Annual Report 2013
Federal Reserve Banks
- Federal Reserve Priced Services
- Currency and Coin
- Fiscal Agency and Government Depository Services
- Use of Federal Reserve Intraday Credit
- FedLine Access to Reserve Bank Services
- Information Technology
- Examinations of the Federal Reserve Banks
- Income and Expenses
- SOMA Holdings and Loans
- Federal Reserve Bank Premises
- Pro Forma Financial Statements for Federal Reserve Priced Services
The Federal Reserve Banks provide payment services to depository and certain other institutions, distribute the nation's currency and coin to depository institutions, and serve as fiscal agents and depositories for the U.S. government and other entities. The Reserve Banks also contribute to setting national monetary policy and supervision of banks and other financial entities operating in the United States (discussed in sections 2 through 4 of this annual report).
Federal Reserve Priced Services
In this Section:
Federal 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.
The Federal Reserve Banks, working with the financial services industry, have made substantial progress in their effort to migrate to a more efficient electronic payment system by expanding the use of ACH payments and by converting from a paper-based check-clearing process to an electronic one. Over the past several years, the Reserve Banks have capitalized on efficiencies gained from increased electronic processing; the Reserve Banks bundle all-electronic payment services and offer information and risk-management services, which help depository institutions manage effectively both their payment operations and associated operational and credit risk.
The Reserve Banks have also been engaged in a number of multiyear technology initiatives that will modernize their priced-services processing platforms. In 2013, the Banks continued efforts to migrate the FedACH, Fedwire Funds, and Fedwire Securities services off a mainframe system and to a distributed computing environment.
In December 2013, the Federal Register published a notice of proposed changes to the Federal Reserve Policy on Payment System Risk (PSR) and conforming amendments to Regulation J (Collection of Checks and Other Items by Federal Reserve Banks and Funds Transfers through Fedwire).1 The proposed changes relate to the Board's procedures for posting debit and credit entries to institutions' Federal Reserve accounts for ACH debit and commercial check transactions.
Under the current posting rules for commercial and government ACH transactions established in 1994, ACH debit transactions post at 11:00 a.m. eastern time (ET), and ACH credit transactions post at 8:30 a.m. ET.2 The Board elected to delay the posting of ACH debit transactions to allow receiving institutions time to obtain funds after the opening of the Reserve Banks' Fedwire Funds Service, which at that time opened at 8:30 a.m. Since then, the Fedwire Funds Service opening has been moved earlier, and the service now opens at 9:00 p.m. the previous evening. Therefore, the Board deemed that continuing the practice of delaying the settlement of ACH debit transactions until 11:00 a.m. was no longer necessary and may retard efforts by institutions to expedite funds settlements.3
In addition, the Board's current posting rules for commercial check transactions reflect a presumption that banks generally handle checks in paper form and do not reflect banks' widespread use of electronic check-processing methods. As a consequence, the Board's posting rules align with the processing of less than one-tenth of 1 percent of checks that the Reserve Banks handle.4 The Board believes that settlement practices should reflect the speed of clearing as well as the timing of deposits and presentments, and that its posting rules should be updated to align with today's electronic check-processing environment. In order to reflect today's electronic check-processing environment, the Board proposed to post commercial check transactions--both credits and debits--at 8:30 a.m., 1:00 p.m., and 5:30 p.m., with the specific posting time depending on when the check was deposited with the Reserve Banks (for credits) or presented by the Reserve Banks (for debits).
Call to Improve the Speed and Efficiency of the Payment System
The Federal Reserve Banks released a public consultation paper in 2013 that requested comments on gaps and opportunities in the payment system and potential desired outcomes, strategies, and tactics to shape the future of U.S. payments from end to end.1 The paper also sought input on the Federal Reserve's role in implementing the strategies and tactics.
Themes explored in the consultation paper included the need for a near-real-time payment system, the need for contemporary features and process improvements in legacy payment systems, the cost and convenience of international payments, and the mitigation of threats to payment system security. Responses were due in December 2013, and the Reserve Banks received feedback from a range of interested parties, including individual financial institutions, businesses, payment networks and processors, software vendors, payment innovators, consultants, and consumers, as well as from trade groups.2 The Reserve Banks are analyzing the responses and seeking clarifications as needed.
In concert with this analysis of responses, the Reserve Banks have engaged in a number of additional information-gathering efforts that are designed to inform the Reserve Banks' future plans. These efforts include
- researching end-user demand for specific payment attributes, including payment speed,
- conducting an assessment of alternatives for speeding U.S. retail payments, and
- identifying gaps and opportunities related to payment system security.3
The consultation paper responses and these additional information-gathering efforts will serve as important inputs to the Reserve Banks' collective thinking in regard to future improvement initiatives, which will be communicated in a paper expected to be published in 2014.
1. See Payment System Improvement--Public Consultation Paper, Federal Reserve Financial Services (http://fedpaymentsimprovement.org/wp-content/uploads/2013/09/Payment_System_Improvement-Public_Consultation_Paper.pdf ). For an overview of the initiative, see In Pursuit of a Better Payment System (http://fedpaymentsimprovement.org/ ). Return to text
2. See Consultation Paper Response Summary, Federal Reserve Financial Services (http://fedpaymentsimprovement.org/wp-content/uploads/industry_feedback_summary.pdf ). Return to text
3. See End-User Payment Research Summary, Federal Reserve Financial Services (http://fedpaymentsimprovement.org/wp-content/uploads/enduser_demand_summary.pdf ). Return to textReturn to text
Recovery of Direct and Indirect Costs
The Monetary Control Act of 1980 requires that the Federal Reserve establish fees for priced services 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.5 The imputed costs and imputed profit are collectively referred to as the private-sector adjustment factor (PSAF). Over the past 10 years, Reserve Banks have recovered 102.0 percent of their priced services costs, including the PSAF (see table 1).6
|Year||Revenue from services 1||Operating expenses and imputed costs 2||Targeted return on equity 3||Total costs||Cost recovery (percent) 4, 5|
Note: Here and elsewhere in this section, components may not sum to totals or yield percentages shown because of rounding.
1. For the 10-year period, includes revenue from services of $6,924.4 million and other income and expense (net) of $519.5 million. Return to table
2. For the 10-year period, includes operating expenses of $6,480.9 million, imputed costs of $34.8 million, and imputed income taxes of $286.5 million. Return to table
3. From 2009 to 2012, the PSAF was adjusted to reflect the actual clearing balance levels maintained; previously, the PSAF had been calculated based on a projection of clearing balance levels. Return to table
4. Revenue from services divided by total costs. Return to table
5. Revenue from services divided by total costs. For the 10-year period, cost recovery is 95.9 percent, including the effect of accumulated other comprehensive income (AOCI) reported by the priced services under ASC 715. For details on changes to the estimation of priced services accumulated other comprehensive income and their effect on the pro forma financial statements, refer to note 4 to the "Pro Forma Financial Statements for Federal Reserve Priced Services" at the end of this section. Return to table
In 2013, Reserve Banks recovered 106.7 percent of total priced services costs, including the PSAF.7 The Banks' operating costs and imputed expenses totaled $409.3 million. Revenue from operations totaled $441.3 million and other income was $0.1 million, resulting in net income from priced services of $32.0 million.
