Annual Performance Report 2012
Overview of the Federal Reserve System
The Federal Reserve System is the central bank of the United States, established by the Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, Congress has expanded the System's role in banking and the economy, and today the Federal Reserve System has numerous, varied responsibilities, including
- conducting the nation's monetary policy by influencing the money and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates;
- helping maintain the stability of the financial system and containing systemic risks that may arise in financial institutions and markets;
- supervising and regulating a variety of financial institutions and activities to ensure the safety and soundness of the nation's banking and financial systems and to protect certain rights of consumers;
- providing certain financial services to depository institutions, the U.S. government, and foreign official institutions; and
- promoting consumer protection, fair lending, and community development.
The System was created on December 23, 1913, when the Federal Reserve Act was signed into law by President Woodrow Wilson "to provide for the establishment of Federal reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes."
In a 1977 amendment to the Federal Reserve Act, the Congress defined the primary objectives of national economic policy by directing the Board and the Federal Open Market Committee to "maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates."
As time has passed, further legislation has clarified and supplemented the System's original purposes. Key laws affecting the Federal Reserve include the Bank Holding Company Act of 1956 and its amendments; the Financial Institutions Reform, Recovery, and Enforcement Act of 1989; the Federal Deposit Insurance Corporation Improvement Act of 1991; the Gramm-Leach-Bliley Act of 1999; the Check Clearing for the 21st Century Act of 2004; and the Dodd-Frank Act.
Background: The Dodd-Frank Act and Its Impact on the U.S. Regulatory Framework
The passage of the Dodd-Frank Act was a significant event for the Federal Reserve and other U.S. regulators of financial institutions and entities.
The act was designed to address critical gaps and weaknesses in the U.S. regulatory framework that were revealed during the course of the financial crisis. For example, the act created an interagency council to monitor and coordinate responses to emerging threats to the financial system, required that large bank holding companies and systemically important financial firms be subject to enhanced prudential standards to reduce the risks they may present to the financial system, and provided for the consolidated supervision of all systemically important financial institutions.
It also provided a mechanism for resolving financial firms whose failure could pose a threat to U.S. financial stability, and provided for the strengthened supervision of systemically important financial market utilities that provide payment, settlement, and clearing services. Moreover, the act enhanced the transparency of the Federal Reserve while preserving its independence, a feature crucial to its ability to implement monetary policy effectively.
In January 2011, pursuant to section 342 of the Dodd-Frank Act, the Board established an Office of Diversity and Inclusion (ODI). The Board has welcomed the new requirements under section 342 of Dodd-Frank as a complement to, and strengthening of, its existing efforts. ODI is working with Human Resources and Procurement staff at the Board to (1) ensure a commitment to recruit and retain a staff that is diverse and inclusive and (2) develop standards and procedures to ensure, to the extent possible, the fair inclusion and utilization of minority-and women-owned businesses in the Board's procurements.
Structure of the System
The Federal Reserve System is considered to be an independent central bank because its decisions are not ratified by other branches of government. The System is, however, subject to oversight by the Congress, and must work within the framework of the overall objectives of economic and financial policy established by its enabling statutes.
Congress designed the structure of the Federal Reserve System to ensure it maintained a broad perspective on the economy and on economic activity in all parts of the nation. It is a federated system, composed of a central, governmental agency--the Board of Governors--in Washington, D.C., and 12 regional Federal Reserve Banks.
A major component of the System is the Federal Open Market Committee (FOMC), a deliberative body consisting of the members of the Board of Governors, the president of the Federal Reserve Bank of New York, and presidents of four other Federal Reserve Banks (who serve on a rotating basis). The FOMC oversees open market operations, the main tool used by the Federal Reserve to influence overall monetary and credit conditions in the United States.
Board of Governors
The Board of Governors of the Federal Reserve System (the Board) is a federal government agency. The Board is composed of seven members, each of whom is appointed by the President and confirmed by the Senate. The full term of a Board member is 14 years, and the appointments are staggered so that one term expires on January 31 of each even-numbered year.
