Annual Report 2012
Federal Reserve Banks
- Federal Reserve Priced Services
- Currency and Coin
- Fiscal Agency and Government Depository Services
- Use of Federal Reserve Intraday Credit
- FedLine Access to Reserve Bank Services
- Information Technology
- Examinations of the Federal Reserve Banks
- Income and Expenses
- SOMA Holdings and Loans
- Federal Reserve Bank Premises
- Pro Forma Financial Statements for Federal Reserve Priced Services
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, "priced services" that include collecting checks, operating an automated clearinghouse (ACH) service, transferring funds and securities, and providing a multilateral settlement service.
The Federal Reserve Banks, working with the financial industry, have made substantial progress in their effort to migrate to a more efficient electronic payment system by expanding the use of ACH payments and by converting from a paper-based check clearing process to an electronic one. Over the past several years, the Reserve Banks have capitalized on efficiencies gained from increased electronic processing by bundling payment services and offering information and risk management services, which help depository institutions manage effectively both their payment operations and associated operational and credit risk.
The Reserve Banks have also been engaged in a number of multiyear technology initiatives that will modernize their priced services processing platforms over the next several years. In 2012, the Banks successfully implemented a new electronic check-processing system; they also continued efforts to migrate the FedACH, Fedwire Funds, and Fedwire Securities services off a mainframe system and to a distributed computing environment.
Further, the Reserve Banks announced in October 2012 their intention to expand efforts to improve the speed and security of payment networks and services and to work more with the industry on standards and processes to further improve overall efficiency. As part of this effort, the Reserve Banks intend to engage on a deeper level with various end users in payment transactions to understand both needs and challenges.
Recovery of Direct and Indirect Costs
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 99.5 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 $7,370.1 million and other income and expense (net) of $514.2 million. Return to table
2. For the 10-year period, includes operating expenses of $7,037.0 million, imputed costs of $42.4 million, and imputed income taxes of $244.8 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 92.1 percent, including the effect of accumulated other comprehensive income (AOCI) reported by the priced services under ASC 715. For details on changes to the estimation of priced services accumulated other comprehensive income and their effect on the pro forma financial statements, refer to note 4 to the "Pro Forma Financial Statements for Federal Reserve Priced Services" at the end of this chapter. Return to table
In 2012, Reserve Banks recovered 104.1 percent of total priced services costs, including the PSAF.4 The Banks' operating costs and imputed expenses totaled $423.0 million. Revenue from operations totaled $449.3 million and other income was $0.5 million, resulting in net income from priced services of $26.8 million.5
Commercial Check-Collection Service
In 2012, Reserve Banks recovered 108.8 percent of the total costs of their commercial check-collection service, including the related PSAF. The Banks' operating expenses and imputed costs totaled $198.4 million. Revenue from operations totaled $220.0 million and other income totaled $0.3 million, resulting in net income of $21.9 million. In 2012, check-service revenue from operations decreased $39.2 million from 2011.6 Reserve Banks handled 6.6 billion checks in 2012, a decrease of 2.3 percent from 2011 (see table 2). The decline in Reserve Bank check volume continues to be influenced by nationwide trends away from the use of checks.
By year-end 2012, 99.9 percent of check deposits processed by the Reserve Banks and 99.9 percent of checks presented by the Reserve Banks to paying banks were processed electronically. In addition, 99.2 percent of unpaid checks were returned electronically to a Reserve Bank and 95.0 percent were delivered electronically by the Reserve Bank to the bank of first deposit. The Reserve Banks in 2012 continued to reduce check-service operating costs by consolidating further their check-processing offices into one site that supports both paper and electronic check processing.7
|2011 to 2012||2010 to 2011|
|Fedwire funds transfer||134,409||129,734||127,762||3.6||1.5|
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
The Automated Clearinghouse Service enables depository institutions and their customers to process large volumes of payments effectively through electronic, batch processes. In 2012, the Reserve Banks recovered 101.0 percent of the total costs of their commercial ACH services, including the related PSAF. Reserve Bank operating expenses and imputed costs totaled $111.4 million.
Revenue from ACH operations totaled $114.8 million and other income totaled $0.1 million, resulting in net income of $3.6 million. The Reserve Banks processed 10.7 billion commercial ACH transactions, an increase of 3.1 percent from 2011.
Fedwire Funds and National Settlement Services
In 2012, Reserve Banks recovered 98.8 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 $89.8 million in 2012. Revenue from these services totaled $90.5 million, and other income amounted to $0.1 million, resulting in a net income of $0.8 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 2012, the number of Fedwire funds transfers originated by depository institutions increased 3.6 percent from 2011, to approximately 134.4 million. The average daily value of Fedwire funds transfers in 2012 was $2.4 trillion, a decrease of 9.7 percent from the previous year.
