[Federal Register Volume 73, Number 213 (Monday, November 3, 2008)]
[Notices]
[Pages 65329-65351]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-26101]
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FEDERAL RESERVE SYSTEM
[Docket No. OP-1337]
Federal Reserve Bank Services
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Notice.
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SUMMARY: The Board has approved the private sector adjustment factor
(PSAF) for 2009 of $62.2 million and the 2009 fee schedules for Federal
Reserve priced services and electronic access. These actions were taken
in accordance with the requirements of the Monetary Control Act of
1980, which requires that, over the long run, fees for Federal Reserve
priced services be established on the basis of all direct and indirect
costs, including the PSAF. The Board has also approved maintaining the
current earnings credit rate on clearing balances.
DATES: The new fee schedules and earnings credit rate become effective
January 2, 2009.
FOR FURTHER INFORMATION CONTACT: For questions regarding the fee
schedules: Jeffrey C. Marquardt, Deputy Director (202/452-2360);
Jeffrey S.H. Yeganeh, Manager, Retail Payments (202/728-5801); Linda S.
Healey, Senior Financial Services Analyst (202/452-5274), Division of
Reserve Bank Operations and Payment Systems. For questions regarding
the PSAF and earnings credits on clearing balances: Gregory L. Evans,
Deputy Associate Director (202/452-3945); Brenda L. Richards, Manager,
Financial Accounting (202/452-2753); or Rebekah Ellsworth, Financial
Analyst (202/452-3480), Division of Reserve Bank Operations and Payment
Systems. For users of Telecommunications Device for the Deaf (TDD)
only, please call 202/263-4869. Copies of the 2009 fee schedules for
the check service are available from the Board, the Federal Reserve
Banks, or the Reserve Banks' financial services Web site at http://www.frbservices.org.
SUPPLEMENTARY INFORMATION:
I. Private Sector Adjustment Factor and Priced Services
A. Overview--Each year, as required by the Monetary Control Act of
1980,
[[Page 65330]]
the Reserve Banks set fees for priced services provided to depository
institutions. These fees are set to recover, over the long run, all
direct and indirect costs and imputed costs, including financing costs,
taxes, and certain other expenses, as well as the return on equity
(profit) that would have been earned if a private business firm
provided the services. The imputed costs and imputed profit are
collectively referred to as the PSAF. Similarly, investment income is
imputed and netted with related direct costs associated with clearing
balances to estimate net income on clearing balances (NICB). From 1998
through 2007, the Reserve Banks recovered 99.1 percent of their total
expenses (including special project costs and imputed expenses) and
targeted after-tax profits or return on equity (ROE) for providing
priced services.\1\
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\1\ The ten-year recovery rate is based on the pro forma income
statement for Federal Reserve priced services published in the
Board's Annual Report.
Effective December 31, 2006, the Reserve Banks implemented
Financial Accounting Standards No. 158: Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans (FAS 158),
which resulted in recognizing a reduction in equity related to the
priced services' benefit plans. Including this reduction in equity
results in cost recovery of 96.7 percent for the ten-year period.
This measure of long-run cost recovery is also published in the
Board's Annual Report.
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Table 1 summarizes 2007, 2008 estimated, and 2009 budgeted cost-
recovery rates for all priced services. Cost recovery is estimated to
be 98.1 percent in 2008 and budgeted to be 93.7 percent in 2009. The
check service accounts for approximately three-quarters of the total
cost of priced services and thus significantly influences the aggregate
cost-recovery rate. The electronic services (FedACH[supreg], the
Fedwire[supreg] Funds Service and National Settlement Service, and the
Fedwire[supreg] Securities Service) account for approximately a quarter
of total costs.\2\
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\2\ FedACH and Fedwire are registered servicemarks of the
Reserve Banks.
Table 1--Aggregate Priced Services Pro Forma Cost and Revenue Performance a
[$ Millions]
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+5 \e\ Recovery
+2 \c\ Total +3 Net income +4 \d\ Targeted rate after
Year +1\b\ Revenue expense (ROE)[1-2] ROE targeted ROE [1/
(2+4)]
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2007..................................................... 1,012.3 913.3 98.9 80.4 101.9%
2008 (estimate).......................................... 853.0 803.3 49.7 66.5 98.1%
2009 (budget)............................................ 692.4 707.9 -15.6 31.1 93.7%
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\a\ Calculations in this table and subsequent pro forma cost and revenue tables may be affected by rounding.
\b\ Revenue includes net income on clearing balances. Clearing balances are assumed to be invested in a broad portfolio of investments, such as short-
term Treasury securities, government agency securities, commercial paper, long-term corporate bonds, and money market funds. To impute income, a
constant spread is determined from the historical average return on this portfolio and applied to the rate used to determine the cost of clearing
balances. NICB equals the imputed income from these investments less earnings credits granted to holders of clearing balances. The cost of earnings
credits is based on the discounted three-month Treasury bill rate.
\c\ The calculation of total expense includes operating, imputed, and other expenses. Imputed and other expenses include taxes, FDIC insurance, Board of
Governors' priced services expenses, the cost of float, and interest on imputed debt, if any. Credits or debits related to the accounting for pensions
under FAS 87 are also included.
\d\ Targeted ROE is the after-tax ROE included in the PSAF.
\e\ The recovery rates in this and subsequent tables do not reflect the unamortized gains or losses that must be recognized in accordance with FAS 158.
Future gains or losses, and their effect on cost recovery, cannot be projected.
Table 2 portrays an overview of cost-recovery performance for the
ten-year period from 1998 to 2007, 2007, 2008 budget, 2008 estimate,
and 2009 budget by priced service.
Table 2--Priced Services Cost Recovery
[Percent]
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Priced service 1998-2007 2007 2008 Budget 2008 Estimate 2009 Budget \a\
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All services............................................. 99.1 101.9 101.1 98.1 93.7
Check.................................................... 97.8 100.7 100.5 97.2 91.5
FedACH................................................... 105.1 107.6 102.0 101.3 100.0
Fedwire Funds and NSS.................................... 104.1 107.3 105.4 100.8 98.3
Fedwire Securities....................................... 102.8 103.7 104.8 102.1 100.5
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\a\ 2009 budget figures reflect the latest data from the Reserve Banks. The Reserve Banks will transmit final budget data to the Board in November 2008,
for Board consideration in December 2008.
