Federal Reserve Bank Services, 67731-67748 [2010-27697]

Agencies

• FEDERAL RESERVE SYSTEM

[Federal Register Volume 75, Number 212 (Wednesday, November 3, 2010)]
[Notices]
[Pages 67731-67748]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-27697]


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FEDERAL RESERVE SYSTEM

[Docket No. OP 1396]


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 2011 of 
$39.5 million and the 2011 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 3, 2011.

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 Jonathan C. Mueller, Senior 
Financial Analyst, (202/530-6291), 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 2011 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 2000 through 2009, the Reserve Banks recovered 97.8 percent of 
their total expenses (including imputed costs) 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 93.0 
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 2009, 2010 estimated, and 2011 budgeted cost-
recovery rates for all priced services. Cost recovery is estimated to 
be 102.9 percent in 2010 and budgeted to be 102.0 percent in 2011. The 
check service accounts for slightly over half of the total cost of 
priced services and thus

[[Page 67732]]

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\ 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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2009............................           675.4           707.5           -32.1            19.9           92.8%
2010 (estimate).................           572.7           543.3            29.4            13.3          102.9%
2011 (budget)...................           497.6           470.9            26.7            16.8          102.0%
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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, federal funds,
  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. For 2011, investments are limited to short-term Treasury securities and federal
  funds with no constant spread imputed. 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 2010 estimate, the targeted ROE reflects
  average actual clearing balance levels through July 2010.
\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 2000 to 2009, 2009, 2010 budget, 2010 estimate, 
and 2011 budget by priced service.

                                     Table 2--Priced Services Cost Recovery
                                                    [Percent]
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                                                                                                    2011 Budget
         Priced service              2000-2009         2009         2010 Budget    2010 Estimate        \a\
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All services....................            97.8            92.8            96.9           102.9           102.0
Check...........................            96.8            92.8            94.7           103.7           102.8
FedACH..........................           102.6            93.4            99.9           101.9           100.4
Fedwire Funds and NSS...........           101.5            92.1           100.2           100.2           101.0
Fedwire Securities..............           101.0            93.8           103.1           104.3           103.8
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\a\ 2011 budget figures reflect the latest data from the Reserve Banks. The Reserve Banks will transmit final
  budget data to the Board in November 2010, for Board consideration in December 2010.

    1. 2010 Estimated Performance--The Reserve Banks estimate that they 
will recover 102.9 percent of the costs of providing priced services in 
2010, including imputed costs and targeted ROE, compared with a 
budgeted recovery rate of 96.9 percent, as shown in table 2. The 
Reserve Banks estimate that all services will achieve full cost 
recovery. Overall, the Reserve Banks estimate that they will fully 
recover actual and imputed costs and earn net income of $29.4 million, 
compared with the target of $13.3 million. The greater-than-targeted 
net income is driven largely by the performance of the check service, 
which had greater-than-expected operational cost savings and revenue.
    2. 2011 Private Sector Adjustment Factor--The 2011 PSAF for Reserve 
Bank priced services is $39.5 million. This amount represents a 
decrease of $2.4 million from the estimated 2010 revised PSAF of $41.9 
million. Although the estimated imputed cost of equity is expected to 
increase, it is offset by a decrease in other required PSAF costs.\2\
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    \2\ In October 2009, the Board approved a budgeted 2010 PSAF of 
$50.2 million, which was based on the July 2009 clearing balance 
level of $4,831.5 million. Since that time, clearing balances have 
declined, which affects the 2010 PSAF and NICB. The 2010 estimated 
PSAF of $41.9 million, which is based on actual average clearing 
balances of $2,772.2 million through July 2010, reflects the lower 
equity costs resulting from the decrease in clearing balances. The 
2010 final PSAF will be adjusted to reflect average clearing balance 
levels through the end of 2010.
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    3. 2011 Projected Performance--The Reserve Banks project a priced 
services cost recovery rate of 102.0 percent in 2011. The 2011 fees for 
priced services are projected to result in a net income of $26.7 
million compared with the target ROE of $16.8 million.
    The primary risks to the Reserve Banks' ability to achieve their 
targeted cost recovery rates are unanticipated volume and revenue 
reductions and the potential for cost overruns or delays with 
technological upgrades. In light of these risks, the Reserve Banks will 
continue to refine their business and operational strategies to 
aggressively manage operating costs, take advantage of efficiencies 
gained from technological upgrades, and increase value-added product 
revenue.
    4. 2011 Pricing--The following summarizes the Reserve Banks' 
changes in fee schedules for priced services in 2011:

