Federal Reserve Bank Services, 57468-57486 [E9-26743]

Agencies

• FEDERAL RESERVE SYSTEM

[Federal Register Volume 74, Number 214 (Friday, November 6, 2009)]
[Notices]
[Pages 57468-57486]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-26743]


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FEDERAL RESERVE SYSTEM

[Docket No. OP-1375]


Federal Reserve Bank Services

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice.

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SUMMARY: The Board of Governors of the Federal Reserve System (Board) 
has approved the private sector adjustment factor (PSAF) for 2010 of 
$50.2 million and the 2010 fee schedules for Federal Reserve priced 
services and electronic access. These actions were taken in

[[Page 57469]]

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 4, 2010.

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 2010 fee schedules 
for the check service are available from the Board, the Federal Reserve 
Banks, or the Reserve Banks' financial services Web site at https://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, 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 1999 through 2008, the Reserve Banks recovered 98.7 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 
Statement of Financial Accounting Standards (SFAS) No. 158: 
Employers' Accounting for Defined Benefit Pension and Other 
Postretirement Plans [Accounting Standards Codification (ASC) 715 
Compensation--Retirement Benefits], 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 92.0 
percent for the ten-year period. This measure of long-run cost 
recovery is also published in the Board's Anneal Report.
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    Table 1 summarizes 2008, 2009 estimated, and 2010 budgeted cost-
recovery rates for all priced services. Cost recovery is estimated to 
be 92.0 percent in 2009 and budgeted to be 96.8 percent in 2010. The 
check service accounts for approximately 60 percent of the total cost 
of priced services and thus significantly influences the aggregate 
cost-recovery rate.

                   Table 1--Aggregate Priced Services Pro Forma Cost and Revenue Performance a
                                                  [$ millions]
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                                                                                                         5 e
                                                                              3  Net                   Recovery
                                                     1 b       2 c  Total     income        4 d       rate after
                      Year                         Revenue      expense     (ROE) [1 -    Targeted     targeted
                                                                                2]          ROE        ROE [1/
                                                                                                        (2+4)]
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2008...........................................        873.8        820.4         53.4         66.5        98.5%
2009 (estimate)................................        679.8        718.0        -38.3         21.1        92.0%
2010 (budget)..................................        565.8        565.7          0.1         18.9        96.8%
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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 pension plans under FAS 158 [ASC 715]
  are also included.
d Targeted ROE is the after-tax ROE included in the PSAF. For the 2009 estimate, the targeted ROE reflects
  average actual clearing balance levels through July 2009.
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 [ASC 715]. 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 1999 to 2008, 2008, 2009 budget, 2009 estimate, 
and 2010 budget by priced service. The check service is the only 
service with a ten-year cost recovery rate below 100 percent. The 
Reserve Banks have been aggressively reducing costs in response to the 
banking industry's transition to an end-to-end electronic check 
processing environment and declining check volumes nationwide. Since 
2003, the Reserve Banks have reduced the number of offices at which 
they process paper checks from forty-five to four and plan to process 
paper checks at only one office by early 2010. In addition, the Reserve 
Banks have significantly reduced check service staff as well as their 
physical check transportation network. The Reserve Banks believe that 
their ongoing cost reduction efforts should enable the check service to 
return to full cost recovery within the next several years.

[[Page 57470]]



                                     Table 2--Priced Services Cost Recovery
                                                    [Percent]
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                                                                               2009         2009         2010
                 Priced service                   1999-2008       2008        Budget      Estimate     Budget a
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All services...................................         98.7         98.5         94.3         92.0         96.8
Check..........................................         97.6         97.8         92.3         92.0         94.5
FedACH.........................................        104.6        101.5        100.3         92.0        100.0
Fedwire Funds and NSS..........................        103.0        100.4         98.6         90.9        100.4
Fedwire Securities.............................        102.4        102.5        100.8         94.7        103.3
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a 2010 budget figures reflect the latest data from the Reserve Banks. The Reserve Banks will transmit final
  budget data to the Board in November 2009, for Board consideration in December 2009.

