Following the extensive preparations undertaken for Y2K, the Bank experienced a very successful century date change weekend and subsequent "Leap Day" on February 29. Prior to the rollover, Bank staff played a critical role in ensuring that all of our customers had tested their interfaces with the Bank, as well as making our own internal applications Y2K-compliant.

From left (standing): Susan A. Sutherland, Senior Vice President Mark Mullinix, Executive Vice President Gordon R. G. Werkema, Executive Vice President Jack H. Beebe, Senior Vice President and Director of Research From left (seated): Terry S. Schwakopf, Executive Vice President Robert T. Parry, President John F. Moore, First Vice President

In May, the operations and administrative areas of the Bank were organized along functional lines, whereby staff within the same function in the five District offices now all report to the same senior officer, as opposed to the officer in charge of their Branch. This organizational change was undertaken to ensure that we are positioned to build on our strong performance over the last several years. Specifically, we sought to improve customer service and customer care, reduce our cost structure, and streamline decision making. Significant benefits from the reorganization were apparent by the third quarter, including reduced operating costs and faster business decisions.

Financial Services

The Bank experienced record increases in cash receipts volume in 2000, partly on account of the anticipated flow-back of Y2K-related currency early in the year. Throughout the rest of the year, however, receipts continued at a record pace, possibly signaling a shift in depository institutions' cash management practices. At the same time, Automated Clearing House (ACH) originations grew by 6.6 percent to comprise nearly 10 percent of the System's total ACH volume. Particularly noteworthy was the fact that the Bank exceeded its local net revenue target for priced services by $1 million and its target in Check Services alone by $875 thousand, increasing its Check net revenue contribution by more than $3.8 million over 1999's level. These accomplishments were the result of tight cost control and stepped-up efforts to market check services.

• In March, the Board of Governors approved the final design and project budget for the Phoenix Processing Center, which will improve the quality of cash services available to the Arizona market. By year-end, construction was well underway, and the building is on schedule to open in September 2001.
  
  
• As Enterprise-Wide Adjustments (EWA) project manager for the Federal Reserve System, the Bank successfully converted 17 Federal Reserve offices to the EWA platform and made significant enhancements to the EWA software, expanding its functionality and strengthening its contingency capabilities. EWA is a component of Check Modernization, a project designed to create an efficient check processing environment that includes stan-dard, centrally managed platforms for item processing, check adjustments, and image services, as well as web-based delivery of check services. The Bank also assumed responsibility on behalf of the System for supporting and enhancing the software that serves as the core for the standardized check processing platform, or Check Standardization, another component of the Check Modernization project.
  
  
• As part of a combined Treasury and Federal Reserve initiative to reduce the cost of fiscal operations and streamline the provision of services to customers, the Bank transferred to other Reserve Banks its long-standing Fiscal Agency functions - Treasury Tax and Loan, Treasury Auction, and Treasury Direct - while maintaining timely and orderly transactions and high quality customer service during these consolidations.

From left: Andrea P. Wolcott, Group Vice President, Salt Lake City Mark Mullinix, Executive Vice President, Los Angeles Gordon R. G. Werkema, Executive Vice President, Seattle Not pictured: Raymond H. Laurence, Senior Vice President, Portland

The Bank continued to work with the Treasury's Financial Management Service to support the Treasury Offset Program (TOP). Since its inception, TOP has recovered through offset a total of $5.65 billion that was returned to creditor federal agencies.

Economic Research

The Bank continued to pursue its long-term strategy of focusing resources on maintaining high standards of research in monetary policy and macroeconomics, banking, regulation, and regional studies, as well as international economics, with a special emphasis on the Pacific Basin.

• Research on U.S. monetary policy issues included several papers on various aspects of policy rules - such as an assessment of nominal income rules under uncertainty, rules as a reflection of policymakers' preferences, and the role of expectations in the instability of rules - as well as an exploration of the policy implications of a shift in trend productivity.
  
  
• Articles on banking and regulation included studies of the issues surrounding the separ-ation of banking and commerce, the benefits of expanded bank powers, and a study of the forecast performance of the implied correlations in exchange rate currency options. Staff also looked at regional and labor market issues, examining the cyclical and demographic influences on California's income distribution, as well as income and wage inequality in the U.S., and union effects on health insurance provision.
  
  
• Research in the international area focused mainly on Pacific Basin issues and included such topics as Japan's banking sector and regulatory policy, aspects of anticipating currency crises, macroeconomic performance under different exchange rate regimes, the continued feasibility of "soft" currency pegging arrangements, and the impact of capital controls.
  
  
• The Bank organized two conferences that addressed macro policy issues and were co-hosted with the Stanford Institute of Economic Policy Research at Stanford University. One conference focused on whether the U.S. economy has undergone a structural change and what the implications are for monetary policy, and the second offered different explanations of the recent behavior of the stock market.
  
  
• Nineteen research articles were accepted for publication, eleven of which were accepted in refereed journals. In addition, two volumes containing papers from conferences sponsored by the Bank were published or were in press. The requirement for publishing in the FRBSF Economic Review was reduced in order to increase the output of papers destined for refereed journals; in the process, the publication was revamped to focus on policy-related articles and updates on staff research, and the number of issues was reduced from three to one.
  
  
• The Bank studied the impact of rising energy prices on the Twelfth District economy, with a particular focus on the severe problems in the California electricity market.

Banking Supervision and Regulation

Check Modernization is comprised of four major projects: Check Standardization (CS), Enterprise-Wide Adjustments (EWA), Image Services System (ISS), and Electronic Access and Delivery (EA&D). Check Modernization will create an efficient check processing environment that includes standard, centrally managed platforms for item processing, check adjustments and image services, as well as web-based delivery of check services.

To provide effective oversight in the face of sweeping changes taking place in the financial services industry, the Bank continued to focus on enhancing its capacity to identify and address emerging supervisory risks.

• The Bank was successful in meeting the demands that resulted from the new powers granted under the Gramm-Leach-Bliley Act, which appointed the Federal Reserve as the "umbrella" supervisor of financial holding companies. The Bank realigned its resources and quickly adjusted to the new supervisory responsibilities created by the financial modernization legislation. The Charles Schwab Corporation, based in San Francisco, became one of the first in the country to apply for financial holding company status under the Act, resulting in the development of an innovative approach to assess enterprise-wide risk in financial holding companies where securities is the primary business.

• The Bank needed tools to monitor the risk associated with the high concentrations of commercial real estate loans found in the portfolios of Twelfth District institutions. Accordingly, a pilot commercial real estate market monitoring program was developed for select metropolitan areas to determine whether such a program would enhance the Bank's ability to assess credit risk. Successful completion of the pilot encouraged expansion of the program to include all the major markets in the District.

• In order to address the impact of economic developments in Asia on domestic and foreign banking organizations, the Bank continued to expand its international program by analyzing financial sector developments in key Asian countries, and providing technical assistance and training to Asian supervisory authorities. In addition, the Bank broadened its supervisory contacts and knowledge base in Europe.

• In the Community Affairs area, the Bank continued to encourage community development throughout the District by providing educational and partnership opportunities for financial institutions. As well as focusing on the Sovereign Lending initiative (see article on page 17), the Bank held quarterly Community Reinvestment Act (CRA) officer roundtables in nine Twelfth District cities, with attendance averaging over 200 financial institution participants per quarter. The Bank also had several successful outreach efforts, coordinating two meetings of the Association of Reinvestment Consortia for Housing in San Francisco and in Boston. The Bank also coordinated and co-sponsored, with the other bank regulatory agencies, the 2000 Community Reinvestment Conference in San Francisco.