In addition to contributing to the setting of national monetary policy and supervising and regulating banks and other financial entities (discussedFRB: Annual Report 2006 in preceding chapters), the Federal Reserve Banks provide payment services to depository and certain other institutions, distribute the nation's currency and coin, and serve as fiscal agents and depositories for the United States.
The Federal Reserve Banks provide a range of payment and related services to depository institutions, including collecting checks, operating an automated clearinghouse service, transferring funds and securities, and providing a multilateral settlement service. The Reserve Banks charge fees for providing these "priced services."
The Monetary Control Act of 1980 requires that the Federal Reserve establish fees for priced services provided to depository institutions so as to recover, over the long run, all direct and indirect costs actually incurred as well as the imputed costs that would have been incurred, including financing costs, taxes, and certain other expenses, and the return on equity (profit) that would have been earned if a private business firm had provided the services. The imputed costs and imputed profit are collectively referred to as the private-sector adjustment factor (PSAF). 1 Over the past ten years, the Reserve Banks have recovered 99.0 percent of their priced services costs, including the PSAF (table). 2 In 2006, the Board implemented changes to the method for calculating the target return on equity measure in the PSAF. 3
Overall, the price index for priced services increased 2.4 percent from 2005 to 2006. Revenue from priced services amounted to $908.4 million, other income was $122.8 million, and costs were $875.5 million, resulting in net income from priced services of $155.7 million. In 2006, the Reserve Banks recovered 108.8 percent of total costs of $947.5 million, including the PSAF. 4
|Millions of dollars except as noted|
imputed costs 2
|Total costs||Cost recovery
(percent) 3 , 4
Here and elsewhere in this chapter, components may not sum to totals or yield percentages shown because of rounding.
1. For the ten-year period, includes revenue from services of $8,727.4 million and other income and expense (net) of $422.5 million. Return to table
2. For the ten-year period, includes operating expenses of $7,722.6 million, imputed costs of $296.4 million, and imputed income taxes of $348.5 million. Return to table
3. Revenue from services divided by total costs. Return to table
4. For the ten-year period, cost recovery is 95.5 percent, including the reduction in equity related to FAS 158 reported by the priced services in 2006. Return to table
In 2006, operating expenses and imputed costs for the Reserve Banks' commercial check collection service totaled $716.9 million, of which $35.4 million was attributable to the transportation of commercial checks between Reserve Bank check-processing centers. Revenue amounted to $745.0 million, of which $34.2 million was attributable to estimated revenues derived from the transportation of commercial checks between Reserve Bank check-processing centers, and other income was $100.7 million. The resulting net income was $128.7 million. Check service revenue in 2006 increased $4.7 million from 2005, largely because of price increases and faster-than-anticipated adoption of check-processing services associated with the Check Clearing for the 21st Century Act (Check 21). 5
The Reserve Banks handled 11.0 billion checks in 2006, a decrease of 9.9 percent from 2005 (table). The decline in Reserve Bank check volume is consistent with nationwide trends away from the use of checks and toward greater use of electronic payment methods. 6 Of all the checks presented by the Reserve Banks to paying banks in 2006, 14.0 percent of the checks were deposited and 4.3 percent were presented using Check 21 products, compared with 1.8 percent and 0.0 percent, respectively, in 2005. 7 Overall, the price index for check services increased 3.6 percent from 2005.
|Thousands of items|
|2005 to 2006||2004 to 2005|
Note:Note: Activity in commercial check is the total number of commercial checks collected, including processed and fine-sort items; in commercial ACH, the total number of commercial items processed; in funds transfer and securities transfer, the number of transactions originated online and offline; and in multilateral settlement, the number of settlement entries processed.
In response to the continuing decline in check volume, the Reserve Banks in 2006 continued to reduce check service operating costs through a combination of measures, including consolidating some check-processing sites. Check processing at New Orleans has now been consolidated to Atlanta; New York's East Rutherford Operations Center to Philadelphia; Columbus to Cleveland; and Boston to Windsor Locks, Connecticut. Additional consolidations are planned for 2007 and beyond.
Reserve Bank operating expenses and imputed costs for commercial automated clearinghouse (ACH) services totaled $80.1 million in 2006. Revenue from ACH operations totaled $80.5 million and other income totaled $10.9 million, resulting in net income of $11.3 million. The Banks processed 8.2 billion commercial ACH transactions (worth $13.1 trillion), an increase of 12.2 percent from 2005. Overall, the price index for ACH services decreased 9.1 percent from 2005.
In 2006, the Reserve Banks began offering ACH risk-management services to all depository institutions. These services help originating institutions manage the operational and credit risk associated with originating ACH payments. By the end of 2006, 76 financial institutions subscribed to these services.
