Policies: Principles for the Pricing of Federal Reserve Bank Services
The Monetary Control Act of 1980 (act) (title I of Public Law 96-221) requires that fees be set for Federal Reserve Bank services according to a set of pricing principles established by the Board. The act required the Board to put a schedule of fees into effect by September 1, 1981. Services covered by the fee schedules are available to all depository institutions. In preparing the pricing principles and fee schedules, the Board takes into account the objectives of fostering competition, improving the efficiency of the payment mechanism, and lowering costs of these services to society at large. At the same time, the Board is cognizant of, and concerned with, the continuing Federal Reserve responsibility and necessity for maintaining the integrity and reliability of the payment mechanism and providing an adequate level of service nationwide.
The act specifies that fees are to be set for the following Federal Reserve Bank services in accordance with the pricing principles adopted by the Board:
- currency and coin transportation and coin wrapping
- check clearing and collection
- wire transfer of funds
- automated clearinghouse (ACH)
- net settlement
- securities services
- noncash collection
- Federal Reserve float
- any new services that the Federal Reserve System offers.
The legislative history of the act indicates that the Congress had two objectives in establishing a requirement that the Federal Reserve price the services it provides. First, the Congress sought to encourage competition to ensure provision of these services at the lowest cost to society. While intending to stimulate competition, the Congress did not wish to precipitate the reemergence of undesirable banking practices--such as nonpar banking or circuitous routing of checks--which the Federal Reserve System was designated to eliminate. Also, the Congress was concerned with ensuring an adequate level of services nationwide. Consequently, it charged the Board with adopting pricing principles that "give due regard to competitive factors and the provision of an adequate level of such services nationwide." This objective is clearly established in the pricing principles established by the act.
Second, the Congress was concerned with the amount of revenue lost to the Treasury because of the reduction in the level of aggregate required reserves resulting from the implementation of the reserve requirement provisions of the act. Pricing for Federal Reserve Bank services will generate revenue that will partially offset the revenue loss associated with reduced required reserves.
The Board has adopted the following pricing principles, which incorporate both the specific statutory requirements of the Monetary Control Act and provisions intended to fulfill its legislative intent:
- All Federal Reserve Bank services covered by the fee schedule shall be priced explicitly.
- All Federal Reserve Bank services covered by the fee schedule shall be available to nonmember depository institutions, and such services shall be priced at the same fee schedule applicable to member banks, except that nonmembers shall be subject to any other terms, including a requirement of balances sufficient for clearing purposes, that the Board may determine are applicable to member banks.
- Over the long run, fees shall be established on the basis of all direct and indirect costs actually incurred in providing the Federal Reserve services priced, including interest on items credited prior to actual collection, overhead, and an allocation of imputed costs that takes into account the taxes that would have been paid and the return on capital that would have been provided had the services been furnished by a private business firm, except that the pricing principles shall give due regard to competitive factors and the provision of an adequate level of such services nationwide.
- Interest on items credited prior to collection shall be charged at the current rate applicable in the market for federal funds.
- The Board intends that fees be set so that revenues for major service categories match costs (inclusive of a private-sector markup). During the initial start-up period, however, new operational requirements and variations in volume may temporarily change unit costs for some service categories. It is the System's intention to match revenues and costs as soon as possible, and the Board will monitor the System's progress in meeting this goal by reviewing regular reports submitted by the Reserve Banks. If, in the interest of providing an adequate level of services nationwide, the Board determines to authorize a fee schedule for a service below cost, it will announce its decision.
- Service arrangements and related fee schedules shall be responsive to the changing needs for services in particular markets. Advance notice will be given for changes in fees and significant changes in service arrangements to permit orderly adjustments by users and providers of similar services.
- The structure of fees and service arrangements may be designed both to improve the efficient utilization of Federal Reserve services and to reflect desirable longer-run improvements in the nation's payment system. Public comment will be requested when changes in fees and service arrangements are proposed that would have significant longer-run effects on the nation's payment system.