Annual Report 2011
Federal Reserve Banks
- Federal Reserve Priced Services
- Currency and Coin
- Fiscal Agency and Government Depository Services
- Use of Federal Reserve Intraday Credit
- Electronic Access to Reserve Bank Services
- Information Technology
- Examinations of the Federal Reserve Banks
- Income and Expenses
- SOMA Holdings and Loans
- Federal Reserve Bank Premises
The Federal Reserve Banks provide payment services to depository and certain other institutions, distribute the nation's currency and coin to depository institutions, and serve as fiscal agents and depositories for the U.S. government and other entities. The Reserve Banks also contribute to setting national monetary policy and supervision of banks and other financial entities operating in the United States (discussed in the preceding sections of this report).
Federal Reserve Priced Services
In this Section:
Federal Reserve Banks provide a range of payment and related services to depository institutions, including collecting checks, operating an automated clearinghouse (ACH) 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.1 The imputed costs and imputed profit are collectively referred to as the private-sector adjustment factor (PSAF).2 Over the past 10 years, Reserve Banks have recovered 98.6 percent of their priced services costs, including the PSAF (see table 1).3
|Year||Revenue from services 1||Operating expenses and imputed costs 2||Targeted return on equity 3||Total costs||Cost recovery (percent) 4, 5|
Note: Here and elsewhere in this chapter, components may not sum to totals or yield percentages shown because of rounding.
1. For the 10-year period, includes revenue from services of $7,837.0 million and other income and expense (net) of $515.7 million. Return to table
2. For the 10-year period, includes operating expenses of $7,506.9 million, imputed costs of $42.1 million, and imputed income taxes of $243.8 million. Return to table
3. Beginning in 2009, the PSAF has been adjusted to reflect the actual clearing balance levels maintained; previously, the PSAF was calculated based on a projection of clearing balance levels. Return to table
4. Revenue from services divided by total costs. Return to table
5. For the 10-year period, cost recovery is 95.3 percent, including the reduction in equity related to ASC 715 reported by the priced services. Return to table
In 2011, Reserve Banks recovered 103.8 percent of total priced services costs, including the PSAF.4 The Banks' operating costs and imputed expenses totaled $444.4 million. Revenue from operations totaled $477.4 million and other income was $1.2 million, resulting in net income from priced services of $34.1 million.5
The Reserve Banks are engaged in a number of technology initiatives that will modernize their priced services processing platforms over the next several years. The Banks are in the process of implementing a new end-to-end electronic check-processing system to improve the efficiency and reliability of their current check-processing operations. They also continued efforts to migrate the FedACH, Fedwire Funds, and Fedwire Securities services off a mainframe system and to a distributed computing environment.
Commercial Check-Collection Service
In 2011, Reserve Banks recovered 105.4 percent of the total costs of their commercial check-collection service, including the related PSAF. The Banks' operating expenses and imputed costs totaled $237.8 million. Revenue from operations totaled $259.2 million and other income totaled $0.7 million, resulting in net income of $22.2 million. In 2011, check-service revenue from operations decreased $94.4 million from 2010.6 Reserve Banks handled 6.8 billion checks in 2011, a decrease of 12.1 percent from 2010 (see table 2). The decline in Reserve Bank check volume continues to be influenced by nationwide trends away from the use of checks.7
By year-end 2011, 99.9 percent of check deposits processed by the Reserve Banks and 99.7 percent of checks presented by the Reserve Banks to paying banks were processed electronically. By year-end 2011, 98 percent of unpaid checks were returned to a Reserve Bank electronically and 90 percent were delivered by the Reserve Bank to the bank of first deposit electronically. The increased acceptance of electronic returns in the past couple of years is partly due to expanded product options offered by the Reserve Banks, such as a PDF delivery option that smaller depository institutions use to receive returns.
|2010 to 2011||2009 to 2010|
|Fedwire funds transfer||129,734||127,762||127,357||1.5||0.3|
|Fedwire securities transfer||7,271||7,913||10,519||-8.3||-24.6|
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 Fedwire funds transfer and securities transfer, the number of transactions originated online and offline; and in national settlement, the number of settlement entries processed.
Commercial Automated Clearinghouse Services
In 2011, the Reserve Banks recovered 100.8 percent of the total costs of their commercial ACH services, including the related PSAF. Reserve Bank operating expenses and imputed costs totaled $106.9 million.
Revenue from ACH operations totaled $111.7 million and other income totaled $0.3 million, resulting in net income of $5.1 million. The Reserve Banks processed 10.4 billion commercial ACH transactions, an increase of 1.1 percent from 2010.
In 2010, the Reserve Banks introduced an opt-in, same-day ACH product that clears and settles selected consumer debit payments on the same day rather than overnight. The service has had limited adoption over the past two years, but its availability has spurred broader industry discussions about whether to establish a same-day service involving both U.S. ACH operators and all ACH participants.
Fedwire Funds and National Settlement Services
In 2011, Reserve Banks recovered 103.0 percent of the costs of their Fedwire Funds and National Settlement Services, including the related PSAF. Reserve Bank operating expenses and imputed costs for these operations totaled $78.8 million in 2011. Revenue from these services totaled $84.0 million, and other income amounted to $0.2 million, resulting in a net income of $5.4 million.
Fedwire Funds Service
The Fedwire Funds Service allows its participants to use their balances at Reserve Banks to transfer funds to other participants in the service. In 2011, the number of Fedwire funds transfers originated by depository institutions increased 1.5 percent from 2010, to approximately 129.7 million. The average daily value of Fedwire funds transfers in 2011 was $2.6 trillion, an increase of 9.6 percent from the previous year.
In November 2011, the Federal Reserve Banks introduced a new message format for the Fedwire Funds Service, the culmination of years of planning and engagement with depository institutions and their corporate customers. The new format was implemented to support extended character business remittance information, an improved cover payments solution, a new field to support payment notification and tracking, and better alignment with SWIFT message formats.
National Settlement Service
The National Settlement Service is a multilateral settlement system that allows participants in private-sector clearing arrangements to settle transactions using Federal Reserve balances. In 2011, the service processed settlement files for 16 local and national private-sector arrangements, a decrease from the 19 arrangements active in 2010. The Reserve Banks processed slightly more than 6,900 files that contained around 571,000 settlement entries for these arrangements in 2011. Activity in 2011 represents an increase from the 522,000 settlement entries processed in 2010.
Fedwire Securities Service
In 2011, the Reserve Banks recovered 103.1 percent of the total costs of the priced-service component of their Fedwire Securities Service, including the related PSAF. The Banks' operating expenses and imputed costs for providing this service totaled $21.0 million in 2011. Revenue from the service totaled $22.5 million and there was no other income, resulting in a net income of $1.5 million.
