[Federal Register Volume 61, Number 233 (Tuesday, December 3, 1996)]
[Notices]
[Pages 64087-64097]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-30705]
-----------------------------------------------------------------------
FEDERAL RESERVE SYSTEM
[Docket No. R-0941]
Federal Reserve Bank Services; Notice
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Notice.
-----------------------------------------------------------------------
SUMMARY: The Board has approved a private sector adjustment factor
(PSAF) for 1997 of $101.5 million, as well as the fee schedules for
Federal Reserve priced services and electronic connections. These
actions were taken in accordance with the requirements of the Monetary
Control Act of 1980, which requires that, over the long run, fees for
Federal Reserve priced services be established on the basis of all
direct and indirect costs, including the PSAF.
DATES: The PSAF and the fee schedules become effective on January 2,
1997.
FOR FURTHER INFORMATION CONTACT: For questions regarding the private
sector adjustment factor: Elizabeth Tacik, Accountant, (202/452-2303),
Division of Reserve Bank Operations and Payment Systems; for questions
regarding the fee schedules: Julius Weyman, Financial Services Analyst,
Check Payments, (202/452- 5223), Scott Knudson, Senior Financial
Services Analyst, ACH Payments, (202/452-3959), Darrell Mak, Financial
Services Analyst, Funds Transfer and Book-Entry Securities Services,
(202/452-3223), Anne Paulin, Senior Information Technology Analyst
(electronic connections), (202/452-2560), Michael Bermudez, Financial
Services Analyst, Noncash Collection Service, (202/452-2216), or Kate
Connor, Senior Financial Services Analyst, Special Cash Services, (202/
452-3917), Division of Reserve Bank Operations and Payment Systems. For
users of Telecommunications Device for the Deaf (TDD) only, please
contact Dorothea Thompson (202/452-3544).
Copies of the 1997 fee schedules for the check, automated clearing
house (ACH), funds transfer and net settlement, book-entry securities,
noncash collection, and special cash services, as well as electronic
connections to Reserve Banks, are available from the Reserve Banks.
SUPPLEMENTARY INFORMATION:
I. Private Sector Adjustment Factor
A. Overview
The Board has approved a 1997 PSAF for Federal Reserve priced
services of $101.5 million. This amount represents an increase of $15.7
million or 18.3 percent from the PSAF of $85.8 million targeted for
1996.
As required by the Monetary Control Act (12 U.S.C. 248a), the
Federal Reserve's fee schedule for priced services includes ``taxes
that would have been paid and the return on capital that would have
been provided had the services been furnished by a private business
firm.'' These imputed costs are based on data developed in part from a
model comprised of the nation's 50 largest (in asset size) bank holding
companies (BHCs).
The methodology first entails determining the value of Federal
Reserve assets that will be used in producing priced services during
the coming year. Short-term assets are assumed to be financed by short-
term liabilities; long-term assets are assumed to be financed by a
combination of long-term debt and equity derived from the BHC model.
Imputed capital costs are determined by applying related interest
rates and rates of return on equity (ROE) derived from the bank holding
company model. The rates drawn from the BHC model are based on
consolidated financial data for the 50 largest BHCs in each of the
[[Page 64088]]
last five years. Because short-term debt, by definition, matures within
one year, only data for the most recent year are used for computing the
short-term debt rate.
The PSAF comprises capital costs, imputed taxes, expenses of the
Board of Governors related to priced services, and an imputed FDIC
insurance assessment on clearing balances held with the Federal Reserve
to settle transactions.
B. Asset Base
The estimated value of Federal Reserve assets to be used in
providing priced services in 1997 is reflected in Table A-1. Table A-2
shows that the assets assumed to be financed through debt and equity
are projected to total $623.5 million. As shown in Table A-3, this
represents a net decrease of $13.8 million or 2.2 percent from 1996.
This decrease results from lower priced asset base levels at the
Federal Reserve Automation Services (FRAS), slightly offset by an
increase in the Reserve Banks' priced asset base due to building
projects in three districts and increased long-term prepayments.
C. Cost of Capital, Taxes, and Other Imputed Costs
Table A-3 shows the financing and tax rates as well as the other
required PSAF recoveries proposed for 1997 and compares the 1997 rates
with the rates used for developing the PSAF for 1996. The pre-tax
return on equity rate increased from 14.2 percent in 1996 to 19.1
percent for 1997. The increase is a result of stronger 1995 BHC
financial performance included in the 1997 BHC model, which replaces
the 1990 BHC financial performance in the 1996 BHC model.
The decrease in the FDIC insurance assessment from $2.2 million in
1996 to $2.0 million in 1997, as shown in Table A-3, is attributable to
the impact of the new lower rate for deposit insurance. The FDIC rate
for adequately capitalized institutions of $0.04 on every $100 in
clearing balances was reduced to $0.03 in January 1996.
D. Capital Adequacy
As shown on Table A-4, the amount of capital imputed for the
proposed 1997 PSAF totals 32.6 percent of risk-weighted assets and 4.1
percent of total assets. While the capital to risk-weighted asset ratio
is well in excess of the 8 percent capital guideline for adequately
capitalized state member banks and BHCs, the Federal Reserve is treated
as an adequately capitalized bank for FDIC assessment purposes based on
its capital to total asset ratio.
II. Priced Services
A. Overview
Over the period 1986 through 1995, the Reserve Banks recovered
100.1 percent of their total costs of providing priced services,
including special project costs that were budgeted for recovery and
targeted after-tax profit, i.e., ROE.1 2 Because the revenue from
the Reserve Banks' priced services recovers imputed costs that are not
actually incurred, the Federal Reserve's provision of priced services
has consistently had a positive effect on the level of earnings
transferred by the Federal Reserve to the Treasury. Over the past 10
years, priced services revenue has exceeded operating costs by more
than $872 million. This net revenue contributes to the amount
transferred to the Treasury. Table 1 summarizes the cost and revenue
performance for priced services since 1986.
---------------------------------------------------------------------------
\1\ The Monetary Control Act requires that, over the long run,
the Federal Reserve set fees for priced services to recover all
direct and indirect costs of providing the services plus imputed
costs, such as taxes that would have been paid and the return on
capital that would have been earned had the services been provided
by a private business firm. The targeted ROE is the budgeted after-
tax profit that the Federal Reserve would have earned, as required
by law, had it been a private business firm. The targeted ROE is
derived from the BHC model based on consolidated financial data for
each of the last five years.
