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Board of Governors of the Federal Reserve System
1987-88
Contents
1
INTRODUCTION
Part I
The 1988 Budgets
Chapter 1
5
6
7
7
8
FEDERAL RESERVE SYSTEM
Net Expense
Trends in Expenses and Employment
Operational Areas
1988 Budget Initiatives
11
11
12
15
BOARD OF GOVERNORS
An Overview of the Board's 1988 Budget
The Budget by Operational Area
Trends in Board Expenses and Positions
21
21
24
28
30
31
32
FEDERAL RESERVE BANKS
An Overview of the 1988 Budget
Operational Areas
Objects of Expense
Capital Outlays
Trends in Expenses and Employment
Volumes and Unit Costs
Chapter 2
Chapter 3
Part II
Special A nalysis
Chapter 4
35
35
38
42
REVIEW OF FISCAL AGENCY SERVICES
Historical Background
Fiscal Agency Services
Reimbursement for Fiscal Services
Appendixes
45
45
46
48
Appendix A
MISSION A N D O P E R A T I O N A L A R E A S
OF T H E F E D E R A L RESERVE SYSTEM
Monetary and Economic Policy
Supervision and Regulation
Services to Financial Institutions and the Public
Services to the U.S. Treasury and Other Government Agencies
49
49
50
Appendix B
B U D G E T PROCESSES
The Budget and Control Process of the Board of Governors
The Budget and Control Process of the Federal Reserve Banks
53
53
56
57
Appendix C
SPECIAL CATEGORIES OF SYSTEM EXPENSE
Priced Services
Capital Outlays
Currency
59
Appendix D
SOURCES A N D USES OF FUNDS
61
Appendix E
F E D E R A L RESERVE SYSTEM A U D I T S
45
65
Appendix F
EXPENSES A N D E M P L O Y M E N T
A T T H E F E D E R A L RESERVE BANKS
75
M A P OF T H E F E D E R A L RESERVE SYSTEM
1
Introduction
This report describes the budgeted
expenses of the Federal Reserve System
for 1988 and compares them with
expenses for 1986 and 1987. It also
contains a special analysis of fiscal
services provided to the U.S. Treasury
and other government agencies.
The Federal Reserve System consists
of the Board of Governors in Washington, D.C., the 12 Federal Reserve
Banks with their 25 Branches, the
Federal Open Market Committee, and
three advisory groups—the Federal
Advisory Council, the Consumer Advisory Council, and the Thrift Institutions Advisory Council.
The System was created by the Federal Reserve Act, passed by the Congress in 1913 to establish a safer and
more flexible monetary and banking
system. After the inception of the
Federal Reserve System, it became
clear that these original purposes were
part of broader national economic and
financial objectives. Stability and
growth of the economy, stability in the
purchasing power of the dollar, and
reasonable balance in transactions
with foreign countries have come to be
recognized as primary objectives of
governmental economic policy. Over
the years, such objectives have been
articulated by the Congress in legislation giving the Federal Reserve more
authority and responsibility.
As the nation's central bank, the
Federal Reserve, through its ability to
influence financial conditions, attempts to ensure growth of the economy consistent with price stability. As
the nation's lender of last resort, the
Federal Reserve also is responsible for
averting national liquidity crises.
Because a sound financial structure
is essential to an effective monetary
policy and a growing and prosperous
economy, the Congress has entrusted
the Federal Reserve with a variety of
bank supervisory and regulatory functions. Among other things, the Federal
Reserve administers the laws that regulate all bank holding companies; it
supervises state-chartered banks that
are members of the Federal Reserve
System; it regulates the foreign activities of U.S. banks and the U.S. activities of foreign banks; and it establishes
rules to ensure that consumers are
informed adequately and treated fairly
in credit transactions.
The Federal Reserve System also
plays a major role in the nation's
payments mechanism. Federal Reserve
Banks distribute currency and coin,
process 35 percent of all domestic
checks, and provide both wire and
automated clearinghouse transfers of
funds and securities amounting to
about $625 billion daily. In addition,
the Federal Reserve System serves as
the fiscal agent for the U.S. Treasury
and provides a variety of financial
services for the Treasury and other
government agencies.
To carry out these responsibilities,
the Federal Reserve System spent an
estimated $1,281 million in 1987 and
has budgeted expenses for 1988 of
$1,336 million. These are the gross
expenses for the Board of Governors
and the Federal Reserve Banks and
their Branches. Offsetting them in 1987
were an estimated $645 million in
revenue from priced services, $106
million in claims for reimbursement,
and $10 million in other income, all of
2
Introduction
which brought 1987 net operating
expenses to $519 million. Net spending
for 1988 is expected to total $555
million.
The major source of Federal Reserve
income, estimated at $16.4 billion in
1987, is earnings on the portfolio of
U.S. government securities in the System Open Market Account. The System uses purchases and sales from this
portfolio to implement monetary policy. Gains on foreign exchange transactions approximated $1.8 billion.
Each year the Federal Reserve returns to the U.S. Treasury its earnings
in excess of expenses, dividends, and
surplus—in 1987, an estimated $17.7
billion. These earnings are treated as
receipts in the U.S. budget accounting
system; projections of these earnings
by the Office of Management and
Budget appear in the U.S. budget.
Part I of this report discusses Federal
Reserve budgeted expenses for 1988
for the System as a whole and for the
Board of Governors and the Reserve
Banks taken separately. Part I I contains a chapter on services the System
provides to the U.S. Treasury and
other government agencies. Appendixes give additional information on
System operations, budget processes,
special categories of System expense,
sources and uses of funds, Federal
Reserve System audits, and Bank expenses and employment.
This report, a complete discussion
of the System's budget, is a companion
to the Board's 74th Annual Report
1987. That document covers all activities and initiatives of the Federal Reserve System during the year.
Parti
The 1988 Budgets
5
Chapter 1
Federal Reserve System
For 1988, the Federal Reserve System
has budgeted operating expenses of
$1,336 million, an increase of 4.3
percent over estimated 1987 expenses.
System operating expenses comprise
the budget for the Reserve Banks,
$1,245 million, and for the Board of
Governors, $91 million (table 1.1). The
budget for the cost of currency is an
additional $162 million for 1988, a
decrease of 5.0 percent from the estimated 1987 cost.1 When the cost of
currency is added to operating expenses, the Reserve Banks account for
83.1 percent of the total; the Board,
6.0 percent; and currency, 10.8 percent
(chart 1.1). Chapter 2 discusses the
1. Public demand for new currency and the
cost o f printing at the Bureau o f Engraving and
Printing largely determine currency costs o f the
Federal Reserve; thus, they are not included in
the analyses o f System operating expenses. For a
further discussion of currency costs, see chap. 2
and appendix C .
budget for the Board; chapter 3 covers
the Reserve Banks. The operational
areas of the System are listed later in
this chapter and described in more
detail in appendix A ; appendix B
describes the System's budget process.
Chart 1.1
Distribution of Operating Expenses
of the Federal Reserve System and
Cost of Currency, 19881
1. See text note 1.
Table 1.1
Operating Expenses of the Federal Reserve System and Cost of Currency, 1986-88 1
Millions of dollars, except as noted
Entity and
type of expense
Reserve Banks 2
Personnel
Nonpersonnel
Board of Governors 3
Personnel
Nonpersonnel
System operating expenses
Personnel
Nonpersonnel
Currency 4
1987
estimate
1988
budget
1986-87
1987-88
1,161.3
729.5
431.8
1,194.3
741.7
452.5
1,245.1
775.8
469.3
2.8
1.7
4.8
4.3
4.6
3.7
84.0
59.4
24.6
86.5
60.2
26.4
90.6
63.4
27.3
3.0
1.3
7.1
4.7
5.4
3.5
1,245.3
788.9
456.4
1,280.8
801.9
478.9
1,335.7
839.2
496.6
2.9
1.6
4.9
4.3
4.7
3.7
170.7
162.2
-5.8
-5.0
181.2
1. I n this and subsequent tables in this volume,
details may not add to totals because of rounding.
2. For detailed information see chap. 3.
Percent change
1986
actual
3. For detailed information see chap. 2.
4. See text note 1 and appendix C.
6
Federal Reserve System Audits
Table 1.2
Operating Expenses of the Federal Reserve System, Net of Receipts
and Claims for Reimbursement, 1986-88
M i l l i o n s o f dollars, except as noted
Item
T o t a l System operating expenses
1986
actual
1987
estimate
1988
budget
1,245
1,281
1,336
628
1
112
645
10
106
658
12
110
519
555
Percent change
1986-87
1987-8
4.3
2.9
LESS
Revenue f r o m priced services .
Other i n c o m e 1
Claims f o r r e i m b u r s e m e n t 2 . . .
2.0
2.8
20.0
3.4
-5T
EQUALS
Net System operating expenses
504
2.9
7.0
1. Beginning i n 1987, about $10 m i l l i o n charged t o
d e p o s i t o r y i n s t i t u t i o n s f o r T r e a s u r y services was
recorded as Federal Reserve income rather t h a n transferred directly t o the U . S . Treasury and claimed as a
reimbursement.
2. T h e costs o f fiscal agency services t o the U . S .
Treasury and other government agencies f o r w h i c h the
agencies have agreed t o reimburse the Federal Reserve.
I n practice, not all these claims are paid. See chap. 4.
Net Expense
ness firm in the private sector. The
revenue from priced services is detailed
in table 1.3.; the discipline imposed on
Federal Reserve budgets by the need to
keep such services competitive is discussed in appendix C.
The "other income" shown in table
1.2 includes fees from services such as
the transfer of U.S. Treasury bookentry securities in the secondary market, the settlement of such transfers
among depository institutions, and the
wire transfer of funds between a depository institution and the Treasury.
Reimbursements from government
agencies are discussed in chapter 4.
The System recovers much of the
expense it incurs in providing its services. Total expenses are offset by the
following items: (1) receipts for
payments-mechanism services provided to depository institutions; (2)
income for services on behalf of the
U.S. Treasury that are charged to
depository institutions using the services; and (3) expenses that are reimbursable by the U.S. Treasury and
other government agencies for fiscal
agency services. These receipts and
claims for reimbursement are budgeted at $780 million for 1988; hence,
1988 expenses net of these receipts and
claims is expected to be $555 million,
or 42 percent of total expenses (table
1.2).
As required by the Monetary Control Act of 1980 (MCA), fees for priced
services to depository institutions are
set to recover the full cost of the
services. Under the M C A , the full cost
includes all direct costs, the imputed
costs of float, and the return on capital
that would have been provided and the
taxes that would have been paid had
the services been furnished by a busi
Table 1.3
Revenue from Priced Services, 1986-88
M i l l i o n s o f dollars
Service
1986
actual
1987
1988
estimate budget
Funds transfer and
net settlement
A u t o m a t e d clearinghouse
C o m m e r c i a l check
B o o k - e n t r y securities
D e f i n i t i v e securities
Noncash collection
Cash services
70
31
483
8
7
13
14
50
36
496
8
7
13
14
69
40
506
9
7
13
15
Total
628
645
658
7 Federal Reserve System Audits
All sources and uses of funds are
presented in appendix D; the audits
of the System are discussed in appendix E.
Trends in Expenses and
Employment
Over the period 1978-88, the operating
expenses of the System increased an
average of 6.6 percent per year in
current dollars and 1.3 percent per
year when adjusted for inflation (chart
1.2). Over the same period, employment in the System decreased by a total
of 431, or 1.7 percent (chart 1.3).
The passage of the MCA in 1980
forced the System to increase expenses
and employment. The act extended
reserve requirements to all nonmember
banks and thrift institutions, requiring
the Federal Reserve to establish new
systems for the collection of data and
maintenance of deposit accounts. Also
under the MCA, all depository institutions obtained access to Federal Reserve services.
Since the 1982 completion of the
transition to the requirements of the
MCA, System expenses have increased
an average of 4.2 percent per year in
Chart 1.2
Operating Expenses of the Federal
Reserve System, 1978-881
Billions o f dollars
current dollars and 1.1 percent per
year in real terms. In that period,
employment in the System declined by
238, or 1.0 percent, even though, since
1985, the Federal Reserve has increased the staff in a pronounced effort
to strengthen the supervision and regulation of member banks and bank
holding companies. The major reductions in employment have been in the
area of services provided to financial
institutions and the public and in the
support and overhead areas.
Operational Areas
For budgeting purposes, the Federal
Reserve classifies its expenses according to the four operational areas of the
System: monetary and economic policy, supervision and regulation, services to financial institutions and the
public, and services to the U.S. Treasury and other government agencies
(table 1.4). Costs for support and
overhead are redistributed or allocated
to these four areas. Services to the
Treasury and other government agencies are performed only by the Reserve
Banks; the operational area unique to
the Board of Governors, System policy
Chart 1.3
Employment in the Federal Reserve
System, 1978-881
Thousands o f persons
1. For 1987, estimate; for 1988, budget.
2. Calculated w i t h the G N P implicit price deflator.
1978
1983
1. For 1987, estimate; for 1988, budget.
1988
8
Federal Reserve System Audits
Table 1.4
Operating Expenses of the Federal Reserve System, by Operational Area, 1986-S
Millions of dollars, except as noted
Operational area
and entity
1986
actual
1987
estimate
1988
budget
Percent change
1986-87
1987-88
Monetary and economic policy
Reserve Banks
Board o f Governors
144.8
90.6
54.3
146.4
88.4
57.9
152.0
91.7
60.2
1.1
2.3
6.8
3.8
3.7
3.9
Supervision and regulation
Reserve Banks
Board o f Governors
190.8
163.9
26.9
196.2
170.1
26.1
210.9
183.4
27.5
2.8
3.8
2.7
7.5
7.8
5.0
Services to financial institutions
and the public
Reserve Banks
Board o f governors
772.9
770.0
2.9
802.3
799.9
2.4
830.4
827.5
2.9
3.8
3.9
- 14.4
3.5
3.4
20.3
Services to the U.S. Treasury and
other government agencies2
Total
Reserve Banks
Board of Governors
136.8
135.9
142.5
-0.7
4.9
1,245.3
1,161.3
84.0
1,280.8
1,194.3
86.5
1,335.7
1.245.1
90.6
2.9
2.8
3.0
4.3
4.3
4.7
1. Operating expenses reflect all allocations for
support and overhead and exclude capital outlays. The
operational area unique to the Board o f Governors,
system policy direction and oversight, which is shown
separately in chap. 2, has been allocated across the
operational areas shown above. As a result, the
numbers in chap. 2 for the operational areas are not the
same as the ones listed in this table.
2. Reserve Banks only. The Board o f Governors
does not operate in this area.
direction and oversight, is an overhead
expense of the System.
The Board decided to develop digitized image processing of checks after
work over the past two years demonstrated the likelihood that this technology will improve the payments mechanism. Because the project is relatively
costly, but not lengthy, the Board
established a separate budget for it
that is not included in the base of
operating expenses.
The Federal Reserve continues to
emphasize the area of supervision and
regulation. Under deregulation, bank
holding companies have developed
new services and product lines, which
in turn require more applications and
more examinations of banks and holding companies.
Also affecting the 1988 budget are
projects on behalf of the U.S. Treasury. In 1988, the System will recognize
the full-year effect of operating Treasury Direct, a system begun in 1987 to
handle in book-entry (electronic) form
all Treasury securities bought and sold
1988 Budget Initiatives
Two major initiatives are planned for
1988. Implementation of the Expedited Funds Availability Act (title V I
of Public Law 100-86, the Competitive
Equality Banking Act of 1987) is expected to cost $15 million; and a
research and development project to
explore digitized image processing of
checks is budgeted at $6 million.
The Expedited Funds Availability
Act of 1987, which becomes effective
on September 1, 1988, requires the
Federal Reserve to devise and issue
regulations to ensure prompt availability of funds and to expedite the return
of checks. The law was enacted too late
in the budget process for the Federal
Reserve Banks to include related expenses on the effort in their 1988
budgets.
9 Federal Reserve System Audits
by individuals. Other initiatives undertaken for the Treasury include development of the Public Debt Accounting
and Reporting System (PARS), the
centralization of bond inscription by
issuing agents, and the high-speed
processing of redeemed bonds. These
projects add costs in 1988; but they are
also expected to cut expenses for the
Federal Reserve and the U.S. government in the future.
Automation also affects the Systemwide 1988 budget. The Board and
several Reserve Banks are expanding
office automation systems, and some
locations are establishing additional
capabilities for contingency processing
for critical operations, such as funds
and securities transfers.
Finally, like the 1987 budget, the
1988 budget gave no consideration to
the effects on expenses of the implementation of Financial Accounting
Standards Board statement number
87, Employers' Accounting for Pensions. The System implemented this
standard in 1987; in accordance with
its terms, the System recognized a
credit to overall 1987 expenses and will
likely record a credit to expenses in
1988. This credit, however, is not
reflected as a reduction in the 1987
estimated expenses or 1988 budgeted
expenses for the System.
11
Chapter 2
Board of Governors
This chapter discusses the operating
and capital budgets of the Board of
Governors and analyzes expenses for
the major operational areas of the
Board: monetary and economic policy,
supervision and regulation, services to
financial institutions and the public,
and System policy direction and oversight.
An Overview of the Board's
1988 Budget
The 1988 operating budget of the
Board of Governors is $90.6 million,
an increase of $4.1 million, or 4.7
percent, over estimated expenses for
1987. The Board's operating budget is
6.0 percent of the System's total budget, including currency costs (see chapter 1).
The growth in Board expenses between 1987 and 1988 arises from several factors: a general pay increase and
routine salary actions ($2.8 million
of the increase); higher costs for
retirement and insurance associated
with higher rates for social security
and health insurance, respectively
($639,000); increases in the unit cost
and volume of goods and services used
by the Board ($700,000); the creation
in late 1987 of an Office of the Inspector General ($333,000); and automation of procedures to manage currency purchases and distribution
($344,000)—this project will save at
least $500,000 per year in System costs
for currency processing.
