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Annual Report 2013

Federal Reserve System Audits

The Board of Governors, the Federal Reserve Banks, and the Federal Reserve System as a whole are all subject to several levels of audit and review.

The Board's financial statements and internal controls over financial reporting are audited annually by an independent outside auditor retained by the Board's Office of Inspector General (OIG). The outside auditor also tests the Board's compliance with certain laws and regulations affecting those statements.

The Reserve Banks' financial statements are audited annually by an independent outside auditor retained by the Board of Governors. In addition, the Reserve Banks are subject to annual examination by the Board. As discussed in section 5, "Federal Reserve Banks," the Board's examination includes a wide range of ongoing oversight activities conducted on site and off site by staff of the Board's Division of Reserve Bank Operations and Payment Systems.

In addition, the OIG conducts audits, investigations, and other reviews relating to the Board's programs and operations as well as to Board functions delegated to the Reserve Banks. Certain aspects of Federal Reserve operations are also subject to review by the Government Accountability Office.

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Board of Governors Financial Statements

The financial statements of the Board of Governors for 2013 and 2012 were audited by Deloitte & Touche LLP, independent auditors.

Board of Governors Seal

March 12, 2014

Management's Report on Internal Control over Financial Reporting

To the Committee on Board Affairs:

The management of the Board of Governors of the Federal Reserve System ("the Board") is responsible for the preparation and fair presentation of the balance sheet as of December 31, 2013, and for the related statement of operations and statement of cash flows for the year then ended (the "Financial Statements"). The Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America and, as such, include some amounts which are based on management judgments and estimates. To our knowledge, the Financial Statements are, in all material respects, fairly presented in conformity with generally accepted accounting principles and include all disclosures necessary for such presentation.

The Board's management is also responsible for establishing and maintaining effective internal control over financial reporting as it relates to the Financial Statements. Such internal control is designed to provide reasonable assurance to management and to the Committee on Board Affairs regarding the preparation of the Financial Statements in accordance with accounting principles generally accepted in the United States of America. The Board's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Board; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of Financial Statements in accordance with generally accepted accounting principles, and that the Board's receipts and expenditures are being made only in accordance with authorizations by its management; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Board's assets that could have a material effect on the Financial Statements.

Internal control, no matter how well designed and operated, can only provide reasonable assurance of achieving the Board's control objectives with respect to the preparation of reliable Financial Statements. The likelihood of achievement of such objectives is affected by limitations inherent to internal control, including the possibility of human error. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that specific controls may become inadequate because of changes in conditions or that the degree of compliance with policies or procedures may deteriorate.

The Board's management assessed its internal control over financial reporting with regards to the Financial Statements based upon the criteria established in the Internal Control--Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Based on this assessment, we believe that the Board has maintained effective internal control over financial reporting as it relates to its Financial Statements.

Donald V. Hammond Signature

Donald V. Hammond
Chief Operating Officer

William L. Mitchell Signature

William L. Mitchell
Chief Financial Officer

Deloitte Logo

INDEPENDENT AUDITORS' REPORT

To the Board of Governors of the Federal Reserve System:

We have audited the accompanying financial statements of the Board of Governors of the Federal Reserve System (the "Board"), which are comprised of the balance sheets as of December 31, 2013 and 2012, and the related statements of operations, and cash flows for the years then ended, and the related notes to the financial statements. We also have audited the Board's internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control--Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Management's Responsibility

The Board's management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. The Board's management is also responsible for its assertion of the effectiveness of internal control over financial reporting, included in the accompanying Management's Assertion.

Auditors' Responsibility

Our responsibility is to express an opinion on these financial statements and an opinion on the Board's internal control over financial reporting based on our audits. We conducted our audit of the financial statements in accordance with auditing standards generally accepted in the United States of America, auditing standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States and we conducted our audit of internal control over financial reporting in accordance with attestation standards established by the American Institute of Certified Public Accountants and in accordance with the auditing standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement and whether effective internal control over financial reporting was maintained in all material respects.

An audit of financial statements involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Board's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances. An audit of financial statements also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. An audit of internal control over financial reporting involves obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions.

Definition of Internal Control Over Financial Reporting

The Board's internal control over financial reporting is a process designed by, or under the supervision of, the Board's principal executive and principal financial officers, or persons performing similar functions, and effected by the Board's Committee on Board Affairs, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Board's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Board; (2) provide

reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Board are being made only in accordance with authorizations of management and governors of the Board; and (3) provide reasonable assurance regarding prevention or timely detection and correction of unauthorized acquisition, use, or disposition of the Board's assets that could have a material effect on the financial statements.

Inherent Limitations of Internal Control Over Financial Reporting

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected and corrected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Opinions

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Board as of December 31, 2013 and 2012, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Also, in our opinion, the Board maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the criteria established in Internal Control--Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Report on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards

In accordance with Government Auditing Standards, we have also issued a report dated March 12, 2014 on our tests of the Board's compliance with certain provisions of laws, regulations, contracts, grant agreements, and other matters. The purpose of that report is to describe the scope of our testing of compliance and the results of that testing, and not to provide an opinion on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standardsand should be read in conjunction with this report in considering the results of our audits.

Deloitte & Touche LLP

March 12, 2014
Washington, DC

Board of Governors of the Federal Reserve System Balance Sheets
  As of December 31,
2013 2012
Assets
Current assets:
Cash $90,851,317 $53,965,151
Accounts receivable - net 7,911,011 2,437,241
Prepaid expenses and other assets 4,621,633 4,518,080
Total current assets 103,383,961 60,920,472
Noncurrent assets:
Property, equipment, and software - net 195,347,206 186,703,851
Other assets 1,959,389 1,081,446
Total noncurrent assets 197,306,595 187,785,297
Total $300,690,556 $248,705,769
 
Liabilities and cumulative results of operations
Current liabilities:
Accounts payable and accrued liabilities $22,376,801 $16,181,003
Accrued payroll and related taxes 25,105,590 20,907,437
Accrued annual leave 31,288,437 29,218,663
Capital lease payable 465,219 456,896
Unearned revenues and other liabilities 2,509,202 617,787
Total current liabilities 81,745,249 67,381,786
Long-term liabilities:
Capital lease payable 603,897 1,069,116
Retirement benefit obligation 30,129,567 33,740,310
Postretirement benefit obligation 11,294,443 13,249,648
Postemployment benefit obligation 8,490,921 10,695,165
Other liabilities 22,060,853 21,261,795
Total long-term liabilities 72,579,681 80,016,034
Total liabilities 154,324,930 147,397,820
 
Cumulative results of operations:
Fund balance 153,616,578 119,140,439
Accumulated other comprehensive income (loss) (7,250,952) (17,832,490)
Total cumulative results of operations 146,365,626 101,307,949
 
Total $300,690,556 $248,705,769
 
See notes to financial statements.    
Board of Governors of the Federal Reserve System Statements of Operations
  For the years ended December 31,
2013 2012
Board operating revenues:  
Assessments levied on Federal Reserve Banks for Board operating expenses and capital expenditures $580,000,000 $490,000,000
Other revenues 14,888,833 9,793,604
Total operating revenues 594,888,833 499,793,604
 
Board operating expenses:  
Salaries 322,740,797 299,889,043
Retirement, insurance, and benefits 73,336,663 70,232,938
Contractual services and professional fees 63,094,846 50,873,548
Depreciation, amortization, and net gains or losses on disposals 24,694,987 21,969,729
Travel 14,726,855 15,068,161
Postage, supplies, and non-capital furniture and equipment 10,955,269 11,256,753
Utilities 9,330,903 9,016,693
Software 11,592,703 10,967,296
Rentals of space 14,790,457 14,120,215
Repairs and maintenance 5,866,831 5,696,326
Printing and binding 1,899,711 2,126,056
Other expenses 7,382,672 7,887,650
Total operating expenses 560,412,694 519,104,408
 
Net income (loss) 34,476,139 (19,310,804)
 
Currency costs:  
Assessments levied or to be levied on Federal Reserve Banks for currency costs 705,030,765 721,074,064
Expenses for costs related to currency 705,030,765 721,074,064
Currency assessments over (under) expenses - -
 
Bureau of Consumer Financial Protection (Bureau):  
Assessments levied on the Federal Reserve Banks for the Bureau 563,200,000 385,200,000
Transfers to the Bureau 563,200,000 385,200,000
Bureau assessments over (under) transfers - -
 
Office of Financial Research (Office):  
Assessments levied on the Federal Reserve Banks for the Office - 2,078,298
Transfers to the Office - 2,078,298
Office assessments over (under) transfers - -
 
Total net income (loss) 34,476,139 (19,310,804)
 
Other comprehensive income:  
Amortization of prior service (credit) cost 605,684 584,890
Amortization of net actuarial (gain) loss 1,218,367 1,659,956
Net actuarial gain (loss) arising during the year 8,757,487 (2,983,794)
Total other comprehensive income (loss) 10,581,538 (738,948)
     
Comprehensive income (loss) 45,057,677 (20,049,752)
     
Cumulative results of operations - beginning of year 101,307,949 121,357,701
 
Cumulative results of operations - end of year $146,365,626 $101,307,949
 
See notes to financial statements.
Board of Governors of the Federal Reserve System Statements of Cash Flows
  For the years ended December 31,
2013 2012
Cash flows from operating activities:
Net income (loss) $34,476,139 $(19,310,804)
Adjustments to reconcile results of operations to net cash provided by (used in) operating activities:    
Depreciation and amortization 22,804,365 21,901,984
Net loss (gain) on disposal of property and equipment 1,890,621 67,745
Other additional non-cash adjustments to results of operations 119,355 492,739
(Increase) decrease in assets:
Accounts receivable, prepaid expenses and other assets (6,455,266) 1,211,886
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities 4,260,385 (6,317,712)
Accrued payroll and related taxes 4,198,153 2,290,903
Accrued annual leave 2,069,774 1,936,913
Unearned revenues and other liabilities 1,891,415 (255,081)
Net retirement benefit obligation 4,694,408 6,363,414
Net postretirement benefit obligation 321,182 602,805
Net postemployment benefit obligation (2,204,244) (449,979)
Other long-term liabilities (523,133) 437,509
Net cash provided by (used in) operating activities 67,543,154 8,972,322
 
Cash flows from investing activities:
Capital expenditures (30,200,771) (28,057,137)
Net cash provided by (used in) investing activities (30,200,771) (28,057,137)
 
Cash flows from financing activities:    
Capital lease payments (456,217) (542,160)
Net cash provided by (used in) financing activities (456,217) (542,160)
 
Net increase (decrease) in cash 36,886,166 (19,626,975)
Cash balance - beginning of year 53,965,151 73,592,126
Cash balance - end of year $90,851,317 $53,965,151
 
See notes to financial statements.    

Board of Governors of the Federal Reserve System Notes to Financial Statements as of and for the Years Ended December 31, 2013 and 2012


(1) Structure

The Federal Reserve System (the System) was established by Congress in 1913 and consists of the Board of Governors (the Board), the Federal Open Market Committee, the twelve regional Federal Reserve Banks (Reserve Banks), the Federal Advisory Council, and the private commercial banks that are members of the System. The Board, unlike the Reserve Banks, was established as a federal government agency and is located in Washington, D.C.

The Board is required by the Federal Reserve Act (the Act) to report its operations to the Speaker of the House of Representatives. The Act also requires the Board, each year, to order a financial audit of each Reserve Bank and to publish each week a statement of the financial condition of each Reserve Bank and a combined statement for all of the Reserve Banks. Accordingly, the Board believes that the best financial disclosure consistent with law is achieved by issuing separate financial statements for the Board and for the Reserve Banks. Therefore, the accompanying financial statements include only the results of operations and activities of the Board. Combined financial statements for the Reserve Banks are included in the Board's annual report to the Speaker of the House of Representatives and weekly statements are available on the Board's public website.

The Dodd-Frank Wall Street Reform and Consumer Financial Protection Act of 2010 (Dodd-Frank Act) established the Bureau of Consumer Financial Protection (Bureau) as an independent bureau within the System and designated the Board's Office of Inspector General (OIG) as the OIG for the Bureau. As required by the Dodd-Frank Act, the Board transferred certain responsibilities to the Bureau. The Dodd-Frank Act requires the Board to fund the Bureau from the combined earnings of the System. The Dodd-Frank Act also created the Financial Stability Oversight Council (FSOC), of which the Chairman of the Board is a member, as well as the Office of Financial Research (Office) within the U.S. Department of Treasury (Treasury) to provide support to the FSOC and the member agencies. The Dodd-Frank Act required that the Board provide funding for the FSOC and the Office until July 2012. Section 1017 of the Dodd-Frank Act provides that the financial statements of the Bureau are not to be consolidated with those of the Board or the System; the Board has also determined that neither the FSOC nor the Office should be consolidated in the Board's financial statements. Accordingly, the Board's financial statements do not include financial data of the Bureau, the FSOC, or the Office other than the funding that the Board is required by the Dodd-Frank Act to provide.

(2) Operations and Services

The Board's responsibilities require thorough analysis of domestic and international financial and economic developments. The Board carries out those responsibilities in conjunction with the Reserve Banks and the Federal Open Market Committee. The Board also exercises general oversight of the operations of the Reserve Banks and exercises broad responsibility in the nation's payments system. Policy regarding open market operations is established by the Federal Open Market Committee. However, the Board has sole authority over changes in reserve requirements, and it must approve any change in the discount rate initiated by a Reserve Bank. The Board also plays a major role in the supervision and regulation of the U.S. banking system. It has supervisory responsibilities for state-chartered banks that are members of the System, bank holding companies, savings and loan holding companies, foreign activities of member banks, U.S. activities of foreign banks, and any systemically important nonbank financial companies that are designated as such by the FSOC. Although the Dodd-Frank Act gave the Bureau general rule-writing responsibility for Federal consumer financial laws, the Board retains rule-writing responsibility under the Community Reinvestment Act and other specific statutory provisions. The Board also enforces the requirements of Federal consumer financial laws for state member banks with assets of $10 billion or less. In addition, the Board enforces certain other consumer laws at all state member banks, regardless of size.

(3) Significant Accounting Policies

Basis of Accounting -- The Board prepares its financial statements in accordance with accounting principles generally accepted in the United States (GAAP).

Revenues -- The Federal Reserve Act authorizes the Board to levy an assessment on the Reserve Banks to fund its operations. The Board allocates the assessment to each Reserve Bank based on the Reserve Bank's capital and surplus balances.

Assessments to Fund the Bureau and the Office -- The Board assesses the Reserve Banks for the funds transferred to the Bureau and the Office based on each Reserve Bank's capital and surplus balances. These assessments and transfers are reported separately from the Board's operating activities in the Board's Statements of Operations.

Assessments for Supervision and Regulation (S&R) -- The Dodd-Frank Act directs the Board to collect assessments, fees, or other charges equal to the total expenses the Board estimates are necessary or appropriate to carry out the supervisory and regulatory responsibilities of the Board for bank holding companies and savings and loan holding companies with total consolidated assets of $50 billion or more and nonbank financial companies designated for Board supervision by the FSOC. More comprehensive information about these assessments is available on the Board's public website. As a collecting entity, the Board does not recognize the S&R assessments as revenue nor does the Board use the collections to fund Board expenses; the funds are transferred to the Treasury. The Board collected and transferred $433,483,299 during 2013.

Civil Money Penalties -- The Board has enforcement authority over the financial institutions it supervises and their affiliated parties, including the authority to assess civil money penalties. As directed by statute, all civil money penalties that are assessed and collected by the Board are remitted to either the Treasury or the Federal Emergency Management Agency (FEMA). As a collecting entity, the Board does not recognize civil money penalties as revenue nor does the Board use the civil money penalty to fund Board expenses. Civil money penalties whose collection is contingent upon fulfillment of certain conditions in the enforcement action are not recorded in the Board's financial records. Checks for civil money penalties made payable to the National Flood Insurance Program are forwarded to FEMA and are not recorded in the Board's financial records.

Currency Costs -- The Board issues the nation's currency (in the form of Federal Reserve notes), and the Reserve Banks distribute currency through depository institutions. The Board incurs expenses and assesses the Reserve Banks for the expenses related to producing, issuing, and retiring Federal Reserve notes as well as providing educational services. The assessment is allocated based on each Reserve Bank's share of the number of notes comprising the System's net liability for Federal Reserve notes on December 31 of the prior year. These expenses and assessments are reported separately from the Board's operating activities in the Board's Statements of Operations.

Accounts Receivable and Allowance for Doubtful Accounts -- Accounts receivable are recorded when amounts are earned but not yet received and are shown net of the allowance for doubtful accounts. Accounts receivable considered uncollectible are charged against the allowance account in the year they are deemed uncollectible. The allowance for doubtful accounts is adjusted monthly, based upon a review of outstanding receivables. The allowance for doubtful accounts is $122,000 and $30,000 as of December 31, 2013 and 2012, respectively.

Property, Equipment, and Software -- The Board's property, equipment, and software are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated on a straight-line basis over the estimated useful lives of the assets, which range from three to ten years for furniture and equipment, ten to fifty years for building equipment and structures, and two to five years for software. Upon the sale or other disposition of a depreciable asset, the cost and related accumulated depreciation or amortization are removed and any gain or loss is recognized. Construction in process includes costs incurred for short-term and long-term projects that have not been placed into service; the majority of the balance represents long-term building enhancement projects.

Art Collections -- The Board has collections of works of art, historical treasures, and similar assets. These collections are maintained and held for public exhibition in furtherance of public service. Proceeds from any sales of collections are used to acquire other items for collections. The cost of collections purchased by the Board is charged to expense in the year purchased and donated collection items are not recorded. The value of the Board's collections has not been determined.

Deferred Rent -- Leases for certain space contain scheduled rent increases over the term of the lease. Rent abatements, lease incentives, and scheduled rent increases must be considered in determining the annual rent expense to be recognized. The deferred rent represents the difference between the actual lease payments and the rent expense recognized. Lease incentives impact deferred rent and are non-cash transactions.

Estimates -- The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Recently Issued Accounting Standards -- In February 2013, the Financial Accounting Standards Board (FASB) issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income related to reporting of significant reclassification adjustments from accumulated other comprehensive income. This update improves the transparency of changes in other comprehensive income and items reclassified out of accumulated other comprehensive income in the financial statements. The required disclosures in ASU 2013-02 are effective for the Board for the year ended December 31, 2013, and are reflected in the Board's 2013 financial statements and Note 9.

(4) Property, Equipment, and Software

The following is a summary of the components of the Board's property, equipment, and software, at cost, less accumulated depreciation and amortization as of December 31, 2013 and 2012:

  As of December 31,
2013 2012
Land $18,640,314 $18,640,314
Buildings and improvements 217,293,649 205,006,985
Construction in process 15,436,635 14,362,523
Furniture and equipment 62,655,420 74,519,266
Software in use 33,690,483 29,147,933
Software in process 1,641,886 2,422,381
Vehicles 1,205,025 960,745
Other intangible assets 0 496,675
Subtotal 350,563,412 345,556,822
Less accumulated depreciation and amortization (155,216,206) (158,852,971)
Property, equipment, and software - net $195,347,206 $186,703,851

The Board retired $28,331,000 and $5,972,000 of long-term assets during 2013 and 2012, respectively.

(5) Leases

Capital Leases -- The Board entered into capital leases for copier equipment in 2008 and 2009 that terminated in March 2012. The Board subsequently entered into new capital leases in 2012. Under the new commitments, the capital lease term extends through 2016. Furniture and equipment includes capitalized leases of $1,853,000 as of 2013 and 2012. Accumulated depreciation includes $801,000 and $337,000 related to assets under capital leases as of 2013 and 2012, respectively. The depreciation expense for the leased equipment is $464,000 and $471,000 for 2013 and 2012, respectively.

The future minimum lease payments required under the capital leases and the present value of the net minimum lease payments as of December 31, 2013, are as follows:

Years Ended December 31, Amount
2014 $711,659
2015 711,659
2016 192,799
Total minimum lease payments 1,616,117
Less amount representing maintenance (523,816)
Net minimum lease payments 1,092,301
Less amount representing interest (23,185)
Present value of net minimum lease payments 1,069,116
Less current maturities of capital lease payments (465,219)
Long-term capital lease obligations $603,897

Operating Leases -- The Board has entered into several operating leases to secure office, training, data center, and warehouse space. Minimum annual payments under the multi-year operating leases having an initial or remaining noncancelable lease term in excess of one year at December 31, 2013, are as follows:

Years Ended December 31,
2014 $15,315,273
2015 24,172,153
2016 26,260,510
2017 27,067,576
After 2017 138,751,173
$231,566,685

Rental expenses under the multi-year operating leases were $13,978,000 and $13,553,000 for the years ended December 31, 2013 and 2012, respectively. The Board entered into four operating leases in 2013, which are reflected in the schedule above. The Board entered into a new operating lease in early 2014. The estimated future minimum lease payments associated with the new lease total $1,068,000 over a ten year period, which is not reflected in the schedule above.

The Board leases and subleases space, primarily to other governmental agencies. The revenues collected for these leases from governmental agencies were $508,000 and $480,000 in 2013 and 2012.

Deferred Rent -- Other long-term liabilities include deferred rent of $21,783,000 and $20,924,000 as of the years ended December 31, 2013 and 2012, respectively. The Board recorded non-cash lease incentives of $1,322,000 and $563,000 for the years ended December 31, 2013 and 2012, respectively.

(6) Retirement Benefits

Substantially all of the Board's employees participate in the Retirement Plan for Employees of the Federal Reserve System (the System Plan). The System Plan provides retirement benefits to employees of the Board, the Reserve Banks, the Office of Employee Benefits of the Federal Reserve System (OEB), and certain employees of the Bureau. The Federal Reserve Bank of New York (FRBNY), on behalf of the System, recognizes the net assets and costs associated with the System Plan in its financial statements. Costs associated with the System Plan were not redistributed to the Board during the years ended December 31, 2013 and 2012.

Employees of the Board who became employed prior to 1984 are covered by a contributory defined benefits program under the System Plan. Employees of the Board who became employed after 1983 are covered by a non-contributory defined benefits program under the System Plan. FRBNY, on behalf of the System, funded $900 million and $780 million during the years ended December 31, 2013 and 2012, respectively. The Board was not assessed a contribution for 2013 or 2012.