    1. 2009 Estimated Performance--The Reserve Banks estimate that they 
will recover 92.0 percent of the costs of providing priced services in 
2009, including imputed expenses and targeted ROE, compared with a 
budgeted recovery rate of 94.3 percent, as shown in table 2. The 
Reserve Banks expect to recover 95 percent of actual expenses, 
incurring an overall net loss of $38.3 million, which is $59.4 million 
less than the budgeted net income of $21.1 million. This shortfall is 
largely driven by lower-than-expected net income from clearing balances 
(NICB) and increased pension costs.\2\
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    \2\ The 2009 estimated NICB was projected to be $48.8 million 
and is now estimated at $14.0 million. The decrease in NICB is due 
to decreases in the level of clearing balances and in the imputed 
investment rate in 2009. The 2009 estimated pension costs are $53.1 
million higher than budgeted.
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    2. 2010 Private Sector Adjustment Factor--The 2010 PSAF for Reserve 
Bank priced services is $50.2 million. This amount represents a 
decrease of $2.6 million from the estimated 2009 revised PSAF of $52.8 
million. This reduction is primarily the result of a decrease in the 
cost of equity, which is due to both a lower required return on equity 
and a lower amount of imputed equity.\3\
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    \3\ In October 2008, the Board approved a budgeted 2009 PSAF of 
$62.2 million, which was based on the July 2008 clearing balance 
level of $7,361.6 million. Since that time, clearing balances have 
declined, which affects 2009 PSAF and NICB. The 2009 estimated PSAF 
of $52.8 million, which is based on actual average clearing balances 
of $4,560.1 million through July 2009, reflects the lower equity 
costs resulting from the decrease in clearing balances. The 2009 
final PSAF will be adjusted to reflect average clearing balance 
levels through the end of 2009.
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    3. 2010 Projected Performance--The Reserve Banks project that the 
FedACH[reg] service, Fedwire[reg] Funds and National Settlement 
Services, and Fedwire[reg] Securities Service will fully recover their 
costs in 2010 and that the check service will not recover its costs.\4\ 
Overall, the Reserve Banks project a priced services cost-recovery rate 
of 96.8 percent in 2010, with a net income of $0.1 million.\5\ The 
projected priced services' cost recovery is heavily influenced by the 
check service's underrecovery. This underrecovery is driven by a 
projected reduction in check deposit volume and a projected decline in 
the effective price of Check 21 services, resulting in lower revenue 
for the service.\6\
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    \4\ FedACH and Fedwire are registered servicemarks of the 
Reserve Banks.
    \5\ The Reserve Banks expect to recover all of their actual and 
imputed expenses in 2010, and earn a small profit.
    \6\ The decline in the effective price of Check 21 services will 
result primarily from an increase in the proportion of checks 
presented to electronic endpoints, which incur relatively lower fees 
than checks presented to paper endpoints.
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    The primary risks to the Reserve Banks' ability to achieve their 
targeted cost recovery rates are (1) unanticipated check volume and 
revenue reductions, (2) the potential for cost overruns or delays with 
technological upgrades, and (3) further substantial declines in 
clearing balances resulting in significant changes to the projected 
PSAF and NICB. Although the check service will not achieve full cost 
recovery in 2010, the Reserve Banks believe that they will return to 
full cost recovery within the next several years by aggressively 
managing operating costs, taking advantage of efficiencies gained from 
technological upgrades, and increasing value-added product revenue.
    4. 2010 Pricing--The following summarizes the Reserve Banks' 
changes in fee schedules for priced services in 2010:

Check

     The Reserve Banks will increase FedForward fees 6 percent 
for checks presented electronically and 17 percent for checks presented 
as substitute checks.\7\ The average fee paid by FedForward depositors 
will decline by 23 percent over the average 2009 fee as the number of 
depository institutions that accept their presentments electronically 
increases. The Reserve Banks will also raise FedReturn fees 23 percent 
for electronic endpoints and almost 46 percent for substitute check 
endpoints.\8\ The average fee paid by depository institutions using 
FedReturn will rise only 7 percent as the number of institutions that 
accept their returns electronically increases.\9\
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    \7\ FedForward is the electronic forward check collection 
product.
    \8\ FedReturn is the electronic check return product.
    \9\ The Reserve Bank's Check 21 service fees include separate 
and substantially different fees for the delivery of checks to 
electronic endpoints and substitute check endpoints. Therefore, the 
average effective fee paid by depository institutions that use Check 
21 services is dependent on the proportion of institutions that 
accept checks electronically. Although the Reserve Banks are raising 
FedForward fees for the presentment of checks to both electronic and 
substitute check endpoints, the effective fee paid by depository 
institutions will decline by 23 percent in 2010 due to the expected 
increase in the number of institutions that accept checks 
electronically. The Reserve Banks are also raising FedReturn fees to 
both electronic and substitute check endpoints. However, because of 
the relatively larger changes for the FedReturn fees, the effective 
fee paid by depository institutions will rise by 7 percent in 2010.
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     The Reserve Banks will increase traditional paper forward 
collection fees 47 percent and traditional paper return service fees 33 
percent.
     With the 2010 fees, the price index for the total check 
service will have increased 83 percent since 2000. In comparison, since 
2005, the first full year in which the Reserve Banks offered Check 21 
services, the price index for Check 21 services will have decreased 57 
percent.