Commercial Check-Collection Service
In 2013, Reserve Banks recovered 115.4 percent of the total costs of their commercial check-collection service, including the related PSAF. The Banks' operating expenses and imputed costs totaled $170.7 million. Revenue from operations totaled $198.8 million and other income totaled $0.1 million, resulting in net income of $28.2 million. In 2013, check-service revenue from operations decreased $21.2 million from 2012.8 Reserve Banks handled 6.0 billion checks in 2013, a decrease of 9.6 percent from 2012 (see table 2). The decline in Reserve Bank check volume continues to be influenced by nationwide trends away from the use of checks.
|2012 to 2013||2011 to 2012|
|Fedwire funds transfer||137,219||134,409||129,734||2.2||3.6|
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.
By year-end 2013, 99.9 percent of check deposits processed by the Reserve Banks and 99.9 percent of checks presented by the Reserve Banks to paying banks were processed electronically. In addition, 98.7 percent of unpaid checks were returned electronically to a Reserve Bank and 96.8 percent were delivered electronically by the Reserve Bank to the bank of first deposit.
Commercial Automated Clearinghouse Service
The Automated Clearinghouse Service enables depository institutions and their customers to process large volumes of payments effectively through electronic, batch processes. In 2013, the Reserve Banks recovered 101.2 percent of the total costs of their commercial ACH services, including the related PSAF. Reserve Bank operating expenses and imputed costs totaled $116.3 million.
Revenue from ACH operations totaled $118.8 million, resulting in net income of $2.6 million. The Reserve Banks processed 11.1 billion commercial ACH transactions, an increase of 4.5 percent from 2012.
Fedwire Funds and National Settlement Services
In 2013, Reserve Banks recovered 98.6 percent of the costs of their Fedwire Funds and National Settlement Services, including the related PSAF. Reserve Bank operating expenses and imputed costs for these operations totaled $97.1 million in 2013. Revenue from these services totaled $96.7 million, resulting in a net loss of $0.3 million.
Fedwire Funds Service
The Fedwire Funds Service allows its participants to use their balances at Reserve Banks to transfer funds to other participants in the service. In 2013, the number of Fedwire funds transfers originated by depository institutions increased 2.2 percent from 2012, to approximately 137.2 million. The average daily value of Fedwire funds transfers in 2013 was $2.8 trillion, an increase of 19 percent from the previous year.
National Settlement Service
The National Settlement Service is a multilateral settlement system that allows participants in private-sector clearing arrangements to settle transactions using Federal Reserve balances. In 2013, the service processed settlement files for 17 local and national private-sector arrangements, one more than in 2012. The Reserve Banks processed slightly fewer than 10,200 files that contained around 725,000 settlement entries for these arrangements in 2013. Activity in 2013 represents an increase from the 663,000 settlement entries processed in 2012.
Fedwire Securities Service
In 2013, the Reserve Banks recovered 105.0 percent of the total costs of the priced-service component of their Fedwire Securities Service, including the related PSAF. The Banks' operating expenses and imputed costs for providing this service totaled $25.3 million in 2013. Revenue from the service totaled $26.8 million and there was no other income, resulting in a net income of $1.5 million.
The Fedwire Securities Service allows its participants to transfer electronically to other service participants certain securities issued by the U.S. Treasury, federal government agencies, government-sponsored enterprises, and certain international organizations.9 In 2013, the number of non-Treasury securities transfers processed via the service increased 1.3 percent from 2012, to approximately 6.5 million.
In 2013, the Reserve Banks had daily average credit float of $630.2 million, compared with daily average credit float of $767.1 million in 2012.10
Currency and Coin
In this Section:
The Federal Reserve Board is the issuing authority for the nation's currency (in the form of Federal Reserve notes). In 2013, the Board paid the U.S. Treasury Department's Bureau of Engraving and Printing (BEP) approximately $664.0 million for costs associated with the production of 6.4 billion Federal Reserve notes. The Federal Reserve Banks distribute and receive currency and coin through depository institutions in response to public demand. Together, the Federal Reserve Board and Reserve Banks work to maintain the integrity of and confidence in Federal Reserve notes.
In 2013, the Reserve Banks distributed 37.4 billion Federal Reserve notes into circulation, the same as in 2012, and received 35.8 billion Federal Reserve notes from circulation, a 0.6 percent increase from 2012.
The value of Federal Reserve notes in circulation increased nearly 6.4 percent in 2013, to $1,197.9 billion at year-end, largely because of international demand for $100 notes. In 2013, the Reserve Banks also distributed 68.3 billion coins into circulation, a 1.2 percent decrease from 2012, and received 56.8 billion coins from circulation, a 3.2 percent decrease from 2012.
Redesigned $100 Note
The Federal Reserve began supplying financial institutions with a redesigned $100 note on October 8, 2013. The redesigned $100 note incorporates new security features to deter counterfeiters and help businesses and consumers tell whether a note is genuine. The Federal Reserve, U.S. Department of the Treasury, the BEP, and the U.S. Secret Service partner to redesign Federal Reserve notes to stay ahead of counterfeiting threats. The redesigned $100 note includes two new security features: a blue 3-D security ribbon with images of bells and 100s, and a color-changing bell in an inkwell. The new features, and additional features retained from the previous design, such as a watermark, offer the public a simple way to visually authenticate the new $100 note.
Improvements to Efficiency and Risk Management
Advances in currency-processing equipment and sensor technology have increased productivity and improved note authentication and fitness measurement, thereby reducing the premature destruction of fit currency while maintaining the quality and integrity of currency in circulation. In 2013, Reserve Banks began implementing a new authentication sensor and fitness sensor, which will be fully deployed in 2014. The Reserve Banks also began working with equipment manufacturers to explore the next generation of equipment to process the high volume of notes received annually for authentication and fitness sorting.
Since 2009, policy changes and improvements to the Reserve Banks' high-speed, currency-processing equipment have increased productivity almost 20 percent and Reserve Banks have reduced staffing levels in cash services by approximately 8 percent. The Reserve Banks, in consultation with Board staff, are investigating additional opportunities to improve processing technology to further increase productivity and enhance risk management. In 2013, Reserve Banks began several field tests to evaluate the feasibility and effectiveness of new processes.
Other Improvements and Efforts
Reserve Banks continue to develop a new cash-automation platform that will replace legacy software applications, automate business concepts and processes, and employ technologies to meet the cash business's current and future needs more cost effectively. The new platform will also facilitate business continuity and contingency planning and enhance the support provided to Reserve Bank customers. In 2013, the Reserve Banks successfully implemented another major component of the new automation platform that will allow communication between various interfaces. The final automation platform is scheduled to be deployed to all cash offices in 2017.