\2\ Certain offsets to costs and certain costs are treated
differently in the pro forma income statement for Federal Reserve
priced services that is published in the Board's Annual Report than
they are for purposes of setting fees. For example, offsets to costs
associated with the transition to and retroactive application of the
Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 87 (SFAS 87), pension accounting, and SFAS
106, other post-retirement employee benefits accounting, have not
been considered in setting fees for priced services. Under the
procedures used to prepare the pro forma income statement, the
Reserve Banks recovered 100.7 percent of the expenses incurred in
providing priced services, including targeted ROE, from 1986 through
1995.
---------------------------------------------------------------------------
During 1994 and 1995, the Reserve Banks did not fully recover their
targeted ROE due primarily to declining check volumes resulting from
the new same-day settlement rule. In response to declining volumes, the
Reserve Banks adjusted the resources devoted to the check service and
increased prices selectively. In 1996, the Reserve Banks estimate that
priced services revenue will yield an after-tax net income of $55.6
million, compared with a targeted return on equity of $36.6 million.
The 1996 recovery rate is estimated to be 102.4 percent of the costs of
providing priced services, including imputed expenses, automation
consolidation special project costs budgeted for recovery, and targeted
ROE.3 Approximately $26.8 million in automation consolidation
special project costs will be recovered in 1996, leaving $30.8 million
in accumulated costs to be financed and recovered in future
years.4
---------------------------------------------------------------------------
\3\ Through August 1996, the Reserve Banks recovered 103.2
percent of total priced services expenses, including automation
consolidation special project costs and targeted ROE.
\4\ Under an existing Board policy, the Reserve Banks may defer
and finance development costs if the development costs would have a
material effect on unit costs, provided that a conservative time
period is set for full cost recovery and a financing factor is
applied to the deferred portion of development costs. The 1996 and
1997 financing rates are 12.0 and 15.1 percent, respectively, which
are the weighted-average imputed costs of the Federal Reserve's
long-term debt and equity. This methodology is similar to the
approach a private firm would use in financing such costs. Starting
in 1992, the Reserve Banks deferred and financed special project
costs for automation consolidation that were associated with
employee retention and severance and excess mainframe computer
capacity. Each priced service is expected to recover fully its
portion of these deferred expenses and accumulated finance charges
within five years after that service has completed its transition to
the consolidated automation environment. Most services have been
able to recover these expenses more quickly than the five-year
deadline.
---------------------------------------------------------------------------
The variation from the Reserve Banks' original budget is
attributable to two factors. First, volumes have been higher than
expected in the funds transfer, book-entry securities transfer, and
noncash collection services, resulting in higher net revenue. Second,
costs have been lower than budgeted in the funds transfer and automated
clearing house (ACH) services, largely due to efficiency gains from
automation consolidation.5
---------------------------------------------------------------------------
\5\ The Reserve Banks have substantially completed the transfer
of mainframe computer operations to the System's consolidated data
centers, managed by the Federal Reserve Automation Services (FRAS)
and also have completed significant milestones in the centralization
of certain key software applications, such as ACH, Fedwire funds
transfers, and the Integrated Accounting System.
---------------------------------------------------------------------------
In 1997, the Reserve Banks project to recover 100.5 percent of
total expenses, including special project costs and targeted ROE. The
proposed 1997 fees for priced services will yield a projected net
income of $49.8 million for the year, compared with a targeted ROE of
$45.8 million. Approximately $27.7 million of automation consolidation
special project expenses will be recovered, leaving an accumulated
balance of special project costs of $22.0 million to be recovered in
future years. The Reserve Banks have indicated that the most
significant risk associated with the proposed fee schedules is the
uncertainty of 1997 volume estimates given the current competitive
environment and the effects of interstate branch banking.
Overall, prices across all services are projected to decline by
approximately
[[Page 64089]]
3.4 percent in 1997, reflecting increases in paper-based check product
prices and selected electronic access fees, price reductions for ACH,
Fedwire funds transfers, and selected electronic check products, and
stable prices for the book-entry securities transfer and noncash
collection services.6
---------------------------------------------------------------------------
\6\ This estimate is based on a chained Fisher Ideal price
index. This index was not adjusted for quality changes in Federal
Reserve priced services. Because the index was not adjusted for
quality and due to data deficiencies in certain electronic services,
the index may overstate the price effects of paper-based services.
Generally, processing costs (and hence prices) have risen in
services that are paper-based, such as check collection, but have
declined in those services that are mostly electronic, such as ACH,
funds transfer, and check payor bank services.
\7\ Calculations on this table and subsequent pro forma cost and
revenue tables may be affected by rounding.
Table 1. \7\--Pro Forma Cost and Revenue Performance a
[$ millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
2 Operating 7 Recovery 8 Special
costs & 3 Special 4 Total 5 Net rate after project
Year 1 Revenue b imputed project expense income ROE 6 Target target ROE costs
expenses c costs [2+3] [1-4] ROE e (percent) deferred &
recovered d [1/(4+6)] financed f
--------------------------------------------------------------------------------------------------------------------------------------------------------
1986............................................ 627.7 571.6 0.0 571.6 56.1 27.3 104.8 0.0
1987............................................ 649.7 598.2 0.0 598.2 51.5 29.3 103.5 0.0
1988............................................ 667.7 641.1 3.2 644.3 23.4 32.7 98.6 0.0
1989............................................ 718.6 692.1 4.6 696.7 21.9 32.9 98.5 0.0
1990............................................ 746.5 698.1 2.8 700.9 45.6 33.6 101.6 0.0
1991............................................ 750.2 710.0 1.6 711.6 38.6 32.5 100.8 0.0
1992............................................ 760.8 731.0 11.2 742.2 18.6 26.0 99.0 1.6
1993............................................ 774.5 722.4 27.1 749.5 25.0 24.9 100.0 12.5
1994............................................ 767.2 748.3 8.8 757.1 10.1 34.6 96.9 33.9
1995............................................ 765.2 724.0 19.8 743.8 21.4 31.5 98.7 36.3
1996 (Est)...................................... 810.4 728.0 26.8 754.8 55.6 36.6 102.4 30.8
1997 (Bud)...................................... 813.9 736.4 27.7 764.1 49.8 45.8 100.5 22.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
a The revenues and expenses for 1986 through 1993 include the definitive securities safekeeping service, which was discontinued in 1993. The table
includes revised revenue and expense data for 1992 and 1993.
