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 provisions of laws, regulations, and contracts 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 6, "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, evaluations, 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.

Board of Governors Financial Statements

The financial statements of the Board of Governors were audited by KPMG LLP, independent auditors, for the years ended December 31, 2018 and 2017.

Federal Reserve System Board of Governors
Letterhead

March 6, 2019

Management's Report on Financial Statements and 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 sheets as of December 31, 2018 and 2017, and the statements of operations and cash flows for the years 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 that 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 fair presentation.

The management of the Board is responsible for establishing and maintaining effective internal control over financial reporting as it relates to the financial statements. The Board's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting 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 (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the Board's assets; (ii) 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 of its management and directors; and (iii) 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 its financial statements.

Even effective internal controls, no matter how well designed, have inherent limitations, including the possibility of human error, and therefore can provide only reasonable assurance with respect to the preparation of reliable financial statements. In addition, projections of effectiveness in the future are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The management of the Board assessed its internal control over financial reporting based upon the criteria established in the Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, we believe that the Board maintained effective internal control over financial reporting.

Michell Clark Signature

Michell Clark
Chief Operating Officer (Acting)
Director, Management Division

Ricardo Aguilera Signature

Ricardo A. Aguilera
Chief Financial Officer
Director, Division of Financial Management

KPMG logo

Report of Independent Registered Public Accounting Firm

To the Board of Governors of the Federal Reserve System:

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying balance sheets of the Board of Governors of the Federal Reserve System (the Board) as of December 31, 2018 and 2017, the related statements of operations and cash flows for the years then ended, and the related notes (collectively, the financial statements). We also have audited the Board's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

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, 2018 and 2017, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Board maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018 based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Basis for Opinions

The Board's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Board's financial statements and an opinion on the Board's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Board in accordance with the relevant requirements relating to our audit.

We conducted our audits in accordance with the standards of the PCAOB, in accordance with auditing standards generally accepted in the United States of America, and in accordance with the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

KPMG logo

Definition and Limitations of Internal Control over Financial Reporting

An entity's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. An entity'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 entity; (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 receipts and expenditures of the entity are being made only in accordance with authorizations of management and directors of the entity; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the entity's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Other Reporting Required by Government Auditing Standards

In accordance with Government Auditing Standards, we have also issued a report dated March 6, 2019 on our tests of the Board's compliance with certain provisions of laws, regulations, and contracts and other matters. The purpose of that 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. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Board's compliance.

KPMG Signature

We have served as the Board's auditor since 2015.

Washington, District of Columbia
March 6, 2019

Board of Governors of the Federal Reserve System Balance Sheets

  As of December 31,
2018 2017
Assets
Current assets:
Cash $ 215,087,854 $ 177,529,448
Accounts receivable – net 2,140,266 2,183,803
Prepaid expenses and other assets 6,602,772 7,335,702
Total current assets 223,830,892 187,048,953
Noncurrent assets:
Property, equipment, and software – net 337,453,642 266,484,427
Other assets 754,410 941,190
Total noncurrent assets 338,208,052 267,425,617
Total assets $ 562,038,944 $ 454,474,570
     
Liabilities and cumulative results of operations
Current liabilities:
Accounts payable and accrued liabilities $ 35,437,008 $ 27,203,026
Accrued payroll and related taxes 41,671,555 37,953,047
Accrued annual leave 43,141,495 40,857,846
Capital lease payable 74,164 77,744
Unearned revenues and other liabilities 3,489,739 4,455,970
Total current liabilities 123,813,961 110,547,633
Long-term liabilities:
Capital lease payable 74,015 140,342
Retirement benefit obligation 106,702,283 102,881,136
Postretirement benefit obligation 14,582,700 15,915,271
Postemployment benefit obligation 6,129,290 7,055,281
Deferred rent 43,056,641 45,418,714
Other liabilities 4,440,119
Total long-term liabilities 174,985,048 171,410,744
Total liabilities 298,799,009 281,958,377
     
Cumulative results of operations:
Fund balance 300,864,880 222,621,531
Accumulated other comprehensive loss (37,624,945) (50,105,338)
Total cumulative results of operations 263,239,935 172,516,193
     
Total liabilities and cumulative results of operations $ 562,038,944 $ 454,474,570
     
See notes to financial statements.

Board of Governors of the Federal Reserve System Statements of Operations

  For the years ended December 31,
2018 2017
Board operating revenues:
Assessments levied on Federal Reserve Banks for Board operating expenses and capital expenditures $ 838,000,000 $ 740,000,000
Assessments levied on Federal Reserve Banks for currency-related operating expenses and capital expenditures 43,874,751 44,008,726
Other revenues 16,096,191 17,141,918
Total operating revenues 897,970,942 801,150,644
     
Board operating expenses:
Salaries 456,517,512 437,179,633
Retirement, insurance, and benefits 100,550,193 97,442,384
Other components of net periodic pension and postretirement costs 9,206,084 7,330,010
Contractual services and professional fees 63,602,914 65,027,459
Depreciation, amortization, and net gains or losses on disposals 42,325,685 40,023,558
Travel 15,764,961 14,020,574
Non-capital furniture, equipment, postage, and supplies 27,781,455 34,372,697
Data, news, and research 16,705,844 13,372,175
Utilities 7,713,508 8,353,654
Software 18,841,942 16,010,063
Rentals of space and equipment 36,718,324 31,325,898
Repairs and maintenance 7,161,325 8,304,501
Other expenses 16,837,846 17,259,902
Total operating expenses 819,727,593 790,022,508
     
Net income 78,243,349 11,128,136
     
Currency costs:
Assessments levied or to be levied on Federal Reserve Banks for currency costs 804,843,293 679,613,935
Expenses for costs related to currency 804,843,293 679,613,935
Currency assessments over (under) expenses
     
Bureau of Consumer Financial Protection (Bureau):
Assessments levied on the Federal Reserve Banks for the Bureau 337,100,000 573,000,000
Transfers to the Bureau 337,100,000 573,000,000
Bureau assessments over (under) transfers
     
Total net income $ 78,243,349 $ 11,128,136
     
Other comprehensive income (loss):
Pension and other postretirement benefit plans:    
Amortization of prior service cost $ 73,588 $ 138,609
Amortization of net actuarial loss 4,255,630 2,856,656
Net actuarial gain (loss) arising during the year 8,151,175 (21,682,486)
Total other comprehensive income (loss) 12,480,393 (18,687,221)
     
Comprehensive income (loss) 90,723,742 (7,559,085)
     
Cumulative results of operations – beginning of period 172,516,193 180,075,278
     
Cumulative results of operations – end of period $ 263,239,935 $ 172,516,193
     
See notes to financial statements.

Board of Governors of the Federal Reserve System Statements of Cash Flows

  For the years ended December 31,
2018 2017
Cash flows from operating activities:
Net income $ 78,243,349 $ 11,128,136
Adjustments to reconcile results of operations to net cash from (used in) operating activities:
Depreciation and amortization 41,910,585 38,904,644
Net loss on disposal of property and equipment 415,100 1,118,914
Other additional noncash adjustments to results of operations (14,012) 324,078
(Increase) decrease in assets:
Accounts receivable 43,537 1,484,872
Prepaid expenses 732,930 (896,622)
Other assets 186,780 (54,276)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities (507,057) 4,498,215
Accrued payroll and related taxes 3,718,508 3,625,316
Accrued annual leave 2,283,649 1,566,437
Unearned revenues and other liabilities 238,952 (360,536)
Net retirement benefit obligation 14,229,828 11,398,148
Net postretirement benefit obligation 739,140 565,113
Net postemployment benefit obligation (925,991) (159,866)
Deferred rent (2,362,073) (1,625,988)
Net cash from by operating activities 138,933,225 71,516,585
     
Cash flows used in investing activities:
Capital expenditures (101,304,912) (42,195,544)
Net cash used in investing activities (101,304,912) (42,195,544)
     
Cash flows used in financing activities:
Capital lease payments (69,907) (46,147)
Net cash used in financing activities (69,907) (46,147)
     
Net increase (decrease) in cash 37,558,406 29,274,894
     
Cash balance – beginning of year 177,529,448 148,254,554
     
Cash balance – end of year $ 215,087,854 $ 177,529,448
     
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, 2018 and 2017

(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 (FOMC), 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 Federal Reserve System uses advisory and working committees in carrying out its varied responsibilities. Five of these committees advise the Board: the Community Advisory Council, the Community Depository Institutions Advisory Council, the Federal Advisory Council, the Insurance Policy Advisory Committee, and the Model Validation Council. The Federal Advisory Council and the Insurance Policy Advisory Committee were established by law. The Community Advisory Council, the Community Depository Institutions Advisory Council, and the Model Validation Council were created by the Board.

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. 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. Accordingly, the Board's financial statements do not include financial data of the Bureau 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 FOMC. 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 FOMC. 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. financial 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 nonbank financial companies the Financial Stability Oversight Council (FSOC) has determined should be supervised by the Board. 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.

Section 11 of the Federal Reserve Act (as amended) 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 certain bank holding companies and savings and loan holding companies and nonbank financial companies designated for Board supervision by the FSOC. As an agent, the Board does not recognize the supervision and regulation assessments as revenue nor does the Board use the collections to fund Board expenses; the funds are transferred to the United States Treasury (Treasury).

Section 7(a)(3)(A) of the Federal Reserve Act requires that any amount of surplus funds of the Reserve Banks that exceed or would exceed $6.825 billion be transferred to the Treasury via the Board. As an intermediary transfer agent, the Board does not recognize the remittances as revenue nor does the Board use the remittances to fund Board expenses. Additional information and disclosures regarding these remittances to the Treasury can be found in the combined financial statements of the Federal Reserve Banks.

(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) on an accrual basis of accounting.

Accounts Receivable and Allowance for Doubtful Accounts — Accounts receivable are recorded when amounts are billed 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.

Prepaid Expenses — The Board recognizes expenses as prepaid for costs paid in advance that will be expensed with the passage of time or upon the occurrence of a triggering event in future periods.

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.

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.

Operating Leases and Deferred Rent — Leases for certain space contain scheduled rent increases over the term of the lease. Along with rent abatements and lease incentives, the scheduled rent increases are spread on a straight-line basis over the term of the lease 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 noncash transactions.

Benefit Obligations — The Board records annual amounts relating to its non-qualified retirement, postretirement, and postemployment plans based on calculations that incorporate various actuarial and other assumptions, including discount rates, mortality, compensation increases, and health-care cost trends. The Board reviews the assumptions on an annual basis and makes modifications to the assumptions based on a variety of factors. The effect of the modifications is recorded in accumulated other comprehensive income and amortized to net periodic cost over future periods, which is presented in the accumulated other comprehensive income (loss) footnote.

Assessments to Fund the Board — 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. The Board recognizes the assessment in the period in which it is assessed.

Assessments for 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 costs and assesses the Reserve Banks for these costs related to producing, issuing, and retiring Federal Reserve notes as well as providing other 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. The Board recognizes the assessment in the year in which the associated costs are incurred. In 2017, the Board started undertaking a greater role in the currency program including the areas of research and development, and quality assurance. See the currency footnote disclosures for more detail on these costs.

Assessments to Fund the Bureau — The Board assesses the Reserve Banks for the funds transferred to the Bureau based on each Reserve Bank's capital and surplus balances. The Board recognizes the assessment in the period in which it is assessed. These assessments and transfers are reported separately from the Board's operating activities in the Board's Statements of Operations.

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.

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 an agent, the Board does not recognize civil money penalties as revenue nor does the Board use civil money penalties 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.

Commitments and Contingencies — Liabilities for loss contingencies arising from claims, assessments, litigation, and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.

Estimates — The preparation of financial statements in conformity with U.S. 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. Significant items subject to such estimates include useful lives of property, equipment, and software; allowance for doubtful accounts receivable; accounts payable; benefit obligations; and commitments and contingencies.

Tax Exempt Status — The Board, as a federal government entity, is not subject to state or local income taxes. Federal income tax on corporations does not apply to the Board.

Recently Issued Accounting Standards — In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842). This update revises the model to assess how a lease should be classified and provides guidance for lessees, requiring lessees to present right-of-use assets and lease liabilities on the balance sheet. Subsequently, in July 2018, the FASB issued a related ASU, ASU 2018-11, Leases(Topic 842). This lease accounting guidance is effective no later than the year ended December 31, 2020, although earlier adoption is permitted. The Board is continuing to evaluate the effect of this new guidance on its financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers(Topic 606). This update was issued to create common revenue recognition guidance for U.S. GAAP and International Financial Reporting Standards. The guidance is applicable to all contracts for the transfer of goods or services regardless of industry or type of transaction. This update requires recognition of revenue in a manner that reflects the consideration that the entity expects to receive in return for the transfer of goods or services to customers. Subsequently, the FASB issued a number of related ASUs, including ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date; ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net); ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing; ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients; and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.This revenue recognition accounting guidance is effective for the Board for the year ending December 31, 2019, and is not expected to have a material effect on the Board's financial statements since the Board reports annually and satisfies all material performance obligations prior to year-end.

In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business (Topic 805). The update clarifies that a set of inputs, processes applied to inputs, and the ability to create outputs is not a business when substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. This standard is effective for the Board for the year ending December 31, 2019. The Board has decided to adopt this guidance early in 2018, as permitted.

In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (Topic 715). This update requires an employer to disaggregate the service cost component from the other components of net benefit cost. It also provides explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allows only the service cost component of net benefit cost to be eligible for capitalization. This update is effective for the Board for the year ended December 31, 2019, although early adoption is permitted. The Board has decided to adopt this guidance in 2017. See changes reflected in the Statements of Operations.

In August 2018, the FASB issued ASU 2018-14, Compensation, Retirement Benefits, Defined Benefits Plans, General (Subtopic 715-20). This update modifies the disclosure requirements for the Board's pension and postretirement plans. The update is effective for the Board for the year ending December 31, 2021, although earlier adoption is permitted. The Board is continuing to evaluate the effect of this new guidance on its disclosures.