Board employees covered under the System Plan are also covered under a Benefits Equalization Plan (BEP). Benefits paid under the BEP are limited to those benefits that cannot be paid from the System Plan due to limitations imposed by the Internal Revenue Code. Activity for the BEP as of December 31, 2013 and 2012, is summarized in the following tables:

  2013 2012
Change in projected benefit obligation:
Benefit obligation - beginning of year $15,152,833 $14,147,186
Service cost 1,361,346 2,100,366
Interest cost 656,007 867,002
Plan participants' contributions - -
Actuarial (gain) loss (4,473,905) (1,928,409)
Gross benefits paid (22,389) (33,312)
Benefit obligation - end of year $12,673,892 $15,152,833
Accumulated benefit obligation - end of year $1,699,943 $3,149,276
Weighted-average assumptions used to determine benefit obligation as of
December 31:
Discount rate 5.26 % 4.25 %
Rate of compensation increase 4.50 % 4.50 %
Change in plan assets:
Fair value of plan assets - beginning of year $ - $ -
Employer contributions 22,389 33,312
Plan participants' contributions - -
Gross benefits paid (22,389) (33,312)
Fair value of plan assets - end of year $ - $ -
Funded status:
Reconciliation of funded status - end of year:
Fair value of plan assets $ - $ -
Benefit obligation (current) 55,061 97,085
Benefit obligation (noncurrent) 12,618,831 15,055,748
Funded status (12,673,892) (15,152,833)
Amount recognized - end of year $(12,673,892) $(15,152,833)
Amounts recognized in the balance sheets consist of:
Asset $ - $ -
Liability - current (55,061) (97,085)
Liability - noncurrent (12,618,831) (15,055,748)
Net amount recognized $(12,673,892) $(15,152,833)
Amounts recognized in accumulated other comprehensive income consist of:
Net actuarial loss (gain) $(1,534,296) $2,939,609
Prior service cost (credit) 521,188 620,967
Net amount recognized $(1,013,108) $3,560,576

Expected cash flows:
Expected employer contributions - 2014 $ 55,061
 
Expected benefit payments: *
2014 $ 55,061
2015 $ 60,238
2016 $ 78,421
2017 $ 99,944
2018 $ 110,329
2019-2023 $ 971,366

*.Expected benefit payments to be made by the Board.

  2013 2012
Components of net periodic benefit cost:
Service cost $ 1,361,346 $ 2,100,366
Interest cost 656,007 867,002
Expected return on plan assets - -
Amortization:
Actuarial (gain) loss - 667,775
Prior service (credit) cost 99,779 78,985
Net periodic benefit cost (credit) $ 2,117,132 $ 3,714,128
Weighted-average assumptions used to determine net periodic benefit cost:
Discount rate 4.25 % 4.50 %
Rate of compensation increase 4.50 % 5.00 %
Other changes in plan assets and benefit obligations recognized in
other comprehensive income:
Current year actuarial (gain) loss $ (4,473,905) $ (1,928,409)
Amortization of prior service credit (cost) (99,779) (78,985)
Amortization of actuarial gain (loss) - (667,775)
Total recognized in other comprehensive (income) loss $ (4,573,684) $ (2,675,169)
Total recognized in net periodic benefit cost and other comprehensive income $ (2,456,552) $ 1,038,959

Estimated amounts that will be amortized from accumulated other comprehensive income into net periodic benefit cost (credit) in 2014 are shown below:

Net actuarial (gain) loss $ (25,667)
Prior service (credit) cost 99,578
Total $ 73,911

The Board also provides another non-qualified plan for officers of the Board. The retirement benefits covered under the Pension Enhancement Plan (PEP) increase the pension benefit calculation from 1.8% above the Social Security integration level to 2.0%. Activity for the PEP as of December 31, 2013 and 2012, is summarized in the following tables:

  2013 2012
Change in projected benefit obligation:
Benefit obligation - beginning of year $ 18,440,730 $ 13,250,209
Service cost 795,619 684,473
Interest cost 821,785 750,474
Plan participants' contributions - -
Actuarial (gain) loss (2,312,328) 3,856,673
Gross benefits paid (152,139) (101,099)
 
Benefit obligation - end of year $ 17,593,667 $ 18,440,730
Accumulated benefit obligation - end of year $ 14,172,160 $ 14,766,590
 
Weighted-average assumptions used to determine benefit obligation as of
December 31:
Discount rate 5.06 % 4.00 %
Rate of compensation increase 4.50 % 4.50 %
 
Change in plan assets:
Fair value of plan assets - beginning of year $ - $ -
Employer contributions 152,139 101,099
Plan participants' contributions - -
Gross benefits paid (152,139) (101,099)
Fair value of plan assets - end of year $ - $ -
 
Funded status:
Reconciliation of funded status - end of year:
Fair value of plan assets $ - $ -
Benefit obligation - current 240,788 97,867
Benefit obligation - noncurrent 17,352,879 18,342,863
Funded status (17,593,667) (18,440,730)
Amount recognized - end of year $ (17,593,667) $ (18,440,730)
 
Amounts recognized in the balance sheets consist of:
Asset $ - $ -
Liability - current (240,788) (97,867)
Liability - noncurrent (17,352,879) (18,342,863)
Net amount recognized $ (17,593,667) $ (18,440,730)
 
Amounts recognized in accumulated other comprehensive income consist of:
Net actuarial loss (gain) $ 5,314,468 $ 8,514,540
Prior service cost (credit) 1,649,093 2,180,488
Net amount recognized $ 6,963,561 $ 10,695,028

Expected cash flows:
Expected employer contributions - 2014 $ 240,788
 
Expected benefit payments: *
2014 $ 240,788
2015 $ 318,244
2016 $ 399,161
2017 $ 483,738
2018 $ 576,898
2019-2023 $ 4,398,804

*.Expected benefit payments to be made by the Board.

  2013 2012
Components of net periodic benefit cost:
Service cost $ 795,619 $ 684,473
Interest cost 821,785 750,474
Expected return on plan assets - -
Amortization:
Actuarial (gain) loss 887,744 758,925
Prior service (credit) cost 531,395 531,395
Net periodic benefit cost (credit) $ 3,036,543 $ 2,725,267
 
Weighted-average assumptions used to determine net periodic benefit cost:
Discount rate 4.00 % 4.50 %
Rate of compensation increase 4.50 % 5.00 %
 
Other changes in plan assets and benefit obligations recognized in
other comprehensive income:
Current year actuarial (gain) loss $ (2,312,328) $ 3,856,673
Amortization of prior service credit (cost) (531,395) (531,395)
Amortization of actuarial gain (loss) (887,744) (758,925)
Total recognized in other comprehensive (income) loss $ (3,731,467) $ 2,566,353
Total recognized in net periodic benefit cost and other comprehensive income $ (694,924) $ 5,291,620

Estimated amounts that will be amortized from accumulated other comprehensive income into net periodic benefit cost (credit) in 2014 are shown below:

Net actuarial (gain) loss $ 387,019
Prior service (credit) cost 531,395
Total $ 918,414

The total accumulated retirement benefit obligation includes a liability for a supplemental retirement agreement and a benefits equalization plan under the Federal Reserve System's Thrift Plan. The total obligation as of December 31, 2013 and 2012 is summarized in the following table:

2013 2012
Retirement benefit obligation:
Benefit obligation - BEP $ 12,673,892 $ 15,152,833
Benefit obligation - PEP 17,593,667 18,440,730
Additional benefit obligations 157,857 146,747
Total accumulated retirement benefit obligation $ 30,425,416 $ 33,740,310

A relatively small number of Board employees participate in the Civil Service Retirement System or the Federal Employees' Retirement System. These defined benefit plans are administered by the U.S. Office of Personnel Management, which determines the required employer contribution levels. The Board's contributions to these plans totaled $778,000 and $586,000 in 2013 and 2012, respectively. The Board has no liability for future payments to retirees under these programs and is not accountable for the assets of the plans.

Employees of the Board may also participate in the Federal Reserve System's Thrift Plan or Roth 401(k). Board contributions to members' accounts were $20,288,000 and $19,211,000 in 2013 and 2012, respectively.

(7) Postretirement Benefits

The Board provides certain life insurance programs for its active employees and retirees. Activity as of December 31, 2013 and 2012, is summarized in the following tables:

  2013 2012
Change in benefit obligation:
Benefit obligation - beginning of year $ 13,249,648 $ 11,799,079
Service cost 219,222 210,030
Interest cost 533,435 534,224
Plan participants' contributions - -
Actuarial (gain) loss (1,971,254) 1,055,530
Gross benefits paid (337,740) (349,215)
Benefit obligation - end of year $ 11,693,311 $ 13,249,648
 
Weighted-average assumptions used to determine benefit obligation as of December 31 - discount rate 4.97 % 4.00 %
 
Change in plan assets:
Fair value of plan assets - beginning of year $ - $ -
Employer contributions 337,740 349,215
Gross benefits paid (337,740) (349,215)
Fair value of plan assets - end of year $ - $ -
 
Funded status:
Reconciliation of funded status - end of year:
Fair value of plan assets $ - $ -
Benefit obligation - current 398,868 345,021
Benefit obligation - noncurrent 11,294,443 12,904,627
Funded status (11,693,311) (13,249,648)
Amount recognized - end of year $ (11,693,311) $ (13,249,648)
 
Amounts recognized in the balance sheets consist of:
Asset $ - $ -
Liability - current (398,868) (345,021)
Liability - noncurrent (11,294,443) (12,904,627)
Net amount recognized $ (11,693,311) $ (13,249,648)
 
Amounts recognized in accumulated other comprehensive income consist of:
Net actuarial loss (gain) $ 1,500,562 $ 3,802,439
Prior service cost (credit) (200,064) (225,554)
Net amount recognized $ 1,300,498 $ 3,576,885

Expected cash flows:
Expected employer contributions - 2014 $ 398,868
 
Expected benefit payments: *
2014 $ 398,868
2015 $ 426,704
2016 $ 458,916
2017 $ 489,011
2018 $ 504,713
2019-2023 $ 2,989,203

*. Expected benefit payments to be made by the Board.

  2012 2011
Components of net periodic benefit cost:
Service cost $ 219,222 $ 210,030
Interest cost 533,435 534,224
Expected return on plan assets - -
Amortization:    
Actuarial (gain) loss 330,623 233,256
Prior service (credit) cost (25,490) (25,490)
Net periodic benefit cost (credit) $ 1,057,790 $ 952,020
 
Weighted-average assumptions used to determine net
periodic benefit cost - discount rate
4.00 % 4.50 %
 
Other changes in plan assets and benefit obligations
recognized in other comprehensive income:
Current year actuarial (gain) loss $ (1,971,254) $ 1,055,530
Amortization of prior service credit (cost) 25,490 25,490
Amortization of actuarial gain (loss) (330,623) (233,256)
Total recognized in other comprehensive (income) loss $ (2,276,387) $ 847,764
Total recognized in net periodic benefit cost and other comprehensive income $ (1,218,597) $ 1,799,784

Estimated amounts that will be amortized from accumulated other comprehensive income into net periodic benefit cost (credit) in 2014 are shown below:

Net actuarial (gain) loss $ 46,594
Prior service (credit) cost (25,490)
Total $ 21,104

(8) Postemployment Benefits

The Board provides certain postemployment benefits to eligible former or inactive employees and their dependents during the period subsequent to employment but prior to retirement. Postemployment costs were actuarially determined using a December 31 measurement date and discount rates of 3.43% and 2.50% as of December 31, 2013 and 2012, respectively. The net periodic postemployment benefit cost (credit) recognized by the Board as of December 31, 2013 and 2012, was ($217,000) and $518,000, respectively.

(9) Accumulated Other Comprehensive Income (Loss)

A reconciliation of beginning and ending balances of accumulated other comprehensive income (loss) for the years ended December 31, 2013 and 2012, is as follows:

  Amount Related to Defined Benefit Retirement Plans Amount Related to Postretirement
Benefits Other
Than Pensions
Total Accumulated
Other
Comprehensive
Income (Loss)
Balance - January 1, 2012 $ (14,364,420) $ (2,729,122) $ (17,093,542)
 
Change in accumulated other comprehensive income (loss):
Net actuarial gain (loss) arising during the year (a) (1,928,264) (1,055,530) (2,983,794)
Other comprehensive income before reclassifications (1,928,264) (1,055,530) (2,983,794)
Amortization of prior service (credit) costs (a)(b) (a) (b) 610,380 (25,490) 584,890
Amortization of net actuarial (gain) loss (a)(b) 1,426,700 233,256 1,659,956
Amounts reclassified from accumulated other comprehensive income 2,037,080 207,766 2,244,846
Change in accumulated other comprehensive income (loss) 108,816 (847,764) (738,948)
Balance - December 31, 2012 (14,255,604) (3,576,886) (17,832,490)
 
Change in accumulated other comprehensive income (loss):
Net actuarial gain (loss) arising during the year (a) 6,786,233 1,971,254 8,757,487
Other comprehensive income before reclassifications 6,786,233 1,971,254 8,757,487
Amortization of prior service (credit) costs (a)(b) 631,174 (25,490) 605,684
Amortization of net actuarial (gain) loss (a)(b) 887,744 330,623 1,218,367
Amounts reclassified from accumulated other comprehensive income 1,518,918 305,133 1,824,051
Change in accumulated other comprehensive income (loss) 8,305,151 2,276,387 10,581,538
Balance - December 31, 2013 $ (5,950,453) $ (1,300,499) $ (7,250,952)

(a).These components of accumulated other comprehensive income are included in the computation of net periodic pension cost (see Notes 6 and 7 for additional details). Return to table

(b).These components of accumulated other comprehensive income are reflected in the "Retirement, insurance, and benefits" line on the Statements of Operations. Return to table

(10) Reserve Banks

The Board performs certain functions for the Reserve Banks in conjunction with its responsibilities for the System, and the Reserve Banks provide certain administrative functions for the Board. The Board assesses the Reserve Banks for its operating expenses, to include expenses related to its currency responsibilities, as well as for the funding the Board is required to provide to the Bureau and the Office. Activity related to the Board and Reserve Banks is summarized in the following table:

  2013 2012
For the years ended December 31:
Assessments levied or to be levied on Reserve Banks for:
Currency expenses $ 705,030,765 $ 721,074,064
Board operations 580,000,000 490,000,000
Transfers of funds to the Bureau 563,200,000 385,200,000
Transfers of funds to the Office - 2,078,298
Total assessments levied or to be levied on Reserve Banks $ 1,848,230,765 $ 1,598,352,362
 
Board expenses charged to the Reserve Banks for data
processing and office space
$ 417,324 $ 423,209
 
Reserve Bank expenses charged to the Board:
Data processing and communication $ 861,671 $ 1,313,902
Office space 1,289,714 -
Contingency site 1,262,616 1,191,220
Total Reserve Bank expenses charged to the Board $ 3,414,001 $ 2,505,122
 
Net transactions with Reserve Banks $ 1,845,234,088 $ 1,596,270,449
 
As of the years ended December 31:    
Accounts receivable due from the Reserve Banks $ 5,496,852 $ 751,614
Accounts payable due to the Reserve Banks $ 1,000,923 $ 334,665

The Board contracted for audit services on behalf of entities that are included in the combined financial statements of the Reserve Banks. The entities reimburse the Board for the cost of the audit services. The Board accrued liabilities of $47,000 and $185,000 in audit services and recorded net receivables of $47,000 and $170,000 from the entities as of December 31, 2013 and 2012, respectively.

The OEB administers certain System benefit programs on behalf of the Board and the Reserve Banks, and costs associated with the OEB's activities are assessed to the Board and Reserve Banks. The Board was assessed $2,402,000 and $2,530,000 for the years ended December 31, 2013 and 2012, respectively.

(11) Federal Financial Institutions Examination Council

The Board is one of the five member agencies of the Federal Financial Institutions Examination Council (the Council), and currently performs certain management functions for the Council. The five agencies that are represented on the Council are the Board, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency, and the Bureau.

The Board's financial statements do not include financial data for the Council. Activity related to the Board and Council is summarized in the following table:

  2013 2012
For the years ended December 31:
Council expenses charged to the Board:
Assessments for operating expenses $ 141,111 $ 137,466
Assessments for examiner education 988,233 1,043,917
Central Data Repository 1,049,787 1,111,793
Home Mortgage Disclosure Act/Community Reinvestment Act 717,177 753,464
Uniform Bank Performance Report 134,977 132,294
Total Council expenses charged to the Board $ 3,031,285 $ 3,178,934
 
Board expenses charged to the Council:
Data processing related services $ 4,233,290 $ 4,392,625
Administrative services 223,000 261,000
Total Board expenses charged to the Council $ 4,456,290 $ 4,653,625
 
As of the years ended December 31:    
Accounts receivable due from the Council $ 442,749 $ 545,770
Accounts payable due to the Council $ 326,875 $ 211,061

(12) The Bureau of Consumer Financial Protection

Beginning July 2011, section 1017 of the Dodd-Frank Act requires the Board to fund the Bureau from the combined earnings of the System, in an amount determined by the Director of the Bureau to be reasonably necessary to carry out the authorities of the Bureau under Federal consumer financial law, taking into account such other sums made available to the Bureau from the preceding year (or quarter of such year). The Dodd-Frank Act limits the amount to be transferred each fiscal year to a fixed percentage of the System's total operating expenses. The Board received and processed funding requests for the Bureau totaling $563,200,000 and $385,200,000 during calendar years 2013 and 2012, respectively. The Bureau transferred to the Board funding for the operations of the OIG of $10 million and $3 million in 2013 and 2012, respectively. Beginning in 2014, the Bureau's funding share of OIG operations will be adjusted based on actual OIG expenses and work allocation from the previous year. The Board accrued a liability of $1.84 million as of December 31, 2013, which will be applied to subsequent Bureau transfers.

As part of the transfer of responsibilities from the Board to the Bureau, certain Board staff were transferred to the Bureau during 2011. The Board continued to administer certain non-retirement benefits for all transferred Board employees through July 20, 2012.

(13) The Office of Financial Research

Section 155(c) of the Dodd-Frank Act requires the Board to provide an amount sufficient to cover the expenses of the Office for the two-year period following the date of the enactment (July 21, 2010). The expenses of the FSOC are included in the expenses of the Office. The Board received and processed funding requests for the Office totaling $42,000,000 during 2012. At the end of the two-year period in 2012, the Office returned $39,921,702 to the Board which was returned to the Reserve Banks.

(14) Currency

The Bureau of Engraving and Printing (BEP) is the sole supplier for currency printing and also provides currency retirement services. The Board provides or contracts for other services associated with currency, such as shipping, education, and quality assurance. The currency costs incurred by the Board for the years ended December 31, 2013 and 2012, are reflected in the following table:

  2013 2012
Expenses related to BEP services:
Printing $ 660,957,789 $ 687,704,624
Retirement 3,081,392 3,132,105
Subtotal related to BEP services $ 664,039,181 $ 690,836,729
 
Other currency expenses:
Shipping $ 20,732,476 $ 17,179,610
Research and development 5,393,220 5,316,005
Quality assurance services 11,284,687 7,259,900
Education services 3,581,201 481,820
Subtotal other currency expenses $ 40,991,584 $ 30,237,335
 
Total currency expenses $ 705,030,765 $ 721,074,064

(15) Commitments and Contingencies

Commitments -- The Board has entered into an agreement with the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, through the Council, to fund a portion of the enhancements and maintenance fees for a central data repository project that requires maintenance through 2019 with two one-year option periods. The estimated Board expense to support this effort is $5 to $6 million.

Litigation and Contingent Liabilities -- The Board is subject to contingent liabilities which arise from litigation cases and various business contracts. These contingent liabilities arise in the normal course of operations and their ultimate disposition is unknown. Based on information currently available to management, it is management's opinion that the expected outcome of these matters, in the aggregate, will not have a material adverse effect on the financial statements.

(16) Subsequent Events

There were no subsequent events that require adjustments to or disclosures in the financial statements as of December 31, 2013. Subsequent events were evaluated through March 12, 2014, which is the date the financial statements were available to be issued.

Deloitte

INDEPENDENT AUDITORS' REPORT ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS

To the Board of Governors of the Federal Reserve System:

We have audited, in accordance with auditing standards generally accepted in the United States of America, auditing standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of the Board of Governors of the Federal Reserve System (the "Board") as of and for the years ended December 31, 2013 and 2012, and the related notes to the financial statements. We have also audited, in accordance with attestation standards established by the American Institute of Certified Public Accountants and in accordance with the auditing standards of the PCAOB, the Board's internal control over financial reporting as of December 31, 2013, based on the criteria established in Internal Control--Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have issued our report on the aforementioned audits dated March 12, 2014.

Compliance and Other Matters

As part of obtaining reasonable assurance about whether the Board's financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards.

Purpose of this Report

The purpose of this report is solely to describe the scope of our testing of compliance and the results of that testing, and not to provide an opinion on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Board's compliance. Accordingly, this communication is not suitable for any other purpose.

Deloitte & Touche LLP

March 12, 2014
Washington, DC

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Federal Reserve Banks Combined Financial Statements

In this Section:

The combined financial statements of the Federal Reserve Banks were audited by Deloitte & Touche LLP, independent auditors, for the years ended December 31, 2013 and 2012.

Deloitte

INDEPENDENT AUDITORS' REPORT

To the Board of Governors of the Federal Reserve System and the Boards of Directors of the Federal Reserve Banks:

We have audited the accompanying combined financial statements of the Federal Reserve Banks (the "Reserve Banks"), which are comprised of the combined statements of condition as of December 31, 2013 and 2012, and the related combined statements of income and comprehensive income, and changes in capital for the years then ended, and the related notes to the combined financial statements.

Management's Responsibility for the Combined Financial Statements

Management is responsible for the preparation and fair presentation of these combined financial statements in accordance with accounting principles established by the Board of Governors of the Federal Reserve System (the "Board") as described in Note 3 to the combined financial statements; this includes determining that the basis of accounting established by the Board is an acceptable basis for the preparation of the combined financial statements in the circumstances. Management is also responsible for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of the combined financial statements that are free from material misstatement, whether due to fraud or error.

Auditors' Responsibility

Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the preparation and fair presentation of the combined financial statements of the Federal Reserve Banks' in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Federal Reserve Banks' internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the combined financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of the Reserve Banks as of December 31, 2013 and 2012, and the results of their operations for the years then ended in accordance with the basis of accounting described in Note 3 to the combined financial statements.

Basis of Accounting

We draw attention to Note 3 to the combined financial statements, which describes the basis of accounting. The Division of Reserve Bank Operations and Payment Systems has prepared these combined financial statements in conformity with accounting principles established by the Board, as set forth in the Financial Accounting Manual for Federal Reserve Banks, which is a basis of accounting other than accounting principles generally accepted in the United States of America. The effects on the combined financial statements of the differences between the accounting principles established by the Board and accounting principles generally accepted in the United States of America are also described in Note 3 to the combined financial statements. Our opinion is not modified with respect to this matter.