Offsetting about $400,000 of these
increases is an extension of the depreciation schedule for the Board's mainframe computer to match more closely
its useful life. Other cost savings and
initiatives eliminate another $200,000
from the increase over last year.
In June 1987, the Board approved a
budget guideline for 1988 that was 3.5
percent higher than estimated 1987
expenses to maintain current operations and initiate specific projects (see
appendix B for a description of the
budgeting process). The approved
growth of 4.7 percent over 1987 expenses includes 3.0 percent to meet the
purposes of the guideline and 1.7
percent for approved initiatives not
identified in the guideline.
The 1988 budget designates resources to implement the Expedited
Funds Availability Act and to further
strengthen the supervision function.
The budget supports improvements to
the Board's internal controls through
the new Office of the Inspector General
and expands information available for
monetary and economic policymaking
by funding new surveys. Finally, the
budget continues to fund the expansion of office automation and enduser computing. Table 2.1 shows the
Board's 1988 operating budget by
object of expense.
Centralized automation services provided by the Information Resources
Management (IRM) divisions account
for a significant part of the Board's
resources. The recently adopted system
of charges for using IRM resources
allows the Board's divisions, within
certain constraints, to draw on other
sources for computing. This element
of competition and accountability encourages both the users and the providers of the resources to be more efficient. In conjunction with improved
12
Board of Governors
Table 2.1
Operating Expenses of the Board of Governors, by Object, 1986-88
Thousands of dollars, except as noted
Object
Personnel
Salaries
Retirement 1
Insurance 2
Total
Nonpersonnel
Travel
Postage
Telephone and telegraph
Printing and binding
Publications committee
Stationery and supplies
Software and supplies
Cafeteria
Furniture and equipment
Rentals
Books and subscriptions
Utilities
Repairs and alterations
Maintenance
Contractual professional services
Interest
Education and membership fees
Subsidies and contributions
Depreciation
Other
Contingency income
Cafeteria sales
Loss (gain) from disposition of assets
Total
1987
estimate
1988
budget
1986-87
1987-88
53,907
2,670
2,793
59,370
53,936
2,935
3,287
60,159
56,977
3,242
3,642
63,863
0.1
9.9
17.7
1.3
5.6
10.5
10.8
6.2
2,541
1,011
1,481
919
10
1,162
2,090
500
804
2,358
438
1,490
892
1,208
2,162
44
591
703
5,793
313
- 1,544
-701
358
24,626
2,825
812
1,387
967
42
1,009
2,601
525
802
1,474
445
1,580
1,094
1,872
2,314
10
746
655
7,540
427
-1,686
-740
0
26,699
3,005
925
1,494
954
26
910
2,585
569
605
774
525
1,638
1,082
2,432
2,900
11.2
-19.7
-6.4
5.2
327.4
-13.2
24.5
5.0
-0.4
-37.5
1.6
6.1
22.7
54.9
-8.8
-77.2
26.1
-6.8
30.2
36.5
9.2
5.6
6.4
13.9
7.8
-1.3
-37.1
-9.8
-0.6
8.4
-24.5
-47.5
18.1
3.7
- 1.1
29.9
25.3
-96.0
-0.2
2.0
2.2
26.9
9.9
3.1
6.8
2.9
3.0
4.7
Savings target
Adjustment to estimated expenses
Total
Percent change
1986
actual
*
744
668
7,704
542
-1,853
-763
0
27,468
-700
-328
83,996
86,531
90,631
1. Increases largely attributable to higher rates for
social security.
2. Increases attributable to higher rates for health
insurance.
•Less than $500.
productivity and quality in the IRM
divisions, these efficiencies have reduced the percentage of the Board's
budget devoted to centrally provided
IRM resources in 1988.
ing within operational areas responded
primarily to Boardwide factors, such
as the general pay increase, and to
elements unique to each area: in monetary and economic policy, higher
costs for automation and an expanded
program of surveys; in supervision and
regulation, additional staffing and
automation initiatives; in services to
financial institutions and the public,
the effort to implement the Expedited
Funds Availability Act and to automate management of currency purchases and transportation; and in System policy direction and oversight, the
The Budget by Operational Area
Tables 2.2 and 2.3 show respectively
the operating expenses and the number
of authorized positions in each of the
Board's four operational areas for the
years 1986-88. The expenses exclude
capital outlays and include an allocation for support and overhead. Spend
13 Board of Governors
Table 2.2
Operating Expenses of the Board of Governors, by Operational Area, 1986-88 1
Thousands of dollars, except as noted
Percent change
1986
actual
1987
estimate
1988
budget
1986-87
1987-88
Monetary and economic policy
Supervision and regulation
Services to financial institutions
and the public
System policy direction and
oversight
44,019
21,616
46,373
20,853
48,514
21,911
5.3
-3.5
4.6
5.1
Total
83,995
Operational area
2,306
1,949
2,457
- 15.5
26.1
16,054
17,356
17,749
8.1
2.3
86,531
90,631
3.0
4.7
1. Operating expenses reflect all allocations for
support and overhead. They exclude capital outlays.
The operational area, services to the U.S. Treasury and
other government agencies, is unique to the Reserve
Banks and is not shown here; see chaps. 1 and 3.
Table 2.3
Positions Authorized at the Board of Governors, by Acitivity, 1986-88
Activity
Monetary and economic policy
Supervision and regulation
Services to financial institutions
and the public
System policy direction and
oversight
Support and overhead1
Total
1986
actual
1987
estimate
397
262
396
261
1988
budget
397
264
Percent change
1986-87
1987-88
-.3
-.4
.3
1.1
15
22
22
46.7
0
156
149
148
-4.5
-.7
738
741
738
.4
-.4
1568
1569
1569
.1
0
1. Includes data processing services.
establishment of the Office of the
Inspector General.
Monetary and Economic Policy
In the area of monetary and economic
policy, the Board monitors and analyzes developments in the money and
credit markets, sets reserve requirements, approves changes in the discount rate, and otherwise manages the
nation's monetary policy. The costs of
this function are expected to total $48.5
million in 1988, an increase of $2.1
million, or 4.6 percent, over 1987.
The budget in this area supports
economic analysis and forecasts, research surveys, and the expansion of
decentralized computing facilities. A
heavy workload and the needs of the
Board and the Federal Open Market
Committee for information about international economic and financial
developments have demanded a rapid
expansion of facilities for handling
and storing data. The major means to
achieve this expansion has been the
installation of networks of microcomputers in the Divisions of Research and
Statistics, Monetary Affairs, and International Finance. The installations are
to be completed during 1988; they will
cost the Board $356,000 in operating
expenses (excluding depreciation) and
$1,367,000 in capital funds in that
year. The expansion of decentralized
computing has allowed a sharp decrease in charges for mainframe com-
14
Board of Governors
puting that, in turn, has checked the
rise in spending in this area.
The installation of the local area
networks, together with lower operating costs for mainframe services, has
reduced costs for mainframe support
by approximately $1.4 million. This
saving offsets a portion of the increases
attributable to the automation network itself, to one new position for
managing the data on the debt problems of developing countries, and to a
workshop and three new surveys to be
conducted in 1988 at a cost of $591,000.
The first survey will examine the use
of financial institutions and services,
and especially of banks, by small
businesses. The Small Business Administration will collaborate on the survey
and is expected to contribute $100,000
toward it; Board costs are expected to
be $400,000. The survey, to begin in
January 1988, may continue through
June 1989. The second survey will
query households on their use of traditional and nontraditional sources of
financial services. Scheduled to start in
February 1988, it will last approximately one year and cost the Board
$170,000. The third survey will focus
on consumer finances to help evaluate
and improve the Board's flow of funds
statistics for the household sector. The
design work is scheduled in 1988 at a
cost of $21,000 and will include an
advisory workshop of government and
academic experts. The survey itself will
require additional funds, to be budgeted for 1989.
Supervision and Regulation
Supervision of financial institutions at
the Board includes reviews of reports
from the Reserve Banks, special studies related to applications for international banking activities, direction of
enforcement actions, and regulation
of trust activities. Regulation of financial institutions includes issuing regulations; overseeing mergers, foreign
banking activities, and compliance
with consumer regulations; and regulating securities credit. The 1988 budget of $21.9 million for supervision
and regulation is $1.1 million, or 5.1
percent, more than estimated expenses
for 1987.
The budget supports the continued
reorganization of the supervision function, which was started in 1986. Growth
and specialization has made it useful
to divide the supervision function into
foreign and domestic segments. Administrative support for the processing
of applications is also realigned. Neither change involves extra cost.
The 1988 budget adds three positions to supervision and regulation to
strengthen the management and analysis of data. The budget also funds
higher personnel costs than last year
because vacancies on the legal staff are
expected to be fewer on average.
Services to Financial Institutions
and the Public
Services to financial institutions and
the public comprise Board staff support and oversight of check payments,
electronic payments, and currency and
food coupon services provided at the
Reserve Banks.
The budget for this operational area
is $2,457,000, which is $508,000, or
26.1 percent, more than 1987 estimated
expenses. The increase is tied to two
projects: (1) a major automation initiative designed to improve the management of currency operations and
(2) implementation of legislation
passed in 1987 to expedite the availability of funds deposited in financial
institutions.
The automation project, which will
15 Board of Governors
have a direct cost of $344,000, will
allow estimated annual savings of at
least $500,000 in the System's currency
budget by reducing the number of
shipments and the volume of currency
ordered.
The Expedited Funds Availability
Act, passed by the Congress in August
1987, requires the Board to publish
rules that improve the responsiveness
of the check clearing system and
shorten the time required to make
funds available to the depositor. Two
positions were added in this operational area in late 1987 to meet the
deadlines in the legislation. The fullyear costs of these positions and related
support account for a portion of the
incremental expenses in this operational area. The 1988 budget adds no
positions to the year-end 1987 number.
System Policy Direction
and Oversight
System policy direction and oversight
covers the supervision of System and
Board programs. The budget for this
operational area, $17,749,000, is
$393,000, or 2.3 percent, more than
estimated 1987 expenses. The increase
Chart 2.1
Annual Rate of Change in Operating
Expenses of the Board of Governors,
1978-881
Percent
1978
1983
1. For 1987, estimate; for 1988, budget
1988
arises from two factors. First, the
establishment of the Office of the
Inspector General in late 1987 added
$333,000 to expenses. Second, the
number and length of position vacancies was high in 1987; the 1988 budget
assumes that filling vacancies will take
less time. These increases are largely
offset by a decrease in the development
costs of a major automation project
that provides support for administrative tasks at the Board such as personnel and payroll.
Trends in Board Expenses
and Positions
Expenses budgeted for 1988 are 4.7
percent greater than expenses estimated for 1987. As chart 2.1 shows,
this rate of increase is higher than
those for 1986 and 1987 but lower than
that for seven of the last ten years. In
that period, the highest rate of increase
was for 1980, when inflation, coupled
with the passage of the Monetary
Control Act, worked to increase the
Board's operating expenses by 12.4
percent. The low (3.3 percent) increase
in 1981 was attributable to the Board's
program to cut spending and reduce
the number of positions as well as to a
dramatic reduction in payments to the
Board retirement system to fund the
cost-of-living adjustments (COLAs)
for retirees. In 1982, without that
reduction, the rate of growth began to
rise again at a relatively stable pace
until 1985. A decrease in the rate of
growth for personnel expenses in 1986
and 1987 resulted from another program of position reductions.
Chart 2.2 compares the Board's
operating expenses in current and
constant dollars over the same 10-year
period. In current dollars, Board expenses increased an annual average of
6.4 percent between 1978 and 1988; in
16
Board of Governors
Chart 2.2
Operating Expenses of the Board of
Governors, 1978-881
of increase ranged from 2.5 percent to
3.5 percent from 1982 through 1985
as the costs of centralized automation,
primarily for programming staff, rose
to meet the requirements of the
legislation.
To stem the growth in expenses, the
Board in 1984 established the Program
Improvement Project (PIP) to raise
productivity, delete lower-priority
work, and reduce costs. PIP reduced
the number of positions at the Board
by 8.5 percent. Although in real terms
the 1988 budget is slightly higher than
the estimated expenses for 1987, it is
lower than the expenses for 1986.
Millions of dollars
80
60
1978
1983
1988
1. For 1987, estimate; for 1988 budget.
2. Calculated with the GNP implicit price deflator.
constant dollars, or real terms, expenses rose only 0.9 percent per year
on average, despite major additions to
the Board's responsibilities mandated
by the Congress over the period. Future additions to the Board's mission
or responsibilities may dictate corresponding budget increases.
In the early years of the period, real
expenses declined as salaries, a large
element in the Board's expenses, rose
less than prices. Real expenses began
to rise again in 1982, when expenses to
fund COLAs for retirees rose significantly and when the staff grew to meet
the phased-in requirements of legislation passed in 1979 and 1980. The rate
Five-Year Trend
Spending in current dollars will rise in
1988 at about the same rate as it did on
average in the 1983-88 period (table
2.4). Many factors raised the costs of
all four operational areas over the last
five years: general pay increases; the
addition of medicare payments for
federal employees and significant increases in rates for health insurance;
changes in federal retirement programs
and increased social security rates.
These cost increases were partially
offset by the savings stemming from
PIP. This section will focus on other
Table 2.4
Operating Expenses of the Board of Governors, by Operational Area, 1983-88
Thousands of dollars, except as noted
Operational area
1983
1984
1985
1988
budget
46,373
20,853
48,514
21,911
4.7
3.2
4.6
5.1
1983-88' 1987-88
41,916
18,034
2,493
2,589
2,306
1,949
2,457
4.8
26.1
14,032
15,051
16,054
17,356
17,749
7.5
2.3
Total
76,475
82,035
83,995
86,531
90,631
4.8
4.7
71,625
44,019
21,616
Percent change
1987
estimate
Monetary and economic policy 38,574
Supervision and regulation
18,721
Services to financial institutions
1,948
and the public
System policy direction and
oversight
12,382
1. Annual average.
45,136
19,259
1986
17 Board of Governors
factors, those that were unique to each
operational area.
Monetary and Economic Policy
Expenses for the monetary and economic policy operational area are
rising in 1988 at about the same rate as
that for Board expenses as a whole; the
1988 rate for this area is also about the
same as the 1983-88 average for the
area and for the Board.
From 1983 through 1985, expenses
in this area rose 8.2 percent per year on
average, responding to the tremendous
increase in the volume of data associated with the Monetary Control Act.
The drop to a 1.4 percent annual rate
of growth from 1985 through 1987
reflects PIP-related declines in expenses for staffing.
The number of positions in this
operational area has fallen sharply
over the five years. No functions have
been eliminated; rather, staff productivity has increased through automation and reorganizations that streamlined operations. The primary effect
of the reduction in staff has been a
reduction of long-term research.
Supervision and Regulation
The budgeted increment in expense for
supervision and regulation for 1988,
5.1 percent, exceeds the five-year trend
for this area and for the Board as a
whole. The increase reflects the
strengthening of the supervision effort
at the Board in recent years and the
addition of three positions in the 1988
budget.
Over the years from 1983 to 1987,
expenses first increased to support the
Neighborhood Reinvestment Corporation and to fund an increase in the
volume of data processing supporting
application processing, examinations,
and surveillance. Expenses then fell in
1984 as parts of these projects were
completed and as activity in the consumer regulation area declined.
Over the two years 1985 through
1987, expenses rose 8.3 percent to
fund the major automation initiative
in 1985 and the new positions authorized in 1986 to enhance the supervision function. The automation initiative was essential to handle the growing
volume of applications processed during the period. It also allowed more
timely analyses of troubled financial
institutions.
Services to Financial Institutions
and the Public
Expenses for services to financial institutions and the public in 1987 were
almost identical to those in 1983.
However, expenses will rise 26.1 percent in 1988, largely to develop an
automated program to improve the
management of currency distribution
and thereby to reduce costs to the
System. Incremental costs of the Expedited Funds Availability Act of 1987
also affect expenses for 1987 and 1988
in this area.
A project to limit risk from daylight
overdrafts in the electronic payments
mechanism raised expenses in 1984 and
1985. The drop in 1986 reflected the
elimination of the service pricing program and the completion of part of the
daylight overdraft project. Expenses
fell further in 1987 as the remaining
portions of the daylight overdraft
project were transferred to the monetary and economic policy operational
area.
System Policy Direction
and Oversight
The 1988 rate of increase in spending
for System policy direction and oversight is considerably below the fiveyear average annual pace for this area
and for all Board activities.
18
Board of Governors
The relatively high rate of growth in
expenses for this area during those five
years was tied to development costs for
improving office automation and administrative data management as well
as for procedures and resources to
enhance oversight of key Reserve Bank
operations. These costs have now
started to decline. In the meantime,
the investment in this area has begun to
bear fruit in the improvement of efficiency within the other operational
areas.
10-Year Trend
This section covers expenses for both
personnel and nonpersonnel services
during the 1978-88 period.
Personnel Services
From 1978 to 1988, expenses for personnel services grew at 5.4 percent per
year on average in current dollars and
fell slightly in constant dollars (chart
2.3). Until 1984, much of the growth in
this area related to increases in the
number of staff members, general pay
increases (GPIs) for Board staff, and
COLAs for retirees. The rate of increase leveled o f f in 1985, when the
GPI was only 4.0 percent, and then
declined in 1986 as a result of the
decrease in the number of positions.