In August 2018, the FASB issued ASU 2018-15, Intangibles, Goodwill and Other Internal Use Software (Subtopic 350-40). This update aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This update is effective for the Board for the year ending December 31, 2020, although earlier adoption is permitted. The Board plans to early adopt this standard for the year ended December 31, 2019, and it is not expected to have a material effect on the Board's financial statements.

(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, 2018 and 2017:

 

  As of December 31,
2018 2017
Land $ 49,464,201 $ 18,640,314
Buildings and improvements 313,052,243 310,235,261
Construction in process 84,820,423 31,670,962
Furniture and equipment 87,136,166 77,682,539
Software in use 66,188,603 59,373,571
Software in process 3,338,072 3,462,045
Vehicles 2,590,042 2,297,985
Lease – office equipment 283,300 283,300
     
Subtotal 606,873,050 503,645,977
     
Less accumulated depreciation and amortization (269,419,408) (237,161,550)
     
Property, equipment, and software – net $ 337,453,642 $ 266,484,427

Construction in process include costs incurred in the current or prior years for long-term projects and building enhancements. The Board recorded accrued liabilities for noncash capital assets of goods received or services performed of $8,741,000 and $5,946,000 at December 31, 2018 and 2017, respectively. The Board recorded retainage liabilities for noncash capital assets of goods received or services performed of $3,235,000 for the year ended December 31, 2018.

In June 2018, the Board acquired a building and land for $40.8 million from the General Services Administration.

(5) Leases

Capital Leases — The Board entered into capital leases for copier equipment in 2016 with lease terms that extend through 2020. Furniture and equipment includes capitalized leases of $283,000 as of 2018 and 2017. Accumulated depreciation includes $143,000 and $77,000 related to assets under capital leases as of 2018 and 2017, respectively. The depreciation expense for leased equipment is $66,000 and $50,000 for 2018 and 2017, 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, 2018, are as follows:

 

Years Ended December 31, Amount
2019 $ 77,636
2020 49,698
2021 29,742
2022 22,306
Total minimum lease payments 179,382
Less amount representing maintenance (35,688)
Net minimum lease payments 143,694
Less amount representing interest (3,352)
Present value of net minimum lease payments 140,342
Less current maturities of capital lease payments (66,327)
Long-term capital lease obligations $ 74,015

Operating Leases — The Board has entered into operating leases for copier equipment and to secure office, training, data center, and warehouse space. Several of the leases are with other governmental agencies and Reserve Banks. Minimum annual payments under the multiyear operating leases having an initial or remaining noncancelable lease term in excess of one year at December 31, 2018, are as follows:

 

Years Ended December 31,
2019 $ 37,252,968
2020 36,237,798
2021 36,761,628
2022 24,720,092
2023 20,723,748
After 2023 49,439,916
  $ 205,136,150

Deferred Rent — The Board recorded noncash lease incentives of $7,734,000 for the year ended December 31, 2017. The Board did not have any new lease incentives for the year ended December 31, 2018.

(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 are not redistributed to the Board.

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 $240,000,000 and $720,000,000 during each of the years ended December 31, 2018 and 2017, respectively. The Board was not assessed a contribution for 2018 or 2017.

Annually, the Society of Actuaries releases new mortality tables and updates mortality projection scales. The System analyzed these new tables relative to the System's actual retiree mortality experience. Based on these analyses, the System, in 2018, adopted the modified MP-2018 projection scales and RP-2014 mortality tables with various adjustments to reflect the System's recent mortality experience of System retirees. The adjusted tables and scales included the Board's experience and the Board concurred with the adoption of these changes.

Benefits Equalization Plan — 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, 2018 and 2017, is summarized in the following tables:

 

  2018 2017
Change in projected benefit obligation:
Benefit obligation – beginning of year $ 66,654,768 $ 41,832,904
Service cost 5,837,651 4,359,375
Interest cost 2,864,362 2,365,386
Plan participants' contributions
Actuarial (gain) loss (3,208,061) 18,158,332
Gross benefits paid (143,137) (61,229)
Benefit obligation – end of year $ 72,005,583 $ 66,654,768
Accumulated benefit obligation – end of year $ 14,288,814 $ 11,854,561
     
Weighted-average assumptions used to determine benefit obligation as of December 31:
Discount rate 4.56% 3.75%
Rate of compensation increase 4.25% 4.00%
     
Change in plan assets:
Fair value of plan assets – beginning of year $ – $ –
Employer contributions 143,137 61,229
Plan participants' contributions
Gross benefits paid (143,137) (61,229)
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) 203,296 145,694
Benefit obligation (noncurrent) 71,802,287 66,509,074
Funded status (72,005,583) (66,654,768)
Amount recognized – end of year $ (72,005,583) $ (66,654,768)
Amounts recognized in the balance sheets consist of:
Asset $ – $ –
Liability – current (203,296) (145,694)
Liability – noncurrent (71,802,287) (66,509,074)
Net amount recognized $ (72,005,583) $ (66,654,768)
Amounts recognized in accumulated other comprehensive income consist of:
Net actuarial loss $ 26,737,493 $ 32,673,765
Prior service cost 39,689 122,876
Net amount recognized $ 26,777,182 $ 32,796,641

 

Expected cash flows:
Expected employer contributions – 2019 $ 203,296
   
Expected benefit payments:*
2019 $ 203,296
2020 $ 270,457
2021 $ 347,999
2022 $ 439,644
2023 $ 555,449
2024–2028 $ 5,875,800

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

 

  2018 2017
Components of net periodic benefit cost:
Service cost $ 5,837,651 $ 4,359,375
Interest cost $ 2,864,362 $ 2,365,386
Expected return on plan assets
Amortization:
Actuarial (gain) loss $ 2,728,211 $ 1,796,670
Prior service cost 83,187 99,578
Net periodic benefit cost $ 11,513,411 $ 8,621,009
     
Weighted-average assumptions used to determine net periodic benefit cost:
Discount rate 3.75% 4.32%
Rate of compensation increase 4.00% 4.00%
     
Other changes in plan assets and benefit obligations recognized in other comprehensive income:
Current year actuarial (gain) loss $ (3,208,061) $ 18,158,332
Amortization of prior service cost $ (83,187) $ (99,578)
Amortization of actuarial gain (loss) (2,728,211) (1,796,670)
Total recognized in other comprehensive (income) loss $ (6,019,459) $ 16,262,084
Total recognized in net periodic benefit cost and other comprehensive income $ 5,493,952 $ 24,883,093

Estimated amounts that will be amortized from accumulated other comprehensive income into net periodic benefit cost (credit) in 2019 are shown below:

 

Net actuarial loss $ 1,762,415
Prior service cost 39,689
Total $ 1,802,104

Pension Enhancement Plan — 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 percent above the Social Security integration level to 2.0 percent. Activity for the PEP as of December 31, 2018 and 2017, is summarized in the following tables:

 

  2018 2017
Change in projected benefit obligation:
Benefit obligation – beginning of year $ 36,590,675 $ 32,378,804
Service cost 1,194,522 1,094,459
Interest cost 1,416,533 1,358,925
Plan participants' contributions
Actuarial (gain) loss (3,216,655) 2,164,636
Gross benefits paid (560,508) (406,149)
Benefit obligation – end of year $ 35,424,567 $ 36,590,675
Accumulated benefit obligation – end of year $ 31,363,223 $ 31,462,483
     
Weighted-average assumptions used to determine benefit obligation as of December 31:
Discount rate 4.35% 3.69%
Rate of compensation increase 4.25% 4.00%
     
Change in plan assets:
Fair value of plan assets – beginning of year $– $–
Employer contributions 560,508 406,149
Plan participants' contributions
Gross benefits paid (560,508) (406,149)
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 648,627 456,157
Benefit obligation – noncurrent 34,775,940 36,134,518
Funded status (35,424,567) (36,590,675)
Amount recognized – end of year $ (35,424,567) $ (36,590,675)
Amounts recognized in the balance sheets consist of:
Asset $– $–
Liability – current (648,627) (456,157)
Liability – noncurrent (34,775,940) (36,134,518)
Net amount recognized $ (35,424,567) $ (36,590,675)
Amounts recognized in accumulated other comprehensive income consist of:
Net actuarial loss $ 8,961,358 $ 13,350,579
Prior service cost
Net amount recognized $ 8,961,358 $ 13,350,579

 

Expected cash flows:
Expected employer contributions – 2019 $ 648,627
   
Expected benefit payments: *  
2019 $ 648,627
2020 $ 781,575
2021 $ 919,930
2022 $ 1,074,821
2023 $ 1,244,420
2024–2028 $ 8,824,664

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

 

  2018 2017
Components of net periodic benefit cost:
Service cost $ 1,194,522 $ 1,094,459
Interest cost 1,416,533 1,358,925
Expected return on plan assets
Amortization:    
Actuarial loss 1,172,566 832,304
Prior service cost 54,908
Net periodic benefit cost $ 3,783,621 $ 3,340,596
     
Weighted-average assumptions used to determine net periodic benefit cost:
Discount rate 3.69% 4.22%
Rate of compensation increase 4.00% 4.00%
     
Other changes in plan assets and benefit obligations recognized in other comprehensive income:
Current year actuarial (gain) loss $ (3,216,655) $ 2,164,636
Amortization of prior service cost - (54,908)
Amortization of actuarial gain (loss) (1,172,566) (832,304)
Total recognized in other comprehensive (income) loss $ (4,389,221) $ 1,277,424
Total recognized in net periodic benefit cost and other comprehensive income $ (605,600) $ 4,618,020

Estimated amounts that will be amortized from accumulated other comprehensive income into net periodic benefit cost (credit) in 2019 are shown below:

 

Net actuarial loss $ 599,512
Prior service cost
Total $ 599,512

The total accumulated retirement benefit obligation includes a liability for a supplemental retirement agreement and a benefits equalization plan under the System's Thrift Plan. The total obligation as of December 31, 2018 and 2017, is summarized in the following table:

 

  2018 2017
Retirement benefit obligation:
Benefit obligation – BEP $ 72,005,583 $ 66,654,768
Benefit obligation – PEP 35,424,567 36,590,675
Additional benefit obligations 124,056 237,544
Total accumulated retirement benefit obligation $ 107,554,206 $ 103,482,987

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 $1,112,000 and $1,080,000 in 2018 and 2017, 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 System's Thrift Plan or Roth 401(k). Board contributions to members' accounts were $28,833,000 and $27,320,000 in 2018 and 2017, respectively.

(7) Postretirement Benefits

The Board provides certain life insurance programs for its active employees and retirees. Activity as of December 31, 2018 and 2017, is summarized in the following tables:

 

  2018 2017
Change in benefit obligation:
Benefit obligation – beginning of year $ 16,467,035 $ 14,710,985
Service cost 170,564 164,069
Interest cost 595,971 610,434
Plan participants' contributions
Actuarial (gain) loss (1,726,457) 1,359,518
Gross benefits paid (343,937) (377,971)
Benefit obligation – end of year 15,163,176 16,467,035
     
Weighted-average assumptions used to determine benefit obligation as of December 31 – discount rate 4.31% 3.64%
     
Change in plan assets:
Fair value of plan assets – beginning of year $– $–
Employer contributions 343,937 377,971
Gross benefits paid (343,937) (377,971)
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 580,476 551,764
Benefit obligation – noncurrent 14,582,700 15,915,271
Funded status (15,163,176) (16,467,035)
Amount recognized – end of year $ (15,163,176) $ (16,467,035)
     
Amounts recognized in the balance sheets consist of:
Asset $– $–
Liability – current (580,476) (551,764)
Liability – noncurrent (14,582,700) (15,915,271)
Net amount recognized $ (15,163,176) $ (16,467,035)
     
Amounts recognized in accumulated other comprehensive income consist of:
Net actuarial loss $ 1,984,526 $ 4,065,836
Prior service credit (98,118) (107,717)
Net amount recognized $ 1,886,408 $ 3,958,119

 

Expected cash flows:
Expected employer contributions – 2019 $ 580,476
   
Expected benefit payments:*
2019 $ 580,476
2020 $ 608,475
2021 $ 654,047
2022 $ 679,536
2023 $ 711,195
2024–2028 $ 3,961,346

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

 

  2018 2017
Components of net periodic benefit cost:
Service cost $ 170,564 $ 164,069
Interest cost 595,971 610,434
Expected return on plan assets
Amortization:    
Actuarial (gain) loss 354,853 227,682
Prior service credit (9,599) (15,877)
Net periodic benefit cost $ 1,111,789 $ 986,308
     
Weighted-average assumptions used to determine net periodic benefit cost – discount rate 3.64 % 4.14 %
     
Other changes in plan assets and benefit obligationsrecognized in other comprehensive income:
Current year actuarial (gain) loss $ (1,726,459) $ 1,359,518
Amortization of prior service credit 9,599 15,877
Amortization of actuarial gain (loss) (354,853) (227,682)
Total recognized in other comprehensive (income) loss $ (2,071,713) $ 1,147,713
Total recognized in net periodic benefit cost and other comprehensive income $ (959,924) $ 2,134,021

Estimated amounts that will be amortized from accumulated other comprehensive income into net periodic benefit cost (credit) in 2019 are shown below:

 

Net actuarial loss $ 65,950
Prior service credit (9,599)
Total $ 56,351
(8) Postemployment Benefits

The Board provides certain postemployment benefits to eligible former or inactive employees and their dependents. Postemployment costs were actuarially determined using a December 31 measurement date and discount rates of 2.84 percent and 2.59 percent as of December 31, 2018 and 2017, respectively. The net periodic postemployment benefit cost (credit) recognized by the Board as of December 31, 2018 and 2017, was ($284,000) and $1,017,000, 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, 2018 and 2017, 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, 2017 $ (28,607,712) $ (2,810,405) $ (31,418,117)
       