The Fedwire Securities Service allows its participants to transfer electronically to other service participants certain securities issued by the U.S. Treasury, federal government agencies, government-sponsored enterprises, and certain international organizations.8 In 2011, the number of non-Treasury securities transfers processed via the service decreased 8.3 percent from 2010, to approximately 7.3 million.
In 2011, the Federal Reserve had daily average credit float of $1,151.8 million, compared with daily average credit float of $1,795.7 million in 2010.9
Provision of Federal Reserve Accounts and Services to Financial Market Utilities
Financial market utilities (FMUs) manage and operate multilateral systems for the purpose of transferring, clearing, or settling payments, securities, or other financial transactions among financial institutions, or between financial institutions and an FMU. The Reserve Banks currently provide accounts and services only to FMUs with banking charters in a similar manner to other depository institutions. Title VIII of the Dodd-Frank Act allows the Board to authorize a Federal Reserve Bank to provide accounts and services to FMUs, irrespective of charter type, that are designated as systemically important by the Financial Stability Oversight Council, subject to any applicable rules, orders, standards, or guidelines as prescribed by the Board.
Currency and Coin
The Federal Reserve Board is the issuing authority for the nation's currency (in the form of Federal Reserve notes). In 2011, the Board paid the U.S. Treasury Department's Bureau of Engraving and Printing (BEP) approximately $623.3 million to produce 6.2 billion Federal Reserve notes. The Federal Reserve Banks distribute and receive currency and coin through depository institutions in response to public demand. In 2011, the Reserve Banks distributed 36.9 billion Federal Reserve notes into circulation (payments), a 1.6 percent increase from 2010, and received 35.1 billion Federal Reserve notes from circulation, a 0.7 percent decrease from 2010. The value of Federal Reserve notes in circulation increased approximately 9.6 percent in 2011, to $1,034.5 billion at year-end, largely because of international demand for $100 notes. In 2011, the Reserve Banks also distributed 68.1 billion coins into circulation, a 1.5 percent decrease from 2010, and received 59.8 billion coins from circulation, a 4.2 percent decrease from 2010.
During 2011, the Reserve Banks achieved a nearly 10 percent increase in currency-processing efficiency, which was associated with a program completed in 2010 to improve the hardware and upgrade the Reserve Banks' high-speed currency-processing machines' software. Reserve Banks continue to develop a new cash automation platform that will replace legacy software applications, automate business concepts and processes, and employ technologies to meet current and future needs for the cash business cost effectively. The applications will also facilitate business continuity and contingency planning and enhance the support provided to Reserve Bank customers.
During 2011, the Federal Reserve eliminated the currency paying, receiving, and processing operations at the San Antonio and Nashville Branches and replaced them with outsourced depot operations. Armored carriers operate the depots, which serve as collection points for depository institutions' currency deposits and distribution points for their orders. The armored carrier transports the deposits to the nearest Reserve Bank cash operation for processing, and the Reserve Bank prepares currency orders for the depot operator to distribute to depository institutions. The Pittsburgh Branch functioned as a Federal Reserve operated depot from 1997 to 2011. During 2011, the Federal Reserve outsourced the Pittsburgh depot operation to an armored carrier. The Federal Reserve now has 10 cash depots, all of which are outsourced to armored carriers.
New functionality of high-speed sorting sensors allowed the Banks to implement a policy in April that reduced the premature destruction of notes used extensively for transactional purposes ($1, $5, $10, and $20 notes) by allowing Reserve Banks to accept from and return to depository institutions bank notes either portrait-side-up or portrait-side-down. This misfaced notes policy decreased the destruction rate of $1 notes 5 percentage points, from 21 percent to 16 percent, and decreased the average destruction rate of $5 through $20 notes 4 percentage points, from 22 percent to 18 percent, between April and December. As a result of this policy, average note life for these denominations will increase by an estimated 10 months. Also as a result of the policy, the 2012 budget for new currency decreased by $14 million.
The Board continues to work with the BEP and the U.S. Secret Service to produce a more-secure, new-design $100 note. During 2011, the Board collaborated with the BEP and its paper supplier to resolve the creasing problem identified by the BEP in 2010. The BEP resumed production of the new-design $100 note in late 2011 and the results of production testing indicate that these mitigation steps have reduced the incidence of creasing.
The Board and its consulting firm continue to partner with the BEP in developing a new quality-assurance program for currency at the BEP. This new program will enable the BEP to meet the Board's increasing print order production quantity requirements and the production of more-complex bank notes into the future.
Fiscal Agency and Government Depository Services
In this Section:
As fiscal agents and depositories for the federal government, the Federal Reserve Banks auction Treasury securities, process electronic and check payments for Treasury, collect funds owed to the federal government, maintain Treasury's bank account, and develop, operate, and maintain a number of automated systems to support Treasury's mission. The Reserve Banks also provide certain fiscal agency and depository services to other entities; these services are primarily related to book-entry securities. Treasury and other entities fully reimbursed the Reserve Banks for the costs of providing fiscal agency and depository services.
In 2011, fiscal agency expenses amounted to $484.2 million, a 6.1 percent increase over 2010 (see table 3). These costs increased as a result of requests from Treasury's Bureau of the Public Debt and Financial Management Service. Support for Treasury programs accounted for 94.2 percent of the cost, and support for other entities accounted for 5.8 percent.
|Agency and service||2011||2010||2009|
|Department of the Treasury|
|Bureau of the Public Debt|
|Treasury retail securities||79,346||73,104||73,679|
|Treasury securities safekeeping and transfer||11,187||10,136||8,815|
|Computer infrastructure development and support||1,969||1,980||2,333|
|Financial Management Service|
|Computer infrastructure development and support||67,014||66,461||66,958|
|Other Federal Agencies|
|Total, other agencies||27,893||27,700||27,758|
|Total reimbursable expenses||484,207||456,445||450,285|
Treasury Securities Services
The Reserve Banks work closely with Treasury's Bureau of the Public Debt in support of the borrowing needs of the federal government. The Banks auction, issue, maintain, and redeem securities; provide customer service; and operate the automated systems supporting U.S. savings bonds and marketable Treasury securities (bills, notes, and bonds). Treasury securities services consist of retail securities programs (which primarily serve individual investors) and wholesale securities programs (which serve institutional customers).
Retail Securities Programs
Reserve Bank operating expenses for the retail securities programs were $79.3 million in 2011, reflecting an 8.5 percent increase compared with $73.1 million in 2010. This cost increase is largely explained by the transition and implementation costs associated with the Bureau of the Public Debt's mandate to consolidate the Reserve Banks' savings bond operations, implement image processing for savings bond redemptions, and continue implementing the Treasury Retail E-Services initiative.
