Federal Reserve Operations
Banking Supervision and Regulation

The Federal Reserve has supervisory

and regulatory authority over a variety

of financial institutions and activities. It

works with other federal and state supervisory authorities to ensure the safety

and soundness of supervised financial

institutions and the stability of U.S.

financial markets as a whole.

In 2006, U.S. banking organizations

reported record earnings despite tight

net interest margins resulting from a

persistently flat yield curve and heightened competition for deposits and loans.

Credit quality indicators remained historically strong, although nonperforming assets increased, particularly in residential real estate portfolios. For a

second consecutive year, there were no

failures of insured banks. Banking supervisors focused on banking activities

that could prove vulnerable in the event

of an economic downturn. In particular,

the federal banking agencies during the

year issued guidance for supervised

financial institutions on extensions of

credit for nontraditional residential mortgages and for commercial real estate.

Delinquencies among loans of these and

most other types remained low.

Federal Reserve staff continued to

work throughout the year with the other

federal banking agencies to prepare for

U.S. implementation of the Basel II capital accord.1 In September, the agencies

issued a joint notice of propo

making (NPR) describing pro

implementing the Basel II fram

the United States. In Decem

issued an NPR proposing re

capital requirements for trad

positions subject to the market 

tal rule. The agencies are also 

ing Basel II supervisory gui

examiners and the banking ind

Under the NPR implement

II, the new capital framework 

mandatory for large, internati

tive banking organizations an

for all others. Federal bankin

sors expect that the vast m

banking organizations will re

ject to the existing risk-base

framework (Basel I). To upda

and mitigate some of the con

of the differences between B

Basel II, the agencies in D

issued an NPR proposing chan

Basel I framework that wou

tional for banking organization

ject to Basel II.

Scope of Responsibilities 

Supervision and Regulatio

The Federal Reserve is the f

pervisor and regulator of all 

holding companies, including 

holding companies formed 

authority of the 1999 Gram

Bliley Act, and state-chartered 

cial banks that are members o

eral Reserve System. In overse

organizations, the Federal Res

1. The Basel II capital accord, an international

agreement formally titled “International Convergence of Capital Measurement and Capital Standards: A Revised Framework,” was developed by

the Basel Committee on Banking Supervision,

which is made up of representatives of the central

banks or other supervisory authorities of thirteen

countries. The original document was issued in

2004; the original version and an updated version

issued in November 2005 are avail

web site of the Bank for International 

(www.bis.org).
primarily to promote their safe and

sound operation, including their compliance with laws and regulations.2

The Federal Reserve also has responsibility for supervising the operations of

all Edge Act and agreement corporations, the international operations of

state member banks and U.S. bank holding companies, and the U.S. operations

of foreign banking companies.

The Federal Reserve exercises important regulatory influence over entry into

the U.S. banking system, and the structure of the system, through its administration of the Bank Holding Company

Act, the Bank Merger Act (with regard

to state member banks), the Change in

Bank Control Act (with regard to bank

holding companies and state member

banks), and the International Banking

Act. The Federal Reserve is also responsible for imposing margin requirements

on securities transactions. In carrying

out these responsibilities, the Federal

Reserve coordinates its supervisory activities with the other federal banking

agencies, state agencies, functional

regulators, and the bank regulatory

agencies of other nations.

Supervision for

Safety and Soundness

To promote the safety and soundness of

banking organizations, the Federal Reserve conducts on-site examinations

and inspections and off-site su

and monitoring. It also takes 

ment and other supervisory 

necessary.

Examinations and Inspectio

The Federal Reserve conducts 

tions of state member banks

branches and agencies of forei

and Edge Act and agreemen

tions. In a process distinct fro

nations, it conducts inspection

holding companies and their 

subsidiaries. Whether an exam

an inspection is being condu

review of operations entails 

sessment of the quality of the 

in place to identify, measure

and control risks; (2) an asse

the quality of the organization

(3) an evaluation of manage

cluding an assessment of inte

cies, procedures, controls, a

tions; (4) an assessment of 

financial factors of capital, ea

quidity, and sensitivity to ma

and (5) a review for compli

applicable laws and regulations

provides information on the exa

and inspections conducted by 

eral Reserve during the past fi

Inspections of bank holdin

nies, including financial holdin

nies, are built around a ratin

introduced in 2005 that reflec

cent shift in supervisory pra

these organizations away from 

torical analysis of financial 

toward a more dynamic, forw

ing assessment of risk-ma

practices and financial facto

the system, known as RFI 

fully termed RFI/C(D), holdin

nies are assigned a composite 

that is based on assessments 

components: risk managemen

nancial condition (F), and 

2. The Board’s Division of Consumer and

Community Affairs coordinates the Federal Reserve’s supervisory activities with regard to compliance with consumer protection and civil rights

laws. Those activities are described in the chapter

“Consumer and Community Affairs.” Supervision

for compliance with other banking laws and regulations, which is described in this chapter, is the

responsibility of the Board’s Division of Banking

Supervision and Regulation and the Federal Reserve Banks, whose examiners also check for

safety and soundness.
impact (I) of the parent company and its

nondepository subsidiaries on the subsidiary depository institution.3 The

fourth component, depository institution

(D), is intended to mirror the primary

regulator’s rating of the subsidiary depository institution.

In managing the supervisory process,

the Federal Reserve takes a risk-focused

approach that directs resources to

(1) those business activities posing the

greatest risk to banking organizations

and (2) the organizations’ management

processes for identifying, m

monitoring, and controlling r

key features of the supervision 

for large complex banking org

(LCBOs) are (1) identifyi

LCBOs that are judged, on th

their shared risk character

present the highest level of su

risk to the Federal Reserve 

(2) maintaining continual supe

these organizations so that th

Reserve’s assessment of each 

tion’s condition is current; (3) 

to each LCBO a supervisory t

posed of Reserve Bank staff 

who have skills appropriate for 

nization’s risk profile (the team 

the System’s central point of c

the organization, has respons

only one LCBO, and is sup

specialists capable of evalu

3. Each of the first two components has four

subcomponents: Risk Management—Board and

Senior Management Oversight; Policies, Procedures, and Limits; Risk Monitoring and Management Information Systems; and Internal Controls.

Financial Condition—Capital; Asset Quality;

Earnings; and Liquidity.

State Member Banks and Holding Companies, 2002–2006

Entity/Item 2006 2005 2004 2003 

State member banks

Total number . . . . . . . . . . . . . . . . . . . . . . . . . . 901 907 919 935 

Total assets (billions of dollars) . . . . . . . . . 1,405 1,318 1,275 1,912 

Number of examinations . . . . . . . . . . . . . . . 761 783 809 822 

By Federal Reserve System . . . . . . . . . . 500 563 581 581 

By state banking agency . . . . . . . . . . . . . 261 220 228 241 

Top-tier bank holding companies

Large (assets of more than $1 billion)

Total number . . . . . . . . . . . . . . . . . . . . . . . . 448 394 355 365 

Total assets (billions of dollars) . . . . . . 12,179 10,261 8,429 8,295 

Number of inspections . . . . . . . . . . . . . . . 566 501 500 454 

By Federal Reserve System1 . . . . . . . 557 496 491 446 

On site . . . . . . . . . . . . . . . . . . . . . . . . . 500 457 440 399 

Off site . . . . . . . . . . . . . . . . . . . . . . . . . 57 39 51 47 

By state banking agency ........... 9 5 9 8 

Small (assets of $1 billion or less)

Total number . . . . . . . . . . . . . . . . . . . . . . . . 4,654 4,760 4,796 4,787 

Total assets (billions of dollars) . . . . . . 947 890 852 847 

Number of inspections . . . . . . . . . . . . . . . 3,449 3,420 3,703 3,453 

By Federal Reserve System . . . . . . . . 3,257 3,233 3,526 3,324 

On site . . . . . . . . . . . . . . . . . . . . . . . . . 112 170 186 183 

Off site . . . . . . . . . . . . . . . . . . . . . . . . . 3,145 3,063 3,340 3,141 

By state banking agency . . . . . . . . . . . 192 187 177 129 

Financial holding companies

Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 599 591 600 612 

Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 38 36 32 

1. For large bank holding companies subject to continuous, risk-focused supervision, includes multiple targeted reviews.
risks of LCBO business activities and

functions); and (4) promoting Systemwide and interagency informationsharing through automated systems.

For other banking organizations, the

risk-focused supervision program provides that examination procedures are

tailored to each banking organization’s

size, complexity, and risk profile. As

with the LCBOs, examinations entail

both off-site and on-site work, including planning, pre-examination visits,

detailed documentation, and examination reports tailored to the scope and

findings of the examination.

State Member Banks

At the end of 2006, 901 state-chartered

banks (excluding nondepository trust

companies and private banks) were

members of the Federal Reserve System. These banks represented approximately 12 percent of all insured U.S.

commercial banks and held approximately 14 percent of all insured commercial bank assets in the United States.

The guidelines for Federal Reserve

examinations of state member banks are

fully consistent with section 10 of the

Federal Deposit Insurance Act, as

amended by section 111 of the Federal

Deposit Insurance Corporation Improvement Act of 1991 and by the Riegle

Community Development and Regulatory Improvement Act of 1994. A fullscope, on-site examination of these

banks is required at least once a year,

although certain well-capitalized, wellmanaged organizations having total

assets of less than $250 million may be

examined once every eighteen months.

The Financial Services Regulatory Relief Act of 2006, signed into law in

October, authorized the federal banking

agencies to raise the total asset threshold

for certain institutions from $250 million to $500 million. Interim rules that

will incorporate this change i

ing regulations are being devel

Federal Reserve conducted 5

of state member banks in 200

Bank Holding Companies

At year-end 2006, a total of 5

bank holding companies were 

tion, of which 5,102 were top

holding companies. These org

controlled 6,106 insured co

banks and held approximatel

cent of all insured commer

assets in the United States.

Federal Reserve guideline

annual inspections of large ban

companies as well as comple

companies. In judging the fina

dition of the subsidiary banks 

holding companies, Federal R

aminers consult examinatio

prepared by the federal and s

ing authorities that have prima

sibility for the supervision 

banks, thereby minimizing d

of effort and reducing the su

burden on banking organizati

complex bank holding compa

consolidated assets of $1 billi

are subject to a special superv

gram that permits a more fle

proach.4 In 2006, the Federa

conducted 557 inspections of l

holding companies and 3,25

tions of small, noncomplex b

ing companies.

Financial Holding Companies

Under the Gramm-Leach-Bl

bank holding companies that 

tain capital, managerial, and 

4. The program was implemented 

modified in 2002. See SR letter 02-01 

sion of the factors considered in 

whether a bank holding company is 

noncomplex (www.federalreserve.go

srletters/).
quirements may elect to become financial holding companies and thereby

engage in a wider range of financial

activities, including full-scope securities

underwriting, merchant banking, and insurance underwriting and sales. The statute streamlines the Federal Reserve’s

supervision of all bank holding companies, including financial holding companies, and sets forth parameters for the

supervisory relationship between the

Federal Reserve and other regulators.

The statute also differentiates between

the Federal Reserve’s relations with

regulators of depository institutions and

its relations with functional regulators

(that is, regulators for insurance, securities, and commodities firms).

As of year-end 2006, 604 domestic

bank holding companies and 44 foreign

banking organizations had financial

holding company status. Of the domestic financial holding companies, 38 had

consolidated assets of $15 billion or

more; 121, between $1 billion and

$15 billion; 86, between $500 million

and $1 billion; and 359, less than

$500 million.

International Activities

The Federal Reserve supervises the foreign branches and overseas investments

of member banks, Edge Act and agreement corporations, and bank holding companies and also the investments by bank

holding companies in export trading companies. In addition, it supervises the activities that foreign banking organizations

conduct through entities in the United

States, including branches, agencies, representative offices, and subsidiaries.

Foreign Operations of

U.S. Banking Organizations

In supervising the international operations of state member banks, Edge Act

and agreement corporations, 

holding companies, the Federa

generally conducts its examin

inspections at the U.S. head 

these organizations where the 

responsibility for the foreign o

Examiners also visit the overse

of U.S. banks to obtain fina

operating information and, 

instances, to evaluate the orga

efforts to implement correct

sures or to test their adheren

and sound banking practices. 

tions abroad are conducted wi

operation of the supervisory a

of the countries in which 

place; for national banks, the 

tions are coordinated with the 

the Comptroller of the Currenc

At the end of 2006, 53 mem

were operating 675 branches 

countries and overseas area

United States; 34 national ba

operating 625 of these branch

state member banks were ope

remaining 50. In addition, 17 

ber banks were operating 21 b

foreign countries and oversea

the United States.

Edge Act and Agreement Corp

Edge Act corporations are int

banking organizations charter

Board to provide all segmen

U.S. economy with a means of 

international business, espec

ports. Agreement corporations 

lar organizations, state charter

erally chartered, that enter 

agreement with the Board 

from exercising any power t

permissible for an Edge Act co

Sections 25 and 25A of th

Reserve Act grant Edge Act a

ment corporations permission 

in international banking an

financial transactions. These 
tions, most of which are subsidiaries of

member banks, may (1) conduct a deposit and loan business in states other

than that of the parent, provided that the

business is strictly related to international transactions, and (2) make foreign

investments that are broader than those

permissible for member banks.

At year-end 2006, 71 banking organizations, operating 9 branches, were

chartered as Edge Act or agreement corporations. These corporations are examined annually.

U.S. Activities of Foreign Banks

The Federal Reserve has broad authority

to supervise and regulate the U.S. activities of foreign banks that engage in

banking and related activities in the

United States through branches, agencies, representative offices, commercial

lending companies, Edge Act corporations, commercial banks, bank holding

companies, and certain nonbanking

companies. Foreign banks continue to

be significant participants in the U.S.

banking system.

As of year-end 2006, 178 foreign

banks from 54 countries were operating

214 state-licensed branches and agencies, of which 8 were insured by the

Federal Deposit Insurance Corporation

(FDIC), and 45 OCC-licensed branches,

of which 4 were insured by the FDIC.

These foreign banks also owned

12 Edge Act and agreement corporations and 2 commercial lending companies; in addition, they held a controlling

interest in 62 U.S. commercial banks.

Altogether, the U.S. offices of these foreign banks at the end of 2006 controlled

approximately 19 percent of U.S. commercial banking assets. These 178 foreign banks also operated 85 representative offices; an additional 59 foreign

banks operated in the United States

solely through a representative office.

State-licensed and federally 

branches and agencies of fore

are examined on-site at least o

eighteen months, either by th

Reserve or by a state or oth

regulator. In most cases, on-s

nations are conducted at least 

ery twelve months, but the pe

be extended to eighteen mon

branch or agency meets certai

In cooperation with the oth

and state banking agencies, th

Reserve conducts a joint pro

supervising the U.S. operatio

eign banking organizations. 

gram has two main parts. On

volves examination of thos

banking organizations that h

tiple U.S. operations and is in

ensure coordination among th

U.S. supervisory agencies. T

part is a review of the fina

operational profile of each org

to assess its general ability to s

U.S. operations and to determ

risks, if any, the organizati

through its U.S. operations. 

these two processes provide c

formation to U.S. supervisors 

cal, uniform, and timely ma

Federal Reserve conducted o

pated with state and federal 

authorities in 339 examination

Anti-Money-Laundering

Examinations

The U.S. Department of the 

regulations (31 CFR 103) imp

the Bank Secrecy Act (BSA) 

require banks and other types 

cial institutions to file certa

and maintain certain records 

useful in criminal or regulatory 

ings. The BSA and separate B

lations require banking organiz

pervised by the Board to file 

suspicious activity related to 
violations of federal law, including

money laundering, terrorist financing,

and other financial crimes. In addition,

BSA and Board regulations require that

banks develop written programs on

BSA/anti-money-laundering compliance

and that the programs be formally approved by bank boards of directors. An

institution’s compliance program must

(1) establish a system of internal controls to ensure compliance with the

BSA, (2) provide for independent compliance testing, (3) identify individuals

responsible for coordinating and monitoring day-to-day compliance, and (4) provide training for personnel as appropriate.

The Federal Reserve is responsible

for examining its supervised institutions

for compliance with various antimoney-laundering laws and regulations.

During examinations of state member

banks and U.S. branches and agencies of

foreign banks and, when appropriate,

inspections of bank holding companies,

examiners review the institution’s compliance with the BSA and determine

whether adequate procedures and controls to guard against money laundering

and terrorism financing are in place.

Specialized Examinations

The Federal Reserve conducts specialized examinations of banking organizations in the areas of information technology, fiduciary activities, transfer agent

activities, and government and municipal securities dealing and brokering. The

Federal Reserve also conducts specialized examinations of certain entities,

other than banks, brokers, or dealers,

that extend credit subject to the Board’s

margin regulations.

Information Technology Activities

In recognition of the importance of information technology to safe and sound

operations in the financial ind

Federal Reserve reviews the 

tion technology activities of s

banking organizations as well 

independent data centers tha

information technology service

organizations. All safety and 

examinations include a risk-fo

view of information techno

management activities. During 

Federal Reserve was the lead 

1 cooperative, multiagency ex

of a large, multiregional data p

servicer.

Fiduciary Activities

The Federal Reserve has super

sponsibility for state member 

cial banks and depository tru

nies that together reported, at 

2006, $36 trillion of assets i

fiduciary or custodial capacit

tionally, state member nond

trust companies supervised by 

eral Reserve reported $33 trill

sets held in a fiduciary or 

capacity. During on-site exa

of fiduciary activities, an orga

compliance with laws, regula

general fiduciary principles a

tial conflicts of interest are 

its management and operation

ing its asset- and account-ma

risk-management, and audit an

procedures, are also evaluated

Federal Reserve examiners 

97 on-site fiduciary examinati

Transfer Agents and

Securities Clearing Agencies

As directed by the Securities 

Act of 1934, the Federal Res

ducts specialized examination

state member banks and ban

companies that are registered 

Board as transfer agents. Am
things, transfer agents countersign and

monitor the issuance of securities, register the transfer of securities, and exchange or convert securities. On-site examinations focus on the effectiveness of

an organization’s operations and its

compliance with relevant securities

regulations. During 2006, the Federal

Reserve conducted on-site examinations

at 15 of the 78 state member banks and

bank holding companies that were registered as transfer agents and examined

1 state member limited-purpose trust

company acting as a national securities

depository.

Government and Municipal Securities

Dealers and Brokers

The Federal Reserve is responsible for

examining state member banks and foreign banks for compliance with the Government Securities Act of 1986 and with

Department of the Treasury regulations

governing dealing and brokering in government securities. Twenty-five state

member banks and 8 state branches of

foreign banks have notified the Board

that they are government securities dealers or brokers not exempt from Treasury’s regulations. During 2006, the

Federal Reserve conducted 6 examinations of broker-dealer activities in government securities at these organizations. These examinations are generally

conducted concurrently with the Federal

Reserve’s examination of the state member bank or branch.

The Federal Reserve is also responsible for ensuring that both state member banks and bank holding companies

that act as municipal securities dealers

comply with the Securities Act Amendments of 1975. Municipal securities

dealers are examined pursuant to

the Municipal Securities Rulemaking

Board’s rule G-16 at least once every

two calendar years. Of the 20 entities

that dealt in municipal securit

2006, 9 were examined during 

Securities Credit Lenders

Under the Securities Exchan

1934, the Board is responsible 

lating credit in certain tra

involving the purchase or ca

securities. As part of its gener

nation program, the Federal 

examines the banks under its 

tion for compliance with the 

Regulation U (Credit by B

Persons other than Brokers o

for the Purpose of Purchasing 

ing Margin Stock). In addition

eral Reserve maintains a regis

sons other than banks, bro

dealers who extend credit s

Regulation U. The Federal Re

conduct specialized examin

these lenders if they are no

subject to supervision by 

Credit Administration, the 

Credit Union Administration 

or the Office of Thrift Su

(OTS).

At the end of 2006, 602 len

than banks, brokers, or dealers 

istered with the Federal Reser

federal regulators supervised 

these lenders, and the rema

were subject to limited Federa

supervision. On the basis of 

requirements and annual rep

Federal Reserve exempted 29

from its on-site inspection pro

securities credit activities of th

ing 102 lenders were subject 

biennial or triennial inspecti

inspections were conducted d

year.

Business Continuity

In 2006, the Federal Reserve 

its efforts to strengthen the res
the U.S. financial system in the event of

unexpected disruptions. Throughout the

year, the staff continued to work with

financial institutions to assess implementation of the sound practices identified in the April 2003 “Interagency Paper on Sound Practices to Strengthen the

Resilience of the U.S. Financial System,” a joint publication with the OCC

and the Securities and Exchange Commission (SEC). During 2006, the agencies provided additional guidance to

help institutions implement testing of

their business continuity plans. The

agencies continue to coordinate their

efforts to ensure a consistent supervisory approach for business continuity

practices.

Enforcement Actions and

Special Examinations

The Federal Reserve has enforcement

authority over the banking organizations

it supervises and their affiliated parties.

Enforcement actions may be taken to

address unsafe and unsound practices or

violations of any law or regulation. Formal enforcement actions include ceaseand-desist orders, written agreements,

removal and prohibition orders, and civil

money penalties. In 2006, the Federal

Reserve completed 37 formal enforcement actions. Civil money penalties totaling $212,050 were assessed. All civil

money penalties, as directed by statute,

are remitted to either the Department of

the Treasury or the Federal Emergency

Management Agency. Enforcement orders, which are issued by the Board, and

written agreements, which are executed

by the Reserve Banks, are made public

and are posted on the Board’s web

site(www.federalreserve.gov/boarddocs/

enforcement).

In addition to taking these formal enforcement actions, the Reserve Banks

completed 70 informal enforcement

actions in 2006. Informal en

actions include memoranda 

standing and board of directo

tions. Information about these 

not available to the public.

Surveillance and

Off-Site Monitoring

The Federal Reserve uses a

screening systems to monitor 

cial condition and performanc

member banks and bank holdin

nies between on-site examinati

monitoring and analysis helps 

amination resources to institu

have higher risk profiles. Scre

tems also assist in the planni

aminations by identifying c

that are engaging in new or 

activities.

In January 2006, the Federa

replaced its primary off-site m

tool, SEER (System to 

Examination Ratings), with th

sion and Regulation Statistica

ment of Bank Risk model (SR

Drawing primarily on the fina

that banks report on their R

Condition and Income (Call 

SR-SABR uses econometric t

to identify banks that report 

characteristics weaker than 

other banks assigned similar su

ratings. To supplement the S

screening, the Federal Res

monitors various market data, 

equity prices, debt spreads, ag

ings, and measures of expect

frequency, to gauge market p

of the risk in banking organiz

addition, the Federal Reserve 

quarterly Bank Holding 

Performance Reports (BHCPR

in monitoring and inspecting s

banking organizations. The 

which are compiled from data 

by large bank holding com
quarterly regulatory reports (FR Y-9C

and FR Y-9LP), contain, for individual

companies, financial statistics and

comparisons with peer companies.

BHCPRs are made available to the

public on the National Information

Center web site, which can be accessed

at www.ffiec.gov.

During the year, four major upgrades

to the web-based Performance Report

Information and Surveillance Monitoring (PRISM) application were completed. PRISM is a querying tool used

by Federal Reserve analysts to access

and display financial, surveillance, and

examination data. In the analytical

module, users can customize the presentation of institutional financial information drawn from Call Reports, Uniform Bank Performance Reports,

FR Y-9 statements, BHCPRs, and other

regulatory reports. In the surveillance

module, users can generate reports

summarizing the results of surveillance

screening for banks and bank holding

companies. The upgrades made more

regulatory data available for querying,

added the results of surveillance

screens (including SR-SABR), added

new search options, and improved the

user interface.

The Federal Reserve works through

the Federal Financial Institutions Examination Council (FFIEC) Task Force

on Surveillance Systems to coordinate

surveillance activities with the other federal banking agencies.5

Technical Assistance

In 2006, the Federal Reserve continued

to provide technical assistance on bank

supervisory matters to foreign central

banks and supervisory authorit

nical assistance involves visit

eral Reserve staff members t

authorities as well as consulta

foreign supervisors who visit 

or the Reserve Banks. Techn

tance in 2006 was concentrate

America, Asia, and former S

countries. The Federal Reser

with the OCC, the FDIC, 

Department of the Treasury, w

active participant in the Middl

North Africa Financial Re

Training Initiative, which is p

U.S. government’s Middle Ea

ship Initiative.

During the year the Federa

offered training courses exclu

foreign supervisory authorities 

ington, D.C., and a number o

jurisdictions. System staff also 

in technical assistance and tra

sions led by the International 

Fund, the World Bank, t

American Development Bank, 

Development Bank, the Basel 

tee on Banking Supervision

Financial Stability Institute.

The Federal Reserve is also 

ciate member of the Associati

pervisors of Banks of the 

(ASBA), an umbrella group o

pervisors from countries in th

Hemisphere. The group, head

in Mexico, promotes comm

and cooperation among bank 

sors in the region; coordinate

programs throughout the reg

the help of national banking su

and international agencies; an

help members develop bank

regulations, and supervisory 

that conform to international 

tices. The Federal Reserve c

significantly to ASBA’s orga

management and to its training 

nical assistance activities.