Deloite & Touche LLP

March 14, 2014
Washington, DC

Federal Reserve Banks


Abbreviations
ABS
Asset-backed securities
ACH
Automated clearinghouse
AIG
American International Group, Inc.
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
BEP
Benefit Equalization Retirement Plan
Bureau
Bureau of Consumer Financial Protection
CDO
Collateralized debt obligation
CDS
Credit default swaps
CIP


Committee on Investment Performance (related to System Retirement Plan)
CMBS
Commercial mortgage-backed securities
FAM
Financial Accounting Manual for Federal Reserve Banks
FASB
Financial Accounting Standards Board
Fannie Mae
Federal National Mortgage Association
Freddie Mac
Federal Home Loan Mortgage Corporation
FOMC
Federal Open Market Committee
FRBA
Federal Reserve Bank of Atlanta
FRBC
Federal Reserve Bank of Cleveland
FRBNY
Federal Reserve Bank of New York
FRBSF
Federal Reserve Bank of San Francisco
GAAP
Accounting principles generally accepted in the United States of America
GSE
Government-sponsored enterprise
IMF
International Monetary Fund
JPMC
JPMorgan Chase & Co.
LLC
Limited liability company
MBS
Mortgage-backed securities
ML
Maiden Lane LLC
ML II
Maiden Lane II LLC
ML III
Maiden Lane III LLC
MTM
Mark-to-market
OFR
Office of Financial Research
RMBS
Residential mortgage-backed securities
SBA
Small Business Administration
SDR
Special drawing rights
SERP


Supplemental Retirement Plan for Select Officers of the Federal Reserve Banks
SOMA
System Open Market Account
STRIPS
Separate Trading of Registered Interest and Principal of Securities
TALF
Term Asset-Backed Securities Loan Facility
TBA
To be announced
TDF
Term Deposit Facility
TRS
Total return swap
VIE
Variable interest entity
Federal Reserve Banks Combined Statements of Condition
as of December 31, 2013 and December 31, 2012
(in millions)
  2013 2012
Assets
Gold certificates $ 11,037 $ 11,037
Special drawing rights certificates 5,200 5,200
Coin 1,955 2,108
Loans:
Depository institutions 74 70
Term Asset-Backed Securities Loan Facility (measured at fair value) 98 560
System Open Market Account:
Treasury securities, net (of which $17,153 and $9,139 is lent as of December 31, 2013 and 2012, respectively) 2,359,434 1,809,188
Government-sponsored enterprise debt securities, net (of which $1,099 and $697 is lent as of December 31, 2013 and 2012, respectively) 59,122 79,479
Federal agency and government-sponsored enterprise mortgage-backed securities, net 1,533,860 950,321
Foreign currency denominated assets, net 23,724 24,873
Central bank liquidity swaps 272 8,889
Accrued interest receivable 23,493 19,031
Other investments 2 23
Investments held by consolidated variable interest entities (of which $1,774 and $2,266 is measured at fair value as of December 31, 2013 and 2012, respectively) 1,926 2,750
Bank premises and equipment, net 2,653 2,676
Items in process of collection 165 216
Other assets 1,134 713
Total assets $ 4,024,149 $ 2,917,134
Liabilities and capital
Federal Reserve notes outstanding, net $ 1,197,920 $ 1,126,661
System Open Market Account:
Securities sold under agreements to repurchase 315,924 107,188
Other liabilities 1,331 3,177
Consolidated variable interest entities:
Beneficial interest in consolidated variable interest entities (measured at fair value) 116 803
Other liabilities (of which $73 and $71 is measured at fair value as of December 31, 2013 and 2012, respectively) 158 415
Deposits:
Depository institutions 2,249,070 1,491,045
Treasury, general account 162,399 92,720
Other deposits 34,150 33,903
Interest payable to depository institutions 99 199
Accrued benefit costs 1,823 3,964
Deferred credit items 1,127 702
Accrued remittances to Treasury 4,791 1,407
Other liabilities 227 230
Total liabilities 3,969,135 2,862,414
Capital paid-in 27,507 27,360
Surplus (including accumulated other comprehensive loss of $2,556 and $4,845 at December 31, 2013 and 2012, respectively) 27,507 27,360
Total capital 55,014 54,720
Total liabilities and capital $ 4,024,149 $ 2,917,134

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

Federal Reserve Banks Combined Statements of Income and Comprehensive Income
for the years ended December 31, 2013 and December 31, 2012
(in millions)
  2013 2012
Interest income
Loans:
Term Asset-Backed Securities Loan Facility $ 6 $ 80
System Open Market Account:
Treasury securities, net 51,591 46,416
Government-sponsored enterprise debt securities, net 2,166 2,626
Federal agency and government-sponsored enterprise mortgage-backed securities, net 36,628 31,429
Foreign currency denominated assets, net 96 139
Central bank liquidity swaps 22 241
Other investments - 9
Investments held by consolidated variable interest entities 6 1,110
Total interest income 90,515 82,050
Interest expense
System Open Market Account:
Securities sold under agreements to repurchase 60 142
Beneficial interest in consolidated variable interest entities - 153
Deposits:
Depository institutions 5,212 3,871
Term Deposit Facility 11 4
Total interest expense 5,283 4,170
Net interest income 85,232 77,880
Non-interest income
System Open Market Account:
Treasury securities gains, net - 13,255
Federal agency and government-sponsored enterprise mortgage-backed securities gains, net 51 241
Foreign currency translation losses, net (1,257) (1,116)
Consolidated variable interest entities:
Investments held by consolidated variable interest entities gains, net 183 7,451
Beneficial interest in consolidated variable interest entities gains (losses), net 1 (2,345)
Income from services 441 449
Reimbursable services to government agencies 530 506
Other 76 35
Total non-interest income 25 18,476
Operating expenses
Salaries and benefits 3,225 3,084
Occupancy 314 314
Equipment 169 193
Other 563 597
Assessments:
Board of Governors operating expenses and currency costs 1,282 1,212
Bureau of Consumer Financial Protection 563 385
Office of Financial Research - 2
Total operating expenses 6,116 5,787
Net income before providing for remittances to Treasury 79,141 90,569
Earnings remittances to Treasury 79,633 88,418
Net (loss) income (492) 2,151
Change in prior service costs related to benefit plans 97 171
Change in actuarial gains (losses) related to benefit plans 2,192 (224)
Total other comprehensive income (loss) 2,289 (53)
Comprehensive income $ 1,797 $ 2,098

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

Federal Reserve Banks Combined Statements of Changes in Capital
for the years ended December 31, 2013 and December 31, 2012
(in millions, except share data)
  Capital
paid-in
Surplus Total
capital
Net income
retained
Accumulated
other
comprehensive
loss
Total
surplus
Balance at December 31, 2011
(537,984,621 shares)
$ 26,899 $ 31,691 $ (4,792) $ 26,899 $ 53,798
Net change in capital stock issued
(9,210,524 shares)
461 - - - 461
Comprehensive income:
Net income - 2,151 - 2,151 2,151
Other comprehensive loss - - (53) (53) (53)
Dividends on capital stock - (1,637) - (1,637) (1,637)
Net change in capital 461 514 (53) 461 922
Balance at December 31, 2012
(547,195,145 shares)
$ 27,360 $ 32,205 $ (4,845) $ 27,360 $ 54,720
Net change in capital stock issued
(2,941,791 shares)
147 - - - 147
Comprehensive income:
Net loss - (492) - (492) (492)
Other comprehensive income - - 2,289 2,289 2,289
Dividends on capital stock - (1,650) - (1,650) (1,650)
Net change in capital 147 (2,142) 2,289 147 294
Balance at December 31, 2013
(550,136,936 shares)
$ 27,507 $ 30,063 $ (2,556) $ 27,507 $ 55,014

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

(1) Structure

The Federal Reserve Banks (Reserve Banks) are part of the Federal Reserve System (System) created by Congress under the Federal Reserve Act of 1913 (Federal Reserve Act), which established the central bank of the United States. The Reserve Banks are chartered by the federal government and possess a unique set of governmental, corporate, and central bank characteristics.

In accordance with the Federal Reserve Act, supervision and control of each Reserve Bank is exercised by a board of directors. The Federal Reserve Act specifies the composition of the board of directors for each of the Reserve Banks. Each board is composed of nine members serving three-year terms: three directors, including those designated as chairman and deputy chairman, are appointed by the Board of Governors of the Federal Reserve System (Board of Governors) to represent the public, and six directors are elected by member banks. Banks that are members of the System include all national banks and any state-chartered banks that apply and are approved for membership. Member banks are divided into three classes according to size. Member banks in each class elect one director representing member banks and one representing the public. In any election of directors, each member bank receives one vote, regardless of the number of shares of Reserve Bank stock it holds.

In addition to the 12 Reserve Banks, the System also consists, in part, of the Board of Governors and the Federal Open Market Committee (FOMC). The Board of Governors, an independent federal agency, is charged by the Federal Reserve Act with a number of specific duties, including general supervision over the Reserve Banks. The FOMC is composed of members of the Board of Governors, the president of the Federal Reserve Bank of New York (FRBNY), and, on a rotating basis, four other Reserve Bank presidents.

(2) Operations and Services

The Reserve Banks perform a variety of services and operations. These functions include participating in formulating and conducting monetary policy; participating in the payment system, including large-dollar transfers of funds, automated clearinghouse (ACH) operations, and check collection; distributing coin and currency; performing fiscal agency functions for the U.S. Department of the Treasury (Treasury), certain federal agencies, and other entities; serving as the federal government's bank; providing short-term loans to depository institutions; providing loans to participants in programs or facilities with broad-based eligibility in unusual and exigent circumstances; serving consumers and communities by providing educational materials and information regarding financial consumer protection rights and laws and information on community development programs and activities; and supervising bank holding companies, state member banks, savings and loan holding companies, U.S. offices of foreign banking organizations, and designated financial market utilities pursuant to authority delegated by the Board of Governors. Certain services are provided to foreign and international monetary authorities, primarily by the FRBNY.

The FOMC, in conducting monetary policy, establishes policy regarding domestic open market operations, oversees these operations, and issues authorizations and directives to the FRBNY to execute transactions. The FOMC authorizes and directs the FRBNY to conduct operations in domestic markets, including the direct purchase and sale of Treasury securities, government-sponsored enterprise (GSE) debt securities, and federal agency and GSE mortgage-backed securities (MBS); the purchase of these securities under agreements to resell; and the sale of these securities under agreements to repurchase. The FRBNY holds the resulting securities and agreements in a portfolio known as the System Open Market Account (SOMA). The FRBNY is authorized and directed to lend the Treasury securities and GSE debt securities that are held in the SOMA.

To counter disorderly conditions in foreign exchange markets or to meet other needs specified by the FOMC to carry out the System's central bank responsibilities, the FOMC has authorized and directed the FRBNY to execute spot and forward foreign exchange transactions in 14 foreign currencies, to hold balances in those currencies, and to invest such foreign currency holdings, while maintaining adequate liquidity. The FOMC has also authorized the FRBNY to maintain reciprocal currency arrangements with the Bank of Canada and the Bank of Mexico in the maximum amounts of $2 billion and $3 billion, respectively, and to warehouse foreign currencies for the Treasury and the Exchange Stabilization Fund in the maximum amount of $5 billion.

Because of the global character of bank funding markets, the System has at times coordinated with other central banks to provide liquidity. The FOMC authorized and directed the FRBNY to establish temporary U.S. dollar liquidity swap lines with the Bank of Canada, the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank. In addition, as a contingency measure, the FOMC authorized and directed the FRBNY to establish temporary foreign currency liquidity swap arrangements with these five central banks to allow for the System to access liquidity, if necessary, in any of the foreign central banks' currencies. On October 31, 2013, the Federal Reserve and these five central banks agreed to convert their existing temporary liquidity swap arrangements to standing agreements which will remain in effect until further notice.

Although the Reserve Banks are separate legal entities, they collaborate on the delivery of certain services to achieve greater efficiency and effectiveness. This collaboration takes the form of centralized operations and product or function offices that have responsibility for the delivery of certain services on behalf of the Reserve Banks. Various operational and management models are used and are supported by service agreements between the Reserve Banks. In some cases, costs incurred by a Reserve Bank for services provided to other Reserve Banks are not shared; in other cases, the Reserve Banks are reimbursed for costs incurred in providing services to other Reserve Banks.

(3) Significant Accounting Policies

Accounting principles for entities with the unique powers and responsibilities of the nation's central bank have not been formulated by accounting standard-setting bodies. The Board of Governors has developed specialized accounting principles and practices that it considers to be appropriate for the nature and function of a central bank. These accounting principles and practices are documented in the Financial Accounting Manual for Federal Reserve Banks (FAM), which is issued by the Board of Governors. The Reserve Banks are required to adopt and apply accounting policies and practices that are consistent with the FAM. The combined financial statements have been prepared in accordance with the FAM.

Limited differences exist between the accounting principles and practices in the FAM and accounting principles generally accepted in the United States of America (GAAP), due to the unique nature of the Reserve Banks' powers and responsibilities as part of the nation's central bank and given the System's unique responsibility to conduct monetary policy. The primary differences are the presentation of all SOMA securities holdings at amortized cost, adjusted for credit impairment, if any, and the recording of all SOMA securities on a settlement-date basis. Amortized cost, rather than the fair value presentation, more appropriately reflects the Reserve Banks' securities holdings given the System's unique responsibility to conduct monetary policy. Although the application of fair value measurements to the securities holdings may result in values substantially greater or less than their carrying values, these unrealized changes in value have no direct effect on the quantity of reserves available to the banking system or on the ability of the Reserve Banks, as the central bank, to meet their financial obligations and responsibilities. Both the domestic and foreign components of the SOMA portfolio may involve transactions that result in gains or losses when holdings are sold before maturity. Decisions regarding securities and foreign currency transactions, including their purchase and sale, are motivated by monetary policy objectives rather than profit. Accordingly, fair values, earnings, and gains or losses resulting from the sale of such securities and currencies are incidental to open market operations and do not motivate decisions related to policy or open market activities. Accounting for these securities on a settlement-date basis, rather than the trade-date basis required by GAAP, better reflects the timing of the transaction's effect on the quantity of reserves in the banking system. The cost bases of Treasury securities, GSE debt securities, and foreign government debt instruments are adjusted for amortization of premiums or accretion of discounts on a straight-line basis, rather than using the interest method required by GAAP.

In addition, the Reserve Banks do not present a Combined Statement of Cash Flows as required by GAAP because the liquidity and cash position of the Reserve Banks are not a primary concern given the Reserve Banks' unique powers and responsibilities as a central bank. Other information regarding the Reserve Banks' activities is provided in, or may be derived from, the Combined Statements of Condition, Income and Comprehensive Income, and Changes in Capital, and the accompanying notes to the combined financial statements. Other than those described above, there are no significant differences between the policies outlined in the FAM and GAAP.

Preparing the combined financial statements in conformity with the FAM requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the combined financial statements, and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

In 2013, the description of certain line items presented in the Combined Statements of Income and Comprehensive Income and the Combined Statements of Condition have been revised to better reflect the nature of these items. Amounts related to these line items were not changed from the prior year, only the nomenclature for the line item was revised, as further noted below:

  • The line item, "Accrued interest on Federal Reserve notes," has been revised in the Combined Statements of Condition to "Accrued remittances to Treasury."
  • The line item, "Net income before interest on Federal Reserve notes expense remitted to Treasury," has been revised in the Combined Statements of Income and Comprehensive Income to "Net income before providing for remittances to Treasury."
  • The line item, "Interest on Federal Reserve notes expense remitted to Treasury," has been revised in the Combined Statements of Income and Comprehensive Income to "Earnings remittances to Treasury."

Certain amounts relating to the prior year have been reclassified in the Combined Statements of Condition to conform to the current year presentation. The amount reported as "System Open Market Account: Accrued interest receivable" for the year ended December 31, 2012 ($19,031 million) was previously reported as a component of "System Open Market Account: Foreign currency denominated assets, net" ($99 million) and "Accrued interest receivable" ($18,932 million).

Certain immaterial amounts relating to the prior year have been reclassified in the Combined Statements of Income and Comprehensive Income to conform to the current year presentation. $34 million previously reported for the year ended December 31, 2012 as "Non-interest income: Term Asset-Back Securities Loan Facility, unrealized losses" have been reclassified to "Non-interest income: Other," and $25 million previously reported as "Operating expenses: Professional fees related to consolidated variable interest entities" have been reclassified to "Operating expenses: Other."

Significant accounts and accounting policies are explained below.

a. Consolidation

The combined financial statements include the accounts and results of operations of the Reserve Banks as well as several variable interest entities (VIEs), which include Maiden Lane LLC (ML), Maiden Lane II LLC (ML II), Maiden Lane III LLC (ML III), and TALF LLC. The consolidation of the VIEs was assessed in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 810 (ASC 810) Consolidation, which requires a VIE to be consolidated by its controlling financial interest holder. Intercompany balances and transactions have been eliminated in consolidation. See Note 6 for additional information on the VIEs. The combined financial statements of the Reserve Banks also include accounts and results of operations of Maiden and Nassau LLC, a Delaware limited liability company (LLC) wholly-owned by the Bank, which was formed to own and operate the 33 Maiden Lane building, which was purchased on February 28, 2012.

A Reserve Bank consolidates a VIE if it has a controlling financial interest, which is defined as the power to direct the significant economic activities of the entity and the obligation to absorb losses or the right to receive benefits of the entity that could potentially be significant to the VIE. To determine whether it is the controlling financial interest holder of a VIE, the Reserve Bank evaluates the VIE's design, capital structure, and relationships with the variable interest holders. The Reserve Bank reconsiders whether it has a controlling financial interest in a VIE, as required by ASC 810, at each reporting date or if there is an event that requires consideration.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) established the Bureau of Consumer Financial Protection (Bureau) as an independent bureau within the System that has supervisory authority over some institutions previously supervised by the Reserve Banks in connection with those institutions' compliance with consumer protection statutes. Section 1017 of the Dodd-Frank Act provides that the financial statements of the Bureau are not to be consolidated with those of the Board of Governors or the System. The Board of Governors funds the Bureau through assessments on the Reserve Banks as required by the Dodd-Frank Act. Section 152 of the Dodd-Frank Act established the Office of Financial Research (OFR) within the Treasury and required the Board of Governors to fund the OFR for the two-year period ended July 21, 2012. The Reserve Banks reviewed the law and evaluated the design of and their relationships to the Bureau and the OFR and determined that neither should be consolidated in the Reserve Banks' comibined financial statements.

b. Gold and Special Drawing Rights Certificates

The Secretary of the Treasury is authorized to issue gold certificates to the Reserve Banks. Upon authorization, the Reserve Banks acquire gold certificates by crediting equivalent amounts in dollars to the account established for the Treasury. The gold certificates held by the Reserve Banks are required to be backed by the gold owned by the Treasury. The Treasury may reacquire the gold certificates at any time, and the Reserve Banks must deliver them to the Treasury. At such time, the Treasury's account is charged, and the Reserve Banks' gold certificate accounts are reduced. The value of gold for purposes of backing the gold certificates is set by law at $42 2/9 per fine troy ounce. Gold certificates are recorded by the Banks at original cost. The Board of Governors allocates the gold certificates among the Reserve Banks once a year based on each Reserve Bank's average Federal Reserve notes outstanding during the preceding twelve months.

Special drawing rights (SDR) are issued by the International Monetary Fund (IMF) to its members in proportion to each member's quota in the IMF at the time of issuance. SDRs serve as a supplement to international monetary reserves and may be transferred from one national monetary authority to another. Under the law providing for U.S. participation in the SDR system, the Secretary of the Treasury is authorized to issue SDR certificates to the Reserve Banks. When SDR certificates are issued to the Reserve Banks, equivalent amounts in U.S. dollars are credited to the account established for the Treasury and the Reserve Banks' SDR certificate accounts are increased. The Reserve Banks are required to purchase SDR certificates, at the direction of the Treasury, for the purpose of financing SDR acquisitions or for financing exchange-stabilization operations. At the time SDR certificate transactions occur, the Board of Governors allocates the SDR certificates among the Reserve Banks based upon each Reserve Bank's Federal Reserve notes outstanding at the end of the preceding calendar year. SDR certificates are recorded by the Banks at original cost. There were no SDR certificate transactions during the years ended December 31, 2013 and 2012.

c. Coin

The amount reported as coin in the Combined Statements of Condition represents the face value of all United States coin held by the Reserve Banks. The Reserve Banks buy coin at face value from the U.S. Mint in order to fill depository institution orders.

d. Loans

Loans to depository institutions are reported at their outstanding principal balances and interest income is recognized on an accrual basis.

The FRBNY has elected the fair value option for all Term Asset-Backed Securities Loan Facility (TALF) loans in accordance with ASC 825. Recording all TALF loans at fair value, rather than at the remaining principal amount outstanding, provides the most appropriate presentation on the financial statements by matching the change in fair value of TALF loans, the related put agreement with TALF LLC, and the valuation of the beneficial interests in TALF LLC. Information regarding the TALF LLC's assets and liabilities is presented in Note 6. Unrealized losses on TALF loans that are recorded at fair value are reported as a component of "Non-interest income: Other" in the Combined Statements of Income and Comprehensive Income. The interest income on TALF loans is recognized based on the contracted rate and is reported as "Interest Income: Term Asset-Backed Securities Loan Facility" in the Combined Statements of Income and Comprehensive Income.

Loans, other than those recorded at fair value, are impaired when current information and events indicate that it is probable that the Reserve Banks will not receive the principal and interest that are due in accordance with the contractual terms of the loan agreement. Impaired loans are evaluated to determine whether an allowance for loan loss is required. The Reserve Banks have developed procedures for assessing the adequacy of any allowance for loan losses using all available information to identify incurred losses. This assessment includes monitoring information obtained from banking supervisors, borrowers, and other sources to assess the credit condition of the borrowers and, as appropriate, evaluating collateral values. Generally, the Reserve Banks would discontinue recognizing interest income on impaired loans until the borrower's repayment performance demonstrates principal and interest would be received in accordance with the terms of the loan agreement. If the Reserve Banks discontinue recording interest on an impaired loan, cash payments are first applied to principal until the loan balance is reduced to zero; subsequent payments are applied as recoveries of amounts previously deemed uncollectible, if any, and then as interest income.

Impaired loans include loans that have been modified in debt restructurings involving borrowers experiencing financial difficulties. The allowance for loan restructuring is determined by discounting the restructured cash flows using the original effective interest rate for the loan. Unless the borrower can demonstrate that it can meet the restructured terms, the Reserve Banks discontinue recognizing interest income. Performance prior to the restructuring, or significant events that coincide with the restructuring, are considered in assessing whether the borrower can meet the new terms.

e. Securities Purchased Under Agreements to Resell, Securities Sold Under Agreements to Repurchase, and Securities Lending

The FRBNY may engage in purchases of securities with primary dealers under agreements to resell (repurchase transactions). These repurchase transactions are settled through a tri-party arrangement. In a tri-party arrangement, two commercial custodial banks manage the collateral clearing, settlement, pricing, and pledging, and provide cash and securities custodial services for and on behalf of the FRBNY and counterparty. The collateral pledged must exceed the principal amount of the transaction by a margin determined by the FRBNY for each class and maturity of acceptable collateral. Collateral designated by the FRBNY as acceptable under repurchase transactions primarily includes Treasury securities (including Treasury Inflation-Protected Securities and Separate Trading of Registered Interest and Principal of Securities (STRIPS) Treasury securities); direct obligations of several federal and GSE-related agencies, including Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac), and Federal Home Loan Banks; and pass-through federal agency and GSE MBS. The repurchase transactions are accounted for as financing transactions with the associated interest income recognized over the life of the transaction. These transactions are reported at their contractual amounts as "System Open Market Account: Securities purchased under agreements to resell" and the related accrued interest receivable is reported as a component of "System Open Market Account: Accrued interest receivable" in the Combined Statements of Condition.

The FRBNY may engage in sales of securities under agreements to repurchase (reverse repurchase transactions) with primary dealers and with the set of expanded counterparties which includes banks, savings associations, GSEs, and domestic money market funds. These reverse repurchase transactions, when arranged as open market operations, are settled through a tri-party arrangement, similar to repurchase transactions. Reverse repurchase transactions may also be executed with foreign official and international account holders as part of a service offering. Reverse repurchase agreements are collateralized by a pledge of an amount of Treasury securities, GSE debt securities, and federal agency and GSE MBS that are held in the SOMA. Reverse repurchase transactions are accounted for as financing transactions, and the associated interest expense is recognized over the life of the transaction. These transactions are reported at their contractual amounts as "System Open Market Account: Securities sold under agreements to repurchase" and the related accrued interest payable is reported as a component of "Other liabilities" in the Combined Statements of Condition.