Reserve Bank operating expenses and imputed costs for the Fedwire Funds and National Settlement Services totaled $59.3 million in 2006. Revenue from these operations totaled $63.6 million and other income amounted to $8.6 million, resulting in net income of $13.0 million.
The Fedwire Funds Service allows participants to draw on their reserve or clearing balances at the Reserve Banks and transfer funds to other institutions that maintain accounts at the Banks. In 2006, the number of Fedwire funds transfers originated by depository institutions increased 0.9 percent from 2005, to approximately 136.4 million. The average daily value of Fedwire funds transfers in 2006 was $2.3 trillion. Overall, the price index for the Fedwire Funds and National Settlement Services increased 3.4 percent from 2005.
Last year, the Reserve Banks collaborated with The Clearing House Payments Company to study the use of funds transfers for business-to-business payments. The study examined why businesses select one payment type over another and what changes are needed to make funds transfers a more attractive payment alternative. Key findings from the study suggested that businesses wanted a more streamlined process for making funds transfers and favored the inclusion of remittance information in funds transfer orders.
The National Settlement Service is a multilateral settlement system that allows participants in private-sector clearing arrangements to exchange and settle transactions on a net basis using reserve or clearing balances. In 2006, the service processed settlement files for approximately fifty-four local and national private arrangements, primarily check clearinghouse associations. The Reserve Banks processed slightly more than 17,300 files that contained more than 470,000 settlement entries for these arrangements in 2006.
The Fedwire Securities Service allows participants to transfer electronically securities issued by the U.S. Treasury, federal government agencies, government-sponsored enterprises, and certain international organizations to other participants in the service. 8 Reserve Bank operating expenses and imputed costs for providing this service totaled $19.1 million in 2006. Revenue from the service totaled $19.2 million, and other income totaled $2.6 million, resulting in net income of $2.7 million. Overall, the price index for the service increased 2.8 percent from 2005.
In 2006, approximately 9.1 million non-Treasury securities transfers were processed by the service, slightly lower than in 2005. Last year, the Reserve Banks also implemented technical changes to the Fedwire Securities Service applications to support changes to the Federal Reserve Policy on Payments System Risk (PSR). The PSR policy changes require that government-sponsored enterprises and certain international organizations fund principal and interest payments before the Reserve Banks distribute those payments in order to limit the credit exposure of the Reserve Banks.
The Federal Reserve had daily average credit float of $85.9 million in 2006, compared with debit float of $133.4 million in 2005. 9
The Federal Reserve Banks distribute the nation's currency (in the form of Federal Reserve notes) and coin through depository institutions and also receive currency and coin from circulation through these institutions. As currency flows into the Reserve Banks, the Banks inspect the notes and destroy those that are unfit for recirculation.
The Reserve Banks received 38.5 billion Federal Reserve notes from circulation in 2006, a 3.5 percent increase from 2005, and made payments of 39.1 billion notes into circulation in 2006, a 1.5 percent increase from 2005. They received 59.7 billion coins from circulation in 2006, a 6.5 percent increase from 2005, and made payments of 73.9 billion coins into circulation, a 2.7 percent increase from 2005.
In March, the Board approved a policy that provides incentives to encourage depository institutions to recirculate fit currency to their customers rather than return it to the Federal Reserve for processing. Under the policy, the Federal Reserve implemented a custodial inventory program that allows depository institutions to transfer a portion of the currency holdings in their vaults to the books of a Reserve Bank. As of December 31, the Reserve Banks had established twenty-nine custodial inventory sites with depository institutions. Beginning in July 2007, the Reserve Banks will charge fees to institutions that, within a one-week period, deposit fit $10 or $20 notes and reorder currency of the same denomination, above a de minimis amount, within the same Reserve Bank office's service area.
In March, the Reserve Banks began issuing the redesigned $10 Federal Reserve note that includes enhanced security features and subtle background colors.
The Presidential $1 Coin Act requires, among other things, that the Federal Reserve and the Mint take steps to ensure that an adequate supply of $1 coins is available for commerce. To that end, the Federal Reserve worked with the United States Mint to develop an effective distribution strategy for Presidential $1 coins, the first of which was issued by the Mint in February 2007. Consistent with the requirements of the Presidential $1 Coin Act, the Federal Reserve and the Mint conducted outreach to depository institutions and coin users in an effort to gauge demand for the coins and to anticipate and eliminate obstacles to the efficient circulation of $1 coins.
The Reserve Banks conducted extensive testing of a prototype upgrade to the high-speed currency-processing machines. The Reserve Banks will begin implementing the upgrades on their machines in 2007; the upgrades are scheduled to be completed in 2009.
The Federal Reserve developed the requirements for an automation system to replace the current platform used to support and facilitate the System's provision of cash services. The Reserve Banks issued a preview request for proposal for development of the new automation system and held an orientation with potential vendors in December.
