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Federal Reserve Banks

The Federal Reserve Banks provide payment services to depository and certain other institutions, distribute the nation's currency and coin, and serve as fiscal agents and depositories for the United States. The Reserve Banks also contribute to setting national monetary policy and supervision and regulation of banks and other financial entities (discussed in the preceding chapters of this report).

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Developments in Federal Reserve Priced Services

Federal Reserve Banks provide a range of payment and related services to depository institutions, including collecting checks, operating an automated clearinghouse (ACH) service, transferring funds and securities, and providing a multilateral settlement service. The Reserve Banks charge fees for providing these "priced services."

The Monetary Control Act of 1980 requires that the Federal Reserve establish fees for priced services provided to depository institutions so as to recover, over the long run, all direct and indirect costs actually incurred as well as the imputed costs that would have been incurred, including financing costs, taxes, and certain other expenses, and the return on equity (profit) that would have been earned if a private business firm had provided the services.1 The imputed costs and imputed profit are collectively referred to as the private sector adjustment factor (PSAF).2 Over the past 10 years, Reserve Banks have recovered 98.7 percent of their priced services costs, including the PSAF (see table, next page).3

In 2008, Reserve Banks recovered 98.5 percent of total priced services costs of $886.9 million, including the PSAF.4 Revenue from priced services amounted to $773.4 million, other income was $100.4 million, and costs were $820.4 million, resulting in net income from priced services of $53.4 million.5

Priced Services Cost Recovery, 1999-2008
Millions of dollars except noted
Year Revenue
from
services1
Operating
expenses
and imputed
costs2
Targeted
return
on equity
Total costs Cost
recovery
(percent)3, 4
1999 867.6 775.7 57.2 832.9 104.2
2000 922.8 818.2 98.4 916.6 100.7
2001 960.4 901.9 109.2 1,011.1 95.0
2002 918.3 891.7 92.5 984.3 93.3
2003 881.7 931.3 104.7 1,036.1 85.1
2004 914.6 842.6 112.4 955.0 95.8
2005 994.7 834.7 103.0 937.7 106.1
2006 1,031.2 875.5 72.0 947.5 108.8
2007 1,012.3 913.3 80.4 993.7 101.9
2008 873.8 820.4 66.5 886.9 98.5
 
1999-2008 9,377.4 8,605.3 896.3 9,501.7 98.7

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 $8,774.1 million and other income and expense (net) of $603.3 million.  Return to table

2. For the 10-year period, includes operating expenses of $8,092.7 million, imputed costs of $171.3 million, and imputed income taxes of $341.3 million.  Return to table
3. Revenue from services divided by total costs.  Return to table
4. For the 10-year period, cost recovery is 92.0 percent, including the net reduction in equity related to FAS 158 reported by the priced services in 2008.  Return to table

Commercial Check-Collection Service

In 2008, Reserve Banks recovered 97.8 percent of the total costs of their commercial check-collection service, including the PSAF. Reserve Banks' operating expenses and imputed costs totaled $647.1 million, of which $14.1 million was attributable to the transportation of commercial checks between Reserve Bank check-processing offices. Revenue amounted to $605.2 million, of which $11.0 million was attributable to estimated revenues derived from the transportation of commercial checks between Reserve Bank check-processing offices, and other income was $78.4 million. The resulting net income was $36.5 million. Check-service fee revenue in 2008 decreased $99.8 million from 2007.

Reserve Banks handled 9.5 billion checks in 2008, a decrease of 4.6 percent from 2007 (see table, opposite page). The decline in Reserve Bank check volume is consistent with nationwide trends away from the use of checks and toward greater use of electronic payment methods.6 Of all the checks presented by Reserve Banks to paying banks in 2008, 75.9 percent were deposited and 53.9 percent were presented using Check 21 products, compared with 42.2 percent and 24.6 percent, respectively, in 2007.7 By year-end 2008, this growth resulted in 91.1 percent of Reserve Bank check deposits and 70.5 percent of Reserve Bank check presentments being made through Check 21 products.

Activity in Federal Reserve Priced Services, 2006-2008
Thousands of items
Service 2008 2007 2006 Percent change
2007 to 2008 2006 to 2007
Commercial check 9,545,424 10,001,289 11,083,122 -4.6 −9.8
Commercial ACH 10,040,388 9,363,429 8,230,782 7.2 13.8
Fedwire funds transfer 134,220 137,555 135,227 −2.4 0.9
National settlement 469 505 470 7.2 7.4
Fedwire securities transfer 11,717 10,110 9,053 15.9 11.7

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.

In November 2008, the Federal Reserve Banks announced that the System would consolidate to a sole site for paper-check-processing and check-adjustments operations. These announcements are part of the Reserve Banks' multiyear initiative, begun in 2003, to reduce the number of offices at which Banks process checks and in order to meet their long-run cost-recovery requirement under the Monetary Control Act of 1980. Because of the rapid adoption of electronic check processing, the Reserve Banks were able to reduce their check-processing infrastructure more quickly than originally expected. The consolidations made it possible for Reserve Banks, in December 2008, to discontinue their dedicated check-transportation routes between Reserve Bank offices. Remaining paper checks that must be shipped between Reserve Banks are transported by the U.S. Postal Service or air freight services.

Commercial Automated Clearinghouse Services

In 2008, the Reserve Banks recovered 101.5 percent of the total costs of their commercial ACH services, including the PSAF. Reserve Bank operating expenses and imputed costs totaled $88.8 million. Revenue from ACH operations totaled $86.6 million and other income totaled $11.3 million, resulting in net income of $9.0 million. The Banks processed 10.0 billion commercial ACH transactions, an increase of 7.2 percent from 2007.

In 2008, nationwide ACH volumes continued to grow, but at a slower rate, as volume increases associated with electronic check-conversion applications--including checks converted at lockbox locations or at the point of purchase--decelerated.

Fedwire Funds and National Settlement Services

In 2008, Reserve Banks recovered 100.4 percent of the costs of their Fedwire Funds and National Settlement Services, including the PSAF. Reserve Bank operating expenses and imputed costs totaled $62.3 million in 2008. Revenue from these operations totaled $59.9 million, and other income amounted to $7.9 million, resulting in net income of $5.5 million.