b Beginning in 1987, net income on clearing balances is included in revenue.
c Imputed expenses include interest on debt, taxes, FDIC insurance premiums, and the cost of float. Credits for prepaid pension costs under SFAS 87 and
the charges for post-retirement benefits in accordance with SFAS 106 are included beginning in 1993.
d Special project costs include research and development expenses for evaluating a different computer processing platform for electronic payments from
1988 through 1990, check image project costs from 1988 through 1993, and automation consolidation costs from 1992 through 1997.
e Targeted ROE is based on the ROE included in the private sector adjustment factor and has been adjusted for taxes, which are included in column 2.
Targeted ROE has not been adjusted to reflect automation consolidation special project costs deferred and financed.
f Totals are cumulative and include financing costs.
B. Check--Table 2 presents the actual 1995, estimated 1996, and
projected 1997 cost recovery performance for the check service.
Table 2.--Check Pro Forma Cost and Revenue Performance
($ millions)
--------------------------------------------------------------------------------------------------------------------------------------------------------
8 Special
2 3 Special 7 Recovery project
Operating project 4 Total 5 Net 6 Target rate after costs
Year 1 Revenue costs and costs expense income ROE target ROE deferred
imputed recovered [2+3] (ROE) [1- (percent) and
expenses 4] [1/(4+6)] financed
--------------------------------------------------------------------------------------------------------------------------------------------------------
1995............................................ 574.0 558.9 5.3 564.2 9.8 24.0 97.6 12.4
1996 (Est)...................................... 605.1 569.7 6.5 576.2 28.9 28.0 100.1 10.4
1997 (Bud)...................................... 616.7 572.9 7.5 580.4 36.3 35.3 100.2 7.4
--------------------------------------------------------------------------------------------------------------------------------------------------------
1. 1995 Performance
The check service recovered 97.6 percent of total expenses in 1995,
including targeted ROE. The volume of checks collected decreased 5.3
percent from 1994 levels, as volume losses associated with bank
consolidations and the implementation of the same-day settlement
regulation continued. In 1995, however, volume losses were less
substantial than the double-digit losses that accompanied the
introduction of the same-day settlement regulation in 1994. Return item
volume increased 3.8 percent in 1995 compared to 1994 levels.
2. 1996 Performance
Through August 1996, the check service recovered 101.2 percent of
total expenses, including automation consolidation special projects
costs budgeted for recovery and targeted ROE. The Reserve Banks
estimate that they will recover 100.1 percent of their costs for the
full year, compared with the targeted 1996 recovery rate of 100.0
percent. Check collection volumes appear to be stabilizing compared to
the relatively significant volume losses in 1994 and 1995. The Reserve
Banks now project that the volume of checks collected during 1996 will
decline by 0.4 percent from 1995 levels, reflecting a 1.6 percent
increase in processed volume and a 9.1 percent decrease in
[[Page 64090]]
fine sort volume. Return item volume is estimated to increase by 2.9
percent.
3. 1997 Issues
The total number of interbank checks will likely continue to
decline as banks merge when interstate branch banking becomes effective
nationwide in June 1997 and as banks continue to consolidate their
payment processing operations. In addition, other service providers in
the interbank check processing market are expected to compete
aggressively for check collection and returned check volume. The
Reserve Banks project modest volume increases in 1997 despite the
challenges posed by this environment. Total forward check collection
volume is expected to increase by 0.7 percent in 1997, reflecting a
projected increase of 1.9 percent in processed volume and a decrease of
5.5 percent in fine sort volume. Returned check volume is expected to
increase 0.4 percent.
The Reserve Banks continue to take steps to improve the efficiency
of their check processing operations. For example, on October 15, the
Federal Reserve Bank of New York closed its Regional Check Processing
Center in Jericho, New York, and consolidated those operations at its
East Rutherford (New Jersey) Operations Center. In addition, the New
York Bank is centralizing the processing of adjustments at its Utica,
New York, Regional Check Processing Center. In addition, on October 27,
the System's Interdistrict Transportation Service (ITS) moved one of
its five airport hubs from Teterboro, New Jersey, to Philadelphia,
Pennsylvania. This move allows for improvements in deposit deadlines
and funds availability for many depositors.
The Reserve Banks will continue to promote electronic check
products that are designed to increase operating efficiency and improve
the speed of the check collection system. For example, Reserve Banks
are expanding the range of deposit products that use electronic cash
letters (ECL). The expanded use of these deposit products is expected
to improve the efficiency of the Reserve Banks' operations and may
ultimately contribute to efficiencies in paying banks' operations by
reducing rejects and minimizing adjustments.
The Reserve Banks also are expanding their image-enhanced check
products, which have the potential to increase the use of electronic
check presentment and to reduce the risks associated with it. At
present, 19 Reserve Bank offices offer image-enhanced products; in
1997, 34 Reserve Bank offices plan to offer these products.
Total check service operating costs plus imputed expenses are
projected to increase by $3.2 million, or 0.6 percent above estimated
1996 expenses.
4. 1997 Fees
The Reserve Banks are continuing the steps taken over the last
several years to set check fees to reflect more accurately the fixed
and variable costs associated with providing check services. The 1997
fees and product offerings are intended to encourage the use of
electronics and to improve the efficiency of the check collection
mechanism. Table 3 summarizes key check service fees.
Table 3.--Selected Check Fees
------------------------------------------------------------------------
Products 1996 price ranges 1997 price ranges
------------------------------------------------------------------------
Items: (per item) (per item)
Forward processed:
City................ $0.003 to 0.080..... $0.003 to 0.080.
RCPC................ $0.003 to 0.079..... $0.004 to 0.090.
Fine sort:
City................ $0.003 to 0.012..... $0.003 to 0.012.
RCPC................ $0.002 to 0.017..... $0.003 to 0.017.
Qualified return items:
City................ $0.100 to 1.110..... $0.160 to 1.110.