During 2013, the Board, its quality consultants, and the BEP continued implementing components of a new quality system for the BEP. Specifically, the consultants turned over to BEP staff several key components of the new quality system, and completed work on a process-change procedure that allows staff to identify, submit, and evaluate opportunities for improvement in all areas of production. One suggestion has already resulted--in less than a year--in savings of about $2 million in ink costs. This program will continue to enable the BEP to more efficiently and effectively meet the Federal Reserve Board's print-order requirements and the future production of bank notes that are more technologically complex
Fiscal Agency and Government Depository Services
In this Section:
As fiscal agents and depositories for the federal government, the Federal Reserve Banks auction Treasury securities, process electronic and check payments for Treasury, collect funds owed to the federal government, maintain Treasury's bank account, and develop, operate, and maintain a number of automated systems to support Treasury's mission. The Reserve Banks also provide certain fiscal agency and depository services to other entities; these services are primarily related to book-entry securities. Treasury and other entities fully reimbursed the Reserve Banks for the costs of providing fiscal agency and depository services.
In 2013, fiscal agency expenses amounted to $530 million, a 4.7 percent increase from 2012 (see table 3). These costs increased as a result of requests from Treasury's Bureau of the Fiscal Service (Fiscal Service). Support for Treasury programs accounted for 93.6 percent of the cost, and support for other entities accounted for 6.4 percent.
|Agency and service||2013||2012||2011|
|Department of the Treasury|
|Treasury securities services|
|Treasury retail securities||55,334||60,208||79,346|
|Treasury securities safekeeping and transfer||14,397||14,131||11,187|
|Computer infrastructure development and support||5,801||4,990||1,969|
|Payment, collection, and cash-management services|
|Computer infrastructure development and support||75,565||70,075||67,014|
|Other federal agencies|
|Total, other agencies||34,077||34,569||27,893|
|Total reimbursable expenses||530,026||506,012||484,207|
Treasury Securities Services
The Reserve Banks work closely with Treasury's Fiscal Service in support of the borrowing needs of the federal government. The Banks auction, issue, maintain, and redeem securities; provide customer service; and operate the automated systems supporting U.S. savings bonds and marketable Treasury securities (bills, notes, and bonds). Treasury securities services consist of retail securities programs (which primarily serve individual investors) and wholesale securities programs (which serve institutional customers).
Retail Securities Programs
Reserve Bank operating expenses for the retail securities programs were $55.3 million in 2013, an 8 percent decrease from $60.2 million in 2012. This cost decrease is largely explained by increased operational efficiencies that resulted in lower staffing levels, as well as by continued savings from a 2012 Reserve Bank initiative that uses image processing to handle savings bond redemptions. In 2013, the Reserve Banks further enhanced their customer service and support environment by centralizing core functions of Treasury's Retail E-Services initiative. Reserve Banks also continued their work on decommissioning the Legacy Treasury Direct (LTD) system--established in 1986 as an application for investors to hold Treasury marketable securities (bills, notes, bonds, and Treasury Inflation-Protected Securities, or TIPS)--in order to eliminate aging technology platforms.
Wholesale Securities Programs
The Reserve Banks support wholesale securities programs through the sale, issuance, safekeeping, and transfer of marketable Treasury securities for institutional investors. In 2013, Reserve Bank operating expenses in support of Treasury securities auctions were $26.7 million, compared with $30.6 million in 2012. The cost decrease is attributable to lower operating costs after program assets were fully amortized. The Banks conducted 267 Treasury securities auctions, compared with 264 in 2012. Reserve Banks also completed work on the Floating Rate Note (FRN), a new type of marketable Treasury security with a floating rate interest payment. Treasury held its inaugural FRN auction in January 2014--the first new Treasury security issued since the introduction of TIPS almost two decades ago.
Operating expenses associated with Treasury securities safekeeping and transfer activities were $14.4 million in 2013, compared with $14.1 million in 2012.
The Reserve Banks work closely with Treasury's Fiscal Service and other government agencies to process payments to individuals and companies. For example, the Banks process federal payroll payments, Social Security and veterans' benefits, income tax refunds, vendor payments, and other types of payments.
Reserve Bank operating expenses for payments-related activity totaled $151.7 million in 2012, compared with $141.5 million in 2012. The increase in expenses is largely due to costs associated with the new Post Payment System (PPS) initiative, expanded Treasury requirements for the Do Not Pay (DNP) and Invoice Processing Platform (IPP) programs, which were partly offset by lower costs for the Go Direct initiative. Reserve Banks began a multiyear effort to modernize several of Treasury's post-payment processing systems into a single application under the PPS initiative. The resulting application will provide a centralized and standardized set of payment data, greatly enhancing operations while reducing costs and providing better data analytics capabilities. In 2013, program expenses for PPS were $3.8 million.
In support of Treasury's DNP initiative, the Reserve Banks continued to enhance the DNP Portal, which is a single point of access through which federal agencies can query multiple data sources before making federal payments. The Reserve Banks implemented a number of software releases, established advanced data analytics functionality for fraud analysis, and added a number of new agency participants. In 2013, expenses for DNP increased to $13.9 million, from $8.0 million in 2012, largely because of the need for additional staffing to support application development, maintenance, and new data source purchases.
The IPP is part of Treasury's all-electronic initiative--an electronic invoicing and payment information system that allows vendors to enter invoice data electronically, either through a web-based portal or electronic submission. The IPP accepts, processes, and presents data from agencies and supplier systems related to all stages of payment transactions (including purchase orders, invoices, and other payment information). In 2013, the Reserve Banks' IPP expenses increased 45.6 percent, to $17.3 million. This increase is primarily driven by the higher staffing levels required to support 11 new federal agencies and bureaus that began using the IPP platform.
The cost decreases associated with the Go Direct initiative partly offset Treasury's other payments-related expenses. In 2013, expenses for Go Direct decreased 18.7 percent, to $23.8 million, because the public outreach campaign ended and because of lower call-center support costs. These cost reductions resulted because Go Direct achieved Treasury's March 2013 goal of making 95 percent of federal benefit check payments via electronic disbursement methods. As of December 2013, 97.5 percent of all federal benefit recipients received their payments electronically.
Treasury's payments-related expenses also were offset by lower spending for the Stored Value Card (SVC) program. This program provides stored value cards that military personnel can use to purchase goods and services on military bases. In 2013, the SVC program's expenses decreased 6.6 percent from 2012, to $13.5 million, because of a decline in new card and kiosk orders.
The Reserve Banks also work closely with Treasury's Fiscal Service to collect funds owed the federal government, including various taxes, fees for goods and services, and delinquent debts. In 2013, Reserve Bank operating expenses related to collections services increased 8.0 percent to $44.8 million, largely as a result of the expanded functionality of the Pay.gov application.
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 109 new agency programs, and it processed more than 116 million online payments totaling $110 billion, a 23 percent and a 17 percent increase, respectively, from 2012. Increases in operational support and enhanced functionality resulted in expenses increasing 33 percent, to $15.5 million.
The Reserve Banks also began supporting Treasury's new electronic commerce (eCommerce) initiative to expand ways for agencies and the public to do business with Treasury--through online banking solutions, mobile technologies, and other payment methods. In 2013, initial program expenses for eCommerce were $156,000 and were included under Pay.gov's budget.
The Reserve Banks also continued to support the government's centralized delinquent debt-collection program. Specifically, the Banks developed and maintained software that facilitates the collection of delinquent debts owed to federal agencies and states by matching federal payments against delinquent debts, including past-due child support payments owed to custodial parents.
