View PDF

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Board of Governors of the Federal Reserve System

1998–99

Board of Governors of the Federal Reserve System

1998–99

April 1998
This publication is available from Publications Services, Board of Governors
of the Federal Reserve System, Washington, DC 20551. It is also available
on the Board’s World Wide Web site, at http://www.bog.frb.fed.us/

Contents
1
1
1
2
3

Introduction
FEDERAL RESERVE BUDGET PROCESSES
AND OPERATIONAL AREAS
Background on the Federal Reserve
Summary of 1997 income and expenditures
Budget processes
Operational areas

Part I The Budgets
9
9
11
13
13

Chapter 1
FEDERAL RESERVE SYSTEM
Net expenses
Trends in expenses and employment
Operational areas
1998 budget initiatives

15
15
16
18
19
24
25
27

Chapter 2
BOARD OF GOVERNORS
Overview of the Board’s budget
Reductions in the cost of programs
Program requests
The operations budget
The capital budget
Trends in expenses and employment
Extraordinary items

29
29
31
32
36
38
40
41
41

Chapter 3
FEDERAL RESERVE BANKS
Major initiatives
1998 budget objective
Budget by operational area
Budget by object of expense
Capital outlays
Trends in expenses and employment
Volume and unit costs
1997 budget performance

Part II Special Analysis
45
45
46

Chapter 4
THE FEDERAL RESERVE’S
RESPONSE TO THE YEAR 2000 PROBLEM
Early efforts at the Federal Reserve
Current efforts

Appendixes
51
51
54
54
54

Appendix A
SPECIAL CATEGORIES OF SYSTEM EXPENSE
Priced services
Capital outlays
Special project: Automation Consolidation
Currency printing and circulation

59

Appendix B
SOURCES AND USES OF FUNDS

61
61
61
66

Appendix C
FEDERAL RESERVE SYSTEM AUDITS
Independent audit
General Accounting Office
Office of Inspector General

69

Appendix D
EXPENSES AND EMPLOYMENT
AT THE FEDERAL RESERVE BANKS

75

MAPS OF THE FEDERAL RESERVE SYSTEM

1

Introduction

Federal Reserve Budget Processes
and Operational Areas
To improve its effectiveness in addressing priorities and allocating resources,
the Board of Governors in 1997 converted its annual budgeting and planning
process to a two-year budget cycle and
a four-year planning cycle. Given their
current business needs, the Federal
Reserve Banks will continue to maintain
an annual budget cycle.
The multiyear process involves the
Board members more actively and earlier
in the discussion of alternative expenditures and thus allows the Board and
the staff to concentrate less on detailed
budgeting and more on planning and the
allocation of resources among activities.
In particular, the Board can now better
define and implement its longer-term
strategies across functional areas. The
longer budget cycle also promises to be
less burdensome to the participants and
more comprehensible to observers. The
first budget produced under the new
system covers calendar years 1998 and
1999.

Background on the
Federal Reserve
The Federal Reserve System consists of
the seven-member Board of Governors
in Washington, D.C., the twelve Federal
Reserve Banks with their twenty-five
Branches distributed throughout the
nation, the Federal Open Market Committee (FOMC), and three advisory
groups—the Federal Advisory Council,
the Consumer Advisory Council, and
the Thrift Institutions Advisory Council. The System was created in 1913
by the Congress to establish a safe

and flexible monetary and banking system. Over the years, the Congress has
given the Federal Reserve more authority and responsibility for achieving
broad national economic and financial
objectives.
As the nation’s central bank, the
Federal Reserve has many, varied
responsibilities: It acts to ensure growth
of the nation’s economy consistent with
price stability; it serves as the nation’s
lender of last resort, with responsibility
for forestalling national liquidity crises;
and it is involved in bank supervision
and regulation, with responsibilities for
bank holding companies, state-chartered
banks that are members of the Federal
Reserve System, the foreign activities
of U.S. banks, and the U.S. activities of
foreign banks. The Federal Reserve also
administers the nation’s consumer credit
protection laws.
The Federal Reserve System plays a
major role in the nation’s payments
mechanism. The Reserve Banks distribute currency and coin, provide wire
and automated clearinghouse transfers
of funds and securities, and process
domestic checks. In addition, the Federal Reserve Banks serve as the fiscal
agents of the United States and provide a variety of financial services
for the Treasury and other government
agencies.

Summary of 1997 Income and
Expenditures
In carrying out its responsibilities in
1997, the Federal Reserve System

2

Annual Report: Budget Review, 1998–99

incurred an estimated $1.1 billion in net
operating expenses. Total spending of an
estimated $2.2 billion was offset by an
estimated $1.1 billion in revenue from
priced services, reimbursements, and
other income.
The major source of Federal Reserve
income is earnings on the portfolio
of U.S. government securities in the
System Open Market Account, estimated at $25.7 billion in 1997. Earnings in excess of expenses, dividends,
and surplus are transferred to the U.S.
Treasury—in 1997 an estimated
$20.7 billion. (These earnings are treated
as receipts in the U.S. budget accounting
system and as anticipated earnings
projected by the Office of Management
and Budget in the U.S. budget.)

Budget Processes
The following sections give an overview
of the separate budgets and budgeting
processes followed by the Board of
Governors and the Reserve Banks.

Board of Governors
The Board’s budget covers a two-year
period. The first year of the budget
cycle—the even-numbered year—is used
to develop a strategic plan for the next
four years, and the second year is used
to develop the budget for the next two
years. As the first under the new system,
the 1998–99 budget and 1998–2002
plan were prepared and approved entirely
in 1997.
The two-year cycle begins in the
summer (thus, for the 2000–01 budget,
the summer of 1998). At that time, the
Board’s divisions examine their operating environments and look for any
adjustments to their priorities, activities,
and resources that might improve the
efficiency and effectiveness of the
Board’s operations. The management of

each division discusses with its Board
oversight committee the issues that
result from its review. After any adjustment, the results are given to the Staff
Planning Group, a small group of senior
managers with a Boardwide perspective,
for use in their analysis of the Board’s
budget options.
After consulting with the Board-level
Budget Committee for final guidance,
the Staff Planning Group drafts a strategic plan and, ultimately, a preliminary
budget objective that identifies the level
and allocation of resources needed to
support the plan. The Budget Committee reviews the plan and preliminary
budget objective, clarifies outstanding
issues with the Staff Planning Group and
division directors, and by late summer
of odd numbered years develops a final
budget objective for consideration by
the Board.
The divisions use the budget objective approved by the Board to complete
their budgeting under the approved plan.
The Board’s Budget Committee, under
authority delegated by the Chairman,
oversees the process until the budget
is submitted to the Board for action at
an open meeting in November of the
odd-numbered year.
The Board of Governors budgets its
activities across four operational areas
(described below). Costs for data
processing are charged as a direct
expense to each of the four areas,
according to actual usage at rates agreed
upon before the budget year starts;
expenses for other elements of support
and overhead are distributed among the
operational areas in proportion to the
share of direct costs attributable to each
area.
The Board, in accordance with generally accepted accounting principles,
capitalizes certain assets and depreciates
their value over appropriate periods
instead of expensing them in their year

Introduction
of purchase. Hence, the Board has both
an operating budget and a capital budget.
The Board’s Office of Inspector General (OIG), in keeping with its statutory
independence, prepares its proposed
budget apart from the Board’s budget.
The OIG presents its two-year budget
directly to the Chairman for action by
the Board of Governors, also at an open
meeting in November.
After it is approved by the Board, the
budget is converted to an operating plan
that allocates expenditures by month;
the operating plan is also the vehicle
for subsequent adjustments within the
budget. Also at this point, the cash
requirement for the first half of
the calendar year is estimated and the
amount is raised by an assessment on
each of the Reserve Banks in proportion
to its capital stock and surplus. The cash
requirement for the second half of each
year is estimated in June and another
assessment is made in July.

Reserve Banks
Each year the Federal Reserve Banks
establish major operating goals for the
coming year, devise strategies for their
attainment, estimate required resources,
and monitor results. The process begins
with development of a budget guideline.
The Board of Governors reviews the
proposed level of spending and communicates the budget objective to the
Reserve Banks for their guidance. Each
Bank then develops its own budget. The
budgets are reviewed at the Board by a
committee of three governors—the Committee on Federal Reserve Bank Affairs—
both as separate documents and in light
of Systemwide issues and the plans
of the other Banks, before they are
presented to the full Board of Governors
for final action at an open meeting in
December.

3

The Banks’ budgets are also structured
in four operational areas (described
below), with support and overhead
charged to these areas. Special projects
are approved separately from the operations budgets; these projects are longrange research and development efforts
that have the potential to make major
improvements in the nation’s payments mechanism or in the Federal
Reserve’s ability to provide services
(the special project for 1998 is described
in appendix A).
The Banks, in accordance with generally accepted accounting principles,
also capitalize certain assets and depreciate their value over appropriate periods
instead of expensing them in their year
of purchase. Hence, the Banks have
an operating budget, a special projects
budget, and a capital budget.
The operations and financial performance of the Reserve Banks are
monitored throughout the year via a
cost-accounting system, the Planning
and Control System (PACS), which was
implemented by the Banks in 1977.
Under PACS, the costs of all Reserve
Bank services, both priced and nonpriced, are grouped by operational area,
and the costs of support and overhead
are charged to the four areas. PACS
makes it possible to compare budgets
with actual expenses and enables the
Board of Governors to compare the
financial and operating performances of
the Reserve Banks.

Operational Areas
For budgeting purposes, the Board of
Governors and the Reserve Banks
account for their activities in four major
operational areas. Three of the areas—
monetary and economic policy, supervision and regulation of financial
institutions, and services to financial

4

Annual Report: Budget Review, 1998–99

institutions and the public—are common to the Board and the Banks. The
Banks’ fourth operational area is services to the U.S. Treasury and other
government agencies, and the Board’s
fourth area is System policy direction
and oversight.

Monetary and Economic Policy
The monetary and economic policy
operational area encompasses Federal
Reserve actions to influence the availability and cost of money and credit
in the nation’s economy. These actions
include setting reserve requirements,
setting the discount rate (which affects
the cost of borrowing), and conducting
open market operations.
A vast amount of banking and financial data flows through the Reserve
Banks to the Board, where it is compiled
and made available to the public. The
research staffs at the Board and the
Reserve Banks use these data, along
with information collected by other
public and private institutions, to assess
the state of the economy and the relationships between the financial markets
and economic activity. Staff members
provide background information for the
Board of Governors and for each meeting of the FOMC by preparing detailed
economic and financial analyses and
projections for the domestic economy
and international markets. They also
conduct longer-run economic studies
on regional, national, and international
issues.

Supervision and Regulation
The Federal Reserve System plays a
major role in the supervision and regulation of banks and bank holding companies. The Board of Governors adopts
regulations to carry out statutory directives and establishes System supervisory

and regulatory policies; the Reserve
Banks conduct on-site examinations and
inspections of state member banks and
bank holding companies, review applications for mergers, acquisitions, and
changes in control from banks and bank
holding companies, and take formal
supervisory actions. In 1997 the Federal
Reserve conducted approximately 550
examinations of state member banks and
approximately 1,780 inspections of bank
holding companies and acted on a total
of 3,641 international and domestic
applications.
The Board also enforces compliance
by state member banks with the federal laws protecting consumers in their
use of credit. In 1997 the System
conducted more than 560 compliance
examinations.
The Board’s supervisory responsibilities also extend to the foreign operations
of U.S. banks and, under the International
Banking Act, to the U.S. operations of
foreign banks. Beyond these activities,
the Federal Reserve maintains continuous oversight of the banking industry to
ensure the overall safety and soundness
of the financial system. This broader
responsibility is reflected in the System’s
presence in financial markets, through
open market operations, and in the
Federal Reserve’s role as lender of last
resort.

Services to Financial Institutions
and the Public
The Federal Reserve System plays a
central role in the nation’s payments
mechanism, which is composed of many
independent systems that move funds
among financial institutions across the
country. The Reserve Banks obtain
currency and coin from the Bureau of
Engraving and Printing and from the
Mint and distribute it to the public
through depository institutions; they

Introduction
also identify counterfeits and destroy
currency that is unfit for circulation.
In 1997 the Reserve Banks received
$406.7 billion in currency and $4.1 billion in coin from depository institutions,
distributed $438.2 billion in currency
and $4.8 billion in coin, and destroyed
$123.4 billion in unfit currency.
The Reserve Banks (along with their
Branches and regional centers) also
process checks for collection—
approximately 16 billion in checks in
1997 with a total value of more than
$12 trillion.
The Federal Reserve also plays a
central role in the nation’s payments
mechanism through its wire transfer
system, Fedwire. Through Fedwire,
depository institutions can draw on their
reserves or clearing accounts at the
Reserve Banks and transfer funds
anywhere in the country. Approximately
8,400 depository institutions use Fedwire
through direct computer connections
with Reserve Banks, and another
1,750 institutions use Fedwire through
off-line means such as telephone. In
1997, approximately 89.5 million transfers valued at about $288 trillion were
sent over Fedwire, an average of $3 million per transfer and $1.1 trillion per
day.
The Federal Reserve allows participants in private clearing arrangements to
exchange and settle transactions on a net
basis through reserve or clearing account
balances. Users of net settlement services include local check clearinghouse
associations, automated clearinghouse
(ACH) networks, credit card processors,
automated teller machine networks, and
national and regional funds transfer and
securities transfer networks.
Approximately 28,100 entities participate in the Federal Reserve’s ACH
service, which allows them to send or
receive payments electronically instead
of by check. The institutions use the

5

ACH service for credit and debit transactions. In 1997, the Reserve Banks
processed approximately 3.28 billion
ACH transactions valued at about
$10.7 trillion; approximately 21 percent
of the transactions were for the federal government, and the rest were for
commercial establishments.
The securities services provided by
the Reserve Banks cover the handling
of book-entry and definitive securities
and the collection of coupons and
miscellaneous items. The book-entry
service, begun in 1968, enables the
holders of Treasury and government
agency securities to transfer the securities electronically to other institutions
throughout the country. In 1997 the
Reserve Banks processed approximately 13.9 million securities transfers
valued at $183 trillion. The noncash
collection service, through which
maturing coupons and bonds are presented for collection, processed about
1.7 million transactions in 1996 and
about 1.2 million transactions in
1997.

Services to the U.S. Treasury
and Other Government Agencies
The U.S. government uses the Federal
Reserve as its bank. Through deposit
accounts at the Reserve Banks, the
government issues checks and payments
and collects receipts. The Reserve Banks
also process wire transfers of funds and
automated clearing house payments and
give the Treasury daily statements of
account activity.
Beyond these typical depository
activities, the Reserve Banks, in their
role as fiscal agents of the United States,
provide several unique services to the
government. They process the business
tax receipts deposited in more than
10,000 tax and loan accounts that are
maintained by depository institutions

6

Annual Report: Budget Review, 1998–99

designated to perform this function; they
hold and monitor the collateral that
those institutions pledge to support these
and other government deposits and
investments; and they transfer funds to
the Treasury’s account at its request.
The Reserve Banks assist the Treasury
in its financing of the public debt
by issuing, servicing, and redeeming all
marketable securities as well as U.S.
savings and retirement plan bonds. The
Reserve Banks also process and destroy
redeemed food coupons for the U.S.
Department of Agriculture.

System Policy Direction and
Oversight
This operational area encompasses
activities by the Board of Governors
in supervising Board and Reserve Bank
programs. Expenses for these activities
are considered overhead expenses of the
System and are therefore allocated across
the other operational areas.

Part I
The Budgets

9

Chapter 1

Federal Reserve System
For 1998, the Federal Reserve System
has budgeted net operating expenses of
$1,111.6 million, a decrease of 1.9 percent from 1997. Revenue from priced
services provided to depository institutions is expected to total $815.9 million,
or 36.4 percent of total budgeted operating expenses. Total operating expenses
are budgeted at $2,240.2 million, an
increase of 2.7 percent over estimated
1997 expenses. Of this total, $2,054.7 million is for the Reserve Banks, and
$185.5 million is for the Board of
Governors (tables 1.1 and 1.2).1
Not included in the budget for operations are expenses for a Reserve Bank
special project, which is budgeted at
$4.7 million for 1998, down from the
$34.7 million estimated for 1997.2 Also
excluded is the cost of currency, budgeted at $370.3 million for 1998, an
increase of 0.8 percent over the estimated
1997 cost of $367.5 million.3 The distribution of expenses is similar to that in
previous years, with the Reserve Banks

1. The Board of Governors now budgets on a
two-year cycle (see chapter 2); in this chapter,
1998 values shown for the System and the Board
reflect the approximate first-year effect of the
Board’s 1998–99 budget.
2. As research and development efforts, special
projects are separate from the continuing operations of the System and are therefore not included
in the System’s operations budget. These relatively
costly, short-term projects are expected to benefit
both the System and the banking industry as a
whole. The special project approved for 1998 is
described in appendix A.
3. The Federal Reserve bears the cost associated with the printing of new currency at the
Bureau of Engraving and Printing. Because this
cost is determined largely by public demand for
new currency, it is not included in Federal Reserve
operating expenses. See appendix A.

accounting for approximately threefourths of the total (chart 1.1).
System employment is budgeted at
24,404 for 1998, a decline of 455 from
the estimated 1997 level. (Details are
given in chapters 2 and 3.)

Net Expenses
The System expects to recover 50.4 percent of its budgeted 1998 operating
expenses through revenue from priced
services, other income, and claims for
reimbursement. Reimbursable claims are
projected to increase 34.5 percent from
1997 to 1998 as a result of submitting
claims for services provided to the
government based on the full cost of the
services provided. After these items are
deducted from budgeted 1998 operating
expenses, the net expenses of the System
show a decrease of 1.9 percent from
estimated 1997 net operating expenses
(table 1.1).
As required by the Monetary Control
Act of 1980, revenue from priced services represents fees set to recover, over
Chart 1.1
Distribution of Expenses of the
Federal Reserve System, 1998
Special Projects, 0.2%
Currency, 14.2%

Board of
Governors, 7.1%

Reserve Banks, 78.6%
Note. See text notes 1, 2, and 3.

10

Annual Report: Budget Review, 1998–99

the long run, all direct and indirect costs
of providing the services plus imputed
costs, such as taxes that would have
been paid and the return on capital that
would have been earned had the services
been provided by a private business
firm. Projected revenue from priced
services is detailed in table 1.3; the

constraint imposed on Federal Reserve
budgets by the need to keep such
services competitive and the calculation
of fees are discussed in appendix A.
‘‘Other income’’ (table 1.1) comes
from services provided on behalf of the
U.S. Treasury that are paid for by the
depository institutions using the ser-

Table 1.1
Operating Expenses of the Federal Reserve System Net of Receipts
and Claims for Reimbursement, 1996–98
Millions of dollars except as noted
Item
Total System operating expenses . . . . . . . . .
Less
Revenue from priced services . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . .
Claims for reimbursement 1 . . . . . . . . . . . .
Equals
Net System operating expenses . . . . . . .

Percentage change

1996
actual

1997
estimate

1998
budget

2,121.6

2,181.7

2,240.2

2.8

2.7

815.9
5.7
215.8

815.1
5.6
228.4

815.9
5.5
307.2

−.1
−1.9
5.8

.1
−1.9
34.5

1,084.2

1,132.6

1,111.6

4.5

−1.9

Note. In this and subsequent tables in this volume,
components may not sum to totals and may not yield
percentages shown because of rounding.
Operating expenses reflect all redistributions for
support and allocations for overhead, and they exclude
capital outlays and special projects.

1996 to 1997 1997 to 1998

1. Cost of fiscal agency and depository services
provided to the U.S. Treasury and other government
agencies that are billed to these agencies.

Table 1.2
Expenses of the Federal Reserve System for Operations, Special Projects,
and Currency, 1996–98
Millions of dollars except as noted
Percentage change

Entity and
type of expense

1996
actual

1997
estimate

1998
budget

Reserve Banks 1 . . . . . . . . . . . . . . . . . . . . . . . . .
Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonpersonnel . . . . . . . . . . . . . . . . . . . . . . . . .
Board of Governors 2 . . . . . . . . . . . . . . . . . . . .
Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonpersonnel . . . . . . . . . . . . . . . . . . . . . . . . .

1,956.1
1,236.6
719.5
165.5
124.7
40.8

2,011.6
1,265.3
746.3
170.1
127.7
42.4

2,054.7
1,286.0
768.7
185.5
129.9
55.6

2.8
2.3
3.7
2.8
2.4
3.9

2.1
1.6
3.0
9.1
1.7
31.1

Total System operating expenses . . . . . . . .
Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonpersonnel . . . . . . . . . . . . . . . . . . . . . . . .

2,121.6
1,361.3
760.3

2,181.7
1,393.0
788.7

2,240.2
1,415.9
824.3

2.8
2.3
3.7

2.7
1.6
4.5

Special projects 3 . . . . . . . . . . . . . . . . . . . . . . . . .

38.3

34.7

4.7

−9.4

−86.5

Currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

403.0

367.5

370.3

−8.8

.8

4

Note. See general note to table 1.1.
1. For detailed information, see chapter 3.
2. Includes extraordinary items and expenses of the
Office of Inspector General. See text note 1 and chapter 2.