RCPC................ $0.120 to 1.560..... $0.017 to 1.560.
Raw return items:
City................ $0.580 to 4.000..... $0.580 to 4.000.
RCPC................ $0.900 to 4.000..... $0.650 to 4.000.
Cash letters: (per cash letter) (per cash letter)
Forward processed....... $1.500 to 9.000..... $1.500 to 9.000.
Forward fine-sort $2.500 to 11.000.... $2.500 to 13.000.
package.
Return items: raw and $1.500 to 8.000..... $1.500 to 7.000.
qualified.
Payor bank services: Min Per item... Min Per item
MICR information........ $5-$30 $0.001-0.005 $5-$30 $0.001-0.005
0. 0.
Electronic presentment.. $3-$14 $0.001-0.004 $3-$14 $0.001-0.004
5. 5.
Truncation.............. $3-$25 $0.010-0.017 $3-$25 $0.010-0.017
0. 0.
------------------------------------------------------------------------
Overall, 1997 fees for forward collection products will increase by
about 1.8 percent on a volume-weighted basis, compared with January
1996 prices. For returned check products, the increase is 2.6 percent.
The most significant increases are in fine sort fees, which are
increasing by 7.8 percent.
Fees for electronic check services will decline or remain stable.
These fees include per-item fees for the Reserve Banks' electronic
check presentment and payor bank information products as well as for
ECL products. On average, the fees assessed for deposits made with a
matching ECL file will result in per-item charges that are $0.002 less
than the same deposit received without an accompanying ECL file. This
price differential reflects the potential efficiencies from processing
checks in conjunction with ECL data. Payor bank services revenue is
expected to increase by 13.9 percent, primarily due to more widespread
acceptance of electronic check presentment and image-enhanced check
products.
For the first time since 1993, the Reserve Banks will change some
ITS fees. For 1997, ITS fees will increase about 11 percent on a
volume-weighted basis. The price changes are designed to reflect more
accurately the cost of servicing certain low-volume and remote routes.
Fees for 12 percent of the routes, representing 47 percent of the check
volume carried on ITS, will remain unchanged. The Reserve Banks are
investigating, for possible implementation during 1997, alternative fee
structures for the ITS.
[[Page 64091]]
The Reserve Banks project that the check service will recover 100.2
percent of total costs in 1997, including targeted ROE and $7.5 million
in automation consolidation special project costs. Approximately $7.4
million in accumulated automation consolidation special project costs
will be deferred and financed for recovery in future years.
The Reserve Banks continue to take steps to control costs, and
their volume projections for 1997 are relatively conservative. It is
difficult, however, to project the effect of interstate branch banking
on the Reserve Banks' check service. The Board believes that steps
could be taken during 1997 to reduce operating costs if volume
projections were not realized. The Board approved the proposed 1997
check service fees, including ITS fees, and the deposit deadlines.
C. Automated Clearing House (ACH)
Table 4 presents the actual 1995, estimated 1996, and projected
1997 cost recovery performance for the commercial ACH service.
Table 4.--ACH Pro Forma Cost and Revenue Performance
[$ millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
2 7 Recovery 8 special
Operating 3 Special 4 Total 5 Net rate after project
Year 1 Revenue costs & project expense income 6 Target target ROE costs
imputed costs [2+3] (ROE) [1- ROE (percent) deferred &
expenses recovered 4] [1/(4+6)] financed
--------------------------------------------------------------------------------------------------------------------------------------------------------
1995............................................ 75.6 66.6 4.0 70.6 5.0 3.1 102.6 21.3
1996 (Est)...................................... 79.8 63.6 9.2 72.8 7.0 3.6 104.5 16.7
1997 (Bud)...................................... 75.4 59.9 11.1 71.0 4.3 4.0 100.5 10.8
--------------------------------------------------------------------------------------------------------------------------------------------------------
1. 1995 Performance
Revenues from the ACH service recovered 102.6 percent of total
expenses, including automation consolidation special project costs and
targeted ROE, during 1995. The overrecovery was due primarily to
higher-than-expected growth in commercial ACH volume. Commercial volume
increased 17.8 percent, compared to a projected growth rate of 12.9
percent. As a result, total ACH revenue was 6.7 percent above target.
2. 1996 Performance
Through August 1996, the ACH service recovered 104.6 percent of
total expenses, including automation consolidation special project
costs budgeted for recovery and targeted ROE. The Reserve Banks
estimate that they will recover 104.5 percent of their costs for the
full year, compared with the targeted 1996 recovery rate of 100.0
percent. This overrecovery is attributable primarily to lower-than-
expected data processing costs resulting from the efficiencies realized
with the new Fed ACH application software. The conversion to Fed ACH
began in late 1995 and was completed in August 1996.
On October 1, the Reserve Banks implemented a number of changes to
their ACH fees and products, which were approved under delegated
authority by the Director of the Board's Division of Reserve Bank
Operations and Payment Systems. The changes included combining the
interregional and intraregional fee into one basic fee of $0.01 per
item, representing a 16.7 percent reduction from the former $0.012
interregional fee; reducing the presort deposit fee by 10 percent to
0.9 cent from 1.0 cent; and eliminating the interregional and presort
deposit deadlines, as well as one local deposit deadline. The reduction
in fees is expected to result in substantial savings to the banking
industry, and the changes in the deadlines will provide originators of
ACH transactions an additional one to one and one-half hours of
processing time.
Through August, commercial ACH volume has increased 16.1 percent
over the 1995 level. For the full year, the Reserve Banks expect
commercial volume to increase 15.2 percent, compared to the 17.5
percent increase originally projected. The revised projection reflects
the effect of consolidation in the banking industry and some increased
use of private-sector processors.
3. 1997 Issues
1997 will be the first full year that all Reserve Banks operate in
the Fed ACH environment. The projected reduction in ACH operating costs
reflects the expected cost savings that should be realized from
centralized processing. Beginning in January 1997, several new features
will be made available to depository institutions, including additional
file delivery options and automated trace and research request
capabilities. The projected volume growth rate of 18.5 percent is very
aggressive in light of 1996 volume estimates. The Reserve Banks
believe, however, that Federal Reserve and industry marketing efforts
will spur commercial ACH volume growth. Moreover, the recent
requirement that most federal government payments be made
electronically by January 1999 may indirectly increase commercial ACH
volume.8
---------------------------------------------------------------------------
\8\ The Debt Collection Improvement Act of 1996 mandates the use
of electronic funds transfers for federal government payments to
recipients who become eligible after July 26, 1996. The Act also
mandates that all federal government payments, with limited
exceptions, be made electronically after January 1, 1999.
