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 have been engaged in a number of multiyear technology initiatives that will modernize their priced-services processing platforms. These investments are expected to enhance efficiency, the overall quality of operations, and the Reserve Banks' ability to offer additional services, consistent with the longstanding principles of fostering efficiency and safety, to depository institutions. The Reserve Banks continued to enhance the resiliency and information security posture of the Fedwire Funds, National Settlement Service, and Fedwire Securities Service through the Fedwire Resiliency Program, a multiyear initiative to respond to environmental threats and cyberthreats. The Reserve Banks are also developing and planning to implement a new FedACH-processing platform to improve the efficiency and reliability of their current FedACH operations. In September 2017, the Reserve Banks implemented the second of three phases of the SameDay ACH service in support of a National Automated Clearing House Association (NACHA) operating rule change; the new SameDay ACH service enhances the existing Reserve Bank SameDay ACH product by enabling time-critical payments via the ACH network and improving the availability of funds to end users. The most recent phase enabled same-day ACH debits for payments such as mortgage and utility payments.2
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.3 The imputed costs and imputed profit are collectively referred to as the private-sector adjustment factor (PSAF). From 2008 through 2017, the Reserve Banks recovered 101.9 percent of the total priced services costs, including the PSAF (see table 1).4
Table 1. Priced services cost recovery, 2008-17
Millions of dollars, except as noted
|Year||Revenue from services1||Operating expenses and imputed costs2||Targeted return on equity3||Total costs||Cost recovery (percent)4|
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 $5,108.6 million and other income and expense (net) of $123.0 million. Return to table
2. For the 10-year period, includes operating expenses of $4,831.7 million, imputed costs of $43.8 million, and imputed income taxes of $108.4 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 94.7 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 AOCI 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
In 2017, Reserve Banks recovered 104.1 percent of the total priced services costs, including the PSAF.5 The Reserve Banks' operating expenses and imputed costs totaled $419.4 million. Revenue from operations totaled $441.6 million, resulting in net income from priced services of $22.2 million. The commercial check-collection service, the Fedwire Funds and National Settlement Services, and the Fedwire Securities Service achieved full cost recovery; however, the FedACH Service did not achieve full cost recovery because of investment costs associated with the multiyear technology initiative to modernize its processing platform.
Box 1. Improving the U.S. Payment System
The Federal Reserve plays many roles in the payment system, including payment system operator, supervisor of financial institutions and systemically important financial market utilities, regulator, researcher, and catalyst for improvement. Acting primarily in its catalyst role, the Federal Reserve encouraged payment stakeholders to join together to improve the payment system in the United States in its Strategies for Improving the U.S. Payment System (Strategies) paper, issued in January 2015. The strategies outlined in the paper included the creation of a task force focused on faster payments and another on payment security, both of which provided forums for a diverse group of industry participants to collaborate.
The strategies and tactics included in the Strategies paper represented the first steps in the payment improvement journey. Many are substantially under way or nearing completion, and some have been completed. In 2017, the Faster Payments Task Force (FPTF) released a two-part final report outlining recommended industry actions to support the goal of all end users' being able to receive faster payments by 2020. The report also provides an overview of 16 proposals developed by FPTF members for implementing faster payments in the United States, including the results of an independent assessment of those proposals. Over the course of the year, the Secure Payments Task Force continued to address the industry's most pressing payment system security issues: identity management, data protection, and fraud and risk information sharing.
Following up on the work of the task forces and other efforts outlined in the Strategies paper, the Federal Reserve published a paper in September 2017 that presented refreshed strategies and tactics for improving the speed, safety, and efficiency of the U.S. payment system in collaboration with payment system stakeholders. Many of these refreshed strategies are currently being implemented. Consistent with the FPTF's recommendations, the industry's faster payments Governance Framework Formation Team was established in the summer of 2017, with Federal Reserve support. At the end of 2017, the Federal Reserve initiated a strategic assessment of its settlement services for the long-term benefit of the U.S. payment system. As part of this assessment, the Federal Reserve is exploring options to support interbank settlement of real-time retail payments, including 24x7x365 real-time settlement functionality. The Federal Reserve has also begun to explore and assess the need, if any, for Federal Reserve engagement as a service provider, beyond providing settlement services, in the faster payment ecosystem. With respect to payment security, the Federal Reserve took initial steps toward conducting a study that is designed to inform industry security-improvement efforts.1
The Federal Reserve's FedPayments Improvement website (https://fedpaymentsimprovement.org/) hosts a FedPayments Improvement Community that enables interested parties to stay informed and to engage in an exchange of information pertaining to the Federal Reserve's efforts to improve the U.S. payment system.