Check

     The Reserve Banks will decrease FedForward fees 8 percent 
for checks presented electronically and increase FedForward fees 50 
percent for checks presented as substitute checks.\3\ The

[[Page 67733]]

average fee paid by FedForward depositors will decline 14 percent from 
the average 2010 fee as the number of depository institutions that 
accept their presentments electronically increases. The Reserve Banks 
will retain FedReturn fees for checks returned electronically through 
FedLine at the current level, decrease fees 30 percent for checks 
returned electronically in PDF files, and increase fees 14 percent for 
endpoints that receive substitute checks.\4\ The average fee paid by 
FedReturn depositors will decrease 20 percent as the number of 
institutions that accept their returns electronically increases.\5\
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    \3\ FedForward is the electronic forward check collection 
product. A substitute check is a paper reproduction of an original 
check that contains an image of the front and back of the original 
check and is suitable for automated processing in the same manner as 
the original check.
    \4\ FedReturn is the electronic check return product.
    \5\ 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. The Reserve Banks are decreasing 
FedForward fees for the presentment of checks to electronic 
endpoints and raising fees for the presentment of checks to 
substitute check endpoints, the effective fee paid by depository 
institutions will decline by 14 percent in 2011 due to the expected 
increase in the number of institutions that accept checks 
electronically. The Reserve Banks are also retaining FedReturn fees 
for checks delivered electronically through FedLine, decreasing fees 
for checks delivered electronically via PDF files, and increasing 
fees for checks delivered as substitute checks. However, the 
effective fee paid by depository institutions will decrease 20 
percent in 2011 as an increasing proportion of checks are returned 
to electronic endpoints and PDF receivers, which are subject to 
relatively lower fees than checks returned to paper endpoints.
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     The Reserve Banks will increase traditional paper forward 
collection fees 181 percent and traditional paper return service fees 
81 percent.
     With the 2011 fees, the price index for the total check 
service will have increased 80 percent since 2001. 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 60 
percent.

FedACH

     The Reserve Banks will raise the addenda record fees for 
originations and receipts from $0.0013 to $0.0015 and increase the 
information extract file fee from $50 to $75.
     With the 2011 fees, the price index for the FedACH service 
will have decreased 32 percent since 2001.

Fedwire Funds and National Settlement

     The Reserve Banks will implement a per-item surcharge of 
$0.18 on the sender of Fedwire Funds transfers processed by the Reserve 
Banks after 5 p.m. ET.
     The Reserve Banks will introduce a $10 monthly fee for the 
usage of the import/export feature of the FedLine Advantage electronic 
access package for the Fedwire Funds Service. This feature allows 
FedLine Advantage customers to import (export) an external file with 
multiple transactions into (from) the Fedwire Funds Service.
     The Reserve Banks will increase the National Settlement 
Service's settlement file fee from $18 to $20, and the settlement entry 
fee from $0.80 to $0.90.
     The Reserve Banks will change the Fedwire Funds Service's 
volume-based transfer fee structure to include incentive discounts 
based on customers' historic volume. This change will increase the base 
price of transfers but will provide substantial discounts from these 
fees for a portion of customers' expected volumes. The change will be 
implemented in two parts. First, the existing fees for all volume tiers 
will increase by as much as 73 percent. Second, customers will receive 
an 80 percent discount on these higher fees for the portion of a 
customer's monthly online volume that exceeds 50 percent of their 
historic benchmark volume, calculated as an average monthly volume of 
activity over the previous five calendar years. The change will produce 
a more stable stream of revenue for the Fedwire Funds service, for the 
first 50 percent of their customers' historic benchmark volume. 
Further, the Reserve Banks expect the incentive discounts to improve 
their ability to retain business and attract additional volume by 
decreasing the marginal price of transfers to a fee closer to the 
Reserve Banks' marginal cost. The decrease in the marginal price of 
transfers is consistent with the Federal Reserve's objectives to foster 
efficiency in the payment systems and to improve the efficiency of 
Reserve Bank services.
     With the 2011 fees, the price index for the Fedwire Funds 
and National Settlement Services will have increased 28 percent since 
2001.