The Reserve Banks completed a comprehensive study of cost-effective alternatives to the existing infrastructure for providing cash services. The study resulted in the elimination of cash processing at the Oklahoma City and Birmingham offices in March and May, respectively, and the replacement of these offices with outsourced cash depots. In these cash depot arrangements, armored carrier facilities serve as collection and distribution points for depository institutions' currency deposits and orders. The deposits and orders are transported to and from the nearest Reserve Bank by armored carrier for processing.
|Thousands of dollars|
|Agency and service||2005||2004||2003|
|Department of the Treasury|
|Bureau of the Public Debt|
|Treasury retail securities||73,931.4||86,503.2||103,257.7|
|Treasury securities safekeeping and transfer||7,535.2||6,055.8||6,267.0|
|Computer infrastructure development and support||3,853.1||2,575.5||5,935.1|
|Financial Management Service|
|Government check processing||20,918.6||20,988.0||24,245.4|
|Fedwire funds transfers||
|Other payment-related services||69,696.8||49,366.0||33,646.9|
|Tax and other revenue collections||37,095.5||39,736.0||34,248.4|
|Other collection-related services||14,122.6||14,354.2||12,922.8|
|Cash management services||48,320.2||40,496.7||21,835.8|
|Computer infrastructure development and support||
|Other Federal Agencies|
|Department of Agriculture|
|U.S. Postal Service|
|Postal money orders||9,334.4||7,647.8||7,774.6|
|Total, other agencies||28,241.4||25,160.4||28,397.5|
|Total reimbursable expenses||426,082.1||369,177.0||369,801.2|
As fiscal agents and depositories for the federal government, the Federal Reserve Banks provide services related to the federal debt, help the Treasury collect funds owed to the federal government, process electronic and check payments for the Treasury, maintain the Treasury's bank account, and invest excess Treasury balances. The Reserve Banks also provide limited fiscal agency and depository services to other entities.
The total cost of providing fiscal agency and depository services to the Treasury and other entities in 2006 amounted to $426.1 million, compared with $396.2 million in 2005 (table). Treasury-related costs were $397.8 million in 2006, compared with $371.0 million in 2005, an increase of 7.2 percent. The cost of providing services to other entities was $28.2 million, compared with $25.2 million in 2005. In 2006, as in 2005, the Treasury and other entities reimbursed the Reserve Banks for the costs of providing these services.
The Reserve Banks auction, provide safekeeping for, and transfer Treasury securities. Reserve Bank operating expenses for these activities totaled $31.1 million in 2006, compared with $23.6 million in 2005. The Banks processed 148,000 commercial tenders for Treasury securities, compared with 169,000 in 2005. They originated 12.9 million transfers of Treasury securities in 2006, a 1.8 percent increase from 2005. The Reserve Banks are developing a new Treasury auction application and infrastructure that will provide increased functionality and security. The application will be operational in late 2007.
The Reserve Banks also operate computer applications and provide customer service and back-office support for the Treasury's retail securities programs. Reserve Bank operating expenses for these activities were $73.9 million in 2006, compared with $86.5 million in 2005. The Reserve Banks operate Legacy Treasury Direct, a program that allows investors to purchase and hold Treasury securities directly with the Treasury through the Reserve Banks instead of through a broker. The program held $72 billion (par value) of Treasury securities as of December 31. Because the program was designed for investors who plan to hold their securities to maturity, it does not provide transfer services. Investors may, however, sell their securities for a fee through Sell Direct, a program operated by one of the Reserve Banks. Approximately 13,000 securities worth $678.9 million were sold through Sell Direct in 2006, compared with 14,000 securities worth $874.8 million in 2005. The Banks printed and mailed more than 28.9 million savings bonds in 2006, a 10 percent decrease from 2005. They issued more than 5.3 million Series I (inflation-indexed) bonds and 23.1 million Series EE bonds.
The Reserve Banks process both electronic and check payments for the Treasury. Reserve Bank operating expenses for processing government payments and for payments-related programs totaled $96.6 million in 2006, compared with $76.2 million in 2005. The Banks processed 991.6 million ACH payments for the Treasury, an increase of 2.8 percent from 2005, and more than 855,000 Fedwire funds transfers. They also processed 192 million paper government checks, a decline of 11 percent from 2005. In addition, the Banks issued more than 170,000 fiscal agency checks, a decrease of 17.4 percent from 2005.
The Reserve Banks support several Treasury programs to collect funds owed the federal government. Reserve Bank operating expenses related to these programs totaled $51.2 million in 2006, compared with $54.1 million in 2005. The Banks operate the Federal Reserve Electronic Tax Application (FR-ETA) as an adjunct to the Treasury's Electronic Federal Tax Payment System (EFTPS). EFTPS allows businesses and individual taxpayers to pay their taxes electronically. It uses the automated clearinghouse (ACH) to collect funds, so tax payments must be scheduled at least one day in advance. Some business taxpayers, however, do not know their tax liability until the tax due date. FR-ETA allows these taxpayers to use EFTPS by providing a same-day electronic federal tax payment alternative. FR-ETA collected $456.3 billion for the Treasury in 2006, compared with $409.2 billion in 2005.
