense was 15 million Future minimum rental payments ments denominated in foreign currencies for each of the years ended December 31, under noncancelable operating leases, which were allocated to the Bank at 2001 and 2000, respectively. net of sublease rentals, with terms of one December 31, 2001, were as follows The Bank leases unused space to year or more, at December 31, 2001, (in millions): outside tenants.Those leases have terms were (in millions): ranging from 1 to 10 years. Rental income Maturities of Investments  Operating Denominated in Foreign Currencies from such leases was 3 million for each of the years ended December 2002 $2 Within 1 Year $ 1,256 31, 2001, and 2000. Future minimum lease pay- 2003 2 Over 1 Year to 5 Years 37 ments under non-cancelable agreements 2004 1 Over 5 Years to 10 Years 40 in existence at December 31, 2001, were 2005 1 Over 10 Years — (in millions): 2006 1 Total $ 1,333 Thereafter 1

2002 $2 Total $8 At December 31, 2001 and 2000, there were no open foreign exchange contracts 2003 3 or outstanding F/X swaps. 2004 3 Under the Insurance Agreement of At December 31, 2001 and 2000, the 2005 2 the Federal Reserve Banks dated as of warehousing facility was  billion, with 2006 2 March 2, 1999, each of the Reserve Banks zero outstanding. Thereafter 3 has agreed to bear, on a per incident Total $15 basis, a pro rata share of losses in excess 6. BANK PREMISES AND EQUIPMENT of 1 percent of the capital paid-in of the A summary of bank premises and claiming Reserve Bank, up to 50 percent equipment at December 31 is as follows 7. COMMITMENTS AND of the total capital paid-in of all Reserve CONTINGENCIES (in millions): Banks. Losses are borne in the ratio that At December 31, 2001, the Bank was a Reserve Bank’s capital paid-in bears obligated under non-cancelable leases 2001 2000 to the total capital paid-in of all Reserve for premises and equipment with terms Bank Premises and Banks at the beginning of the calendar Equipment: ranging from 1 to approximately 10 years. year in which the loss is shared. No claims Land $6$6 These leases provide for increased rentals were outstanding under such agreement based upon increases in real estate taxes, Buildings 131 129 at December 31, 2001 or 2000. operating costs or selected price indices. Building Machinery On September 4, 2001, the Bank and Equipment 17 17 Rental expense under operating leases sold its Westgate facility for a total of 3 for certain operating facilities, ware- Construction in million.The gain of 1 million is reported houses, and data processing and office Progress 31 as a component of “Other income.” equipment (including taxes, insurance Furniture and The Bank is involved in certain legal Equipment 107 101 and maintenance when included in rent), actions and claims arising in the ordinary net of sublease rentals, was 3 million and $ 264 $ 254 course of business. Although it is difficult 2 million for each of the years ended Accumulated Depreciation (127) (119) to predict the ultimate outcome of these December 31, 2001 and 2000, respectively. Bank Premises actions, in management’s opinion, based Certain of the Bank’s leases have options and Equipment, Net $ 137 $ 135 on discussions with counsel, the afore- to renew. mentioned litigation and claims will be