Employment and Positions
On balance, from 1978 to 1988, the
number of budgeted positions declined
slightly, as chart 2.4 shows. A 1979
program to reduce positions eliminated 36 in that year. In the following
year, 67 positions were added, most of
them to handle the workload generated
by the Monetary Control Act. Thirtytwo positions were eliminated in 1981,
but increases in the workload forced
the addition of 110 more from 1981
through 1984, mostly in data processing (50 positions), in the new Contingency Processing Center (17), in the
oversight portion of the System policy
direction and oversight operational
area (15), and in the supervision and
regulation operational area (6).
PIP was responsible for abolishing
143 positions during 1985 and 1986.
During 1986, 22 other positions were
abolished in data processing as a result
of improvements in productivity and
the tightening of accountability for
these resources. But, to meet new
responsibilities and general increases
Chart 2.4
Employment and Positions at the
Board of Governors, 1978-881
Chart 2.3
Expenses for Personnel Services at
the Board of Governors, 1978-881
Number, in thousands
Millions of dollars
I
1978
!
i
I
I
I
1983
I
I
I
|
1988
1. For 1987, estimate; for 1988, budget.
2. Calculated with the GNP implicit price deflator.
i
1978
i
I
i
I
t
1983
i
i
I
f
1988
1. Year-end data. For 1987, estimate; for 1988,
budget.
19 Board of Governors
in workload, 20 positions were added
in the supervision and regulation operational area and 19 positions in other
areas.
Employment and positions are expected to remain constant from yearend 1986 through 1988, with increases
in some key areas offset by reductions
in less critical areas. Six new positions
added to the budget in 1988 support
the operational areas of supervision
and regulation and monetary and economic policy. Reductions occur mostly
in centralized data processing, by virtue of a decline in user requirements
and of gains in productivity.
of buildings and grounds; and software and supplies, for microcomputer
software. Expenses decreased significantly in only three categories during
the period: publications, as increases
in income from subscriptions have
more than offset those in expenses;
fees, as the use of consulting services
declined; and rentals, as the purchase
of high-technology equipment has become more attractive than leasing.
Nonpersonnel Services
Between 1978 and 1988, the cost of
nonpersonnel services on average rose
faster, in current and constant dollars,
than the cost of personnel services
(chart 2.5). Four accounts increased
dramatically: maintenance, mainly for
mainframe and office automation
equipment; contractual professional
services, primarily for support for
mainframe software; repairs and alterations, mainly for the care and upkeep
Millions of dollars
Chart 2.5
Expenses for Nonpersonnel Services
at the Board of Governors, 1978-881
•HHUHt * t'
1978
i
f
1983
i
i
i
i
i
1988
1. For 1987, estimate; for 1988, budget.
2. Calculated with the GNP implicit price deflator.
21
Chapter 3
Federal Reserve Banks
This chapter presents the expenses and
budgets of the Federal Reserve Banks.
An overview of all the Districts for
1988 presents the aggregate budgets
for personnel and nonpersonnel expenses, major initiatives, and the budget objective. Subsequent sections provide details for the four operational
areas, objects of expense, capital outlays, and long-term trends.
Appendix F gives further data, including a summary of the budget
performance of the Reserve Banks in
1987 and trends in expenses by operational area.
dited funds legislation will also require
$15 million of capital expenditures;
when added to the capital budget, these
costs will bring 1988 capital spending
to $240.9 million.
Personnel expenses comprise salaries and benefits and account for 62
percent of the Banks' expenses in 1988;
at $775.8 million, they are $34.1 million, or 4.6 percent, higher than estimated for 1987. This increase is partially offset by a reduction of 74, or 0.3
percent, in the average number of
personnel, to 23,031.2 This reduction
includes the effect of early retirement
programs, which the Board of Governors has approved at seven Reserve
An Overview of the 1988 Budget
Banks. Employment will be lower in
For 1988, the Board of Governors has overhead services, services to the U.S.
approved an operating budget of Treasury, and priced and nonpriced
$1,245.1 million for the Federal Re- services to financial institutions; it will
serve Banks. This is an increase of be higher in supervision and regulation
$51.9 million, or 4.3 percent, over and in monetary and economic policy.
estimated expenses in 1987 after excludNonpersonnel expenses are buding $1.1 million counted in 1987 oper- geted at $469.3 million, an increase of
ating expenses for development of $16.7 million, or 3.7 percent. These
digitized image processing of checks expenses are influenced primarily by
(table 3.1).1 The Reserve Banks have automation and building projects,
not included in their budgets the $6.2 which result in higher expenses for the
million cost in 1988 for research and following major items: depreciation
development of check image process- and maintenance of equipment, rent,
ing, a project described later in this property depreciation, and real estate
chapter. Also excluded are an esti- taxes.
mated $15 million of expenses to im2. The term "average number of personnel"
plement the Expedited Funds Availability Act. These costs bring the 1988 describes levels and changes in employment at
the Reserve Banks. ANP measures the number
operating budget for the Reserve Banks of employees in terms of full-time positions for
to $1,266.3 million, an increase of $72 the time period. For instance, a full-time emmillion, or 6.0 percent, over 1987 ployee who starts work July 1 counts as 0.5 ANP
expenses. Implementation of the expe- for that year; two half-time employees who start
1. Appendix B describes the budget process
for the Reserve Banks.
January 1 count as one ANP. The ANP for any
given year is the average of the number of
full-time employees (measured in this way) in the
months of that year.
22
Federal ReserveSystemAudits
Table 3.1
Operating Expenses of the Federal Reserve Banks, 1986-88 1
Thousands of dollars, except as noted
Item
Personnel
Nonpersonnel
Total
1986
actual
729,531
431,759
1,161,290
1987
estimate
741,724
452,547
1,194,271:
1988
budget
Percent change
1986-87
1987-88
775,805
469,297
1.7
4.8
4.6
3.7
1,245,102
2.8
4.3
1. Including the costs of support and overhead
service (see appendix F, table F.4, note 1, for definitions).
2. Includes $1.1 million for the check image process-
ing project; for 1988, the project was removed from the
operating budget and placed in a separate account. See
table F. 1.
Major Initiatives in 1988
Public Accounting and Reporting System at an increase in cost of $290,000
and is managing two savings bonds
projects at the Pittsburgh branch at a
cost of $420,000 in 1988.
Automation initiatives in the System
will add $3.9 million to operating costs
in 1988. The major projects are a
change in computer operating systems
in San Francisco ($1.3 million), the
expansion of the office automation
project in New York ($1.2 million),
and an office automation system for
Minneapolis ($600,000).
The guidelines of the Board of Governors regarding the frequency of
examinations and inspections of financial institutions and the demands for
oversight of these institutions will
continue to require more staff and
higher operating costs in supervision
and regulation: costs will rise $3.5
million in 1988, and employment in
the supervision service will increase 2.7
percent, to 2,213 ANP.
Back-up facilities are being established to handle data processing contingencies for critical operations, such
as the transfer of funds and securities;
such facilities will cost $2.9 million
more in 1988 than they did in 1987.
The most significant project is in the
New York District and accounts for
$2.6 million of the increment.
Growth in the volume of currency
Several major initiatives account for a
large percentage of the budgeted increase in Reserve Bank expenses: in
building projects, programs for the
U.S. Treasury, automation, supervision of banks and bank holding companies, contingency back-up, and improved cash operations (table 3.2).
Building projects will cost $6.6 million in 1988. The most significant are
the renovation and addition at the
Chicago building ($2.8 million); transitional costs for New York's remote
operations center ($1.6 million); a
renovation and addition at Atlanta
($800,000); asbestos containment at
Minneapolis ($400,000); the increase
in taxes, property depreciation, and
cost of utilities for the new Jacksonville
building ($300,000); and renovation
and tenant improvements in Cleveland
and Cincinnati ($500,000).
Expenses for centrally provided
Treasury services are budgeted to increase $4.7 million, or 24.3 percent,
with an increase of 82 ANP. Much of
the increase is due to the first full year
of operations of the Treasury Direct
Access Book-Entry System (Treasury
Direct) and the addition of reinvestment activity to the system. Also, the
Cleveland Bank is continuing the development of an operation called the
Federal ReserveSystemAudits23
handled by the Banks requires an
increase of $2.0 million and 59 ANP.
The Federal Reserve Banks of Boston,
Philadelphia, Richmond, Minneapolis, and San Francisco plan to add
shifts. The San Francisco District will
also add two high-speed sorting machines in its Los Angeles Branch.
Beyond the major initiatives, 0.4
percentage point of the 4.3 percent rise
in operating expense is due to increases
of $2.8 million in rent at the New York
office, of $1.4 million in the System's
maintenance contract for currency
processing equipment, and of nearly
$1.0 million in real estate taxes in
Boston.
Table 3.2 shows that budgeted 1988
expenses for operations continuing
from 1987 will rise 2.4 percent over
estimated 1987 expenses and that the
initiatives just summarized will add
Table 3.2
Effect of Major Initiatives on the 1988
Budget of the Reserve Banks
Thousands of dollars, except as noted
Item
Operating expenses
1987 estimate
1988 budget
Increase, 1987 to 1988
Thousands of dollars .
Percent
Amount
1,193,171'
1,245,102
51,931
4.4
LESS
Major 1988 initiatives:
Facilities
Programs for the U.S. Treasury
Automation
Increased supervision of banks
and bank holding companies...
Contingency back-up
Improved cash operations
Total
6,563
4,748
3,918
3,460
2,916
1,961
23,566
1.9 percent for an overall growth of 4.3
percent.
Check Image Processing
In addition to the initiatives discussed
above, the Board of Governors has
authorized further research and development of digitized image processing
of checks. The technology captures
check images electronically for computer storage and retrieval; it offers
the promise of replacing microfilm,
which the Federal Reserve uses to store
images of truncated checks, including
Treasury checks, and of speeding the
transmittal of returned checks by substituting an electronic image for the
physical check.3
Research authorized by the Federal
Reserve in 1985 and conducted on its
behalf has demonstrated the feasibility
of making a computerized image of
one side of a check at high speed under
laboratory conditions. The technical
demonstration was completed in 1987
at a cost for that year of approximately
$1.1 million, distributed across the
operating budgets of all the Districts.
The next phases, for which $6.2
million has been allocated in a specialproject account separate from the
System's operating budgets, will test
the high-speed capture of both sides of
checks plus the ability to store and
retrieve the image data. These phases
will be first conducted under laboratory conditions with a limited volume
of checks and then at a Reserve Bank
under production conditions.
The Federal Reserve will share the
results of this research with the financial community, where it might also
EQUALS
Increase excluding major
1988 initiatives
Thousands of dollars
Percent
28,365
2.4
1. Excluding $1.1 million for the check image
processing project.
3. Truncated checks are those that are not
routinely sent to the account holder when
cleared.
24
Federal ReserveSystemAudits
offer widespread benefits in the storage and exchange of check images.
Budget Objective for 1988
The 1988 objective for the Banks,
approved by the Board of Governors
in the spring of 1987, provided for the
increase in general Bank expenses
(those excluding expenses unique to
one District) to equal 4.3 percent of
total estimated 1987 operating expenses. In addition, the objective provided a 0.6 percent rise over 1987 to
cover expenses unique to one District
and a 0.5 percent increase for work on
check image processing, for an overall
expansion of 5.4 percent (table 3.3).
The Expedited Funds Availability Act
was passed too late in the Federal
Reserve budget process (August 1987)
to include its associated expenses in the
budget objective.
The approved operating budget for
general Bank expenses is 4.0 percent
higher than estimated 1987 expenses,
compared to the objective of 4.3 percent. The total budget, 4.8 percent
higher than 1987 estimated expenses,
is lower than the overall objective by
0.6 percentage point, or $7.2 million.
Table 3.3
Operational Areas
The following discussion presents Reserve Bank expenses and employment
in each of the four operational areas.
They are summarized in tables 3.4 and
3.5 and detailed in tables 3.6 through
3.9.
Monetary and Economic Policy
Expenses for monetary and economic
policy at the Federal Reserve Banks
total $91.7 million and account for
approximately 7 percent of their 1988
budgets (table 3.6). Expenses are expected to increase $3.3 million, or 3.7
percent, over 1987. Employment will
increase 7 ANP, or 0.9 percent, to 788.
The rise in cost reflects the net
addition to staff, salary actions, and
improvements in office automation.
Staff members were added in New
York for testing the replacement for
an eight-year-old system used for open
market trading, intensifying the monitoring and analysis of debt in less
developed countries, and studying the
feasibility of receiving data electronically from reporting institutions; in
Atlanta for continuing a special effort
to improve the quality of economic
research; and in Dallas for supporting
a Southwestern economic development program.
Comparison of 1988 Budget of the Reserve
Banks with 1988 Budget Objective
Supervision and Regulation
Percent increase from 1987 estimated expenses
Item
District expenses
less those unique
to one District
Expenses unique
to one District
Check image processing
project
Total
1988
budget
1988
budget
objective
4.0
4.3
.3
.6
.5
.5
4.8
5.4
Expenses for supervision and regulation, which total $183.4 million, are
expected to increase $13.3 million, or
7.8 percent, over 1987 (table 3.7). This
area now accounts for 14.7 percent of
total System expenses, compared with
12.8 percent in 1983. A staff level of
2,213 ANP is budgeted, an increase of
58, or 2.7 percent, over 1987.
Federal ReserveSystemAudits25
Table 3.4
Operating Expenses of the Federal Reserve Banks, by Operational Area, 1986-88
Thousands of dollars, except as noted
Operational area
Monetary and economic policy
Supervision and regulation
Services to financial institutions
and the public
Services to the U.S. Treasury
and other government agencies
1986
actual
1987
estimate
1988
budget
Percent change
1986-87
1987-88
90,570
163,915
88,447
170,067
91,742
183,397
-2.3
3.8
3.7
7.8
770,015
799,865
827,458
3.9
3.4
136,789
135,892
142,504
-.9
4.9
1,161,290
Total
1,194,271
1,245,102
2.8
4.3
Table 3.5
Employment at the Federal Reserve Banks, by Operational Area, 1986-88
Average number of personnel, except as noted 1
Activity
Operational areas
Monetary and economic policy
Supervision and regulation
Services to financial institutions
and the public
Services to the U.S. Treasury
and other government agencies
Support and overhead2
Support
Overhead
Total
1986
actual
1988
budget
Percent change
1986-87
1987-88
.9
2.7
791
2,087
781
2,155
788
2,213
-1.2
3.2
8,799
8,767
8,746
-.4
-.2
1,819
1,826
1,800
.4
-1.4
4,469
5,274
4,517
5,057
4,541
4,945
1.1
-4.1
.5
-2.2
23,239
23,103
23,033
-.6
-.3
1. See text note 2 for definition o f ANP.
The increase in costs is driven by
demands for resources in the bank
supervision area. These demands arise
from the continually changing conditions in the banking industry. For
example, deregulation has led bank
holding companies to develop new
service and product lines, which call
for more examinations of banks and
holding companies; moreover, firms
throughout the industry are becoming
larger and more complex.
As in the past, the Reserve Banks are
attempting to use resources more efficiently by increasing the use of personal computers in the field and in the
office, by accelerating the develop
1987
estimate
2. See appendix F, table F.4, note 1, for definitions.
ment of examiners, and by hiring
candidates with relevant experience.
Services to Financial Institutions
and the Public
The area of services to financial institutions and the public, which includes
both priced and nonpriced services, is
budgeted at $827.5 million and accounts for approximately two-thirds
of the operating expenses of the Reserve Banks (table 3.8). Expenses are
rising $27.6 million, or 3.4 percent,
above those in 1987; however, this
area accounts for only a slightly higher
share of total expenses than it did in
26
Federal ReserveSystemAudits
Table 3.6
Expenses of the Federal Reserve Banks for Monetary and Economic Policy, 1986-88
Thousands of dollars, except as noted
Percent change
1986
actual
1987
estimate
1988
budget
1986-87
1987-88
Economic policy determination
Open market trading
79,437
11,133
75,729
12,718
76,847
14,895
-4.7
14.2
1.5
17.1
Total
90,570
88,447
91,742
-2.3
3.7
Item
Table 3.7
Expenses of the Federal Reserve Banks for Supervision and Regulation, 1986-88
Thousands of dollars, except as noted
Item
Supervision of District
financial institutions
Administration of laws and regulations
related to banking
Studies of banking and financial
market structures
Total
1987
estimate
1988
budget
1986-87
1987-88
93,223
100,182
109,828
7.5
9.6
64,325
63,012
65,801
-2.0
4.4
6,367
6,873
7,768
7.9
13.0
163,915
170,067
183,397
3.8
7.8
1983. Staffing is budgeted at 8,746
ANP, which is 21 ANP, or 0.2 percent,
lower than in 1987.
Commercial check processing accounts for almost half of the budgeted
expenses in this area and, at 5,150
ANP, about 60 percent of the staff.
The increase in expenses in 1988 is
expected to be only $7.8 million, or 2.0
percent, over 1987, with a decrease of
15 A N P . Even with a smaller staff, the
System expects to handle a 2.7 percent
increase in the annual number of
checks processed, to 15.3 billion. Unit
cost is not expected to change in 1988.
Restraining the growth of expenses
are early retirement programs, the
consolidation of operations, incentive
pay for productivity increases, and a
new contract for interdistrict shipping.
Expenses associated with implementation of the Expedited Funds Availability Act are not included in these data.
Expenses for currency processing
Percent change
1986
actual
($121.5 million), which are expected to
increase $6.0 million, or 5.2 percent, in
1988, will constitute nearly 15 percent
of the budget in this area. Changes in
staffing are expected to result in a net
increase of 37 ANP, or 2.4 percent,
because of sharp increases in volume
in some Districts. Overall volume is
anticipated to expand 6.3 percent, but
unit cost is projected to rise only 0.1
percent. New contracts for maintenance on the high-speed currency sorting machines will also raise costs in
1988. The increase in staffing arising
from higher volumes at some Districts
is partially offset by a new "containerization" process at New York that
will permit a reduction of 19 A N P
there.
