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August 2004

Government Performance and Results Act
Performance Report, 2002-03

A report by the Board of Governors of the Federal Reserve System

Introduction
Biennial Performance Report

Consistent with the requirements of the Government Performance and Results Act (GPRA), this Biennial Performance Report is based on the Strategic Planning Document submitted to the Congress in 2001 and the Biennial Performance Plan submitted in 2002. The performance report is biennial rather than annual because the Board uses a biennial budget. Also, the report is centered on the monetary policy function, the operations of the Board in overseeing the activities of the System, and management actions to improve effectiveness and efficiency. The following discussion of the System’s structure helps to explain the performance measures used by the Board; however, the document focuses solely on the operations of the Board.

As required by the GPRA, this is an independent report. However, numerous documents, when used in conjunction with this report, give a more detailed picture of the planning, budget, operations, and performance of the Board. As required by the Federal Reserve Act, the Board submits to the Congress an annual report that describes in detail the operations of the System for the previous year. Since 1985, the Board has also provided the Congress with a supplement, the Annual Report: Budget Review. This document provides a detailed explanation of the plans and resources contained in the approved budgets of the Board and the Reserve Banks. The most recent versions of these two documents were provided to the Congress in April 2004.

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

  1. Conducting the nation’s monetary policy by influencing money and credit conditions in the economy in pursuit of maximum sustainable employment and stable prices

  2. Supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking system; maintaining the stability of the financial system and containing systemic risk that may arise in financial markets; protecting the credit rights of consumers; and encouraging banks to meet the credit needs of consumers, including those in low- and moderate-income neighborhoods

  3. Playing a major role in operating the nation’s payment system by providing certain financial services to the U.S. government, to financial institutions, and to foreign official institutions

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

Values
The following values of the Federal Reserve guide its organizational decisions and its employees’ actions:

Commitment to the public interest. The Federal Reserve endeavors to provide to the public, the U.S. government, and the financial community service that is consistent with its mandate. It expects to be held accountable to the public it serves.

Integrity. The Federal Reserve seeks to adhere to the highest standards of honesty, fairness, and discretion in its dealings with the public, the financial community, and its employees.

Quality and excellence. The Federal Reserve strives for excellence, embracing prudent change and innovation.

Independence of views and careful analysis. The Federal Reserve values the regional nature of the System and the diversity of its employees, and it encourages (1) input from a variety of sources, (2) independent professional judgment, (3) thorough and careful analysis, and (4) the integration of these components through teamwork into coherent and effective policies.

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

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

  2. to promote a safe, sound, competitive, and accessible banking system and stable financial markets

  3. to provide high-quality professional oversight of Reserve Bank operations and to foster the integrity, efficiency, and accessibility of U.S. payment and settlement systems

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

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

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

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

Federal Reserve Banks
The Congress chartered the twelve Federal Reserve Banks as operating arms of the central banking system. Each Reserve Bank is a separate legal entity whose makeup and organization incorporate both public and private elements. As part of the Federal Reserve System, the Banks are subject to oversight by the Congress. Each Reserve Bank has its own board of nine directors chosen from outside the Bank, as provided by law. The Board of Governors exercises broad authority over the operations and activities of the Federal Reserve Banks. This authority includes oversight of the Banks’ priced financial services; fiscal agency and depository services; and examination and supervision of state member banks, bank holding companies, and foreign bank organizations operating in the United States. Each Reserve Bank must submit its annual budget to the Board of Governors for approval, and the appointment and salary of its president are subject to Board approval.

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

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

Strategic planning is a critical factor in ensuring the long-term effectiveness of Board operations and in minimizing costs. Effectiveness is enhanced through timely identification of threats and of opportunities to improve operations. Efficiency is enhanced by early identification of issues and timely responses. Major factors affecting performance in the 2002-03 period, which were included in Board planning, included the following:

  • continuing advances in automation and telecommunication technologies that reduce the time needed to deal with systemic issues; to change the nature of financial products; to enhance systems for identifying, measuring, and pricing risk; and to improve the capability to gather and analyze associated data

  • the current state of the U.S. and foreign economies

  • fiscal policy

  • consolidation, deregulation, and globalization trends affecting the financial industry and the impact of those trends on safety and soundness, consumer protection, and payment and financial system stability

  • financial services modernization legislation (Gramm-Leach-Bliley Act, including the privacy provisions)

  • coordination of plans, strategies, actions, and information sharing with other domestic and foreign financial regulators

