Federal Reserve Banks

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 sections 2 through 4 of this annual report).

Federal Reserve Priced Services

Reserve Banks provide a range of payment and related services to depository and certain other institutions; these "priced services" include collecting checks, operating an automated clearinghouse (ACH) service, transferring funds and securities, and providing a multilateral settlement service.¹

The Reserve Banks, working with the financial services 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; the Reserve Banks offer a bundle of all-electronic payment services and offer 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.

In 2014, the Reserve Banks continued efforts to migrate the FedACH, Fedwire Funds, and Fedwire Securities services from a mainframe system to a distributed computing environment. A significant milestone was reached by successfully migrating the Fedwire Funds Settlement application and the Reserve Banks' accounting system to a distributed environment. The Reserve Banks continued to make progress on the migration of the Fedwire Securities applications. However, after conducting an assessment of the viability and cost-effectiveness of the FedACH program, the Reserve Banks suspended the initiative and began to investigate the use of other technology solutions.

In October 2014, the Federal Reserve Board announced final revisions to part I of the Federal Reserve Policy on Payment System Risk (PSR policy) that are based on and generally consistent with the international risk-management standards in the April 2012 Principles for Financial Market Infrastructures developed jointly by the Committee on Payment and Settlement Systems and the International Organization of Securities Commissions.² The revised policy retains the expectation that the Fedwire Funds Service and the Fedwire Securities Service will meet or exceed the applicable risk-management standards in the policy. The final policy became effective on December 31, 2014.

In December 2014, the Federal Reserve Board adopted changes to part II of the PSR policy and companion amendments to Regulation J (Collection of Checks and Other Items by Federal Reserve Banks and Funds Transfers through Fedwire) that were designed to enhance the efficiency of the payment system. The changes are largely related to the posting rules for ACH and commercial check transactions.³

Under the current posting rules for commercial and government ACH transactions, ACH debit transactions post at 11:00 a.m., and ACH credit transactions post at 8:30 a.m.⁴ The Board changed the posting of ACH debit transactions to 8:30 a.m. to align with the posting time of ACH credit transactions.

In addition, the Board's current posting rules for commercial check transactions reflect a presumption that banks generally handle checks in paper form and do not reflect banks' widespread use of electronic check-processing methods. To reflect the current electronic check-processing environment, the Board changed the posting time for receiving most credits for deposits and debits for presentments to 8:30 a.m. and established two other posting times at 1:00 p.m. and 5:30 p.m.

The amendments to Regulation J permit the Reserve Banks to obtain settlement from paying banks as early as 8:30 a.m. for checks that the Reserve Banks present. The amendments also permit the Reserve Banks to require paying banks that receive presentment of checks from the Reserve Banks to make the proceeds of settlement for those checks available to the Reserve Banks as soon as 30 minutes after receipt of the checks. These changes to the PSR policy and Regulation J become effective July 23, 2015.

Recovery of Direct and Indirect Costs

The Monetary Control Act of 1980 requires that the Federal Reserve establish fees for priced services 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.⁵ The imputed costs and imputed profit are collectively referred to as the private-sector adjustment factor (PSAF). From 2005 through 2014, the Reserve Banks recovered 102.9 percent of the total priced services costs, including the PSAF (see table 1).⁶

In 2014, Reserve Banks recovered 102.1 percent of the total priced services costs, including the PSAF.⁷ The Reserve Banks' operating expenses and imputed costs totaled $418.7 million. Revenue from operations totaled $433.1 million, resulting in net income from priced services of $14.5 million. Although the check service, the Fedwire Funds and National Settlement Services, and the Fedwire Securities Service achieved full cost recovery, the FedACH Service recovered 86.7 percent of its costs because of a $31.6 million charge associated with the decision to suspend its investment in a multiyear technology initiative to modernize its processing platform. Greater-than-expected check volume processed by the Reserve Banks was the single most significant factor influencing priced services cost recovery.

Table 1. Priced services cost recovery, 2005-14
Millions of dollars, except as noted

Year	Revenue from services 1	Operating expenses and imputed costs 2	Targeted return on equity 3	Total costs	Cost recovery (percent) 4
2005	993.8	834.4	103.0	937.4	106.0
2006	1,029.7	874.8	72.0	946.8	108.8
2007	1,012.3	912.9	80.4	993.3	101.9
2008	873.8	820.4	66.5	886.9	98.5
2009	675.4	707.5	19.9	727.5	92.8
2010	574.7	532.8	13.1	545.9	105.3
2011	478.6	444.4	16.8	461.2	103.8
2012	449.8	423.0	8.9	432.0	104.1
2013	441.3	409.3	4.2	413.5	106.7
2014	433.1	418.7	5.5	424.1	102.1
2005-14	6,962.4	6,378.3	390.3	6,768.6	102.9

Note: Here and elsewhere in this section, components may not sum to totals or yield percentages shown because of rounding.