The Chairman, Vice Chairman, and the Vice Chairman for Supervision of the Board are also appointed by the President and confirmed by the Senate. The nominees to these posts must already be members of the Board or must be simultaneously appointed to the Board. The terms for these positions are four years.
Mission and Values of the Board of Governors
The Board's longstanding mission is to foster the stability, integrity, and efficiency of the nation's monetary, financial, and payment systems in pursuit of optimal macroeconomic performance. This mission is rooted in the Federal Reserve System's statutory mandates, and on a set of core institutional values.
- Public interest. In its actions and policies, the Board seeks to promote the public interest; it is accountable and responsive to the general public, the U.S. government, and the financial community.
- Integrity. The Board adheres to the highest standards of integrity in its dealings with the public, the financial community, and its employees.
- Excellence. The conduct of monetary policy, responsibility for bank supervision, and maintenance of the payment system demand high-quality analysis, high performance standards, and a secure, robust infrastructure. The pursuit of excellence drives the Board's policies concerning recruitment, selection, and retention of Board employees.
- Efficiency and effectiveness. In carrying out its functions, the Board is continually aware that its operations are supported primarily by public funds, and it recognizes its obligation to manage resources efficiently and effectively.
- Independence of views. The Board values the diversity of its employees, input from a variety of sources, and the independent professional judgment that is fostered by the System's regional structure. It relies on strong teamwork and consensus-building to mold independent viewpoints into coherent, effective policies.
Board Division Responsibilities
The Board is organized along divisional lines, with each division having specific functions.
Office of Board Members
The Office of Board Members--including the seven Governors--provides overview, direction, and supervision for System goals, objectives, and projects involving monetary policy, supervision and regulation policy, and managerial policy.
Within the office, the public affairs unit provides the public with information concerning Federal Reserve actions and works to increase the public's understanding of the System's functions, responsibilities, and policy goals. The congressional liaison program facilitates effective communication between the Board and the Congress and other government agencies.
Office of the Secretary
The Office of the Secretary provides corporate secretary and governmental services to Board members, Board staff, and the public.
The division maintains electronic information systems (Board records management and distribution/voting applications), oversees Board meetings and agendas, prepares minutes of Board meetings and notation voting summaries, and administers the Freedom of Information Act program. Specialty services include managing the Reserve Bank directors program (providing guidance on selection of directors and applicable regulations and conducting orientation programs and conferences for Reserve Bank directors and chairs), securing official passports for Board and System staff, planning official conferences and events, and providing temporary executive assistants for Board members.
The division also serves as liaison to the Federal Advisory Council and the Community Depository Institutions Advisory Council and acts as the Board's Ombudsman.
Research and Statistics
The Division of Research and Statistics (R&S) focuses on the domestic economy, and provides the Board, FOMC, and other System officials with analysis and research pertaining to current and prospective economic conditions, and supplies data and analyses for public use. The division also provides analysis and research pertaining to supervision and regulation, payment system policy and oversight, and consumer affairs.
The Division of International Finance (IF) focuses on the global economy and provides the Board, the FOMC, and other System officials with assessments of current and prospective international, economic, and financial developments. The division evaluates and forecasts major economic and financial developments abroad, developments in foreign exchange and other international asset markets, and U.S. international transactions.
The division maintains close contacts with international organizations and foreign official institutions and supports the Board's participation in international meetings. The division also provides support for the Board's financial supervision and regulation activities and supplies data on international financial positions for public use.
The Division of Monetary Affairs (MA) supports the Board and the FOMC in the formulation of U.S. monetary policy and on matters pertaining to financial stability.
The division serves as secretariat of the FOMC and contributes to the communication of policy through vehicles such as the FOMC statement and the minutes of FOMC meetings. The division also oversees the implementation of monetary policy through open market operations, discount rates and the operations and administration of the discount window, and reserve requirements.
