Federal Reserve Bank Services Private Sector Adjustment Factor, 67007-67012 [2012-26918]
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Federal Register / Vol. 77, No. 217 / Thursday, November 8, 2012 / Notices
BILLING CODE 6210–01–P
FOR FURTHER INFORMATION CONTACT:
By order of the Board of Governors of the
Federal Reserve System, October 25, 2012.
Robert deV. Frierson,
Secretary of the Board.
Gregory L. Evans, Deputy Associate
Director (202) 452–3945, Brenda L.
Richards, Manager (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), contact (202) 263–
4869.
SUPPLEMENTARY INFORMATION:
[FR Doc. 2012–26864 Filed 11–7–12; 8:45 am]
BILLING CODE 6210–01–C
FEDERAL RESERVE SYSTEM
[Docket No. OP–1447]
Federal Reserve Bank Services Private
Sector Adjustment Factor
Board of Governors of the
Federal Reserve System.
ACTION: Notice.
AGENCY:
The Board has approved
modifications to its method for
calculating the private-sector
adjustment factor (PSAF). The PSAF is
part of the Board’s calculation, as
required by the Monetary Control Act of
1980 (MCA), to establish the fees that
Federal Reserve Banks (Reserve Banks)
charge for certain financial services
provided to depository institutions.
Because the Federal Reserve priced
services have historically had
characteristics most analogous to
correspondent banks, clearing balances
held by depository institutions at
Reserve Banks were a primary
component in computing the PSAF. The
clearing balance program was largely
modeled after similar programs offered
by correspondent banks, wherein banks
maintain balances with their
correspondents. The Board was
prompted to consider a new PSAF
methodology because clearing balances
held at Reserve Banks were declining
following the Board’s implementation of
the payment of interest on required
reserve and excess balances held at
Reserve Banks. Effective July 2012, the
Board eliminated the contractual
clearing balance program in connection
with its simplification of reserve
policies. Changes in the priced services
market and the elimination of clearing
balances have made the correspondent
bank analogy less applicable to the
priced services provided by the Federal
Reserve. Accordingly, the Board is
adopting a publicly traded firm model
to set the PSAF. Use of the new
methodology is reflected in priced
services fees for 2013, which is
published elsewhere in today’s Federal
Register.
DATES: Effective Date: November 8,
2012. The revised method will be used
to calculate the PSAF that is reflected in
the 2013 priced services fees.
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SUMMARY:
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I. Background
Under the MCA, the Federal Reserve
Banks must establish fees for ‘‘priced
services,’’ to recover, over the long run,
all direct and indirect costs actually
incurred in providing these services as
well as the imputed costs that would
have been incurred had the services
been provided by a private-sector
firm.1 2 The imputed costs—sales and
income taxes, debt costs, and a required
return on equity (profit)—are
collectively referred to as the PSAF and
are an additional cost considered when
setting fees and determining cost
recovery.
The Board’s current method for
calculating the PSAF involves
developing an estimated Federal
Reserve priced services pro forma
balance sheet using actual priced
services assets and liabilities. The
remaining components on the balance
sheet, such as equity, are imputed as if
these services were provided by a
correspondent bank. Equity is imputed
at a level necessary for a wellcapitalized depository institution and
the target return on equity capital (ROE)
is estimated based on the capital asset
pricing model (CAPM). Finally, the
PSAF includes an estimated share of the
Board of Governors’ expenses incurred
to oversee Reserve Bank priced services,
imputed sales and income taxes, and an
imputed Federal Deposit Insurance
Corporation (FDIC) assessment.
The methodology underlying the
PSAF is reviewed periodically to ensure
that it is appropriate and relevant in
light of Reserve Bank priced services
activities, accounting standards, finance
theory, and regulatory and business
practices.3 The Board considers five
principles when reviewing the PSAF
methodology: (1) Providing a
conceptually sound basis for efficient
pricing in the market for payments
services, (2) using Reserve Bank
financial information as applicable, (3)
1 These priced services include check, FedACH®,
Fedwire® Funds, and Fedwire® Securities services
(for activity unrelated to Treasury).
2 12 U.S.C. 248a(c)(3).
3 The previous review of the PSAF was completed
in 2005 and changes were implemented for the
2006 PSAF. 70 FR 60341 (Oct. 17, 2005).
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maintaining consistency with privatesector practice, (4) using data in the
public domain to make the PSAF
replicable, and (5) avoiding any undue
cost or complexity of the PSAF
methodology.
Under the current correspondent bank
model, clearing balances maintained by
Reserve Bank customers have been a
significant component of the pro forma
financial statements and an important
driver in calculating nearly all of the
imputed costs considered in setting fees
for priced services. Similar to how a
correspondent bank would use its
respondent balances, the clearing
balances are a funding source for shortand long-term assets, including
investments, and affect the level of
imputed equity. Clearing balance levels,
therefore, affect the overall size of the
balance sheet, influence the need to
impute debt funding, and contribute to
total cost recovery through imputed net
income on clearing balances.
The payment of interest on balances
in Federal Reserve accounts and related
monetary policy actions have affected
the level of clearing balances and the
similarity between correspondent banks
and Federal Reserve priced services.4
Following the implementation of
interest on required reserve and excess
balances, the Board recognized a
significant decline in clearing balances
and anticipated that the trend would
continue.
The Board requested comment on
modifications to its computation of the
PSAF in April 2009 5 (2009 notice) and
in October 2011 6 (2011 notice)
(concurrent with the Board’s request for
comment on reserves simplification).
Because clearing balances were a
significant component of the pro forma
balance sheets under the current
method and because of the decline in
clearing balance levels, the Board
requested in its 2009 notice comment on
the anticipated level of clearing
balances given certain interest rate
scenarios, the relevance of the clearing
balance program, and whether the
clearing balance program should
continue.7 The Board requested
comment on whether a new
methodology and its associated data
sources and computations would be
4 In 2008, Congress amended the Federal Reserve
Act to authorize Reserve Banks to pay interest on
balances of eligible institutions. (See section 19 of
the Federal Reserve Act (12 U.S.C. 461(b).) Since
then, interest has been paid on balances maintained
to satisfy reserve balance requirements and excess
reserves at a rate determined by the Board
(currently 25 basis points for required and excess
reserve balances).
5 74 FR 15481 (Apr. 6, 2009).
6 76 FR 64250 (Oct. 18, 2011).
7 74 FR at 15484.
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appropriate for the priced services. The
Board also requested comment on the
appropriate term for the risk-free rate
that is used to calculate the target ROE.8
In the 2009 notice, the Board
proposed a publicly traded firm (PTF)
model for calculating the imputed costs
that factor into priced services fees and
cost recovery.9 The imputed PSAF costs
under the proposed PTF model were
principally based on the U.S. publicly
traded firm market and not limited to
one sector of the market. Because the
analogy between correspondent banks
and the Reserve Banks’ priced services
had become less applicable with the
decline in the level of clearing balances
held and in Reserve Bank paper check
collection volume for which
correspondent banks were the primary
competitors, the design of the PTF
model uses the U.S. publicly traded firm
market to simplify the peer group
assumption. This simplifying
assumption is intended to address the
limited comparable private sector firm
data in the public domain as well as
avoid undue cost or complexity.
In the 2009 notice, the Board also
considered and requested comment on
two other PSAF models: the user-owned
utility model, which incorporated the
financial characteristics of a user-owned
utility to derive its priced services
balance sheet, and the cost plus model,
which incorporated a markup to the
priced services operating expenses for
the year. In addition, the Board
considered and requested comment on
whether it should continue using the
correspondent bank model.
In the 2011 notice, the Board
requested comment on eliminating the
contractual clearing balance program,
the appropriate level of minimum
equity for the previously proposed PTF
model, and whether the level of float
should be considered before replacing
the correspondent bank model.10
Although the level of clearing balances
did not decline to the degree anticipated
in 2009, the contractual clearing balance
program was subsequently eliminated in
2012 as part of the Board’s reserves
simplification.11
In these notices, the Board proposed
and requested comment on the
following considerations and elements
of the new PSAF methodology:
• Adopting an imputed capital
structure, effective tax rate, and debt
financing rates of the priced services
based on the U.S. publicly traded firm
8 Id.
at 15488.
at 15489–15490.
10 76 FR at 64255–64256.