In addition, the Reserve Banks operate Pay.gov, a Treasury program that allows members of the public to pay for goods and services offered by the federal government over the Internet. They also operate the Treasury's Paper Check Conversion and Electronic Check Processing programs, whereby checks written to government agencies are converted into ACH transactions at the point of sale or at lockbox locations. In 2006, the Reserve Banks originated more than 2.6 million ACH transactions through these programs, roughly the same number of transactions as in 2005.
The Treasury maintains its bank account at the Reserve Banks and invests the funds it does not need for current payments with qualified depository institutions through the Treasury Tax and Loan (TT&L) program, which the Reserve Banks operate. Reserve Bank operating expenses related to this program and other cash-management initiatives totaled $48.3 million in 2006, compared with $40.5 million in 2005. The investments either are callable on demand or are for a set term. In 2006, the Reserve Banks placed a total of $309.2 billion in immediately callable investments, which includes funds invested through retained tax deposits and direct, special direct, and dynamic investments, and $508 billion in term investments. The rate for term investments is set by auction; the Reserve Banks held 104 such auctions in 2006, roughly the same number of auctions as in 2005. In 2006, the Treasury's income from the TT&L program was $1.04 billion. In March, Treasury launched the Repurchase Agreement Program, a pilot program that allows Treasury to place a portion of its excess operating funds directly with TT&L depositaries through a repurchase transaction for a set period at an agreed-on interest rate. In 2006, the Reserve Banks placed a total of $478.9 billion of investments through repurchase agreements.
The Reserve Banks provide fiscal agency and depository services to other domestic and international entities when required to do so by the Secretary of the Treasury or when required or permitted to do so by federal statute. The majority of the work is securities-related.
In 2006, the Federal Reserve Banks completed the migration of their FedLine DOS customers to FedLine Advantage. About 6,200 customers were converted to FedLine Advantage, a web-based access delivery channel typically used by small and medium-sized depository institutions to access critical payment services, such as the Fedwire Funds, Fedwire Securities, National Settlement, and FedACH Services. In addition, the Reserve Banks began migrating their high-volume computer-interface customers, which are typically large depository institutions, to FedLine Direct, an internet-protocol-based computer-to-computer access delivery channel for critical payment services. Also in 2006, the Reserve Banks announced a new option, FedLine Command, a lower-cost computer-to-computer access delivery channel for FedACH customers. The Reserve Banks will continue to migrate customers to FedLine Direct and FedLine Command in 2007.
In early 2006, the Federal Reserve Banks initiated the first phase of the Information Security Architecture Framework (ISAF), a program that will cost $30.5 million by the end of 2008, when this phase of the program will be completed. The ISAF program is intended to respond to the continuing and increasingly sophisticated threats facing information technology systems and to improve information security at all points in the Federal Reserve System's networks. ISAF is a portfolio of initiatives to improve (1) targeted security services by ensuring that overall risks are reduced and the residual risks of these services are acceptable and (2) the overall efficiency and coherence of the provisioning of these services.
The System established a National Information Security Assurance (NISA) function in 2006 to enhance information security governance. By managing and coordinating information security at the enterprise level, NISA will have an integrated view of information security compliance across the Reserve Banks. NISA will implement a business-oriented model of information security responsibility and accountability and will establish comprehensive information security standards and processes for all the Reserve Banks.
In mid-2006, the Federal Reserve System adopted the Technology Project Standards (TPS), a set of standards for managing information technology projects. The standards are based on the Project Management Book of Knowledge (PMBOK), a recognized industry best practice. All Reserve Banks are expected to train their staff members who are involved in information technology projects and to fully transition to the TPS by January 1, 2008.
Also in 2006, the Federal Reserve Bank of New York migrated its primary dealers (banks and securities broker-dealers) to the FedTrade application, which provides increased functionality and security. The FedTrade application is used to execute various forms of open market operations using electronic auctions with the primary dealers as bidders.
Throughout 2006, the Reserve Banks continued to focus on initiatives to reduce IT costs over the long term by standardizing processes, increasing productivity, and strengthening the Federal Reserve's ability to respond to cyber security threats.