Treasury Cash-Management Services
The Reserve Banks maintain Treasury's operating cash account and provide collateral-management and collateral-monitoring services for those Treasury programs that have collateral requirements. The Reserve Banks also support Treasury's efforts to modernize its financial management processes by developing software, operating help desks, and managing projects on behalf of the Fiscal Service.
In 2013, Reserve Bank operating expenses related to Treasury cash-management services totaled $66.5 million, compared with $59.0 million in 2012.
During 2013, the Reserve Banks continued to support Treasury's efforts to improve centralized government accounting and reporting functions. In particular, the Reserve Banks collaborated with the Fiscal Service on several ongoing software development efforts, such as the Central Accounting Reporting System (CARS), which is intended to provide Treasury with a modernized system for the collection and dissemination of financial management and accounting information transmitted from and to federal program agencies. In 2013, expenses for CARS were $26.6 million, compared with $22.1 million in 2012.
Services Provided to Other Entities
When permitted by federal statute or when required by the Secretary of the Treasury, the Reserve Banks provide fiscal agency and depository services to other domestic and international entities.
Reserve Bank operating expenses for services provided to other entities were $34.1 million in 2013, compared with $34.6 million in 2012. Book-entry securities issuance and maintenance activities account for a significant amount of the work performed for other entities, with the majority performed for the Federal Home Loan Mortgage Association, the Federal National Mortgage Association, and the Government National Mortgage Association.
The Reserve Banks continue to process postal money orders primarily in image form, resulting in operational improvements, lower staffing levels, and lower costs to the U.S. Postal Service. In 2013, expenses for postal money orders were $3.4 million, compared with $4.0 million in 2012.
Use of Federal Reserve Intraday Credit
The Board's Payment System Risk (PSR) policy governs the use of Federal Reserve Bank intraday credit, also known as daylight overdrafts. A daylight overdraft occurs when an institution's account activity creates a negative balance in the institution's Federal Reserve account at any time in the operating day. Daylight overdrafts enable an institution to send payments more freely throughout the day than if it were limited strictly by its available intraday funds balance. The PSR policy recognizes explicitly the role of the central bank in providing intraday balances and credit to healthy institutions; under the policy, the Reserve Banks provide collateralized intraday credit at no cost.
Before the 2007-09 financial crisis, overnight balances were much lower and daylight overdrafts significantly higher than levels observed since late 2008. In 2007, for example, institutions held, on average, less than $20 billion in overnight balances, and total average daylight overdrafts were around $60 billion.
In contrast, institutions held historically high levels of overnight balances--on average more than $2 trillion--at the Reserve Banks in 2013, while daylight overdrafts remained historically low. Average daylight overdrafts across the System declined to $1.9 billion in 2013 from $2.1 billion in 2012, a decrease of about 10 percent (see figure 1). The average level of peak daylight overdrafts fell from almost $20 billion in 2012 to $12 billion in 2013; the average level of peak daylight overdrafts in 2013 was just a fraction of its level in 2008 (about 7 percent).
Daylight overdraft fees are also at historically low levels. In 2013, institutions paid about $40,000 in daylight overdraft fees; in contrast, fees totaled more than $50 million in 2008. The decrease in fees is largely attributable to the elevated level of reserve balances that began to accumulate in late 2008 and to the March 2011 policy revision that eliminated fees for collateralized daylight overdrafts.
FedLine Access to Reserve Bank Services
The Reserve Banks' FedLine access solutions provide depository institutions with a variety of alternatives for electronically accessing the Banks' payment and information services. These FedLine channels are designed to meet the individual connectivity, security, and contingency requirements of depository institution customers.
For the past few years, as a result of the declining number of depository institutions, Reserve Bank FedLine connections have decreased. At the same time, the number of employees within depository institutions who have credentials that establish them as trusted users increased, reflecting in part the expansion of electronic value-added services provided. Between 2007 and 2013, the total number of depository institutions in the U.S. declined 19.2 percent. The number of depository institutions with FedLine connections declined 8.8 percent, while the number of trusted users increased 10.5 percent over the same period.
The Reserve Banks continue to maintain their focus on security and resiliency by upgrading critical elements of the FedLine solutions. The next-generation VPN solution is a key component of the security model for the FedLine Advantage and FedLine Command access solutions, used by approximately
6,000 financial institutions. The solution was certified for general availability in July 2013, and the overall migration is scheduled for completion by September 2015.
The Bank's credential management strategy, known as FedLine User Authentication Enhancements, focused on eliminating the use of user IDs and passwords for authentication to any FedLine environment. The project was completed in November 2013, with more than 30,000 credentials migrated.
The Federal Reserve Banks continued to improve the efficiency, effectiveness, and security of information technology (IT) services and operations in 2013.
The Federal Reserve System's National IT reorganized to align functional responsibilities and improve service and support. Additional efforts were initiated to help System leaders articulate business needs through IT roadmaps and to identify additional opportunities to employ common technology services and solutions.
Major multiyear programs to consolidate the Federal Reserve's IT operations and networking services are nearing completion and are expected to improve the overall efficiency and quality of business operations. Two projects within the programs are finished, and the centralization of the remaining enterprise IT functions will be complete by the end of 2014.
Additionally, National IT continued to improve the Reserve Banks' information security posture, and the chief information security officer (CISO) continued efforts to ensure System preparedness for potential information security (IS) risk are coordinated to mitigate advanced persistent threats among the Federal Reserve Banks.11 Under the direction of the CISO, management of the Federal Reserve's IS risk continues to mature, with priority given to IS strategy, performance objectives, and measures of success for National IT's IS operations. The Federal Reserve System continued its implementation of a new IS framework, known as System Assurance for the Federal Reserve, which is based on guidance from the National Institute of Standards and Technology and adapted to the Federal Reserve's environment.
Examinations of the Federal Reserve Banks
The Reserve Banks and several consolidated variable interest entities (VIEs) operated by the Federal Reserve System in response to the 2007-09 financial crisis are subject to several levels of audit and review.12 The combined financial statements of the Reserve Banks --as well as the financial statements of each of the 12 Banks and those of the consolidated VIEs--are audited annually by an independent public accountant retained by the Board of Governors.13 In addition, the Reserve Banks, including the consolidated VIEs, are subject to oversight by the Board of Governors, which performs its own reviews.
The Reserve Banks use the 1992 framework established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to assess their internal controls over financial reporting, including the safeguarding of assets. Within this framework, the management of each Reserve Bank annually provides an assertion letter to its board of directors that confirms adherence to COSO standards. Similarly, each consolidated VIE annually provides an assertion letter to the board of directors of the New York Reserve Bank.
