Annual Report Budget Review 2013
This publication provides current budgeted expenses of the Federal Reserve Board of Governors and the Federal Reserve Banks, as well as the previous year's income and expenses for both the Board and the Banks. It also describes their budgeting processes and shows trends in their expenses and employment. For a comprehensive report on the Board and Reserve Banks' operations and activities during the year, see the Annual Report of the Board of Governors of the Federal Reserve System at www.federalreserve.gov/publications/annual-report/default.htm.
Overview of the Federal Reserve System
The Federal Reserve System--the nation's central bank--consists of the Board of Governors in Washington, D.C., the 12 Federal Reserve Banks and their 24 branches distributed throughout the nation, the Federal Open Market Committee (FOMC), and three advisory councils--the Federal Advisory Council, the Community Depository Institutions Advisory Council, and the Model Validation Council.1 The System was created in 1913 by the Congress to establish a safe and flexible monetary and banking system. Over the years, the Congress has adjusted the Federal Reserve's authority and responsibility to help achieve broad national economic and financial objectives.
As the nation's central bank, the Federal Reserve System performs five general functions:
- conducting the nation's monetary policy by influencing the money and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates
- helping maintain the stability of the financial system and containing systemic risks that may arise in financial markets
- supervising and regulating a variety of financial institutions and activities to ensure the safety and soundness of the nation's banking and financial systems and to protect certain rights of consumers
- providing certain financial services to depository institutions, the U.S. government, and foreign official institutions
- promoting consumer protection, fair lending, and community development
Summary of 2012 Income and Expenditures
In carrying out its responsibilities in 2012, the Federal Reserve System incurred $3.7 billion in net expenses. Total spending of $4.7 billion was offset by $1.0 billion in revenue from priced services, claims for reimbursement, and other income. Total 2012 expenses were $29.9 million, or 0.6 percent, less than the amount budgeted for 2012 (table 1).
Table 1. Total expenses of the Federal Reserve System, 2012Millions of dollars, except as noted
|Reserve Banks 1||3,446.1||3,462.1||16.0||0.5|
|Total System expenses||4,725.5||4,695.6||-29.9||-0.6|
Note: Excludes capital outlays as well as assessments for the Consumer Financial Protection Bureau and the Office of Financial Research. Components may not sum to totals and may not yield percentages shown because of rounding.
1. The final 2012 budget of $3,441.3 million was approved by the Board in December 2011. In May 2012, the Board approved an additional $4.8 million for employee equity adjustments, which is included in the 2012 budget number above. Return to table
2. Includes expenses of the Office of Inspector General. Return to table
The Reserve Banks' current income in 2012 was $81.6 billion.2 The major sources of income were interest earnings from the portfolio of U.S. government securities ($49.0 billion) and federal agency mortgage-backed securities (MBS) ($31.4 billion) in the System Open Market Account. Earnings in excess of expenses, dividends, and surplus are transferred to the U.S. Treasury--in 2012, a total of $88.4 billion. (These net earnings are treated as receipts in the U.S. budget accounting system when received and as anticipated earnings projected by the Office of Management and Budget in the Budget of the United States Government.)
In this Section:
The major operations of the Federal Reserve System can be described using the following broad categories: monetary and economic policy, supervision of financial institutions, services to financial institutions and the public, and services to the U.S. Treasury and other government agencies.
Monetary and Economic Policy
The monetary and economic policy operational area encompasses Federal Reserve System actions to influence the availability and cost of money and credit in the pursuit of the Federal Reserve's statutory objectives of maximum employment, stable prices, and moderate long-term interest rates. It also encompasses broad activities undertaken by the Federal Reserve System to monitor the stability of financial institutions and financial markets and to develop appropriate policy responses to structural and emerging risks.
In developing its monetary policy, the Federal Reserve collects vast amounts of banking, financial, and economic data from the public. This information generally flows through the Reserve Banks to the Board, where the data are compiled and made available to the public. The research staffs at the Board and the Banks use the data, along with information collected by other public and private institutions, to assess the state of the economy and the relationships between the financial markets and economic activity. Staff members provide background information to the Board of Governors and the FOMC, including detailed economic and financial analyses and projections for the domestic and international economies. These analyses and projections are used in determining the appropriate stance of monetary policy, including the path for the federal funds rate and the size and composition of the Federal Reserve balance sheet. Staff members also conduct longer-run economic studies on regional, national, and international issues in order to improve understanding of a range of questions of interest to policymakers and economists.