1. The Federal Reserve announced plans in early 2018 to transition its industry engagement from the task force model to an approach that will provide greater flexibility for stakeholders to engage in the ongoing payment security initiatives. As part of this transition, the Secure Payments Task Force concluded its efforts in March 2018, following publication of its final deliverables. Later in 2018, the Federal Reserve expects to initiate new collaborative industry work groups, informed by its planned security study. Return to textReturn to text
Commercial Check-Collection Service
The commercial check-collection service provides a suite of electronic and paper processing options for forward and return collections. In 2017, the Reserve Banks recovered 107.0 percent of the total costs of their commercial check-collection service, including the related PSAF. Revenue from operations totaled $142.0 million, resulting in net income of $10.7 million. The Reserve Banks' operating expenses and imputed costs totaled $131.3 million. Reserve Banks handled 5.2 billion checks in 2017, a decrease of 1.7 percent from 2016 (see table 2). The average daily value of checks collected by the Reserve Banks in 2017 was approximately $33.8 billion, a decrease of 5.0 percent from the previous year.
Table 2. Activity in Federal Reserve priced services, 2015-17
Thousands of items, except as noted
|2016 to 2017||2015 to 2016|
|Fedwire funds transfer||156,788||151,899||146,006||3.1||4|
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 commercial ACH service provides domestic and cross-border batched payment options for same-day and next-day settlement. In 2017, the Reserve Banks recovered 99.8 percent of the total costs of their commercial ACH services, including the related PSAF. Revenue from operations totaled $141.3 million, resulting in a net income of $1.3 million. The Reserve Banks' operating expenses and imputed costs totaled $140.0 million. The Reserve Banks processed 13.7 billion commercial ACH transactions in 2017, an increase of 6.1 percent from 2016 (see table 2). The average daily value of FedACH transfers in 2017 was approximately $93.6 billion, an increase of 8.0 percent from the previous year.
Fedwire Funds and National Settlement Services
In 2017, the Reserve Banks recovered 106.2 percent of the costs of their Fedwire Funds and National Settlement Services, including the related PSAF. Revenue from operations totaled $129.7 million, resulting in a net income of $8.9 million. The Reserve Banks' operating expenses and imputed costs totaled $120.8 million in 2017.
Fedwire Funds Service
The Fedwire Funds Service allows its participants to send or receive domestic time-critical payments using their balances at Reserve Banks to transfer funds in real time. From 2016 to 2017, the number of Fedwire funds transfers originated by depository institutions increased 3.1 percent, to approximately 157 million (see table 2). The average daily value of Fedwire funds transfers in 2017 was $2.9 trillion, a decrease of 3.5 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 their balances at Reserve Banks. In 2017, the service processed settlement files for 12 local and national private-sector arrangements. The Reserve Banks processed 8,243 files that contained about 517,000 settlement entries for these arrangements in 2017 (see table 2). Settlement file activity in 2017 decreased 1.0 percent, and settlement entries increased 3.3 percent.
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, and certain international organizations.6 In 2017, the Reserve Banks recovered 103.6 percent of the costs of their Fedwire Securities Service, including the related PSAF. Revenue from operations totaled $28.6 million, resulting in a net income of $1.3 million. The Reserve Banks' operating expenses and imputed costs totaled $27.3 million in 2017. In 2017, the number of non-Treasury securities transfers processed via the service decreased 10.7 percent from 2016, to approximately 3.5 million (see table 2). The average daily value of Fedwire Securities transfers in 2017 was approximately $1.2 trillion, an increase of 4.4 percent from the previous year.
In 2017, the Reserve Banks had daily average credit float of $379.3 million, compared with daily average credit float of $334.4 million in 2016.7
Currency and Coin
The Federal Reserve Board issues the nation's currency (in the form of Federal Reserve notes) to 28 Federal Reserve Bank offices. The Reserve Banks, in turn, distribute Federal Reserve notes to depository institutions in response to public demand. The Reserve Banks also distribute coin to depository institutions on behalf of the U.S. Department of the Treasury's Mint.8 Together, the Board and Reserve Banks work to maintain the integrity of and confidence in Federal Reserve notes. In 2017, the Board paid Treasury's Bureau of Engraving and Printing (BEP) $673.9 million for costs associated with the production of 6.6 billion Federal Reserve notes.
The volume of Federal Reserve notes in circulation at year-end 2017 totaled 41.6 billion pieces, a 4.7 percent increase from 2016. More than half of this growth was attributable to growth in demand for $100 notes, and an additional 34 percent was attributable to growth in demand for $1 and $20 notes. In 2017, the Reserve Banks distributed 37.0 billion Federal Reserve notes into circulation, a 2.0 percent increase from 2016, and received 35.2 billion Federal Reserve notes from circulation, a 1.4 percent increase from 2016.
The value of Federal Reserve notes in circulation at year-end 2017 totaled $1,571 billion, a 7.4 percent increase from 2016. The year-over-year increase is attributable largely to increased demand for $100 notes. The Board estimates that at least one-half of the value of Federal Reserve notes in circulation is held abroad, mainly as a store of value.
In addition, the Reserve Banks distributed 73.4 billion coins into circulation and received 58.2 billion coins from circulation, which is relatively unchanged from 2016.
U.S. Currency Education Program
The U.S. Currency Education Program (CEP) is an interagency program managed by the Board in partnership with the United States Secret Service and the BEP. The CEP is responsible for providing users of U.S. currency around the world with access to education, training, and information about all designs of Federal Reserve notes.