Treasury securities and GSE debt securities held in the SOMA may be lent to primary dealers, typically overnight, to facilitate the effective functioning of the domestic securities markets. The amortized cost basis of securities lent continues to be reported as "Treasury securities, net" and "Government-sponsored enterprise debt securities, net," as appropriate, in the Combined Statements of Condition. Securities lending transactions are fully collateralized by Treasury securities that have fair values in excess of the securities lent. The FRBNY charges the primary dealer a fee for borrowing securities, and these fees are reported as a component of "Non-interest income: Other" in the Combined Statements of Income and Comprehensive Income.

Activity related to securities purchased under agreements to resell, securities sold under agreements to repurchase, and securities lending is allocated to each of the Reserve Banks on a percentage basis derived from an annual settlement of the interdistrict settlement account that occurs in the second quarter of each year.

f. Treasury Securities; Government-Sponsored Enterprise Debt Securities; Federal Agency and Government-Sponsored Enterprise Mortgage-Backed Securities; Foreign Currency Denominated Assets; and Warehousing Agreements

Interest income on Treasury securities, GSE debt securities, and foreign currency denominated assets included in the SOMA is accrued on a straight-line basis. Interest income on federal agency and GSE MBS is accrued using the interest method and includes amortization of premiums, accretion of discounts, and gains or losses associated with principal paydowns. Premiums and discounts related to federal agency and GSE MBS are amortized or accreted over the term of the security to stated maturity, and the amortization of premiums and accretion of discounts are accelerated when principal payments are received. Gains and losses resulting from sales of securities are determined by specific issue based on average cost. Treasury securities, GSE debt securities, and federal agency and GSE MBS are reported net of premiums and discounts in the Combined Statements of Condition and interest income on those securities is reported net of the amortization of premiums and accretion of discounts in the Combined Statements of Income and Comprehensive Income.

In addition to outright purchases of federal agency and GSE MBS that are held in the SOMA, the FRBNY enters into dollar roll transactions (dollar rolls), which primarily involve an initial transaction to purchase or sell "to be announced" (TBA) MBS for delivery in the current month combined with a simultaneous agreement to sell or purchase TBA MBS on a specified future date. During the years ended December 31, 2013 and 2012, the FRBNY executed dollar rolls primarily to facilitate settlement of outstanding purchases of federal agency and GSE MBS. The FRBNY accounts for dollar rolls as purchases or sales on a settlement-date basis. In addition, TBA MBS transactions may be paired off or assigned prior to settlement. Net gains resulting from these MBS transactions are reported as "Non-interest income: System Open Market Account: Federal agency and government-sponsored enterprise mortgage-backed securities gains, net" in the Combined Statements of Income and Comprehensive Income.

Foreign currency denominated assets, which can include foreign currency deposits, securities purchased under agreements to resell, and government debt instruments, are revalued daily at current foreign currency market exchange rates in order to report these assets in U.S. dollars. Foreign currency translation gains and losses that result from the daily revaluation of foreign currency denominated assets are reported as "Non-interest income: System Open Market Account: Foreign currency translation losses, net" in the Combined Statements of Income and Comprehensive Income.

Activity related to Treasury securities, GSE debt securities, and federal agency and GSE MBS, including the premiums, discounts, and realized gains and losses, is allocated to each Reserve Bank on a percentage basis derived from an annual settlement of the interdistrict settlement account that occurs in the second quarter of each year. Activity related to foreign currency denominated assets, including the premiums, discounts, and realized and unrealized gains and losses, is allocated to each Reserve Bank based on the ratio of each Reserve Bank's capital and surplus to the Reserve Banks' aggregate capital and surplus at the preceding December 31.

Warehousing is an arrangement under which the FOMC has approved the exchange, at the request of the Treasury, of U.S. dollars for foreign currencies held by the Treasury over a limited period. The purpose of the warehousing facility is to supplement the U.S. dollar resources of the Treasury for financing purchases of foreign currencies and related international operations. Warehousing agreements are valued daily at current market exchange rates. Activity related to these agreements is allocated to each Reserve Bank based on the ratio of each Reserve Bank's capital and surplus to the Reserve Banks' aggregate capital and surplus at the preceding December 31.

The FRBNY is authorized to hold foreign currency working balances and execute foreign exchange contracts to facilitate international payments and currency transactions it makes on behalf of foreign central bank and U.S. official institution customers. These foreign currency working balances and contracts are not related to the FRBNY's monetary policy operations. Foreign currency working balances are reported as a component of "Other assets" in the Combined Statements of Condition and the related foreign currency translation gains and losses that result from the daily revaluation of the foreign currency working balances and contracts are reported as a component of "Non-interest income: Other" in the Combined Statements of Income and Comprehensive Income.

g. Central Bank Liquidity Swaps

Central bank liquidity swaps, which are transacted between the FRBNY and a foreign central bank, can be structured as either U.S. dollar or foreign currency liquidity swap arrangements.

Central bank liquidity swaps activity, including the related income and expense, is allocated to each Reserve Bank based on the ratio of each Reserve Bank's capital and surplus to aggregate capital and surplus at the preceding December 31. The foreign currency amounts associated with these central bank liquidity swap arrangements are revalued daily at current foreign currency market exchange rates.

U.S. dollar liquidity swaps

At the initiation of each U.S. dollar liquidity swap transaction, the foreign central bank transfers a specified amount of its currency to a restricted account for the FRBNY in exchange for U.S. dollars at the prevailing market exchange rate. Concurrent with this transaction, the FRBNY and the foreign central bank agree to a second transaction that obligates the foreign central bank to return the U.S. dollars and the FRBNY to return the foreign currency on a specified future date at the same exchange rate as the initial transaction. The foreign currency amounts that the FRBNY acquires are reported as "System Open Market Account: Central bank liquidity swaps" in the Combined Statements of Condition. Because the swap transaction will be unwound at the same U.S. dollar amount and exchange rate that were used in the initial transaction, the recorded value of the foreign currency amounts is not affected by changes in the market exchange rate.

The foreign central bank compensates the FRBNY based on the foreign currency amounts it holds for the FRBNY. The FRBNY recognizes compensation during the term of the swap transaction, which is reported as "Interest income: System Open Market Account: Central bank liquidity swaps" in the Combined Statements of Income and Comprehensive Income.

Foreign currency liquidity swaps

The structure of foreign currency liquidity swap transactions involves the transfer by the FRBNY, at the prevailing market exchange rate, of a specified amount of U.S. dollars to an account for the foreign central bank in exchange for its currency. The foreign currency amount received would be reported as a liability by the Reserve Banks.

h. Investments Held by Consolidated Variable Interest Entities

The investments held by consolidated VIEs consist primarily of cash and cash equivalents, short-term investments with maturities of greater than three months and less than one year, commercial mortgage loans, and swap contracts. Investments are reported as "Investments held by consolidated variable interest entities" in the Combined Statements of Condition. These investments are accounted for and classified as follows:

  • ML's investments in debt securities are accounted for in accordance with FASB ASC Topic 320 (ASC 320 ) Investments - Debt and Equity Securities, and ML elected the fair value option for all eligible assets and liabilities in accordance with ASC 825. Other financial instruments, including swap contracts in ML, are recorded at fair value in accordance with FASB ASC Topic 815 (ASC 815) Derivatives and Hedging.
  • ML II and ML III qualify as nonregistered investment companies under the provisions of FASB ASC Topic 946 (ASC 946) Financial Services - Investment Companies, and therefore, all investments are recorded at fair value in accordance with ASC 946.
  • TALF LLC follows the guidance in ASC 320 when accounting for any acquired asset-backed securities (ABS) investments and has elected the fair value option for all eligible assets in accordance with ASC 825.
i. Bank Premises, Equipment, and Software

Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets, which range from 2 to 50 years. Major alterations, renovations, and improvements are capitalized at cost as additions to the asset accounts and are depreciated over the remaining useful life of the asset or, if appropriate, over the unique useful life of the alteration, renovation, or improvement. Maintenance, repairs, and minor replacements are charged to operating expense in the year incurred.

Costs incurred to acquire software are capitalized based on the purchase price. Costs incurred during the application development stage to develop internal-use software are capitalized based on the cost of direct services and materials associated with designing, coding, installing, and testing the software. Capitalized software costs are amortized on a straight-line basis over the estimated useful lives of the software applications, which generally range from two to five years. Maintenance costs related to software are charged to operating expense in the year incurred.

Capitalized assets, including software, buildings, leasehold improvements, furniture, and equipment, are impaired and an adjustment is recorded when events or changes in circumstances indicate that the carrying amount of assets or asset groups is not recoverable and significantly exceeds the assets' fair value.

j. Federal Reserve Notes

Federal Reserve notes are the circulating currency of the United States. These notes, which are identified as issued to a specific Reserve Bank, must be fully collateralized. All of the Reseve Banks' assets are eligible to be pledged as collateral. The collateral value is equal to the book value of the collateral tendered with the exception of securities, for which the collateral value is equal to the par value of the securities tendered. The par value of securities sold under agreements to repurchase is deducted from the eligible collateral value.

The Board of Governors may, at any time, call upon a Reserve Bank for additional security to adequately collateralize outstanding Federal Reserve notes. To satisfy the obligation to provide sufficient collateral for outstanding Federal Reserve notes, the Reserve Banks have entered into an agreement that provides for certain assets of the Reserve Banks to be jointly pledged as collateral for the Federal Reserve notes issued to all Reserve Banks. In the event that this collateral is insufficient, the Federal Reserve Act provides that Federal Reserve notes become a first and paramount lien on all the assets of the Reserve Banks. Finally, Federal Reserve notes are obligations of the United States government.

"Federal Reserve notes outstanding, net" in the Combined Statements of Condition represents the Reserve Banks' Federal Reserve notes outstanding, reduced by the Reserve Banks' currency holdings of $203 billion and $228 billion at December 31, 2013 and 2012, respectively.

At December 31, 2013 and 2012, all Federal Reserve notes outstanding, reduced by the Reserve Banks' currency holdings, were fully collateralized. At December 31, 2013, all gold certificates, all special drawing rights certificates, and $1,182 billion of domestic securities held in the SOMA were pledged as collateral. At December 31, 2013, no investments denominated in foreign currencies were pledged as collateral.

k. Beneficial Interest in Consolidated Variable Interest Entities

ML and TALF LLC have outstanding financial interests, and ML II and ML III have outstanding senior and subordinated financial interests. Upon issuance of the financial interests, ML, ML II, ML III, and TALF LLC each elected to measure these obligations at fair value in accordance with ASC 825. Principal, interest, and changes in fair value on the senior financial interest, which were extended by the FRBNY, are eliminated in consolidation. The financial interests are recorded at fair value as "Beneficial interest in consolidated variable interest entities" in the Combined Statements of Condition. Interest expense and changes in fair value of the financial interest are recorded in "Interest expense: Beneficial interest in consolidated variable interest entities" and "Non-interest income: Beneficial interest in consolidated variable interest entities gains (losses), net," respectively, in the Combined Statements of Income and Comprehensive Income.

l. Deposits
Depository Institutions

Depository institutions' deposits represent the reserve and service-related balances in the accounts that depository institutions hold at the Reserve Banks. The interest rates paid on required reserve balances and excess balances are determined by the Board of Governors, based on an FOMC-established target range for the federal funds rate. Interest payable is reported as a component of "Interest payable to depository institutions" in the Combined Statements of Condition.

The Term Deposit Facility (TDF) consists of deposits with specific maturities held by eligible institutions at the Reserve Banks. The Reserve Banks pay interest on these deposits at interest rates determined by auction. Interest payable is reported as a component of "Interest payable to depository institutions" in the Combined Statements of Condition. There were no deposits held by the Reserve Banks under the TDF at December 31, 2013 and 2012.

Treasury

The Treasury general account is the primary operational account of the Treasury and is held at the FRBNY.

Other

Other deposits include foreign central bank and foreign government deposits held at the FRBNY. Other deposits also include GSE deposits held by the Reserve Banks.

m. Items in Process of Collection and Deferred Credit Items

Items in process of collection primarily represents amounts attributable to checks that have been deposited for collection and that, as of the balance sheet date, have not yet been presented to the paying bank. Deferred credit items represents the counterpart liability to items in process of collection. The amounts in this account arise from deferring credit for deposited items until the amounts are collected. The balances in both accounts can fluctuate significantly.

n. Capital Paid-in

The Federal Reserve Act requires that each member bank subscribe to the capital stock of the Reserve Bank in an amount equal to six percent of the capital and surplus of the member bank. These shares are nonvoting, with a par value of $100, and may not be transferred or hypothecated. As a member bank's capital and surplus changes, its holdings of Reserve Bank stock must be adjusted. Currently, only one-half of the subscription is paid in, and the remainder is subject to call. A member bank is liable for Reserve Bank liabilities up to twice the par value of stock subscribed by it.

By law, each Reserve Bank is required to pay each member bank an annual dividend of six percent on the paid-in capital stock. This cumulative dividend is paid semiannually.

o. Surplus

The Board of Governors requires the Reserve Banks to maintain a surplus equal to the amount of capital paid-in. On a daily basis, surplus is adjusted to equate the balance to capital paid-in. Accumulated other comprehensive income is reported as a component of "Surplus" in the Combined Statements of Condition and the Combined Statements of Changes in Capital. Additional information regarding the classifications of accumulated other comprehensive income is provided in Notes 9, 10, and 11.

p. Remittances to Treasury

The Board of Governors requires the Reserve Banks to transfer excess earnings to the Treasury as interest on Federal Reserve notes after providing for the costs of operations, payment of dividends, and reservation of an amount necessary to equate surplus with capital paid-in. Currently, remittances to Treasury are made on a weekly basis. This amount is reported as "Earnings remittances to Treasury" in the Combined Statements of Income and Comprehensive Income. The amount due to the Treasury is reported as "Accrued remittances to Treasury" in the Combined Statements of Condition. See Note 13 for additional information on remittances to Treasury.

If earnings during the year are not sufficient to provide for the costs of operations, payment of dividends, and equating surplus and capital paid-in, remittances to the Treasury are suspended. A deferred asset is recorded that represents the amount of net earnings a Reserve Bank will need to realize before remittances to the Treasury resume. This deferred asset is periodically reviewed for impairment.

q. Income and Costs Related to Treasury Services

When directed by the Secretary of the Treasury, the Reserve Banks are required by the Federal Reserve Act to serve as fiscal agent and depositary of the United States Government. By statute, the Treasury has appropriations to pay for these services. During the years ended December 31, 2013 and 2012, the Bank was reimbursed for all services provided to the Treasury as its fiscal agent.

r. Assessments

The Board of Governors assesses the Reserve Banks to fund its operations, the operations of the Bureau and, for a two-year period following the July 21, 2010 effective date of the Dodd-Frank Act, the OFR. These assessments are allocated to each Reserve Bank based on each Reserve Bank's capital and surplus balances. The Board of Governors also assesses each Reserve Bank for expenses related to producing, issuing, and retiring Federal Reserve notes based on each Reserve Bank's share of the number of notes comprising the System's net liability for Federal Reserve notes on December 31 of the prior year.

The Dodd-Frank Act requires that, after the transfer date of July 21, 2011, the Board of Governors fund the Bureau in an amount not to exceed a fixed percentage of the total operating expenses of the System as reported in the Board of Governors' 2009 annual report, which totaled $4.98 billion. The fixed percentage of total operating expenses of the System for the years ended December 31, 2013 and 2012 was 12 percent ($597.6 million) and 11 percent ($547.8 million), respectively. After 2013, the amount will be adjusted in accordance with the provisions of the Dodd-Frank Act. The Reserve Banks' assessment for Bureau funding is reported as "Assessments: Bureau of Consumer Financial Protection" in the Combined Statements of Income and Comprehensive Income.

The Board of Governors assessed the Reserve Banks to fund the operations of the OFR for the two-year period ended July 21, 2012, following enactment of the Dodd-Frank Act; thereafter, the OFR is funded by fees assessed on bank holding companies and nonbank financial companies that meet the criteria specified in the Dodd-Frank Act.

s. Fair Value

Certain assets and liabilities reported on the Reserve Banks' Combined Statements of Condition are measured at fair value in accordance with ASC 820, including TALF loans, investments and beneficial interests of the consolidated VIEs, and assets of the Retirement Plan for Employees of the System. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a three-level fair value hierarchy that distinguishes between assumptions developed using market data obtained from independent sources (observable inputs) and the Reserve Banks' assumptions developed using the best information available in the circumstances (unobservable inputs). The three levels established by ASC 820 are described as follows:

  • Level 1 - Valuation is based on quoted prices for identical instruments traded in active markets.
  • Level 2 - Valuation is based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
  • Level 3 - Valuation is based on model-based techniques that use significant inputs and assumptions not observable in the market. These unobservable inputs and assumptions reflect the Reserve Banks' estimates of inputs and assumptions that market participants would use in pricing the assets and liabilities. Valuation techniques include the use of option pricing models, discounted cash flow models, and similar techniques.

The inputs or methodology used for valuing assets and liabilities are not necessarily an indication of the risk associated with those assets and liabilities.

t. Taxes

The Reserve Banks are exempt from federal, state, and local taxes, except for taxes on real property. The Reserve Banks' real property taxes were $48 million and $47 million for the years ended December 31, 2013 and 2012, respectively, and are reported as a component of "Operating expenses: Occupancy" in the Combined Statements of Income and Comprehensive Income.

u. Restructuring Charges

The Reserve Banks recognize restructuring charges for exit or disposal costs incurred as part of the closure of business activities in a particular location, the relocation of business activities from one location to another, or a fundamental reorganization that affects the nature of operations. Restructuring charges may include costs associated with employee separations, contract terminations, and asset impairments. Expenses are recognized in the period in which the Reserve Banks commit to a formalized restructuring plan or execute the specific actions contemplated in the plan and all criteria for financial statement recognition have been met.

Note 12 describes the Reserve Banks' restructuring initiatives and provides information about the costs and liabilities associated with employee separations and contract terminations. The costs associated with the impairment of certain Reserve Banks' assets are discussed in Note 7. Costs and liabilities associated with enhanced pension benefits in connection with the restructuring activities for all of the Reserve Banks are recorded on the books of the FRBNY and discussed in Note 9. Costs and liabilities associated with enhanced postretirement benefits are discussed in Note 10.

v. Recently Issued Accounting Standards

In December 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. This update requires a reporting entity to present enhanced disclosures for financial instruments and derivative instruments that are offset or subject to master netting agreements or similar such agreements. In January 2013, the FASB issued ASU 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. This update clarifies that the scope of ASU 2011-11 applies to derivatives accounted for in accordance with Topic 815. These updates are effective for the Reserve Banks for the year ended December 31, 2013, and the required disclosures are included in Note 6.

In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. This update indefinitely deferred the requirements of ASU 2011-05, which required an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective net income line items. Subsequently, in February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,which established an effective date for the requirements of ASU 2011-05 related to reporting of significant reclassification adjustments from accumulated other comprehensive income. This update improves the transparency of changes in other comprehensive income and items reclassified out of accumulated other comprehensive income in the combined financial statements. These presentation requirements of ASU 2011-05 and required disclosures in ASU 2013-02 are effective for the Reserve Banks for the year ending December 31, 2013, and are reflected in the Bank's 2013 combined financial statements and Note 11.

In April 2013, the FASB issued ASU 2013-07, Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting. This update clarifies when entities in liquidation should apply the liquidation basis of accounting and provides guidance on financial statement presentation. This update is effective for an entity that determines liquidation is imminent during annual reporting periods beginning after December 15, 2013. During 2012, ML II and ML III sold their remaining portfolio assets; however, the financial statement presentations for ML II and ML III were not modified to the liquidation basis as the standard does not apply to entities whose liquidation follows a plan for liquidation that was specified in the entity's governing documents at inception.

In June 2013, the FASB issued ASU 2013-08, Financial Services - Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements. This update changes the assessment of whether an entity is an investment company by developing a new two-tiered approach for that assessment, which requires an entity to possess certain fundamental characteristics while allowing judgment in assessing other typical characteristics. This update, which is applicable to ML II and ML III, is effective for the Bank for the year ending December 31, 2014 and is not expected to have a material effect on the Reserve Banks' combined financial statements.

(4) Loans
Loans to Depository Institutions

The Reserve Banks offers primary, secondary, and seasonal loans to eligible borrowers, and each program has its own interest rate. Interest is accrued using the applicable interest rate established at least every 14 days by the Reserve Banks' board of directors, subject to review and determination by the Board of Governors. Primary and secondary loans are extended on a short-term basis, typically overnight, whereas seasonal loans may be extended for a period of up to nine months.

Primary, secondary, and seasonal loans are collateralized to the satisfaction of each Reserve Bank to reduce credit risk. Assets eligible to collateralize these loans include consumer, business, and real estate loans; Treasury securities; GSE debt securities; foreign sovereign debt; municipal, corporate, and state and local government obligations; ABS; corporate bonds; commercial paper; and bank-issued assets, such as certificates of deposit, bank notes, and deposit notes. Collateral is assigned a lending value that is deemed appropriate by each Reserve Bank, which is typically fair value reduced by a margin. Loans to depository institutions are monitored daily to ensure that borrowers continue to meet eligibility requirements for these programs. If a borrower no longer qualifies for these programs, the Reserve Bank will generally request full repayment of the outstanding loan or, for primary or seasonal loans, may convert the loan to a secondary credit loan. Collateral levels are reviewed daily against outstanding obligations, and borrowers that no longer have sufficient collateral to support outstanding loans are required to provide additional collateral or to make partial or full repayment.

The remaining maturity distribution of loans to depository institutions outstanding as of December 31, 2013, and 2012, was as follows (in millions):

  Within
15 days
16 days
to 90 days
Total
December 31, 2013 $ 69 $ 5 $ 74
December 31, 2012 $ 67 $ 3 $ 70

At December 31, 2013 and 2012, the Reserve Banks did not have any loans that were impaired, restructured, past due, or on non-accrual status, and no allowance for loan losses was required. There were no impaired loans during the years ended December 31, 2013 and 2012.

TALF

The TALF assisted financial markets in accommodating the credit needs of consumers and businesses of all sizes by facilitating the issuance of ABS collateralized by a variety of consumer and business loans. Each TALF loan had an original maturity of three years, except loans secured by Small Business Administration (SBA) Pool Certificates, loans secured by SBA Development Company Participation Certificates, or ABS backed by student loans or commercial mortgage loans, which had an original maturity of five years if the borrower so elected. The loans are secured by eligible collateral, with the FRBNY having lent an amount equal to the value of the collateral, as determined by the FRBNY, less a margin.

The TALF loans were extended on a nonrecourse basis. If the borrower does not repay the loan, the FRBNY will enforce its rights in the collateral and may sell the collateral to TALF LLC, a Delaware LLC, established for the purpose of purchasing such assets. As of December 31, 2013, the FRBNY has not enforced its rights to the collateral because there have been no defaults.