5. The federal banking agencies that are members of the FFIEC are the Federal Reserve Board,

the FDIC, the NCUA, the OCC, and the OTS.
Supervisory Policy

The Federal Reserve’s supervisory

policy function is responsible for developing guidance for examiners and banking organizations as well as regulations

for banking organizations under the Federal Reserve’s supervision. Staff members participate in supervisory and regulatory forums, provide support for the

work of the FFIEC, and participate in

international forums such as the Basel

Committee on Banking Supervision, the

Joint Forum, and the International Accounting Standards Board.

Capital Adequacy Standards

Risk-Based Capital Standards for

Certain Internationally Active

Banking Organizations

On September 25, 2006, the Federal

Reserve, OCC, FDIC, and OTS published a joint notice of proposed rulemaking (NPR) setting forth their views

on Basel II and seeking public comment

on the U.S. plan for implementing the

agreement. Under the proposal, the basic minimum risk-based capital ratio

format—regulatory capital divided by

risk-weighted assets—would be maintained, with the minimum for tier 1 capital set at 4 percent and the minimum for

total qualifying capital set at 8 percent.

The primary differences between the

current and proposed rules are the

internal-ratings-based methodologies

used to calculate risk-weighted assets

and the advanced measurement approach for operational risk under Basel II. Banking organizations using the

methods set forth in the NPR would also

be subject to certain public disclosure

requirements, to foster transparency and

market discipline. All banking organizations, including those using the internalratings-based approach for credit risk

and the advanced measure

proach for operational risk, w

tinue to be subject to the tier 

ratio requirement and the m

capital rule, if applicable, as w

prompt corrective action rules

Revisions to Market Risk Cap

On September 25, 2006, the 

issued for public comment a 

proposed rulemaking propos

sions to the market risk capital 

by the OCC, Board, and FD

1997 for banking organizatio

significant exposure to market 

der the market risk capital ru

banking organizations are re

calculate a capital requireme

general market risk of their 

positions and the specific ris

covered debt and equity posit

proposed revisions would en

rule’s risk sensitivity, require t

risk capital charge to reflect 

mental default risk of traded 

and require public disclosure 

qualitative and quantitative m

information. The comment p

end on January 23, 2007.

Risk-Based Capital Standards

for Banking Organizations

Not Subject to Basel II

On December 26, 2006, the 

agencies issued for public co

NPR proposing modifications 

that would be optional for bank

nizations not subject to Base

proposals aim to enhance risk 

without unduly increasing r

burden. They would expand th

of risk-weight categories, allo

of external credit ratings to ri

certain exposures, expand the 

recognized collateral and elig

antors, use loan-to-value (LT

to risk-weight residential m
increase the credit conversion factor for

certain commitments having an original

maturity of one year or less, assess a

capital charge for early amortizations in

securitizations of revolving credit exposures, and remove the 50 percent limit

on the risk weight for certain over-thecounter derivatives transactions. The

comment period for the NPR will end

on March 26, 2007.

Other Capital Issues

Board staff conduct supervisory analyses of innovative capital instruments and

novel transactions to determine whether

such instruments qualify for inclusion in

tier 1 capital.6 Much of this work in

2006 involved evaluating enhanced

forms of trust preferred securities that

bank holding companies developed in

order to be granted more credit for equity by the rating agencies under the

Board’s 2005 revisions to the rule on the

qualifying components of tier 1 capital.

Staff members also identify and

address supervisory concerns related to

supervised banking organizations’ capital issuances and work with the Reserve

Banks to evaluate the overall composition of banking organizations’ capital.

In this work, the staff often must

review the funding strategies proposed

in applications for acquisitions and

other transactions submitted to the Federal Reserve by banking organizations.

Accounting Policy

The supervisory policy function is also

responsible for monitoring major domestic and international proposals, standards, and other developments affecting the banking industry in 

of accounting, auditing, inte

trols, disclosure, and supervis

cial reporting. Federal Rese

members interact with key enti

accounting and auditing profe

cluding standards-setters and a

firms, the other banking agen

the banking industry, and 

pervisory guidance as appropr

During 2006, the Federal Re

gether with the other banking 

issued a comment letter to the 

Accounting Standards Board (

its then-proposed Statement of 

Accounting Standards titled 

Value Option for Financial A

Financial Liabilities.

7 The age

jointly issued guidance on loan 

losses and on limitations on th

of external auditors.

Policy Statement on the Allow

Loan and Lease Losses

In December the Federal 

FDIC, NCUA, OCC, and OT

“Interagency Policy Stateme

Allowance for Loan and Lease 

which updates and replaces ea

ance on the methodology for c

the allowance for loan and le

(ALLL). Revisions were made 

that policy is consistent with 

accepted accounting principles 

recent supervisory guidance 

the ALLL. Updated in the gui

the responsibilities of boards 

tors, management, and bankin

zation examiners; factors to b

ered in estimating the ALLL

objectives and elements of an 

loan review system, including 

credit-grading system. The 

6. Tier 1 capital comprises common stockholders’ equity and qualifying forms of preferred stock,

less required deductions such as goodwill and

certain intangible assets.

7. The FASB issued the final stan

ment of Financial Accounting Standa

in February 2007.
also reiterates the points of agreement

between the SEC and the banking agencies since 1999. To assist in application

of the revised guidance, the agencies

also issued a supplemental document

anticipating frequently asked questions.

Advisory on Limitations on the

Liability of External Auditors

The Federal Reserve, FDIC, NCUA,

OCC, and OTS in May issued “Interagency Advisory on the Unsafe and Unsound Use of Limitation of Liability

Provisions in External Audit Engagements.” The guidance addresses safety

and soundness concerns that may arise

when financial institutions enter into external audit contracts that limit the auditor’s liability for audit services. Specifically, the guidance informs financial

institutions that the inclusion of certain

auditor liability limitations in external

audit contracts (typically referred to as

engagement letters) for audits of financial statements, audits of internal control over financial reporting, or attestations on management’s assessment of

internal control over financial reporting

is generally unsafe and unsound.

Bank Secrecy Act and

Anti–Money Laundering

In 2006, the FFIEC updated the Bank

Secrecy Act/Anti–Money Laundering

Examination Manual issued in 2005 by

adding sections on risk assessment and

automated clearinghouse transactions,

updating the section on trade finance,

and incorporating regulatory changes.

The manual continues to contain an

overview of Bank Secrecy Act (BSA)

and anti-money-laundering requirements

and supervisory expectations, resource

materials, and examination procedures

and to emphasize a banking organization’s responsibility to establish and

implement a risk-based app

complying with the BSA.

In January, the Federal Re

Department of the Treasury’s 

Crimes Enforcement Network

other federal banking agenci

guidance on sharing Suspiciou

Reports (SARs) with head 

controlling companies. The 

confirmed that a U.S. branch 

of a foreign bank may disclose 

its head office outside the Uni

Similarly, a U.S. bank or sav

ciation may disclose a SAR t

trolling company, whether do

foreign.

In March, the Federal Rese

a final rule amending Regulat

ternational Banking Operation

form the Board’s regulations 

requirements and to clarify 

and agreement corporations 

branches, agencies, and repr

offices of foreign banks supe

the Federal Reserve must esta

maintain procedures reason

signed to ensure and monito

ance with the BSA and its imp

regulations.

In April, the Federal Reserv

other federal banking agencie

into a memorandum of unde

with the Office of Foreign As

trol within the Department of 

sury to facilitate informatio

and to further enhance interage

dination in implementing U.S. 

rules.

International Guidance on

Supervisory Policies

As a member of the Basel Com

Banking Supervision (Basel 

tee), the Federal Reserve parti

efforts to advance sound su

policies for internationally ac

ing organizations and to im
stability of the international banking

system. In 2006, the Federal Reserve

continued to work cooperatively on

Basel II, the 2004 accord to revise the

international capital regime, and to develop international supervisory guidance. The Federal Reserve also continued to participate in Basel Committee

working groups to address issues not

fully resolved in the Basel II framework.

Risk Management

The Federal Reserve contributed to supervisory policy papers, reports, and

recommendations issued by the Basel

Committee during 2006 that were generally aimed at improving the supervision of banking organizations’ riskmanagement practices.8

• “Enhancing Corporate Governance for

Banking Organizations,” final paper

issued in February, updating guidance

published in 1999

• “Basel II: International Convergence

of Capital Measurement and Capital

Standards: A Revised Framework—

Comprehensive Version,” published

in June

Core Principles for

Effective Banking Supervision

The Core Principles, developed by the

Basel Committee in 1997, have become

the de facto international standard for

sound prudential regulation and supervision of banks. In 2006, the Federal Reserve participated in a Basel Committee

effort to update the Core Principles in

light of the significant changes in international banking regulation and experience gained since the principles were

last revised in 1999. The revised guidance, “CorePrinciplesforEffec

ing Supervision,” was issued in 

Joint Forum

In 2006, the Federal Reserve 

tinued to participate in 

Forum—a group established 

aegis of the Basel Committee 

issues related to the banking, 

and insurance sectors, inclu

regulation of financial conglom

is made up of representativ

Basel Committee, the Interna

ganization of Securities Com

and the International Associat

surance Supervisors. The Fe

serve contributed to the follow

visory policy papers, repo

recommendations issued by 

Forum during 2006.9

• “Regulatory and Market Di

Issues and Observations,” 

May

• “The Management of Liqu

in Financial Groups,” issued 

• “High-Level Principles for 

Continuity,” issued in Augu

International Accounting

The Federal Reserve participa

Basel Committee’s Account

Force (ATF) and represents 

Committee at international me

accounting, auditing, and disc

sues affecting global banking 

tions. During 2006, Federal 

staff were involved in the dev

of two key Basel Committee d

issued to national supervisors 

of various comment letters 

accounting and auditing that 

mitted to the International A

8. Papers issued by the Basel Committee can

be accessed via the Bank for International Settlements web site at www.bis.org.

9. Papers issued by the Joint Fo

accessed via the Bank for Internat

ments web site at www.bis.org.
Standards Board and the International

Auditing and Assurance Standards

Board.

The Basel Committee document “Supervisory Guidance on the Use of the

Fair Value Option for Financial Instruments by Banks,” issued in June, provides guidance on the prudential supervision of banks in their implementation

of the fair value option included in the

amended International Accounting Standard (IAS) 39, which became effective

January 1, 2006. Under IAS 39, the fair

value option allows an organization to

irrevocably elect, at the date of purchase, a fair value measurement for certain financial instruments and to record

in current earnings the gains and losses

resulting from changes in fair value.

The Basel Committee document

“Sound Credit Risk Assessment and

Valuation for Loans,” issued in June,

provides guidance on assessing credit

risk and accounting for loan impairment. Specifically, the document addresses supervisory expectations for, and

supervisory evaluations of, a banking

organization’s establishment and support of its loan-loss-allowance accounts.

Response to Hurricane Katrina

Since Hurricane Katrina, the federal

banking agencies—the Federal Reserve,

FDIC, NCUA, OCC, and OTS—and the

state banking agencies in Alabama,

Louisiana, and Mississippi have worked

together to monitor and support the

recovery efforts of financial institutions

and their customers in the U.S. Gulf

Coast region. In 2006, the interagency

efforts included

• developing examiner guidance on the

agencies’ expectations related to assessments of the financial condition of

institutions affected by the hurricane;

• conducting a public service 

encouraging individuals af

Hurricane Katrina to con

lenders (and also issuing a 

encouraging financial insti

work with their borrowers 

them in their financial recov

• releasing “Lessons Learned 

ricane Katrina: Preparing Yo

tion for a Catastrophic Event

let describing financial in

experiences with Hurrican

and the lessons they learned 

institutions might find helpf

sidering their readiness fo

strophic event.

Credit Risk Management

The Federal Reserve works 

other federal banking age

develop guidance on the ma

of credit risk.

Real Estate Appraisals

Under the federal banking 

regulations on real estate a

regulated institutions must en

the appraisals they use in c

with federally related transac

here to the Uniform Standards 

sional Appraisal Practice (US

June 2006, the Federal Reser

NCUA, OCC, and OTS issued 

agency statement informing 

institutions that the Appraisal 

Board of the Appraisal Found

made significant revisions to 

effective July 1, 2006; prov

overview of the revisions; an

ing the ramifications of the rev

the institutions’ compliance 

regulations.

Home Equity Lending

In September, the Federal 

FDIC, NCUA, OCC, and OTS 
addendum to guidance issued in 2005—

“Interagency Credit Risk Management

Guidance for Home Equity Lending”—

that provided additional guidance on

managing the risks associated with

open-end home equity lines of credit

(HELOCs) that have interest-only or

negative amortization features. While

such HELOCs may give consumers

some flexibility, the agencies are concerned that consumers may not fully

understand the product terms and associated risks. The addendum addressed

the timing and content of communications with consumers that are obtaining

HELOCs having these features and

clarified the agencies’ expectations for

assessing borrower repayment capacity.

Nontraditional Mortgage Products

In September, the Federal Reserve,

FDIC, NCUA, OCC, and OTS issued

guidance, titled “Interagency Guidance

on Nontraditional Mortgage Product

Risks,” that addresses risk-management

and consumer disclosure practices that

institutions should employ to effectively

assess and manage the risks associated

with residential mortgage loans that

allow borrowers to defer repayment of

principal and, sometimes, interest (referred to as nontraditional mortgage

loans). Specifically, the guidance states

that regulated institutions should

• ensure that loan terms and underwriting standards are consistent with prudent lending practices (including, for

example, that they evaluate the borrower’s repayment capacity);

• recognize that many nontraditional

mortgage loans, particularly those that

have risk-layering features, are untested in a stressed environment and

warrant strong risk-management standards, capital levels commensurate

with risk, and allowances for loan and

lease losses that reflect the c

ity of the portfolio; and

• ensure that consumers have 

information to understand 

terms and the associated ris

they choose a product or a 

arrangement.

Commercial Real Estate

Concentrations

In December, the Federal 

FDIC, and OCC issued guida

“Interagency Guidance on C

tions in Commercial Real Est

ing, Sound Risk Management 

to remind institutions that str

management practices and a

levels of capital are important 

of a sound lending program, p

if the institution has a concen

commercial real estate loans. 

ance reinforced and enhance

regulations and guidelines for 

sound real estate lending. (For 

formation, see the box “Gui

Concentrations in Commercia

tate Lending.”)

Complex Structured Finance A

During the year, the Federal 

FDIC, OCC, OTS, and SEC p

final statement on sound pra

complex structured finance tra

(CSFTs). The statement, to be 

early 2007, describes the type

nal controls and risk-manage

cedures that financial institutio

use to identify, manage, and a

heightened legal and reputati

that may arise from certain 

(Excluded are most structure

transactions that are familiar 

pants in the financial markets 

well-established track records

standard public mortgage-back

ties and hedging-type transa
volving “plain vanilla” derivatives or

collateralized debt obligations.) Financial institutions that engage in CSFTs

should, as part of their process for approving transactions and new products,

establish and maintain policies, procedures, and systems that are designed to

identify elevated-risk CSFTs and should

ensure that transactions and new products so identified are subject to greater

review by appropriate levels of management. An institution should decline to

participate in an elevated-risk CSFT if it

determines that the transaction presents

unacceptable risks or would result in a

violation of applicable laws, regulations,

or accounting principles.

Banks’ Securities Activities

In December, the Board and the SEC

requested comments on joint proposed

rules that would help define the scope of

securities activities that a bank may conduct without registering with the SEC as

a securities broker. The Gramm-LeachBliley Act eliminated the blanket “broker” exception for banks that had been

contained in section 3(a)(4) of the Securities Exchange Act of 1934, but it

granted exceptions designed to allow

banks to continue to engage in securities

transactions for customers in connection

with their normal trust, fiduciary, custodial, and other banking operations. The

proposed rules would implement the

most important “broker” exceptions.

Comments on the proposal are due by

March 26, 2007.

Small Bank Holding Company

Threshold

In February, the Board issued a final

rule that raises, from $150 million to

$500 million, the asset-size threshold

used to determine whether a bank holding company qualifies for (1) the

Board’s Small Bank Holding 

Policy Statement and (2) an e

from the Board’s risk-based a

age capital adequacy guide

bank holding companies. The 

also modifies the qualitativ

used in determining whethe

holding company that is u

asset-size threshold neverthel

not qualify for the policy sta

the exemption. In addition, 

rule clarifies the treatme

the policy statement of sub

debt associated with trust 

securities.

Economic Growth and Reg

Paperwork Reduction Act o

The Economic Growth and R

Paperwork Reduction Act of 

quires that the federal banking 

review their regulations every 

to identify and eliminate any 

sary requirements imposed o

depository institutions. (In ad

Board periodically reviews e

regulations.) During 2006, th

Reserve, OCC, FDIC, and O

ducted the required review

other activities, they met with 

tatives of the banking indust

consumer groups around the c

hear their concerns and thei

tions for reducing regulatory 

The agencies expect to issu

report in 2007.

Bank Holding Company

Regulatory Financial Repor

The Federal Reserve requires 

bank holding companies pe

submit reports providing fina

structure information. This in

is essential to the supervisio

companies and the formulatio

lations and supervisory polic
also used in responding to requests from

Congress and the public for information

on bank holding companies and their

nonbank subsidiaries. Foreign banking

organizations are also required to periodically submit reports to the Federal

Reserve.

The FR Y-9 series of reports provides

standardized financial statements for

bank holding companies on both a consolidated basis and a parent-only basis.

The reports are used to detect 

financial problems, to revie

mance and conduct pre-i

analysis, to monitor and eva

profiles and capital adequacy, 

ate proposals for bank holding 

mergers and acquisitions, and 

the holding company’s overal

condition. The nonbank s

reports—FRY-11, FR 23

FR Y-7N—help the Federal 

Guidance on Concentrations in Commercial Real Estate Lendi

As any banker worth his or her salt knows, lending concentrations mu

carefully identified, monitored, and managed. It is one of the basics of bank

understand the consequences of placing all your eggs in one basket. Natu

supervisors from time to time have concerns about growing credit risk conce

tions at banks and bankers’ ability to manage them.

Susan Schmidt Bies, Member, Board of Gov

June 

In response to rising concentrations of

commercial real estate (CRE) loans at

many financial institutions, the Federal

Reserve, the Office of the Comptroller of

the Currency, and the Federal Deposit Insurance Corporation on December 12,

2006, issued guidance promoting sound

risk-management practices in this sector.1

In the guidance, titled “Concentrations in

Commercial Real Estate Lending, Sound

1. As defined by the guidance, CRE loans

include land development and construction loans

(including one- to four-family residential and

commercial construction loans) and other land

loans; loans secured by multifamily property;

and loans secured by nonfarm nonresidential

property for which 50 percent or more of the

source of repayment is third-party, nonaffiliated,

rental income or the proceeds of the sale, refinancing, or permanent financing of the property.

The guidance also applies to some loans to real

estate investment trusts and unsecured loans to

developers.

Risk Management Practices,” the 

recognize that financial institutio

vital role in funding real estate 

ment in their communities and can 

a profitable way. However, as a

tion’s concentration in CRE len

creases, management should unde

possible exposure to a downtur

CRE market or to other adverse m

economic events.

Supervisors have observed ove

decade that CRE concentrations h

rising at many institutions, esp

small and medium-size banks. 

1993 and 2005, CRE loans as a p

of total equity plus reserves r

145 percent to 280 percent for co

banks with assets between $10

and $1 billion and from 120 p

230 percent for commercial ba

assets of $1 billion to $10 billion

ence has shown that credit conce

add a dimension of risk that co

the simple risk inherent in individ
determine the condition of bank holding

companies that are engaged in nonbank

activities and also aid in monitoring the

volume, nature, and condition of the

companies’ nonbank subsidiaries.

In March, several revisions to the

FR Y-9C, FR Y-9LP, and FR Y-9SP

reports were approved for implementation during 2006. Effective March 31,

the asset-size threshold for filing

the FR Y-9C and FR Y-9LP reports

was raised from $150 m

$500 million, reducing the n

respondents by approximatel

cent. Other FR Y-9C revision

March 31 included the elimin

number of data items; the a

data items on loans for purch

carrying securities, regulator

and credit derivatives; and th

of the FR Y-9C filing requir

lower-tier bank holding comp

Further, supervisors are concerned that

risk-management practices at some institutions may not have kept pace with the

growth of CRE concentrations.

The agencies developed the 2006 CRE

guidance to remind financial institutions

that strong risk-management practices and

appropriate capital levels are important

elements of a sound CRE lending program,

particularly when an institution has a concentration in CRE loans or has experienced

rapid portfolio growth. The guidance provides the agencies’ examiners with two

supervisory screening criteria designed to

identify institutions whose CRE concentrations may require additional scrutiny:

• Total loans for construction, land development, and other land represent 100

percent or more of the institution’s total

capital; or

• Total CRE loans represent 300 percent or

more of the institution’s total capital, and

the outstanding balance of the institution’s commercial real estate loan portfolio has increased 50 percent or more

during the previous thirty-six months.

These screening criteria serve as a starting point for a dialogue between the agencies’ supervisory staff and an institution’s

management about the level and nature of

CRE concentration risk. The guidance focuses on CRE loans for which the risk of

default is sensitive to CRE market demand,

capitalization rates, vacancy rates, or rents.

The agencies recognize that 

types of CRE lending present diff

els of risk. For example, a well-s

loan for a multifamily housing 

would generally have a lower ri

than a loan for an office building t

on speculation. The guidance 

edges that institutions are in the b

tion to make such assessments 

level and nature of concentratio

their CRE portfolios.

Building upon the agencies’ 

regulations and guidelines for r

lending and loan portfolio man

the guidance describes the key 

that an institution should addre

areas of board and management o

portfolio management, managem

mation systems, market analysi

underwriting standards, portfoli

testing and sensitivity analysis, 

credit-risk review function.

The Federal Reserve recogn

commercial real estate lending i

cally important activity that has 

the “bread and butter” business 

small and medium-size banks. Su

emphasize that they did not in

guidance to limit commercial re

lending; rather, they expect that 

ance will encourage institutions to 

and maintain appropriate c

governance structures to address 

posed by their lending strategies.
ing total assets of $1 billion or more.

Revisions effective September 30 included new officer signature requirements and additional data items on mortgage banking activities and secured

borrowings.

Effective June 30, the asset-size cap

for the FR Y-9SP was raised from

$150 million to $500 million, increasing

the number of respondents by approximately 50 percent. Other FR Y-9SP revisions effective June 30 included the

addition of two items identifying the

total value of off-balance-sheet activities conducted directly or through a nonbank subsidiary and the total value of

debt and equity securities registered

with the SEC. Revised officer signature

requirements for the FR Y-9SP were

effective December 31.

In March, the Board also revised the

asset-size threshold for the quarterly

FR Y-11 and FR 2314 nonbank subsidiary reports, to make it consistent with

the revised threshold for the FR Y-9C

and to reduce reporting burden. Revising the threshold for the FR Y-11 reduced the number of quarterly respondents by approximately 30 percent; the

revision had no immediate effect on the

number of FR 2314 filers. Other

FR Y-11 and FR 2314 revisions effective March 31 included the addition of a

new equity capital component to the

balance sheet for reporting partnership

interest and, for the FR Y-11 only, the

expansion of the scope of several loan

items reported on the balance sheet

memoranda.

Effective December 31, a new report

was implemented: the Annual Report of

Merchant Banking Investments Held for

an Extended Period (FR Y-12A). The

report collects data concerning merchant banking investments that are approaching the end of the holding period

permissible under Regulation Y (Bank

Holding Companies and C

Bank Control).

Commercial Bank

Regulatory Financial Repor

As the federal supervisor of s

ber banks, the Federal Reser

with the other banking agencie

the FFIEC, requires banks 

quarterly Consolidated Report

dition and Income (Call Repo

Reports are the primary sourc

for the supervision and regu

banks and the ongoing assessm

overall soundness of the natio

ing system. Call Report data, w

serve as benchmarks for the 

information required by ma

Federal Reserve regulatory fin

ports, are widely used by state 

governments, state banking su

the banking industry, securitie

and the academic community.

For the 2006 reporting p

FFIEC implemented various 

to the Call Report to streamli

porting requirements and to 

items that focus on areas of 

supervisory concern. The prin

sions included the collection o

lated to the implementation o

insurance reform provisions

sources (Federal Home Lo

advances and other borrowi

mortgage banking activities. T

ture and attestation requirem

revised to add the chief financ

or equivalent, to the list of of

quired to attest to and sign 

Report.

In October, the FFIEC prop

sions for the 2007 reporting 

address new safety and sound

siderations and to facilitate su

Among the proposed revi

changes in data collection rela

deposit insurance assessment 
process; changes in generally accepted

accounting principles (including certain

financial instruments measured at fair

value and principles for accounting for

defined benefit pension and other postretirement plans); and nontraditional

mortgage products.

Supervisory Information

Technology

Information technology supporting Federal Reserve supervisory activities is

managed within the System supervisory

information technology (SSIT) function

in the Board’s Division of Banking

Supervision and Regulation. SSIT

works through assigned staff at the

Board and the Reserve Banks, as well

as through System committees, to

ensure that key staff members throughout the System participate in identifying requirements and setting priorities

for IT initiatives.

