Performance and Results Act
Performance Report, 2002-03
by the Board of Governors of the Federal Reserve System
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
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:
- Conducting the nation’s monetary policy by influencing money and
credit conditions in the economy in pursuit of maximum sustainable employment
and stable prices
- 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
- 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
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.
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
The Federal Reserve Board has three primary goals with interrelated and
mutually reinforcing elements:
- to conduct monetary policy that promotes the achievement of maximum
sustainable long-term growth and the price stability that fosters that
- to promote a safe, sound, competitive, and accessible banking system
and stable financial markets
- 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
Conduct monetary policy that promotes the achievement of maximum sustainable
long-term growth and the price stability that fosters that goal
- 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.
- 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
- Implement monetary policy effectively in rapidly changing economic
circumstances and in an evolving financial market structure.
- Contribute to the development of U.S. international policies and
procedures, in cooperation with the U.S. Department of the Treasury
and other agencies.
- Promote understanding of Federal Reserve policy among other government
policy officials and the general public.
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.
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
Provide a safe, sound, competitive, and accessible banking system and
stable financial markets.
- Provide comprehensive and effective supervision of U.S. banks, bank
and financial holding companies, foreign banking organizations with
U.S. operations, and related entities.
- Promote overall financial stability, manage and contain systemic
risk, and ensure that emerging financial crises are identified early
and successfully resolved.
- Improve efficiency and effectiveness and reduce burden on supervised
- Promote equal access to banking services.
- Administer and ensure compliance with consumer protection statutes
relating to consumer financial transactions.
- 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.
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.)
- 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
2002-03 target: No specific performance target has been identified
Results: No major financial problems or disruptions to the
financial or payments systems
- 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
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.
- 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
2003: 99 percent of examinations were completed within Board-established
2002: 99 percent of examinations were completed within Board-established
- 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
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
Effectively oversee Reserve Bank operations and foster the integrity,
efficiency, and accessibility of U.S. payment and settlement systems.
- Develop sound, effective policies and regulations that foster payment
system integrity, efficiency, and accessibility.
- 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
- Conduct research and analysis that contributes to policy development
and increases the Board’s and others’ understanding of payment system
dynamics and risk.
- 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
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
- 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
- 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
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
- Publication of research and analysis relating to U.S. retail payments
2002-03 target: Federal Reserve Bulletin article, third
quarter 2002 and separate staff study, third quarter 2003
2003: Ongoing effort to publish staff study
2002: Published “The Use of Checks and Other Noncash Payments
in the U.S.,” August 2002
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
Foster the integrity, efficiency, and effectiveness of Board programs.
- 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
- Develop appropriate policies, oversight mechanisms, and measurement
criteria to ensure that the recruiting, training, and retention of staff
meet Board needs.
- Provide financial management support needed for sound business decisions.
- Provide modern, safe, facilities and necessary support activities
conducive to efficient and effective Board operations.
- Contract for an outside audit of the financial statements of the
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
- 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
- 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
- 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
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
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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