Change in accumulated other comprehensive income (loss):
Net actuarial gain (loss) arising during the year (20,322,968) (1,359,518) (21,682,486)
Other comprehensive income before reclassifications (20,322,968) (1,359,518) (21,682,486)
Amortization of prior service (credit) costs (a)(b)(a) (b) 154,486 (15,877) 138,609
Amortization of net actuarial (gain) loss (a)(b) 2,628,974 227,682 2,856,656
Amounts reclassified from accumulated other comprehensive income 2,783,460 211,805 2,995,265
Change in accumulated other comprehensive income (loss) (17,539,508) (1,147,713) (18,687,221)
Balance – December 31, 2017 (46,147,220) (3,958,118) (50,105,338)
       
Change in accumulated other comprehensive income (loss):
Net actuarial (gain) loss arising during the year (a) 6,424,716 1,726,459 8,151,175
Other comprehensive income before reclassifications 6,424,716 1,726,459 8,151,175
Amortization of prior service (credit) costs (a)(b) 83,187 (9,599) 73,588
Amortization of net actuarial (gain) loss (a)(b) 3,900,777 354,853 4,255,630
Amounts reclassified from accumulated other comprehensive income 3,983,964 345,254 4,329,218
Change in accumulated other comprehensive income (loss) 10,408,680 2,071,713 12,480,393
Balance – December 31, 2018 $ (35,738,540) $ (1,886,405) $ (37,624,945)

 (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) Selected Transactions with the 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 operations, to include expenses related to its currency responsibilities, as well as for the funding the Board is required to provide to the Bureau. Selected activity related to the Board and Reserve Banks is summarized in the following table:

 

  2018 2017
For the years ended December 31:    
Assessments levied or to be levied on Reserve Banks for:
Currency expenses $ 848,718,044 $ 723,622,661
Board operations 838,000,000 740,000,000
Transfers of funds to the Bureau 337,100,000 573,000,000
Total assessments levied or to be levied on Reserve Banks $2,023,818,044 $2,036,622,661

The OEB administers certain System benefit plans 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 $2,957,000 and $2,733,000 for the years ended December 31, 2018 and 2017, respectively. Activity related to the Board and the OEB is summarized in the following table:

 

  2018 2017
As of December 31:    
Accounts receivable due from the Office of Employee Benefits $ 839,258 $ 603,452
Accounts payable due to the Office of Employee Benefits $ – $ 121,184
(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 performs certain administrative functions for the Council. The five agencies that are represented on the Council are the Board, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, and the Bureau.

The Board's financial statements do not include financial data for the Council. The Council expenses charged to the Board were $4,527,000 and $4,179,577 for the years ended December 31, 2018 and 2017, respectively for the assessment of operating, examiner education, and other Council program expenses. The Board expenses charged to the Council were $1,846,000 and $2,990,578 for the years ended December 31, 2018 and 2017, respectively for the reimbursement of data processing and other administrative charges performed on behalf of the Council.

(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 Bureau transfers funds to the Board to fund their share of OIG operations. The Board recorded revenue of $12,500,000 related to OIG funding in each of the 2018 and 2017 calendar years.

(13) Currency Costs

The Bureau of Engraving and Printing is the sole supplier for currency printing and also provides currency retirement, new Bureau of Engraving and Printing facility, and meaningful access services. The Board contracts for other services associated with currency, such as shipping, education, and quality assurance. Certain currency amounts relating to the prior year have been reclassified to conform to the current-year presentation. The presentation of $9,597,309 of the $13,117,081 quality assurance services for the year ended December 31, 2017, has been revised to conform to the current-year presentation from other expenses to contractual services and professional fees.

The currency costs incurred by the Board for the years ended December 31, 2018 and 2017, are reflected in the following table:

 

  2018 2017
Costs related to Bureau of Engraving and Printing:    
Printing $ 799,885,504 $ 673,936,234
Retirement 3,501,362 3,568,867
Meaningful access program 1,452,899 1,425,853
New facility 3,528 682,981
Subtotal related to Bureau of Engraving and Printing $ 804,843,293 $ 679,613,935
     
Other currency costs:
Shipping $ 20,252,210 $ 21,710,886
Research and development 11,961,481 6,831,283
Quality assurance services 9,755,730 13,117,081
Education services 1,905,330 2,349,476
Subtotal of other currency costs $ 43,874,751 $ 44,008,726
     
Total currency costs $ 848,718,044 $ 723,622,661
(14) 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 2020 which includes option periods.

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.

(15) Subsequent Events

There were no subsequent events that require adjustments to or disclosures in the financial statements as of December 31, 2018. Subsequent events were evaluated through March 6, 2019, which is the date the financial statements were available to be issued.

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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 the standards of the Public Company Accounting Oversight Board (United States), auditing standards generally accepted in the United States of America, 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"), which comprise the balance sheet as of December 31, 2018, and the related statement of operations and cash flows for the year then ended, and the related notes to the financial statements. We have issued our report thereon dated March 6, 2019.

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, and contracts, 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 the effectiveness of the Board's 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. This report is intended solely for the information and use of the Board of Governors of the Federal Reserve System and is not intended to be and should not be used by anyone other than this specified party.

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Washington, District of Columbia
March 6, 2019

Federal Reserve Banks Combined Financial Statements

The combined financial statements of the Federal Reserve Banks were audited by KPMG LLP, independent auditors, for the years ended December 31, 2018 and 2017.

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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 statements of condition of the Federal Reserve Banks (the "Reserve Banks") as of December 31, 2018 and 2017, and the related combined statements of operations and changes in capital for the years then ended. These combined financial statements are the responsibility of the Division of Reserve Bank Operations and Payment Systems' management. Our responsibility is to express an opinion on these combined financial statements based on our audits.

We conducted our audits in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As described in Note 3 to the combined financial statements, the Division of Reserve Bank Operations and Payment Systems has prepared these combined financial statements in conformity with the accounting principles established by the Board of Governors of the Federal Reserve System (the "Board"), as set forth in the Financial Accounting Manual for Federal Reserve Banks, which is a basis of accounting other than U.S. generally accepted accounting principles.

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, 2018 and 2017, and the results of its operations for the years then ended, on the basis of accounting described in Note 3.

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Washington, DC
March 8, 2019

Federal Reserve Banks

Abbreviations
ACH
Automated clearinghouse
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
BEP
Benefit Equalization Retirement Plan
Budget Act
Bipartisan Budget Act of 2018
Bureau
Bureau of Consumer Financial Protection
CDS
Credit default swaps
CIP
Committee on Investment Performance (related to System Retirement Plan)
DFMU
Designated financial market utility
FAM
Financial Accounting Manual for Federal Reserve Banks
FASB
Financial Accounting Standards Board
FOMC
Federal Open Market Committee
FRBNY
Federal Reserve Bank of New York
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
RMBS
Residential mortgage-backed securities
OEB
Office of Employee Benefits of the Federal Reserve System
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
TBA
To be announced
TDF
Term Deposit Facility
TRS
Total return swap
VIE
Variable interest entity
Combined Statements of Condition

As of December 31, 2018 and December 31, 2017

(in millions)

  2018 2017
ASSETS
Gold certificates   $ 11,037 $ 11,037
Special drawing rights certificates   5,200 5,200
Coin   1,726 1,892
Loans Note 4 61 134
System Open Market Account: Note 5    
Treasury securities, net (of which $25,102 and $28,053 is lent as of December 31, 2018 and 2017, respectively)   2,302,462 2,545,733
Government-sponsored enterprise debt securities, net (of which $0 is lent as of December 31, 2018 and 2017)   2,741 4,752
Federal agency and government-sponsored enterprise mortgage-backed securities, net   1,683,532 1,817,700
Foreign currency denominated investments, net   20,906 21,316
Central bank liquidity swaps   4,207 12,067
Accrued interest receivable   22,236 24,744
Other assets   - 13
Investments held by consolidated variable interest entity, net (of which $0 and $1,712 is measured at fair value as of December 31, 2018 and 2017, respectively) Note 6 - 1,713
Prepaid pension benefit costs Note 9 - 14
Bank premises and equipment, net Note 7 2,553 2,571
Items in process of collection   236 81
Other assets   983 1,001
Total assets   $ 4,057,880 $ 4,449,968
LIABILITIES AND CAPITAL
Federal Reserve notes outstanding, net   $ 1,671,437 $ 1,570,727
System Open Market Account: Note 5    
Securities sold under agreements to repurchase   304,012 563,958
Other liabilities   34 558
Deposits:
Depository institutions   1,555,954 1,947,633
Treasury, general account   402,138 228,933
Other deposits   78,317 89,816
Interest payable to depository institutions and others   1,381 1,006
Accrued benefit costs Notes 9, 10 2,558 2,332
Deferred credit items   1,006 1,001
Accrued remittances to the Treasury   1,597 2,337
Other liabilities   286 278
Total liabilities   4,018,720 4,408,579
Capital paid-in   32,335 31,389
Surplus (including accumulated other comprehensive loss of $3,292 and $3,334 at December 31, 2018 and 2017, respectively)   6,825 10,000
Total capital   39,160 41,389
Total liabilities and capital   $ 4,057,880 $ 4,449,968

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

Combined Statements of Operations

For the years ended December 31, 2018 and December 31, 2017

(in millions)

  2018 2017
INTEREST INCOME      
Loans Note 4 $ 3 $ 1
System Open Market Account: Note 5    
Treasury securities, net   62,807 64,267
Government-sponsored enterprise debt securities, net   175 416
Federal agency and government-sponsored enterprise mortgage-backed securities, net   49,289 48,912
Foreign currency denominated investments, net   (29) (17)
Central bank liquidity swaps   15 14
Total interest income   112,260 113,593
INTEREST EXPENSE      
System Open Market Account: Note 5    
Securities sold under agreements to repurchase   4,559 3,365
Other   4 7
Deposits:
Depository institutions and others   38,484 25,849
Term Deposit Facility   2 13
Total interest expense   43,049 29,234
Net interest income   69,211 84,359
OTHER ITEMS OF INCOME (LOSS)
System Open Market Account: Note 5    
Treasury securities gains, net   5 28
Federal agency and government-sponsored enterprise mortgage-backed securities (losses) gains, net   (3) 8
Foreign currency translation (losses) gains, net   (390) 1,894
Other   21 27
Income from investments held by consolidated variable interest entity, net Note 6 9 6
Income from services   443 442
Reimbursable services to government agencies   706 698
Other   69 68
Total other items of income   860 3,171
OPERATING EXPENSES
Salaries and benefits   3,206 3,085
Occupancy   338 325
Equipment   193 184
Net periodic pension expense Note 9 484 525
Other   725 682
Assessments:
Board of Governors operating expenses and currency costs   1,687 1,464
Bureau of Consumer Financial Protection   337 573
Total operating expenses   6,970 6,838
       
Net income before providing for remittances to the Treasury   63,101 80,692
Earnings remittances to the Treasury: Note 3o 65,319 80,559
Net (loss) income after providing for remittances to the Treasury   (2,218) 133
       
Change in prior service costs related to benefit plans Note 9, 10 31 59
Change in actuarial gains related to benefit plans Note 9, 10 11 592
Total other comprehensive income   42 651
Comprehensive (loss) income   $ (2,176) $ 784

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

Combined Statements of Changes in Capital

For the years ended December 31, 2018 and December 31, 2017

(in millions, except share data)

  Capital paid-in Surplus Total capital
Net income retained Accumulated other comprehensive income (loss) Total surplus
Balance at December 31, 2016(608,848,261 shares) $ 30,442 $ 13,985 $ (3,985) $ 10,000 $ 40,442
Net change in capital stock issued(18,923,950 shares) 947 - - - 947
Comprehensive income:
Net income - 133 - 133 133
Other comprehensive loss - - 651 651 651
Dividends on capital stock - (784) - (784) (784)
Net change in capital 947 (651) 651 - 947
Balance at December 31, 2017(627,772,211 shares) $ 31,389 $ 13,334 $ (3,334) $ 10,000 $ 41,389
Net change in capital stock issued (18,931,796 shares) 946 - - - 946
Comprehensive income:
Net loss - (2,218) - (2,218) (2,218)
Other comprehensive income - - 42 42 42
Dividends on capital stock - (999) - (999) (999)
Net change in capital 946 (3,217) 42 (3,175) (2,229)
Balance at December 31, 2018 (646,704,007 shares) $ 32,335 $ 10,117 $ (3,292) $ 6,825 $ 39,160

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 nationally-chartered 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 director 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 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, edge and agreement corporations, and certain financial market utilities that have been designated as systemically important. Certain services are provided to foreign official and international account holders, primarily by the FRBNY.

The FOMC, in conducting monetary policy, establishes policy regarding domestic open market operations and oversees these operations. The FOMC has selected the FRBNY to execute open market transactions for the System Open Market Account (SOMA) as provided in its annual authorization. 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 SOMA. The FRBNY is authorized and directed to lend the Treasury securities and GSE debt securities that are held in the SOMA.

To be prepared to meet the needs specified by the FOMC to carry out the System's central bank responsibilities, the FOMC authorized and directed the FRBNY to execute standalone spot and forward foreign exchange transactions in the resultant foreign currencies, to hold balances in those currencies, and to invest such foreign currency holdings, while maintaining adequate liquidity. The FRBNY holds these securities and agreements in the SOMA. The FOMC also authorized and directed 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 at the request of the Treasury to conduct swap transactions with the United States Exchange Stabilization Fund in the maximum amount of $5 billion, also known as warehousing.

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 maintain standing U.S. dollar liquidity swap arrangements and standing foreign currency liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank. The FRBNY holds amounts outstanding under these liquidity swap lines in the SOMA. These liquidity swap lines are subject to annual review and approval by the FOMC.