The Reserve Banks in 2012 introduced payment notification functionality, which allows a sending bank that is a Fedwire Funds Service participant to request an e-mail notification from a beneficiary's bank when the beneficiary's bank credits or otherwise pays the beneficiary of a particular funds transfer. This functionality facilitates transparency and responds to needs expressed by both depository institutions and their corporate customers.
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 2012, the service processed settlement files for 16 local and national private-sector arrangements, the same number of arrangements as were active in 2011. The Reserve Banks processed slightly more than 8,500 files that contained around 663,000 settlement entries for these arrangements in 2012. Activity in 2012 represents an increase from the 571,000 settlement entries processed in 2011.
Fedwire Securities Service
In 2012, the Reserve Banks recovered 100.3 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 $23.5 million in 2012. Revenue from the service totaled $24.1 million and there was no other income, resulting in a net income of $0.6 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 2012, the number of non-Treasury securities transfers processed via the service decreased 11.4 percent from 2011, to approximately 6.4 million.
In 2012, the Reserve Banks had daily average credit float of $ 767.1 million, compared with daily average credit float of $1,151.8 million in 2011.9
Currency and Coin
The Federal Reserve Board is the issuing authority for the nation's currency (in the form of Federal Reserve notes). In 2012, the Board paid the U.S. Treasury Department's Bureau of Engraving and Printing (BEP) approximately $687.7 million to produce 7.8 billion Federal Reserve notes. The Federal Reserve Banks distribute and receive currency and coin through depository institutions in response to public demand.
In 2012, the Reserve Banks distributed 37.4 billion Federal Reserve notes into circulation (payments), a 1.2 percent increase from 2011, and received 35.6 billion Federal Reserve notes from circulation, a 1.3 percent increase from 2011.
The value of Federal Reserve notes in circulation increased nearly 9 percent in 2012, to $1,126.7 billion at year-end, largely because of international demand for $100 notes. In 2012, the Reserve Banks also distributed 69.1 billion coins into circulation, a 1.7 percent increase from 2011, and received 58.7 billion coins from circulation, a 1.5 percent decrease from 2011.
Improvements to Efficiency and Risk Management
The Reserve Banks have increased operational efficiency and improved risk management. Advances in currency-processing equipment and sensor technology have increased productivity and improved note authentication and fitness measurement, thereby reducing the premature destruction of fit currency while maintaining the quality and integrity of currency in circulation.
Since 2009, policy changes and improvements to the Reserve Banks' high-speed currency-processing equipment have increased productivity almost 20 percent and Reserve Banks have reduced staffing levels in cash services approximately 8 percent. Adoption of a risk-based approach to business processes has increased efficiency by using technology more extensively and calibrating risk controls to the level of inherent risk. As a result of these changes, the Federal Reserve has increased its ability to adapt operations and implement new policies that improve its ability to meet currency demand efficiently. The Reserve Banks are investigating additional opportunities to improve processing technology to further increase productivity, reduce unit costs, and enhance risk management.
Other Improvements and Efforts
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 the cash business's current and future needs cost effectively. The new platform will also facilitate business continuity and contingency planning and enhance the support provided to Reserve Bank customers. In 2012, the Reserve Banks implemented one of the first major components of the new platform, the National Cash Data Warehouse, a central repository for the Reserve Banks' cash data. The full automation platform is scheduled to be complete in 2017.
The Board continues to work with the Treasury Department and its BEP and the U.S. Secret Service in preparing for issuing the new-design $100 note. During 2012, the BEP met the Board's order of nearly 1.6 billion new-design $100 notes and the Board ordered an additional 2.0 billion of these notes for 2013 to build inventories in preparation for issuance.
The Board and its consulting firm continue to partner with the BEP in developing a new, comprehensive quality-assurance program at the BEP. During 2012, the Board, the BEP, and the consultants formed cross-functional teams to improve product and technology development, quality-system management, standard operating procedures, process changes, training programs, inspection of incoming raw materials, supplier management, and equipment calibration and maintenance. This program will enable the BEP to more efficiently and effectively meet the Board's print order requirements and the production of more-technologically 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 2012, fiscal agency expenses amounted to $506.0 million, a 4.5 percent increase from 2011 (see table 3). These costs increased as a result of requests from Treasury's Bureau of the Fiscal Service.10 Support for Treasury programs accounted for 93.2 percent of the cost, and support for other entities accounted for 6.8 percent.