In 2011, Treasury decided to consolidate the savings bond operations into a single location. The Reserve Banks completed the consolidation within budget, ahead of schedule, and with no degradation of customer service. In addition, the Reserve Banks began a project to take advantage of developments in image processing to handle savings bond redemptions, which will allow the Reserve Banks to retire software that was built solely to support Treasury savings-bond processing. Finally, the Reserve Banks continued working with the Bureau of the Public Debt on the Treasury Retail E-Services initiative, which will create a virtual customer service and support environment across the Bureau and Reserve Banks sites. Each of these initiatives involves up-front costs but is expected to yield significant savings in the future.
Wholesale Securities Programs
The Reserve Banks support wholesale securities programs through the sale, issuance, safekeeping, and transfer of marketable Treasury securities for institutional investors. Reserve Bank operating expenses in 2011 in support of Treasury securities auctions were $29.2 million, compared with $30.7 million in 2010. In 2011, the Banks conducted 269 Treasury securities auctions, compared with 301 in 2010. The decrease in the number of auctions was attributable primarily to the discontinuation of special cash-management bill auctions that funded the Supplementary Financing Program (SFP). The SFP was introduced by Treasury in 2008 to assist the Federal Reserve System with operations related to the financial crisis.
Operating expenses associated with Treasury securities safekeeping and transfer activities were $11.2 million in 2011, compared with $10.1 million in 2010. The cost increase reflected lower agency volume in 2011, which shifted more cost to Treasury.
The Reserve Banks work closely with Treasury's Financial Management Service and other government agencies to process payments to individuals and companies. For example, the Banks process federal payroll payments, Social Security and veterans' benefits, income tax refunds, vendor payments, and other types of payments.
Reserve Bank operating expenses for payments-related activity totaled $125.2 million in 2011, compared with $112.2 million in 2010. The significant increase in expenses is largely due to expanded requirements for several Treasury programs, notably Go Direct and GOVerify.
Go Direct is an ongoing effort focused on converting check benefit payments to direct deposit or debit cards. In 2011, expenses for Go Direct increased 69.0 percent, to more than $25 million, largely as a result of the construction of a new Go Direct call center. GOVerify is an initiative begun in 2011 and currently provides a single point of entry, or portal, where federal agencies will comply with an OMB mandate to query five data sources before making federal payments. These data sources are collectively known as the "Do Not Pay List." In 2011, expenses for GOVerify were $2.2 million.
The Reserve Banks also manage the Stored Value Card (SVC) program and the Internet Payment Platform (IPP). The SVC program provides stored value cards for use by military personnel on military bases. In 2011, the SVC program's expenses increased 6.6 percent, to $18.1 million, primarily because of a request from the military to purchase additional EagleCash (SVC) cards and new laptops. These expenses were slightly offset by the cancellation of a major SVC deployment.
The Internet Payment Platform (IPP) is part of Treasury's all-electronic initiative and is an electronic invoicing and payment information system that allows vendors to enter invoice data electronically, either through a web-based portal or electronic submission. The IPP accepts, processes, and presents data from agencies and supplier systems related to all stages of the transactions. During 2011, the Federal Reserve Banks' IPP expenses increased 25.8 percent, to $9.1 million. This increase is primarily driven by IPP's increased efforts to expand agency outreach and support in response to Treasury's initiative.
The Reserve Banks also work closely with Treasury's Financial Management Service to collect funds owed the federal government, including various taxes, fees for goods and services, and delinquent debts. In 2011, Reserve Bank operating expenses related to collection services increased by 2.9 percent largely as a result of ongoing support for Treasury's Collections and Cash Management Modernization initiative.
The Reserve Banks also continued to operate Pay.gov, an application supporting Treasury's program that allows the public to use the Internet to authorize and initiate payments to federal agencies. During the year, the Pay.gov program was expanded to include 103 new agency programs, which almost doubled the number of online payments processed by Pay.gov. This expansion resulted in expenses increasing 25.0 percent, to $10.5 million.
The Reserve Banks continued to support the government's centralized delinquent debt-collection program. Specifically, the Banks developed and maintained software that facilitates the collection of delinquent debts owed to federal agencies and states by matching federal payments against delinquent debts, including past-due child support payments owed to custodial parents.
Treasury Cash-Management Services
The Reserve Banks maintain Treasury's operating cash account and provide collateral-management and collateral-monitoring services for those Treasury programs that have collateral requirements. The Reserve Banks also support Treasury's efforts to modernize its financial management processes by developing software, operating help desks, and managing projects on behalf of the Financial Management Service. In 2011, Reserve Bank operating expenses related to Treasury cash-management services totaled $53.8 million, compared with $48.2 million in 2010.
During 2011, the Reserve Banks continued to support Treasury's effort to improve centralized government accounting and reporting functions. In particular, the Reserve Banks collaborated with the Financial Management Service on several ongoing software development efforts, such as the Governmentwide Accounting and Reporting Modernization initiative, which is intended to provide Treasury with a modernized system for the collection and dissemination of financial management and accounting information transmitted from and to federal program agencies.
Services Provided to Other Entities
When permitted by federal statute or when required by the Secretary of the Treasury, the Reserve Banks provide fiscal agency and depository services to other domestic and international entities. Reserve Bank operating expenses for services provided to other entities were $27.9 million in 2011, compared with $27.7 million in 2010, a change of less than 1 percent. Book-entry securities issuance and maintenance activities account for a significant amount of the work performed for other entities, with the majority performed for the Federal Home Loan Mortgage Association, the Federal National Mortgage Association, and the Government National Mortgage Association.
Postal money orders also account for a significant portion of the amount of work performed for other entities; they are processed primarily in image form, resulting in operational improvements, lower staffing levels, and lower costs to the U.S. Postal Service. Postal money orders accounted for 14.9 percent, or $4.1 million, of Reserve Bank operating expenses for services provided to other entities.
Use of Federal Reserve Intraday Credit
The Board's Payment System Risk (PSR) policy governs the use of Federal Reserve Bank intraday credit, also known as daylight overdrafts. A daylight overdraft occurs when an institution's account activity creates a negative balance in the institution's Federal Reserve account at any time in the operating day. Daylight overdrafts enable an institution to send payments more freely throughout the day than if it were limited strictly by its available funds balance. In 2011, the Board implemented significant revisions to the PSR policy to recognize explicitly the role of the central bank in providing intraday balances and credit to healthy depository institutions and to provide collateralized intraday credit at a zero fee. These changes better aligned the Federal Reserve's intraday credit policy with that of other central banks.