1. For the 10-year period, includes revenue from services of $6,491.6 million and other income and expense (net) of $470.8 million. Return to table

2. For the 10-year period, includes operating expenses of $6,079.4 million, imputed costs of $34.5 million, and imputed income taxes of $264.5 million. Return to table

3. From 2009 to 2012, the PSAF was adjusted to reflect the actual clearing balance levels maintained; previously, the PSAF had been calculated based on a projection of clearing balance levels. Return to table

4. Revenue from services divided by total costs. For the 10-year period, cost recovery is 95.1 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 3 to the "Pro Forma Financial Statements for Federal Reserve Priced Services" at the end of this section. Return to table

Commercial Check-Collection Service

In 2014, Reserve Banks recovered 115.6 percent of the total costs of their commercial check-collection service, including the related PSAF. Revenue from operations totaled $174.7 million, resulting in net income of $25.4 million. This revenue decreased $24.1 million from 2013. The Reserve Banks' operating expenses and imputed costs totaled $149.3 million. Reserve Banks handled 5.7 billion checks in 2014, a decrease of 4.1 percent from 2013 (see table 2). The decline in Reserve Bank check volume, attributable to the decline in the number of checks written generally, was not as great as anticipated and led to the resulting net income. The average daily value of checks collected by the Reserve Banks in 2014 was approximately $32.3 billion, an increase of 1.9 percent from the previous year.

Table 2. Activity in Federal Reserve priced services, 2012-14
Thousands of items

Service	2014	2013	2012	Percent change
				2013 to 2014	2012 to 2013
Commercial check	5,741,527	5,988,302	6,622,265	-4.1	-9.6
Commercial ACH	11,620,376	11,142,821	10,664,613	4.3	4.5
Fedwire funds transfer	138,133	137,219	134,409	0.7	2.1
National settlement	597	661	663	-9.7	-0.3
Fedwire securities	4578	6,535	6,441	-30.0	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 Service

The Reserve Banks' long-run cost recovery average from 2005 to 2014 for FedACH was 100.0 percent. In 2014, the Reserve Banks recovered 86.7 percent of the total costs of their commercial ACH services, including the related PSAF. Revenue from ACH operations totaled $124.4 million, an increase of $5.5 million from 2013. Reserve Bank operating expenses and imputed costs totaled $141.4 million, resulting in a net loss of $17.0 million. In 2014, the Reserve Banks processed 11.6 billion commercial ACH transactions, an increase of 4.3 percent from 2013. The average daily value of FedACH transfers in 2014 was approximately $79.2 billion, an increase of 1.0 percent from the previous year.

Fedwire Funds and National Settlement Services

In 2014, Reserve Banks recovered 103.2 percent of the costs of their Fedwire Funds and National Settlement Services, including the PSAF. Reserve Bank operating expenses and imputed costs for these operations totaled $105.2 million in 2014. Revenue from these services totaled $110.1 million, resulting in a net income of $4.8 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 2014, the number of Fedwire funds transfers originated by depository institutions increased 0.7 percent from 2013, to approximately 138 million. The average daily value of Fedwire funds transfers in 2014 was $3.5 trillion, an increase of 24 percent from the previous year.

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 2014, the service processed settlement files for 17 local and national private-sector arrangements. The Reserve Banks processed 9,896 files that contained 569,502 settlement entries for these arrangements in 2014. Activity in 2014 represents a decrease from the 661,466 settlement entries processed in 2013.

Fedwire Securities Service

The Fedwire Securities Service allows its participants to transfer electronically to other service participants certain securities issued by the U.S. Treasury Department, federal government agencies, government-sponsored enterprises (GSEs), and certain international organizations.⁸ In 2014, the number of non-Treasury securities transfers processed via the service decreased 30.0 percent from 2013, to approximately 9.4 million. The average daily value of Fedwire Securities transfers in 2014 was $1.1 trillion, a decrease of 3 percent from the previous year.

The Reserve Banks recovered 104.1 percent of the total costs of the priced-service component of their Fedwire Securities Service, including the PSAF. The Reserve Banks' operating expenses and imputed costs for providing this service totaled $22.7 million in 2014. Revenue from the service totaled $24.0 million, resulting in a net income of $1.2 million.

Float

In 2014, the Reserve Banks had daily average credit float of $590.8 million, compared with daily average credit float of $630.2 million in 2013.⁹

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Currency and Coin

The Board is the issuing authority for the nation's currency (in the form of Federal Reserve notes). In 2014, the Board paid the U.S. Treasury Department's Bureau of Engraving and Printing (BEP) $656.8 million for costs associated with the production of 6.9 billion Federal Reserve notes. The Reserve Banks distribute and receive currency and coin through depository institutions in response to public demand. Together, the Board and Reserve Banks work to maintain the integrity of and confidence in Federal Reserve notes.

In 2014, the Reserve Banks distributed 37.6 billion Federal Reserve notes into circulation, a 0.6 percent increase from 2013, and received 35.7 billion Federal Reserve notes from circulation, a 0.2 percent decrease from 2013. The value of Federal Reserve notes in circulation increased nearly 8.4 percent in 2014, to $1,298.7 billion at year-end, largely because of international demand for $100 notes. In 2014, the Reserve Banks also distributed 69.4 billion coins into circulation, a 1.7 percent increase from 2013, and received 55.4 billion coins from circulation, a 2.5 percent decrease from 2013.

Redesigned $100 Note

The Federal Reserve began supplying financial institutions with a redesigned $100 note on October 8, 2013. The Federal Reserve, U.S. Department of the Treasury, the BEP, and the U.S. Secret Service partner to redesign Federal Reserve notes to stay ahead of counterfeiting threats. During 2014, the Federal Reserve Banks distributed 3.6 billion redesigned $100 notes and replaced nearly 30 percent of all $100 notes in circulation with the redesigned $100 note.

Improvements to Efficiency and Risk Management

Advances in currency-processing equipment and sensor technology 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. In 2014, Reserve Banks installed a new type of fitness sensor and began installing a new type of authentication sensor. Additionally, the Reserve Banks continue working with equipment manufacturers to explore the next generation of equipment to process the high volume of notes received annually for authentication and fitness sorting.

