November 14, 2006
Board approves fee schedule for Federal Reserve Bank priced services
For immediate release
The Federal Reserve Board on Tuesday approved fee schedules for Federal Reserve Bank payment services for depository institutions (priced services), effective January 2, 2007.
Since the mid-1990s, there has been a national trend away from the use of checks and toward the use of more efficient electronic payment alternatives. In response, the Reserve Banks have undertaken a number of initiatives to improve operational efficiency and reduce costs, making significant changes to their payments infrastructure. In particular, the Reserve Banks have been adapting their physical check processing infrastructure, reducing the number of Federal Reserve check processing locations from forty-five in 2003 to twenty-two in 2006, and modernizing their check-processing platform. In addition, the Reserve Banks began modifying their product offerings to encourage depository institutions to move to a more electronic check- processing environment.
As a result, the Reserve Banks project that they will recover 101.5 percent of all their priced services costs in 2007 and achieve full cost recovery for the third consecutive year. Overall, the price level for Federal Reserve priced services will increase about 1 percent in 2007. This increase reflects an approximately 6 percent rise in paper check service fees combined with a 0.1 percent increase in fees for the Reserve Banks' electronic payment services. In 2007, the Reserve Banks will continue to encourage the movement to a more electronic check-processing environment by offering depository institutions incentives to receive their checks electronically through Check 21 and by lowering the price on Check 21 deposits destined to electronic recipients by 12.5 percent. The 2007 fee schedule for each of the priced services, except the check service, is included in the attached Federal Register notice. Fee schedules for all priced services are available on the Federal Reserve Banks' financial services web site at http://www.frbservices.org/.
From 1996 to 2005, the Reserve Banks recovered 98.4 percent of priced services costs, including operating costs, imputed costs, and targeted return on equity (or net income). Net income during this ten-year period totaled about $700 million. The Reserve Banks estimate that they will recover 108.2 percent of their priced services costs in 2006 before recognizing the effects of a standard recently issued by the Financial Accounting Standards Board on employers' accounting for defined benefit pension and other postretirement plans (FAS 158). Recognizing the deferred benefit plan losses on the balance sheet, as required by FAS 158, will reduce cost recovery in 2006 to an estimated 77.2 percent. The deferred items could be significant gains or losses in any given year; therefore, recognizing them could cause cost recovery to vary significantly above or below 100 percent. To avoid volatility in priced-services fees, the Reserve Banks will not consider the deferred gains or losses when they set prices each year. The Reserve Banks will, however, continue to factor such gains or losses into the fee-setting process to the extent that they are recognized in expenses through the systematic approach required by generally accepted accounting principles. Furthermore, in light of the recent adoption of FAS 158, the Board plans to continue to study how incorporating FAS 158 affects our assessment of the Federal Reserve's compliance with the Monetary Control Act's long-run cost recovery requirement.
In addition, the Board approved the 2007 private-sector adjustment factor (PSAF) for Reserve Bank priced services of $132.5 million. The PSAF is an allowance for income taxes and other imputed expenses that would have to be paid and profits that would have to be earned if the Reserve Banks' priced services were provided by a private business. The Monetary Control Act of 1980 requires that the Federal Reserve establish fees 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 Board's notice is attached.