Pursuant to a put agreement with the FRBNY, TALF LLC has committed to purchase assets that secure a TALF loan at a price equal to the principal amount outstanding plus accrued but unpaid interest, regardless of the fair value of the collateral. Funding for TALF LLC's purchases of these securities is derived first through the fees received by TALF LLC from the FRBNY for this commitment and any interest earned on its investments. In the event that such funding proved insufficient for the asset purchases that TALF LLC has committed to make under the put agreement, the Treasury originally committed to lend up to $20 billion, and on March 25, 2009, the Treasury funded $100 million. In addition to the Treasury's commitment, the FRBNY originally committed to lend up to $180 billion to TALF LLC if it needed the funding to purchase assets pursuant to the put agreement and provided that the Treasury had fully funded its commitment. Subsequently, the Treasury and FRBNY commitments to lend to TALF LLC were eliminated, because the cash equivalents and short-term investments held by TALF LLC exceeded the remaining amount of TALF loans outstanding, and the credit protection from the Treasury was no longer deemed necessary. The TALF remains a joint Treasury-Federal Reserve program, and the Treasury and Federal Reserve will continue to consult on the administration of the program.

TALF LLC has repaid in full the outstanding principal and accrued interest on the initial funding previously provided by the Treasury. The Board of Governors has also authorized TALF LLC to begin distributions from the accumulated fees and income earned by TALF LLC since inception to the Treasury and the FRBNY in the amount by which such accumulated fees and income exceeds the current outstanding TALF loan balance plus funds reserved for future expenses of TALF LLC. Treasury receives 90 percent of the distributions and the FRBNY receives 10 percent.

As of December 31, 2013, TALF loans were classified within Level 2 of the valuation hierarchy. TALF loans were transferred from Level 3 to Level 2 because they were valued at December 31, 2013 using model-based techniques for which all significant inputs were considered observable (Level 2). Previously, TALF loans were valued using significant unobservable inputs (level 3).

The following table presents the TALF loans at fair value as of December 31 by ASC 820 hierarchy (in millions):

  2013 2012
Level 2 $ 98 $ -
Level 3 - 560
Total fair value $ 98 $ 560

The following table presents a reconciliation of TALF loans measured at fair value using significant unobservable inputs (Level 3) during the years ended December 31, 2013 and 2012 (in millions):

  TALF loans
Fair value at December 31, 2011 $ 9,059
Loan repayments and prepayments (8,465)
Total realized and unrealized (losses) (34)
Fair value at December 31, 2012 $ 560
Gross transfer out 1 (560)
Fair value at December 31, 2013 $ -

1. The amount of transfers is based on fair values of the transferred assets at the beginning of the reporting period. Return to table

The fair value of TALF loans reported in the Combined Statements of Condition as of December 31, 2013 and 2012, includes $1 million and $3 million in unrealized gains, respectively. The FRBNY attributes substantially all changes in fair value of loans to changes in instrument-specific credit spreads.

Eligible collateral includes U.S. dollar-denominated ABS that are backed by student loans, insurance premium financial loans, or commercial mortgage loans. The following table presents the collateral concentration and remaining maturity distribution measured at fair value as of December 31, 2013 and 2012 (in millions):

Collateral type 1 Time to maturity
Within 90 days 91 days to 1 year Over 1 year to 5 years Total
December 31, 2013:
Student loan $ - $ 14 $ 33 $ 47
CMBS - 51 - 51
Total $ - $ 65 $ 33 $ 98
December 31, 2012:
Student loan $ - $ - $ 382 $ 382
CMBS 3 - 129 132
Other 2 46 - - 46
Total $ 49 $ - $ 511 $ 560

1. All credit ratings are AAA unless otherwise indicated. Return to table

2. Includes insurance premium financial loans. Return to table

The aggregate remaining principal amount outstanding on TALF loans as of December 31, 2013 and 2012, was $97 million and $556 million, respectively.

At December 31, 2013 and 2012, no TALF loans were over 90 days past due or on nonaccrual status.

Earnings reported by the FRBNY related to the TALF include interest income and unrealized gains and losses on TALF loans as well as the FRBNY's allocated share of the TALF LLC's net income. Additional information regarding the income of TALF LLC is presented in Note 6. The following table presents the components of TALF earnings recorded by the FRBNY for the years ended December 31 (in millions):

  2013 2012
Interest income $ 6 $ 80
Unrealized gains (losses) (3) (34)
Subtotal - TALF loans $ 3 $ 46
Allocated share of TALF LLC - (7)
Total TALF $ 3 $ 39

(5) System Open Market Account
a. Domestic Securities Holdings

The FRBNY conducts domestic open market operations and, on behalf of the Reserve Banks, holds the resulting securities in the SOMA.

During the years ended December 31, 2013 and 2012, the FRBNY continued the purchase of Treasury securities and federal agency and GSE MBS under the large-scale asset purchase programs authorized by the FOMC. In September 2011, the FOMC announced that the Federal Reserve would reinvest principal payments from the SOMA portfolio holdings of GSE debt securities and federal agency and GSE MBS in federal agency and GSE MBS. In June 2012, the FOMC announced that it would continue the existing policy of reinvesting principal payments from the SOMA portfolio holdings of GSE debt securities and federal agency and GSE MBS in federal agency and GSE MBS. In September 2012, the FOMC announced that the Federal Reserve would purchase additional federal agency and GSE MBS at a pace of $40 billion per month. In December 2012, the FOMC announced that the Federal Reserve would purchase longer-term Treasury securities initially at a pace of $45 billion per month after its program to extend the average maturity of its holdings of Treasury securities was completed at the end of 2012. In December 2012, the FOMC announced that the Federal Reserve would continue the policy of rolling over maturing Treasury securities into new issues at auction.

During the year ended December 31, 2012, the FRBNY also continued the purchase and sale of SOMA portfolio holdings under the maturity extension programs authorized by the FOMC. In September 2011, the FOMC announced that the Federal Reserve would extend the average maturity of the SOMA portfolio holdings of securities by purchasing $400 billion par value of Treasury securities with maturities of six to thirty years and selling or redeeming an equal par amount of Treasury securities with remaining maturities of three years or less by the end of June 2012. In June 2012, the FOMC announced that the Federal Reserve would continue through the end of 2012 its program to extend the average maturity of securities by purchasing $267 billion par value of Treasury securities with maturities of six to thirty years and selling or redeeming an equal par amount of Treasury securities with maturities of three and a quarter years or less by the end of 2012.

The total of Treasury securities, GSE debt securities, and federal agency and GSE MBS, net, excluding accrued interest, held in the SOMA at December 31 was as follows (in millions):

  2013
Par Unamortized
premiums
Unaccreted
discounts
Total
amortized
cost
Notes $ 1,467,427 $ 33,385 $ (5,697) $ 1,495,115
Bonds 741,348 128,541 (5,570) 864,319
Total Treasury securities $ 2,208,775 $ 161,926 $ (11,267) $ 2,359,434
GSE debt securities $ 57,221 $ 1,903 $ (2) $ 59,122
Federal agency and GSE MBS $ 1,490,162 $ 44,781 $ (1,083) $ 1,533,860
  2012
Par Unamortized
premiums
Unaccreted
discounts
Total
amortized
cost
Notes $ 1,110,398 $ 32,532 $ (711) $ 1,142,219
Bonds 555,747 111,360 (138) 666,969
Total Treasury securities $ 1,666,145 $ 143,892 $ (849) $ 1,809,188
GSE debt securities $ 76,783 $ 2,703 $ (7) $ 79,479
Federal agency and GSE MBS $ 926,662 $ 24,367 $ (708) $ 950,321

The FRBNY enters into transactions for the purchase of securities under agreements to resell and transactions to sell securities under agreements to repurchase as part of its monetary policy activities. In addition, transactions to sell securities under to repurchase agreements are entered into as part of a service offering to foreign official and international account holders.

There were no material transactions related to securities purchased under agreements to resell during the years ended December 31, 2013 and 2012. Financial information related to securities sold under agreements to repurchase for the years ended December 31 was as follows (in millions):

  2013 2012
Contract amount outstanding, end of year $ 315,924 $ 107,188
Average daily amount outstanding, during the year 99,681 91,898
Maximum balance outstanding, during the year 315,924 122,541
Securities pledged (par value), end of year 310,452 93,547
Securities pledged (market value), end of year 314,901 107,188

The remaining maturity distribution of Treasury securities, GSE debt securities, federal agency and GSE MBS bought outright, and securities sold under agreements to repurchase at December 31, 2013 and 2012 was as follows (in millions):

  Within
15 days
16 days
to 90 days
91 days
to 1 year
Over
1 year
to 5 years
Over
5 years
to 10 years
Over
10 years
Total
December 31, 2013:
Treasury securities
(par value)
$ - $ 298 $ 176 $ 763,329 $ 864,700 $ 580,272 $ 2,208,775
GSE debt securities
(par value)
2,310 7,568 8,666 36,268 62 2,347 57,221
Federal agency and GSE
MBS (par value) 1
- - - 5 2,549 1,487,608 1,490,162
Securities sold under
agreements to
repurchase
(contract amount)
315,924 - - - - - 315,924
December 31, 2012:
Treasury securities
(par value)
$ - $ 5 $ 16 $ 378,476 $ 862,410 $ 425,238 $ 1,666,145
GSE debt securities
(par value)
1,565 2,795 15,202 52,830 2,044 2,347 76,783
Federal agency and GSE
MBS (par value)1
- - 2 1 2,365 924,294 926,662
Securities sold under
agreements to
repurchase
(contract amount)
107,188 - - - - - 107,188

1. The par amount shown for federal agency and GSE MBS is the remaining principal balance of the securities. Return to table

Federal agency and GSE MBS are reported at stated maturity in the table above. The estimated weighted average life of these securities, which differs from the stated maturity primarily because it factors in scheduled payments and prepayment assumptions, was approximately 6.5 and 3.3 years as of December 31, 2013 and 2012, respectively.

The amortized cost and par value of Treasury securities and GSE debt securities that were loaned from the SOMA at December 31 was as follows (in millions):

  2013 2012
Treasury securities (amortized costs) $ 17,153 $ 9,139
Treasury securities (par value) 15,447 8,460
GSE debt securities (amortized cost) 1,099 697
GSE debt securities (par value) 1,055 676

The FRBNY enters into commitments to buy and sell Treasury securities and records the related securities on a settlement-date basis. As of December 31, 2013, there were no outstanding commitments.

The FRBNY enters into commitments to buy and sell federal agency and GSE MBS and records the related securities on a settlement-date basis. As of December 31, 2013, the total purchase price of the federal agency and GSE MBS under outstanding purchase commitments was $59,350 million, of which $479 million was related to dollar rolls. As of December 31, 2013, there were no outstanding sales commitments for federal agency and GSE MBS. These commitments, which had contractual settlement dates extending through February 2014, are for the purchase of TBA MBS for which the number and identity of the pools that will be delivered to fulfill the commitment are unknown at the time of the trade. These commitments are subject to varying degrees of off-balance-sheet market risk and counterparty credit risk that result from their future settlement. The FRBNY requires the posting of cash collateral for commitments as part of the risk management practices used to mitigate the counterparty credit risk.

Other investments consist of cash and short-term investments related to the federal agency and GSE MBS portfolio. Other liabilities, which are related to federal agency and GSE MBS purchases and sales, includes the FRBNY's obligation to return cash margin posted by counterparties as collateral under commitments to purchase and sell federal agency and GSE MBS. In addition, other liabilities includes obligations that arise from the failure of a seller to deliver securities to the FRBNY on the settlement date. Although the FRBNY has ownership of and records its investments in the MBS as of the contractual settlement date, it is not obligated to make payment until the securities are delivered, and the amount included in other liabilities represents the obligation to pay for the securities when delivered. The amount of other investments and other liabilities held in the SOMA at December 31 was as follows (in millions):

  2013 2012
Other investments $ 2 $ 23
Other liabilities:
Cash margin $ 1,320 $ 3,092
Obligations from MBS transaction fails 11 85
Total other liabilities $ 1,331 $ 3,177

Accrued interest receivable on domestic securities holdings was $23,405 million and $18,924 million as of December 31, 2013 and 2012, respectively. These amounts are reported as a component of "System Open Market Account: Accrued interest receivable" in the Combined Statements of Condition.

Information about transactions related to Treasury securities, GSE debt securities, and federal agency and GSE MBS during the years ended December 31, 2013 and 2012, is summarized as follows (in millions):

  Bills Notes Bonds Total
Treasury
securities
GSE debt
securities
Federal
agency and
GSE MBS
Balance December 31, 2011 $ 18,423 $ 1,311,917 $ 419,937 $ 1,750,277 $ 107,828 $ 848,258
Purchases 1 118,886 397,999 263,991 780,876 - 431,487
Sales1 - (507,420) (11,727) (519,147) - -
Realized gains, net 2 - 12,003 1,252 13,255 - -
Principal payments and maturities (137,314) (67,462) - (204,776) (27,211) (324,181)
Amortization of premiums and accretion of discounts, net 5 (5,461) (7,531) (12,987) (1,138) (5,243)
Inflation adjustment on inflation-indexed securities - 643 1,047 1,690 - -
Balance December 31, 2012 $ - $ 1,142,219 $ 666,969 $ 1,809,188 $ 79,479 $ 950,321
Purchases1 - 358,656 206,208 564,864 - 864,538
Sales1 - - - - - -
Realized gains, net2 - - - - - -
Principal payments and maturities - (21) - (21) (19,562) (273,991)
Amortization of premiums and accretion of discounts, net - (6,024) (9,503) (15,527) (795) (7,008)
Inflation adjustment on inflation-indexed securities - 285 645 930 - -
Balance December 31, 2013 $ - $ 1,495,115 $ 864,319 $ 2,359,434 $ 59,122 $ 1,533,860
Year ended December 31, 2012
Supplemental information -
par value of transactions:
Purchases 3 $ 118,892 $ 383,106 $ 205,115 $ 707,113 $ - $ 413,160
Sales3 - (492,234) (9,094) (501,328) - -
Year ended December 31, 2013
Supplemental information -
par value of transactions:
Purchases3 $ - $ 356,766 $ 184,956 $ 541,722 $ - $ 837,490
Sales3 - - - - - -

1.Purchases and sales may include payments and receipts related to principal, premiums, discounts, and inflation compensation adjustments to the basis of inflation-indexed securities. The amount reported as sales includes the realized gains and losses on such transactions. Purchases and sales exclude MBS TBA transactions that are settled on a net basis. Return to table

2.Realized gains, net offset the amount of realized gains and losses included in the reported sales amount. Return to table

3.Includes inflation compensation. Return to table

b. Foreign Currency Denominated Assets

The FRBNY conducts foreign currency operations and, on behalf of the Reserve Banks, holds the resulting foreign currency denominated assets in the SOMA.

The FRBNY holds foreign currency deposits with foreign central banks and the Bank for International Settlements and invests in foreign government debt instruments of Germany, France, and Japan. These foreign government debt instruments are guaranteed as to principal and interest by the issuing foreign governments. In addition, the FRBNY enters into transactions to purchase Euro-denominated government debt securities under agreements to resell for which the accepted collateral is the debt instruments issued by the governments of Belgium, France, Germany, Italy, the Netherlands, and Spain.

Information about foreign currency denominated investments valued at amortized cost and foreign currency market exchange rates at December 31 was as follows (in millions):

  2013 2012
Euro:
Foreign currency deposits $ 7,530 $ 8,925
Securities purchased under agreements to resell 2,549 659
German government debt instruments 2,397 2,133
French government debt instruments 2,397 2,421
Japanese yen:
Foreign currency deposits 2,926 3,553
Japanese government debt instruments 5,925 7,182
Total $ 23,724 $ 24,873

Accrued interest receivable on foreign currency denominated assets was $88 million and $99 million as of December 31, 2013 and 2012, respectively. These amounts are reported as a component of "System Open Market Account: Accrued interest receivable" in the Combined Statements of Condition.

The remaining maturity distribution of foreign currency denominated investments at December 31, 2013 and 2012, was as follows (in millions):

  Within
15 days
16 days
to 90 days
91 days
to 1 year
Over 1 year
to 5 years
Total
December 31, 2013:
Euro $ 7,037 $ 1,803 $ 2,161 $ 3,872 $ 14,873
Japanese yen 3,116 380 1,870 3,485 8,851
Total $ 10,153 $ 2,183 $ 4,031 $ 7,357 $ 23,724
December 31, 2012:
Euro $ 6,593 $ 1,726 $ 2,151 $ 3,668 $ 14,138
Japanese yen 3,801 490 2,138 4,306 10,735
Total $ 10,394 $ 2,216 $ 4,289 $ 7,974 $ 24,873

There were no foreign exchange contracts related to open market operations outstanding as of December 31, 2013.

The FRBNY enters into commitments to buy foreign government debt instruments and records the related securities on a settlement-date basis. As of December 31, 2013, there were no outstanding commitments to purchase foreign government debt instruments During 2013, there were purchases, sales, and maturities of foreign government debt instruments of $3,539 million, $0, and $3,431 million, respectively.

In connection with its foreign currency activities, the FRBNY may enter into transactions that are subject to varying degrees of off-balance-sheet market risk and counterparty credit risk that result from their future settlement. The FRBNY controls these risks by obtaining credit approvals, establishing transaction limits, receiving collateral in some cases, and performing daily monitoring procedures.

At December 31, 2013 and 2012, there was no balance outstanding under the authorized warehousing facility.

There were no transactions related to the authorized reciprocal currency arrangements with the Bank of Canada and the Bank of Mexico during the years ended December 31, 2013 and 2012.

Foreign currency working balances held and foreign exchange contracts executed by the Bank to facilitate its international payments and currency transactions it made on behalf of foreign central banks and U.S. official institution customers were not material as of December 31, 2013 and 2012.

c. Central Bank Liquidity Swaps
U.S. Dollar Liquidity Swaps

The total foreign currency held under U.S. dollar liquidity swaps in the SOMA at December 31, 2013 and 2012, was $272 million and $8,889 million, respectively.

The remaining maturity distribution of U.S. dollar liquidity swaps that were allocated to the Bank at December 31 was as follows (in millions):

  2013 2012
Within
15 days
16 days
to 90 days
Total Within
15 days
16 days
to 90 days
Total
Euro $ 113 $ 159 $ 272 $ 1,741 $ 7,147 $ 8,888
Japanese yen - - - 1 - 1
Total $ 113 $ 159 $ 272 $ 1,742 $ 7,147 $ 8,889

Foreign Currency Liquidity Swaps

There were no transactions related to the foreign currency liquidity swaps during the years ended December 31, 2013 and 2012.

d. Fair Value of SOMA Assets

The fair value amounts below are presented solely for informational purposes. Although the fair value of SOMA security holdings can be substantially greater than or less than the recorded value at any point in time, these unrealized gains or losses have no effect on the ability of the Reserve Banks, as the central bank, to meet their financial obligations and responsibilities.

The fair value of the Treasury securities, GSE debt securities, federal agency and GSE MBS, and foreign government debt instruments in the SOMA's holdings is subject to market risk, arising from movements in market variables such as interest rates and credit risk. The fair value of federal agency and GSE MBS is also affected by the expected rate of prepayments of mortgage loans underlying the securities. The fair value of foreign government debt instruments is also affected by currency risk. Based on evaluations performed as of December 31, 2013, there are no credit impairments of SOMA securities holdings.

The following table presents the amortized cost and fair value of and cumulative unrealized gains (losses) on the Treasury securities, GSE debt securities, and federal agency and GSE MBS, net held in the SOMA at December 31 (in millions):

  2013 2012
Amortized
cost
Fair value Cumulative
unrealized
gains
(losses)
Amortized
cost
Fair value Cumulative
unrealized
gains
(losses)
Treasury securities:
Notes $ 1,495,115 $ 1,499,000 $ 3,885 $ 1,142,219 $ 1,213,177 $ 70,958
Bonds 864,319 842,336 (21,983) 666,969 761,138 94,169
Total Treasury securities $ 2,359,434 $ 2,341,336 $ (18,098) $ 1,809,188 $ 1,974,315 $ 165,127
GSE debt securities 59,122 62,236 3,114 79,479 85,004 5,525
Federal agency and GSE MBS 1,533,860 1,495,572 (38,288) 950,321 993,990 43,669
Total domestic SOMA portfolio
securities holdings
$ 3,952,416 $ 3,899,144 $ (53,272) $ 2,838,988 $ 3,053,309 $ 214,321
Memorandum - Commitments for:
Purchases of Treasury securities $ - $ - $ - $ - $ - $ -
Purchases of Federal agency and
GSE MBS
59,350 59,129 (221) 118,215 118,397 182
Sales of Federal agency and
GSE MBS
- - - - - -

The fair value of Treasury securities and GSE debt securities was determined using pricing services that provide market consensus prices based on indicative quotes from various market participants. The fair value of federal agency and GSE MBS was determined using a pricing service that utilizes a model-based approach that considers observable inputs for similar securities.

At December 31, 2013 and 2012, the fair value of foreign currency denominated investments, was $23,802 million and $25,042 million, respectively. The fair value of government debt instruments was determined using pricing services that provide market consensus prices based on indicative quotes from various market participants. The fair value of foreign currency deposits and securities purchased under agreements to resell was determined by reference to market interest rates.

The cost basis of securities purchased under agreements to resell, securities sold under agreements to repurchase, and other investments held in the SOMA approximate fair value.

The following table provides additional information on the amortized cost and fair values of the federal agency and GSE MBS portfolio at December 31 (in millions):

Distribution
of MBS holdings
by coupon rate
2013 2012
Amortized
cost
Fair value Amortized
cost
Fair value
2.0% $ 14,191 $ 13,529 $ 845 $ 846
2.5% 123,832 118,458 37,562 37,766
3.0% 521,809 484,275 160,613 161,757
3.5% 349,689 338,357 179,587 184,752
4.0% 230,256 231,113 137,758 145,955
4.5% 185,825 195,481 262,485 282,182
5.0% 83,290 87,968 125,107 132,213
5.5% 21,496 22,718 39,970 41,819
6.0% 3,051 3,225 5,642 5,888
6.5% 421 448 752 812
Total $ 1,533,860 $ 1,495,572 $ 950,321 $ 993,990

Because SOMA securities are recorded at amortized cost, the change in the cumulative unrealized gains (losses) is not reported in the Combined Statements of Income and Comprehensive Income. The following table presents the realized gains and the change in the cumulative unrealized gains (losses), presented as "Fair value changes unrealized losses," of the domestic securities holdings during the years ended December 31, 2013 and 2012 (in millions):

  2013 2012
Total portfolio
holdings
realized
gains 1
Fair value
changes
unrealized
losses
Total portfolio
holdings
realized
gains1
Fair value
changes
unrealized
losses
Treasury securities $ - $ (183,225) $ 13,255 $ (1,142)
GSE debt securities - (2,411) - (885)
Federal agency and GSE MBS 51 (81,957) 241 (3,568)
Total $ 51 $ (267,593) $ 13,496 $ (5,595)

1.Total portfolio holdings realized gains are reported in "Non-interest income (loss): System Open Market Account" in the Combined Statements of Income and Comprehensive Income. Return to table

The amount of change in unrealized gains position, net, related to foreign currency denominated assets was a decrease of $90 million and an increase of $3 million for the years ended December 31, 2013 and 2012, respectively.