1996 to 1997 1997 to 1998

3. See text note 2 and appendix A.
4. See text note 3 and appendix A.

Federal Reserve System
Table 1.3
Revenue from Priced Services, 1996–98
Millions of dollars

11

Chart 1.2
Operating Expenses of the
Federal Reserve System, 1988–98
Billions of dollars

Service
Funds transfers and
net settlement . . . . . . . .
Automated clearinghouse .
Commercial checks . . . . . . .
Book-entry securities
transfers . . . . . . . . . . . . .
Noncash collection . . . . . . .
Special cash services . . . . .
Total . . . . . . . . . . . . . . . . . . . .

1996
1997
1998
actual estimate budget

Current dollars
97.6
79.8
610.6

95.3
72.4
621.1

88.6
68.6
636.3

17.1
5.4
5.4

16.7
4.5
5.1

16.3
3.4
2.7

815.9

815.1

815.9

2.0
1992 dollars

1.6

1988

vices; included are fees for such services
as the settlement of transfers among
depository institutions and the wire
transfer of funds between depository
institutions and the Treasury.
Claims for reimbursement represent
the expenses incurred by Reserve Banks
in providing fiscal agency services to the
Treasury and other government agencies
for which claims for reimbursement
are made. The marked rise in claims
for reimbursement in 1998 is associated
with the 1998 implementation of the
System initiative ‘‘Accounting and
Reporting for Government Services.’’
The initiative requires that claims for
services provided to the government be
based on the full cost of the service.
Sources and uses of funds are presented in appendix B, and the audits of
the System are listed in appendix C.

1

1993

1998

Note. For 1997, estimate; for 1998, budget. See also
text note 1 and general note to table 1.1.
1. Calculated with the GDP price deflator.

have also increased an average of
5.2 percent per year. Over the same
period, nondefense discretionary spending by the federal government has
increased an average of 5.2 percent
(chart 1.3). Federal Reserve System
employment, including staff working on
special projects and Federal Reserve
Automation Services (FRAS), has
decreased 417 over the period
(chart 1.4).
Chart 1.3
Cumulative Change in Federal Reserve
System Expenses and Federal Government
Expenses, 1988–98
Percent

80
Federal government

60

Trends in Expenses and
Employment
From actual 1988 to budgeted 1998
amounts, the operating expenses of the
Federal Reserve System (excluding
special projects) have increased an
average of 5.2 percent per year (2.1 percent per year when adjusted for inflation) (chart 1.2) and total System
expenditures (including special projects)

40
20
+
0
–

Federal Reserve

1988

1993

1998

Note. Federal Reserve System expenses shown here
are operating expenses plus the cost of special projects;
federal government expenses are discretionary spending
less expenditures on defense. See also general note to
chart 1.2.

12

Annual Report: Budget Review, 1998–99

Chart 1.4
Employment in the
Federal Reserve System, 1988–98
Thousands of persons

26
25
24

1988

1993

1998

Note. Includes Federal Reserve Automation Services
staff. See also general note to chart 1.2.

From 1982, when the transition to the
requirements of the Monetary Control
Act of 1980 was completed, through
1984, System expenses remained essentially flat when adjusted for inflation,

and employment declined. In 1985, the
staffing level was increased in a pronounced effort to strengthen supervision
and regulation of member banks and
bank holding companies. The System
was able to partially offset the increase
in staff through reductions in employment in other areas, mainly services to
financial institutions and the public;
support; and overhead.
The Expedited Funds Availability
Act, which became effective in 1988,
requires the Federal Reserve to issue
regulations to ensure the prompt availability of funds and the expeditious
return of checks. Increases in staff levels
throughout the System in 1988 and 1989
resulted from the implementation of this
legislation.
Beginning in 1991 and continuing
through 1997, spending on bank supervision expanded. This expansion reflected

Table 1.4
Operating Expenses of the Federal Reserve System, by Operational Area, 1996–98
Millions of dollars except as noted
Operational area
and entity

1996
actual

1997
estimate

1998
budget

Percentage change
1996 to 1997 1997 to 1998

Monetary and economic policy . . . . . . . . . . .
Reserve Banks . . . . . . . . . . . . . . . . . . . . . . . .
Board of Governors . . . . . . . . . . . . . . . . . . .

223.8
138.6
85.2

233.5
144.7
88.8

250.3
152.7
97.6

4.3
4.4
4.2

7.2
5.5
9.9

Services to the U.S. Treasury and
other government agencies 1 . . . . . . . . .

215.6

212.0

220.9

−1.7

4.2

Services to financial institutions
and the public . . . . . . . . . . . . . . . . . . . . . .
Reserve Banks . . . . . . . . . . . . . . . . . . . . . . . .
Board of Governors . . . . . . . . . . . . . . . . . . .

1,181.6
1,177.4
4.2

1,219.2
1,214.9
4.3

1,230.7
1,226.3
4.4

3.2
3.2
2.4

.9
.9
2.3

Supervision and regulation . . . . . . . . . . . . . . .
Reserve Banks . . . . . . . . . . . . . . . . . . . . . . . .
Board of Governors . . . . . . . . . . . . . . . . . . .

500.6
424.5
76.1

517.0
440.0
77.0

538.3
454.8
83.5

3.3
3.7
1.2

4.1
3.4
8.4

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve Banks . . . . . . . . . . . . . . . . . . . . . . .
Board of Governors 2 . . . . . . . . . . . . . . . . .

2,121.6
1,956.1
165.5

2,181.7
2,011.6
170.1

2,240.2
2,054.7
185.5

2.8
2.8
2.8

2.7
2.1
9.1

Note. Operating expenses reflect all redistributions
for support and allocations for overhead, and they exclude
capital outlays and special projects. The operational area
unique to the Board of Governors, System policy
direction and oversight, which is shown separately in
chapter 2, has been allocated across the operational areas
listed here. As a result, the numbers for the operational

areas in chapter 2 are not the same as the numbers shown
in this table.
1. Reserve Banks only; the Board of Governors does
not provide these services.
2. Includes expenses of the Office of Inspector General
and extraordinary items. See also text note 1.

Federal Reserve System
an increase in the number and complexity of examinations; greater attention to
problem institutions; and the requirements of FIRREA (the Financial Institutions Reform, Recovery, and Enforcement Act of 1989) and FDICIA (the
Federal Deposit Insurance Corporation
Improvement Act of 1991). The System was able to partially offset these
increases by reducing staff levels in
other operational areas, mainly services
to the U.S. Treasury and services to
financial institutions and the public.
During 1998, the Federal Reserve
System will continue to realize staff
reductions in the operational areas, and
the staffing needs in Supervision and
Regulation should begin to moderate.

Operational Areas
For budgeting purposes, the expenses of
the Federal Reserve are classified according to the four major operational areas
of the System (table 1.4). The costs of
support and overhead (including Board
expenditures for System policy direction
and oversight, considered an overhead
expense of the System) are redistributed
or allocated to these four areas.

1998 Budget Initiatives
Several major initiatives that have an
impact on System budgets will continue
or begin in 1998:
• Century date change compliance (see
chapter 4)
• Installation of equipment and software
to support the image processing of
commercial and Treasury checks and
the archiving of Treasury checks
• Enhancements to high-speed currency
processors
• Facilities repair and maintenance.
Partly offsetting the greater expenditures associated with these initiatives are

13

lower costs associated with staff reductions made possible by several reengineering initiatives and programs to
increase efficiency in Federal Reserve
operations. In addition, efforts to consolidate System automation, an initiative
that began in 1992, will be completed
during 1998.

15

Chapter 2

Board of Governors
The 1998–99 budget for the Board of
Governors provides $352.3 million for
operations, $15.4 million for extraordinary items (projects of a unique
nature), and $6.4 million for the Office
of Inspector General. The Board has
authorized 1,711 staff positions for
operational areas and 29 positions for
the Office of Inspector General; no
positions are required for the extraordinary items. The total of 1,740 positions is a decrease of 40 from the
number authorized at the end of 1997.

Overview of the Board’s Budget
The Board accounts for extraordinary
items separately from the operations
budget so that unique, one-time requirements do not compete with regular
operations and so that expenses in those
operations can be readily compared
across years without distortion. The
budget of the Office of Inspector General is prepared separately in keeping
with the independence of the office.
As noted in the introduction to this
volume, the 1998–99 budget is the
Board’s first to cover two years (calendar years 1998 and 1999). In the course
of the following discussion, the 1998–99
budget is compared with the immediately preceding ‘‘two-year base,’’
which is the sum of final expenses for
1996 and budgeted expenses for 1997.
Average annual changes in operating
expenses are also presented to allow
comparisons with earlier (annual)
budgets and expenses. The figures in the
charts for 1998 and 1999 expenditures
are, however, only the estimated annual
effects of the two-year, 1998–99 budget.

Board Operations
The $352.3 million operations budget
covers the Board’s four operational
areas (described in the introduction to
this volume) for calendar years 1998
and 1999; it is 6.2 percent ($20.5 million) greater than the 1996–97 base. The
average annual change in expenses for
the two-year period is 3.0 percent.
The 1998–99 budget reflects major
changes to support the plans developed
in 1997 as part of a revised planning
process. The $20.5 million net increase
in the budget relative to the two-year
base is a result of $36.3 million in higher
costs for salaries, benefits, and some
goods and services as well as initiatives,
less $15.8 million in program reductions
and improved efficiencies. The increases
arise from $14.5 million in merit pay
increases over the two years; investments in programs and automation
worth $11.3 million; $4.9 million in
costs resulting from policy decisions in
1996 and 1997; and increases in insurance premiums and other costs paid
on behalf of employees, and higher
prices for goods and services, which
together total $5.6 million. Reductions
in programs save $11.4 million, and
administrative actions to reduce the
cost of benefits save an additional
$4.4 million.1
The $14.5 million for merit salary
raises is the largest component of the
budget increase for 1998–99; the raises,
which reflect the market for skills

1. The reduction in the cost of benefits is based
on legislation that is pending in the Congress. The
level of savings will depend on the timing of the
passage of a final bill.

16

Annual Report: Budget Review, 1998–99

required by the Board, average 3.8 percent in 1998 and 3.5 percent in 1999.
Policy changes adopted in 1996 and
1997 account for $4.9 million of
increased spending in 1998–99. The
new policies consist of a change in
the method of funding the Office of
Employee Benefits; an expanded cash
award program to recognize excellent
performance by individual employees;
revised System accounting for communication costs under Federal Reserve
Automation Services; funding for recruitment and training of a small number of
welfare recipients to prepare them for
employment at the Federal Reserve; and
an increase in the scope and frequency
of the external audits of the Reserve
Banks.
The $5.6 million associated with
benefits and with inflation in prices for
goods and services include, for benefits,
rate increases for federal health and life
insurance and other standard benefits
and a higher wage base for the social
security tax; and, for goods and services,
a 2.7 percent price increase as projected
in the federal budget.

Extraordinary Items
In the past, certain periodic or one-time
expenses have produced undue volatility
in the Board’s budget, creating competition for funds to carry out the Board’s
basic mission. To address this problem,
funding for such ‘‘extraordinary items’’
has, for the past several years, been set
apart from the Board’s operating budget.
For 1998–99, $8.1 million in operating
funds and $3.1 million in capital have
been budgeted for work on software to
ensure its operation after the century
date change, and $7.3 million has been
budgeted for two major economic
surveys. Details on these projects appear
at the end of the chapter.

Office of Inspector General
The 1998–99 budget of $6.4 million for
the Office of Inspector General (OIG)
represents an average annual increase of
3.3 percent over the OIG’s combined
1996 actual and 1997 budgeted expenses
of $6.0 million. The budget for the
OIG is prepared in a manner that
is administratively consistent with the
preparation of the Board’s operating
budget; but in conformance with the
statutory independence of the office, the
OIG presents its budget directly to the
Chairman of the Board of Governors for
consideration by the Board.

Reductions in the Cost
of Programs
During the planning process, the Budget
Committee asked each division director
to look for ways to improve efficiency
(generate savings that would not reduce
the effectiveness of operations, and
eliminate lower-priority work). Ultimately, in conjunction with the Voluntary
Retirement Incentive Program, directors
identified program reductions worth
$11.4 million over the 1998–99 budget
period.2 The reductions were in each
of the operational areas and in the
administrative areas.

Monetary Policy
Reductions in the monetary policy function amounted to $0.6 million and
twelve positions, six of which were for
summer interns. The savings resulted
from rearranging tasks to reduce clerical
requirements, efforts to improve the

2. The Voluntary Retirement Incentive Program
offered employees already eligible to retire a
financial incentive to move up their retirement
date. Approximately 100 employees accepted the
offer.

Board of Governors
capture and distribution of data on
financial futures and options, and filling
positions vacated by the retirement
incentive program at lower salary levels.

Supervision and Regulation
Reductions in the supervision and regulation function were more substantial and
reflect improvements in the health of the
financial industry.
Reorganization of the Division of
Banking Supervision and Regulation
reduced expenses by $1.0 million and
eliminated twelve positions (ten of them
in late 1997). The restructuring realigns
and simplifies the division’s major line
functions and improves coordination
and consistency, particularly with respect
to large interstate and foreign organizations. The reorganization also improves
the use of automation and information
technology and changes the management structure to improve the development of supervisory policies and
procedures.
The Legal Division was able to
eliminate three positions and reduce
expenses by $0.4 million because of
reductions in workload associated with
the health of the industry. Finally, the
Regulatory Planning and Review Section in the Office of the Secretary was
abolished; absorbing its work in the line
divisions eliminated five positions and
saved $0.5 million.

System Policy Direction
and Oversight
The budget for the System policy
direction and oversight function reflects
the elimination of five positions and a
savings of $1.1 million. In the Division
of Reserve Bank Operations and Payment Systems, the financial examination
and automation management areas
shifted to the use of outside auditors and

17

consolidated the information systems
staff with the information technology
staff. These actions reduced authorized
staffing by three positions and costs by
$0.4 million. The remaining $0.7 million in savings arose from the consolidation of EEO activities, which eliminated two positions, and from the
replacement, at lower salary levels, of
staff members accepting the retirement
incentive.

Other Savings
Program changes that eliminated activity or revised procedures resulted in
division-specific reallocations (discussed
below under ‘‘Program Requests’’)
amounting to $5 million. Additional
management actions to adjust program
activities reduced administrative costs
and yielded gains in efficiency that
account for the remainder of the
$11.4 million in program savings.
Among the management actions were
the elimination of fourteen positions and
$2.4 million of expense by merging the
Office of the Controller with the Division of Human Resources Management and steps taken in the Division of
Support Services to streamline procedures, implement new automation, and
reduce some services. Miscellaneous
efforts in other divisions to gain efficiencies yielded another $0.4 million in
savings.

Current Issues
A number of efficiency issues raised by
the Budget Committee are still under
review. The more significant of these
concern the philosophy of the Board’s
oversight of the Reserve Banks, the flow
of information from the Board to the
public, the advisory group structure,
data collection initiatives, and the
Board’s use of automated data sources.

18

Annual Report: Budget Review, 1998–99

As the reviews are completed, any
changes in funding that arise will be
incorporated in the budget.

Program Requests
During the planning process, division
directors identified approximately
$16.0 million in opportunities for new
or expanded programs. The Budget
Committee found most of these to
be worthwhile but did not fund approximately $4.7 million of the requests. Of
the remaining $11.3 million in requested
activities, the Board followed the Budget
Committee’s recommendation in providing new funding in the amount of
$6.3 million and encouraging division
directors to indirectly fund the remaining $5 million in requested activities
through reallocations from lowerpriority areas and savings.

Reallocations
For research on the domestic economy
(primarily in the Division of Research
and Statistics and the Division of Monetary Affairs), resources were reallocated
to enhance the efficacy of policy rules,
manage the transition to a new data
system for monetary aggregates, study
competitive forces in banking markets,
improve coordination of changes in the
implementation of interest rates, analyze
the mutual funds industry, better utilize
financial market data, and study explicit
inflation targets and loan and deposit
rates.
For research on the international
economy (primarily the Division of
International Finance), resources were
transferred to better understand the
opportunities and risks of the continuing globalization of the U.S. economy,
increase analysis of financial linkages,
and upgrade country analyses (including
additional attention to Asia).

The Division of Reserve Bank Operations and Payment Systems reallocated
funds to expand efforts to ensure the
safety and efficiency of the payments
system; these efforts include the study of
potentially useful regulatory or policy
changes and the examination of electronic money issues, multicurrency
clearinghouses and settlement services,
and new net settlement services for retail
payment systems.
Management in the Division of
Consumer and Community Affairs
redirected some resources to data
systems to better handle the high volume
of requests for interpretive information
arising from revisions to the Community
Reinvestment Act. Other responsibilities, such as unifying the regulations
implementing the Truth in Lending Act
and the Real Estate Settlement Procedures Act will be met by expanding the
involvement of Reserve Bank personnel.
Should such resources not be available,
the division may have difficulty in
accomplishing the regulatory unification.

New Funding
The Board approved the Budget Committee’s recommendations for $6.3 million in additional funding for programs.3
The majority of the funds, $4.1 million,
are for Boardwide automation activities
that contribute to the standardization of
automation tools throughout the System
and that advance the ability of the staff
to quickly manipulate large quantities of
data.
3. Recent amendments to the Freedom of
Information Act became effective at various times
during 1997, most recently in November. The
amendments require agencies to provide electronic
access to information without limiting other forms
of access. Additional resources may be required to
comply with the amendments, but the resource
implications were not fully known at the time the
budget was completed.

Board of Governors
In addition, $1.0 million was provided
in the monetary policy function; most of
it, $0.7 million, is for data to improve
the measurement of prices, output,
productivity, and aggregate resource
utilization. The remainder was for four
positions to further study the process of
inflation and assess whether developments in the labor and product markets
have altered it.
To assist the Division of Banking
Supervision and Regulation in operating effectively with a smaller staff in a
rapidly changing environment, $0.3 million was allocated for improved training
of division staff, additional domestic and
international travel for division business
generally, and additional travel to assist
in the training of foreign supervisors.
Investments in facilities and equipment
of $0.8 million are intended to maintain
the quality of work life and improve
productivity in various Board operations; productivity improvements include
advances in electronic printing and the
preparation of electronic manuals available to System staff and financial institutions. Minor investments account for the
$0.1 million remainder of the $6.3 million total.

Requests Not Recommended
The remainder of the $16.0 million in
requested increases, approximately
$4.7 million, were recommended neither
for funding nor for reallocations. Among
these were program requests that the
Budget Committee found to be of
interest; most of them were offered for
longer-term consideration rather than
immediate implementation.
Automation and facilities projects
were also among the requests that were
not recommended. The Boardwide plan
to increase bandwidth to employees’
desktop computers by installing fiber
optic cable has been delayed in part

19

because of potential infrastructure
improvements in the Board building.
Requests for upgrades and replacements
for furniture and equipment, including a
plan to replace in all offices the furniture
that accommodates computers and their
peripheral devices, were deferred.

The Operations Budget
Presented here are the Board’s operating
expenses and authorized positions for
1998–99 in comparison to those for the
1996–97 base. Expenses and authorized
positions by organizational unit appear
in tables 2.1 and 2.2. Discussed below
are expenses by object (table 2.3) and
operational area (table 2.4) and the
number of authorized positions by
operational area (table 2.5).

By Object of Expense
The largest dollar increase in the
1998–99 budget by object of expense is
in personnel costs (table 2.3). The total
cost of personnel (which consists of
salaries, retirement, and insurance)
increased $11.5 million, or 4.6 percent,
over the 1996–97 base; projected salary
increases more than offset declines from
lower staffing and from administrative
actions to reduce health insurance costs.
For goods and services, the increase
of $9.0 million, or 5.2 percent, came
from higher telecommunications costs
associated with an accounting change,
software investments to improve standardization and ensure year 2000 compliance, and investments in training. Higher
costs for contractual professional services were offset by added income from
reimbursement for those services.