During 2014, some Reserve Banks began implementing new processes designed to increase productivity and enhance risk management, which all Reserve Banks will implement in 2015.

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 more cost effectively. The new platform will also facilitate business continuity and contingency planning and enhance the support provided to Reserve Bank customers. In 2014, the Reserve Banks continued application development and testing efforts for the new automation platform, which is scheduled to be deployed to all cash offices by year-end 2017.

The Board and the BEP continued implementing components of a new quality system for the BEP throughout 2014. The BEP installed and began using sorting equipment that culls good notes from rejected half sheets. This process, known as "single note inspection," should reduce spoilage rates and printing costs.

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Fiscal Agency and Government Depository Services

As fiscal agents and depositories for the federal government, the 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 reimburse the Reserve Banks for the expense of providing fiscal agency and depository services.

In 2014, fiscal agency expenses amounted to $569.6 million, a 7.5 percent increase from 2013 (see table 3). Expenses increased as a result of requests from Treasury's Bureau of the Fiscal Service (Fiscal Service). Support for Treasury programs accounted for 93.9 percent of expenses, and support for other entities accounted for 6.1 percent.

In April 2014, as part of the federal government's effort to increase operational efficiency and effectiveness, Treasury announced the consolidation of the fiscal agency services provided by the Reserve Banks. Although Treasury expects long-term savings by reducing the number of Reserve Banks that provide fiscal agency services, an increase in expenses is projected during the consolidation process. Select Reserve Bank business lines began transitioning in 2014 and the consolidation is expected to conclude in 2018. Total consolidation expenses for 2014 amounted to $27.3 million. Consolidation expenses are included in the line items for Payment, Collection, and Cash-management services in table 3. Of the consolidation expenses, $6.7 million is attributable to pension costs incurred by exiting Reserve Banks.

Table 3. Expenses of the Federal Reserve Banks for fiscal agency and depository services, 2012-14
Thousands of dollars

Agency and service	2014	2013	2012
Department of the Treasury
Treasury securities services
Treasury retail securities	54,966	55,334	60,208
Treasury securities safekeeping and transfer	16,568	14,397	14,131
Treasury auction	29,499	26,673	30,648
Computer infrastructure development and support	5,792	5,801	4,990
Other services	853	2,971	3,340
Total	107,678	105,176	113,317
Payment, collection, and cash-management services
Payment services	161,629	151,715	141,534
Collection services	54,355	44,788	41,456
Cash-management services	75,878	66,519	58,975
Computer infrastructure development and support	79,289	75,565	70,075
Other services	11,465	9,360	9,075
Total	382,615	347,947	321,115
Other Treasury
Total	44,756	42,826	37,011
Total, Treasury	535,049	495,949	471,443
Other federal agencies
Total, other agencies	34,588	34,077	34,569
Total reimbursable expenses	569,638	530,026	506,012

Note: The decrease in "Treasury Securities Services: Other Services" is due to the reclassification of programs into "Treasury Securities Services: Treasury Retail Securities."

Treasury Securities Services

The Reserve Banks work closely with Treasury's Fiscal Service in support of the borrowing needs of the federal government. The Reserve 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 $55.0 million in 2014, a 0.7 percent decrease compared with $55.3 million in 2013. Increased operational efficiencies in retail securities resulted in lower staffing levels and led to an overall decrease in expenses. Throughout the year, Reserve Banks and Treasury continued work on Treasury's Retail E-Services initiative to create a new customer service and support environment. Reserve Banks also engaged in an ongoing effort to decommission the Legacy Treasury Direct system--established in 1986 as an application for investors to hold Treasury marketable securities (bills, notes, bonds, and Treasury Inflation-Protected Securities)--in order to eliminate aging technology platforms.

Wholesale Securities Programs

The Reserve Banks support wholesale securities programs through the sale, issuance, safekeeping, and transfer of marketable Treasury securities for institutional investors. The Reserve Banks conducted 270 Treasury securities auctions in 2014. Of the 270 auctions, 12 auctions were for Floating Rate Notes--a new marketable Treasury security with a floating rate interest payment. Floating Rate Notes are the first new Treasury security issued since the introduction of Treasury Inflation-Protected Securities almost two decades ago.

In 2014, Reserve Bank operating expenses in support of Treasury securities auctions were $29.5 million, compared with $26.7 million in 2013. This increase was driven by upgrades to the auction system, which receives and processes bids submitted primarily by wholesale security auction participants.

Operating expenses associated with Treasury securities safekeeping and transfer activities were $16.6 million in 2014, compared with $14.4 million in 2013. The increase is attributable to the Reserve Banks' ongoing technological effort to migrate securities services from a mainframe system to a distributed computing environment.

Payment Services

The Reserve Banks work closely with the Treasury's Fiscal Service and other government agencies to process payments to individuals and companies. The Reserve 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 $161.6 million in 2014, compared with $151.7 million in 2013. Total payments-related operating expenses in 2014 included $17.0 million in consolidation expenses. The increase in 2014 expenses was due to a combination of consolidation costs and increased programmatic expenses associated with the Invoice Processing Platform (IPP), the Post Payment System (PPS) initiative, Do Not Pay (DNP), and International Treasury Services (ITS). These expense increases were partly offset by lower expenses for the U.S. Treasury Electronic Payment Solution Center (formerly known as the Go Direct Contact Center).

