Federal Reserve Bank Services, 68440-68458 [2011-28588]

Agencies

• FEDERAL RESERVE SYSTEM

[Federal Register Volume 76, Number 214 (Friday, November 4, 2011)]
[Notices]
[Pages 68440-68458]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-28588]


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

FEDERAL RESERVE SYSTEM

[Docket No. OP-1436]


Federal Reserve Bank Services

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice.

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

SUMMARY: The Board of Governors of the Federal Reserve System (Board) 
has approved the private sector adjustment factor (PSAF) for 2012 of 
$29.9 million and the 2012 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, 2012.

FOR FURTHER INFORMATION CONTACT: For questions regarding the fee 
schedules: Susan V. Foley, Associate Director, (202/452-3596); Samantha 
J. Pelosi, Manager, Retail Payments, (202/530-6292); 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 John W. Curle, Senior 
Financial Analyst, (202/452-3916), 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 2012 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 2001 through 2010, the Reserve Banks recovered 97.9 percent of 
their total expenses (including imputed costs) and targeted after-tax 
profits or return on equity (ROE) for providing priced services.\1\
---------------------------------------------------------------------------

    \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 95.1 
percent for the ten-year period. This measure of long-run cost 
recovery is also published in the Board's Annual Report.
---------------------------------------------------------------------------

    Table 1 summarizes 2010 actual, 2011 estimated, and 2012 budgeted 
cost-recovery rates for all priced services. Cost recovery is estimated 
to be 102.3 percent in 2011 and budgeted to be 100.8 percent in 2012. 
The check service accounts for slightly over half 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]
----------------------------------------------------------------------------------------------------------------
                                                                                                       5 \e\
                                                   2 \c\  Total    3  Net income       4 \d\       recovery rate
              Year                1 \b\  Revenue      expense       (roe) [1-2]    Targeted roe   after targeted
                                                                                                   roe [1/(2+4)]
----------------------------------------------------------------------------------------------------------------
2010 (actual)...................           574.7           532.8            41.8            13.1          105.3%
2011 (estimate).................           471.4           444.1            27.3            16.8          102.3%
2012 (budget)...................           436.7           419.6            17.1            13.8         100.8%
----------------------------------------------------------------------------------------------------------------
\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 2012, 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.

[[Page 68441]]

 
\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 2011 estimate, the targeted ROE reflects
  average actual clearing balance levels through July 2011.
\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 2001 to 2010, 2010 actual, 2011 budget, 2011 
estimate, and 2012 budget by priced service.

                                     Table 2--Priced Services Cost Recovery
                                                    [Percent]
----------------------------------------------------------------------------------------------------------------
                                                                                                   2012  Budget
         Priced service              2001-2010     2010  Actual    2011  Budget   2011  Estimate        \a\
----------------------------------------------------------------------------------------------------------------
All services....................            97.9           105.3           102.1           102.3           100.8
Check...........................            96.9           107.1           102.9           103.6           101.0
FedACH..........................           102.7           103.4           100.2           100.2           100.5
Fedwire Funds and NSS...........           101.4           100.6           100.5           101.5           100.0
Fedwire Securities..............           100.9           102.8           106.5           100.4          102.5
----------------------------------------------------------------------------------------------------------------
\a\ 2012 budget figures reflect the latest data from the Reserve Banks. The Reserve Banks will transmit final
  budget data to the Board in November 2011, for Board consideration in December 2011. 2011 budget figures
  reflect the final budget as approved by the Board.