1. 2008 Estimated Performance--The Reserve Banks estimate that they
will recover 98.1 percent of the costs of providing priced services,
including imputed expenses and targeted ROE, compared with a budgeted
recovery rate of 101.1 percent, as shown in Table 2. While the FedACH,
the Fedwire Funds and National Settlement, and the Fedwire Securities
Services are expected to achieve full cost recovery in 2008, the check
service is expected to recover 97.2 percent of its costs. Overall, the
Reserve Banks expect to recover all actual and imputed costs of
providing priced services and earn a net income of $49.7 million,
compared with a targeted ROE of $66.5 million. This shortfall is
largely driven by lower-than-expected NICB and increased pension
costs.\3\ In addition to these factors that affect all
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services, the check service will incur one-time costs associated with
the next phase of the Reserve Banks' check restructuring efforts, which
will result in less than full cost recovery for that service.
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\3\ The 2008 estimated NICB is significantly lower than
budgeted. For the year, NICB was projected to be $125.8 million and
is now estimated at $86.9 million. This shortfall is due primarily
to the decline in short-term Treasury bill rates. The 2008 estimated
pension debit is $4.4 million higher than budgeted, due to updated
demographic data that generated actuarial losses.
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2. 2009 Private Sector Adjustment Factor--The 2009 PSAF for Reserve
Bank priced services is $62.2 million. This amount represents a
decrease of $50.9 million from the 2008 PSAF of $113.1 million. This
reduction is the result of a decrease in the cost of equity due to a
lower required return on equity and a lower amount of imputed equity.
3. 2009 Projected Performance--The Reserve Banks project that the
FedACH and Fedwire Securities Services will fully recover their costs
in 2009. The Reserve Banks also project that the Fedwire Funds and
National Settlement Services will achieve close to full cost recovery
and that the check service will substantially under recover its costs.
Overall, the Reserve Banks project a priced services cost-recovery rate
of 93.7 percent in 2009, with a net loss of $15.6 million, compared to
a targeted ROE of $31.1 million. The projected priced services' under
recovery is heavily influenced by the check service's cost recovery
rate, which is expected to be 91.5 percent, as revenues decline due
largely to projected reductions in check deposits and an increasing
proportion of checks being presented electronically. The other
significant factors affecting the check service's cost recovery are
projected reductions in NICB and increased pension costs.
The major risks to the Reserve Banks' ability to achieve their
targeted cost recovery rates are substantial declines in clearing
balances due to the implementation of interest on reserves and its
effect on imputed income as well as unanticipated increases in pension
costs. In addition, greater-than-expected check volume declines due to
increased competition from correspondent banks and other service
providers could adversely affect cost recovery. Other risks include
costs associated with unanticipated problems with technological
upgrades and check office restructurings.
4. 2009 Pricing--The following summarizes the Reserve Banks'
changes in fee schedules for priced services in 2009:
Check
The Reserve Banks will increase the fees for forward paper
check collection 26 percent and paper return check products 33 percent.
The Reserve Banks will increase FedForward fees 3.8
percent for checks presented electronically and 37 percent for checks
presented as substitute checks. The Reserve Banks will also raise
FedReturn fees 26 percent. Because the fees to collect and return
checks drawn on depository institutions that accept electronics will be
lower than on those that accept paper, the rapid rise in the number of
depository institutions that are accepting presentments and returns
electronically is expected to result in a 10 percent reduction in the
effective price to collect a check electronically and an 8 percent
reduction in the effective price to return a check electronically.
With the 2009 fee changes, the price index for the total
check service will have increased 136 percent since 1999.
FedACH
The Reserve Banks will raise the monthly fees for account
servicing from $25 to $37 per routing number, for FedACH settlement
from $20 to $37 per routing number, and for information extract files
from $20 to $35 per routing number.
The Reserve Banks will raise the non-electronic input/
output fees for paper from $15 per file to $50 per file, and for CD/DVD
from $25 to $50 per CD/DVD. The Reserve Banks will increase the fee for
facsimile exception returns/notifications of change from $15 to $30 and
for voice response returns/notifications of change fees from $2 to $3.
With the 2009 fee changes, the price index for the FedACH
service will have decreased 52.8 percent since 1999.
Fedwire Funds and National Settlement
The Reserve Banks will introduce a $60 monthly
participation fee for Fedwire Funds customers with activity in that
month and raise the offline origination and receipt fee from $30 to
$40. In addition, the Reserve Banks will increase the National
Settlement Service's settlement file charge from $14 to $18 and the
offline file origination fee from $25 to $40.
With the 2009 fee changes, the price index for the Fedwire
Funds and National Settlement Services will have decreased 24.8 percent
since 1999.
Fedwire Securities
The Reserve Banks will raise the basic transfer fee from
$0.34 to $0.35, the monthly maintenance fee from $16 to $21, and the
fees on claims adjustments from $0.30 to $0.60.
With the 2009 fee changes, the price index for the Fedwire
Securities Service will have decreased 36.2 percent since 1999.
5. 2009 Price Index--Figure 1 compares indexes of fees for the
Reserve Banks' priced services with the GDP price index. Compared with
the price index for 2008, the price index for all Reserve Bank priced
services is projected to increase 26.2 percent in 2009. The price index
for paper check and electronic payment services in 2009 are projected
to increase 40.7 percent and 2.2 percent, respectively. While the
prices for Check 21 services are also increasing, the rapid increase in
the number of depository institutions accepting checks electronically
is resulting in reductions in the effective prices paid to collect and
return checks using Check 21 services. As a result, a Check 21 price
index is misleading, given these substantial shifts, and therefore is
not shown in the figure 1. For the period 1999 to 2009, the price index
for all priced services is expected to increase 81.3 percent. In
comparison, for the period 1999 to 2008 the GDP price index increased
24.7 percent.
