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Message from the First Vice President

2002 Annual Report: Operations Report

May 1, 2003


James M. Lyon First Vice President
Message from the First Vice President

The Federal Reserve faced significant challenges in all of its primary areas of responsibility—monetary policy, banking supervision and regulation, and financial services—in 2002. Some of these challenges tend to be cyclical in nature. Others—most notably a general decline in check volume and the resulting need for a wholesale change in our check processing infrastructure—place 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 in us.

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