Treasury securities, GSE debt securities, Federal agency and GSE MBS, and foreign government debt instruments are classified as Level 2 within the ASC 820 hierarchy because the fair values are based on indicative quotes and other observable inputs obtained from independent pricing services. The fair value hierarchy level of SOMA financial assets is not necessarily an indication of the risk associated with those assets.

(6) Investments Held by Consolidated Variable Interest Entities
a. Summary Information for Consolidated Variable Interest Entities

The total assets of consolidated VIEs, including cash, cash equivalents, accrued interest, and other receivables at December 31 were as follows (in millions):

  2013 2012
ML $ 1,732 $ 1,811
ML II 63 61
ML III 22 22
TALF LLC 109 856
Total $ 1,926 $ 2,750

The FRBNY's approximate maximum exposure to loss at December 31, 2013 and 2012, was $1,089 million and $829 million, respectively. These estimates incorporate potential losses associated with assets recorded on the FRBNY's balance sheet, net of the fair value of subordinated interests (beneficial interest in consolidated VIEs).

The classification of significant assets and liabilities of the consolidated VIEs at December 31 was as follows (in millions):

  2013 2012
Assets:
Short-term investments $ 530 $ 690
Commercial mortgage loans 507 466
Swap contracts 158 408
Non-agency RMBS 8 2
Other investments 1 2 66
Subtotal $ 1,205 $ 1,632
Cash, cash equivalents, accrued interest receivable, and other receivables 721 1,118
Total investments held by consolidated VIEs $ 1,926 $ 2,750
Liabilities:
Beneficial interest in consolidated VIEs $ 116 $ 803
Other liabilities 2 $ 158 $ 415

1. Investments with a fair value of $1 million as of December 31, 2012 were recategorized from "Federal agency and GSE MBS" to "Other investments" to conform to the current year presentation. Return to table

2. The amount reported as "Consolidated variable interest entities: Other liabilities" in the Combined Statements of Condition includes $82 million and $341 million related to cash collateral received on swap contracts at December 31, 2013 and 2012, respectively. The amount also includes accrued interest and accrued other expenses. Return to table

Total realized and unrealized gains (losses) for the year ended December 31, 2013, were as follows (in millions):

  Total portfolio
holdings realized
gains (losses)
Fair value
changes unrealized
gains (losses)
Total portfolio
holdings realized/
unrealized gains (losses)
Commercial mortgage loans 1 $ 28 $ 176 $ 204
Swap contracts 83 (136) (53)
Non-agency RMBS 10 1 11
Residential mortgage loans1 (1) 1 -
CDOs 2 (2) -
Other investments 9 12 21
Total $ 131 $ 52 $ 183

1. Substantially all unrealized gains (losses) on the commercial mortgage loans are attributable to changes in instrument-specific credit risk. Return to table

Total realized and unrealized gains (losses) for the year ended December 31, 2012, were as follows (in millions):

  Total portfolio
holdings realized
gains (losses)
Fair value
changes unrealized
gains (losses)
Total portfolio
holdings realized/
unrealized gains (losses)
Short-term investments $ - $ 2 $ 2
Commercial mortgage loans 1 (101) 394 293
Swap contracts 75 (165) (90)
Non-agency RMBS (334) 2,038 1,704
Residential mortgage loans1 (326) 322 (4)
CDOs 1,110 4,439 5,549
Other investments 2 11 (14) (3)
Total $ 435 $ 7,016 $ 7,451

1. Substantially all unrealized gains (losses) on the commercial and residential mortgage loans are attributable to changes in instrument-specific credit risk. Return to table

2. Investments with realized gains of $12 million, unrealized losses of $13 million, and total realized/unrealized losses of $1 million as of December 31, 2012 were recategorized from "Federal agency and GSE MBS" to "Other investments" to conform to the current year presentation. Return to table

The net income (loss) attributable to ML, ML II, ML III, and TALF LLC for the year ended December 31, 2013, was as follows (in millions):

  ML ML II ML III TALF LLC Total
Interest income:
Portfolio interest income $ 2 $ 4 $ - $ - $ 6
Less: Interest expense - - - - -
Net interest income 2 4 - - 6
Non-interest income:
Portfolio holdings gains, net 183 - - - 183
Realized losses on beneficial interest in consolidated VIEs - - - (573) 1 (573)
Unrealized gains (losses) on beneficial interest in consolidated VIEs - (1) - 5741 573
Net non-interest income (loss) 183 (1) - 1 183
Total net interest income and non-interest income 185 3 - 1 189
Less: Professional fees 6 1 - 1 8
Net income attributable to consolidated VIEs $ 179 $ 2 $ - $ - 2 $ 181

1.The TALF LLC's realized and unrealized loss on beneficial interest represents Treasury's financial interest in the net income of TALF LLC for the year ended December 31, 2013. Return to table

2.Additional information regarding TALF-related income recorded by the FRBNY is presented in Note 4. Return to table

The net income (loss) attributable to ML, ML II, ML III, and TALF for the year ended December 31, 2012, was as follows (in millions):

  ML ML II ML III TALF LLC Total
Interest income:
Portfolio interest income $ 34 $ 52 $ 1,023 $ 1 $ 1,110
Less: Interest expense 45 7 97 4 153
Net interest income (loss) (11) 45 926 (3) 957
Non-interest income:
Portfolio holdings gains, net 553 1,392 5,506 - 7,451
Realized losses on beneficial interest in consolidated VIEs - (453) (2,905) - 1 (3,358)
Unrealized gains (losses) on
beneficial interest in consolidated VIEs
- 216 801 (4)1 1,013
Net non-interest income (loss) 553 1,155 3,402 (4) 5,106
Total net interest income and
non-interest income (loss)
542 1,200 4,328 (7) 6,063
Less: Professional fees 13 1 11 - 25
Net income (loss) attributable to
consolidated VIEs
$ 529 $ 1,199 $ 4,317 $ (7) 2 $ 6,038

1.The TALF LLC's realized and unrealized loss on beneficial interest represents Treasury's financial interest in the net income of TALF LLC for the year ended December 31, 2012. Return to table

2.Additional information regarding TALF-related income recorded by the FRBNY is presented in Note 4. Return to table

Following is a summary of the consolidated VIEs' subordinated financial interest for the years ended December 31, 2013 and 2012 (in millions):

  ML
subordinated
loan
ML II
deferred
purchase
price
ML III
equity
contribution
TALF
financial
interest
Total
Fair value, December 31, 2011 $ 1,385 $ 1,332 $ 6,350 $ 778 $ 9,845
Interest accrued and capitalized 45 7 97 4 153
Realized (gain)/loss - 453 2,905 - 3,358
Unrealized (gain)/loss - (216) (801) 4 (1,013)
Payments 1 (1,430) (1,566) (8,544) - (11,540)
Fair value, December 31, 2012 $ - $ 10 $ 7 $ 786 $ 803
Interest accrued and capitalized $ - $ - $ - $ - $ -
Realized (gain)/loss - - - 573 573
Unrealized (gain)/loss - 1 - (574) (573)
Payments1 - - - (687) (687)
Fair value, at December 31, 2013 $ - $ 11 $ 7 $ 98 $ 116

1.For ML includes payments of $1,150 million of principal and $280 million of interest. For ML II includes payments of $1,000 million of principal, $113 million of interest, and $453 million of variable deferred purchase price. For ML III includes payments of $5,000 million of principal, $639 million of interest, and $2,905 million of excess amounts. For TALF LLC includes payments of $100 million of principal, $13 million of interest, and $574 million of contingent interest. Return to table

b. Maiden Lane LLC

To facilitate the merger of The Bear Stearns Companies, Inc. (Bear Stearns) and JPMorgan Chase & Co. (JPMC), the FRBNY extended credit to ML in June 2008. ML is a Delaware LLC formed by the FRBNY to acquire certain assets of Bear Stearns and to manage those assets. The assets acquired by ML were valued at $29.9 billion as of March 14, 2008, the date that the FRBNYcommitted to the transaction, and largely consisted of federal agency and GSE MBS, non-agency residential mortgage-backed securities (RMBS), commercial and residential mortgage loans, and derivatives and associated hedges.

The FRBNY extended a senior loan of approximately $28.8 billion and JPMC extended a subordinated loan of $1.15 billion to finance the acquisition of the assets. On June 14, 2012, the remaining outstanding balance of the senior loan from the FRBNY to ML was repaid in full, with interest. On November 15, 2012, the remaining outstanding balance of the subordinated loan from JPMC was repaid in full, with interest. The FRBNY will continue to sell the remaining assets from the ML portfolio as market conditions warrant and if the sales represent good value for the public. In accordance with the ML agreements, proceeds from future asset sales will be distributed to the FRBNY as contingent interest after all derivative instruments in ML have been terminated and paid or sold from the portfolio.

The following is a description of the significant holdings at December 31, 2013, and the associated risk for each holding:

i. Debt Securities

ML has investments in short-term instruments with maturities of greater than three months and less than one year when acquired. As of December 31, 2013, ML's short-term instruments consisted of approximately $530 million in U.S. Treasury bills.

ii. Commercial Mortgage Loans

Commercial mortgage loans are subject to a high degree of credit risk because of exposure to financial loss resulting from failure by a counterparty to meet its contractual obligations. Default rates are subject to a wide variety of factors, including, but not limited to, property performance, property management, supply and demand, construction trends, consumer behavior, regional economic conditions, interest rates, and other factors.

The performance profile for the commercial mortgage loans at December 31, 2013, was as follows (in millions):

  Unpaid principal
balance
Fair value Fair value as a
percentage of
unpaid principal
balance
Commercial mortgage loans:
Performing loans $ 28 $ 28 99.6%
Non-performing/non-accrual loans 1 512 479 93.5%
Total $ 540 $ 507 93.8%

1. Non-performing/non-accrual loans include loans with payments past due greater than 90 days. Return to table

Commercial mortgage loans held by ML are composed of different levels of subordination with respect to the underlying properties, and relative to each other. Senior mortgage loans are secured property loans evidenced by a first mortgage that is senior to any subordinate or mezzanine financing. Subordinate mortgage interests, sometimes known as B Notes, are loans evidenced by a junior note or a junior participation in a mortgage loan. Mezzanine loans are loans made to the direct or indirect owner of the property-owning entity. Mezzanine loans are not secured by a mortgage on the property but rather by a pledge of the mezzanine borrower's direct or indirect ownership interest in the property-owning entity. As of December 31, 2013, ML had unpaid principal balances of approximately $12 million in senior mortgage loans and $528 million in mezzanine loans.

As of December 31, 2013, the property types of commercial mortgage loans were concentrated in the office sector with one sponsor representing all of the total unpaid principal balance.

iii. Derivative Instruments

Derivative contracts are instruments, such as swap contracts, that derive their value from underlying assets, indexes, reference rates, or a combination of these factors. The ML portfolio is composed of derivative financial instruments included in a total return swap (TRS) agreement with JPMC. ML and JPMC entered into the TRS with reference obligations representing credit default swaps (CDS) primarily on commercial mortgage-backed securities (CMBS) and RMBS, with various market participants, including JPMC.

On an ongoing basis, ML pledges collateral for credit or liquidity related shortfalls based on 20 percent of the notional amount of sold CDS protection and 10 percent of the present value of future premiums on purchased CDS protection. Failure to post this collateral constitutes a TRS event of default. Separately, ML and JPMC engage in bilateral posting of collateral to cover the net mark-to-market (MTM) variations in the swap portfolio. ML only nets the collateral received from JPMC from the bilateral MTM posting for the reference obligations for which JPMC is the counterparty.

The values of ML's cash equivalents, purchased by the re-hypothecation of cash collateral associated with the TRS, were $149 million and $477 million, for the years ended December 31, 2013 and 2012, respectively. In addition, ML has pledged $124 million and $231 million of US Treasury notes to JPMC as of December 31, 2013 and 2012, respectively.

The following risks are associated with the derivative instruments held by ML as part of the TRS agreement with JPMC:

Market Risk

CDS are agreements that provide protection for the buyer against the loss of principal and, in some cases, interest on a bond or loan in case of a default by the issuer. The nature of a credit event is established by the protection buyer and protection seller at the inception of a transaction, and such events include bankruptcy, insolvency, or failure to meet payment obligations when due. The buyer of the CDS pays a premium in return for payment protection upon the occurrence, if any, of a credit event. Upon the occurrence of a triggering credit event, the maximum potential amount of future payments the seller could be required to make under a CDS is equal to the notional amount of the contract. Such future payments could be reduced or offset by amounts recovered under recourse or by collateral provisions outlined in the contract, including seizure and liquidation of collateral pledged by the buyer. ML's derivatives portfolio consists of purchased and sold credit protection with differing underlying referenced names that do not necessarily offset.

Credit Risk

Credit risk is the risk of financial loss resulting from failure by a counterparty to meet its contractual obligations to ML. This can be caused by factors directly related to the counterparty, such as business or management. Taking collateral is the most common way to mitigate credit risk. ML takes financial collateral in the form of cash and marketable securities to cover JPMC counterparty risk as part of the TRS agreement with JPMC. ML remains exposed to credit risk for counterparties, other than JPMC, related to the swaps that underlie the TRS.

ML has entered into an International Swaps and Derivatives Association, Inc. master netting agreement with JPMC in connection with the TRS. This agreement provides ML with the right to liquidate securities held as collateral and to offset receivables and payables with JPMC in the event of default. This agreement also establishes the method for determining the net amount of receivables and payables that ML is entitled to receive from or owes to each counterparty to the swaps that underlie the TRS based upon the relevant fair value of the CDS.

For the derivative balances reported in the Combined Statements of Condition, ML offsets its asset and liability positions held with the same counterparty. In addition, ML offsets the cash collateral held with JPMC against any net liabilities of JPMC with ML under the TRS. As of December 31, 2013 and 2012, there were no amounts subject to an enforceable master netting agreement that were not offset in the Combined Statements of Condition.

The following table summarizes the fair value and notional amounts of derivative instruments by contract type on a gross basis as of December 31, 2013 and 2012, which is reported as a component of "Investments held by consolidated variable interest entities" in the Combined Statements of Condition (in millions, except contract data):

  2013 2012
Gross
derivative
assets
Gross
derivative
liabilities
Notional
amounts 3
Gross
derivative
assets
Gross
derivative
liabilities
Notional
amounts3
Credit derivatives:
CDS 1, 2 $ 345 $ (193) $ 899 $ 816 $ (343) $ 1,755
Amounts offset in the
Combined Statements of
Condition
Counterparty netting
(120) 120   (272) 272  
Cash collateral (67) -   (136) -  
Net amounts in the Combined Statements of Condition $ 158 $ (73)   $ 408 $ (71)  

1.CDS fair values as of December 31, 2013 for assets and liabilities include interest receivables of $15 million and payables of $2 million. CDS fair values as of December 31, 2012 for assets and liabilities includes interest receivables of $15 million and payables of $9 million. Return to table

2.There were 269 and 470 CDS contracts outstanding as of December 31, 2013 and 2012, respectively. Return to table

3.Represents the sum of gross long and gross short notional derivative contracts. The change in notional amounts is representative of the volume of activity for the year ended December 31, 2013. Return to table

The table below summarizes certain information regarding protection sold through CDS as of December 31 (in millions):

Credit ratings
of the reference obligation
Maximum potential payout/notional
2013 2012
Years to maturity Fair
value
Total Fair
value
1 year
or less
After
1 year
through
3 years
After
3 years
through
5 years
After
5 years
Total Asset/
(liability)
Asset/
(liability)
Investment grade (AAA to BBB-) $ - $ - $ - $ 13 $ 13 $ (3) $ 52 $ (5)
Non-investment grade (BB+ or lower) - - - 293 293 (188) 438 (329)
Total credit protection sold $ - $ - $ - $ 306 $ 306 $ (191) $ 490 $ (334)

The table below summarizes certain information regarding protection bought through CDS as of December 31 (in millions):

Credit ratings
of the reference obligation
Maximum potential recovery/notional
2013 2012
Years to maturity Fair
value
Total Fair
value
1 year
or less
After
1 year
through
3 years
After
3 years
through
5 years
After
5 years
Total Asset/
(liability)
Asset/
(liability)
Investment grade (AAA to BBB-) $ - $ - $ 5 $ 51 $ 56 $ 2 $ 150 $ 27
Non-investment grade (BB+ or lower) - - 9 528 537 327 1,115 774
Total credit protection bought $ - $ - $ 14 $ 579 $ 593 $ 329 $ 1,265 $ 801

Currency Risk

Currency risk is the risk of financial loss resulting from exposure to changes in exchange rates between two currencies. Under the terms of the TRS, JPMC may post cash collateral in the form of either U.S. dollar or Euro denominated currencies to cover the net MTM variation in the swap portfolio. Starting in December 2012, JPMC began posting collateral in Euro currency. This risk is mitigated by daily variation margin updates that capture the movement in the value of the swap portfolio in addition to any movement in exchange rates on the swap collateral. Swap collateral received that is denominated in a foreign currency is translated into U.S. dollar amounts using the prevailing exchange rate as of the date of the combined financial statements. There is no gain or loss associated with this foreign denominated collateral as the asset and liability positions associated with it are offsetting.

c. Maiden Lane II LLC

The FRBNY extended credit to ML II, a Delaware LLC formed to purchase non-agency RMBS from the reinvestment pool of the securities lending portfolios of several regulated U.S. insurance subsidiaries of American International Group, Inc. (AIG). ML II borrowed $19.5 billion from the FRBNY and used the proceeds to purchase non-agency RMBS that had an approximate fair value of $20.8 billion as of October 31, 2008, from AIG's domestic insurance subsidiaries. The FRBNY is the sole and managing member and the controlling party of ML II and will remain as the controlling party as long as the FRBNY retains an economic interest in ML II. As part of the agreement, the AIG subsidiaries also received from ML II a fixed deferred purchase price of up to $1.0 billion, plus interest on any such fixed deferred purchase price outstanding.

On February 28, 2012, the FRBNY announced the sale of the remaining securities in the ML II portfolio. On March 1, 2012, the loan from the FRBNY to ML II was repaid in full with interest, in accordance with the terms of the facility. On March 15, 2012, the remaining portion of the fixed deferred purchase price plus interest owed to the AIG subsidiaries was repaid in full. Concurrently, distributions were made to the Bank and the AIG subsidiaries in the form of contingent interest and variable deferred purchase price for the amounts of $2.3 billion and $0.5 billion, respectively.

On March 19, 2012, ML II was dissolved and the FRBNY began the wind up process in accordance with and as required by Delaware law and the agreements governing ML II. Winding up requires ML II to pay or make reasonable provision to pay all claims and obligations. Any remaining proceeds will be divided between the Bank, which is entitled to receive five-sixths, and the AIG subsidiaries, which are entitled to receive one-sixth. While its affairs are being wound up, the ML II is retaining certain assets to meet trailing expenses and other obligations as required by law. Dissolution costs are not expected to be material.

d. Maiden Lane III LLC

The FRBNY extended credit to ML III, a Delaware LLC formed to purchase ABS CDOs from certain third-party counterparties of AIG Financial Products Corp. ML III borrowed approximately $24.3 billion from the FRBNY, and AIG provided an equity contribution of $5.0 billion to ML III. The proceeds were used to purchase ABS CDOs with a fair value of $29.6 billion. On April 3, 2012, the FRBNY revised ML III's investment objective to allow for asset sales and began conducting such sales shortly thereafter. On June 14, 2012, the FRBNY announced that its loan to ML III had been repaid in full, with interest. On July 16, 2012, the FRBY announced that net proceeds from additional sales of securities in ML III enabled the full repayment of AIG's equity contribution plus accrued interest and provided residual profits to the FRBNY and AIG. During 2012, distributions were made to the Bank and AIG in the form of contingent interest and excess amounts in the amounts of $5.9 billion and $2.9 billion, respectively. On August 23, 2012, the FRBNY announced that all remaining securities in ML III were sold.

On September 10, 2012, ML III was dissolved and the FRBNY began the wind up process in accordance with and as required by Delaware law and the agreements governing ML III. Winding up requires ML III to pay or make reasonable provision to pay all claims and obligations. Any remaining proceeds will be divided between the FRBNY, which is entitled to receive two-thirds, and AIG (or its assignee), which is entitled to receive one-third, in accordance with the agreement. While its affairs are being wound up, ML III is retaining certain assets to meet trailing expenses and other obligations as required by law. Dissolution costs are not expected to be material.

e. TALF LLC

Cash receipts resulting from the put option fees paid to TALF LLC are invested in the following types of U.S. dollar-denominated short-term investments and cash equivalents eligible for purchase by the LLC: (1) U.S. Treasury securities, (2) federal agency securities that are senior, negotiable debt obligations of Fannie Mae, Freddie Mac, Federal Home Loan Banks, and Federal Farm Credit Banks, which have a fixed rate of interest, (3) repurchase agreements that are collateralized by Treasury and federal agency securities and fixed-rate agency mortgage-backed securities, and (4) money market mutual funds registered with the Securities and Exchange Commission and regulated under Rule 2a-7 of the Investment Company Act that invest exclusively in U.S. Treasury and federal agency securities. Cash may also be invested in a demand interest-bearing account held at The Bank of New York Mellon. Proceeds from the Treasury's loan were also invested in these short-term investments and cash equivalents until the outstanding principal on the loan was repaid in full as described below.

On January 15, 2013, the Treasury and FRBNY eliminated the Treasury's and FRBNY's funding commitments to TALF LLC. These commitments were no longer deemed necessary because the cash equivalents and short-term investiments held by TALF LLC exceeded the amount of TALF loans then outstanding. In addition, the agreement related to distribution of proceeds was amended to limit funding of the cash collateral account to an amount equal to the outstanding principal plus accrued interest of all TALF loans as of the payment determination date; all accumulated funding in excess of that amount would then be distributed according to the distribution priorities described in the agreements governing TALF LLC.

Pursuant to this agreement on February 6, 2013, TALF LLC repaid in full the outstanding principal and accrued interest on the Treasury loan. During the year ended December 31, 2013, additional distributions were made to the Treasury and FRBNY as contingent interest in the amounts of $573 million and $64 million, respectively.

f. Fair Value Measurement

The consolidated VIEs have adopted ASC 820 and ASC 825 and have elected the fair value option for all securities and mortgage loans held by ML and TALF LLC. ML II and ML III qualify as nonregistered investment companies under the provisions of ASC 946, and therefore, all investments are recorded at fair value in accordance with ASC 820. In addition, the FRBNY has elected to record the beneficial interests in ML II, ML III, and TALF LLC at fair value.

The accounting and classification of these investments appropriately reflect the VIEs' and the FRBNY's intent with respect to the purpose of the investments and most closely reflect the amount of the assets available to liquidate the entities' obligations.

i. Determination of Fair Value

The consolidated VIEs value their investments on the basis of the last available bid prices or current market quotations provided by dealers or pricing services selected by the designated investment managers. To determine the value of a particular investment, pricing services may use information on transactions in such investments; quotations from dealers; pricing metrics; market transactions in comparable investments; relationships observed in the market between investments; and calculated yield measures based on valuation methodologies commonly employed in the market for such investments.