It coordinates with the Open Market Desk at the Federal Reserve Bank of New York in the conduct of open market operations. The division produces data series on related financial elements of the economy and analyses developments in money, reserves, bank credit and profits, and interest rates, and forecasts movements in money, reserves, and bank credit. Staff in the division, working with colleagues in other divisions, conducts analysis of topics related to financial stability, assists in the implementation of the Dodd-Frank Act, and provides support for the Board's financial supervision and regulation activities (including "stress-testing" of financial institutions and helping in the development of regulations related to liquidity issues). The division also oversees the Term Deposit Facility and the Statistics and Reserves business function for the System.
Office of Financial Stability Policy and Research
The Office of Financial Stability Policy and Research (OFS) coordinates staff support to the Board and FOMC on financial stability policy. Together with staff in other divisions and the Reserve Banks, it analyzes risks to the financial system by monitoring key financial institutions, markets, and infrastructures, and conducts research on the causes and consequences of financial disruptions.
The office also develops and evaluates alternative macroprudential supervisory and regulatory policy responses, and presents them for consideration to policymakers in order to mitigate emerging and structural vulnerabilities. In addition, the office coordinates the Federal Reserve's involvement in interagency and international financial stability policymaking groups, including the Financial Stability Oversight Council (FSOC) and the Financial Stability Board (FSB).
Banking Supervision and Regulation
The Division of Banking Supervision and Regulation (BS&R) is responsible for informing the Board on current and anticipated developments in bank supervision and banking structure. The division also coordinates and directs the System's bank supervision and examination activities; in this role, the division develops and ensures implementation of policy for these activities, and it develops requirements for data collection, supervisory automated systems and related technology, and training. The division has a leading role in the implementation of the Dodd-Frank Act provisions across the Federal Reserve System. In addition to these responsibilities, the division also processes applications for prior consent to form or expand bank holding companies or make other changes in banking structure.
Consumer and Community Affairs
The Division of Consumer and Community Affairs (C&CA) informs the Board on the concerns of consumers and communities and coordinates the System's consumer compliance supervision and examination activities, including policy development and examiner training. The division also conducts consumer focused research and policy analysis, implements requirements for consumer protection statutes, and promotes community development in traditionally underserved neighborhoods.
The Legal Division provides legal advice and services to the Board to meet its responsibilities in all aspects of its duties, including the Board's bank supervisory and regulatory responsibilities. The division also provides legal support for the Board's role in developing and implementing monetary policy, employing its financial stability tools, and all aspects of the Board's operations, including the Board's procurement and personnel functions, ethics, and information disclosure.
The Legal Division represents the Board in litigation in federal and state court, and pursues enforcement actions against individuals and companies over which the Board has supervisory authority. The Legal Division also drafts regulations and proposes statutory changes to advance the Board's mission.
Reserve Bank Operations and Payment Systems
The Division of Reserve Bank Operations and Payment Systems (RBOPS) oversees the Federal Reserve Banks' provision of financial services to depository institutions, fiscal agency services to the Treasury and other entities, and emergency liquidity facilities.
The division also has oversight responsibility for Reserve Bank support functions, such as information technology, human resources, financial and cost accounting, operating and capital budgets, facilities management, and internal audit. In addition, it develops and recommends to the Board policies and regulations governing payment, clearing, and settlement systems; works collaboratively with other central banks and market regulators to set standards to promote the safety and efficiency of payment, clearing, and settlement systems globally; and conducts research regarding payment and settlement matters.
Office of the Chief Operating Officer
The Office of the Chief Operating Officer works with all division directors to establish, implement, and measure performance against the Board's strategic direction, and provides analysis and counsel to the administrative governor regarding the overall operation of the Board's administrative functions, technology services, and short- and long-term strategic planning goals.
The chief operating officer provides oversight to the Division of Information Technology, the Management Division, the Division of Financial Management, the Office of Diversity and Inclusion, and the chief data officer function.