The IPP is part of Treasury's all-electronic initiative--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 a payment transaction, including the purchase order, invoice, and other payment information. In 2014, the Reserve Banks' IPP expenses increased 42.0 percent, to $24.6 million. This increase was primarily attributable to $5.3 million in consolidation expenses. Additional program expenses were incurred to increase staffing levels in support of a Department of Defense mandate to implement IPP for intragovernmental transactions, as well as to provide support for broader agency participation and greater invoice volumes.

Reserve Banks continued work on the PPS initiative, a multiyear effort to modernize several of Treasury's legacy post-payment processing systems into a single application to provide a centralized and standardized set of payment data, enhance operations, reduce expenses, and improve data analytics capabilities. In 2014, program expenses for PPS increased 248.4 percent, from $4.9 million to $17.0 million, as the result of greater system development expenses and $3.9 million in consolidation expenses.

In support of Treasury's DNP initiative, the Reserve Banks continued to enhance the DNP Portal, which is a single point of access through which federal agencies can query multiple data sources before making federal payments. In 2014, expenses for DNP increased 10.8 percent to $15.4 million, largely because of additional staffing necessary to support application development, advanced analytics, and new data source purchases.

The Reserve Banks operate the ITS application, which provides cross-border payment and collection services as well as cash-management functions on behalf of the Treasury. U.S. government agencies use ITS to issue international benefit, payroll, and vendor payments in 100 currencies to recipients in established and emerging markets. ITS expenses increased 24.3 percent, to $17.9 million, in 2014 primarily because of $3.7 million in consolidation costs.

The Treasury's 2014 payments-related expenses were offset by lower spending for the U.S. Treasury Electronic Payment Solution Center, which helps convert individuals' federal benefit payments from paper check to electronic delivery. As of December 2014, 97.8 percent of all federal benefit payments were made electronically. In 2014, expenses for the U.S. Treasury Electronic Payment Solution Center decreased 31.3 percent, to $16.4 million, primarily because of a reduction in enrollment calls that followed the end of the Go Direct Campaign.

Collection Services

The Reserve Banks also work closely with the Fiscal Service to collect funds owed to the federal government, including various taxes, fees for goods and services, and delinquent debts. In 2014, Reserve Bank operating expenses related to collection services increased 21.4 percent to $54.4 million, largely because of $3.7 million in consolidation expenses and increased operating expenses for Pay.gov and eCommerce.

The Reserve Banks operate Pay.gov, an application 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 100 new agency programs and processed more than 123 million online payments totaling $144 billion, a 9 percent and a 20 percent increase, respectively, from 2013. Increased operational support and expanded functionality resulted in expenses increasing 18.2 percent, to $18.3 million.

The Reserve Banks also continued supporting the Treasury's electronic commerce initiative (eCommerce) to expand ways for agencies and the public to do business with the Treasury through online banking solutions, mobile technologies, and other payment methods. Program expenses for eCommerce increased from $156,000 in 2013 to $1.6 million in 2014, largely because of expenses associated with developing a new mobile payment platform that will facilitate more-efficient federal revenue collections.

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 2014, Reserve Bank operating expenses related to Treasury cash-management services totaled $75.9 million, compared with $66.5 million in 2013. Total cash-management-related operating expenses for 2014 included $6.0 million in consolidation expenses.

During 2014, the Reserve Banks continued to support Treasury's efforts to improve centralized government accounting and reporting functions. In particular, the Reserve Banks, in collaboration with the Fiscal Service, completed software development efforts for the Central Accounting Reporting System (CARS). CARS will provide Treasury with a modernized system for the collection and dissemination of financial management and accounting information transmitted by and to federal program agencies. In 2014, expenses for CARS decreased to $18.6 million, from $26.6 million in 2013, primarily because of decreased application development expenses.

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 2014, compared with $34.1 million in 2013. 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 (Freddie Mac), the Federal National Mortgage Association (Fannie Mae), and the Government National Mortgage Association (Ginnie Mae).

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Use of Federal Reserve Intraday Credit

The Board's 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 the 2007-09 financial crisis, 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 around $60 billion. In contrast, institutions held historically high levels of overnight balances--on average more than $2.7 trillion--at the Reserve Banks in 2014, while daylight overdrafts remained historically low. Average daylight overdrafts across the Federal Reserve System declined to $1.62 billion in 2014 from $1.9 billion in 2013, a decrease of about 17 percent (see figure 1). The average level of peak daylight overdrafts fell to $8.44 billion in 2014 from $12 billion in 2013; the average level of peak daylight overdrafts in 2014 was just a fraction of its level in 2008 (about 5 percent).

Daylight overdraft fees are also at historically low levels. In 2014, institutions paid about $31,000 in daylight overdraft fees; in contrast, fees totaled more than $50 million in 2008. The decrease in fees is largely attributable to the elevated level of reserve balances that began to accumulate in late 2008 and to the March 2011 policy revision that eliminated fees for collateralized daylight overdrafts.

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FedLine Access to Reserve Bank Services

The Reserve Banks' FedLine access solutions provide depository institutions with a variety of alternatives for electronically accessing the Banks' payment and information services. The Reserve Banks charge fees for these electronic connections and allocate the associated costs and revenue to the various priced services. There are currently five FedLine channels through which customers can access the Reserve Banks' priced services: FedMail, FedLine Web, FedLine Advantage, FedLine Command, and FedLine Direct. These FedLine channels are designed to meet the individual connectivity, security, and contingency requirements of depository institution customers.