---------------------------------------------------------------------------
4. 1997 Fees
The new Fed ACH processing environment is expected to enable the
Federal Reserve to realize significant operating efficiencies. The
Board has approved several fee reductions effective January 1997. These
changes support the System's strategic direction of moving from a
paper-based to an electronic payments system and recognize the
technological and operational changes implemented during the past year.
Table 5
------------------------------------------------------------------------
Proposed 1997
Fee category Current fee fee
------------------------------------------------------------------------
Premium surcharge.................. $0.01 $0.005
Addenda fee........................ 0.004 0.003
Discrete/commingled file fee....... 10.00 Eliminate.
------------------------------------------------------------------------
As Table 5 indicates, the Reserve Banks will reduce the premium
surcharge by 50 percent on items deposited after 8:00 p.m. Eastern
Time. Reducing the premium cycle surcharge recognizes the improvements
made in the Federal Reserve's processing of ACH transactions that
reduce operational and
[[Page 64092]]
float risk. The Reserve Banks will continue to review originating
institutions' deposit patterns to determine whether the current premium
deposit deadline can be extended. In addition, the Reserve Banks will
reduce the fee for addenda records by $0.001, or 25 percent. The
reduction in the addenda record fee is intended to promote the use of
electronic payments for financial electronic data interchange
applications. Finally, the Reserve Banks will eliminate the monthly
discrete/commingled file receipt fee. The discrete/commingled file fee,
which is charged to receiving points that receive multiple files
segregated by routing number, is being eliminated because of the new
delivery features that are available in Fed ACH.
In addition to the above changes, the Reserve Banks plan to propose
a new fee schedule during 1997 that fully reflects the efficiencies of
the Fed ACH processing environment.
To determine the nature and extent of the expected efficiencies,
the Reserve Banks are studying their processing costs in the new
environment. It is anticipated that, under delegated authority, the
Director of the Board's Division of Reserve Bank Operations and Payment
Systems will be requested to approve a new ACH fee schedule by mid-
1997.
The Reserve Banks project that the ACH service will recover 100.5
percent of its 1997 costs, including $11.1 million in automation
consolidation special project costs and targeted ROE. Approximately
$10.8 million in automation consolidation special project costs will
continue to be deferred and financed for recovery in future years.
D. Funds Transfer and Net Settlement
Table 6 presents the actual 1995, estimated 1996, and projected
1997 cost recovery performance for the funds transfer and net
settlement service.
Table 6.--Funds Transfer and Net Settlement Pro Forma Cost and Revenue Performance
[$ millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
2 7 Recovery 8 Special
Operating 3 Special 4 Total 5 Net rate after project
Year 1 Revenue costs & project expense Income 6 Target target ROE costs
imputed costs [2+3] (ROE) [1- ROE (percent) deferred &
expenses recovered 4] [1/(4+6)] financed
--------------------------------------------------------------------------------------------------------------------------------------------------------
1995............................................ 90.6 74.1 9.7 83.8 6.8 3.4 103.8 0.0
1996 (Est)...................................... 97.3 69.6 9.3 78.8 18.5 3.8 117.7 0.3
1997 (Bud)...................................... 95.2 80.2 7.4 87.6 7.6 5.1 102.7 0.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
1. 1995 Performance
For 1995, the funds transfer and net settlement service recovered
103.8 percent of total expenses, including automation consolidation
special project costs and targeted ROE. Basic funds transfer
origination volume increased 5.6 percent over the 1994 level, resulting
in higher revenues.
2. 1996 Performance
Through August 1996, the funds transfer and net settlement service
recovered 117.9 percent of total expenses, including automation
consolidation special project costs budgeted for recovery and targeted
ROE. For full-year 1996, the Reserve Banks estimate that the funds
transfer service will recover 117.7 percent of total expenses, compared
to a targeted recovery rate of 106.0 percent. This difference is
attributable to both lower-than-anticipated costs and higher-than-
anticipated revenue. The Reserve Banks estimate that operating costs
will be lower than the original budget estimates due to lower-than-
budgeted allocations of local and national data communications costs.
In addition, the Reserve Banks are beginning to realize the
efficiencies from processing funds transfers in a centralized software
environment.
Total revenue is estimated to be $6.4 million (or 7.1 percent) over
the original budget, due to higher-than-expected on-line funds transfer
volume. Basic origination volume growth is estimated to be 8.3 percent
in 1996 compared to original budget projections of 2.1 percent. The
higher volume has been attributed to sharply increased mutual fund
activity, aggressive marketing of cash management services by
depository institutions to their customers, and, to a lesser extent,
increased mortgage activity and securities-related settlement payments
(the latter due to the market's move to a T+3 settlement cycle and
same-day funds settlement on securities trades).
3. 1997 Issues
The Reserve Banks expect funds transfer origination volume to
increase 5.3 percent over 1996 estimated levels. This projected growth
rate is lower than the 1996 estimated growth rate but slightly above
the ten-year historical average annual growth rate of 5.0 percent.
Uncertainties in achieving the projected volume growth include the
effects of increased bank mergers and consolidations as interstate
branch banking takes effect in 1997 and the level of mutual fund and
cash management activity in 1997.
Operating costs also are anticipated to increase in 1997 due
primarily to two changes to the Reserve Banks' cost accounting
methodology that become effective in 1997.\9\ Partially offsetting this
increase is a projected decline in data processing costs due to the
conversion of the New York Reserve Bank's funds transfer application to
the consolidated FRAS environment in spring 1997.
---------------------------------------------------------------------------
\9\ The Reserve Banks have modified their methodology for
allocating FRAS data processing and data communications (DP/DC)
costs to provide more incentives for the efficient use of DP/DC
resources, and for allocating certain joint overhead costs to
recognize that these costs are not closely related to particular
services. These cost accounting changes are consistent with general
industry practices.