    1. 2011 Estimated Performance--The Reserve Banks estimate that they 
will recover 102.3 percent of the costs of providing priced services in 
2011, including imputed costs and targeted ROE, compared with a 
budgeted recovery rate of 102.1 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 $27.3 million, 
compared with the target of $16.8 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.
    2. 2012 Private Sector Adjustment Factor--The 2012 PSAF for Reserve 
Bank priced services is $29.9 million. This amount represents a 
decrease of $7.6 million from the revised 2011 PSAF estimate of $37.5 
million. This reduction is primarily the result of a change in the FDIC 
assessment as well as a decrease in the cost of equity, which is due to 
a lower amount of imputed equity.\2\
---------------------------------------------------------------------------

    \2\ In October 2010, the Board approved a budgeted 2011 PSAF of 
$39.5 million, which was based on the July 2010 clearing balance 
level of $2,600.3 million. Since that time, clearing balances have 
continued to decline, which affects the 2011 PSAF and NICB. The 2011 
estimated PSAF of $37.5 million, which is based on actual average 
clearing balances of $2,595.8 million through July 2011, reflects a 
change in the FDIC assessment. Similar to 2010, the 2011 final PSAF 
will be adjusted to reflect average clearing balance levels through 
the end of 2011.
---------------------------------------------------------------------------

    3. 2012 Projected Performance--The Reserve Banks project a priced 
services cost recovery rate of 100.8 percent in 2012. The 2012 fees for 
priced services are projected to result in a net income of $17.1 
million compared with the target ROE of $13.8 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 manage 
aggressively operating costs, take advantage of efficiencies gained 
from technological upgrades, and increase product revenue.
    4. 2012 Pricing--The following summarizes the Reserve Banks' 
changes in fee schedules for priced services in 2012:
Check
     The Reserve Banks will reduce by half their forward and 
return deadlines from 8 to 4 and 4 to 2, respectively. FedForward cash 
letter fees will decrease by 8 percent on a per-item basis. In addition 
the Reserve Banks will increase FedForward fees for checks presented 
electronically by 4 percent and increase FedForward fees for checks 
presented as substitute checks by 2 percent.\3\ The net result is only 
a modest increase in the per item weighted effective average fee.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

     The Reserve Banks will retain at current levels FedReturn 
fees for checks returned electronically and for endpoints that receive 
substitute checks.\4\ The effective average fee paid by FedReturn 
depositors will decrease approximately 16 percent as the number of 
institutions that accept their returns electronically increases.\5\
---------------------------------------------------------------------------

    \4\ FedReturn is the electronic check return product.
    \5\ The Reserve Banks' Check 21 service fees include separate 
and substantially different fees for the delivery of checks to 
electronic endpoints and substitute check endpoints. Therefore, the 
effective average fee paid by depository institutions that use Check 
21 services is dependent on the proportion of institutions that 
accept checks electronically.
---------------------------------------------------------------------------

     The Reserve Banks will retain traditional paper forward 
collection and return fees at their current levels.
     The Reserve Banks will price separately for two categories 
of adjustment types that are identified commonly in Reserve Bank 
processing operations: Encoding errors and non-conforming items that 
fail Reserve Bank edit checks.
     With the 2012 fees, the price index for the total check 
service will have increased 63 percent since 2002. 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 50 
percent.
FedACH
     The Reserve Banks will raise the fee charged to receivers 
of ACH returns from $0.0025 to $0.005. The Reserve Banks will also 
increase the information extract file monthly fee from $75 to $100 and 
increase the international

[[Page 68442]]

ACH transaction (IAT) output file sort monthly fee from $35 to $50. 
Fees for FedLine Web origination returns and notification of change 
will also rise from $0.30 to $0.35.
     With the 2012 fees, the price index for the FedACH service 
will have decreased 16 percent since 2002.
Fedwire Funds and National Settlement
     The Reserve Banks will implement a new per item fee of 
$0.12 on all transfers sent and received that exceed $10 million (high-
value transfer surcharge).
     The Reserve Banks will implement a new per item fee of 
$0.20 on all transfers sent that contain any data in the new tag field 
{3620{time}  that supports payment notification and tracking (payment 
notification surcharge).
     The Reserve Banks will increase the Tier 1 per item pre-
incentive fee from $0.52 to $0.58 per transaction; the Tier 2 per item 
pre-incentive fee from $0.23 to $0.24; and the Tier 3 per item pre-
incentive fee from $0.13 to $0.135.\6\
---------------------------------------------------------------------------