In 2006, the SSIT function worked on

the following strategic projects and initiatives: (1) align technology investments with business needs; (2) improve

security of information-sharing technologies and provide for seamless

collaboration in interagency efforts;

(3) identify and implement improvements in the accessibility of technology

to staff working in the field; (4) identify

opportunities to converge and streamline IT applications, including key

administrative systems, to provide consistent and seamless information;

(5) evaluate and implement technologies (such as portals, search engines,

and content management tools) to

integrate supervisory and management

information systems that support both

office-based and field staff; and

(6) enhance the information security

framework for the supervisory function,

improving both overall security and

compliance with best-pract

regulatory requirements.

National Information Cente

The National Information Cen

is the Federal Reserve’s comp

repository for supervisory, fina

banking structure data and su

documents. NIC includes co

sive data on banking structure 

out the United States; the Na

amination Database (NED

enables supervisory personnel 

banking authorities to access 

the Banking Organization 

Desktop (BOND), an applic

facilitates secure, real-time 

information-sharing and col

among federal and state banki

tors for the supervision of bank

nizations; and the Central Docu

Text Repository (CDTR), w

tains documents supporting th

sory processes.

The structure and supervi

systems are continually bein

to extend their useful lives an

business workflow efficiency

2006, the NED system was m

begin collecting Bank Sec

information in an automated 

support Federal Reserve en

activities. In 2006, the BO

CDTR systems were modifie

vide further integration with th

Reserve’s internal surveilla

gram, to provide additional su

the supervision of large finan

tutions, and to allow integ

examinations of technology 

providers. In addition, user a

tion software was upgraded fo

agency users, and use of th

and CDTR systems was ex

additional federal and state 

agencies.
Staff Development

The System Staff Development Program

trains staff members at the Board, the

Reserve Banks, state banking departments, and foreign supervisory authorities. Training is offered at the basic,

intermediate, and advanced levels in

several disciplines within bank supervision: safety and soundness, information

technology, international banking, and

consumer affairs. Classes are conducted

in Washington, D.C., as well as at

Reserve Banks and other locations. The

Federal Reserve System also participates in training offered by the FFIEC

and by certain other regulatory agencies.

The System’s involvement includes developing and implementing basic and

advanced training in relation to various

emerging issues as well as in specialized

areas such as international banking, information technology, anti–money laundering, capital markets, payment systems risk, and real estate appraisal. In

addition, the System co-hosts the World

Bank Seminar for supervisors from developing countries.

In 2006, the Federal Reserve trained

3,619 students in System schools, 952 in

schools sponsored by the FFIEC, and 24

in other schools, for a total of 4,595,

including 312 representatives of foreign

central banks and supervisory agencies

(see table). The number of training days

in 2006 totaled 23,321.

The System gave scholarship assistance to the states for training their examiners in Federal Reserve and FFIEC

schools. Through this program, 605 state

examiners were trained—308 in Federal

Reserve courses, 293 in FFIEC programs, and 4 in other courses.

A staff member seeking an examiner’s commission is required to take a

first proficiency examination as well as

a second proficiency examination in one

of two specialty areas: safety and soundness or consumer affairs. In 2

examiners passed the first p

examination, and 61 passed t

proficiency examination: 53 

and soundness exam, and 8 

sumer affairs exam.

Regulation of the

U.S. Banking Structure

The Federal Reserve administe

federal statutes that apply to b

ing companies, financial holdin

nies, member banks, and fore

ing organizations—the Bank 

Company Act, the Bank Merge

Change in Bank Control Act

eral Reserve Act, and the Int

Banking Act. In administer

statutes, the Federal Reserve 

variety of proposals that direct

rectly affect the structure of 

banking system at the local, 

and national levels; the interna

erations of domestic banking 

tions; or the U.S. banking ope

foreign banks. The proposal

bank holding company forma

acquisitions, bank mergers, 

transactions involving bank o

firms. In 2006, the Federal 

acted on 1,378 proposals, wh

sented 3,171 individual ap

filed under the five adm

statutes.

Bank Holding Company A

Under the Bank Holding Com

a corporation or similar leg

must obtain the Federal 

approval before forming a ban

company through the acquisiti

or more banks in the Unite

Once formed, a bank holding 

must receive Federal Reserve 

before acquiring or establish

tional banks. The act also ide
nonbanking activities permissible for

bank holding companies; depending on

the circumstances, these activities may

or may not require Federal Reserve

approval in advance of their commencement.

When reviewing a bank holding company application or notice that requires

prior approval, the Federal Reserve may

consider the financial and m

resources of the applicant, t

prospects of both the applican

firm to be acquired, the conven

needs of the community to b

the potential public benefits, 

petitive effects of the proposa

applicant’s ability to make av

the Federal Reserve informatio

Training Programs for Banking Supervision and Regulation, 2006

Program

Number of sessions cond

Total 

Schools or seminars conducted by the Federal Reserve

Core schools

Banking and supervision elements ............................... 8 

Financial analysis and risk management .......................... 8 

Bank management .............................................. 3 

Report writing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 

Management skills .............................................. 8 

Conducting meetings with management . . . . . . . . . . . . . . . . . . . . . . . . . . 14 

Other schools

Credit risk analysis ............................................. 5 

Examination management ....................................... 5 

Real estate lending seminar ...................................... 3 

Senior forum for current banking and regulatory issues ............ 2 

Basel II corporate activities ...................................... 3 

Basel II operational risk ......................................... 2 

Basel II retail activities .......................................... 3 

Principles of fiduciary supervision .............................. 2 

Commercial lending essentials for consumer affairs ............... 1 

Consumer compliance examinations I ............................ 2 

Consumer compliance examinations II ........................... 2 

CRA examination techniques .................................... 2 

CA risk-focused examination techniques ......................... 2 

Fair lending examination techniques ............................. 3 

Foreign banking organizations seminar ........................... 1 

Information systems continuing education ........................ 7 

Asset liability management (ALM1) ............................. 2 

Asset liability management (ALM2) ............................. 2 

Fundamentals of interest rate risk management ................... 8 

Trading and operations .......................................... 1 

Technology risk integration ...................................... 3 

Leadership dynamics ............................................ 6 

Fundamentals of fraud . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 

Information technology seminars1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 

Seminar for senior supervisors of foreign central banks2

and 13 other international courses . . . . . . . . . . . . . . . . . . . . . . . . . . 34 

Self-study or online learning3

Orientation (core and specialty) .................................... ... 

Self-study modules (26 modules) ................................... ... 

Other agencies conducting courses4

Federal Financial Institutions Examination Council . . . . . . . . . . . . . . . . . . 78 

The Options Institute .............................................. 1 

1. Held at the IT Lab at the Chicago Reserve Bank.

2. Conducted jointly with the World Bank.

3. Self-study programs do not involve g

4. Open to Federal Reserve employees.
necessary to ensure compliance with

applicable law. In the case of a foreign

banking organization seeking to acquire

control of a U.S. bank, the Federal

Reserve also considers whether the foreign bank is subject to comprehensive

supervision or regulation on a consolidated basis by its home-country supervisor. In 2006, the Federal Reserve acted

on 638 applications filed by bank holding companies to acquire a bank or a

nonbank firm, or to otherwise expand

their activities.

Bank holding companies generally

may engage in only those nonbanking

activities that the Board has previously

determined to be closely related to banking under section 4(c)(8) of the Bank

Holding Company Act. Since 1996, the

act has provided an expedited priornotice procedure for certain permissible

nonbank activities and for acquisitions

of small banks and nonbank entities.

Since that time the act has also permitted well-run bank holding companies

that satisfy certain criteria to commence

certain other nonbank activities on a de

novo basis without first obtaining Federal Reserve approval.

A bank holding company may repurchase its own shares from its shareholders. When the company borrows money

to buy the shares, the transaction

increases the company’s debt and decreases its equity. The Federal Reserve

may object to stock repurchases by holding companies that fail to meet certain

standards, including the Board’s capital

adequacy guidelines. In 2006, the

Federal Reserve reviewed 7 stockrepurchase proposals by bank holding

companies.

The Federal Reserve also reviews

elections from bank holding companies

seeking financial holding company status under the authority granted by the

Gramm-Leach-Bliley Act. Bank holding

companies seeking financial holding

company status must file a wr

laration with the Federal Re

2006, 48 domestic financia

company declarations and 

bank declarations were approv

Bank Merger Act

The Bank Merger Act requir

proposals involving the m

insured depository institutions 

on by the appropriate federa

agency. The Federal Reserve 

mary jurisdiction if the instit

viving the merger is a state 

bank. Before acting on a me

posal, the Federal Reserve 

the financial and managerial 

of the applicant, the future pr

the existing and combined 

tions, the convenience and ne

community(ies) to be served

competitive effects of the 

merger. In 2006, the Federa

approved 65 merger applicati

the act.

As a result of enactment of 

cial Services Regulatory Reli

2006, the Federal Reserve is 

required for each proposed ba

to either request competitive f

ports from the other federal ba

thrift regulatory agencies or p

ports on competitive factors 

other agencies. The Federal 

now must consider only the vi

U.S. Department of Justice reg

competitive aspects of a prop

merger. In addition, the view

Department of Justice need no

ited for bank mergers involv

ated insured depository in

Before these statutory changes 

in the third quarter of 2006, th

Reserve had submitted 45

on competitive factors to 

agencies.
Change in Bank Control Act

The Change in Bank Control Act requires individuals and certain other parties that seek control of a U.S. bank or

bank holding company to obtain approval from the appropriate federal

banking agency before completing the

transaction. The Federal Reserve is responsible for reviewing changes in the

control of state member banks and bank

holding companies. In its review, the

Federal Reserve considers the financial

position, competence, experience, and

integrity of the acquiring person; the

effect of the proposed change on the

financial condition of the bank or bank

holding company being acquired; the

effect of the proposed change on competition in any relevant market; the completeness of the information submitted

by the acquiring person; and whether

the proposed change would have an adverse effect on the federal deposit insurance funds. In addition, with enactment

of the Financial Services Regulatory Relief Act of 2006, the Federal Reserve

must also consider the future prospects

of the institution to be acquired: a proposed transaction should not jeopardize

the stability of the institution or the

interests of depositors. During its review

of a proposed transaction, the Federal

Reserve may contact other regulatory or

law enforcement agencies for information about relevant individuals.

In 2006, the Federal Reserve approved 98 changes in control of state

member banks and bank holding

companies.

Federal Reserve Act

Under the Federal Reserve Act, a member bank may be required to seek Federal Reserve approval before expanding

its operations domestically or internationally. State member banks must obtain Federal Reserve approval 

lish domestic branches, and al

banks (including national ban

obtain Federal Reserve appro

tablish foreign branches. Whe

ing proposals to establish 

branches, the Federal Reserv

ers, among other things, the 

nature of the banking activit

conducted. When reviewing 

for foreign branches, the 

Reserve considers, among oth

the condition of the bank and t

experience in international ba

2006, the Federal Reserve acte

and merger-related branch pro

2,033 domestic branches an

prior approval for the establish

new foreign branches.

State member banks must a

Federal Reserve approval to 

financial subsidiaries. These su

may engage in activities that 

cial in nature or incidental to 

activities, including securities 

ance agency-related activities

1 application for a financial 

was approved.

Overseas Investments by

U.S. Banking Organization

U.S. banking organizations m

in a broad range of activities 

Many of the activities are 

indirectly through Edge Act a

ment corporation subsidiaries. 

most foreign investments are 

der general consent procedure

volve only after-the-fact notif

the Federal Reserve, large and 

nificant investments require 

proval. In 2006, the Federa

approved 29 proposals for s

overseas investments by U.S

organizations. The Federal Re

approved 16 applications to m

tional investments through 
Act or agreement corporation, 1 application to establish an Edge Act corporation, and 2 applications to extend the

corporate existence of an Edge Act

corporation.

International Banking Act

The International Banking Act, as

amended by the Foreign Bank Supervision Enhancement Act of 1991, requires

foreign banks to obtain Federal Reserve

approval before establishing branches,

agencies, commercial lending company

subsidiaries, or representative offices in

the United States.

In reviewing proposals, the Federal

Reserve generally considers whether the

foreign bank is subject to comprehensive supervision or regulation on a consolidated basis by its home-country supervisor. It also considers whether the

home-country supervisor has consented

to the establishment of the U.S. office;

the financial condition and resources of

the foreign bank and its existing U.S.

operations; the managerial resources of

the foreign bank; whether the homecountry supervisor shares information

regarding the operations of the foreign

bank with other supervisory authorities;

whether the foreign bank has provided

adequate assurances that information

concerning its operations and activities

will be made available to the Federal

Reserve, if deemed necessary to determine and enforce compliance with

applicable law; whether the foreign bank

has adopted and implemented procedures to combat money laundering and

whether the home country of the foreign

bank is developing a legal regime to

address money laundering or is participating in multilateral efforts to combat

money laundering; and the record of the

foreign bank with respect to compliance

with U.S. law. In 2006, the Fe

serve approved 19 application

eign banks to establish branch

cies, or representative offic

United States.

Public Notice of

Federal Reserve Decisions

Certain decisions by the Fe

serve that involve an acquisi

bank holding company, a bank 

change in control, or the esta

of a new U.S. banking prese

foreign bank are made know

public by an order or an annou

Orders state the decision, the 

facts of the application or n

the basis for the decision; a

ments state only the decision. 

and announcements are made p

mediately; they are subsequ

ported in the Board’s weekly H

tical release. The H.2 rele

contains announcements of ap

and notices received by the Fe

serve upon which action ha

been taken. For each pending 

tion and notice, the related H

tains the deadline for comm

Board’s web site (www.feder

gov) provides information on o

announcements as well as a 

U.S. and foreign banking org

that wish to submit applicatio

tices to the Federal Reserve.

Enforcement of

Other Laws and Regulati

The Federal Reserve’s enforc

sponsibilities also extend to t

sure of financial information 

member banks and the use of 

purchase and carry securities.
Financial Disclosures by

State Member Banks

State member banks that issue securities

registered under the Securities Exchange

Act of 1934 must disclose certain information of interest to investors, including

annual and quarterly financial reports

and proxy statements. By statute, the

Board’s financial disclosure rules must

be substantially similar to those of the

SEC. At the end of 2006, 17 state member banks were registered with the

Board under the Securities Exchange

Act of 1934.

Securities Credit

Under the Securities Exchange Act, the

Board is responsible for regulating

credit in certain transactions involving

the purchase or carrying of securities.

The Board’s Regulation T limits the

amount of credit that may be provided

by securities brokers and dealers when

the credit is used to trade debt and

equity securities. The Board’s Regulation U limits the amount of credit that

may be provided by lenders other than

brokers and dealers when the credit is

used to purchase or carry publicly held

equity securities if the loan is secured by

those or other publicly held equity securities. The Board’s Regulation 

these credit limitations, or m

quirements, to certain borrow

certain credit extensions, such 

obtained from foreign lender

citizens.

Several regulatory agencie

the Board’s securities cred

tions. The SEC, the National 

tion of Securities Dealers, 

national securities exchanges 

brokers and dealers for co

with Regulation T. With r

compliance with Regulation U

eral banking agencies exam

under their respective jurisdic

Farm Credit Administrat

NCUA, and the OTS examin

under their respective jurisdic

the Federal Reserve exami

Regulation U lenders.

Federal Reserve Member

At the end of 2006, 2,593 ba

members of the Federal Reserv

and were operating 53,938 

These banks accounted for 35 

all commercial banks in th

States and for 71 percent of all 

cial banking offices. 
Consumer and Community Affairs

Among the Federal Reserve’s responsibilities in the areas of consumer and

community affairs are

• writing and interpreting regulations to

implement federal laws that protect

and inform consumers;

• supervising state member banks to ensure compliance with the regulations;

• investigating complaints from the

public about state member banks’

compliance with regulations; and

• promoting community development in

historically underserved markets.

These responsibilities are carried out by

the members of the Board of Governors,

the Board’s Division of Consumer and

Community Affairs, and the consumer

and community affairs staff of the Federal Reserve Banks.

Implementation of Statutes

Designed to Inform and Protect

Consumers

The Board of Governors writes regulations to implement federal laws involving consumer financial services and fair

lending. The Board revises and updates

these regulations to address the introduction of new products and technologies, to implement legislative changes to

existing laws, and to address problems

consumers may encounter in their financial transactions. To interpret and clarify

the regulations, Board staff issue commentaries and other guidance.

During 2006, the Board published final amendments to its Regulation E,

which implements the Electro

Transfer Act, and the associa

mentary to make the regulatio

ble to payroll card accounts e

through an employer to provi

sumer with electronic fund tr

salary, wages, or other emplo

pensation on a recurring b

Board also amended Regula

clarify that a person, such as a 

must obtain a consumer’s aut

to collect returned-item fees 

cally from the consumer’s acc

Board engaged in several ru

and other activities with the 

eral banking agencies and th

Trade Commission (FTC). T

the Federal Deposit Insurance 

tion (FDIC), and the Offic

Comptroller of the Currenc

issued final guidance on the m

amendments to the agencies’ 

nity Reinvestment Act (CRA

tions. The Board also issued 

guidance with the OCC, the F

Office of Thrift Supervision (O

the National Credit Union A

tion (NCUA) to address the ris

ated with nontraditional mortg

ucts. In addition, the Board an

jointly issued a report to Co

the consumer dispute provisio

Fair Credit Reporting Act.

Furthermore, the Board r

dollar threshold that triggers 

requirements under the Hom

ship and Equity Protection 

raised the exemption thres

depository institutions require

lect data under the Home Mort

closure Act.
Amendments to Regulation E

(Electronic Fund Transfers)

Payroll Cards

In August, the Board published final

amendments to Regulation E that address payroll card accounts established

through an employer on behalf of a

consumer and to which recurring electronic fund transfers of salary, wages, or

other employee compensation are made.

Under the final rule, payroll card

accounts are subject to the same requirements that apply to traditional transaction accounts under Regulation E; these

requirements include a financial institution’s duty to provide payroll-card

account holders with initial disclosures,

periodic statements, and error-resolution

and liability provisions. For periodic

statements, however, the final rule

allows financial institutions to provide

the specified account information electronically, and in writing upon the consumer’s request, rather than through

paper statements.

Regulation E applies to financial institutions that (1) hold an account belonging to a consumer or (2) both issue

an access device (such as a debit card)

to a consumer and agree with the consumer to provide electronic fund transfer (EFT) services. The final rule clarifies that the depository institution

holding the consumer’s funds in a payroll card account is a financial institution under the regulation. The final rule

does not generally cover employers or

third-party service providers. The mandatory compliance date for the final rule

is July 1, 2007.

Returned-Item Fees

In December, the Board published a

final rule amending Regulation E and

its official staff commentary. These

amendments clarify the c

authorization requirements for 

tronic collection of returned-

The final rule states that a per

ing to collect a fee for a retur

or any other item must obta

sumer’s authorization to initia

to collect this fee. This re

applies to the person initiating 

not to the consumer’s accoun

financial institution. Consume

zation is obtained when (1) 

stating the specific amount o

(or explaining how the fee 

lated, if the fee may vary) an

ment that the fee will be col

an EFT is provided to the 

and (2) the consumer goes for

the transaction. For point-of-s

actions, the notice must be p

prominent and conspicuous 

and a copy of the notice mus

to the consumer to retain. Th

copy of the notice may be giv

consumer at the time of the t

or mailed to the consumer’s a

soon as reasonably practicable 

EFT has been initiated.

Joint Guidance on the Com

Reinvestment Act Regulati

In March, the Board, along 

FDIC and the OCC, issued j

guidance to implement chang

agencies’ CRA regulations, w

effective in September 2005. 

ance answers frequently asked 

about the new CRA rules, in

new rule that provides CRA 

nity development” consider

bank activities that revitalize o

designated disaster areas. The 

states that banks will receive 

ation for activities they condu

36 months of an area’s design

disaster area when such activ

to attract new, or to retain exis
nesses or residents to the area and are

related to disaster recovery.

The guidance also implements a new

rule that provides “community development” consideration for bank activities

that revitalize or stabilize underserved

or distressed middle-income rural areas.

The guidance describes the types of activities that will receive consideration as

well as how such activities will be

evaluated. In addition, the guidance discusses the new community development

test for intermediate small banks (banks

that have assets of between $250 million

and $1 billion).

Interagency Guidance

on the Risks of

Nontraditional Mortgage Products

In September, the Board, along with the

OCC, the FDIC, the OTS, and the

NCUA, issued final guidance to address

the risks associated with the growing

use of so-called nontraditional mortgage

products, such as interest-only mortgages and payment-option adjustablerate mortgages.1 These products, which

allow borrowers to defer repayment of

the loan’s principal and sometimes interest, are being offered to a wide spectrum

of borrowers. Among other issues, the

interagency guidance addresses concerns that some borrowers may not fully

understand the risks of these products,

including their potential for negative

amortization.

Specifically, the agencies provided

guidance in three primary areas: loan

terms and underwriting standards, portfolio and risk-management practices,

and consumer protection issues. The

first section of the guidance advises financial institutions to ensure that their

loan terms and underwriting standards

for nontraditional mortgage pr

consistent with prudent lend

tices, which include considerin

a borrower has the capacity t

loan. The second section ou

need for financial institution

strong risk-management stand

tal levels commensurate with 

their products and activities, a

lowance for loan and lease l

reflects the collectibility of 

portfolio. The third section 

recommended practices to en

financial institutions are provi

sumers with clear and balanced 

tion that allows them to unde

terms and associated risks o

before they choose a specific p

payment option. (See related b

traditional Mortgages—Balanc

vation, Regulation, and Educa

Report on Compliance with

Consumer Dispute Provisio

the Fair Credit Reporting A

In August, the Board and the F

a joint report to Congress pu

section 313(b) of the Fair and 

Credit Transactions Act of 

FACT Act). In addition 

changes, the FACT Act ame

Fair Credit Reporting Act (F

enhance the FCRA’s consum

provisions. The joint report 

the extent to which consumer 

agencies (CRAs) and furnisher

mation to CRAs comply with 

sumer dispute provisions of th

Before writing the report, the B

the FTC conducted a study t

ined several sources of inf

public comments from co

CRAs, and consumer and 

groups; consumer complaints 

federal financial institution 

agencies; bank examination 

FCRA compliance; and othe

1. See www.federalreserve.gov/boarddocs/press/

bcreg/2006/20060929/default.htm.
Nontraditional Mortgages—

Balancing Innovation, Regulation, and Education

Homeownership has long been viewed as a

fundamental step to furthering personal

and financial well-being. A home is often

the largest and most important asset

individuals and families acquire, and the

equity earned on a home can, over time,

provide homeowners with financial flexibility and security. Consumers have

benefited from public policies to encourage and facilitate homeownership, as well

as from innovations in the financial services industry that have increased both the

number of lenders and types of home loans

available. While increased competition and

product choice provide consumers with

new opportunities, they also present many

challenges for both borrowers, who must

be prepared to evaluate their options, and

for regulators, who seek to ensure

consumer protections without hindering

market innovation through overly restrictive regulation.

In recent years, so-called nontraditional

mortgages, including interest-only and

payment-option adjustable-rate mortgages,

have become increasingly popular. Originally designed as niche products to meet the

needs of certain borrowers, such as wealthy

customers or customers who have seasonal

or other fluctuations in their incomes, nontraditional mortgages are now commonplace among more-typical borrowers. In

2006, nontraditional mortgages accounted

for one-third of all mortgage originations,

compared with only one-tenth of mortgage

originations in 2003. Nontraditional mortgages can provide borrowers with greater

flexibility by allowing them to repay only

interest for a period of time or to choose

among other repayment options, in contrast

to a fully amortizing loan that requires

fixed payments throughout the loan term.

The interest rate and payments are adjusted

later in the term of a nontraditio

gage in order to recapture repa

principal. Because nontradition

gages typically allow a borrower 

lower payments early in the lo

loans have become increasingly p

high-cost housing markets.

But nontraditional mortgages 

carry significant risk, including 

amortization, which occurs w

amount of the loan increases over 

“payment shock,” which occu

interest rate adjustments result in 

higher payment later in the loan t

ther, reports of aggressive market

tices for these loans, as well as 

incidents of consumers receivi

equate or misleading loan disclosu

raised concerns among consume

financial institution regulatory 

and some lawmakers that nont

mortgages are inappropriately ma

and used by some borrowers. How

need to ensure that consumer pr

are in place for nontraditional m

must be balanced with the desire t

age innovation and flexibility in 

gage industry.

In 2006, the Federal Reserve B

a multifaceted approach to respo

consumer-related issues in today

gage market, including the risks 

by the growing use of nontraditio

gage products. During the sum

Board convened a series of public 

to discuss home equity lending 

and practices. After conducting in

reach to an array of interested gro

eral Reserve regulatory and rese

structured the hearings to includ

sion panels on the impact of 

changes to the Home Owner

Equity Protection Act (HOEP
lations, as well as panels on key issues in

the mortgage market. Topics included

trends and issues associated with complex

products, such as nontraditional mortgages

and reverse mortgages, as well as efforts to

provide consumers with pre- and postpurchase counseling and intervention,

lender “best practices” and the role of

mortgage brokers, and the results of research on state predatory lending laws. The

hearings also explored consumer behavior

in shopping for mortgage loans and discussed the challenges of designing more

effective and informative consumer disclosures. Both lenders and consumer advocates participated in the hearings, which

enabled diverse viewpoints on both the

benefits and pitfalls of nontraditional mortgages to be presented.