To help the Federal Reserve carry out its responsibilities for promoting the stability of the financial system, the Board's Office of Financial Stability Policy and Research coordinates with other groups at the Board and at the Reserve Banks to monitor financial institutions, markets, and infrastructure; assess potential risks; and develop appropriate policy responses. It also helps develop and evaluate alternative approaches to implement macroprudential regulations and works with bank supervisory committees on a variety of issues. Staff members conduct research in banking, finance, and macroeconomics to foster a broader understanding of financial stability issues. In addition, the office coordinates the Board's interagency and international work on financial stability, including the Board's responsibilities as a member of the Financial Stability Oversight Council and the Financial Stability Board.
Details on the Federal Reserve's monetary and economic policy activities and decisionmaking are published in the Board's Annual Report and its semiannual Monetary Policy Reports to the Congress as well as in FOMC meeting statements and minutes. These publications are available on the Board's website at www.federalreserve.gov.
Supervision and Regulation of Financial Institutions
The Federal Reserve is the federal supervisor and regulator of all U.S. BHCs, including financial holding companies, and state-chartered commercial banks that are members of the Federal Reserve System. It also has responsibility for supervising the operations of all Edge Act and agreement corporations, the international operations of state member banks and U.S. BHCs, and the U.S. operations of foreign banking organizations. Furthermore, through the Dodd-Frank Act, the Federal Reserve has been assigned responsibilities for nonbank financial firms and financial market utilities (FMUs) designated by the Financial Stability Oversight Council as systemically important as well as savings and loan holding companies (SLHCs).3 In overseeing the institutions under the Federal Reserve's authority, the Federal Reserve seeks primarily to promote safety and soundness, including compliance with laws and regulations.
The Reserve Banks conduct on-site examinations and inspections of state member banks, BHCs, SLHCs, and branches and agencies of foreign banking organizations; review applications for mergers, acquisitions, and changes in control from banks and BHCs; and take formal supervisory actions. In 2012, the Federal Reserve conducted 487 examinations of state member banks (some of them jointly with state agencies); 691 inspections of large BHCs; 3,150 inspections of small, noncomplex BHCs; and 301 inspections of SLHCs. It also acted on 1,029 proposals involving BHC and SLHC formations and acquisitions, bank mergers, and other transactions. In coordination with appropriate state regulatory authorities, the Federal Reserve conducted or participated in 447 examinations of branches and agencies of foreign banking organizations.
The Board also enforces the compliance of state member banks and certain foreign banking organizations with the federal laws that protect consumers who use credit and deposit accounts. During the reporting period from July 1, 2011, to June 30, 2012, the System conducted 282 consumer compliance examinations of state member banks and 11 examinations of foreign banking organizations.4 During this period, the System also conducted 256 examinations of banks for their compliance with the Community Reinvestment Act.
Beyond these activities, the Federal Reserve System maintains continuous oversight of the banking industry as part of its effort to ensure the overall safety and soundness of the financial system.
Services to Financial Institutions and the Public
The Federal Reserve System plays a central role in the nation's payment systems by ensuring that enough currency and coin are in circulation to meet the public's demand. As the issuing authority for Federal Reserve notes, the Board orders new currency from the Treasury's Bureau of Engraving and Printing and issues that currency to the Reserve Banks. The Reserve Banks distribute currency and coin to the public through depository institutions to meet demand. The Reserve Banks process currency that they receive from depository institutions and remove poor quality and suspect counterfeit notes. In 2012, the Reserve Banks distributed approximately $747.2 billion in currency and $6.3 billion in coin to depository institutions. The Reserve Banks also received approximately $654.5 billion in currency and $5.7 billion in coin from depository institutions, and they destroyed $105.5 billion in unfit currency.
The Reserve Banks also play a central role in the nation's payment systems by collecting checks and providing a variety of electronic services for depository institutions. In 2012, the Banks collected 6.6 billion commercial checks, with a total value of $8.1 trillion. The Banks' automated clearinghouse (ACH) service allows depository institutions to send or receive credit transfers, such as direct payroll payments and corporate payments to vendors, and debit payment transactions, such as payments of insurance premiums, mortgages, and other bills from consumer accounts. In 2012, the Reserve Banks processed approximately 12 billion ACH transactions, valued at $23.9 trillion. Approximately 11.5 percent of the transactions were for the federal government; the rest were for commercial establishments.