Institutions held historically high levels of overnight balances (on average about $1.5 trillion) at the Reserve Banks in 2011, while demand for daylight overdrafts on average remained historically low. In 2011, average daylight overdrafts across the System decreased to just under $2 billion from more than $6 billion in 2010, a decrease of about 70 percent (see figure 1). Similarly, the average level of peak daylight overdrafts decreased to almost $30 billion in 2011 from $60 billion in 2010, a decrease of about 50 percent. Before the financial crisis, overnight balances were much lower and daylight overdrafts significantly higher. In 2007, institutions held on average less than $20 billion in overnight balances and total average daylight overdrafts were $60 billion. In 2011, institutions paid less than $1 million in daylight overdraft fees, down from $6 million in 2010. The decrease in fees is largely attributable to the 2011 policy revision that eliminated fees for collateralized daylight overdrafts.
Electronic Access to Reserve Bank Services
The Reserve Banks provide depository institutions with a variety of alternatives for electronically accessing the Banks' financial services payment and information services. These electronic-access solutions are designed to meet the individual connectivity and contingency requirements of depository institution customers.
For the past few years, as a result of the declining number of depository institutions, Reserve Bank electronic-access connections have decreased. At the same time, the number of employees within depository institutions who have credentials that establish them as trusted users increased, reflecting in part the expansion of electronic value-added services provided. Between 2007 and 2011, the total number of depository institutions in the U.S. declined 12.8 percent. The number of depository institutions with electronic-access connections declined 1.3 percent, while the number of trusted users increased 13.0 percent over the same period.
In 2011, the Reserve Banks expanded their service package options, adding a simplified, bundled payment services package, Fed Complete, and implementing a new product, Fed Transaction Analyzer, which is a risk-management tool to facilitate the analysis of payment transactions and to help automate risk and compliance-reporting requirements.
In 2011, the Federal Reserve Banks continued to improve the efficiency, effectiveness, and security of information technology (IT) services and operations.
To improve the efficiency and overall quality of operations, major multiyear initiatives are under way to consolidate the management and function of the Federal Reserve's help desk, server, and network operations. The consolidation of the help desk function was successfully completed, and progress continues toward the centralization of the remaining enterprise IT functions.
In addition, Federal Reserve Information Technology (FRIT) continued to lead the Reserve Banks' transition to a more robust information security posture by appointing a chief information security officer (CISO), who is responsible for maintaining System awareness of information security (IS) risk and coordinating IS activities among the Federal Reserve Banks.10 The CISO will be responsible, additionally, for overseeing the ongoing transition to the Federal Reserve System's IS framework, which is based on guidance from the National Institute of Science and Technology and adapted to the Federal Reserve's environment.11
Examinations of the Federal Reserve Banks
The Reserve Banks and the consolidated limited liability company (LLC) entities are subject to several levels of audit and review.12 The combined financial statements of the Reserve Banks (see "Federal Reserve Banks Combined Financial Statements" in the "Federal Reserve System Audits" section of this report) as well as the financial statements of each of the 12 Banks and those of the consolidated LLC entities are audited annually by an independent public accountant retained by the Board of Governors.13 In addition, the Reserve Banks, including the consolidated LLC entities, are subject to oversight by the Board of Governors, which performs its own reviews.
The Reserve Banks use the framework established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to assess their internal controls over financial reporting, including the safeguarding of assets. Within this framework, the management of each Reserve Bank annually provides an assertion letter to its board of directors that confirms adherence to COSO standards. Similarly, each consolidated LLC entity annually provides an assertion letter to the board of directors of the Federal Reserve Bank of New York (the New York Reserve Bank).
The Board engaged Deloitte & Touche LLP (D&T) to audit the 2011 combined and individual financial statements of the Reserve Banks and those of the consolidated LLC entities.14
In 2011, D&T also conducted audits of internal controls over financial reporting for each of the Reserve Banks and the consolidated LLC entities. Fees for D&T's services totaled $8 million, of which $2 million was for the audits of the consolidated LLC entities. To ensure auditor independence, the Board requires that D&T be independent in all matters relating to the audits. Specifically, D&T 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.
The Board's reviews of the Reserve Banks include a wide range of off-site and on-site oversight activities, conducted primarily by its Division of Reserve Bank Operations and Payment Systems. Division personnel monitor on an ongoing basis the activities of each Reserve Bank and consolidated LLC entity, FRIT, and the Office of Employee Benefits of the Federal Reserve System (OEB), and they conduct a comprehensive on-site review of each Reserve Bank, FRIT, and OEB at least once every three years.
The comprehensive on-site reviews typically include an assessment of the internal audit function's effectiveness and its conformance to the Institute of Internal Auditors' (IIA) International Standards for the Professional Practice of Internal Auditing, applicable policies and guidance, and the IIA's code of ethics.
The division also reviews the System Open Market Account (SOMA) and foreign currency holdings to determine whether the New York Reserve Bank, while conducting the related transactions, complies with the policies established by the Federal Open Market Committee (FOMC) and to assess SOMA-related IT project management and application development, vendor management, and system resiliency and contingency plans. In addition, D&T audits the year-end schedule of participated asset and liability accounts and the related schedule of participated income accounts. The FOMC is provided with the external audit reports and a report on the division's review.
Income and Expenses
Table 4 summarizes the income, expenses, and distributions of net earnings of the Reserve Banks for 2011 and 2010. Income in 2011 was $85,241 million, compared with $79,301 million in 2010.
|SOMA interest income||83,874||74,957|
|Loan interest income||674||3,528|
|Other current income 1||693||816|
|Operating expenses 2||3,499||3,489|
|Interest paid to depository institutions and earnings credits granted||3,773||2,687|
|Interest expense on securities sold under agreements to repurchase||44||94|
|Current net income||77,925||73,031|
|Net additions to (deductions from) current net income||2,016||9,746|
|Profit on sales of Treasury securities||2,258||0|
|Profit on sales of federal agency and government-sponsored enterprise mortgage-backed securities||10||782|
|Profit on foreign exchange transactions||152||554|
|Net income (loss) from consolidated LLCs||-356||7,560|
|Other additions 3||-48||850|
|Assessments by the Board of Governors||1,403||1,088|
|For Board expenditures||472||422|
|For currency costs||649||623|
|For Consumer Financial Protection Bureau costs 4||242||33|
|For Office of Financial Research costs4||40||10|
|Change in funded status of benefit plans||-1,162||46|
|Comprehensive income before distributions to Treasury||77,376||81,735|
|Transferred to surplus and change in accumulated other comprehensive income||375||884|
|Distributions to U.S. Treasury 5||75,424||79,268|
1. Includes income from priced services, compensation received for services provided, and securities lending fees. Return to table
2. Includes a net periodic pension expense of $525 million in 2011 and $529 million in 2010. Return to table
3. Includes dividends on preferred interests and unrealized loss on Term Asset-Backed Securities Loan Facility loans. Return to table
4. The Board of Governors assesses the Reserve Banks to fund the operations of the Consumer Financial Protection Bureau and, for a two-year period beginning July 21, 2010, the Office of Financial Research. Return to table
5. Interest on Federal Reserve notes. Return to table
Expenses totaled $8,719 million: $3,499 million in operating expenses, $3,773 million in interest paid to depository institutions on reserve balances and term deposits, and earnings credits granted to depository institutions, $44 million in interest expense on securities sold under agreements to repurchase, $472 million in assessments for Board of Governors expenditures, $649 million for new currency costs, $242 million for Consumer Financial Protection Bureau costs, and $40 million for Office of Financial Research costs. Net additions to and deductions from current net income totaled $2,016 million, which includes $2,268 million in realized gains on Treasury securities and federal agency and government-sponsored enterprise mortgage-backed securities (GSE MBS), $356 million in net loss associated with consolidated LLCs, $48 million in other deductions, and $152 million in unrealized gains on investments denominated in foreign currencies revalued to reflect current market exchange rates. Dividends paid to member banks, set at 6 percent of paid-in capital by section 7(1) of the Federal Reserve Act, totaled $1,577 million.