Expenses for the automated clearinghouse service are budgeted to rise $5.1
million, or 8.3 percent. The change
reflects a 16.6 percent expansion in
volume and an adjustment in account-
Federal ReserveSystemAudits27
Table 3.8
Expenses of the Federal Reserve Banks for Services to Financial Institutions
and the Public, 1986-88
Thousands of dollars, except as noted
Percent change
1986
actual
1987
estimate
1988
budget
1986-87
1987-88
Currency and coin
Commercial checks
Other checks
Funds transfers
Automated clearinghouse
Book-entry securities transfers
Definitive securities safekeeping
and noncash collections
Loans to members and others
Bank and public relations
Other
150,134
379,781
18,226
57,951
55,462
19,962
153,353
397,474
19,169
56,693
61,479
23,108
160,163
405,307
19,017
58,532
66,601
25,919
2.1
4.7
5.2
-2.2
10.9
15.8
4.4
2.0
-.8
3.2
8.3
12.2
19,771
12,812
35,120
20,797
18,337
13,343
36,999
19,911
18,487
13,965
38,610
20,856
-7.3
4.1
5.3
-4.3
.8
4.7
4.4
4.7
Total
770,016
799,866
827,457
3.9
3.4
Service
Table 3.9
Expenses of the Federal Reserve Banks for Services to the U.S. Treasury
and Other Government Agencies, 1986-88
Thousands of dollars, except as noted
Service
Savings bonds
Other Treasury issues
Centrally provided
Treasury agency services
Government accounts
Food coupons
Other
Total
1987
estimate
1988
budget
40,878
28,231
39,725
21,148
40,424
19,573
-2.8
-25.1
1.8
-7.4
12,972
20,627
12,131
21,950
19,560
20,328
12,261
22,870
24,308
21,824
12,574
23,801
50.8
-1.4
1.1
4.2
24.3
7.4
2.5
4.1
136,789
135,892
142,504
-.7
4.9
ing to distribute the costs of data
processing and data communications
(DP/DC) more accurately. A decrease
of 2 A N P is budgeted. Unit costs are
expected to increase 1.1 percent.
The costs for funds transfer are expected to increase $1.8 million, or 3.2
percent, on balance, reflecting a 6.1
percent rise in volume, an additional 3
ANP, and a decrease due to the D P / D C
accounting change. Unit costs are
expected to increase only 1.9 percent.
Costs for book-entry securities are
expected to increase $2.8 million, or
12.1 percent, because of an 11.7 percent increase in volume, initiatives to
Percent change
1986
actual
1986-87
1987-88
reduce risk in the payments system, the
D P / D C accounting change, and higher
costs for the maintenance of shared
software.
The budget for public relations,
which shows an increase of $1.6 million, or 4.4 percent, over 1987 expenses, pays for conferences, printed and
video materials, occupancy, educational exhibits, and postage. The staff
level is expected to decrease 6 ANP.
The " o t h e r " category will increase
$900,000, or 4.7 percent, reflecting
automation initiatives at New York
for services to other central banks that
will permit a decline of 10 ANP.
28
Federal ReserveSystemAudits
Services to the U.S. Treasury and
Other Government Agencies
Expenses for services to the U.S. Treasury and other government agencies
are budgeted at $142.5 million, an
increase of $6.6 million, or 4.9 percent,
from 1987 (table 3.9). This area accounts for approximately 11 percent
of operating costs. Staffing is budgeted
to decrease 26 ANP, or 1.4 percent, to
1,800 ANP.
Consolidation of operations and
higher levels of automation are two
influences on these costs. Several Districts are consolidating operations at
one office. The Banks are seeking
greater efficiency through the substitution of electronic ("book-entry")
records for paper ("definitive") securities and through the use of highspeed sorting machines to process food
coupons and savings bonds.
The most significant initiatives are
in centrally provided Treasury services; expenses here are budgeted to
increase $4.7 million, or 24.3 percent,
and 82 ANP will be added to the staff.
Much of this increase ($4 million and
54 ANP) occurs because 1988 is the
first full year of operation for the
Treasury Direct system and because
reinvestment activity has been added
to that system. Treasury Direct, which
handles all purchases of government
securities by individuals in book-entry
form, is managed in Philadelphia with
local operations in each District. Its
expansion permits an offsetting decrease in the operation that handles
definitive securities—"other Treasury
issues"—for which staff is decreasing
52 ANP and expenses $1.6 million.
Besides Treasury Direct, the increase
in centrally provided Treasury services
reflects three programs in the Cleveland District. First, Cleveland is continuing to develop the Public Account
ing and Reporting System, which will
increase costs $290,000 in 1988 and
require an expansion in staff of 13
ANP. Second, the Treasury has designated the Pittsburgh Branch to centralize the inscription of bonds by issuing
agents and to eliminate the need for the
consignment of savings bonds. This
program will increase costs $213,000
in 1988 and add 9 ANP. Third, the
Pittsburgh Branch will explore the use
of the Federal Reserve's high-speed
check sorting equipment to process
savings bonds. This program will require $208,000 and 6 ANP in 1988.
Consolidation of operations in the
savings bond service is expected in
four Districts and consolidation of
definitive safekeeping in one District.
These efforts are expected to reduce
staff levels. About half of the Districts
have budgeted funds for a new tax and
loan accounting system that was developed by one Bank for the U.S. Treasury under voluntary cost-sharing arrangements.
Objects of Expense
The expenses of the Federal Reserve
Banks are shown by personnel and
nonpersonnel objects in table 3.10.
Personnel expenses consist of salaries for officers and employees, other
expenses to compensate personnel, and
retirement and other benefits. Total
personnel costs account for 62 percent
of total Federal Reserve expenses and
are expected to increase $34.1 million,
or 4.6 percent, in 1988.
Salaries and other personnel expenses account for nearly 52 percent of
the Banks' budgeted expenses and are
expected to increase $24.4 million, or
3.9 percent, in 1988. Salaries are expected to increase 4.5 percent, while
other personnel expenses are expected
to decline 20.7 percent. Merit pay
Federal ReserveSystemAudits29
Table 3.10
Operating Expenses of the Federal Reserve Banks, by Object, 1986-88
Thousands of dollars, except as noted
Object
1986
1987
1988
actual
estimate
budget
Percent change
1986-87
1987-88
PERSONNEL
Officers' salaries
Employees' salaries
Other personnel
Retirement and benefits
Total personnel
56,168
523,309
16,693
133,360
729,531
59,704
547,203
13,738
121,080
741,724
62,272
571,833
10,896
130,804
775,805
6.3
4.6
- 17.7
-9.2
1.7
4.3
4.5
-20.7
8.0
4.6
3,096
40,665
68,000
38,998
150,760
3,964
34,434
76,578
43,604
158,579
2,820
27,416
82,874
49,510
162,621
28.0
-15.3
12.6
11.8
5.2
-28.9
-20.4
8.2
13.5
2.5
Buildings
Insurance
Taxes on Real Estate
Property Depreciation
Utilities
Rent
Other
Total buildings
610
22,213
23,549
22,809
14,976
13,607
97,765
887
21,871
26,466
23,047
17,461
18,499
108,231
917
24,666
29,525
24,127
20,814
17,948
117,997
45.3
-1.5
12.4
1.0
16.6
36.0
10.7
3.4
12.8
11.6
4.7
19.2
-3.0
9.0
Shipping
Postage
Other
Total shipping
13,464
68,416
81,880
12,337
69,845
82,181
13,275
69,351
82,626
-8.4
2.1
.4
7.6
-.7
.5
46,005
19,775
15,255
11,207
9,114
101,356
46,725
22,086
12,570
11,223
10,951
103,555
47,952
22,965
12,602
9,577
12,956
106,052
1.6
11.7
- 17.6
.2
20.2
2.2
2.6
4.0
.3
-14.7
18.3
2.4
431,760
452,547
469,297
4.8
3.7
1,161,290
1,194,271
1,245,102
2.8
4.3
NONPERSONNEL
Equipment
Purchases
Rentals
Depreciation
Repairs and maintenance
Total equipment
Other
Supplies
Travel
Communications
Fees
Other
Total other
Total nonpersonnel
Total
increases of 4.8 percent are partially
offset by reductions in overtime expenses. Salary increases for promotions, adjustments in structure, and
reclassifications are offset by an increase in turnover (the replacement of
a departing employee by one with a
lower salary) and by an increase in the
time a position remains vacant. The
decline in other personnel expenses
reflects primarily the decline in the use
of computer programmers on contract.
Each Federal Reserve office bases
its salary structure for staff members
other than officers on annual surveys
of compensation offered by major
employers in its community. Nationwide surveys are used to adjust the
structure of officers' salaries.
Expenses for retirement and other
benefits, which account for 10 percent
of the Banks' budgeted expenses, are
projected to increase $9.7 million, or
8.0 percent, in 1988. This increase
reflects higher costs for hospital, medical, and dental insurance, along with
the effect of large claims in several
Districts; an increase in the tax rate for
social security; an increase in benefits,
30
Federal ReserveSystemAudits
reflecting payments to employees accepting early retirement; and resumption of normal group life insurance
premiums (the Districts did not have to
pay any in 1987).
Nonpersonnel expenses account for
38 percent of the Banks' expenses and
are projected to increase 3.7 percent.
Equipment accounts for 13 percent of
the Banks' expenses and are budgeted
to increase 2.5 percent. Developments
in priced services are responsible for
the rise in equipment costs: initiatives
to meet the changing needs and demands of check collection; efforts to
standardize automation and communication systems in response to the
consolidation of financial institutions;
progress toward encrypting communication links for various users of priced
services; and continued work to expand and upgrade electronic networks
that provide information to financial
institutions.
Building expenses, which account
for 9 percent of total expenses, are
expected to increase 9.0 percent in
1988. Building renovations and repairs
at Chicago, New York, Cleveland, and
Dallas contribute to increases in depreciation, taxes on real estate, and utility
expenses. Rental expenses are 19.2
percent higher, primarily because of
the $2.8 million increase at New York.
These increases will be partially offset
by a decline in other building costs,
which were swollen in 1987 in the
majority of Districts by one-time,
outside contractual expenses.
Shipping costs, which account for
nearly 7 percent of 1988 budgeted
expenses, will increase only 0.5 percent, as savings from a renegotiated
contract for interdistrict transportation will offset an anticipated increase
in postal rates.
Other nonpersonnel expenses will
rise only 2.4 percent. Increases in
expenditures for travel—primarily for
supervision and regulation—and for
supplies, will be offset by projected
declines in fees.
Capital Outlays
Capital outlays of the Reserve Banks
are budgeted at $225.9 million, an
increase of $66.0 million, or 41.3
percent, from the 1987 level (table
3.11). Capital budgets continue to be
dominated by outlays for data processing and data communications equipment and for buildings.
Outlays for data processing and data
communication equipment total $92.8
million in 1988, approximately 41
percent of the total capital budget.
This equipment includes new mainframes or upgrades for Dallas ($6.4
million), San Francisco ($4.8 million),
the Los Angeles Branch ($4.3 million),
Atlanta ($2.8 million), Richmond ($1.8
million), Chicago ($1.4 million), and
St. Louis ($1.4 million). New or upgraded check processing equipment is
expected at Chicago ($8.2 million),
Cleveland ($5.2 million), Atlanta ($2.8
million), and Richmond ($2.5 million).
Outlays for computer peripheral equipment are planned at New York ($4.1
million), Cleveland ($3.2 million),
Chicago ($2.6 million), and Richmond
($2.4 million). Other major outlays
result from office automation projects
for New York ($3.6 million) and Minneapolis ($1.3 million).
Building outlays total $86.2 million
in 1988, about 38 percent of the total
capital budget. The bulk of these
outlays are in additions and improvements at Chicago ($35.0 million) and
Atlanta ($2.6 million). New buildings
are budgeted for Charlotte ($18.5
million) and Helena ($500,000). The
initial phases of two building projects
are budgeted for 1988: a remote operations center in New York ($1.5
million, exclusive of land) and fees to
Federal ReserveSystemAudits31
Table 3.11
Capital Outlays of the Federal Reserve Banks, by Class of Outlay, 1986-88
Thousands of dollars, except as noted
Class
Data processing and data
communications equipment
Furniture and other equipment
Land and other real estate
Buildings
Building machinery and equipment
Leasehold improvements
Total
1986
actual
1987
estimate
68,246
19,623
432
69,930
3,697
3,389
54,892
20,151
6,475
67,844
7,814
2,748
165,317
159,924
1988
budget
Percent change
1986-87
1987-88
92,833
24,435
7,137
86,209
12,296
3,008
-19.6
2.7
1,398.8
-3.0
111.4
-18.9
69.1
21.2
10.2
27.1
57.4
9.4
225,918
-3.3
41.3
consider alternative space at Cleve- million, primarily for the Cranford
land ($1.0 million). Asbestos abate- regional check processing center in the
ment continues in 1988 at Chicago New York District. Most of the New
($1.8 million), St. Louis ($500,000), York Bank's check processing will be
San Francisco ($400,000), and Dallas relocated there as the initial step in the
($400,000). Minneapolis has an ex- Bank's strategy to open its remote
tensive asbestos problem, but proj- operations center.
ect costs for removal were not
available.
Trends in Expenses
Purchases of furniture and other
and Employment
equipment are budgeted for $24.4
million. Major outlays are planned to For the 10 years ending in 1988, the
coincide with building improvements expenses of the Reserve Banks have
at Atlanta ($3.4 million) and Chicago increased 6.6 percent per year on
($1.2 million). New York continues its average in current dollars and 1.3
currency containerization project at a percent per year in 1978 dollars measured with the GNP implicit price
cost of $1.2 million.
Capital outlays for building machin- deflator (chart 3.1). Increases were
ery and equipment are budgeted at
$12.3 million. Atlanta's budget of
$900,000 is related to its building Chart 3.1
addition. Other major items are new Operating Expenses of the Federal
1
or upgraded power-smoothing equip- Reserve Banks, 1978-88
Billions of dollars
ment or uninterruptible power systems at Chicago ($1.8 million), Boston
($1.5 million), Philadelphia ($1.3 million), Cleveland ($800,000), Atlanta
($400,000), San Francisco ($400,000),
and Dallas ($100,000).
Purchases of land and other real
estate are budgeted at $7.0 million,
allocated mostly to purchase land for
the remote operations center at New
York.
1. For 1987, estimate; for 1988, budget.
2. Calculated with the GNP implicit price deflator.
Leasehold improvements total $3.0
32
Federal ReserveSystemAudits
Chart 3.2
Table 3.12
Employment at the Federal Reserve
Banks, 1978-881
Changes from 1987 to 1988 in Volumes
and Unit Costs of Federal Reserve
Bank Services
ANP, in thousands2
Percent
Service
Payments
Commercial checks
Automated clearinghouse
Funds transfers
Other
1978
1983
1988
1. For 1987, estimate; for 1988, budget.
2. See text note 2 for definition of ANP.
largest during the early 1980s, when
the Banks began implementing the
requirements of the Monetary Control
Act (MCA) and the high rate of inflation drove up wages. From 1980 to
1983, normal expenses increased an
average of 9.1 percent per year in
current dollars, while the rate of inflation averaged 6.6 percent. Since then,
a much lower trend has been evident,
with nominal expenses rising an average of 3.9 per year, and prices an
average of 3.0 percent.
Over the last decade the number of
employees at the Reserve Banks has
declined 448 ANP, or 1.9 percent
(chart 3.2). In 1974, employment at
the Reserve Banks peaked at 26,567
A N P ; it declined a total of 3,624, or
13.6 percent, over the next five years
under a Systemwide program to increase productivity. Employment increased in 1980 and 1981 because of
the M C A ; however, over the next three
years, employment declined a total of
1,320, or 5.5 percent, reaching 22,669
in 1984, its lowest level in the 1978-88
period. Employment rose again in 1985
and 1986 as bank examiners were
added and actions were taken to handle
increasing volume. Employment is
expected to decline 136 A N P in 1987,
in part because of budget restraint in
the spirit of the Gramm-Rudman
Volume
Unit cost
4.5
2.7
16.6
6.1
1.7
.5
.2
1.1
1.9
1.6
5.0
6.3
-2.3
.7
.1
4.8
-3.1
-.7
-27.5
-.3
33.6
6.9
3.8
24.7
4.9
.3
Securities
and noncash services
6.0
4.3
All
3.7
1.5
Cash
Currency
Coin
Fiscal agency
Savings bonds
Other Treasury issues
Other fiscal agency
Treasury Direct
Hollings legislation. In 1988, employment is budgeted to decline 74 ANP, as
measures to control costs, mostly in
support and overhead, offset the added
staff needed for supervision and regulation and the growth in the number of
items handled.
Volumes and Unit Costs
Total volume for all measured services
of the Reserve Banks in 1988 is budgeted to increase 3.7 percent over 1987,
and unit costs are expected to increase
1.5 percent (table 3.12). The rise in unit
costs is derived mainly from fiscal
agency services, where volumes are
declining relative to costs, and from
securities services, where expenses are
increasing relative to volumes. Unit
costs in the two largest operations,
check and currency, are expected to
rise only slightly. On average, over the
five years from 1983 to 1988, total
volume increased 4.3 percent per year,
while unit costs in current dollars
decreased 0.1 percent per year.