FedACH

     The Reserve Banks will introduce a $25 minimum monthly fee 
for an originating depository financial institution (ODFI) that 
originates forward items and the revenue associated with origination is 
less than $25. Additionally, the Reserve Banks will introduce a $15 
minimum monthly fee for a receiving depository financial institution 
(RDFI) that does not originate forward transactions and that has 
revenue less than $15 associated with receipts.
     The Reserve Banks will increase the monthly fees for 
FedACH settlement

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from $37 to $45 per routing number and for information extract files 
from $35 to $50 per routing number. In addition, Reserve Banks will 
raise the addenda record fees for originations and receipts 0.3 mills 
and introduce a $0.15 fee for the use of automated notification of 
change functionality.
     The Reserve Banks will realign the volume-based pricing 
for receipts by implementing a per-item fee of 2.5 mills for items up 
to 1 million each month, a per-item fee of 1.8 mills for items over 1 
million and up to 25 million each month, and a per-item fee of 1.6 
mills for all items when volume is greater than 25 million each month.
     With the 2010 fees, the price index for the FedACH service 
will have decreased 36 percent since 2000.

Fedwire Funds and National Settlement

     The Reserve Banks will raise the monthly participation fee 
for Fedwire Funds customers with activity in that month from $60 to 
$75. In addition, the Reserve Banks will increase the online transfer 
fee by $0.04 in the highest-priced tier, $0.02 in the mid-priced tier, 
and $0.01 in the lowest-priced tier and increase the threshold to 
qualify for volume-based discounts.
     The Reserve Banks will increase the National Settlement 
Service's special settlement arrangement fee from $100 to $150.
     With the 2010 fees, the price index for the Fedwire Funds 
and National Settlement Services will have increased 12 percent since 
2000.

Fedwire Securities

     The Reserve Banks will retain fees at their current 
levels.
     With the 2010 fees, the price index for the Fedwire 
Securities Service will have decreased 23 percent since 2000.
     5. 2010 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 2009, the price index for all Reserve Bank 
priced services is projected to increase 1.3 percent in 2010. The price 
index for the FedACH service, Fedwire Funds and National Settlement 
Services, and Fedwire Securities Service is projected to increase 14 
percent. The price index for Check 21 services is projected to decrease 
16 percent, reflecting the rapid increase in the number of depository 
institutions accepting checks electronically and the resulting 
reductions in the effective prices paid to collect and return checks 
using Check 21 services. The price index for all other check services 
is projected to increase 66 percent. For the period 2000 to 2010, the 
price index for all priced services is expected to increase 63 percent. 
In comparison, for the period 2000 to 2008 the GDP price index 
increased 22 percent.
[GRAPHIC] [TIFF OMITTED] TN06NO09.000


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    B. Private Sector Adjustment Factor--In March 2009, the Board 
requested comment on proposed changes to the methodology for 
calculating the PSAF.\10\ The Board proposed replacing the current 
correspondent bank model with a ``publicly traded firm model' in which 
the key components used to determine the priced-services balance sheet 
and the PSAF costs would be based on data for the market of U.S. 
publicly traded firms. Specifically, these components include the 
capitalization ratio used to determine financing on the priced-services 
balance sheet and the effective tax rate, return on equity rate, and 
debt financing rates. The proposed changes were prompted by the 
implementation of the payment of interest on reserve (IOR) balances 
held by depository institutions (DIs) at the Reserve Banks and the 
anticipated consequent decline in balances held by DIs at Reserve Banks 
for clearing priced-services transactions (clearing balances).
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    \10\ 74 FR 15481-15491 (Apr. 6, 2009).
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    Since the implementation of IOR, clearing balances have not 
declined as rapidly or significantly as originally anticipated. Between 
the implementation of IOR in October 2008 and January 2009, the total 
level of clearing balances held by DIs decreased approximately $2 
billion, from $6.5 billion to $4.5 billion. During the first half of 
2009, clearing balance levels were fairly flat at approximately $4.5 
billion. Recently, clearing balances have begun to moderately decline 
again, with an average balance of $4.0 billion in September 2009. As a 
result of the relative stability in clearing balance behavior and the 
continued significant level of balances, the Board will continue to use 
the correspondent bank model, with two minor modifications, for the 
2010 PSAF. First, given the lower level of clearing balances, the Board 
will reduce the level of core clearing balances.\11\ Second, in the 
event that debt is required, the Board will use market-based rather 
than bank holding company (BHC)-based debt rates. Both of these changes 
are outlined below.
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    \11\ Core clearing balances are considered the portion of 
clearing balances that has remained stable over time and are used to 
fund long-term priced services assets as needed.
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    The Board is currently analyzing further the proposed publicly 
traded firm model and an alternate model suggested by several 
commenters based on a peer group of publicly traded payments 
processors.
    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 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. 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. A portion of clearing 
balances is used as a funding source for short-term priced-services 
assets. Long-term assets are partially funded from core clearing 
balances.
    Because of the notable reduction in clearing balances since the 
implementation of IOR, the Board will adjust the level of core clearing 
balances from $4 billion to $1 billion. In addition, the Board will 
base the imputed debt rate on a market-based average debt rate for any 
imputed debt, if necessary, rather than an average BHC debt rate.\12\ 
As compared to an average BHC rate, a market-based debt rate is easier 
to calculate and more transparent. The Board will use the average of 
the 3-month AA and A2/P2 nonfinancial commercial paper rates for short-
term debt and the Merrill Lynch Corporate and High Yield Bond Index 
yield for long-term debt. The Board requested comment on this proposed 
change to the correspondent bank model. No comments were received that 
addressed this proposal.
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    \12\ This change will likely have little practical effect on the 
PSAF because the funding need on the priced services balance sheet 
historically has been a fraction of the available clearing balances. 
Given current priced services assets and liabilities, the Board 
anticipates that even with sizable decreases in clearing balances 
through 2010, imputed debt will not be necessary.
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    Imputed equity meets the FDIC requirements for a well-capitalized 
institution for insurance premium purposes and represents the market 
capitalization, or shareholder value, for Reserve Bank priced 
services.\13\ 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.
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    \13\ 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 member banks of the Federal Reserve System, but rather to the 
implied shareholders that would have an ownership interest if the 
Reserve Banks' priced services were provided by a private firm.
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    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 the priced 
services' imputed 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 that 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 of Governors and imputed sales