Section 21 of the Federal Reserve Act requires the Board of Governors to order an examination of each Federal Reserve Bank at least once a year. The Board performs its own reviews and engages a public accounting firm. The public accounting firm performs an annual audit of the combined financial statements of the Reserve Banks (see the section " Federal Reserve Banks Combined Financial Statements ") and audits the annual financial statements of each of the twelve Banks. The Reserve Banks use the framework established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in assessing their internal controls over financial reporting, including the safeguarding of assets. The Reserve Banks have further enhanced their assessments under the COSO framework to strengthen the key control assertion process and in 2006 met the requirements of the Sarbanes-Oxley Act of 2002. Within this framework, management of each Reserve Bank provides an assertion letter to its board of directors annually confirming adherence to COSO standards, and a public accounting firm confirms management's assertion and issues an attestation report to the Bank's board of directors and to the Board of Governors.
The firm engaged for the audits of the individual and combined financial statements of the Reserve Banks for 2006 was PricewaterhouseCoopers LLP (PwC). Fees for these services totaled $4.2 million. To ensure auditor independence, the Board requires that PwC be independent in all matters relating to the audit. Specifically, PwC may not perform services for the Reserve Banks or others that would place it in a position of auditing its own work, making management decisions on behalf of the Reserve Banks, or in any other way impairing its audit independence. In 2006, the Reserve Banks did not engage PwC for nonaudit services.
The Board's annual examination of the Reserve Banks includes a wide range of off-site and on-site oversight activities conducted by the Division of Reserve Bank Operations and Payment Systems. Division personnel monitor the activities of each Reserve Bank on an ongoing basis and conduct on-site reviews based on the division's risk-assessment methodology. The examinations also include assessing the efficiency and effectiveness of the internal audit function. To assess compliance with the policies established by the Federal Reserve's Federal Open Market Committee (FOMC), the division also reviews the accounts and holdings of the System Open Market Account at the Federal Reserve Bank of New York and the foreign currency operations conducted by that Bank. In addition, PwC audits the schedule of participated asset and liability accounts and the related schedule of participated income accounts at year-end. The FOMC receives the external audit reports and the report on the division's examination.
|Millions of dollars|
|Operating expenses 1||2,987||2,677|
|Earnings credits granted||276||213|
|Current net income||35,147||27,840|
|Net additions to (deductions from, - ) current net income||-159||-3,577|
|Assessments by the Board of Governors||793||743|
|For expenditures of Board||301||266|
|For cost of currency||492||477|
|Net income before payments to Treasury||34,195||23,520|
|Transferred to surplus 2||4,272||1,272|
|Payments to Treasury 3||29,052||21,468|
1. Includes net periodic pension expense of $53 million in 2006 and a net periodic pension credit of $11 million in 2005.
Return to table
2. The implementation of FAS 158 in 2006 reduced surplus by $1,849 million and increased the amount of the transfer required to equate capital and surplus. Return to table 3. Interest on Federal Reserve notes. Return to table
The accompanying table summarizes the income, expenses, and distributions of net earnings of the Federal Reserve Banks for 2005 and 2006.
Income in 2006 was $38,410 million, compared with $30,729 million in 2005. Expenses totaled $4,056 million ($2,987 million in operating expenses, $276 million in earnings credits granted to depository institutions, $301 million in assessments for expenditures by the Board of Governors, and $492 million for the cost of new currency). Revenue from priced services was $908 million. Net additions to and deductions from current net income showed a net loss of $159 million. The loss was due primarily to interest expense on securities sold under agreements to repurchase offset, in part, by unrealized gains on assets denominated in foreign currencies revalued to reflect current market exchange rates. Statutory dividends paid to member banks totaled $871 million, $90 million more than in 2005; the increase reflects an increase in the capital and surplus of member banks and a consequent increase in the paid-in capital stock of the Reserve Banks.
Payments to the U.S. Treasury in the form of interest on Federal Reserve notes totaled $29,052 million in 2006, up from $21,468 million in 2005; the payments equal net income after the deduction of dividends paid and of the amount necessary to equate the Reserve Banks' surplus to paid-in capital. The implementation of FAS 158 required a reduction to surplus of $1,849 million and increased the amount necessary to equate surplus to paid-in capital in 2006.
In the "Statistical Tables" section of this report, table 10 details the income and expenses of each Reserve Bank for 2006 and table 11 shows a condensed statement for each Bank for the years 1914 through 2006; table 9 is a statement of condition for each Bank, and table 13 gives the number and annual salaries of officers and employees for each Bank. A detailed account of the assessments and expenditures of the Board of Governors appears in the section "Board of Governors Financial Statements."
|Millions of dollars except as noted|
|Item and year||Total||U.S. government
|Average daily holdings 3|
|Average interest rate (percent)|
1. Includes federal agency obligations.
Return to table
2. Does not include indebtedness assumed by the Federal Deposit Insurance Corporation. Return to table
3. Based on holdings at opening of business. Return to table
4. Earnings have not been netted with the interest expense on securities sold under agreements to repurchase. Return to table
The Federal Reserve Banks' average daily holdings of securities and loans during 2006 amounted to $794,395 million, an increase of $32,886 million from 2005 (table). Holdings of U.S. government securities increased $32,879 million, and holdings of loans increased $7 million. The average rate of interest earned on the Reserve Banks' holdings of government securities increased to 4.59 percent, from 3.80 percent in 2005, and the average rate of interest earned on loans increased to 5.44 percent, from 3.49 percent.