  • maintain a highly motivated, properly trained, and fairly compensated professional workforce and preparing for management succession

  • enhance the safety and security of Board staff and to prepare for continuity of operations and business recovery

As technological and other changes accelerate, planning is essential to the effective and efficient conduct of the Board’s operations. A particular challenge to government organizations in this regard is to determine the appropriate measures of performance. The Board’s strategic planning effort recognizes key differences between government and private-sector strategic planning and measurement of results. Private planning can use measures of cost and revenue derived from prices determined in competitive markets; the results of the planning are reflected in the private entity’s ability to prosper over time. Because the government does not have direct competition in certain areas and has a monopoly in others (monetary policy, for example), establishing a proxy for costs and prices is extraordinarily difficult. Moreover, the results are judged relative to public policy objectives embodied in law, which often are not readily measurable. Nonetheless, the Board tries to accomplish its mission effectively while creating the efficiencies that come from strategic planning, recognizing that analogies are just that. Thus, the Board’s planning is oriented toward achieving effectiveness and efficiency specific to the functions it serves.

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Monetary Policy Function
Goal
Conduct monetary policy that promotes the achievement of maximum sustainable long-term growth and the price stability that fosters that goal

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

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

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

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

  5. Promote understanding of Federal Reserve policy among other government policy officials and the general public.
Performance Measures
The performance of monetary policy in relation to evolving economic and financial circumstances will continue to be reviewed by the Congress in the context of the Board’s semiannual monetary policy report and the accompanying testimony. The Congress has not chosen to establish quantitative objectives for monetary policy in statute. Moreover, it is recognized that monetary policy has only a partial and indirect influence on economic performance.

Resources
For the 2002-03 biennium, approximately $189.7 million in costs for 417 positions and allocated costs for support, facilities, and overhead. The position count does not include support and overhead.

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Supervision and Regulation Function
Goal
Provide a safe, sound, competitive, and accessible banking system and stable financial markets.

Objectives

  1. Provide comprehensive and effective supervision of U.S. banks, bank and financial holding companies, foreign banking organizations with U.S. operations, and related entities.

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

  3. Improve efficiency and effectiveness and reduce burden on supervised institutions.

  4. Promote equal access to banking services.

  5. Administer and ensure compliance with consumer protection statutes relating to consumer financial transactions.
Performance Measures
  1. Net losses to the Bank Insurance Fund (BIF) from state member banks consistent with economic conditions but, at a minimum, less than the amount charged to the Federal Deposit Insurance Corporation (FDIC) insurance fund (or the amount that would have been charged for premiums if the cap had not been reached on the FDIC fund).

    2002-03 target: BIF losses from state member banks not to exceed premiums paid into the BIF by state member banks.

    Results:
    2003: No net loss to the fund
    2002: Three bank failures occurred with losses exceeding premiums paid into the BIF by state member banks for that year. (The FDIC only assesses premium against banks with a less-than-satisfactory rating or banks that are not well capitalized.)

  2. Extent to which the Federal Reserve, working alone or in cooperation with other authorities, is successful in identifying supervisory and/or financial problems in a timely manner and resolving them in a way that minimizes disruptions to the financial and payment systems and the economy more generally.

    2002-03 target: No specific performance target has been identified

    Results: No major financial problems or disruptions to the financial or payments systems

  3. All financial institution examinations completed as required by statute and current risk portfolios actively reviewed and updated; material loss reviews by OIG show prudent and careful oversight even when a financial institution failure occurs.

    2002-03 target: 98 percent of examinations conducted in accordance with 12- or 18-month statutory requirements, as appropriate; subsequent supervisory follow-up performed on CAMELS 3, 4, or 5 as required by Federal Reserve guidelines

    Results:
    2003: 99 percent of state-chartered member banks (SMB) exams were conducted in the required timeframe. Institutions with CAMELS rating of 3, 4, or 5 received the appropriate supervisory follow-up, as required by Federal Reserve guidelines

    2002: Approximately 98 percent of SMB exams were conducted in the required timeframe. Institutions with CAMELS rating of 3, 4, or 5 received the appropriate supervisory follow-up, as required by Federal Reserve guidelines.

  4. Consumer affairs examinations conducted to ensure compliance with consumer protection laws and regulations.

    2002-03 Target: Complete 99 percent of compliance examinations within Board-established timeframes

    Results:
    2003: 99 percent of examinations were completed within Board-established timeframes
    2002: 99 percent of examinations were completed within Board-established timeframes

  5. Guidance needed to ensure compliance with consumer protection laws issued on a timely basis to reflect industry changes and legislation.