Fedwire Funds Service

The Fedwire Funds Service allows participants to use their balances at Reserve Banks to transfer funds to other participants. In 2008, the number of Fedwire funds transfers originated by depository institutions decreased 2.4 percent from 2007, to approximately 134.2 million. The average daily value of Fedwire funds transfers in 2008 was $3.0 trillion.

In 2008, the Reserve Banks announced plans to implement enhanced Fedwire Funds Service message formats for cover payments and for payments containing remittance information by November 2009 and late 2010, respectively. These changes are intended to improve payment transparency and efficiency, and provide additional value-added services to Fedwire Funds Service participants.

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 2008, the service processed settlement files for 47 local and national private-sector arrangements, primarily check clearinghouse associations. The Reserve Banks processed slightly more than 15,000 files that contained almost 469,000 settlement entries for these arrangements in 2008.

Fedwire Securities Service

In 2008, the Reserve Banks recovered 102.5 percent of the total costs of their Fedwire Securities Service, including the PSAF. The Reserve Banks' operating expenses and imputed costs for providing this service totaled $22.2 million in 2008. Revenue from the service totaled $21.6 million, and other income totaled $2.9 million, resulting in net income of $2.3 million.

The Fedwire Securities Service allows participants to transfer electronically to other participants in the service certain securities issued by the U.S. Treasury, federal government agencies, government-sponsored enterprises, and certain international organizations.8 In 2008, the number of non-Treasury securities transfers processed via the service increased 15.9 percent from 2007, to approximately 11.7 million.

Float

The Federal Reserve had daily average credit float of $1,193.4 million in 2008, compared with credit float of $604.9 million in 2007.9

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Developments in Currency and Coin

The Federal Reserve Banks issue the nation's currency (in the form of Federal Reserve notes) and distribute coin through depository institutions. The Reserve Banks also receive currency and coin from circulation through these institutions. The Reserve Banks received 36.7 billion Federal Reserve notes from circulation in 2008, a 3.4 percent decrease from 2007, and made payments of 37.7 billion notes into circulation in 2008, a 2.1 percent decrease from 2007. They received 64.4 billion coins from circulation in 2008, a 1.9 percent increase from 2007, and made payments of 72.3 billion coins into circulation, a 4.5 percent decrease from 2007.

Since mid-September, the crisis in financial markets has heightened demand for $100 notes among both international and domestic users.10 In 2008, payments exceeded receipts by 1.0 billion notes, most of which were of the $100 denomination. For this reason, the value of currency in circulation, as of December 31, increased 7.8 percent from December 31, 2007, to $853.2 billion.11

Board staff worked with the Treasury Department, the U.S. Secret Service, and the Reserve Banks' Currency Technology Office to develop more-secure designs for the $5 and $100 Federal Reserve notes. Reserve Banks issued the redesigned $5 note in March 2008. The Treasury is continuing to develop a new design for the $100 note.

Consistent with the requirements of the Presidential $1 Coin Act, the Federal Reserve and the Mint conducted additional outreach to depository institutions and coin users to gauge demand for the coins and to anticipate and eliminate obstacles to the efficient circulation of $1 coins. Board staff worked with the Reserve Banks' Cash Product Office to address other coin distribution and management issues, including increased coin inventories, resulting partially from the United States Mint's commemorative circulating coin programs.

Reserve Banks continued implementing a program to extend the useful life of the System's BPS 3000 high-speed currency-processing machines. The program will replace the operating systems of the current equipment, which will help improve processing efficiency. Reserve Banks are in the early stages of adopting a new cash automation platform, known as the currency and coin handling environment, or CACHE. The new system will facilitate control and improve efficiency in cash operations, provide an expansive and responsive management information reporting system with superior and flexible report tools, facilitate business continuity and contingency planning, and enhance the support provided to customers and business partners.

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Developments in Fiscal Agency and Government Depository Services

As fiscal agents and depositories for the federal government, the Federal Reserve Banks provide services related to the federal debt, help the Treasury collect funds owed to the federal government, process electronic and check payments for the Treasury, maintain the Treasury's bank account, and invest Treasury balances. Reserve Banks also provide certain fiscal agency and depository services to other entities.

The total cost of providing fiscal agency and depository services to the Treasury and other entities in 2008 amounted to $461.1 million, compared with $458.2 million in 2007 (see table). Treasury-related costs were $429.9 million in 2008, compared with $427.2 million in 2007, an increase of 0.6 percent. The cost of providing services to other entities was $31.3 million, compared with $31.0 million in 2007. In 2008, as in 2007, the Treasury and other entities reimbursed Reserve Banks for the costs of providing these services.

Expenses of the Federal Reserve Banks for Fiscal Agency and Depository Services, 2006-2008
Thousands of dollars
Agency and service 2008 2007 2006
Department of the Treasury  
Bureau of the Public Debt  
Treasury retail securities 72,373.7 74,149.2 73,931.4
Treasury securities safekeeping and transfer 9,304.7 8,687.7 7,535.2
Treasury auction 37,071.6 41,372.0 23,594.9
Computer infrastructure development and support 4,463.7 3,558.7 3,853.1
Other services 909.9 724.5 1,578.7
Total 124,123.7 128,492.1 110,493.2
Financial Management Service  
Payment services 
Government check processing 16,366.9 17,522.7 20,918.6
Automated clearinghouse 6,530.5 6,050.3 5,823.1
Fedwire funds transfers 108.3 116.8 123.1
Other payment programs 85,212.8 81,636.9 69,696.8
Collection services 
Tax and other revenue collections 37,412.1 38,254.5 37,095.5
Other collection programs 11,767.6 12,483.6 14,122.6
Cash-management services 51,620.6 46,093.6 48,320.2
Computer infrastructure development and support 65,058.6 70,999.9 67,046.4
Other services 7,577.4 7,245.7 7,414.8
Total 281,654.8 280,404.2 270,561.2
Other Treasury  
Total 24,073.1 18,258.6 16,786.3
Total, Treasury 429,851.5 427,154.9 397,840.7
Other Federal Agencies  
Department of Agriculture  
Food coupons 2,676.3 2,706.0 2,929.8
United States Postal Service  
Postal money orders 8,257.7 8,913.2 9,334.4
Other agencies  
Other services 20,358.4 19,412.0 15,977.1
Total, other agencies 31,292.3 31,031.1 28,241.4
Total reimbursable expenses 461,143.9 458,186.0 426,082.1

Note: Numbers in bold reflect restatements due to recategorization.