By Operational Area
The Board’s budget supports four major
functions: monetary and economic pol-

20

Annual Report: Budget Review, 1998–99

icy, supervision and regulation, services
to financial institutions and the public, and System policy direction and
oversight. Expense data for the four
operational areas include overhead and
support costs. Factors affecting all
operational areas—including the largest
one, merit pay and benefits—have
already been discussed. Detailed below
are the major factors affecting cost
changes that are unique to each function
(tables 2.4 and 2.5).
Monetary and Economic Policy
The 1998–99 budget for the monetary
and economic policy function is

$152.0 million, an increase of $11.7 million, or 8.3 percent (4.1 percent annually), from the 1996–97 base. Activities
in this area relate to the Board’s role in
the management of the nation’s monetary policy; they include monitoring and
analysis of developments in the money
and credit markets, setting of reserve
requirements, and approval of changes
in the discount rate.
The increase in this function is
primarily the result of investments in
automation, taking on some responsibilities for the Regulatory Planning and
Review activities formerly housed in the
supervision and regulation function, and
a small addition to staff to study causes

Table 2.1
Operating Expenses of the Board of Governors, by Division, Office,
or Special Account, 1996–97 to 1998–99
Thousands of dollars except as noted
Change

Division, office,
or special account

1996–97
base1

1998–99
budget

Amount

Percent

Board Members . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and Statistics . . . . . . . . . . . . . . . . . . . . . .
International Finance . . . . . . . . . . . . . . . . . . . . . . .
Monetary Affairs . . . . . . . . . . . . . . . . . . . . . . . . . . .
Banking Supervision and Regulation . . . . . . . . .
Consumer and Community Affairs . . . . . . . . . . .
Legal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve Bank Operations
and Payment Systems . . . . . . . . . . . . . . . . . .
Staff Director for Management . . . . . . . . . . . . . .
Controller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Human Resources Management . . . . . . . . . . . . .
Support Services . . . . . . . . . . . . . . . . . . . . . . . . . . .
Information Resources Management (IRM) . .
IRM income account 2 . . . . . . . . . . . . . . . . . . . . . .
Publications Committee . . . . . . . . . . . . . . . . . . . . .
Special projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8,977
8,661
53,446
20,091
17,837
52,171
13,843
16,812

8,873
8,443
57,052
20,788
18,530
55,143
14,995
17,101

−104
−218
3,606
697
694
2,972
1,152
290

−1.2
−2.5
6.7
3.5
3.9
5.7
8.3
1.7

27,659
4,439
6,588
10,767
55,733
56,862
−31,040
1,394
7,540

29,973
2,252
6,925
9,240
57,945
68,842
−39,551
2,951
12,751

2,313
−2,187
337
−1,526
2,212
11,981
−8,511
1,557
5,211

8.4
−49.3
5.1
−14.2
4.0
21.1
−27.4
111.7
69.1

Total, Board operations . . . . . . . . . . . . . . . . . . . .

331,779

352,255

20,476

6.2 3

Extraordinary items . . . . . . . . . . . . . . . . . . . . . . . . .
Office of Inspector General . . . . . . . . . . . . . . . . . .

3,786
6,016

15,392
6,419

. . .
403

. . .
6.7 3

Note. Operating expenses reflect all redistributions
for support and allocations for overhead, and they exclude
capital outlays.
The budget was approved as shown above. Effective
January 1, 1998, the Office of the Controller, the Division
of Human Resources Management, the Equal Employment Opportunity Program in the Office of the Staff
Director for Management, and the Procurement Section of the Division of Support Services are to be
combined in a new Management Division.

1. The sum of actual expenses in 1996 and budgeted
expenses for 1997.
2. Income from various Board divisions for use of
central IRM resources.
3. Average annual percentage change from 1997 to
1999 is 3.0 for Board operations and 3.3 for the Office of
Inspector General.
. . . Not applicable.

Board of Governors
of inflation and better analyze the
resulting data. These costs offset savings
from more efficient deployment of staff
members who are analyzing monetary
aggregates and from reductions of
temporary resources that had been
budgeted for international economic
analyses.
Supervision and Regulation
The 1998–99 budget for the supervision
and regulation function is $129.9 million, an increase of $5.9 million, or
4.8 percent (2.4 percent annually), from
the 1996–97 base. Supervision includes
review of the Reserve Banks’ examination reports on state member banks
and of their inspection reports on bank

21

holding companies, special studies
related to international applications, the
direction of enforcement actions, and
oversight of trust activities. Regulation
includes the formulation of regulations,
oversight of mergers and foreign banking activities, enforcement of consumer
protection regulations, and the regulation of securities credit.
The rate of increase in this operational
area is less than that for the Board as
a whole. The lower rate reflects the
elimination of twelve positions in the
Division of Banking Supervision and
Regulation (ten in late 1997 and two in
1998) and three in the Legal Division,
all of which were permitted by the
generally healthy state of the financial
industry. The modifications of the

Table 2.2
Positions Authorized at the Board of Governors, by Division, Office,
or Special Account, 1997 to 1998–99
Division, office,
or special account

Year-end 1997
base1

1998–99
budget

Change

Board Members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and Statistics . . . . . . . . . . . . . . . . . . . . . . . . .
International Finance . . . . . . . . . . . . . . . . . . . . . . . . . .
Monetary Affairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Banking Supervision and Regulation . . . . . . . . . . . .
Consumer and Community Affairs . . . . . . . . . . . . . .
Legal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve Bank Operations and
Payment Systems . . . . . . . . . . . . . . . . . . . . . . . . .
Staff Director for Management . . . . . . . . . . . . . . . . .
Controller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Human Resources Management . . . . . . . . . . . . . . . .
Concern 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Support Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Information Resources Management (IRM) . . . . .
Special projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

42
62
275
113
66
225
71
87

39
54
273
109
64
223
71
84

−3
−8
−2
−4
−2
−2
0
−3

125
7
35
44
31
263
279
1

129
19
31
32
31
247
279
1

4
12
−4
−12
0
−16
0
0

Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,726

1,686 3

−40

...................

25

25

0

Total, Board operations . . . . . . . . . . . . . . . . . . . . . . .

1,751

1,711

−40

Office of Inspector General . . . . . . . . . . . . . . . . . . . . .

32

29

−3

Reimbursable IRM support

4

Note. See general note to table 2.1 regarding creation
of a Management Division effective January 1, 1998.
1. Projected. Positions for total Board operations at
year-end 1996 totaled 1,733.
2. EEO summer intern and youth positions managed
by the Division of Human Resources Management.

3. Includes 20 temporary (two-year) positions that will
be abolished by year-end 1999.
4. Positions that provide IRM support to the Federal
Financial Institutions Examination Council for processing
data collected under the Home Mortgage Disclosure
Act and the Community Reinvestment Act.

22

Annual Report: Budget Review, 1998–99

Table 2.3
Operating Expenses of the Board of Governors, by Account Classification,
1988–89 to 1998–99
Thousands of dollars except as noted

Account classification

1988–89

1990–91

1992–93

1994–95

Personnel services
Salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

117,432
7,328
8,116
132,876

143,130
9,662
11,429
164,222

169,265
13,366
14,407
197,039

190,210
15,564
16,862
222,637

Goods and services
Travel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postal and other package delivery . . . . . . . . . . .
Telecommunications . . . . . . . . . . . . . . . . . . . . . . . .
Printing and binding . . . . . . . . . . . . . . . . . . . . . . . .
Publications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stationery and supplies . . . . . . . . . . . . . . . . . . . . .
Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment . . . . . . . . . . . . . . . . . . . .
Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Books and subscriptions . . . . . . . . . . . . . . . . . . . .
Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Building repairs and alterations . . . . . . . . . . . . . .
Furniture and equipment repairs
and maintenance . . . . . . . . . . . . . . . . . . . . . . .
Contingency Processing Center . . . . . . . . . . . . . .
Contractual professional services . . . . . . . . . . . .
Tuition/registration and membership fees . . . .
Subsidies and contributions . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6,489
2,226
3,114
2,200
−764
1,467
5,017
1,211
474
1,087
3,170
1,893

6,864
2,347
3,364
2,238
406
1,668
4,529
1,521
−282
1,187
3,388
1,945

8,453
2,327
3,665
2,237
2,212
1,635
5,615
2,442
3,156
1,451
3,683
3,402

9,399
2,483
4,168
2,866
2,976
1,755
6,453
2,497
7,202
1,913
4,145
3,273

3,906
142
6,482
1,077
1,110
14,269
−2,228
52,343

3,734
327
5,355
1,273
1,168
11,489
−4,635
47,986

4,072
465
9,666
1,823
1,504
12,574
−8,309
62,074

4,198
206
13,797
2,394
1,433
14,347
−16,175
69,330

Total, Board operations . . . . . . . . . . . . . . . . . . . .

185,219

212,208

259,113

291,967

Extraordinary items . . . . . . . . . . . . . . . . . . . . . . . . .
Office of Inspector General . . . . . . . . . . . . . . . . . .

0
139

0
227

0
780

0
239

Regulatory Planning and Review function mentioned above also affected the
rate of increase. The budget provides
for additional computer hardware and
software to help offset the effect of the
position reductions; greater spending on
information technology is also directed
at the workstation project to improve
efficiency in supervising foreign banking organizations.

$6.8 million, a decrease of $0.1 million,
or 1.5 percent, from the 1996–97 base.
This function covers the Board’s
oversight and control with regard to
services provided by the Reserve Banks
and Branches for check payments; for
electronic payments; and for the handling
of currency, coin, and food coupons.
The 1997 completion of automation
projects is the primary cause of the
decrease in this operational area.

Services to Financial Institutions
and the Public

System Policy Direction and Oversight

The 1998–99 budget for services to
financial institutions and the public is

The 1998–99 budget for System policy
direction and oversight is $63.6 million,

Board of Governors

23

Table 2.3
Continued
Thousands of dollars except as noted

Account classification

1996–97
base1

1998–99
budget

Average annual change
(percent)
1997–99

Personnel services
Salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1989–99
6.8 2
10.0
5.8
6.9

212,523
17,231
18,117
247,871

226,012
19,089
14,244
259,345

3.1
5.3
−11.3
2.3

Goods and services
Travel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postal and other package delivery . . . . . . . . . . .
Telecommunications . . . . . . . . . . . . . . . . . . . . . . . .
Printing and binding . . . . . . . . . . . . . . . . . . . . . . . .
Publications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stationery and supplies . . . . . . . . . . . . . . . . . . . . .
Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment . . . . . . . . . . . . . . . . . . . .
Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Books and subscriptions . . . . . . . . . . . . . . . . . . . .
Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Building repairs and alterations . . . . . . . . . . . . . .
Furniture and equipment repairs
and maintenance . . . . . . . . . . . . . . . . . . . . . . .
Contingency Processing Center . . . . . . . . . . . . . .
Contractual professional services . . . . . . . . . . . .
Tuition/registration and membership fees . . . .
Subsidies and contributions . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9,813
2,257
4,369
2,772
2,845
1,847
8,132
7,436
8,706
2,045
4,039
2,936

10,236
2,455
5,334
2,573
2,947
2,061
10,471
8,015
8,616
2,061
4,255
3,315

2.1
4.3
10.5
−3.6
1.8
5.6
13.5
3.8
−.5
.4
2.7
6.3

4.7
1.0
5.5
1.6 2
. . .2
3.5 2
7.6
20.8 3
33.7 3
6.6
3.0
5.8

3,463
0
19,098
2,629
1,376
17,220
−17,067
83,908

3,570
0
23,430
3,225
1,418
20,625
−21,726
92,910

1.9
. . .
10.8
10.8
1.5
9.4
12.8
5.2

−.8
. . .
13.7
11.6
2.5
3.8
25.6
5.9

Total, Board operations . . . . . . . . . . . . . . . . . . . .

331,779

352,255

3.0

6.6

Extraordinary items . . . . . . . . . . . . . . . . . . . . . . . . .
Office of Inspector General . . . . . . . . . . . . . . . . . .

3,786
6,016

15,392
6,419

. . .
3.3

. . .
46.7

1. The sum of actual expenses in 1996 and budgeted
expenses for 1997.
2. Accounting for income in performance reports
changed during the period. Until 1991, income was netted
against expenses in the appropriate cost center and
program; since then, income has been captured in the ‘‘all
other’’ account. The change has had only a minor effect
on the 1988–99 percentage change in the accounts for
salaries, printing and binding, and stationary and supplies,

but in the accounts for publications and rentals, it has
made a measurement of the 1989–99 change meaningless.
3. Beginning in 1998 the threshold expenditure for
capitalizing and depreciating a purchase rather than
expensing it rose from $1,000 to $5,000. The data for
1996–97 have been adjusted, but accurate adjustments for
earlier years are not possible.
. . . Not applicable.

an increase of $3.0 million, or 4.9 percent (2.4 percent annually), from the
1996–97 base. This operational area
covers oversight, direction, and supervision of System and Board programs,
including the work of Board members in overseeing Reserve Bank operations; budgeting and accounting;
financial examinations; audit and oper-

ations reviews; and automation and
communications.
The rate of increase in this operational
area is less than that for the Board as a
whole. The rate was held down by a
reduction in the program for the internal
examination of Reserve Banks in favor
of outside audits of the Banks. To ensure
their independence, the audits were

24

Annual Report: Budget Review, 1998–99

budgeted as overhead items rather than
in this operational area.

lion, or 24.0 percent, from the 1996–97
base. The budgeted amount provides for
improvements in office automation and
the automation infrastructure; security;
and other facility elements. The capital
budget also funds design work for major
repairs to the facility infrastructure, but
it does not fund the repair work.

The Capital Budget
The Board’s 1998–99 capital budget is
$13.0 million, a decrease of $4.1 mil-

Table 2.4
Operating Expenses of the Board of Governors, by Operational Area, 1996–97 to 1998–99
Thousands of dollars except as noted
Change

1996–97
base1

1998–99
budget

Amount

Percent

Monetary and economic policy . . . . . . . . . . . . . .
Supervision and regulation . . . . . . . . . . . . . . . . . .
Services to financial institutions
and the public . . . . . . . . . . . . . . . . . . . . . . . . .
System policy direction and oversight . . . . . . .

140,299
123,956

151,955
129,894

11,656
5,938

8.3
4.8

6,892
60,632

6,787
63,619

−105
2,987

−1.5
4.9

Total, Board operations . . . . . . . . . . . . . . . . . . . .

331,779

352,255

20,476

6.2 2

Extraordinary items . . . . . . . . . . . . . . . . . . . . . . . . .
Office of Inspector General . . . . . . . . . . . . . . . . . .

3,786
6,016

15,392
6,419

. . .
403

. . .
6.7 2

Operational area

Note. Operating expenses reflect all redistributions
for support and allocations for overhead, and they exclude
capital outlays.
1. The sum of actual expenses in 1996 and budgeted
expenses for 1997.

2. Average annual percentage change from 1997 to
1999 is 3.0 for Board operations and 3.3 for the Office of
Inspector General.
. . . Not applicable.

Table 2.5
Positions Authorized at the Board of Governors for Operational Areas,
Support and Overhead, and Office of Inspector General, 1997 to 1998–99
Activity

Year-end 1997
base1

1998–99
budget

Change

Monetary and economic policy . . . . . . . . . . . . . . . . .
Supervision and regulation . . . . . . . . . . . . . . . . . . . . .
Services to financial institutions and the public . .
System policy direction and oversight . . . . . . . . . .

434
379
22
160

426
374
22
173

−8
−5
0
13

Support and overhead 2 . . . . . . . . . . . . . . . . . . . . . . . . .

731

691

−40

Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,726

1,686

−40

Reimbursable IRM support . . . . . . . . . . . . . . . . . . . .

25

25

0

Total, Board operations . . . . . . . . . . . . . . . . . . . . . . .

1,751

1,711

−40

Office of Inspector General . . . . . . . . . . . . . . . . . . . . .

32

29

−3

3

1. Projected. Positions for total Board operations at
year-end 1996 totaled 1,733.
2. Includes 10 youth positions, 11 summer intern
positions, 10 worker-trainee positions, and 20 temporary
(two-year) positions that will be abolished by year-end
1999.

3. Positions that provide IRM support to the Federal
Financial Institutions Examination Council for processing
data collected under the Home Mortgage Disclosure
Act and the Community Reinvestment Act.

Board of Governors

Trends in Expenses and
Employment
The 1998–99 budget increased 3.0 percent on an annual basis. In comparison,
1997 budgeted expenses were 2.5 percent higher than 1996 actual expenses.
The increase from 2.5 percent to
3.0 percent is largely the result of salary
increases, which rose from 3.0 percent
for 1997 to 3.8 percent for 1998. The
3.0 percent average annual increase in
operations expenses between 1996–97
and 1998–99 is, however, less than half
the 6.6 percent average annual rise over
the ten years from 1988–89 to 1998–99
(table 2.3). The decline is largely attributChart 2.1
Operating Expenses of the
Board of Governors, 1988–99
Millions of dollars

175
Current dollars

150
1992 dollars 1

125
100

1988

1994

1999

25

Chart 2.2
Expenses for Personnel Services
at the Board of Governors, 1988–99
Millions of dollars

125

Current dollars

100

1992 dollars

75

1988

1994

1999

Note. See notes to chart 2.1.

able to moderating growth in the supervision and regulation function and to
aggressive steps to streamline operations and reduce costs. Charts 2.1
through 2.5 show trends over 1988–99.
Approximately 73.6 percent of Board
operating expenses is for personnel
(salaries, retirement, and insurance benefits); consequently, any discussion of
trends involves trends in staffing. Over
the ten years between 1989 and 1999,
the number of authorized positions at
the Board has increased by 152 (a total
of 9.7 percent), from 1,559 to 1,711.
Most of the increase—107 positions—
was in the supervision and regulation

Millions of dollars
Year
Current dollars
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999

............
............
............
............
............
............
............
............
............
............
............
............

1992 dollars 1

89.9
95.3
102.4
109.8
122.8
136.3
140.7
151.2
162.7
168.5
173.2
179.0

104.7
106.5
110.0
113.0
122.8
132.8
134.0
140.5
148.0
149.6
149.9
151.0

Note. Excludes the Office of Inspector General and
extraordinary items. For 1997, estimate; for 1998 and
1999, the values are the approximate calendar-year effects
of the two-year budget.
1. Calculated with the GDP price deflator.

Chart 2.3
Expenses for Goods and Services
at the Board of Governors, 1988–99
Millions of dollars
Current dollars

45
30
1992 dollars

15

1988

1994

Note. See notes to chart 2.1.

1999

26

Annual Report: Budget Review, 1998–99

Chart 2.4
Annual Change in Operating Expenses
of the Board of Governors, 1988–99
Percent

12
9
6
3

1988

1994

1999

While the number of positions at the
Board have fluctuated during the tenyear period, the salary budget (not
including retirement and insurance
benefits) has remained relatively stable
at roughly 65 percent of operating
expenses. The portion of operating
expenses devoted to retirement and
insurance has increased as a result of
increases in health insurance costs, a
change in the law to apply Medicare
costs to federal employees, and increases
in the Board contribution rate for the
employee thrift plan. The increases were

Note. Year-end data. See also general note to
chart 2.1.

function. The decrease of 40 positions
between 1997 and the 1998–99 budget
is the result of automation investments,
adjustments to programs and services,
streamlining and mergers affecting
administrative functions, and careful
reviews by division directors of the
resources needed to support each
function.
Early in the 1989–99 period, the
number of positions at the Board hit a
low—1,529 in 1990. From 1990 to 1995
the number of authorized positions rose
to meet an increasing workload driven
in large part by expanded statutory
responsibilities and requirements. Passage of legislation emphasizing safety
and soundness, regulation, and consumer
issues significantly increased staffing
requirements in these areas. The increase
in positions over the past several years
has been moderate. The advent of the
century date change problem caused a
temporary increase of 20 positions,
which began in 1997 and will be
reversed once Board systems are compliant. The increase associated with the
century date change was followed by a
program that will eliminate 40 positions
during the 1998–99 budget period and
more positions in the future.

Chart 2.5
Employment and Authorized Positions
at the Board of Governors, 1988–99
Thousands
Authorized positions

1.7
1.6
Employment

1.5

1988

1994
Year

1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999

............
............
............
............
............
............
............
............
............
............
............
............

1999

Employment

Authorized
positions

1,484
1,477
1,505
1,517
1,563
1,636
1,635
1,644
1,686
1,638
1,650
1,650

1,534
1,533
1,529
1,542
1,639
1,664
1,664
1,665
1,712
1,713
1,680
1,680

Note. Year-end data. For 1997, estimate; for 1998–99,
budget. Data exclude summer intern, worker-trainee, and
youth positions as well as positions for the Office of
Inspector General. For 1998–99 these positions number
31 and 29 respectively; figures for 1993–99 include
positions that provide support to the Federal Financial
Institutions Examination Council for processing data
collected under the Home Mortgage Disclosure Act and
the Community Reinvestment Act.

Board of Governors
partially offset by factors eliminating the
Board contribution to the retirement
plan and the transfer of most employees
in the Civil Service Retirement Plan to
the Board Retirement Plan.

Extraordinary Items
The 1998–99 budget for extraordinary
items, summarized at the outset of the
chapter, includes $8.1 million in operating funds and $3.1 million in capital to
bring the Board’s software into compliance with the century date change. The
Federal Reserve accelerated work on it’s
century date change project in 1997, and
the new goal is to complete all critical
systems by year-end 1998. The largest
cost is for labor, and some of these costs
will be absorbed through reallocations
from lower-priority work. Associated
hardware costs are for test environments
that will parallel the production environments. The Board is sharing mainframe
resources with Federal Reserve Automation Services where possible.
The budget for extraordinary items
also provides $4.3 million to conduct a
Survey of Consumer Finances (SCF) in
1998. The SCF is designed to gather
data from households on their income,
assets, debts, pensions, employment, use
of financial services, and other characteristics. The survey, which is part of a
series begun in 1983, provides the only
representative microlevel data for the
United States on the structure of household finances and household uses of
financial services, and the results are
often used by the Federal Reserve in
responding to requests from the Congress
and federal agencies. The surveys are
used in long-term research to support
the Board’s objectives as well as in
policy analyses relating to consumer
debt, the ‘‘unbanked’’ public, the effects
of large price movements in the stock

27

market, and projections of household
data by income groups.
Last, the extraordinary-items budget
provides $3.0 million for the National
Survey of Small Business Finances
(NSSBF). The survey gathers data from
small businesses on their financial
relationships, credit experiences, lending terms and conditions, income, balance sheets, location and types of
financial institutions used, and other
characteristics. Similar surveys were
conducted in 1987 and 1993. The new
survey will be conducted in 1999 for
data as of year-end 1998. The NSSBF
provides the only substantial financial
services information regarding the scope
of geographic and product markets for
small businesses. The survey is used in
analyzing the competitive effect of bank
mergers, benchmarking of other data
series (such as the noncorporate sector
of the flow of funds accounts), as input
to the quinquennial small business report
mandated by section 227 of the Economic Growth and Regulatory Paperwork Reduction Act of 1996, and for
research and policy analyses of a wide
variety of issues in small business
finances.