|Agency and service||2012||2011||2010|
|Department of the Treasury|
|Treasury Securities Services|
|Treasury retail securities||60,208||79,346||73,104|
|Treasury securities safekeeping and transfer||14,131||11,187||10,136|
|Computer infrastructure development and support||4,990||1,969||1,980|
|Payment, Collection, and Cash-Management Services|
|Computer infrastructure development and support||70,075||67,014||66,461|
|Other Federal Agencies|
|Total, other agencies||34,569||27,893||27,700|
|Total reimbursable expenses||506,012||484,207||456,445|
Treasury Securities Services
The Reserve Banks work closely with Treasury's Fiscal Service 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 $60.2 million in 2012, a 24 percent decrease compared with $79.3 million in 2011. This cost decrease is largely explained by the Fiscal Service's decision to consolidate Reserve Bank savings bond operations, and to effect other operational changes. Treasury relied on a recently completed Reserve Bank initiative that takes advantage of developments in image processing to handle savings bond redemptions and has allowed the Reserve Banks to retire some savings-bond unique software that was built solely to support Treasury. In addition, the Reserve Banks continue to support Treasury's Retail E-Services initiative, which will create a new customer service and support environment for the Treasury and the Reserve Banks.
Wholesale Securities Programs
The Reserve Banks support wholesale securities programs through the sale, issuance, safekeeping, and transfer of marketable Treasury securities for institutional investors. In 2012, Reserve Bank operating expenses in support of Treasury securities auctions were $30.6 million, compared with $29.2 million in 2011. The Banks conducted 264 Treasury securities auctions, compared with 269 in 2011.
Operating expenses associated with Treasury securities safekeeping and transfer activities were $14.1 million in 2012, compared with $11.2 million in 2011. The cost increase is attributable to the Reserve Banks' ongoing technological effort to migrate securities services from a mainframe system to a distributed computing environment as well as lower government agency volume in 2012, which shifted more costs to Treasury.
The Reserve Banks work closely with Treasury's Fiscal 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 $141.5 million in 2012, compared with $125.2 million in 2011. The significant increase in expenses is largely due to expanded Treasury requirements for the Go Direct, Do Not Pay (formerly known as the GoVerify program), and the Invoice Processing Platform (IPP) programs.
The Go Direct initiative incurred additional costs as Reserve Banks expanded operations to meet Treasury's 2013 deadline to convert federal benefit check payments to electronic channels. In 2012, expenses for Go Direct increased 17.2 percent, to more than $29.3 million, because of staff increases to support higher Go Direct call-center volumes.
In support of Treasury's Do Not Pay initiative, the Reserve Banks have built a single point of access, or portal, through which federal agencies can query multiple data sources before making federal payments. The Reserve Banks implemented a number of software releases, automated manual processes, and added a number of new agency participants. In 2012, expenses for Do Not Pay were $8.0 million, compared with $2.2 million in 2011.
The 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 transactions. During 2012, the Reserve Banks' IPP expenses increased 30.8 percent, to $11.9 million. This increase is primarily driven by IPP's support of expanded agency outreach and support in response to Treasury's initiative.
Treasury's payments-related expenses were offset somewhat by decreases in the Stored Value Card (SVC) program. The program provides stored value cards that military personnel can use to purchase goods and services on military bases. In 2012, the SVC program's expenses decreased 20.2 percent, to $14.5 million, because the military deferred replacing SVC mobile kiosks and implementing software projects.
The Reserve Banks also work closely with Treasury's Fiscal Service to collect funds owed the federal government, including various taxes, fees for goods and services, and delinquent debts. In 2012, Reserve Bank operating expenses related to collections services increased 7.1 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 expanded to include 75 new agency programs, and it processed more than 94 million online payments, a 22 percent increase from 2011. This expansion resulted in expenses' increasing 11 percent, to $11.7 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 Fiscal Service.
In 2012, Reserve Bank operating expenses related to Treasury cash-management services totaled $59.0 million, compared with $53.8 million in 2011.
During 2012, the Reserve Banks continued to support Treasury's efforts to improve centralized government accounting and reporting functions. In particular, the Reserve Banks collaborated with the Fiscal Service on several ongoing software development efforts, such as the Central Accounting Reporting System (CARS), 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. In 2012, expenses for CARS were $22.1 million, compared with $16.5 million in 2011.
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 $34.6 million in 2012, compared with $27.9 million in 2011, an increase of 23.9 percent. The expense increase in 2012 is attributable to the Reserve Banks' ongoing effort to migrate securities services from a mainframe system to a distributed computing environment.
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.
The Reserve Banks continue to process postal money orders primarily in image form, resulting in operational improvements, lower staffing levels, and lower costs to the U.S. Postal Service. In 2012, expenses for postal money orders were $4.0 million, compared with $4.1 million in 2011.