In 2017, the CEP introduced three new educational materials in hard copy and added two new animated videos and one podcast series to the resources available to the global public on uscurrency.gov. The CEP also carried out training and outreach programs in the United States, Vietnam, and Malaysia, helping to educate cash handlers on how to authenticate genuine U.S. currency and how to report suspected counterfeit notes.
Other Improvements and Efforts
During 2017, the Reserve Banks completed implementation of a new cash automation platform (CashForward) to 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 cash platform will facilitate business continuity and contingency planning and enhance the support provided to Reserve Bank customers. The Federal Reserve also has initiated a program to replace the aging high-speed currency processing equipment at all Reserve Banks by 2026. In 2017, the Federal Reserve engaged with two vendors to build prototype machines by 2020, at which point one vendor will be selected for the development and implementation of the new production machine.
The Board and the BEP continued to build on the improved quality assurance processes established to date at the BEP. The BEP continued to reclaim $100 notes using single-note inspection equipment and also began to reclaim $20 notes.9 In addition, the Board and BEP continued to implement a long-term capital equipment replacement strategy to modernize and replace aging production equipment at the BEP that has exceeded its useful life, and thus to improve production efficiency and reduce spoilage. As part of this plan, the BEP purchased six new intaglio printing presses and three finishing presses, which it expects will be installed and operational in 2018 and 2019, respectively.
The Board also engaged in a range of work to support its role as issuing authority. This included research and development to improve potential new security features and optical inspection for Federal Reserve notes. The Board also began efforts to conduct cognitive and perception studies to better understand how users authenticate and handle notes and built an in-house laboratory to facilitate adversarial analysis to better understand counterfeiting threats. In addition, the Board worked with the BEP and design consultants to accelerate the next family of Federal Reserve notes.
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 2017, fiscal agency expenses increased to $698.3 million (see table 3), primarily as a result of requests from Treasury's Bureau of the Fiscal Service. Support for Treasury programs accounted for 95.0 percent of expenses, and support for other entities accounted for 5.0 percent.
Table 3. Expenses of the Federal Reserve Banks for fiscal agency and depository services, 2015-17
Thousands of dollars
|Agency and service||2017||2016||2015|
|Department of the Treasury|
|Treasury securities services|
|Treasury retail securities||46,244||50,203||52,945|
|Treasury securities safekeeping and transfer||25,171||22,890||21,254|
|Technology infrastructure development and support 1||7,442||6,909||6,371|
|Payment, collection, and cash-management services|
|Technology infrastructure development and support*||116,931||96,931||89,069|
|Other Treasury services|
|Total, other entities||34,580||37,333||35,140|
|Total, Treasury and other entities||50,837||59,493||54,586|
|Total reimbursable expenses||698,271||676,981||650,583|
1. Labeled "Computer infrastructure development and support" in 2015. Return to table
2. Board policy requires the Reserve Banks to seek reimbursement for the costs to provide fiscal agency services. Historically, the Reserve Banks did not seek reimbursement for pension benefits to Reserve Bank employees who support fiscal agency services. The Reserve Banks began to seek reimbursement for the one-time pension costs that resulted from consolidation activities in 2014 and to seek full reimbursement for all fiscal agency-related pension costs beginning in 2015. Pension costs are shown in the aggregate across programs in table 3 rather than by each program. Return to table
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, the Reserve Banks are experiencing an increase in expenses during the consolidation process, which will continue over the next several years. In 2017, total consolidation expenses amounted to $12.2 million as a result of the two Reserve Bank business lines that transitioned and preparations for the two remaining business line transitions. Consolidation expenses are included in the line items for Payment, Collection, and Cash-management services in table 3.
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 program, which provides services to non-institutional holders of Treasury and related securities, decreased to $44.0 million in 2017, largely because of Treasury's decision to phase out the myRA retirement savings program. Program expense drivers included the Reserve Banks' operation of a virtual case-file system and a virtual contact center to support retail securities services as well as increased staffing to manage the savings-bond processing workload.
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 277 Treasury securities auctions in 2017. Of the 277 auctions, 12 auctions were for Floating Rate Notes.
In 2017, Reserve Bank operating expenses to support Treasury securities auctions increased to $43.7 million. Operating expenses were driven by upgrades to the auction application, which receives and processes bids submitted primarily by wholesale securities auction participants, and by modernization of the application infrastructure.
Operating expenses associated with Treasury securities safekeeping and transfer activities increased to $25.2 million in 2017 as a result of the Reserve Banks' effort to migrate the securities services from a mainframe system to a distributed computing environment.
The Reserve Banks work closely with 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 increased to $177.1 million in 2017, primarily because of increased expenses for the Stored Value Card (SVC) program, the Invoice Processing Platform (IPP), the U.S. Electronic Payment Solution Center, and the Post Payment System (PPS). These increases were partially offset by decreased program expenses for International Treasury Services (ITS) and Automated Standard Application for Payments (ASAP).