The Federal Reserve Board engaged Deloitte & Touche LLP (D&T) to audit the 2013 combined and individual financial statements of the Reserve Banks and those of the consolidated VIEs.14
In 2013, D&T also conducted audits of the internal controls associated with financial reporting for each of the Reserve Banks. Fees for D&T's services totaled $7 million, of which $1 million was for the audits of the consolidated VIEs. To ensure auditor independence, the Board requires that D&T be independent in all matters relating to the audits. Specifically, D&T may not perform services for the Reserve Banks or others that would place it in a position of auditing its own work, making management decisions on behalf of the Reserve Banks, or in any other way impairing its audit independence. In 2013, the Banks did not engage D&T for any non-audit
The Board's reviews of the Reserve Banks include a wide range of off-site and on-site oversight activities, conducted primarily by its Division of Reserve Bank Operations and Payment Systems. Division personnel monitor on an ongoing basis the activities of each Reserve Bank and consolidated VIE, FRIT, and the Office of Employee Benefits of the Federal Reserve System (OEB), and they conduct a comprehensive on-site review of each Reserve Bank, FRIT, and OEB at least once every three years.
The comprehensive on-site reviews 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 the System Open Market Account (SOMA) and foreign currency holdings to (1) determine whether the New York Reserve Bank, while conducting the related transactions, complies with the policies established by the Federal Open Market Committee (FOMC) and (2) assess SOMA-related IT project management and application development, vendor management, and system resiliency and contingency plans. In addition, D&T audits the year-end schedule of participated asset and liability accounts and the related schedule of participated income accounts. The FOMC is provided with the external audit reports and a report on the Board review.
Income and Expenses
Table 4 summarizes the income, expenses, and distributions of net earnings of the Reserve Banks for 2013 and 2012. Income in 2013 was $91,150 million, compared with $81,586 million in 2012.
|Loan interest income||6||81|
|SOMA interest income||90,503||80,860|
|Other current income 2||641||645|
|Net periodic pension expense||617||641|
|Interest paid on depository institutions deposits and term deposits||5,223||3,875|
|Interest expense on securities sold under agreements to repurchase||60||142|
|Current net income||82,015||73,788|
|Net additions to (deductions from) current net income||-1,029||18,380|
|Treasury securities gains, net||0||13,255|
|Federal agency and government-sponsored enterprise mortgage-backed securities||51||241|
|Foreign currency translation losses||-1,257||-1,116|
|Net income (loss) from consolidated VIEs||181||6,038|
|Other deductions 3||-4||-38|
|Assessments by the Board of Governors||1,845||1,599|
|For Board expenditures||580||490|
|For currency costs||702||722|
|For Consumer Financial Protection Bureau costs 4||563||385|
|For Office of Financial Research costs4||0||2|
|Net income before providing for remittances to Treasury||79,141||90,569|
|Earnings remittances to Treasury||79,633||88,418|
|Net income (loss)||-492||2,151|
|Other comprehensive gain (loss)||2,289||-53|
|Total distribution of net income||81,430||90,516|
|Dividends on capital stock||1,650||1,637|
|Transfer to surplus and change in accumulated other comprehensive income||147||461|
|Earnings remittances to Treasury||79,633||88,418|
1. Certain amounts relating to 2012 have been reclassified to conform to the current-year presentation. Return to table
2. Includes income from priced services, compensation received for services provided, and securities lending fees. Return to table
3. Includes unrealized loss on Term Asset-Backed Securities Loan Facility loans. Return to table
4. The Board of Governors assesses the Reserve Banks to fund the operations of the Consumer Financial Protection Bureau and, for a two-year period beginning July 21, 2010, the Office of Financial Research. Return to table
Expenses totaled $10,980 million: $5,223 million in interest paid to depository institutions on reserve balances and term deposits; $3,765 million in operating expenses; $617 million in net periodic pension expense, $60 million in interest expense on securities sold under agreements to repurchase; $580 million in assessments for Board of Governors expenditure; $702 million for new currency costs; $563 million for Consumer Financial Protection Bureau costs; the expenses were reduced by $530 million in reimbursements for services provided to government agencies. Net deductions from current net income totaled $1,029 million, which includes $1,257 million in unrealized losses on foreign currency denominated assets revalued to reflect current market exchange rates; $181 million in net income associated with consolidated VIEs; and $51 million in realized gains on federal agency and government-sponsored enterprise mortgage-backed securities (GSE MBS). Dividends paid to member banks, set at 6 percent of paid-in capital by section 7(1) of the Federal Reserve Act, totaled $1,650 million.
Comprehensive net income before interest on Federal Reserve notes expense remitted to Treasury totaled $81,430 million in 2013 (net income of $79,141 million, increased by other comprehensive gain of $2,289 million). Earnings remittances to Treasury totaled $79,633 million in 2013. The remittances equal comprehensive income after the deduction of dividends paid and the amount necessary to equate the Reserve Banks' surplus to paid-in capital.
Section 10 of this report (Statistical Tables) provides more detailed information on the Reserve Banks and the VIEs. Table 9 is a statement of condition for each Reserve Bank; table 10 details the income and expenses of each Reserve Bank for 2013; table 11 shows a condensed statement for each Reserve Bank for the years 1914 through 2013; 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 11, "Federal Reserve System Audits").
SOMA Holdings and Loans
The Reserve Banks' average net daily holdings of securities and loans during 2013 amounted to $3,341,859 million, an increase of $625,883 million from 2012 (see table 5).
|Item||Average daily assets (+)/liabilities (-)||Current income (+)/expense (-)||Average interest rate (percent)|
|U.S. Treasury securities 1||2,092,769||1,774,043||51,591||46,416||2.47||2.62|
|Government-sponsored enterprise debt securities1||69,872||94,248||2,166||2,626||3.10||2.79|
|Federal agency and government-sponsored enterprise mortgage-backed securities 2||1,249,810||872,819||36,628||31,429||2.93||3.60|
|Foreign currency denominated assets 3||23,941||25,488||96||139||0.40||0.55|
|Central bank liquidity swaps 4||3,361||38,737||22||241||0.65||0.62|
|Other SOMA investments 5||63||66||*||9||0.03||…|
|Total SOMA assets||3,439,816||2,805,401||90,503||80,860||2.63||2.88|
|Securities sold under agreements to repurchase||-95,519||-91,785||-60||-142||0.06||0.15|
|Other SOMA liabilities 6||-2,781||-2,209||…||…||…||…|
|Total SOMA liabilities||-98,300||-93,994||-60||-142||0.06||0.15|
|Total SOMA holdings||3,341,516||2,711,407||90,443||80,718||2.71||2.98|
|Primary, secondary, and seasonal credit||79||72||*||*||0.25||0.38|
|Total loans to depository institutions||79||72||*||*||0.25||0.38|
|Term Asset-Backed Securities Loan Facility (TALF) 7||264||4,497||6||80||2.27||1.78|
|Total loans to others||264||4,497||6||80||2.27||1.78|
|Total SOMA holding and loans||3,341,859||2,715,976||90,449||80,798||2.71||2.97|
1. Face value, net of unamortized premiums and discounts. Return to table
2. Face value, which is the remaining principal balance of the securities, net of unamortized premiums and discounts. Does not include unsettled transactions. Return to table
3. Includes accrued interest. Foreign currency denominated assets are revalued daily at market exchange rates. Return to table
4. Dollar value of foreign currency held under these agreements valued at the exchange rate to be used when the foreign currency is returned to the foreign central bank. This exchange rate equals the market exchange rate used when the foreign currency was acquired from the foreign central bank. Return to table
5. Cash and short-term investments related to the federal agency and government-sponsored enterprise mortgage-backed securities portfolio. Return to table
6. Represents the obligation to return cash margin posted by counterparties as collateral under commitments to purchase and sell federal agency and GSE MBS, as well as obligations that arise from the failure of a seller to deliver securities on the settlement date. Return to table
7. Represents the remaining principal balance. Return to table
* Less than $500 thousand. Return to table
… Not applicable.