Lenders testified that nontraditional

mortgage loans are appropriately underwritten and have historically shown strong

performance. Consumer advocates and

state officials, on the other hand, testified

that aggressive marketing and the complexity of these products increase the risk that a

borrower will obtain a mortgage he or she

does not understand and might not be able

to afford. They also questioned whether

additional loan disclosures would only

overwhelm consumers, because the products are so complex. Board staff are considering the comments from these hearings, as

well as insights gained from consumer focus groups and other sources of information, as they evaluate potential revisions to

the mortgage disclosure requirements in

Regulation Z.

Recognizing the important role of education in understanding mortgage transactions, the Board partnered with other federal supervisory agencies to improve the

resources available to both consumers and

lenders on nontraditional mortgages. For

consumers, the Federal Reserve, in partnership with the Office of Thrift Supervision,

updated the “Consumer Handbook on

Adjustable-Rate Mortgages,” which includes an in-depth discussion of 

tional mortgages and illustration

loan payments may result in neg

ortization.1 The Board also pub

consumer information brochure, 

Only Mortgage Payments and 

Option ARMs—Are They for 

which includes a glossary of lendi

a mortgage shopping worksheet, 

of additional information source

consumers evaluate whether these 

loans are right for them.2 This pu

stresses the importance of unde

key mortgage loan terms, warn

risks consumers may face, and u

rowers to be realistic about whe

can handle future payment incr

addition, interagency guidance on 

tional mortgages, issued in Se

highlights the increased risk fo

and borrowers that nontradition

gages can present.3 The guidance 

the importance of (1) carefully m

the potential heightened risk le

the benefit of both lenders and b

(2) using prudent loan-structu

-underwriting standards; (3) cons

borrower’s repayment capacity; an

suring that consumers have suffici

mation to understand the terms 

before making a loan or payment 

The mortgage industry has pro

innovative in developing a wide 

mortgage credit products. Throug

pervisory responsibilities, resear

sumer education, and outreach to 

nities and lenders, the Federal 

will continue to strive to balance 

novation in the financial services 

with responsive oversight and 

protection.

1. www.federalreserve.gov/pubs/arms

english.htm

2. www.federalreserve.gov/pubs/mort

interestonly/default.htm

3. www.federalreserve.gov/boarddocs/

2006/20060929/default.htm
reports, and data conducted or maintained by the federal financial institution

regulatory agencies. The report found

that most CRAs appear to be processing

consumer disputes within the statutory

time frame; however, there was disagreement as to the adequacy of the

dispute investigations conducted by

CRAs and furnishers of information to

CRAs.

To ensure that the FACT Act provisions enhancing the consumer dispute

process are given enough time to be

effective, the Board and the FTC did not

recommend any additional administrative or legislative actions at this time.

However, as discussed in the report, the

FTC and the Board will continue to

monitor the performance of the dispute

process, explore possible enhancements,

and recommend actions, if appropriate.

Other Regulatory Actions

The Board also took the following regulatory actions during 2006:

• In August, the Board amended the

official staff commentary to Regulation Z to raise from $528 to $547 the

total dollar amount of points and fees

that triggers additional requirements

for certain mortgage loans under the

Home Ownership and Equity Protection Act. As prescribed by that statute,

the increased threshold (effective

January 1, 2007) reflects changes in

the consumer price index.

• In December, the Board amended the

official staff commentary to Regulation C to raise from $35 million to

$36 million the asset-size exemption

threshold for depository institutions

required to collect data under the

Home Mortgage Disclosure Act. As

prescribed by that statute, the

increased threshold reflects changes

in the consumer price ind

result, depository institut

have assets of $36 million or 

December 31, 2006, are exe

data collection, effective J

2007.

Supervision for Complian

with Consumer Protection 

Community Reinvestment 

Activities Related to the

Community Reinvestment A

The Community Reinvestm

(CRA) requires that the Federa

and other banking agencies 

financial institutions to help 

credit needs of the local comm

which they do business, consi

safe and sound operations. To 

this mandate, the Federal Rese

• examines state member ban

sess their compliance with t

• analyzes applications for me

acquisitions by state memb

and bank holding companie

tion to CRA performance; a

• disseminates information on 

nity development technique

ers and the public through c

affairs offices at the Reserve 

Examinations for Compliance

with the CRA

The Federal Reserve assesses 

the CRA performance of stat

banks in the course of examina

ducted by staff at the twelve 

Banks. During the 2006 

period, the Reserve Banks 

CRA examinations of 276 b

were rated Outstanding, 248 w

Satisfactory, none was rated 
Improve, and one was rated Substantial

Noncompliance.2

Analysis of Applications for

Mergers and Acquisitions in

Relation to the CRA

During 2006, the Board considered

applications for several significant banking mergers. The Board approved the

application by Capital One Financial

Corporation, McLean, Virginia, to acquire North Fork Bancorporation, Inc.,

Melville, New York, in November; this

acquisition was a major expansion of

Capital One Corporation’s relatively

new retail banking operations. In addition, three large bank holding companies, National City Corporation, in

Cleveland, Ohio; BB&T Corporation, in

Winston-Salem, North Carolina; and

Marshall & Ilsley Corporation, in Milwaukee, Wisconsin, each acquired two

large banking organizations in 2006.

Several other significant applications

are listed below.

• An application by Trustmark Corporation, Jackson, Mississippi, to acquire

Republic Bancshares of Texas, Inc.,

Houston, Texas, was approved in

August.

• An application by Wachovia Corporation, Charlotte, North Carolina, to

acquire Golden West Financial Corporation, Oakland, California, was approved in September.

• An application by Regions Financial

Corporation, Birmingham, Alabama,

to acquire AmSouth Bancorporation,

also of Birmingham, was approved in

October.

The public submitted comments on

each of these applications. Commenters

expressed concerns that minority applicants were being denied mortg

more frequently than nonmino

cants; other concerns described 

potentially predatory lending 

of subprime and payday lende

tial adverse effects of branch 

and lenders’ failure to addres

venience and needs of l

moderate-income communities

the comments referenced pric

mation on residential mortg

that was required to be report

ning with the 2004 Home Mor

closure Act (HMDA) data. C

ers’ concerns that minority 

were more likely than no

applicants to receive higher-pr

gages were largely based on 

tions of the 2004 and 2005 HM

ing data.3

In total, the Board acted o

four bank and bank holding 

applications that involved pr

members of the public conce

CRA performance of insured d

institutions. The Board also 

thirty-six applications involv

issues related to CRA, fair le

compliance with consumer c

tection laws.4

Other Consumer Complian

Activities

The Division of Consumer and 

nity Affairs supports and ov

supervisory efforts of the Rese

to ensure that consumer prote

and regulations are fully and 

2. The 2006 reporting period for examination

data was July 1, 2005, through June 30, 2006.

3. HMDA requires lenders to collec

mation on loans they originated in 

priced segment of the home-loan mark

priced mortgages” refers to mortgage 

annual percentage rates are 3 percenta

more over the yield on comparable Tr

rities on first-lien loans, and 5 percent

more over that yield on junior-lien lo

4. In addition, four applications in

sumer compliance issues were withdr
forced. Division staff provide guidance

and expertise to the Reserve Banks on

consumer protection regulations, examination and enforcement techniques, examiner training, and emerging issues.

The staff develop and update examination policies, procedures, and guidelines, as well as review Reserve Bank

supervisory reports and work products.

They also participate in interagency activities that promote uniformity in examination principles and standards.

Examinations are the Federal Reserve’s primary means of enforcing

compliance with consumer protection

laws. During the 2006 reporting period,

the Reserve Banks conducted 321 consumer compliance examinations—303

of state member banks and 18 of foreign

banking organizations.5

The Board periodically issues guidance for Reserve Bank examiners on

consumer protection laws and regulations. In addition to updating examination procedures and guidance in concert

with the other federal financial institution regulatory agencies, the Board

issued guidance on state member banks’

activities in disaster areas affected by

the 2005 hurricanes in the Gulf Coast

region.6 As put forth in the guidance,

state member banks located outside of

the hurricane disaster areas will receive

CRA consideration for their activities

that revitalize or stabilize the disaster

areas, if the banks have otherwise adequately met the needs of the

ment areas. (See “Response to 

Hurricanes” later in this chapt

Fair Lending

The Federal Reserve is com

ensuring that every institution 

vises complies fully with the f

lending laws—the Equal Cred

tunity Act (ECOA) and the Fai

Act. Fair lending reviews are 

regularly within the supervis

Additionally, examiners may 

fair lending reviews outside of 

supervisory cycle, if warrante

mote rigorous and consistent 

ing enforcement, the Division 

sumer and Community Aff

coordinate investigations of 

fair lending violations with 

Bank staff.

The Federal Reserve enf

ECOA and the provisions of 

Housing Act that apply to len

tutions. The ECOA prohibits 

from discriminating against a

cant, in any aspect of a cred

tion, on the basis of race, c

gion, national origin, sex, m

tus, or age. In addition, cred

not discriminate against an 

because the applicant receive

from a public assistance progr

exercised, in good faith, any r

the Consumer Credit Protec

The Fair Housing Act proh

crimination in residential re

related transactions, including 

ing and purchasing of mortga

on the basis of race, color, 

national origin, handicap, fam

tus, or sex.

Pursuant to the ECOA, if 

has reason to believe that a cr

engaged in a pattern or practi

crimination in violation of th

the matter will be referred to th

5. The foreign banking organizations examined

by the Federal Reserve are organizations operating

under section 25 or 25A of the Federal Reserve

Act (Edge Act and agreement corporations) and

state-chartered commercial lending companies

owned or controlled by foreign banks. These institutions are not subject to the Community Reinvestment Act and typically engage in relatively few

activities that are covered by consumer protection

laws.

6. The guidance was released in a letter (CA

06-5) to the Reserve Banks on February 24, 2006

(www.federalreserve.gov/boarddocs/caletters).
ment of Justice. If a violation of the

ECOA also constitutes a violation of

the Fair Housing Act and a referral is

not made to the Department of Justice,

the matter will be referred to the

Department of Housing and Urban

Development.

During 2006, the Board referred the

following matters to the Department of

Justice, on the basis of these findings:

• The Board determined that a mortgage company owned by a state

member bank had engaged in redlining—that is, discrimination against

potential borrowers on the basis of

the racial composition of their

neighborhoods—in violation of the

ECOA and the Fair Housing Act. The

mortgage company had adopted a

marketing strategy that was based on

negative racial stereotypes and, as a

result, excluded a cluster of minority

neighborhoods from its lending

activity.

• The Board found that a state member

bank had violated the ECOA and the

Fair Housing Act by discriminating

against several mortgage applicants on

the basis of race and national origin.7

The bank rejected several minority

applicants on the basis of “insufficient

collateral” without ordering an appraisal, even though, in contrast, the

bank did not deny any white applicants for insufficient collateral without ordering an appraisal.

• Two state member banks w

to have engaged in discrim

the basis of marital status 

pricing of auto loans, in vi

the ECOA. The banks used r

that expressly provided 

spousal co-applicants (appli

were not married to each oth

be charged higher interest ra

• The Board determined tha

member bank discriminate

basis of age, in violation of t

by offering customers over 5

age a special account with p

credit features. The “over 50

provided for an interest rate 

on consumer loans if pay

made through automatic d

interest rate reduction was n

to borrowers who did not 

“over 50” account. The ECO

ally prohibits creditors from 

ing age when evaluating cre

ness, except that a cred

consider the age of an 

62 years or older in the a

favor.

Since the addition of pricing 

tion to the data reported unde

the Federal Reserve has used t

data to facilitate its fair lendin

ment efforts. (See “Reporting 

Mortgage Disclosure Act Dat

this chapter.) The Federal Res

not rely on HMDA data alo

enforcement efforts, however

HMDA data do not inclu

potential determinants of loa

such as the borrower’s cred

and the loan-to-value ratio. In

Federal Reserve analyzes th

pricing data in conjunction w

fair lending risk factors—

discretionary pricing and ince

loan officers to charge higher p

identify lenders that are at risk 

7. The Board referred this case to the Department of Justice in December 2005. It was not

included in the 2005 Annual Report because the

referral occurred outside the reporting period for

the 2005 report (July 1, 2004, through June 30,

2005). It is included in the 2006 Annual Report,

which otherwise reports referrals occurring during

the 2006 calendar year.
ing discrimination.8 These lenders will

receive a targeted pricing review. During a targeted pricing review, examiners collect additional information

(including factors that are not available

in the HMDA data) to determine

whether a pricing disparity by race or

ethnicity is fully attributable to legitimate factors, or whether any portion of

the pricing disparity is attributable to

discrimination.

Flood Insurance

The National Flood Insurance Act imposes certain requirements on loans secured by buildings or mobile homes located in, or to be located in, areas

determined to have special flood hazards. Under the Federal Reserve’s Regulation H, which implements the act, state

member banks are generally prohibited

from making, extending, increasing, or

renewing any such loan unless the building or mobile home and any personal

property securing the loan are covered

by flood insurance for the term of the

loan. The act requires the Board and

other federal financial institution regulatory agencies to impose civil money

penalties when it finds a pattern or practice of violations of the regulation. The

civil money penalties are payable to

the Federal Emergency Management

Agency for deposit into the National

Flood Mitigation Fund.

During 2006, the Board imposed civil

money penalties against four state member banks. The penalties, which were

assessed via consent orders, totaled

$32,050.

Coordination with

Other Federal Banking Agenc

The member agencies of th

Financial Institutions Ex

Council (FFIEC) develop un

amination principles, standard

dures, and report formats.9 In 

FFIEC revised examination p

for the Fair Credit Repor

(FCRA). Section 604(g) of t

generally prohibits creditors 

taining and using medical in

in connection with any determ

a consumer’s eligibility, or 

eligibility, for credit unless per

regulation. The agencies ha

regulations creating exceptio

statute’s general prohibition; 

the FCRA examination proced

been revised to reflect these ne

tions. In addition, the FFIEC r

CRA examination procedures 

banks, small banks, who

limited-purpose banks, and ba

ating under strategic plans. 

sions incorporate the CRA 

changes that were approved in 

In 2006, the four banking 

(the FDIC; the Federal Res

OCC; and the OTS) convene

Interagency Consumer Affair

ence. The conference’s object

to (1) discuss the banking 

issues that affect consumers, 

mine more-effective ways for 

cies to share information abou

plaints they receive, and (3

best practices for communic

interacting with the public. Th

cies plan to hold regular 

8. See the Interagency Fair Lending Examination Procedures for a full discussion of fair lending

risk factors (www.ffiec.gov/PDF/fairlend.pdf).

9. The FFIEC member agencies a

of Governors of the Federal Reserve 

Federal Deposit Insurance Corporat

the Office of the Comptroller of th

(OCC), the Office of Thrift Supervisio

the National Credit Union Administrat
affairs conferences; the next conference

is scheduled for October 2007.

Finally, the Board, the OCC, and the

FDIC updated the host-state loan-todeposit ratios used to determine compliance with section 109 of the RiegleNeal Interstate Banking and Branching

Efficiency Act of 1994.10

Response to 2005 Hurricanes

In 2006, the Federal Reserve and the

other banking agencies continued initiatives to help financial institutions affected by the 2005 hurricanes in the

Gulf Coast. The Board, the FDIC, the

OCC, and the OTS sponsored an interagency forum, “The Future of Banking

in the Gulf Coast: Helping Banks and

Thrifts Rebuild Communities,” that focused on the short-term and long-term

challenges facing these financial institutions, including how they can help meet

the needs of their local communities. In

addition to officials from the sponsoring

agencies, senior executives from both

large and small financial institutions and

representatives from community development corporations and a number of

other federal agencies participated in the

forum.

The FFIEC member agencies and the

Conference of State Bank Supervisors

released a booklet, “Lessons Learned

from Hurricane Katrina: Preparing Your

Institution for a Catastrophic Event.”11

Using financial institutions’ experiences

and lessons learned during Hurricane

Katrina and its aftermath, the booklet is

intended to help other institutions plan

for an emergency or a catastrophic

event.

The FFIEC member agenc

with state financial institutio

tors, also conducted a publi

campaign to encourage bank

and credit unions to continue 

with borrowers affected by 

Katrina or Hurricane Rita. P

vice announcements (PSAs) 

tributed to radio stations and 

lications in geographic areas 

the highest concentrations of 

fected by the hurricanes. T

PSAs played more than 1,495 

thirty-one stations, reaching 

mated audience of 4.13 milli

in the targeted regions. The p

appeared more than sixteen tim

newspapers and other local pub

reaching approximately 565,00

Training for Bank Examine

Ensuring that financial institut

ply with laws that protect c

and encourage community rei

is an important part of the ba

nation and supervision proces

number and complexity of 

financial transactions grow, tr

examiners of the organizatio

the Federal Reserve’s superv

sponsibility becomes even mo

tant. The consumer complian

iner training curriculum cons

courses focused on various 

protection laws, regulations, a

ining concepts. In 2006, thes

were offered in ten sessions 

than 195 consumer complianc

ers and System staff members

Board and Reserve Bank s

larly review the core curriculu

aminer training, updating subj

and adding new elements as ap

During 2006, staff conducted 

lum reviews of the follow

courses in order to incorporate 

changes in policy and laws, a

10. See the June 13, 2006, press release

(www.federalreserve.gov/boarddocs/press/bcreg/

2006/).

11. The booklet is available on the FFIEC’s

web site (www.ffiec.gov/Katrina_lessons.htm).
changes in instructional delivery

techniques:

• Community Reinvestment Act Examination Techniques Course. Equips assistant examiners to participate in all

aspects of a CRA examination, including the evaluation of a bank’s CRA

program and the determination of its

CRA rating.

• Fair Lending Examination Techniques

Course. Provides assistant examiners

with the skills and knowledge to plan

and conduct the risk-focused fair lending portion of a consumer compliance

examination.

When appropriate, courses are delivered via alternative methods, such as the

Internet or other distance-learning technologies. The CRA course discussed

above uses a combination of instructional methods: (1) classroom instruction focused on case studies and

(2) specially developed computer-based

instruction that includes interactive selfcheck exercises. The computer-based

instruction is reinforced through daily

conference calls and discussions on

electronic bulletin boards. The Fair

Lending course discussed above also

uses computer-based training.

In addition to providing core training,

the examiner curriculum emphasizes the

importance of continuing professional

development. Opportunities for continuing development include special projects

and assignments, self-study programs,

rotational assignments, the opportunity

to instruct at System schools, mentoring

programs, and an annual senior examiner forum.

Reporting on Home Mortgage

Disclosure Act Data

The Home Mortgage Disclosure Act

(HMDA), enacted by Congress in 1975,

requires most mortgage lende

in metropolitan areas to co

about their housing-related le

tivity, report the data annua

government, and make the dat

available. In 1989, Congress 

the data required by HMDA 

information about loan applica

did not result in a loan origi

well as information about the 

and income of applicants and b

In response to the growt

subprime-loan market, the 

Reserve updated Regulation C 

The revisions, which became 

in 2004, require lenders to co

information for loans they ori

the higher-priced segment of 

loan market. When applicabl

report the number of percenta

by which a loan’s annual p

rate exceeds the threshold th

“higher-priced loans.” The th

3 percentage points or more 

yield on comparable Treasury 

for first-lien loans, and 5 p

points or more above that 

junior-lien loans. The HMDA 

lected in 2004 and released to 

lic in 2005 provided the firs

available loan-level data ab

prices. The FFIEC released 

HMDA data to the public in S

2006.

A September 2006 article 

by Federal Reserve staff in th

Reserve Bulletin uses the 200

describe the market for hig

loans and patterns of lending a

products, geographic markets

rowers and neighborhoods of 

races and incomes.12

As in 2004, relatively few 

accounted for most of the hig

12. The complete article is a

www.federalreserve.gov/pubs/bulletin

bull06hmda.pdf.
loan originations in 2005. Of the 8,850

home lenders reporting HMDA data,

1,120 of them made 100 or more higherpriced loans. The 10 home lenders that

had the largest volume of higher-priced

loans accounted for about 59 percent of

all such loans. Higher-priced lending is

also concentrated by price: in 2005, the

vast majority of higher-priced loans had

annual percentage rates within 3 percentage points of the reporting thresholds. As in 2004, the majority of all

loan originations were not higher priced

in 2005, however, the incidence of

higher-priced lending did increase

substantially—26.2 percent in 2005,

compared with 15.5 percent in 2004.

Some of the increase in the incidence

of higher-priced lending is attributed to

changes in the interest rate environment

from 2004 to 2005, as well as to

changes in borrower profiles and lender

practices.

Loan pricing is a complex process

that may reflect a wide variety of factors about the level of risk a particular

loan or borrower presents to the lender.

As a result, the prevalence of higherpriced lending varies widely. First, the

incidence of higher-priced lending varies by product type. For example,

manufactured-home loans show the

greatest incidence of higher-priced

lending, because these loans are considered higher risk. In addition, first-lien

mortgages are generally less risky than

comparable junior-lien loans, and the

pricing for these loans reflects their risk

profiles: 25.7 percent of first-lien refinance loans were reported as higherpriced in 2005, compared with 30.2

percent of comparable junior-lien loans.

Second, higher-priced lending varies

widely by geography. As in 2004, many

of the metropolitan areas that reported

the greatest incidence of higher-priced

lending were in the southern region of

the country. Several metropolitan areas

on the West Coast also had an 

incidence of higher-priced l

2005. For example, in many m

tan areas in the South, South

West, 30 percent to 40 perce

homebuyers who obtained con

loans in 2005 received high

loans.

Third, the incidence of hig

lending varies greatly among 

of different races and ethni

2005, as in 2004, blacks and 

were much more likely t

Hispanic whites and Asians 

higher-priced loans. For ex

2005, 55 percent of black b

and 46 percent of Hispanic b

received higher-priced home

loans, compared with only 17 

non-Hispanic white or Asian b

To a large extent, these diffe

flect a segmentation of the h

market, that is, black and Hisp

rowers were much more likely 

mortgage loans from institu

specialize in higher-priced len

Because HMDA data lack 

tion about credit risk and ot

mate pricing factors, it is not p

determine from HMDA da

whether the observed pricing 

and market segmentation re

crimination. When analyzed in 

tion with other fair lending ri

and supervisory information, 

the HMDA data can facilitate 

ing supervision and enforcem

“Fair Lending” earlier in this 

Agency Reports on Compli

with Consumer Protection 

The Board reports annually o

ance with consumer protectio

entities supervised by federal 

This section summarizes data 

from the twelve Federal Reser
the FFIEC member agencies, and other

federal enforcement agencies.13

Regulation B

(Equal Credit Opportunity)

The FFIEC agencies reported that

87 percent of the institutions examined

during the 2006 reporting period were in

compliance with Regulation B, compared with 85 percent for the 2005 reporting period. The most frequently

cited violations involved the failure to

take one or more of the following actions:

• abstain from inquiring about the race,

color, religion, national origin, or sex

of an applicant in connection with a

credit transaction unless permitted by

regulation

• collect information for monitoring

purposes about the race, ethnicity, sex,

marital status, and age of applicants

seeking credit primarily for the purchase or refinancing of a principal

residence

• note on the application form monitoring information regarding ethnicity,

race, and sex when an applicant

chooses not to provide the information

• provide a written notice of denial or

other adverse action to a credit applicant that contains the specific reason

for the adverse action, along with

other required information

During this reporting period, the OTS

issued one supervisory agreement to a

savings association for its alleged violations of the Equal Credit Opportunity

Act (ECOA) and Regulation B

as other consumer regulations. 

FFIEC agencies did not issue 

mal enforcement actions re

Regulation B during the rep

riod.

The other agencies that en

ECOA—the Farm Credit A

tion (FCA), the Department 

portation, the Securities and 

Commission (SEC), the Small 

Administration, and the Grai

tion, Packers and Stockyards 

tration of the Department 

riculture—reported substantia

ance among the entities they 

The FCA’s examination 

revealed that most Regulation 

tions involved either creditor

ing inadequate statements o

reasons for denial or credito

to request or provide inform

government monitoring purp

reported by the SEC, an ex

conducted by the National A

of Securities Dealers, Inc., f

violation of Regulation B at 

firm. The firm’s written su

procedures did not contain in

regarding the denial of cred

tomers. However, none of th

agencies initiated any forma

ment actions relating to Reg

during 2006.

Regulation E

(Electronic Fund Transfers)

The FFIEC agencies reported 

proximately 95 percent of th

tions examined during the 20

ing period were in complia

Regulation E, which is comp

the level of compliance for 

reporting period. The most 

cited violations involved the 

take one or more of the follo

tions:

13. Because the agencies use different methods

to compile the data, the information presented

here supports only general conclusions. The 2006

reporting period was July 1, 2005, through June

30, 2006.
• determine whether an error occurred,

within ten business days of receiving

a notice of error from a consumer

• give the consumer provisional credit

for the amount of an alleged error

when an investigation into the alleged

error cannot be completed within ten

business days

• provide initial disclosures that contain

required information, including limitations on the types of transfers permitted and error-resolution procedures, at

the time a consumer contracts for an

electronic fund transfer service

• when a determination is made that no

error has occurred, provide a written

explanation and note the consumer’s

right to request documentation supporting the institution’s findings

The Federal Trade Commission (FTC)

filed two complaints in federal district

court for alleged violations of Regulation E and federal statutes. Among other

allegations, one complaint alleged that

the defendants charged consumers’

credit cards or debited their bank

accounts, both on a recurring basis, to

pay for a discount health plan, without

obtaining the consumers’ authorization

for preauthorized electronic fund transfers. The other complaint alleged that

defendants enrolled consumers in a

mail-order program for dietary supplements and then automatically billed consumers on a recurring basis, without

obtaining their authorizations for the recurring debits. The FFIEC agencies and

the SEC did not issue any formal enforcement actions relating to Regulation

E during the period.