The SVC program comprises three military cash-management programs: EagleCash, EZPay, and Navy Cash. These programs provide electronic payment methods for goods and services on military bases and Navy ships, both domestic and overseas. The Reserve Banks, as fiscal agent, have operated EagleCash and EZpay and assumed responsibility for Navy Cash in 2017. In 2017, Reserve Bank operating expenses for Treasury's SVC business increased to $36.0 million, including $2.6 million associated with the upcoming transition of the overall SVC program as part of the fiscal agent consolidation.
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, through either a web-based portal or electronic submission. The IPP accepts, processes, and presents data from supplier systems related to various stages of a payment transaction, such as the purchase order and invoice. In 2017, the Reserve Banks' IPP expenses increased to $27.8 million, including $7.2 million associated with the recently completed IPP transition in support of consolidation.
The U.S. Treasury Electronic Payment Solution Support Center provides broad support for Treasury initiatives aimed at eliminating paper check payments and increasing electronic payments to individuals. As of November 2017, 98.4 percent of all federal benefit recipients received their payments electronically. In 2017, expenses for the U.S. Treasury Electronic Payment Solution Support Center increased 17.8 percent, to $17.9 million, because of increased staffing and increased support costs.
The 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 enhance operations, reduce expenses, improve data analytics capabilities, and provide a centralized and standardized set of payment data. In 2017, program expenses for PPS increased to $20.7 million, including $1.9 million associated with system development expenses.
The Reserve Banks operate the ITS application, which provides cross-border payment and collection services as well as cash-management functions on behalf of 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 in 2017 decreased to $12.6 million primarily because of decreased staffing costs and location-based cost savings following the consolidation.
The ASAP application enables federal agencies to electronically disburse funds to recipient organizations. Expenses for ASAP decreased 19.8 percent from 2016, to $7.3 million in 2017, because of the completion of consolidation activities.
The Reserve Banks also work closely with the Fiscal Service to collect funds--including various taxes, fees for goods and services, and delinquent debts--owed to the federal government. In 2017, Reserve Bank operating expenses related to collection services increased to $68.6 million, largely because of greater operating expenses for Pay.gov and the Collections Information Repository (CIR).
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 more than 168 new agency programs and processed more than 189 million online payments totaling nearly $155 billion. Pay.gov expenses increased to $21.5 million in 2017, primarily because of increased staffing and software amortization expenses.
The CIR application enables the Fiscal Service to standardize the availability of financial information, furthering transparency goals and enabling federal agencies to improve cash-management decisions and performance. In 2017, CIR expenses increased 19.6 percent to $9.2 million, primarily because of software amortization costs.
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 and operating help desks.
In 2017, Reserve Bank operating expenses related to Treasury cash-management services decreased 10.5 percent, to $73.5 million. The decrease was primarily due to completion of the Straight-Through Processing initiative, which resulted in decreased development costs for the Direct Voucher System and the decommissioning of FRB CA$HLINK. Additionally, the Bank Management System had lower development costs in 2017. The Bank Management System application reports and compensates commercial banks for providing depository services to Treasury.
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 decreased to $34.6 million in 2017. Debt servicing 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).
Use of Federal Reserve Intraday Credit
The Board's Payment System Risk 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, increasing efficiency and reducing payment system risk. The Payment System Risk 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. The use of daylight overdrafts spiked amid the market turmoil near the end of 2008 but dropped sharply as various liquidity programs initiated by the Federal Reserve, all since terminated, took effect. During this period, the Federal Reserve also began paying interest on balances held at the Reserve Banks, increased its lending under the Term Auction Facility, and began purchasing government-sponsored enterprise mortgage-backed securities. These measures tended to increase balances institutions held at the Banks, which decreased the demand for intraday credit. 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 at the Reserve Banks in 2017, while daylight overdrafts remained historically low, as shown in figure 1.
Daylight overdraft fees are also at historically low levels. In 2017, institutions paid about $73,796 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 2011 policy revision that eliminated fees for daylight overdrafts that are collateralized.
FedLine Access to Reserve Bank Services
The Reserve Banks' FedLine access solutions provide financial institutions with a variety of alternatives for electronically accessing the Banks' payment and information services. For priced services, the Reserve Banks charge fees for these electronic connections and allocate the associated costs and revenue to the various services. There are currently six FedLine channels through which customers can access the Reserve Banks' priced services: FedMail, FedLine Web, FedLine Exchange, 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 2008 and 2017, Reserve Bank priced FedLine connections and number of depository institutions in the United States continued to decline, though the number of depository institution employees with FedLine credentials increased 11 percent. As of December 2017, more than 54,000 individuals had access to value-added services (Accounting Management Information, FedTransaction Analyzer, and ACH Risk Services) and more than 52,000 individuals had access to central bank applications for regulatory reporting purposes.
The Reserve Banks continue to advance the safety and security of the FedLine network with key infrastructure upgrades, proactive monitoring of an evolving threat environment, strengthened endpoint security policies, and dedicated customer communication and education programs.