Part II
Special Analysis
35
Chapter 4
Review of Fiscal Agency Services
As fiscal agents of the United States,
the Federal Reserve Banks provide a
variety of services to the public and to
depository institutions on behalf of
federal agencies. The U.S. Treasury,
in fact, is the single largest user of
Federal Reserve Bank services. In
1987, the Reserve Banks spent an
estimated $206 million, or 17 percent
of total operating expenses, in providing fiscal services to government agencies and the public.1 They expect to
spend $217 million in 1988. The System's legal mandate for providing
these services is different from the
mandate in the Monetary Control Act,
which guides the provision of Federal
Reserve Bank services to depository
institutions. This review looks at the
mandate for fiscal agency services, the
scope of services provided to government agencies, and the reimbursement
to the System for those services.
cies. This function was added two years
later at the request of Secretary of the
Treasury W.G. McAdoo, who on November 24, 1915, appointed the Federal Reserve Banks as "fiscal agents"
of the United States.2 Almost immediately, U.S. government funds on deposit with national banks were transferred to the Treasury's account at
each Federal Reserve Bank; these accounts established the Reserve Banks
as an integral part of the mechanism by
which the U.S. Treasury collected and
disbursed funds on behalf of the federal government.
Services for the Treasury and other
government agencies were added over
time. For example, the Banks' securities services—including distribution,
redemption, and safekeeping—began
in May 1917 with the first Liberty
Bond offering to finance the U.S.
effort in World War I. After the war,
the government's growing need to
borrow from the private sector comHistorical Background
pelled the Treasury to seek an alterThe original Federal Reserve Act, native to its limited network of
signed into law in 1913, did not give the Subtreasuries.3 When the SubtreasuFederal Reserve Banks a role in provid- ries closed in 1921, the functions related
ing fiscal services to government agen- to financing the public debt were
transferred to the Reserve Banks. The
role of Reserve Banks as fiscal agents
expanded when Series E savings bonds
1. The costs the Reserve Banks incur in
providing fiscal agency services are divided
were introduced in 1941 to help finance
between two operational areas. The area of
World War II. Today, the savings
services to the U.S. Treasury and other governbond operation is the largest of the
ment agencies accounted for an estimated $136
million in 1987. The remaining $70 million
pertains to certain fiscal services, such as government funds transfers and automated clearinghouse payments, Treasury book-entry services,
and check processing, that are counted under the
area of services to financial institutions and the
public. See chap. 3 and appendix A for details
about operational areas of the Reserve Banks.
2. A fiscal agent is a person or entity authorized by another person or entity to act on its
behalf in financial matters.
3. The system of Subtreasuries provided
access to depository institutions in regional
money centers.
36
Review of Fiscal Agency Services
fiscal agency services provided by the
Reserve Banks.
When the Reserve Banks began to
provide securities services to the Treasury in 1917, Secretary McAdoo initiated the reimbursement of the Banks
for the cost of the services. In a wire to
each of the Banks on May 1, 1917, he
stated that " i t will be understood that
the Federal reserve banks will be reimbursed for all direct expenditures connected with this work and approved by
the Treasury Department.'' This directive governed Treasury practice on
reimbursement until 1920, when the
Federal Reserve Act was amended to
lay a more formal legal basis for fiscal
agency. The amendment allowed the
secretary of the Treasury to require
fiscal services from the Reserve Banks
but declared that compensation to the
Banks, while possible and legal, was
not mandatory. 4
4. Authority for reimbursement to fiscal
agents is provided by 31 USC 3302(f) as follows:
" ( 0 When authorized by the Secretary, an
official or agent of the Government having
custody or possession of public money, or
performing other fiscal agent services, may be
allowed necessary expenses to collect, keep,
transfer, and pay out public money and to
perform those services. However, money appropriated for those expenses may not be used to
employ or pay officers and employees of the
Government."
Table 4.1
Expenses and Reimbursements for Fiscal Agency Services Provided
to the U.S. Treasury by the Federal Reserve Banks, Calendar Years 1985-88
Millions of dollars, except as noted
Service
Savings bonds
Marketable securities
Commercial book entry
Interest coupons
Treasury Direct
Accounts processing
Funds transfers
Automated clearinghouse
Collections
Check processing
Other
1985
actual
37.7
31.1
3.5
2.4
7.5 1
20.0
.3
29.2
2.5
15.0
6.2
1986
actual
40.9
28.2
14.0
2.1
13.01
20.6
.3
30.3
2.7
15.6
5.8
1987
estimate
1988
budget
39.7
21.1
16.2
1.8
19.6
20.3
.3
31.2
3.2
15.9
5.4
40.4
19.6
18.1
1.8
24.3
21.8
.3
32.7
3.4
16.0
5.3
Total 2
155.4
173.5
174.7
183.7
Reimbursement from Treasury...
Unreimbursed expenses
52.2
103.2
31.3
142.2
42.0
132.7
43.0
140.7
66.4
82.0
76.0
76.6
Percent unreimbursed
1. Comprises mostly development expenses. Treasury Direct was developed for the Treasury by the
Federal Reserve Bank of Philadelphia, which operates
the system. Implemented in July 1986, the system
enables the Treasury to eliminate definitive (physical)
securities by maintaining book-entry (electronic) accounts for individual investors. Over time, the costs of
the marketable securities service should decline as
outstanding definitive issues are retired or redeemed
and new issues placed on the Treasury Direct system in
book-entry form.
2. Not all of these expenses are currently claimed for
reimbursement.
37 Review o f Fiscal A g e n c y Services
Table 4.2
Description of Fiscal Agency Services Provided by the Federal Reserve Banks
to the U.S. Treasury
BUREAU OF THE PUBLIC DEBT
Marketable securities/special issues
Maintain stocks o f unissued Treasury securities
Provide Treasury securities information
Process applications and maintenance transactions
for Treasury bills, notes, and bonds
Conduct intermediate exchange transactions
Redeem eligible securities
Pay interest on book-entry securities
Pay matured coupons on obligations as authorized
Pay principal and interest on state
and local government securities
Account for all Treasury securities
and all public debt receipts and expenditures
Process lost or stolen claims for Treasury securities
Provide information returns to IRS on matured
Treasury bearer securities and coupons
Prepare Treasury investor classification reports
Process telegraphic transfers of securities
Maintain accounts reflecting securities held
in book-entry form
Conduct auctions for marketable securities
Savings bonds
Maintain stocks of unissued savings bonds and
notes
Instruct issuing and paying agents and advise public
Qualify issuing and paying agents
Process applications or payments for individual
or payroll bonds
Process appropriate claims
Reissue savings bonds
Redeem savings bonds submitted directly
by individuals or by nonauthorized
paying agents
Account for registration stubs for sales
and paid bonds and ship
Issue Treasury checks
Confirm and reconcile agents' on-hand balance
of unissued stock
Process adjustments
Duplicate and distribute redemption tables on
magnetic tape
Process series H and H H (savings bonds) checks
and A C H interest payments for the
Parkersburg office
Provide statistical information on sales
FINANCIAL MANAGEMENT SERVICE
Process federal tax deposits
Maintain Treasury tax and loan accounts
H o l d collateral for public funds
Process government checks and deposits
Process electronic funds transfers
Process recurring federal payments
Maintain letter of credit
Execute securities purchase and sale
at Treasury's request
Provide investment functions for government
and trust fund accounts
Maintain Treasury's general account
Verify, account for, and destroy unfit currency
Prepare investor classification reports
and forward them to the Treasury
Process telegraphic transfers of securities
(CPD transfers)
Maintain accounts reflecting securities held
on book-entry form
Process government checks (IRS, Bureau of the Mint)
Refund reclamation (IRS)
Government deposits (IRS)
OFFICE OF THE ASSISTANT SECRETARY
FOR INTERNATIONAL AFFAIRS
Exchange Stabilization Fund
Conduct foreign exchange or investment
transactions
Maintain foreign currency and investment accounts
Invest any dollar proceeds of foreign exchange
transactions
Provide information and analysis
Treasury Foreign Currency Reports
and Treasury International Capital Reports
Receive reports on foreign currency and on claims
and liabilities of foreigners from banks
and nonbanks and review for accurracy
Consolidate reports for all Districts
Provide data services, including programming
support for computer time-sharing
OFFICE OF THE ASSISTANT SECRETARY
FOR ENFORCEMENT AND OPERATIONS—
FOREIGN ASSET CONTROL
Process applications for licenses to conduct
business with certain regulated countries
or from individuals in those countries
to conduct business in the United States
and forward to Treasury for review
Advise applicants o f acceptance or rejection
BUREAU OF ALCOHOL, TOBACCO, AND FIREARMS
Safekeeping of valuables seized in investigations
Safekeeping of securities deposited in lieu
o f surety bonds
Supply currency for investigation
U . S . CUSTOMS SERVICE
Safekeeping of securities
Certifying foreign exchange rates pursuant
to the T a r i f f Act o f 1930
Transit check processing
Safekeeping of confiscated items
Check deposits
Check collection
38
Review of Fiscal Agency Services
Table 4.3
Fiscal Agency Services Provided to Non-Treasury Principals
by the Federal Reserve Banks, by Receiving Entity 1
Securities activity
Entity
Issuing
Servicing
Redeeming
Account
processing
Payment of
registered
interest
African development Bank
Asian Development Bank
Department of Agriculture
Commodity Credit Corporation
Farm Credit Administration
Farmers Home Administration
Food and Nutrition Service
Department of Housing and Urban
Development, Government
National Mortgage Association
Federal Home Loan Bank Board
Federal Home Loan Mortgage
Corporation
Federal National Mortgage Association
Inter-American Development Bank
International Bank for Reconstruction
and Development
Small Business Administration
Student Loan Marketing Association..,
U.S. Postal Service
Washington Metropolitan Area
Transit Authority
For notes, see end of table.
Fiscal Agency Services
I n 1987, services to the U.S. Treasury
accounted for 85 percent, or $175
million, of the fiscal agency costs the
Reserve Banks incurred (table 4.1).
The other 15 percent, or $31 million,
was spent on fiscal services to other
domestic public agencies and to international agencies in which the U.S.
participates. For 1988, the Banks have
budgeted $184 million for Treasury
services and $33 million for services to
the other organizations.
Three units account for most of the
services the Banks perform for the
Treasury: the Bureau of the Public
Debt, the Financial Management Service, and the Office of the Assistant
Secretary for International Affairs.
The Office of the Assistant Secretary
for Enforcement and Operations—
Foreign Asset Control, the Bureau of
Alcohol, Tobacco, and Firearms, and
the Customs Service also receive fiscal
services (table 4.2).
For the Bureau of the Public Debt,
the Reserve Banks issue, service, and
redeem Treasury securities and savings
bonds. These activities were the single
largest component of the fiscal services
the Reserve Banks provided in 1987,
accounting for $98.4 million, or nearly
half, of the fiscal agency expenses in
that year.
The Financial Management Service
uses the Reserve Banks to process
federal tax deposits, Treasury tax and
loan accounts, government checks,
and automated clearinghouse payments, and to maintain the Treasury's
general account. These services cost
the Reserve Banks $75.7 million in
1987.
39 Review of Fiscal Agency Services
Table 4.3—Continued
Securities activity
Entity
IRS
information
reporting
Payment of
book-entry
interest
Securities
safekeeping
Coupon
processing
Miscellaneous2
African Development Bank
Asian Development Bank
Department of Agriculture
Commodity Credit Corporation
Farm Credit Administration
Farmers Home Administration
Food and Nutrition Service
Department of Housing and Urban
Development, Government
National Mortgage Association
Federal Home Loan Bank Board
Federal Home Loan Mortgage
Corporation
Federal National Mortgage Association .
Inter-American Development Bank
International Bank for Reconstruction
and Development
Small Business Administration
Student Loan Marketing Association
U.S. Postal Service
Washington Metropolitan Area
Transit Authority
1. These services are performed by most Federal
Reserve Banks. Principals receive their fiscal agency
services directly from a Reserve Bank or Branch.
The Reserve Banks serve the Office
of the Assistant Secretary for International Affairs in connection with the
exchange stabilization fund, foreign
currency reports, foreign capital reports, and foreign asset controls. Reserve Bank expenses for these activities
were $1.1 million in 1987.
The level and scope of fiscal agency
services to the Treasury increased
significantly in 1986, reflecting its need
both for changes in existing service
and for new services.5 Most initiatives, including those requiring substantial resources or involving policy
5. Requests for new services and projects
develop through multilevel contacts among staff
members of the Federal Reserve and of the
Treasury. Operations personnel routinely exchange ideas and resolve problems during visits
and through task forces and committees.
2. Legend:
a. Processing receipts and disbursements.
b. Processing food coupons.
c. Processing postal money orders.
issues, must be approved by the Board
of Governors even though the secretary of the Treasury has the authority
to direct the Federal Reserve Banks to
provide service.
In general, the Reserve Banks provide the following fiscal services to the
U.S. Treasury and approximately 30
other public organizations:
Securities activities
Issuing: The Banks announce original
issues of agency securities; respond to
public inquiries; receive subscriptions,
allotments, and payments; inscribe
registered securities; issue adjustment
checks; and send securities to the
customer.
Servicing: In the period preceding
the maturity of an issue, Banks maintain unissued stock and exchange,
convert, and transfer bearer, regis-
40
Review of Fiscal Agency Services
Table 4.4
Fiscal Agency Services Provided to Nonprincipals
by the Federal Reserve Banks, by Receiving Entity and Provider 1
Federal Reserve Bank or Branch 2
Entity
Boston
Department of Agriculture,
Forest Service
Department of Defense
Department of Education
Department of Health and
Human Services
Department of Housing and
Urban Development
Department of Interior
Bureau of Indian Affairs
Bureau of Land Management
Department of Justice, Immigration and
Naturalization Service
Department of Labor, Workman's
Compensation
Department of Transportation,
U.S. Coast Guard
District of Columbia Armory Board
Export-Import Bank
Federal Deposit Insurance Corporation ..
International Finance Corporation
United States Courts
Urban Mass Transportation
Administration
i
Philadelphia
Pittsburgh
Richmond
Chicago
St.
Louis
d
a
d
d
e
e,b
a,g
1. Nonprincipals usually receive their fiscal agency
services indirectly from a Reserve Bank or Branch
through a depository institution.
2. Legend:
a. Securities safekeeping.
b. Securities safekeeping for instructions in receivership; charges billed directly to institutions.
tered, interim, and book-entry forms
of the issue.
Redeeming: The Banks verify the
securities presented for redemption in
bearer, registered, and book-entry
form; calculate and pay the interest;
and ship the redeemed definitive securities to the appropriate agency. For
some agencies, this service also includes processing semiannual payments of interest on book-entry securities and payment of interest on
registered securities.
Processing accounts: The Banks
make entries, analyze the accounts,
and prepare statements, reports, and
transcripts.
Reporting IRS information: The
New
York
a,c
c. Processing accounts, including receipt and
processing of various forms of payment.
d. Redeeming maturing securities and coupons.
e. Processing FDIC receivership drafts.
f. Buying and selling securities.
g. Maintaining book-entry accounts.
h. Cashing large government checks for payrolls.
i. Maintaining accounts.
j. Redeeming maturing securities.
Banks report to the Internal Revenue
Service on form 1099 all interest paid,
in conformance with the Tax Equity
and Fiscal Responsibility Act of 1982
and the Interest and Dividend Tax
Compliance Act of 1983.
Safekeeping: The Banks maintain
and update balances for safekeeping
accounts of definitive and book-entry
securities; prepare and distribute periodic statements; make switches, withdrawals, and deliveries; detach maturing coupons and withdraw maturing
securities for presentment to owners or
paying agents; and effect secondary
market transfers of book-entry securities . This service also includes handling
purchase and sale orders in the second-
41 Review of Fiscal Agency Services
Table 4.4—Continued
Federal Reserve Bank or Branch 2
Entity
Minneapolis
Department of Agriculture,
Forest Service
Department of Defense
Department of Education
Department of Health and
Human Services
Department of Housing and
Urban Development
Department of Interior
Bureau of Indian Affairs
Bureau of Land Management
Department of Justice, Immigration and
Naturalization Service
Department of Labor, Workman's
Compensation
Department of Transportation,
U.S. Coast Guard
District of Columbia Armory Board
Export-Import Bank
Federal Deposit Insurance Corporation .
International Finance Corporation
United States Courts
Urban Mass Transportation
Administration
ary market for Treasury and agency
securities.
Processing coupons
The Banks verify, sort, and balance
the securities coupons; make payment;
cancel and ship the redeemed coupons
for destruction by the appropriate
agent; maintain accounting records;
and prepare the forms for withholding
of tax on nonresident aliens.
Processing postal money orders
The Banks receive and process money
orders and accompanying cash letters
from depositors, make adjustments,
and handle return items.
Kansas
City
d
a,f
Denver
1
Dallas
San
Portland
Francisco
f,b
Processing food coupons
On behalf of the Department of Agriculture, the Banks receive the food
coupons from depository institutions,
credit their accounts, verify the deposits, and destroy the coupons.
Apart from the Treasury, some of
the entities receiving these services are
"principals"—that is, they receive
fiscal services directly from a Reserve
Bank or Branch (table 4.3). "Nonprincipals" usually receive their fiscal
agency services indirectly, via depository institutions (table 4.4). In 1987,
the Banks spent $31 million on fiscal
services apart from those to the Treasury, and they expect to spend $33
million in 1988 (table 4.5).
42
Review of Fiscal Agency Services
Table 4.5
Expenses and Reimbursements for Fiscal Agency Services Provided to Principals
and Nonprincipals by the Federal Reserve Banks, Calendar Years 1985-88 1
Millions of dollars
1985
actual
1986
actual
1987
estimate1
1988
budget
Securities activity
Safekeeping securities services
Coupon processing
Food coupon processing
Postal money-order processing
7
6
1
12
3
7
6
1
12
3
10
5
1
12
3
11
5
1
13
3
Total
29
29
31
33
Reimbursement
Unreimbursed expenses
29
0
29
0
31
0
33
0
Service
1. Excludes services to the U.S. Treasury. See tables
4.3 and 4.4 for the lists of principals and nonprincipals
and a more detailed list of services.