BILLING CODE 6210-01-P
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BILLING CODE 6210-01-C
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B. Private Sector Adjustment Factor--The method for calculating the
financing and equity costs in the PSAF requires determining the
appropriate imputed levels of debt and equity and then applying the
applicable financing rates. In this process, a pro forma balance sheet
using estimated assets and liabilities associated with the Reserve
Banks' priced services is developed, and the remaining elements that
would exist if these priced services were provided by a private
business firm are imputed. The same generally accepted accounting
principles that apply to commercial-entity financial statements also
apply to the relevant elements in the priced-services pro forma
financial statements.
The portion of Federal Reserve assets that will be used to provide
priced services during the coming year is determined using information
on actual assets and projected disposals and acquisitions. The priced
portion of these assets is determined based on the allocation of the
related depreciation expense. The priced portion of actual Federal
Reserve liabilities consists of balances held by depository
institutions (DIs) at Reserve Banks for clearing priced-services
transactions (clearing balances), and other liabilities such as
accounts payable and accrued expenses.
Long-term debt is imputed only when core clearing balances, long-
term liabilities, and equity are not sufficient to fund long-term
assets or if the interest rate risk sensitivity analysis, which
measures the interest rate effect of the difference between interest
rate sensitive assets and liabilities, indicates that a 200 basis point
change in interest rates would change cost recovery by more than two
percentage points.\4\ Short-term debt is imputed only when short-term
liabilities and clearing balances not used to finance long-term assets
are insufficient to fund short-term assets. Imputed equity meets the
FDIC requirements for a well-capitalized DI for insurance premium
purposes and represents the market capitalization, or shareholder
value, for Reserve Bank priced services.\5\
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\4\ A portion of clearing balances is used as a funding source
for priced-services assets. Long-term assets are partially funded
from core clearing balances, which are currently $4 billion. Core
clearing balances are considered the portion of the balances that
has remained stable over time without regard to the magnitude of
actual clearing balances.
\5\ The FDIC requirements for a well-capitalized depository
institution are (1) a ratio of total capital to risk-weighted assets
of 10 percent or greater, (2) a ratio of Tier 1 capital to risk-
weighted assets of 6 percent or greater, and (3) a leverage ratio of
Tier 1 capital to total assets of 5 percent or greater. The priced
services balance sheet has no components of Tier 1 or total capital
other than equity; therefore, requirements 1 and 2 are essentially
the same measurement.
As used in this context, the term ``shareholder'' does not refer
to the actual member banks of the Federal Reserve System, but rather
to the implied shareholders who would have an ownership interest if
the Reserve Banks' priced services were provided by a private firm.
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The equity financing rate is the targeted ROE rate produced by the
capital asset pricing model (CAPM). In the CAPM, the required rate of
return on a firm's equity is equal to the return on a risk-free asset
plus a risk premium. To implement the CAPM, the risk-free rate is based
on the three-month Treasury bill; the beta is assumed to equal 1.0,
which approximates the risk of the market as a whole; and the monthly
returns in excess of the risk-free rate over the most recent 40 years
are used as the market risk premium. The resulting ROE influences the
dollar level of the PSAF because this is the return a shareholder would
require in order to invest in a private business firm.
For simplicity, given that federal corporate income tax rates are
graduated, state income tax rates vary, and various credits and
deductions can apply, an actual income tax expense is not calculated
for Reserve Bank priced services. Instead, the Board targets a pretax
ROE that would provide sufficient income to fulfill its income tax
obligations. To the extent that actual performance results are greater
or less than the targeted ROE, income taxes are adjusted using an
imputed income tax rate. Because the Reserve Banks provide similar
services through their correspondent banking activities, including
payment and settlement services, and the amount of imputed equity meets
the FDIC requirements for a well-capitalized DI, the imputed income tax
rate is the median of the rates paid by the top fifty bank holding
companies based on deposit balances over the past five years, adjusted
to the extent that they invested in tax-free municipal bonds.
The PSAF also includes the estimated priced-services-related
expenses of the Board and imputed sales taxes based on Reserve Bank
estimated expenditures. An assessment for FDIC insurance is imputed
based on current FDIC rates and projected clearing balances held with
the Reserve Banks.
1. Net Income on Clearing Balances--The NICB calculation is
performed each year along with the PSAF calculation and is based on the
assumption that the Reserve Banks invest clearing balances net of an
imputed reserve requirement and balances used to finance priced-
services assets.\6\ The Reserve Banks impute a constant spread,
determined by the return on a portfolio of investments, over the three-
month Treasury bill rate and apply this investment rate to the net
level of clearing balances.\7\
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\6\ Reserve requirements are the amount of funds that a DI must
hold in reserve against specified deposit liabilities. DIs must hold
reserves in the form of vault cash or deposits with Federal Reserve
Banks. The dollar amount of a DI's reserve requirement is determined
by applying the reserve ratios specified in the Board's Regulation D
to the institution's reservable liabilities. The Reserve Banks
priced services impute a reserve requirement of ten percent, which
is applied to the amount of clearing balances held with the Reserve
Banks.
\7\ The investment portfolio is composed of investments
comparable to a bank holding company's investment holdings, such as
short-term Treasury securities, government agency securities,
commercial paper, long-term corporate bonds, and money market funds.
See table 7 for the investments imputed in 2009.
NICB is projected to be $48.8 million for 2009. This result uses
an investment rate equal to a constant spread of 26 basis points
over the three-month Treasury bill rate, applied to the clearing
balance levels used in the 2009 pricing process. The 2008 NICB
estimate is $86.9 million.