The Federal Reserve Banks continued to improve the efficiency, effectiveness, and security of information technology (IT) services and operations in 2017. Led by the Federal Reserve's National IT organization, the System made significant progress in addressing the challenges outlined in its IT Strategic Plan. Elements of the plan focus on IT productivity, simplicity, accountability, and stewardship across the System. Several specific initiatives under the plan also strengthened information security. National IT continues to guide the plan's implementation and tracks progress toward the plan's goals. This effort is scheduled to be completed in 2020.
Under the direction of the Office of the Chief Information Security Officer, the Reserve Banks remained vigilant about their cybersecurity posture, investing in risk-mitigation initiatives and programs and continuously monitoring and safeguarding their operations against cybersecurity risks. The Federal Reserve implemented several cybersecurity initiatives that strengthen identity access management, enhance its abilities to detect and respond to cyber incidents, reduce the risk of insider threats, and continue to improve its continuous monitoring capabilities for critical assets.
Box 2. Developments in Financial Technology
As part of its core objective to foster the safety and efficiency of the payment system and to promote financial stability, the Federal Reserve has a public policy interest in understanding and monitoring the development of innovations that could affect the structural design and functioning of financial markets. In general, the Federal Reserve views developments in financial technology through the lens of our long-standing public policy goals of (1) safety and soundness of financial institutions, (2) safety and efficiency for the payment system, (3) financial stability and monetary policy more broadly, and (4) an innovative financial system that provides widely shared benefits to the public over time.
Over the past several years, Federal Reserve staff has worked to fulfill these public policy goals by monitoring technological developments and conducting research and communicating with the industry in an effort to understand better the technologies behind the innovations, potential use cases, benefits, and relevant risks. In 2017, the Federal Reserve engaged with the industry and other central banks on developments in financial technology, such as distributed ledger and digital currencies.
Specifically, Federal Reserve staff participated in international efforts to understand the implications of distributed ledger technology in payments, clearing, and settlement. In February 2017, the Committee on Payments and Market Infrastructures issued a report on distributed ledger technology that provides an analytical framework for central banks as they review and analyze the use of distributed ledger technology for payment, clearing, and settlement.1 In addition, Board members have spoken repeatedly and publicly on innovation in the payment system and the ways the financial industry may use distributed ledger technology and digital currencies, among other technologies. They also discussed the hurdles to broad adoption of new financial technologies and emphasized the importance of maintaining confidence in the payment system during a period of rapid change.2
Overall, the Federal Reserve's work over the past year highlighted the importance of being open to innovative technologies and, where appropriate, fostering their development while at the same time remaining focused on the Board's traditional public policy objectives with respect to the payment system.
1. Committee on Payments and Market Infrastructures, "Distributed ledger technology in payment, clearing and settlement," Bank for International Settlements, February 2017, available at: https://www.bis.org/cpmi/publ/d157.pdf. Return to text
2. See, for example: https://www.federalreserve.gov/newsevents/speech/powell20170303a.htm, https://www.federalreserve.gov/newsevents/speech/powell20171018a.htm, https://www.federalreserve.gov/newsevents/speech/brainard20171116a.htm, https://www.federalreserve.gov/newsevents/speech/quarles20171130a.htm. Return to text
Examinations of the Federal Reserve Banks
The combined financial statements of the Reserve Banks as well as the financial statements of each of the 12 Reserve Banks are audited annually by an independent public accounting firm retained by the Board of Governors.10 In addition, the Reserve Banks 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 KPMG LLP (KPMG) to audit the 2017 combined and individual financial statements of the Reserve Banks.11
In 2017, KPMG also conducted audits of the internal controls associated with financial reporting for each of the Reserve Banks. Fees for KPMG's services totaled $6.8 million. To ensure auditor independence, the Board requires that KPMG be independent in all matters relating to the audits. Specifically, KPMG 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 2017, the Reserve Banks did not engage KPMG for significant non-audit services.
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, 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, and the IIA's code of ethics.
The Board also reviews SOMA and foreign currency holdings to
- determine whether the New York Reserve Bank, while conducting the related transactions and associated controls, 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, KPMG 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.
Income and Expenses
Table 4 summarizes the income, expenses, and distributions of net earnings of the Reserve Banks for 2017 and 2016. Income in 2017 was $114.2 billion, compared with $111.7 billion in 2016.