Regulation M (Consumer Leasing)

The FFIEC agencies reported that more

than 99 percent of the institutions examined during the 2006 reporting period

were in compliance with Regu

which is comparable to the lev

pliance for the 2005 reportin

The FFIEC agencies did not 

formal enforcement actions r

Regulation M during the perio

Regulation P (Privacy of Con

Financial Information)

The FFIEC agencies repo

98 percent of the institutions 

during the 2006 reporting perio

compliance with Regulation 

pared with 97 percent for the 

porting period. The most f

cited violations involved the 

take one or more of the 

actions:

• provide a clear and co

annual privacy notice to cus

• disclose the institution’s inf

sharing practices in initial, a

revised privacy notices

• provide customers with a 

conspicuous initial privacy n

accurately reflects the institu

vacy policies and practices

than when the customer rela

established

The FFIEC agencies did not 

formal enforcement actions r

Regulation P during the 

period.

Regulation Z (Truth in Lendin

The FFIEC agencies repo

85 percent of the institutions 

during the 2006 reporting perio

compliance with Regulation 

pared with 80 percent for the 

porting period. The most f

cited violations involved the 

take one or more of the 

actions:
• in closed-end credit transactions, accurately disclose the finance charge

and the security interest that the creditor has or will acquire in the property

identified

• ensure that disclosures reflect the

terms of the legal obligation between

the parties and, when any information

necessary for an accurate disclosure is

unknown, ensure that the creditor

states that the disclosure is an estimate

• on certain residential mortgage transactions, provide a good faith estimate

of the required disclosures before consummation, or not later than three

business days after receipt of the loan

application

In addition, 106 banks supervised by

the Federal Reserve and the FDIC were

required, under the Interagency Enforcement Policy on Regulation Z, to

reimburse a total of approximately

$1.5 million to consumers for understating the annual percentage rate or the

finance charge in their consumer loan

disclosures.

The OTS issued three supervisory

agreements for violations of a number

of consumer regulations, including

Regulation Z, during the reporting

period. The other FFIEC agencies did

not issue any formal enforcement

actions relating to Regulation Z during

the reporting period.

The Department of Transportation investigated one air carrier for its improper handling of credit card and cash

refunds for unused refundable tickets.

As a result of this investigation, the air

carrier made the required refunds and

entered into a consent order under which

it was directed to cease and desist from

further violations of the credit refund

requirements of Regulation Z. The air

carrier was assessed a civil penalty of

$50,000.

The FTC continued litigatio

a mortgage broker and its prin

their alleged violations of Reg

and federal statutes, in conne

advertisements for extremely 

gage rates. In 2004, the court 

stipulated preliminary injuncti

the defendants. In 2006, the de

chief executive filed for bankr

lowing his 2005 agreement to

other terms—pay the FTC $40

der a stipulated order releasing 

confinement for civil contem

2004 stipulated preliminary i

The FTC filed a proof of 

amounts it is owed in the u

federal district court action an

tempt action. Litigation is o

this case.

In 2006, the FTC settled ch

case alleging that a defendan

Regulation Z and federal sta

defendant allegedly engaged i

resentation about refunds for 

mation products. After accep

uct returns from consum

otherwise acknowledging tha

sumers were owed refunds, t

dant failed to credit the co

credit card accounts in a timel

Regulation AA (Unfair or Dec

Acts or Practices)

The FFIEC agencies reported 

than 99 percent of the instituti

ined during the 2006 reporti

were in compliance with R

AA, which is comparable to th

compliance for the 2005 

period. No formal enforceme

relating to Regulation AA w

during the reporting period.

Regulation CC (Availability of 

and Collection of Checks)

The FFIEC agencies repo

92 percent of institutions exam
ing the 2006 reporting period were in

compliance with Regulation CC, compared with 93 percent for the 2005 reporting period. The most frequently

cited violations involved the failure to

take one or more of the following

actions:

• make available on the next business

day the lesser of $100 or the aggregate

amount of checks deposited that are

not subject to next-day availability

• follow procedures when invoking the

exception for large-dollar deposits

• provide required information when

placing an exception hold on an

account

• make funds from local and certain

other checks available for withdrawal

within the times prescribed by regulation

The OTS issued one supervisory agreement for violations of a number of consumer regulations, including Regulation

CC. The other FFIEC agencies did not

issue any formal enforcement actions

related to Regulation CC during the reporting period.

Regulation DD (Truth in Savings)

The FFIEC agencies reported that 91

percent of institutions examined during

the 2006 reporting period were in compliance with Regulation DD, which is

comparable to the level of compliance

for the 2005 reporting period. The most

frequently cited violations involved the

failure to take one or more of the following actions:

• use the phrase “annual percentage

yield” in an advertisement disclosing

required additional terms and conditions for customer accounts

• provide account disclosures containing all required information

• provide account disclosure

and conspicuously, in writin

form that the consumer may 

The FFIEC agencies did not 

formal enforcement actions 

Regulation DD during the rep

riod.

Consumer Complaints

The Federal Reserve investig

plaints against state member b

forwards to the appropriate en

agency any complaints that i

that involved other creditors 

nesses. Each Reserve Bank in

complaints against state mem

in its District. In 2006, the Fe

serve received 641 consumer c

about regulated practices by s

ber banks—complaints were re

mail, by telephone, in person, 

tronically via the Internet.

Complaints against

State Member Banks

Of the 641 complaints about 

practices, 70 percent involved 

loans: 2 percent alleged discr

on a basis prohibited by law (r

religion, national origin, sex, m

tus, handicap, age, the fact th

plicant’s income comes from 

assistance program, or the fac

applicant has exercised a right 

Consumer Credit Protection 

the remainder concerned oth

related practices, such as fair 

porting; billing-error resolu

credit card rates, terms, a

Twenty-eight percent of the c

involved disputes about in

funds charges and procedures

withdrawn from a consumer’

funds availability, and other d

count practices, including 
fund transfers; the remaining 2 percent

concerned disputes about trust services

or other practices. (See tables.)

In 97.5 percent of the 641 complaints

against state member banks regarding

regulated practices that were investigated in 2006, the banks had correctly

handled the customer’s account. The

remaining 2.5 percent of the complaints

against state member banks re

finding that the bank had v

consumer protection regula

most common violations invo

estate loans, deposit accounts, 

tronic fund transfers.

Unregulated Practices

As required by section 18(f) o

eral Trade Commission Act, 

continued to monitor compla

banking practices that are not 

existing regulations and to 

those that concern possible 

deceptive practices. In 2006, 

eral Reserve received more t

complaints against state mem

that involved unregulated 

The most common complaints 

checking accounts and cred

Consumers most frequently co

about problems with either o

closing an account (113 co

issues involving fraud 

insufficient-funds charges an

dures (77), and concerns ove

interest rates, terms, and fees 

cards (70). The remainder of 

Consumer Complaints against State

Member Banks, by Classification, 2006

Classification Number

Regulation B (Equal Credit Opportunity) . . . . . 53

Regulation C (Home Mortgage Disclosure) . . . 0

Regulation E (Electronic Fund Transfers) . . . . 73

Regulation H (Bank Sales of Insurance) ...... 1

Regulation H (Flood Insurance) ............. 3

Regulation M (Consumer Leasing) ........... 1

Regulation P (Privacy of Consumer

Financial Information) . . . . . . . . . . . . . . . . . . 17

Regulation Q (Payment of Interest) .......... 0

Regulation Z (Truth in Lending) . . . . . . . . . . . . . 243

Regulation BB (Community Reinvestment) . . . 1

Regulation CC (Expedited Funds

Availability) . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Regulation DD (Truth in Savings) . . . . . . . . . . . 60

Fair Credit Reporting Act . . . . . . . . . . . . . . . . . . . 117

Fair Debt Collection Practices Act . . . . . . . . . . . 20

Fair Housing Act . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Regulations T, U, and X .................... 0

Real Estate Settlement Procedures Act . . . . . . . 10

Total ....................................... 641

Complaints against State Member Banks That Involve Regulated Practices, 2006

Subject of complaint

All complaints Complaints involving 

Number Percent Number 

Total ............................... 641 100 16 

Loans

Discrimination alleged

Real estate loans . . . . . . . . . . . . . . . 3 0.47 0 

Credit cards . . . . . . . . . . . . . . . . . . . . 4 0.62 0 

Other loans . . . . . . . . . . . . . . . . . . . . 3 0.47 0 

Other types of complaints

Real estate loans . . . . . . . . . . . . . . . 57 8.89 4 

Credit cards . . . . . . . . . . . . . . . . . . . . 342 53.35 3 

Other loans . . . . . . . . . . . . . . . . . . . . 41 6.40 1 

Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 16.85 3 

Electronic fund transfers . . . . . . . . . . . . . 73 11.39 5 

Trust services . . . . . . . . . . . . . . . . . . . . . . . 1 0.16 0 

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1.40 0 
plaints concerned a wide range of

unregulated practices involving credit

cards, including errors or delays in processing consumers’ payments, the

amounts banks charged for late payments, and overlimit fees and procedures.

Complaint Referrals to HUD

In accordance with a memorandum of

understanding between HUD and the

federal bank regulatory agencies that requires that a complaint alleging a violation of the Fair Housing Act be forwarded to HUD, in 2006 the Federal

Reserve referred three complaints to

HUD that alleged state member bank

violations of the Fair Housing Act. In

two of the three cases, the Federal Reserve’s investigations revealed no evidence of illegal discrimination. The remaining case was pending at year-end.

Advice from the

Consumer Advisory Council

The Board’s Consumer Advisory

Council—whose members represent

consumer and community organizations,

the financial services industry, academic institutions, and state agencies—

advises the Board of Governors on

matters concerning laws and regulations that the Board administers and on

other issues related to consumer financial services. Council meetings are held

three times a year, in March, June, and

October, and are open to the public.

(For a list of members of the council,

see the section “Federal Reserve System Organization.”)

During their March meeting, council

members discussed proposed changes to

Regulation E, which implements the

Electronic Fund Transfer Act (EFTA).

The proposed changes addressed payroll

card accounts, specifically the disclosure and notification require

financial institutions that pro

roll card account services to c

Under the interim final rule, 

institutions are granted relief 

requirement to provide consu

paper periodic statements—if 

vide the information in perio

ments to consumers through a

means (such as electronically 

phone). Both industry and 

representatives generally supp

proposed changes and agreed 

scope and approach effect

dressed consumer protectio

Several industry representati

that substituting alternative m

the delivery of account inform

propriately balances consume

and their need to access their 

on the one hand, with financi

tions’ potential compliance co

other. Some consumer repres

however, suggested that the 

statements are an important ed

tool for consumers and, there

sumers would benefit from 

paper periodic statements.

Council members also discu

posed changes to Regulation 

implements the Truth in Len

(TILA), at their March meeti

bers shared their views on w

Board should establish a stand

time for the crediting of pay

open-end credit accounts. Th

did not reach a consensus on 

cutoff time; however, memb

that such a cutoff would have 

consequences, including high 

increased interest rates, for c

who make late payments. Sev

bers suggested that the need t

consumers with more tra

about the costs and fees imp

result of late payments may b

than the need to establish cu

for the crediting of payments
members also discussed a TILA amendment that requires creditors that offer

open-end credit accounts to provide consumers with disclosures, on each periodic statement, about the effects of making only minimum payments on their

accounts. Members expressed a wide

range of views on whether such disclosures would be meaningful and useful to

consumers; members also shared concerns about ensuring the accuracy of the

disclosures.

During its March and June meetings,

the council discussed issues related to

the Board’s public hearings on the home

equity lending market, as well as the

adequacy of existing consumer disclosures and protections. Members discussed the Board’s 2002 revisions to the

Home Ownership and Equity Protection

Act (HOEPA) rules and their effect on

consumer protections and the availability of credit in the high-cost and

subprime-lending markets. The council

also discussed several issues related to

how consumers shop for credit and how

that process may affect the loan terms

they ultimately receive. Members discussed the increased role that mortgage

brokers play in the loan-making

process—and whether this role highlights a need for additional regulation of

brokers, specifically regulation on the

broker practice of directing potential

borrowers to certain mortgage products.

Members addressed the need to

strengthen consumer disclosures to ensure that borrowers understand key

credit terms and costs, particularly for

mortgage products that feature interestonly periods, prepayment penalties, and

adjustable or “teaser rates.” Several

members also expressed a need for additional research on consumer behavior in

the home mortgage market.

In June, the council discussed several

issues related to financial literacy,

including goals for financial education

programs, methods for educa

sumers, and how to measure a

ate the effectiveness of financ

tion programs. Members 

financial education as a fun

tool for helping consumers 

preserve assets. Because fin

eracy not only enhances the w

of individuals or households 

strengthens neighborhoods an

nities, council members su

making financial literacy a nat

lic policy priority and (2) cre

tional education initiatives a

formalized methods to train an

consumers.

At the October meeting, 

also discussed proposed regul

guidelines to implement prov

the Fair and Accurate Credit 

tions Act (FACT Act) that requ

cial institutions to identify “

for detecting possible cases o

theft. Most industry represent

pressed the need for mor

guidelines that would allow 

institutions to use a risk-based 

to address identity-theft risk

change rapidly. Consumer r

tives were concerned that the 

guidelines give covered institu

creditors too much discretion 

identity-theft prevention and 

policies. Council members al

their views on the implementa

proposed regulations, includin

training requirement and req

for covered institutions to de

implement a written identity-

vention program.

At their October meeting, 

discussed the importance of 

greater incentives to encoura

ment in affordable housing. H

ership is a fundamental part 

sumer’s asset-building stra

availability of affordable hou

neighborhood can create econ
portunities that, in turn, support future

investments in entrepreneurship and

education. Members noted that financial

institutions play a critical role by providing mortgage credit to consumers and

by financing the development of affordable housing. They highlighted the need

for federal bank regulators to play a

larger role by providing institutions with

greater incentives for (1) meeting affordable housing needs and (2) expanding

their outreach to local community organizations, as part of their community

reinvestment strategies.

During each of their meetings this

past year, council members discussed

interagency guidance on managing the

potential heightened risk of new and

emerging residential mortgage products,

often referred to as “nontraditional,” “alternative,” or “exotic” mortgage loans.

Members generally supported the guidance, noting its importance in light of

the recent proliferation and use of nontraditional mortgage products, especially

by consumers whose household incomes

are not keeping up with home-price

appreciation. Members generally agreed

that these products do not present problems for some borrowers. But the loans

are risky for consumers whose cash

flows or income projections may limit

their ability to repay, who may not have

the capacity or discipline to manage the

loan, or who are not fully informed

about the terms and conditions such

loans carry.

Several members expressed concern

that the guidance has given certain mortgage originators a competitive advantage, since the key principles of the

guidance apply only to banking and

thrift organizations and federal credit

unions. Others reiterated this concern by

emphasizing that the agencies are only

providing guidance rather than creating

requirements that could be enforced by

consumers or law enforcement agencies.

Members also commented on 

posed illustrations of consume

tion, which were part of the 

The illustrations are designe

borrowers better understand th

of nontraditional mortgages. T

cil was generally supportive o

trations. Members stated that 

trations highlight important inf

such as the costs, terms, fea

risks of a loan, for borrowers. 

members expressed a need t

additional loan information, s

formation on the risk of paym

to the consumer, the costs of 

documentation loans, prepaym

ties, and the potential for nega

tization of the loan.

Consumer Education

and Research

The Consumer Education and 

section produces the Board’s 

education materials and sup

Board’s consumer outreach i

Section staff also conduct re

support of the division’s policy 

ment and community developm

tions. For example, research 

lyze the annual HMDA data, 

then used in the monitoring an

ment of the fair lending laws.

The Federal Reserve mainta

sumer information web sit

federalreserve.gov/consumer.h

contains publications and ed

materials related to the Boa

sumer regulations. In 2006, 

duced or updated the followin

tions on nontraditional mortga

• “Interest-Only Mortgage 

and Payment-Option AR

They for You?” (a new pu

issued jointly with the FFI

cies, that includes a glossar

ing terms, a mortgage-shopp
sheet, and a list of additional

information sources)

• “Consumer Handbook on AdjustableRate Mortgages” (substantially revised and updated in conjunction with

the OTS to incorporate descriptions

and illustrations of how changes in

interest rates affect a consumer’s loan

payments, including an example of how

an increase in interest rates may actually increase the total loan amount)

In addition, the Board’s brochure “How

to File a Consumer Complaint about a

Bank,” was updated. (The brochure is

available in both English and Spanish.)

Print and web-based versions of these

publications are available on the web

site.

Throughout the year, Board staff participated in a number of financial education events, including events for

community members, federal employees, and congressional staff. The Board

continued to work with the interagency

Financial Literacy and Education Commission (FLEC); last year, staff helped

update and expand the FLEC’s

MyMoney.gov web site to incorporate

links to Reserve Bank consumer education resources. In their speeches and

other appearances, Board members

underscored the importance of financial

education to an individual’s economic

well-being. Former Governor Mark

Olson spoke at the press conference for

the announcement of FLEC’s National

Strategy for Financial Education in

April. Chairman Ben Bernanke testified

on the Federal Reserve’s role in financial education before the U.S. Senate

Committee on Banking, Housing, and

Urban Affairs in May.14

In cooperation with the Department

of Defense, the U.S. Army, and Army

Emergency Relief (a private 

organization), staff are studyin

a two-day financial education 

had an impact on how the pa

soldiers manage their finance

stage, baseline data have been 

and staff will be working 

follow-up data.

Research on Financial Info

and Disclosures

A financial institution is requir

vide consumers with disclosu

its products and services, incl

closures about its privacy pol

terms of a loan. The Federal R

one of seven agencies worki

velop more “consumer-friendl

sures, that is, disclosures writte

understandable language that p

formation a consumer can us

pare financial services provid

spring, the agencies released 

that summarized their research 

oping a comprehensible fina

vacy notice for consumers.15 T

cial Services Regulatory Reli

2006, which was signed in Oct

sequently required the federal 

regulatory agencies to develop 

privacy notice. The design, fo

language of the model notice 

easily understood and allow c

to compare the privacy policie

ent financial institutions.

As part of its overall effort t

consumer disclosures, the Boa

how consumers use different 

information sources—both th

and quality of the sources—an

this information affected their 

investment decisions. This 

addition to the research on pr

tices, will be used in the 

14. See www.federalreserve.gov/boarddocs/

testimony/2006/20060523/default.htm.

15. See www.federalreserve.gov/b

press/bcreg/2006/20060331/default.ht
review of the Board’s open-end credit

regulations. The Board has contracted

with a market research firm to conduct

formative and usability testing on credit

card disclosures, including the disclosures used in solicitation letters, applications, periodic statements, and changein-terms notices. Consumer testing will

continue in early 2007; the Board will

consider data collected in these sessions

as it develops new proposed rules under

Regulation Z.

Promotion of Community

Economic Development and

Access to Financial Services in

Historically Underserved

Markets

In 2006, the community affairs function

within the Federal Reserve System supported several initiatives to promote

community economic development and

fair access to credit for low- and

moderate-income communities and

populations. The function continued to

focus on improving the sustainability

and financial capacity of community development organizations, creating assetbuilding opportunities for low-income

individuals, and promoting initiatives to

help homeowners preserve this important asset and avoid foreclosure. Activities included publishing newsletters and

articles, sponsoring conferences and

seminars, conducting research, and supporting the dissemination of information

to both general and targeted audiences.

As a decentralized function, the Community Affairs Offices (CAOs) at each

of the twelve Reserve Banks design activities in response to the needs of communities in the Districts they serve in

conjunction with staff from the Board.

The CAOs focus on providing information and promoting awareness of

investment opportunities to financial

institutions, government agencies, and

organizations that serve l

moderate-income communi

populations. Similarly, the Boa

promotes and coordinates Sy

efforts, in addition to engaging 

ties and exploring issues that 

lic policy implications. In 

Board and the Reserve Bank

rated on a number of activitie

cused on asset-building for in

and strengthening community 

ment organizations, while c

their efforts to expand publ

standing of the need to enhan

to affordable credit in un

markets.

Collaborative Efforts

The Reserve Banks and the B

tinued their work on two subst

laborative efforts over the past 

System resumed its asset-bui

wealth-creation partnership 

CFED, a nonprofit organizat

cated to expanding access to 

opportunity by bringing toge

munity development practitio

lic policy analysts, and priv

representatives. In 2006, th

Reserve System and the CFED 

last three in a series of fiv

convening leaders in econom

community development, phi

and the financial industry. Sta

the initial forum in June 200

rums were convened to encou

individuals to engage in asse

activities, such as homeowne

trepreneurship, savings, and in

One session, held in Kansas 

cused on the unique challenge

oping asset-building program

communities; the forum wa

sored by the Reserve Banks 

City, Dallas, Minneapolis, and 

A second meeting, hosted 

Reserve Bank of Atlanta, explo
building for low- and moderate-income

savers, but from the perspective of

financial institutions. The discussions

focused on developing products to help

this population begin or expand its saving efforts. The final forum, hosted by

the Board of Governors, gathered a

roundtable of leaders in the assetbuilding field. The leaders reflected on

the results of the regional forums and

identified next steps to help the industry

progress.16

A related initiative, led by the San

Francisco Reserve Bank, was a call for

papers on asset-building issues and strategies. Twenty-eight of the more than

100 papers received were presented at a

research forum during CFED’s 2006

Assets Learning Conference, “A Lifetime of Assets: Building Families, Communities and Economies.” More than

1,000 participants attended; staff from

each Reserve Bank and the Board were

actively involved in planning the conference, including developing the agenda,

presenting research, and serving as moderators and participants in formal discussion groups. The Board’s Community

Affairs officer delivered a keynote address during the conference. Board staff

presented research on the asset portfolios of low-income households and

how these assets have changed over the

past fifteen years (from 1989 to 2004).

Staff also explored homeownership and

foreclosure patterns that affect the assetbuilding capabilities of low-income

households.17

Beyond the CFED partnership,

Reserve Banks have been active in the

promotion and development of regional

asset-building coalitions. Staff from the

Richmond Reserve Bank ch

planning committee for the So

lina Asset Development Coll

and staff from the San 

Reserve Bank facilitated bot

egon Asset Building Converg

the Washington State Asset 

Summit. Other Reserve Bank

ued to provide advisory ser

more than a dozen other stat

gional asset-building coalition

out the country, such as the 

Asset Building Coalition, M

Saves, and the Nashville Wea

ing Alliance.

Another Systemwide col

was a partnership with the As

tute, a national research and 

development organization. Th

this collaboration was to ide

tainable and scalable busines

that community development 

tions can use to more e

advance their goals. In 2006, th

Reserve System and the Aspe

cosponsored four conference

the country that explored a 

business models that have le

cessful community developme

programs. A forum at the San 

Reserve Bank highlighted fu

forts for community developm

cial institutions (CDFIs), indi

velopment account program

schools, and child care facilit

rum at the Chicago Reserve 

cused on collaborative effort

mote the earned-income tax 

helping low- to moderate-inco

lies prepare their taxes. Partici

forum at the New York Rese

examined several collaborati

undertaken by development 

tions, including efforts to sh

structure resources (facilitie

ment, etc.), collaborate on fu

and pool other resources and 

to increase their organizationa

16. Summaries of the forum sessions are available on the CFED web site (www.cfed.org/

focus.m).

17. The research papers presented at this conference are available at www.frbsf.org/community/

research/assets.html.
Finally, a forum at the Dallas Reserve

Bank focused on the formation of potential new sources of capital for CDFIs

and community development corporations. These forums generated ongoing

Systemwide research on various aspects

of public and private subsidies for community development. Staff from several

of the Reserve Banks and the Board are

currently involved in a research project

to measure the magnitude of the need

for public and private groups to subsidize community development, measure

how effectively these subsidies are utilized, and identify emerging strategies

for optimizing the leverage of subsidy

dollars.

Access to Financial Services

Staff from around the System have continued working on several initiatives to

enhance access to affordable credit in

currently underserved markets. In 2006,

the San Francisco Reserve Bank and the

Board partnered to study issues related

to the creation of a secondary market for

community development loans. The San

Francisco Reserve Bank devoted an

issue of its Community Development

Investment Review to an overview of the

community development finance industry, which included advice on best practices from industry practitioners. The

Board and the San Francisco Reserve

Bank followed up by hosting a conference in Washington, D.C., for lenders,

investors, and financial intermediaries,

in addition to policymakers and academics. The conference sought to (1) assess

the status of the industry and (2) discuss

ways to innovate and collaborate to

increase liquidity for community development lending. The next edition of the

Review included the conference proceedings and essays by conference participants laying out a possible road map

for the creation of a secondary market

for community developme

and included remarks by 

Kroszner, who keynoted the co

The Minneapolis Reserve 

taken the lead in another in

expand access to financial 

through its work with Native 

communities. On many reserv

cess to affordable credit is oft

by ambiguities and inconsis

the various tribal laws that g

cured transactions. In respons

apolis Reserve Bank staff hav

to help investors and lenders 

derstand the property rights 

Americans. For the past few 

Reserve Bank staff have work

ate an improved legal struc

tribes can use to facilitate their 

borrow from off-reservation p

other tribes. In 2005, staff wer

team that completed a dra

Tribal Secured Transactions A

for the National Conference 

missioners on Uniform St

(NCCUSL). Throughout 2006

ported education and dissemi

forts for the MTA by providin

cal assistance and making 

presentations, including one 

judges, on the benefits of triba

of the MTA. During the year, 

tribe adopted the MTA, three 

tribes in Montana passed reso

adopt it, and approximately fif

were in various stages of co

adoption of the MTA.