Debt Services

The Reserve Banks support Treasury's wholesale securities services by auctioning, providing book-entry safekeeping for, and transferring Treasury securities. Reserve Bank operating expenses for these activities totaled $46.4 million in 2008, compared with $50.1 million in 2007. To improve support of Treasury-securities auction activities, the Reserve Banks implemented a new Treasury-securities auction application and infrastructure in April 2008. The Banks conducted 263 Treasury securities auctions in 2008, compared with 220 in 2007. In addition, the Banks processed 12.8 million transfers of Treasury securities in 2008 through the Fedwire Securities Service, compared with 13.7 million transfers in 2007.

Reserve Banks also support the Treasury's retail securities program that primarily serves individual investors. Reserve Bank operating expenses for these activities were $72.4 million in 2008, compared with $74.1 million in 2007. Reserve Banks operate the Legacy Treasury Direct system, which allows investors to purchase and hold marketable Treasury securities directly with the Treasury instead of through a financial institution. The Legacy Treasury Direct system held $63.4 billion (par value) of Treasury securities as of December 31. The Banks also issue, service, and redeem nonmarketable savings bonds. The Banks printed and mailed more than 22.6 million savings bonds in 2008, a 9.7 percent decrease from 2007. Overall, the volume of retail securities transactions processed by the Reserve Banks has declined for several years and, consequently, the Banks have reduced expenses and staffing levels.

Payments Services

Reserve Banks process both electronic and check payments for the Treasury. Reserve Bank operating expenses for processing government payments and for payments-related programs totaled $108.2 million in 2008, compared with $105.3 million in 2007. In 2008, the Banks processed 1,132 million ACH payments for the Treasury, an increase of 10.2 percent from 2007. They also processed 269.4 million government checks, an increase of 26.1 percent from 2007. The increase in ACH and check payments is largely attributable to economic stimulus payments issued in 2008.

The proportion of government checks processed in paper form continues to decline, as an increasing number of depository institutions present checks in image form. Of all the government checks processed by the Reserve Banks in 2008, 23 percent were presented in paper form and 77 percent in image form, compared with 54 percent and 46 percent, respectively, in 2007.

Reserve Banks also support the Treasury's initiative to convert check benefit payments to direct deposit. In 2008, more than 577,000 check payments were converted to direct deposit.

Collection Services

Reserve Banks support several Treasury programs that serve to collect funds owed the federal government. Reserve Bank operating expenses related to these programs totaled $49.2 million in 2008, compared with $50.7 million in 2007. For example, the Banks operate the Federal Reserve Electronic Tax Application (FR-ETA), which provides taxpayers a same-day electronic federal tax payment alternative. FR-ETA collected $505.0 billion for the Treasury in 2008, compared with $519.8 billion in 2007.

In addition, the Reserve Banks operate Pay.gov, a Treasury program that allows the public to use the Internet to initiate and authorize payment for federal government goods and services. They also operated the Treasury's Paper Check Conversion and Electronic Check Processing programs, whereby checks written to government agencies are converted into ACH transactions at the point of sale or at lockbox locations. In 2008, Reserve Banks originated 35.6 million ACH transactions through these three programs, compared with 15.3 million in 2007. At the Treasury's direction, Reserve Banks worked to ensure a smooth transition of the Paper Check Conversion and Electronic Check Processing programs to a commercial bank effective in early 2009.

Treasury Cash-Management Services

The Treasury maintains an operating cash account at the Reserve Banks, and invests the funds it does not need for a given day's payments with qualified depository institutions through several investment programs supported by the Reserve Banks. Reserve Bank operating expenses related to these programs and other cash management initiatives totaled $51.6 million in 2008, compared with $46.1 million in 2007. In the Treasury Tax and Loan (TT&L) program, qualified depository institutions collect tax payments and may retain these funds as investments for the Treasury. The Treasury also invests funds at certain TT&L depositories through direct deposits. These fully collateralized investments are either callable on demand or set for a term. In 2008, Reserve Banks placed a total of $783.1 billion in immediately callable investments--including funds invested through retained tax deposits and direct investments--and $1,217.8 billion in term investments. In addition, the Treasury may invest a portion of its operating funds directly with TT&L depositories through its repurchase agreements program. In 2008, the Reserve Banks placed a total of $225.8 billion of investments through this program.

In 2008, the Reserve Banks and Treasury continued work on the Collections and Cash Management Modernization (CCMM) initiative, which is a multiyear effort to streamline, modernize, and improve the services, systems, and processes supporting the Treasury's collections and cash management programs. Several Reserve Banks have been selected to work on aspects of the CCMM initiative.

Services Provided to Other Entities

When permitted by federal statute or when required by the Secretary of the Treasury, Reserve Banks provide fiscal agency and depository services to other domestic and international entities. The majority of the work performed for these entities is securities-related.

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Electronic Access to Reserve Bank Services

In 2008, the Federal Reserve Banks substantially completed the migration of computer interface customers to FedLine Direct and FedLine Command.12 This migration, typically for high-volume depository institutions, and the FedLine Advantage migration, typically for low- to moderate-volume depository institutions, complete the Reserve Banks' initiative to migrate electronic access to Reserve Bank services to internet-protocol-based electronic access.13

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Information Technology

In 2008, the Federal Reserve continued to develop and implement the Reserve Banks' IT strategy, further strengthened IT governance, managed information security risk, and analyzed and coordinated the System's IT investments.