Table 12 in the "Statistical Tables" section shows the volume of operations in the principal departments of the Federal Reserve Banks for the years 2003 through 2006.
In 2006, construction continued on the Kansas City Bank's new headquarters building and construction began on the San Francisco Bank's new Seattle Branch building after the Board approved the project's final design. The multiyear renovation program at the New York Bank's headquarters building continued, as did facility renovation projects at several Reserve Bank offices to accommodate the consolidation of check activities. A long-term facility redevelopment program at the St. Louis Bank continued. Construction of a new pedestrian-screening vestibule was completed, and construction of an addition to the Board's headquarters building began.
Security enhancement programs continue at several facilities. One such project is the recently completed external perimeter security improvement project at the Boston Bank. In addition, the Richmond Bank continued construction of additional security improvements to its headquarters building. The Dallas Bank completed the purchase of property behind its headquarters building for the construction of a remote vehicle-screening and shipping/receiving facility. Planning continues for a similar screening facility at the Philadelphia Bank.
Also during 2006, the Board approved the Richmond Bank's purchase of property adjacent to its headquarters building for construction of a new parking garage. The sales of the Chicago Bank's former Detroit Branch building, the Kansas City Bank's Oklahoma City Branch building, and the San Francisco Bank's Portland Branch building were finalized. Efforts to sell the St. Louis Bank's Little Rock Branch building continued, as did efforts by the Dallas Bank to sell excess land at its Houston Branch.
Activities for the Portland Branch were moved to leased facilities. The Kansas City Bank sold its Oklahoma City Branch building and is leasing space in the building for the Branch's administrative activity. The Birmingham Branch check and cash operations were relocated to the head office in Atlanta. The Birmingham building will house the remaining Branch activities, and available space will be leased.
|Millions of dollars|
|Short-term assets ( Note 1 )|
|Imputed reserve requirements on clearing balances||821.7||993.2|
|Materials and supplies||0.9||1.3|
|Items in process of collection||3,391.0||5,934.4|
|Total short-term assets||11,557.1||15,657.7|
|Long-term assets ( Note 2 )|
|Furniture and equipment||127.9||156.1|
|Leases, leasehold improvements, and long-term prepayments||83.3||88.5|
|Prepaid pension costs||399.0||796.8|
|Deferred tax asset||146.0||0.0|
|Total long-term assets||1,181.0||1,465.9|
|Clearing balances and balances arising from early credit of uncollected items||8,015.6||10,703.2|
|Total short-term liabilities||11,708.4||15,992.4|
|Postretirement/postemployment benefits obligation||392.8||275.0|
|Total long-term liabilities||392.8||275.0|
|Equity (including accumulated other comprehensive loss of $343.9 million at December 31, 2006)||636.9||856.2|
|Total liabilities and equity ( Note 3 )||12,738.1||17,123.6|
Components may not sum to totals because of rounding.
The accompanying notes are an integral part of these pro forma priced services financial statements.
|Millions of dollars|
|Revenue from services provided to depository institutions ( Note 4 )||908.4||901.0|
|Operating expenses ( Note 5 )||803.5||750.0|
|Income from operations||104.8||150.9|
|Imputed costs ( Note 6 )|
|Interest on float||-4.9||6.1|
|Interest on debt||.0||.0|
|Income from operations after imputed costs||98.9||133.5|
|Other income and expenses ( Note 7 )|
|Income before income taxes||221.8||227.2|
|Imputed income taxes ( Note 6 )||66.1||67.3|
|Memo: Targeted return on equity ( Note 6 )||72.0||103.0|
Components may not sum to totals because of rounding.
The accompanying notes are an integral part of these pro forma priced services financial statements.
|Millions of dollars|
|Revenue from services ( Note 4 )||908.4||745.0||80.5||63.6||19.2|
|Operating expenses ( Note 5 )||803.5||658.2||74.7||52.9||17.7|
|Income from operations||104.8||86.8||5.8||10.7||1.5|
|Imputed costs ( Note 6 )||5.9||4.1||0.6||0.8||0.3|
|Income from operations after imputed costs||98.9||82.7||5.2||9.9||1.3|
|Other income and expenses, net ( Note 7 )||122.8||100.7||10.9||8.6||2.6|
|Income before income taxes||221.8||183.3||16.1||18.5||3.9|
|Imputed income taxes ( Note 6 )||66.1||54.6||4.8||5.5||1.2|
|Memo: Targeted return on equity ( Note 6 )||72.0||57.1||7.5||5.6||1.8|
Components may not sum to totals because of rounding.