Reimbursement for Fiscal Services
As noted above, the Treasury and
other agencies receiving fiscal services
from the Reserve Banks are permitted
by law to reimburse the Banks. Historically, the other agencies have made
full reimbursement (table 4.5). Although the Treasury has agreed in
principle to make reimbursement, it
has not been fully able to do so in
recent years because it has not obtained
adequate funding from the Congress.
Except for the last several years, compensation from the Treasury has
ranged between 40 and 50 percent of
Reserve Bank expenses; recently, it has
fallen substantially (table 4.6). The
payment from the Treasury for fiscalyear 1988 is expected to be $43 million,
or about 24 percent of the Reserve
Banks' expenses for services to the
Treasury.
Table 4.6
Expenses and Reimbursements for
Fiscal Agency Services Provided to the
U.S. Treasury by the Federal Reserve
Banks, Fiscal Years 1978-88 1
Millions of dollars, except as noted
Year
Expenses
ReimPercent
bursement reimbursed
1978
1979
1980
82
85
94
38
38
45
46
45
48
1981
1982
1983
1984
1985
96
116
131
137
157
46
48
52
61
59
48
41
40
45
38
1986
1987 estimate ..
171
174
30
41
18
24
1988 budget....
177
43
24
1. Data not available for earlier years.
Appendixes
45
Appendix
A
Mission and Operational Areas
of the Federal Reserve System
In their budgets the Federal Reserve
Banks and the Board of Governors
divide their activities into four major
operational areas: monetary and economic policy, supervision and regulation of financial institutions, services
to financial institutions and the public,
and services to the U.S. Treasury and
other government agencies.1 This appendix describes each of these areas in
detail.
System open market operations; it
comprises the Board, the President of
the Federal Reserve Bank of New
York, and, on a rotating basis, the
presidents of four other Reserve Banks.
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 in weekly and monthly statistical releases on the monetary aggregates, interest rates, bank credit, exchange rates, and so on. The research
Monetary and Economic Policy
staffs at the Board and the Reserve
The Federal Reserve contributes to the Banks use this information, along with
attainment of the nation's economic data collected by other public and
and financial goals through its ability private institutions, to assess the state
to influence money and credit in the of the economy and the relationships
economy. The System has several tools between the financial markets and
to affect the availability and cost of the economic activity. Staff members pronation's money and credit: setting of vide background for the Board and
reserve requirements; setting of the each meeting of the FOMC by prepardiscount rate; and the primary tool of ing detailed economic and financial
monetary policy, open market opera- analyses and projections for the domestic economy and international martions.
The seven-member Board of Gover- kets. In addition, they conduct longernors sets reserve requirements, and it run economic studies of issues at the
acts on requests from the Federal regional, national, and international
Reserve Banks to adjust the discount levels.
rate. The Federal Open Market Committee (FOMC) meets in Washington
eight times per year, usually twice each Supervision and Regulation
business quarter, to set policies for Under the authority of the Federal
Reserve Act and the Bank Holding
Company Act of 1956 as amended, the
Federal Reserve System plays a major
1. Services to the U.S. Treasury and other
role in the supervision and regulation
government agencies is an operational area
unique to the Federal Reserve Banks. The fourth of banks and bank holding companies.
operational area for the Board of Governors,
The System conducts its oversight
System policy direction and oversight, provides
responsibilities through on-site examiresources for the supervision of Board and
nations and inspections of state memSystem programs and is discussed in chap. 2.
46
Mission and Operational Areas
ber banks and bank holding companies; off-site surveillance and
monitoring of financial institutions;
review of applications for mergers,
acquisitions, and changes in control;
formal supervisory actions; and adoption and enforcement of regulations to
carry out statutory directives. Under
the Bank Holding Company Act, the
Board is also responsible for assuring
that all activities of bank holding companies are "closely related to banking
and a proper incident thereto."
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. The Monetary Control Act of
1980 expanded that role by extending
the privilege of borrowing from the
Federal Reserve to all depository institutions whose liabilities are subject to
reserve requirements.2
The Board of Governors establishes
System supervisory and regulatory
policies; the Reserve Banks conduct
on-site examinations and inspections,
review various types of applications
from banks and bank holding companies, and implement other supervisory
programs. The System makes available
to the public nonidentifying information it periodically collects on the
condition and income of banks and
bank holding companies.
Over the past two years, the System
has intensified its supervision of state
member banks and bank holding com-
2. Depository institutions are commercial
banks, savings banks, savings and loan associations, and credit unions.
panies in light of the rising number of
failing and problem banks. In 1987,
the Board and the Banks conducted
835 examinations of state member
banks, an increase of 3.6 percent over
1986, and 2,633 inspections of bank
holding companies and their subsidiaries, an increase of 12.5 percent over
1986. The System also reviewed 2,404
applications from foreign and domestic bank holding companies, an increase of 4.3 percent over 1986.
The Board enforces compliance by
state member banks with the federal
laws protecting consumers in their use
of credit. In 1987, the System conducted examinations for such compliance at about 625 banks.
The Board's supervisory responsibilities also extend to foreign operations
of U.S. banks and, under the International Banking Act, to U.S. operations
of foreign banks.
Services to Financial Institutions
and the Public
The Federal Reserve System plays a
central role in the nation's payments
mechanism, which consists of many
independent systems designed to move
funds among financial institutions
across the country. The Federal Reserve distributes currency and coin,
processes checks for collection, operates electronic funds transfer networks, and provides for transfers of
securities and for coupon collection.
Ensuring that the supply of currency
and coin meets the public's demand
for cash is the responsibility of the
Federal Reserve. The Reserve Banks
obtain currency and coin from the
Bureau of Engraving and Printing and
the Mint and distribute it to the public
through depository institutions. The
Banks use highly sophisticated equipment to count cash, identify counter-
47 Mission and Operational Areas
feits, and destroy currency that is unfit
for circulation. In 1987, the Reserve
Banks paid out $233.8 billion in currency and $4.2 billion in coin and
destroyed $44.9 billion of unfit currency, an increase of roughly 90 percent over 1980 in all three activities.
The Reserve Banks collect and clear
checks under the specific authority of
the Federal Reserve Act of 1913. The
Banks, Branches, and regional checkprocessing centers currently clear approximately 15 billion checks each year
with an average daily value of more
than $40 billion. Most checks deposited with the Federal Reserve are collected on the day they are deposited or
on the next business day.
The Federal Reserve also plays a
central role in the nation's payments
mechanism through its electronic wire
transfer system, Fedwire. Depository
institutions can draw on their reserves
or clearing accounts at the Reserve
Banks through Fedwire and transfer
funds anywhere in the country within
minutes. Approximately 5,800 depository institutions use Fedwire through
direct computer connections with Federal Reserve Banks, and another 5,400
institutions use Fedwire through offline means such as telephone and telex.
During 1987, approximately 53 million
transfers valued at about $152 trillion
were sent over Fedwire, an average of
$2.9 million per transfer and $605
billion per day.
The Federal Reserve allows participants in private clearing arrangements
to exchange and settle transactions on
a net basis through reserve or clearingaccount balances. Users of this net
settlement service include local check
clearinghouse associations, credit card
processors, automated teller machine
networks, and national and regional
funds transfer networks. In 1987,
about 621,000 net settlement entries
were processed by the Reserve Banks.
Approximately 22,000 depository
institutions use the automated clearinghouse, which makes recurring payments electronically instead of by
check. The institutions use the A C H
primarily to pay salaries and pensions
and to make preauthorized bill payments, such as those for insurance
premiums and mortgages. About 3,700
of the institutions using the A C H
originate and receive transactions via
electronic connections with the Federal
Reserve; the others use machinereadable magnetic tapes. In 1987, the
Reserve Banks processed about 1.1
billion A C H transactions; about 40
percent were governmental, largely
disbursements of social security benefits and civilian and military pay.
The securities services provided by
the Reserve Banks cover the handling
of book-entry securities and definitive
securities and the collection of coupons
and miscellaneous items. The bookentry service, begun in 1968, enables
holders of government agency securities to transfer them to other institutions throughout the country. The Reserve Banks maintained about 37,000
book-entry accounts in 1987 and processed 9.4 million security transfers.
In the definitive securities service,
the Banks store physical securities
ineligible for maintenance on the bookentry system. The Federal Reserve held
approximately $27 billion of such
securities at the end of 1987.
In its noncash collection service, the
Federal Reserve processes coupons,
bonds, and miscellaneous items such
as bankers acceptances and certain
checks and drafts. Coupon collection,
which accounts for approximately 95
percent of the transactions in this
service, amounted to about 4.2 million
coupons in 1986 and about 3.7 million
in 1987.
48
Mission and Operational Areas
Services to the U.S. Treasury and
Other Government Agencies
receipts deposited in the 15,600 tax
and loan accounts maintained by deAs required by the Federal Reserve pository institutions designated by the
Act, the U.S. government uses the Treasury to perform this function; and
Federal Reserve as its bank. Through they hold the collateral that those
deposit accounts at the Federal Reserve institutions pledge to support those
Banks, the government issues its checks deposits and transfer funds to the
and payments and collects its receipts. Treasury's account at its request. The
The Reserve Banks also process wire Reserve Banks assist the Treasury in its
transfers of funds and automated financing of the public debt by issuing,
clearinghouse payments and give the servicing, and redeeming all marketTreasury daily statements of account able Treasury securities as well as all
Treasury savings bonds and retirement
activity.
Beyond these typical depository ac- plan bonds. In another unique fiscal
tivities, the Federal Reserve Banks service, the Reserve Banks redeem
provide several unique services to the food coupons for the Department of
government. They monitor the tax Agriculture and destroy them.
49
Appendix
B
Budget Processes
This appendix describes the budget
processes of the Board of Governors
and the Reserve Banks and explains
PACS, the planning and control system that the Banks use for accounting.
The Budget and Control Process
of the Board of Governors
All levels of management at the Board
take part in a planning, budget, and
control process based on the calendar
year. To ensure that all elements are
coordinated and objectives are
achieved, the Administrative Governor oversees the process under authority delegated by the Chairman.
The Board places expenses and employment in four operational areas:
economic and monetary policy, supervision and regulation of financial institutions, services to financial institutions and the public, and System policy
direction and oversight. Costs for data
processing are charged as direct expenses to the four major areas according to usage. Expenses for other elements of support and overhead are
allocated to the four areas in proportion to the shares of direct costs attributable to each area.
taking into account anticipated initiatives discussed at the meetings and
other factors such as a general pay
increase, changes in costs of employee
benefits, and inflation.
Using this projection of expenses,
the Controller prepares a proposed
guideline for approval of the Board in
June. The approved guideline is then
used by the divisions for preparation
of their budget proposals in the fall.
The objectives and budgets prepared
by the divisions are reviewed with the
Controller, the Staff Director for Management, and the oversight committees. After appropriate adjustments,
the Controller in coordination with the
Staff Director for Management prepares a consolidated budget for the
Administrative Governor to present to
the Board for final approval at an open
meeting in December.
Treatment of Capital
Expenditures
In 1985, the Board began capitalizing
certain assets and depreciating their
value over appropriate time periods
instead of expensing them in their year
of purchase. Capitalizing, which is in
accordance with generally accepted
accounting principles, more closely
The Budget Schedule
aligns the cost of capital assets with
Early each year, the Board's functional their periods of service and is consisoversight committees discuss with the tent with the accounting practices
divisions under their purview plans for followed by the Reserve Banks.
the following year and beyond. The
The capital budget is developed
Board's Controller and Staff Director concurrently with the operating budfor Management coordinate the over- get, following the same procedures.
sight meetings and the Controller simul- Although the capital budget is not
taneously prepares a budget estimate covered by the guideline for the operbased on the current level of operation, ating budget, depreciation costs asso
50
Budget Processes
ciated with capital assets fall under the
guideline because they are an operating
cost.
Financial Monitoring
and Control
Each division constructs quarterly
operating plans, which managers monitor and review throughout the year.
The Controller observes performance
against budgeted targets and submits
quarterly reports to the Board.
After a midyear review of current
expenses with each division director,
the Controller and the Staff Director
for Management estimate expenses for
the entire year and submit the estimate
to the Board along with any recommendations for reallocations. The midyear
review helps control current expenses
and provides a baseline for analyzing
budget requests. At the beginning of
the next year, the Controller and the
Staff Director for Management report
to the Board on the previous year's
performance against budget and operating goals.
Assessments
The cash requirement for operations
during the first half of the year, which
is estimated after the Board adopts its
budget, is approved by the Administrative Governor in early January. As the
Federal Reserve Act provides, the
required amount is raised by an assessment on each of the Reserve Banks in
proportion to its capital stock and
surplus. For the second half of the
year, the cash requirement is estimated
in June, and the second assessment is
made in July. Funds are transferred
quarterly to minimize cash balances
held by the Board.
The Budget and Control Process
of the Federal Reserve Banks
The Federal Reserve Banks, like the
Board, use a calendar-year process to
set major goals and strategies, estimate
resources needed to achieve the goals,
and monitor operating results and
financial performance.
The Planning and Control System
The Planning and Control System is
an accounting and budgeting system
that affords a review of expenses, an
expense audit trail, and expense accountability. Implemented by the Federal Reserve Banks in 1977, the PACS
enables the Board of Governors to
compare the financial and operating
performance of the Reserve Banks.
All costs are grouped by major
services, which are shown here under
the four operational areas previously
described and under support and overhead (see the accompanying list). The
costs of support and overhead, in turn,
are fully allocated to the four operational areas. The PACS offers a detailed analysis of all these services and
activities, including productivity statistics (primarily unit costs and items per
employee hour), "environmental" statistics (to clarify the differences among
the Bank's operating environments),
and "quality" statistics (to measure
performance.) In short, the PACS
serves as the fundamental cost accounting system for all the services provided
by the Federal Reserve Banks, whether
priced or nonpriced, special or routine.
Through periodic on-site reviews,
the Board confirms that the Reserve
Banks are complying with PACS instructions and also with System guidelines set by the Board. In addition, the
General Accounting Office and an
outside public accounting firm have
51 Budget Processes
determined in independent examinations that the PACS is an appropriate
and effective accounting mechanism
for the Federal Reserve.
The Budget Process
One year before the start of each
budget year, staff members at the
Board and at the Banks develop guidelines based on forecasts of changes in
workload and productivity at the
Banks. These guidelines, which are
separate from those for the Board's
divisions, are presented for Board
action in the spring. The annual budget
objective, which follows these guidelines, is used by the Reserve Banks in
developing plans and budgets. To plan
for priced services, the Banks also
update each year a strategic statement
for the next three years. In the spring,
the Banks develop their own goals,
objectives, and strategies and begin
their budget process.
The management of each Bank department uses a zero-base budget procedure whenever possible, especially
for travel and training. Senior Bank
officials review departmental requests.
The President and First Vice President
decide which requests to recommend
to the Bank's Board of Directors,
which acts on the budget. In the fall the
Board of Governors acts on fee schedules for priced services and on the
Reserve Bank budgets.
buildings, automation equipment, furnishings, or land—receive a thorough
review separate from the planning,
budgeting, and control process. The
Board of Governors must specifically
approve acquisitions of mainframe
computers and peripheral equipment
costing more than a specified amount.
A l l proposals for capital acquisitions are reviewed by technical staff at
the Board, who make recommendations to the Director of the Division of
Federal Reserve Bank Operations or to
the Board of Governors, depending on
the level of approval required.
Review at the Board o f Governors
In the fall, Reserve Banks forward
their budgets to the Board, where
analysts review them and note Systemwide issues to be addressed during the
budget review. They analyze the executive summary and the statement of
objectives in each budget in light of the
Bank's own trends, plans at the other
Banks, the System budget objective,
and the cost-recovery objectives for
priced services. The Product Directors
and the Pricing Policy Committee also
examine the Reserve Bank budgets for
priced services.1 The Board's Committee on Federal Reserve Bank Activities
evaluates the entire budget of each
Reserve Bank in connection with its
fall meetings with each Reserve Bank
President and First Vice President.
The Capital Budget Process
The Banks manage their capital expenditures through the planning, budgeting, and control process. In accordance w i t h generally accepted
accounting principles, the Banks include depreciation of capital assets in
their expenses. A l l plans for large
capital expenditures—whether for
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 Pricing
Policy Committee comprises one Governor, the
Board's Staff Director for Federal Reserve Bank
Activities, the Presidents of two Reserve Banks,
and the First Vice Presidents of two other
Reserve Banks.
52
Budget Processes
Board A p p r o v a l
Federal Reserve Bank Services
Following review by the Committee on
Federal Reserve Bank Activities, all
Bank budgets are sent to the Board of
Governors for action at an open meeting in December.
Monetary and economic policy
Economic policy determination
Open market trading
OPERATIONAL AREAS
Supervision and regulation
Supervision of District financial institutions
Administration of laws and regulations
related to banking
Studies of banking and financial market structure
Services to financial institutions and the public
Special cash service
Currency
Coin
Transfer of account balances
Automated clearinghouse
Commercial check
Other check
Book-entry securities
Definitive securities
Loans to depository institutions and others
Noncash collection
Public programs
Other
Services to the U.S. Treasury
and other government agencies
Savings bonds
Other Treasury issues
Centrally provided Treasury and agency services
Government agency issues
Other Treasury and government agency services
Treasury and government coupons
Food coupons
Government accounts
SUPPORT AND OVERHEAD
Support
Data processing
Centrally provided support
Occupancy service
Printing and supplies
Centralized planning
District projects
Overhead
Administration
System projects and contingency processing center
Special projects
Mail
Legal
General books and budget and expense control
Files and records storage
Personnel
Purchasing
Protection
Motor vehicles
Library
Telephone
Audit
53
Appendix
C
Special Categories of System Expense
This appendix discusses System expenses for priced services, capital assets, and currency.