Distributions to the U.S. Treasury in the form of interest on Federal Reserve notes totaled $75,424 million in 2011. The distributions equal comprehensive income after the deduction of dividends paid and the amount necessary to equate the Reserve Banks' surplus to paid-in capital.
The "Statistical Tables" section of this report provides more detailed information on the Reserve Banks and the LLCs. Table 9 is a statement of condition for each Reserve Bank; table 10 details the income and expenses of each Reserve Bank for 2011; table 11 shows a condensed statement for each Reserve Bank for the years 1914 through 2011; and table 13 gives the number and annual salaries of officers and employees for each Reserve Bank. A detailed account of the assessments and expenditures of the Board of Governors appears in the Board of Governors Financial Statements (see "Federal Reserve System Audits").
SOMA Holdings and Loans
The Reserve Banks' average net daily holdings of securities and loans during 2011 amounted to $2,576,882 million, an increase of $453,109 million from 2010 (see table 5).
|Item||Average daily assets (+)/liabilities (-)||Current income (+)/expense (-)||Average interest rate (percent)|
|U.S. Treasury securities 1||1,557,878||837,078||42,257||26,373||2.71||3.15|
|Government-sponsored enterprise debt securities1||125,698||166,810||3,053||3,510||2.43||2.10|
|Federal agency and government-sponsored enterprise mortgage-backed securities 2||918,007||1,079,230||38,281||44,839||4.17||4.15|
|Foreign currency denominated assets 3||26,566||24,936||249||223||0.94||0.89|
|Securities purchased under agreements to resell||0||0||0||0||0.00||0.00|
|Central bank liquidity swaps 4||5,368||989||34||12||0.63||1.21|
|Other SOMA assets 5||8||288||*||*||...||...|
|Total SOMA assets||2,633,525||2,109,331||83,874||74,957||3.18||3.55|
|Securities sold under agreements to repurchase||-72,159||-58,476||-44||-94||0.06||0.16|
|Other SOMA liabilities 6||-56||-799||*||...||0.00||0.00|
|Total SOMA liabilities||-72,215||-59,275||-44||-94||0.06||0.16|
|Total SOMA holdings||2,561,310||2,050,056||83,830||74,863||3.27||3.65|
|Primary, secondary. and seasonal credit||62||4,709||*||32||0.43||0.68|
|Term auction credit||0||7,105||0||18||...||0.25|
|Total loans to depository institutions||62||11,814||*||50||0.43||0.42|
|Credit extended to American International Group, Inc. (AIG), net 7, 8||711||22,874||409||2,728||3.94||11.93|
|Term Asset-Backed Securities Loan Facility (TALF) 9||14,799||39,029||265||750||1.79||1.92|
|Total loans to others||15,510||61,903||674||3,478||4.35||5.62|
|Total SOMA holding and loans||2,576,882||2,123,773||84,504||78,391||3.28||3.69|
1. Face value, net of unamortized premiums and discounts. Return to table
2. Face value of the securities, which is the remaining principal balance of the underlying mortgages, net of unamortized premiums and discounts. Does not include unsettled transactions. Return to table
3. Includes accrued interest. Foreign currency denominated assets are revalued daily at market exchange rates. Return to table
4. Dollar value of foreign currency held under these agreements valued at the exchange rate to be used when the foreign currency is returned to the foreign central bank. This exchange rate equals the market exchange rate used when the foreign currency was acquired from the foreign central bank. Return to table
5. Cash and short-term investments related to the federal agency and government-sponsored enterprise mortgage-backed securities portfolio. Return to table
6. Represents the obligation to return cash margin posted by counterparties as collateral under commitments to purchase and sell federal agency and GSE MBS, as well as obligations that arise from the failure of a seller to deliver securities on the settlement date. Return to table
7. Average daily balance includes outstanding principal and capitalized interest net of unamortized deferred commitment fees and allowance for loan restructuring, and excludes undrawn amounts and credit extended to consolidated limited liability companies. Return to table
8. As a result of the closing of the AIG recapitalization plan, $381 million of deferred commitment fees and allowances were recognized as interest income. The average interest rate calculation for 2011 excludes these items. Return to table
9. Represents the remaining principal balance. Excludes amount necessary to adjust TALF loans to fair value at December 31, which is reported in "Other assets" in the Statement of Condition of the Federal Reserve Banks in Table 9A in the "Statistical Tables" section of this report. Return to table
* Less than $500 thousand.
... Not applicable.
SOMA Securities Holdings
The average daily holdings of Treasury securities increased by $720,800 million, to an average daily amount of $1,557,878 million. The average daily holdings of GSE debt securities decreased by $41,112 million, to an average daily amount of $125,698 million. The average daily holdings of federal agency and GSE MBS decreased by $161,223 million, to an average daily amount of $918,007 million.
The increase in average daily holdings of Treasury securities is due to the purchases through a large-scale asset purchase program and reinvestment of principal payments from other SOMA holdings in Treasury securities. The average daily holdings of GSE debt securities and federal agency and GSE MBS decreased as a result of principal payments received.
Beginning in August 2010, principal payments received from Treasury securities, GSE debt securities, and federal agency and GSE MBS were reinvested in Treasury securities. Beginning in September 2011, principal payments from GSE debt securities and federal agency and GSE MBS were reinvested in federal agency and GSE MBS. There were no holdings of securities purchased under agreements to resell in 2011 or 2010. Average daily holdings of foreign currency denominated assets in 2011 were $26,566 million, compared with $24,936 million in 2010. The average daily balance of central bank liquidity swap drawings was $5,368 million in 2011 and $989 million in 2010. The average daily balance of securities sold under agreements to repurchase was $72,159 million, an increase of $13,683 million from 2010.