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The calculation also involves determining the priced-services cost
of earnings credits (amounts available to offset service fees) on
contracted clearing balances held, net of expired earnings credits,
based on a discounted Treasury bill rate. Rates and clearing balance
levels used in the NICB estimate are based on July 2008 rates and
clearing balance levels. Because clearing balances are held for
clearing priced-services transactions or offsetting priced-services
fees, they are directly related to priced services. The net earnings or
expense attributed to the investments and the cost associated with
holding clearing balances, therefore, are considered net income for
priced services.
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\8\ The imputed interest income on the imputed reserve
requirement is projected to be $15.2 million for 2009. The projected
2009 rate for imputed interest income on the reserve requirement is
based on the July 2008 rate of 1.9 percent.
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A few changes to the 2009 NICB estimate have been made as a result
of the Board's decision to pay interest on required reserve and excess
balances held at Reserve Banks beginning on October 9, 2008.
Accordingly, a return on the imputed reserve requirement based on the
level of clearing balances on the pro forma balance sheet has been
estimated for 2009.\8\ Additionally, the priced-services cost of
earnings credits has also been changed to compensate clearing balance
holders on 100 percent of their contracted clearing balances. Formerly,
earnings credits were only paid on 90 percent of contracted clearing
balances assuming that a private sector correspondent bank would not
compensate respondents for
[[Page 65334]]
their required reserve balances.\9\ Lastly, because all excess balances
held at the Reserve Banks will receive explicit interest, the priced
services will no longer impute investment income on any portion of
excess balances.
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\9\ On October 3, 2008, section 128 of the Emergency Economic
Stabilization Act of 2008 accelerated the Reserve Banks' authority
to pay interest on required reserve and excess balances held by DIs.
For further information regarding the Board's implementation of this
authority and a description of these changes, see the interim final
rule amending Regulation D (http://www.federalreserve.gov/newsevents/press/monetary/20081006a.htm).
See section C for more information on the earnings credit rate
changes.
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2. Analysis of the 2009 PSAF--The decrease in the 2009 PSAF is
primarily due to an overall reduction in the level of imputed equity
and in the targeted ROE rate provided by the CAPM.
Estimated 2009 Federal Reserve assets, reflected in table 3, have
decreased $3,408.6 million, mainly due to a decline in items in process
of collection of $3,175.3 million. This reduction largely stems from
the continued reduction in paper check volumes and the accelerated
collection of items processed in the Check 21 environment.\10\
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\10\ In previous years, a historical average balance of items in
process of collection was used as an estimate for the coming year's
items in process of collection balance. Given the substantial
declines in both paper check volumes and items in process of
collection, the Reserve Banks have estimated 2009 items in process
of collection using projected 2009 paper check volumes and the
historical relationship between paper check volume and items in
process of collection.
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In past years, the level of clearing balances reflected in table 3
has consisted of contracted clearing balances and the priced-services
portion of excess balances held at Reserve Banks. As noted above, all
excess balances are now considered reserve-related. Consequently, the
clearing balances on the priced-services pro forma balance sheet for
2009 do not reflect excess clearing balances and only consist of
contracted clearing balances held. The 2009 projected clearing balances
continue to be based on July 2008 balance levels held at Reserve
Banks.\11\ In light of the uncertainty regarding the level of clearing
balances in an interest-on-reserves environment, the Board approved
basing the actual PSAF costs used in cost-recovery calculations on the
actual levels of clearing balances held throughout 2009. To the extent
that clearing balances fall below the current level of core clearing
balances, debt would be imputed.
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\11\ To the extent that the interest rates on excess balances
are higher than the earnings credit rate, clearing balances will
likely decrease in the future as DIs shift balances from the
clearing balance program to excess balances in pursuit of greater
flexibility and higher returns. It is difficult to forecast the
rapidity and degree of this shift because it depends on DI behavior
and the disparity between the excess reserves rate and the earnings
credit rate.
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As shown in table 4, the portion of assets financed with clearing
balances has increased. Short-term liabilities exceed short-term assets
by $2.5 million; therefore, no clearing balances are used to fund
short-term assets. This figure represents a $6.7 million decline from
the short-term assets funded in 2008, a decrease that results largely
from the reduction in estimated short-term receivables. The amount of
core clearing balances used to fund long-term assets has increased
$16.5 million primarily because of a lower amount of imputed equity,
which also is used to fund long-term assets.
As previously mentioned, clearing balances are available as a
funding source for priced-services assets. Table 4 shows that $82.5
million in clearing balances is used to fund priced-services assets in
2009. The interest rate sensitivity analysis in table 5 indicates that
a 200 basis point decrease in interest rates affects the ratio of rate-
sensitive assets to rate-sensitive liabilities and increases cost
recovery by 1.6 percentage points, while an increase of 200 basis
points in interest rates decreases cost recovery by 1.7 percentage
points. The established threshold for a change in cost recovery is two
percentage points; therefore, interest rate risk associated with using
these balances is within acceptable levels and no long-term debt is
imputed.
As shown in table 3, the amount of equity imputed for the 2009 PSAF
is $458.4 million, a decrease of $170.5 million from the imputed equity
for 2008. In accordance with FAS 158, this amount includes an
accumulated other comprehensive loss of $322.6 million. Both the
capital to total assets ratio and the capital to risk-weighted assets
ratio meet or exceed the regulatory requirements for a well-capitalized
DI. Equity is calculated as 5 percent of total assets, and the ratio of
capital to risk-weighted assets is 10.0 percent.\12\ The Reserve Banks
imputed an FDIC assessment for the priced services based on the FDIC's
2009 assessment rates and the level of clearing balances held at
Reserve Banks.\13\ For 2009, the net FDIC assessment is imputed at $0.9
million, compared with a net FDIC assessment of $0.4 million in
2008.\14\
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\12\ In December 2006, bank regulators (the Board, the FDIC, the
Office of the Comptroller of the Currency, and the Office of Thrift
Supervision) announced an interim ruling that excludes FAS 158-
related accumulated other comprehensive income or losses from the
calculation of regulatory capital. The Reserve Banks, however,
elected to impute total equity at 5 percent of assets, as indicated
above, until the regulators announce a final ruling.