Fedwire Securities

     The Reserve Banks will retain fees at their current 
levels.
     With the 2011 fees, the price index for the Fedwire 
Securities Service will have decreased 14 percent since 2001.
    5. 2011 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 2010, the price index for all Reserve Bank priced 
services is projected to decrease 3 percent in 2011. The price index 
for total check services is projected to decrease approximately 8 
percent. The price index for Check 21 services is projected to decrease 
approximately 17 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 46 percent. The price index for 
electronic payment services, which include the FedACH Service, Fedwire 
Funds and National Settlement Services, and Fedwire Securities Service, 
is projected to increase approximately 3 percent. For the period 2001 
to 2011, the price index for all priced services is expected to 
increase 68 percent. In comparison, for the period 2001 to 2009, the 
GDP price index increased 21 percent.

[[Page 67734]]

[GRAPHIC] [TIFF OMITTED] TN03NO10.000

    B. Private Sector Adjustment Factor--In March 2009, the Board 
requested comment on proposed changes to the methodology for 
calculating the PSAF.\6\ 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 balances held by 
depository institutions at the Reserve Banks and the anticipated 
consequent decline in balances held by depository institutions at 
Reserve Banks for clearing priced-services transactions (clearing 
balances).
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    \6\ 74 FR 15481-15491 (Apr. 6, 2009).
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    Since the implementation of the payment of interest on reserve 
balances, clearing balances have not declined as rapidly as originally 
anticipated and remain significant. Between the October 2008 
implementation of the payment of interest on reserve balances and 
January 2009, the total level of clearing balances held by depository 
institutions decreased approximately $2 billion, from $6.5 billion to 
$4.5 billion. During the first half of 2009, clearing balance levels 
were nearly flat at approximately $4.5 billion. Since mid-2009, 
clearing balances have declined moderately each month, and as of the 
end of July 2010, clearing balances were $2.6 billion. As a result of 
the relative significance of the remaining balances, the Board 
continued to use the correspondent bank model for the 2010 PSAF, and 
will continue using the correspondent bank model for the 2011 PSAF.\7\
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    \7\ The Board is currently analyzing further the proposed 
publicly traded firm model.
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    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 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, other 
long-term liabilities, and equity are not sufficient to fund long-term 
assets.\8\ Short-term debt is imputed only when other 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 may be

[[Page 67735]]

partially funded from core clearing balances.
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    \8\ Core clearing balances, currently $1 billion, are considered 
the portion of the balances that has remained stable over time 
without regard to the magnitude of actual clearing balances.
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    Imputed equity is set to meet 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.\9\ 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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    \9\ As shown in table 7, 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 50 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 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.\10\ 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.\11\ A return on the imputed reserve 
requirement, which is based on the level of clearing balances on the 
pro forma balance sheet, is imputed to reflect the return that would be 
earned on a required reserve balance held at a Reserve Bank.
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    \10\ Reserve requirements are the amount of funds that a 
depository institution must hold, in the form of vault cash or 
deposits with Federal Reserve Banks, in reserve against specified 
deposit liabilities. The dollar amount of a depository institution'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 10 percent, which is applied to the amount of 
clearing balances held with the Reserve Banks.
    \11\ The allowed portfolio of investments is comparable to a 
bank holding company's investment holdings, such as short-term 
Treasury securities, government agency securities, federal funds, 
commercial paper, long-term corporate bonds, and money market funds. 
As shown in table 7, the investments imputed for 2011 are three-
month Treasury bills and federal funds.
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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 2011 projected NICB are based on July 2010 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.
    NICB is projected to be $1.2 million for 2011, including earnings 
on imputed reserve requirements.\12\ The imputed rate is equal to the 
three-month Treasury bill rate with no constant spread due to the 
results of the interest rate sensitivity analysis. See the ``Analysis 
of the 2011 PSAF'' section for more information on the interest rate 
sensitivity analysis results and the effect on the 2011 NICB.
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    \12\ The 2010 NICB was initially budgeted to be $14.5 million 
and is now estimated at $8.0 million. The decrease in NICB is due to 
a decrease in clearing balance levels.
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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. 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 PSAF derived during the price-
setting process with only minimal adjustments for actual rates or 
balance levels.\13\ Beginning in 2009, in light of the uncertainty 
about the long-term effect that the payment of interest on reserve 
balances would have on the level of clearing balances, the Board 
adjusts the PSAF used in the actual cost-recovery calculation to 
reflect the actual clearing balance levels maintained throughout the 
year. 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 during the year when calculating actual priced services 
cost recovery.
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    \13\ 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 2011 PSAF--The decrease in the 2011 PSAF is due 
primarily to a reduction in the level of imputed equity associated with 
a decrease in assets and clearing balances.
    Projected 2011 Federal Reserve priced-services assets, reflected in 
table 3, have decreased $1,844.0 million, mainly due to a decline in 
imputed investments in marketable securities of $1,496.1 million. This 
reduction stems from the decline in clearing balances held by 
depository institutions at Reserve Banks.
    The priced services balance sheet includes projected clearing 
balances of $2,600.3 million for 2011, which represents a decrease of 
$2,231.2 million from the amount of clearing balances on the balance 
sheet for the budgeted 2010 PSAF. Because of the continued uncertainty 
regarding the level of clearing balances in an interest-on-reserves 
environment, the actual PSAF costs used in cost-recovery calculations 
will continue to be based on the actual levels of clearing balances 
held throughout 2011.
    Credit float, which represents the difference between items in 
process of collection and deferred credit items, increased from 
$1,200.0 million in 2010