11 77 FR 21846 (Apr. 12, 2012).
9 Id.
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market using specific market data and
time frames;
• Basing the capital structure on the
most recent full-year value-weighted
average capital structure (that is, total
long-term debt to total long-term debt
plus equity) of all U.S. publicly traded
firms included in the Standard & Poor’s
Compustat® database; 12
• Basing the long-term debt financing
rate on the five-year mean of the Aaa
and Baa Moody’s bond yields published
on the Federal Reserve Board’s H.15
Statistical Release and the
reasonableness of including only
investment grade bonds in the
calculation; 13
• When short-term assets exceed
short-term liabilities, imputing shortterm debt financing rate on the average
of the three-month AA and A2/P2
nonfinancial commercial paper rates as
published on the Federal Reserve
Board’s Commercial Paper Release; 14
• Basing the imputed effective
income tax rate on the five-year mean of
the value-weighted average ratios of
current tax expense to total net income
for all U.S. publicly traded firms in the
financial database; and
• Considering the user-owned utility
model, the cost-plus model, or a
continuation of the correspondent bank
model as alternative methodologies to
the PTF model.
II. Summary of Comments and Analysis
The Board received eight comments
in response to its 2009 notice.
Comments were submitted by three
bankers’ banks, two industry groups,
one bank holding company, one
association, and one individual. Overall,
the comments on the proposed PSAF
methodology were mixed. Some
commenters disagreed with the
proposed methodology and suggested
alternative approaches that required
using financial data that are not publicly
available. Three of the four who
commented on the overall proposed
PSAF methodology did not support the
proposed PTF model. One of these
commenters supported a continuation of
the correspondent bank model and one
supported a cost-plus model. One
commenter supported the PTF model
but encouraged evaluation of the costplus methodology for computing the
PSAF. The remaining four commenters
expressed neither support for nor
opposition to the proposed PTF model
12 The Standard & Poor’s Compustat database
contains information on more than 6,000 U.S.
publicly traded firms, which approximate the
entirety of the U.S. market.
13 https://www.federalreserve.gov/releases/h15/
update/.
14 Id.
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but provided other, more general
comments. Four commenters requested
an extension of the comment period for
further analysis or dialogue. The Board
received one response to its October
2011 request for comment related to the
PSAF. This commenter stated that the
Board should conduct further analysis
and provide the public with additional
information before adopting a new
methodology.
A. The Contractual Clearing Balance
Program
The Board requested comment on the
general relevance of the clearing
balances in the computation of PSAF as
a consequence of anticipated continued
declines in clearing balance levels.
Three commenters acknowledged the
effect interest on required reserve and
excess balances would have on the level
of clearing balances maintained when
the rates paid on required and excess
reserve balances are greater than the
earnings credit rate on clearing
balances. Subsequently, the Board
eliminated the clearing balance
program. As a result, there is no longer
a need to consider the levels of balances
as they relate to the PSAF calculation.
B. Publicly Traded Firm Model
In response to its request for
comment, the Board received various
comments regarding the proposed
assumptions used in the PTF model
related to peer group benchmarking,
capital structure, effective tax rate, and
debt financing.
(1) Peer Group Benchmarking
The cost of equity, a key component
of priced services cost structure, is
computed based on the CAPM, which
uses the U.S. publicly traded firm
market to determine the average risk
premium. Three commenters stated that
the U.S. publicly traded firm market
was too broad of a benchmark and
suggested narrowing the peer group to
specific financial institutions or
publicly-traded payments processors.
One of these three commenters
recommended a list of participants in
the payment processing industry as a
peer group benchmark and also
suggested commissioning a peer-group
study to benchmark payment processing
industry costs.
Because of the concentration of the
market activity of the suggested peer
group in a few entities, the financial
results of such a peer group would
likely be volatile.15 The Board found
15 Although the MCA’s requirement for cost
recovery over the long run allows the Board to set
fees to over- or under-recover costs in a given year
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that one entity accounted for
approximately 43 percent of the group’s
total assets and the range of the
individual effective tax rates of the
entities was broad (from 18 to 71
percent). The Board believes that a peer
group or proxy for competitors to
Federal Reserve priced services should
consist of enough participants with
publicly available financial data to
mitigate the potentially volatile effects
of the financial characteristics of a few
firms. Because of the challenges in
identifying a viable peer group, the U.S.
publicly traded firm market is an
attractive alternative. The use of
averages based on the U.S. publicly
traded firm market minimizes the effect
of extreme or anomalous financial
characteristics in the PTF model.
In reviewing appropriate peer group
benchmarks for computing the PSAF,
the Board considered adopting a userowned utility model, which recognizes
that the Reserve Banks’ major
competitors in the provision of priced
services are increasingly user-owned
utilities rather than traditional
correspondent banks. One commenter
noted that the definition of user-owned
utilities was not adequately described in
the request for comment. Another
commenter requested additional insight
on the Board’s conclusion that userowned utilities have become its
predominant competitors. None of the
commenters specifically supported a
user-owned utility model.
Financial information regarding some
significant user-owned utilities is not
publicly available. The primary userowned utility that provides services
similar to those provided by the Reserve
Banks is The Clearing House Payments
Company, LLC, which operates CHIPS,
the primary competitor for the Reserve
Bank’s Fedwire® Funds Service, and the
Electronic Payments Network, the only
private-sector automated clearinghouse
operator.16 Establishing the method to
calculate the requisite imputed
elements—capital structure, debt
financing rates, and income taxes—
using theoretical assumptions or
academic studies could be challenging.
In the absence of publicly available data
on a significant number of user-owned
utilities or substantial academic
literature regarding the financial
characteristics of these organizations,
the Board does not consider adopting
to minimize price volatility in imputed costs makes
the pricing process more complex. As a result, the
Board has typically preferred to adopt PSAF
methodologies that provide for stable rather than
volatile imputed costs.
16 The Board identified 15 user-owned utilities, 4
of which have some membership ownership.
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user-owned utilities to be an
appropriate peer group benchmark.
The Board also considered continuing
to use the correspondent bank model,
without clearing balances and with
minor modifications, to impute costs.
One commenter supported the
continued use of the correspondent
bank model and stated that private
market participants are affected by
factors similar to the Federal Reserve in
setting fees for services. One commenter
noted that a reduction in clearing
balances does not necessarily indicate a
failure of the PSAF and that the
correspondent bank model has been
reasonably effective over time. Others
who commented on the proposal did
not comment on the Board’s continued
use of this model.
A principal disadvantage of the
correspondent bank model is the
decreasing similarity between the
characteristics of the Reserve Bank
priced services without the contractual
clearing balance program and traditional
correspondent banks. Historically, the
Board recognized that the financial
characteristics of correspondent banks
were not driven primarily by the
payment services that compete with
those offered by Reserve Banks, but
considered correspondent banks as an
appropriate peer group because both
entities held customer balances for the
purpose of facilitating payments
services and they were the primary
competitors to the Reserve Banks’ check
services. Because the contractual
clearing balance program was
eliminated and the check service has
declined as a percentage of the Reserve
Banks’ priced services revenue and
expenses, comparing priced services to
correspondent banks for the purpose of
establishing a PSAF methodology is
increasingly difficult. Accordingly, the
Board has determined that the peer
group of correspondent banks is no
longer appropriate to impute priced
services costs.
Based on its review of possible
benchmarks, the Board believes the use
of market wide averages of U.S. publicly
traded firms is an appropriate proxy that
avoids the challenges associated with
the potential financial data volatility
associated with the small size of the
peer group of payment processors or
user-owned utilities, the lack of public
financial data of user-owned utilities,
and the decreasing similarity between
the characteristics of the Reserve Banks’
priced services and correspondent
banks. The use of the publicly-traded
firm model builds on the approach used
in the current PSAF methodology that
uses the U.S. publicly traded firm
market to determine the average risk
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premium in determining the cost of
capital.