    \6\ The per item pre-incentive fee is the fee that the Reserve 
Banks charge for transfers that do not qualify for incentive 
discounts. The Tier 1 per item pre-incentive fee applies to the 
first 14,000 transfers, the Tier 2 per item pre-incentive fee 
applies to the next 76,000 transfers, and the Tier 3 per item pre-
incentive fee applies to any additional transfers. The Reserve Banks 
apply an 80 percent incentive discount to every transfer over 50 
percent of a customer's historic benchmark volume.
---------------------------------------------------------------------------

     The Reserve Banks will increase the monthly fee for the 
usage of the import/export feature of the FedLine Advantage electronic 
access package from $10 to $20.
     The Reserve Banks will increase the end-of-day origination 
surcharge from $0.18 to $0.20.
     The Reserve Banks will increase the Fedwire monthly 
participation fee from $75 to $85.
     The Reserve Banks will increase the National Settlement 
Service's settlement file charge from $20 to $21, and the settlement 
charge per entry from $0.90 to $1.00.
     With the 2012 fees, the price index for the Fedwire Funds 
and National Settlement Services will have increased 44 percent since 
2002.
Fedwire Securities
     The Reserve Banks will increase the online transfer fee 
from $0.35 to $0.45.
     The Reserve Banks will increase the monthly account 
maintenance fee from $36 to $40.
     The Reserve Banks will increase the monthly issue 
maintenance fee from $0.40 to $0.45 per issue.
     The Reserve Banks will increase the offline surcharge from 
$60 to $66.
     The Reserve Banks will increase the claim adjustment fee 
from $0.60 to $0.66.
     With the 2012 fees, the price index for the Fedwire 
Securities Service will have decreased 14 percent since 2002.
Electronic Access
     The Reserve Banks propose adding a new package, FedLine 
Advantage Premier to the FedLine packaged solutions that will be priced 
at $500 per month.
     The Reserve Banks will begin to charge $15 per month for 
FedPhone.
     The Reserve Banks will also charge an additional $20 per 
month for the FedLine Advantage Plus packages, $100 per month for the 
FedLine Command Plus packages, $250 per month for FedLine Direct 
packages, and $200 per month for the FedLine Direct Premier packages.
     The Reserve Banks will raise the monthly fees for 
additional dedicated electronic access connections, specifically, the 
56K, T1, and VPN surcharge by $250, $150, and $25, respectively.
     The FedLine international one-time setup fee will increase 
from $1,000 to $5,000.
     The Reserve Banks will also increase the monthly fees for 
accounting information services basic reports to improve the alignment 
of value and revenue.
     Electronic access fees are allocated to each priced 
service and are not separately reflected in comparison with the GDP 
price index.
     5. 2012 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 2011, the price index for all Reserve Bank 
priced services is projected to increase 4 percent in 2012. The price 
index for total check services is projected also to increase 
approximately 4 percent. The price index for Check 21 services is 
projected to increase just over 1 percent, reflecting a slight increase 
in the effective prices paid to collect and return checks using Check 
21 services and stabilization in the adoption of electronic check 
services. The price index for all other check services is projected to 
increase approximately 14 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 5 percent. For the period 2002 to 
2012, the price index for all priced services is expected to increase 
64 percent. In comparison, for the period 2002 to 2010, the GDP price 
index increased 21 percent.

[[Page 68443]]

[GRAPHIC] [TIFF OMITTED] TN04NO11.054

    B. Private Sector Adjustment Factor--In 2009, the Board requested 
comment on proposed changes to the methodology for calculating the 
PSAF.\7\ 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. 
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).
---------------------------------------------------------------------------

    \7\ 74 FR 15481-15491 (Apr. 6, 2009).
---------------------------------------------------------------------------