[[Page 67736]]

to $1,800.0 million in 2011.\14\ The increase is primarily a result of 
credit float generated by a greater use of Check 21 deferred-
availability products.
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    \14\ Credit float occurs when the Reserve Banks present 
transactions 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 
2011, $15.5 million in clearing balances is used as a funding source 
for short-term assets. Long-term liabilities and equity exceed long-
term assets by $23.8 million; therefore, no core clearing balances are 
used to fund long-term assets.
    The Board uses an interest rate sensitivity analysis to ensure that 
the interest rate risk of the priced services balance sheet, and its 
effect on cost recovery, are appropriately managed and that the priced 
services long-term assets are appropriately funded with long-term 
liabilities and equity. The interest rate sensitivity analysis measures 
the relationship between rate sensitive assets and liabilities when 
they reprice as a result of a change in interest rates.\15\ If a 200 
basis point increase or decrease in interest rates changes priced 
services cost recovery by more than 2 percentage points, rather than 
using core clearing balances to fund long-term assets, long-term debt 
is imputed.
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    \15\ Interest rate sensitive assets and liabilities are defined 
as those balances that will reprice in a year.
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    The interest rate sensitivity analysis shown in table 5 indicates 
that a 200 basis point decrease in rates decreases cost recovery 5.1 
percentage points, while an increase of 200 basis points in rates 
increases cost recovery 4.9 percentage points. The greater-than-two-
percentage-point effect on cost recovery is the result of a large gap 
between rate-sensitive assets and liabilities, and the relationship to 
priced services net income. The gap is caused by an increase in rate 
sensitive assets, specifically, the imputed federal funds investment 
needed to offset projected level of credit float in 2011. The results 
of the analysis have the following effects on the 2011 PSAF and NICB:
     Generally, the results of the interest rate sensitivity 
analysis indicate when long-term debt should be imputed rather than 
using core clearing balances to fund long-term assets. The requirement 
to impute debt remedies an asset mismatch when too many clearing 
balances (rate sensitive liabilities) are being used to fund long-term 
assets and there is a need for another funding source (i.e. long-term 
debt). For the 2011 PSAF, however, the mismatch arises from the level 
of credit float rather than the use of clearing balances to fund long-
term assets. If debt were to be imputed for the 2011 PSAF, clearing 
balances now used to finance assets would be invested in rate sensitive 
assets. Therefore, imputing debt would cause the gap between interest-
rate-sensitive assets and liabilities to widen further, resulting in an 
even greater effect on cost recovery than shown in table 5. 
Accordingly, the Board will not impute debt for the 2011 PSAF. Going 
forward, imputed debt will be limited to the amount of clearing 
balances used to finance long-term assets. (See table 4 for the portion 
of clearing balances used to fund priced-services assets.)
     Because of the heightened cost recovery sensitivity to 
interest rate fluctuations, the investment of clearing balances is 
limited to three-month Treasury bills (with no additional imputed 
constant spread).
    As shown in table 3, the amount of equity imputed for the 2011 PSAF 
is $277.2 million, a decrease of $92.2 million from the imputed equity 
for 2010. In accordance with FAS 158 [ASC 715], this amount includes an 
accumulated other comprehensive loss of $343.2 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 
depository institution. Equity is calculated as 5 percent of total 
assets, and the ratio of capital to risk-weighted assets exceeds 10 
percent.\16\ The Reserve Banks imputed an FDIC assessment for the 
priced services based on the FDIC's proposed assessment rates and the 
level of clearing balances held at Reserve Banks.\17\ For 2011, the 
FDIC assessment is imputed at $5.3 million, compared with an FDIC 
assessment of $9.6 million in 2010.
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    \16\ 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 
previously, until the regulators announce a final ruling.
    \17\ For information on the proposed FDIC assessment rates, see 
https://www.fdic.gov/news/news/press/2010/pr10229.html.
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    Table 6 shows the imputed PSAF elements, including the pretax ROE 
and other required PSAF costs, for 2010 and 2011. The $3.4 million 
decrease in ROE is caused by a lower amount of imputed equity, slightly 
offset by a higher target ROE rate. Imputed sales taxes decreased from 
$5.2 million in 2010 to $4.2 million in 2011. The effective income tax 
rate used in 2011 decreased to 32.4 percent from 33.1 percent in 2010. 
The priced services portion of the Board's expenses decreased $2.0 
million, from $7.2 million in 2010 to $5.2 million in 2011.