(2) Capital Structure
In the PTF model, the capital
structure will be derived from the U.S.
publicly traded firm market, subject to
minimum equity constraints consistent
with those required by the FDIC for a
well-capitalized institution. One
commenter, who supported the
correspondent bank model for
computing the PSAF, objected to the
absence of an FDIC assessment, related
capital requirements, and regulatory
overhead. Although the PTF
methodology does not model depository
institution requirements, the Board
requested comment on whether it
should use FDIC minimum equity
requirements, but did not receive any
comments on this matter. To ensure a
reasonable level of equity is imputed to
protect against financial, operating, and
business risks, the Board will use the
minimum equity constraints established
by the FDIC, with equity set at a level
of at least five percent of assets or ten
percent of risk weighted assets. The
Board, however, will not include an
FDIC assessment, because the peer
group is not composed primarily of
depository institutions.
(3) Effective Tax Rate
In the PTF model, the imputed
effective income tax rate will be the
five-year mean of the value-weighted
average ratios of current tax expense to
total net income for all U.S. publicly
traded firms in Standard & Poor’s
Compustat® database. One commenter
assumed an upward trend of tax rates
and objected to the tax rate derivation
from historical data rather than future
tax rates. To maintain consistency in the
PTF model, the Board will use tax rates
from the U.S. publicly traded firm
market. The Board considered
alternatives to calculating the tax rate,
including expanding the period of the
mean calculation from five to ten or
twenty years, filtering key parameters
on tax expense or total net income, and
using additional statistical measures.
Because the results of the alternative
approaches reflected only a small subset
of the U.S. publicly traded firm market,
the Board did not adopt these
alternatives.
(4) Debt Financing
Due to the elimination of clearing
balances, a key source of financing of
priced services assets in the
correspondent bank model, the Board
recognizes that additional debt and
equity may need to be imputed in the
PTF model to meet funding needs. The
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Board initially proposed using the fiveyear mean of the Aaa and Baa Moody’s
bond yield for the long-term debt
financing rate. To include noninvestment grade debt in the PTF
model, however, the Board will use the
five-year mean of the annual Merrill
Lynch Corporate & High Yield Index
rate. Using the corporate and high yield
index rating is also consistent with the
Board’s assumption of comparing the
priced services to the U.S. publicly
traded firm market. The Board will use
a five-year mean when imputing a debt
financing rate to maintain consistency
with the effective tax rate and to reduce
year-to-year volatility due to changes in
the yield curve.
C. Alternative Methodology—The CostPlus Model
In response to previous Board
proposals related to the PSAF, some
commenters have suggested adopting
variations on a cost-plus model. In 2005,
while commenting on proposed changes
to the PSAF methodology for calculating
the ROE, two commenters suggested a
cost-plus model as a simple,
straightforward method for calculating
the PSAF. The Board reconsidered this
methodology in its 2009 notice. One
commenter noted that the Board should
consider using a cost-plus model, but
expressed concern that its estimated 700
percent increase in the PSAF under a
cost-plus model compared to the
correspondent bank model may be too
much to impose on the financialservices industry. In implementing a
cost-plus PSAF model, the Board
considered deriving the MCA-required
imputed costs by establishing a fixed
markup over operating expenses. Each
time the Board has considered this
model, developing a viable method for
calculating the markup has been
challenging.
The Board considered a cost-based
model with the markup percentage
derived from either historical PSAF
values or the income statement
operating margins of all U.S. publicly
traded firms. The Board evaluated the
PSAF results after applying a markup
over expenses ratio based on valueweighted average data for all publicly
traded U.S. firms in the Standard &
Poor’s Computstat® database and
applying a markup over expenses ratio
based on historical PSAF. Although a
cost-plus model is simple, transparent,
and replicable by the public, it also has
limitations. A cost-plus model based on
historical PSAF values is static and
assumes continued use of the current
correspondent bank model, which is of
diminishing relevance. In addition,
basing a cost-plus model on accounting-
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based values captures only book, not
market, values of financing and other
costs, which is not consistent with
current finance theory. Accordingly, the
Board does not consider this a viable
alternative model to the correspondent
bank model.
D. Other General Comments
The Board received comments that
focused on the Federal Reserve priced
services involvement in payment
services more generally. Four
commenters suggested that the Federal
Reserve work to further lower costs.
Three of these four commenters believe
that the Federal Reserve should
continue to provide payment services.
Two commenters requested that the
Federal Reserve explicitly state its
intent regarding continuing involvement
in payment systems and the proposed
PSAF methodology changes. Two
commenters addressed the effect of
proposed changes on market
competition, pricing, and payment
systems generally.
The Board received other comments
that requested additional analysis or
information related to the notice and
requests for comment. Two commenters
requested more specific information on
the effect of the PSAF changes to the
Federal Reserve’s price schedule. One
commenter recommended that the
notice and request for comment include
the effect of the proposed changes on
community banks. One commenter
requested illustrative example
calculations to demonstrate how the
PSAF would be affected by shrinking
contractual clearing balances. The same
commenter also stated that it would be
informative to the public if the Board
provided a side-by-side comparison of
the correspondent banking model with
the PTF model, displaying numerical
results of the financial models under
different scenarios. One commenter
suggested that the PTF model leaves too
much to interpretation.
Consistent with MCA requirements,
the Board evaluates and considers the
costs of priced services, competitive
factors, and the adequacy of payment
services nationwide when approving the
prices of Federal Reserve Bank
services.17 Because the Federal Reserve
seeks to recover only its actual and
imputed costs, the effect of the PSAF
changes on Reserve Bank prices can be
approximated by estimating the impact
of the PSAF change to total costs. The
effect of the PSAF methodology changes
on a variety of organizations, including
community banks, is largely dependent
on the extent to which an organization
17 12
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uses payment services provided by the
Federal Reserve.18 With respect to
comments requesting additional
information and the degree of
interpretation in the PTF model, the
Board believes that the analyses it has
conducted, and the information
provided in this and previous notices,
have provided the analysis and
information necessary for the public to
understand its proposal.
The Board received other comments
on issues not related to the proposal and
are not addressed in this notice.
After considering the comments
received, the Board has adopted the PTF
methodology for the 2013 PSAF. The
PTF methodology is transparent,
consistent with current financial theory
and practice, and is conceptually sound
as a basis for efficient pricing in the
market of payment services. It uses
relevant Reserve Bank financial
information as input to the model, and
can be replicated by the public. In its
analysis, the Board evaluated
computations in the models considered
for imputing the capital structure,
effective tax rate, and long- and shortterm debt financing rates. The Board
evaluated the advantages and obstacles
surrounding the use of each alternative
methodology. The Board believes the
new methodology is appropriate in light
of the elimination of clearing balances
and the evolution of payment system
providers beyond commercial banking.
E. Future Industry and Regulatory
Changes
The MCA requires the Federal
Reserve Banks to impute costs that
would have been incurred had the
services been provided by a private
sector firm. Accordingly, the Board
considers industry and regulatory
changes relevant to the private sector.
The Board applies its payment system
risk policies, which incorporate relevant
international risk-management
standards to the Federal Reserve Banks’
Fedwire® Funds and Fedwire®
Securities services. In considering
revisions to payment system risk
policies to address the new Principles
for Financial Market Infrastructures
(PFMI), the Board will also consider
whether revisions to the PSAF are
necessary.19
III. Summary and Effect of New PSAF
Methodology
Based on comments received and
further consideration of the issues
18 A side-by-side comparison of the
correspondent bank model and the PTF model was
provided in the 2009 notice (74 FR at 15494).
19 The PFMI are available at https://www.bis.org/
publ/cpss101a.pdf.
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around the appropriate computation of
the PSAF, the Board has adopted the
PTF model for computing the PSAF as
proposed with a minor adjustment.20
The Board will develop pro forma
financial statements under the PTF
model using an estimate of assets and
liabilities used in priced services and
incorporate the following elements:
• Peer Group Benchmarking: The
imputed capital structure, debt and ROE
rates, and effective income tax rate will
be based on data for the U.S. publicly
traded firm market and calculated using
time frames that minimize volatility
from year-to-year. The model will
incorporate a one-year period for
elements that historically have been
more stable and, to minimize volatility,
a five-year average period for elements
that have been more volatile
historically. When averaging data, the
Board will use value-weighted averages
to more accurately reflect the financial
characteristics of the U.S. publicly
traded firm market rather than those of
the simple average firm in the market.
Data for computing the market-based
debt-to-equity ratios and effective tax
rates will be derived from Standard &
Poor’s Compustat® database. The
database contains information on more
than 6,000 U.S. publicly traded firms,
which approximates the entirety of the
U.S. market.