The Reserve Banks' Fedwire Funds Service allows participants to use their accounts at the Reserve Banks to transfer funds to other participants. In 2012, the Reserve Banks processed approximately 132 million Fedwire funds transfers, valued at $599.2 trillion.
The Reserve Banks' National Settlement Service allows participants in private clearing arrangements to settle transactions through their Federal Reserve accounts. In 2012, 16 local and national private arrangements used the National Settlement Service. The Reserve Banks processed 662,912 settlement entries for these arrangements, with a debit value of $16.1 trillion in 2012.
The Reserve Banks' Fedwire Securities Service provides securities services to participants, including the settlement of book-entry transfers of securities issued by the Treasury, federal government agencies, government-sponsored enterprises, and certain international organizations. In 2012, participants originated 18.7 million transfers, valued at more than $288.4 trillion.
Services to the U.S. Treasury and Other Government Agencies
As fiscal agents and depositories for the federal government, the Reserve Banks auction Treasury securities; process electronic and check payments for the Treasury; collect funds owed to the federal government; maintain the Treasury's bank account; and develop, operate, and maintain a number of automated systems to support the Treasury's mission. The Reserve Banks also provide certain fiscal agency and depository services to other entities. The Treasury and other entities fully reimburse the Reserve Banks for the costs of providing fiscal agency and depository services.
The Reserve Banks auction, issue, maintain, and redeem securities, as well as operate the automated systems supporting paper U.S. savings bonds and book-entry marketable Treasury securities. In 2012, the Reserve Banks conducted 264 Treasury securities auctions and processed nearly 11.6 million Treasury securities transfers. The Reserve Banks continued to support the Treasury's efforts to improve the quality and efficiency of its securities services.
The Reserve Banks collect and disburse funds on behalf of the federal government. In 2012, the Reserve Banks processed 1.4 billion government ACH payments and 121 million Treasury check payments. The Reserve Banks continued to support the Treasury's ongoing effort to convert paper checks to electronic payments through the Go Direct initiative and operated Pay.gov , an application supporting the Treasury's program that allows the public to use the Internet to authorize and initiate payments to federal agencies.
The Treasury maintains operating cash accounts at the Reserve Banks. In 2012, the Reserve Banks continued to support the Treasury's effort to modernize its financial management processes, with a focus on improving centralized government accounting and reporting functions. The Reserve Banks also managed several new and ongoing software development efforts in support of the Treasury's objectives.
When permitted by federal statute or when required by the Secretary of the Treasury, the Reserve Banks provide fiscal agency and depository services to other domestic and international entities. Book-entry securities issuance and maintenance activities account for a significant amount of the work performed for these entities.
1. The Model Validation Council was established in 2012 by the Board of Governors to provide expert and independent advice on its process to rigorously assess the models used in stress tests of banking institutions; for more information on the advisory councils, see www.federalreserve.gov/aboutthefed/advisorydefault.htm. Return to text
2. For a list of items included in the Reserve Banks' current income, refer to Table 10, Income and expenses of the Federal Reserve Banks, in the "Statistical Tables" section of the 2012 Annual Report of the Board of Governors of the Federal Reserve System, available at www.federalreserve.gov/publications/annual-report/default.htm. More detailed information on System income and the distribution of income can also be found in the Annual Report. Return to text
3. Under the Dodd-Frank Act, supervisory and regulatory authority for SLHCs was transferred from the Office of Thrift Supervision to the Board of Governors on July 21, 2011. For a fuller discussion of entities supervised and regulated by the Federal Reserve, see the "Supervision and Regulation" section of the Annual Report, available at www.federalreserve.gov/publications/annual-report/default.htm. Return to text
4. The foreign banking organizations examined by the Federal Reserve are organizations that operate under section 25 or 25A of the Federal Reserve Act (Edge Act and agreement corporations) and state-chartered commercial lending companies owned or controlled by foreign banks. These institutions are typically not subject to the Community Reinvestment Act, and they typically engage in relatively few activities covered by consumer protection laws. Return to text