   Table 3--Comparison of Pro Forma Balance Sheets for Federal Reserve
                          Priced Services \18\
            [Millions of dollars--projected average for year]
------------------------------------------------------------------------
                                            2011       2010      Change
------------------------------------------------------------------------
Short-term assets:
    Imputed reserve requirement on          $440.0     $603.1   $(163.1)
     clearing balances.................
    Receivables........................       41.4       45.9      (4.5)
    Materials and supplies.............        1.5        0.9        0.6
    Prepaid expenses...................        7.6       23.2     (15.6)
    Items in process of collection \19\      300.0      520.0    (220.0)
                                        --------------------------------
        Total short-term assets........      790.7    1,193.1    (402.6)
Imputed investments....................    3,968.6    5,464.7  (1,496.1)
Long-term assets:
    Premises \20\......................      173.1      235.4     (62.3)
    Furniture and equipment............       43.2       62.1     (18.9)
    Leasehold improvements and long-          68.2       60.3        7.9
     term prepayments..................
    Prepaid pension costs..............      299.8      148.9      150.9
    Prepaid FDIC asset.................       10.9       24.6     (13.7)

[[Page 67737]]

 
    Deferred tax asset.................      189.7      198.9      (9.2)
                                        --------------------------------
        Total long-term assets.........      784.9      730.2       54.7
                                        --------------------------------
            Total assets...............    5,544.0    7,388.0  (1,844.0)
                                        --------------------------------
Short-term liabilities \21\:
    Clearing balances..................    2,600.3    4,831.5  (2,231.2)
    Deferred credit items \19\.........    2,100.0    1,720.0      380.0
    Short-term payables................       35.0       59.8     (24.8)
                                        --------------------------------
        Total short-term liabilities...    4,735.3    6,611.3  (1,876.0)
Long-term liabilities \21\
    Postemployment/postretirement            531.5      407.3      124.2
     benefits liability \22\...........
                                        --------------------------------
        Total liabilities..............    5,266.8    7,018.6  (1,751.8)
Equity \23\............................      277.2      369.4     (92.2)
                                        --------------------------------
    Total liabilities and equity.......    5,544.0    7,388.0  (1,844.0)
------------------------------------------------------------------------
\18\ The 2010 PSAF values in tables 3, 4, and 6 reflect the budgeted
  2010 PSAF of $50.2 million approved by the Board in October 2009.
\19\ Represents float that is directly estimated at the service level.
\20\ Includes the allocation of Board of Governors assets to priced
  services of $0.7 million for 2011 and $0.9 million for 2010.
\21\ No debt is imputed because clearing balances are a funding source.
\22\ Includes the allocation of Board of Governors liabilities to priced
  services of $0.5 million for 2011 and $0.4 million for 2010.
\23\ Includes an accumulated other comprehensive loss of $407.7 million
  for 2010 and $343.2 million for 2011, which reflects 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 4--Portion of Clearing Balances Used to Fund Priced-Services Assets
                                              [Millions of dollars]
----------------------------------------------------------------------------------------------------------------
                                                       2011                            2010
----------------------------------------------------------------------------------------------------------------
A. Short-term asset financing
    Short-term assets to be financed:
        Receivables.............................           $41.4  ..............           $45.9  ..............
        Materials and supplies..................             1.5  ..............             0.9  ..............
        Prepaid expenses........................             7.6  ..............            23.2  ..............
                                                 ----------------                ----------------
            Total short-term assets to be                   50.5  ..............            70.0  ..............
             financed...........................
    Short-term funding sources..................
        Short-term payables.....................            35.0  ..............            59.8  ..............
        Portion of short-term assets funded with  ..............            15.5  ..............            10.2
         clearing balances \24\.................
B. Long-term asset financing
    Long-term assets to be financed:
        Premises................................           173.1  ..............           235.4  ..............
        Furniture and equipment.................            43.2  ..............            62.1  ..............
        Leasehold improvements and long-term                68.2  ..............            60.3  ..............
         prepayments............................
        Prepaid pension costs...................           299.8  ..............           148.9  ..............
        Prepaid FDIC asset......................            10.9  ..............            24.6  ..............
        Deferred tax asset......................           189.7  ..............           198.9  ..............
                                                 ----------------                ----------------
            Total long-term assets to be                   784.9  ..............           730.2  ..............
             financed...........................
    Long-term funding sources:
        Postemployment/postretirement benefits             531.5  ..............           407.3  ..............
         liability..............................
        Imputed equity \25\.....................           277.2  ..............           369.4  ..............
                                                 ----------------                ----------------
            Total long-term funding sources.....           808.7  ..............           776.7  ..............
