Federal Reserve's Key Policies for the Provision of Financial Services
The twelve Federal Reserve Banks provide banking services to depository institutions and the federal government. For depository institutions, they maintain accounts for reserve and clearing balances and provide various payment services, including collecting checks, electronically transferring funds, and distributing and receiving currency and coin. For the federal government, they act as fiscal agents. As such, the Reserve Banks maintain the Treasury Department's transaction account; pay Treasury checks; process electronic payments; and issue, transfer, and redeem U.S. government securities.
The Federal Reserve Banks have been providing payment services to the banking industry since shortly after the Federal Reserve System was established in 1913. Historically, these services were available only to banks that were members of the Federal Reserve, and they were generally provided without explicit charge.
Congress expanded the Federal Reserve's role in the payment system with the enactment of the Monetary Control Act of 1980 (MCA). The MCA subjected all depository institutions, not just member banks, to reserve requirements and also gave all depository institutions access to the Federal Reserve's payment services.
The MCA requires the Federal Reserve Banks to set fees to recover not only all direct and indirect costs of providing the payment services over the long run but also the imputed costs, such as taxes and the cost of capital, that would have been incurred and the imputed profits that would have been earned if a private firm had provided these services. These imputed costs and profits are referred to as the private-sector adjustment factor, or PSAF. The pricing of Federal Reserve services has facilitated competition between the Federal Reserve Banks and private-sector providers of payment services, which has resulted in a more efficient payment system.
Since 1980, the Federal Reserve has adopted policies regarding the provision of Reserve Bank payment services. These policies address various topics, including pricing principles, standards of conduct for avoiding conflicts of interest, the process and criteria for assessing and approving new services and service enhancements, and guidelines for seeking public comment.