Resources, Advisory Servic

and Outreach

In 2006, the Board released an 

the Federal Reserve Fiscal Im

(FIT). First released in 2003

software helps users analyze 

impacts of economic develo

small- and mid-sized commun

supports economic developm
ning by producing a cost-benefit analysis of proposed development projects;

FIT estimates a project’s impact on local

sales and property tax revenues and on

costs to local government. To supplement this analysis, FIT integrates a wide

array of data, at the city, county, and

state levels, on incorporated locations in

the United States. The 2006 update contains more and newer data, along with a

module that allows for time discounting

and the calculation of a net present

value. The Board distributed more than

1,000 copies of the updated software in

2006. Users include state and local economic development organizations, academics, and consultants. A recent survey of users identified two communities—El Paso, Texas, and Lincoln,

Nebraska—that have employed FIT to

assist in setting limits on incentives for

development projects.

During the past year, the foreclosure

rate has risen for certain housing markets. Low- and moderate-income families and communities may be especially

at risk for foreclosure. Consequently,

the Board and the Reserve Banks have

enhanced their efforts to preserve homeownership among these populations.

The Board continued its involvement

with NeighborWorkst America (NeighborWorks), a national network of more

than 240 community-based organizations providing financial support, technical assistance, and training for community rehabilitation efforts. A member of

the Board of Governors serves on the

NeighborWorks board of directors, and

members of the Board’s staff serve on

the organization’s Center for Homeownership Education and Counseling. Staff

from the Reserve Banks have led regional collaborative efforts with NeighborWorks through their participation in

foreclosure-prevention training workshops for homeownership counselors.

The Banks have also provided support

to and endorsement of state-le

ties, for example, the Mi

Reserve Bank’s participation 

sota’s Emerging Market Ho

ship Initiative and the 

Reserve Bank’s promotion (th

Pittsburgh Branch) of the fo

mitigation efforts of the Pen

secretary of banking.

Over the past year, the Boa

ued its outreach activities to p

public with information a

Board’s responsibilities, to fac

derstanding of changes in bank

lations and their impact on b

consumers, to promote comm

velopment and consumer educ

to foster discussion of polic

Board staff periodically met w

cial institutions, community gr

other members of the public 

and informal settings. For exa

Board expanded its prior work 

eration HOPE, a national non

ganization dedicated to devel

implementing programs focuse

necting minority communi

mainstream, private-sector 

and to empowering underser

munities. The System has co

with Operation HOPE in pr

and the director of the Board’

of Consumer and Communi

serves on the Operation HO

Atlantic Advisory Board. 

Chairman Bernanke delivered 

address at the “Anacostia 

Summit,” a conference spon

Operation HOPE and the Distr

lumbia. (Anacostia is an under

neighborhood in southeast W

D.C.) The summit focused on 

encourage revitalization in thi

highlighted the importance of 

both targeted public and priva

ment to jump-start the develo

forts in this and other un

neighborhoods. In preparatio
conference, Chairman Bernanke toured

the Anacostia community with lenders,

community development leaders, and

local property developers to 

hand insight into the com

redevelopment. 
Federal Reserve Banks

In addition to contributing to the setting

of national monetary policy and supervising and regulating banks and other

financial entities (discussed in preceding chapters), the Federal Reserve Banks

provide payment services to depository

and certain other institutions, distribute

the nation’s currency and coin, and

serve as fiscal agents and depositories

for the United States.

Developments in

Federal Reserve Priced Services

The Federal Reserve Banks provide a

range of payment and related services to

depository institutions, including collecting checks, operating an automated

clearinghouse service, transferring funds

and securities, and providing a multilateral settlement service. The Reserve

Banks charge fees for providing these

“priced services.”

The Monetary Control Act of 1980

requires that the Federal Reserve establish fees for priced services provided to

depository institutions so as to recover,

over the long run, all direct and indirect

costs actually incurred as well as the

imputed costs that would have been incurred, including financing costs, taxes,

and certain other expenses, and the return on equity (profit) that would have

been earned if a private business firm

had provided the services. The imputed

costs and imputed profit are collectively

referred to as the private-sector adjustment factor (PSAF).1 Over the past ten

years, the Reserve Banks ha

ered 99.0 percent of their price

costs, including the PSAF (t

2006, the Board implemented 

to the method for calculating 

return on equity measure in th

Overall, the price index f

services increased 2.4 percent f

to 2006. Revenue from price

amounted to $908.4 million, 

come was $122.8 million, 

were $875.5 million, resultin

income from priced services 

million. In 2006, the Reserve 

covered 108.8 percent of tota

$947.5 million, including the 

1. In addition to income taxes and the return on

equity, the PSAF is made up of three imputed

costs: interest on debt, sales taxes, and assessments for deposit insurance by the Federal Deposit

Insurance Corporation (FDIC). Board of Governors assets and costs that are relate

services are also allocated to priced 

the pro forma financial statements a

this chapter, Board assets are part o

assets, and Board expenses are includ

ing expenses.

2. Effective December 31, 2006, 

Banks implemented the Financial 

Standards Board’s Statement of Fi

counting Standards No. 158, Employe

ing for Defined Benefit Pension and O

tirement Plans (FAS 158), which res

recognition of a $343.9 million reduct

related to the priced services’ benef

cluding this reduction in equity, whic

a decline in economic value, results in 

ery of 95.5 percent for the ten-year 

details on how implementing FAS 158 

pro forma financial statements, refer t

and 5 at the end of this chapter.

3. In 2005, the Board approved c

method from using the average of th

three analytical methods—the com

counting earnings model, the disco

flow model, and the capital asset pr

(CAPM)—to using only the CAPM.

4. Financial data reported thro

chapter—revenue, other income, co

enue, and income before taxes—can 

the pro forma financial statements a

this chapter. Other income is revenue 
Commercial Check Collection

Service

In 2006, operating expenses and imputed costs for the Reserve Banks’ commercial check collection service totaled

$716.9 million, of which $35.4 million

was attributable to the transportation of

commercial checks between Reserve

Bank check-processing centers. Revenue amounted to $745.0 million, of

which $34.2 million was attributable

to estimated revenues derived from

the transportation of commercial

checks between Reserve Bank checkprocessing centers, and other income

was $100.7 million. The resulting net

income was $128.7 million. Check service revenue in 2006 increased $4.7 million from 2005, largely because of price

increases and faster-than-anticipated

adoption of check-processing 

associated with the Check Cl

the 21st Century Act (Check 2

The Reserve Banks handled 

lion checks in 2006, a decrea

percent from 2005 (table). Th

in Reserve Bank check volum

sistent with nationwide tren

from the use of checks an

greater use of electronic paym

ods.6 Of all the checks presen

Reserve Banks to paying bank

14.0 percent of the checks we

ited and 4.3 percent were pre

ing Check 21 products, comp

1.8 percent and 0.0 percen

ment of clearing balances net of earnings credits,

an amount termed net income on clearing balances. Total cost is the sum of operating expenses,

imputed costs (interest on debt, interest on float,

sales taxes, and the FDIC assessment), imputed

income taxes, and the targeted return on equity.

5. The Reserve Banks’ Check 21 p

includes electronic alternatives to pape

lection, return, and presentment.

6. The Federal Reserve System’s 

ments research suggests that the numb

written in the United States has be

since the mid-1990s. For details, 

Reserve System, “The 2004 Fede

Payments Study: Analysis of Nonca

Trends in the United States, 

(December 2004). (www.frbservice

pdf/2004PaymentResearchReport.pdf

Priced Services Cost Recovery, 1997–2006

Millions of dollars except as noted

Year Revenue from

services1

Operating

expenses and

imputed costs2

Targeted return

on equity

Total

costs

C

(

1997 ...................... 818.8 752.8 54.3 807.1 

1998 ...................... 839.8 743.2 66.8 809.9 

1999 ...................... 867.6 775.7 57.2 832.9 

2000 ...................... 922.8 818.2 98.4 916.6 

2001....................... 960.4 901.9 109.2 1,011.1 

2002 ...................... 918.3 891.7 92.5 984.3 

2003 ...................... 881.7 931.3 104.7 1,036.1 

2004 ...................... 914.6 842.6 112.4 955.0 

2005 ...................... 994.7 834.7 103.0 937.7 

2006 . . . . . . . . . . . . . . . . . . . . . . 1,031.2 875.5 72.0 947.5 

1997–2006 . . . . . . . . . . . . . . . . 9,149.9 8,367.5 870.5 9,238.1 

Note: Here and elsewhere in this chapter, totals and

percentages may not reflect components shown because

of rounding.

1. For the ten-year period, includes revenue from services of $8,727.4 million and other income and expense

(net) of $422.5 million.

2. For the ten-year period, includes operating expenses

of $7,722.6 million, imputed costs of $296

imputed income taxes of $348.5 million.

3. Revenue from services divided by tot

4. For the ten-year period, cost recover

cent, including the reduction in equity relat

reported by the priced services in 2006.
tively, in 2005.7 Overall, the price index

for check services increased 3.6 percent

from 2005.

In response to the continuing decline

in check volume, the Reserve Banks in

2006 continued to reduce check service

operating costs through a combination

of measures, including consolidating

some check-processing sites. Check processing at New Orleans has now been

consolidated to Atlanta; New York’s

East Rutherford Operations Center to

Philadelphia; Columbus to Cleveland;

and Boston to Windsor Locks, Connecticut. Additional consolidations are

planned for 2007 and beyond.

Commercial Automated

Clearinghouse Services

Reserve Bank operating expenses and

imputed costs for commercial automated

clearinghouse (ACH) services totaled

$80.1 million in 2006. Revenue from

ACH operations totaled $80.5 million

and other income totaled $10.9 million,

resulting in net income of $11.3 million.

The Banks processed 8.2 billion commercial ACH transactions (worth $13.1

trillion), an increase of 12.

from 2005. Overall, the price 

ACH services decreased 9.

from 2005.

In 2006, the Reserve Ban

offering ACH risk-managemen

to all depository institutions. T

vices help originating institut

age the operational and credit 

ciated with originating ACH 

By the end of 2006, 76 financ

tions subscribed to these servi

Fedwire Funds and

National Settlement Service

Reserve Bank operating exp

imputed costs for the Fedw

and National Settlement Ser

taled $59.3 million in 2006. 

from these operations totaled $

lion and other income amount

million, resulting in net incom

million.

Fedwire Funds Service

The Fedwire Funds Service a

ticipants to draw on their r

clearing balances at the Reser

and transfer funds to other in

that maintain accounts at the 

2006, the number of Fedw

transfers originated by deposi

7. The Reserve Banks also offer non-Check 21

electronic presentment products. In 2006, 25.2

percent of the Reserve Banks’ deposit volume was

presented to paying banks using these products.

Activity in Federal Reserve Priced Services, 2004–2006

Thousands of items

Service 2006 2005 2004

Percent c

2005 to 2006 2

Commercial check . . . . . . . . . . . . . . . . . 10,982,367 12,195,301 13,904,382 –9.9 

Commercial ACH . . . . . . . . . . . . . . . . . . 8,230,782 7,338,950 6,486,091 12.2 

Funds transfer ..................... 136,399 135,227 128,270 0.9 

Multilateral settlement . . . . . . . . . . . . . 470 440 435 6.8 

Securities transfer . . . . . . . . . . . . . . . . . . 9,053 9,235 9,208 –2.0 

Note: Activity in commercial check is the total number of commercial checks collected, including processed

and fine-sort items; in commercial ACH, the total number

of commercial items processed; in funds transfer and

securities transfer, the number of transacti

online and offline; and in multilateral s

number of settlement entries processed.
tutions increased 0.9 percent from 2005,

to approximately 136.4 million. The

average daily value of Fedwire funds

transfers in 2006 was $2.3 trillion. Overall, the price index for the Fedwire

Funds and National Settlement Services

increased 3.4 percent from 2005.

Last year, the Reserve Banks collaborated with The Clearing House Payments Company to study the use of

funds transfers for business-to-business

payments. The study examined why

businesses select one payment type over

another and what changes are needed to

make funds transfers a more attractive

payment alternative. Key findings from

the study suggested that businesses

wanted a more streamlined process for

making funds transfers and favored the

inclusion of remittance information in

funds transfer orders.

National Settlement Service

The National Settlement Service is a

multilateral settlement system that

allows participants in private-sector

clearing arrangements to exchange and

settle transactions on a net basis using

reserve or clearing balances. In 2006,

the service processed settlement files for

approximately fifty-four local and national private arrangements, primarily

check clearinghouse associations. The

Reserve Banks processed slightly more

than 17,300 files that contained more

than 470,000 settlement entries for these

arrangements in 2006.

Fedwire Securities Service

The Fedwire Securities Service allows

participants to transfer electronically securities issued by the U.S. Treasury, federal government agencies, governmentsponsored enterprises, and certain

international organizations to other participants in the service.8 Rese

operating expenses and impu

for providing this service tota

million in 2006. Revenue from 

vice totaled $19.2 million, 

income totaled $2.6 million, re

net income of $2.7 million. O

price index for the service 

2.8 percent from 2005.

In 2006, approximately 9

non-Treasury securities trans

processed by the service, sligh

than in 2005. Last year, the 

Banks also implemented 

changes to the Fedwire Secu

vice applications to support c

the Federal Reserve Policy on 

System Risk (PSR). The PS

changes require that gov

sponsored enterprises and cer

national organizations fund 

and interest payments be

Reserve Banks distribute th

ments in order to limit the cr

sure of the Reserve Banks.

Float

The Federal Reserve had dail

credit float of $85.9 million 

compared with debit float of $

lion in 2005.9

8. The expenses, revenues, volum

reported here are for transfers of secu

by federal government agencies, g

sponsored enterprises, and certain 

organizations. The Reserve Banks p

sury securities services in their role 

Treasury’s fiscal agent. These serv

considered priced services. For deta

section “Debt Services” later in this c

9. Credit float occurs when the Re

present items for collection to the 

prior to providing credit to the depo

and debit float occurs when the Re

credit the depositing bank prior to pres

for collection to the paying bank.
Developments in

Currency and Coin

The Federal Reserve Banks distribute

the nation’s currency (in the form of

Federal Reserve notes) and coin through

depository institutions and also receive

currency and coin from circulation

through these institutions. As currency

flows into the Reserve Banks, the Banks

inspect the notes and destroy those that

are unfit for recirculation.

The Reserve Banks received 38.5 billion Federal Reserve notes from circulation in 2006, a 3.5 percent increase from

2005, and made payments of 39.1 billion notes into circulation in 2006, a

1.5 percent increase from 2005. They

received 59.7 billion coins from circulation in 2006, a 6.5 percent increase from

2005, and made payments of 73.9 billion coins into circulation, a 2.7 percent

increase from 2005.

In March, the Board approved a policy that provides incentives to encourage depository institutions to recirculate

fit currency to their customers rather

than return it to the Federal Reserve for

processing. Under the policy, the Federal Reserve implemented a custodial

inventory program that allows depository institutions to transfer a portion of

the currency holdings in their vaults to

the books of a Reserve Bank. As of

December 31, the Reserve Banks had

established twenty-nine custodial inventory sites with depository institutions. Beginning in July 2007, the

Reserve Banks will charge fees to institutions that, within a one-week period,

deposit fit $10 or $20 notes and reorder

currency of the same denomination,

above a de minimis amount, within the

same Reserve Bank office’s service

area.

In March, the Reserve Banks began

issuing the redesigned $10 Federal

Reserve note that includes enhanced security features and subtle ba

colors.

The Presidential $1 Coin 

quires, among other things, tha

eral Reserve and the Mint tak

ensure that an adequate supp

coins is available for commerc

end, the Federal Reserve wo

the United States Mint to d

effective distribution strategy 

dential $1 coins, the first of w

issued by the Mint in Febru

Consistent with the requireme

Presidential $1 Coin Act, th

Reserve and the Mint condu

reach to depository institution

users in an effort to gauge de

the coins and to anticipate and 

obstacles to the efficient circ

$1 coins.

The Reserve Banks conduc

sive testing of a prototype u

the high-speed currency-proce

chines. The Reserve Banks w

implementing the upgrades on 

chines in 2007; the upgrades 

uled to be completed in 2009.

The Federal Reserve deve

requirements for an automatio

to replace the current platform 

support and facilitate the Syst

vision of cash services. The 

Banks issued a preview reque

posal for development of the 

mation system and held an o

with potential vendors in Dece

The Reserve Banks complet

prehensive study of cost-effec

natives to the existing infrastr

providing cash services. T

resulted in the elimination of 

cessing at the Oklahoma City 

mingham offices in March 

respectively, and the replac

these offices with outsourced 

pots. In these cash depot arra

armored carrier facilities serve 

tion and distribution points fo
tory institutions’ currency deposits and

orders. The deposits and orders are

transported to and from the nearest

Reserve Bank by armored carrier for

processing.

Developments in

Fiscal Agency and

Government Depository Services

As fiscal agents and depositories for the

federal government, the Federal Reserve

Banks provide services related to the

federal debt, help the Treasury collect

funds owed to the federal government,

process electronic and check 

for the Treasury, maintain 

sury’s bank account, and inv

Treasury balances. The Reser

also provide limited fiscal ag

depository services to other en

The total cost of providi

agency and depository servic

Treasury and other entities 

amounted to $426.1 million, 

with $396.2 million in 200

Treasury-related costs were $3

lion in 2006, compared with $

lion in 2005, an increase of 7.

The cost of providing service

Expenses of the Federal Reserve Banks for Fiscal Agency and Depository Servi

2004–2006

Thousands of dollars

Agency and service 2006 2005 

Department of the Treasury

Bureau of the Public Debt

Treasury retail securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,931.4 86,503.2 1

Treasury securities safekeeping and transfer . . . . . . . . . . . . . 7,535.2 6,055.8 

Treasury auction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,594.9 17,553.5 

Computer infrastructure development and support . . . . . . . 3,853.1 2,575.5 

Other services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,578.7 1,806.5 

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,493.2 114,494.5 

Financial Management Service

Payment services

Government check processing . . . . . . . . . . . . . . . . . . . . . . . . 20,918.6 20,988.0 

Automated clearinghouse . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,823.1 5,709.5 

Fedwire funds transfers .............................. 123.1 109.4 

Other payment programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69,696.8 49,366.0 

Collection services

Tax and other revenue collections . . . . . . . . . . . . . . . . . . . . 37,095.5 39,736.0 

Other collection programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,122.6 14,354.2 

Cash-management services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,320.2 40,496.7 

Computer infrastructure development and support . . . . . . . 67,046.4 67,703.3 

Other services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,414.8 2,332.2 

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270,561.2 240,795.4 

Other Treasury

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,786.3 15,726.7 

Total, Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 397,840.7 371,016.6 3

Other Federal Agencies

Department of Agriculture

Food coupons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,929.8 2,642.4 

United States Postal Service

Postal money orders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,334.4 7,647.8 

Other agencies

Other services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,977.1 14,870.2 

Total, other agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,241.4 25,160.4 

Total reimbursable expenses ............................ 426,082.1 396,177.0 3
entities was $28.2 million, compared

with $25.2 million in 2005. In 2006, as

in 2005, the Treasury and other entities

reimbursed the Reserve Banks for the

costs of providing these services.

Debt Services

The Reserve Banks auction, provide

safekeeping for, and transfer Treasury

securities. Reserve Bank operating expenses for these activities totaled

$31.1 million in 2006, compared with

$23.6 million in 2005. The Banks processed 148,000 commercial tenders for

Treasury securities, compared with

169,000 in 2005. They originated

12.9 million transfers of Treasury securities in 2006, a 1.8 percent increase

from 2005. The Reserve Banks are developing a new Treasury auction application and infrastructure that will provide increased functionality and

security. The application will be operational in late 2007.

The Reserve Banks also operate computer applications and provide customer

service and back-office support for the

Treasury’s retail securities programs.

Reserve Bank operating expenses for

these activities were $73.9 million in

2006, compared with $86.5 million in

2005. The Reserve Banks operate

Legacy Treasury Direct, a program that

allows investors to purchase and hold

Treasury securities directly with the

Treasury through the Reserve Banks instead of through a broker. The program

held $72 billion (par value) of Treasury

securities as of December 31. Because

the program was designed for investors

who plan to hold their securities to maturity, it does not provide transfer services. Investors may, however, sell their

securities for a fee through Sell Direct, a

program operated by one of the Reserve

Banks. Approximately 13,000 securities

worth $678.9 million were sold through

Sell Direct in 2006, compa

14,000 securities worth $874

in 2005. The Banks printed a

more than 28.9 million saving

2006, a 10 percent decrease fr

They issued more than 5.3 m

ries I (inflation-indexed) bond

million Series EE bonds.

Payments Services

The Reserve Banks process b

tronic and check payments for 

sury. Reserve Bank operating 

for processing government 

and for payments-related pro

taled $96.6 million in 2006, 

with $76.2 million in 2005. T

processed 991.6 million ACH 

for the Treasury, an increase o

cent from 2005, and more tha

Fedwire funds transfers. They 

cessed 192 million paper go

checks, a decline of 11 per

2005. In addition, the Banks is

than 170,000 fiscal agency 

decrease of 17.4 percent from 

Collection Services

The Reserve Banks suppor

Treasury programs to colle

owed the federal government

Bank operating expenses relate

programs totaled $51.2 million 

compared with $54.1 million 

The Banks operate the Federa

Electronic Tax Application (FR

an adjunct to the Treasury’s 

Federal Tax Payment System 

EFTPS allows businesses and 

taxpayers to pay their taxes 

cally. It uses the automated 

house (ACH) to collect fund

payments must be scheduled a

day in advance. Some busine

ers, however, do not know 

liability until the tax due date
allows these taxpayers to use EFTPS by

providing a same-day electronic federal

tax payment alternative. FR-ETA collected $456.3 billion for the Treasury in

2006, compared with $409.2 billion in

2005.

In addition, the Reserve Banks operate Pay.gov, a Treasury program that

allows members of the public to pay for

goods and services offered by the federal government over the Internet. They

also operate the Treasury’s Paper Check

Conversion and Electronic Check Processing programs, whereby checks written to government agencies are converted into ACH transactions at the point

of sale or at lockbox locations. In 2006,

the Reserve Banks originated more than

2.6 million ACH transactions through

these programs, roughly the same number of transactions as in 2005.

Cash-Management Services

The Treasury maintains its bank account

at the Reserve Banks and invests the

funds it does not need for current payments with qualified depository institutions through the Treasury Tax and Loan

(TT&L) program, which the Reserve

Banks operate. Reserve Bank operating

expenses related to this program and

other cash-management initiatives totaled $48.3 million in 2006, compared

with $40.5 million in 2005. The investments either are callable on demand or

are for a set term. In 2006, the Reserve

Banks placed a total of $309.2 billion in

immediately callable investments, which

includes funds invested through retained

tax deposits and direct, special direct,

and dynamic investments, and $508 billion in term investments. The rate for

term investments is set by auction; the

Reserve Banks held 104 such auctions

in 2006, roughly the same number of

auctions as in 2005. In 2006, the Treasury’s income from the TT&L program

was $1.04 billion. In March, 

launched the Repurchase A

Program, a pilot program th

Treasury to place a portion of 

operating funds directly with T

positaries through a repurchas

tion for a set period at an 

interest rate. In 2006, the Rese

placed a total of $478.9 billion 

ments through repurchase agre

Services Provided to Other 

The Reserve Banks provi

agency and depository service

domestic and international ent

required to do so by the Secret

Treasury or when required or 

to do so by federal statute. Th

of the work is securities-relate

Electronic Access to

Reserve Bank Services

In 2006, the Federal Reser

completed the migration of t

Line DOS customers to FedLin

tage. About 6,200 customers 

verted to FedLine Advantage

based access delivery channel 

used by small and medium-siz

tory institutions to access cri

ment services, such as the 

Funds, Fedwire Securities, 

Settlement, and FedACH Se

addition, the Reserve Banks b

grating their high-volume c

interface customers, which are 

large depository institutions, t

Direct, an internet-proto

computer-to-computer access 

channel for critical payment 

Also in 2006, the Reserve B

nounced a new option, 

Command, a lower-cost com

computer access delivery ch

FedACH customers. The Rese

will continue to migrate cus
FedLine Direct and FedLine Command

in 2007.