The FOMC has authorized and directed the FRBNY to conduct small-value exercises periodically for the purpose of testing operational readiness.

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 among 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 and associated disclosures have been prepared in accordance with the FAM.

Due to the unique nature of the Bank's powers and responsibilities as part of the nation's central bank and given the System's unique responsibility to conduct monetary policy, the Board has adopted accounting principles and practices in the FAM that differ from accounting principles generally accepted in the United States of America (GAAP). The more significant 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 financial position associated with 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 primarily motivated by monetary policy and financial stability 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.

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, Operations, and Changes in Capital, and the accompanying notes to the combined financial statements. Other than those described above, the accounting policies described in FAM are generally consistent with those in GAAP and the references to GAAP in the notes to the combined financial statements highlight those areas where FAM is consistent with 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.

Certain amounts relating to the prior year have been reclassified in the Combined Statements of Condition to conform to the current year presentation. $1,722 million previously reported as "Assets: Investments held by consolidated variable interest entity" and $9 million previously reported as "Liabilities and capital: Liabilities of consolidated variable interest entity," as of December 31, 2017, have been combined and reported in a new line titled "Assets: Investments held by consolidated variable interest entity, net." Also, parenthetical fair value amounts $1,720 million and $8 million previously reported as of December 31, 2017 in the line headings of "Assets: Investments held by consolidated variable interest entity" and "Liabilities and capital: Liabilities of consolidated variable interest entity," have been combined and reported parenthetically in the line "Assets: Investments held by consolidated variable interest entity, net."

Certain amounts relating to the prior year have been reclassified in the Combined Statements of Operations to conform to the current year presentation. $15 million and $9 million previously reported for the year ended December 31, 2017 as "Interest income: Investments held by consolidated variable interest entity" and "Non-interest income: Investments held by consolidated variable interest entity losses, net" have been combined and reported in a new line titled "Other items of income (loss): Income from investments held by consolidated variable interest entity, net."

Certain amounts relating to the prior year have been reclassified in the Combined Statements of Condition to conform to the current year presentation. $6,798 million previously reported as "Liabilities and capital: Deposits: Depository institutions" as of December 31, 2017 have been reclassified as "Liabilities and capital: Deposits: Other deposits."

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 a variable interest entity (VIE), Maiden Lane Limited Liability Company (LLC) (ML). The consolidation of the VIE 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 VIE. The combined financial statements of the Reserve Banks also include accounts and results of operations of Maiden and Nassau LLC, a Delaware LLC wholly-owned by the FRBNY, which was formed to own and operate the FRBNY-owned 33 Maiden Lane building.

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. The Reserve Banks reviewed the law and evaluated the design of and their relationship to the Bureau and determined that it should not be consolidated in the Reserve Banks' combined 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 Reserve 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 12 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 Reserve Banks at original cost.

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.

Loans 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.

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

The FRBNY may engage in purchases of securities under agreements to resell (repurchase agreements) with primary dealers. Transactions under these repurchase agreements are typically settled through a tri-party arrangement, in which a commercial custodial bank manages the collateral clearing, settlement, pricing, and pledging, and provides cash and securities custodial services for and on behalf of the FRBNY and the 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 agreements primarily includes Treasury securities (including Treasury Inflation-Protected Securities, Separate Trading of Registered Interest and Principal of Securities (STRIPS) Treasury securities, and Treasury Floating Rate Notes); direct obligations of several federal and GSE-related agencies, including Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and Federal Home Loan Banks; and pass-through federal agency and GSE MBS. The repurchase agreements are accounted for as financing transactions with the associated interest income recognized over the life of the transaction. These repurchase agreements 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. Interest income is reported as a component of "System Open Market Account: Securities purchased under agreements to resell" in the Combined Statements of Operations.

The FRBNY may engage in sales of securities under agreements to repurchase (reverse repurchase agreements) with primary dealers and with a set of expanded counterparties that includes banks, savings associations, GSEs, and domestic money market funds. Transactions under these reverse repurchase agreements are designed to have a margin of zero and are settled through a tri-party arrangement, similar to repurchase agreements. Reverse repurchase agreements 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, or federal agency and GSE MBS that are held in the SOMA. Reverse repurchase agreements are accounted for as financing transactions, and the associated interest expense is recognized over the life of the transaction. These reverse repurchase agreements 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 "System Open Market Account: Other liabilities" in the Combined Statements of Condition. Interest expense is reported as a component of "System Open Market Account: Securities sold under agreements to repurchase" in the Combined Statements of Operations.

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 "System Open Market Account: Treasury securities, net" and "System Open Market Account: Government-sponsored enterprise debt securities, net," as appropriate, in the Combined Statements of Condition. Securities lending transactions are fully collateralized by Treasury securities based on the fair values of the securities lent increased by a margin determined by the FRBNY. The FRBNY charges the primary dealer a fee for borrowing securities, and these fees are reported as a component of "Other items of income (loss): System Open Market Account: Other" in the Combined Statements of Operations.

Activity related to repurchase agreements, reverse repurchase agreements, 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, and Foreign Currency Denominated Investments

Interest income on Treasury securities, GSE debt securities, federal agency and GSE MBS, and foreign currency denominated investments included in the SOMA is recorded when earned and includes amortization of premiums and accretion of discounts using the effective interest method. Interest income on federal agency and GSE MBS also includes 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 Operations.

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, 2018 and 2017, the FRBNY executed dollar rolls to facilitate settlement of outstanding purchases of federal agency and GSE MBS. The FRBNY accounts for dollar rolls as individual purchases and sales, on a settlement-date basis. Accounting for these transactions as purchases and sales, rather than as financing transactions, is appropriate because the purchase or sale component of the MBS TBA dollar roll is paired off or assigned prior to settlement and, as a result, there is no transfer and return of securities. Net gains (losses) resulting from MBS transactions are reported as a component of "Other items of income (loss): System Open Market Account: Federal agency and government-sponsored enterprise mortgage-backed securities (losses) gains, net" in the Combined Statements of Operations.

Foreign currency denominated investments, which can include foreign currency deposits, repurchase agreements, and government debt instruments, are revalued daily at current foreign currency market exchange rates in order to report these assets in U.S. dollars. Any negative interest associated with these foreign currency denominated investments is included as a component of "Interest income: System Open Market Account: Foreign currency denominated investments, net" in the Combined Statements of Operations. Foreign currency translation gains and losses that result from the daily revaluation of foreign currency denominated investments are reported as "Other items of income (loss): System Open Market Account: Foreign currency translation (losses) gains, net" in the Combined Statements of Operations.

Because the FRBNY enters into commitments to buy Treasury securities, federal agency and GSE MBS, and foreign government debt instruments and records the related securities on a settlement-date basis in accordance with the FAM, the related outstanding commitments are not reflected in the Combined Statements of Condition.

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 investments, including the premiums, discounts, and realized and unrealized gains and losses, is allocated to each Reserve Bank on a percentage basis, adjusted annually in the second quarter of each year, calculated as 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 "Other items of income (loss): Other" in the Combined Statements of Operations.

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 a percentage basis, adjusted annually in the second quarter of each year, calculated as the ratio of each Reserve Bank's capital and surplus to the Reserve Banks' aggregate capital and surplus at the preceding December 31.

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 amount outstanding and the rate under the swap agreement. The Reserve Banks recognize compensation received 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 Operations.

Foreign currency liquidity swaps

Foreign currency liquidity swap transactions involve 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 amounts that the FRBNY receives are recorded as a liability.

h. Consolidated VIE – Investments and Liabilities

The investments held by the consolidated VIE consist primarily of cash and cash equivalents, short-term investments with maturities of greater than three months and less than one year, and swap contracts. Swap contracts consist of credit default swaps (CDS). Investments are reported as "Investments held by consolidated variable interest entity, net" in the Combined Statements of Condition. Changes in fair value of the investments are recorded in "Other items of income (loss): Income from investments held by consolidated variable interest entity, net" in the Combined Statements of Operations.

Investments in debt securities are accounted for in accordance with FASB ASC Topic 320, Investments – Debt and Equity Securities, and the VIE elected the fair value option for all eligible assets and liabilities in accordance with FASB ASC Topic 825 (ASC 825), Financial Instruments. Other financial instruments, including swap contracts, are recorded at fair value in accordance with FASB ASC Topic 815 (ASC 815), Derivatives and Hedging.

The liabilities of the consolidated VIE consist primarily of swap contracts, cash collateral on swap contracts, and accruals for operating expenses. Swap contracts are recorded at fair value in accordance with ASC 815. Liabilities are reported in "Investments held by consolidated variable interest entity, net" in the Combined Statements of Condition. Changes in fair value of the liabilities are recorded in "Other items of income (loss): Income from investments held by consolidated variable interest entity, net" in the Combined Statements of Operations.

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. Reserve Banks may transfer assets to other Reserve Banks or may lease property of other Reserve Banks.

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 and minor replacements related to software are charged to operating expense in the year incurred. Leased assets that meet the criteria of FASB ASC Topic 840, Leases,are capitalized and amortized over the shorter of the useful life of the asset or the term of the lease.

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 Reserve 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 pledged as collateral under reverse repurchase agreements 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 $190 billion and $175 billion at December 31, 2018 and 2017, respectively.

At December 31, 2018 and 2017, all Federal Reserve notes outstanding, net, were fully collateralized. At December 31, 2018 and 2017, all gold certificates, all SDR certificates, and $1,655 billion and $1,554 billion, respectively, of domestic securities held in the SOMA were pledged as collateral. At December 31, 2018 and 2017, no investments denominated in foreign currencies were pledged as collateral.

k. Deposits

Depository Institutions

Depository institutions' deposits represent the reserve and service-related balances in the accounts that depository institutions hold at the Reserve Banks. Required reserve balances are those that a depository institution must hold to satisfy its reserve requirement. Reserve requirements are the amount of funds that a depository institution must hold in reserve against specified deposit liabilities. Excess reserves are those held by the depository institutions in excess of their required reserve balances. 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 expense on depository institutions' deposits is accrued daily at the appropriate rate. Interest payable is reported as a component of "Interest payable to depository institutions and others" 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 expense on deposits held by the Reserve Banks under the TDF is accrued daily at the appropriate rate. Interest payable is reported as a component of "Interest payable to depository institutions and others" in the Combined Statements of Condition. There were no deposits held by the Reserve Banks under the TDF at December 31, 2018 and 2017.

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 cash collateral, deposits of designated financial market utilities (DFMUs), and GSE deposits held by the Reserve Banks. The Reserve Banks pay interest on deposits held by DFMUs at the rate paid on balances maintained by depository institutions or another rate determined by the Board of Governors from time to time, not to exceed the general level of short term interest rates. Interest payable is reported as a component of "Interest payable to depository institutions and others" in the Combined Statements of Condition.

l. 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 represent 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.

m. 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 6 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.

The Federal Reserve Act requires each Reserve Bank to pay each member bank an annual dividend based on the amount of the member bank's paid-in capital stock and a rate determined by the member bank's total consolidated assets. Member banks with total consolidated assets in excess of a threshold established in the Federal Reserve Act receive a dividend equal to the smaller of 6 percent or the rate equal to the high yield of the 10-year Treasury note auctioned at the last auction held prior to the payment of the dividend. Member banks with total consolidated assets equal to or less than the threshold receive a dividend of 6 percent. The threshold for total consolidated assets was $10.2 billion and $10.1 billion for the years ended December 31, 2018 and 2017, respectively. This threshold is adjusted annually based on the Gross Domestic Product Price Index, which is published by the Bureau of Economic Analysis. The dividend is paid semiannually and is cumulative.

n. Surplus

The Federal Reserve Act limits aggregate Reserve Bank surplus. Effective February 9, 2018, the Bipartisan Budget Act of 2018 (Budget Act) reduced the statutory limit on aggregate Reserve Bank surplus from $10 billion to $7.5 billion. Effective May 24, 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (Economic Growth Act), further reduced the statutory limit on aggregate Reserve Bank surplus from $7.5 billion to $6.825 billion. Reserve Bank surplus is allocated among the Reserve Banks based on the ratio of each Reserve Bank's capital paid-in to total Reserve Bank capital paid-in as of December 31 of each year.

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.

o. Earnings Remittances to the Treasury

The Federal Reserve Act requires that any amounts of the surplus funds of the Reserve Banks that exceed, or would exceed, the aggregate surplus limitation shall be transferred to the Board of Governors for transfer to the Treasury. The Reserve Banks remit excess earnings to the Treasury after providing for the cost of operations, payment of dividends, and reservation of an amount necessary to maintain surplus at the Reserve Bank's allocated portion of the aggregate surplus limitation. Remittances to the Treasury are made on a weekly basis. The amount of the remittances to the Treasury is reported as "Earnings remittances to the Treasury" in the Combined Statements of Operations. The amount due to the Treasury is reported as "Accrued remittances to the Treasury" in the Combined Statements of Condition. See Note 12 for additional information on earnings remittances to the Treasury.

If earnings during the year are not sufficient to provide for the costs of operations, payment of dividends, and maintaining surplus at an amount equal to the Reserve Bank's allocated portion of the aggregate surplus limitation, remittances to the Treasury are suspended. This decrease in earnings remittances to the Treasury results in a deferred asset that represents the amount of net earnings a Reserve Bank will need to realize before remittances to the Treasury resume.

p. 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, 2018 and 2017, the Bank was reimbursed for all services provided to the Treasury as its fiscal agent.

q. Assessments

The Board of Governors assesses the Reserve Banks to fund its operations and the operations of the Bureau. 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 of its responsibilities to the Bureau on 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 Governor's 2009 annual report, which totaled $4.98 billion. After 2013, the amount will be adjusted annually in accordance with the provisions of the Dodd-Frank Act. The percentage of total operating expenses of the System for the years ended December 31, 2018 and 2017 was 13.31 percent ($663.0 million) and 12.98 percent ($646.2 million), respectively. The Bank's assessment for Bureau funding is reported as "Operating expenses: Assessments: Bureau of Consumer Financial Protection" in the Combined Statements of Operations.

r. Fair Value

Investments and liabilities of the Combined VIE and assets of the Retirement Plan for Employees of the System are measured at fair value in accordance with FASB ASC Topic 820 (ASC 820), Fair Value Measurement. 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.

s. 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 $53 million and $49 million for the years ended December 31, 2018 and 2017, respectively, and are reported as a component of "Operating expenses: Occupancy" in the Combined Statements of Operations.

t. 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 Bank commits to a formalized restructuring plan or executes the specific actions contemplated in the plan and all criteria for financial statement recognition have been met.