\13\ For information on the 2009 FDIC assessment rates, see
http://www.fdic.gov/news/news/press/2008/pr08094.html.
\14\ Per FDIC rules, any remaining portion of the one-time
assessment credit can offset up to 90 percent of the assessment
amount in subsequent years. For 2009, 90 percent of the total
imputed assessment of $9.3 million was offset by the remaining
assessment credit, resulting in a net assessment of $0.9 million.
For 2008, the net FDIC assessment was $0.4 million.
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Table 6 shows the imputed PSAF elements, including the pretax ROE
and other required PSAF costs, for 2008 and 2009. The $50.4 million
decrease in ROE is caused by the combination of a lower amount of
imputed equity and a decrease in the risk-free rate of return. Sales
taxes decreased from $8.9 million in 2008 to $7.3 million in 2009. The
effective income tax rate used in 2009 increased to 32.6 percent from
31.2 percent in 2008. The priced-services portion of the Board's
expenses increased $0.6 million from $7.2 million in 2008 to $7.8
million in 2009.
3. Revised PSAF Methodology for 2010--In light of the
implementation of the payment of interest on reserves, the Board is
evaluating potential changes to the PSAF methodology, for
implementation in 2010 and may request public comment on a proposed
revised PSAF methodology later this year.
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BILLING CODE 6210-01-C?>
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C. Earnings Credits on Clearing Balances--The Reserve Banks will
maintain the current rate of 80 percent of the three-month Treasury
bill rate to calculate earnings credits on clearing balances.
Clearing balances were introduced in 1981, as part of the Board's
implementation of the Monetary Control Act, to facilitate access to
Federal Reserve priced services by institutions that did not have
sufficient reserve balances to support the settlement of their payment
transactions. The earnings credit calculation uses a percentage
discount on a rolling thirteen-week average of the annualized coupon
equivalent yield of three-month Treasury bills in the secondary market.
Earnings credits, which are calculated monthly, can be used only to
offset charges for priced services and expire if not used within one
year.\15\
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\15\ A band is established around the contracted clearing
balance to determine the maximum balance on which credits are earned
as well as any deficiency charges. The clearing balance allowance is
2 percent of the contracted amount or $25,000, whichever is greater.
Earnings credits are based on the period-average balance maintained
up to a maximum of the contracted amount plus the clearing balance
allowance. Deficiency charges apply when the average balance falls
below the contracted amount less the allowance, although credits are
still earned on the average maintained balance.
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Effective October 9, 2008, in conjunction with the implementation
of interest on reserves, the Board changed the method of computation
for earnings credits and the recovery of float costs. These changes
discontinued practices related to reserve requirements that are no
longer necessary. Adjustments were previously made to ensure that
respondents viewed balances at the Federal Reserve Banks and balances
at a private-sector correspondent as equivalent. Therefore, the formula
used by the Reserve Banks to calculate earnings credits on contracted
clearing balances was revised.\16\
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\16\ Effective October 9, 2008, the formula used by the Reserve
Banks to calculate earnings credits has changed from
*e = [ b * (1-FRR) * r] + [ b * (MRR) * f ]
to e = [ b * r]
Where e is total earnings credits, b is the average clearing
balance maintained, FRR is the assumed Reserve Bank marginal reserve
ratio (10 percent), r is the earnings credit rate, MRR is the
marginal reserve ratio of the DI holding the balance (either 0
percent, 3 percent, or 10 percent), and f is the average federal
funds rate. A DI that meets its reserve requirement entirely with
vault cash is assigned a marginal reserve requirement of zero.
D. Check Service--Table 8 shows the 2007, 2008 estimated, and 2009
budgeted cost recovery performance for the commercial check service.
Table 8--Check Service Pro Forma Cost and Revenue Performance
[$ millions]
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5 Recovery rate
Year 1 Revenue 2 Total expense 3 Net income 4 Targeted ROE after targeted
(ROE) [1-2] ROE [1/(2+4)]
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2007..................................................... 812.0 743.3 68.6 63.2 100.7%
2008 (estimate).......................................... 665.6 632.6 33.0 51.9 97.2%
2009 (budget)............................................ 493.8 516.9 -23.1 22.4 91.5%
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1. 2008 Estimate--For 2008, the Reserve Banks estimate that the
check service will recover 97.2 percent of total expenses, including
imputed expenses, and targeted ROE, compared with the budgeted recovery
rate of 100.5 percent (see table 8). Through August 2008, the check
service has recovered 101.3 percent of total costs, including imputed
expenses, and targeted ROE. For the full year, the Reserve Banks expect
to recover all actual and imputed expenses of providing check services
and earn a net income of $33.0 million, compared with a targeted ROE of
$51.9 million.
The lower-than-budgeted cost recovery is the result of lower-than-
expected NICB and higher-than-projected pension costs. For the year,
NICB is expected to be nearly $30 million below budget. This shortfall,
however, is expected to be partially offset by a $20 million increase
in product revenue, reflecting additional revenue associated with the
midyear price increase on all paper deposit products. Additionally, the
check service's cost recovery shortfall will be affected by one-time
costs associated with the next phase of the Reserve Banks' check
restructuring initiative.
The number of checks deposited electronically has grown rapidly in
2008 (see table 9). In August, the proportion of checks deposited
electronically with the Reserve Banks for collection was approximately
83 percent of total check deposits. By the end of 2008, the Reserve
Banks expect Fed Forward deposit penetration rates to surpass 90
percent.
The number of checks presented electronically using Check 21
products has also grown steadily in 2008 (see table 9). In August, 57
percent of the Reserve Banks' volume was presented using Check 21
products. By the end of the year, the Reserve Banks expect that nearly
70 percent of all checks will be presented using Check 21 products. For
the last several years, depository institutions had been slower to
accept check presentments electronically because financial incentives
were generally stronger for electronic check deposit and because
integrating electronic presentments into back-office processing and
risk-management systems was a complex and expensive undertaking. Given
the significant increase in electronic deposits and presentments, it
now appears that depository institutions have made substantial progress
towards establishing an end-to-end electronic check-processing
environment.