SOMA Securities Holdings
The average daily holdings of Treasury securities increased by $318,726 million, to an average daily amount of $2,092,769 million. The average daily holdings of GSE debt securities decreased by $24,376 million, to an average daily amount of $69,872 million. The average daily holdings of federal agency and GSE MBS increased by $376,991 million, to an average daily amount of $1,249,810 million.
The increases in average daily holdings of Treasury securities and federal agency and GSE MBS are due to the purchases through a large-scale asset purchase program and reinvestment of principal payments from other SOMA holdings in federal agency and GSE MBS. The average daily holdings of GSE debt securities decreased as a result of maturities.
There were no significant holdings of securities purchased under agreements to resell in 2013 or 2012. Average daily holdings of foreign currency denominated assets in 2013 were $23,941 million, compared with $25,488 million in 2012. The average daily balance of central bank liquidity swap drawings was $3,361 million in 2013 and $38,737 million in 2012. The average daily balance of securities sold under agreements to repurchase was $95,519 million, an increase of $3,734 million from 2012.
The average rates of interest earned on the Reserve Banks' holdings of Treasury securities decreased to 2.47 percent and the average rates on GSE debt securities increased to 3.10 percent in 2013. The average rate of interest earned on federal agency and GSE MBS decreased to 2.93 percent in 2013. The average interest rates for securities sold under agreements to repurchase decreased to 0.06 percent in 2013. The average rate of interest earned on foreign currency denominated assets decreased to 0.40 percent while the average rate of interest earned on central bank liquidity swaps increased to 0.65 percent in 2013.
In 2013, the average daily primary, secondary, and seasonal credit extended by the Reserve Banks to depository institutions increased by $7 million, to $79 million. The average rate of interest earned on primary, secondary, and seasonal credit decreased to 0.25 percent in 2013, from 0.38 percent in 2012. The average daily balance of Term Asset-Backed Securities Loan Facility (TALF) loans in 2013 was $264 million, a decrease of $4,233 million from 2012. The average rate of interest earned on TALF loans in 2013 was 2.27 percent.
Investments of the Consolidated VIEs
Certain lending facilities established during 2008 and 2009, under authority of section 13(3) of the Federal Reserve Act, involved creating and lending to the consolidated VIEs (see table 6). Consistent with generally accepted accounting principles, the assets and liabilities of these VIEs have been consolidated with the assets and liabilities of the New York Reserve Bank in the preparation of the statements of condition included in this report. The proceeds at the maturity or the liquidation of the consolidated VIEs' assets are used to repay the loans extended by the New York Reserve Bank.
|Item||TALF LLC||Maiden Lane LLC||Maiden Lane II LLC||Maiden Lane III LLC||Total VIEs|
|Net portfolio assets of the consolidated VIEs and the net position of the New York Reserve Bank (FRBNY) and subordinated interest holders|
|Net portfolio assets 1||109||856||1,732||1,811||63||61||22||22||1,926||2,750|
|Liabilities of consolidated VIEs||0||0||-157||-415||0||0||0||0||-157||-415|
|Net portfolio assets available 2||109||856||1,575||1,396||63||61||22||22||1,769||2,335|
|Loans extended to the consolidated VIEs by the FRBNY 3||0||0||0||0||0||0||0||0||0||0|
|Other beneficial interests3, 4||0||113||0||0||0||0||0||0||0||113|
|Total loans and other beneficial interests||0||113||0||0||0||0||0||0||0||113|
|Cumulative change in net assets since the inception of the program 5|
|Allocated to FRBNY||11||71||1,575||1,396||53||51||15||15||1,654||1,533|
|Allocated to other beneficial interests||98||672||0||0||10||10||7||7||115||689|
|Cumulative change in net assets||109||743||1,575||1,396||63||61||22||22||1,769||2,222|
|Summary of consolidated VIE net income, including a reconciliation of total consolidated VIE net income to the consolidated VIE net income|
|Portfolio interest income 6||0||1||2||34||4||52||*||1,023||6||1,110|
|Interest expense on loans extended by FRBNY 7||0||0||0||-10||0||-11||0||-46||0||-67|
|Portfolio holdings gains (losses)||-573||0||183||552||0||1,393||0||5,506||-390||7,451|
|Net income (loss) of consolidated VIEs||-574||-3||179||519||3||1,426||*||6,374||-392||8,316|
|Less: Net income (loss) allocated to other beneficial interests||574||4||0||0||-1||238||*||2,103||573||2,345|
|Net income (loss) allocated to FRBNY||0||-7||179||519||2||1,188||*||4,271||181||5,971|
|Add: Interest expense on loans extended by FRBNY, eliminated in consolidation7||0||0||0||10||0||11||0||46||0||67|
|Net income (loss) recorded by FRBNY 8||0||-7||179||529||2||1,199||0||4,317||181||6,038|
|Balances of loans extended to the consolidated VIEs by the FRBNY|
|Balance at beginning of the year||0||0||0||4,859||0||6,792||0||9,826||0||21,477|
|Accrued and capitalized interest||0||0||0||10||0||11||0||46||0||67|
|Balance at end of the year||0||0||0||0||0||0||0||0||0||0|
1. TALF, Maiden Lane, Maiden Lane II, and Maiden Lane III holdings are recorded at fair value. Fair value reflects an estimate of the price that would be received upon selling an asset if the transaction were to be conducted in an orderly market on the measurement date. Return to table
2. Represents the net assets available for distribution to FRBNY and "other beneficiaries" of the consolidated VIEs. Return to table
3. Book value. Includes accrued interest. Return to table
4. The other beneficial interest holders are the U.S. Treasury for TALF LLC, JPMorgan Chase for Maiden Lane LLC, and AIG for Maiden Lane II LLC and Maiden Lane III LLC. Return to table
5. Represents the allocation of the change in net assets and liabilities of the consolidated VIEs that are available for distribution to FRBNY and the other beneficiaries of the consolidated VIEs. The differences between the fair value of the net assets available and the book value of the loans (including accrued interest) are indicative of gains or losses that would be incurred by the beneficiaries if the assets had been fully liquidated at prices equal to the fair value. Return to table
6. Interest income is recorded when earned and includes amortization of premiums, accretion of discounts, and paydown gains and losses. Return to table
7. Interest expense recorded by each consolidated VIE on the loans extended by FRBNY is eliminated when the VIEs are consolidated in FRBNY's financial statements and, as a result, the consolidated VIEs' net income (loss) recorded by FRBNY is increased by this amount. Return to table
8. In addition to the net income attributable to TALF LLC, FRBNY earned $3 million on TALF loans during the year ended December 31, 2013 (interest income of $6 million and a loss on the valuation of loans of $3 million). FRBNY earned $46 million on TALF loans during the year ended December 31, 2012 (interest income of $80 million and loss on the valuation of loans of $34 million). Return to table
* Less than $500 thousand. Return to table
Net portfolio assets of the consolidated VIEs decreased from $2,750 million in 2012 to $1,926 million in 2013. The sale of portfolio assets held by Maiden Lane LLC, Maiden Lane II LLC, and Maiden Lane III LLC during 2012 enabled the repayment in full, including accrued interest, of loans extended to those VIEs by the Federal Reserve Bank of New York. Funds advanced to those VIEs by other beneficial interests were also repaid in full.