Market quotations may not represent fair value in circumstances in which the investment manager believes that facts and circumstances applicable to an issuer, a seller, a purchaser, or the market for a particular security result in the current market quotations reflecting an inaccurate measure of fair value. In such cases or when market quotations are unavailable, the investment manager determines fair value by applying proprietary valuation models that use collateral performance scenarios and pricing metrics derived from the reported performance of the universe of investments with similar characteristics as well as the observable market.

Because of the uncertainty inherent in determining the fair value of investments that do not have a readily available fair value, the fair value of these investments may differ significantly from the values that would have been reported if a readily available fair value had existed for these investments and may differ materially from the values that may ultimately be realized.

The fair value of the liability for the beneficial interests of consolidated VIEs is estimated based upon the fair value of the underlying assets held by the VIEs. The holders of these beneficial interests do not have recourse to the general credit of the FRBNY.

ii. Valuation Methodologies for Level 3 Assets and Liabilities

In certain cases in which there is limited activity around inputs to the valuation, investments are classified within Level 3 of the valuation hierarchy. These valuations also incorporate pricing metrics derived from the reported performance of the universe of similar investments and from observations and estimates of market data. Because external price information is not available, market-based models are used to value these securities. Key inputs to the model may include market spreads or yield estimates for comparable instruments, performance data (i.e. prepayment rates, default rates, and loss severity), valuation estimates for underlying property collateral, projected cash flows, and other relevant contractual features. Because there is lack of observable pricing, some securities and investment loans that are carried at fair value are classified within Level 3.

For the CDS agreements, all of which are categorized as Level 3 assets and liabilities, there are various valuation methodologies. In each case, the fair value of the instrument underlying the swap is a significant input used to derive the fair value of the swap. When there are broker or dealer prices available for the underlying instruments, the fair value of the swap is derived based on those prices. When the instrument underlying the swap is a market index (i.e. CMBS index), the closing market index price, which can also be expressed as a credit spread, is used to determine the fair value of the swap. In the remaining cases, the fair value of the underlying instrument is principally based on inputs and assumptions not observable in the market (i.e. discount rates, prepayment rates, default rates, and recovery rates).

ML Inputs for Level 3 Assets and Liabilities

The following table presents the valuation techniques and ranges of significant unobservable inputs generally used to determine the fair values of ML's Level 3 assets and liabilities as of December 31, 2013 (in millions, except for input values):

Investment Fair value Principal
valuation
technique
Unobservable
inputs
Range of
input values
Weighted
average 3
Commercial mortgage loans $507 Discounted cash flows Discount rate 4%-13% 12%
    Property capitalization rate 7% 7%
    Net operating income growth rate 3%-5% 4%
   
CDS 1 $ 152 Discounted cash flows Credit spreads 2 2,259 bps-8,870 bps 6,299 bps
    Discount rate 5%-25% 15%
    Constant prepayment rate 0%-17% 3%
    Constant default rate 0%-30% 6%
    Loss severity 40%-95% 54%

1.Swap assets and liabilities are presented net for the purposes of this table. Return to table

2.Implied spread on closing market prices for index positions. Return to table

3.Weighted averages are calculated based on the fair value of the respective instruments. Return to table

The following table presents the valuation techniques and ranges of significant unobservable inputs generally used to determine the fair values of ML's Level 3 assets and liabilities as of December 31, 2012 (in millions, except for input values):

Investment Fair value Principal
valuation
technique
Unobservable
inputs
Range of
input values
Weighted
average 3
Commercial mortgage loans $ 466 Discounted cash flows Discount rate 6%-20% 14%
    Property capitalization rate 6%-10% 7%
    Net operating income growth rate 3%-7% 3%
   
CDS 1 $ 473 Discounted cash flows Credit spreads 2 100 bps- 6,451 bps 4,995 bps
    Discount rate 0%-47% 15%
    Constant prepayment rate 0%-20% 1%
    Constant default rate 0%-34% 7%
    Loss severity 40%-80% 49%

1.Swap assets and liabilities are presented net for the purposes of this table. Return to table

2.Implied spread on closing market prices for index positions. Return to table

3.Weighted averages are calculated based on the fair value of the respective instruments. Return to table

Sensitivity of ML Level 3 Fair Value Measurements to Changes in Unobservable Inputs

The following provides a general description of the impact of a change in an unobservable input on the fair value measurement and the interrelationship of unobservable inputs.

  1. Mortgage Loans

    In general, an increase in isolation in either the discount rate or the property capitalization rate, which is the ratio between the net operating income produced by an asset and its current fair value, would result in a decrease in the fair value measurement; while an increase in net operating income growth rate, in isolation would result in an increase in the fair value measurement. For each of the relationships described above, the inverse would also generally apply.
  2. Derivatives

    For CDS with reference obligations on CMBS, an increase in credit spreads would generally result in a higher fair value measurement for protection buyers and a lower fair value measurement for protection sellers. The inverse would also generally apply to this relationship given a decrease in credit spreads.

    For CDS with reference obligations on RMBS or other ABS assets, changes in the discount rate, constant prepayment rate, constant default rate, and loss severity would have an uncertain effect on the overall fair value measurement. This is because, in general, changes in these inputs could potentially affect other inputs used in determining the fair value measurement. For example, a change in the assumptions used for the constant default rate will generally be accompanied by a corresponding change in the assumption used for the loss severity and an inverse change in the assumption used for constant prepayment rates. Additionally, changes in the fair value measurement based on variations in the inputs used generally cannot be extrapolated because the relationship between each input is not perfectly correlated.

The following tables present the financial instruments recorded in VIEs at fair value as of December 31 by ASC 820 hierarchy (in millions):

  2013
Level 1 1 Level 21 Level 3 Netting 2 Total
fair value
Assets:
Cash equivalents 3 $ 569 $ - $ - $ - $ 569
Short-term investments 530 - - - 530
Commercial mortgage loans - - 507 - 507
Swap contracts - - 345 (187) 158
Non-agency RMBS - 2 6 - 8
Other investments - - 2 - 2
Total assets $ 1,099 $ 2 $ 860 $ (187) $ 1,774
Liabilities:
Beneficial interest in consolidated VIEs $ - $ 116 $ - $ - $ 116
Swap contracts - - 193 (120) 73
Total liabilities $ - $ 116 $ 193 $ (120) $ 189

1.There were no transfers between Level 1 and Level 2 during the year ended December 31, 2013. Return to table

2.Derivative receivables and payables and the related cash collateral received and paid are shown net when a master netting agreement exists. Return to table

3.Cash equivalents consist primarily of money market funds. Return to table

  2012
Level 1 1 Level 21 Level 3 Netting 2 Total
fair value
Assets:
Cash equivalents 3 $ 634 $ - $ - $ - $ 634
Short-term investments 454 236 - - 690
Commercial mortgage loans - - 466 - 466
Swap contracts - - 816 (408) 408
Non-agency RMBS - 2 - - 2
Other investments 4 - 11 55 - 66
Total assets $ 1,088 $ 249 $ 1,337 $ (408) $ 2,266
Liabilities:
Beneficial interest in
consolidated VIEs
$ - $ 803 $ - $ - $ 803
Swap contracts - - 343 (272) 71
Total liabilities $ - $ 803 $ 343 $ (272) $ 874

1.There were no significant transfers between Level 1 and Level 2 during the year ended December 31, 2012. Return to table

2.Derivative receivables and payables and the related cash collateral received and paid are shown netted when a master netting agreement exists. Return to table

3.Cash equivalents consist primarily of money market funds and repurchase agreements. Return to table

4.Investments with a fair value of $1 million that were classified as a Level 2 instrument as of December 31, 2012 were recategorized from "Federal agency and GSE MBS" to "Other investments" to conform to the current year presentation. Return to table

The table below presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of December 31, 2013 (in millions). Unrealized gains and losses related to those assets still held at December 31, 2013 are reported as a component of "Investments held by consolidated variable interest entities, net" in the Combined Statements of Condition.

  2013 Change in
unrealized
gains (losses)
related to
financial
instruments
held at
December 31,
2013
Fair value
December 31,
2012
Purchases,
sales,
issuances,
and
settlements,
net
Net
realized/
unrealized
gains
(losses)
Gross
transfers
in 1, 2
Gross
transfers
out1,2
Fair value
December 31,
2013
Assets:
Commercial mortgage
loans
$ 466 $ (163) $ 204 $ - $ - $ 507 $ 183
Non-agency RMBS - 4 - 2 - 6 -
CDOs - - - - - - (2)
Other investments 55 (73) 18 2 - 2 (2)
Total assets $ 521 $ (232) $ 222 $ 4 $ - $ 515 $ 179
Net swap contracts 3 $ 473 $ (268) $ (53) $ - $ - $ 152 $ (53)

1.The amount of transfers is based on the fair values of the transferred assets at the beginning of the reporting period. Return to table

2.Non-agency RMBS and other investments, with December 31, 2012 fair values of $2 and $2, respectively, were transferred from Level 2 to Level 3 because they are valued at December 31, 2013 based on non-observable inputs (Level 3). These investments were valued in the prior year based on quoted prices for identical or similar assets in non-active markets or model-based techniques for which all significant inputs were observable (Level 2). Return to table

3.Level 3 derivative assets and liabilities are presented net for purposes of this table. Return to table

The following table presents the gross components of purchases, sales, issuances, and settlements, net, shown for the year ended December 31, 2013 (in millions):

  2013
Purchases Sales Issuances Settlements 2 Purchases,
sales,
issuances,
and
settlements,
net
Assets:
Commercial mortgage loans $ - $ (88) - (75) (163)
Non-agency RMBS 4 - - - (4)
CDOs 3 (5) $ - $ 2 $ -
Other investments - (74) - 1 (73)
Total assets $ 7 $ (167) $ - $ (72) $ (232)
Net swap contracts 1 $ - $ (153) $ - $ (115) $ (268)

1.Level 3 swap assets and liabilities are presented net for the purpose of this table. Return to table

2.Includes paydowns. Return to table

The table below presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of December 31, 2012 (in millions). Unrealized gains and losses related to those assets still held at December 31, 2012 are reported as a component of "Investments held by consolidated variable interest entities, net" in the Combined Statements of Condition.

  2012 Change in
unrealized
gains (losses)
related to
financial
instruments
held at
December 31,
2012
Fair value
December 31,
2011
Purchases,
sales, and
settlements,
net
Net
realized/
unrealized
gains
(losses)
Gross
transfers
in 1, 2
Gross
transfers
out1,2
Fair value
December 31,
2012
Assets:
Commercial mortgage
loans
$ 1,397 (1,187) $ 256 $ - $ - $ 466 $ 135
Non-agency RMBS 5,410 (6,347) 937 - - - -
Residential mortgage
loans
378 (374) (4) - - - (1)
CDOs 17,687 $ (23,196) 5,509 - - - (2)
Other investments 108 (65) 2 10 - 55 -
Total assets $ 24,980 $ (31,169) $ 6,700 $ 10 $ - $ 521 $ 132
Net swap contracts 3 $ 839 $ (276) $ (90) $ - $ - $ 473 $ (93)
Liabilities:
Beneficial interest in consolidated VIEs $ 9,845 $ (1,385) $ - $ - $ (8,460) $ - $ -

1.The amount of transfers is based on the fair values of the transferred assets at the beginning of the reporting period. Return to table

2.Beneficial interest in consolidated VIEs, with a December 31, 2011, fair value of $8,460 million, were transferred from Level 3 to Level 2 because they are valued at December 31, 2012, based on model-based techniques for which all significant inputs are observable (Level 2). These investments were valued in the prior year on non-observable model based inputs (Level 3). There were also certain other investments for which valuation inputs became less observable during the year ended December 31, 2012, which resulted in $10 million in transfers from Level 2 to Level 3. There were no other transfers between Level 2 and Level 3 during the current year. Return to table

3.Level 3 derivative assets and liabilities are presented net for purposes of this table. Return to table

The following table presents the gross components of purchases, sales, issuances, and settlements, net, shown for the year ended December 31, 2012 (in millions):

  2012
Purchases Sales Issuances Settlements 2 Purchases,
sales,
issuances,
and
settlements,
net
Assets:
Commercial mortgage loans $ - $ (1,119) $ - $ (68) $ (1,187)
Non-agency RMBS - (6,221) - (126) (6,347)
Residential mortgage loans - (370) - (4) (374)
CDOs - (22,206) - (990) $ (23,196)
Other investments - (66) - 1 (65)
Total assets $ - $ (29,982) $ - $ (1,187) $ (31,169)
Net swap contracts 1 $ - $ (147) $ - $ (129) $ (276)
Liabilities:
Beneficial interest in consolidated VIEs $ 452 $ - $ - $ (1,430) $ (1,385)

1.Level 3 swap assets and liabilities are presented net for the purpose of this table. Return to table

2.Includes paydowns. Return to table

g. Professional Fees

The consolidated VIEs have recorded costs for professional services provided, among others, by several nationally recognized institutions that serve as investment managers, administrators, and custodians for the VIEs' assets. The fees charged by the investment managers, custodians, administrators, auditors, attorneys, and other service providers, are recorded in "Operating Expenses: Other" in the Combined Statements of Income and Comprehensive Income.

(7) Bank Premises, Equipment, and Software

Bank premises and equipment at December 31 were as follows (in millions):

  2013 2012
Bank premises and equipment:
Land and land improvements $ 395 $ 394
Buildings 2,693 2,659
Building machinery and equipment 554 520
Construction in progress 37 27
Furniture and equipment 1,006 1,024
Subtotal 4,685 4,624
Accumulated depreciation (2,032) (1,948)
Bank premises and equipment, net $ 2,653 $ 2,676
Depreciation expense, for the years ended December 31 $ 202 $ 218

Bank premises and equipment at December 31 included the following amounts for capitalized leases (in millions):

  2013 2012
Leased premises and equipment under capital leases $ 27 $ 33
Accumulated depreciation (18) (20)
Leased premises and equipment under capital leases, net $ 9 $ 13
Depreciation expense related to leased premises
and equipment under capital leases
$ 6 $ 7

The Reserve Banks lease space to outside tenants with remaining lease terms ranging from 1 to 11 years. Rental income from such leases was $35 million and $37 million for the years ended December 31, 2013 and 2012, respectively, and is reported as a component of "Non-interest income: Other" in the Combined Statements of Income and Comprehensive Income. Future minimum lease payments that the Reserve Banks will receive under noncancelable lease agreements in existence at December 31, 2013, are as follows (in millions):

2014 $ 33
2015 29
2016 23
2017 18
2018 14
Thereafter 36
Total $ 153

The Reserve Banks had capitalized software assets, net of amortization, of $356 million and $213 million at December 31, 2013 and 2012, respectively. Amortization expense was $73 million and $64 million for the years ended December 31, 2013 and 2012, respectively. Capitalized software assets are reported as a component of "Other assets" in the Combined Statements of Condition and the related amortization is reported as a component of "Operating expenses: Other" in the Combined Statements of Income and Comprehensive Income.

As a result of the Federal Reserve Bank of Cleveland's (FRBC) restructuring plan discussed in Note 12, the FRBC sold its Pittburgh facility during the third quarter of 2013. This sale resulted in a $1.9 million loss, of which $0.2 million is reflected in "Operating expense: Occupancy" and $1.7 million is reflected in "Operating expense: Other" in the Statements of Income and Comprehensive Income.

In 2008 after relocating operations to a new facility, the Federal Reserve Bank of San Francisco (FRBSF) classified its former Seattle branch office building as held for sale, and the building was reported at fair value as a component of "Other Assets" in the Statements of Condition. In April 2012, the FRBSF completed the donation of the building to the United States General Services Administration (GSA). Under the donation agreement, the FRBSF must continue to maintain the building for up to fifteen months from the time GSA takes ownership. The FRBSF recorded an additional impairment of $3.4 million during the year ended December 31, 2012, to reflect the final disposition of this building, which was recorded as a component of "Operating expenses: Other" in the Statements of Income and Comprehensive Income.

(8) Commitments and Contingencies

In conducting its operations, the Reserve Banks enter into contractual commitments, normally with fixed expiration dates or termination provisions, at specific rates and for specific purposes.

At December 31, 2013, the Reserve Banks were obligated under noncancelable leases for premises and equipment with remaining terms ranging from 1 to approximately 9 years. These leases provide for increased lease payments based upon increases in real estate taxes, operating costs, or selected price indexes.

Rental expense under operating leases for certain operating facilities, warehouses, and data processing and office equipment (including taxes, insurance, and maintenance when included in rent), net of sublease rentals, was $17 million and $16 million for the years ended December 31, 2013 and 2012, respectively.

Future minimum lease payments under noncancelable operating leases, net of sublease rentals, with remaining terms of one year or more, at December 31, 2013, are as follows (in millions):

2014 $ 5
2015 5
2016 2
2017 2
2018 2
Thereafter 4
Future minimum rental payments $ 20

At December 31, 2013, the Reserve Banks had unrecorded unconditional purchase commitments and long-term obligations extending through the year 2022 with a remaining fixed commitment of $240 million. Purchases of $37 million and $28 million were made against these commitments during 2013 and 2012, respectively. These commitments are for maintenance of currency processing machines and have variable and/or fixed components. The variable portion of the commitments is for additional services above the fixed contractual service limits. The fixed payments for the next five years under these commitments are as follows (in millions):

2014 $ 23
2015 27
2016 26
2017 26
2018 26

The Reserve Banks are involved in certain legal actions and claims arising in the ordinary course of business. Although it is difficult to predict the ultimate outcome of these actions, in management's opinion, based on discussions with counsel, the legal actions and claims will be resolved without material adverse effect on the financial position or results of operations of the Reserve Banks.

Other Commitments

In support of financial market stability activities, the FRBNY entered into commitments to provide financial assistance to financial institutions. The FRBNY had remaining unfunded contractual commitments related to commercial mortgage loans in ML of $40 and $55 million at December 31, 2013 and 2012, respectively.

(9) Retirement and Thrift Plans
Retirement Plans

The Reserve Banks currently offer three defined benefit retirement plans to its employees, based on length of service and level of compensation. Substantially all of the employees of the Reserve Banks, Board of Governors, and Office of Employee Benefits of the Federal Reserve System participate in the Retirement Plan for Employees of the Federal Reserve System (System Plan). Under the Dodd-Frank Act, newly hired Bureau employees are eligible to participate in the System Plan. In addition, employees at certain compensation levels participate in the Benefit Equalization Retirement Plan (BEP) and certain Reserve Bank officers participate in the Supplemental Retirement Plan for Select Officers of the Federal Reserve Banks (SERP).

The FRBNY, on behalf of the System, recognizes the net asset or net liability and costs associated with the System Plan in its consolidated financial statements. During the years ended December 31, 2013 and 2012, certain costs associated with the System Plan were reimbursed by the Bureau.

Following is a reconciliation of the beginning and ending balances of the System Plan benefit obligation (in millions):

  2013 2012
Estimated actuarial present value of projected benefit obligation at January 1 $ 11,468 $ 10,198
Service cost-benefits earned during the period 407 349
Interest cost on projected benefit obligation 472 473
Actuarial (gain) loss (1,527) 833
Contributions by plan participants 5 4
Special termination benefits 6 9
Benefits paid (355) (334)
Plan amendments - (64)
Estimated actuarial present value of projected benefit obligation at December 31 $ 10,476 $ 11,468

Following is a reconciliation showing the beginning and ending balance of the System Plan assets, the funded status, and the accrued pension benefit costs (in millions):

  2013 2012
Estimated plan assets at January 1 (of which $9,440 and $7,977 is
measured at fair value as of January 1, 2013 and 2012, respectively)
$ 9,566 $ 8,048
Actual return on plan assets 683 1,066
Contributions by the employer 909 782
Contributions by plan participants 5 4
Benefits paid (355) (334)
Estimated plan assets at December 31 (of which $10,687 and $9,440 is measured at fair value as of December 31, 2013 and 2012, respectively) $ 10,808 $ 9,566
Funded status and accrued pension benefit costs $ 332 $ (1,902)
Amounts included in accumulated other comprehensive loss are shown
below:
Prior service cost $ (456) $ (559)
Net actuarial loss (1,928) (3,784)
Total accumulated other comprehensive loss $ (2,384) $ (4,343)

The FRBNY, on behalf of the System, funded $900 million and $780 million during the years ended December 31, 2013 and 2012, respectively. The Bureau is required by the Dodd-Frank Act to fund the System plan for each Bureau employee based on an established formula. During the years ended December 2013 and 2012, the Bureau funded contributions of $9 million and $2 million, respectively.

Accrued pension benefit costs are reported as a component of "Other assets" and "Accrued benefit costs" respectively, in the Combined Statements of Condition.

The accumulated benefit obligation for the System Plan, which differs from the estimated actuarial present value of projected benefit obligation because it is based on current rather than future compensation levels, was $9,308 million and $10,035 million at December 31, 2013 and 2012, respectively.

The weighted-average assumptions used in developing the accumulated pension benefit obligation for the System Plan as of December 31 were as follows:

  2013 2012
Discount rate 4.92% 4.00%
Rate of compensation increase 4.50% 4.50%

Net periodic benefit expenses for the years ended December 31, 2013 and 2012, were actuarially determined using a January 1 measurement date. The weighted-average assumptions used in developing net periodic benefit expenses for the System Plan for the years were as follows:

  2013 2012
Discount rate 4.00% 4.50%
Expected asset return 6.50% 7.25%
Rate of compensation increase 4.50% 5.00%

Beginning in 2013, the System Plan discount rate assumption setting convention changed from rounding the rate to the nearest 25 basis points to using an unrounded rate.

Discount rates reflect yields available on high-quality corporate bonds that would generate the cash flows necessary to pay the System Plan's benefits when due. The expected long-term rate of return on assets is an estimate that is based on a combination of factors, including the System Plan's asset allocation strategy and historical returns; surveys of expected rates of return for other entities' plans and for various asset classes; a projected return for equities and fixed income investments based on real interest rates, inflation expectations, and equity risk premiums; and surveys of expected returns in equity and fixed income markets.

The components of net periodic pension benefit expense for the System Plan for the years ended December 31 are shown below (in millions):

  2013 2012
Service cost-benefits earned during the period $ 407 $ 349
Interest cost on projected benefit obligation 472 473
Amortization of prior service cost 103 116
Amortization of net loss 284 292
Expected return on plan assets (638) (599)
Net periodic pension benefit expense 628 631
Special termination benefits 6 9
Bureau of Consumer Financial Protection contributions (9) (2)
Total periodic pension benefit expense $ 625 $ 638

Estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic pension benefit expense in 2014 are shown below:

Prior service cost $ 100
Net actuarial loss 87
Total $ 187

Following is a summary of expected benefit payments, excluding enhanced retirement benefits (in millions):

2014 $ 406
2015 429
2016 455
2017 483
2018 512
2018-2023 2,982
Total $ 5,267

The System's Committee on Investment Performance (CIP) is responsible for establishing investment policies, selecting investment managers, and monitoring the investment managers' compliance with its policies. At December 31, 2013, the System Plan's assets were held in nine investment vehicles: three actively-managed long-duration fixed income portfolios, a passively-managed long-duration fixed income portfolio, an indexed U.S. equity fund, an indexed non-U.S. developed-markets equity fund, an indexed emerging-markets equity fund, a private equity limited partnership, and a money market fund.