    Since the implementation of the payment of interest on reserve 
balances, clearing balances have not decreased as much as 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 $2.0 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 further, and as of the end of July 2011, clearing balances 
were $2.7 billion. As a result of the relative significance of the 
remaining balances, the Board used the correspondent bank model for the 
2011 PSAF, and will continue using the correspondent bank model for the 
2012 PSAF.
    The Board recently requested public comment on proposed amendments 
to Regulation D, which implements section 19 of the Federal Reserve Act 
and requires reserve requirements be held on certain deposits and other 
liabilities of depository institutions for the purpose of implementing 
monetary policy.\8\ The proposed amendments eliminate the contractual 
clearing balance program and its administrative complexities as part of 
an effort to simplify reserve balance administration. Because 
contractual clearing balances are a significant element in determining 
imputed costs that must be recovered by Reserve Bank priced services 
fees, the Board requested comment on additional questions related to 
imputing costs to be recovered by Reserve Bank priced services fees 
after the proposed elimination of the contractual clearing balance 
program.
---------------------------------------------------------------------------

    \8\ 76 FR 64250-64259 (Oct. 18, 2011).
---------------------------------------------------------------------------

    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

[[Page 68444]]

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.\9\ 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 partially funded from core clearing 
balances.
---------------------------------------------------------------------------

    \9\ 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.
---------------------------------------------------------------------------

    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.\10\ 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.
---------------------------------------------------------------------------

    \10\ 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.
---------------------------------------------------------------------------

    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 during 2012 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.\11\ 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.\12\ 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.
---------------------------------------------------------------------------

    \11\ 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 and to credit float.
    \12\ 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 2012 are three-
month Treasury bills and federal funds.
---------------------------------------------------------------------------

    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 three-month Treasury bill rate. Rates and 
clearing balance levels used in the 2012 projected NICB are based on 
July 2011 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 $1.0 million for 2012, including earnings 
on imputed reserve requirements.\13\ 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 section of 
this memo ``Analysis of the 2012 PSAF'' for more information on the 
interest rate sensitivity analysis results and the effect on the 2012 
NICB.
---------------------------------------------------------------------------

    \13\ The 2011 NICB was initially budgeted to be $1.2 million and 
the estimate is consistent with the budget.
---------------------------------------------------------------------------

    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.\14\ 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 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.
---------------------------------------------------------------------------

    \14\ 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.
---------------------------------------------------------------------------

    3. Analysis of the 2012 PSAF--The decrease in the 2012 PSAF is due

[[Page 68445]]

primarily to a reduction in the level of imputed equity associated with 
a decrease in assets and credit float.
    Projected 2012 Federal Reserve priced-services assets, reflected in 
table 3, have decreased $850.8 million, mainly due to a decline in 
imputed investments in marketable securities of $477.9 million as a 
result of lower expected credit float. The priced services balance 
sheet includes projected clearing balances of $2,661.1 million for 
2012, which represents an increase of $60.8 million from the amount of 
clearing balances on the balance sheet for the budgeted 2011 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 2012.
    Credit float, which represents the difference between items in 
process of collection and deferred credit items, decreased from 
$1,800.0 million in 2011 to $1,100.0 million in 2012.\15\ The decrease 
is primarily a result of credit float generated by a less use of Check 
21 deferred-availability products.
---------------------------------------------------------------------------

    \15\ Credit float occurs when the Reserve Banks present 
transactions to the paying bank prior to providing credit to the 
depositing bank.
---------------------------------------------------------------------------

    As previously mentioned, clearing balances are available as a 
funding source for priced-services assets. As shown in table 4, in 
2012, $19.2 million in clearing balances is used as a funding source 
for short-term assets. Long-term liabilities and equity exceed long-
term assets by $124.9 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.\16\ 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.
---------------------------------------------------------------------------

    \16\ Interest rate sensitive assets and liabilities are defined 
as those balances that will reprice within a year.
---------------------------------------------------------------------------

    The interest rate sensitivity analysis shown in table 5 indicates 
that a 200 basis point decrease in rates decreases cost recovery 3.9 
percentage points, while an increase of 200 basis points in rates 
increases cost recovery 3.8 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 the projected level of credit float in 2011. The 
results of the analysis have the following effects on the 2012 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 and 2012 PSAF, however, the mismatch arises from the level of 
credit float rather than the use of clearing balances to fund long-term 
assets. If the Board were to impute debt for the 2012 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 2012 PSAF. Imputed 
debt is 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 2012 PSAF is $234.7 million, a decrease of $42.5 
million from the imputed equity for 2011. In accordance with FAS 158 
[ASC 715], this amount includes an accumulated other comprehensive loss 
of $537.7 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 depository institution. Equity is 
calculated as 5 percent of total assets, and the ratio of capital to 
risk-weighted assets exceeds 10 percent.\17\ The Reserve Banks imputed 
an FDIC assessment for the priced services based on the FDIC's 
assessment rates and the level of total priced services assets held at 
Reserve Banks.\18\ For 2012, the FDIC assessment is imputed at $2.2 
million, compared with an FDIC assessment of $5.3 million in 2011.
---------------------------------------------------------------------------

