Message from the First Vice President

The evolving financial markets and payments systems continue to influence the Federal Reserve System's operations. Increased competition in financial services and further consolidation in the banking and financial industries have accelerated the need for Reserve Banks to reduce operating costs in their payments services and support activities. Moreover, the shift from paper-based checks to electronic alternatives has adversely affected Reserve Bank check-processing volumes. This shift has also created significant new opportunities for the System to advance its goal of increasing the safety and efficiency of the nation's payments system.

In response to these changes, the Federal Reserve Bank of Minneapolis pursued financial and operational strategies directed at ensuring that all System objectives were met while also maximizing the Bank's operational efficiency and quality of service delivery. The Bank's many and varied accomplishments in 2004 demonstrate our effectiveness at carrying out our broad responsibilities and ensuring that we maintain the public trust placed in us.

• The Bank met all of its 2004 financial objectives. Operational efficiency and quality across most of the Bank's financial services improved relative to 2003. For the fourth consecutive year, District Check exceeded its local net revenue target. These results are noteworthy given the significant increase in the Bank's net revenue target, additional challenges posed by operational conversions and declining check volumes. More broadly, the Bank met its budget objectives, and virtually every function had an underrun in normal operating costs.

• In 2004, the Bank continued its leadership of the Federal Reserve System's payments policy-making arm, the Financial Services Policy Committee. During the year, the FSPC made decisions to further consolidate and downsize its check-processing infrastructure, develop a new long-term strategic direction for Check Services to ensure full cost recovery and expand investments in its electronic payments services. The decisions recognize that the retail payments systems are rapidly changing and that Reserve Banks must be positioned to both address these changes and play an integral role in the development of new products and services. In concert with FSPC objectives, the System launched its new Web-based customer access system, FedLine Advantage, which combines the benefits of Web technology and customer functionality while maintaining stringent security standards.

• The Bank's responsibilities on behalf of the Federal Reserve System also include services in support of the U.S. Treasury. During 2004, Minneapolis staff completed all planned phases related to the first-year consolidation plans for Treasury Retail Securities. Of particular note was the hiring and training of 88 new employees. Minneapolis will be one of two national consolidated sites that handle all retail Treasury securities assigned to the Federal Reserve System. The Minneapolis FedImage Archive was also selected to serve as the primary storage site for images of U.S. Treasury checks processed within the System.

• In response to the ongoing consolidation of the financial services industry and the growing complexity of financial institutions and their activities, Supervision and Regulation sharpened its focus on core bank supervisory responsibilities in 2004. Noteworthy changes included greater emphasis on strengthening staff expertise, development of new work tools and enhanced supervisory processes through a Bank Secrecy Act project that included enhanced off-site monitoring and BSA risk assessment on all state member banks.

• Effective risk management is a key element of the Federal Reserve System's continuing success. In 2004, the Bank undertook significant new initiatives related to enterprise risk management, adoption of the Committee of Sponsoring Organizations expanded management attestation requirements, and the transition to the System's new Information Security standards. In addition, the Audit Committee of the Board of Directors established a dedicated hotline, administered by an independent third party, to receive on a confidential, anonymous basis any concerns regarding financial statement disclosures, internal accounting controls or auditing matters.

• The Bank's commitment to economic research was recognized when Edward Prescott, a long-term adviser to the Bank, was awarded the Nobel Prize in economics. In awarding the prize to Prescott, the Nobel Committee noted that he made fundamental contributions to understanding the driving forces behind business cycle fluctuations and the design of economic policy and that his work had influenced the practice of monetary and fiscal policy in many countries. Over the course of 2004, economists gave presentations on a broad range of economic issues, including the importance of early childhood education and the risks of the current deposit insurance framework. The Region, the Bank's highly regarded publication on banking and economic policy issues, published interviews with Federal Reserve Board Governor Ben S. Bernanke, Harvard economist Claudia Goldin and European Central Bank President Jean-Claude Trichet.

The Bank's performance in 2004 reflects the collective effort and energy of our employees and our Board of Directors. Working together, we will continue to develop strategies to ensure that the Bank is positioned to respond effectively to changes in the financial markets and payments systems, while at the same time carrying out the Federal Reserve System's mission to maintain a stable price environment and to ensure the safety and soundness of the nation's financial system.

James M. Lyon
First Vice President