Information Technology

In early 2006, the Federal Reserve

Banks initiated the first phase of the

Information Security Architecture

Framework (ISAF), a program that will

cost $30.5 million by the end of 2008,

when this phase of the program will be

completed. The ISAF program is intended to respond to the continuing and

increasingly sophisticated threats facing

information technology systems and to

improve information security at all

points in the Federal Reserve System’s

networks. ISAF is a portfolio of initiatives to improve (1) targeted security

services by ensuring that overall risks

are reduced and the residual risks of

these services are acceptable and (2) the

overall efficiency and coherence of the

provisioning of these services.

The System established a National

Information Security Assurance (NISA)

function in 2006 to enhance information

security governance. By managing and

coordinating information security at the

enterprise level, NISA will have an integrated view of information security

compliance across the Reserve Banks.

NISA will implement a businessoriented model of information security

responsibility and accountability and

will establish comprehensive information security standards and processes for

all the Reserve Banks.

In mid-2006, the Federal Reserve

System adopted the Technology Project

Standards (TPS), a set of standards for

managing information technology

projects. The standards are based on the

Project Management Book of Knowledge (PMBOK), a recognized industry

best practice. All Reserve Banks are

expected to train their staff members

who are involved in information technology projects and to fully tra

the TPS by January 1, 2008.

Also in 2006, the Federa

Bank of New York migrated i

dealers (banks and securitie

dealers) to the FedTrade ap

which provides increased fun

and security. The FedTrade a

is used to execute various form

market operations using electr

tions with the primary d

bidders.

Throughout 2006, the Rese

continued to focus on initiati

duce IT costs over the long 

standardizing processes, incre

ductivity, and strengthening th

Reserve’s ability to respond 

security threats.

Examinations of the

Federal Reserve Banks

Section 21 of the Federal Re

requires the Board of Governo

an examination of each Federa

Bank at least once a year. T

performs its own reviews and 

public accounting firm. Th

accounting firm performs an a

dit of the combined financial s

of the Reserve Banks (see th

“Federal Reserve Banks C

Financial Statements”) and a

annual financial statements o

the twelve Banks. The Reser

use the framework establishe

Committee of Sponsoring Org

of the Treadway Commission 

in assessing their internal con

financial reporting, including 

guarding of assets. The Reser

have further enhanced their as

under the COSO frame

strengthen the key control asse

cess and in 2006 met the req

of the Sarbanes-Oxley Act 

Within this framework, mana
each Reserve Bank provides an assertion letter to its board of directors annually confirming adherence to COSO

standards, and a public accounting firm

confirms management’s assertion and

issues an attestation report to the Bank’s

board of directors and to the Board of

Governors.

The firm engaged for the audits of the

individual and combined financial statements of the Reserve Banks for 2006

was PricewaterhouseCoopers LLP

(PwC). Fees for these services totaled

$4.2 million. To ensure auditor independence, the Board requires that PwC be

independent in all matters relating to the

audit. Specifically, PwC may not perform services for the Reserve Banks or

others that would place it in a position

of auditing its own work, making management decisions on behalf of the

Reserve Banks, or in any other way

impairing its audit independence. In

2006, the Reserve Banks did not engage

PwC for nonaudit services.

The Board’s annual examination of

the Reserve Banks includes a wide range

of off-site and on-site oversight activities conducted by the Division of

Reserve Bank Operations and Payment

Systems. Division personnel monitor the

activities of each Reserve Bank on an

ongoing basis and conduct on-site

reviews based on the division’s riskassessment methodology. The examinations also include assessing the efficiency and effectiveness of the internal

audit function. To assess compliance

with the policies established by the Federal Reserve’s Federal Open Market

Committee (FOMC), the division also

reviews the accounts and holdings of the

System Open Market Account at the

Federal Reserve Bank of New York and

the foreign currency operations conducted by that Bank. In addition, PwC

audits the schedule of participated asset

and liability accounts and the related

schedule of participated in

counts at year-end. The FOMC 

the external audit reports and 

on the division’s examination

Income and Expenses

The accompanying table summ

income, expenses, and distrib

net earnings of the Federal 

Banks for 2005 and 2006.

Income in 2006 was $38,41

compared with $30,729 millio

Expenses totaled $4,056 millio

million in operating expenses, 

lion in earnings credits grant

pository institutions, $301 mil

sessments for expenditures by 

of Governors, and $492 milli

cost of new currency). Reve

priced services was $908 mi

additions to and deductions fro

net income showed a net 

$159 million. The loss was d

rily to interest expense on secu

under agreements to repurcha

in part, by unrealized gains 

denominated in foreign curren

ued to reflect current market 

rates. Statutory dividends paid 

ber banks totaled $871 million

lion more than in 2005; the 

reflects an increase in the c

surplus of member banks and 

quent increase in the paid-

stock of the Reserve Banks.

Payments to the U.S. Treas

form of interest on Federal 

notes totaled $29,052 million 

up from $21,468 million in 

payments equal net income 

deduction of dividends paid a

amount necessary to equate th

Banks’ surplus to paid-in ca

implementation of FAS 158 r

reduction to surplus of $1,84

and increased the amount ne

equate surplus to paid-in capita
In the “Statistical Tables” section of

this report, table 10 details the income

and expenses of each Reserve Bank for

2006 and table 11 shows a condensed

statement for each Bank for the years

1914 through 2006; table 9 is a statement of condition for each Bank, and

table 13 gives the number and annual

salaries of officers and employees for

each Bank. A detailed account of the

assessments and expenditures of the

Board of Governors appears in the section “Board of Governors Financial

Statements.”

Holdings of Securities and Loans

The Federal Reserve Banks’ average

daily holdings of securities and loans

during 2006 amounted to $794,395 million, an increase of $32,886 million

from 2005 (table). Holdings of U.S. government securities increased $32,879

million, and holdings of loans increased

$7 million. The average rate of interest

earned on the Reserve Banks’ holdings

of government securities increased to

4.59 percent, from 3.80 percen

and the average rate of intere

on loans increased to 5.44 per

3.49 percent.

Volume of Operations

Table 12 in the ’’Statistical Ta

tion shows the volume of ope

the principal departments of th

Reserve Banks for the ye

through 2006.

Federal Reserve Bank Pr

In 2006, construction continu

Kansas City Bank’s new hea

building and construction beg

San Francisco Bank’s new 

Branch building after the B

proved the project’s final de

multiyear renovation progra

New York Bank’s headquarter

continued, as did facility r

projects at several Reserve Ba

to accommodate the consoli

check activities. A long-term f

Income, Expenses, and Distribution of Net Earnings

of the Federal Reserve Banks, 2006 and 2005

Millions of dollars

Item 2006 

Current income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,410 

Current expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,264 

Operating expenses1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,987 

Earnings credits granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276 

Current net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,147 

Net additions to (deductions from, − ) current net income ............... –159 

Assessments by the Board of Governors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 793 

For expenditures of Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 301 

For cost of currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 492 

Net income before payments to Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,195 

Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 871 

Transferred to surplus2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,272 

Payments to Treasury3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,052 

1. Includes a net periodic pension expense of $53 million in 2006 and a net periodic pension credit of $11 million in 2005.

2. The implementation of FAS 158 in 2006 reduced

surplus by $1,849 million and increased the 

transfer required to equate capital and surp

3. Interest on Federal Reserve notes.
development program at the St. Louis

Bank continued. Construction of a new

pedestrian-screening vestibule was completed, and construction of an addition

to the Board’s headquarters building began.

Security enhancement programs continue at several facilities. One such

project is the recently completed external perimeter security improvement

project at the Boston Bank. In addition,

the Richmond Bank continued construction of additional security improvements

to its headquarters building. The Dallas

Bank completed the purchase of property behind its headquarters building for

the construction of a remote vehiclescreening and shipping/receiving facility. Planning continues for a similar

screening facility at the Philadelphia

Bank.

Also during 2006, the Board approved the Richmond Bank’s purchase

of property adjacent to its headquarters

building for construction of a new parking garage. The sales of the 

Bank’s former Detroit Branch 

the Kansas City Bank’s Oklah

Branch building, and the San 

Bank’s Portland Branch build

finalized. Efforts to sell the 

Bank’s Little Rock Branch bui

tinued, as did efforts by the Da

to sell excess land at its 

Branch.

Activities for the Portlan

were moved to leased facil

Kansas City Bank sold its O

City Branch building and i

space in the building for the 

administrative activity. The 

ham Branch check and cash o

were relocated to the head off

lanta. The Birmingham buil

house the remaining Branch 

and available space will be lea

Table 14 in the “Statistica

section of this report details th

tion costs and net book val

Federal Reserve Banks and Br

Securities and Loans of the Federal Reserve Banks, 2004–2006

Millions of dollars except as noted

Item and year Total

U.S.

government

securities1

L

Average daily holdings 3

2004 ....................................... 719,647 719,494 

2005 ....................................... 761,509 761,295 

2006 ....................................... 794,395 794,174 

Earnings4

2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,347 22,344 

2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,966 28,959 

2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,464 36,452 

Average interest rate (percent)

2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.11 3.11 

2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.80 3.80 

2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.59 4.59 

1. Includes federal agency obligations.

2. Does not include indebtedness assumed by the Federal Deposit Insurance Corporation.

3. Based on holdings at opening of business.

4. Earnings have not been netted w

est expense on securities sold under a

repurchase.
Pro Forma Financial Statements for Federal Reserve Priced S

Pro Forma Balance Sheet for Priced Services, December 31, 2006 and 2005

Millions of dollars

Item 2006 2005

Short-term assets (Note 1)

Imputed reserve requirements

on clearing balances ............ 821.7 993.2

Imputed investments . . . . . . . . . . . . . . . . . 7,245.7 8,626.4

Receivables . . . . . . . . . . . . . . . . . . . . . . . . . 73.6 77.0

Materials and supplies . . . . . . . . . . . . . . . 0.9 1.3

Prepaid expenses . . . . . . . . . . . . . . . . . . . . 24.2 25.6

Items in process of collection . . . . . . . . 3,391.0 5,934.4

Total short-term assets . . . . . . . . 11,557.1 

Long-term assets (Note 2)

Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . 424.9 424.5

Furniture and equipment ............. 127.9 156.1

Leases, leasehold improvements, and

long-term prepayments . . . . . . . . . . 83.3 88.5

Prepaid pension costs ................ 399.0 796.8

Deferred tax asset . . . . . . . . . . . . . . . . . . . . 146.0 0.0

Total long-term assets . . . . . . . . . 1,181.0 

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . 12,738.1 

Short-term liabilities

Clearing balances and balances

arising from early credit

of uncollected items . . . . . . . . . . . . . 8,015.6 10,703.2

Deferred-availability items . . . . . . . . . . . 3,592.5 5,163.0

Short-term debt . . . . . . . . . . . . . . . . . . . . . . 0.0 0.0

Short-term payables .................. 100.4 126.2

Total short-term liabilities . . . . . 11,708.4 

Long-term liabilities

Long-term debt . . . . . . . . . . . . . . . . . . . . . . 0.0 0.0

Postretirement/postemployment

benefits obligation .............. 392.8 275.0

Total long-term liabilities ..... 392.8 

Total liabilities . . . . . . . . . . . . . . . . . . . . . . 12,101.2 

Equity (including accumulated other

comprehensive loss of

$343.9 million at

December 31, 2006) ............ 636.9 

Total liabilities and equity (Note 3) . . . 12,738.1 

Note: Components may not sum to totals because of

rounding.

The accompanying notes are an integra

pro forma priced services financial stateme
Pro Forma Income Statement for Federal Reserve Priced Services, 2006 and 200

Millions of dollars

Item 2006 2005

Revenue from services provided

to depository institutions (Note 4) ...... 908.4 

Operating expenses (Note 5) ................ 803.5 

Income from operations .................... 104.8 

Imputed costs (Note 6)

Interest on float . . . . . . . . . . . . . . . . . . . . . . . . . –4.9 6.1

Interest on debt . . . . . . . . . . . . . . . . . . . . . . . . . . 0.0 0.0

Sales taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.8 11.3

FDIC insurance . . . . . . . . . . . . . . . . . . . . . . . . . 0.0 5.9 0.0 

Income from operations after

imputed costs . . . . . . . . . . . . . . . . . . . . . . . . . 98.9 

Other income and expenses (Note 7)

Investment income ...................... 383.6 292.7

Earnings credits . . . . . . . . . . . . . . . . . . . . . . . . . –260.8 122.8 −199.0 

Income before income taxes ................ 221.8 

Imputed income taxes (Note 6) . . . . . . . . . . . . . 66.1 

Net income ................................ 155.7 

Memo: Targeted return on equity (Note 6) . . 72.0 

Note: Components may not sum to totals because of

rounding.

The accompanying notes are an integra

pro forma priced services financial stateme

Pro Forma Income Statement for Federal Reserve Priced Services, by Service, 2

Millions of dollars

Item Total

Commercial

check

collection

Commercial

ACH

Fedwire

funds

Revenue from services

(Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . 908.4 745.0 80.5 63.6 

Operating expenses

(Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . 803.5 658.2 74.7 52.9 

Income from operations ................ 104.8 86.8 5.8 10.7 

Imputed costs (Note 6) . . . . . . . . . . . . . . . . . 5.9 4.1 0.6 0.8 

Income from operations

after imputed costs . . . . . . . . . . . . . . . . 98.9 82.7 5.2 9.9 

Other income and expenses,

net (Note 7) . . . . . . . . . . . . . . . . . . . . . . 122.8 100.7 10.9 8.6 

Income before income taxes ............ 221.8 183.3 16.1 18.5 

Imputed income taxes

(Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . 66.1 54.6 4.8 5.5 

Net income ............................ 155.7 128.7 11.3 13.0 

Memo: Targeted return on

equity (Note 6) . . . . . . . . . . . . . . . . . . . 72.0 57.1 7.5 5.6 

Note: Components may not sum to totals because of

rounding.

The accompanying notes are an integra

pro forma priced services financial stateme
FEDERAL RESERVE BANKS

Notes to Pro Forma Financial Statements for Priced Services

(1) Short-Term Assets

The imputed reserve requirement on clearing balances

held at Reserve Banks by depository institutions reflects a

treatment comparable to that of compensating balances

held at correspondent banks by respondent institutions.

The reserve requirement imposed on respondent balances

must be held as vault cash or as non-earning balances

maintained at a Reserve Bank; thus, a portion of priced

services clearing balances held with the Federal Reserve

is shown as required reserves on the asset side of the

balance sheet. Another portion of the clearing balances is

used to finance short-term and long-term assets. The

remainder of clearing balances is assumed to be invested

in a portfolio of investments, shown as imputed

investments.

Receivables are (1) amounts due the Reserve Banks for

priced services and (2) the share of suspense-account and

difference-account balances related to priced services.

Materials and supplies are the inventory value of shortterm assets.

Prepaid expenses include salary advances and travel

advances for priced-service personnel.

Items in process of collection is gross Federal Reserve

cash items in process of collection (CIPC) stated on a

basis comparable to that of a commercial bank. It reflects

adjustments for intra-System items that would otherwise

be double-counted on a consolidated Federal Reserve

balance sheet; adjustments for items associated with nonpriced items, such as those collected for government

agencies; and adjustments for items associated with providing fixed availability or credit before items are received and processed. Among the costs to be recovered

under the Monetary Control Act is the cost of float, or net

CIPC during the period (the difference between gross

CIPC and deferred-availability items, which is the portion

of gross CIPC that involves a financing cost), valued at

the federal funds rate.

(2) Long-Term Assets

Consists of long-term assets used solely in priced services, the priced-service portion of long-term assets

shared with nonpriced services, and an estimate of the

assets of the Board of Governors used in the development

of priced services.

Effective December 31, 2006, the Reserve Banks

implemented FAS 158, which requires an employer to

record the funded status of its benefit plans on its balance

sheet, resulting in a reduction to the prepaid pension asset

related to priced services and the recognition of an associated deferred tax asset with an offsetting adjustment, net

of tax, to accumulated other comprehensive income

(AOCI) (see note 3).

(3) Liabilities and Equity

Under the matched-book capital structure for assets,

short-term assets are financed with short-term payables

and clearing balances. Long-term assets are financed with

long-term liabilities and clearing balances. As a result, no

short- or long-term debt is imputed. Other short-term

liabilities include clearing balances maintai

Banks and deposit balances arising from 

long-term liabilities consist of accrued po

postretirement, and nonqualified pension 

and obligations on capital leases.

In order to reflect the funded status of it

as required by FAS 158, the Reserve Ban

the deferred items related to these plans, 

prior service costs and actuarial gains or 

balance sheet. This resulted in an increase 

obligation related to the priced services an

adjustment, net of tax, to AOCI, which 

equity.

Equity is imputed at 5 percent of total a

(4) Revenue

Revenue represents charges to depository i

priced services and is realized from ea

through one of two methods: direct charge

tion’s account or charges against its accu

ings credits.

(5) Operating Expenses

Operating expenses consist of the direct, 

other general administrative expenses of 

Banks for priced services plus the expe

members of the Board of Governors worki

the development of priced services. The 

Board staff members were $7.5 million in 

million in 2005.

Effective January 1, 1987, the Reserve 

mented the Financial Accounting Stand

Statement of Financial Accounting Stand

Employers’ Accounting for Pensions (FAS 

ingly, the Reserve Banks recognized opera

for the qualified pension plan of $11.5 m

and a credit to expenses of $1.3 million in 

ing expenses also include the nonqualifie

pense of $3.2 million in 2006 and $1.0 m

The implementation of FAS 158 does n

systematic approach required by gener

accounting principles to recognize the ex

ated with the Reserve Banks’ benefit plans 

statement.

The income statement by service reflect

erating expenses, and imputed costs. Cer

overhead costs not closely related to any pa

service are allocated to priced services 

expense-ratio method. Corporate overhead 

among the priced services during 2006 

follows (in millions):

2006 

Check . . . . . . . . . . . . . . . . . . . . . 30.6 

ACH . . . . . . . . . . . . . . . . . . . . . . 4.1 

Fedwire funds . . . . . . . . . . . . . . 2.8 

Fedwire securities . . . . . . . . . . 1.5 

Total . . . . . . . . . . . . . . . . . . . . . . 39.0 
(6) Imputed Costs

Imputed costs consist of income taxes, return on equity,

interest on debt, sales taxes, the FDIC assessment, and

interest on float. Many imputed costs are derived from the

private-sector adjustment factor (PSAF) model. The cost

of debt and the effective tax rate, which reflect bank

holding company data as the proxy for a private-sector

firm, are used to impute debt and income taxes in the

PSAF model. The after-tax rate of return on equity is

based on the returns of the equity market as a whole and

is used to impute the profit that would have been earned

had the services been provided by a private-sector firm.

Interest is imputed on the debt assumed necessary to

finance priced-service assets; however, no debt was imputed in 2006 or 2005. The sales taxes and FDIC assessment that the Federal Reserve would have paid had it

been a private-sector firm are also among the components

of the PSAF.

Interest on float is derived from the value of float to be

recovered, either explicitly or through per-item fees, during the period. Float costs include costs for checks,

book-entry securities, ACH, and funds transfers.

Float cost or income is based on the actual float

incurred for each priced service. Other imputed costs are

allocated among priced services according to the ratio of

operating expenses less shipping expenses for each service to the total expenses for all services less the total

shipping expenses for all services.

The following list shows the daily average recovery of

actual float by the Reserve Banks for 2006 in millions of

dollars:

Total float –84.7

Unrecovered float 15.6

Float subject to recovery –100.3

Sources of recovery of float

Income on clearing balances –10.0

As-of adjustments –1.2

Direct charges 497.6

Per-item fees –589.1

Unrecovered float includes float generat

to government agencies and by other cen

vices. Float recovered through income on 

ances is the result of the increase in inve

balances; the increase is produced by a dedu

for cash items in process of collection, w

imputed reserve requirements. The incom

balances reduces the float to be recovered 

means. As-of adjustments and direct charge

that is created by interterritory check tran

the observance of non-standard holidays by 

tory institutions. Such float may be recov

depository institutions through adjustment

reserve or clearing balances or by billin

directly. Float recovered through direct ch

item fees is valued at the federal funds ra

recovered through per-item fees has been su

the cost base subject to recovery in 2006.

(7) Other Income and Expenses

Consists of investment income on clearing 

the cost of earnings credits. Investment inc

ing balances for 2006 and 2005 represen

coupon-equivalent yield on three-month 

plus a constant spread, based on the return 

of investments. In both years, the return is 

total clearing balance maintained, adjusted 

of reserve requirements on clearing balan

for earnings credits granted to depository 

their clearing balances are derived by ap

counted average coupon-equivalent yield o

Treasury bills to the required portion o

balances, adjusted for the net effect of re

ments on clearing balances.
The Board of Governors and the

Government Performance and Results Act

The Government Performance and

Results Act (GPRA) of 1993 requires

that federal agencies, in consultation

with Congress and outside stakeholders,

prepare a strategic plan covering a multiyear period and submit an annual performance plan and performance report.

Although the Federal Reserve is not

covered by the GPRA, the Board of

Governors voluntarily complies with the

spirit of the act.

Strategic Plan, Performance

Plan, and Performance Report

The Board’s strategic plan articulates

the Board’s mission, sets forth major

goals, outlines strategies for achieving

those goals, and discusses the environment and other factors that could affect

their achievement. It also addresses

issues that cross agency jurisdictional

lines, identifies key quantitative performance measures, and discusses performance evaluation. The most recent strategic plan covers the period 2006–09.

Both the performance plan and the

performance report are prepared biennially. The performance plan sets forth

specific targets for some of the performance measures identified in the strategic plan and describes the operational

processes and resources needed to meet

those targets. It also discusses data validation and results verification. The most

recent performance plan covers the

period 2006–07.

The performance report discusses the

Board’s performance in relation to its

goals. The most recent performance report indicates that the Board 

met its goals for 2004–05.

All of the aforementioned d

are available on the Board’s 

at www.federalreserve.gov/b

rptcongress. The Board’s mis

ment and a summary of th

Reserve’s goals and objectiv

forth in the most recently rele

tegic and performance plans, 

below.

Mission

The mission of the Board is to 

stability, integrity, and efficien

nation’s monetary, financial, 

ment systems so as to promo

macroeconomic performance.

Goals and Objectives

The Federal Reserve has six 

goals with interrelated and mu

inforcing elements.

Goal

To conduct monetary policy 

motes the achievement of 

sustainable long-term growth 

price stability that fosters that 

Objectives

v Stay abreast of recent dev

and prospects in the U.S. 

and financial markets, and 

abroad, so that monetary po

sions will be well informed.

v Enhance our knowledge of 

tural and behavioral relatio
the macroeconomic and financial markets, and improve the quality of the

data used to gauge economic performance, through developmental research activities.

v Implement monetary policy effectively in rapidly changing economic

circumstances and in an evolving

financial market structure.

v Contribute to the development of U.S.

international policies and procedures,

in cooperation with the U.S. Department of the Treasury and other

agencies.

v Promote understanding of Federal

Reserve policy among other government policy officials and the general

public.

Goal

To promote a safe, sound, competitive,

and accessible banking system and

stable financial markets

Objectives

v Promote overall financial stability,

manage and contain systemic risk, and

identify emerging financial problems

early so that crises can be averted.

v Provide a safe, sound, competitive,

and accessible banking system

through comprehensive and effective

supervision of U.S. banks, bank and

financial holding companies, foreign

banking organizations, and related

entities. At the same time, remain

sensitive to the burden on supervised

institutions.

v Provide a dynamic work environment

that is challenging and rewarding. Enhance efficiency and effectiveness,

while remaining sensitive to the burden on supervised institutions, by addressing the supervision function’s

procedures, technology, resource allocation, and staffing issues.

v Promote compliance by dom

foreign banking organizatio

vised by the Federal Res

applicable laws, rules, re

policies, and guidelines t

comprehensive and effectiv

sion program.

Goal

To effectively implement fed

designed to inform and protec

sumer, to encourage commun

opment, and to promote acces

ing services in historically un

markets

Objectives

v Take a leadership role in sh

national dialogue on consum

tion in financial services, a

the rapidly emerging issues 

today’s consumers, strengthe

sumer compliance supervi

grams when required, and 

sensitive to the burden on s

institutions.

v Promote, develop, and stren

fective communications and 

rations within the Board, th

Reserve Banks, and other 

and organizations.

v Increase public understandin

sumer protection and comm

velopment and the Board’

these areas through increased 

and by developing program

dress the information need

sumers and the financial 

industry.

v Develop a staff that is high

professional, innovative, an

providing career developm

portunities to ensure the 

of highly productive staff an

ing highly qualified an

employees.
v Promote an efficient and effective

work environment by aligning business functions with appropriate work

processes and implementing solutions

for work products and processes that

can be handled more efficiently

through automation.

Goal

To foster the integrity, efficiency, and

accessibility of U.S. payment and settlement systems

Objectives

v Develop sound, effective policies and

regulations that foster payment system integrity, efficiency, and accessibility. Support and assist the Board in

overseeing U.S. dollar payment and

securities settlement systems by assessing their risks and risk management approaches against relevant policy objectives and standards.

v Conduct research and analysis that

contributes to policy development and

increases the Board’s and others’ understanding of payment system dynamics and risk.

