Release Date: October 22, 2003
The Federal Reserve Board on Wednesday approved fee schedules for Federal Reserve Bank priced services, effective January 2, 2004.
From 1993 to 2002, the Reserve Banks recovered 98.8 percent of priced services costs, including operating costs, imputed costs, and targeted return on equity (ROE, or net income), which amounts to a ten-year total net income of slightly less than $500 million. The Reserve Banks' underrecovery reflects changes that are affecting the check service, which comprises about 85 percent of priced services costs. Since the mid-1990s, there has been a national trend away from the use of checks that has affected the entire industry. This trend, which is consistent with the Federal Reserve's position of encouraging the use of more efficient electronic payment alternatives, has reduced the Reserve Banks' check volume.
The Reserve Banks have undertaken aggressive initiatives to improve operational efficiencies, to reduce their excess check processing capacity, and to reduce costs. First, the Reserve Banks will be completing a check modernization initiative later this year that will standardize the Reserve Banks' check processing operations. This initiative will enable the Reserve Banks to improve their operating efficiency and position them to reduce excess capacity. Second, the Reserve Banks have begun a check restructuring initiative that was announced earlier this year. Under this initiative, the Reserve Banks will continue to provide check services nationwide but will stop processing checks at 13 of their 45 check processing offices, consolidate check adjustments operations into 12 of their 43 check adjustment offices, and consolidate their check administrative functions. Third, the Reserve Banks have aggressively reduced costs in a variety of support and overhead areas that contribute significant costs to the check service.
Overall, the price level for Federal Reserve priced services will increase
about 4 percent in 2004 from 2003 levels. The increase reflects an approximately
5 percent rise in check service fees combined with a 1 percent drop in
fees for the Reserve Banks' electronic payment services.
The Board also approved, effective January 8, 2004, changing the earnings credit rate on clearing balances from the federal funds rate to 90 percent of the three-month Treasury bill rate, and increasing the frequency with which depository institutions can change contracted clearing balances.
In addition, the Board approved the 2004 private-sector adjustment factor (PSAF) for Reserve Bank priced services of $179.7 million. The PSAF is an allowance for taxes and other imputed expenses that would have to be paid and profits that would have to be earned if the Federal Reserve's priced services were provided by a private business. The Monetary Control Act of 1980 requires the Federal Reserve to recover the costs of providing priced services, including the PSAF, over the long run, to promote competition between the Reserve Banks and private-sector service providers.
The Reserve Banks estimate that they will recover 85.6 percent of all their priced services costs in 2003 and project that they will recover 93.6 percent of these costs in 2004.
The Board's notice is attached.
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Last update: October 22, 2003