    2002-03 target: Keep all guidance up-to-date and current

    Results: All guidance up-to-date

Resources
For the 2002-03 biennium, approximately $189.8 million in costs for 357 positions and allocated costs for support, facilities, and overhead. The position count does not include support and overhead.

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Payment System Policy Oversight Function
Goal
Effectively oversee Reserve Bank operations and foster the integrity, efficiency, and accessibility of U.S. payment and settlement systems.

Objectives
  1. Develop sound, effective policies and regulations that foster payment system integrity, efficiency, and accessibility.

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

  3. Conduct research and analysis that contributes to policy development and increases the Board’s and others’ understanding of payment system dynamics and risk.
Performance Measures
  1. Modification of the Board’s payment system risk policy.

    2002-03 target: Publish longer-term policy direction, third quarter 2002; request comment on incorporation of certain international central bank standards, first quarter 2003

    Results
    2003: Requested public comment, with the first responses due in the first quarter 2004
    2002: Published analysis and next steps, August 2002; published statement on longer-term policy direction

  2. Complete all Reserve Bank reviews, as scheduled; complete annual Reserve Bank examinations.

    2002-03 target: Complete all reviews as scheduled

    Results: All reviews completed as scheduled

  3. Monitor and ensure the full collateralization of Federal Reserve notes as defined by the Federal Reserve Act.

    2002-03 target: Ensure 100 percent collateralization

    Results: 100 percent collateralization achieved

  4. Respond timely to requests for policy interpretations, deviations, and exception requests from the Reserve Banks.

    2002-03 target: No target specified

    Results: All requests from Reserve Banks responded to in a timely manner

  5. Publication of research and analysis relating to U.S. retail payments system.

    2002-03 target: Federal Reserve Bulletin article, third quarter 2002 and separate staff study, third quarter 2003

    Results
    2003: Ongoing effort to publish staff study
    2002: Published “The Use of Checks and Other Noncash Payments in the U.S.,” August 2002

Resources
For the 2002-03 biennium, approximately $85.7 million in costs for 185 positions and allocated costs for support, facilities, and overhead. The position count does not include support and overhead.

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Internal Board Support
Goal
Foster the integrity, efficiency, and effectiveness of Board programs.

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

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

  3. Provide financial management support needed for sound business decisions.

  4. Provide modern, safe, facilities and necessary support activities conducive to efficient and effective Board operations.
Performance Measures
  1. Contract for an outside audit of the financial statements of the Board.

    2002-03 target: Clean opinion of the accuracy of the Board’s annual financial statements and internal controls

    Results: The audit of the financial statements of the Board resulted in an unqualified opinion each year

  2. Solicit feedback from division directors on the quality of support provided in attracting, retaining, and training staff capable of meeting the varied and highly technical requirements of the Board.

    2002-03 target: Good or better rating from at least 90 percent of division directors on support areas such as financial management, compensation, recruiting, training, and employee relations

    Results: Overall, respondents rated the services provided and the staff as good to excellent

  3. Revise the Board’s planning and budget process to better incorporate voluntary compliance with the GPRA, to achieve more streamlined operations, and to reduce administrative costs while maintaining service levels.

    2002-03 target: Review options and implement a new budget-formulation software package for the 2004-05 budget process that will reduce administrative workload, January 2003

    Results: A new automated budget system was implemented and goals, objectives, and performance measures were submitted by divisions

  4. Enhance Boardwide physical security and capacity for disaster recovery to reduce the time for resuming normal operations.

    2002-03 target: Enhance capacity at remote sites and increase the amount of information and the number of systems supported at those sites

    Results: Expanded disaster recovery services and applications provided at our three contingency sites and significantly enhanced client support at our primary site

    2002-03 target: Enhance physical security by adding security staff, using canines for greater perimeter security, and using contract support for mail handling

    Results: Hired and placed nearly two thirds of the 96 new security positions, implemented a four-team canine unit, and successfully moved mail screening from the Eccles/Martin complex to an off-site area operated by a contractor

Resources
For the 2002-03 biennium, approximately $188.1 million in direct costs for 813 positions, facilities, and other costs. The expenses have already been allocated back to the Board’s core functions and are included in the costs shown for those functions. The positions have not been included in the position count for the other functions.

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