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Letter of Transmittal

Board of Governors of the Federal Reserve System


Washington, D.C.

June 2007

The Speaker of the House of Representatives:

Pursuant to the requirements of section 10 of the Federal Reserve Act,


I am pleased to submit the ninety-third annual report of the
Board of Governors of the Federal Reserve System.

This report covers operations of the Board during calendar year 2006.

Sincerely,

Ben Bernanke
Chairman
Overview of the Federal Reserve
As the nation’s central bank, the Federal ety of System functions, including oper-
Reserve System has numerous, varied ating a nationwide payments system;
responsibilities: distributing the nation’s currency and
coin; under authority delegated by the
• conducting the nation’s monetary pol-
Board of Governors, supervising and
icy by influencing monetary and credit
regulating bank holding companies and
conditions in the economy
state-chartered banks that are members
• supervising and regulating banking in-
of the System; serving as fiscal agents
stitutions, to ensure the safety and
of the U.S. Treasury; and providing a
soundness of the nation’s banking and
variety of financial services for the Trea-
financial system and to protect the
sury, other government agencies, and
credit rights of consumers
other fiscal principals.
• maintaining the stability of the finan-
A major component of the Federal
cial system and containing systemic
Reserve System is the Federal Open
risk that may arise in financial markets
Market Committee (FOMC), which is
• providing financial services to deposi-
made up of the members of the Board of
tory institutions, the U.S. government,
Governors, the president of the Federal
and foreign official institutions
Reserve Bank of New York, and presi-
The Federal Reserve is a federal sys- dents of four other Federal Reserve
tem composed of a central, governmen- Banks, who serve on a rotating basis.
tal agency—the Board of Governors— The FOMC establishes monetary policy
and twelve regional Federal Reserve and oversees open market operations,
Banks. The Board of Governors, located the Federal Reserve’s main tool for in-
in Washington, D.C., is made up of fluencing overall monetary and credit
seven members appointed by the Presi- conditions. The FOMC sets the federal
dent of the United States and supported funds rate, but the Board has sole au-
by a staff of about 1,850. In addition thority over changes in reserve require-
to conducting research, analysis, and ments and must approve any change in
policymaking related to domestic and the discount rate initiated by a Reserve
international financial and economic Bank.
matters, the Board plays a major role Two other groups play roles in the
in the supervision and regulation of the functioning of the Federal Reserve: de-
U.S. banking system and administers pository institutions, through which
most of the nation’s laws regarding con- monetary policy operates, and advisory
sumer credit protection. It also has broad councils, which make recommendations
oversight responsibility for the nation’s to the Board and the Reserve Banks
payments system and the operations and regarding System responsibilities.
activities of the Federal Reserve Banks. All federally chartered banks are, by
The Federal Reserve Banks, which law, members of the Federal Reserve
combine public and private elements, System. State-chartered banks may be-
are the operating arms of the central come members if they meet Board
banking system. They carry out a vari- requirements. Á
Contents
Monetary Policy and Economic Developments
3 MONETARY POLICY AND THE ECONOMIC OUTLOOK
5 Monetary Policy, Financial Markets, and the Economy in 2006 and Early 2007
6 Economic Projections for 2007 and 2008

9 ECONOMIC AND FINANCIAL DEVELOPMENTS IN 2006 AND EARLY 2007


10 The Household Sector
13 The Business Sector
17 The Government Sector
20 The External Sector
22 The Labor Market
24 Prices
26 U.S. Financial Markets
30 International Developments

35 MONETARY POLICY REPORT OF JULY 2006


35 Monetary Policy and the Economic Outlook
39 Economic and Financial Developments in 2006

Federal Reserve Operations


63 BANKING SUPERVISION AND REGULATION
63 Scope of Responsibilities for Supervision and Regulation
64 Supervision for Safety and Soundness
73 Supervisory Policy
83 Supervisory Information Technology
84 Staff Development
84 Regulation of the U.S. Banking Structure
88 Enforcement of Other Laws and Regulations
89 Federal Reserve Membership

91 CONSUMER AND COMMUNITY AFFAIRS


91 Implementation of Statutes Designed to Inform and Protect Consumers
96 Supervision for Compliance with Consumer Protection and
Community Reinvestment Laws
107 Consumer Complaints
109 Advice from the Consumer Advisory Council
111 Consumer Education and Research
113 Promotion of Community Economic Development and Access to Financial Services
in Historically Underserved Markets
119 FEDERAL RESERVE BANKS
119 Developments in Federal Reserve Priced Services
123 Developments in Currency and Coin
124 Developments in Fiscal Agency and Government Depository Services
126 Electronic Access to Reserve Bank Services
127 Information Technology
127 Examinations of the Federal Reserve Banks
128 Income and Expenses
129 Holdings of Securities and Loans
129 Volume of Operations
129 Federal Reserve Bank Premises
131 Pro Forma Financial Statements for Federal Reserve Priced Services