[[Page 57473]]

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.\14\ 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.\15\
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    \14\ 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.
    \15\ 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 2010.
    NICB is projected to be $14.5 million for 2010. This result uses 
an investment rate equal to a constant spread of 29 basis points 
over the three-month Treasury bill rate, applied to the clearing 
balance levels used in the 2010 pricing process. The 2009 NICB 
estimate is $14.0 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 2010 projected NICB are based on July 2009 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.
    Because the Reserve Banks now pay interest on reserve balances, a 
return on the imputed reserve requirement based on the level of 
clearing balances on the pro forma balance sheet is also projected.\16\ 
Similar to the NICB calculation, the interest income on the imputed 
reserve requirement calculation is based on July 2009 clearing balance 
and rate information. In addition, because all excess balances held at 
the Reserve Banks receive explicit interest following the 
implementation of IOR, the priced services no longer impute investment 
income on any portion of excess balances. Consequently, the clearing 
balances on the priced-services pro forma balance sheet do not reflect 
excess clearing balances and only consist of contracted clearing 
balances held.
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    \16\ The imputed interest income on the imputed reserve 
requirement is projected to be $1.5 million for 2010. The projected 
2010 rate for imputed interest income on the reserve requirement is 
based on the July 2009 rate of 0.25 percent.
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    2. Calculating Cost Recovery--The PSAF and NICB are incorporated 
into the projected and actual annual cost recovery calculations for 
Reserve Bank priced services. In the fall of each year, the Board 
projects the PSAF for the following year using July clearing balance 
and rate data during the process of establishing priced services fees. 
When calculating actual cost recovery for the priced services at the 
end of each year, the Board historically has used the projected PSAF 
derived during the price-setting process with only minimal adjustments 
for actual rates or balance levels.\17\ For 2009, in light of the 
uncertainty about the long-term effect that IOR would have on the level 
of clearing balances, the Board will adjust the PSAF used in the actual 
cost-recovery calculation to reflect the actual clearing balance levels 
maintained throughout 2009. NICB is also projected in the fall of each 
year using July data and is recalculated to reflect actual interest 
rates and clearing balance levels throughout the year when calculating 
actual priced services cost recovery.
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    \17\ The largest portion of the PSAF, the target ROE, 
historically has been fixed. Imputed sales tax, income tax, and the 
FDIC assessment are recalculated at the end of each year to adjust 
for actual expenditures, net income, and clearing balance levels.
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    3. Analysis of the 2010 PSAF--The 2010 PSAF for Reserve Bank priced 
services is $50.2 million. This amount represents a decrease of $2.6 
million from the estimated 2009 revised PSAF of $52.8 million and a 
decrease of $12.0 million from the 2009 budgeted PSAF of $62.2 million. 
The decrease in the 2010 PSAF is primarily due to a reduction in the 
level of imputed equity and in the targeted ROE rate provided by the 
CAPM, partially offset by an increase in the imputed FDIC assessment.
    Estimated 2010 Federal Reserve priced-services assets, reflected in 
table 3, have decreased $1,780.7 million, mainly due to a decline in 
imputed investments in marketable securities of $1,634.3 million. This 
reduction stems from the decline in clearing balances held by DIs at 
Reserve Banks following the implementation of IOR in October 2008.
    The priced-services balance sheet includes projected clearing 
balances of $4,831.5 million, which represent a decrease of $2,530.1 
million from the amount of clearing balances on the balance sheet for 
the budgeted 2009 PSAF. Because of the continued uncertainty regarding 
the level of clearing balances in an IOR environment, the actual PSAF 
costs used in cost-recovery calculations will continue to be based on 
the actual levels of clearing balances held throughout 2010.\18\ To the 
extent that clearing balances fall below the current level of core 
clearing balances, debt would be imputed.
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    \18\ To the extent that the interest rates on excess balances 
are higher than the earnings credit rate, clearing balances will 
likely continue to decline. 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, which at current rates is negligible. The Board is planning to 
evaluate DIs' views as to any continued benefit to retaining the 
clearing balance program.
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    Credit float, which represents the difference between items in 
process of collection and deferred credit items, increased from $617.8 
million in 2009 to $1,200.0 million in 2010.\19\ The increase is 
primarily a result of new check products introduced in 2009.
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    \19\ Credit float occurs when the Reserve Banks present items 
for collection to the paying bank prior to providing credit to the 
depositing bank.
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    As previously mentioned, clearing balances are available as a 
funding source for priced-services assets. As shown in table 4, in 
2010, $10.2 million in clearing balances is used as a funding source 
for short-term assets. Because of moderate decreases in several long-
term assets in 2010 ($154.4 million in pension assets, $86.9 million in 
Bank premises, and $30.7 million in furniture and equipment), long-term 
liabilities exceed long-term assets by $46.5 million. Consequently, no 
core clearing balances are used to fund long-term assets and the excess 
$46.5 million in equity capital is included in the NICB projection 
calculation as additional imputed investments. This represents a 
decrease of $72.3 million in clearing balances used to fund priced-
services assets in 2010 over the level of clearing balances used to 
fund assets for the 2009 PSAF. 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 1.3 percentage points, while 
an increase of 200 basis points in