    Portion of long-term assets funded with core  ..............             0.0  ..............             0.0
     clearing balances \24\.....................
                                                 ----------------                ----------------
C. Total clearing balances used for funding       ..............            15.5  ..............            10.2
 priced-services assets.........................
----------------------------------------------------------------------------------------------------------------
\24\ 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 $1 billion in clearing balances is available
  for this purpose in 2010 and 2011, 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.
\25\ See table 6 for calculation of required imputed equity amount.


[[Page 67738]]


                              Table 5--2011 Interest Rate Sensitivity Analysis \26\
                                              [Millions of dollars]
----------------------------------------------------------------------------------------------------------------
                                                                                       Rate
                                                                  Rate sensitive    insensitive        Total
----------------------------------------------------------------------------------------------------------------
Assets:
    Imputed reserve requirement on clearing balances............          $440.0  ..............          $440.0
    Imputed investments.........................................         3,968.6  ..............         3,968.6
    Receivables.................................................  ..............           $41.4            41.4
    Materials and supplies......................................  ..............             1.5             1.5
    Prepaid expenses............................................  ..............             7.6             7.6
    Items in process of collection..............................  ..............           300.0           300.0
    Long-term assets............................................  ..............           784.9           784.9
                                                                 -----------------------------------------------
        Total assets............................................         4,408.6         1,135.4         5,544.0
================================================================================================================
Liabilities:
    Clearing balances...........................................         2,600.3  ..............         2,600.3
    Deferred credit items.......................................  ..............         2,100.0         2,100.0
    Short-term payables.........................................  ..............            35.0            35.0
    Long-term liabilities.......................................  ..............           531.5           531.5
                                                                 -----------------------------------------------
        Total liabilities.......................................         2,600.3         2,666.5         5,266.8
                                                                 ===============================================
 Rate change results:                                             ..............       200 basis       200 basis
                                                                                  point decrease  point increase
                                                                                        in rates        in rates
                                                                 -----------------------------------------------
    Asset yield ($4,408.6 x rate change)........................  ..............         $(88.2)           $88.2
    Liability cost ($2,600.3 x rate change).....................  ..............          (52.0)            52.0
                                                                                 -------------------------------
        Effect of 200 basis point change........................  ..............          (36.2)            36.2
                                                                                 ===============================
    2011 budgeted revenue.......................................  ..............           497.6           497.6
    Effect of change............................................  ..............          (36.2)            36.2
                                                                                 -------------------------------
        Revenue adjusted for effect of interest rate change.....  ..............           461.4           533.8
                                                                                 ===============================
    2011 budgeted total expenses................................  ..............           443.4           443.4
    2011 budgeted PSAF..........................................  ..............            44.3            44.3
    Tax effect of interest rate change ($ change x 32.4%).......  ..............          (11.7)            11.7
                                                                                 -------------------------------
        Total recovery amounts..................................  ..............           476.0           499.4
                                                                                 ===============================
    Recovery rate before interest rate change...................  ..............          102.0%          102.0%
    Recovery rate after interest rate change....................  ..............           96.9%          106.9%
    Effect of interest rate change on cost recovery \27\........  ..............          (5.1)%            4.9%
----------------------------------------------------------------------------------------------------------------
\26\ 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 of
  rate-sensitive assets to rate-sensitive liabilities and the effect on cost recovery of a change in interest
  rates of up to 200 basis points.
\27\ The effect of a potential change in rates is greater than a two percentage point change in cost recovery;
  however, no long-term debt is imputed for 2011 because the priced services have adequate funding sources. See
  the ``Analysis of the 2011 PSAF'' section for more information on the interest rate sensitivity analysis
  results and its effect on the 2011 PSAF and NICB.