The average rates of interest earned on the Reserve Banks' holdings of Treasury securities decreased to 2.71 percent and the average rates on GSE debt securities increased to 2.43 percent in 2011. The average rate of interest earned on federal agency and GSE MBS increased to 4.17 percent in 2011. The average interest rates for securities sold under agreements to repurchase decreased to 0.06 percent in 2011. The average rate of interest earned on foreign currency denominated assets increased to 0.94 percent while the average rate of interest earned on central bank liquidity swaps decreased to 0.63 percent in 2011.
In 2011, the average daily primary, secondary, and seasonal credit extended by the Reserve Banks to depository institutions decreased by $4,647 million to $62 million. The average rate of interest earned on primary, secondary, and seasonal credit decreased to 0.43 percent in 2011, from 0.68 percent in 2010. There were no extensions of credit outstanding under the Term Auction Facility in 2011; the last auction under the program was conducted in March 2010, and the related loans matured in April 2010.
On January 14, 2011, all outstanding draws under the American International Group, Inc. (AIG) revolving line of credit and the related accrued interest, capitalized interest, and capitalized commitment fees were paid in full as a result of the closing of the AIG recapitalization plan. AIG's outstanding draws under the revolving line of credit had an average daily balance of $711 million in 2011, which earned interest at an average rate of 3.94 percent.
The average daily balance of Term Asset-Backed Securities Loan Facility (TALF) loans in 2011 was $14,799 million, which earned interest at an average rate of 1.79 percent. The Board of Governors' authorization for the extension of new TALF loans expired in 2010. The authorization for TALF loans collateralized by newly issued asset-backed securities and legacy commercial mortgage-backed securities (CMBS) expired March 31, 2010, and TALF loans collateralized by newly issued CMBS expired June 30, 2010.
Investments of the Consolidated LLCs
Additional lending facilities established during 2008 and 2009, under authority of section 13(3) of the Federal Reserve Act, involved creating and lending to the consolidated LLC entities (see table 6). Consistent with generally accepted accounting principles, the assets and liabilities of these LLCs have been consolidated with the assets and liabilities of the New York Reserve Bank in the preparation of the statements of condition included in this report. The proceeds at the maturity or the liquidation of the consolidated LLCs' assets are used to repay the loans extended by the New York Reserve Bank.
|Item||Commercial Paper Funding Facility LLC (CPFF)||TALF LLC||Maiden Lane LLC||Maiden Lane II LLC||Maiden Lane III LLC||Total LLCs|
|Net portfolio assets of the consolidated LLCs and the net position of the New York Reserve Bank (FRBNY) and subordinated interest holders|
|Net portfolio assets 1||...||...||811||665||7,805||27,961||9,257||16,457||17,820||23,583||35,693||68,666|
|Liabilities of consolidated LLCs||...||...||0||0||-684||-915||-3||-2||-3||-4||-690||-921|
|Net portfolio assets available 2||...||...||811||665||7,121||27,046||9,254||16,455||17,817||23,579||35,003||67,745|
|Loans extended to the consolidated LLCs by the FRBNY 3||...||...||0||0||4,859||25,845||6,792||13,485||9,826||14,071||21,477||53,401|
|Other beneficial interests3, 4||...||...||109||106||1,385||1,315||1,106||1,071||5,542||5,366||8,142||7,858|
|Total loans and other beneficial interests||...||...||109||106||6,244||27,160||7,898||14,556||15,368||19,437||29,619||61,259|
|Cumulative change in net assets since the inception of the program 5|
|Allocated to FRBNY||...||...||32||-65||877||0||1,130||1,582||1,641||2,775||3,680||4,292|
|Allocated to other beneficial interests||...||...||669||624||0||-114||226||317||808||1,367||1,703||2,194|
|Cumulative change in net assets||...||...||701||559||877||-114||1,356||1,899||2,449||4,142||5,383||6,486|
|Summary of consolidated LLC net income, including a reconciliation of total consolidated LLC net income to the consolidated LLC net income recorded by FRBNY|
|Portfolio interest income 6||...||213||0||1||808||1,133||609||794||2,012||2,299||3,429||4,440|
|Interest expense on loans extended by FRBNY 7||...||-4||0||0||-138||-205||-117||-186||-146||-204||-401||-599|
|Portfolio holdings gains (losses)||...||1||0||0||434||2,571||-991||2,467||-3,363||3,141||-3,920||8,180|
|Net income (loss) of consolidated LLCs||...||208||-4||-4||991||3,364||-543||3,031||-1,692||5,041||-1,248||11,640|
|Less: Net income (loss) allocated to other beneficial interests||...||...||44||-75||114||1,135||-91||1,353||-558||2,266||-491||4,679|
|Net income (loss) allocated to FRBNY||...||208||-48||71||877||2,229||-452||1,678||-1,134||2,775||-757||6,961|
|Add: Interest expense on loans extended by FRBNY, eliminated in consolidation7||...||4||0||0||138||205||117||186||146||204||401||599|
|Net income (loss) recorded by FRBNY||...||212||-48 8||718||1,015||2,434||-335||1,864||-988||2,979||-356||7,560|
|Balances of loans extended to the consolidated LLCs by the FRBNY|
|Balance at beginning of the year||...||9,378||0||0||25,845||29,233||13,485||16,004||14,071||18,500||53,401||73,115|
|Accrued and capitalized interest||...||4||0||0||138||204||117||186||146||204||401||598|
|Balance at end of the year||...||0||0||0||4,859||25,845||6,792||13,485||9,826||14,071||21,477||53,401|
Note: CPFF LLC was formed to provide liquidity to the commercial paper market. The last commercial paper purchases by the CPFF matured on April 26, 2010, and the CPFF was dissolved on August 30, 2010. TALF LLC was formed in 2009 to purchase assets of the Term Asset-Backed Securities Loan Facility, which was formed to improve market conditions for asset-backed securities. Maiden Lane LLC was formed to acquire certain assets of Bear Stearns; Maiden Lane II LLC and Maiden Lane III LLC were formed to acquire certain assets of AIG and its subsidiaries.
