The Federal Reserve faced significant challenges in all
of its primary areas of responsibilitymonetary policy, banking
supervision and regulation, and financial servicesin 2002. Some
of these challenges tend to be cyclical in nature. Othersmost
notably a general decline in check volume and the resulting need for
a wholesale change in our check processing infrastructureplace
us in untested waters. Like any business dealing with uncertainty and
rapid change, we must respond both quickly and carefully. Rigorous analysis
and operational excellence in pursuit of our goals are crucial in light
of the Federal Reserve's responsibilities and the public trust placed
The Bank's 2002 accomplishments demonstrate how we put these standards
into practice on a daily basis.
- The Bank met its 2002 local net revenue targets for Check and for
priced services overall. These results are noteworthy given the increase
in our targets from 2001 and the decline in check volumes. More generally,
the Bank met its budget objectives across all operations. Achieving
these results required all business areas to carefully manage expenses
throughout the year.
- As a result of extensive preparations in 2002, the Bank is now prepared
to convert to the new standard check processing environment, a major
undertaking given the volume of checks we process. This new system,
set for full nationwide implementation in 2003, will allow us to better
serve our customers and respond to changes in the marketplace for payment
services. The national Check Standardization project team, led by Minneapolis
staff, continued to successfully manage the project during 2002.
- The Bank was selected in 2002 as a Customer Contact Center, one of
only two sites across the Federal Reserve System that provide customer
support to financial institutions electronically accessing our financial
services. We were awarded this responsibility, in part, due to our established
record of excellent customer service and System leadership.
- We restructured the operations of our Helena Branch, consolidating
certain support areas with the main office in Minneapolis, to realize
greater efficiencies. These changes will allow us to respond more effectively
to the increasing cost pressures on our financial services businesses.
To remain competitive in the marketplace, we will strive to continue
to improve productivity across all of our operations.
- In our supervision of Ninth District financial institutions, we responded
effectively to the challenge of weakening banking conditions. We also
continued our efforts to incorporate market information into the supervisory
assessment of financial institutions' risk management processes.
- During 2002, the Bank pursued a number of research projects. In the
housing arena, we explored the so-called affordability crisis and questioned
the efficacy of policies that seek to increase homeownership through
small reductions in mortgage rates. In the economic development arena,
we explored how Hmong business owners in our district's largest metropolitan
area finance their activities and whether they have adequate access
to financial institutions. The results of this work are summarized in
this year's Annual Report essay.
The year 2002 presented a number of difficult challenges,
and the outlook for 2003 is no less daunting. Having met the challenges
of 2002 successfully, we will not rest on past accomplishments. Rather,
we will strive to continue to improve the quality and cost efficiency
of our operations.
In 2003, this Bank will assume the leadership of the Federal Reserve System's
Financial Services Policy Committee. Minneapolis Fed President Gary Stern
becomes chairman of this Systemwide group, which is responsible for oversight
of the Federal Reserve Banks' participation in the U.S. payments system.
This role offers us an opportunity to continue the Minneapolis Fed's tradition
of rigorous analysis and execution on a wide array of critical issues
in the future.
James M. Lyon
First Vice President