Division of Financial Management
The Division of Financial Management (DFM) is responsible for providing effective financial and risk management activities across the organization, including (1) overseeing implementation of the recommendations resulting from the ongoing strategic planning effort and (2) ensuring that the investment requirements outlined in the strategic plan are aligned with the Board's budget process.
The Division of Information Technology (IT) provides infrastructure support to all Board divisions, including mainframe operations and distributed processing, applications development, central automation and telecommunication support, data and communications security, local area network administration, and technology reviews of all Board functions.
The Management Division (MGT) provides the full spectrum of personnel management, facility, and logistical support for the Board's day-to-day operations, including managing office space and property and providing food services and physical security. The division also provides continuity-of-operations services and business-resumption services.
Office of the Inspector General
The Office of the Inspector General (OIG) conducts independent and objective audits, inspections, evaluations, investigations, and other reviews related to the program and operations of the Board and the Consumer Financial Protection Bureau. Through this work, OIG promotes integrity, economy, efficiency, and effectiveness; helps prevent and detect fraud, waste, and abuse; and strengthens the agencies' accountability to Congress and the public.
The Impact of the 2007-09 Financial Crisis and the Dodd-Frank Act on the Board
While the Federal Reserve's broad mission and functions remain essentially unchanged, the 2007-09 financial crisis fundamentally changed how the Board operates within its functional disciplines.
Changes in the Board's approach to monetary policy, supervision, and financial stability are expected to prove particularly critical, and will drive an evolution in Board capabilities begun after the crisis and in response to the provisions of the Dodd-Frank Act. This operational evolution will prove central to the Board's effort to continue to build its capabilities in key areas over the next four years covered under this strategic plan:
- Elevating financial stability. First and foremost, the review of the financial crisis of 2007-09 elevated the importance of designing the operational capabilities in the Federal Reserve System to help identify threats to the stability of the U.S. financial system. Today, financial stability issues are prominent in discussions of monetary policy, and the Board is providing a robust policy infrastructure to support financial stability. When completed, this new infrastructure will include new capital and liquidity requirements to strengthen the financial sector, a more robust monitoring system for markets and institutions, an ambitious research agenda to establish context for policymakers, and more effective tools for addressing future financial crises.
Enhancing supervision. The crisis highlighted gaps in the regulatory structure imposed by statute to supervise financial institutions. In particular, it became clear that various entities exerting potential impact on the nation's monetary, financial, and payment systems were inadequately supervised at the federal level. In addition, the crisis revealed that existing supervisory policies did not fully address issues raised by complex and interrelated financial structure.While broader government-wide improvements and changes are needed to address these issues, the Board, for its part, has adopted an enhanced supervisory approach that takes a more systemic approach to understanding the risks posed by the combined actions of institutions rather than focusing on the health of individual firms; this includes business drivers, new industry practices, new products, and the potential risk implications of such developments in financial markets and the economy. The more proactive approach to supervision reflected in the Dodd-Frank Act has meant re-thinking the type of skills required at the Board, and improving coordination of new and existing skill sets across the System.
Developing and refining new tools for monetary policy. The financial crisis tested the limits of traditional monetary policy tools, and triggered a re-examination of standard monetary policy assumptions.Looking ahead, the Board will focus significant efforts on research regarding the evaluation of tools introduced during the crisis, such as large-scale asset purchases and emergency liquidity provision. The organizational challenge will include ensuring the right balance between, on one hand, resources devoted to designing monetary policy and, on the other hand, resources needed to support crisis prevention or containment.
- Integrating the way monetary policy and financial stability decisions are made. The Dodd-Frank Act gives the Federal Reserve an important role in areas of financial stability policy (such as macroprudential supervisory oversight), defining the conditions that can result in financial instability, identifying policy strategies that can prevent such outcomes, and providing oversight of systemically important financial institutions and financial market infrastructures. The Federal Reserve's role in financial stability also recognizes that the analysis and data required for supervision is useful in conducting monetary policy and vice versa. It will take time and effort to establish the processes and procedures that best exploit these synergies.