Goal

To provide high-quality professional

oversight of Reserve Banks

Objective

v Produce high-quality assessments and

oversight of Federal Reserve System

strategies, projects, and operations,

including adoption of technology to

the business and operational needs of

the Federal Reserve. The oversight

process and outputs should help Federal Reserve management foster and

strengthen sound internal control systems, efficient and reliable operations,

effective performance, an

project management and sho

the Board in the effective di

its oversight responsibilities

Goal

To foster the integrity, effici

effectiveness of Board program

Objectives

v Oversee a planning and bu

cess that clearly identifies th

mission, results in concise 

the effective accomplishme

erations, transmits to the st

formation needed to attain 

efficiently, and allows the 

measure our accomplishmen

v Develop appropriate polic

sight mechanisms, and me

criteria to ensure that the r

training, and retention of 

Board needs.

v Establish, encourage, and 

climate of fair and equitable 

for all employees regardles

creed, color, national origin

sex.

v Provide financial managem

port needed for sound 

decisions.

v Provide cost-effective an

information resource ma

services to Board division

divisional distributed-proce

quirements, and provide an

information technology issu

Board, Reserve Banks, othe

regulatory institutions, an

banks.

v Efficiently provide safe, mo

secure facilities and necessa

for activities conducive to 

and effective Board operatio
Federal Legislative Developments

The following federal laws enacted during 2006 affect the Federal Reserve System and the institutions it regulates: the

Financial Services Regulatory Relief

Act of 2006; the Unlawful Internet

Gambling Enforcement Act of 2006; the

Military Personnel Financial Services

Protection Act; and the Financial Netting Improvements Act of 2006.

Financial Services

Regulatory Relief Act of 2006

On October 13, 2006, President Bush

signed into law the Financial Services

Regulatory Relief Act of 2006 (Regulatory Relief Act), culminating more than

four years of work by Congress, the

Board, and other interested parties. The

act incorporates a number of significant

monetary policy, supervisory, and regulatory provisions that were proposed or

supported by the Board. These provisions should reduce unnecessary burden

on banking organizations and improve

operation of the financial system. The

most important provisions of the Regulatory Relief Act affecting the Federal

Reserve System and banking organizations supervised by the Federal Reserve

are discussed below. Except as noted

below, the act became effective on October 13, 2006.

Monetary Policy Provisions

Authority to Pay Interest

on Balances Held at Reserve Banks

and Greater Flexibility in Setting

Reserve Requirements

For monetary policy purposes, federal

law obliges the Board to establish reserve requirements on certain 

held at depository institut

mandates that the Board set 

of required reserves on tr

accounts above a certain p

(8 percent for amounts abov

called low reserve tranche, a

cent for amounts within the lo

tranche). Because the Federa

does not pay interest on balanc

Reserve Banks to meet reserv

ments, depositories have an in

reduce their reserve balances 

mum. To do so, they engage in 

of reserve-avoidance activitie

ing using “sweep” arrangem

move funds from accounts tha

ject to reserve requirements to 

and money market investmen

not. These sweep programs a

activities absorb resources and 

diminish banking system e

Depository institutions also m

tarily hold contractual clearing 

and excess reserve balances at 

Bank. These balances also do n

itly earn interest, although c

clearing balances implicitly ea

in the form of credits that ma

to pay for Federal Reserve 

such as check clearing.

The Regulatory Relief Act 

Federal Reserve the authority

as of October 1, 2011, to pa

interest on all types of balance

ing required reserves, excess 

and contractual clearing balan

by or for depository institut

Reserve Bank. Paying intere

quired reserve balances, on

rized, will remove a substanti

of the incentive for depos
engage in reserve-avoidance measures,

and the resulting improvements in efficiency should eventually be passed

through to bank borrowers and depositors.

Moreover, if the Board were to determine to pay explicit interest on contractual clearing balances, once authorized

to do so, the action could provide a

stable enough supply of voluntary balances to allow the Federal Reserve to

effectively implement monetary policy

using existing procedures without the

need for required reserves.

Importantly, the Regulatory Relief

Act gives the Board the discretion, effective as of October 1, 2011, to lower

the ratio of reserves that a depository

institution must maintain against its

transaction accounts below the ranges

currently established by law, including

potentially establishing a zero reserve

ratio. Thus, once these authorities

become effective, the Board could reduce

or even eliminate reserve requirements if

it determined that such action was consistent with the effective implementation of

monetary policy. Such action, if taken,

would reduce a significant regulatory

burden for all depository institutions.

Having the authority to pay interest

on excess reserves also will enhance the

Federal Reserve’s monetary policy toolkit. If the Board were to determine to pay

interest on such balances at some point in

the future, the rate paid would act as a

minimum for overnight interest rates

and, thus, could help mitigate potential

volatility in overnight interest rates.

Authority for Member Banks

to Use Pass-Through Reserves

The Regulatory Relief Act also eliminated the statutory provisions that prohibited banks that are members of the

Federal Reserve from counting as

reserves their deposits in other banks

that are “passed through” by those banks

to the Federal Reserve as re

serve balances. These ame

once implemented, will enabl

and state member banks to ta

tage of the same type of pas

reserve arrangements previou

able only to state nonmember 

Supervisory and

Regulatory Provisions

Rules Implementing the “Brok

Exceptions for Banks Adopted 

Part of the Gramm-Leach-Bli

Before the Gramm-Leach-B

(GLB Act) of 1999, banks had 

exception from the definition 

ker” in the Securities Exchan

1934. This meant that ban

engage in any type of securiti

permissible under federal 

banking laws without registe

the Securities and Exchange 

sion (SEC) as a broker and wit

plying with the SEC’s rules 

to registered brokers. In the 

Congress eliminated this blank

tion for banks from the def

“broker” and replaced it wi

exceptions for broad types of 

activities conducted by bank

new activity-focused excepti

designed and intended to allow 

continue to provide their custo

securities services as part of t

trust, fiduciary, custodial, a

banking functions. The SEC 

comment on rules that would i

these “broker” exceptions for 

2001 and 2004.

The Regulatory Relief Ac

that the SEC and the Board, w

days of enactment, jointly req

ment on a new “single set” o

implement the “broker” exce

banks that were adopted as p

GLB Act. The Regulatory R
also requires that the SEC and the Board

jointly adopt a “single set” of final rules

to implement these exceptions after consulting with, and seeking the concurrence of, the Office of the Comptroller

of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and

the Office of Thrift Supervision (OTS).

In addition, the act provides that the

single set of final rules adopted jointly

by the Board and the SEC shall supersede the rules previously issued by the

SEC to implement these exceptions.

On December 18, 2006—well before

the end of the 180-day period established by the Regulatory Relief Act—

the Board and the SEC issued and requested comment on joint proposed

rules to implement the “broker” exceptions for banks. See 71 FR 77,522

(Dec. 26, 2006). These joint proposed

rules—designated Regulation R—are

designed to accommodate the securities

activities that banks conduct as part of

their normal banking functions, consistent with the purposes of the GLB Act.

Expanded Eligibility for EighteenMonth Examination Schedule

for Small Banks

The Regulatory Relief Act expands the

number of well-capitalized and wellmanaged small insured depository institutions that may qualify for an eighteenmonth (rather than a twelve-month) onsite safety and soundness examination

schedule. Before the act, an insured

depository institution could qualify for

an extended eighteen-month safety and

soundness examination schedule only if

the institution had less than $250 million in total assets, was well capitalized

and well managed, and met certain other

supervisory criteria. See 12 USC

1820(d)(4). The act raised this $250 million asset threshold for an eighteenmonth exam cycle to $500 million,

thereby allowing additional sm

run institutions to potentially q

an extended examination sch

January 11, 2007, President 

signed into law a compleme

Pub. L. 109-473, that allows a

depository institution that m

new $500 million total assets 

to potentially qualify for an 

month on-site exam cycle if t

tion received a composite 

either a 1 or a 2 at its most rec

and soundness examination.

Nonwaiver of Privileges

The Regulatory Relief Act in

important provision that shou

tate the sharing of information 

banking organizations and fed

and foreign banking authoritie

cally, the act provides that any 

(for example, attorney-client 

product privilege) a person 

with respect to informatio

waived or destroyed if the pe

vides that information to “an

banking agency, state bank s

or foreign banking authority fo

pose in the course of the supe

regulatory process of such ag

pervisor, or authority.”

Voting State Representative Ad

the Federal Financial Institut

Examination Council

Another provision of the R

Relief Act adds a state represe

a voting member of the Fede

cial Institutions Examination 

(FFIEC). Specifically, the act 

for the current State Liaison C

of the FFIEC (which is com

five representatives of state su

agencies for depository instit

elect a chairperson, and a

chairperson as a full voting m

the FFIEC.
Elimination of Certain Reporting

Requirements Relating to

Insider Lending

The Regulatory Relief Act eliminated

certain reporting requirements previously imposed on banks and their executive officers and principal shareholders

that the federal banking agencies did not

find particularly useful in monitoring

insider lending or preventing insider

abuse. Specifically, the act eliminated

the statutory provisions that previously

required

• an executive officer of a bank to file a

report with the bank’s board of directors whenever the executive officer

obtained a loan from another bank in

an amount that exceeded the amount

the executive officer could obtain

from his or her own bank (12 USC

375a(g)(6)),

• a bank to file a separate report with its

quarterly Call Report concerning any

loans the bank made to its executive

officers since its previous Call Report

(12 USC 375a(g)(9)), and

• an executive officer or principal shareholder of a bank to file an annual

report with the bank’s board of directors if the officer or shareholder had a

loan outstanding from a correspondent bank of the bank (12 USC

1972(2)(G)).

Although the act eliminated these reporting requirements, it did not alter the

statutory and regulatory limits and restrictions on lending to insiders or the

ability of the federal banking agencies

to examine for potential insider lending

abuses as part of the supervisory process. On December 6, 2006, the Board

adopted, on an interim basis, and requested public comment on amendments

to the Board’s Regulation O (12 CFR

215) that implement the elim

these reporting requirements. S

71,472 (December 11, 2006).

Streamlining the Supervisory 

for Bank Merger Transactions

The Regulatory Relief Act st

the supervisory process for Ban

Act (12 USC 1828(c)) trans

two respects. First, it eliminate

for the responsible agency i

Merger Act transaction to req

port on the competitive effec

transaction from each of the 

eral banking agencies, as w

Attorney General. Instead, th

quires that the responsible a

quest a competitive factors re

from the Attorney General an

a copy of the request to the FD

not the responsible agency). S

Regulatory Relief Act al

reviewing agency for a Ban

Act transaction to avoid req

competitive factors report from 

federal banking agencies and 

ney General if the transaction 

affiliated institutions. The act a

nates the post-approval waiti

for bank mergers involving aff

stitutions, as these transaction

do not present any competiti

The act does not, however, al

way the reviewing agency’s 

to conduct a competitive ana

proposed Merger Act transacti

Amendment Allowing the Boa

Grant Exceptions from the At

Rule in Section 2(g)(2) of the 

Holding Company Act

Section 2(g)(2) of the Bank 

Company Act (BHC Act) 

1841(g)(2)) provides that in a

stances, a company is deemed 

any shares that are held by a tr

benefit of the company or its s
ers, members, or employees. This attribution rule was intended to prevent a

bank holding company from using a

trust established for the benefit of its

management, shareholders, or employees to evade the BHC Act’s restrictions

on the acquisition of shares of banks and

nonbanking companies. However, the

rule can create inappropriate results in

situations in which the bank holding

company does not have the ability to

control, directly or indirectly, the shares

acquired by the trust. Accordingly, the

Regulatory Relief Act allows the Board

to waive application of this attribution

rule if the Board determines that the

exception is appropriate in light of the

facts and circumstances of the case and

the purposes of the BHC Act. Such an

exception might be appropriate, for

example, if the shares are held by the

trust as part of a participant-directed and

widely held 401(k) plan and the plan’s

investment options are selected by an

independent fiduciary (and not by the

bank holding company or its officers,

directors, or employees).

Streamlining Reports of Condition

The Regulatory Relief Act requires the

Board and the other federal banking

agencies to conduct a review of the

Call Report forms within one year of

enactment, and at least once every five

years thereafter, and to eliminate any

information or schedule that the agencies determine is no longer necessary or

appropriate.

Increase in Asset Threshold for the

Small Depository Institution Exception

under the Depository Institution

Management Interlocks Act

The Depository Institution Management

Interlocks Act, among other things, generally prohibits a management official

of one depository organization from

serving as a management offic

other nonaffiliated depository 

tion if the organizations hav

located in the same metropoli

tical area. The act provides an 

from this restriction if eac

depository organizations inv

less than a specified amoun

assets. The Regulatory Relief 

this specified amount from $2

to $50 million, thus allowing 

number of small depository 

tions to qualify for the excepti

Protection of Confidential Inf

Received by Federal Banking 

from Foreign Banking Superv

The Regulatory Relief Act cl

authority of the Board and 

federal banking agencies to ma

confidentiality of information 

from a foreign regulatory or su

authority. Specifically, the ac

that a federal banking agency 

be compelled to disclose in

received from a foreign regu

supervisory authority if publ

sure of the information wou

the law of the foreign countr

federal banking agency obtain

formation in connection with t

istration and enforcement of t

banking laws or under a mem

of understanding between th

authority and the agency. The 

ever, would not authorize the 

to withhold such information f

gress or if the information w

under a court order in an actio

by the United States or the ag

Modification to Cross-Market

Restrictions Applicable to

Merchant Banking Investment

Another provision of the Regu

lief Act allows the depository 

subsidiaries of a financial hold
pany, with prior Board approval, to

engage in cross-marketing activities

through “statement stuffers” and Internet web sites with nonfinancial portfolio

companies held by the financial holding

company under the GLB Act’s merchant banking authority. Previously, the

depository institution subsidiaries of a

financial holding company were permitted to engage, with Board approval, in

these limited types of cross-marketing

activities only with portfolio companies

held by the financial holding company

under the GLB Act’s insurance company investment authority.

Change in Bank Control Act

Amendments

The Regulatory Relief Act expands the

factors that the Board and the other federal banking agencies may consider in

determining whether to disapprove, or

extend the time period for processing, a

notice filed under the Change in Bank

Control Act (CIBC Act). In particular,

the act allows the appropriate federal

banking agency to disapprove a CIBC

Act notice if the agency determines that

the future prospects of the institution to

be acquired might jeopardize the stability of the institution or the interests of

depositors. (Currently, the financial and

managerial factors in the CIBC Act focus on the resources of the acquiring

person, not the institution to be acquired.) In addition, the act allows an

agency to extend the time for processing

a CIBC Act notice for up to an additional two 45-day periods (beyond the

initial 60-day review period and discretionary 30-day extension) if the agency

determines that additional time is needed

to analyze (1) the future prospects of the

institution to be acquired or (2) the safety

and soundness of any plans by the acquiring person to make major changes in

the business, corporate structure, or management of the institution.

Amendments to Allow D.C.-C

Banks to Become State Memb

The Regulatory Relief Act m

eral technical changes to th

Reserve Act to allow banks ch

the District of Columbia to bec

member banks.

Enforcement-Related Provi

Amendments Expanding the A

Suspension Authority

The Federal Deposit Insurance 

Act) currently allows the a

federal banking agency to 

remove, or prohibit an in

affiliated party (IAP) from pa

in the affairs of the deposito

tion with which he or she is a

the IAP is charged with or co

certain crimes involving d

breach of trust, or money la

See 12 USC 1818(g)(1). The R

Relief Act expands this aut

allowing the appropriate fede

ing agency to suspend an IAP 

been charged with such a cr

participating in the affairs of a

tory institution (not just the ins

which the IAP then serves). In 

the act clarifies that the ap

agency may suspend, remove

hibit an IAP even if the IAP is 

associated with any deposito

tion at the time the action is ta

Restricting the Ability of Conv

Individuals to Participate in t

of a Bank Holding Company 

Edge Act or Agreement Corpo

Section 19 of the Federal Dep

ance Act (12 USC 1829) auto

prohibits a person that has b

victed of a crime involving dis

breach of trust, or money l

from participating in the affa
insured depository institution without

the consent of the FDIC. The Regulatory Relief Act extends this prohibition

so that persons convicted of such crimes

also may not participate in the affairs of

a bank holding company (other than a

foreign bank), an Edge or agreement

corporation, or a savings and loan holding company unless the individual receives the prior consent of the Board or

the OTS, as appropriate. The Regulatory

Relief Act also gives the Board and the

OTS additional discretionary authority

to remove a person convicted of such a

crime from, respectively, a nonbank subsidiary of a bank holding company or a

savings and loan holding company.

Authority to Enforce

Deposit Insurance Conditions

Section 8 of the Federal Deposit Insurance Act currently permits the appropriate federal banking agency for an insured depository institution to enforce a

written condition imposed by that

agency on the institution or an IAP of

the institution. The Regulatory Relief

Act amended section 8 of the FDI Act to

allow the appropriate federal banking

agency for an institution to enforce a

condition imposed on an insured depository institution by another federal banking agency. This will allow, for example, the Board (as the appropriate

agency for a state member bank) to enforce a condition imposed on a state

member bank by the FDIC in connection with the bank’s application for deposit insurance

Standards for Enforcing Written

Conditions and Written Agreements

The Regulatory Relief Act also amended

section 8 of the Federal Deposit Insurance Act to allow the appropriate federal banking agency for an insured

depository institution to enforce a written condition imposed on the 

or an IAP, or a written agree

tered into by the agency with t

tion or IAP, without demonstr

the institution or IAP was un

riched or acted in reckless di

the law or a prior agency or

larly, the act allows the approp

eral banking agency for an und

ized institution to enforce 

condition imposed on, or 

agreement entered into with, t

tion or an IAP without rega

limit in the FDI Act (

1831o(e)(2)(E)) that normally 

liability of a controlling shareh

der a capital restoration plan.

Clarifying the Ability of the B

Agencies to Enforce Condition

Imposed in Connection with

CIBC Act Notices

The Regulatory Relief Act am

tion 8(b) of the Federal Depo

ance Act to provide that the a

federal banking agency for a

depository institution may enf

ten conditions imposed in c

with “any action on any ap

notice, or other request” by th

tory institution or an IAP. Thes

are designed to clarify and co

agencies’ ability to enforce 

imposed in connection with a n

under the Change in Bank Con

Board Approval of

OCC Removal Actions

The Regulatory Relief Act s

provision in the FDI Act (see 

1818(e)(4)) that required the 

issue a final decision in any 

administrative action by the 

remove or prohibit an IAP of 

bank. Thus, the OCC now has 

authority as the Board, the F

the OTS to independently r
prohibit an IAP of an institution under

the agency’s jurisdiction.

Consumer-Related Provisions

Public Welfare Investments by

National and State Banks

The Regulatory Relief Act makes several important modifications to the statutes that authorize national and state

member banks to make “public welfare”

investments. See 12 USC 24 (eleventh)

and 338a. First, it raises, from 10 percent of capital and surplus to 15 percent

of capital and surplus, the aggregate

amount of “public welfare” investments

that a national or state member bank

may make under these authorities.1 In

addition, the act refocuses these investments on low- and moderate-income

(LMI) families and communities by providing that to be considered a “public

welfare” investment, an investment must

primarily benefit LMI families or communities (such as by providing housing,

services, or jobs). The act also clarifies

that each “public welfare” investment

made by a national or state member

bank, either directly or through a subsidiary, must benefit primarily LMI communities or families.

Development of Model

Privacy Disclosure Forms

The Regulatory Relief Act requires the

Board, the other federal banking agencies, the National Credit Union Administration, the Secretary of the Treasury,

the Securities and Exchange Commission, and the Federal Trade Commission

to jointly develop a model form that

may be used by financial insti

their option, to fulfill the i

annual privacy policy discl

quirements imposed by sectio

the Gramm-Leach-Bliley Act 

6803). The model form must 

in proposed form for public 

within 180 days of enactm

Board has been working ex

with the other relevant age

conducting consumer testing t

potential model privacy forms 

be used by financial institution

Studies and Reports

GAO Study of

Currency Transaction Reports

The Regulatory Relief Act d

Government Accountability 

(GAO) to conduct a study of th

of currency transaction repor

filed with the Secretary of the 

under the Bank Secrecy Act. 

must evaluate, among othe

(1) the extent to which deposi

tutions avail themselves of th

exemption system for CTRs, (

improve the current exemptio

for CTRs, and (3) the usef

CTRs to law enforcement age

Regulatory Relief Act also pro

the study should include reco

tions for changes to the CTR e

system that would reduce bur

out adversely affecting the repo

tem’s effectiveness. The GAO 

mit a report on its findings to 

by January 13, 2007.

Unlawful Internet Gambl

Enforcement Act of 2006

The Unlawful Internet Gam

forcement Act of 2006, Pub

347, (codified at 31 USC 536

prohibits a person engaged in 

1. As under current law, a national or state

member bank would have to obtain the approval

of the OCC or the Board, respectively, to make

"public welfare" investments that, in the aggregate, exceed 5 percent of the bank’s capital and

surplus.
ness of betting or wagering from knowingly accepting credit, electronic fund

transfers, checks, drafts, or similar instruments drawn on or payable through

any financial institution in connection

with the participation of another person

in unlawful Internet gambling (“restricted transactions”). The act generally

defines “unlawful Internet gambling” as

transmitting a bet by any means that

involves the use, at least in part, of the

Internet and where such bet or wager is

unlawful under any applicable federal or

state law in the state or tribal lands in

which the bet or wager is initiated, received, or otherwise made.

The act charges the Secretary of the

Treasury and the Board, in consultation

with the Attorney General, with developing regulations to require each payment system that the agencies determine

could be used to process restricted payments (as well as financial transaction

providers participating in such payment

systems) to establish “policies and procedures reasonably designed to identify

and block or otherwise prevent or prohibit the acceptance of restricted transactions.” In prescribing the regulations,

the Secretary and the Board must identify the types of policies and procedures,

including nonexclusive examples,

deemed by the agencies to be reasonably designed to identify and block restricted transactions. To the extent practical, any participant in a designated

payment system must be permitted to

choose among alternative means of

complying, including by relying on and

complying with the policies and procedures of the designated payment system,

so long as these policies and procedures

comply with the regulation. The act also

requires the Secretary and the Board to

grant exemptions from any requirement

imposed under the regulations to particular types of transactions or designated payment systems if the agencies

jointly find that it is not reason

tical to identify and block, or 

prevent or prohibit, such restric

actions. The regulations mus

lished by July 10, 2007.

Military Personnel Financ

Services Protection Act

The National Defense Authori

for Fiscal Year 2007, Pub. L. 

364, enacted on September 

imposes restrictions on and 

requirements for consumer c

vided to members of the mi

their families. The act charge

partment of Defense (DOD) w

ing “consumer credit” in its r

and permits the DOD to includ

sumer credit apart from residen

gages, loans to fund the purc

motor vehicle, and other perso

erty loans when the property 

from the proceeds of the loan 

collateral for the loan. Require

creditors include a 36 perce

percentage rate (APR) ca

includes all fees, along with A

lations and disclosures that d

the APR used in disclosures 

Truth in Lending Act (TILA

mandates that all credit di

including TILA disclosures, be 

both orally and in writing pr

extension of credit.

Moreover, the act imposes l

on lending to members of th

and their dependents, such as 

ing rollovers and refinancing

sumer credit by the same cre

prohibiting loans with prepay

alties and mandatory arbitratio

The act imposes criminal and 

penalties for knowing viola

voids contracts that are prohib

the statute. The legislation was 

at least in part, to address 

about payday loans, installm
that are secured by a motor vehicle

(other than loans for the purchase of a

motor vehicle), and other forms of shortterm credit to military members and

their dependents. In prescribing regulations for this legislation, the DOD must

consult with the Board, among other

federal agencies. The effective date of

the act is October 1, 2007, regardless of

whether the DOD adopts regulations.

This statute would become effective earlier if interim regulations are issued by

the DOD.

Financial Netting Improvements

Act of 2006

In 2005, Congress passed comprehensive legislation to revise the federal

bankruptcy laws (Bankruptcy Abuse

Prevention and Consumer Protection

Act of 2005, Pub. L. 109-8). Title IX of

that act contained amendments to banking laws and the Bankruptcy Code to

provide increased certainty that netting

and close-out of financial market contracts would be enforceable, even in the

event of a counterparty insolvency. Title

IX also clarified certain duties and

obligations of the FDIC as receiver or

conservator of an insured depository

institution.

The Financial Netting Improvements

Act of 2006 (Pub. L. 109-390), enacted

on December 12, 2006, makes technical

changes to the netting and fina

tract provisions that were add

vised by title IX of the 2005 

2006 act updates the descri

various financial contracts (“

contract,” “forward contra

“swap agreement”) in the Fe

posit Insurance Act, the Fede

Union Act (FCUA), and the B

Code to reflect current market 

latory practice. The 2006 ac

vises provisions in the Bankru

to clarify the rights of certain 

parties to exercise self-help fo

on-collateral rights, setoff ri

netting rights with respect to 

contracts with a debtor. The

sions conform the Bankrup

with parallel provisions in the 

and the FCUA. In addition, the 

amends the FDI Act and the 

clarify the conditions under w

ceiver of an insolvent deposito

tion can enforce a financial co

contains a “walkaway” clause 

that would otherwise allow 

participant to suspend, conditi

tinguish a payment obligation 

other party becomes insolv

2006 act also makes other tech

conforming revisions to the 

FCUA, Bankruptcy Code, Fe

posit Insurance Corporation 

ment Act of 1991, and Securit

tor Protection Act of 1970.