Table 4. Income, expenses, and distribution of net earnings of the Federal Reserve Banks, 2017 and 2016
Millions of dollars
|Loan interest income||1||1|
|SOMA interest income||113,592||111,105|
|Other current income 1||601||638|
|Net periodic pension expense||525||565|
|Interest paid on depository institutions deposits and term deposits||25,862||12,044|
|Interest expense on securities sold under agreements to repurchase||3,365||1,122|
|Current net income||80,796||94,481|
|Net additions to (deductions from) current net income||1,933||-114|
|Treasury securities gains (losses)||28||-15|
|Federal agency and government-sponsored enterprise mortgage-backed securities||8||19|
|Foreign currency translation gains (losses)||1,894||-103|
|Net income (loss) from consolidated VIE||4||-12|
|Assessments by the Board of Governors||2,037||2,006|
|For Board expenditures||740||709|
|For currency costs||724||701|
|For Consumer Financial Protection Bureau costs2||573||596|
|Net income before providing for remittances to the Treasury||80,692||92,361|
|Earnings remittances to the Treasury||80,559||91,467|
|Net income after providing for remittances to the Treasury||133||894|
|Other comprehensive gain (loss)||651||-183|
|Comprehensive income (loss)||784||711|
|Total distribution of net income||81,343||92,178|
|Dividends on capital stock||784||711|
|Transfer to surplus and change in accumulated other comprehensive income||0||0|
|Earnings remittances to the Treasury||80,559||91,467|
Expenses totaled $35,435 million:
- $25,862 million in interest paid to depository institutions on reserve balances and term deposits;
- $4,337 million in Reserve Bank operating expenses;
- $3,365 million in interest expense on securities sold under agreements to repurchase;
- $525 million in net periodic pension expense;
- $740 million in assessments for Board of Governors expenditures;
- $724 million for the cost of producing, issuing, and retiring currency;
- $573 million for Consumer Financial Protection Bureau costs; and
- $7 million in other costs.
The expenses were reduced by $698 million in reimbursements for services provided to government agencies. Net additions to current net income totaled $1,933 million, which includes $1,894 million in unrealized gains on foreign currency denominated investments revalued to reflect current market exchange rates, $28 million in realized gains on Treasury securities, and $8 million in realized gains on federal agency and government-sponsored enterprise mortgage-backed securities (GSE MBS).
Net income before remittances to Treasury totaled $81,343 million in 2017 (net income of $80,692 million, increased by other comprehensive gain of $651 million). Dividends paid to member banks for 2017 totaled $784 million. Earnings remittances to the Treasury totaled $80,559 million in 2017. The Reserve Banks reported comprehensive income of $784 million in 2017 after providing for remittances to Treasury.
Section 11 of this report, "Statistical Tables," provides more detailed information on the Reserve Banks. Table 9 is a statement of condition for each Reserve Bank; table 10 details the income and expenses of each Reserve Bank for 2017; table 11 shows a condensed statement for each Reserve Bank for the years 1914 through 2017; 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").
SOMA Holdings and Loans
The Reserve Banks' average net daily SOMA holdings during 2017 amounted to $4,026 billion, a decrease of $45 billion from 2016 (see table 5).
Table 5. System Open Market Account (SOMA) holdings of the Federal Reserve Banks, 2017 and 2016
Millions of dollars, except as noted
|Item||Average daily assets (+)/liabilities (-)||Current income (+)/expense (-)* *||Average interest rate (percent)|
|U.S. Treasury securities1||2,560,796||2,570,106||64,267||63,845||2.51||2.48|
|Government-sponsored enterprise debt (GSE) securities 1||9,932||25,298||416||959||4.19||3.79|
|Federal agency and GSE mortgage-backed securities2||1,822,543||1,802,439||48,912||46,299||2.68||2.57|
|Foreign currency denominated investments3||20,673||20,713||-17||-7||-0.08||-0.03|
|Central bank liquidity swaps4||858||933||14||9||1.63||0.96|
|Other SOMA assets5||12||13||*||*||0.68||0.16|
|Total SOMA assets||4,414,814||4,419,502||113,592||111,105||2.57||2.51|
|Securities sold under agreements to repurchase: Primary dealers and expanded counterparties||-145,959||-105,648||-1,224||-303||0.84||0.29|
|Securities sold under agreements to repurchase: Foreign official and international accounts||-241,581||-241,848||-2,141||-819||0.89||0.34|
|Total securities sold under agreements to repurchase||-387,540||-347,496||-3,365||-1,122||0.87||0.32|
|Other SOMA liabilities 6||-878||-1,010||n/a||n/a||n/a||n/a|
|Total SOMA liabilities||-338,418||-348,506||-3,365||-1,122||0.87||0.32|
|Total SOMA holdings||4,026,396||4,070,996||110,227||109,983||2.74||2.70|
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. 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
n/a Not applicable.
* Less than $500,000.
SOMA Securities Holdings
The average daily holdings of Treasury securities decreased by $9 billion, to an average daily amount of $2,561 billion. The average daily holdings of GSE debt securities decreased by $15 billion, to an average daily amount of $10 billion. The average daily holdings of federal agency and GSE MBS increased by $20 billion, to an average daily amount of $1,823 billion.
Through September 2017, FRBNY continued to reinvest all principal payments from SOMA holdings of GSE debt securities and federal agency and GSE MBS into federal agency and GSE MBS and to roll over maturing Treasury securities at auction. Beginning in October 2017, the FOMC initiated a balance sheet normalization program intended to reduce gradually the SOMA holdings by decreasing the reinvestment of principal payments received from securities held in the SOMA through the implementation of monthly caps. Such principal payments will be reinvested only to the extent that they exceed gradually rising caps.