Between 2007 and 2014, the number of depository institutions in the United States declined 22.2 percent, and Reserve Bank FedLine connections decreased 11.7 percent. During this same period, the number of employees within depository institutions who have FedLine credentials increased 11.6 percent, reflecting in part the expansion of value-added services provided. Additionally, the FedLine network was broadened to nonfinancial services. Between 2012 and 2014, more than 10,000 credentials were issued to individuals accessing central bank applications via FedLine.

The Reserve Banks continue to maintain their focus on security and resiliency by upgrading critical elements of the FedLine solutions. The next-generation virtual private network solution is a key component of the security model for the FedLine Advantage and FedLine Command access solutions used by approximately 5,000 financial institutions.¹⁰ The solution was certified for general availability in July 2013, and the overall migration is nearing completion.

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Information Technology

The Federal Reserve Banks continued to improve the efficiency, effectiveness, and security of information technology (IT) services and operations in 2014.

National IT continued its restructuring to streamline the organization to maintain strong operational performance; streamline layers of management to achieve a flatter, more efficient structure; and strengthen skills and proficiency in critical areas.¹¹ Major multiyear programs to consolidate the Federal Reserve's IT operations and networking services were completed and improved the overall efficiency and quality of business operations. Additional efforts helped System leaders articulate business needs through IT roadmaps and to identify more opportunities to employ common technology services and solutions.

National IT also led an effort to institute common IT principles throughout the System to motivate strategic decisions and behaviors throughout System IT.¹² These principles provide a common foundation for delivering IT services as effectively, securely, efficiently, and innovatively as possible, and support the System's IT objective to deliver highly effective and efficient IT services and solutions that support business objectives and enhance productivity while safeguarding Federal Reserve data and assets.

Finally, under the direction of the chief information security officer, management of the Federal Reserve's information systems (IS) risk continues to mature, with priority given to cybersecurity and IS strategy. The Federal Reserve remains vigilant about its cybersecurity posture, making thoughtful investments in key risk-mitigation initiatives and programs and continuously monitoring and assessing cybersecurity risks to its operations. In 2014, the Federal Reserve completed its implementation of a new IS framework for key systems. The framework, known as System Assurance for the Federal Reserve, is based on guidance from the National Institute of Standards and Technology and adapted to the Federal Reserve's environment.

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Examinations of the Federal Reserve Banks

The Reserve Banks and several consolidated variable interest entities (VIEs) operated by the Federal Reserve System in response to the 2007-09 financial crisis are subject to several levels of audit and review.¹³ The combined financial statements of the Reserve Banks--as well as the financial statements of each of the 12 Reserve Banks and Maiden Lane LLC--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 2013 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.

The Federal Reserve Board engaged Deloitte & Touche LLP (D&T) to audit the 2014 combined and individual financial statements of the Reserve Banks and Maiden Lane LLC.¹⁵

In 2014, D&T also conducted audits of the internal controls associated with financial reporting for each of the Reserve Banks. Fees for D&T's services totaled $6.9 million, of which $0.4 million was for the audit of Maiden Lane LLC. 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 2014, the Reserve Banks did not engage D&T for any non-audit services.¹⁶

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, National IT, and the System's Office of Employee Benefits (OEB). They conduct a comprehensive on-site review of each Reserve Bank, and OEB at least once every three years and review National IT, the System Open Market Account (SOMA), and Fedwire annually.

The comprehensive on-site reviews 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, the IIA's code of ethics, and the definition of internal auditing.

The Board also reviews 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
• 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 Board review.

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Income and Expenses

Table 4 summarizes the income, expenses, and distributions of net earnings of the Reserve Banks for 2014 and 2013. Income in 2014 was $116,562 million, compared with $91,150 million in 2013.

Expenses totaled $12,579 million:

• $6,862 million in interest paid to depository institutions on reserve balances and term deposits;
• $3,926 million in Reserve Bank operating expenses;
• $383 million in net periodic pension expense;
• $112 million in interest expense on securities sold under agreements to repurchase;
• $590 million in assessments for Board of Governors expenditure;
• $711 million for new currency costs;
• $563 million for Consumer Financial Protection Bureau costs; and
• $2 million in other costs.

The expenses were reduced by $570 million in reimbursements for services provided to government agencies. Net deductions from current net income totaled $2,718 million, which includes $2,907 million in unrealized losses on foreign currency denominated investments revalued to reflect current market exchange rates, $110 million in net income associated with consolidated VIEs, and $81 million in realized gains on federal agency and GSE mortgage-backed securities (GSE MBS). Dividends paid to member banks, set at 6 percent of paid-in capital by section 7(1) of the Federal Reserve Act, totaled $1,686 million.

Comprehensive net income before interest on Federal Reserve notes expense remitted to Treasury totaled $99,653 million in 2014 (net income of $101,265 million, decreased by other comprehensive loss of $1,612 million). Earnings remittances to Treasury totaled $96,902 million in 2014. The remittances equal comprehensive income after the deduction of dividends paid and the amount necessary to equate the Reserve Banks' surplus to paid-in capital.

Section 11 of this report, "Statistical Tables," 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 2014; table 11 shows a condensed statement for each Reserve Bank for the years 1914 through 2014; 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 section 12, "Federal Reserve System Audits").