[[Page 57474]]

interest rates decreases cost recovery by 1.3 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 2010 PSAF 
is $369.4 million, a decrease of $89.0 million from the imputed equity 
for 2009. In accordance with FAS 158 [ASC 715], this amount includes an 
accumulated other comprehensive loss of $407.7 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 5.0 percent of total assets, and the ratio 
of capital to risk-weighted assets is 10.0 percent.\20\ The Reserve 
Banks imputed an FDIC assessment for the priced services based on the 
FDIC's proposed 2010 assessment rates and the level of clearing 
balances held at Reserve Banks. For 2010, the FDIC assessment is 
imputed at $9.6 million, compared with a net FDIC assessment of $0.9 
million in 2009. The increase is due to the exhaustion of the one-time 
FDIC credit that was used in prior years to offset a majority of the 
estimated FDIC assessment.\21\ The imputed FDIC assessment also 
reflects the increased rates and new assessment calculation methodology 
from the FDIC's most recent proposed rule, which resulted in a prepaid 
FDIC asset of $24.6 million on the priced-services balance sheet.\22\
---------------------------------------------------------------------------

    \20\ In December 2006, 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 [ASC 715]-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.
    \21\ Previously, per FDIC rules, any remaining portion of the 
one-time assessment credit could offset up to 90 percent of the 
assessment amount. 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. No credit 
remained in 2010 to offset any portion of the $9.6 million 
assessment.
    \22\ For information on the proposed 2009 FDIC assessment rates, 
see https://www.fdic.gov/news/news/press/2009/pr09178.html.
    \23\ The 2009 PSAF values in tables 3, 4 and 6 reflect the 
budgeted 2009 PSAF of $62.2 million approved by the Board in October 
2008.
    \24\ Represents float that is directly estimated at the service 
level.
    \25\ Includes the allocation of Board of Governors assets to 
priced services of $0.9 million for 2010 and $1.1 million for 2009.
    \26\ No debt is imputed because clearing balances are a funding 
source.
    \27\ Includes an accumulated other comprehensive loss of $322.6 
million for 2009 and $407.7 million for 2010, which reflect the 
ongoing amortization of the accumulated loss in accordance with FAS 
158 [ASC 715]. Future gains or losses, and their effects on the pro 
forma balance sheet, cannot be projected.
---------------------------------------------------------------------------

    Table 6 shows the imputed PSAF elements, including the pretax ROE 
and other required PSAF costs, for 2009 and 2010. The $18.0 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 $7.3 million in 2009 to $5.2 million in 2010. The 
effective income tax rate used in 2010 increased to 33.1 percent from 
32.6 percent in 2009. The priced-services portion of the Board's 
expenses decreased $0.6 million from $7.8 million in 2009 to $7.2 
million in 2010.