In 2008, Federal Reserve Information Technology (FRIT) continued to lead Reserve Bank efforts to transition to a more-robust information security model. The Information Security Architecture Framework (ISAF), a three-year program, was successfully completed. ISAF was developed to respond to the continuing and increasingly sophisticated security threats facing information technology systems and to improve information security at all points in the Federal Reserve. Through ISAF, the System was able to implement projects that enhanced user authentication, separated sensitive applications and infrastructure from low- and moderate-risk systems, and strengthened compliance and patch management. FRIT will continue working to address residual information security risks.

To enable certain functionalities and, secondly, to help address the business implications of reduced demand for mainframe services, Reserve Banks are engaged in a multiyear effort to move major business applications off the mainframe and to a distributed environment. In 2008, the new Treasury automated auction processing system became one of the first major business applications to be migrated.

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Examinations of the Federal Reserve Banks

Section 21 of the Federal Reserve Act requires the Board of Governors to order an examination of each Federal Reserve Bank at least once a year. The Board performs its own reviews and engages a public accounting firm. The public accounting firm performs an annual audit of the combined financial statements of the Reserve Banks (see the "Federal Reserve Banks Combined Financial Statements" section of this report) as well as the annual financial statements of each of the 12 Banks and the consolidated limited liability company (LLC) entities. 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. The Reserve Banks have further enhanced their assessments under the COSO framework to strengthen the key control assertion process and, in 2008, again met the requirements of the Sarbanes-Oxley Act of 2002. Within this framework, the management of each Reserve Bank provides an assertion letter to its board of directors annually that confirms adherence to COSO standards, and a public accounting firm issues an attestation report to each Bank's board of directors and to the Board of Governors.

In 2008, the Board engaged Deloitte & Touche LLP (D&T) for the audits of the individual and combined financial statements of the Reserve Banks and those of the consolidated LLC entities. Fees for D&T's services totaled $9.5 million. Of the total fees, $2.3 million were for the audits of the consolidated LLC entities that are associated with recent Federal Reserve actions to address the financial crisis, and are consolidated in the financial statements of the Federal Reserve Bank of New York (the New York Reserve Bank).14 To ensure auditor independence, the Board requires that D&T be independent in all matters relating to the audit. 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 2008, one Reserve Bank engaged D&T for nonaudit consulting services for which the fees were immaterial.

The Board's annual examination of the Reserve Banks and the consolidated LLC entities includes a wide range of off-site and on-site oversight activities, conducted primarily by the Division of Reserve Bank Operations and Payment Systems. Division personnel monitor the activities of each Reserve Bank on an ongoing basis and conduct a comprehensive on-site review of each Reserve Bank at least once every three years. The reviews also include an assessment of the internal audit function's conformance to International Standards for the Professional Practice of Internal Auditing, conformance to applicable policies and procedures, and the audit department's efficiency.

To assess compliance with the policies established by the Federal Reserve's Federal Open Market Committee (FOMC), the division also reviews the accounts and holdings of the System Open Market Account (SOMA) at the New York Reserve Bank and the foreign currency operations conducted by that Bank. In addition, D&T audits the schedule of participated asset and liability accounts and the related schedule of participated income accounts at year-end. The FOMC receives the external audit reports and the report on the division's examination.

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Income and Expenses

Income, Expenses, and Distribution of Net Earnings of the Federal Reserve Banks, 2008 and 2007
Millions of dollars
Item 2008 2007
Current income 41,046 42,576
Current expenses 4,870 5,198
Operating expenses1 3,232 3,270
Interest paid to depository institutions and earnings credits granted2 901 240
Interest expense on securities sold under agreements to repurchase 737 1,688
Current net income 36,175 37,378
Net additions to (deductions from, -) current net income 3,341 1,886
Profits on sales of U.S. government securities 3,769 ...
Profits on foreign exchange transactions 1,266 1,886
Net loss from consolidated VIEs3 -1,693 ...
Assessments by the Board of Governors 853 872
For Board expenditures 352 296
For currency costs 500 576
Change in funded status of benefit plans4 -3,159 324
Comprehensive income before payments to Treasury 35,504 38,716
Dividends paid 1,190 992
Transferred to surplus and change in accumulated other comprehensive income 2,626 3,126
Payments to U.S. Treasury5 31,689 34,598

NOTE: Numbers in bold reflect reclassification of amounts to maintain comparability for the years presented.

1. Includes a net periodic pension expense of $160 million in 2008 and $110 million in 2007.  Return to table

2. In October 2008, the Reserve Banks began to pay interest to depository institutions on qualifying balances.  Return to table

3. Includes $961 million of interest earnings on loans extended by the New York Reserve Bank in 2008.  Return to table

4. Subsequent to the adoption of SFAS 158 in 2006, the Reserve Banks began to recognize the change in funded status of benefit plans as an element of other comprehensive income in their Statements of Income and Comprehensive Income.  Return to table

5. Interest on Federal Reserve notes.  Return to table

. . . Not applicable. Return to table

The table opposite summarizes the income, expenses, and distributions of net earnings of the Federal Reserve Banks for 2008 and 2007. Income in 2008 was $41,046 million, compared with $42,576 million in 2007.

Expenses totaled $5,723 million ($3,232 million in operating expenses, $901 million in interest paid to depository institutions on reserve balances and earnings credits granted to depository institutions, $737 million in interest expense on securities sold under agreements to repurchase, $352 million in assessments for Board of Governors expenditures, and $500 million for currency costs).15 Net additions to and deductions from current net income showed a net profit of $3,341 million, which consists of $3,769 million in realized gains on sales of U.S. government securities and $1,266 million in unrealized gains on investments denominated in foreign currencies revalued to reflect current market exchange rates, reduced by $1,693 million in net losses associated with consolidated variable interest entities (VIEs). Dividends paid to member banks, set at 6 percent of paid-in capital by section 7(1) of the Federal Reserve Act, totaled $1,190 million, $198 million more than in 2007; the increase reflects an increase in the capital and surplus of member banks and a consequent increase in the paid-in capital stock of the Reserve Banks.

Payments to the U.S. Treasury in the form of interest on Federal Reserve notes totaled $31,689 million in 2008, down from $34,598 million in 2007; the payments equal net income after the deduction of dividends paid and of the amount necessary to equate the Reserve Banks' surplus to paid-in capital.