    \17\ 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.
    \18\ The FDIC changed the base of its assessments from deposits 
to total assets. For information on the FDIC assessment rates, see 
the Final Rule at https://www.fdic.gov/news/news/press/2011/pr11028.html.
---------------------------------------------------------------------------

    Table 6 shows the imputed PSAF elements for 2012 and 2011, 
including the pretax ROE and other required PSAF costs. The $4.9 
million decrease in ROE is caused by a lower amount of imputed equity 
and a lower target ROE rate. Imputed sales taxes decreased from $4.2 
million in 2011 to $3.7 million in 2012. The effective income tax rate 
used in 2012 decreased to 30.9 percent from 32.4 percent in 2011. The 
priced services portion of the Board's expenses decreased $1.1 million, 
from $5.2 million in 2011 to $4.1 million in 2012.

  Table 3--Comparison of Pro Forma Balance Sheets for Budgeted Federal
                      Reserve Priced Services \19\
            [Millions of dollars--projected average for year]
------------------------------------------------------------------------
                                            2012       2011      Change
------------------------------------------------------------------------
Short-term assets:
    Imputed reserves requirements on        $376.1     $440.0    $(63.9)
     reserveable liabilities...........
    Receivables........................       36.3       41.4      (5.1)
    Materials and supplies.............        0.9        1.5      (0.6)
    Prepaid expenses...................       10.3        7.6        2.7

[[Page 68446]]

 
    Items in process of collection \20\      250.0      300.0     (50.0)
                                        --------------------------------
        Total short-term assets........      673.6      790.5    (116.9)
Imputed investments....................    3,490.7    3,968.6    (477.9)
Long-term assets:
    Premises \21\......................      148.2      173.1     (24.9)
    Furniture and equipment............       36.3       43.2      (6.9)
    Leasehold improvements and long-          75.9       68.2        7.7
     term prepayments..................
    Prepaid pension costs..............  .........      299.8    (299.8)
    Prepaid FDIC asset.................       19.4       10.9        8.5
    Deferred tax asset.................      249.1      189.7       59.4
                                        --------------------------------
        Total long-term assets.........      528.9      784.9    (256.0)
                                        --------------------------------
        Total assets...................    4,693.2    5,544.0    (850.8)
                                        ================================
Short-term liabilities: \22\
    Clearing balances..................    2,661.1    2,600.3       60.8
    Deferred credit items \20\.........    1,350.0    2,100.0    (750.0)
    Short-term payables................       28.3       35.0      (6.7)
                                        --------------------------------
        Total short-term liabilities...    4,039.4    4,735.3    (695.9)
Long-term liabilities: \22\
    Postemployment/postretirement            419.1      531.5    (112.4)
     benefits liability and pension
     liabilities \23\..................
                                        --------------------------------
        Total liabilities..............    4,458.5    5,266.8    (808.3)
Equity \24\............................      234.7      277.2     (42.5)
                                        --------------------------------
        Total liabilities and equity...    4,693.2    5,544.0    (850.8)
------------------------------------------------------------------------