29

Chapter 3

Federal Reserve Banks
The 1998 Reserve Bank operating
budgets approved by the Board of
Governors total $2,054.7 million, an
increase of $43.1 million, or 2.1 percent, over estimated 1997 expenditures
(table 3.1). Including the cost of the
Automation Consolidation special project
($4.7 million), the Reserve Banks’ 1998
budgets total $2,059.4 million, an increase of $13.1 million, or 0.6 percent.1
Employment, including the staff associated with FRAS (Federal Reserve
Automation Services), is budgeted at
22,754 ANP (average number of personnel), a decrease of 467 ANP, or
2.0 percent, from estimated 1997
employment.2 Reserve Bank employment is expected to decline by 516 ANP,
and FRAS employment will increase by
49 ANP.
Expenses for personnel (salaries and
benefits) account for $1,286.0 million or
63 percent of the 1998 operations
budget, an increase of $20.7 million, or
1.6 percent, over estimated 1997 personnel expenses (table 3.2). Nonpersonnel expenses (mainly for building and
1. The budget for the Automation Consolidation special project includes transition expenses
associated with the move to a centralized environment and expenses for FRAS (Federal Reserve
Automation Services, the unit responsible for
consolidated data processing and data communications for the Reserve Banks). FRAS charges to the
Automation Consolidation special project in 1998
are budgeted at $2.0 million.
2. The term average number of personnel
describes levels and changes in employment at the
Reserve Banks. ANP is the number of employees
in terms of full-time positions for the time period.
For instance, a full-time employee who starts work
on July 1 counts as 0.5 ANP for that calendar year;
two half-time employees who start on January 1
count as 1 ANP.

automation projects) are budgeted at
$768.7 million, an increase of $22.4 million, or 3.0 percent, over estimated 1997
nonpersonnel expenses.
The following two sections discuss
major initiatives and the budget objective for the Reserve Banks in 1998.
Subsequent sections provide details for
the four operational areas as well as
for objects of expense, capital outlays,
and long-term trends. Appendix A gives
more information on capital outlays, the
special project, and other special categories of expense, and appendix D gives
additional data by District and operational area.

Major Initiatives
The 1998 Reserve Banks budgets
provide for the following initiatives
(table 3.3):
System-defined
• Century date change compliance
• Installation of equipment and software
to support image processing of commercial and government checks and
archiving of the images
• Enhancements to high-speed currency
processors
District-defined
• Office automation and upgrading of
local area networks
• Reengineering programs
Contributing significantly to the 1998
operations budget are expenses associated with efforts to ensure century
date change (CDC) compliance for all
automated systems. The total cost of the
CDC project in 1998 is expected to be
$31.9 million and will involve 226 ANP.

30

Annual Report: Budget Review, 1998–99

The majority of these costs ($22.8 million or 71 percent) represents a reallocation of current resources. The remaining
incremental expense of $9.1 million
is primarily for consulting services and
contract programmers. The total CDC
initiative includes $6.5 million and
52 ANP at FRAS; these expenses are
reflected in the Reserve Bank budgets
as FRAS charges for infrastructure.
Expenses for the ongoing checkimaging initiative are budgeted at
$26.9 million, an increase of approximately $11.2 million over estimated
1997 expenditures. Approximately
45 percent of the funds are earmarked
for a government check-imaging proj-

ect, requested by the U.S. Treasury,
whereby the Federal Reserve provides
image-supported check truncation services to the Treasury. The plans also
include funding for two additional
government imaging services, EZ
Clear Savings Bonds and Postal Money
Orders.
In keeping with the System’s effort
to expand electronic delivery of check
services, many Reserve Banks plan to
expand the commercial check image
services they offer to depository institutions and are upgrading sorters and
check-processing control software to
make them image-capable. The budget
increase for 1998 is associated with

Table 3.1
Expenses and Employment at the Federal Reserve Banks, 1997–98
1997
estimate

1998
budget

Expenses (millions of dollars)
Operations 1 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special project . . . . . . . . . . . . . . . . . . . . . . . .

2,011.6
34.7

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,046.3

Category

Employment (average number
of personnel) 2
Operations 1 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Reserve Automation Services . . .

Percent

43.1
−30.0

2.1
−86.5

2,059.4

23,221

Amount

2,054.7
4.7

22,672
549

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Change

13.1

.6

22,156
598

−2.3
8.9

22,754

Note. See general note to table 1.1, chapter 1.
Excludes capital outlays.
1. Includes support and overhead (see appendix D,
table D.3, note 1, for definitions).

−516
49
−467

−2.0

2. See text note 2 for definition. The costs of the
special project do not involve personnel.

Table 3.2
Operating Expenses of the Federal Reserve Banks, by Object, 1996–98
Millions of dollars except as noted
Percentage change

Object

1996
actual

1997
estimate

1998
budget

1996 to 1997

1997 to 1998

Personnel . . . . . . . . . . . . . . . . . . . . .
Nonpersonnel . . . . . . . . . . . . . . . . .

1,236.6
719.5

1,265.3
746.3

1,286.0
768.7

2.3
3.7

1.6
3.0

Total . . . . . . . . . . . . . . . . . . . . . . . . .

1,956.1

2,011.6

2,054.7

2.8

2.1

Note. Includes support and overhead (see appendix D, table D.3, note 1,
for definitions). Excludes special project.

Federal Reserve Banks
additional equipment depreciation and
maintenance, software amortization, and
related programming and data processing for both commercial and government check processing. This initiative
will also add 68 ANP in 1998, mainly in
the New York, Philadelphia, Richmond,
and Atlanta Districts to support imaging
of commercial checks.
The initiative to enhance currency
processors that have been installed
over the last few year is budgeted at
$2.9 million, an increase of $2.2 million
over estimated 1997 expenditures. The
enhancements to the currency processors will improve operating efficiency,
automate processing functions, ensure
CDC compliance, allow for currency
design changes, and improve management information reporting.
Funding for office automation projects
is projected to increase $3.0 million.
Five Banks identified plans to improve
their local area networks (LANs) by
improving the existing infrastructure
and addressing backup and contingency.

31

Another Bank has budgeted funds to
continue the conversion of the District’s paper-based system to electronic
images.
Several Reserve Banks are projecting savings, totaling $22.1 million and
280 ANP, associated with reengineering
efforts—that is efforts to restructure
business processes—and other operational improvements. Although the bulk
of the savings are associated with
Bankwide programs, three districts have
identified specific cost reductions and
realized efficiencies in their check operations. Reductions in the Supervision
and Regulation examination staff are
also contributing to cost savings and
staff reductions.

1998 Budget Objective
In 1997 the Board approved a 1998
Reserve Bank budget objective that
provided for an increase in total expenses, including special projects, of

Table 3.3
Contribution of Change in Major Initiatives to the Change in Operating Expenses
of the Federal Reserve Banks, 1997 to 1998
Millions of dollars except as noted

Initiative

1997
estimate

1998
budget

Contribution of change
to change in total
operating expenses,
1997 to 1998
Amount

Percentage points

System-defined
Century date change . . . . . . . . . . . . . . . .
Check imaging . . . . . . . . . . . . . . . . . . . . . .
Currency processors . . . . . . . . . . . . . . . . .

14.4
15.7
.7

31.9
26.9
2.9

17.5
11.2
2.2

.9
.6
.1

District-defined
Office automation
and network upgrades . . . . . . . . . .
Reengineering . . . . . . . . . . . . . . . . . . . . . .

7.1
. . .

10.1
−22.1

3.0
−22.1

.1
−1.1

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

37.9

49.7

11.8

.6

Memo
Other operating expenses . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . .

1,973.7
2,011.6

2,005.0
2,054.7

31.3
43.1

1.5
2.1

32

Annual Report: Budget Review, 1998–99

$24.9 million, or 1.2 percent above
budgeted 1997 expenditures. Excluding
expenses for a special project, which
was expected to decrease in 1998, the
increase was projected to be 2.8 percent.
The Board anticipated that within this
guideline expenses for ongoing Reserve
Bank operations (including the impact
of an overall savings target of $12.6 million) would increase 2.0 percent over
budgeted 1997 expenditures. Expenses
for three initiatives, century date change
compliance, check imaging, and new
currency processor enhancements, were
expected to account for $16.6 million of
the projected 1998 expenses. Table 3.4
shows the 1998 budget objective relative to the 1997 budget and the approved
1998 budget relative to estimated 1997
expenditures.
The 1998 increase for ongoing
Reserve Bank operations (when the
savings target is included) is $15.0 million less than anticipated in the budget
objective. The increase is less than
the 2.0 percent target, by 0.9 percentage
point, for three main reasons: (1) lowerthan-anticipated building expenses for

Table 3.4
Change in Budget Objective and Budget
of the Federal Reserve Banks, 1997 to 1998
Percent
Item

1998
budget
objective 1

1998
budget 2

Operating expenses . . . . . . . .
System-defined
initiatives 3 . . . . . . . . . . . .
Total, excluding
special project . . . . . .

2.0
.8

1.1
1.0

2.8

2.1

Special project . . . . . . . . . . . .

−1.6

−1.5

Total, including
special project . . . . . . .

1.2

.6

the Cleveland and Minneapolis facilities
projects; (2) 1997 expenses higher than
budgeted because of unbudgeted costs
for CDC compliance; unplanned onetime costs associated with closing the
Lewiston office; unanticipated check
write-offs; unbudgeted severance payments; and higher-than-planned use of
outside agency help, primarily in the
check and automation areas; and (3) savings greater than anticipated from various reengineering programs throughout
the organization.
Spending on Reserve Bank initiatives
is expected to be $3.1 million more than
the target approved by the Board. The
increase is due largely to a $5.5 million
increase in costs for the check imaging
initiative resulting from additional equipment requirements for this project
because better information was available related to customer demands for
commercial imaging products and the
requirements for two additional services, EZ Clear Savings Bond and
Postal Money Order image processing.
Offsetting the expected higher costs
for the check imaging initiative are
incremental costs for century date change
efforts, which are $0.3 million less than
projected, and costs associated with
currency processor enhancements, which
are $1.9 million less.
Both the 1998 budget objective and
the 1998 Reserve Bank budget for the
Automation Consolidation special project
were $4.7 million. This project, which
will be ending during 1998, is budgeted
at $30.1 million less than in 1997.

1. As a change from 1997 budget.
2. As a change from 1997 estimated expenses.
3. Century date change, check imaging, and currency
processors.

Budget by Operational Area
Tables 3.5 and 3.6 summarize employment and expenses for the Reserve
Banks’ four operational areas.
Tables 3.7 through 3.11 give details for
each area.

Federal Reserve Banks

Monetary and Economic Policy
The 1998 budget for the monetary and
economic policy operational area is
$152.7 million, an increase of $8.0 million, or 5.5 percent, over estimated 1997
expenditures. The increase is due to
merit pay increases, slightly higher staff
levels, century date change initiatives,
and higher FRAS and local automation
costs. Local automation initiatives
include expansion of distributed processing platforms and applications and the
expansion of electronic services to the

33

public, including electronic reference
services. The staffing level is increasing
by 4 ANP, or 0.6 percent, over estimated
1997 employment, mainly because of
the full-year impact of filling positions
that were vacant during part of 1997.

Services to the U.S. Treasury
and Other Government Agencies
The 1997 budget for services to the
Treasury and other government agencies of $220.9 million is $8.9 million,

Table 3.5
Employment at the Federal Reserve Banks, by Activity, 1996–98
Average number of personnel except as noted 1
Activity

Percentage change

1996
actual

1997
estimate

1998
budget

734

720

724

−2.0

.6

1996 to 1997 1997 to 1998

Operational areas
Monetary and economic policy . . . . . . . . . . .
Services to the U.S. Treasury
and other government agencies . . . . . .
Services to financial institutions
and the public . . . . . . . . . . . . . . . . . . . . . .
Supervision and regulation . . . . . . . . . . . . . . .

1,542

1,469

1,397

−4.8

−4.8

8,083
3,111

7,958
3,022

7,773
2,953

−1.5
−2.9

−2.3
−2.3

Support and overhead 2
Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4,538
4,901

4,640
4,863

4,535
4,773

2.2
−.8

−2.3
−1.9

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

22,909

22,672

22,156

−1.0

−2.3

Note. Excludes Federal Reserve Automation Services. The costs of the special project do not involve
personnel.

1. See text note 2 for definition.
2. See appendix D, table D.3, note 1, for definitions.

Table 3.6
Operating Expenses of the Federal Reserve Banks, by Operational Area, 1996–98
Thousands of dollars except as noted
Operational area
Monetary and economic policy . . . . . . . . . . .
Services to the U.S. Treasury
and other government agencies . . . . . .
Services to financial institutions
and the public . . . . . . . . . . . . . . . . . . . . . .
Supervision and regulation . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1996
actual

1997
estimate

1998
budget

Percentage change
1996 to 1997 1997 to 1998

138,649

144,712

152,699

4.4

5.5

215,609

212,010

220,939

−1.7

4.2

1,177,444
424,402

1,214,810
440,025

1,226,243
454,791

3.2
3.7

.9
3.4

1,956,104

2,011,557

2,054,672

2.8

2.1

Note. Includes support and overhead (see appendix D, table D.3, note 1,
for definitions); excludes special project.

34

Annual Report: Budget Review, 1998–99

or 4.2 percent, above estimated 1997
expenditures. Increased costs are due
mainly to higher FRAS charges for
Treasury and agency services, due
primarily to the CDC compliance project,
and continued efforts to automate and
enhance Treasury-related systems.
Employment is projected to be 72 ANP,
or 4.8 percent, lower than estimated
1997 employment. Staffing levels are
being reduced in all services. Over
one-third of the reduction is associated
with a 26 ANP reduction in the Food
Coupon processing area, resulting from
expanded Electronic Benefits Transfer
programs. Reductions in other areas are
the result of reengineering efforts in
several districts.

Services to Financial Institutions
and the Public
Expenses for providing services to
financial institutions and the public are
budgeted at $1,226.2 million, an increase of $11.4 million, or 0.9 percent,
over estimated 1997 expenditures. The
budget for priced services is declining $6.1 million, or 0.9 percent, over
estimated 1997 expenditures, and the
budget for nonpriced services is increasing $17.5 million, or 3.5 percent.
The Reserve Banks budgeted
$26.9 million in 1998 to provide commercial check, postal money order, and
Treasury check imaging services; funding for this project is $11.2 million

Table 3.7
Expenses of the Federal Reserve Banks for Monetary and Economic Policy, 1996–98
Thousands of dollars except as noted
Percentage change

1996
actual

1997
estimate

1998
budget

Economic policy determination . . . . . . . . . . .
Open market trading . . . . . . . . . . . . . . . . . . . . .

109,040
29,609

114,419
30,293

120,478
32,221

4.9
2.3

5.3
6.4

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

138,649

144,712

152,699

4.4

5.5

Service

1996 to 1997 1997 to 1998

Note. Excludes special project.

Table 3.8
Expenses of the Federal Reserve Banks for Services to the U.S. Treasury
and Other Government Agencies, 1996–98
Thousands of dollars except as noted
Percentage change

1996
actual

1997
estimate

1998
budget

Centralized operations—savings bonds . . . .
Other Treasury issues . . . . . . . . . . . . . . . . . . . .
Centralized operations—
other Treasury issues . . . . . . . . . . . . . . . .
Centrally provided Treasury
and agency services . . . . . . . . . . . . . . . . .
Government accounts . . . . . . . . . . . . . . . . . . . .
Food coupons . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

67,888
22,065

62,395
14,862

64,625
16,278

−8.1
−32.6

3.6
9.5

2,112

1,790

1,488

−15.2

−16.9

26,474
37,491
25,002
34,577

35,048
34,085
25,922
37,908

36,268
36,563
26,588
39,129

32.4
−9.1
3.7
9.6

3.5
7.3
2.6
3.2

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

215,609

212,010

220,939

−1.7

4.2

Service

Note. Excludes special project.

1996 to 1997 1997 to 1998

Federal Reserve Banks
higher than the 1997 estimate. Commercial check processed volume is
projected to increase 3.4 percent, with
individual district volume projections
ranging from a decline of 1.8 percent to
an increase of 9.1 percent. The volume
for government checks processed is
projected to decline 5.1 percent. Funding for BPS 3000 currency software
enhancements is projected to be
$2.9 million.

35

Staffing is budgeted to decline 185
ANP, or 2.3 percent, from estimated
1997 employment. Staff reductions are
occurring in both priced and nonpriced
services, including a decline of 89 ANP
for the commercial check service due
to extensive reengineering projects in
several banks, and the closing of the
Lewiston check processing facility. Staffing for ACH, Funds Transfer, and
Book-Entry Securities services are

Table 3.9
Expenses of the Federal Reserve Banks for Services to Financial Institutions
and the Public, 1996–98
Thousands of dollars except as noted
Service

1996
actual

1997
estimate

1998
budget

Percentage change
1996 to 1997 1997 to 1998

Currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Coin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial check . . . . . . . . . . . . . . . . . . . . . . .
Other check . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Funds transfer . . . . . . . . . . . . . . . . . . . . . . . . . . .
Automated clearinghouse . . . . . . . . . . . . . . . .
Book-entry securities transfer . . . . . . . . . . . .
Other securities and noncash collection . . .
Loans to member banks and others . . . . . . .
Public programs . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

243,421
29,164
5,117
547,674
37,081
62,507
79,254
37,215
7,616
22,583
72,184
33,628

249,145
28,959
4,765
569,115
42,001
68,643
68,215
40,324
6,884
23,901
76,299
36,559

257,973
29,734
2,481
570,549
47,161
64,930
69,763
36,084
5,259
23,654
80,321
38,334

2.4
−.7
−6.9
3.9
13.3
9.8
−13.9
8.4
−9.6
5.8
5.7
8.7

3.5
2.7
−47.9
.3
12.3
−5.4
2.3
−10.5
−23.6
−1.0
5.3
4.9

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,177,444

1,214,810

1,226,243

3.2

.9

Note. Excludes special project.

Table 3.10
Expenses of the Federal Reserve Banks for Services to the U.S. Treasury
and Other Government Agencies and to Financial Institutions and the Public, 1996–98
Thousands of dollars except as noted
Service

1996
actual

U.S. government services 1 . . . . . . . . . . . . . . .
Cash services . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Priced services . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

303,395
272,584
690,744
126,331

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,393,054

Note. Excludes special project.
1. The amounts shown here do not include expenses in
this service that are recorded in the monetary and
economic policy operational area. For 1996, these
expenses were $647 thousand; for 1997, they are

1997
estimate

1998
budget

Percentage change
1996 to 1997 1997 to 1998

301,413
278,104
713,115
134,188

306,309
287,707
707,001
146,165

−.7
2.0
3.2
6.2

1.6
3.5
−.9
8.9

1,426,821

1,447,182

2.4

1.4

estimated at $606 thousand; and for 1998, they are
budgeted at $880 thousand. These expenses increase the
total costs of services provided by the Reserve Banks as
fiscal agents and depositories of the United States.

36

Annual Report: Budget Review, 1998–99

projected to decline by 29 ANP due to
efficiencies gained as a result of the
transition to FRAS centralized applications. Consolidation continues in the
Noncash service; one office will provide
all processing for the Banks. Expenses
for the CDC compliance project will be
$1.2 million greater than estimated 1997
expenditures.

Supervision and Regulation
The 1998 budget for the supervision and
regulation operational area is $454.8
million, an increase of $14.8 million,
or 3.4 percent, over estimated 1997
expenditures. Changes in individual
Reserve Bank budgets vary considerably from District to District and range
from a decline of 4.4 percent to an
increase of 7.7 percent. Additional funding for market-based merit pay programs
is partially offset by savings associated
with staff reductions.
The supervision and regulation area
continues to allocate resources toward
Table 3.11
Expenses of the Federal Reserve Banks
for Supervision and Regulation, 1998
Thousands of dollars
Service
Supervision of large multistate,
multi-District banking
organizations . . . . . . . . . . . . . . . . . . . . .
Supervision of domestic regional
and community banking
organizations . . . . . . . . . . . . . . . . . . . . .
Supervision of foreign
banking organizations . . . . . . . . . . . . .
Administration of laws and
regulations related to banking . . . . . .
Supervision activities benefiting
the banking system . . . . . . . . . . . . . . .
Studies of banking and financial
markets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1998 budget

64,615
177,752
48,638
95,758
46,003
22,025
454,791

Note. Excludes special project. The services in this
operational area have been redefined for 1998, and thus
the budgets for them cannot be compared with service
budgets of previous years.

enhancing distributed processing platforms and implementing new applications. Automation initiatives include
expanding off-site access for examiners,
automating resource tracking and scheduling functions, and implementing system software for examiner and consumer
compliance applications.
The staffing level is budgeted to
decrease by 69 ANP, or 2.3 percent,
from the estimated 1997 level; reductions associated with the increased use
of risk-based examinations, changes in
examination frequency, and efficiencies
gained through automation are partially
offset by slight staff increases in three
districts due to the full-year effect of
filling positions that were vacant during
part of 1997.