The Bank had no significant restructuring activities in 2018 and 2017.

u. Recently Issued Accounting Standards

Other than the significant differences described in Note 3, the accounting policies described in FAM are generally consistent with those in GAAP. The following items represent recent GAAP accounting standards and describe how FAM was or will be revised to be consistent with these standards.

In May 2014, the FASB issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). This update was issued to create common revenue recognition guidance for U.S. GAAP and International Financial Reporting Standards. The guidance is applicable to all contracts for the transfer of goods or services regardless of industry or type of transaction. This update requires recognition of revenue in a manner that reflects the consideration that the entity expects to receive in return for the transfer of goods or services to customers. Subsequently, the FASB issued a number of related ASUs including ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date;ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net); ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing; ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients; and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. This revenue recognition accounting guidance is effective for the Reserve Banks for the year ending December 31, 2019, and is not expected to have a material effect on the Reserve Banks' combined financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this update eliminate the requirement to disclose methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet. This update is effective for the Reserve Banks for the year ending December 31, 2019, and is not expected to have a material effect on the Reserve Banks' combined financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update revises the model to assess how a lease should be classified and provides guidance for lessees, requiring lessees to present right-of-use assets and lease liabilities on the balance sheet. Subsequently, in July 2018, the FASB issued additional related ASUs, ASU 2018-10, Codification Improvements to Topic 842, Leasesand ASU 2018-11, Leases (Topic 842): Targeted Improvements; and in November 2018, ASU 2018-20, Leases (Topic 842): Narrow-scope Improvements for Lessors. This lease accounting guidance is effective for the Reserve Banks for the year ending December 31, 2020. The Board of Governors is continuing to evaluate the effect of this guidance on the Reserve Banks' combined financial statements, and is considering the information and processes necessary to adopt the guidance.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This update revises the methodology for assessing expected credit losses and requires consideration of reasonable and supportable information to inform credit loss estimates. Subsequently, in November 2018, the FASB issued one related ASU, ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses. The update is effective for the Reserve Banks for the year ending December 31, 2022, although earlier adoption is permitted, and is not expected to have a material effect on the Banks' combined financial statements.

In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This update requires an employer to disaggregate the service cost component from the other components of net benefit cost. It also provides explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allows only the service cost component of net benefit cost to be eligible for capitalization. This update is effective for the Reserve Banks for the year ending December 31, 2019, and is not expected to have a material effect on the Reserve Banks' combined financial statements.

In March 2017, the FASB issued ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20) – Premium Amortization on Purchased Callable Debt Securities. This update shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. This update is effective for the Reserve Banks for the year ending December 31, 2019, and is not expected to have a material effect on the Reserve Banks' combined financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820). This update modifies disclosure requirements for fair value measurements in Topic 820 to provide users of financial statements with information about assets and liabilities measured at fair value, including the valuation techniques, the uncertainty in fair value measurements, and how changes in the measurements will affect financial performance. This update is effective for the Reserve Banks for the year ending December 31, 2020. The Board of Governors is continuing to evaluate the effect of this new guidance on the Reserve Banks' combined financial statements.

In August 2018, the FASB issued ASU 2018-14, Retirement Benefits-Defined Benefits Plans-General (Subtopic 715-20). This update modifies the disclosure requirements for pension and postretirement plans. The update is effective for the Reserve Banks for the year ending December 31, 2021, although earlier adoption is permitted. The Board of Governors is continuing to evaluate the effect of this new guidance on the Reserve Banks' combined financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40). This update aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This update is effective for the Reserve Banks for the year ending December 31, 2021, although earlier adoption is permitted. The Board of Governors plans to early adopt this standard for the year ending December 31, 2019, and it is not expected to have a material effect on the Reserve Banks' combined financial statements.

(4) Loans
Loans to Depository Institutions

The Reserve Banks offer primary, secondary, and seasonal loans to eligible borrowers (depository institutions that maintain reservable transaction accounts or nonpersonal time deposits and have established discount window borrowing privileges). Each program has its own interest rate and 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 the 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; asset-backed securities; 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 the 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, 2018 and 2017 was as follows (in millions):

 

  Within 15 days 16 days to 90 days Total
December 31, 2018 $ 61 $ - $ 61
December 31, 2017 $ 133 $ 1 $ 134

At December 31, 2018 and 2017, 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, 2018 and 2017. Interest income attributable to loans to depository institutions was immaterial during the years ended December 31, 2018 and 2017.

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

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

Pursuant to FOMC directives, during the period from January 1, 2017 through September 30, 2017, the FRBNY continued to reinvest all principal payments from the SOMA's holdings of GSE debt securities and federal agency and GSE MBS in federal agency and GSE MBS and to roll over maturing Treasury securities at auction. In October 2017, the FOMC initiated a balance sheet normalization program intended to reduce gradually the SOMA holdings by decreasing reinvestment of the principal payments received from securities held in the SOMA through the implementation of monthly caps. Effective from October 2017 and through December 2017, the FOMC directed the FRBNY to roll over principal payments from the SOMA holdings of Treasury securities maturing during each calendar month that exceeded a $6 billion cap, and to reinvest in federal agency and GSE MBS the amount of principal payments from the SOMA holdings of GSE debt securities and federal agency and GSE MBS received during each calendar month that exceeded a $4 billion cap. Effective 2018, the monthly cap on Treasury redemptions increased in steps of $6 billion at three-month intervals until it reached $30 billion per month, and the monthly cap for federal agency and GSE MBS increased in steps of $4 billion at three-month intervals until it reached $20 billion per month. The FOMC also anticipates that the caps will remain in place so that the SOMA holdings will continue to decline in a gradual and predictable manner until the FOMC judges that the SOMA is holding no more securities than necessary to implement monetary policy efficiently and effectively.

The total Treasury securities, GSE debt securities, and federal agency and GSE MBS, net, excluding accrued interest, held in the SOMA at December 31, 2018 and 2017 was as follows (in millions):

 

  2018
Par Unamortized premiums Unaccreted discounts Total amortized cost
Treasury securities
Notes $ 1,382,654 $ 5,434 $ (4,159) $ 1,383,929
Bonds 839,893 87,579 (8,939) 918,533
Total Treasury securities $ 2,222,547 $ 93,013 $ (13,098) $ 2,302,462
         
GSE debt securities $ 2,409 $ 332 $ - $ 2,741
         
Federal agency and GSE MBS $ 1,637,123 $ 46,738 $ (329) $ 1,683,532

 

  2017
Par Unamortized premiums Unaccreted discounts Total amortized cost
Treasury securities
Notes $ 1,624,620 $ 9,665 $ (4,714) $ 1,629,571
Bonds 829,588 95,574 (9,000) 916,162
Total Treasury securities $ 2,454,208 $ 105,239 $ (13,714) $ 2,545,733
         
GSE debt securities $ 4,391 $ 361 $ - $ 4,752
         
Federal agency and GSE MBS $ 1,764,929 $ 53,160 $ (389) $ 1,817,700

There were no material transactions related to repurchase agreements during the years ended December 31, 2018 and 2017.

During the years ended December 31, 2018 and 2017, the FRBNY entered into reverse repurchase agreements as part of its monetary policy activities. These operations have been undertaken as necessary to maintain the federal funds rate in a target range. In addition, reverse repurchase agreements are entered into as part of a service offering to foreign official and international account holders. Financial information related to reverse repurchase agreements held in the SOMA for the years ended December 31, 2018 and 2017 was as follows (in millions):

 

  2018 2017
Primary dealers and expanded counterparties:
Contract amount outstanding, end of year $ 41,848 $ 319,595
Average daily amount outstanding, during the year 12,552 145,959
Maximum balance outstanding, during the year 319,595 468,355
Securities pledged (par value), end of year 42,485 302,690
Securities pledged (fair value), end of year 41,919 320,048
Foreign official and international accounts:
Contract amount outstanding, end of year $ 262,164 $ 244,363
Average daily amount outstanding, during the year 236,818 241,581
Maximum balance outstanding, during the year 262,164 264,290
Securities pledged (par value), end of year 261,615 240,660
Securities pledged (fair value), end of year 262,184 244,417
     
Total contract amount outstanding, end of year $ 304,012 $ 563,958
Supplemental information - interest expense:    
Primary dealers and expanded counterparties $ 186 $ 1,224
Foreign official and international accounts 4,373 2,141
Total interest expense - securities sold under agreements to repurchase $ 4,559 $ 3,365

Securities pledged as collateral, at December 31, 2018 and 2017, consisted solely of Treasury securities. The contract amount outstanding as of December 31, 2018 of reverse repurchase agreements that were transacted with primary dealers and expanded counterparties had a term of one business day and matured on January 2, 2019. The contract amount outstanding as of December 31, 2018 of reverse repurchase agreements that were transacted with foreign official and international account holders had a term of one business day and matured on January 2, 2019.

The remaining maturity distribution of Treasury securities, GSE debt securities, federal agency and GSE MBS bought outright, and reverse repurchase agreements at December 31, 2018 and 2017 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, 2018:
Treasury securities (par value) $ 2,092 $ 92,622 $ 290,222 $ 958,065 $ 260,898 $ 618,648 $ 2,222,547
GSE debt securities (par value) - 62 - - - 2,347 2,409
Federal agency and GSE MBS (par value) 1 - - 4 214 62,706 1,574,199 1,637,123
Securities sold under agreements to repurchase (contract amount) 304,012 - - - - - 304,012
               
December 31, 2017:
Treasury securities (par value) $ 20,601 $ 107,658 $ 315,420 $ 1,077,270 $ 310,375 $ 622,884 $ 2,454,208
GSE debt securities (par value) - - 1,982 62 - 2,347 4,391
Federal agency and GSE MBS (par value) 1 - - 1 173 20,013 1,744,742 1,764,929
Securities sold under agreements to repurchase (contract amount) 563,958 - - - - - 563,958

 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 7.0 and 6.9 years as of December 31, 2018 and 2017, respectively.

The amortized cost and par value of Treasury securities that were loaned from the SOMA under securities lending agreements at December 31, 2018 and 2017 were as follows (in millions):

 

  2018 2017
Treasury securities (amortized cost) $ 25,102 $ 28,053
Treasury securities (par value) 24,761 26,990

Securities pledged as collateral by the counterparties in the securities lending arrangements at December 31, 2018 and 2017 consisted solely of Treasury securities. The securities lending agreements outstanding as of December 31, 2018 had a term of one business day and matured on January 2, 2019.

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, 2018, 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, 2018, the total purchase price of the federal agency and GSE MBS under outstanding purchase commitments was $294 million, none of which was related to dollar rolls. These commitments, which had contractual settlement dates extending through January 2019, 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. As of December 31, 2018, there were no outstanding sales commitments for federal agency and GSE MBS. MBS 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 MBS commitments as part of its risk management practices used to mitigate the counterparty credit risk.

Other assets held in the SOMA consist primarily of cash and short-term investments related to the federal agency and GSE MBS portfolio and were immaterial and $13 million at December 31, 2018 and 2017, respectively. Other liabilities include the FRBNY's accrued interest payable related to repurchase agreements transactions, obligations to return cash margin posted by counterparties as collateral under commitments to purchase and sell federal agency and GSE MBS, and obligations that arise from the failure of a seller to deliver MBS 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 FRBNY's obligation to pay for the securities when delivered. The amount of other liabilities held in the SOMA at December 31, 2018 and 2017 was as follows (in millions):

 

  2018 2017
Other liabilities:
Accrued interest payable $ 25 $ 63
Cash margin 8 481
Obligations from MBS transaction fails 1 14
Total other liabilities $ 34 $ 558

In 2018, the description of the line item "Other liabilities: Other" has been revised to "Other liabilities: Accrued interest payable" in the preceding table to better reflect the nature of the item. The amount related to this line item was not changed from the prior year, only the nomenclature for the line item was revised.