Table 4. Income, expenses, and distribution of net earnings of the Federal Reserve Banks, 2014 and 2013
Millions of dollars

Item	2014	2013 1
Current income	116,562	91,150
Loan interest income	2	6
SOMA interest income	115,933	90,503
Other current income 2	627	641
Net expenses	10,715	9,135
Operating expenses	3,926	3,765
Reimbursements	-570	-530
Net periodic pension expense	383	617
Interest paid on depository institutions deposits and term deposits	6,862	5,223
Interest expense on securities sold under agreements to repurchase	112	60
Other expenses	2	0
Current net income	105,847	82,015
Net additions to (deductions from) current net income	-2,718	-1,029
Federal agency and government-sponsored enterprise mortgage-backed securities	81	51
Foreign currency translation losses	-2,907	-1,257
Net income (loss) from consolidated VIEs	110	181
Other deductions	-2	-4
Assessments by the Board of Governors	1,864	1,845
For Board expenditures	590	580
For currency costs	711	702
For Consumer Financial Protection Bureau costs 3	563	563
Net income before providing for remittances to the Treasury	101,265	79,141
Earnings remittances to the Treasury	96,902	79,633
Net income (loss)	4,363	-492
Other comprehensive (loss) gain	-1,612	2,289
Comprehensive income	2,751	1,797
Total distribution of net income	99,653	81,430
Dividends on capital stock	1,686	1,650
Transfer to surplus and change in accumulated other comprehensive income	1,065	147
Earnings remittances to the Treasury	96,902	79,633

1. Certain amounts relating to 2013 have been reclassified to conform to the current-year presentation. Return to table

2. Includes income from priced services, compensation received for services provided, and securities lending fees. Return to table

3. The Board of Governors assesses the Reserve Banks to fund the operations of the Consumer Financial Protection Bureau. Return to table

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SOMA Holdings and Loans

The Reserve Banks' average net daily holdings of securities and loans during 2014 amounted to $4,055,301 million, an increase of $717,603 million from 2013 (see table 5).

Table 5. System Open Market Account (SOMA) holdings and loans of the Federal Reserve Banks, 2014 and 2013
Millions of dollars, except as noted

Item	Average daily assets (+)/liabilities (-)		Current income (+)/expense (-)		Average interest rate (percent)
	2014	2013	2014	2013	2014	2013
U.S. Treasury securities 1	2,520,120	2,092,769	63,011	51,591	2.50	2.47
Government-sponsored enterprise debt (GSE) securities1	46,122	69,872	1,579	2,166	3.42	3.10
Federal agency and GSE mortgage-backed securities 2	1,700,521	1,249,810	51,264	36,628	3.01	2.93
Foreign currency denominated investments 3	23,296	23,941	78	96	0.33	0.40
Central bank liquidity swaps 4	192	3,361	1	22	0.52	0.65
Other SOMA assets 5	28	63	*	*	0.01	0.03
Total SOMA assets	4,290,279	3,439,816	115,933	90,503	2.70	2.63
Securities sold under agreements to repurchase	-233,249	-99,680r	-112	-60	0.05	0.06
Other SOMA liabilities 6	-1,899	-2,781	n/a	n/a	n/a	n/a
Total SOMA liabilities	-235,148	-102,461r	-112	-60	0.05	0.06
Total SOMA holdings	4,055,131	3,337,355r	115,821	90,443	2.86	2.55r
Primary, secondary, and seasonal credit	118	79	* *	*	0.21	0.25
Total loans to depository institutions	118	79	*	*	0.21	0.25
Term Asset-Backed Securities Loan Facility (TALF) 7	52	264	2	6	3.85	2.27
Total loans to others	52	264	2	6	3.85	2.27
Total loans	170	343	2	6	1.18	1.75
Total SOMA holdings and loans	4,055,301	3,337,698r	115,823	90,449	2.86	2.55r

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 (GSE MBS) 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. Represents the remaining principal balance. During the year ended December 31, 2014, all remaining TALF loans were repaid in full, including accrued interest. Return to table

r Revised.

n/a Not applicable.

*Less than $500 thousand. Return to table

SOMA Securities Holdings

The average daily holdings of Treasury securities increased by $427,351 million, to an average daily amount of $2,520,120 million. The average daily holdings of GSE debt securities decreased by $23,750 million, to an average daily amount of $46,122 million. The average daily holdings of
federal agency and GSE MBS increased by $450,711 million, to an average daily amount of $1,700,521 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 maturities.

There were no significant holdings of securities purchased under agreements to resell in 2014 or 2013. Average daily holdings of foreign currency denominated investments in 2014 were $23,296 million, compared with $23,941 million in 2013. The average daily balance of central bank liquidity swap drawings was $192 million in 2014 and $3,361 million in 2013. The average daily balance of securities sold under agreements to repurchase was $233,249 million, an increase of $133,569 million from 2013.

The average rates of interest earned on the Reserve Banks' holdings of Treasury securities increased to 2.50 percent and the average rates on GSE debt securities increased to 3.42 percent in 2014. The average rate of interest earned on federal agency and GSE MBS increased to 3.01 percent in 2014. The average interest rates for securities sold under agreements to repurchase decreased to 0.05 percent in 2014. The average rate of interest earned on foreign currency denominated investments decreased to 0.33 percent while the average rate of interest earned on central bank liquidity swaps decreased to 0.52 percent in 2014.

Lending

In 2014, the average daily primary, secondary, and seasonal credit extended by the Reserve Banks to depository institutions increased by $39 million, to $118 million. The average rate of interest earned on primary, secondary, and seasonal credit decreased to 0.21 percent in 2014, from 0.25 percent in 2013. The average daily balance of Term Asset-Backed Securities Loan Facility (TALF) loans in 2014 was $52 million, a decrease of $212 million from 2013. The average rate of interest earned on TALF loans in 2014 was 3.85 percent.