            Table 3--Comparison of Pro Forma Balance Sheets for Federal Reserve Priced Services \23\
                                [Millions of dollars--projected average for year]
----------------------------------------------------------------------------------------------------------------
                                                                       2010            2009           Change
----------------------------------------------------------------------------------------------------------------
Short-term assets:
    Imputed reserve requirement on clearing balances............          $603.1          $797.9        $(194.8)
    Receivables.................................................            45.9            53.6           (7.7)
    Materials and supplies......................................             0.9             1.9           (1.0)
    Prepaid expenses............................................            23.2            26.3           (3.1)
    Items in process of collection \24\.........................           520.0           236.4           283.6
                                                                 -----------------------------------------------
        Total short-term assets.................................         1,193.1         1,116.1            77.0
Imputed investments.............................................        $5,464.7        $7,099.0      $(1,634.3)
Long-term assets:
    Premises \25\...............................................          $235.4          $322.3         $(86.9)
    Furniture and equipment.....................................            62.1            92.8          (30.7)
    Leasehold improvements and long-term prepayments............            60.3            83.0          (22.7)
    Prepaid pension costs.......................................           148.9           303.3         (154.4)
    Prepaid FDIC asset..........................................            24.6             0.0            24.6
    Deferred tax asset..........................................           198.9           152.2            46.7
                                                                 -----------------------------------------------
        Total long-term assets..................................           730.2           953.6         (223.4)
                                                                 -----------------------------------------------
            Total assets........................................        $7,388.0        $9,168.7      $(1,780.7)
                                                                 ===============================================
Short-term liabilities \26\
    Clearing balances...........................................        $4,831.5        $7,361.6      $(2,530.1)
    Deferred credit items \24\..................................         1,720.0           854.2           865.8
    Short-term payables.........................................            59.8            84.3          (24.5)
                                                                 -----------------------------------------------
        Total short-term liabilities............................         6,611.3         8,300.1       (1,688.8)
Long-term liabilities \26\
    Postemployment/postretirement benefits liability............          $407.3          $410.2          $(2.9)
                                                                 -----------------------------------------------
        Total liabilities.......................................        $7,018.6        $8,710.3      $(1,691.7)
Equity \27\.....................................................           369.4           458.4          (89.0)
                                                                 -----------------------------------------------
        Total liabilities and equity............................        $7,388.0        $9,168.7      $(1,780.7)
----------------------------------------------------------------------------------------------------------------

BILLING CODE 6210-01-P

[[Page 57475]]

     
---------------------------------------------------------------------------

    \28\ Clearing balances shown in table 3 are available for 
financing priced-services assets. Using these balances reduces the 
amount available for investment in the NICB calculation. Long-term 
assets are financed with long-term liabilities, equity, and core 
clearing balances; a total of $4 billion and $1 billion in clearing 
balances is available for this purpose in 2009 and 2010, 
respectively. Short-term assets are financed with short-term 
payables and clearing balances not used to finance long-term assets. 
No short- or long-term debt is imputed.
    \29\ See table 6 for calculation of required imputed equity 
amount.
[GRAPHIC] [TIFF OMITTED] TN06NO09.001


[[Page 57476]]



                              Table 5--2010 Interest Rate Sensitivity Analysis \30\
                                              [millions of dollars]
----------------------------------------------------------------------------------------------------------------
                                                                                       Rate
                                                                  Rate sensitive    insensitive        Total
----------------------------------------------------------------------------------------------------------------
Assets:
    Imputed reserve requirement on clearing balances............  ..............          $603.1          $603.1
    Imputed investments.........................................        $5,464.7  ..............         5,464.7
    Receivables.................................................  ..............            45.9            45.9
    Materials and supplies......................................  ..............             0.9             0.9
    Prepaid expenses............................................  ..............            23.2            23.2
    Items in process of collection \31\.........................       (1,200.0)         1,720.0           520.0
    Long-term assets............................................  ..............           730.2           730.2
                                                                 -----------------------------------------------
        Total assets............................................        $4,264.7        $3,123.3        $7,388.0
                                                                 ===============================================
Liabilities:
    Clearing balances...........................................        $4,831.5  ..............        $4,831.5
    Deferred credit items.......................................  ..............        $1,720.0         1,720.0
    Short-term payables.........................................  ..............            59.8            59.8
    Long-term liabilities.......................................  ..............           407.3           407.3
                                                                 -----------------------------------------------
        Total liabilities.......................................        $4,831.5        $2,187.1        $7,018.6
�����������������������������������������������������������������===============================================