Federal Reserve Bank Premises
Several Reserve Banks took action in 2013 to maintain and renovate their facilities. The multiyear renovation programs at the Boston, New York, Richmond, St. Louis, and San Francisco Reserve Banks' headquarters buildings continued. The New York Reserve Bank began anticipated renovations to the 33 Maiden Lane building, and the Chicago Federal Reserve Bank began construction of security enhancements to its building. The Cleveland and Atlanta Reserve Banks disposed of the buildings formerly used to house their Pittsburgh and Nashville Branches, respectively. The Dallas Reserve Bank secured leased office space for its San Antonio Branch and in 2014 will pursue the sale of the building that previously housed the Branch's operations.
For more information on the acquisition costs and net book value of the Federal Reserve Banks and Branches, see table 14 in the "Statistical Tables" section of this report.
Pro Forma Financial Statements for Federal Reserve Priced Services
In this Section:
|Short-term assets (Note 2)|
|Imputed reserve requirements on clearing balances||913.3||510.9|
|Materials and supplies||0.9||0.9|
|Items in process of collection||165.3||216.0|
|Total short-term assets||1,122.5||772.8|
|Long-term assets (Note 3)|
|Furniture and equipment||32.5||33.8|
|Leases, leasehold improvements, and long-term prepayments||95.0||78.6|
|Prepaid pension costs||59.2||-|
|Prepaid FDIC asset||-||20.3|
|Deferred tax asset||291.8||287.5|
|Total long-term assets||622.8||591.4|
|Total short-term liabilities||1,122.5||738.9|
|Accrued benefit costs||406.1||549.8|
|Total long-term liabilities||535.5||549.8|
|Equity (including accumulated other comprehensive loss of $466.2 million and $643.0 million at December 31, 2013 and 2012, respectively)||87.3||75.4|
|Total liabilities and equity (Note 4)||1,745.3||1,364.1|
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.
|Revenue from services provided to depository institutions (Note 5)||441.2||449.3|
|Operating expenses (Note 6)||385.5||406.1|
|Income from operations||55.7||43.2|
|Imputed costs (Note 7)|
|Interest on float||-0.7||-1.1|
|Interest on debt||0.1||-|
|FDIC Insurance||0.0||Subtotal 3.8||1.4||Subtotal 4.9|
|Income from operations after imputed costs||51.9||38.3|
|Other income and expenses (Note 8)|
|Earnings credits||0.0||Subtotal 0.1||-0.5||Subtotal 0.5|
|Income before income taxes||52.0||38.8|
|Imputed income taxes (Note 7)||20.0||12.0|
|Memo: Targeted return on equity (Note 7)||4.2||8.9|
Note: Components may not sum to totals because of rounding. The accompanying notes are an integral part of these pro forma priced services financial statements.
|Item||Total||Commercial check collection||Commercial ACH||Fedwire funds||Fedwire securities|
|Revenue from services (Note 5)||441.2||198.8||118.8||96.7||26.8|
|Operating expenses (Note 6) 1||385.5||151.8||113.5||96.2||24.1|
|Income from operations||55.7||47.0||5.4||0.5||2.8|
|Imputed costs (Note 7)||3.8||1.2||1.2||1.1||0.3|
|Income from operations after imputed costs||51.9||45.8||4.2||-0.6||2.5|
|Other income and expenses, net (Note 8)||0.1||0.1||0.0||0.0||0.0|
|Income before income taxes||52.0||45.8||4.2||-0.5||2.5|
|Imputed income taxes (Note 7)||20.0||17.6||1.6||-0.2||1.0|
|Memo: Targeted return on equity (Note 7)||4.2||1.6||1.2||1.0||0.3|
|Cost recovery (percent) (Note 9)||106.7||115.4||101.2||98.6||105.0|
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.
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) Discontinuation of Clearing Balance Program
Effective July 11, 2012, the Board discontinued the contractual clearing balance program in connection with its simplification of reserve requirements. Clearing balances were a primary component of the pro forma balance sheet used to compute the imputed costs in the PSAF. As a result of the Board discontinuing the clearing balance program, Reserve Bank priced services no longer impute related expenses or investment income.
(2) Short-Term Assets
Before the discontinuation of the clearing balance program in 2012, a portion of the clearing balances was used to finance short- and long-term assets. The remainder of these clearing balances and the deposit balances arising from float were assumed to be invested in a portfolio of investments, shown as imputed investments. In addition, priced services imputed a reserve requirement on clearing balances, which are comparable to compensating balances held at correspondent banks by respondent institutions, held at Reserve Banks by depository institutions. The Board's reserve requirement imposed on respondent balances could be held as vault cash or as balances maintained; thus, a portion of priced services clearing balances was shown as required reserves on the asset side of the balance sheet. There were no clearing balances or related reserve requirement balances on December 31, 2012 (see note 1).
Receivables are composed of fees due the Reserve Banks for providing priced services and the share of suspense- and difference-account balances related to priced services.
Items in process of collection are gross Federal Reserve cash items in process of collection (CIPC), stated on a basis comparable to that of a commercial bank. They reflect adjustments for intra-Reserve Bank items that would otherwise be double-counted on the combined Federal Reserve balance sheet and adjustments for items associated with nonpriced items (such as those collected for government agencies). Among the costs to be recovered under the Monetary Control Act is the cost of float, or net CIPC during the period (the difference between gross CIPC and deferred-availability items, which is the portion of gross CIPC that involves a financing cost), valued at the federal funds rate.
(3) Long-Term Assets
Long-term assets consist of long-term assets used solely in priced services and the priced-service portion of long-term assets shared with nonpriced services, including the net pension asset and deferred tax asset related to the priced services pension and postretirement benefits obligation. The tax rate associated with the deferred tax asset was 38.5 percent and 30.9 percent for 2013 and 2012, respectively.
Long-term assets also consist of an estimate of the assets of the Board of Governors used in the development of priced services.
(4) 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. Equity is imputed at 5 percent of total assets and 10 percent of risk-weighted assets for 2013 and 2012, respectively, to satisfy the FDIC requirements for a well-capitalized institution.