The diversification of the Plan's investments is designed to limit concentration of risk and the risk of loss related to an individual asset class. The three actively-managed long-duration fixed income portfolios are separate accounts benchmarked to a custom benchmark of 55 percent Barclays Long Credit Index and 45 percent Citigroup 15+ years U.S. Treasury STRIPS Index. This custom benchmark was selected as a proxy to match the liabilities of the Plan and the guidelines for these portfolios are designed to limit portfolio deviations from the benchmark. The passively-managed long-duration fixed-income portfolio is invested in two commingled funds and is benchmarked to 55 percent Barclays Long Credit Index and 45 percent Barclays 20+ STRIPS Index. The indexed U.S. equity fund is intended to track the overall U.S. equity market across market capitalizations and is benchmarked to the Dow Jones U.S. Total Stock Market Index. The indexed non-U.S. developed-markets equity fund is intended to track the Morgan Stanley Capital International (MSCI) World ex-US Investible Markets Index (IMI), which includes stocks from 23 markets deemed by MSCI to be "developed markets." The indexed emerging-markets equity fund is intended to track the MSCI Emerging Markets IMI Index, which includes stocks from 21 markets deemed by MSCI to be "emerging markets." The three indexed equity funds include stocks from across the market capitalization spectrum (i.e., large-, mid- and small-cap stocks). The private equity limited partnership invests globally across various private equity strategies. Finally, the money market fund, which invests in short term Treasury and Agency debt and repurchase agreements backed by Treasury and Agency debt, is the repository for cash balances and adheres to a constant dollar methodology.

Permitted and prohibited investments, including the use of derivatives, are defined in either the trust agreement (for the passively-managed long-duration fixed income portfolio) or the investment guidelines (for the remaining investments). The CIP reviews the trust agreement and approves all investment guidelines as part of the selection of each investment to ensure that the trust agreement is consistent with the CIP's investment objectives for the System Plan's assets.

The System Plan's policy weight and actual asset allocations at December 31, by asset category, are as follows:

  Policy weight Actual asset allocations
2013 2012
U.S. equities 30.0% 29.7% 34.9%
International equities 18.0% 18.3% 13.6%
Emerging market equities 2.0% 1.9% 0.0%
Fixed income 50.0% 49.4% 50.4%
Cash and cash equivalents 0.0% 0.7% 1.1%
Total 100.0% 100.0% 100.0%

In June 2013, the Committee on Investment Performance (the "Committee") approved a change in the allocation and benchmarks for the Plan's public equity portfolio. The new benchmark is the MSCI All Country World Investible Markets Index. This benchmark change will reduce the Plan's holdings in U.S. equities, increase the Plan's holdings of developed markets international equities, and add an investment in emerging market equities when it is fully implemented in mid-2014. The Committee approved a phased six-month implementation period for these changes, commencing in September 2013 for developed market equities and November 2013 for emerging market equities. The policy weight percentages shown above reflect the target allocation as of December 2013 based on this implementation strategy.

Employer contributions to the System Plan may be determined using different assumptions than those required for financial reporting. The System Plan's anticipated funding level for 2014 is $480 million. In 2014, the Bank plans to make monthly contributions of $40 million and will reevaluate the monthly contributions upon completion of the 2014 actuarial valuation. The Bank's projected benefit obligation, funded status, and net pension expenses for the BEP and the SERP at December 31, 2013 and 2012, and for the years then ended, were not material.

Determination of Fair Value

The System Plan's publicly available investments are valued on the basis of the last available bid prices or current market quotations provided by dealers, or pricing services. To determine the value of a particular investment, pricing services may use information on transactions in such investments; quotations from dealers; pricing metrics; market transactions in comparable investments; relationships observed in the market between investments; and calculated yield measures based on valuation methodologies commonly employed in the market for such investments.

Because of the uncertainty inherent in determining the fair value of investments that do not have a readily available fair value, the fair value of these investments may differ significantly from the values that would have been reported if a readily available fair value had existed for these investments and may differ materially from the values that may ultimately be realized.

The following tables present the financial instruments recorded at fair value as of December 31 by ASC 820 hierarchy (in millions):

Description 2013
Level 1 1 Level 21 Level 3 Total
Short-term investments 2 $ 14 $ 126 $ - $ 140
Treasury and Federal agency securities 38 1,565 - 1,603
Corporate bonds - 1,773 - 1,773
Other fixed income securities - 362 - 362
Commingled funds - 6,795 - 6,795
Private Equity - - 14 14
Total $ 52 $ 10,621 $ 14 $ 10,687

1.There were no transfers between Level 1 and Level 2 during the year. Return to table

2.Short-term investments includes cash equivalents of $78 million. Return to table

Description 2012
Level 1 1 Level 21 Level 3 Total
Short-term investments $ 23 $ 25 $ - $ 48
Treasury and Federal agency securities 141 1,746 - 1,887
Corporate bonds - 1,947 - 1,947
Other fixed income securities - 352 - 352
Commingled funds - 5,206 - 5,206
Total $ 164 $ 9,276 $ - $ 9,440

1.U.S. Treasury STRIPs with a fair value of $1,737 million were transferred from Level 1 to Level 2 because they were valued based on quoted prices in non-active markets (Level 2). There were no other transfers between Level 1 and Level 2 during the year. Return to table

The System Plan enters into futures contracts, traded on regulated exchanges, to manage certain risks and to maintain appropriate market exposure in meeting the investment objectives of the System Plan. The System Plan bears the market risk that arises from any unfavorable changes in the value of the securities or indexes underlying these futures contracts. The use of futures contracts involves, to varying degrees, elements of market risk in excess of the amount recorded in the Combined Statements of Condition. The guidelines established by the CIP further reduce risk by limiting the net futures positions, for most fund managers, to 15 percent of the market value of the advisor's portfolio.

At December 31, 2013 and 2012, a portion of short-term investments was available for futures trading. There were $8 million and $7 million of Treasury securities pledged as collateral for the years ended December 31, 2013 and 2012, respectively.

Thrift Plan

Employees of the Reserve Banks participate in the defined contribution Thrift Plan for Employees of the Federal Reserve System (Thrift Plan). The Reserve Banks match 100 percent of the first six percent of employee contributions from the date of hire and provides an automatic employer contribution of one percent of eligible pay. The Reserve Banks' Thrift Plan contributions totaled $108 million and $102 million for the years ended December 31, 2013 and 2012, respectively, and are reported as a component of "Operating expenses: Salaries and benefits" in the Combined Statements of Income and Comprehensive Income.

(10) Postretirement Benefits Other Than Retirement Plans and Postemployment Benefits
Postretirement Benefits Other Than Retirement Plans

In addition to the Reserve Banks' retirement plans, employees who have met certain age and length-of-service requirements are eligible for both medical and life insurance benefits during retirement.

The Reserve Banks fund benefits payable under the medical and life insurance plans as due and, accordingly, has no plan assets.

Following is a reconciliation of the beginning and ending balances of the benefit obligation (in millions):

  2013 2012
Accumulated postretirement benefit obligation at January 1 $ 1,755 $ 1,506
Service cost benefits earned during the period 75 59
Interest cost on accumulated benefit obligation 67 69
Net actuarial loss (gain) (290) 181
Curtailment loss (gain) - -
Special termination benefits loss 1 1
Contributions by plan participants 24 22
Benefits paid (93) (87)
Medicare Part D subsidies 5 5
Plan amendments (6) (1)
Accumulated postretirement benefit obligation at December 31 $ 1,538 $ 1,755

At December 31, 2013 and 2012, the weighted-average discount rate assumptions used in developing the postretirement benefit obligation were 4.79 percent and 3.75 percent, respectively.

Discount rates reflect yields available on high-quality corporate bonds that would generate the cash flows necessary to pay the plan's benefits when due. Beginning in 2013, the System Plan discount rate assumption setting convention changed from rounding the rate to the nearest 25 basis points to using an unrounded rate.

Following is a reconciliation of the beginning and ending balance of the plan assets, the unfunded postretirement benefit obligation, and the accrued postretirement benefit costs (in millions):

  2013 2012
Fair value of plan assets at January 1 $ - $ -
Contributions by the employer 64 60
Contributions by plan participants 24 22
Benefits paid (93) (87)
Medicare Part D subsidies 5 5
Fair value of plan assets at December 31 $ - $ -
Unfunded obligation and accrued postretirement benefit cost $ 1,538 $ 1,755
Amounts included in accumulated other comprehensive loss are shown below:
Prior service cost $ 29 $ 36
Net actuarial loss (201) (538)
Total accumulated other comprehensive loss $ (172) $ (502)

Accrued postretirement benefit costs are reported as a component of "Accrued benefit costs" in the Combined Statements of Condition.

For measurement purposes, the assumed health-care cost trend rates at December 31 are as follows:

  2013 2012
Health-care cost trend rate assumed for next year 7.00% 7.00%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) 5.00% 5.00%
Year that the rate reaches the ultimate trend rate 2019 2018

Assumed health-care cost trend rates have a significant effect on the amounts reported for health-care plans. A one percentage point change in assumed health-care cost trend rates would have the following effects for the year ended December 31, 2013 (in millions):

  One percentage
point increase
One percentage
point decrease
Effect on aggregate of service and interest cost components of net periodic postretirement benefit costs $ 25 $ (20)
Effect on accumulated postretirement benefit obligation 184 (157)

The following is a summary of the components of net periodic postretirement benefit expense for the years ended December 31 (in millions):

  2013 2012
Service cost-benefits earned during the period $ 75 $ 59
Interest cost on accumulated benefit obligation 67 69
Amortization of prior service cost (11) (10)
Amortization of net actuarial loss 46 31
Total periodic expense $ 177 $ 149
Curtailment (gain) - -
Special termination benefits loss 1 1
Net periodic postretirement benefit expense $ 178 $ 150

Estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic postretirement benefit expense in 2014 are shown below:

Prior service cost $ (10)
Net actuarial loss 9
Total $ (1)

Net postretirement benefit costs are actuarially determined using a January 1 measurement date. At January 1, 2013 and 2012, the weighted-average discount rate assumptions used to determine net periodic postretirement benefit costs were 3.75 percent and 4.5 percent, respectively.

Net periodic postretirement benefit expense is reported as a component of "Operating expenses: Salaries and benefits" in the Combined Statements of Income and Comprehensive Income.

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 established a prescription drug benefit under Medicare (Medicare Part D) and a federal subsidy to sponsors of retiree health-care benefit plans that provide benefits that are at least actuarially equivalent to Medicare Part D. The benefits provided under the Reserve Banks' plan to certain participants are at least actuarially equivalent to the Medicare Part D prescription drug benefit. The estimated effects of the subsidy are reflected in actuarial gainin the accumulated postretirement benefit obligation and net periodic postretirement benefit expense.

Federal Medicare Part D subsidy receipts were $4.0 million and $4.3 million in the years ended December 31, 2013 and 2012, respectively. Expected receipts in 2014, related to benefits paid in the years ended December 31, 2013 and 2012, are $3.5 million.

Following is a summary of expected postretirement benefit payments (in millions):

  Without subsidy With subsidy
2014 $ 77 $ 72
2015 $ 81 $ 75
2016 $ 85 $ 79
2017 $ 89 $ 83
2018 $ 94 $ 87
2019-2023 $ 544 $ 498
Total $ 970 $ 894
Postemployment Benefits

The Reserve Banks offer benefits to former or inactive employees. Postemployment benefit costs are actuarially determined using a January 1 measurement date and include the cost of providing disability; medical, dental, and vision insurance; and survivor income benefits. The accrued postemployment benefit costs recognized by the Reserve Banks at December 31, 2013 and 2012, were $148 million and $164 million, respectively. This cost is included as a component of "Accrued benefit costs" in the Combined Statements of Condition. Net periodic postemployment benefit expense included in 2013 and 2012 operating expenses were $7 million and $25 million, respectively, and are recorded as a component of "Operating expenses: Salaries and benefits" in the Combined Statements of Income and Comprehensive Income.

(11) Accumulated Other Comprehensive Income and Other Comprehensive Income

Following is a reconciliation of beginning and ending balances of accumulated other comprehensive loss as of December 31 (in millions):

  2013 2012
Amount related
to defined
benefit
retirement plan
Amount related to
postretirement
benefits other
than retirement
plans
Total
accumulated
other
comprehensive
loss
Amount related
to defined
benefit
retirement plan
Amount related to
postretirement
benefits other
than retirement
plans
Total
accumulated
other
comprehensive
loss
Balance at January 1 $ (4,343) $ (502) $ (4,845) $ (4,449) $ (343) $ (4,792)
Change in funded status
of benefit plans:
Prior service costs
arising during
the year
- 5 5 64 1 65
Amortization of prior
service cost
103 1 (11) 2 92 1161 (10)2 106
Change in prior
service costs
related to
benefit plans
103 (6) 97 180 (9) 171
Net actuarial
gain (loss) arising
during the year
1,572 290 1,862 (366) (181) (547)
Amortization of net
actuarial loss
2841 462 330 2921 312 323
Change in actuarial
gain (losses) related to
benefit plans
1,856 336 2,192 (74) (150) (224)
Change in funded status
of benefit plans -
other comprehensive
income (loss)
1,959 330 2,289 106 (159) (53)
Balance at December 31 $ (2,384) $ (172) $ (2,556) $ (4,343) $ (502) $ (4,845)

1.Reclassification is reported as a component of "Operating Expenses: Net periodic pension expense" in the Combined Statements of Income and Comprehensive Income. Return to table

2.Reclassification is reported as a component of "Operating Expenses: Salaries and benefits" in the Combined Statements of Income and Comprehensive Income. Return to table

Additional detail regarding the classification of accumulated other comprehensive loss is included in Note 9 and 10.

(12) Business Restructuring Charges

The Reserve Banks had no material business restructuring charges in 2013 or 2012.

In 2011, the U.S. Treasury announced a restructuring initiative to consolidate the Treasury Retail Securities operations. As a result of this initiative, Treasury Retail Securities operations performed by the FRBC were consolidated into the Federal Reserve Bank of Minneapolis. Additional announcements in 2011 included the consolidation of paper check processing, performed by the FRBC, into the Federal Reserve Bank of Atlanta (FRBA).

In years prior to 2011, the Reserve Banks announced the acceleration of their check restructuring initiatives to align the check processing infrastructure and operations with declining check processing volumes. The new infrastructure consolidated paper and electronic check processing at the FRBA.

Restructuring costs associated with certain Bank assets, including software, buildings, leasehold improvements, furniture, and equipment, are discussed in Note 7.

(13) Distribution of Comprehensive Income

In accordance with Board policy, Reserve Banks remit excess earnings, after providing for dividends and the amount necessary to equate surplus with capital paid-in, to the U.S. Treasury as earnings remittances to Treasury. The following table presents the distribution of the Reserve Banks' comprehensive income in accordance with the Board's policy for the years ended December 31 (in millions):

  2013 2012
Dividends on capital stock $ 1,650 $ 1,637
Transfer to surplus - amount required to equate surplus with capital paid-in 147 461
Earnings on remittances to Treasury 79,633 88,418
Total distribution $ 81,430 $ 90,516

(14) Subsequent Events

There were no subsequent events that require adjustments to or disclosures in the combined financial statements as of December 31, 2013. Subsequent events were evaluated through March 14, 2014, which is the date that the combined financial statements were available to be issued.

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Office of Inspector General Activities

The Office of Inspector General (OIG) for the Federal Reserve Board, which is also the OIG for the Consumer Financial Protection Bureau (CFPB), operates in accordance with the Inspector General Act of 1978, as amended. The OIG conducts activities and makes recommendations to promote economy and efficiency; enhance policies and procedures; and prevent and detect waste, fraud, and abuse in Board programs and operations, including functions that the Board has delegated to the Federal Reserve Banks. Accordingly, the OIG plans and conducts audits, inspections, evaluations, investigations, and other reviews relating to Board and Board-delegated programs and operations. It also retains an independent public accounting firm to annually audit the Board's and the Federal Financial Institutions Examination Council's financial statements. In addition, the OIG keeps the Congress and the Board of Governors fully informed about serious abuses and deficiencies.

During 2013, the OIG issued 25 audit, inspection, and evaluation reports (table 1) and conducted a number of follow-up reviews to evaluate action taken on prior recommendations. Due to the sensitive nature of some of the material, certain reports were only issued internally to the Board, as indicated. OIG investigative work resulted in 3 arrests, 20 indictments, 11 convictions, and 2 suspensions/terminations, as well as $438,286,403 in criminal fines and restitution. Eighteen investigations were opened and six investigations were closed during the year. The OIG also issued two Semiannual Reports to Congress and performed approximately 50 reviews of legislation and regulations related to the operations of the Board, the CFPB, and/or the OIG.

For more information and to obtain copies of OIG reports, visit the OIG website at www.federalreserve.gov/oig/. Specific details about the OIG's body of work also may be found in the OIG's Work Plan and Semiannual Report to Congress.

Table 1. OIG audit, inspection, and evaluation reports issued in 2013
Report title Month issued
No Changes Recommended to Freedom of Information Act Exemption Included in the Amended Federal Reserve Act January
Federal Financial Institutions Examination Council Financial Statements as of and for the Years Ended December 31, 2012 and 2011, and Independent Auditors' Reports March
Board of Governors of the Federal Reserve System Financial Statements as of and for the Years Ended December 31, 2012 and 2011, and Independent Auditors' Reports March
Review of the Failure of Bank of Whitman March
Status of the Transfer of Office of Thrift Supervision Functions March
Security Control Review of the Consumer Financial Protection Bureau's Consumer Response System (internal report) March
CFPB Contract Solicitation and Selection Processes Facilitate FAR Compliance, but Opportunities Exist to Strengthen Internal Controls March
Audit Observations on the Board's Planning and Contracting Process for the Martin Building Construction, Renovation, and Relocation of Staff March
Controls over the Board's Purchase Card Program Can Be Strengthened March
Board Should Enhance Compliance with Small Entity Compliance Guide Requirements Contained in the Small Business Regulatory Enforcement Fairness Act of 1996 July
Security Control Review of the Board's National Examination Database System (internal report) July
Security Control Review of a Third-party Commercial Data Exchange Service Used by the Board's Division of Banking Supervision and Regulation (internal report) August
Opportunities Exist to Enhance the CFPB's Policies, Procedures, and Monitoring Activities for Conferences August
Board Should Strengthen Controls over the Handling of the Federal Open Market Committee Meeting Minutes August
The Board Can Benefit from Implementing an Agency-Wide Process for Maintaining and Monitoring Administrative Internal Control September
Status of the Transfer of Office of Thrift Supervision Functions September
Opportunities Exist for the CFPB to Strengthen Compliance with Its Purchase Card Policies and Procedures September
The Board Should Improve Procedures for Preparing for and Responding to Emergency Events September
The CFPB Should Strengthen Internal Controls for Its Government Travel Card Program to Ensure Program Integrity September
Observations and Matters for Consideration Regarding the CFPB's Annual Budget Process October
Response to a Congressional Request Regarding the CFPB's Compliance with Federal Requirements for Addressing Climate Change October
Response to a Congressional Request Regarding the Board's Compliance with Federal Requirements for Addressing Climate Change October
2013 Audit of the Board's Information Security Program November
2013 Audit of the CFPB's Information Security Program December
The CFPB Should Reassess Its Approach to Integrating Enforcement Attorneys Into Examinations and Enhance Associated Safeguards December

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Government Accountability Office Reviews

The Federal Banking Agency Audit Act (Pub. L. No. 95-320) authorizes the Government Accountability Office (GAO) to audit certain aspects of Federal Reserve System operations. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) directs GAO to conduct additional audits with respect to these operations. In 2013, the GAO completed 16 projects that involved the Federal Reserve (table 1). Twenty-one projects were ongoing as of December 31, 2013 (table 2). Some of the major projects that GAO has undertaken include parts II and III of a study of the Independent Foreclosure Review process; a review of the process of enacting regulations pursuant to Dodd-Frank Act requirements; a report on the diversity of employees at economic institutions as well as at federal financial regulators; and a review of virtual currencies.

Table 1. Reports completed during 2013
Report title Report number Month issued (2013)
State Small Business Credit Initiative: Opportunities Exist to Enhance Performance Measurement and Evaluation GAO-14-97 December
Small Business Lending Fund: Treasury Should Ensure Evaluation Includes Methods to Isolate Program Impact GAO-14-135 December
Dodd-Frank Regulations: Agencies Conducted Regulatory Analyses and Coordinated but Could Benefit from Additional Guidance on Major Rules GAO-14-67 December
Government Support for Bank Holding Companies: Statutory Changes to Limit Future Support Are Not Yet Fully Implemented GAO-14-18 November
U.S. Currency: Coin Inventory Management Needs Better Performance Information GAO-14-110 November
Troubled Asset Relief Program: Status of Treasury's Investments in General Motors and Ally Financial GAO-14-6 October
Financial Company Bankruptcies: Need to Further Consider Proposals' Impact on Systemic Risk GAO-13-622 July
Federal Housing Administration: Improving Disposition and Oversight Practices May Increase Returns on Foreclosed Property Sales GAO-13-542 June
Diversity Management: Trends and Practices in the Financial Services Industry and Agencies after the Recent Financial Crisis GAO-13-238 May
Federal Reserve Banks: Areas for Improvement in Information System Controls GAO-13-419R May
Automated Teller Machines: Some Consumer Fees Have Increased GAO-13-266 April
Foreclosure Review: Lessons Learned Could Enhance Continuing Reviews and Activities under Amended Consent Orders GAO-13-277 March
Iran: U.S. and International Sanctions Have Adversely Affected the Iranian Economy GAO-13-326 February
Financial Regulatory Reform: Financial Crises Losses and Potential Impacts of the Dodd-Frank Act GAO-13-180 January
Financial Regulatory Reform: Regulators Have Faced Challenges Finalizing Key Reforms and Unaddressed Areas Pose Potential Risks GAO-13-195 January
Financial Institutions: Causes and Consequences of Recent Bank Failures GAO-13-71 January
Table 2. Projects active at year-end 2013
Subject of project Month initiated Status
College credit, debit and prepaid card agreement November 2012 Closed 02/13/2014
Annual audit of Treasury financial statements February 2013 Open
International financial regulatory reform March 2013 Open
Data breach response policies and procedures March 2013 Closed 01/08/2014
College credit cards April 2013 Closed 02/25/2014
TARP: Making Homes Affordable Programs April 2013 Closed 02/06/2014
Regulatory actions and banking-related financial crises lessons learned May 2013 Open
Impact of Servicemembers Civil Service Relief Act (SCRA) protections May 2013 Closed 01/28/2014
Costs and revenues of Puerto Rico statehood May 2013 Open
Foreclosure review and amended consent orders May 2013 Open
Treasury floating rate notes June 2013 Open
CFPB's data collection and information security August 2013 Open
Small Business Administration's Office of Advocacy August 2013 Open
Potential reforms of single-family housing finance August 2013 Open
Financial Stability Oversight Council (FSOC) designations November 2013 Open
Student loan repayment programs November 2013 Open
Student loan debt of older Americans November 2013 Open
Capital reform requirements December 2013 Open
Virtual currency December 2013 Open
Perceived government support for the largest bank holding companies December 2013 Open
Effect of low interest rates on seniors December 2013 Open

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Last update: July 2, 2014

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