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Appendix B: Priced Services

The Monetary Control Act of 1980 requires the Federal Reserve to charge depository institutions for certain services. The fees charged for providing these priced services are set to recover, over the long run, all direct and indirect costs of providing the services plus imputed costs, including the interest on items credited before actual collection (float) and the private-sector adjustment factor (PSAF). To calculate the PSAF, the Federal Reserve Banks impute the costs that would have been incurred, such as taxes that would have been paid, and the profits that would have been earned (return on equity) had the priced services been provided by a private business firm.

Annual Pricing Process

To meet the requirement for the full recovery of costs over the long run, the Federal Reserve has developed an annual pricing process that involves projecting Reserve Bank expenses, volumes, and revenues, as well as the PSAF and net income on clearing balances, for each service category.

Fees for Federal Reserve services must be approved by the product director for the respective service, by the Reserve Banks' Financial Services Policy Committee (FSPC), and, ultimately, by the Board of Governors.1

The cost of float is projected by applying the federal funds rate to an estimate of the level of float to be generated in the coming year. The PSAF targeted return-on-equity (ROE) capital is based on a capital-asset pricing model using data from the equity market as a whole. The ROE is applied to the level of priced services equity that is imputed to finance the assets the Federal Reserve expects to use in providing priced services in the coming year. Estimates of income taxes are based on the tax rates derived from the financial data of the 50 largest U.S. bank holding companies, based on deposit balances.

The other components of the PSAF are derived from the budgets of the Reserve Banks and the Board: the imputed sales tax (based on budgeted outlays for materials, supplies, and capital); the imputed assessment for insurance by the Federal Deposit Insurance Corporation (based on expected clearing balances and amounts deferred to depository institutions for items deposited for collection with the Reserve Banks); and the portion of the expenses of the Board of Governors related to priced services.2

To estimate net income on clearing balances, the priced services investment income is imputed and netted with related direct costs associated with clearing balances. The pro forma financial statements for the priced services are presented in the 2009 Annual Report of the Board of Governors of the Federal Reserve System.

  1. The product directors are those first vice presidents at selected Reserve Banks with responsibility for management of specific services. The FSPC is responsible for the overall direction of financial services for the Federal Reserve Banks. Return to text
  2. On March 31, 2009, the Board of Governors requested public comment on a proposal to replace the current correspondent bank model underlying the PSAF calculation with a model based on elements derived from publicly traded firms more broadly. The Board is currently analyzing further the proposed publicly traded firm model and an alternate model based on a peer group of publicly traded payments processors that was suggested by several commenters. Return to text

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