In the "Statistical Tables" section of this report, table 10 details the income and expenses of each Reserve Bank for 2008, and table 11 shows a condensed statement for each Bank for the years 1914 through 2008; table 9 is a statement of condition for each Bank, and table 13 gives the number and annual salaries of officers and employees for each Bank. A detailed account of the assessments and expenditures of the Board of Governors appears in the section "Board of Governors Financial Statements."

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SOMA Holdings and Loans

The Federal Reserve Banks' average net daily holdings of securities and loans during 2008 amounted to $1,035,700 million, an increase of $233,072 million from 2007 (see table).

SOMA Holdings and Loans of the Federal Reserve Banks, 2008 and 20071
Millions of dollars except noted
Item Average daily assets (+)/liabilities (-)2 Current income (+)/expense (-) Average interest rate (percent)
2008 2007 2008 2007 2008 2007
U.S. government securities3 547,165 782,179 25,631 38,707 4.68 4.95
Securities purchased under agreements to resell 86,130 31,683 1,891 1,591 2.20 5.02
Securities sold under agreeements to repurchase -55,034 -34,548 -737 -1,688 1.34 4.89
Investments denominated in foreign currencies4 24,212 21,325 623 546 2.57 2.56
Central bank liquidity swaps5 160,331 532 3,606 28 2.25 5.34
Primary, secondary, and seasonal credit6 32,022 636 512 33 1.60 5.20
Term auction credit 172,905 822 3,305 38 1.91 4.66
Other loans  
Primary dealer and other broker-dealer credit7 28,298 ... 511 ... 1.81 ...
AMLF 21,036 ... 470 ... 2.24 ...
Credit extended to AIG8 18,636 ... 2,367 ... 12.70 ...
Total 1,035,700 802,628 38,179 39,256 3.69 4.89

NOTE: Amounts in bold reflect restatements due to changes in previously reported data and recategorization.

1. Does not include loans to consolidated VIEs.  Return to table

2. Based on holdings at opening of business.  Return to table

3. Includes federal agency and GSE obligations beginning in 2008.  Return to table

4. Excludes accrued interest. Investments denominated in foreign currencies are revalued daily at market exchange rates.  Return to table

5. 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

6. Excludes indebtedness assumed by the Federal Deposit Insurance Corporation.  Return to table

7. Includes credit extended through the PDCF and credit extended to certain other broker-dealers.  Return to table

8. Excludes credit extended to consolidated LLCs and undrawn amounts.  Return to table

... Not applicable.  Return to table

SOMA Securities Holdings

The average daily holdings of U.S. government, federal agency, and government-sponsored enterprise (GSE) securities decreased by $235,014 million, to an average daily level of $547,165 million. The decrease is due to the sale of securities during 2008 and maturing securities that were not replaced, offset by the purchase of federal agency and GSE securities beginning in 2008. Average daily holdings of securities purchased under agreements to resell in 2008 were $86,130 million, an increase of $54,447 million from 2007, while the average daily balance of securities sold under agreements to repurchase was $55,034 million, an increase of $20,486 million from 2007. Average daily holdings of investments denominated in foreign securities in 2008 were $24,212 million, compared with $21,325 million in 2007. During 2008, the Federal Reserve authorized increases in the amount of central bank liquidity swaps and in the number of eligible foreign central banks. The average daily balance of central bank liquidity swap drawings was $160,331 million in 2008 and $532 million in 2007.

The average rate of interest earned on the Reserve Banks' holdings of government securities decreased to 4.68 percent, from 4.95 percent in 2007. The average interest rates for securities purchased under agreements to resell and securities sold under agreements to repurchase were 2.20 percent and 1.34 percent, respectively, in 2008. Investments denominated in foreign currencies and central bank liquidity swaps earned interest at average rates of 2.57 percent and 2.25 percent, respectively, in 2008.

Lending

In 2008, average daily primary, secondary, and seasonal credit extended increased $31,386 million to $32,022 million and term auction credit extended under the Term Auction Facility increased $172,083 million to $172,905 million. The average rate of interest earned on primary, secondary, and seasonal credit decreased to 1.60 percent in 2008, from 5.20 percent in 2007, while the average interest rate on term auction credit decreased to 1.91 percent in 2008, from 4.66 percent in 2007.

During 2008, the Federal Reserve established several lending facilities under authority of section 13(3) of the Federal Reserve Act. These included the Primary Dealer Credit Facility (PDCF), the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), and the American International Group, Inc. (AIG) credit line. Amounts funded by the Reserve Banks under these programs are recorded as loans by the Reserve Banks. During 2008, the average daily holdings under the PDCF and AMLF were $28,298 million and $21,036 million, respectively, with average rates of interest earned of 1.81 percent and 2.24 percent, respectively. The average daily balance of credit extended to AIG in 2008 was $18,636 million, which earned interest at an average rate of 12.70 percent.

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Investments of Consolidated Variable Interest Entities

Additional lending facilities established during 2008 under authority of section 13(3) of the Federal Reserve Act involved creating and lending to special purpose vehicles (SPVs).16 The SPVs were funded by the New York Reserve Bank and acquired financial assets and financial liabilities pursuant to the policy objectives. The SPVs were determined to be VIEs, and the New York Reserve Bank is considered to be the primary beneficiary of each.17 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.18 The proceeds at the maturity or the liquidation of the VIEs' assets will be used to repay the loans extended by the New York Reserve Bank. Information regarding the Reserve Banks' lending to the VIEs and the asset portfolios of each VIE is as described in the table.