There were no significant holdings of securities purchased under agreements to resell in 2017 or 2016. Average daily holdings of foreign currency denominated investments in 2017 were $20,673 million, compared with $20,713 million in 2016. The average daily balance of central bank liquidity swap drawings was $858 million in 2017 and $933 million in 2016. The average daily balance of securities sold under agreements to repurchase was $387,540 million, an increase of $40,044 million from 2016.
The average rates of interest earned on the Reserve Banks' holdings of Treasury securities increased to 2.51 percent, and the average rates on GSE debt securities increased to 4.19 percent in 2017. The average rate of interest earned on federal agency and GSE MBS increased to 2.68 percent in 2017. The average interest rates paid for securities sold under agreements to repurchase increased to 0.87 percent in 2017. The average rate of interest earned on foreign currency denominated investments decreased to -0.08 percent, while the average rate of interest earned on central bank liquidity swaps increased to 1.63 percent in 2017.
In 2017, the average daily primary, secondary, and seasonal credit extended by the Reserve Banks to depository institutions increased by $2 million, to $103 million. The average rate of interest earned on primary, secondary, and seasonal credit increased to 1.16 percent in 2017, from 0.62 percent in 2016.
Maiden Lane LLC (ML) is a lending facility established in 2008 under authority of FRA section 13(3) in response to the 2007-09 financial crisis. Net portfolio assets of ML decreased from $1,742 million in 2016 to $1,722 million in 2017, and liabilities decreased from $33 million to $9 million. ML net income of $4 million in 2017 comprised interest income of $15 million, loss on investments of $9 million, and operating expenses of $2 million.
Federal Reserve Bank Premises
Several Reserve Banks initiated or continued in 2017 significant renovation programs for their physical facilities. Multiyear renovation programs at the New York, Richmond, Kansas City, and San Francisco Reserve Banks' headquarters and Los Angeles Branch building 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 Philadelphia Bank initiated the design of improvements to its building's infrastructure systems.
For more information on the acquisition costs and net book value of the Reserve Banks and Branches, see table 14 in section 11 ("Statistical Tables") of this annual report.
Pro Forma Financial Statements for Federal Reserve Priced Services
Table 6. Pro forma balance sheet for Federal Reserve priced services, December 31, 2017 and 2016
Millions of dollars
|Short-term assets (note 1)|
|Materials and supplies||0.6||0.5|
|Items in process of collection||80.8||117.7|
|Total short-term assets||1,050.3||978.4|
|Long-term assets (note 2)|
|Furniture and equipment||39.4||36.9|
|Leases, leasehold improvements, and long-term prepayments||105.2||112.2|
|Deferred tax asset||184.4||184.7|
|Total long-term assets||468.4||454.1|
|Total short-term liabilities||1,050.3||942.3|
|Accrued benefit costs||347.7||418.6|
|Total long-term liabilities||392.4||418.6|
|Equity (including accumulated other comprehensive loss of $628.1 million and $670.4 million at December 31, 2017 and 2016, respectively)||75.9||71.6|
|Total liabilities and equity (note 3)||1,518.7||1,432.5|
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.
Table 7. Pro forma income statement for Federal Reserve priced services, 2017 and 2016
Millions of dollars
|Revenue from services provided to depository institutions (note 4)||441.6||434.1|
|Operating expenses (note 5)||410.7||401.5|
|Income from operations||30.9||32.5|
|Imputed costs (note 6)|
|Interest on debt||-3.8||-1.4|
|Interest on float||2.0||0.1|
|Income from operations after imputed costs||28.7||30|
|Other income and expenses (note 7)|
|Income before income taxes||28.7||30.2|
|Imputed income taxes (note 6)||6.5||6.5|
|Memo: Targeted return on equity (note 6)||4.6||4.1|
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.
Table 8. Pro forma income statement for Federal Reserve priced services, by service, 2017
Millions of dollars
|Item||Total||Commercial check collection||Commercial ACH||Fedwire funds||Fedwire securities|
|Revenue from services (note 4)||441.6||142.0||141.3||129.7||28.6|
|Operating expenses (note 5) 1||410.7||126.3||141.3||116.5||26.5|
|Income from operations||30.9||15.7||0.0||13.2||2.1|
|Imputed costs (note 6)||2.2||1.9||-1.7||1.7||0.4|
|Income from operations after imputed costs||28.7||13.8||1.7||11.5||1.7|
|Other income and expenses, net (note 8)||0.0||0.0||0.0||0.0||0.0|
|Income before income taxes||28.7||13.8||1.7||11.5||1.7|
|Imputed income taxes (note 6)||6.5||3.1||0.4||2.6||0.4|
|Memo: Targeted return on equity (note 6)||4.6||1.4||1.6||1.3||0.3|
|Cost recovery (percent) (note 7)||104.1||107.0||99.8||106.2||103.6|
Note: Components may not sum to totals because of rounding. The accompanying notes are an integral part of these pro forma priced services financial statements.
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 rates associated with the deferred tax asset were 22.7 percent and 21.6 percent for 2017 and 2016, 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 requirements for a well-capitalized institution, in 2017 equity is imputed at 5.0 percent of total assets and 11.0 percent of risk-weighted assets, and 2016 equity is imputed at 5.0 percent of total assets and 10.9 percent of risk-weighted assets.