---------------------------------------------------------------------------
4. 1997 Fees
Despite projected increased costs in 1997, the benefits of
automation consolidation combined with strong volume growth will enable
the Reserve Banks to reduce the basic funds transfer fee by 10 percent
from $0.50 to $0.45. All other funds transfer and net settlement fees
will remain unchanged. The Reserve Banks project that revenues will
recover 102.7 percent of total funds transfer expenses, including
targeted ROE and all allocated automation consolidation special project
costs.
E. Book-Entry Securities \10\
Table 7 presents the actual 1995, estimated 1996, and projected
1997 cost
[[Page 64093]]
recovery performance for the book-entry securities service.\11\
---------------------------------------------------------------------------
\10\ Includes Purchase and Sale Activity.
\11\ The Reserve Banks provide securities transfer services for
securities issued by the U.S. Treasury, federal government agencies,
government sponsored enterprises, and certain international
institutions. The priced component of this service, reflected in
this memorandum, consists of the revenues, expenses, and volumes
associated with the transfer of all non-Treasury securities. For
Treasury securities, the Reserve Banks act as fiscal agents and the
Treasury Department assesses fees for those transfer services.
Table 7.--Book-Entry Securities Pro Forma Cost and Revenue Performance
[$ millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
2 7 Recovery 8 Special
Operating 3 Special 5 Net rate after project
Year 1 Revenue costs & project 4 Total income 6 Target target ROE costs
imputed costs expense (ROE) ROE (percent) deferred &
expenses recovered [1/(4+6)] financed
--------------------------------------------------------------------------------------------------------------------------------------------------------
1995............................................ 15.9 14.6 0.9 15.5 0.4 0.7 97.8 2.4
1996 (Est)...................................... 16.9 14.3 1.7 16.0 0.9 0.8 100.7 3.2
1997 (Bud)...................................... 16.7 14.4 1.5 15.8 0.9 0.9 100.1 3.8
--------------------------------------------------------------------------------------------------------------------------------------------------------
1. 1995 Performance
The book-entry securities service recovered 97.8 percent of total
expenses in 1995, including automation consolidation special project
costs budgeted for recovery and targeted ROE. Origination volume
declined 0.3 percent from the 1994 level, compared to a budgeted
increase of 3.1 percent. Total costs were over budget due to higher-
than-expected data communication costs as a result of increased circuit
expenses and lower-than-expected savings from reductions in local data
processing operations.
2. 1996 Performance
Through August 1996, the book-entry securities service recovered
100.6 percent of total expenses, including automation consolidation
special project costs and targeted ROE. For the full-year 1996, the
Reserve Banks estimate that revenues will recover 100.7 percent of
total costs compared to a budgeted recovery rate of 100.0 percent.
Total revenue is expected to be $1.1 million higher than budget due
primarily to higher-than-anticipated growth in on-line origination
volume. Volume in 1996 is estimated to grow 9.7 percent, compared to a
budgeted decline of 0.4 percent. This unexpected growth partially
reflects the one-time movement of securities associated with mergers
and higher-than-expected mortgage-backed securities activity.
3. 1997 Issues
The Reserve Banks expect book-entry securities transfer origination
volume to decline 1.3 percent in 1997 from the 1996 estimated level.
Participants Trust Company (PTC) expects to expand its mortgage-backed
securities business by mid-1997 to include Fedwire-eligible securities
issued by the Federal Home Loan Mortgage Corporation and the Federal
National Mortgage Association. In addition, Reserve Banks may face
potential volume reductions resulting from bank mergers and
consolidations as interstate branch banking takes effect in 1997. The
Board believes that there is some risk in achieving the volume levels
projected by the Reserve Banks because of uncertainties regarding the
extent to which Reserve Banks' mortgage-backed securities transfer
volume will move to PTC's new service.
4. 1997 Fees
The Reserve Banks will maintain 1997 book-entry securities fees at
the 1996 level. The Reserve Banks project that the book-entry
securities service will recover 100.1 percent of costs, including
targeted ROE and $1.5 million in automation consolidation special
project costs.
F. Electronic Connections
The Reserve Banks charge fees for the electronic connections used
by depository institutions to access priced services and allocate the
cost and revenue associated with electronic access to the various
priced services. The Reserve Banks will retain the current monthly fees
for electronic access for all connection types in 1997 without
modification but increase the fees for installation and training.
Currently, the Reserve Banks assess an installation and training
fee of $300 for new Fedline customers and a $300 fee for the
installation of new computer-interface connections. These fees have not
changed since 1986. The current fees assessed for customer training and
installation do not reflect fully the costs of these activities,
particularly for computer-interface customers.
In 1997, the Reserve Banks will charge separate fees for
installation and training activities. Compared to the current combined
installation and training fee of $300, the Reserve Banks will assess a
fee of $150 for the training of new Fedline customers and a fee of $300
for Fedline installations; the $150 fee for retraining is unchanged. In
addition, the Reserve Banks will increase the one-time computer-
interface installation fee from $300 to $800.
G. Noncash Collection
Table 8 presents the actual 1995, estimated 1996, and projected
1997 cost recovery performance for the noncash collection service.
[[Page 64094]]
Table 8.--Noncash Collection Pro Forma Cost and Revenue Performance
[$ millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
2 7 Recovery 8 Special
Operating 3 Special 4 Total 5 Net rate after project
Year 1 Revenue costs & project expense income 6 Target target ROE costs
imputed costs [2+3] (ROE) [1- ROE (percent) deferred &
expenses recovered 4] [1/(4+6)] financed
--------------------------------------------------------------------------------------------------------------------------------------------------------
1995............................................ 4.0 4.5 0.0 4.5 (0.5) 0.2 84.7 0.3
1996 (Est)...................................... 5.6 5.2 0.0 5.2 0.4 0.2 103.0 0.3
1997 (Bud)...................................... 4.5 3.8 0.3 4.1 0.3 0.2 102.8 0.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
1. 1995 Performance
The noncash collection service recovered 84.7 percent of total
expenses, including targeted ROE, in 1995. Volume increased 23.2
percent compared to an original budgeted growth rate of 16.6 percent.
The cost recovery shortfall was attributed to transition costs
associated with consolidation of the Federal Reserve's noncash
collection service at two processing sites--the Cleveland Reserve Bank
and the Jacksonville Branch of the Federal Reserve Bank of Atlanta.