Budget by Object of Expense
Personnel expenses—officer and employee salaries, other compensation to
personnel, and retirement and other
benefits—account for 63 percent of
Reserve Bank operating expenses budgeted for 1998. The amount budgeted is
1.6 percent more than estimated 1997
personnel expenses (table 3.12).
Salaries and other personnel expenses,
which account for 49 percent of budgeted
1998 operating expenses, are expected
to be $12.8 million, or 1.3 percent,
greater than estimated 1997 expenses.
Salaries for officers and employees are
budgeted to increase $24.0 million, or
2.5 percent. Contributing to the increase
are merit increases (4.0 percent of salary
liability, or $36.6 million), promotions
and reclassifications ($8.0 million), and
market adjustments ($2.1 million). Partly
offsetting these increases are a reduction in overtime ($6.2 million), lower
expenses resulting from short-term position vacancies or lag ($5.6 million),
and a decline in the staffing level of
516 ANP ($11.2 million). The decrease

Federal Reserve Banks
in other personnel expenses ($11.1 million) is due to a decline in the use of
outside agency help and reduced severance and retention payments, partially
offset by increased payments for cash
awards and incentive-based programs.
Expenditures for retirement and other
benefits, which account for 14 percent
of budgeted 1998 operating expenses,
are expected to increase $7.9 million,
or 2.9 percent, over estimated 1997
expenses. Benefits tied to salaries, such
as social security payments and thrift
plan contributions, are budgeted to
increase 2.2 percent, and costs for
non-salary-related benefits, such as insurance and health care for active employees
and retirees, are budgeted to increase
4.3 percent.
Nonpersonnel expenses, which account
for 37 percent of Reserve Bank operating expenses budgeted for 1998, are
projected to increase 3.0 percent over
estimated 1997 expenditures.

37

Expenditures on equipment are
expected to increase $10.3 million, or
5.9 percent, accounting for 9 percent of
budgeted 1998 expenses. Depreciation
and maintenance costs are increasing
for equipment related to Reserve Bank
initiatives, including check-imaging
equipment and upgraded local area
networks and end-user computing equipment. Expenses are also increasing as a
result of depreciation on upgraded checkprocessing equipment, documentimaging equipment, dedicated systems
for check adjustment and cash management, and upgraded telephone and voice
response systems. These cost increases
are partially offset by the planned
release of the data processing mainframe
computer in New York as the Bank
completes the transition to FRAS.
Shipping expenses, which account
for 4 percent of budgeted 1998 operating expenses, are expected to decrease
$2.2 million, or 2.8 percent, mainly

Table 3.12
Operating Expenses of the Federal Reserve Banks, by Object, 1996–98
Thousands of dollars except as noted
Percentage change

1996
actual

1997
estimate

1998
budget

Personnel
Officers’ salaries . . . . . . . . . . . . . . . . . . . . . . . . .
Employees’ salaries . . . . . . . . . . . . . . . . . . . . . .
Other 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retirement and other benefits . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

100,161
834,913
34,151
267,376
1,236,600

104,955
853,070
38,548
268,699
1,265,272

109,957
872,021
27,433
276,578
1,285,989

4.8
2.2
12.9
.5
2.3

4.8
2.2
−28.8
2.9
1.6

Nonpersonnel
Forms and supplies . . . . . . . . . . . . . . . . . . . . . .
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shipping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Travel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

59,557
160,123
32,726
77,849
44,931
167,659
−52,319
228,978
719,504

52,960
173,308
37,128
80,058
45,059
174,680
−53,231
236,323
746,285

52,774
183,615
36,940
77,825
42,848
180,130
−56,619
251,169
768,683

−11.1
8.2
13.5
2.8
.3
4.2
1.7
3.2
3.7

−.4
5.9
−.5
−2.8
−4.9
3.1
6.4
6.3
3.0

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,956,104

2,011,557

2,054,672

2.8

2.1

Object

Note. Excludes special project.
1. Certain contractual arrangements and miscellaneous
other personnel expenses.

1996 to 1997 1997 to 1998

2. Communications, fees, contra-expenses, shared costs
distributed and received, excess capacity, and miscellaneous other expenses.

38

Annual Report: Budget Review, 1998–99

because of the implementation of the
Interdistrict Transportation network
design changes in late 1997.
Within the travel budget, expenditures
on foreign travel are budgeted at
$3.9 million, or 0.2 per cent of total
budgeted 1998 operating expenses.
Decreased examiner travel associated
with the examination of foreign banks is
offset by an increase in foreign travel by
bank staff supporting research efforts
related to newly industrializing countries
and emerging markets.
Building expenses, which account for
9 percent of budgeted 1998 operating
expenses, are expected to increase
$5.5 million, or 3.1 percent. The increase
is driven by increased real estate taxes
and property depreciation resulting from
various building improvements, building renovations, and completion of the
Minneapolis’ new building and Cleveland’s operations center.
Recoveries will increase by $3.4 million. Nearly half of this increase
($1.4 million) is the result of the

Reserve Bank’s 1998 implementation of
the Uniform Cash Access policy.
‘‘Other’’ nonpersonnel expenses are
budgeted to increase $14.8 million from
estimated 1997 expenses, accounting for
12 percent of budgeted 1998 operating
expenses. The increase is due mainly to
the Banks receiving higher production
charges from FRAS for infrastructure,
data processing, and data communications services. These increases are
partially offset by decreased fees to
consultants and lower check write-offs.

Capital Outlays
Capital outlays for 1998 are budgeted at
$310.8 million, an increase of $26.1 million, or 9.2 percent, from estimated 1997
expenses (table 3.13). The budget
includes FRAS capital outlays of
$44.1 million, an increase of $11.1 million, or 33.8 percent, over estimated
1997 expenses. The budgets of six of the
twelve Banks are below estimated 1997
outlays.

Table 3.13
Capital Outlays of the Federal Reserve Banks, by Class, 1996–98
Thousands of dollars except as noted
Percentage change

1996
actual

1997
estimate

1998
budget

Data processing and data
communications equipment 1 . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture, furnishings, and fixtures . . . . . . .
Other equipment 2 . . . . . . . . . . . . . . . . . . . . . . . .
Land and other real estate . . . . . . . . . . . . . . . .
Building machinery and equipment . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . .
Software 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

81,580
125,391
16,934
73,449
7,107
20,422
1,542
8,628

107,573
76,918
26,814
27,433
8,518
20,707
1,368
15,406

126,583
80,417
25,303
16,196
2,323
29,634
14,695
15,647

31.9
−38.7
58.3
−62.7
19.9
1.4
−11.3
78.6

17.7
4.5
−5.6
−41.0
−72.7
43.1
974.2
1.6

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

335,053

284,737

310,798

−15.0

9.2

Memo
FRAS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

19,714

33,004

44,146

67.4

33.8

Class

1. For Federal Reserve Automation Services (FRAS),
includes capital of $16,337 thousand in 1996, $28,725
thousand in 1997, and $39,465 thousand in 1998.
2. For FRAS, includes no outlay in 1996, $30 thousand
in 1997, and $20 thousand in 1998.

1996 to 1997 1997 to 1998

3. For FRAS, includes $3,377 thousand in 1996,
$4,249 thousand in 1997, and $4,661 thousand in 1998.

Federal Reserve Banks
Outlays for data processing and data
communications equipment, budgeted at
$126.6 million, account for approximately 41 percent of capital outlays
budgeted for 1998. Included in the
budget is $38.4 million for the purchase
of personal computers and to upgrade
local area networks. Other significant
outlays include $18.1 million for check
imaging systems, check sorters, and
related equipment, $10.4 million for
central processing units (CPUs), storage
devices, printers, and related equipment,
and $12.8 million for various projects
that include the replacement of systems
in the Markets Group and Central Bank
Services functions in New York and the
purchase of a Counterfeit Catalogue and
Retrieval system for the Currency
Technology Office.
FRAS has budgeted $39.4 million for
data processing and data communications equipment in 1998. Outlays for
CPUs account for $14.3 million. The
FRAS budget also includes $15.0 million for computer peripheral and desk
top equipment and $10.1 million for
data communications equipment to
improve and expand FEDNET (the
Federal Reserve System’s communication network) and enhance its security.
Building outlays are budgeted at
$80.4 million, an increase of $3.5 million from the 1997 estimate. Cleveland
is budgeting $21.8 million for renovation of its head office. Atlanta’s building
budget is $17.5 million; the funds are
primarily for long-term facilities initiatives, which include architectural and
engineering fees for the Atlanta and
Birmingham projects and funds to begin
construction in Birmingham. Building
renovation and modernization projects
in New York total $18.5 million.
San Francisco is budgeting $11.2 million, largely for renovation projects at
all offices in the district. A variety of
smaller building projects accounts for

39

the remaining building outlays included
in the 1998 budget. Leasehold improvements, budgeted at $14.7 million, are
primarily associated with New York’s
plans to improve and occupy newly
leased space adjacent to its main
building.
Purchases of furniture and other equipment are budgeted at $41.5 million and
account for about 13 percent of total
capital outlays. The majority of the
furniture and equipment included in
the 1998 budget is associated with the
various remodeling, renovation, and
leasehold improvement projects that
are occurring in most districts. Yearover-year expenses in this category are
declining due to the completion of major
construction projects in Minneapolis
and Cleveland and the final installation
of BPS 3000 currency processors in
those two locations.
Land and other real estate expenses
are budgeted at $2.3 million, a reduction
of $6.2 million from the 1997 estimate.
The reduction is primarily due to the
completion of the Minneapolis building
during 1997 and a delay in the two land
improvement projects associated with
new buildings in the Atlanta District.
The most significant outlay during 1998
is associated with the new building
projects in Atlanta and Birmingham.
Building machinery and equipment
outlays are budgeted at $29.6 million,
or about 10 percent of total capital
outlays. Included are items related to
the building and renovation projects in
New York ($6.4 million), Cleveland
($5.9 million) and Atlanta ($4.7 million)
and San Francisco ($2.7 million). Other
districts are also budgeting for a variety
of smaller items, including replacement
of elevators to comply with the
Americans with Disabilities Act.
Software purchases in 1998 are
budgeted at $15.6 million. FRAS has
budgeted $4.7 million for software. The

40

Annual Report: Budget Review, 1998–99

budget of the New York Reserve Bank
includes $3.8 million for a new check
adjustment system and replacement of
the Bank’s market data software. Checkimage software in Boston accounts
for about $2.1 million of the total, and
smaller software purchases throughout
the Reserve Banks account for the
balance.

Trends in Expenses and
Employment
Over the ten years ending with the 1998
budget, Reserve Bank expenses have
increased an average of 5.0 percent per
year (chart 3.1), and the average number
of employees at the Reserve Banks
(including FRAS) has decreased by 591,
from 23,345 to 22,754 (chart 3.2). Since
1988, staff levels have decreased in the
commercial check service (783 ANP),
the overhead services (180 ANP), securities safekeeping and noncash services
(131 ANP), the ACH and funds transfer services (321 ANP), services to the
Treasury and other government agencies
(421), and the monetary policy service
(42 ANP). These staff reductions have
been due largely to consolidation of

operations and increased operational
efficiencies throughout the System.
Partly offsetting the decreases are
staff additions in supervision and regulation (745 ANP) due mainly to implementation of the Federal Deposit Insurance Corporation Improvement Act and
the Community Reinvestment Act, in
data services due to the consolidation
of data processing and data communications at FRAS (401 ANP), and in
public programs due to efforts to enhance
consumer education and communications with the public (93 ANP).
The average annual growth of operating expenses has slowed in recent years
and is projected to be 3.7 percent over
the five years ending with the 1998
budget. Affecting growth during this
period were expanded bank supervision
needs and the transition to a consolidated data processing and data communications environment at FRAS.
Mainly because of production charges
from FRAS, nonpersonnel costs have
been increasing at a faster rate than
personnel costs—5.5 percent compared
with 2.3 percent—as the Reserve Banks
downsize labor-intensive and computer

Chart 3.2
Employment at the
Federal Reserve Banks, 1988–98

Chart 3.1
Operating Expenses of the
Federal Reserve Banks, 1988–98

ANP, in thousands

Billions of dollars
Current dollars

24

1.9
1992 dollars 1

1.6
23
1.3
1988

1988

1993

1998

Note. Excludes special project. For 1997, estimate;
for 1998, budget.
1. Calculated with the GDP price deflator.

1993

1998

Note. Includes Federal Reserve Automation Services.
The costs of the special project do not involve personnel.
For 1997, estimate; for 1998, budget. See text note 2 for
definition of ANP.

Federal Reserve Banks
operations and substitute technology for
labor.
By operational area, expense increases
over the five years have been highest
for supervision and regulation (average
annual increase of 6.9 percent), followed by monetary and economic policy (5.9 percent, reflecting increases
in support and overhead services) and
services to the Treasury and other government agencies and services to financial institutions and the public (both
3.7 percent).
Under services to financial institutions and the public, expenses for the
currency service have increased an
average of 6.5 percent per year, primarily because of the installation of new
currency processors, and expenses for
public programs have risen an average
7.3 percent per year. Nonetheless, overall
growth in this service has slowed in
recent years because of downsizing in
the commercial check service resulting
from declining volume and centralization efforts in the funds transfer and
ACH services.
Just over half of the expenses in the
Reserve Banks’ 1998 budget (about
55 percent) are recoverable through
revenues or are reimbursable by the
Treasury and other government agencies. Recoverable expenses are increasing slightly from those of earlier years
because of an increase in reimbursable
claims for services provided to the U.S.
Treasury and other agencies associated
with the 1998 implementation of the
System initiative ‘‘Accounting and
Reporting for Government Services.’’
The initiative requires that claims for
services provided to the government be
based on the full cost of the service.

Volume and Unit Costs
The volume of measured services in
1998 is budgeted to increase 3.2 per-

41

Table 3.14
Change in Volumes and Unit Costs of
Measured Federal Reserve Bank Services,
1997 to 1998
Percent
Service

Volume

Unit cost

Payments . . . . . . . . . . . . . . . . . . . . . .
Commercial check . . . . . . . . . .
Automated clearinghouse . . . .
Funds transfer . . . . . . . . . . . . . . .

3.9
2.7
12.0
3.8

−4.8
−3.6
−8.7
−8.9

Cash 1 . . . . . . . . . . . . . . . . . . . . . . . . .

1.1

.5

Fiscal . . . . . . . . . . . . . . . . . . . . . . . . .

1.9

3.1

Securities and noncash . . . . . . . . .

−3.3

−7.5

All measured services . . . . . . . . .

3.2

−2.7

1. Currency, coin, and special cash services.

cent over estimated 1997 volume, and
the unit cost is expected to decrease
2.7 percent (table 3.14). Since 1993,
volume has grown at an average annual
rate of 2.3 percent, and unit costs have
decreased at an average annual rate of
0.5 percent.
The decrease in unit cost expected for
1998 reflects net decreases for the
payments mechanism, book-entry securities, and fiscal services. The unit cost for
commercial checks, the largest component in the overall index, is expected to
decline 2.5 percent.

1997 Budget Performance
The Reserve Banks estimate that 1997
expenditures will be $2,011.6 million—
$14.3 million, or 0.7 percent, more
than the approved 1997 budget of
$1,997.2 million. The 1997 budget
approved by the Board in December
1996 represented an increase of
$37.9 million, or 1.9 percent, over
estimated 1996 expenses; at the estimated 1997 level of spending, the
increase over actual 1996 expenditures
will be 2.8 percent.

42

Annual Report: Budget Review, 1998–99

Four Reserve Banks expect their 1997
spending will come in below budget, by
1 percent or less. Six Banks expect to
exceed their 1997 budgets by less than
1 percent, and two Banks expect larger
overruns—Boston (4.7 percent) and
St. Louis (2.3 percent). Boston’s 1997
expenses were affected by a change in
the allocation of costs among the twelve
Banks, causing Boston to retain rather
than share about $4.8 million. The
overrun in St. Louis is due primarily to
unbudgeted fees related to CDC compliance ($1.5 million).

Part II
Special Analysis

45

Chapter 4

The Federal Reserve’s Response
to the Year 2000 Problem
Until recently, the costs of computer
processing, memory, and data storage
were significant challenges to developers of software and designers of embedded chip systems. Consequently, these
resources were treated as scarce and
needed to be conserved; one obvious
way of doing so was to designate years
with two digits in date fields. So long
as date calculations involved only one
century, four-digit year fields were
unnecessary. These calculations, however, produce inaccurate results when
dates span centuries because both 1900
and 2000 are represented as "00" in the
two-digit system.
This year 2000 problem is a challenge
that affects all industries and systems
that depend on computers, telecommunications, or embedded chip controls.
If not corrected or replaced by the time
the clock rolls over to the next century,
these systems and chips—and the myriad
activities that depend on them—will be
crippled by errors and malfunctions.
Although most computer programs
and systems developed over the last
several years have been designed to be
year 2000 ready, a large number of older
systems remain to be renovated. In
addition to correcting internally developed applications, organizations must
coordinate with third-party providers of
software, hardware, or services to ensure
that these products are also year 2000
ready.
The Federal Reserve System considers the year 2000 problem to be the
single greatest risk currently facing the
U.S. financial system. The Federal
Reserve has given its highest priority to

ensuring that the depository institutions
and other financial firms the Federal
Reserve supervises and serves are devoting all necessary resources to meet their
public responsibility to be fully compliant and prepared to continue normal
operations on the arrival of the new
millennium.
First, however, the Federal Reserve’s
own computer systems, including its
payment system applications, must be
ready. Readiness, however, applies to
more than technical computer issues;
the degree of readiness determines the
degree of continuity with which the
Federal Reserve System will be able to
conduct its business. As such, the
System’s year 2000 efforts—correction
as well as contingency planning—must
go beyond the information technology
(IT) areas to encompass all operational
areas. Toward that end, the Federal
Reserve in 1995 initiated the Systemwide
Century Date Change (CDC) project to
coordinate the year 2000 efforts of the
Reserve Banks, Federal Reserve Automation Services (FRAS), and the Board
of Governors, and in turn to coordinate
all their work with related programs of
the industry.

Early Efforts at the
Federal Reserve
The Federal Reserve recognized the
scope of the year 2000 problem when, in
1992, it began consolidating mainframe
data processing operations of the Reserve
Banks under the new FRAS organization. The consolidation required the

46

Annual Report: Budget Review, 1998–99

creation of new centralized applications,
such as Fedwire funds transfer, Fedwire
securities transfer, and automated clearinghouse systems. These applications
were designed to recognize the century
date change.
The consolidation also required a
comprehensive inventory of other
mainframe applications with a view to
standardizing them, and this cataloging
was also a necessary first step in the
discovery and correction of two-digit
year fields. The assessment of these
applications required the review of
approximately 90 million lines of
computer code.

Current Efforts
In 1998 the Federal Reserve will more
than double the resources it commits to
the year 2000 problem, from $13 million
and 105 person-years during 1997 to
$32 million (see chapter 3, table 3.3) and
226 person-years.

Testing
The Federal Reserve is allocating
significant resources to internal testing
as well as to the testing needs of
depository institutions and the rest of the
financial services industry. Under the
CDC project, all remaining year 2000
changes in essential (mission-critical)
Federal Reserve software, along with
testing by internal and external users,
is scheduled for completion by the end
of 1998. Furthermore, mission-critical
computer programs that work in tandem
with systems at depository institutions,
will be ready by mid-1998, allowing
eighteen months of testing before the
arrival of the century date change.
The Federal Reserve is communicating its CDC plans to depository insti-

tutions through a series of newsletters.
In October 1997 the Federal Reserve
described its methodology for testing
mission-critical applications using the
date rollover between the last business
day of 1999 and the first business day of
2000 as well as the three-day leap-year
sequence between February 28 and
March 1, 2000. Depository institutions
will have the opportunity to test the
same date change scenarios between
single Federal Reserve applications or
to test multiple applications on ‘‘shared
test days’’ on six weekends in 1998.
Institutions will also be able to test
funds transfers, securities transfers, and
automated clearinghouse transactions
with other institutions. In March 1998
the Federal Reserve is releasing a
newsletter that describes specific testing
opportunities, testing schedules, and the
CDC readiness of software for Federal
Reserve transactions and file transfers.