Use of Federal Reserve Intraday Credit
The Federal Reserve 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 intraday funds balance. The PSR policy recognizes explicitly the role of the central bank in providing intraday balances and credit to healthy institutions; under the policy the Reserve Banks provide collateralized intraday credit at no cost.
Before late 2008, overnight balances were much lower and daylight overdrafts significantly higher than levels observed since late 2008. In 2007, for example, institutions held on average less than $20 billion in overnight balances, and total average daylight overdrafts were $60 billion. In contrast, institutions held historically high levels of overnight balances (on average about $1.5 trillion) at the Reserve Banks in 2012, while demand for daylight overdrafts on average remained historically low.
Average daylight overdrafts across the System increased to $2.1 billion in 2012 from $1.7 billion in 2011, an increase of about 20 percent (see figure 1). Conversely, the average level of peak daylight overdrafts decreased to almost $20 billion in 2012 from $30 billion in 2011, a decrease of about 35 percent.
Daylight overdraft fees are also at historically low levels. In 2012, institutions paid less than $50,000 in daylight overdraft fees, down from almost $1 million in 2011. The decrease in fees is largely attributable to the March 2011 PSR policy revision that eliminated fees for collateralized daylight overdrafts.
FedLine Access to Reserve Bank Services
The Reserve Banks provide depository institutions with a variety of alternatives for electronically accessing the Banks' payment and information services through their FedLine Access Solutions. These FedLine channels 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 FedLine 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 2012, the total number of depository institutions in the U.S. declined 15.4 percent. The number of depository institutions with FedLine connections declined 5.9 percent, while the number of trusted users increased 11.0 percent over the same period.
In 2012, the Reserve Banks continued to expand usage of new service package options launched in 2011. The number of depository institutions using the FedComplete bundled payment services package increased from 60 to 146 at year-end 2012. Fed Transaction Analyzer, a risk-management tool to facilitate the analysis of payment transactions and to help automate risk and compliance-reporting requirements, was used by 816 depository institutions with 2,020 credentialed employees, increases of 571 and 1,457, respectively.
The Federal Reserve Banks continued to improve the efficiency, effectiveness, and security of information technology (IT) services and operations in 2012.
To improve the efficiency and overall quality of operations, major multiyear initiatives continue to consolidate the management and function of the Federal Reserve's IT operations and networking services. Substantial progress has been made, and the centralization of the remaining enterprise IT functions will be completed within the next two years.
In addition, Federal Reserve Information Technology (FRIT) continued to lead the Reserve Banks' transition to a more robust information security posture, and FRIT's chief information security officer (CISO) continued in his role maintaining System awareness of information security (IS) risk and coordinating IS activities among the Federal Reserve Banks.11 Under the direction of the CISO, management of the Federal Reserve's information security risk has matured. In addition to the implementation of the first phase of a program to implement a number of robust security measures across the System, 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, continues to progress.12
Examinations of the Federal Reserve Banks
The Reserve Banks and the consolidated variable interest entities (VIEs) are subject to several levels of audit and review.13 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 VIEs are audited annually by an independent public accountant retained by the Board of Governors.14 In addition, the Reserve Banks, including the consolidated VIEs, 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 VIE annually provides an assertion letter to the board of directors of the New York Reserve Bank.
The Federal Reserve Board engaged Deloitte & Touche LLP (D&T) to audit the 2012 combined and individual financial statements of the Reserve Banks and those of the consolidated VIEs.15
In 2012, D&T also conducted audits of internal controls over financial reporting for each of the Reserve Banks, Maiden Lane LLC, Maiden Lane III LLC, and TALF LLC. Fees for D&T's services totaled $7 million, of which $1 million was for the audits of the consolidated VIEs. 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. In 2012, the Banks did not engage D&T for any non-audit services. One Bank leases office space to D&T.
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 VIE, 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 2012 and 2011. Income in 2012 was $81,586 million, compared with $85,241 million in 2011.