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Key Financial Data for Consolidated Variable Interest Entities as of December 31, 2008
Millions of dollars
Item Commercial Paper Funding Facility LLC (CPFF) Maiden Lane LLC1 Maiden Lane II LLC1 Maiden Lane III LLC1 Total
Net portfolio assets2 334,910 30,635 19,195 27,256 411,996
Liabilities of consolidated VIEs -812 -4,951 -2 -48 -5,813
Net portfolio assets available3 334,098 25,684 19,193 27,208 406,183
Loans extended by the New York Reserve Bank4 333,020 29,087 19,522 24,384 406,013
Other beneficial interests4,5 ... 1,188 1,003 5,022 7,213
Total loans and other beneficial interests 333,020 30,275 20,525 29,406 413,226
Allocation of excess/(deficiency) of net portfolio assets available over loans and other beneficial interests6  
Loans extended by the New York Reserve Bank 1,078 -3,403 -329 0 -2,654
Other beneficial interests ... -1,188 -1,003 -2,198 -4,389
Total 1,078 -4,591 -1,332 -2,198 -7,043

1. Maiden Lane LLC was formed to acquire certain assets of Bear Stearns; Maiden Lane II LLC and Maiden Lane III LLC were formed to acquire certain assets of AIG and its subsidiaries.  Return to table

2. 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. CPFF holdings are recorded at book value, which includes amortized cost and related fees.  Return to table

3. Represents the net assets available for repayment of loans extended by the New York Reserve Bank and other beneficiaries of the consolidated VIEs as of December 31, 2008.  Return to table

4. Book value. Includes accrued interest.  Return to table

5. The "other beneficiary" for Maiden Lane is JPMorgan Chase & Co., and AIG is the "other beneficiary" for Maiden Lane II and Maiden Lane III.  Return to table

6. Represents the allocation of the change in net assets and liabilities of the consolidated VIEs available for repayment of the loans extended by the New York Reserve Bank and other beneficiaries of the consolidated VIEs. The differences between the fair value of the net assets available and the face 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 as of December 31, 2008.  Return to table

... Not applicable.  Return to table

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Reserve Bank Branch Closure

The Board approved the discontinuation of the New York Reserve Bank's Buffalo Branch effective October 31.19 At the time of the discontinuation, the Branch consisted of a small research and community outreach staff and the Branch board of directors, which provided economic and financial intelligence to the Bank. The Branch had not performed financial services since 2004. The Branch board of directors was replaced by an upstate New York regional advisory board, which provides economic and financial intelligence.

Federal Reserve Bank Premises

A number of Reserve Banks took action in 2008 to upgrade and refurbish their facilities and streamline operations. The Kansas City Bank moved into its new building, and the Seattle Branch of the San Francisco Bank dedicated its new building. The multiyear renovation program at the New York Bank's headquarters building also continued, while the St. Louis Bank continued a long-term facility redevelopment program that includes the construction of an addition to the Bank's headquarters building. The New York Bank made progress on a program to enhance the business resiliency of its information technology systems and to upgrade facility support for the Bank's open market operations, central bank services, and data center operations.

Security-enhancement programs continued at several facilities, including construction of security improvements to the Richmond Bank's headquarters building and the development of remote vehicle-screening facility designs for the Philadelphia and Dallas Banks.

Additionally, the St. Louis Bank sold its Little Rock Branch building, and the San Francisco Bank continued its efforts to sell the former Seattle Branch building.

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

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Pro Forma Financial Statements for Federal Reserve Priced Services

Pro Forma Balance Sheet for Federal Reserve Priced Services, December 31, 2008 and 2007
Millions of dollars
Item 2008 2007
Short-term assets (Note 1)
Imputed reserve requirements on clearing balances 418.8 755.7
Imputed investments 4,292.7 6,465.7
Receivables 60.0 66.7
Materials and supplies 2.1 1.8
Prepaid expenses 29.2 28.5
Items in process of collection 983.1
1,769.6
Total short-term assets 5,786.0 9,088.0
Long-term assets (Note 2)
Premises 441.1 453.5
Furniture and equipment 113.0 130.2
Leases, leasehold improvements, and long-term prepayments 76.7 64.2
Prepaid pension costs 0.0 484.6
Deferred tax asset 313.2
109.4
Total long-term assets 944.0
1,242.0
Total assets 6,729.9 10,330.0
Short-term liabilities  
Clearing balances and balances arising from early credit of uncollected items 2,391.8 7,641.1
Deferred-availability items 2,779.8 1,685.1
Short-term debt 0.0 0.0
Short-term payables 573.5
102.4
Total short-term liabilities 5,745.1 9,428.5
Long-term liabilities  
Long-term debt 0.0 0.0
Accrued benefit costs 605.6
385.0
Total long-term liabilities 605.6
385.0
Total liabilities 6,350.7 9,813.5
Equity (including accumulated other comprehensive loss of $690.6 million and $237.9 million at December 31, 2008 and 2007, respectively) 379.2
516.5
Total liabilities and equity (Note 3) 6,729.9 10,330.0

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.

Pro Forma Income Statement for Federal Reserve Priced Services, 2008 and 2007
Millions of dollars
Item 2008 2007
Revenue from services provided to depository institutions (Note 4)   773.4   878.4
Operating expenses (Note 5)   808.7

  888.2

Income from operations   -35.3   -9.8
Imputed costs (Note 6)  
Interest on float -22.4   -32.0  
Interest on debt 0.0   0.0  
Sales taxes 9.4   11.6  
FDIC Insurance 0.5

-12.5

0.0

-20.4

Income from operations after imputed costs   -22.8   10.6
Other income and expenses (Note 7)  
Investment income 181.2   362.3  
Earnings credits -80.7

100.4 -228.5

133.8
Income before income taxes 77.6 144.5
Imputed income taxes (Note 6)   24.2

  45.5

Net income   53.4   98.9
MEMO: Targeted return on equity (Note 6)   66.5   80.4

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.

Pro Forma Income Statement for Federal Reserve Priced Services, by Service, 2008
Millions of dollars
Item Total Commercial check collection Commercial ACH Fedwire funds Fedwire securities
Revenue from services (Note 4) 773.4 605.2 86.6 59.9 21.6
Operating expenses (Note 5) 808.7

644.4

84.4

59.0

20.9

Income from operations -35.3 -39.2 2.2 0.9 0.7
Imputed costs (Note 6) -12.5

-13.8

0.3

0.8

0.3

Income from operations after imputed costs -22.8 -25.3 1.9 0.2 0.5
Other income and expenses, net (Note 7) 100.4

78.4

11.3

7.9

2.9

Income before income taxes 77.6 53.0 13.1 8.1 3.3
Imputed income taxes (Note 6) 24.2

16.5

4.1

2.5

1.0

Net income 53.4 36.5 9.0 5.5 2.3
MEMO: Targeted return on equity (Note 6) 66.5 51.9 7.6 5.3 1.7
MEMO: Cost recovery (percent) (Note 8) 98.5 97.8 101.5 100.4 102.5

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.