2. 1996 Performance
Through August 1996, the noncash collection service recovered 103.3
percent of total expenses, including targeted ROE. For the year,
Reserve Banks now estimate that the noncash collection service will
recover 103.0 percent of total expenses, including targeted ROE,
compared with the targeted full-year recovery rate of 100.0 percent.
Noncash collection volume is expected to continue its long-term
contraction.12 The Reserve Banks estimate that 1996 volume will be
less than 24 percent of the peak volume processed in 1985. Due to this
declining demand, most national providers have withdrawn from providing
noncash collection services. As a result, the Reserve Banks estimate
that volume will increase 31.8 percent in 1996, compared to the
budgeted increase of 22.5 percent. The combined effect of higher than
budgeted volume, fee increases, and cost containment efforts account
for the better-than-anticipated cost recovery.
---------------------------------------------------------------------------
\12\ The Tax Equity and Fiscal Responsibility Act of 1982
(TEFRA) imposed a tax disadvantage to the holding of bearer
securities, which has resulted in the virtual elimination of new
issues. Following the enactment of TEFRA, many bearer municipal
securities were ``immobilized'' in depositories, such as DTC,
further reducing the demand for noncash collection services.
---------------------------------------------------------------------------
3. 1997 Issues
The Depository Trust Company (DTC) has recently entered the noncash
collection business. The Reserve Banks believe that DTC's entrance into
this service will not materially affect the Reserve Banks' 1997 noncash
volume, since DTC's noncash collection service is limited to its
participants. For 1997, the Reserve Banks project a 19.6 percent volume
decline from the 1996 estimated volume.
4. 1997 Fees
The current fees will be retained in 1997. At these fee levels, the
Reserve Banks project a cost recovery of 102.8 percent for 1997.
H. Special Cash Services
Priced special cash services represent a very small portion
(approximately 2 percent) of overall cash services provided by the
Reserve Banks to depository institutions. Special cash services include
cash transportation, coin wrapping, nonstandard packaging of currency
orders and deposits, and nonstandard frequency of access to cash
services.
Table 9 presents the actual 1995, estimated 1996, and projected
1997 cost recovery performance for special cash services.
Table 9.--Cash Pro Forma Cost and Revenue Performance
[$ millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
2 7 Recovery 8 Special
Operating 3 Special 4 Total 5 Net rate after project
Year 1 Revenue costs & project expense income 6 Target target ROE costs
imputed costs [2+3] (ROE) [1- ROE (percent) deferred &
expenses recovered 4] [1/(4+6)] financed
--------------------------------------------------------------------------------------------------------------------------------------------------------
1995............................................ 5.2 5.2 0.0 5.2 0.0 0.1 97.7 0.0
1996 (Est)...................................... 5.7 5.7 0.0 5.7 0.0 0.2 96.9 0.0
1997 (Bud)...................................... 5.5 5.2 0.0 5.2 0.4 0.3 102.1 0.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
1. 1995 Performance
The special cash services recovered 97.7 percent of total expenses,
including targeted ROE, in 1995.
2. 1996 Performance
Through August 1996, the special cash services recovered 98.1
percent of total expenses, including targeted ROE. For full-year 1996,
the Reserve Banks estimate that special cash services will recover 96.9
percent of total expenses, compared to a targeted recovery rate of
102.2 percent. Costs were higher than budgeted and priced volumes were
lower than budgeted in certain offices. In March 1996, the Director of
the Board's Division of Reserve Bank Operations and Payment Systems,
under delegated authority from the Board, approved a proposal from the
Federal Reserve Bank of San Francisco to charge fees for access to cash
services beyond the basic service level.13 Estimated
[[Page 64095]]
revenues are lower than budgeted for 1996 because of lower-than-
anticipated volume levels in the San Francisco District.
---------------------------------------------------------------------------
\13\ In April 1996, the Board approved a new cash access policy
for the Federal Reserve Banks that becomes effective on May 1, 1998.
The policy provides for a base level of free currency access to all
depository institutions, but restricts the number of offices served
and the frequency of access. Depository institutions that meet
minimum volume thresholds will be able to obtain more frequent free
access. Additional access, beyond the free level, will be priced.
---------------------------------------------------------------------------
3. 1997 Fees
For 1997, the Reserve Banks project that special cash services will
recover 102.1 percent of costs, including targeted ROE. Several Reserve
Banks will increase fees for wrapped coin.
III. Competitive Impact Analysis
All operational and legal changes considered by the Board that have
a substantial effect on payment system participants are subject to the
competitive impact analysis described in the March 1990 policy
statement ``The Federal Reserve in the Payments System.'' In this
analysis, the Board assesses whether the proposed change would have a
direct and material adverse effect on the ability of other service
providers to compete effectively with the Federal Reserve in providing
similar services due to differing legal powers or constraints or due to
a dominant market position of the Federal Reserve deriving from such
legal differences.
The Board believes that the recommended price and service level
changes will not have a direct and material adverse effect on the
ability of other service providers to compete with the Reserve Banks in
providing similar services. The 1997 fees proposed by the Reserve Banks
result in a projected return on equity that meets the targeted return
on equity, based on the 50 bank holding company model. Over the long
term, the Reserve Banks have recovered their total costs of providing
priced services, including imputed costs and targeted return on equity.
Other service providers have pricing flexibility that is equal to, or
greater than, that used by the Reserve Banks.