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

    \19\ The 2011 PSAF values in tables 3, 4, and 6 reflect the 
budgeted 2011 PSAF of $39.5 million approved by the Board in October 
2010.
    \20\ Represents float that is directly estimated at the service 
level.
    \21\ Includes the allocation of Board of Governors assets to 
priced services of $0.6 million and $0.7 million for 2012 and 2011, 
respectively.
    \22\ No debt is imputed because clearing balances are a funding 
source.
    \23\ Includes the allocation of Board of Governors liabilities 
to priced services of $0.5 million and $0.5 million for 2012 and 
2011, respectively. Includes pension liabilities of $4.1 and $0.0 
million for 2012 and 2011, respectively.
    \24\ Includes an accumulated other comprehensive loss of $537.7 
million for 2012 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]
------------------------------------------------------------------------
                                                       2012       2011
------------------------------------------------------------------------
A. Short-term asset financing
Short-term assets to be financed:
    Receivables...................................      $36.3      $41.4
    Materials and supplies........................        0.9        1.5
    Prepaid expenses..............................       10.3        7.6
                                                   ---------------------
        Total short-term assets to be financed....       47.5       50.5
Short-term funding sources:
    Short-term payables...........................       28.3       35.0
    Portion of short-term assets funded with             19.2       15.5
     clearing balances \25\.......................
B. Long-term asset financing
Long-term assets to be financed:
    Premises......................................      148.2      173.1
    Furniture and equipment.......................       36.3       43.2
    Leasehold improvements and long-term                 75.9       68.2
     prepayments..................................
    Prepaid pension costs.........................  .........      299.8
    Prepaid FDIC asset............................       19.4       10.9
    Deferred tax asset............................      249.1      189.7
                                                   ---------------------
        Total long-term assets to be financed.....      528.9      784.9
Long-term funding sources:
    Postemployment/postretirement benefits              419.1      531.5
     liability....................................

[[Page 68447]]

 
    Imputed equity \26\...........................      234.7      277.2
                                                   ---------------------
        Total long-term funding sources...........      653.8      808.7
    Portion of long-term assets funded with core          0.0        0.0
     clearing balances \25\.......................
                                                   =====================
C. Total clearing balances used for funding priced-      19.2       15.5
 services assets..................................
------------------------------------------------------------------------

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

    \25\ 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 2011 and 2012, 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.
    \26\ See table 6 for calculation of required imputed equity 
amount.

                              Table 5--2012 Interest Rate Sensitivity Analysis \27\
                                              [Millions of dollars]
----------------------------------------------------------------------------------------------------------------
                                                                                       Rate
                                                                  Rate sensitive    insensitive        Total
----------------------------------------------------------------------------------------------------------------
Assets:
    Imputed reserve requirement on clearing balances............         $ 376.1  ..............          $376.1
    Imputed investments.........................................         3,490.7  ..............         3,490.7
    Receivables.................................................  ..............           $36.3            36.3
    Materials and supplies......................................  ..............             0.9             0.9
    Prepaid expenses............................................  ..............            10.3            10.3
    Items in process of collection..............................  ..............           250.0           250.0
    Long-term assets............................................  ..............           528.9           528.9
                                                                 -----------------------------------------------
        Total assets............................................         3,866.8           826.4         4,693.2
                                                                 ===============================================
Liabilities:
    Clearing balances...........................................         2,661.1  ..............         2,661.1
    Deferred credit items.......................................  ..............         1,350.0         1,350.0
    Short-term payables.........................................  ..............            28.3            28.3
    Long-term liabilities.......................................  ..............           419.1           419.1
                                                                 -----------------------------------------------
        Total liabilities.......................................         2,661.1         1,797.4         4,458.5
----------------------------------------------------------------------------------------------------------------


 
                                             200 basis       200 basis
           Rate change results            point decrease  point increase
                                             in rates        in rates
------------------------------------------------------------------------
Asset yield ($4,408.4 x rate change)....         $(77.3)           $77.3
Liability cost ($2,600.3 x rate change).          (53.2)            53.2
                                         -------------------------------
    Effect of 200 basis point change....          (24.1)            24.1
                                         ===============================
2012 budgeted revenue...................           436.7           436.7
Effect of change........................          (24.1)            24.1
                                         -------------------------------
    Revenue adjusted for effect of                 412.6           460.8
     interest rate change...............
                                         ===============================
2012 budgeted total expenses............           401.9           401.9
2012 budgeted PSAF......................            31.4            31.4
Tax effect of interest rate change ($              (7.5)             7.5
 change x 30.9%)........................
                                         -------------------------------
    Total recovery amounts..............           425.8           440.8
                                         -------------------------------
Recovery rate before interest rate                100.8%          100.8%
 change.................................
Recovery rate after interest rate change           96.9%          104.5%
Effect of interest rate change on cost            (3.9)%            3.8%
 recovery \28\..........................
------------------------------------------------------------------------