The accompanying notes are an integral part of these pro forma priced services financial statements.
The imputed reserve requirement on clearing balances held at Reserve Banks by depository institutions reflects a treatment comparable to that of compensating balances held at correspondent banks by respondent institutions. The reserve requirement imposed on respondent balances must be held as vault cash or as non-earning balances maintained at a Reserve Bank; thus, a portion of priced services clearing balances held with the Federal Reserve is shown as required reserves on the asset side of the balance sheet. Another portion of the clearing balances is used to finance short-term and long-term assets. The remainder of clearing balances is assumed to be invested in a portfolio of investments, shown as imputed investments.
Receivables are (1) amounts due the Reserve Banks for priced services and (2) the share of suspense-account and difference-account balances related to priced services.
Materials and supplies are the inventory value of short-term assets.
Prepaid expenses include salary advances and travel advances for priced-service personnel.
Items in process of collection is gross Federal Reserve cash items in process of collection (CIPC) stated on a basis comparable to that of a commercial bank. It reflects adjustments for intra-System items that would otherwise be double-counted on a consolidated Federal Reserve balance sheet; adjustments for items associated with nonpriced items, such as those collected for government agencies; and adjustments for items associated with providing fixed availability or credit before items are received and processed. Among the costs to be recovered under the Monetary Control Act is the cost of float, or net CIPC during the period (the difference between gross CIPC and deferred-availability items, which is the portion of gross CIPC that involves a financing cost), valued at the federal funds rate.Return to table
Consists of long-term assets used solely in priced services, the priced-service portion of long-term assets shared with nonpriced services, and an estimate of the assets of the Board of Governors used in the development of priced services.
Effective December 31, 2006, the Reserve Banks implemented FAS 158, which requires an employer to record the funded status of its benefit plans on its balance sheet, resulting in a reduction to the prepaid pension asset related to priced services and the recognition of an associated deferred tax asset with an offsetting adjustment, net of tax, to accumulated other comprehensive income (AOCI) (see note 3).
Under the matched-book capital structure for assets, short-term assets are financed with short-term payables and clearing balances. Long-term assets are financed with long-term liabilities and clearing balances. As a result, no short- or long-term debt is imputed. Other short-term liabilities include clearing balances maintained at Reserve Banks and deposit balances arising from float. Other long-term liabilities consist of accrued postemployment, postretirement, and nonqualified pension benefits costs and obligations on capital leases.
In order to reflect the funded status of its benefit plans as required by FAS 158, the Reserve Banks recognized the deferred items related to these plans, which include prior service costs and actuarial gains or losses, on the balance sheet. This resulted in an increase to the benefits obligation related to the priced services and an offsetting adjustment, net of tax, to AOCI, which is included in equity.
Equity is imputed at 5 percent of total assets.
Revenue represents charges to depository institutions for priced services and is realized from each institution through one of two methods: direct charges to an institution's account or charges against its accumulated earnings credits.Return to table
Operating expenses consist of the direct, indirect, and other general administrative expenses of the Reserve Banks for priced services plus the expenses for staff members of the Board of Governors working directly on the development of priced services. The expenses for Board staff members were $7.5 million in 2006 and $6.6 million in 2005.
Effective January 1, 1987, the Reserve Banks implemented the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 87, Employers' Accounting for Pensions (FAS 87). Accordingly, the Reserve Banks recognized operating expenses for the qualified pension plan of $11.5 million in 2006 and a credit to expenses of $1.3 million in 2005. Operating expenses also include the nonqualified pension expense of $3.2 million in 2006 and $1.0 million in 2005. The implementation of FAS 158 does not change the systematic approach required by generally accepted accounting principles to recognize the expenses associated with the Reserve Banks' benefit plans in the income statement.
The income statement by service reflects revenue, operating expenses, and imputed costs. Certain corporate overhead costs not closely related to any particular priced service are allocated to priced services based on an expense-ratio method.
Corporate overhead was allocated among the priced services during 2006 and 2005 as follows (in millions):
Imputed costs consist of income taxes, return on equity, interest on debt, sales taxes, the FDIC assessment, and interest on float. Many imputed costs are derived from the private-sector adjustment factor (PSAF) model. The cost of debt and the effective tax rate, which reflect bank holding company data as the proxy for a private-sector firm, are used to impute debt and income taxes in the PSAF model. The after-tax rate of return on equity is based on the returns of the equity market as a whole and is used to impute the profit that would have been earned had the services been provided by a private-sector firm.
Interest is imputed on the debt assumed necessary to finance priced-service assets; however, no debt was imputed in 2006 or 2005. The sales taxes and FDIC assessment that the Federal Reserve would have paid had it been a private-sector firm are also among the components of the PSAF.