|SOMA interest income||80,860||83,874|
|Loan interest income||81||674|
|Other current income 1||645||693|
|Operating expenses 2||3,781||3,499|
|Interest paid on depository institutions deposits and term deposits||3,875||3,773|
|Interest expense on securities sold under agreements to repurchase||142||44|
|Current net income||73,788||77,925|
|Net additions to (deductions from) current net income||18,380||2,016|
|Profit on sales of Treasury securities||13,255||2,258|
|Profit on sales of federal agency and government-sponsored enterprise mortgage-backed securities||241||10|
|Profit (loss) on foreign exchange transactions||-1,116||152|
|Net income (loss) from consolidated VIEs||6,038||-356|
|Other additions 3||-38||-48|
|Assessments by the Board of Governors||1,599||1,403|
|For Board expenditures||490||472|
|For currency costs||722||649|
|For Consumer Financial Protection Bureau costs 4||385||242|
|For Office of Financial Research costs4||2||40|
|Net income before interest on Federal Reserve notes expense remitted to Treasury||90,569||78,538|
|Interest on Federal Reserve notes expense remitted to Treasury||88,418||75,424|
|Other comprehensive loss||-53||-1,162|
|Total distribution of net income||90,516||77,376|
|Dividends on capital stock||1,637||1,577|
|Transfer to surplus and change in accumulated other comprehensive income||461||375|
|Interest on Federal Reserve notes expense remitted to Treasury||88,418||75,424|
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 $641 million in 2012 and $525 million in 2011. 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
Expenses totaled $9,397 million: $3,781 million in operating expenses; $3,875 million in interest paid to depository institutions on reserve balances and term deposits; $142 million in interest expense on securities sold under agreements to repurchase; $490 million in assessments for Board of Governors expenditure; $722 million for new currency costs; $387 million for Consumer Financial Protection Bureau costs and Office of Financial Research costs. Net additions to current net income totaled $18,380 million, which includes $13,496 million in realized gains on Treasury securities and federal agency and government-sponsored enterprise mortgage-backed securities (GSE MBS); $6,038 million in net income associated with consolidated VIEs; $38 million in other deductions; and $1,116 million in unrealized losses on foreign currency denominated assets 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 $1,637 million.
Comprehensive net income before interest on Federal Reserve notes expense remitted to Treasury totaled $90,516 million in 2012 (net income of $90,569 million, reduced by other comprehensive loss of $53 million). Distributions to Treasury in the form of interest on Federal Reserve notes totaled $88,418 million in 2012. The distribution equals 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 VIEs.Table 9 is a statement of condition for each Reserve Bank; table 10 details the income and expenses of each Reserve Bank for 2012; table 11 shows a condensed statement for each Reserve Bank for the years 1914 through 2012; 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 2012 amounted to $2,715,976 million, an increase of $139,094 million from 2011 (see table 5).
|Item||Average daily assets (+)/liabilities (-)||Current income (+)/expense (-)||Average interest rate (percent)|
|U.S. Treasury securities 1||1,774,043||1,557,878||46,416||42,257||2.62||2.71|
|Government-sponsored enterprise debt securities1||94,248||125,698||2,626||3,053||2.79||2.43|
|Federal agency and government-sponsored enterprise mortgage-backed securities 2||872,819||918,007||31,429||38,281||3.60||4.17|
|Foreign currency denominated assets 3||25,488||26,566||139||249||0.55||0.94|
|Central bank liquidity swaps 4||38,737||5,368||241||34||0.62||0.63|
|Other SOMA assets 5||66||8||9||*||...||...|
|Total SOMA assets||2,805,401||2,633,525||80,860||83,874||2.88||3.18|
|Securities sold under agreements to repurchase||-91,785||-72,159||-142||-44||0.15||0.06|
|Other SOMA liabilities 6||-2,209||-56||...||...||...||...|
|Total SOMA liabilities||-93,994||-72,215||-142||-44||0.15||0.06|
|Total SOMA holdings||2,711,407||2,561,310||80,718||83,830||2.98||3.27|
|Primary, secondary. and seasonal credit||72||62||*||*||0.38||0.43|
|Total loans to depository institutions||72||62||*||*||0.38||0.43|
|Credit extended to American International Group, Inc. (AIG), net 7, 8||...||711||...||409||...||3.94|
|Term Asset-Backed Securities Loan Facility (TALF) 9||4,497||14,799||80||265||1.78||1.79|
|Total loans to others||4,497||15,510||80||674||1.78||4.35|
|Total SOMA holding and loans||2,715,976||2,576,882||80,798||84,504||2.97||3.28|
1. Face value, net of unamortized premiums and discounts. Return to table
2. Face value, which is the remaining principal balance of the securities, 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. Return to table
* Less than $500 thousand.
... Not applicable.
SOMA Securities Holdings
The average daily holdings of Treasury securities increased by $216,165 million, to an average daily amount of $1,774,043 million. The average daily holdings of GSE debt securities decreased by $31,450 million, to an average daily amount of $94,248 million. The average daily holdings of federal agency and GSE MBS decreased by $45,188 million, to an average daily amount of $872,819 million.
The increases in average daily holdings of Treasury securities and federal agency and GSE MBS are due to the purchases through a large-scale asset purchase program and reinvestment of principal payments from other SOMA holdings in federal agency and GSE MBS. The average daily holdings of GSE debt securities decreased as a result of principal payments received.