Communication
The focus of the CDC effort at the Board
goes beyond the immediate need to
prepare systems and ensure reliable
operation of its payment systems. The
CDC project team is promoting awareness and commitment throughout the
Federal Reserve and the wider financial
services industry. The Federal Reserve
continually advises depository institutions of its plans and schedules for
making its software compliant and issues
periodic bulletins addressing specific
technical issues. Internet Web sites with
extensive links to official and industry
information on year 2000 issues have
been deployed by the Federal Reserve
Board (http://www.bog.frb.fed.us/y2k/)
and the Federal Financial Institutions
Examination Council (http://www.
ffiec.gov/y2k/), which also has a tollfree Fax Back service (1-888-8820982).

The Year-2000 Problem

Business Continuity
Because smooth and uninterrupted financial flows are obviously of utmost
importance, the Federal Reserve has
focused on continued system readiness
and the avoidance of problems. As a
result, computer and telecommunications systems are designed to maintain a
high level of availability through use of
redundant components and preparation
for recovery after a disaster.
Federal Reserve IT and operational
areas are working closely to anticipate
internal and external year 2000 failures
that could disrupt operations and to
develop plans for alternative means of
service delivery. Experience already
gained in responding to liquidity
problems in institutions as well as to
such diverse events as earthquakes,
fires, storms, and power outages is being
applied in developing the Federal
Reserve’s CDC business continuity
plans.

Supervisory Issues
The Federal Reserve is also addressing
the supervisory issues raised by the year
2000 problem. As a bank supervisor, the
Federal Reserve has worked closely
with the other agencies of the Federal
Financial Institutions Examination Council (FFIEC) to communicate to the
industry the complexities and urgency
of the issue, to monitor year 2000
preparations, and to identify and address
problems as they arise. In May 1997,
federal banking agencies developed a
questionnaire to collect information on
the year 2000 readiness of federally
insured institutions. The responses,
together with other information, indicate
that the banking industry’s awareness
improved substantially during 1997 and
that institutions have intensified their
CDC compliance work.

47

The Federal Reserve plans to examine
the year 2000 readiness efforts of all
state member banks, U.S. branches and
agencies of foreign banks, large bank
holding companies, and selected other
organizations, such as service providers
for banks, subject to its supervision—
about 1,800 examinations—by June 30,
1998. The examination program reviews
each organization’s CDC plans, ensures
that senior management and the board of
directors are directly involved in overseeing CDC projects, and monitors progress
against the plan. Institutions with
problems receive intensified supervisory
attention and high priority for subsequent
examinations.

Appendixes

51

Appendix A

Special Categories of System Expense
Fees for priced services and the treatment of capital outlays are explained in
this appendix. Also described are the
Reserve Bank special project for 1998
and Federal Reserve expenses for currency printing.

Priced Services
The Monetary Control Act of 1980
requires the Federal Reserve to make
available to all depository institutions,
for a fee, certain services that the Federal Reserve had previously provided
without explicit charge and only to
member banks. As the act requires, the
fees charged for providing these priced
services are based on the cost of
providing the services, including all
direct and indirect costs, the interest on
items credited before actual collection
(float), and the private sector adjustment
factor (PSAF). The PSAF takes into
account the return on capital that would
have been provided, and the taxes that
would have been paid, had the services
been furnished by a private business
firm.

Annual Pricing Process
To meet the requirement for the full
recovery of costs, the Federal Reserve
has developed an annual pricing process
involving a review of Reserve Bank
expenses in addition to the review
required by the System’s budget processes. Use of the budgets is an integral
part of the pricing exercise because most
of the recoverable costs of priced
services are direct and indirect costs as
determined by the budgets. To assist

depository institutions in their planning
to provide or use correspondent banking
services, the Federal Reserve usually
sets each year’s prices only once, in the
fourth quarter of the preceding year.
Fees for Federal Reserve services
must be approved by the product director for the respective service, by the
Financial Services Policy Committee,
and ultimately by the Board of Governors.1 If fees for any service are set so
that the full recovery of costs is not
anticipated, the Board announces the
rationale.
The cost of float is estimated by
applying the current federal funds rate to
the level of float expected to be generated in the coming year. Estimates of
income taxes and the return on capital
are based on tax and financing rates
derived from a model of the fifty largest
U.S. bank holding companies; these
rates are applied to the assets the Federal
Reserve expects to use in providing
priced services in the coming year. The
other components of the PSAF are
derived from the budgets of the Reserve
Banks and the Board: the imputed sales
tax (based on budgeted outlays for
materials, supplies, and capital assets);
the imputed assessment for insurance
by the Federal Deposit Insurance Corporation (FDIC) (based on expected

1. The product directors are the first vice
presidents at selected Reserve Banks with
responsibility for day-to-day policy guidance over
specific Systemwide priced services. The Financial Services Policy Committee comprises the
presidents of three Reserve Banks, the first vice
presidents of three other Reserve Banks, and, as
liaison, the director of the Board’s Division of
Reserve Bank Operations and Payment Systems.

52

Annual Report: Budget Review, 1998–99

clearing balances and amounts deferred
to depository institutions for items
deposited for collection with the Reserve
Banks); and the portion of the expenses
of the Board of Governors that is
directly related to the development of
priced services.
The intent of the PSAF calculation is
to require the Federal Reserve to include
in the costs of its priced services the
costs that would have been incurred had

the services been provided by a privatesector firm.

Calculation of the PSAF for 1998
In 1997 the Board approved a 1998
private sector adjustment factor for
Reserve Bank priced services of
$108.5 million, an increase of $7.0 million, or 6.9 percent, from the PSAF of
$101.5 million targeted for 1997.

Table A.1
Pro Forma Balance Sheet for Federal Reserve Priced Services, 1997 and 1998
Millions of dollars
Item

1997

Assets
Short-term assets
Imputed reserve requirement on clearing balances . . . . . . . .
545.7
Investment in marketable securities . . . . . . . . . . . . . . . . . . . . . 4,911.3
64.3
Receivables 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11.6
Materials and supplies 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1 ......................................
14.6
Prepaid expenses
Items in process of collection . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,548.2
Total short-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1998

750.4
6,753.5
69.0
4.3
14.1
2,922.8
8,095.7

10,514.1

Long-term assets
Premises 1 ,2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
348.0
167.0
Furniture and equipment 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18.0
Leasehold improvements and long-term prepayments 1 . . . .
Capital leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.7
Total long-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

533.7

528.9

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8,629.4

11,043.0

360.4
145.2
23.3
.0

Liabilities
Short-term liabilities
Clearing balances and balances arising
from early credit of uncollected items . . . . . . . . . . . . . . 5,457.0
Deferred-credit items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,548.2
90.5
Short-term debt 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total short-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7,503.9
2,922.8
87.4
8,095.7

10,514.1

Long-term liabilities
Obligations under capital leases . . . . . . . . . . . . . . . . . . . . . . . . .
.7
Long-term debt 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
180.5
Total long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

181.2

185.1

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8,276.9

10,699.2

Equity 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

352.5

343.8

Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8,629.4

11,043.0

Note. Data are averages for the year.
1. Financed through the private sector adjustment
factor; other assets are self-financing.
2. Includes allocations of Board of Governors’ assets

.0
185.1

to priced services of $0.5 million for both 1997 and
1998.
3. Imputed figures representing the source of financing
for certain priced-service assets.

Special Categories of System Expense
Asset Base
The value of Federal Reserve assets to
be used in providing priced services in
1998 is estimated at $11,043.0 million
(table A.1). The value of assets assumed
to be financed through debt and equity
in 1998 is $616.3 million, a decrease of
$7.2 million, or 1.2 percent, from 1997

53

(table A.2); the decrease is due primarily
to lower base levels of asset prices for
Federal Reserve Automation Services.
Cost of Capital and Taxes
and Other Imputed Costs
For 1998, a pretax rate of return on
equity of 22.4 percent, or $77.0 million,

Table A.2
Derivation of the Private Sector Adjustment Factor (PSAF), 1997 and 1998
Millions of dollars except as noted
Item

1997

1998

PSAF Components
Assets to be financed 1
Short-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

90.5
533.0
623.5

87.4
528.9
616.3

Cost of capital (percent) 3
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pretax return on equity 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average long-term cost of capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5.2
7.1
19.1
15.1

5.1
6.8
22.4
16.9

Capital structure (percent)
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14.5
29.0
56.5

14.2
30.0
55.8

Tax rate (percent) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

32.1

32.1

Required PSAF Recoveries
Capital costs 5
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.7
12.8
67.5
85.0

4.5
12.5
77.0
94.0

Other costs
Sales taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assessment for federal deposit insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses of Board of Governors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11.6
2.0
2.9
16.5

9.1
2.6
2.8
14.5

Total PSAF recoveries
Millions of dollars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As a percentage of capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As a percentage of expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

101.5
16.3
16.6

108.5
17.6
18.1

1. Calculated with the ‘‘direct determination of assets’’
method.
2. Consists of total long-term assets less capital leases
that are self-financing.
3. All short-term assets are assumed to be financed
with short-term debt. Of the total 1998 long-term assets,
35 percent are assumed to be financed with long-term
debt and 65 percent with equity. The data are average
rates paid by the fifty largest (by asset size) bank holding
companies.

4. The pretax rate of return on equity is based on
average after-tax rates of return on equity, adjusted by the
effective tax rate to yield the pretax rate of return on
equity for each bank holding company for each year.
These data are then averaged over the five years 1992–96
to yield the pretax return on equity for use in the PSAF.
5. The calculations underlying these data use the dollar
value of assets to be financed, divided as described in
note 3, and the rates for the cost of capital.

54

Annual Report: Budget Review, 1998–99

is planned. Other required PSAF recoveries for 1998—imputed sales taxes, the
imputed FDIC insurance assessment,
and Board expenses—total $14.5 million (table A.2).

Capital Outlays
Under generally accepted accounting
principles (GAAP), the cost of an asset
that is expected to benefit an entity over
future periods should be allocated over
those periods. Such treatment allows
a realistic measurement of operating
performance. In accordance with GAAP,
the Federal Reserve System depreciates
the cost of fixed assets over their estimated useful lives.
The Banks capitalize and depreciate
all assets that cost $1,500 or more; they
may either capitalize or expense assets
costing less. The capitalization guideline
for the Board is $5,000.
The Banks maintain a multiyear plan
for capital spending. The Board, in turn,
requires the Banks to budget annually
for capital outlays by capital class to
estimate the effect of total operating and
capital spending. During the budget
year, the Banks must submit proposals
for major purchases of assets to the
Board for further review and approval.
The Board of Governors also reviews
capital expenditures for the Board.

Special Project:
Automation Consolidation
Special projects are research and
development activities that are expected
to provide long-range benefits to the
Federal Reserve System and the banking
industry as a whole. Because spending
on special projects is relatively high
and short term, the Federal Reserve
accounts for them separately from its
operating expenses. For 1997–98, the

Board of Governors has approved one
special project.
In 1992 the Federal Reserve System
began to incur expenses for a major
effort to consolidate all its mainframe
computer operations within a new
System entity, Federal Reserve Automation Services (FRAS)
The Automation Consolidation special project was created to
capture the extraordinary costs associated with this effort.
In 1992, work focused on establishing
a project plan and on staffing and
equipping the three data centers. In 1993
and 1994 the emphasis was on the
conversion of District workloads and
the transition of District EPS images to
the production environment. In 1995 the
processing of funds transfers was moved
into FRAS, and the San Francisco and
New York Reserve Banks completed the
System’s move into the District-unique
environment. In 1996, consolidation
efforts centered around implementation
of the centralized ACH and, continuing
through 1997, implementation of the
new book-entry applications.
During 1998, the Banks will continue
to implement the new book-entry application, and New York will complete
its transition to FRAS. The Automation
Consolidation special project will end
during 1998 with the System’s completion of its transition to FRAS.
The 1998 budget provides $4.7 million in support of these efforts. Including
budgeted 1998 funding, expenditures
on this special project to date total
$276.0 million.

Currency Printing
and Circulation
The Department of the Treasury’s
Bureau of Engraving and Printing (BEP)
prints U.S. currency; the Federal Reserve

Special Categories of System Expense
Banks put it into circulation through
depository institutions and destroy it
as it wears out (table A.3). The Board
of Governors establishes the annual
budget for the costs associated with the
printing of new notes and subsequently
assesses the Federal Reserve Banks
through an accounting procedure similar
to that used in assessing the Reserve
Banks for Board operating expenses.
The 1998 currency budget is
$370.3 million, an increase of 0.8 percent over estimated 1997 expenditures
(chart A.1).
In 1997, Federal Reserve expenditures
related to supplying currency totaled an
estimated $367.5 million, about 9.4 percent less than the budgeted amount,
primarily for two reasons. First, the
Reserve Banks finished the conversion
to the BPS 3000 currency processors,
which yielded an increase in the number
of notes classified as fit (usable) and
a corresponding decrease in the need
for new notes. Second, the BEP has
credited the Federal Reserve with
$25 million for funds previously collected because of improved productivity
and reduced overtime at the BEP.

Table A.3
Currency in Circulation, New Notes Issued,
and Notes Destroyed, 1997
Millions of pieces
Notes
in
circulation 1

New
notes
issued 2

Notes
destroyed

...........
...........
...........
...........
...........
...........
...........

6,525
562
1,522
1,372
4,263
939
2,854

4,184
27
904
785
1,735
438
886

3,512
8
865
776
1,538
602
469

Total . . . . . . . . .

18,036

8,959

7,770

Dollar
denomination
1
2
5
10
20
50
100

1. As of November 1997.
2. Does not include additions to inventory at the
Reserve Banks.

55

Chart A.1
Federal Reserve Budget for
Supplying U.S. Currency, 1993–98
Millions of dollars

400

200

1993

1994

1995

1996

1997

1998

Note. For 1997, estimate; for 1998, budget.

Printing of Federal Reserve Notes
By far the largest expense in the
currency budget is the cost of printing
new Federal Reserve notes. The 1998
budget for the printing of new notes is
$357.6 million, a 0.5 percent increase
over estimated 1997 expenditures
(table A.4). Several factors influence
the size of this portion of the currency
budget, the most important of which is
the number of notes printed. The 1998
budget provides for the printing of
9.2 billion notes. This volume is based
on the anticipated destruction of an
estimated 9.0 billion notes, an expected
increase of about 500 million notes in
circulation, and a planned decrease of
300 million notes in Reserve Bank
inventories (chart A.2).
The cost of printing the notes also
influences the budget. The unit cost
of producing Federal Reserve notes in
1998 will decrease 2.8 percent, from
$40 per thousand notes to $39
(chart A.3).
The unit cost, which is established by
the Bureau of Engraving and Printing,
was formerly a blend of the costs of the
three types of notes produced—the new
currency design, other threaded currency (bills with the special security

56

Annual Report: Budget Review, 1998–99

Chart A.2
Use of Currency Printed, 1993–98
Billions of notes

Dollars

Inventory increase
Circulation increase

12

Currency replacement

8
4

1993

1994

1995

Chart A.3
Production of Currency, by Type, and
Unit Cost of Total Production, 1993–98

1996

1997

1998

45
40
35

Billions of notes
Cost per 1,000 notes

12
Total production

9
Nonthreaded
Threaded

6
3

New design

Note. For 1998, projections.

1993 1994 1995 1996 1997 1998

thread), and $1 notes. Beginning in
1998, the BEP will charge the Board
separately for each of the three types
(chart A.3 and table A.5). The BEP’s
Western facility (located in Fort Worth,
Texas) will produce all but the $50
and $100 denominations; the BEP’s
Washington facility produces all
denominations.
In 1997 the BEP encountered problems in printing the Series 1996
$50 notes, producing 217.6 million of
them before it could correct the problem. Steps were taken to ensure that the
defective notes were not placed in
circulation.

Note. Left scale is cost; right scale is production
volume. Total production is the sum of nonthreaded,
threaded, and new design.

Shipment of Currency
The Board contracts with armoredcarrier companies to transport new
currency from the BEP’s Washington
and Western facilities to the Federal
Reserve Banks and their Branches. The
1998 budget for transporting new Federal Reserve notes is $9.0 million, a
5.9 percent increase from estimated
1997 expenditures; the increase is attributable to higher charges for airfreight.
The currency budget also includes
funds for the shipment of fit currency

Table A.4
Federal Reserve Costs of Supplying Currency, 1997 and 1998
Thousands of dollars except as noted
1997
estimate

1998
budget

Percentage
change

Printing of new Federal Reserve notes . . . . . . . . . . . . . . . . . .
Shipment of new notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shipment of fit notes within the System . . . . . . . . . . . . . . . .
Extended custodial inventory program . . . . . . . . . . . . . . . . . .
Return of currency pallets to Bureau of
Engraving and Printing . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reimbursement to the U.S. Treasury . . . . . . . . . . . . . . . . . . . .

355,672
8,500
400
200

357,586
9,000
800
175

.5
5.9
100.0
−12.5

26
2,700

30
2,750

15.4
1.9

Total cost of currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

367,498

370,341

.8

Item

Special Categories of System Expense

57

Table A.5
Projected Cost of Printing New Notes, by Type of Note, 1998
Type of currency

Number of
notes (thousands)

Percentage of
total notes

Cost per
thousand notes
(dollars)

Total cost
(thousands of
dollars)

New design . . . . . . . . . . . . . . . . . . . . . . . . . . .
Threaded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonthreaded ($1 note) . . . . . . . . . . . . . . . . .

3,676.8
1,708.8
3,814.4

40
19
41

53.50
34.10
26.90

196,708.8
58,270.1
102,607.4

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9,200.0

100

38.87

357,586.2

among Federal Reserve offices. The
1998 budget provides $0.8 million for
these shipments, or 100 percent more
than estimated 1997 expenditures. The
increase is in anticipation of the introduction of the Series 1996 $20 note,
tentatively scheduled for fall 1998; extra
shipments of $20 notes are expected
in advance of the new note to maintain
adequate inventories at each Federal
Reserve office.

Extended Custodial Inventory
Program
The Federal Reserve established the
extended custodial inventory (ECI)
program in 1996 to facilitate the
international introduction of the redesigned (Series 1996) $100 note. The
Federal Reserve Bank of New York,
which manages the program, maintains
inventories of Series 1996 notes at
several banks in selected locations
abroad (currently London, Frankfurt,
and Zurich). These banks verify and sort
incoming deposits to assist in the
repatriation and destruction of pre-1996
Series $100 notes, and they help develop
an international market for the fit Series
1996 $100 notes.
The 1998 ECI budget is $175,000,
12.5 percent less than estimated 1997
expenditures. In 1998, the ECI program
will increase the number of locations in
the same three European cities from four

to five. The program may be expanded
in 1998 to other regions.

Return of Storage Pallets
The BEP stores and ships currency on
aluminum pallets. The pallets are also
used in several Reserve Bank offices
with automated currency vaults. The
1998 budget for returning empty pallets
to the BEP is $30,000, or 15.4 percent
more than estimated 1997 expenditures.

Reimbursement to the Treasury
Unfit currency is canceled, destroyed,
and accounted for according to procedures prescribed by the U.S. Treasury’s
Office of Currency Standards, and that
office processes claims for redemption
of damaged or mutilated currency. The
Federal Reserve’s 1998 currency budget
includes $2.7 million to reimburse the
Treasury for this service, a 3.9 percent
increase over estimated 1997 expenses.

59

Appendix B

Sources and Uses of Funds
The Federal Reserve System, in accordance with generally accepted accounting principles, accrues income and
expenses and capitalizes acquisitions of
assets whose useful lives extend over
several years (see appendix A).
The System derives its income primarily from earnings on U.S. government securities that the Federal Reserve
has acquired through open market operations, one of the tools of monetary
policy. These earnings account for
approximately 95 percent of current
income (table B.1).
The current expenses of the Reserve
Banks consist of their operating expenses
and the costs of the earnings credits
granted to depository institutions on
clearing balances held with the Reserve
Banks (table B.2). The Reserve Banks
record extraordinary adjustments to
current net income in a profit and loss
account. The primary entries in the
account are for gains or losses on the
sale of U.S. government securities and
for gains or losses on assets denominated
in foreign currencies that result either
Table B.1
Income of the Federal Reserve System,
1996 and 1997
Millions of dollars
Source

1996
actual

1997
estimate

Loans . . . . . . . . . . . . . . . . . . . . . . .
U.S. government securities . . .
Foreign currencies . . . . . . . . . . .
Priced services . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . .

10.9
23,883.7
442.8
787.2
39.8

14.6
25,699.0
375.4
789.1
39.2

Total . . . . . . . . . . . . . . . . . . . . . . .

25,164.3

26,917.2

from the sale of those assets or from
their revaluation at market exchange
rates.
The Reserve Banks maintain a surplus
account to absorb unexpected losses,
much as commercial establishments
retain earnings. The Board of Governors
requires that the surplus account at
year-end be an amount equal to the
capital paid in by the member banks.
Since the end of 1964, the Board’s
policy has been to transfer to the U.S.
Treasury all net income after paying the
statutory dividend to member banks and
the amount necessary to equate surplus
to paid-in capital. The amount transferred
is classified as interest on Federal
Reserve notes. Such payments were
$20.1 billion for 1996 and are estimated to be $20.7 billion for 1997.
In addition to these payments, special
transfers of surplus of $106 million
on October 1, 1996, and $107 million
on October 1, 1997, were statutorily
required.