Fees for Federal Reserve services
must be approved by the Product
Director for each service, by the System Pricing Policy Committee, and
ultimately by the Board of Governors.1
Priced Services
The Board announces the rationale for
Under the Monetary Control Act of the price of any service that recovers
1980, the Federal Reserve charges less than the full level of anticipated
2
depository institutions for their use of costs.
The cost of float is estimated by
certain Federal Reserve services at a
price intended to recover the full costs applying the current federal funds rate
of providing the services. Before 1980, to the level of float expected to be
the services the act covers had been generated in the coming year. To
offered without explicit charge and estimate income taxes and the return
on capital, tax and financing rates are
only to member banks.
As the act requires, the cost of derived from a model of the 25 largest
providing these services includes all U.S. bank holding companies; these
direct and indirect costs, the interest rates are applied to the assets the
on items credited before actual collec- Federal Reserve expects to use in opertion (float), and the private sector ating priced services in the coming
adjustment factor (PSAF). The PSAF year. Imputed sales taxes are based on
is the return on capital that would have outlays for materials, supplies, and
been provided and the taxes that would capital assets budgeted by the Reserve
have been paid had the services been Banks.
The two other components of the
furnished by a firm in the private
sector. The market discipline imposed PSAF are also derived from Reserve
by including these imputed costs in the Bank budgets: the expenses of the
charges for Federal Reserve services Board of Governors associated with
ensures that expenses for priced ser- the provision of priced services and the
expected assessment for FDIC insurvices are no higher than necessary.
Most of the recoverable costs of ance on clearing balances maintained
priced services consist of the direct and with the Federal Reserve to settle
indirect costs determined by the budget transactions.
process for the Reserve Banks; hence,
the Bank budgets are an integral part
of the pricing exercise and have a maj or
1. See appendix B, note 1, for a description of
influence on the fee structure. To assist the position of Product Director and of the
depository institutions in their plan- System Pricing Policy Committee.
2. An example is the pricing program anning to provide or use correspondent
banking services, the Federal Reserve nounced to encourage use of the automated
clearinghouse service, under which prices were
usually sets each year's prices only established to recover an increasing percentage
once, in the fourth quarter of the of full costs each year, reaching 100 percent in
preceding year.
1986.
54
Special Categories of System Expense
Calculation o f the P S A F f o r 1988
The Board has approved a 1988 PSAF
of $76.2 million, an increase of 7.5
percent over the 1987 PSAF of $70.9
million.
Asset Base
The assets to be used in providing
priced services in 1988 have an estimated value of $3,093.2 million (table
C . l ) . The portion of these assets assumed to be financed through debt
and equity—largely bank premises,
furniture, and equipment—totals
$417.2 million, an increase of 6 percent
over 1987 (table C.2). 3
Cost of Capital and Taxes
Mergers and changes in the relative
asset sizes of bank holding companies
3. Short-term assets are assumed to be financed by short-term liabilities; long-term assets
are assumed to be financed by a combination of
equity and long-term debt.
Table C.l
Pro Forma Balance Sheet for Federal Reserve Priced Services, 1987-88 1
Millions of dollars
Asset or liability
1987
1988
ASSETS
Short-term assets
Imputed reserve requirements on clearing balances
Investment in marketable securities
Receivables2
Materials and supplies 2
Prepaid expenses2
Net items in process of collection* (float)
Total short-term assets
Long-term assets
Premises2,3
Furniture and equipment 2
Leases
Leasehold improvements 2
Total long-term assets.
239.2
1,753.8
26.8
4.4
4.2
363.5
268.2
1,967.0
28.0
6.4
5.8
438.3
2,391.9
229.6
126.8
1.8
2.0
2,713.7
245.4
129.5
2.5
2.2
360.2
2,752.1
Total assets
379.6
3,093.2
LIABILITIES
Short-term liabilities
Clearing balances
Balance arising from early credit
of uncollected items
Short-term debt 4
1,993.0
2,235.2
363.5
35.4
438.3
40.1
Total short-term liabilities.
Long-term liabilities
Obligations under capital leases ..
Long-term debt 4
Total long-term liabilities .
Total liabilities.
Equity
4
Total liabilities and equity.
1. Data are averages for the year.
2. Financed through the private sector adjustment
factor; other assets are self financing.
3. Includes allocations of $600,000 in Board of
2,391.9
1.8
126.2
2,713.6
2.5
136.4
128.0
138.9
2,519.9
2,852.5
232.2
240.7
2,752.1
3,093.2
Governors' assets to priced services for 1987 and
$500,000 for 1988.
4. Imputed figures representing the source o f financing for certain priced-service assets.
55 Special Categories of System Expense
since last year have changed the composition of the 25-company sample
used to calculate the PSAF. As in the
past, the bank holding companies in
the sample with the highest and lowest
rates of return on equity before taxes
were excluded, and calculations were
based on the remaining 23 firms.
The rate of return on equity, the
interest rate on long-term debt, and
the income tax rate used in calculating
the PSAF are all based on three-year
averages of values calculated from the
model.
Other Imputed Costs
The other required PSAF recoveries
for 1988—imputed sales taxes, FDIC
Table C.2
Derivation of the Private Sector Adjustment Factor, 1987Millions of dollars, except as noted
1987
1988
Assets to be financed1
Short-term
Long-term 2
Total
35.4
358.4
393.8
40.1
377.1
417.2
Capital structure (percent)
Short-term
Long-term
Equity
Total
9.0
31.9
59.1
100.0
9.6
32.7
57.7
100.0
8.5
10.2
19.1
15.3
7.1
9.7
20.1
15.4
33.9
32.3
Capital costs5
Short-term debt.
Long-term debt.
Equity
Total
3.0
12.8
44.5
60.3
2.8
13.3
48.3
64.4
Other costs
Sales taxes
Assessment for federal deposit insurance
Expenses of Board of Governors
Total
7.3
1.6
1.7
10.6
8.2
1.9
1.7
11.8
Total PSAF recoveries
Millions of dollars
As a percent of capital ..
As a percent of expenses
70.9
18.0
15.8
76.2
18.3
16.3
Item
P S A F COMPONENTS
Cost of capital (percent)3
Short-term debt
Long-term debt
Pretax equity 4
Weighted average ..
Tax rate (percent) 4
REQUIRED P S A F RECOVERIES
1. The asset base for priced services is directly
determined.
2. Total long-term assets less capital leases that are
self-financing.
3. A l l short-term assets are assumed to be financed
by short-term debt. O f the total long-term assets, 36
percent are assumed to be financed by long-term debt
and 64 percent by equity in 1988. The data are average
rates paid by the bank holding companies included in
the sample.
4. The pretax rate of return on equity is based on
average aftertax rates of return on equity for the sample
of bank holding companies, adjusted by the effective
tax rate. The 1988 figures for pretax equity and the tax
rate are based on a three-year average of these rates, for
1984-86.
5. The calculations underlying these data use the
dollar value of assets to be financed, divided as
described in note 4, and the rates for the cost of capital.
56
Special Categories of System Expense
insurance, and Board expenses—total
$11.8 million, up 11 percent from 1987
(table C.2). Most of the increase is in
imputed sales taxes, primarily because
of capital expenditures planned for
1988; the remainder is from the expected rise in clearing balances and the
resulting rise in imputed costs for
FDIC insurance (table C. 1).
Capital Outlays
The Federal Reserve System accounts
for its operations in accordance with
generally accepted accounting principles (GAAP) and depreciates the cost
of fixed assets over their estimated
useful lives. In the federal government,
where no requirement exists for depreciation accounting, the cost of fixed
assets is typically recorded as an expense at the time of purchase. However, the General Accounting Office's
Policy and Procedures Manual for
Guidance of Federal Agencies, which
governs accounting in the federal government, specifies in title 2 the use of
depreciation accounting for business
Table C.3
Total Expenses of the Federal Reserve System,
Federal Government Accounting Method, 1983-88
Millions of dollars, except as noted
Year and entity
Total
expenses
Depreciation 1
Equipment
Total
outlays
(3)
Percent
change
from
previous
year
( l ) - ( 2 ) + (3)
Property
(2)
(1)
Capital
outlays
1983
Reserve Banks
Board of Governors
Total
1,028.5
71.6
1,100.1
39.7
1.8
41.5
18.9
1.6
20.5
97.2
.7
97.9
1,067.0
68.9
1,135.9
1984
Reserve Banks
Board of Governors
Total
1,067.8
76.5
1,144.3
51.4
2.0
53.5
20.6
1.6
22.1
88.7
7.9 2
96.6
1,084.5
80.8
1,165.3
1.6
17.3
2.6
1985
Reserve Banks
Board of Governors
Total
1,117.4
82.0
1,199.4
60.3
3.3
63.6
21.1
1.6
22.7
148.2
4.2 2
152.4
1,184.2
81.3
1,265.5
9.2
.6
8.6
1986
Reserve Banks
Board of Governors
Total
1,161.3
84.0
1,245.3
68.0
4.2
72.6
23.5
1.6
25.1
164.1
16.5
180.6
1,233.9
94.7
1,295.2
4.2
16.5
2.3
1987 estimate
Reserve Banks
Board of Governors
Total
1,194.3
86.5
1,280.1
76.6
4.3
82.5
26.5
1.6
28.1
159.9
4.9
164.8
1,251.1
85.5
1,335.0
1.4
-9.7
3.1
1988 budget
Reserve Banks
Board of Governors
Total
1,245.1
90.6
1,335.7
82.9
4.5
89.0
29.5
1.6
31.1
225.9
3.4
229.3
1,358.6
87.9
1,444.9
8.6
2.8
8.2
1. The Board of Governors did not depreciate capital
assets before 1985; data for earlier years are estimates
based on current accounting procedures and historical
data.
2. The Board's capital expenditures increased
sharply in 1984 as a result of outlays for equipment for
the Contingency Processing Center. The establishment
of this facility also affected expenditures in 1985.
57 Special Categories of System Expense
types of operations and for activities
that recover costs from reimbursements or user charges. Certain activities of the Federal Reserve meet both
of these criteria, and hence the Banks
and the Board use depreciation accounting. Under GAAP, the cost of
acquiring an asset that is expected to
benefit an entity over future periods
should be allocated over those periods. Such treatment also provides for
a more realistic measurement of the
operating performance of an entity.
The Banks capitalize and depreciate
all capital assets that cost $1,500 or
more; they can either capitalize or
expense assets costing less. The capitalization guideline for the Board is
must submit proposed major purchases of capital assets to the Board
for further review and approval. The
Board of Governors reviews capital
expenditures for the Board.
Table C.3 shows total System outlays for recent years based on the
federal government's typical practice
of expensing capital assets. Total outlays for each year are derived from
total expenses less depreciation costs
plus capital outlays. Because capital
outlays are thus shown in total in the
year of purchase rather than spread
over the useful lives of the assets, the
amounts and percent changes vary
widely from year to year.
$1,000.
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 in order to estimate the effect of
total operating and capital spending.
During the budget year, the Banks
Table C.4
Currency in Circulation,
New Notes Issued,
and Notes Destroyed, 1987 Estimate
Millions of pieces
New
notes
paid
out 2
Notes
destroyed2
3,970
1,015
1,152
2,871
526
943
2,545
661
595
1,154
125
150
2,488
722
638
1,066
69
64
10,477
5,230
5,047
Notes
Dollar
in
denomination circulation 1
1
5
10
20
50
100
Total
1. As of July.
2. Based on actual levels through the third quarter
and expected levels for the fourth quarter of 1987.
Notes paid out do not include additions to inventory at
the Reserve Banks.
Currency Printing
The Bureau of Engraving and Printing
produces currency; the Federal Reserve Banks put it into circulation
through depository institutions and
destroy it as it wears out. New currency
is printed to replace worn notes and to
accommodate increases in the demand
for circulating currency (table C.4).
Notes are also required for Federal
Reserve Bank inventories, which are
held to meet changes in demand. The
Federal Reserve Act stipulates that the
costs associated with these activities be
assumed by the Federal Reserve System (table C.5).
To minimize the number of new
notes ordered and the cost of their
printing, the Board consults with the
Bureau of Engraving and Printing to
ensure that it uses efficient methods,
maintains System guidelines on the
quality of notes, and sees that Reserve
Banks do not destroy notes prematurely. The Board and the Banks also
monitor all related costs, such as those
for transportation and packaging.
58
Special Categories of System Expense
Table C. 5
Costs to the Federal Reserve of New Currency, 1986-88
Millions of dollars, except as noted
Item
Shipping from Washington 2
Reimbursement to the Treasury
for issuance and retirement
System-Treasury programs to deter counterfeiting
Total costs of currency
1. Based on 6.5 billion notes in 1986, 6.6 billion
notes in 1987, and 6.0 billion notes in 1988.
1986
actual
1987
estimate
1988
budget
174.8
4.6
164.2
4.9
156.3
4.3
1.6
2.2
1.6
0
1.6
0
183.2
170.7
162.2
Percent
change
1987-88
-4.8
-12.2
0
0
-5.0
2. Includes purchase of pouches and seals for Bureau
of Engraving and Printing.
59
Appendix
D
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
future years (see appendix C). The
System derives its income primarily
from U.S. government securities; the
Federal Reserve acquires the securities
through open market operations, one
of the tools of monetary policy. These
earnings account for approximately 95
percent of current net income (table
D.l).
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 D.2). The
Table D.l
Income of the Federal Reserve System,
1986-87
Millions of dollars
1986
actual
Source
1987
estimate
279.2
U.S. government securities... 16,141.5
393.6
Foreign currencies
627.7
Priced services
22.1
Other
224.4
16,371.4
343.9
645.2
48.5
17,464.2
17,633.3
Total
Reserve Banks record extraordinary
gains or deductions from current net
income in a profit-and-loss account.
The primary entries in the account are
for losses on the sale of U.S. government securities and for gains or losses
resulting from the sale or revaluation
of assets denominated in foreign currencies.
The Reserve Banks retain a surplus
to cushion unexpected losses, much
the same as commercial establishments
retain earnings. The Board of Governors requires that the surplus account
be an amount equal to the paid-in
capital of the member banks.
Since the end of 1964, the Board's
policy has been to transfer to the
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 counted as interest on Federal Reserve notes. In 1987,
current income before expenses, dividends, additions to surplus, and payments to the Treasury is an estimated
$17.2 billion. Profit-and-loss transactions made a net addition of $1.1
billion to current net income. Statutory
dividends to member banks in 1987 are
an estimated $ 116 million; additions to
surplus, $167 million; and payments to
the Treasury, $17.7 billion.
60
Sources and Uses o f Funds
Table D. 2
Distribution of the Income of the Federal Reserve Banks, 1986-87
Millions of dollars
1986
actual
17,633
1,049
Current income 1
1987
estimate
17,464
Item
1,034
114
LESS
2 3
Current expenses of Reserve Banks Operating expenses
Earnings-credit costs
108
EQUALS
Current net income
16,307
16,486
1,976
1,844
PLUS
Net additions to or deductions from ( - ) current net income
LESS
Cost of unreimbursed Treasury services5
4
0
45
Assessments by Board
Board expenses
Cost of currency
181
82
171
Other distributions
Dividends paid to member banks 6
Transfers to or from ( - ) surplus 7
110
92
117
174
17,804
17,740
97
EQUALS
Payments to U.S. Treasury
1. See table D . l .
2. Net of reimbursements due from the U.S. Treasury and other government agencies.
3. Reflects reduction of $49.2 million resulting from
the implementation in 1987 of Financial Accounting
Standards Board statement no. 87, Employers' Accounting for Pensions.
4. This account is the same as that reported under
the same name in the table "Income and Expenses of
the Federal Reserve System," in the Statistical Tables
section of the Board's Annual Report and includes
gains and losses on foreign exchange transactions due
mainly to revaluations at market exchange rates; gains
and losses on sales of U.S. government securities; and
miscellaneous gains and losses.
5. This account, added in 1987, reflects 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. These amounts
were formerly debited to profit and loss (note 4).
6. The Federal Reserve Act requires the Federal
Reserve to pay dividends to member banks at the rate of
6 percent of paid-in capital.
7. Each year the Federal Reserve transfers to its
surplus account an amount sufficient to equate surplus
to paid-in capital to provide a reserve against losses.
61
Appendix
E
Federal Reserve System Audits
The Board of Governors, each of the
Reserve Banks taken separately, and
the Federal Reserve System as a whole
are all subject to several levels of audit
and review. A t 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
Federal Reserve Bank Operations,
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. The Board itself is reviewed by its own staff of auditors and
operations reviewers; the responsibility for these internal reviews at the
Board was consolidated in 1987 in a
new Office of the Inspector General
(see chapter 2). In addition, an independent auditor annually examines the
financial operations of the Board.
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 20 projects
in various stages of completion, since
1979 has completed 42 reports on
selected aspects of Federal Reserve
operations (see tables E . l and E.2).
The GAO has also involved the Federal
Reserve in about 60 other reviews not
directly related to the System and has
terminated 23 others before completion. The reports are available directly
from the GAO.
Table E.l
Active G A O Projects Related to the Federal Reserve
Subject
Federal Reserve market oversight
Risks in the commercial banking industry
Regulation of banks' foreign exchange rate
Federal banking agencies' uniform country-risk examination system
Conflicts of interest
Food stamp redemption process
Regulation Q
Internationalization of capital markets
Government securities secondary market trading system
Supervision of banks' use of short-term funding
Federal Reserve administrative expenses
Food stamp program within Federal Reserve banking system
Merging federal deposit insurance funds
Comparison of regulations governing U.S. financial institutions' operations overseas
with those governing domestic operations
Federal Reserve pricing of check clearing services
High-yield bond study
Sectoral risk in commercial banking
Current condition of U.S. commercial banking industry
Cashing of government checks
Government in the Sunshine Act
62
Federal Reserve System A u d i t s
Table E. 2
Completed G A O Reports Related to the Federal Reserve System
Report
Comparing Policies and Procedures
of the Three Bank Regulatory Agencies
Federal Systems Not Designed to Collect Data
on All Foreign Investments in U.S. Depository Institutions ..