• Capital Structure: The capital
structure will be imputed based on the
net funding (assets less liabilities),
subject to minimum equity constraints.
If estimated assets are in excess of
estimated liabilities, the Board will
impute first debt funding (either shortor long-term) and then equity funding to
meet the capital structure of the U.S.
publicly traded firm market or
minimum equity constraints. Minimum
equity will follow FDIC requirements of
at least 5 percent of total assets and 10
percent of risk-weighted assets. If
minimum equity constraints are not met
after imputing equity based on all other
financial statement components,
additional equity is imputed to meet
these constraints.
• Effective Tax Rate: As with the
imputed capital structure, the effective
tax rate will be based on data from the
U.S. publicly traded firm market. This
tax rate will be the mean of the
weighted average rates of the U.S.
publicly traded firm market over the
past five years.
• Debt and Equity Financing: The
imputed short- and long-term debt
financing rates will be derived from the
Federal Reserve Board’s release of
nonfinancial commercial paper rates
from the H.15 Selected Interest Rates
release and the annual Merrill Lynch
Corporate & High Yield Index rate,
respectively.21 There will be no change
to the methodology for computing the
ROE rate. The Board will continue
calculating the required rate of ROE
using the CAPM with a beta of 1.0 and
a 40-year average historical market
premium with a 3-month Treasury rate.
The rates for debt and equity financing
will be applied to the priced services’
estimated imputed liabilities and
imputed equity derived from the target
capital structure. Additional equity
imputed to meet minimum equity
requirements will be invested solely in
Treasury securities.
Using the 2012 PSAF for illustrative
purposes, the data below illustrate the
effect of implementing a PTF model
approach. For comparative purposes,
amounts illustrated for the
correspondent bank model exclude the
effect of clearing balances. The tax rate
computation differences between the
correspondent bank model and the PTF
model are reflected in the pretax ROE.
Equity under both models is imputed at
five percent of assets to satisfy the FDIC
minimum equity requirements for wellcapitalized institutions.
PSAF ILLUSTRATION
[$ in millions]
Pretax ROE
(percent)
Correspondent Bank Model 22 .........................................................................................
PTF Model 23 (estimate) ..................................................................................................
8.5
9.3
Equity
$96.0
96.0
Cost of
equity
$8.2
8.9
PSAF
$17.9
16.7
In its March 1990 policy statement
‘‘The Federal Reserve in the Payments
System,’’ the Board stated that all
operational and legal changes
considered by the Board that could have
a substantial effect on payment system
participants are subject to a competitiveimpact analysis.24 Under this policy, the
Board evaluates whether a proposed
change would have a direct and material
adverse effect on the ability of other
service providers to compete effectively
with the Reserve Banks in providing
similar services. These effects could be
caused by differences in legal authority
or constraints between Reserve Banks
and private-sector competitors or by a
dominant market position that the
Reserve Banks might derive from such
legal differences. If the proposed change
creates such an effect, the Board must
further evaluate the changes to
determine whether its benefits—such as
contributions to payment system
efficiency, payment system integrity, or
other Board objectives—can be retained
while reducing the hindrances to
competition.
The intent of the PSAF, and more
broadly of setting priced services fees to
fully recover the costs (including
imputed costs and profits) to provide
them, is to facilitate competition
between Reserve Banks and privatesector providers of payment services to
foster a more efficient payment system.
Identifying a meaningful private-sector
peer group for the purpose of
calculating the PSAF, however, has
been difficult given the specific nature
of the priced services provided by the
Reserve Banks. The correspondent bank
model historically provided a
reasonable proxy for Reserve Bank
priced services because correspondent
banks hold balances for the purpose of
facilitating payment services and they
were the primary competitors to the
Reserve Banks’ check service, although
20 The PTF model will incorporate the Merrill
Lynch Corporate & High Yield Index rate instead of
the Aaa and Baa Moody’s bond yield as initially
proposed.
21 Data for the H.15 Selected Interest Rates release
is supplied by The Depository Trust & Clearing
Corporation, a national clearinghouse for the
settlement of securities trades and a custodian for
securities. The Merrill Lynch US Corporate & High
Yield Index tracks the performance of U.S. dollar
denominated investment grade and below
investment grade corporate debt publicly issued in
the U.S. domestic market. Index constituents are
capitalization-weighted based on their current
amount outstanding.
22 Amounts approved by the Board in its 2012
fees were $234.7 million, $19.9 million, and $29.9
million for imputed equity, the cost of equity, and
total PSAF, respectively. 76 FR 68440 (Nov. 4,
2011).
23 Amounts for the PTF model were estimated.
24 Federal Reserve Regulatory Service 9–1558.
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IV. Competitive Impact Analysis
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Federal Register / Vol. 77, No. 217 / Thursday, November 8, 2012 / Notices
the Board recognized that correspondent
bank balance sheets and ROE are
typically driven largely by services that
are not similar to those provided by the
Reserve Banks. Because the contractual
clearing balance program has been
eliminated and correspondent banks are
not the primary competitors of the
Reserve Banks’ priced services,
correspondent banks no longer serve as
the best PSAF benchmark peer group.
User-owned utilities are increasingly
becoming the Reserve Banks’ key priced
services competitors; however, because
no reliable comparative data are
publicly available for the user-owned
utilities, it also does not provide a
viable model for the PSAF. Lacking a
more specific viable peer group, the
Board believes modeling the PSAF on a
PTF model is appropriate. The Board
believes that such a change in the PSAF
methodology does not have a direct and
material adverse effect on the ability of
other service providers to compete
effectively with Reserve Banks in
providing similar services. Rather, the
Board believes that this PSAF revision
will facilitate competition between the
Reserve Banks and private-sector
providers.
V. Paperwork Reduction Act
In accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C. ch.
3506; 5 CFR part 1320 appendix A.1),
the Board has reviewed the proposal
under the authority delegated to the
Board by the Office of Management and
Budget. The proposal contains no
provisions subject to the Paperwork
Reduction Act.
By order of the Board of Governors of the
Federal Reserve System, October 25, 2012.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2012–26918 Filed 11–7–12; 8:45 am]
BILLING CODE 6210–01–P
The applications listed below, as well
as other related filings required by the
Board, are available for immediate
inspection at the Federal Reserve Bank
indicated. The applications will also be
available for inspection at the offices of
the Board of Governors. Interested
persons may express their views in
writing on the standards enumerated in
the BHC Act (12 U.S.C. 1842(c)). If the
proposal also involves the acquisition of
a nonbanking company, the review also
includes whether the acquisition of the
nonbanking company complies with the
standards in section 4 of the BHC Act
(12 U.S.C. 1843). Unless otherwise
noted, nonbanking activities will be
conducted throughout the United States.
Unless otherwise noted, comments
regarding each of these applications
must be received at the Reserve Bank
indicated or the offices of the Board of
Governors not later than December 3,
2012.
A. Federal Reserve Bank of Kansas
City (Dennis Denney, Assistant Vice
President) 1 Memorial Drive, Kansas
City, Missouri 64198–0001:
1. Townsend Holding Company,
Grove, Oklahoma; to become a bank
holding company by acquiring 100
percent of the voting shares of Bank of
Grove, Grove, Oklahoma.
Board of Governors of the Federal Reserve
System, November 5, 2012.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2012–27313 Filed 11–7–12; 8:45 am]
BILLING CODE 6210–01–P
DEPARTMENT OF HEALTH AND
HUMAN SERVICES
Meeting of the Advisory Committee on
Blood and Tissue Safety and
Availability
Department of Health and
Human Services, Office of the Secretary,
Office of the Assistant Secretary for
Health.
ACTION: Notice.
AGENCY:
FEDERAL RESERVE SYSTEM
tkelley on DSK3SPTVN1PROD with NOTICES
Formations of, Acquisitions by, and
Mergers of Bank Holding Companies
The companies listed in this notice
have applied to the Board for approval,
pursuant to the Bank Holding Company
Act of 1956 (12 U.S.C. 1841 et seq.)
(BHC Act), Regulation Y (12 CFR part
225), and all other applicable statutes
and regulations to become a bank
holding company and/or to acquire the
assets or the ownership of, control of, or
the power to vote shares of a bank or
bank holding company and all of the
banks and nonbanking companies
owned by the bank holding company,
including the companies listed below.