60

Annual Report: Budget Review, 1998–99

Table B.2
Distribution of the Income of the Federal Reserve Banks, 1996 and 1997
Millions of dollars
Item

1996
actual

1997
estimate

Current income 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less
Current expenses of Reserve Banks 2
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs of earnings credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equals
Current net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plus
Net additions to, or deductions from (−), current net income 3 . . . . . . . . . . . . . . . . .
Less
Cost of unreimbursed Treasury services 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

25,164

26,917

1,639
309

1,613
359

23,216

24,946

−1,639

−2,577

38

35

Assessments by the Board
Board expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

163
403

174
364

Other distributions
Dividends paid to member banks 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers to, or from (−), surplus 6,7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

256
635

300
832

Equals
Payment to U.S. Treasury 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

20,083

20,664

1. See table B.1.
2. Net of reimbursements due from the U.S. Treasury
and other government agencies. Also reflects reductions
in credits for net periodic pension cost amounting to
$139.5 million in 1996 and $200.1 million in 1997.
3. This account is the same as that reported under the
same name in the table ‘‘Income and Expenses of Federal Reserve Banks’’ in the Statistical Tables section of
the Board’s Annual Report and includes realized and
unrealized gains on assets denominated in foreign
currencies, gains on sales of U.S. government securities,
and miscellaneous gains and losses.

4. The cost of services provided to the U.S. Treasury
that are reimbursable under agreements with the Treasury
and for which reimbursement is not anticipated.
5. The Federal Reserve Act requires the Federal
Reserve to pay dividends to member banks at the rate of
6 percent of paid-in capital.
6. Each year, to provide a reserve against losses, the
Federal Reserve transfers to its surplus account an amount
sufficient to equate surplus to paid-in capital.
7. Does not reflect the special transfers of surplus from
the Federal Reserve System to the Treasury: $106 million
on October 1, 1996, and $107 million on October 1, 1997.

61

Appendix C

Federal Reserve System Audits
The Board of Governors, each of the
Reserve Banks, and the Federal Reserve
System as a whole are all subject to
several levels of audit and review. At
each Federal Reserve Bank, a full-time
staff of auditors under the direction of a
general auditor reports directly to the
Bank’s board of directors. The Board’s
Division of Reserve Bank Operations
and Payment Systems, acting on behalf
of the Board of Governors, regularly
audits the financial operations of each
of the Banks and periodically reviews
all other Bank operations. In addition,
the financial statements of the Reserve
Banks are audited annually by an independent outside auditor.
The Office of Inspector General (OIG)
conducts audits and investigations of the
programs and operations of the Board
and those Board functions delegated
to the Federal Reserve Banks. The OIG
retains an independent auditor each year
to certify the fairness of the Board’s
financial statements and its compliance
with laws and regulations affecting
those financial statements.

Independent Audit
The Board of Governors contracts with
an external audit firm, currently Coopers
and Lybrand L.L.P., for an annual
financial audit of the combined Reserve
Bank financial statements and the financial statements of each of the twelve
Reserve Banks. The Reserve Banks are
also audited by each Bank’s internal
audit function and by the Board’s
financial examiners.

General Accounting Office
The 1978 passage of the Federal Banking Agency Audit Act (Public Law
95–320) brought most of the operations
of the Federal Reserve System under
the purview of the General Accounting Office (GAO). The GAO, which
currently has 10 projects in various
stages of completion, since 1979 has
completed 159 reports on selected
aspects of Federal Reserve operations
(tables C.1 and C.2). The GAO has also
involved the Federal Reserve in about
90 other reviews not directly related
to the System and has terminated 54
others before completion. The reports
are available directly from the GAO.

62

Annual Report: Budget Review, 1998–99

Table C.1
Active GAO Projects Relating to the Federal Reserve
Subject

Date initiated

Review of Treasury financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
On-line banking services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-based capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Electronic check presentment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
North Carolina performance data for banks and thrifts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
On-line banking effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year 2000 electronic data exchange problems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FR System’s year 2000 efforts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SBA section 7(a) loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Indiana bank closure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12-22-95
10-16-96
11-6-96
7-16-97
8-8-97
8-28-97
10-20-97
11-19-97
11-19-97
12-1-97

Table C.2
Completed GAO Reports Relating to the Federal Reserve System
Report
Comparing Policies and Procedures of the Three Bank
Regulatory Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Are OPEC Financial Holdings a Danger to U.S. Banks or the Economy? .
Federal Systems Not Designed to Collect Data on All Foreign
Investments in U.S. Depository Institutions . . . . . . . . . . . . . . . . . . . . . . .
Considerable Increase in Foreign Banking in United States since 1972 .
Investment Policies, Practices and Performance
of Federal Retirement Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Supervision of Bank Holding Companies Needs Better, More
Formalized Supervision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Federal Reserve Should Assure Compliance
with the 1970 Bank Holding Company Act Amendments . . . . . . . . .
Federal Agencies’ Initial Problems with the Right to Financial
Privacy Act of 1978 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Internal Auditing Can Be Strengthened in the Federal Reserve System .
Despite Positive Effects, Further Foreign Acquisitions of U.S. Banks
Should Be Limited until Policy Conflicts Are Fully Addressed . . . .
Federal Examinations of Financial Institutions: Issues That
Need to Be Resolved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Examinations of Financial Institutions Do Not Assure Compliance
with Consumer Credit Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disappointing Progress in Improving Systems for Resolving
Billions in Audit Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
An Economic Overview of Bank Solvency Regulation . . . . . . . . . . . . . . . . .
Federal Reserve Security over Currency Transportation Is Adequate . . . .
The Federal Structure for Examining Financial Institutions
Can Be Improved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Response to Questions Bearing on the Feasibility
of Closing the Federal Reserve Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank Secrecy Act Reporting Requirements Have Not Met
Expectations, Suggesting Need for Amendment . . . . . . . . . . . . . . . . . . .
Federal Reserve Could Improve the Efficiency of Bank Holding
Company Inspections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Institution Regulatory Agencies Should Perform Internal Audit
Reviews of their Examination and Supervision Activities . . . . . . . . .
Information on Selected Aspects of Federal Reserve System Expenditures .
Federal Review of Intrastate Branching Can Be Reduced . . . . . . . . . . . . . .
Despite Improvements, Recent Bank Supervision Could
Be More Effective and Less Burdensome . . . . . . . . . . . . . . . . . . . . . . . .
Issues to Be Considered while Debating Interstate Bank Branching . . . . .
The Federal Reserve Should Move Faster to Eliminate Subsidy
of Check-Clearing Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Number

Date issued

GGD-79-27
EMD-79-45

3-29-79
6-11-79

GGD-79-42
GGD-79-75

6-19-79
8-1-79

FPCD-79-17

8-31-79

GGD-80-20

2-12-80

GGD-80-21

3-12-80

GGD-80-64
GGD-80-59

5-29-80
8-8-80

GGD-80-66

8-26-80

GGD-81-12

1-6-81

GGD-81-13

1-21-81

AFMD-81-27
PAD-81-25
GGD-81-27

1-23-81
2-13-81
2-23-81

GGD-81-21

4-24-81

GGD-81-49

5-21-81

GGD-81-80

7-23-81

GGD-81-79

8-18-81

GGD-82-5

10-19-81

GGD-82-33
GGD-82-31

2-12-82
2-24-82

GGD-82-21
GGD-82-36

2-26-82
4-9-82

GGD-82-22

5-7-82

Federal Reserve System Audits

63

Table C.2
Continued
Report
Information about Depository Institutions’ Ancillary Activities Is Not
Adequate for Policy Purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank Merger Process Should Be Modernized and Simplified . . . . . . . . . . .
An Analysis of Fiscal and Monetary Policies . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank Examination for Country Risk and International Lending . . . . . . . . .
Credit Insurance Disclosure Provisions of the Truth-in-Lending Act
Consistently Enforced Except When Decisions Appealed . . . . . . . . . .
Survey of Investor Protection and the Regulation
of Financial Intermediaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Institutions Regulatory Agencies Can Make Better Use
of Consumer Complaint Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expediting Tax Deposits Can Increase the Government’s
Interest Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unauthorized Disclosure of the Federal Reserve’s
Monetary Policy Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Financial Institutions Examination Council Has Made Limited
Progress toward Accomplishing Its Mission . . . . . . . . . . . . . . . . . . . . . .
Control Improvements Needed in Accounting for Treasury Securities
at the Federal Reserve Bank of New York . . . . . . . . . . . . . . . . . . . . . . . .
Statutory Requirements for Examining International Banking
Institutions Need Attention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supervisory Examinations of International Banking Facilities
Need to Be Improved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
An Examination of Concerns Expressed about the Federal Reserve’s
Pricing of Check-Clearing Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Difficulties in Evaluating the Effectiveness of the Community
Reinvestment Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International Coordination of Bank Supervision: The Record to Date . . .
Implementation of the Export Trading Company Act of 1982 . . . . . . . . . .
Information on Independent Public Accountant Audits
of Financial Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
An Analysis of Two Types of Pooled Investment Funds . . . . . . . . . . . . . . .
How the Markets Are Developed and How They Are Regulated . . . . . . .
U.S. Banking Supervision and International Supervisory Principles . . . . .
Financial Institution Regulators’ Compliance Examination . . . . . . . . . . . . .
The Market’s Structure, Risks, and Regulation . . . . . . . . . . . . . . . . . . . . . . . .
Dealer Views on Market Operations and Federal Reserve
Securities Transfer System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Questions about the Federal Reserve’s Securities Transfer System . . . . . .
Federal Reserve Board Opposition to Credit Card Interest Rate Limits .
Insulating Banks from the Potential Risk of Expanded Activities . . . . . . .
The Federal Reserve Response Regarding Its Market-Making Standard .
Change in Fees and Deposit Account Interest Rates since Deregulation .
An Examination of Views Expressed about Access to Brokers’ Services .
Issues Related to Repeal of the Glass–Steagall Act . . . . . . . . . . . . . . . . . . . .
Preliminary Observations on the October 1987 Crash . . . . . . . . . . . . . . . . . .
Supervision of Overseas Lending Is Inadequate . . . . . . . . . . . . . . . . . . . . . . .
Competitive Concerns of Foreign Financial Firms in Japan,
the United Kingdom and the United States . . . . . . . . . . . . . . . . . . . . . . .
Administrative Expenses at FHLBB and FRB for 1985 and 1986 . . . . . .
Government in the Sunshine Act Compliance at Selected Agencies . . . .
Trends in Commercial Bank Performance, December 1976–June 1987 . .
U.S. Commercial Banks’ Securities Activities in London . . . . . . . . . . . . . . .
Lending to Troubled Sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Government Check-Cashing Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Number

Date issued

GGD-82-57
GGD-82-53
PAD-82-45
ID-82-52

6-1-82
8-16-82
8-31-82
9-2-82

GGD-83-3

10-25-82

GGD-83-30

7-13-83

GGD-83-13

8-25-83

GGD-84-14

11-21-83

GGD-84-40

2-3-84

GGD-84-4

2-3-84

AFMD-84-10

5-2-84

GGD-84-39

7-11-84

GGD-84-65

9-30-84

GGD-85-9A

1-14-85

OCE-86-1

11-4-85

NSIAD-86-40
NSIAD-86-42

2-6-86
2-27-86

GGD-84-44FS
GGD-86-63
GGD-86-26
NSIAD-86-93
GGD-86-94
GGD-86-80BR

4-21-86
5-12-86
5-15-86
7-25-86
8-1-86
8-20-86

GGD-86-147FS
GGD-87-15BR

9-29-86
10-20-86

GGD-87-38BR
GGD-87-35
GGD-87-55FS
GGD-87-70
GGD-88-8

4-7-87
4-14-87
4-21-87
7-13-87
12-18-87

GGD-88-37
GGD-88-38
NSIAD-88-87

1-22-88
1-26-88
5-5-88

NSIAD-88-171
AFMD-88-33
GGD-88-97
GGD-88-106BR
NSIAD-88-238
GGD-88-126BR
GGD-89-12

6-2-88
6-15-88
7-20-88
7-28-88
9-8-88
9-26-88
10-7-88

64

Annual Report: Budget Review, 1998–99

Table C.2
Completed GAO Reports Relating to the Federal Reserve System—Continued
Report

Number

Date issued

Conflict of Interest: Abuses in Commercial Banking Institutions . . . . . . .
Competitive Fairness Is an Elusive Goal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Independent Audits Needed to Strengthen Internal Control
and Bank Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Information on the System’s Check Collection Service . . . . . . . . . . . . . . . .

GGD-89-35
GGD-89-61

1-27-89
5-12-89

AFMD-89-25
GGD-90-17

5-31-89
12-15-89

IMTEC-90-14
GGD-90-48
GGD-90-33
NSIAD-90-98

1-14-90
3-14-90
4-11-90
5-7-90

NSIAD-90-99
GGD-90-88
IMTEC-90-47
GGD-90-97
AFMD-90-55FS
AFMD-90-100

5-21-90
5-23-90
7-12-90
8-15-90
8-24-90
9-11-90

GGD-90-114
GGD-90-113

9-14-90
9-25-90

Implementation of Risk-Based Capital Adequacy Standards . . . . . . . . . . . .
Overview of Six Foreign Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposit Insurance: A Strategy for Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank Supervision: Prompt and Forceful Regulatory Actions Needed . . . .
Many Federal Agencies Collect and Disseminate Information . . . . . . . . . .
Money Laundering: The U.S. Government Is Responding to the Problem .
A Framework for Limiting the Government’s Exposure to Risks . . . . . . .
Treasury Tax and Loan Activity at Two Troubled Banks . . . . . . . . . . . . . .
OCC’s Supervision of the Bank of New England
Was Not Timely or Forceful . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank Holding Company Securities Subsidiaries’ Market
Activities Update . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time Limits on Holding Deposits Generally Met
but More Oversight Needed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legislation Needed to Strengthen Bank Oversight . . . . . . . . . . . . . . . . . . . . .

NSIAD-91-80
NSIAD-91-104
GGD-92-26
GGD-91-69
NSIAD-91-173
NSIAD-91-130
GGD-91-90
AFMD-91-87

1-25-91
2-22-91
3-4-91
4-15-91
5-1-91
5-16-91
5-22-91
9-12-91

GGD-91-128

9-16-91

GGD-91-131

9-20-91

GGD-91-132
AFMD-92-19

9-30-91
10-21-91

Contracting Practices with Data Processing Servicers . . . . . . . . . . . . . . . . . .
Challenges to Harmonizing International Capital Standards Remain . . . .
Assessing the Need to Regulate Additional Financial Activities . . . . . . . .
Call Report Automation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Flexible Accounting Rules Lead to Inflated Financial Reports . . . . . . . . . .
Cross-Border Information Sharing Is Improving, but Obstacles Remain .
Changes in Collateral Practices Could Reduce the Federal
Government’s Risk of Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Initial Assessment of Certain BCCI Activities in the U.S. . . . . . . . . . . . . . .
Appraisal Reform: Implementation Status and Unresolved Issues . . . . . . .

GGD-92-19
GGD-92-41
GGD-92-70
IMTEC-92-60R
AFMD-92-52
GGD-92-110

2-5-92
3-10-92
4-21-92
5-28-92
6-1-92
7-28-92

AFMD-92-54
GGD-92-96
GGD-93-19

9-14-92
9-30-92
10-30-92

Oversight of Critical Banking Systems Should Be Strengthened . . . . . . . .
Activities of Securities of Bank Holding Companies . . . . . . . . . . . . . . . . . . .
The Stock, Options, and Futures Markets Are Still at Risk . . . . . . . . . . . . .
Update on U.S. Commercial Banks’ Securities in London . . . . . . . . . . . . . .
U.S. Financial Services’ Competitiveness under the Single
Market Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Limited Public Demand for New Dollar Coin or Elimination of Pennies .
Oversight of Automation Used to Clear and Settle Trades Is Uneven . . .
The Government’s Exposure to Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office of Inspector General Operations at Financial Regulatory Agencies .
Additional Reserves and Reform Needed to Strengthen the Fund . . . . . . .
More Transaction Information and Investor Protection Measures
Are Needed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issues Relating to Banks Selling Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Bank and Thrift Criminal Fraud: The Federal Commitment
Could Be Broadened . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FRB Examinations and Inspections Do Not Fully Assess Bank Safety
and Soundness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Improvements Needed in Examination Quality and Regulatory Structure .
Personnel Engaged in Public and Congressional Affairs
in Federal Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit Availability Guidance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury Automation: Automated Auction May Not Achieve Benefits
or Operate Properly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IRS Can Improve the Federal Tax Deposit System . . . . . . . . . . . . . . . . . . . .
Funding Foreign Bank Examinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preliminary Information Related to a Futures Transaction Fee . . . . . . . . . .

GGD-93-48

1-8-93

AFMD-93-13
AFMD-93-15

2-16-93
2-16-93

GGD-93-71FS
GGD-93-15R
IMTEC-93-28
AFMD-93-40
GGD-93-35R
GGD-93-108

3-8-93
3-30-93
4-27-93
4-28-93
5-4-93
5-17-93

Federal Reserve System Audits

65

Table C.2
Continued
Report
The Business Environment in the United States, Japan,
and Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory Impediments to Small Business Lending Should Be
Removed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recent Developments in Foreign Exchange Markets . . . . . . . . . . . . . . . . . . .
Benefits and Risks of Removing Regulatory Restrictions . . . . . . . . . . . . . . .
Regulatory Burden: Recent Studies, Industry Issues,
and Agency Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Strengthening the Framework for Supervising International Banks . . . . . .
Insider Problems and Violations Indicate Broader Management
Deficiencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Credit Card Industry: Competitive Developments Need to be
Closely Monitored . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Better Guidance Is Needed for Real Estate Evaluations . . . . . . . . . . . . . . . .
Treasury Securities Auction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Divergent Loan Loss Methods Undermine Usefulness
of Financial Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interstate Banking: Experiences in Three Western States . . . . . . . . . . . . . . .

Number
GGD-93-124

8-9-93

GGD-93-121
GGD-93-154
GGD-94-26

9-7-93
9-24-93
11-2-93

GGD-94-28

12-13-93

GGD-94-68

3-21-94

GGD-94-88

3-30-94

GGD-94-23
GGD-94-144
AIMD-94-165R
AIMD-95-8
GGD-95-35

Lessons Learned from Resolving First City Bancorporation of Texas . . .
Investment of Trust Assets in Bank Proprietary Mutual Funds . . . . . . . . .
Status Report on the Initiative to Improve Economic Statistics . . . . . . . . .
Mandated Studies to Review Costly Bank and Thrift Failures . . . . . . . . . .
Differences in Screening Bank Executives . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Banks’ Securities Activities: Oversight Differs Depending on Activity
and Regulator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mutual Funds: Impact on Bank Deposits and Credit Availability . . . . . . .
Bank Mutual Funds: Sales Practices and Regulatory Issues . . . . . . . . . . . .
Challenges Remain to Successfully Implement CRA . . . . . . . . . . . . . . . . . . .

GGD-95-37
GGD-95-21
GGD-95-98
GGD-95-126
GGD-95-181R

Foreign Banks: Assessing Their Role in the U.S. Banking System . . . . . .
Federal Reserve Banks: Internal Control, Accounting,
and Auditing Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico’s Financial Crisis: Origins, Awareness, Assistance,
and Initial Efforts to Recover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Counterfeit U.S. Currency Abroad: Issues and U.S. Deterrence Efforts . .
Money Laundering: A Framework for Understanding
U.S. Efforts Overseas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Reserve System: Current and Future Challenges
Require Systemwide Attention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair Lending: Federal Oversight and Enforcement Improved
but Some Challenges Remain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Reserve Banks: Inaccurate Reporting of Currency
at the Los Angeles Branch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Implementation of the Foreign Bank Supervision Enhancement
Act of 1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Derivatives: Actions Taken or Proposed since May 1994 . . . . .
Inspectors General: Mandated Studies to Review Costly Bank
and Thrift Failures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory Burden: Measurement Challenges and Concerns
Raised by Selected Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank Oversight Structure: U.S. and Foreign Experience May Offer
Lessons for Modernizing U.S. Structure . . . . . . . . . . . . . . . . . . . . . . . . . .
Implementation of FDICIA’s Prompt Regulatory Action Provisions . . . . .
Bank Regulatory Structure: Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

GGD-96-26

Bank Data: Material Loss of Oversight Information from
Interstate Banking Is Unlikely . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Commodity Exchange Act: Legal and Regulatory Issues Remain . .
Treasury’s Plan to Study Genuine and Counterfeit U.S. Currency Abroad .
Bank Oversight: Few Cases of Tying Have Been Detected . . . . . . . . . . . . .