There were no significant holdings of securities purchased under agreements to resell in 2012 or 2011. Average daily holdings of foreign currency denominated assets in 2012 were $25,488 million, compared with $26,566 million in 2011. The average daily balance of central bank liquidity swap drawings was $38,737 million in 2012 and $5,368 million in 2011. The average daily balance of securities sold under agreements to repurchase was $91,785 million, an increase of $19,626 million from 2011.
The average rates of interest earned on the Reserve Banks' holdings of Treasury securities decreased to 2.62 percent and the average rates on GSE debt securities increased to 2.79 percent in 2012. The average rate of interest earned on federal agency and GSE MBS decreased to 3.60 percent in 2012. The average interest rates for securities sold under agreements to repurchase increased to 0.15 percent in 2012. The average rate of interest earned on foreign currency denominated assets decreased to 0.55 percent while the average rate of interest earned on central bank liquidity swaps decreased to 0.62 percent in 2012.
In 2012, the average daily primary, secondary, and seasonal credit extended by the Reserve Banks to depository institutions increased by $10 million, to $72 million. The average rate of interest earned on primary, secondary, and seasonal credit decreased to 0.38 percent in 2012, from 0.43 percent in 2011. The average daily balance of Term Asset-Backed Securities Loan Facility (TALF) loans in 2012 was $4,497 million, which earned interest at an average rate of 1.78 percent.
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 repaid in full as a result of the closing of the AIG recapitalization plan.
Investments of the Consolidated VIEs
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 VIEs (see table 6). Consistent with generally accepted accounting principles, the assets and liabilities of these VIEs 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 VIEs' assets are used to repay the loans extended by the New York Reserve Bank.
Net portfolio assets of the consolidated VIEs decreased from $35,693 million to $2,750 million. The sale of portfolio assets held by Maiden Lane LLC, Maiden Lane II LLC, and Maiden Lane III LLC during 2012 enabled the repayment in full, including accrued interest, of loans extended to those VIEs by the FRBNY. Funds advanced to those VIEs by other beneficial interests were also repaid in full.
|Item||TALF LLC||Maiden Lane LLC||Maiden Lane II LLC||Maiden Lane III LLC||Total VIEs|
|Net portfolio assets of the consolidated VIEs and the net position of the New York Reserve Bank (FRBNY) and subordinated interest holders|
|Net portfolio assets 1||856||811||1,811||7,805||61||9,257||22||17,820||2,750||35,693|
|Liabilities of consolidated VIEs||0||0||-415||-684||0||-3||0||-3||-415||-690|
|Net portfolio assets available 2||856||811||1,396||7,121||61||9,254||22||17,817||2,335||35,003|
|Loans extended to the consolidated VIEs by the FRBNY 3||0||0||0||4,859||0||6,792||0||9,826||0||21,477|
|Other beneficial interests3, 4||113||109||0||1,385||0||1,106||0||5,542||113||8,142|
|Total loans and other beneficial interests||113||109||0||6,244||0||7,898||0||15,368||113||29,619|
|Cumulative change in net assets since the inception of the program 5|
|Allocated to FRBNY||71||32||1,396||877||51||1,130||15||1,641||1,533||3,680|
|Allocated to other beneficial interests||672||669||0||0||10||226||7||808||689||1,703|
|Cumulative change in net assets||743||701||1,396||877||61||1,356||22||2,449||2,222||5,383|
|Summary of consolidated VIE net income, including a reconciliation of total consolidated VIE net income to the consolidated VIE net income|
|Portfolio interest income 6||1||0||34||808||52||609||1,023||2,012||1,110||3,429|
|Interest expense on loans extended by FRBNY 7||0||0||-10||-138||-11||-117||-46||-146||-67||-401|
|Portfolio holdings gains (losses)||0||0||552||434||1,393||-991||5,506||-3,363||7,451||-3,920|
|Net income (loss) of consolidated VIEs||-3||-4||519||991||1,426||-543||6,374||-1,692||8,316||-1,248|
|Less: Net income (loss) allocated to other beneficial interests||4||44||0||114||238||-91||2,103||-558||2,345||-491|
|Net income (loss) allocated to FRBNY||-7||-48||519||877||1,188||-452||4,271||-1,134||5,971||-757|
|Add: Interest expense on loans extended by FRBNY, eliminated in consolidation7||0||0||10||138||11||117||46||146||67||401|
|Net income (loss) recorded by FRBNY||-7 8||-488||529||1,015||1,199||-335||4,317||-988||6,038||-356|
|Balances of loans extended to the consolidated VIEs by the FRBNY|
|Balance at beginning of the year||0||0||4,859||25,845||6,792||13,485||9,826||14,071||21,477||53,401|
|Accrued and capitalized interest||0||0||10||138||11||117||46||146||67||401|
|Balance at end of the year||0||0||0||4,859||0||6,792||0||9,826||0||21,477|
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 distribution to FRBNY and "other beneficiaries" of the consolidated VIEs. 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 VIEs that are available for distribution to FRBNY and the other beneficiaries of the consolidated VIEs. 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 VIE on the loans extended by FRBNY is eliminated when the VIEs are consolidated in FRBNY's financial statements and, as a result, the consolidated VIEs' 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 $46 million on TALF loans during the year ended December 31, 2012 (interest income of $80 million and a loss on the valuation of loans of $34 million). FRBNY earned $181 million on TALF loans during the year ended December 31, 2011 (interest income of $265 million and loss on the valuation of loans of $84 million). Return to table
Federal Reserve Bank Premises
Several Reserve Banks took action in 2012 to maintain and renovate their facilities. The multiyear renovation programs at the New York, St. Louis, and San Francisco Reserve Banks' headquarters buildings continued. The Dallas Reserve Bank completed security-enhancement projects at its headquarters building that included improvements to its main-entrance lobby and construction of a remote vehicle-screening facility.