Interest on float is derived from the value of float to be recovered, either explicitly or through per-item fees, during the period. Float costs include costs for checks, book-entry securities, ACH, and funds transfers.
Float cost or income is based on the actual float incurred for each priced service. Other imputed costs are allocated among priced services according to the ratio of operating expenses less shipping expenses for each service to the total expenses for all services less the total shipping expenses for all services.
The following list shows the daily average recovery of actual float by the Reserve Banks for 2006 in millions of dollars:
|Float subject to recovery||-100.3|
|Sources of recovery of float|
|Income on clearing balances||-10.0|
Unrecovered float includes float generated by services to government agencies and by other central bank services. Float recovered through income on clearing balances is the result of the increase in investable clearing balances; the increase is produced by a deduction for float for cash items in process of collection, which reduces imputed reserve requirements. The income on clearing balances reduces the float to be recovered through other means. As-of adjustments and direct charges refer to float that is created by interterritory check transportation and the observance of non-standard holidays by some depository institutions. Such float may be recovered from the depository institutions through adjustments to institution reserve or clearing balances or by billing institutions directly. Float recovered through direct charges and per-item fees is valued at the federal funds rate; credit float recovered through per-item fees has been subtracted from the cost base subject to recovery in 2006.Return to table
Consists of investment income on clearing balances and the cost of earnings credits. Investment income on clearing balances for 2006 and 2005 represents the average coupon-equivalent yield on three-month Treasury bills plus a constant spread, based on the return on a portfolio of investments. In both years, the return is applied to the total clearing balance maintained, adjusted for the effect of reserve requirements on clearing balances. Expenses for earnings credits granted to depository institutions on their clearing balances are derived by applying a discounted average coupon-equivalent yield on three-month Treasury bills to the required portion of the clearing balances, adjusted for the net effect of reserve requirements on clearing balances. Return to table
Table 14 in the "Statistical Tables" section of this report
details the acquisition costs and net book value of the Federal Reserve
Banks and Branches.
Return to text
1. In addition to income taxes and the return on equity, the PSAF is made up of three imputed costs: interest on debt, sales taxes, and assessments for deposit insurance by the Federal Deposit Insurance Corporation (FDIC). Board of Governors assets and costs that are related to priced services are also allocated to priced services; in the pro forma financial statements at the end of this chapter, Board assets are part of long-term assets, and Board expenses are included in operating expenses. Return to text
2. Effective December 31, 2006, the Reserve Banks implemented the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans (FAS 158), which resulted in the recognition of a $343.9 million reduction in equity related to the priced services' benefit plans. Including this reduction in equity, which represents a decline in economic value, results in cost recovery of 95.5 percent for the ten-year period. For details on how implementing FAS 158 affected the pro forma financial statements, refer to notes 2, 3, and 5 at the end of this chapter. Return to text
3. In 2005, the Board approved changing the method from using the average of the results of three analytical methods--the comparable accounting earnings model, the discounted cash-flow model, and the capital asset pricing model (CAPM)--to using only the CAPM. Return to text
4. Financial data reported throughout this chapter--revenue, other income, cost, net revenue, and income before taxes--can be linked to the pro forma financial statements at the end of this chapter. Other income is revenue from investment of clearing balances net of earnings credits, an amount termed net income on clearing balances. Total cost is the sum of operating expenses, imputed costs (interest on debt, interest on float, sales taxes, and the FDIC assessment), imputed income taxes, and the targeted return on equity. Return to text
5. The Reserve Banks' Check 21 product suite includes electronic alternatives to paper-check collection, return, and presentment. Return to text
6. The Federal Reserve System's retail payments research suggests that the number of checks written in the United States has been declining since the mid-1990s. For details, see Federal Reserve System, " The 2004 Federal Reserve Payments Study: Analysis of Noncash Payments Trends in the United States, 2000-2003 " (December 2004). ( www.frbservices.org/Retail/pdf/2004PaymentResearchReport.pdf ) Return to text
7. The Reserve Banks also offer non-Check 21 electronic presentment products. In 2006, 25.2 percent of the Reserve Banks' deposit volume was presented to paying banks using these products. Return to text
8. The expenses, revenues, volumes, and fees reported here are for transfers of securities issued by federal government agencies, government-sponsored enterprises, and certain international organizations. The Reserve Banks provide Treasury securities services in their role as the U.S. Treasury's fiscal agent. These services are not considered priced services. For details, see the section "Debt Services" later in this chapter. Return to text
9. Credit float occurs when the Reserve Banks present items for collection to the paying bank prior to providing credit to the depositing bank, and debit float occurs when the Reserve Banks credit the depositing bank prior to presenting items for collection to the paying bank. Return to text