Accrued interest receivable on domestic securities held in the SOMA was $22,160 million and $24,655 million as of December 31, 2018 and 2017, 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 held in the SOMA during the years ended December 31, 2018 and 2017, is summarized as follows (in millions):

 

Total SOMA
  Bills Notes Bonds Total Treasury securities GSE debt securities Federal agency and GSE MBS
Balance at December 31, 2016 $ - $ 1,647,339 $ 920,083 $ 2,567,422 $ 16,648 $ 1,795,003
             
Purchases 1 - 161,378 15,849 177,227 - 324,524
Sales 1 - (124) (326) (450) - (331)
Realized gains (losses), net2 - (2) 30 28 - 2
Principal payments and maturities - (175,933) (13,402) (189,335) (11,789) (290,939)
Amortization of premiums and accretion of discounts, net - (3,796) (7,917) (11,713) (107) (10,559)
Inflation adjustment on inflation-indexed securities - 709 1,845 2,554 - -
Subtotal of activty - (17,768) (3,921) (21,689) (11,896) 22,697
Balance at December 31, 2016 $ - $ 1,629,571 $ 916,162 $ 2,545,733 $ 4,752 $ 1,817,700
             
Purchases 1 126 192,346 15,560 208,032 - 121,190
Sales 1 (47) (49) (65) (161) - (253)
Realized gains (losses), net 2 - (1) 6 5 - (5)
Principal payments and maturities (79) (435,970) (7,731) (443,780) (1,982) (246,316)
Amortization of premiums and accretion of discounts, net - (2,929) (7,781) (10,710) (29) (8,784)
Inflation adjustment on inflation-indexed securities - 961 2,382 3,343 - -
Subtotal of activty - (245,642) 2,371 (243,271) (2,011) (134,168)
Balance at December 31, 2018 $ - $ 1,383,929 $ 918,533 $ 2,302,462 $ 2,741 $ 1,683,532
             
Year-ended December 31, 2017
Supplemental information - par value of transactions:
Purchases3 $ - $ 161,796 $ 15,976 $ 177,772 $ - $ 314,797
Sales - (125) (275) (400) - (320)
             
Year-ended December 31, 2018
Supplemental information - par value of transactions:
Purchases 3 $ 126 $ 193,093 $ 15,713 $ 208,932 $ - $ 118,762
Sales 3 (47) (51) (59) (157) - (251)

 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 (losses), net is the offset of 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 Investments

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

The FRBNY holds foreign currency deposits with foreign central banks and invests in foreign government debt instruments of France, Germany, the Netherlands, and Japan. These foreign government debt instruments are backed by the full faith and credit of the issuing foreign governments. In addition, the FRBNY may enter into repurchase agreements to purchase government debt securities for which the accepted collateral is the debt instruments issued by a foreign government.

At December 31, 2018 and 2017, there were no repurchase agreements outstanding and, consequently, no related foreign securities held as collateral.

Information about foreign currency denominated investments recorded at amortized cost and valued at foreign currency market exchange rates held in the SOMA at December 31, 2018 and 2017 was as follows (in millions):

 

  2018 2017
Euro:
Foreign currency deposits $ 6,390 $ 6,070
French government debt instruments 3,045 3,089
Dutch government debt instruments 1,511 1,626
German government debt instruments 1,440 2,239
     
Japanese yen:
Foreign currency deposits 7,286 6,765
Japanese government debt instruments 1,234 1,527
Total $ 20,906 $ 21,316

Net interest income earned on foreign currency denominated investments for the years ended December 31, 2018 and 2017 held in the SOMA as follows (in millions):

 

  2018 2017
Net interest income:1
Euro $ (30) $ (19)
Japanese yen 1 2
Total net interest income $ (29) $ (17)

 1. As a result of negative interest rates in certain foreign currency denominated investments held in the SOMA, interest income on foreign currency denominated investments, net contains negative interest of $43 million and $36 million for the years ended December 31, 2018 and 2017, respectively. Return to table

Accrued interest receivable on foreign currency denominated investments, net was $72 million and $82 million as of December 31, 2018 and 2017, 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, 2018 and 2017 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 Total
December 31, 2018:
Euro $ 6,425 $ 81 $ 448 $ 2,792 $ 2,640 $ 12,386
Japanese yen 7,286 90 301 843 - 8,520
Total $ 13,711 $ 171 $ 749 $ 3,635 $ 2,640 $ 20,906
             
December 31, 2017:
Euro $ 6,162 $ 102 $ 1,228 $ 3,134 $ 2,398 $ 13,024
Japanese yen 6,765 62 263 1,202 - 8,292
Total $ 12,927 $ 164 $ 1,491 $ 4,336 $ 2,398 $ 21,316

There were no foreign exchange contracts related to foreign currency operations outstanding as of December 31, 2018.

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, 2018, there were no outstanding commitments to purchase foreign government debt instruments. During 2018, there were purchases, sales, and maturities of foreign government debt instruments of $842 million, $2 million, and $1,734 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 monitoring procedures.

Foreign currency working balances held and foreign exchange contracts executed by the FRBNY to facilitate international payments and currency transactions made on behalf of foreign central banks and U.S. official institution customers were immaterial as of December 31, 2018 and 2017.

c. Central Bank Liquidity Swaps

U.S. Dollar Liquidity Swaps

The total foreign currency held in the SOMA under U.S. dollar liquidity swaps at December 31, 2018 and 2017 was $4,207 million and $12,067 million.

The remaining maturity distribution of U.S. dollar liquidity swaps at December 31, 2018 and 2017 was as follows (in millions):

 

  2018 2017
Within 15 days Within 15 days
Euro $ 4,197 $ 11,907
Japanese yen 10 160
Total $ 4,207 $ 12,067

Foreign Currency Liquidity Swaps

At December 31, 2018 and 2017, there was no balance outstanding related to foreign currency liquidity swaps.

d. Fair Value of SOMA Assets and Liabilities

The fair value amounts below are presented solely for informational purposes and are not intended to comply with the fair value disclosures required by ASC 820. 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. Because SOMA securities are recorded at amortized cost, cumulative unrealized gains (losses) are not recognized in the Combined Statements of Condition and the changes in cumulative unrealized gains (losses) are not recognized in the Combined Statements of Operations.

The fair value of the Treasury securities, GSE debt securities, federal agency and GSE MBS, and foreign government debt instruments held in the SOMA 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, 2018 and 2017, there are no credit impairments of SOMA securities holdings.

The following table presents the amortized cost, fair value, and cumulative unrealized gains (losses) on the Treasury securities, GSE debt securities, and federal agency and GSE MBS held in the SOMA at December 31, 2018 and 2017 (in millions):

 

  2018 2017
Amortized cost Fair value Cumulative unrealized gains (losses), net Amortized cost Fair value Cumulative unrealized gains (losses), net
Treasury securities:
Notes $ 1,383,929 $ 1,370,515 $ (13,414) $ 1,629,571 $ 1,624,540 $ (5,031)
Bonds 918,533 967,479 48,946 916,162 1,008,468 92,306
Total Treasury securities 2,302,462 2,337,994 35,532 2,545,733 2,633,008 87,275
GSE debt securities 2,741 3,222 481 4,752 5,383 631
Federal agency and GSE MBS 1,683,532 1,641,381 (42,151) 1,817,700 1,809,918 (7,782)
Total domestic SOMA portfolio securities holdings $ 3,988,735 $ 3,982,597 $ (6,138) $ 4,368,185 $ 4,448,309 $ 80,124
             
Memorandum - Commitments for:
Purchases of Treasury securities $ - $ - $ - $ 11,447 $ 11,467 $ 20
Purchases of Federal agency and GSE MBS 294 296 2 19,257 19,285 28
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 pricing services that utilize a model-based approach that considers observable inputs for similar securities.

The cost bases of repurchase agreements, reverse repurchase agreements, central bank liquidity swaps, and other investments held in the SOMA portfolio approximate fair value. Due to the short-term nature of these agreements and the defined amount that will be received upon settlement, the cost basis approximates fair value.

At December 31, 2018 and 2017, the fair value of foreign currency denominated investments held in the SOMA was $20,957 million and $21,348 million, respectively. The fair value of foreign government debt instruments was determined using pricing services that provide market consensus prices based on indicative quotes from various market participants. Due to the short-term nature of foreign currency deposits, the cost basis is estimated to approximate fair value.

The following table provides additional information on the amortized cost and fair value of the federal agency and GSE MBS portfolio held in the SOMA at December 31, 2018 and 2017 (in millions):

 

Distribution of MBS holdings by coupon rate 2018 2017
Amortized cost Fair value Amortized cost Fair value
Total SOMA:        
2.0% $ 7,532 $ 7,296 $ 8,968 $ 8,739
2.5% 92,877 89,530 110,452 108,371
3.0% 601,805 577,317 674,138 660,939
3.5% 585,114 571,406 630,590 630,245
4.0% 297,546 294,038 289,819 291,868
4.5% 69,474 71,559 68,069 71,896
5.0% 23,296 24,128 28,352 30,048
5.5% 5,097 5,277 6,318 6,739
6.0% 691 722 870 939
6.5% 100 108 124 134
Total $ 1,683,532 $ 1,641,381 $ 1,817,700 $ 1,809,918

The following tables present the realized gains (losses) and the change in the cumulative unrealized gains (losses) related to SOMA domestic securities holdings held in the SOMA during the years ended December 31, 2018 and 2017 (in millions):

 

  2018 2017
Realized gains (losses), net 1 ,2 Change in cumulative unrealized gains (losses)3 Realized gains (losses), net 1, 2 Change in cumulative unrealized gains (losses) 3
Treasury securities $ 5 $ (51,743) $ 28 $ 13,991
GSE debt securities - (150) - (163)
Federal agency and GSE MBS (3) (34,369) 8 (263)
Total $ 2 $ (86,262) $ 36 $ 13,565

 1. Realized gains (losses) for Treasury securities are reported in "Other items of income (loss): System Open Market Account: Treasury securities gains, net" in the Combined Statements of Operations. Return to table

 2. Realized gains (losses) for federal agency and GSE MBS are reported in "Other items of income (loss): System Open Market Account: Federal agency and government-sponsored enterprise mortgage-backed securities (losses) gains, net" in the Combined Statements of Operations. Return to table

 3. Because SOMA securities are recorded at amortized cost, the change in the cumulative unrealized gains (losses) is not reported in the Combined Statements of Operations. Return to table

The amount of change in cumulative unrealized gains (losses) position, net related to foreign currency denominated investments was a gain of $19 million and a loss of $36 million for the years ended December 31, 2018 and 2017, respectively. Realized gains, net related to foreign currency denominated investments was immaterial for the years ended December 31, 2018 and 2017.

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) Consolidated Variable Interest Entity
a. Description of Consolidated VIE

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 FRBNY committed to the transaction, and largely consisted of federal agency and GSE MBS, non-agency residential mortgage-back 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, both of which were repaid in full plus interest in 2012. During 2018, the FRBNY sold all remaining securities from the ML portfolio and in accordance with the ML agreements, net proceeds were distributed to the FRBNY. On November 1, 2018, ML LLC was dissolved. While its affairs are being wound up, ML LLC will retain minimal cash to meet trailing expenses and other obligations as required by law. The costs to wind up ML LLC are not expected to be material.

b. Summary Information for Consolidated VIE

As of December 31, 2018, investments held by the consolidated VIE consisted primarily of $0.4 million in cash equivalents. The classification of significant assets and liabilities of ML at December 31, 2017 is summarized in the following table (in millions):

 

  2017
Assets:
Short-term investments $ 998
Swap contracts 5
Other investments 1
Subtotal 1,004
   
Cash, cash equivalents, accrued interest receivable, and other receivables 716
Cash collateral on swap contracts 2
Total investments held by consolidated VIE $ 1,722
   
Liabilities:
Swap contracts $ 8
Other liabilities 1
Total liabilities of consolidated VIE 9
Investments held by consolidated VIE, net $ 1,713

At December 31, 2018, FRBNY had no remaining exposure to loss from its investments. At December 31, 2017, FRBNY's approximate maximum exposure to loss was $1,004 million. This estimate incorporates potential losses associated with the investments recorded on the FRBNY's balance sheet.

The net income attributable to ML for the year ended December 31, 2018 and 2017 was as follows (in millions):

 

  2018 2017
Other items of income:
Interest income: Investments held by consolidated VIE $ 20 $ 15
Realized portfolio holdings losses, net (58) (6)
Unrealized portfolio holdings gains (losses), net 47 (3)
Other items of income: Consolidated VIE, net 9 6
     
Less: Professional fees 2 2
Net income attributable to consolidated VIE $ 7 $ 4

i. Debt Securities

ML had short-term investments with maturities of greater than three months and less than one year when acquired. As of December 31, 2018 there were no remaining investments in debt securities held in ML. As of December 31, 2017, ML's short-term investments consisted of U.S. Treasury bills.

ii. 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. As of December 31, 2018, there were no remaining derivative financial instruments in ML and the total return swap (TRS) with JPMC was terminated on September 11, 2018. As of December 31, 2017, the ML portfolio was composed of derivative financial instruments included in a TRS agreement with JPMC. ML and JPMC entered into the TRS with reference obligations representing CDS primarily on commercial mortgage-backed securities and RMBS, with various market participants, including JPMC.

c. Fair Value Measurement

ML has adopted ASC 820 and ASC 825 and has elected the fair value option for all holdings. The accounting and classification of these investments appropriately reflect ML's 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 entity's obligations.

Determination of Fair Value

ML values its investments and cash equivalents on the basis of last available bid prices or current market quotations provided by dealers or pricing services selected under the supervision of the FRBNY's designated investment manager. To determine the value of a particular investment, pricing services may use certain information with respect to market transactions in such investments or comparable investments, various relationships observed in the market between investments, quotations from dealers, and pricing metrics and calculated yield measures based on valuation methodologies commonly employed in the market for such investments. The fair value of swap contracts is provided by JPMC as calculation agent and is reviewed by the investment manager.

Market quotations may not represent fair value in certain instances in which the investment manager and the VIE believe that facts and circumstances applicable to an issuer, a seller, a purchaser, or the market for a particular investment cause such market quotations to not reflect the fair value of an investment. In such cases or when market quotations are unavailable, the investment manager applies proprietary valuation models that use collateral performance scenarios and pricing metrics derived from the reported performance of investments with similar characteristics as well as available market data to determine fair value.

Due to 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 from the values that may ultimately be realized and paid.

As of December 31, 2018, all remaining assets, consisting entirely of cash equivalents, were classified as Level 1. There were no remaining Level 2 or Level 3 assets or liabilities held in ML as of December 31, 2018. The following table presents the financial instruments recorded in the VIE at fair value as of December 31, 2017 by ASC 820 hierarchy (in millions):

 

  Level 11 Level 2 1 Level 3 1 Netting2 Total fair value
Assets:
Short-term investments $ 998 $ - $ - $ - $ 998
Cash equivalents3 716 - - - 716
Swap contracts - - 6 (1) 5
Other investments - 1 - - 1
Total assets $ 1,714 $ 1 $ 6 $ (1) $ 1,720
           
Liabilities:
Swap contracts $ - $ - $ 14 $ (6) $ 8
Investments held by consolidated VIE, net $ 1,714 $ 1 $ (8) $ 5 $ 1,712

 1. There were no transfers between Levels during the year ended December 31, 2017. 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

Certain amounts relating to the prior year have been revised in the preceding table. $716 million previously reported as of December 31, 2017 as "Assets: Short-term investments" has been revised to $998 million. $998 million previously reported as of December 31, 2017 as "Assets: Cash equivalents" has been revised to $716 million.