Table 9--Check 21 Product Penetration Rates a
[Percent] \b\
----------------------------------------------------------------------------------------------------------------
August 2008 August 2008 December 2008
2007 year-to-date actual projection
----------------------------------------------------------------------------------------------------------------
Deposit--FedForward......................... 42 70 83 93
Presentment................................. 25 48 57 70
FedReceipt.............................. 4 6 8 10
[[Page 65341]]
FedReceipt Plus......................... 21 42 50 60
Return--FedReturn........................... 23 35 42 66
----------------------------------------------------------------------------------------------------------------
\a\ FedForward is the electronic forward check collection product; FedReturn is the electronic check return
product; and FedReceipt is electronic presentment with accompanying images. Under FedReceipt, the Reserve
Banks electronically present only the checks that were deposited electronically or that were deposited in
paper form and converted into electronic form by the Reserve Banks to improve their efficiency. Under
FedReceipt Plus, the Reserve Banks electronically present, at the request of the depository institution, all
checks drawn on that depository institution.
\b\ Deposit and presentment statistics are calculated as a percentage of total forward collection volume. Return
statistics are calculated as a percentage of total return volume.
For full-year 2008, the Reserve Banks estimate that their total
forward check collection volume will decline 5 percent.\17\ Paper
forward-collection volume is expected to decline 63 percent for the
full year, compared with a budgeted decline of 42 percent (see table
10). This greater-than-expected decline in paper check volume is
primarily the result of more checks being deposited electronically. For
2008, the Reserve Banks estimate that electronic check deposit volume
will increase 75 percent. The Reserve Banks also estimate that paper
return volume will decline at a faster pace than anticipated, 42
percent for the full year, compared with a budgeted decline of 34
percent, due to a 33 percent increase in electronic check return
volume.
---------------------------------------------------------------------------
\17\ Total forward Reserve Bank check volumes are expected to
drop from roughly 10.0 billion in 2007 to 9.4 billion in 2008.
Table 10--Paper Check Product Volume Changes
[Percent]
------------------------------------------------------------------------
Budgeted Estimated
2008 2008
change change
------------------------------------------------------------------------
Forward collection.............................. -42 -63
Returns......................................... -34 -42
------------------------------------------------------------------------
2. 2009 Pricing--In 2009, the Reserve Banks project that the check
service will recover 91.5 percent of total expenses and targeted ROE.
Revenue is projected to be $493.8 million, or about a $172 million
decline from 2008. This decline is driven largely by projected
reductions in check deposits and an increasing proportion of checks
being presented electronically, as well as a $33 million reduction in
NICB. Total expenses for the check service are projected to be $516.9
million, a decline of about $116 million from 2008. A key driver in the
reduction of check costs is the continued decline in the number of
Reserve Bank check-processing sites and associated staff reductions.
The Reserve Banks have recently announced plans to accelerate the
consolidation of check processing offices in 2009 and are assessing
further reductions in their check processing infrastructure.
For 2009, the Reserve Banks estimate that their total forward check
volume will decline 12 percent. Volume from traditional paper check
deposit services will decline 86 percent and represent less than 5
percent of the Reserve Banks' check deposits by year-end 2009. This
volume decline will be partially offset by a projected 10 percent
increase in FedForward volume as the shift from paper to electronic
check collection continues. The Reserve Banks also estimate that total
return volume will decline 10 percent, as a 55 percent reduction in
paper check return volume is partially offset by a 24 percent increase
in FedReturn volume. The Reserve Banks also project that combined
FedReceipt and FedReceipt Plus volume will increase 57 percent in 2009
(see table 11).
Table 11--Check 21 Volume
------------------------------------------------------------------------
2009
Budgeted Growth
volume from 2008
(millions estimate
of items) (percent)
------------------------------------------------------------------------
FedForward...................................... 7,970 10
FedReceipt/FedReceipt Plus...................... 6,382 57
FedReturn....................................... 71 24
------------------------------------------------------------------------
For 2009, the Reserve Banks will increase forward paper check
collection fees 26 percent and paper return service fees 33 percent.
These increases are designed to encourage the continued rapid adoption
of Check 21 services and to reflect the higher costs associated with
processing and transporting paper checks. For Check 21 services, the
Reserve Banks will increase FedForward fees 3.8 percent for checks
presented electronically and 37 percent for checks presented as
substitute checks. FedReturn fees would increase 26 percent (see table
12). Because the fees to collect and return checks drawn on depository
institutions that accept electronics are lower than on those that
accept paper, the rapid rise in the number of depository institutions
that are accepting presentments and returns electronically are expected
to result in a 10 percent reduction in the effective price to collect a
check electronically and an 8 percent reduction in the effective price
to return a check electronically.
Table 12--2009 Fee Changes
[Percent]
------------------------------------------------------------------------
Fee
Product change
------------------------------------------------------------------------
Paper Check:
Forward collection....................................... 26
Returns.................................................. 33
Check 21\a\:
FedForward (electronic endpoints)........................ 3.8
FedForward (substitute check endpoints).................. 37
FedReturn................................................ 26
------------------------------------------------------------------------
\a\ FedReceipt customers receive a $0.004 discount per check presented
electronically. This discount can be used to offset fees for checks
deposited electronically with the Reserve Banks.
There are a number of risks to the Reserve Banks' ability to
achieve the budgeted 2009 cost recovery. These risks include greater-
than-expected check volume losses to correspondent banks, aggregators,
and direct exchanges, which would result in lower-than-anticipated
revenue. Also, a substantial decline in clearing balances due to the
implementation of interest on reserves could adversely affect cost
recovery. Other risks include higher-than-anticipated pension costs and
significant cost overruns associated with unanticipated problems with
check restructuring or the Reserve Banks' Check 21 platform.
[[Page 65342]]
E. FedACH Service--Table 13 shows the 2007, 2008 estimate, and 2009
budgeted cost-recovery performance for the commercial FedACH service.