In 2014, the Board approved revisions to the Payment System Risk policy to reflect the new international standards for financial market infrastructures developed by the Committee on Payment and Settlement Systems and the Technical Committee of the International Organization of Securities Commissions in the Principles for Financial Market Infrastructures. The policy retains the expectation that the Fedwire Services will meet or exceed the applicable risk-management standards. The Reserve Banks' priced services will hold six months of the Fedwire Funds Service's current operating expenses as liquid net financial assets and equity on the pro forma balance sheet and, if necessary, impute additional assets and equity to meet the requirement. The imputed assets held as liquid net financial assets are cash items in process of collection, which are assumed to be invested in federal funds. In 2017, there was sufficient assets and equity such that additional imputed balances were not required.
In accordance with Accounting Standards Codification (ASC) Topic 715 (ASC 715), Compensation-Retirement Benefits, the Reserve Banks record 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 recognize the deferred items related to these plans, which include prior service costs and actuarial gains or losses, on the balance sheet. This results 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 asset, which is a component of accrued benefit costs, of $32.0 million in 2017 and a pension liability of $33.2 million in 2016. The change in the funded status of the pension and other benefit plans resulted in a corresponding decrease in accumulated other comprehensive loss of $42.2 million in 2017.
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 $5.4 million in 2017 and $5.0 million in 2016.
In accordance with ASC 715, the Reserve Bank priced services recognized qualified pension-plan operating expenses of $31.9 million in 2017 and $34.4 million in 2016. Operating expenses also include the nonqualified net pension expense of $3.3 million in 2017 and $4.9 million in 2016. The adoption of ASC 715 does not change the systematic approach required by generally accepted accounting principles to recognize the expenses associated with the Reserve Banks' benefit plans in the income statement. As a result, these expenses do not include amounts related to changes in the funded status of the Reserve Banks' benefit plans, which are reflected in AOCI.
The income statement by service reflects revenue, operating expenses, imputed costs, other income and expenses, and cost recovery. The tax rates associated with imputed taxes were 22.7 percent and 21.6 percent for 2017 and 2016, respectively.
(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 2017 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.12
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 2017, in millions of dollars:
|Float not related to priced services1||-0.3|
|Float subject to recovery through per-item fees||-379.0|
1. Float not related to priced services includes float generated by services to government agencies and by other central bank services. Return to table
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 2017 and 2016.
(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.
1. The ACH enables depository institutions and their customers to process large volumes of payments through electronic batch processes. Return to text
2. The first phase of same-day ACH was implemented in September 2016 and enabled same-day ACH credits for payments, such as direct deposit of payroll, social security benefits, and tax refunds. Return to text
3. Depository Institutions Deregulation and Monetary Control Act, Pub. L. No. 96-221, 94 Stat. 132 (1980). Financial data reported throughout this section--including revenue, other income, costs, income before taxes, and net income--will reference the "Pro Forma Financial Statements for Federal Reserve Priced Services" at the end of this section. Return to text
4. According to the Accounting Standards Codification (ASC) Topic 715 (ASC 715), Compensation-Retirement Benefits, the Reserve Banks recognized a $628.1 million reduction in equity related to the priced services' benefit plans through 2017. Including this reduction in equity, which represents a decline in economic value, results in cost recovery of 94.7 percent for the 10-year period. For details on how implementing ASC 715 affected the pro forma financial statements, refer to note 3 to the pro forma financial statements at the end of this section. Return to text
5. Total cost is the sum of operating expenses, imputed costs (income taxes, interest on debt, interest on float, and sales taxes), and the targeted return on equity. Return to text
6. 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 Treasury's fiscal agent. These services are not considered priced services. For details, see "Treasury Securities Services" later in this section. Return to text
7. Credit float occurs when the Reserve Banks debit the paying bank for checks and other items prior to providing credit to the depositing bank. Return to text
8. The Federal Reserve Board is the issuing authority for Federal Reserve notes, whereas the United States Mint, a bureau of the U.S. Department of the Treasury, is the issuing authority for coin. Return to text
9. The reclamation program uses single-note inspection equipment, which recovers good notes from bad sheets and results in reduced spoilage, cost savings, and more-consistent quality of notes delivered to the Board. Return to text
11. In addition, KPMG audited the Office of Employee Benefits of the Federal Reserve System (OEB), the Retirement Plan for Employees of the Federal Reserve System (System Plan), and the Thrift Plan for Employees of the Federal Reserve System (Thrift Plan). The System Plan and the Thrift Plan provide retirement benefits to employees of the Board, the Federal Reserve Banks, the OEB, and the Consumer Financial Protection Bureau. Return to text
12. See Federal Reserve Bank Services Private-Sector Adjustment Factor, 77 Fed. Reg. 67,007 (November 8, 2012), www.gpo.gov/fdsys/pkg/FR-2012-11-08/pdf/2012-26918.pdf, for details regarding the PSAF methodology change. Return to text