VerDate Mar<15>2010
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As stipulated by the Federal
Advisory Committee Act, the U.S.
Department of Health and Human
Services is hereby giving notice that the
Advisory Committee on Blood and
Tissue Safety and Availability
(ACBTSA) will hold a meeting.
The meeting will be open to the
public.
SUMMARY:
National Institutes of Health
Conference Room, 5635 Fisher Lane,
Terrace Level, Rockville, MD 20852.
ADDRESSES:
Mr.
James Berger, Senior Advisor for Blood
Policy and Executive Secretary
ACBTSA, Division of Blood and Tissue
Safety and Availability, Office of HIV/
AIDS and Infectious Disease Policy,
Office of the Assistant Secretary for
Health, U.S. Department of Health and
Human Services, 1101 Wootton
Parkway, Suite 250, Rockville, MD
20852, (240) 453–8809, Fax (240) 453–
8456, email ACBSA@hhs.gov.
FOR FURTHER INFORMATION CONTACT:
The
ACBTSA shall provide advice to the
Secretary through the Assistant
Secretary for Health. The Committee
shall advise on a range of policy issues
to include: innovations in blood and
tissue products and their potential
impact on emergency preparedness.
The public will have the opportunity
to present their views to the Committee
during a public comment session
scheduled for December 7, 2012.
Comments will be limited to five
minutes per speaker and must be
pertinent to the discussion. Preregistration is required for participation
in the public comment session. Any
member of the public who would like to
participate in this session is encouraged
to contact the Executive Secretary to
register for time (limited to 5 minutes);
individuals must register prior to close
of business on December 3, 2012. If it
is not possible to provide 30 copies of
the material to be distributed, then
individuals are requested to provide a
minimum of one (1) copy of the
document(s) to be distributed prior to
the close of business on December 5,
2012. It is also requested that any
member of the public who wishes to
provide comments to the Committee
utilizing electronic data projection
submit the necessary material to the
Executive Secretary prior to the close of
business on December 3, 2012.
SUPPLEMENTARY INFORMATION:
Dated: November 2, 2012.
James J. Berger,
Senior Advisor for Blood Policy, Executive
Secretary ACBTSA.
[FR Doc. 2012–27307 Filed 11–7–12; 8:45 am]
BILLING CODE 4150–41–P
The meeting will take place
Thursday, December 6, and Friday,
December 7, 2012, from 8:00 a.m. to
4:00 p.m. on both days.
DATES:
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]]>Agencies
[Federal Register Volume 77, Number 217 (Thursday, November 8, 2012)]
[Notices]
[Pages 67007-67012]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-26918]
-----------------------------------------------------------------------
FEDERAL RESERVE SYSTEM
[Docket No. OP-1447]
Federal Reserve Bank Services Private Sector Adjustment Factor
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Notice.
-----------------------------------------------------------------------
SUMMARY: The Board has approved modifications to its method for
calculating the private-sector adjustment factor (PSAF). The PSAF is
part of the Board's calculation, as required by the Monetary Control
Act of 1980 (MCA), to establish the fees that Federal Reserve Banks
(Reserve Banks) charge for certain financial services provided to
depository institutions. Because the Federal Reserve priced services
have historically had characteristics most analogous to correspondent
banks, clearing balances held by depository institutions at Reserve
Banks were a primary component in computing the PSAF. The clearing
balance program was largely modeled after similar programs offered by
correspondent banks, wherein banks maintain balances with their
correspondents. The Board was prompted to consider a new PSAF
methodology because clearing balances held at Reserve Banks were
declining following the Board's implementation of the payment of
interest on required reserve and excess balances held at Reserve Banks.
Effective July 2012, the Board eliminated the contractual clearing
balance program in connection with its simplification of reserve
policies. Changes in the priced services market and the elimination of
clearing balances have made the correspondent bank analogy less
applicable to the priced services provided by the Federal Reserve.
Accordingly, the Board is adopting a publicly traded firm model to set
the PSAF. Use of the new methodology is reflected in priced services
fees for 2013, which is published elsewhere in today's Federal
Register.
DATES: Effective Date: November 8, 2012. The revised method will be
used to calculate the PSAF that is reflected in the 2013 priced
services fees.
FOR FURTHER INFORMATION CONTACT: Gregory L. Evans, Deputy Associate
Director (202) 452-3945, Brenda L. Richards, Manager (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), contact (202) 263-4869.
SUPPLEMENTARY INFORMATION:
I. Background
Under the MCA, the Federal Reserve Banks must establish fees for
``priced services,'' to recover, over the long run, all direct and
indirect costs actually incurred in providing these services as well as
the imputed costs that would have been incurred had the services been
provided by a private-sector firm.\1\ 2 The imputed costs--
sales and income taxes, debt costs, and a required return on equity
(profit)--are collectively referred to as the PSAF and are an
additional cost considered when setting fees and determining cost
recovery.
---------------------------------------------------------------------------
\1\ These priced services include check, FedACH[supreg],
Fedwire[supreg] Funds, and Fedwire[supreg] Securities services (for
activity unrelated to Treasury).
\2\ 12 U.S.C. 248a(c)(3).
---------------------------------------------------------------------------
The Board's current method for calculating the PSAF involves
developing an estimated Federal Reserve priced services pro forma
balance sheet using actual priced services assets and liabilities. The
remaining components on the balance sheet, such as equity, are imputed
as if these services were provided by a correspondent bank. Equity is
imputed at a level necessary for a well-capitalized depository
institution and the target return on equity capital (ROE) is estimated
based on the capital asset pricing model (CAPM). Finally, the PSAF
includes an estimated share of the Board of Governors' expenses
incurred to oversee Reserve Bank priced services, imputed sales and
income taxes, and an imputed Federal Deposit Insurance Corporation
(FDIC) assessment.
The methodology underlying the PSAF is reviewed periodically to
ensure that it is appropriate and relevant in light of Reserve Bank
priced services activities, accounting standards, finance theory, and
regulatory and business practices.\3\ The Board considers five
principles when reviewing the PSAF methodology: (1) Providing a
conceptually sound basis for efficient pricing in the market for
payments services, (2) using Reserve Bank financial information as
applicable, (3) maintaining consistency with private-sector practice,
(4) using data in the public domain to make the PSAF replicable, and
(5) avoiding any undue cost or complexity of the PSAF methodology.
---------------------------------------------------------------------------
\3\ The previous review of the PSAF was completed in 2005 and
changes were implemented for the 2006 PSAF. 70 FR 60341 (Oct. 17,
2005).
---------------------------------------------------------------------------
Under the current correspondent bank model, clearing balances
maintained by Reserve Bank customers have been a significant component
of the pro forma financial statements and an important driver in
calculating nearly all of the imputed costs considered in setting fees
for priced services. Similar to how a correspondent bank would use its
respondent balances, the clearing balances are a funding source for
short- and long-term assets, including investments, and affect the
level of imputed equity. Clearing balance levels, therefore, affect the
overall size of the balance sheet, influence the need to impute debt
funding, and contribute to total cost recovery through imputed net
income on clearing balances.
The payment of interest on balances in Federal Reserve accounts and
related monetary policy actions have affected the level of clearing
balances and the similarity between correspondent banks and Federal
Reserve priced services.\4\ Following the implementation of interest on
required reserve and excess balances, the Board recognized a
significant decline in clearing balances and anticipated that the trend
would continue.
---------------------------------------------------------------------------
\4\ In 2008, Congress amended the Federal Reserve Act to
authorize Reserve Banks to pay interest on balances of eligible
institutions. (See section 19 of the Federal Reserve Act (12 U.S.C.
461(b).) Since then, interest has been paid on balances maintained
to satisfy reserve balance requirements and excess reserves at a
rate determined by the Board (currently 25 basis points for required
and excess reserve balances).
---------------------------------------------------------------------------
The Board requested comment on modifications to its computation of
the PSAF in April 2009 \5\ (2009 notice) and in October 2011 \6\ (2011
notice) (concurrent with the Board's request for comment on reserves
simplification). Because clearing balances were a significant component
of the pro forma balance sheets under the current method and because of
the decline in clearing balance levels, the Board requested in its 2009
notice comment on the anticipated level of clearing balances given
certain interest rate scenarios, the relevance of the clearing balance
program, and whether the clearing balance program should continue.\7\
The Board requested comment on whether a new methodology and its
associated data sources and computations would be
[[Page 67008]]
appropriate for the priced services. The Board also requested comment
on the appropriate term for the risk-free rate that is used to
calculate the target ROE.\8\
---------------------------------------------------------------------------
\5\ 74 FR 15481 (Apr. 6, 2009).