Investments of the Consolidated VIEs

Certain 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 (GAAP), 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.

Net portfolio assets of the consolidated VIEs decreased from $1,926 million in 2013 to $1,811 million in 2014. In 2013, the loan extended to TALF LLC by the Treasury was repaid in full, including outstanding principal and accrued interest. During 2014, final distributions of assets were made by Maiden Lane II LLC, Maiden Lane III LLC, and TALF LLC, and the entities were dissolved.

Table 6. Key financial data for consolidated variable interest entities (VIEs), 2014 and 2013
Millions of dollars

Item	TALF LLC		Maiden Lane LLC		Maiden Lane II LLC		Maiden Lane III LLC		Total VIEs
	2014	2013	2014	2013	2014	2013	2014	2013	2014	2013
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	0	109	1,811	1,732	0	63	0	22	1,811	1,926
Liabilities of consolidated VIEs	0	0	-127	-157	0	0	0	0	-127	-157
Net portfolio assets available 2	0	109	1,684	1,575	0	63	0	22	1,684	1,769
Loans extended to the consolidated VIEs by the FRBNY 3	0	0	0	0	0	0	0	0	0	0
Other beneficial interests3	0	0	0	0	0	0	0	0	0	0
Total loans extended to the consolidated VIEs by the FRBNY and other beneficial interests	0	0	0	0	0	0	0	0	0	0
Cumulative change in net assets since the inception of the program 4
Allocated to FRBNY	0	11	1,684	1,575	0	53	0	15	1,684	1,654
Allocated to other beneficial interests	0	98	0	0	0	10	0	7	0	115
Cumulative change in net assets	0	109	1,684	1,575	0	63	0	22	1,684	1,769
Summary of consolidated VIE net income, including a reconciliation of total consolidated VIE net income to the consolidated VIE net income
Portfolio interest income 5	* *	0	77	2	*	4	*	*	77	6
Portfolio holdings gains (losses)	*	-573	37	183	0	0	*	0	37	-390
Professional fees	*	-1	-4	-6	*	-1	*	*	-4	-8
Net income (loss) of consolidated VIEs	*	-574	110	179	*	3	*	*	110	-392
Less: Net income (loss) allocated to other beneficial interests	*	574	0	0	*	-1	*	*	0	573
Net income (loss) allocated to and recorded by FRBNY 6	*	0	110	179	*	2	*	0	110	181

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. During the year ended December 31, 2014, all remaining assets of TALF LLC, Maiden Lane II, and Maiden Lane III, were distributed to the FRBNY and other beneficial interest holders and these entities were dissolved. Return to table

3. The remaining balances of the loans extended to the consolidated VIEs by the FRBNY and by amounts provided to the VIEs by other beneficial interest holders were repaid in full, including accrued interest, during the years ended December 31, 2012, and December 31, 2013. Return to table

4. 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

5. Interest income is recorded when earned and includes amortization of premiums, accretion of discounts, and paydown gains and losses. Return to table

6. In addition to the net income attributable to TALF LLC, FRBNY earned $3 million on TALF loans during the year ended December 31, 2013 (interest income of $6 million and a loss on the valuation of loans of $3 million). Return to table

*Less than $500 thousand. Return to table

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Federal Reserve Bank Premises

Several Reserve Banks took action in 2014 to maintain and renovate their facilities. The multiyear renovation programs at the Boston, New York, Richmond, St. Louis, and San Francisco Reserve Banks' headquarters buildings continued. All Reserve Banks continued to implement projects to maintain building systems to ensure efficient and reliable operations. The New York Reserve Bank continued repairs and renovations to the 33 Maiden Lane building, and the Chicago Federal Reserve Bank continued construction of security enhancements to its building. In 2014, the Dallas Reserve Bank moved to leased office space for its San Antonio Branch and sold the building that previously housed the Branch's operations.

For more information on the acquisition costs and net book value of the Reserve Banks and Branches, see table 14 in the "Statistical Tables" section of this report.

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Pro Forma Financial Statements for Federal Reserve Priced Services

Table 7. Pro forma balance sheet for Federal Reserve priced services, December 31, 2014 and 2013
Millions of dollars

Item	2014		2013
Short-term assets (Note 1)
Imputed investments	556.7		913.3
Receivables	36.9		36.2
Materials and supplies	0.7		0.9
Prepaid expenses	11.1		6.6
Items in process of collection	85.7		165.3
Total short-term assets		691.2		1,122.5
Long-term assets (Note 2)
Premises	131.2		144.2
Furniture and equipment	35.9		32.5
Leases, leasehold improvements, and long-term prepayments	101.7		95.0
Prepaid pension costs	0.0		59.2
Deferred tax asset	325.6		291.8
Total long-term assets		594.4		622.8
Total assets		1,285.6		1,745.3
Short-term liabilities
Deferred-availability items	642.4		1,078.6
Short-term debt	24.8		20.4
Short-term payables	24.0		23.4
Total short-term liabilities		691.2		1,122.5
Long-term liabilities
Long-term debt	60.9		129.4
Accrued benefit costs	459.3		406.1
Total long-term liabilities		520.2		535.5
Total liabilities		1,211.4		1,658.0
Equity (including accumulated other comprehensive loss of $549.7 million and $466.2 million at December 31, 2014 and 2013, respectively)		74.2		87.3
Total liabilities and equity (Note 3)		1,285.6		1,745.3

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.