135 THE BOARD OF GOVERNORS AND THE GOVERNMENT PERFORMANCE


AND RESULTS ACT
135 Strategic Plan, Performance Plan, and Performance Report
135 Mission
135 Goals and Objectives

139 FEDERAL LEGISLATIVE DEVELOPMENTS


139 Financial Services Regulatory Relief Act of 2006
146 Unlawful Internet Gambling Enforcement Act of 2006
147 Military Personnel Financial Services Protection Act
148 Financial Netting Improvements Act of 2006

Records
151 RECORD OF POLICY ACTIONS OF THE BOARD OF GOVERNORS
151 Regulation D (Reserve Requirements of Depository Institutions)
151 Regulation E (Electronic Fund Transfers)
152 Regulation H (Membership of State Banking Institutions in the
Federal Reserve System) and Regulation Y (Bank Holding Companies and
Change in Bank Control)
152 Regulation K (International Banking Operations)
152 Regulation O (Loans to Executive Officers, Directors, and Principal Shareholders of
Member Banks)
152 Regulation Y (Bank Holding Companies and Change in Bank Control)
153 Regulation BB (Community Reinvestment)
153 Rules Regarding Equal Opportunity
153 Policy Statements and Other Actions
155 Discount Rates in 2006
157 MINUTES OF FEDERAL OPEN MARKET COMMITTEE MEETINGS
157 Authorization for Domestic Open Market Operations
159 Domestic Policy Directive
159 Authorization for Foreign Currency Operations
160 Foreign Currency Directive
161 Procedural Instructions with Respect to Foreign Currency Operations
161 Meeting Held on January 31, 2006
173 Meeting Held on March 27–28, 2006
181 Meeting Held on May 10, 2006
189 Meeting Held on June 28–29, 2006
197 Meeting Held on August 8, 2006
204 Meeting Held on September 20, 2006
211 Meeting Held on October 24–25, 2006
220 Meeting Held on December 12, 2006

229 LITIGATION

Federal Reserve System Organization


233 BOARD OF GOVERNORS

236 FEDERAL OPEN MARKET COMMITTEE

237 ADVISORY COUNCILS TO THE BOARD OF GOVERNORS


237 Federal Advisory Council
238 Consumer Advisory Council
239 Thrift Institutions Advisory Council

240 FEDERAL RESERVE BANKS AND BRANCHES


240 Officers of the Banks and Branches
241 Conference of Chairmen
241 Conference of Presidents
242 Conference of First Vice Presidents
242 Directors of the Banks and Branches

259 MEMBERS OF THE BOARD OF GOVERNORS, 1913–2006


Statistical Tables
264 1. Federal Reserve Open Market Transactions, 2006
268 2. Federal Reserve Bank Holdings of U.S. Treasury and Federal Agency Securities,
December 31, 2004–2006
269 3. Federal Reserve Bank Interest Rates on Loans to Depository Institutions,
December 31, 2006
270 4. Reserve Requirements of Depository Institutions, December 31, 2006
271 5. Banking Offices and Banks Affiliated with Bank Holding Companies
in the United States, December 31, 2005 and 2006
272 6. Reserves of Depository Institutions, Federal Reserve Bank Credit,
and Related Items
A. Year-End 1984–2006 and Month-End 2006
B. Year-End 1918–1983
280 7. Principal Assets and Liabilities of Insured Commercial Banks,
by Class of Bank, June 30, 2006 and 2005
281 8. Initial Margin Requirements under Regulations T, U, and X
282 9. Statement of Condition of the Federal Reserve Banks, by Bank,
December 31, 2006 and 2005
286 10. Income and Expenses of the Federal Reserve Banks, by Bank, 2006
290 11. Income and Expenses of the Federal Reserve Banks, 1914–2006
296 12. Operations in Principal Departments of the Federal Reserve Banks, 2003–2006
297 13. Number and Annual Salaries of Officers and Employees of the Federal Reserve
Banks, December 31, 2006
298 14. Acquisition Costs and Net Book Value of the Premises of the Federal Reserve
Banks and Branches, December 31, 2006

Federal Reserve System Audits


301 AUDITS OF THE FEDERAL RESERVE SYSTEM
303 BOARD OF GOVERNORS FINANCIAL STATEMENTS
321 FEDERAL RESERVE BANKS COMBINED FINANCIAL STATEMENTS
337 OFFICE OF INSPECTOR GENERAL ACTIVITIES
338 GOVERNMENT ACCOUNTABILITY OFFICE REVIEWS

340 MAPS OF THE FEDERAL RESERVE SYSTEM

345 INDEX