\6\ 76 FR 64250 (Oct. 18, 2011).
\7\ 74 FR at 15484.
\8\ Id. at 15488.
---------------------------------------------------------------------------
In the 2009 notice, the Board proposed a publicly traded firm (PTF)
model for calculating the imputed costs that factor into priced
services fees and cost recovery.\9\ The imputed PSAF costs under the
proposed PTF model were principally based on the U.S. publicly traded
firm market and not limited to one sector of the market. Because the
analogy between correspondent banks and the Reserve Banks' priced
services had become less applicable with the decline in the level of
clearing balances held and in Reserve Bank paper check collection
volume for which correspondent banks were the primary competitors, the
design of the PTF model uses the U.S. publicly traded firm market to
simplify the peer group assumption. This simplifying assumption is
intended to address the limited comparable private sector firm data in
the public domain as well as avoid undue cost or complexity.
---------------------------------------------------------------------------
\9\ Id. at 15489-15490.
---------------------------------------------------------------------------
In the 2009 notice, the Board also considered and requested comment
on two other PSAF models: the user-owned utility model, which
incorporated the financial characteristics of a user-owned utility to
derive its priced services balance sheet, and the cost plus model,
which incorporated a markup to the priced services operating expenses
for the year. In addition, the Board considered and requested comment
on whether it should continue using the correspondent bank model.
In the 2011 notice, the Board requested comment on eliminating the
contractual clearing balance program, the appropriate level of minimum
equity for the previously proposed PTF model, and whether the level of
float should be considered before replacing the correspondent bank
model.\10\ Although the level of clearing balances did not decline to
the degree anticipated in 2009, the contractual clearing balance
program was subsequently eliminated in 2012 as part of the Board's
reserves simplification.\11\
---------------------------------------------------------------------------
\10\ 76 FR at 64255-64256.
\11\ 77 FR 21846 (Apr. 12, 2012).
---------------------------------------------------------------------------
In these notices, the Board proposed and requested comment on the
following considerations and elements of the new PSAF methodology:
Adopting an imputed capital structure, effective tax rate,
and debt financing rates of the priced services based on the U.S.
publicly traded firm market using specific market data and time frames;
Basing the capital structure on the most recent full-year
value-weighted average capital structure (that is, total long-term debt
to total long-term debt plus equity) of all U.S. publicly traded firms
included in the Standard & Poor's Compustat[supreg] database; \12\
---------------------------------------------------------------------------
\12\ The Standard & Poor's Compustat database contains
information on more than 6,000 U.S. publicly traded firms, which
approximate the entirety of the U.S. market.
---------------------------------------------------------------------------
Basing the long-term debt financing rate on the five-year
mean of the Aaa and Baa Moody's bond yields published on the Federal
Reserve Board's H.15 Statistical Release and the reasonableness of
including only investment grade bonds in the calculation; \13\
---------------------------------------------------------------------------
\13\ https://www.federalreserve.gov/releases/h15/update/.
---------------------------------------------------------------------------
When short-term assets exceed short-term liabilities,
imputing short-term debt financing rate on the average of the three-
month AA and A2/P2 nonfinancial commercial paper rates as published on
the Federal Reserve Board's Commercial Paper Release; \14\
---------------------------------------------------------------------------
\14\ Id.
---------------------------------------------------------------------------
Basing the imputed effective income tax rate on the five-
year mean of the value-weighted average ratios of current tax expense
to total net income for all U.S. publicly traded firms in the financial
database; and
Considering the user-owned utility model, the cost-plus
model, or a continuation of the correspondent bank model as alternative
methodologies to the PTF model.
II. Summary of Comments and Analysis
The Board received eight comments in response to its 2009 notice.
Comments were submitted by three bankers' banks, two industry groups,
one bank holding company, one association, and one individual. Overall,
the comments on the proposed PSAF methodology were mixed. Some
commenters disagreed with the proposed methodology and suggested
alternative approaches that required using financial data that are not
publicly available. Three of the four who commented on the overall
proposed PSAF methodology did not support the proposed PTF model. One
of these commenters supported a continuation of the correspondent bank
model and one supported a cost-plus model. One commenter supported the
PTF model but encouraged evaluation of the cost-plus methodology for
computing the PSAF. The remaining four commenters expressed neither
support for nor opposition to the proposed PTF model but provided
other, more general comments. Four commenters requested an extension of
the comment period for further analysis or dialogue. The Board received
one response to its October 2011 request for comment related to the
PSAF. This commenter stated that the Board should conduct further
analysis and provide the public with additional information before
adopting a new methodology.
A. The Contractual Clearing Balance Program
The Board requested comment on the general relevance of the
clearing balances in the computation of PSAF as a consequence of
anticipated continued declines in clearing balance levels. Three
commenters acknowledged the effect interest on required reserve and
excess balances would have on the level of clearing balances maintained
when the rates paid on required and excess reserve balances are greater
than the earnings credit rate on clearing balances. Subsequently, the
Board eliminated the clearing balance program. As a result, there is no
longer a need to consider the levels of balances as they relate to the
PSAF calculation.
B. Publicly Traded Firm Model
In response to its request for comment, the Board received various
comments regarding the proposed assumptions used in the PTF model
related to peer group benchmarking, capital structure, effective tax
rate, and debt financing.
(1) Peer Group Benchmarking
The cost of equity, a key component of priced services cost
structure, is computed based on the CAPM, which uses the U.S. publicly
traded firm market to determine the average risk premium. Three
commenters stated that the U.S. publicly traded firm market was too
broad of a benchmark and suggested narrowing the peer group to specific
financial institutions or publicly-traded payments processors. One of
these three commenters recommended a list of participants in the
payment processing industry as a peer group benchmark and also
suggested commissioning a peer-group study to benchmark payment
processing industry costs.
Because of the concentration of the market activity of the
suggested peer group in a few entities, the financial results of such a
peer group would likely be volatile.\15\ The Board found
[[Page 67009]]
that one entity accounted for approximately 43 percent of the group's
total assets and the range of the individual effective tax rates of the
entities was broad (from 18 to 71 percent). The Board believes that a
peer group or proxy for competitors to Federal Reserve priced services
should consist of enough participants with publicly available financial
data to mitigate the potentially volatile effects of the financial
characteristics of a few firms. Because of the challenges in
identifying a viable peer group, the U.S. publicly traded firm market
is an attractive alternative. The use of averages based on the U.S.
publicly traded firm market minimizes the effect of extreme or
anomalous financial characteristics in the PTF model.
---------------------------------------------------------------------------
\15\ Although the MCA's requirement for cost recovery over the
long run allows the Board to set fees to over- or under-recover
costs in a given year to minimize price volatility in imputed costs
makes the pricing process more complex. As a result, the Board has
typically preferred to adopt PSAF methodologies that provide for
stable rather than volatile imputed costs.
---------------------------------------------------------------------------
In reviewing appropriate peer group benchmarks for computing the
PSAF, the Board considered adopting a user-owned utility model, which
recognizes that the Reserve Banks' major competitors in the provision
of priced services are increasingly user-owned utilities rather than
traditional correspondent banks. One commenter noted that the
definition of user-owned utilities was not adequately described in the
request for comment. Another commenter requested additional insight on
the Board's conclusion that user-owned utilities have become its
predominant competitors. None of the commenters specifically supported
a user-owned utility model.
Financial information regarding some significant user-owned
utilities is not publicly available. The primary user-owned utility
that provides services similar to those provided by the Reserve Banks
is The Clearing House Payments Company, LLC, which operates CHIPS, the
primary competitor for the Reserve Bank's Fedwire[supreg] Funds
Service, and the Electronic Payments Network, the only private-sector
automated clearinghouse operator.\16\ Establishing the method to
calculate the requisite imputed elements--capital structure, debt
financing rates, and income taxes--using theoretical assumptions or
academic studies could be challenging. In the absence of publicly
available data on a significant number of user-owned utilities or
substantial academic literature regarding the financial characteristics
of these organizations, the Board does not consider adopting user-owned
utilities to be an appropriate peer group benchmark.