Table 8. Pro forma income statement for Federal Reserve priced services, 2014 and 2013
Millions of dollars

Item	2014		2013
Revenue from services provided to depository institutions (Note 4)		433.1		441.2
Operating expenses (Note 5)		399.0		385.5
Income from operations		34.1		55.7
Imputed costs (Note 6)
Interest on debt	7.1		0.1
Interest on float	-0.5		-0.7
Sales taxes	4.5	11.0	4.4	3.8
Income from operations after imputed costs		23.0		51.9
Other income and expenses (Note 7)
Investment income		0.0	0.1	0.1
Income before income taxes		23.0		52.0
Imputed income taxes (Note 6)		8.6		20.0
Net income		14.5		32.0
Memo: Targeted return on equity (Note 6)		5.5		4.2

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.

Table 9. Pro forma income statement for Federal Reserve priced services, by service, 2014
Millions of dollars

Item	Total	Commercial check collection	Commercial ACH	Fedwire funds	Fedwire securities
Revenue from services (Note 4)	433.1	174.7	124.4	110.1	24.0
Operating expenses (Note 5) 1	399.0	130.9	147.2	99.5	21.4
Income from operations	34.1	43.8	-22.9	10.5	2.6
Imputed costs (Note 6)	11.0	3.4	4.2	2.9	0.6
Income from operations after imputed costs	23.0	40.4	-27.0	7.7	2.0
Other income and expenses, net (Note 7)	0.0	0.0	0.0	0.0	0.0
Income before income taxes	23.0	40.4	-27.0	7.7	2.0
Imputed income taxes (Note 6)	8.6	15.0	-10.1	2.9	0.7
Net income	14.5	25.4	-17.0	4.8	1.2
Memo: Targeted return on equity (Note 6)	5.5	1.8	2.0	1.4	0.3
Cost recovery (percent) (Note 8)	102.1	115.6	86.7	103.2	104.1

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.

1. Operating expenses include pension costs, Board expenses, and reimbursements for certain nonpriced services. Return to table

Notes to Pro Forma Financial Statements for Priced Services

(1) Short-Term Assets

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. Investments of excess financing derived from credit float are assumed to be invested in federal funds.

(2) 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 a deferred tax asset related to the priced services pension and postretirement benefits obligation. The tax rate associated with the deferred tax asset was 37.2 percent and 38.5 percent for 2014 and 2013, respectively.

Long-term assets also consist of an estimate of the assets of the Board of Governors used in the development of priced services.

(3) Liabilities and Equity

Under the matched-book capital structure for assets, short-term assets are financed with short-term payables and imputed short-term debt, if needed. Long-term assets are financed with long-term liabilities, imputed long-term debt, and imputed equity, if needed. To meet the Federal Deposit Insurance Corporation (FDIC) requirements for a well-capitalized institution, in 2014 equity is imputed at 5.8 percent of total assets and 10 percent of risk-weighted assets, and in 2013 equity is imputed at 5.0 percent of total assets and 10.2 percent of risk-weighted assets. In accordance with Accounting Standards Codification (ASC) Topic 715 (ASC 715), Compensation-Retirement Benefits, the Reserve Banks recorded the funded status of pension and other benefit plans on their balance sheets. To reflect the funded status of their 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 plan liabilities 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, which is a component of accrued benefit costs, of $42.0 million and a pension asset of $59.2 million in 2014 and 2013, 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 $83.5 million in 2014.

(4) Revenue

Revenue represents fees charged to depository institutions for priced services and is realized from each institution through direct charges to an institution's account.

(5) Operating Expenses

Operating expenses consist of the direct, indirect, and other general administrative expenses of the Reserve Banks for priced services and the expenses of the Board related to the development of priced services. Board expenses were $4.1 million in 2014 and $4.0 million in 2013.

In accordance with ASC 715, the Reserve Bank priced services recognized qualified pension-plan operating expenses of $22.7 million in 2014 and $45.4 million in 2013. Operating expenses also include the nonqualified net pension expense of $4.7 million in 2014 and net pension credit of $0.7 million in 2013. The implementation of ASC 715 does not change the systematic approach required by GAAP 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.

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, and interest on float. Many imputed costs are derived from the PSAF model. The 2014 cost of short-term debt imputed in the PSAF model is based on nonfinancial commercial paper rates; the cost of imputed long-term debt is based on Merrill Lynch Corporate and High Yield Index returns; and the effective tax rate is derived from U.S. publicly traded firm data, which serve as the proxy for the financial data of a representative private-sector firm. The after-tax rate of return on equity is based on the returns of the equity market as a whole.¹⁷

Interest is imputed on the debt assumed necessary to finance priced-service assets. These 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.

Interest on float is derived from the value of float to be recovered for the check and ACH services, Fedwire Funds Service, and Fedwire Securities Services through per-item fees during the period. Float income or cost is based on the actual float incurred for each priced service.

The following shows the daily average recovery of actual float by the Reserve Banks for 2014, in millions of dollars:

Total float	-590.8
Unrecovered float	4.7
Float subject to recovery through per item fees	-595.5

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 ACH funding requirements and check products generate credit float; this float has been subtracted from the cost base subject to recovery in 2014 and 2013.

(7) Other Income and Expenses

Other income consists of income on imputed investments. Excess financing resulting from additional equity imputed to meet the FDIC well-capitalized requirements is assumed to be invested and earning interest at the 3-month Treasury bill rate.

(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 after-tax targeted return on equity.

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