                                  Table 6--Derivation of the 2011 and 2010 PSAF
                                              [Millions of dollars]
----------------------------------------------------------------------------------------------------------------
                                                     2011                                   2010
----------------------------------------------------------------------------------------------------------------
A. Imputed elements
    Short-term debt \28\..........  ...........         $0.0  ...........  ...........         $0.0
    Long-term debt \29\...........  ...........          0.0  ...........  ...........          0.0
    Equity
        Total assets from table 3.     $5,544.0  ...........  ...........     $7,388.0
        Required capital ratio               5%  ...........  ...........           5%
         \30\.....................
                                   -------------                          --------------------------------------
            Total equity..........  ...........       $277.2  ...........  ...........       $369.4
B. Cost of capital
    1. Financing rates/costs
        Short-term debt...........  ...........          N/A  ...........  ...........          N/A
        Long-term debt............  ...........          N/A  ...........  ...........          N/A

[[Page 67739]]

 
        Pretax return on equity     ...........         8.9%  ...........  ...........         7.6%
         \31\.....................
    2. Elements of capital costs
        Short-term debt...........  ...........  ...........         $0.0  ...........  ...........         $0.0
        Long-term debt............  ...........  ...........          0.0  ...........  ...........          0.0
        Equity....................        $277.2x8.9% =              24.8        $369.4x7.6% =              28.2
                                                             -------------                          ------------
                                    ...........  ...........        $24.8  ...........  ...........        $28.2
C. Other required PSAF costs
    Sales taxes...................  ...........         $4.2  ...........  ...........         $5.2
    FDIC assessment...............  ...........          5.3  ...........  ...........          9.6
    Board of Governors expenses...  ...........          5.2  ...........  ...........          7.2
                                                -------------                          -------------------------
                                    ...........  ...........         14.7  ...........  ...........         22.0
                                                             -------------                          ------------
D. Total PSAF.....................  ...........  ...........        $39.5  ...........  ...........        $50.2
                                                             =============                          ============
    As a percent of assets........  ...........  ...........         0.7%  ...........  ...........         0.7%
    As a percent of expenses \32\.  ...........  ...........         8.9%  ...........  ...........         9.6%
E. Tax rates......................  ...........  ...........        32.4%  ...........  ...........        33.1%
----------------------------------------------------------------------------------------------------------------
\28\ No short-term debt is imputed because clearing balances are a funding source for those assets that are not
  financed with short-term payables.
\29\ No long-term debt is imputed because core clearing balances are a funding source.
\30\ Based on the regulatory requirements for a well-capitalized institution for the purpose of assessing
  insurance premiums.
\31\ The 2011 ROE is equal to a risk-free rate plus a risk premium (beta * market risk premium). The 2011 after-
  tax CAPM ROE is calculated as 0.16% + (1 * 5.88%) = 6.04%. Using a tax rate of 32.4%, the after-tax ROE is
  converted into a pretax ROE, which results in a pretax ROE of (6.04%/(1-32.4%)) = 8.9%.
\32\ System 2011 budgeted priced services expenses less shipping and float are $441.7 million.