---------------------------------------------------------------------------
\16\ The Board identified 15 user-owned utilities, 4 of which
have some membership ownership.
---------------------------------------------------------------------------
The Board also considered continuing to use the correspondent bank
model, without clearing balances and with minor modifications, to
impute costs. One commenter supported the continued use of the
correspondent bank model and stated that private market participants
are affected by factors similar to the Federal Reserve in setting fees
for services. One commenter noted that a reduction in clearing balances
does not necessarily indicate a failure of the PSAF and that the
correspondent bank model has been reasonably effective over time.
Others who commented on the proposal did not comment on the Board's
continued use of this model.
A principal disadvantage of the correspondent bank model is the
decreasing similarity between the characteristics of the Reserve Bank
priced services without the contractual clearing balance program and
traditional correspondent banks. Historically, the Board recognized
that the financial characteristics of correspondent banks were not
driven primarily by the payment services that compete with those
offered by Reserve Banks, but considered correspondent banks as an
appropriate peer group because both entities held customer balances for
the purpose of facilitating payments services and they were the primary
competitors to the Reserve Banks' check services. Because the
contractual clearing balance program was eliminated and the check
service has declined as a percentage of the Reserve Banks' priced
services revenue and expenses, comparing priced services to
correspondent banks for the purpose of establishing a PSAF methodology
is increasingly difficult. Accordingly, the Board has determined that
the peer group of correspondent banks is no longer appropriate to
impute priced services costs.
Based on its review of possible benchmarks, the Board believes the
use of market wide averages of U.S. publicly traded firms is an
appropriate proxy that avoids the challenges associated with the
potential financial data volatility associated with the small size of
the peer group of payment processors or user-owned utilities, the lack
of public financial data of user-owned utilities, and the decreasing
similarity between the characteristics of the Reserve Banks' priced
services and correspondent banks. The use of the publicly-traded firm
model builds on the approach used in the current PSAF methodology that
uses the U.S. publicly traded firm market to determine the average risk
premium in determining the cost of capital.
(2) Capital Structure
In the PTF model, the capital structure will be derived from the
U.S. publicly traded firm market, subject to minimum equity constraints
consistent with those required by the FDIC for a well-capitalized
institution. One commenter, who supported the correspondent bank model
for computing the PSAF, objected to the absence of an FDIC assessment,
related capital requirements, and regulatory overhead. Although the PTF
methodology does not model depository institution requirements, the
Board requested comment on whether it should use FDIC minimum equity
requirements, but did not receive any comments on this matter. To
ensure a reasonable level of equity is imputed to protect against
financial, operating, and business risks, the Board will use the
minimum equity constraints established by the FDIC, with equity set at
a level of at least five percent of assets or ten percent of risk
weighted assets. The Board, however, will not include an FDIC
assessment, because the peer group is not composed primarily of
depository institutions.
(3) Effective Tax Rate
In the PTF model, the imputed effective income tax rate will be the
five-year mean of the value-weighted average ratios of current tax
expense to total net income for all U.S. publicly traded firms in
Standard & Poor's Compustat[supreg] database. One commenter assumed an
upward trend of tax rates and objected to the tax rate derivation from
historical data rather than future tax rates. To maintain consistency
in the PTF model, the Board will use tax rates from the U.S. publicly
traded firm market. The Board considered alternatives to calculating
the tax rate, including expanding the period of the mean calculation
from five to ten or twenty years, filtering key parameters on tax
expense or total net income, and using additional statistical measures.
Because the results of the alternative approaches reflected only a
small subset of the U.S. publicly traded firm market, the Board did not
adopt these alternatives.
(4) Debt Financing
Due to the elimination of clearing balances, a key source of
financing of priced services assets in the correspondent bank model,
the Board recognizes that additional debt and equity may need to be
imputed in the PTF model to meet funding needs. The
[[Page 67010]]
Board initially proposed using the five-year mean of the Aaa and Baa
Moody's bond yield for the long-term debt financing rate. To include
non-investment grade debt in the PTF model, however, the Board will use
the five-year mean of the annual Merrill Lynch Corporate & High Yield
Index rate. Using the corporate and high yield index rating is also
consistent with the Board's assumption of comparing the priced services
to the U.S. publicly traded firm market. The Board will use a five-year
mean when imputing a debt financing rate to maintain consistency with
the effective tax rate and to reduce year-to-year volatility due to
changes in the yield curve.
C. Alternative Methodology--The Cost-Plus Model
In response to previous Board proposals related to the PSAF, some
commenters have suggested adopting variations on a cost-plus model. In
2005, while commenting on proposed changes to the PSAF methodology for
calculating the ROE, two commenters suggested a cost-plus model as a
simple, straightforward method for calculating the PSAF. The Board
reconsidered this methodology in its 2009 notice. One commenter noted
that the Board should consider using a cost-plus model, but expressed
concern that its estimated 700 percent increase in the PSAF under a
cost-plus model compared to the correspondent bank model may be too
much to impose on the financial-services industry. In implementing a
cost-plus PSAF model, the Board considered deriving the MCA-required
imputed costs by establishing a fixed markup over operating expenses.
Each time the Board has considered this model, developing a viable
method for calculating the markup has been challenging.
The Board considered a cost-based model with the markup percentage
derived from either historical PSAF values or the income statement
operating margins of all U.S. publicly traded firms. The Board
evaluated the PSAF results after applying a markup over expenses ratio
based on value-weighted average data for all publicly traded U.S. firms
in the Standard & Poor's Computstat[supreg] database and applying a
markup over expenses ratio based on historical PSAF. Although a cost-
plus model is simple, transparent, and replicable by the public, it
also has limitations. A cost-plus model based on historical PSAF values
is static and assumes continued use of the current correspondent bank
model, which is of diminishing relevance. In addition, basing a cost-
plus model on accounting-based values captures only book, not market,
values of financing and other costs, which is not consistent with
current finance theory. Accordingly, the Board does not consider this a
viable alternative model to the correspondent bank model.
D. Other General Comments
The Board received comments that focused on the Federal Reserve
priced services involvement in payment services more generally. Four
commenters suggested that the Federal Reserve work to further lower
costs. Three of these four commenters believe that the Federal Reserve
should continue to provide payment services. Two commenters requested
that the Federal Reserve explicitly state its intent regarding
continuing involvement in payment systems and the proposed PSAF
methodology changes. Two commenters addressed the effect of proposed
changes on market competition, pricing, and payment systems generally.
The Board received other comments that requested additional
analysis or information related to the notice and requests for comment.
Two commenters requested more specific information on the effect of the
PSAF changes to the Federal Reserve's price schedule. One commenter
recommended that the notice and request for comment include the effect
of the proposed changes on community banks. One commenter requested
illustrative example calculations to demonstrate how the PSAF would be
affected by shrinking contractual clearing balances. The same commenter
also stated that it would be informative to the public if the Board
provided a side-by-side comparison of the correspondent banking model
with the PTF model, displaying numerical results of the financial
models under different scenarios. One commenter suggested that the PTF
model leaves too much to interpretation.
Consistent with MCA requirements, the Board evaluates and considers
the costs of priced services, competitive factors, and the adequacy of
payment services nationwide when approving the prices of Federal
Reserve Bank services.\17\ Because the Federal Reserve seeks to recover
only its actual and imputed costs, the effect of the PSAF changes on
Reserve Bank prices can be approximated by estimating the impact of the
PSAF change to total costs. The effect of the PSAF methodology changes
on a variety of organizations, including community banks, is largely
dependent on the extent to which an organization uses payment services
provided by the Federal Reserve.\18\ With respect to comments
requesting additional information and the degree of interpretation in
the PTF model, the Board believes that the analyses it has conducted,
and the information provided in this and previous notices, have
provided the analysis and information necessary for the public to
understand its proposal.
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\17\ 12 U.S.C. 248a (c)(3) & (d).
\18\ A side-by-side comparison of the correspondent bank model
and the PTF model was provided in the 2009 notice (74 FR at 15494).
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The Board received other comments on issues not related to the
proposal and are not addressed in this notice.