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

    \27\ 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. Calculations may be affected by 
rounding.
    \28\ 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 2012 because the priced services have adequate 
funding sources. See the section of the memo ``Analysis of the 2012 
PSAF'' for more information on the interest rate sensitivity 
analysis results and its effect on the 2012 PSAF and NICB.

[[Page 68448]]



              Table 6--Derivation of the 2012 and 2011 PSAF
                          [Millions of dollars]
------------------------------------------------------------------------
                                               2012            2011
------------------------------------------------------------------------
A. Imputed elements
    Short-term debt \29\................            $0.0            $0.0
    Long-term debt \30\.................             0.0             0.0
    Equity..............................
        Total assets from table 3.......         4,693.2         5,544.0
        Required capital ratio \31\.....              5%              5%
                                         -------------------------------
            Total equity................           234.7           277.2
B. Cost of capital
1. Financing rates/costs
    Short-term debt.....................             N/A             N/A
    Long-term debt......................             N/A             N/A
    Pretax return on equity \32\........            8.5%            8.9%
2. Elements of capital costs
    Short-term debt.....................             0.0             0.0
    Long-term debt......................             0.0             0.0
        Equity..........................  234.7 x 8.5% =    277.2 x 8.9%
                                                    19.9           =24.8
                                                    19.9            24.8
C. Other required PSAF costs
    Sales taxes.........................             3.7             4.2
    FDIC assessment.....................             2.2             5.3
    Board of Governors expenses.........             4.1             5.2
                                                    10.0            14.7
                                         -------------------------------
D. Total PSAF...........................            29.9            39.5
                                         -------------------------------
    As a percent of assets..............            0.6%            0.7%
    As a percent of expenses \33\.......            6.5%            8.9%
                                         -------------------------------
E. Tax rates............................           30.9%           32.4%
------------------------------------------------------------------------

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

    \29\ No short-term debt is imputed because clearing balances are 
a funding source for those assets that are not financed with short-
term payables.
    \30\ No long-term debt is imputed because core clearing balances 
are a funding source.
    \31\ Based on the regulatory requirements for a well-capitalized 
institution for the purpose of assessing insurance premiums.
    \32\ The 2012 ROE is equal to a risk-free rate plus a risk 
premium (beta * market risk premium). The 2012 after-tax CAPM ROE is 
calculated as 0.04% + (1 * 5.83%) = 5.87%. Using a tax rate of 
30.9%, the after-tax ROE is converted into a pretax ROE, which 
results in a pretax ROE of (5.87% / (1-30.9%)) = 8.5%. Calculations 
may be affected by rounding.
    \33\ System 2012 and 2011 budgeted priced services expenses less 
shipping and float are $430.8 million and $441.7 million, 
respectively. A new methodology was adopted for the estimation of 
budgeted priced services in 2012.

Table 7--Computation of 2012 Capital Adequacy for Federal Reserve Priced
                                Services
                          [millions of dollars]
------------------------------------------------------------------------
                                                               Weighted
                                      Assets    Risk weight     assets
------------------------------------------------------------------------
Imputed reserve requirement on          $376.1          0.0         $0.0
 clearing balances...............
Imputed investments:
    3-month Treasury bills \34\..      2,390.7          0.0          0.0
    Federal funds \35\...........      1,100.0          0.2        220.0
                                  --------------------------------------
        Total imputed investments      3,490.7  ...........        220.0
                                  --------------------------------------
Receivables......................         36.3          0.2          7.3
Materials and supplies...........          0.9          1.0          0.9
Repaid expenses..................         10.3          1.0         10.3
Items in process of collection...        250.0          0.2         50.0
Premises.........................        148.2          1.0        148.2
Furniture and equipment..........         36.3          1.0         36.3
Leasehold improvements and long-          75.9          1.0         75.9
 term prepayments................
Prepaid pension costs............  ...........          1.0  ...........
Prepaid FDIC asset...............         19.4          1.0         19.4
Deferred tax asset...............        249.1          1.0        249.1
                                  --------------------------------------