                Table 7--Computation of 2011 Capital Adequacy for Federal Reserve Priced Services
                                              [Millions of dollars]
----------------------------------------------------------------------------------------------------------------
                                                                                                     Weighted
                                                                      Assets        Risk weight       assets
----------------------------------------------------------------------------------------------------------------
Imputed reserve requirement on clearing balances................          $440.0             0.0            $0.0
Imputed investments:
    3-month Treasury bills \33\.................................         2,168.6             0.0             0.0
    Federal funds \34\..........................................         1,800.0             0.2           360.0
                                                                 -----------------------------------------------
        Total imputed investments...............................         3,968.6  ..............           360.0
Receivables.....................................................            41.4             0.2             8.3
Materials and supplies..........................................             1.5             1.0             1.5
Prepaid expenses................................................             7.6             1.0             7.6
Items in process of collection..................................           300.0             0.2            60.0
Premises........................................................           173.1             1.0           173.1
Furniture and equipment.........................................            43.2             1.0            43.2
Leasehold improvements and long-term prepayments................            68.2             1.0            68.2
Prepaid pension costs...........................................           299.8             1.0           299.8
Prepaid FDIC asset..............................................            10.9             1.0            10.9
Deferred tax asset..............................................           189.7             1.0           189.7
                                                                 -----------------------------------------------
    Total.......................................................         5,544.0  ..............         1,222.3
                                                                 ===============================================
Imputed equity for 2011.........................................          $277.2
Capital to risk-weighted assets.................................           22.7%
Capital to total assets.........................................            5.0%
----------------------------------------------------------------------------------------------------------------
\33\ The imputed investments are similar to those for which rates are available on the Federal Reserve's H.15
  statistical release, which can be located at https://www.federalreserve.gov/releases/h15/data.htm.
\34\ The investments are computed from the amounts arising from the collection of items prior to providing
  credit according to established availability schedules. These imputed amounts are invested in federal funds.

    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

[[Page 67740]]

earnings credit calculation uses a percentage discount on a rolling 13-
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.\35\
---------------------------------------------------------------------------

    \35\ 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 2009, 2010 estimated, and 2011 
budgeted cost recovery performance for the commercial check service.

                          Table 8--Check Service Pro Forma Cost and Revenue Performance
                                                  [$ millions]
----------------------------------------------------------------------------------------------------------------
                                                                                                    5 Recovery
                                                                                                    rate after
              Year                   1 Revenue        2 Total      3 Net income   4 Targeted ROE   targeted ROE
                                                      expense       (ROE) [1-2]                      [1/(2+4)]
                                                                                                     (percent)
----------------------------------------------------------------------------------------------------------------
2009............................           490.9           514.6           -23.7            14.4            92.8
2010 (estimate).................           358.7           337.6            21.1             8.2           103.7
2011 (budget)...................           279.2           262.2            17.0             9.3           102.8
----------------------------------------------------------------------------------------------------------------

    1. 2010 Estimate--For 2010, the Reserve Banks estimate that the 
check service will recover 103.7 percent of total expenses and targeted 
ROE, compared with the budgeted recovery rate of 94.7 percent. The 
Reserve Banks expect to recover all actual and imputed costs of 
providing check services and earn a net income of $21.1 million (see 
table 8).
    The higher-than-budgeted cost recovery is the result of higher 
projected revenue of $13.3 million. In paper services, revenue is 
higher than expected because of mid-year price increases and higher-
than-budgeted exception item volume. In electronic services, the higher 
revenue is due to greater use of products with later deposit deadlines 
and volume destined to higher-priced paper endpoints. Expenses are 
projected to be $16.1 million lower than expected due primarily to the 
full-year effects of cost savings associated with the earlier-than-
expected elimination of transportation for paper checks among Reserve 
Bank offices, the transition from courier service to overnight delivery 
service for paper check presentments, and the accelerated restructuring 
of the Reserve Banks' check processing infrastructure.
    The general decline in the number of checks written continues to 
influence the decline in checks collected by the Reserve Banks. Through 
August, total forward check volume and return check volume is 9 percent 
and 16 percent lower, respectively, than the same period last year. For 
full-year 2010, the Reserve Banks estimate that their total forward 
check collection volume will decline nearly 10 percent and return check 
volume will decline 15 percent from 2009 levels.\36\ The proportion of 
checks deposited and presented electronically has grown steadily in 
2010 (see table 9). The Reserve Banks expect that year-end 2010 
FedForward deposit and FedReceipt presentment penetration rates will 
reach 99.7 percent and 98.9 percent, respectively. The Reserve Banks 
also expect that year-end 2010 FedReturn and FedReceipt Return 
penetration rates will reach 96.2 percent and 80.0 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-of