After considering the comments received, the Board has adopted the
PTF methodology for the 2013 PSAF. The PTF methodology is transparent,
consistent with current financial theory and practice, and is
conceptually sound as a basis for efficient pricing in the market of
payment services. It uses relevant Reserve Bank financial information
as input to the model, and can be replicated by the public. In its
analysis, the Board evaluated computations in the models considered for
imputing the capital structure, effective tax rate, and long- and
short-term debt financing rates. The Board evaluated the advantages and
obstacles surrounding the use of each alternative methodology. The
Board believes the new methodology is appropriate in light of the
elimination of clearing balances and the evolution of payment system
providers beyond commercial banking.
E. Future Industry and Regulatory Changes
The MCA requires the Federal Reserve Banks to impute costs that
would have been incurred had the services been provided by a private
sector firm. Accordingly, the Board considers industry and regulatory
changes relevant to the private sector. The Board applies its payment
system risk policies, which incorporate relevant international risk-
management standards to the Federal Reserve Banks' Fedwire[supreg]
Funds and Fedwire[supreg] Securities services. In considering revisions
to payment system risk policies to address the new Principles for
Financial Market Infrastructures (PFMI), the Board will also consider
whether revisions to the PSAF are necessary.\19\
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\19\ The PFMI are available at https://www.bis.org/publ/cpss101a.pdf.
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III. Summary and Effect of New PSAF Methodology
Based on comments received and further consideration of the issues
[[Page 67011]]
around the appropriate computation of the PSAF, the Board has adopted
the PTF model for computing the PSAF as proposed with a minor
adjustment.\20\ The Board will develop pro forma financial statements
under the PTF model using an estimate of assets and liabilities used in
priced services and incorporate the following elements:
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\20\ The PTF model will incorporate the Merrill Lynch Corporate
& High Yield Index rate instead of the Aaa and Baa Moody's bond
yield as initially proposed.
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Peer Group Benchmarking: The imputed capital structure,
debt and ROE rates, and effective income tax rate will be based on data
for the U.S. publicly traded firm market and calculated using time
frames that minimize volatility from year-to-year. The model will
incorporate a one-year period for elements that historically have been
more stable and, to minimize volatility, a five-year average period for
elements that have been more volatile historically. When averaging
data, the Board will use value-weighted averages to more accurately
reflect the financial characteristics of the U.S. publicly traded firm
market rather than those of the simple average firm in the market. Data
for computing the market-based debt-to-equity ratios and effective tax
rates will be derived from Standard & Poor's Compustat[supreg]
database. The database contains information on more than 6,000 U.S.
publicly traded firms, which approximates the entirety of the U.S.
market.
Capital Structure: The capital structure will be imputed
based on the net funding (assets less liabilities), subject to minimum
equity constraints. If estimated assets are in excess of estimated
liabilities, the Board will impute first debt funding (either short- or
long-term) and then equity funding to meet the capital structure of the
U.S. publicly traded firm market or minimum equity constraints. Minimum
equity will follow FDIC requirements of at least 5 percent of total
assets and 10 percent of risk-weighted assets. If minimum equity
constraints are not met after imputing equity based on all other
financial statement components, additional equity is imputed to meet
these constraints.
Effective Tax Rate: As with the imputed capital structure,
the effective tax rate will be based on data from the U.S. publicly
traded firm market. This tax rate will be the mean of the weighted
average rates of the U.S. publicly traded firm market over the past
five years.
Debt and Equity Financing: The imputed short- and long-
term debt financing rates will be derived from the Federal Reserve
Board's release of nonfinancial commercial paper rates from the H.15
Selected Interest Rates release and the annual Merrill Lynch Corporate
& High Yield Index rate, respectively.\21\ There will be no change to
the methodology for computing the ROE rate. The Board will continue
calculating the required rate of ROE using the CAPM with a beta of 1.0
and a 40-year average historical market premium with a 3-month Treasury
rate. The rates for debt and equity financing will be applied to the
priced services' estimated imputed liabilities and imputed equity
derived from the target capital structure. Additional equity imputed to
meet minimum equity requirements will be invested solely in Treasury
securities.
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\21\ Data for the H.15 Selected Interest Rates release is
supplied by The Depository Trust & Clearing Corporation, a national
clearinghouse for the settlement of securities trades and a
custodian for securities. The Merrill Lynch US Corporate & High
Yield Index tracks the performance of U.S. dollar denominated
investment grade and below investment grade corporate debt publicly
issued in the U.S. domestic market. Index constituents are
capitalization-weighted based on their current amount outstanding.
---------------------------------------------------------------------------
Using the 2012 PSAF for illustrative purposes, the data below
illustrate the effect of implementing a PTF model approach. For
comparative purposes, amounts illustrated for the correspondent bank
model exclude the effect of clearing balances. The tax rate computation
differences between the correspondent bank model and the PTF model are
reflected in the pretax ROE. Equity under both models is imputed at
five percent of assets to satisfy the FDIC minimum equity requirements
for well-capitalized institutions.
PSAF Illustration
[$ in millions]
----------------------------------------------------------------------------------------------------------------
Pretax ROE Cost of
(percent) Equity equity PSAF
----------------------------------------------------------------------------------------------------------------
Correspondent Bank Model \22\............................... 8.5 $96.0 $8.2 $17.9
PTF Model \23\ (estimate)................................... 9.3 96.0 8.9 16.7
----------------------------------------------------------------------------------------------------------------
IV. Competitive Impact Analysis
In its March 1990 policy statement ``The Federal Reserve in the
Payments System,'' the Board stated that all operational and legal
changes considered by the Board that could have a substantial effect on
payment system participants are subject to a competitive-impact
analysis.\24\ Under this policy, the Board evaluates whether a proposed
change would have a direct and material adverse effect on the ability
of other service providers to compete effectively with the Reserve
Banks in providing similar services. These effects could be caused by
differences in legal authority or constraints between Reserve Banks and
private-sector competitors or by a dominant market position that the
Reserve Banks might derive from such legal differences. If the proposed
change creates such an effect, the Board must further evaluate the
changes to determine whether its benefits--such as contributions to
payment system efficiency, payment system integrity, or other Board
objectives--can be retained while reducing the hindrances to
competition.
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\22\ Amounts approved by the Board in its 2012 fees were $234.7
million, $19.9 million, and $29.9 million for imputed equity, the
cost of equity, and total PSAF, respectively. 76 FR 68440 (Nov. 4,
2011).
\23\ Amounts for the PTF model were estimated.
\24\ Federal Reserve Regulatory Service 9-1558.
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The intent of the PSAF, and more broadly of setting priced services
fees to fully recover the costs (including imputed costs and profits)
to provide them, is to facilitate competition between Reserve Banks and
private-sector providers of payment services to foster a more efficient
payment system. Identifying a meaningful private-sector peer group for
the purpose of calculating the PSAF, however, has been difficult given
the specific nature of the priced services provided by the Reserve
Banks. The correspondent bank model historically provided a reasonable
proxy for Reserve Bank priced services because correspondent banks hold
balances for the purpose of facilitating payment services and they were
the primary competitors to the Reserve Banks' check service, although
[[Page 67012]]
the Board recognized that correspondent bank balance sheets and ROE are
typically driven largely by services that are not similar to those
provided by the Reserve Banks. Because the contractual clearing balance
program has been eliminated and correspondent banks are not the primary
competitors of the Reserve Banks' priced services, correspondent banks
no longer serve as the best PSAF benchmark peer group. User-owned
utilities are increasingly becoming the Reserve Banks' key priced
services competitors; however, because no reliable comparative data are
publicly available for the user-owned utilities, it also does not
provide a viable model for the PSAF. Lacking a more specific viable
peer group, the Board believes modeling the PSAF on a PTF model is
appropriate. The Board believes that such a change in the PSAF
methodology does not have a direct and material adverse effect on the
ability of other service providers to compete effectively with Reserve
Banks in providing similar services. Rather, the Board believes that
this PSAF revision will facilitate competition between the Reserve
Banks and private-sector providers.
V. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
ch. 3506; 5 CFR part 1320 appendix A.1), the Board has reviewed the
proposal under the authority delegated to the Board by the Office of
Management and Budget. The proposal contains no provisions subject to
the Paperwork Reduction Act.
By order of the Board of Governors of the Federal Reserve
System, October 25, 2012.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2012-26918 Filed 11-7-12; 8:45 am]
BILLING CODE 6210-01-P