[[Page 68449]]

 
    Total........................     $4,693.2  ...........       $817.4
                                  ======================================
Imputed equity for 2012..........       $234.7  ...........  ...........
Capital to risk-weighted assets..        28.7%  ...........  ...........
    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.\36\
---------------------------------------------------------------------------

    \34\ 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.
    \35\ 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.
    \36\ The Board has requested public comment on proposed 
amendments to Regulation D to eliminate the clearing balance 
program. If the Board adopts these amendments, effective during 
2012, the clearing balances would be redesignated as excess 
reserves, and would be subject to explicit interest, rather than 
earnings credits. See 76 FR 64250-64259 (Oct. 18, 2011).
---------------------------------------------------------------------------

    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 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.\37\
---------------------------------------------------------------------------

    \37\ 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 2010 actual, 2011 estimated, 
and 2012 budgeted cost recovery performance for the commercial check 
service.

                                              Table 8--Check Service Pro Forma Cost and Revenue Performance
                                                                      [$ millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                         5 Recovery rate
                             Year                                   1 Revenue      2 Total expense    3 Net income     4 Targeted roe    after targeted
                                                                                                       (ROE) [1-2]                          [1/(2+4)]
--------------------------------------------------------------------------------------------------------------------------------------------------------
2010 (actual).................................................             358.4             326.5              31.9               8.1            107.1%
2011 (estimate)...............................................             254.8             237.1              17.7               8.8            103.6%
2012 (budget).................................................             209.1             200.4               8.6               6.5            101.0%
--------------------------------------------------------------------------------------------------------------------------------------------------------

    1. 2011 Estimate--For 2011, the Reserve Banks estimate that the 
check service will recover 103.6 percent of total expenses and targeted 
ROE, compared with the budgeted recovery rate of 102.9 percent. The 
Reserve Banks expect to recover all actual and imputed costs of 
providing check services and earn a net income of $17.7 million (see 
table 8).
    The general decline in the number of checks written continues to 
influence the decline in checks collected by the Reserve Banks. Through 
September, total forward check volume and return check volume is 14 
percent and 17 percent lower, respectively, than the same period last 
year. For full-year 2011, the Reserve Banks estimate that their total 
forward check collection volume will decline nearly 16 percent and 
return check volume will decline 15 percent from 2010 levels.\38\ The 
proportion of checks deposited and presented electronically has grown 
steadily in 2011 (see table 9). The Reserve Banks expect that year-end 
2011 FedForward deposit and FedReceipt presentment penetration rates 
will reach 99.9 percent and 99.6 percent, respectively. The Reserve 
Banks also expect that year-end 2011 FedReturn and FedReceipt Return 
volume penetration rates will reach 98.8 percent and 99.1 percent, 
respectively.
---------------------------------------------------------------------------

    \38\ Total Reserve Bank forward check volumes are expected to 
drop from roughly 7.7 billion in 2010 to 6.4 billion in 2011. Total 
Reserve Bank return check volumes are expected to drop from roughly 
73.2 million in 2010 to 62.3 million in 2011.

                                                     Table 9--Check 21 Product Penetration Rates \a\
                                                                      [Percent] \b\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                Forward deposit volume                                 Return volume \c\
                                                 -------------------------------------------------------------------------------------------------------
                                                         FedForward                FedReceipt                 FedReturn             FedReceipt return
                                                 -------------------------------------------------------------------------------------------------------
                                                   Full-year     Year-end    Full-year     Year-end    Full-year     Year-end    Full-year     Year-end
--------------------------------------------------------------------------------------------------------------------------------------------------------
2005............................................          1.9          5.0        < 0.1          0.1          4.0          6.9          N/A          N/A

[[Page 68450]]

 
2006............................