As of December 31, 2017, both the Level 3 assets and liabilities held in the Combined Statements of Condition as "Investments held by consolidated variable interest entity, net", and the associated unrealized gains and losses related to those assets and liabilities are immaterial.

(7) Bank Premises, Equipment, and Software

Bank premises and equipment at December 31, 2018 and 2017 were as follows (in millions):

 

  2018 2017
Bank premises and equipment:
Land and land improvements $ 418 $ 408
Buildings 2,978 2,923
Building machinery and equipment 668 633
Construction in progress 68 64
Furniture and equipment 1,068 1,077
Subtotal 5,200 5,105
     
Accumulated depreciation (2,647) (2,534)
     
Bank premises and equipment, net $ 2,553 $ 2,571
     
Depreciation expense, for the years ended December 31 $ 223 $ 217

Reserve Bank premises and equipment at December 31, 2018 and 2017 included the following amounts for capitalized leases (in millions):

 

  2018 2017
Leased premises and equipment under capital leases $ 30 $ 29
Accumulated depreciation (21) (23)
Leased premises and equipment under capital leases, net $ 9 $ 6
Depreciation expense related to leased premises and equipment under capital leases, for the years ended December 31 $ 4 $ 3

The Reserve Banks lease space to outside tenants with remaining lease terms ranging from 1 to 15 years. Rental income from such leases was $41 million and $40 million for the years ended December 31, 2018 and 2017, respectively, and is reported as a component of "Other items of income (loss): Other" in the Combined Statements of Operations. Future minimum lease payments that the Reserve Banks will receive under non-cancelable lease agreements in existence at December 31, 2018, are as follows (in millions):

 

2019 $ 38
2020 36
2021 32
2022 28
2023 23
Thereafter 55
Total $ 212

The Reserve Banks had capitalized software assets, net of amortization, of $436 million and $438 million at December 31, 2018 and 2017, respectively. Amortization expense was $134 million and $122 million for the years ended December 31, 2018 and 2017, 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 Operations.

(8) Commitments and Contingencies

In conducting their 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, 2018, the Reserve Banks were obligated under non-cancelable leases for premises and equipment with remaining terms ranging from 1 to approximately 11 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 $14 million and $16 million for the years ended December 31, 2018 and 2017, respectively.

Future minimum lease payments under non-cancelable operating leases, net of sublease rentals, with remaining terms of one year or more, at December 31, 2018, are as follows (in millions):

 

  Operating leases
2019 $ 5
2020 5
2021 3
2022 3
2023 3
Thereafter 6
Future minimum lease payments $ 25

At December 31, 2018, the Reserve Banks had unrecorded unconditional purchase commitments and long-term obligations extending through the year 2022 with a remaining fixed commitment of $118 million. Purchases of $36 million and $37 million were made against these commitments during 2018 and 2017, respectively. These commitments represent maintenance of currency processing machines and development of new equipment and have variable and 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):

 

2019 $ 18
2020 42
2021 29
2022 29

Under the Insurance Agreement of the Reserve Banks, each of the Reserve Banks has agreed to bear, on a per-incident basis, a share of certain losses in excess of 1 percent of the capital paid-in of the claiming Reserve Bank, up to 50 percent of the total capital paid-in of all Reserve Banks. Losses are borne in the ratio of a Reserve Bank's capital paid-in to the total capital paid-in of all Reserve Banks at the beginning of the calendar year in which the loss is shared. No claims were outstanding under the agreement at December 31, 2018 and 2017.

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.

(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 (OEB) participate in the Retirement Plan for Employees of the Federal Reserve System (System Plan).1 Under the Dodd-Frank Act, eligible Bureau employees may participate in the System Plan and, during the years ended December 31, 2018 and 2017, certain costs associated with the System Plan were reimbursed by the Bureau. 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. The net costs related to the System Plan, as well as the costs related to the BEP and SERP, as a component of "Operating expenses: Net periodic pension expense" in its Combined Statements of Operations. Accrued pension benefit costs are reported as a component of "Prepaid pension benefit costs" if the funded status is a net asset or "Accrued benefit costs" if the funded status is a net liability in the Combined Statements of Condition.

Following is a reconciliation of the beginning and ending balances of the System Plan benefit obligation for the years ended December 31, 2018 and 2017 (in millions):

 

  2018 2017
Estimated actuarial present value of projected benefit obligation at January 1 $ 16,501 $ 14,642
Service cost-benefits earned during the period 576 486
Interest cost on projected benefit obligation 622 614
Actuarial loss (gain) (1,621) 1,179
Contributions by plan participants 6 4
Special termination benefits 12 11
Benefits paid (463) (435)
Estimated actuarial present value of projected benefit obligation at December 31 $ 15,633 $ 16,501

Annually, the Society of Actuaries released new mortality tables and updated mortality projection scales. The System analyzed these new tables relative to the System's actual retiree mortality experience. Based on these analyses, the System in 2018 adopted the modified MP-2018 projections scales and RP-2014 mortality tables with various adjustments to reflect the System's recent mortality experience of System retirees. These adjustments resulted in a reduction to the System Plan projected benefit obligation of approximately $62 million and $70 million in 2018 and 2017, respectively.

Following is a reconciliation showing the beginning and ending balance of the System Plan assets, the funded status, and the accrued pension benefit costs for the years ended December 31, 2018 and 2017 (in millions):

 

  2018 2017
Estimated plan assets at January 1 (of which $16,454 and $13,671 is measured at fair value as of January 1, 2018 and 2017, respectively) $ 16,515 $ 13,699
Actual return on plan assets (920) 2,497
Contributions by the employer 276 750
Contributions by plan participants 6 4
Benefits paid (463) (435)
Estimated plan assets at December 31 (of which $15,389 and $16,454 is measured at fair value as of December 31, 2018 and 2017, respectively) $ 15,414 $ 16,515
     
Funded status and accrued pension benefit costs $ (219) $ 14
Amounts included in accumulated other comprehensive loss are shown below:
Prior service cost $ (20) $ (82)
Net actuarial loss (3,167) (3,045)
Total accumulated other comprehensive loss $ (3,187) $ (3,127)

The FRBNY, on behalf of the System, funded $240 million and $720 million during the years ended December 31, 2018 and 2017, 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 2018 and 2017, the Bank received contributions from the Bureau of $36 million and $30 million, respectively.

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 $13,705 million and $14,376 million at December 31, 2018 and 2017, respectively.

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

 

  2018 2017
Discount rate 4.36% 3.65%
Rate of compensation increase 4.25% 4.00%

Net periodic benefit expenses for the years ended December 31, 2018 and 2017 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:

 

  2018 2017
Discount rate 3.65% 4.15%
Expected asset return 6.00% 6.50%
Rate of compensation increase 4.00% 4.00%

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 various asset classes; and projected returns for equities and fixed income investments based on observable inputs for real interest rates, inflation expectations, and equity risk premiums. In 2018, a change in estimate was made to the discount rate methodology used by the actuarial model to determine the System Plan's projected benefit obligation. Specifically, the discount rate methodology was refined to expand the universe of eligible fixed income securities and market pricing data. This change was applied prospectively and resulted in a reduction to the System Plan projected benefit obligation of approximately $324 million for the year ended December 31, 2018.

The components of net periodic pension benefit expense (credit) for the System Plan for the years ended December 31, 2018 and 2017 are shown below (in millions):

 

  2018 2017
Service cost - benefits earned during the period $ 576 $ 486
Interest cost on projected benefit obligation 622 614
Amortization of prior service cost 62 88
Amortization of net loss 160 209
Expected return on plan assets (983) (899)
Net periodic pension benefit expense 437 498
Special termination benefits 12 11
Bureau of Consumer Financial Protection contributions (36) (30)
Total periodic pension benefit expense $ 413 $ 479

Estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic pension benefit expense in 2019 are shown below (in millions):

 

Prior service cost $ 9
Net actuarial loss 160
Total $ 169

The recognition of special termination benefits is primarily the result of enhanced retirement benefits provided to employees in the normal course of operations. Following is a summary of expected benefit payments, excluding enhanced retirement benefits (in millions):

 

2019 $ 539
2020 577
2021 616
2022 656
2023 697
2024 - 2028 4,094
Total $ 7,179

The System's Committee on Plan Administration is responsible for oversight of the operations of the Retirement Plan, which includes the Retirement Plan trust and for determining the amounts necessary to maintain the Retirement Plan on an actuarially sound basis and the amounts that employers must contribute to pay the expenses of OEB and the Retirement Plan.

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, 2018, the System Plan's assets were held in 25 investment vehicles: 5 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, 4 private equity limited partnerships, a private equity separate account, 4 core real estate funds, 6 real estate limited partnerships, and a money market fund.

The diversification of the System 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 of either Bloomberg, Barclays, or Citigroup 15+ years U.S. Treasury STRIPS Index. This custom benchmark was selected as a proxy to match the liabilities of the System 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 2 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 CRSP U.S. Total 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 22 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 24 markets deemed by MSCI to be "emerging markets."

The 3 indexed equity funds include stocks from across the market capitalization spectrum (i.e., large-, mid- and small-cap stocks).

The 4 private equity limited partnerships invest globally across various private equity strategies and the private equity separate account invests in various private equity investments globally across various strategies. The private equity separate account invests in various private equity funds (both primary and secondary interests) and coinvestment opportunities globally in private companies and targets returns in excess of public markets over a complete market cycle.

The 4 core real estate funds invest in high quality, well leased, low leverage commercial real estate throughout the U.S.

The 6 real estate limited partnerships invest in non-core U.S. and international commercial real estate including development and repositioning of assets. 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 certain 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 they are 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, 2018 and 2017 by asset category, are as follows:

 

  2018
Policy weight
Actual asset allocations
2018 2017
Fixed income 50.0% 51.6% 48.6%
U.S. equities 21.9% 21.1% 22.8%
International equities 14.0% 13.3% 16.0%
Emerging markets equities 4.7% 4.4% 5.1%
Private equity 4.7% 5.1% 3.6%
Real estate 4.7% 3.8% 2.9%
Cash 0.0% 0.7% 1.0%
Total 100.0% 100.0% 100.0%

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 2019 is $180 million. In 2019, the FRBNY plans to make monthly contributions of $15 million and will reevaluate the monthly contributions upon completion of the 2019 actuarial valuation. The Reserve Banks' projected benefit obligation, funded status, and net pension expenses for the BEP and the SERP at December 31, 2018 and 2017, and for the years then ended, were immaterial.

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.

Collective trust funds are valued using the net asset value, calculated daily, based on the fair value of the underlying investments. Private equity and real estate investments are valued using the net asset value, as a practical expedient, which is based on the fair value of the underlying investments. The net asset value is adjusted for contributions, distributions, and both realized and unrealized gains and losses incurred during the period. The realized and unrealized gains and losses are based on reported valuation changes.

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, 2018 and 2017 by ASC 820 hierarchy (in millions):

 

Description 2018
Level 1 Level 2 Level 3 Total 1
Short-term investments $ 159 $ - $ - $ 159
Treasury and Federal agency securities 136 2,697 - 2,833
Corporate bonds - 2,844 - 2,844
Other fixed income securities - 327 - 327
Collective trusts 7,844 - - 7,844
Investments measured at net asset value 2 - - - 1,375
Total investments at fair value 3 $ 8,139 $ 5,868 $ - $ 15,382

 1. There were no transfers between Levels during the year ended December 31, 2018. Return to table

 2. Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy. Return to table

 3. In addition to total investments, the System Plan holds future margin receivable of $14 million and future margin payable of $7 million at December 31, 2018. Return to table

 

Description 2017
Level 1 Level 2 Level 3 Total 1
Short-term investments $ 226 $ - $- $ 226
Treasury and Federal agency securities 87 2,785 - 2,872
Corporate bonds - 3,072 - 3,072
Other fixed income securities - 381 - 381
Collective trusts 8,838 - - 8,838
Investments measured at net asset value 2 - - - 1,062
Total investments at fair value3 $ 9,151 $ 6,238 $ - $ 16,451

 1. There were no transfers between Levels during the year ended December 31, 2017. Return to table

 2. Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy. Return to table

 3. In addition to total investments, the System Plan holds future margin receivable of $4 million and future margin payable of $1 million at December 31, 2017. 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, 2018 and 2017, a portion of short-term investments was available for futures trading. There were $5 million and $7 million of Treasury securities pledged as collateral for the years ended December 31, 2018 and 2017, 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 6 percent of employee contributions from the date of hire and provides an automatic employer contribution of 1 percent of eligible pay. The Reserve Banks' Thrift Plan contributions totaled $141 million and $136 million for the years ended December 31, 2018 and 2017, respectively, and are reported as a component of "Operating expenses: Salaries and benefits" in the Combined Statements of Operations.

(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 and plan participants fund benefits payable under the medical and life insurance plans as due and the plans have no assets.

Following is a reconciliation of the beginning and ending balances of the benefit obligation for the years ended December 31, 2018 and 2017 (in millions):

 

  2018 2017
Accumulated postretirement benefit obligation at January 1 $ 1,865 $ 1,751
Service cost benefits earned during the period 86 75
Interest cost on accumulated benefit obligation 68 70
Net actuarial loss (gain) (117) 48
Contributions by plan participants 28 26
Benefits paid (104) (103)
Medicare Part D subsidies 2 2
Plan amendments (1) (4)
Accumulated postretirement benefit obligation at December 31 $ 1,827 $ 1,865

At December 31, 2018 and 2017, the weighted-average discount rate assumptions used in developing the postretirement benefit obligation were 4.26 percent and 3.59 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. The System Plan discount rate assumption setting convention uses an unrounded rate.