 
                                                   200 basis   200 basis
                                                     point       point
               Rate change results                 decrease    increase
                                                   in  rates   in  rates
------------------------------------------------------------------------
Asset yield ($4,264.7 x rate change)............     $(85.3)       $85.3
Liability cost ($4,831.5 x rate change).........      (96.6)        96.6
                                                 -----------------------
        Effect of 200 basis point change........       $11.3     $(11.3)
                                                 =======================
2010 budgeted revenue...........................      $565.8      $565.8
Effect of change................................        11.3      (11.3)
                                                 -----------------------
        Revenue adjusted for effect of interest       $577.1      $554.5
         rate change............................
                                                 =======================
2010 budgeted total expenses....................      $543.7      $543.7
2010 budgeted PSAF (net of $9.3 tax effect) \32\        40.9        40.9
Tax effect of interest rate change ($ change x           3.8       (3.8)
 33.1%).........................................
                                                 -----------------------
        Total recovery amounts..................      $588.4      $580.8
                                                 =======================
Recovery rate before interest rate change.......       96.8%       96.8%
Recovery rate after interest rate change........       98.1%       95.5%
Effect of interest rate change on cost recovery         1.3%      (1.3)%
 \33\...........................................
------------------------------------------------------------------------

BILLING CODE 6210-01-P

     
---------------------------------------------------------------------------

    \30\ The interest rate sensitivity analysis evaluates the level 
of interest rate risk presented by the difference between rate-
sensitive assets and rate-sensitive liabilities. The analysis 
reviews the ratio-sensitive assets to rate-sensitive liabilities and 
the effect on cost recovery of a change in interest rates of up to 
200 basis points.
    \31\ The amount designated as rate-sensitive represents items 
collected prior to providing credit according to established 
availability schedules.
    \32\ The tax effect is due to the projected under-recovery of 
total actual costs, imputed costs, and targeted ROE.
    \33\ The effect of a potential change in rates is less than a 
two percentage point change in cost recovery; therefore, no long-
term debt is imputed for 2010.

---------------------------------------------------------------------------

[[Page 57477]]

[GRAPHIC] [TIFF OMITTED] TN06NO09.002

     
---------------------------------------------------------------------------

    \34\ No short-term is imputed because clearing balances are a 
fundign source for those assets that are not financed with short-
term payables.
    \35\ No long-term debt is imputed because core clearing balances 
are a funding source.
    \36\ Based on the regulatory requirements for a well-capitalized 
institution for the purpose of assessing insurance premiums.
    \37\ The 2010 ROE is equal to a risk-free rate plus a risk 
premium (beta * market risk premium). The 2010 after-tax CAPM ROE is 
calculated as 0.18% + (1 * 4.93%) = 5.11%. Using a tax rate of 
33.1%, the after-tax ROE is converted into a pretax ROE, which 
results in a pretax ROE of (5.11% / (1-33.1%)) = 7.6%.
    \38\ System 2010 budgeted priced services expenses less shipping 
and float are $521.2 million.

[[Page 57478]]



Table 7--Computation of 2010 Capital Adequacy for Federal Reserve Priced
                                Services
                          [Millions of dollars]
------------------------------------------------------------------------
                                                               Weighted
                                      Assets    Risk weight     assets
------------------------------------------------------------------------
Imputed reserve requirement on          $603.1          0.0         $0.0
 clearing balances...............
Imputed investments:
    3-month Treasury bills            $2,317.5          0.0         $0.0
     \39,40\.....................
    Commercial paper (1-month)         2,746.3          1.0      2,746.3
     \39\........................
    GNMA mutual fund \41\........        400.9          0.2         80.2
                                  --------------------------------------
        Total imputed investments      5,464.7  ...........      2,826.5
Receivables......................        $45.9          0.2         $9.2
Materials and supplies...........          0.9          1.0          0.9
Prepaid expenses.................         23.2          1.0         23.2
Items in process of collection...        520.0          0.2        104.0
Premises.........................        235.4          1.0        235.4
Furniture and equipment..........         62.1          1.0         62.1
Leasehold improvements and long-          60.3          1.0         60.3
 term prepayments................
Prepaid pension costs............        148.9          1.0        148.9
Prepaid FDIC asset...............         24.6          1.0         24.6
Deferred tax asset...............        198.9          1.0        198.9
                                  --------------------------------------
        Total....................     $7,388.0  ...........     $3,694.0
                                  ======================================
Imputed equity for 2010..........       $369.4
Capital to risk-weighted assets..        10.0%
Capital to total assets..........         5.0%
------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \39\ The imputed investments are assumed to be similar to those 
for which rates are available on teh Federal Reserve's H.15 
statistical release, which can be located at https://www.federalreserve.gov/releases/h15/data.htm.
    \40\ Includes estimated amounts arising from the collection of 
items prior to providing credit according to established 
availability schedules. These amounts are assumed to be invested in 
a short-term Treasury security.
    \41\ The imputed mutual fund investment is based on Vanguard's 
GNMA Fund Investor Shares fund, which was chosen based on the 
investment strategies articulated in its prospectuses. The fund 
returns can be located at https://personal.vanguard.com/VGApp/hnw/FundsByType.
---------------------------------------------------------------------------

    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.\42\
---------------------------------------------------------------------------

    \42\ 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.
---------------------------------------------------------------------------

    D. Check Service--Table 8 shows the 2008, 2009 estimated, and 2010 
budgeted cost recovery performance for the commercial check service.