The New York Reserve Bank completed the purchase of the 33 Maiden Lane property. The San Francisco Reserve Bank disposed of 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 secured leased office space for its Pittsburgh Branch and is moving forward with plans to sell the former building, and the Dallas Reserve Bank is in the process of obtaining leased office space for its San Antonio Branch and will pursue the sale of the former building during 2013. The Chicago and Cleveland Reserve Banks secured leased space for their contingency requirements.
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 2)|
|Imputed reserve requirements on clearing balances||-||262.3|
|Materials and supplies||0.9||1.4|
|Items in process of collection||216.0||275.4|
|Total short-term assets||772.8||3,390.9|
|Long-term assets (Note 3)|
|Furniture and equipment||33.8||38.2|
|Leases, leasehold improvements, and long-term prepayments||78.6||74.6|
|Prepaid pension costs||-||321.9|
|Prepaid FDIC asset||20.3||21.7|
|Deferred tax asset||287.5||138.5|
|Total long-term assets||591.4||775.7|
|Total short-term liabilities||738.9||3,576.9|
|Accrued benefit costs||549.8||381.3|
|Total long-term liabilities||549.8||381.3|
|Equity (including accumulated other comprehensive loss of $643.0 million and $288.9 million at December 31, 2012 and 2011, respectively)||75.4||208.3|
|Total liabilities and equity (Note 4)||1,364.1||4,166.6|
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 5)||449.3||477.4|
|Operating expenses (Note 6)||406.1||421.3|
|Income from operations||43.2||56.1|
|Imputed costs (Note 7)|
|Interest on float||(1.1)||-1.3|
|Interest on debt||-||-|
|Income from operations after imputed costs||38.3||49.3|
|Other income and expenses (Note 8)|
|Income before income taxes||38.8||50.5|
|Imputed income taxes (Note 7)||12.0||16.3|
|Memo: Targeted return on equity (Note 7)||8.9||16.8|
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.
|Item||Total||Commercial check collection||Commercial ACH||Fedwire funds||Fedwire securities|
|Revenue from services (Note 5)||449.3||220.0||114.8||90.5||24.1|
|Operating expenses (Note 6)||406.1||186.7||108.4||88.1||22.9|
|Income from operations||43.2||33.3||6.4||2.4||1.1|
|Imputed costs (Note 7)||4.9||1.9||1.4||1.3||0.3|
|Income from operations after imputed costs||38.3||31.4||5.0||1.1||0.8|
|Other income and expenses, net (Note 8)||0.5||0.3||0.1||0.1||0.0|
|Income before income taxes||38.8||31.7||5.2||1.2||0.8|
|Imputed income taxes (Note 7)||12.0||9.8||1.6||0.4||0.3|
|Memo: Targeted return on equity (Note 7)||8.9||4.1||2.4||1.9||0.5|
|Cost recovery (percent) (Note 9)||104.1||108.8||101.0||98.8||100.3|
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) Discontinuation of Clearing Balance Program
Effective July 2012, the Board discontinued the contractual clearing balance program in connection with its simplification of reserve requirements. Clearing balances were a primary component of the pro forma balance sheet used to compute the imputed costs in the private sector adjustment factor (PSAF). The elimination of clearing balances reduced the size of the pro forma balance sheet substantially as well as the associated imputed expenses and investment income.
(2) 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- 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. As a result of the discontinuation of the clearing balance program in July 2012 there were no clearing balances or related reserve requirement balances on December 31, 2012. (See note 1)
Receivables are composed of fees due the Reserve Banks for providing priced services and the share of suspense- and difference-account balances related to priced services.