Table 13--FedACH Service Pro Forma Cost and Revenue Performance
[$ millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
5 Recovery rate
Year 1 Revenue 2 Total expense 3 Net income 4 Targeted ROE after targeted
(ROE) [1-2] ROE [1/(2+4)]
--------------------------------------------------------------------------------------------------------------------------------------------------------
2007..................................................... 102.0 85.9 16.0 8.8 107.6%
2008 (estimate).......................................... 96.6 87.8 8.8 7.6 101.3%
2009 (budget)............................................ 102.4 97.9 4.5 4.5 100.0%
--------------------------------------------------------------------------------------------------------------------------------------------------------
1. 2008 Estimate--The Reserve Banks estimate that the FedACH
service will recover 101.3 percent of total expenses and targeted ROE,
compared with the budgeted recovery rate of 102.0 percent, due mostly
to lower-than-anticipated NICB. The Reserve Banks expect to recover all
actual and imputed expenses of providing FedACH services and earn a net
income of $8.8 million. Through August, FedACH average daily commercial
origination volume was 8.5 percent higher than during the same period
last year. For full-year 2008, the Reserve Banks estimate that FedACH
commercial originations will grow 11.2 percent, compared with a
budgeted full-year growth rate of 11.7 percent.
2. 2009 Pricing--The Reserve Banks project that the FedACH service
will recover 100.0 percent of total expenses and targeted ROE in 2009.
Total revenue is budgeted to increase $5.8 million from the 2008
estimate, primarily due to the increases in monthly fixed fees and non-
electronic information services, as well as new revenues from the
implementation of value-added services. Total expenses are budgeted to
increase $10.1 million from the 2008 estimate, generally due to costs
associated with development of a new FedACH technology platform and
increased pension costs.
The Reserve Banks expect FedACH commercial origination volume to
grow 7.5 percent in 2009. While the growth rates for recurring ACH
credits and debits have been relatively steady, the growth rates for
payments that have accounted for the bulk of ACH growth in recent years
(for example, electronic check conversion applications, including
checks converted at lockboxes and at the point of sale, and consumer
web-initiated entries) may start to decline. Additionally, the
continued growth of direct exchanges and the competition from EPN will
continue to affect FedACH volume growth.
To address these challenges, Reserve Banks will maintain FedACH
transaction prices at current levels. At the same time, the Reserve
Banks will increase monthly fees for account servicing, FedACH
settlement, and information extract files. Fees for voice response
returns and notifications of change and fees for non-electronic input/
output, which includes paper, CD/DVD, and facsimile exception returns/
notifications, will also rise.
Major risks to meeting the Reserve Banks' budgeted 2009 cost
recovery are lower-than-anticipated volume growth due to competition
from EPN, an increase in direct ACH exchanges, lower-than-expected
NICB, and higher-than-expected pension expenses. In addition,
unanticipated problems with technology upgrades may result in cost
overruns.
F. Fedwire Funds and National Settlement Services--Table 14 shows
the 2007, 2008 estimate, and 2009 budgeted cost recovery performance
for the Fedwire Funds and National Settlement Services.
Table 14--Fedwire Funds and National Settlement Services Pro Forma Cost and Revenue Performance
[$ millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
5 Recovery rate
Year 1 Revenue 2 Total expense 3 Net income 4 Targeted ROE after targeted
(ROE) [1-2] ROE [1/(2+4)]
--------------------------------------------------------------------------------------------------------------------------------------------------------
2007..................................................... 74.5 63.1 11.4 6.3 107.3%
2008 (estimate).......................................... 67.4 61.6 5.8 5.3 100.8%
2009 (budget)............................................ 71.7 69.7 1.9 3.2 98.3%
--------------------------------------------------------------------------------------------------------------------------------------------------------
1. 2008 Estimate--The Reserve Banks estimate that the Fedwire Funds
and National Settlement Services will recover 100.8 percent of total
expenses and targeted ROE, compared with a 2008 budgeted recovery rate
of 105.4 percent. The lower-than-expected recovery rate is primarily
attributable to lower-than-expected NICB and transaction fee revenue.
Through August, online Fedwire funds transfer volume was 2.0 percent
lower than the same period last year. For full-year 2008, the Reserve
Banks estimate that online Fedwire funds transfer volume will decline
1.2 percent, compared to a budgeted growth rate of 2.1 percent. With
respect to the National Settlement Service, the Reserve Banks estimate
that the volume of settlement entries processed during 2008 will
decline 4.4 percent, due to three fewer settlement arrangements
submitting settlement files.
2. 2009 Pricing--The Reserve Banks expect the Fedwire Funds and
National Settlement Services to recover 98.3 percent of total expenses
and targeted ROE in 2009. The Reserve Banks project total revenue to
increase $4.3 million compared with the 2008 estimate. The increase in
revenue is due to the implementation of a monthly participation fee for
the Fedwire Funds Service. Total expenses are budgeted to increase $8.1
million from the 2008 estimate due to higher pension costs, as well as
increases in operating costs. Online volume for the Fedwire Funds
Service for 2009 is budgeted to decline by 1.0 percent, consistent with
2008 volume trends. Online volume for the
[[Page 65343]]
National Settlement Service for 2009 is budgeted to be unchanged.
The Reserve Banks will implement a $60 per month participation fee,
which will only be applied to Fedwire funds participants' routing
numbers that have activity during the billing month. The monthly fee is
intended to better align the revenue stream with the costs of providing
the service, which are predominately fixed. The Reserve Banks will also
increase the surcharge for offline Fedwire funds transfers. With
respect to the National Settlement Service, the Reserve Banks will
increase the basic settlement file fee, as well as the surcharge for an
offline file origination.