Following is a reconciliation of the beginning and ending balance of the plan assets, and the unfunded postretirement benefit obligation and accrued postretirement benefit costs for the years ended December 31, 2018 and 2017 (in millions):

 

  2018 2017
Fair value of plan assets at January 1 $ - $ -
Contributions by the employer 74 75
Contributions by plan participants 28 26
Benefits paid (104) (103)
Medicare Part D subsidies 2 2
Fair value of plan assets at December 31 $ - $ -
     
Unfunded obligation and accrued postretirement benefit cost $ 1,827 $ 1,865
     
Amounts included in accumulated other comprehensive loss are shown below:
     
Prior service cost $ 98 $ 128
Net actuarial loss (203) (336)
Deferred curtailment gain - 1
Total accumulated other comprehensive loss $ (105) $ (207)

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, 2018 and 2017 are provided in the table below:

 

  2018 2017
Health-care cost trend rate assumed for next year 6.25% 6.20%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) 4.75% 4.75%
Year that the rate reaches the ultimate trend rate 2025 2022

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, 2018 (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 $ 28 $ (23)
Effect on accumulated postretirement benefit obligation 241 (203)

The following is a summary of the components of net periodic postretirement benefit expense for the years ended December 31, 2018 and 2017 (in millions):

 

  2018 2017
Service cost-benefits earned during the period $ 86 $ 75
Interest cost on accumulated benefit obligation 68 70
Amortization of prior service cost (32) (33)
Amortization of net actuarial loss 18 11
Total periodic expense 140 123
Curtailment gain (1) -
Net periodic postretirement benefit expense $ 139 $ 123

Estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic postretirement benefit expense in 2019 are shown below:

 

Prior service cost $ (31)
Net actuarial loss 8
Total $ (23)

Net postretirement benefit costs are actuarially determined using a January 1 measurement date. At January 1, 2018 and 2017, the weighted-average discount rate assumptions used to determine net periodic postretirement benefit costs were 3.59 percent and 4.07 percent, respectively.

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

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 the actuarial loss in the accumulated postretirement benefit obligation and net periodic postretirement benefit expense.

Federal Medicare Part D subsidy receipts were immaterial in the years ended December 31, 2018 and 2017. Expected receipts in 2019, related to benefits paid in the years ended December 31, 2018 and 2017, are immaterial.

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

 

  Without subsidy With subsidy
2019 $ 78 $ 77
2020 86 85
2021 91 90
2022 97 95
2023 103 101
2024 - 2028 593 581
Total $ 1,048 $ 1,029
Postemployment Benefits

The Reserve Banks offer benefits to former qualifying or inactive employees. Postemployment benefit costs are actuarially determined using a December 31 measurement date and include the cost of providing disability; medical, dental, and vision insurance; survivor income benefits, and certain workers' compensation expenses. The accrued postemployment benefit costs recognized by the Reserve Banks at December 31, 2018 and 2017 were $110 million and $131 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 2018 and 2017 operating expenses were $3 million and $13 million, respectively, and are recorded as a component of "Operating expenses: Salaries and benefits" in the Combined Statements of Operations.

(11) Accumulated Other Comprehensive Income and Other Comprehensive Income

Following is a reconciliation of beginning and ending balances of accumulated other comprehensive income (loss) as of December 31, 2018 and 2017 (in millions):

 

  2018 2017
Amount related to defined benefit retirement plan Amount related to postretirement benefits other than retirement plans Total accumulated other comprehensive income (loss) Amount related to defined benefit retirement plan Amount related to postretirement benefits other than retirement plans Total accumulated other comprehensive income (loss)
Balance at January 1 $ (3,127) $ (207) $ (3,334) $ (3,844) $ (141) $ (3,985)
Change in funded status of benefit plans:
Prior service costs arising during the year - 1 1 - 4 4
Amortization of prior service cost 621 (32)2 30 88 1 (33) 2 55
Change in prior service costs related to benefit plans 62 (31) 31 88 (29) 59
Net actuarial gain (loss) arising during the year (282) 116 (166) 420 (48) 372
Amortization of net actuarial loss 160 1 18 2 178 209 1 11 2 220
Amortization of deferred curtailment gain - (1) (1) - - -
Change in actuarial gain (loss) related to benefit plans (122) 133 11 629 (37) 592
Change in funded status of benefit plans—other comprehensive income (loss) (60) 102 42 717 (66) 651
Balance at December 31 $ (3,187) $ (105) $ (3,292) $ (3,127) $ (207) $ (3,334)

 1. Reclassification is reported as a component of "Operating expenses: Net periodic pension expense" in the Combined Statements of Operations. Return to table

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

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

(12) Reconciliation of Total Distribution of Comprehensive Income

In accordance with the Federal Reserve Act, the Reserve Banks remit excess earnings to the Treasury after providing for the cost of operations, payment of dividends, and reservation of an amount necessary to maintain the Reserve Bank's allocated portion of the aggregate surplus limitation.

For the year ending December 31, 2017 and through February 8, 2018, the aggregate surplus limitation was $10 billion. On February 9, 2018, the Budget Act reduced the aggregate surplus limitation to $7.5 billion, which required the Reserve Banks to make a lump-sum payment to the Treasury in the amount of $2.5 billion, and the payment was remitted to the Treasury on February 22, 2018.

On May 24, 2018, the Economic Growth Act reduced the aggregate surplus limitation to $6.825 billion, which required the Reserve Banks to make a lump-sum payment to the Treasury in the amount of $675 million, and the payment was remitted to the Treasury on June 21, 2018.

The following table presents the distribution of the System total comprehensive income for the years ended December 31, 2018 and 2017 (in millions):

 

  2018 2017
Net income before providing for remittances to Treasury $ 63,101 $ 80,692
Other comprehensive income 42 651
Comprehensive income - available for distribution $ 63,143 $ 81,343
     
Distribution of comprehensive income (loss):
Transfer from surplus $ (3,175) $ -
Dividends 999 784
Earnings remittances to the Treasury1 65,319 80,559
Total distribution of comprehensive income $ 63,143 $ 81,343

 1. Inclusive of lump-sum payments required by legislation enacted during the year ended December 31, 2018. Return to table

(13) Subsequent Events

There were no subsequent events that required adjustments to or disclosures in the combined financial statements as of December 31, 2018. Subsequent events were evaluated through March 8, 2019, which is the date that the combined financial statements were available to be issued.

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 plans and conducts audits, inspections, evaluations, investigations, and other reviews relating to Board and CFPB programs and operations, including functions that the Board has delegated to the Federal Reserve Banks. It also retains an independent public accounting firm to annually audit the Board's and the Federal Financial Institutions Examination Council's financial statements. These activities promote economy and efficiency; enhance policies and procedures; and prevent and detect waste, fraud, and abuse. In addition, the OIG keeps the Congress, the Board of Governors, and the CFPB director fully informed about serious abuses and deficiencies.

During 2018, the OIG issued 26 reports (table 1) to the Board and the CFPB and conducted follow-up reviews to evaluate actions taken on prior recommendations. Because of the sensitive nature of some of the material, the OIG issued four nonpublic reports to the Board and three nonpublic reports to the CFPB, as indicated. Regarding the OIG's investigative work related to the Board and the CFPB, 29 investigations were opened and 31 investigations were closed during the year. OIG investigative work resulted in 4 indictments, 10 convictions, and 4 prohibitions from the banking industry, as well as $1.34 billion in criminal fines and restitution. The OIG also issued its listings of major management challenges facing the Board and the CFPB. Further, the OIG issued two semiannual reports to Congress and performed approximately 30 reviews of legislation and regulations related to the operations of the Board, the CFPB, or the OIG.

For more information and to view OIG reports, visit the OIG's website at https://oig.federalreserve.gov. Specific details about the OIG's body of work also may be found in the OIG's Work Plan and semiannual reports to Congress.

Table 1. OIG reports issued in 2018

Report title Month issued
The CFPB Can Further Strengthen Controls Over Certain Offboarding Processes and Data January
Audit of the CFPB's Encryption of Data on Mobile Devices (nonpublic report) January
Report on the Independent Audit of the Consumer Financial Protection Bureau's Privacy Program February
Fiscal Year 2017 Risk Assessment of the CFPB's Travel Card Program February
Fiscal Year 2017 Risk Assessment of the CFPB's Purchase Card Program February
Federal Financial Institutions Examination Council Financial Statements as of and for the Years Ended December 31, 2017 and 2016, and Independent Auditors' Reports February
Board of Governors of the Federal Reserve System Financial Statements as of and for the Years Ended December 31, 2017 and 2016, and Independent Auditors' Reports March
Security Control Review of the RADAR Data Warehouse (nonpublic report) March
Review of the Failure of Allied Bank March
Security Control Review of the Board's Public Website (nonpublic report) March
Closure of the Security Control Review of the CFPB's SQL Operating Environment (nonpublic report) March
Independent Accountants' Report on the Bureau Civil Penalty Fund's 2017 Compliance With the Improper Payments Information Act of 2002, as Amended May
In Accordance With Applicable Guidance, Reserve Banks Rely on the Primary Federal Regulator of the Insured Depository Institution in the Consolidated Supervision of Regional Banking Organizations, but Document Sharing Can Be Improved June
The Bureau Could Have Better Managed Its GMMB Contract and Should Strengthen Controls for Contract Financing and Contract Management June
Security Control Review of the Bureau's Mosaic System (nonpublic report) June
Knowledge Management for the Board's Comprehensive Liquidity Analysis and Review Is Generally Effective and Can Be Further Enhanced September
The Bureau's Travel Card Program Controls Are Generally Effective but Could Be Further Strengthened September
Review of the Failure of Fayette County Bank September
Security Control Review of the Board Division of Research and Statistics' General Support System (nonpublic report) September
2018 Audit of the Board's Information Security Program October
2018 Audit of the Bureau's Information Security Program October
Evaluation of the Board's Implementation of Splunk (nonpublic report) November
The Board Can Strengthen Information Technology Governance November
The Board's Currency Shipment Process Is Generally Effective but Can Be Enhanced to Gain Efficiencies and to Improve Contract Administration December
Bureau Purchase Card Program Controls Appear to Be Operating Effectively December
The Board Can Strengthen Controls Over Its Academic Assistance Program December

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 Fed-eral Reserve System operations. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) directs the GAO to conduct additional audits with respect to these operations. In 2018, the GAO completed 18 projects that involved the Federal Reserve (table 1). Twelve projects were ongoing as of December 31, 2018 (table 2).

Table 1. Reports completed during 2018

Report title Report number Month issued (2018)
Dodd-Frank Regulations: Consumer Financial Protection Bureau Needs a Systematic Process to Prioritize Consumer Risks GAO-19-158 December
Financial Technology: Agencies Should Provide Clarification on Lenders' Use of Alternative Data GAO-19-111 December
Financial Company Bankruptcies: Experts Had Mixed Views on Companies' Controls for Mitigating Obstacles GAO-19-30 December
Financial Audit: Bureau of the Fiscal Service's Fiscal Years 2018 and 2017 Schedules of Federal Debt GAO-19-113 November
Community Banks: Effect of Regulations on Small Business Lending and Institutions Appears Modest, but Lending Data Could Be Improved GAO-18-312 September
Freedom of Information Act: Agencies Are Implementing Requirements but Additional Actions Are Needed GAO-18-365 June
Small Business Loans: Additional Actions Needed to Improve Compliance with the Credit Elsewhere Requirement GAO-18-421 June
Puerto Rico: Factors Contributing to the Debt Crisis and Potential Federal Actions to Address Them GAO-18-387 May
Bureau of Engraving and Printing: Options for and Costs of a Future Currency Production Facility GAO-18-338 May
Management Report: Areas for Improvement in the Federal Reserve Banks' Information System Controls GAO-18-334R April
Financial Technology: Additional Steps by Regulators Could Better Protect Consumers and Aid Regulatory Oversight GAO-18-254 March
Community Reinvestment Act: Options for Treasury to Consider to Encourage Services and Small-Dollar Loans When Reviewing Framework GAO-18-244 March
Commercial Real Estate Lending: Banks Potentially Face Increased Risk; Regulators Generally Are Assessing Banks' Risk Management Practices GAO-18-245 March
Homeownership: Information on Mortgage Options and Effects on Accelerating Home Equity Building GAO-18-297 March
Remittances to Fragile Countries: Treasury Should Assess Risks from Shifts to Non-Banking Channels GAO-18-313 March
Community Banks and Credit Unions: Regulators Could Take Additional Steps to Address Compliance Burdens GAO-18-213 February
Bank Secrecy Act: Derisking along the Southwest Border Highlights Need for Regulators to Enhance Retrospective Reviews GAO-18-263 February
Financial Services Regulations: Procedures for Reviews under Regulatory Flexibility Act Need to Be Enhanced GAO-18-256 January

Table 2. Projects active at year-end 2018

Subject of project Month initiated Status
Impact of de-risking on money transmitters October 2016 Open
Bank regulatory oversight April 2017 Open
Tax-time financial products August 2017 Open
Potential changes to coin and currency January 2018 Closed 3/21/2019
Credit reporting agencies' data security January 2018 Closed 3/26/2019
Data governance good practices and lessons learned March 2018 Open
Bank Secrecy Act implementation March 2018 Open
Public comment fraud April 2018 Open
Fair credit reporting for student loans July 2018 Open
Consumer reporting agencies' data accuracy and protection September 2018 Open
Bank Secrecy Act costs and benefits October 2018 Open
Federal debt management and demand for Treasury securities December 2018 Open
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Last Update: August 08, 2019