FEDERAL RESERVE BANKS

Notes to Pro Forma Financial Statements for Priced Services

(1) Short-Term Assets

The imputed reserve requirement on clearing balances held at Reserve Banks by depository institutions reflects a treatment comparable to that of compensating balances held at correspondent banks by respondent institutions. The reserve requirement imposed on respondent balances must be held as vault cash or as balances maintained at a Reserve Bank; thus, a portion of priced services clearing balances held with the Federal Reserve is shown as required reserves on the asset side of the balance sheet. Another portion of the clearing balances is used to finance short-term and long-term assets. The remainder of clearing balances is assumed to be invested in a portfolio of investments, shown as imputed investments.

Receivables are comprised of fees due the Reserve Banks for providing priced services and the share of suspense-account and difference-account balances related to priced services.

Materials and supplies are the inventory value of short-term assets.

Prepaid expenses include salary advances and travel advances for priced-service personnel.

Items in process of collection are gross Federal Reserve cash items in process of collection (CIPC), stated on a basis comparable to that of a commercial bank. They reflect adjustments for intra-System items that would otherwise be double-counted on a consolidated Federal Reserve balance sheet; adjustments for items associated with nonpriced items (such as those collected for government agencies); and adjustments for items associated with providing fixed availability or credit before items are received and processed. Among the costs to be recovered under the Monetary Control Act is the cost of float, or net CIPC during the period (the difference between gross CIPC and deferred-availability items, which is the portion of gross CIPC that involves a financing cost), valued at the federal funds rate.

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(2) Long-Term Assets

Long-term assets consist of long-term assets used solely in priced services, the priced-service portion of long-term assets shared with nonpriced services, an estimate of the assets of the Board of Governors used in the development of priced services, and a deferred tax asset related to the priced services pension and postretirement benefits obligation (see Note 3).

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(3) Liabilities and Equity

Under the matched-book capital structure for assets, short-term assets are financed with short-term payables and clearing balances. Long-term assets are financed with long-term liabilities and core clearing balances. As a result, no short- or long-term debt is imputed. Other short-term liabilities include clearing balances maintained at Reserve Banks and deposit balances arising from float. Other long-term liabilities consist of accrued postemployment, postretirement, and qualified and nonqualified pension benefits costs and obligations on capital leases.

Effective December 31, 2006, the Reserve Banks implemented the Financial Accounting Standard Board's Statement of Financial Accounting Standards (SFAS) No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, which requires an employer to record the funded status of its benefit plans on its balance sheet. In order to reflect the funded status of its benefit plans, the Reserve Banks recognized the deferred items related to these plans, which include prior service costs and actuarial gains or losses, on the balance sheet. This resulted in an adjustment to the pension and benefit plans related to priced services and the recognition of an associated deferred tax asset with an offsetting adjustment, net of tax, to accumulated other comprehensive income (AOCI), which is included in equity. The Reserve Bank priced services recognized a net pension liability in 2008 and a net pension asset in 2007. The reduction in the System Retirement Plan's funded status in 2008 was due to reduced asset values and an increase in the projected benefit obligation. This reduction in the funded status resulted in a corresponding change in AOCI of $452.7 million in 2008.

To satisfy the FDIC requirements for a well-capitalized institution, equity is imputed at 10 percent of total risk-weighted assets.

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(4) Revenue

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).

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(5) Operating Expenses

Operating expenses consist of the direct, indirect, and other general administrative expenses of the Reserve Banks for priced services plus the expenses of the Board of Governors related to the development of priced services. Board expenses were $7.2 million in 2008 and $6.7 million in 2007.

Effective January 1, 1987, the Reserve Banks implemented SFAS No. 87, Employers' Accounting for Pensions. Accordingly, the Reserve Bank priced services recognized qualified pension-plan operating expenses of $28.8 million in 2008 and $21.3 million in 2007. Operating expenses also include the nonqualified pension expense of $5.4 million in 2008 and $3.1 million in 2007. The implementation of SFAS No. 158 does not change the systematic approach required by generally accepted accounting principles to recognize the expenses associated with the Reserve Banks' benefit plans in the income statement. As a result, these expenses do not include amounts related to changes in the funded status of the Reserve Banks' benefit plans, which are reflected in AOCI (see Note 3).

  2008 2007
Check 31.0 34.7
ACH 4.6 4.3
Fedwire funds 3.5 3.0
Fedwire securities 1.9 1.7
Total 41.2


43.7


The income statement by service reflects revenue, operating expenses, imputed costs, and cost recovery. Certain corporate overhead costs not closely related to any particular priced service are allocated to priced services based on an expense-ratio method. Corporate overhead was allocated among the priced services during 2008 and 2007 as follows (in millions):


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(6) Imputed Costs

Imputed costs consist of income taxes, return on equity, interest on debt, sales taxes, an FDIC assessment, and interest on float. Many imputed costs are derived from the private-sector adjustment factor (PSAF) model. The cost of debt and the effective tax rate are derived from bank holding company data, which serves 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 used to impute the profit that would have been earned had the services been provided by a private-sector firm.

Interest is imputed on the debt assumed necessary to finance priced-service assets; however, no debt was imputed in 2008 or 2007.

Effective in 2007, the Reserve Bank priced services imputed a one-time FDIC assessment credit. In 2008, the credit offset $4.6 million of the imputed $5.1 million assessment, resulting in a remaining credit of $8.0 million. The remaining credit can be used to offset up to 90 percent of the assessment in the future.