Date issued

GGD-95-214
GGD-95-230
GGD-95-210
GGD-96-23

AIMD-96-5

4-28-94
5-24-94
8-25-94
10-31-94
12-30-94
3-15-95
3-16-95
7-7-95
7-31-95
8-17-95
9-21-95
9-22-95
9-27-95
11-28-95
2-7-96
2-9-96

GGD-96-56
GGD-96-11

2-23-96
2-26-96

GGD-96-105

5-24-96

GGD-96-128

6-17-96

GGD-96-145

8-13-96

AIMD-96-146

9-30-96

GGD-96-187
GGD-AIMD-97-8

9-30-96
11-1-96

GGD-97-4

11-7-96

GGD-97-2

11-18-96

GGD-97-23
GGD-97-18
GGD-97-5

11-20-96
11-21-96
12-27-96

GGD-97-49
GGD-97-50
NSIAD-97-104
GGD-97-58

3-26-97
4-7-97
4-11-97
5-8-97

66

Annual Report: Budget Review, 1998–99

Table C.2
Continued
Report

Number

Foreign Banks: Opportunities Exist to Enhance Supervision Programs
as Implementation Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Four Financial Crises in the 1980s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments, Clearance, and Settlement: A Guide to the Systems, Risks,
and Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International Financial Crises: Efforts to Anticipate, Avoid,
and Resolve Sovereign Crises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Reserve Banks: Internal Controls Over Cash at Atlanta,
Los Angeles, and Philadelphia Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign Banks: Internal Control and Audit Weaknesses in U.S. Branches .
OTC Derivatives: Additional Oversight Could Reduce Costly
Sales Practice Disputes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Information on Private Banking and Its Vulnerability
to Money Laundering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Date issued

GGD-97-80
GGD-97-96

5-9-97
5-21-97

GGD-97-73

6-20-97

GGD-NSIAD-97-168

7-7-97

AIMD-97-127
GGD-97-181

8-28-97
9-29-97

GGD-98-5

10-2-97

GGD-98-19R

10-30-97

Table C.3
Completed OIG Audit Reports Relating to the Federal Reserve System, 1997
Report

Number

Month issued

Audit of the Administrative Systems Automation Project . . . . . . . . . . . . . . . . . . . .
Audit of the FFIEC’s Financial Statements (years ended 12-31-96
and 12-31-95) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Audit of the Board’s Financial Statements (years ended 12-31-96
and 12-31-95) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inquiry Regarding Delays in Depositing Check Payments
for Board Publications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assistance to Financial Statement Audit of the Federal Reserve
Employee Benefits System (years ended 12-31-96 and 12-31-95) . . . . . . . .
Audit of the Fixed Assets Management Process (Advisory Letter) . . . . . . . . . . . .
Audit of New Currency
(joint letter with Inspector General of the Treasury Department) . . . . . . . . .
Audit of the Division of Banking Supervision and Regulation’s
Distributed Processing Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Monitoring of the PeopleSoft Payroll and Benefits System
Implementation (Advisory Letter) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Business Process Review of Travel Administration . . . . . . . . . . . . . . . . . . . . . . . . . .
Audit of the Federal Reserve System’s Enforcement Activities . . . . . . . . . . . . . . .
Audit of the Board’s Business Resumption and Contingency Planning
Process (Advisory Letter) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Audit of the Division of Consumer and Community Affairs’
Distributed Processing Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

A9609

February

A9701

March

Office of Inspector General
The Board’s Office of Inspector General
functions in accordance with the Inspector General Act of 1978, as amended.
The OIG plans and conducts audits and
investigations of the programs and operations of the Board and its delegated
functions at the Federal Reserve Banks.
The OIG also reviews existing and
proposed legislation and regulations for
economy and efficiency. It recommends

A9700

March

P9718

March

A9706
A9705

May
June

A9612

June

A9610

June

P9620
A9702
A9613

June
July
October

A9708

October

A9704

December

policies, and it supervises and conducts
activities that promote economy and
efficiency and that prevent and detect
waste, fraud, and abuse in Board and
Board-delegated programs and operations. In addition, it coordinates its
efforts with other governmental and
nongovernmental agencies to promote
economy and efficiency and to detect
and prevent fraud and abuse in activities
administered or financed by the Board.
The OIG keeps the Congress and the

Federal Reserve System Audits
Chairman of the Board fully informed
about serious abuses and deficiencies
and about the status of any corrective
actions.
During 1997, the OIG publicly
reported on thirteen audits (table C.3)
and conducted a number of follow-up
and other reviews. In addition, the OIG
closed seven investigations and performed numerous legislative and regulatory reviews.

67

Appendix D

Expenses and Employment
at the Federal Reserve Banks
Table D.1
Operating Expenses of the Federal Reserve Banks, by District, 1997 and 1998
Thousands of dollars except as noted
District

1997
estimate

1998
budget

Change
Amount

Percent

Boston . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New York . . . . . . . . . . . . . . . . . . . . . . . . . .
Philadelphia . . . . . . . . . . . . . . . . . . . . . . . .
Cleveland . . . . . . . . . . . . . . . . . . . . . . . . . .
Richmond . . . . . . . . . . . . . . . . . . . . . . . . . .
Atlanta . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chicago . . . . . . . . . . . . . . . . . . . . . . . . . . . .
St. Louis . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minneapolis . . . . . . . . . . . . . . . . . . . . . . . .
Kansas City . . . . . . . . . . . . . . . . . . . . . . . .
Dallas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
San Francisco . . . . . . . . . . . . . . . . . . . . . . .

138,391
427,145
104,088
120,747
152,298
185,665
212,273
99,095
104,065
125,880
124,593
217,317

143,620
437,029
107,196
122,869
158,140
192,194
210,927
102,138
103,998
124,017
127,955
224,600

5,229
9,884
3,108
2,123
5,842
6,528
−1,347
3,043
−77
−1,863
3,361
7,283

3.8
2.3
3.0
1.8
3.8
3.5
−.6
3.1
−.1
−1.5
2.7
3.4

Total, all Districts . . . . . . . . . . . . . . . . . .

2,011,557

2,054,672

43,114

2.1

Special project
Automation Consolidation . . . . . . . . . . .

34,691

4,650

−30,041

−86.6

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,046,248

2,059,321

13,073

.6

Note. Excludes capital outlays.

70

Annual Report: Budget Review, 1998–99

Table D.2
Employment at the Federal Reserve Banks, by District, 1997 and 1998
Average number of personnel except as noted 1
1997
estimate

1998
budget

Boston . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New York . . . . . . . . . . . . . . . . . . . . . . . . . .
Philadelphia . . . . . . . . . . . . . . . . . . . . . . . .
Cleveland . . . . . . . . . . . . . . . . . . . . . . . . . .
Richmond . . . . . . . . . . . . . . . . . . . . . . . . . .
Atlanta . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chicago . . . . . . . . . . . . . . . . . . . . . . . . . . . .
St. Louis . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minneapolis . . . . . . . . . . . . . . . . . . . . . . . .
Kansas City . . . . . . . . . . . . . . . . . . . . . . . .
Dallas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
San Francisco . . . . . . . . . . . . . . . . . . . . . . .

1,231
4,129
1,259
1,400
2,074
2,323
2,187
1,196
1,271
1,577
1,527
2,498

Total, all Districts . . . . . . . . . . . . . . . . . .

District

Change
Amount

Percent

1,233
3,917
1,246
1,325
2,085
2,335
2,105
1,212
1,201
1,509
1,516
2,472

3
−212
−13
−75
11
12
−81
16
−70
−68
−12
−27

.2
−5.1
−1.0
−5.4
.5
.5
−3.7
1.3
−5.5
−4.3
−.8
−1.1

22,672

22,156

−516

−2.3

Federal Reserve Automation Services .

549

598

49

8.9

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

23,221

22,754

−467

−2.0

1. See chapter 3, note 2, for definition of average number of personnel.

Table D.3
Expenses of the Federal Reserve Banks, by Operational Area, 1997 and 1998
Thousands of dollars except as noted
Operational area
Monetary and economic policy . . . . . . .
Services to the U.S. Treasury and
other government agencies . . . . . .
Services to financial institutions
and the public . . . . . . . . . . . . . . . . . .
Supervision and regulation . . . . . . . . . .

1997
estimate

1998
budget

Change
Amount

Percent

144,712

152,699

7,987

5.5

212,010

220,939

8,929

4.2

1,214,810
440,025

1,226,243
454,791

11,433
14,767

.9
3.4

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,011,557

2,054,672

43,115

2.1

Memo 1
Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overhead . . . . . . . . . . . . . . . . . . . . . . . . . . .

743,973
527,616

764,230
534,870

20,257
7,255

2.7
1.4

1. These costs are included in the expenses by
operational area. Support refers to activities, such as data
processing, whose costs can be charged to users according

to the amount of use. Overhead refers to activities, such as
auditing, whose costs are charged according to the users’
shares of total direct costs.

Expenses and Employment

71

Table D.4
Expenses of the Federal Reserve Banks
for Salaries of Officers and Employees, by District, 1997 and 1998
Thousands of dollars except as noted
1997
estimate

1998
budget

Boston . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New York . . . . . . . . . . . . . . . . . . . . . . . . . .
Philadelphia . . . . . . . . . . . . . . . . . . . . . . . .
Cleveland . . . . . . . . . . . . . . . . . . . . . . . . . .
Richmond . . . . . . . . . . . . . . . . . . . . . . . . . .
Atlanta . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chicago . . . . . . . . . . . . . . . . . . . . . . . . . . . .
St. Louis . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minneapolis . . . . . . . . . . . . . . . . . . . . . . . .
Kansas City . . . . . . . . . . . . . . . . . . . . . . . .
Dallas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
San Francisco . . . . . . . . . . . . . . . . . . . . . . .

57,210
211,891
50,584
52,011
76,625
83,467
96,838
44,634
48,531
60,112
60,312
115,809

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

958,025

District

Change
Amount

Percent

59,588
216,994
52,426
50,246
80,914
87,305
96,390
47,360
48,237
59,717
62,140
120,660

2,378
5,102
1,842
−1,765
4,289
3,839
−448
2,726
−294
−395
1,828
4,851

4.2
2.4
3.6
−3.4
5.6
4.6
−.5
6.1
−.6
−.7
3.0
4.2

981,978

23,953

2.5

Table D.5
Factors in the Change from 1997 to 1998 in the Salaries
of Officers and Employees of the Federal Reserve Banks, by District
Percentage points
District

Merit
adjustment

Structure
adjustment

Promotion
and reclassification

Boston . . . . . . . . . . . . . . . . .
New York . . . . . . . . . . . . . .
Philadelphia . . . . . . . . . . . .
Cleveland . . . . . . . . . . . . . .
Richmond . . . . . . . . . . . . . .
Atlanta . . . . . . . . . . . . . . . . .
Chicago . . . . . . . . . . . . . . . .
St. Louis . . . . . . . . . . . . . . .
Minneapolis . . . . . . . . . . . .
Kansas City . . . . . . . . . . . .
Dallas . . . . . . . . . . . . . . . . . .
San Francisco . . . . . . . . . .

3.4
4.1
3.9
3.7
3.9
3.5
3.5
3.8
3.7
4.0
3.4
4.1

.2
.3
.3
.0
.3
.3
.0
.2
.0
.6
.3
.1

.8
.9
.7
.4
1.0
1.0
1.0
.8
.5
1.1
.4
.9

.0
−2.0
−.1
−5.5
2.1
1.1
−3.6
2.7
−3.7
−3.0
−.1
−.5

.3
−.3
−1.0
−1.3
−.9
−.7
−.9
−.5
−.6
−1.6
−.4
−.1

Total . . . . . . . . . . . . . . . . . .

3.8

.2

.8

−1.2

−.6

Change in Turnover Overtime
staffing
and lag 1

Other

Total
change

−.5
−.7
−.2
−.8
−.8
−.6
−.6
−.9
−.5
−1.8
−.6
−.3

.0
.1
.0
.1
.0
.0
.1
.0
.0
.0
.0
.0

4.2
2.4
3.6
−3.4
5.6
4.6
−.5
6.1
−.6
−.7
3.0
4.2

−.6

.1

2.5

1. Turnover is the replacement of a departing employee with one having a lower pay grade.
Lag is the time during which a position remains vacant.

72

Annual Report: Budget Review, 1998–99

Table D.6
Capital Outlays of the Federal Reserve Banks, by District, 1997 and 1998
Thousands of dollars except as noted
1997
estimate

1998
budget

Boston . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New York . . . . . . . . . . . . . . . . . . . . . . . . . .
Philadelphia . . . . . . . . . . . . . . . . . . . . . . . .
Cleveland . . . . . . . . . . . . . . . . . . . . . . . . . .
Richmond . . . . . . . . . . . . . . . . . . . . . . . . . .
Atlanta . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chicago . . . . . . . . . . . . . . . . . . . . . . . . . . . .
St. Louis . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minneapolis . . . . . . . . . . . . . . . . . . . . . . . .
Kansas City . . . . . . . . . . . . . . . . . . . . . . . .
Dallas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
San Francisco . . . . . . . . . . . . . . . . . . . . . . .

15,330
36,053
9,635
41,826
14,688
27,276
16,106
10,748
45,438
6,879
8,042
19,730

Total, all Districts . . . . . . . . . . . . . . . . . .

District

Change
Amount

Percent

12,463
78,721
6,362
40,443
12,928
38,114
18,186
12,117
5,787
7,398
5,044
29,090

−2,867
42,668
−3,273
−1,384
−1,760
10,837
2,080
1,369
−39,651
519
−2,980
9,360

−18.7
118.3
−34.0
−3.3
−12.0
39.7
12.9
12.7
−87.3
7.5
−37.1
47.4

251,733

266,653

14,919

5.9

Federal Reserve Automation Services .

33,004

44,146

11,142

33.8

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

284,737

310,798

26,061

9.2

Table D.7
Budget Performance of the Federal Reserve Banks,
Operating Expenses, by District, 1997
Thousands of dollars except as noted
District

1997
budget

1997
estimate

Change
Amount

Percent

Boston . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New York . . . . . . . . . . . . . . . . . . . . . . . . . .
Philadelphia . . . . . . . . . . . . . . . . . . . . . . . .
Cleveland . . . . . . . . . . . . . . . . . . . . . . . . . .
Richmond . . . . . . . . . . . . . . . . . . . . . . . . . .
Atlanta . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chicago . . . . . . . . . . . . . . . . . . . . . . . . . . . .
St. Louis . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minneapolis . . . . . . . . . . . . . . . . . . . . . . . .
Kansas City . . . . . . . . . . . . . . . . . . . . . . . .
Dallas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
San Francisco . . . . . . . . . . . . . . . . . . . . . . .

132,180
424,390
103,765
119,852
152,560
184,192
213,222
96,901
104,157
124,917
125,811
215,272

138,391
427,145
104,088
120,747
152,298
185,665
212,273
99,095
104,065
125,880
124,593
217,317

6,211
2,755
323
894
−261
1,474
−948
2,194
−92
964
−1,218
2,045

4.7
.6
.3
.7
−.2
.8
−.4
2.3
−.1
.8
−1.0
.9

Total, all Districts . . . . . . . . . . . . . . . . . .

1,997,216

2,011,557

14,341

.7

Special project
Automation Consolidation . . . . . . . . . . .

34,667

34,691

24

.1

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,031,883

2,046,248

14,365

.7

Note. Excludes capital outlays.

Expenses and Employment

73

Table D.8
Budget Performance of the Federal Reserve Banks,
Employment, by District, 1997
Average number of personnel except as noted 1
1997
budget

Boston . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New York . . . . . . . . . . . . . . . . . . . . . . . . . .
Philadelphia . . . . . . . . . . . . . . . . . . . . . . . .
Cleveland . . . . . . . . . . . . . . . . . . . . . . . . . .
Richmond . . . . . . . . . . . . . . . . . . . . . . . . . .
Atlanta . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chicago . . . . . . . . . . . . . . . . . . . . . . . . . . . .
St. Louis . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minneapolis . . . . . . . . . . . . . . . . . . . . . . . .
Kansas City . . . . . . . . . . . . . . . . . . . . . . . .
Dallas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
San Francisco . . . . . . . . . . . . . . . . . . . . . . .

1,241
4,067
1,254
1,438
2,078
2,299
2,244
1,210
1,263
1,607
1,545
2,463

Total, all Districts . . . . . . . . . . . . . . . . . .

Change

1997
estimate

District

Amount

Percent

1,231
4,129
1,259
1,400
2,074
2,323
2,187
1,196
1,271
1,577
1,527
2,498

−10
62
5
−38
−4
24
−57
−14
8
−30
−18
35

−.8
1.5
.4
−2.6
−.2
1.0
−2.5
−1.1
.6
−1.9
−1.1
1.4

22,709

22,672

−37

−.2

Federal Reserve Automation Services .

549

549

0

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

23,258

23,221

−37

0
−.2

1. See chapter 3, note 2, for definition of average number of personnel.

Table D.9
Operating Expenses of the Federal Reserve Banks, by Operational Area, 1993–98
Thousands of dollars except as noted
Monetary
and
economic
policy

Services to
the U.S.
Treasury
and other
government
agencies

Services to
financial
institutions
and the
public

Supervision
and
regulation

Total

........................
........... ...........
........... ...........
........... ...........
estimate . . . . . . . . . . . . . . .
budget . . . . . . . . . . . . . . . . .

114,617
120,869
128,303
138,649
144,712
152,699

193,621
209,453
216,790
215,609
212,010
220,939

1,076,914
1,105,140
1,127,320
1,177,444
1,214,810
1,226,243

326,334
361,458
392,294
424,402
440,025
454,791

1,711,486
1,796,920
1,864,707
1,956,104
2,011,557
2,054,672

Memo
Average annual
change (percent) . . . . . . . .

5.9

2.7

2.6

6.9

3.7

Year

1993
1994
1995
1996
1997
1998

Note. Excludes special project.

74

Annual Report: Budget Review, 1998–99

Table D.10
Employment at the Federal Reserve Banks, by Operational Area, 1993–98
Average number of personnel except as noted 1
Monetary
and
economic
policy

Services to
the U.S.
Treasury
and other
government
agencies

Services to
financial
institutions
and the
public

Supervision
and
regulation

Support 2

Overhead 2

Total

.....................
.....................
.....................
.....................
estimate . . . . . . . . . . . .
budget . . . . . . . . . . . . . .

751
729
737
734
720
724

1,780
1,754
1,683
1,542
1,469
1,397

8,609
8,301
8,209
8,083
7,958
7,773

2,910
3,079
3,073
3,111
3,022
2,953

4,762
4,603
4,511
4,538
4,640
4,535

5,182
5,162
4,949
4,901
4,863
4,773

23,995
23,627
23,162
22,909
22,672
22,156

Memo
Average annual
change (percent) . . . . .

−.7

−4.7

−2.0

.3

−1.0

−1.6

−1.6

Year

1993
1994
1995
1996
1997
1998

1. Excludes special project and Federal Reserve Automation Services. See chapter 3,
note 2, for definition of average number of personnel.
2. See table D.3, note 1, for definition.

Maps of the
Federal Reserve System

76

Annual Report: Budget Review, 1998–99

The Federal Reserve System

1

9
2

MINNEAPOLIS

7

12
SAN FRANCISCO

CHICAGO

10

CLEVELAND

4

KANSAS CITY
ST. LOUIS

8
11 DALLAS

BOSTON

NEW YORK
3PHILADELPHIA

RICHMOND

5

6ATLANTA

ALASKA
HAWAII

Legend
Both pages
Federal Reserve Bank city
Board of Governors of the Federal
Reserve System, Washington, D.C.

Note
The Federal Reserve officially identifies
Districts by number and Reserve Bank
city (shown on both pages) and by letter
(shown on the facing page).
In the 12th District, the Seattle Branch
serves Alaska and the San Francisco
Bank serves Hawaii.
The System serves commonwealths
and territories as follows: The New York

Facing page

•

Federal Reserve Branch city
Branch boundary

Bank serves the Commonwealth of
Puerto Rico and the U.S. Virgin Islands;
the San Francisco Bank serves American
Samoa, Guam, and the Commonwealth
of the Northern Mariana Islands. The
maps show the boundaries within the
System as of year-end 1997.

Maps of the Federal Reserve System
1–A

2–B

4–D

3–C

5–E

Pittsburgh

ME

77

Baltimore

MD

NY
PA
VA

NJ

PA

CT

OH

VT

WV

WV
NH

Buffalo
NY

NJ

CT

NC

Cincinnati

DE

MA

Charlotte

KY
SC

RI

BOSTON

NEW YORK

7–G

6–F

RICHMOND

CLEVELAND

PHILADELPHIA

8–H

Nashville

TN

KY

Birmingham

AL

MI
IL

WI

MS

GA

Detroit

IA

IN

Louisville

MO

TN
LA

AR

Jacksonville

New Orleans

Memphis

IL

Little
Rock

IN

FL

MS

Miami

9–I

ST. LOUIS

CHICAGO

ATLANTA
MT
ND

MN

Helena
MI
WI
SD

MINNEAPOLIS
12–L

10–J
WY

NE

Omaha

CO

MO

Denver

KS

ALASKA

WA

Seattle

NM

Oklahoma City
Portland
OK
OR

KANSAS CITY

ID
CA
NV

11–K

TX

Salt Lake City

NM

LA

El Paso

UT

Houston
Los Angeles
San Antonio
HAWAII
AZ

DALLAS

SAN FRANCISCO

FRB1/1–1200–0498–C


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102