                          Table 8--Check Service Pro Forma Cost and Revenue Performance
                                                  [$ millions]
----------------------------------------------------------------------------------------------------------------
                                                                                                      5 Recovery
                                                                              3 Net                   rate after
                      Year                        1 Revenue     2 Total       income     4 Targeted    targeted
                                                                expense    (ROE) [1-2]      ROE        ROE [1/
                                                                                                        (2+4)]
----------------------------------------------------------------------------------------------------------------
2008...........................................        683.6        647.1         36.5         51.9        97.8%
2009 (estimate)................................        495.8        524.0        -28.2         15.1        92.0%
2010 (budget)..................................        345.4        353.7         -8.4         11.6        94.5%
----------------------------------------------------------------------------------------------------------------

    1. 2009 Estimate--Through August 2009, the check service has 
recovered 95.3 percent of total costs, including imputed expenses, and 
targeted ROE. For the full year, the Reserve Banks do not expect to 
recover fully their costs of providing check services. Specifically, 
the Reserve Banks estimate that the check service will recover 92.0 
percent of its total costs for the full year compared with the budgeted 
2009 recovery rate of 92.3 percent, with an operating loss of $28.2 
million (see table 8).\43\ The lower-than-budgeted recovery rate is 
driven primarily by lower-than-anticipated NICB and higher-than-
expected pension costs, which are offset largely by higher-than-
expected product

[[Page 57479]]

revenue and lower-than-expected operating costs.
---------------------------------------------------------------------------

    \43\ The Reserve Banks expect to recover 95 percent of their 
actual expenses in 2009.
---------------------------------------------------------------------------

    The general decline in the number of checks written continues to 
influence the decline in checks collected by the Reserve Banks, 
although the estimated decline for 2009 is somewhat less than the 
budgeted assumption. For full-year 2009, the Reserve Banks estimate 
that their total forward check collection volume will decline nearly 9 
percent compared with a budgeted decline of 12 percent.\44\ The 
proportion of checks deposited and presented electronically has grown 
steadily in 2009 (see table 9). The Reserve Banks expect that year-end 
2009 FedForward deposit and FedReceipt presentment penetration rates 
will reach 99 percent and 97 percent, respectively. The Reserve Banks 
also expect that year-end 2009 FedReturn and FedReceipt Return 
penetration rates will reach 97 percent and 72 percent, respectively. 
FedReturn and FedReturn Receipt penetration rates have lagged those of 
FedForward and FedReceipt because initial efforts by the Reserve Banks 
and depository institutions to apply electronics to the check clearing 
process focused on the relatively higher volume forward collection 
process. Moreover, the recent economic environment has limited 
depository institutions' back-office investments to apply electronics 
to the check return process.
---------------------------------------------------------------------------

    \44\ Total forward Reserve Bank check volumes are expected to 
drop from roughly 9.5 billion in 2008 to 8.7 billion in 2009.

                                                     Table 9--Check 21 Product Penetration Rates \a\
                                                                      [Percent] \b\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                Forward deposit volume                                   Return Volume
                                                 -------------------------------------------------------------------------------------------------------
                                                         FedForward                FedReceipt                 FedReturn          FedReceipt     Return
                                                 -------------------------------------------------------------------------------------------------------
                                                   Full-year     Year-end    Full-year     Year-end    Full-year     Year-end    Full-year     Year-end
--------------------------------------------------------------------------------------------------------------------------------------------------------
2007............................................           43           58           12           23           38           45            1            1
2008............................................           77           92           42           61           58           72            6           13
2009 (estimate).................................           97           98           78           90           82           93           28           45
2010 (budget)...................................           99           99           95           97           95           97           60          72
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ FedForward is the electronic forward check collection product; FedReceipt is electronic presentment with accompanying images; FedReturn is the
  electronic check return product; and FedReceipt Return is the electronic delivery of returned checks with accompanying images.
\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.

    As the vast majority of Reserve Bank check deposits are now 
electronic, paper forward-collection volume is expected to decline 
nearly 86 percent for the full year (see table 10). The Reserve Banks 
also estimate that paper return volume will decline at a slightly 
faster pace than a