1. TALF, Maiden Lane, Maiden Lane II, and Maiden Lane III holdings are recorded at fair value. Fair value reflects an estimate of the price that would be received upon selling an asset if the transaction were to be conducted in an orderly market on the measurement date. Return to table
2. Represents the net assets available for repayment of loans extended by FRBNY and "other beneficiaries" of the consolidated LLCs. Return to table
3. Book value. Includes accrued interest. Return to table
4. The other beneficial interest holders are the U.S. Treasury for TALF LLC, JPMorgan Chase for Maiden Lane LLC, and AIG for Maiden Lane II LLC and Maiden Lane III LLC. Return to table
5. Represents the allocation of the change in net assets and liabilities of the consolidated LLCs that are available for repayment of the loans extended by FRBNY and the other beneficiaries of the consolidated LLCs. The differences between the fair value of the net assets available and the book value of the loans (including accrued interest) are indicative of gains or losses that would be incurred by the beneficiaries if the assets had been fully liquidated at prices equal to the fair value. Return to table
6. Interest income is recorded when earned and includes amortization of premiums, accretion of discounts, and paydown gains and losses. Return to table
7. Interest expense recorded by each consolidated LLC on the loans extended by FRBNY is eliminated when the LLCs are consolidated in FRBNY's financial statements and, as a result, the consolidated LLCs' net income (loss) recorded by FRBNY is increased by this amount. Return to table
8. In addition to the net income attributable to TALF LLC, FRBNY earned $181 million on TALF loans during the year ended December 31, 2011 (interest income of $265 million and a loss on the valuation of loans of $84 million). FRBNY earned $327 million on TALF loans during the year ended December 31, 2010 (interest income of $750 million, loss on the valuation of loans of $436 million, and administrative fees of $13 million). Return to table
... Not applicable.
Federal Reserve Bank Premises
Several Reserve Banks took action in 2011 to maintain and renovate their facilities. The multiyear renovation programs at the New York, St. Louis, and San Francisco Reserve Banks' headquarters buildings continued. Security-enhancement programs continued at several facilities, including the construction of a remote vehicle-screening facility and main entrance lobby security improvements for the Dallas Reserve Bank's headquarters buildings.
The New York Reserve Bank evaluated the purchase of the 33 Maiden Lane property; the purchase was completed in February 2012. The San Francisco Reserve Bank continued its efforts to sell the building formerly used to house its Seattle Branch operations, and the Atlanta Reserve Bank initiated efforts to sell its Nashville Branch building. Additionally, the Cleveland and Dallas Reserve Banks consolidated certain operations performed at their Pittsburgh and San Antonio Branches, respectively, into other Reserve Bank offices. As a result, these Reserve Banks will maintain smaller Branch staffs. The Cleveland Reserve Bank is preparing to sell the Pittsburgh Branch building, and the Dallas Reserve Bank is evaluating options for the San Antonio Branch building.
For more information on the acquisition costs and net book value of the Federal Reserve Banks and Branches, see table 14 in the "Statistical Tables" section of this report.
Pro Forma Financial Statements for Federal Reserve Priced Services
In this Section:
|Short-term assets (Note 1)|
|Imputed reserve requirements on clearing balances||262.3||248.8|
|Materials and supplies||1.4||1.2|
|Items in process of collection||275.4||374.5|
|Total short-term assets||3,390.9||4,150.6|
|Long-term assets (Note 2)|
|Furniture and equipment||38.2||57.3|
|Leases, leasehold improvements, and long-term prepayments||74.6||65.6|
|Prepaid pension costs||321.9||354.7|
|Prepaid FDIC asset||21.7||25.0|
|Deferred tax asset||138.5||132.4|
|Total long-term assets||775.7||880.2|
|Total short-term liabilities||3,576.9||4,345.9|
|Accrued benefit costs||381.3||392.3|
|Total long-term liabilities||381.3||392.3|
|Equity (including accumulated other comprehensive loss of $288.9 million and $267.6 million at December 31, 2011 and 2010, respectively)||208.3||292.6|
|Total liabilities and equity (Note 3)||4,166.6||5,030.8|
Note: Components may not sum to totals because of rounding. The accompanying notes are an integral part of these pro forma priced services financial statements.
|Revenue from services provided to depository institutions (Note 4)||477.4||566.7|
|Operating expenses (Note 5)||421.3||503.9|
|Income from operations||56.1||62.9|
|Imputed costs (Note 6)|
|Interest on float||-1.3||-3.2|
|Interest on debt||0.0||0.0|
|Income from operations after imputed costs||49.3||54.6|
|Other income and expenses (Note 7)|
|Income before income taxes||50.5||62.5|
|Imputed income taxes (Note 6)||16.3||20.7|
|Memo: Targeted return on equity (Note 6)||16.8||13.1|
Note: Components may not sum to totals because of rounding. The accompanying notes are an integral part of these pro forma priced services financial statements.
|Item||Total||Commercial check collection||Commercial ACH||Fedwire funds||Fedwire securities|
|Revenue from services (Note 4)||477.4||259.2||111.7||84.0||22.5|
|Operating expenses (Note 5)||421.3||224.0||102.7||74.7||20.0|
|Income from operations||56.1||35.3||9.0||9.3||2.5|
|Imputed costs (Note 6)||6.8||3.2||1.8||1.4||0.4|
|Income from operations after imputed costs||49.3||32.1||7.2||7.8||2.1|
|Other income and expenses, net (Note 7)||1.2||0.7||0.3||0.2||0.0|
|Income before income taxes||50.5||32.8||7.5||8.0||2.2|
|Imputed income taxes (Note 6)||16.3||10.6||2.4||2.6||0.7|
|Memo: Targeted return on equity (Note 6)||16.8||8.8||4.1||3.0||0.8|
|Cost recovery (percent) (Note 8)||103.8||105.4||100.8||103.0||103.1|
Note: Components may not sum to totals because of rounding. The accompanying notes are an integral part of these pro forma priced services financial statements.
Notes to Pro Forma Financial Statements for Priced Services
(1) Short-Term Assets
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 balances maintained; 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 and deposit balances arising from float are assumed to be invested in a portfolio of investments, shown as imputed investments.
Receivables are composed of fees due the Reserve Banks for providing priced services and 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 are gross Federal Reserve cash items in process of collection (CIPC), stated on a basis comparable to that of a commercial bank. They reflect adjustments for intra-System items that would otherwise be double-counted on a combined 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.
(2) Long-Term Assets
Long-term assets consist of long-term assets used solely in priced services, the priced-service portion of long-term assets shared with nonpriced services, an estimate of the assets of the Board of Governors used in the development of priced services, an imputed prepaid Federal Deposit Insurance Corporation (FDIC) asset (see note 6), and a deferred tax asset related to the priced services pension and postretirement benefits obligation (see note 3).
(3) Liabilities and Equity
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 core clearing balances. As a result, no short- or long-term debt is imputed. Other short-term liabilities include clearing balances maintained at Reserve Banks. Other long-term liabilities consist of accrued postemployment, postretirement, and qualified and nonqualified pension benefits costs and obligations on capital leases.
