Regional President Speech

Reserve Bank Governance Over Shared Activities Cathy E. Minehan Chair, Conference of Presidents Annual Meeting Reserve Bank Audit Committee Chairs Conference of General Auditors January 11, 2005

Agenda o Background o Governance Model o Governance Responsibilities o Governance Processes o Role of Reserve Bank Audit Committees o Questions 2

Background o Every District involved in shared activities o Impact ranges from 6% to nearly 60% of costs o Effect is two-way • Districts perform services for others • Districts receive services 3

Current Consolidation Realities $30.6 MILLION· 383 STAFF 23.1% OF TOTAL MINNEAPOLIS* 359 STAFF *SAN FRANCISCO 12.8% OF TOTAL 5.4% OF TOTAL $17.7 MILLION• 90 STAFF 6.4% OF TOTAL $16.3 MILLION 138 STAFF KANSAS CITY* 13.4% OF TOTAL *ST. LOUIS $31.l MILLION 373 STAFF 18% OF TOTAL 31.3% OF TOTAL DALLAS* $19.l MILLON • 144 STAFF TOTAL 12.3% OF TOTAL $673 MILLION (25.2%) 3,400 STAFF (16.0%) MORE THAN 100 CONSOLIDATED AND NATIONAL SERVICES 4

Background o What is the role of Presidents, directors in this process? How are decisions made? What management and governance models apply? o Check Infrastructure Decisions in 2002/03 o Strategic Direction Project of the Conference of Presidents • Completed in 2004 • Governance a key focus 5

Governance Model o Reserve Banks are separate legal entities, but must work together o Board of Governors provides oversight; Reserve Bank boards of directors have fiduciary duty o Presidents are CEO's; by law and through delegation from their boards they can make vast majority of decisions related to Reserve Bank operations o They can choose to make decisions regarding shared activities through the Conference of Presidents and its Committee structure; they have done so since at least 1936 6

Governance Model o Exception: Decisions related to strategic direction or material matters must have explicit board of directors involvement and agreement • Strategic and material not explicitly defined; will vary • Boards can authorize President to vote, or can require him/her to come back for approval • "Opt-out" is possible, but not desirable; "Opt in" is best • All parties - Presidents, boards, Board of Governors - must work together o Clear, timely communication is critical • From System entities to the Conference of Presidents when major matters being considered • Among Presidents • Between Presidents and their boards 7

Governance Responsibilities o Presidents • Ensure boards are up-to-date on major System initiatives • Communicate early and often • Bring board concerns about any major matters to the Conference of Presidents • Reflect a duty of loyalty to the Bank while ensuring the public interest is served • Evaluate both what the Bank does for others and what others do for the Bank and discuss with board of directors as necessary 8

Governance Responsibilities o Boards of Directors • Understand their responsibilities for strategic and material decisions • With the President, define "strategic" and "material" for the Bank • Receive and discuss communications from the President and from the Conference of Presidents about strategic and material items • Work with President to develop Bank's position on particular material and strategic matters, reflecting the Bank's own concerns and the public interest • Receive and discuss reports on services provided and received by the Bank Work with the President and Bank management to resolve service or operational problems 9

Governance Processes o Service Agreements • Will define both governance of and annual operational targets for shared activities • Will include provisions for timely communication of significant risk and control issues, as well as the annual assertion on the adequacy of financial reporting goals • Currently in draft form for the Wholesale Product Office, and in development for Retail, Cash and other offices as well as FRIT o COP Guidelines • Will define decision-making process, i.e. what is a quorum, etc. • In draft form; will be discussed at COP meeting February 15-16 10

Governance Processes o COP Communication • Board chairs will now receive COP agendas, statements of action, minutes • Have already received 2005 draft COP Objectives • More routine communication may be necessary o Governance Review by Conference of Chairmen • Conference of Chairmen reviewed and accepted governance document in December 2004 • Process is scheduled for discussion by the Chairmen in June; changes if any would be discussed in December 11

Role of the Audit Committee o Audit Committees typically have close oversight of Bank operations • Internal audit reports • External auditor interaction • Whistle-blower procedures o Governance processes will introduce formal service agreements 12

Role of the Audit Committee o Should Audit Committees oversee performance under these agreements? • Primary oversight will be done by Bank management • There is overlap with existing Audit Committee work • Might be overload for the Audit Committee; involving another Committee or the full board could be useful • In the end, the President and the board should decide o Audit Committee role o New Committee; some examples here o Role of full board 13