Effective December 31, 2006, the Reserve Banks implemented the Financial Accounting Standard Board's (FASB) Statement of Financial Accounting Standards (SFAS) No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans (codified in FASB Accounting Standards Codification (ASC) Topic 715 (ASC 715), Compensation-Retirement Benefits), which requires an employer to record the funded status of its pension and other benefit plans on its balance sheet. To reflect the funded status of its benefit plans, the Reserve Banks recognized the deferred items related to these plans, which include prior service costs and actuarial gains or losses, on the balance sheet. This resulted in an adjustment to the pension and other benefit plans related to priced services and the recognition of an associated deferred tax asset with an offsetting adjustment, net of tax, to accumulated other comprehensive income (AOCI), which is included in equity.
The Reserve Bank priced services recognized a pension asset of $59.2 million and a pension liability, which is a component of accrued benefit costs, of $103.6 million in 2013 and 2012, respectively. The change in the funded status of the pension and other benefit plans resulted in a corresponding increase in accumulated other comprehensive loss of $176.8 million in 2013.
The method for estimating the priced services portion of the SFAS 158/ASC715 adjustments to the pension and other benefit liabilities, AOCI, and deferred tax asset was refined in 2012 and incorporates AOCI component changes from year-to-year since the adoption of SFAS 158 in 2006. This estimation change does not directly affect the income statement or cost recovery.
Revenue represents fees charged to depository institutions for priced services and is realized from each institution through direct charges to an institution's account or, until the elimination of the clearing balance program, charges against its accumulated earnings credits (see note 7).
After all accumulated earnings credits expired in 2013, institutions could no longer use earnings credits to pay for priced services.
(6) 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 of Governors related to the development of priced services. Board expenses were $4.0 million in 2013 and $4.1 million in 2012.
In accordance with SFAS No. 87, Employers' Accounting for Pensions (codified in ASC 715), the Reserve Bank priced services recognized qualified pension-plan operating expenses of $45.4 million in 2013 and $49.1 million in 2012. Operating expenses also include the nonqualified pension credit and expense of $(0.7) million in 2013 and $0.3 million in 2012. The implementation of SFAS No. 158 (ASC 715) does not change the systematic approach required by generally accepted accounting principles to recognize the expenses associated with the Reserve Banks' benefit plans in the income statement. As a result, these expenses do not include amounts related to changes in the funded status of the Reserve Banks' benefit plans, which are reflected in AOCI (see note 4).
The income statement by service reflects revenue, operating expenses, imputed costs, other income and expenses, and cost recovery.
(7) Imputed Costs
Imputed costs consist of income taxes, return on equity, interest on debt, sales taxes, interest on float, and, in 2012, an FDIC assessment. Many imputed costs are derived from the PSAF model. The 2013 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 Aaa and Baa Moody's bond yields; 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.16
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 2013, in millions of dollars:
|Float subject to recovery through per item fees||(637.3)|
Unrecovered float includes float generated by services to government agencies and by other central bank services. Float that is created by account adjustments due to transaction errors and the observance of nonstandard holidays by some depository institutions was recovered from the depository institutions through charging institutions directly. Float subject to recovery is valued at the federal funds rate. Certain ACH funding requirements and check products generate credit float; this float has been subtracted from the cost base subject to recovery in 2013 and 2012.
(8) Other Income and Expenses
Before the contractual clearing balance program was discontinued, other income and expenses consisted of income on the imputed investment of the required portion of the clearing balances, earning at the average coupon-equivalent yield on three-month Treasury bills, and income from expired earnings credits. Earnings credits were granted to depository institutions on their clearing balances based on a discounted average coupon-equivalent yield on three-month Treasury bills, and the credits expired 52 weeks after they were granted. For 2013, other income and expenses consists exclusively of income from expired earnings credits. Expired earnings credits in 2013 were immaterial.
(9) Cost Recovery
Annual cost recovery is the ratio of revenue, including other income, to the sum of operating expenses, imputed costs, imputed income taxes, and after-tax targeted return on equity.
2. All times are eastern time unless otherwise specified. Return to text
3. The Board initially requested comment in 2008 on moving the posting time of ACH debit transactions from 11:00 a.m. to 8:30 a.m. to coincide with the posting of ACH credit transactions but decided not to pursue the change because of economic conditions at the time and the additional costs and liquidity pressures that could be placed on some institutions. Return to text
4. Under the current posting rules, commercial check credits post according to one of two options: (1) all credits post at a single, float-weighted posting time, or (2) fractional credits post between 11:00 a.m. and 6:00 p.m., depending on the institution's preference. Both crediting options are based on surveys of check presentment times and vary across time zones. Commercial check debits are posted on the next clock hour at least one hour after presentment beginning at 11:00 a.m. for paper checks and 1:00 p.m. local time for electronic checks, and ending at 3:00 p.m. local time. Return to text
5. 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
6. Effective December 31, 2006, the Reserve Banks implemented the Financial Accounting Standards Board's Statement of Financial Accounting Standards (SFAS) No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans [Accounting Standards Codification (ASC) Topic 715 (ASC 715), Compensation-Retirement Benefits], which has resulted in the recognition of a $466.2 million reduction in equity related to the priced services' benefit plans through 2013. Including this reduction in equity, which represents a decline in economic value, results in cost recovery of 95.9 percent for the 10-year period. For details on how implementing ASC 715 affected the pro forma financial statements, refer to note 4 to the pro forma financial statements at the end of this section. Return to text
7. 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
8. Section 17 of the Check Clearing for the 21st Century Act requires the Federal Reserve Board's Annual Report to include costs of and revenue from inter-District commercial check transportation. In 2008, the Reserve Banks discontinued the transportation of commercial checks between their check-processing offices. As a result, in 2013, there were no costs or imputed revenues associated with the transportation of commercial checks between Reserve Bank check-processing offices. Return to text
9. The expenses, revenues, volumes, and fees reported here are for transfers of securities issued by federal government agencies, government-sponsored enterprises, and certain international organizations. Reserve Banks provide Treasury securities services in their role as the U.S. Treasury's fiscal agent. These services are not considered priced services. For details, see "Treasury Securities Services" later in this section. Return to text
10. Credit float occurs when the Reserve Banks present checks and other items to the paying bank prior to providing credit to the depositing bank (debit float occurs when the Reserve Banks credit the depositing bank before presenting checks and other items to the paying bank). Return to text
11. National IT supplies national infrastructure and business line technology services to the Federal Reserve Banks and provides guidance on the System's information technology architecture and business use of technology. Return to text
12. The New York Reserve Bank is considered to be the controlling financial interest holder of each of the consolidated VIEs. Return to text
13. See "Federal Reserve Banks Combined Financial Statements" in section 11 of this report. Each VIE reimburses the Board of Governors--from the entity's available net assets--for the fees related to the audit of its financial statements. Return to text
14. In addition, D&T audited the Office of Employee Benefits of the Federal Reserve System (OEB), the Retirement Plan for Employees of the Federal Reserve System (System Plan), and the Thrift Plan for Employees of the Federal Reserve System (Thrift Plan). The System Plan and the Thrift Plan provide retirement benefits to employees of the Board, the Federal Reserve Banks, the OEB, and the Consumer Financial Protection Bureau. Return to text
15. One Bank leases office space to D&T. Return to text
16. Details regarding the PSAF methodology change can be found at www.gpo.gov/fdsys/pkg/FR-2012-11-08/pdf/2012-26918.pdf. Return to text