52 FRBC 2001 ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS

resolved without material adverse effect 9. POSTRETIREMENT BENEFITS Following is a reconciliation of the on the financial position or results of OTHER THAN PENSIONS AND beginning and ending balance of the POSTEMPLOYMENT BENEFITS operations of the Bank. plan assets, the unfunded postretirement Postretirement Benefits Other benefit obligation, and the accrued post- Than Pensions 8. RETIREMENT AND THRIFT PLANS retirement benefit cost (in millions): In addition to the Bank’s retirement plans, Retirement Plans employees who have met certain age and 2001 2000 The Bank currently offers two defined length of service requirements are eligible Fair Value of Plan Assets benefit retirement plans to its employees, for both medical benefits and life insurance at January 1 $–$– based on length of service and level of coverage during retirement. Actual Return on compensation. Substantially all of the The Bank funds benefits payable Plan Assets –– Bank’s employees participate in the Retire- under the medical and life insurance Contributions by ment Plan for Employees of the Federal plans as due and, accordingly, has no plan the Employer 3.7 3.2 Reserve System (“System Plan”) and assets. Net postretirement benefit cost is Contributions by the Benefit Equalization Retirement Plan Plan Participants 0.3 0.2 actuarially determined using a January 1 (“BEP”).The System Plan is a multi- measurement date. Benefits Paid (4.0) (3.4) employer plan with contributions fully Following is a reconciliation of Fair Value of Plan funded by participating employers. No beginning and ending balances of the assets at December 31 $–$– separate accounting is maintained of assets benefit obligation (in millions): Unfunded Postretirement contributed by the participating employers. Benefit Obligation 75.2 70.1 The Bank’s projected benefit obligation 2001 2000 Unrecognized Prior and net pension costs for the BEP at Accumulated Service Cost 18.6 13.9 Postretirement December 31, 2001 and 2000, and for Unrecognized Net Benefit Obligation Actuarial Gain (17.1) (9.3) the years then ended, are not material. at January 1 $ 70.1 $ 67.3 Accrued Postretirement Service Cost-Benefits Thrift Plan Benefit Cost $ 76.7 $ 74.7 Earned During the Period 1.5 1.4 Employees of the Bank may also partici- Interest Cost of Accrued postretirement benefit cost pate in the defined contribution Thrift Accumulated Benefit Plan for Employees of the Federal Reserve Obligation 5.4 4.7 is reported as a component of “Accrued System (“Thrift Plan”).The Bank’s Thrift Actuarial (Gain) Loss 10.0 (0.1) benefit cost.”  At December 31, 2001 and 2000, Plan contributions totaled 4.7 million Contributions by Plan and 4.4 million for the years ended Participants 0.3 0.2 the weighted average discount rate assumptions used in developing the December 31, 2001 and 2000, respectively, Benefits Paid (4.1) (3.4) and are reported as a component of benefit obligation were 7.0 percent and Plan Amendments, percent, respectively. “Salaries and other benefits.” Acquisitions, Foreign 7.5 Currency Exchange For measurement purposes, a 10.00 Rate Changes, percent annual rate of increase in the Business Combinations, Divestitures, Curtailments, cost of covered health care benefits was Settlements, Special assumed for 2002.Ultimately, the health Termination Benefits (8.0) – care cost trend rate is expected to decrease Accumulated gradually to 5.00 percent by , and Postretirement remain at that level thereafter. Benefit Obligation at December 31 $ 75.2 $ 70.1

INSPIRING CONFIDENCE ★ THE FED’S RESPONSE TO 9/11 53 NOTES TO FINANCIAL STATEMENTS

Assumed health care cost trend rates Postemployment Benefits have a significant effect on the amounts The Bank offers benefits to former or reported for health care plans. A one inactive employees. Postemployment percentage point change in assumed benefit costs are actuarially determined health care cost trend rates would have and include the cost of medical and the following effects for the year ended dental insurance, survivor income, and December 31, 2001 (in millions): disability benefits. Costs were projected using the same discount rate and health One One Percentage Percentage care trend rates as were used for project- Point Point ing postretirement costs.The accrued Increase Decrease postemployment benefit costs recognized Effect on Aggregate of Service and Interest by the Bank at December 31, 2001 and Cost Components of Net 2000, were 11 million and 10 million, Periodic Postretirement respectively.This cost is included as a Benefit Cost $ 1.3 $ (1.0) component of “Accrued benefit cost.” Effect on Accumulated Net periodic postemployment benefit Postretirement Benefit Obligation 11.9 (9.5) costs included in 2001 and 2000 operating expenses were 2 million for each year.

The following is a summary of the 10. SUBSEQUENT EVENT components of net periodic postretire- Subsequent to December 31, 2001 ment benefit cost for the years ended Federal Reserve System management December 31 (in millions): determined that it would not proceed with an ongoing technology project. 2001 2000 Accordingly, in 2002 the Bank will record Service Cost-Benefits an asset impairment of 7 million for Earned During the Period $ 1.5 $ 1.4 assets currently held by the Bank on Interest Cost of behalf of the System. Accumulated Benefit Obligation 5.4 4.7

Amortization of Prior Service Cost (1.3) (1.3)

Recognized Net Actuarial Loss 0.2 –

Net Periodic Postretirement Benefit Cost $ 5.8 $ 4.8

Net periodic postretirement benefit cost is reported as a component of “Salaries and other benefits.”

54 FRBC 2001 ANNUAL REPORT additional information our mission

★ Set the standard for excellence in the Federal Reserve System

★ Work together, value diversity, communicate openly, be creative and fair

★ Live by our core values of integrity, respect, responsibility and excellence

For additional copies of this annual report contact the Public Information Center, Federal Reserve Bank of Chicago, at () - or access the Bank’s web site at chicagofed.org. 11 / 9 annual report 2001 se to Respon ing Conﬁdence ing Inspir The Fed’s Fed’s The federal reserve bank of chicago