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-Reserve Bank items that would otherwise be double-counted on the combined Federal Reserve balance sheet and adjustments for items associated with nonpriced items (such as those collected for government agencies). 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.
(3) Long-Term Assets
Long-term assets consist of long-term assets used solely in priced services and the priced-service portion of long-term assets shared with nonpriced services, including the net pension asset and deferred tax asset related to the priced services pension and postretirement benefits obligation.
Long-term assets also consist of an estimate of the assets of the Board of Governors used in the development of priced services and an imputed prepaid Federal Deposit Insurance Corporation (FDIC) asset.
(4) Liabilities and Equity
Under the matched-book capital structure for assets, short-term assets are financed with short-term payables, clearing balances, and imputed short-term debt, if needed. Long-term assets are financed with long-term liabilities, core clearing balances, imputed equity, and imputed long-term debt, if needed. Equity is imputed at 10 percent of total risk-weighted assets to satisfy the FDIC requirements for a well-capitalized institution. No short- or long-term debt was imputed for 2012 or 2011.
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 pension and other 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 other 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 pension liability in accrued benefit costs in 2012 and a net pension asset in 2011. The pension liability and net pension asset were $103.6 million and $321.9 million in 2012 and 2011, respectively. The change in the funded status of the pension and other benefit plans resulted in a corresponding increase in accumulated other comprehensive loss of $354.1 million in 2012.
The method for estimating the priced services portion of the SFAS 158/ASC715 adjustments to the pension and other benefit liabilities, AOCI, and deferred tax asset was refined in 2012 and incorporates AOCI component changes from year-to-year since the adoption of SFAS 158 in 2006. This estimation change does not directly affect the income statement or cost recovery.
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).
(6) 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 $4.1 million in 2012 and $5.2 million in 2011.
In accordance with SFAS No. 87, Employers' Accounting for Pensions (codified in ASC 715), the Reserve Bank priced services recognized qualified pension-plan operating expenses of $49.1 million in 2012 and $45.2 million in 2011. Operating expenses also include the nonqualified pension expense of $0.3 million in 2012 and $3.1 million in 2011. 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 4).
The income statement by service reflects revenue, operating expenses, imputed costs, other income and expenses, and cost recovery.
(7) 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 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. 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 2012 or 2011. 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 2012, in millions of dollars:
|Float subject to recovery||(777.9)|
|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 subject to recovery is valued at the federal funds rate. Certain check products are designed to generate credit float and therefore have lower per-item fees; this float has been subtracted from the cost base subject to recovery in 2012 and 2011.
(8) Other Income and Expenses
Other income and expenses consist of investment and interest income on the imputed investment of clearing balances and the cost of earnings credits or income from expired earnings credits. Investment income on clearing balances for 2012 and 2011 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. Earnings credits expire 52 weeks after they are granted.
(9) 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 for priced services at the end of this chapter, Board assets are part of long-term assets, and Board expenses are included in operating expenses. The discontinuation of the clearing balance program in July 2012 had a significant effect on the PSAF, as described in the pro forma financial statements. 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 $643.0 million reduction in equity related to the priced services' benefit plans through 2012. Including this reduction in equity, which represents a decline in economic value, results in cost recovery of 92.1 percent for the 10-year period. For details on how implementing ASC 715 affected the pro forma financial statements, refer to note 4 to the pro forma financial statements 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, and income from expired earning credits. Return to text
6. Section 17 of the Check-Clearing for the 21st Century Act requires the Federal Reserve Board's Annual Reportto include costs of and revenue from inter-District commercial check transportation. In 2008, the Reserve Banks discontinued the transportation of commercial checks between their check-processing offices. As a result, in 2012, there were no costs or imputed revenues associated with the transportation of commercial checks between Reserve Bank check-processing offices. Return to text
7. The Reserve Banks completed in 2010 a multiyear initiative, which began in 2003, that reduced the number of offices at which they process paper checks from 45 to one. Since February 2010, the Cleveland Reserve Bank operated the only paper check-processing site for the System, while the Atlanta Reserve Bank served as the System's electronic check-processing site. As of December 31, 2012, the Atlanta Reserve Bank alone processes both paper and electronic checks for the System. 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" on page 95. 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. Treasury consolidated the Financial Management Service and Bureau of Public Debt into the new Bureau of the Fiscal Service, effective October 7, 2012. Return to text
11. 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
12. The National Institute of Science and Technology is a nonregulatory federal agency within the U.S. Department of Commerce. Return to text
13. The New York Reserve Bank is considered to be the controlling financial interest holder of each of the consolidated VIEs. Return to text
14. Each VIE 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
15. 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