Table A-1--Comparison of Pro Forma Balance Sheets for Federal Reserve
Priced Services
[Millions of dollars--average for year]
------------------------------------------------------------------------
1997 1996
------------------------------------------------------------------------
Short-term assets:
Imputed reserve requirement on clearing
balances................................. $545.7 409.6
Investment in marketable securities....... 4,911.3 3,686.7
Receivables \1\........................... 64.3 64.4
Materials and supplies \1\................ 11.6 8.6
Suspense & Difference \1\................. 0.0 0.0
Prepaid expenses \1\...................... 14.6 13.9
Items in process of collection............ 2,548.2 2,413.2
-------------------------
Total short-term assets............... 8,095.7 6,596.4
-------------------------
Long-term assets:
Premises \1\ \2\.......................... 348.0 346.4
Furniture and equipment \1\............... 167.0 189.4
Leasehold improvements and long-term
prepayments \1\.......................... 18.0 14.6
Capital leases............................ 0.7 2.3
-------------------------
Total long-term assets................ 533.7 552.7
=========================
Total assets.......................... 8,629.4 7,149.1
=========================
Short-term liabilities:
Clearing balances and balances arising
from early credit of uncollected items... 5,457.0 4,096.3
Deferred credit items..................... 2,548.2 2,413.2
Short-term debt \3\....................... 90.5 86.8
-------------------------
Total short-term liabilities.......... 8,095.7 6,596.3
-------------------------
Long-term liabilities:
Obligations under capital leases.......... 0.7 2.3
Long-term debt \3\........................ 180.5 182.7
-------------------------
Total long-term liabilities........... 181.2 185.0
-------------------------
Total liabilities..................... 8,276.9 6,781.3
-------------------------
Equity \3\.................................... 352.5 367.8
-------------------------
Total liabilities and equity.............. 8,629.4 7,149.1
------------------------------------------------------------------------
\1\ Financed through PSAF; other assets are self-financing.
\2\ Includes allocations of Board of Governors' assets to priced
services of $0.5 million for 1997 and $0.5 million for 1996.
\3\ Imputed figures represent the source of financing for certain priced
services assets.
Note: Details may not add to totals due to rounding.
[[Page 64096]]
Table A-2--Derivation of the 1997 PSAF
[Millions of dollars]
A. Assets to be Financed: \1\
Short-term......................................................... $90.5
Long-term \2\...................................................... 533.0
----------------------------------------
Total............................................................ $623.5
========================================
B. Weighted Average Cost:
1. Capital Structure: \3\
Short-term Debt.................................................... 14.5%
Long-term Debt..................................................... 28.9%
Equity............................................................. 56.5%
2. Financing Rates/Costs: \3\
Short-term Debt.................................................... 5.2%
Long-term Debt..................................................... 7.1%
Pre-tax Equity \4\................................................. 19.1%
3. Elements of Capital Costs:
Short-term Debt.................................................... $90.5 x 5.2%=$4.7
Long-term Debt..................................................... 180.5 x 7.1%=12.8
Equity............................................................. 352.5 x 19.1%=67.5
----------------------------------------
Total............................................................ 85.0
========================================
C. Other Required PSAF Recoveries:
Sales Taxes........................................................ $11.6
Federal Deposit Insurance Assessment............................... 2.0
Board of Governors Expenses........................................ 2.9
----------------------------------------
Total.......................................................... $16.5
========================================
D. Total PSAF Recoveries............................................... $101.5
As a percent of capital............................................ 16.3%
As a percent of expenses \5\....................................... 16.6%
----------------------------------------------------------------------------------------------------------------
\1\ Priced service asset base is based on the direct determination of assets method.
\2\ Consists of total long-term assets, including the priced portion of FRAS assets, less self financing capital
leases.
\3\ All short-term assets are assumed to be financed by short-term debt. Of the total long-term assets, 33
percent are assumed to be financed by long-term debt and 67 percent by equity.
\4\ The pre-tax rate of return on equity is based on the average after-tax rate of return on equity, adjusted by
the effective tax rate to yield the pre-tax rate of return on equity for each bank holding company for each
year. These data are then averaged over five years to yield the pre-tax return on equity for use in the PSAF.
\5\ Systemwide 1997 budgeted priced service expenses less shipping are $613.1 million.
Table A-3.--Comparison Between 1997 and 1996 PSAF Components
------------------------------------------------------------------------
1997 1996
------------------------------------------------------------------------
A. Assets to be Financed (millions of dollars):
Short-term.................................... $90.5 $86.9
Long-term..................................... 533.0 550.4
---------------------
Total....................................... $623.5 $637.3
---------------------
B. Cost of Capital:
Short-term Debt Rate.......................... 5.2% 3.9%
Long-term Debt Rate........................... 7.1% 7.6%
Pre-tax Return on Equity...................... 19.1% 14.2%
Weighted Average Long-term Cost of Capital... 15.1% 12.0%
C. Tax Rate....................................... 32.1% 29.9%
D. Capital Structure:
Short-term Debt............................... 14.5% 13.6%
Long-term Debt................................ 29.0% 28.7%
Equity........................................ 56.5% 57.7%
E. Other Required PSAF Recoveries (millions of
dollars):
Sales Taxes................................... $11.6 $11.3
Federal Deposit Insurance Assessment.......... 2.0 2.2
Board of Governors Expenses................... 2.9 2.8
F. Total PSAF:
Required Recovery............................. $101.5 $85.8
As Percent of Capital......................... 16.3% 13.5%
As Percent of Expenses........................ 16.6% 14.1%
------------------------------------------------------------------------
Table A-4.--Computation of Capital Adequacy for Federal Reserve Priced Services
[Millions of dollars]
----------------------------------------------------------------------------------------------------------------
Weighted
Assets Risk weight assets
----------------------------------------------------------------------------------------------------------------
Imputed reserve requirement on clearing balances......................... $545.7 0.0 $0.0
Investment in marketable securities...................................... 4,911.3 0.0 0.0
Receivables.............................................................. 64.3 0.2 12.9
Materials and supplies................................................... 11.6 1.0 11.6
[[Page 64097]]
Suspense & Difference.................................................... 0.0 0.2 0.0
Prepaid expenses......................................................... 14.6 1.0 14.6
Items in process of collection........................................... 2,548.2 0.2 509.6
Premises................................................................. 348.0 1.0 348.0
Furniture and equipment.................................................. 167.0 1.0 167.0
Leases & long-term prepayments........................................... 18.7 1.0 18.7
------------- ------------
Total................................................................ $8,629.5 ........... 1,082.4
------------- ------------
Imputed Equity for 1996.................................................. $352.5 ........... ...........
Capital to Risk-Weighted Assets (percent)................................ 32.6 ........... ...........
Capital to Total Assets (percent)........................................ 4.1 ........... ...........
----------------------------------------------------------------------------------------------------------------
By order of the Board of Governors of the Federal Reserve
System.
Dated: November 26, 1996.
William W. Wiles,
Secretary of the Board.
[FR Doc. 96-30705 Filed 12-2-96; 8:45 am]
BILLING CODE 6210-01-P