G. Fedwire Securities Service--Table 15 shows the 2007, 2008
estimate, and 2009 budgeted cost recovery performance for the Fedwire
Securities Service.\18\
---------------------------------------------------------------------------
\18\ The Reserve Banks provide transfer services for securities
issued by the U.S. Treasury, federal government agencies,
government-sponsored enterprises, and certain international
institutions. The priced component of this service, reflected in
this memorandum, consists of revenues, expenses, and volumes
associated with the transfer of all non-Treasury securities. For
Treasury securities, the U.S. Treasury assesses fees for the
securities transfer component of the service. The Reserve Banks
assess a fee for the funds settlement component of a Treasury
securities transfer; this component is not treated as a priced
service.
Table 15--Fedwire Securities Service Pro Forma Cost and Revenue Performance
[$ millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
5 Recovery rate
Year 1 Revenue 2 Total expense 3 Net income 4 Targeted ROE after targeted
(ROE) [1-2] ROE [1/(2+4)]
--------------------------------------------------------------------------------------------------------------------------------------------------------
2007..................................................... 23.9 21.0 2.9 2.0 103.7%
2008 (estimate).......................................... 23.4 21.2 2.2 1.7 102.1%
2009 (budget)............................................ 24.5 23.4 1.2 1.1 100.5%
--------------------------------------------------------------------------------------------------------------------------------------------------------
1. 2008 Estimate--The Reserve Banks estimate that the Fedwire
Securities Service will recover 102.1 percent of total expenses and
targeted ROE, compared with a 2008 budgeted recovery rate of 104.8
percent. The lower-than-budgeted recovery is primarily attributable to
lower-than-expected NICB. Through August, online securities volume was
19.8 percent higher than during the same period last year. The higher-
than-budgeted volume is driven by recent market volatility. For full-
year 2008, the Reserve Banks estimate that online securities volume
will grow 7.9 percent, although more recent data suggest that full-year
volume growth may be somewhat higher.
2. 2009 Pricing--The Reserve Banks project that the Fedwire
Securities Service will recover 100.5 percent of total expenses and
targeted ROE in 2009. The Reserve Banks project total revenue to
increase by $1.1 million compared with the 2008 estimate. The increase
in revenue is due to fee increases. Total expenses are budgeted to
increase $2.2 million from the 2008 estimate due to higher pension
costs as well as increases in operating costs. Online and offline
securities volumes in 2009 are projected to be unchanged from 2008
estimates.
The Reserve Banks will increase the account maintenance fee by
$5.00, the basic transfer fee by $0.01, and the claims adjustment fee
by $0.30. The increase to the account maintenance fee is intended to
better align the revenue stream with the costs of providing the
service, which are predominately fixed.
H. Electronic Access--The Reserve Banks allocate the costs and
revenues associated with electronic access to the Reserve Banks' priced
services. There are currently three types of electronic access channels
through which customers can access the Reserve Banks' priced services:
FedLine[supreg], FedPhone[supreg], and FedMail[supreg].\19\ For 2009,
the Reserve Banks will increase the fees on nearly all electronic
access packages, as well as the other electronic access options, to
address increases in costs.
---------------------------------------------------------------------------
\19\ FedPhone, FedMail, and FedLine are registered service marks
of the Reserve Banks. These connections may also be used to access
non-priced services provided by the Reserve Banks. FedPhone is a
free access option.
---------------------------------------------------------------------------
The Reserve Banks offer nine electronic access packages that are
supplemented by a number of premium (or a la carte) access and
accounting information options. The first package provides access to
information services through FedMail Email. The next two packages are
FedLine Web packages, with three or five subscribers, that offer access
to basic information and check services. The next two packages are
FedLine Advantage packages, with three or five subscribers, that expand
upon the FedLine Web packages and offer access to FedACH and Fedwire
Services. The next package is FedLine Command, which offers an
unattended connection to FedACH, Fedwire Securities statement services,
and most accounting information services. The last three packages are
FedLine Direct packages, which allow for unattended connections with
three different connection speeds to FedACH, Fedwire Funds and
Securities transactional and information services, and most accounting
information services.
II. Analysis of Competitive Effect
All operational and legal changes considered by the Board that have
a substantial effect on payments system participants are subject to the
competitive impact analysis described in the March 1990 policy, ``The
Federal Reserve in the Payments System.'' \20\ Under this policy, the
Board assesses whether the changes would have a direct and material
adverse effect on the ability of other service providers to compete
effectively with the Federal Reserve in providing similar services
because of differing legal powers or constraints or because of a
dominant market position deriving from such legal differences. If the
changes create such an effect, the Board must further evaluate the
changes to assess whether the associated benefits--such as
contributions to payment system efficiency, payment system integrity,
or other Board objectives--can be achieved while minimizing the adverse
effect on competition.
---------------------------------------------------------------------------
\20\ Federal Reserve Regulatory Service (FRRS) 9-1558.
---------------------------------------------------------------------------
The Board believes that the 2009 fees will result in a projected
net income below the targeted ROE primarily due to shortfalls in the
check service. Given the ongoing major structural transition in the
nation's check clearing system, it is likely that other market
participants are also not achieving an ROE equivalent to that targeted
by the Reserve Banks. Therefore, while it is possible, it is not likely
that the Reserve Banks' failure to
[[Page 65344]]
achieve the targeted ROE would adversely affect the ability of other
service providers to compete with the Reserve Banks. In addition, any
potential adverse effect on competing service providers would not be
the result of differing legal powers or a dominant market position
deriving from such legal differences.
The Reserve Banks have taken steps to maximize their 2009 cost
recovery. Specifically, they increased fees for paper check and Check
21 services. The Reserve Banks believe that more significant increases
to the fees for Check 21 services will slow the transition to a full
electronic check processing environment nationwide and, at the same
time, result in lower check net revenue due to volume losses. Given the
fee increases and the check market environment, the Board believes that
additional fee increases may hinder the achievement of the Reserve
Banks' objective of improving the efficiency of the nation's check-
collection system and may not materially improve cost recovery.
BILLING CODE 6210-01-P
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BILLING CODE 6210-01-C
[[Page 65351]]
By order of the Board of Governor of the Federal Reserve System,
October 28, 2008.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. E8-26101 Filed 10-31-08; 8:45 am]
BILLING CODE 6210-01-P