The Federal Reserve Should Assure Compliance
with the 1970 Bank Holding Company Act Amendments
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
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 Banks
Bank Secrecy Act Reporting Requirements Have Not Yet Met
Expectations, Suggesting Need for Amendment
Federal Reserve Could Improve the Efficiency
of Bank Holding Company Inspections
Information on Selected Aspects of
Federal Reserve System Expenditures
Federal Review of Intrastate Branching Can Be Reduced
Number
Date
GGD-79-27
3/29/79
GGD-79-42
6/19/79
GGD-80-21
3/12/80
GGD-80-59
8/8/80
GGD-80-66
8/26/80
GGD-81-12
1/6/81
GGD-81-13
1/21/81
AFMD-81-27
1/23/81
GGD-81-27
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-82-33
GGD-82-31
2/12/82
2/24/82
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
Information about Depository Institutions' Ancillary
Activities Is Not Adequate for Policy Purposes
Bank Merger Process Should Be Modernized and Simplified
GGD-82-21
GGD-82-36
2/26/82
4/9/82
GGD-82-22
5/7/82
GGD-82-57
GGD-82-53
6/1/82
8/16/82
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
Financial Institutions Regulatory Agencies Can
Make Better Use of Consumer Complaint Information
Unauthorized Disclosure of the Federal Reserve's
Monetary Policy Decision
PAD-82-45
8/31/82
ID-82-52
9/2/82
Despite I m p r o v e m e n t s , Recent B a n k S u p e r v i s i o n
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
GGD-83-3
10/25/82
GGD-83-13
8/25/83
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
Federal Reserve System Audits
Table E.2—Continued
Report
Information on Independent Public Accountant Audits
of Financial Institutions
A n Analysis of Two Types of Pooled Investment Funds
How the Markets 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
Number
Date
GGD-84-44FS
GGD-86-63
GGD-86-26
4/21/86
5/12/86
5/15/86
NSIAD-86-93
GGD-86-94
7/25/86
8/1/86
GGD-86-80BR
8/20/86
GGD-86-147FS
GGD-87-15BR
GGD-87-38BR
GGD-87-35
9/29/86
10/20/86
4/7/87
4/14/87
GGD-87-55FS
4/21/87
GGD-87-70
7/13/87
63
65
Appendix
F
Expenses and Employment
at the Federal Reserve Banks
Table F.l
Operating Expenses of the Federal Reserve Banks, by District, 1987-88
Thousands of dollars, except as noted
1987
estimate
Change
Amount
Percent
73,499
245,337
67,140
74,251
95,343
115,084
146,216
62,729
61,673
81,025
79,606
143,199
3,020
14,424
2,541
2,624
2,948
5,203
4,037
2,013
2,565
3,060
3,235
5,160
4.3
6.2
3.9
3.7
3.2
4.7
2.8
3.3
4.3
3.9
4.2
3.7
1,245,102
50,831
4.3
1,194,271
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
1988
budget
1,194,271'
District
1,251,283
57,012
4.8
70,480
230,913
64,599
71,627
92,394
109,881
142,179
60,716
59,108
77,964
76,371
138,040
Total, all Districts
Special project
6,181
Total
1. Includes $1.1 million for the Systemwide check
image processing project in 1987. The initiative was
converted to special project status for 1988 and funds
for it accounted separately from the operating budgets.
Table F.2
Expenses and Staff Increases Required for Expedited Funds Availability,
by District, 19881
Thousands of dollars, except as noted
Operating expenses
District
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Total
Capital
outlays
Other
0
2,179
622
1,595
98
861
2,686
172
368
1,640
2,362
2,287
400
598
233
405
287
724
1,154
130
300
305
125
1,151
684
730
603
312
460
618
1,009
455
497
975
909
1,864
1,084
1,328
836
717
747
1,342
2,163
585
797
1,280
1,034
3,015
28
60
15
12
26
21
42
14
23
40
13
74
16
25
9
5
19
14
21
11
13
25
7
44
14,870
5,811
9,117
14,927
368
208
1. Not included in 1988 budget figures.
2. Average number of personnel; see chap. 3, note 2,
for definition.
Staff increase
Total
Transportation
New
positions
ANP2
66
Expenses a n d E m p l o y m e n t
Table F. 3
Employment at the Federal Reserve Banks, by District, 1987-88
Average number of personnel1
District
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Total
Change
1987
estimate
1988
budget
1,490
4,043
1,228
1,414
1,937
2,188
2,768
1,316
1,071
1,640
1,555
2,455
1,500
3,982
1,244
1,398
1,940
2,196
2,673
1,313
1,076
1,645
1,582
2,482
10
-61
16
-16
3
8
-95
3
5
5
27
27
.7
-1.5
1.3
-1.1
.2
.4
-3.4
-.2
.5
.3
1.7
1.1
23,0322
-73
-.3
23,105
Amount
Percent
1. See chap. 3, note 2, for definition of A N P .
2. Includes 1 A N P for Systemwide check image
processing project.
Table F. 4
Expenses of the Federal Reserve Banks, by Operational Area, 1987-88
Thousands of dollars, except as noted
Operational area
1988
budget
Change
Amount
Percent
Total
88,447
135,892
799,865
91,742
142,504
827,458
3,296
6,612
27,593
3.7
4.9
3.4
170,067
183,397
13,330
7.8
1,194,271
Monetary and economic policy
Supervision and regulation
Services to financial institutions
and the public
Services to the U.S. Treasury and
other government agencies
MEMO
1987
estimate
1,245,102
50,831
4.3
380,754
349,573
404,796
351,583
24,041
2,010
6.3
.6
1
Support
Overhead
1. Costs of support and overhead included in
expenses by operational area. Support refers to activities, such as data processing, whose costs can be charged
to users according to amount of use. Overhead refers to
activities, such as auditing, whose costs are charged
according to the users' shares of total costs.
67 Expenses a n d E m p l o y m e n t
Table F. 5
Expenses of the Federal Reserve Banks
for Monetary and Economic Policy, by District, 1987-88
Thousands of dollars, except as noted
Change
1987
estimate
1988
budget
Amount
Boston
New York 1
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
4,680
31,900
4,020
4,878
4,225
5,352
7,257
4,751
4,394
4,419
4,558
8,013
4,539
35,314
3,890
4,928
4,227
5,737
7,244
4,979
3,585
4,425
5,000
7,874
-141
3,415
-130
50
2
385
-13
228
-809
6
442
-139
-3.0
10.7
-3.2
1.0
.0
7.2
-.2
4.8
-18.4
.1
9.7
-1.7
Total
88,447
91,742
3,296
3.7
District
Percent
1. Expenses of open market trading operations,
located in the District, are $12.7 million for 1987 and
$14.9 million for 1988.
Table F. 6
Expenses of the Federal Reserve Banks
for Supervision and Regulation, by District, 1987-88
Thousands of dollars, except as noted
District
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Total
Change
1987
estimate
1988
budget
Amount
7,304
34,049
7,311
10,052
9,810
13,917
25,335
7,118
7,577
15,404
12,299
19,891
8,030
37,362
7,746
10,502
10,534
14,900
27,143
7,654
8,718
16,293
14,278
20,237
726
3,313
435
450
725
983
1,808
536
1,142
889
1,979
346
9.9
9.7
6.0
4.5
7.4
7.1
7.1
7.5
15.1
5.8
16.1
1.7
170,067
183,397
13,330
7.8
Percent
68
Expenses and Employment
Table F.7
Expenses of the Federal Reserve Banks
for Services to Financial Institutions and the Public, by District, 1987-88
Thousands of dollars, except as noted
Change
1987
estimate
1988
budget
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
52,168
134,310
37,836
46,939
69,757
80,975
94,439
40,676
43,023
51,716
53,195
94,833
54,014
140,823
39,067
47,762
71,758
84,172
95,997
42,228
44,625
53,754
53,715
99,543
1,846
6,512
1,231
823
2,001
3,197
1,558
1,552
1,602
2,038
520
4,711
3.5
4.8
3.3
1.8
2.9
3.9
1.7
3.8
3.7
3.9
1.0
5.0
Total
799,865
827,458
27,593
3.4
District
Amount
Percent
Table F. 8
Expenses of the Federal Reserve Banks
for Services to the U.S. Treasury and Other Government Agencies, by District, 1987-88
Thousands of dollars, except as noted
District
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Total
Change
1987
estimate
1988
budget
Amount
Percent
6,327
30,654
15,432
9,758
8,603
9,637
15,149
8,171
4,114
6,426
6,319
15,303
6,916
31,838
16,437
11,059
8,824
10,275
15,833
7,868
4,745
6,553
6,613
15,546
588
1,184
1,005
1,301
221
638
684
-303
631
127
294
242
9.3
3.9
6.5
13.3
2.6
6.6
4.5
-3.7
15.3
2.0
4.7
1.6
135,892
142,504
6,612
4.9
69 Expenses and Employment
Table F. 9
Expenses of the Federal Reserve Banks
for Salaries of Officers and Employees, by District, 1987-88
Thousands of dollars, except as noted
Change
1987
estimate
1988
budget
Amount
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
40,265
119,945
31,604
35,017
45,701
52,924
72,406
31,317
27,445
41,122
40,091
69,070
42,275
125,222
33,561
36,178
47,597
55,275
73,169
33,112
29,108
43,030
42,826
72,752
2,010
5,277
1,958
1,160
1,896
2,352
763
1,795
1,664
1,908
2,735
3,682
5.0
4.4
6.2
3.3
4.1
4.4
1.1
5.7
6.1
4.6
6.8
5.3
Total
606,907
634,105
27,198
4.5
District
Percent
Table F. 10
Factors in the 1987-88 Change in Salaries
of Officers and Employees of the Federal Reserve Banks, by District
Percentage points
District
Merit Structure
adjust- adjustment
ment
Promotion
and reclassification
Change in Turnover
Overtime Other
staffing
and lag 1
Total
change
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
5.9
5.2
4.8
4.4
5.0
4.4
4.3
5.0
4.5
4.6
4.4
5.0
.1
.0
.5
.2
.0
.2
.0
.0
.0
.5
.2
.0
1.3
.8
.7
.8
1.4
.3
1.0
.7
1.0
.9
.6
.2
.8
-.8
1.8
.3
-.8
.2
-2.6
-.1
1.1
1.0
2.6
1.2
-2.3
-.8
-.6
-2.9
-1.1
-.5
-.7
.0
-.3
-1.3
-.7
-.1
-.8
-.2
- 1.0
.0
-.5
-.2
-.9
-.1
-.2
-.2
-.4
-.2
.0
.3
.0
.4
.1
.0
.0
.4
.0
-.9
.2
.0
5.0
4.5
6.2
3.2
4.1
4.4
1.1
5.9
6.1
4.6
6.8
6.1
Total
4.8
.1
.8
.1
-.9
-.4
.1
4.5
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.
70
Expenses and E m p l o y m e n t
Table F. 11
Capital Outlays of the Federal Reserve Banks, by District, 1987-88
Thousands of dollars, except as noted
District
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Total
1987
estimate
1988
budget
Change
Amount
Percent
8,738
30,110
2,991
7,479
18,993
15,491
40,130
4,755
4,829
5,659
4,643
16,106
7,664
30,423
5,830
14,953
28,799
19,178
63,556
7,340
4,687
6,582
15,301
21,609
-1,075
313
2,839
7,474
9,807
3,687
23,426
2,585
-147
924
10,658
5,503
-12.3
1.0
94.9
99.9
51.6
23.8
58.4
54.4
-3.0
16.3
229.5
34.2
159,924
225,918
65,994
41.3
71 Expenses a n d E m p l o y m e n t
Table F. 12
Capital Outlays of the Federal Reserve Banks, by District and Class of Outlay, 1987-88
Thousands of dollars
District
and year
Data processing and
data communication
equipment
Furniture,
furnishings, and
fixtures
Other
equipment
Land
and
other
real
estate
Buildings
Building
machinery
and
equipment
Leasehold
improvements
Total
Boston
1987 estimate
1988 budget
4,615
4,533
331
182
835
490
0
0
2,639
1,623
300
837
19
0
8,738
7,664
New York
1987 estimate
1988 budget
14,762
11,965
1,800
1,740
2,696
3,496
5,000
6,600
5,662
4,382
0
91
190
2,151
30,110
30,423
Philadelphia
1987 estimate
1988 budget
1,672
2,881
255
129
397
432
0
0
145
98
510
2,100
13
190
2,991
5,830
Cleveland
1987 estimate
1988 budget
3,237
9,521
944
1.108
477
661
0
0
1,519
2,241
1,145
1,422
156
0
7,479
14,953
Richmond
1987 estimate
1988 budget
4,568
7,562
200
460
1,350
939
1
125
12,774
19,639
100
75
0
0
18,993
28,799
Atlanta
1987 estimate
1988 budget
3,635
9,236
2,231
4,099
907
1,191
322
115
5,884
3,259
2,513
1,232
0
45
15,491
19,178
Chicago
1987 estimate
1988 budget
8,246
17,195
1,364
1,872
838
1,260
0
0
27,793
40,280
1,489
2,667
400
282
40,130
63,556
St. Louis
1987 estimate
1988 budget
1,876
2,621
332
137
459
327
0
0
1,967
3,932
121
323
0
0
4,755
7,340
Minneapolis
1987 estimate
1988 budget
2,551
3,084
80
100
407
304
1,050
98
537
582
205
515
0
0
4,830
4,683
Kansas City
1987 estimate
1988 budget
2,433
2,202
381
1,002
531
813
102
55
1,491
2,028
722
483
0
0
5,659
6,582
Dallas
1987 estimate
1988 budget
2,030
9,200
174
105
217
817
0
144
2,052
3,359
100
1,652
70
25
4,643
15,301
San Francisco
1987 estimate
1988 budget
5,270
12,836
904
934
2,043
1,838
0
0
5,380
4,786
610
900
1,900
315
16,106
21,609
Total
1987 estimate
1988 budget
54,892
92,833
8,996
11,868
11,155
12,567
6,475
7,137
67,844
86,209
7,814
12,296
2,748
3,008
159,924
225,918
72
Expenses and E m p l o y m e n t
Table F. 13
Budget Performance of the Federal Reserve Banks,
Operating Expenses, by District, 1987
Thousands of dollars, except as noted
District
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
1987
budget
1987
estimate
Change
Amount
Percent
70,480
230,939
66,209
71,583
92,055
109,947
142,232
60,299
59,128
78,200
76,345
140,397
0
-26
-1,610
44
339
-66
-53
417
-20
-235
26
-2,358
.0
.0
-2.4
.1
.4
-.1
.0
.7
.0
-.3
.0
-1.7
1,197,814
Total
70,480
230,913
64,599
71,627
92,394
109,881
142,179
60,716
59,108
77,964
76,371
138,040
1,194,271
-3,543
-.3
Table F. 14
Budget Performance of the Federal Reserve Banks,
Employment, by District, 1987
Average number of personnel, except as noted 1
District
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Total
1987
estimate
1,460
4,047
1,256
1,399
1,963
2,196
2,803
1,322
1,079
1,621
1,563
2,453
1,490
4,043
1,228
1,414
1,937
2,188
2,768
1,316
1,071
1,640
1,555
2,455
30
-4
-28
15
-26
-8
-35
-6
-8
19
-8
2
2.1
-.1
-2.2
1.1
-1.3
-.4
-1.2
-.5
-.7
1.2
-.5
.1
23,162
23,105
-57
-.2
1. See chap. 3, note 2, for definition of ANP.
Change
1987
budget
Amount
Percent
73 Expenses a n d E m p l o y m e n t
Table F. 15
Expenses of the Federal Reserve Banks, by Operational Area, 1983-88
Thousands of dollars, except as noted
Monetary
and
economic
policy
Services to
the U.S.
Treasury
and other
government
agencies
Total
131,848
140,690
151,991
163,915
170,067
183,397
675,918
701,453
742,896
770,016
799,865
827,458
120,256
126,307
131,544
136,789
135,892
142,504
1,028,465
1,067,802
1,117,377
1,161,290
1,194,271
1,245,102
-1.8
1983
1984
1985
1986
1987 estimate
1988 budget
Services to
financial
institutions
and the
public
100,443
99,351
90,945
90,570
88,447
91,742
Year
Supervision
and
regulation
6.8
4.1
3.5
3.9
Average annual
change, percent
Table F. 16
Employment at the Federal Reserve Banks, by Operational Area, 1983-88
Average number of personnel, except as noted 1
Year
Monetary
and
economic
policy
Services to
Supervision
financial
institutions
and
and the
regulation
public
Services to
the U.S.
Treasury
and other
government
agencies
Support 2
Overhead2
Total
1983
1984
1985
1986
1987 estimate
1988 budget
804
826
816
791
781
788
1,862
1,885
1,912
2,087
2,155
2,213
8,424
8,395
8,754
8,799
8,767
8,746
1,838
1,798
1,781
1,819
1,826
1,800
4,367
4,340
4,398
4,469
4,517
4,541
5,589
5,424
5,323
5,274
5,057
4,945
22,883
22,669
22,984
23,238
23,105
23,031
Average annual
change, percent
-.4
3.5
.8
-.4
.8
-2.4
.1
1. See chap. 3, note 2, for definition of ANP.
2. See table F.4, note 1, for definition.
75
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Boundaries of Federal Reserve Districts
and their Branch Territories
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