Effective December 31, 2006, the Reserve Banks implemented the Financial Accounting Standard Board's (FASB) Statement of Financial Accounting Standards (SFAS) No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans (codified in FASB Accounting Standards Codification (ASC) Topic 715 (ASC 715), Compensation-Retirement Benefits), which requires an employer to record the funded status of its benefit plans on its balance sheet. In order to reflect the funded status of its benefit plans, 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 adjustment to the pension and benefit plans 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), which is included in equity. The Reserve Bank priced services recognized a net pension asset in 2011 and 2010. The change in the funded status resulted in a corresponding increase in accumulated other comprehensive loss of $21.3 million in 2011.
To satisfy the FDIC requirements for a well-capitalized institution, equity is imputed at 5 percent of total assets.
Revenue represents fees charged 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 (see note 7).
(5) Operating Expenses
Operating expenses consist of the direct, indirect, and other general administrative expenses of the Reserve Banks for priced services plus the expenses of the Board of Governors related to the development of priced services. Board expenses were $5.2 million in 2011 and $7.2 million in 2010.
Effective January 1, 1987, the Reserve Banks implemented SFAS No. 87, Employers' Accounting for Pensions (codified in ASC 715). Accordingly, the Reserve Bank priced services recognized qualified pension-plan operating expenses of $45.2 million in 2011 and $53.8 million in 2010. Operating expenses also include the nonqualified pension expense of $3.1 million in 2011 and $4.4 million in 2010. The implementation of SFAS No. 158 (ASC 715) 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. As a result, these expenses do not include amounts related to changes in the funded status of the Reserve Banks' benefit plans, which are reflected in AOCI (see note 3).
The income statement by service reflects revenue, operating expenses, imputed costs, other income and expenses, and cost recovery.
(6) Imputed Costs
Imputed costs consist of income taxes, return on equity, interest on debt, sales taxes, an 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 are derived from bank holding company data, which serve as the proxy for the financial data of a representative private-sector firm, and 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 applied to the equity on the balance sheet to impute the profit that would have been earned had the services been provided by a private-sector firm. In October 2008, the Federal Reserve began paying interest on required reserve and excess balances held by depository institutions at Reserve Banks, as authorized by the Emergency Economic Stabilization Act of 2008. Beginning in 2009, given the uncertain long-term effect that payment of interest on reserve balances would have on the level of clearing balances, the equity used to determine the imputed profit has been adjusted to reflect the actual clearing balance levels maintained; previously, projections of clearing balance levels were used.
Interest is imputed on the debt assumed necessary to finance priced-service assets; there was no need to impute debt in 2011 or 2010. The imputed FDIC assessment reflects rate and assessment methodology changes in 2011.
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 the check, Fedwire Funds, ACH, and Fedwire Securities services.
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, less the total shipping expenses, for all services.
The following shows the daily average recovery of actual float by the Reserve Banks for 2011, in millions of dollars:
|Float subject to recovery||-1,156.0|
|Sources of recovery of float|
Unrecovered float includes float generated by services to government agencies and by other central bank services. Float that is created by account adjustments due to transaction errors and the observance of nonstandard holidays by some depository institutions was recovered from the depository institutions through charging 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 2011 and 2010.
(7) Other Income and Expenses
Other income and expenses consist of investment and interest income on clearing balances and the cost of earnings credits. Investment income on clearing balances for 2011 and 2010 represents the average coupon-equivalent yield on three-month Treasury bills. The investment return is applied to the required portion of the clearing balance. Other income also includes imputed interest on the portion of clearing balances set aside as required reserves. Expenses for earnings credits granted to depository institutions on their clearing balances are based on a discounted average coupon-equivalent yield on three-month Treasury bills.
(8) Cost Recovery
Annual cost recovery is the ratio of revenue, including other income, to the sum of operating expenses, imputed costs, imputed income taxes, and targeted return on equity.
1. Financial data reported throughout this chapter--including revenue, other income, costs, income before taxes, and net income--will reference to the "Pro Forma Financial Statements for Federal Reserve Priced Services" at the end of this chapter. Return to text
2. In addition to income taxes and the return on equity, the PSAF includes three other imputed costs: interest on debt, sales taxes, and an assessment 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
3. Effective December 31, 2006, the Reserve Banks implemented the Financial Accounting Standards Board's Statement of Financial Accounting Standards (SFAS) No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans [Accounting Standards Codification (ASC) Topic 715 (ASC 715), Compensation-Retirement Benefits], which has resulted in the recognition of a $288.9 million reduction in equity related to the priced services' benefit plans through 2011. Including this reduction in equity, which represents a decline in economic value, results in cost recovery of 95.3 percent for the 10-year period. For details on how implementing ASC 715 affected the pro forma financial statements, refer to notes 3 and 5 to the "Pro Forma Financial Statements for Federal Reserve Priced Services" at the end of this chapter. Return to text
4. Total cost is the sum of operating expenses, imputed costs (income taxes, interest on debt, interest on float, sales taxes, and the FDIC assessment), and the targeted return on equity. Return to text
5. Other income is investment income earned on clearing balances net of the cost of earnings credits, an amount termed net income on clearing balances. Return to text
6. In 2008, the Reserve Banks discontinued the transportation of commercial checks between their check-processing offices. As a result, in 2011, there were no costs or imputed revenues associated with the transportation of commercial checks between Reserve Bank check-processing offices. Return to text
7. Federal Reserve System retail payments research suggests that the number of checks written in the United States has been declining since the mid-1990s. For details, see "The 2010 Federal Reserve Payments Study: Noncash Payment Trends in the United States, 2006-2009" (December 2010), www.frbservices.org/files/communications/pdf/press/2010_payments_study.pdf . 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. 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 "Treasury Securities Services." Return to text
9. Credit float occurs when the Reserve Banks present checks and other items to the paying bank prior to providing credit to the depositing bank (debit float occurs when the Reserve Banks credit the depositing bank before presenting checks and other items to the paying bank). Return to text
10. FRIT supplies national infrastructure and business line technology services to the Federal Reserve Banks and provides thought leadership regarding the System's information technology architecture and business use of technology. Return to text
11. The National Institute of Science and Technology is a nonregulatory federal agency within the U.S. Department of Commerce. Return to text
12. The consolidated LLC entities were funded by the Federal Reserve Bank of New York (the New York Reserve Bank), and acquired financial assets and financial liabilities pursuant to the policy objectives. The consolidated LLC entities were determined to be variable interest entities, and the New York Reserve Bank is considered to be the controlling financial interest holder of each. Return to text
13. Each consolidated LLC entity reimburses the Board of Governors--from the entity's available net assets--for the fees related to the audit of its financial statements. Return to text
14. In addition, D&T audited the Office of Employee Benefits of the Federal Reserve System (OEB), the Retirement Plan for Employees of the Federal Reserve System (System Plan), and the Thrift Plan for Employees of the Federal Reserve System (Thrift Plan). The System Plan and the Thrift Plan provide retirement benefits to employees of the Board, the Federal Reserve Banks, and the OEB. Return to text