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, National Settlement Service, 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 2008 in millions of dollars:

Total float −1,191.8
Unrecovered float -42.1

Float subject to recovery −1,149.7
Sources of recovery of float  
Income on clearing balances −89.3
As-of adjustments -1.6
Direct charges 111.8
Per-item fees −1,173.8

Unrecovered float includes float generated by services to government agencies and by other central bank services. Float recovered through income on clearing balances is the result of the increase in investable clearing balances; the increase is produced by a deduction for float for CIPC, which reduces imputed reserve requirements. The income on clearing balances reduces the float to be recovered through other means. As-of adjustments and direct charges refer to float that is created by interterritory check transportation and the observance of nonstandard holidays by some depository institutions. Such float may be recovered from the depository institutions through adjustments to institution reserve or clearing balances or by billing institutions directly. Float recovered through direct charges and per-item fees is valued at the federal funds rate; credit float recovered through per-item fees has been subtracted from the cost base subject to recovery in 2008.

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(7) Other Income and Expenses

Other income and expenses consist of investment and interest income on clearing balances and the cost of earnings credits. Investment income on clearing balances for 2008 and 2007 represents the average coupon-equivalent yield on three-month Treasury bills plus a constant spread, based on the return on a portfolio of investments. Before October 9, 2008, the return was applied to the total clearing balance maintained, adjusted for the effect of reserve requirements on clearing balances. On October 9, 2008, the Federal Reserve began paying interest on required reserve and excess balances held by depository institutions at Reserve Banks as authorized by the Emergency Economic Stabilization Act of 2008. As a result of this change, the investment return is applied only 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.

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(8) Cost Recovery

Annual cost recovery is the ratio of revenue, including other income, to the sum of operating expenses, imputed costs, imputed income taxes, and targeted return on equity.

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1. Financial data reported throughout this chapter--including revenue, other income, costs, income before taxes, and net income--can be linked to the pro forma financial statements at the end of this chapter.  Return to text
2. In addition to income taxes and the return on equity, the PSAF includes three other imputed costs: interest on debt, sales taxes, and an assessment for deposit insurance by the Federal Deposit Insurance Corporation (FDIC). Board of Governors assets and costs that are related to priced services are also allocated to priced services; in the pro forma financial statements at the end of this chapter, Board assets are part of long-term assets, and Board expenses are included in operating expenses.   Return to text
3. Effective December 31, 2006, the Reserve Banks implemented the Financial Accounting Standards Board's Statement of Financial Accounting Standards (SFAS) No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, which has resulted in the recognition of a $690.6 million reduction in equity related to the priced services' benefit plans through 2008. Including this reduction in equity, which represents a decline in economic value, results in cost recovery of 92.0 percent for the 10-year period. For details on how implementing SFAS No. 158 affected the pro forma financial statements, refer to notes 3 and 5 at the end of this chapter.  Return to text
4. Total cost is the sum of operating expenses, imputed costs (interest on debt, interest on float, sales taxes, and the FDIC assessment), imputed income taxes, and the targeted return on equity.    Return to text
5. Other income is revenue from investment of clearing balances net of earnings credits, an amount termed net income on clearing balances.   Return to text
6. The Federal Reserve System's retail payments research suggests that the number of checks written in the United States has been declining since the mid-1990s. For details, see Federal Reserve System, "The 2007 Federal Reserve Payments Study: Noncash Payment Trends in the United States, 2003-2006" (78 KB PDF) (December 2007).   Return to text
7. The Reserve Banks also offer non-Check 21 electronic-presentment products. In 2008, 8.4 percent of Reserve Banks' deposit volume was presented to paying banks using these products.   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 the section "Debt Services" later in this chapter.   Return to text
9. Credit float occurs when the Reserve Banks present items for collection to the paying bank prior to providing credit to the depositing bank, and debit float occurs when the Reserve Banks credit the depositing bank prior to presenting items for collection to the paying bank.   Return to text
10. The Federal Reserve measures demand for U.S. currency in terms of growth in net payments (payments to circulation minus receipts from circulation). International demand for U.S. currency is influenced primarily by political and economic uncertainties associated with certain foreign currencies, which contrast with the U.S. dollar's relatively high degree of stability.    Return to text
11. This increase is double the 3.9 percent average annual increase over the last five years.   Return to text
12. FedLine Direct is a computer-to-computer electronic access channel used to access critical payment services, such as Fedwire Funds, Fedwire Securities, National Settlement, and FedACH Services. FedLine Command is a lower-cost internet-protocol-based computer-to-computer electronic access channel for file delivery services, including the FedACH Service.   Return to text
13. FedLine Advantage is a web-based electronic access channel used to access critical payment services. The Reserve Banks completed the FedLine Advantage migration in 2006.   Return to text
14. Each LLC will reimburse the Board of Governors for the fees related to the audit of its financial statements from the entity's available net assets.   Return to text
15. Effective October 9, 2008, the Reserve Banks began paying explicit interest on reserve balances held by depository institutions at the Reserve Banks as authorized by the Emergency Economic Stabilization Act of 2008. Return to text
16. For further information on the establishment and policy objectives of these SPVs, see the "Monetary Policy Report" section of this report.   Return to text
17. A VIE is an entity for which the value of the beneficiaries' financial interests in the entity changes with changes in the fair value of its net assets. A VIE is consolidated by the financial interest holder that is determined to be the primary beneficiary of the VIE because the primary beneficiary will absorb a majority of the VIE's expected losses, receive a majority of the VIE's expected residual gains, or both. To determine whether it is the primary beneficiary of a VIE, the Reserve Bank evaluates the VIE's design, capital structure, and the relationships among the variable interest holders.    Return to text
18. As a consequence of the consolidation, the extensions of credit from the New York Reserve Bank to the VIEs are eliminated, the net assets of the VIEs appear as assets in table 9 in the "Statistical Tables" section of this report, and the liabilities of the VIEs to entities other than the New York Reserve Bank, including those with recourse only to the portfolio holdings of the VIEs, are included in other liabilities in statistical table 9.   Return to text
19. Before the Buffalo Branch closure, the only discontinued Branch in the history of the System was the Federal Reserve Bank of San Francisco's Spokane Branch, which was discontinued in 1938.   Return to text