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Board of Governors of the Federal Reserve System

1986-87



Contents
1

INTRODUCTION

Part I

The 1987 Budgets

Chapter 1
5
5
6
7
8

FEDERAL RESERVE SYSTEM
Trends in Expenses and Employment
Operational Areas
Net Expense
1987 Budget Initiatives

11
11
12
16
19
22
23
25

Chapter 2
BOARD OF GOVERNORS
An Overview of the Board's 1987 Budget
1987 Budget by Operational Area
Trends in Board Expenses and Positions
Characteristics of the 1987 Budget
Positions in the 1987 Budget
Capital Budget
1987 Operating Budget by Division

29
29
30
31
32
33
37
39
40
41

Chapter 3
FEDERAL RESERVE BANKS
An Overview of the 1987 Budget Year
Major Initiatives in 1987
Reductions in Expenses in 1986 and 1987
Budget Objective for 1987
Operational Areas
Objects of Expense
Capital Outlays
Trends in Expenses and Employment
Volumes and Unit Costs

Part II

Special

Analysis

Chapter 4
45
P R O D U C T I V I T Y AT T H E FEDERAL RESERVE BANKS
45
Overview
46
Measuring Productivity at the Reserve Banks
47
Reserve Bank Performance
49
Check Collection Service
51
Wire Transfer of Funds Service
52
Automated Clearinghouse Service
54
Securities and Noncash Collection Services
55
Currency and Coin Service
56
Fiscal-Agency Services
58
Comparison with Other Sectors



A ppendixes

63
63
64
66

Appendix A
MISSION A N D OPERATIONAL AREAS
OF T H E FEDERAL 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

67
67
68

Appendix B
BUDGET PROCESSES
The Budget and Control Process of the Board of Governors
The Budget and Control Process of the Federal Reserve Banks

63

71

Appendix C
RESPONSE OF T H E FEDERAL RESERVE SYSTEM
TO T H E G R A M M - R U D M A N - H O L L I N G S LEGISLATION

75
75
76
80

Appendix D
SPECIAL CATEGORIES OF SYSTEM EXPENSE
Federal Reserve Priced Services
Capital Outlays
Currency Printing

81

Appendix E
SOURCES A N D USES OF FUNDS

83

Appendix F
FEDERAL RESERVE SYSTEM AUDITS

87

Appendix G
TRENDS IN EXPENSES A N D E M P L O Y M E N T
AT T H E BOARD OF GOVERNORS

97

Appendix H
TRENDS IN EXPENSES A N D E M P L O Y M E N T
AT T H E FEDERAL RESERVE BANKS
Accounting Changes

99

M A P OF T H E FEDERAL RESERVE SYSTEM

89




1

Introduction
This report describes the budgeted expenses of the Federal Reserve System
for 1987 and compares them with
expenses for 1985 and 1986. It also
contains a special analysis of System
productivity in providing priced and
nonpriced services.
The Federal Reserve System comprises the Board of Governors in
Washington, D.C., and the 12 Federal Reserve Banks with their 25
Branches. The System was created by
the Federal Reserve Act, passed by
the Congress in 1913 to establish more
effective supervision of banking and
a safer and more flexible monetary
and banking system.
As the nation's central bank the
Federal Reserve, through its ability to
influence financial conditions, attempts to ensure sufficient expansion
in money and credit to encourage sustained growth in the economy consistent with price stability. And as the
nation's lender of last resort, the Federal Reserve has the responsibility of
forestalling 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 adequately informed and
treated fairly in certain 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 $1,249 million in 1986 and
has budgeted expenses for 1987 of
$1,284 million. These are the gross
expenses for the Board of Governors
and the Federal Reserve Banks and
their Branches and do not reflect revenue from priced services and certain
other services or reimbursements expected from the U.S. Treasury and
other government agencies. In 1986,
estimated net expenses were $518 million; net expenses are budgeted at
$547 million for 1987.
The budgeted expenditures, which
the next several chapters explain in
detail, are broken down into the four
main operational areas of the Board
of Governors and the Reserve Banks:
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.
Part I discusses Federal Reserve
budgeted expenses for 1987 for the
System as a whole and for the Board
of Governors and the Reserve Banks

2

Introduction

taken separately. Part II contains the
special analysis of System productivity in priced and nonpriced services.
Appendixes provide additional details
on System functions and budgets.
The major source of Federal Reserve income, estimated at $16.1 billion in 1986, 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. In 1986, the Reserve
Banks collected an estimated $630
million in fees for priced services and
recorded approximately $100 million
in reimbursements from the Treasury
and other government agencies. Gains
on foreign exchange transactions approximated $2.0 billion.
Each year the Federal Reserve returns to the U.S. Treasury its earnings




in excess of expenses, dividends, and
surplus—in 1986, an estimated $17.8
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.
ANNUAL

REPORT: BUDGET

REVIEW

is a complete discussion of the System's budget. It is a companion to the
Board's 73 rd Annual Report, 1986.
That document is a comprehensive review of the activities and initiatives of
the Federal Reserve System that discusses the economy, domestic monetary policy, and international developments; describes supervisory and
regulatory actions considered and
undertaken during the year; and presents statistical summaries of Federal
Reserve activities.

Part I
The 1987 Budgets




5

Chapter 1

Federal Reserve System
Operating expenses budgeted by the
Federal Reserve System for 1987 total
$1,284 million, an increase of 2.8 percent over 1986 estimated expenses
(table 1.1). These expenses exclude
the cost of currency, which is $191
million, an increase of 4.8 percent
from 1986.' The 1987 budget is
$1,198 million for the Reserve Banks,
or 81.2 percent of total System expenses (including currency costs); $86
million for the Board of Governors,
or 5.9 percent of the total; and $191
million for currency costs, or 12.9
percent of the total. Chart 1.1 compares the expenses budgeted in these
areas for 1987 with the actual expenses in these areas in 1982.
1. Currency costs are determined largely by
public demand for new currency and by expenses o f the Bureau of Engraving and Printing; thus, they are not included in the analyses
o f System operating expenses.

Table

Chart

1.1

O p e r a t i n g Expenses o f the Federal
Reserve System a n d Cost o f
1982 a n d

Currency,

19871
Dollars in millions

$973.6(85.5%)

Banks

$1197.8(81.2%)

1. See text note 1.

Trends in Expenses
and Employment
The expenses of the Federal Reserve
System have increased from 1977 to

1.1

O p e r a t i n g Expenses o f the F e d e r a l Reserve System a n d Cost o f C u r r e n c y ,

1985-87'

Millions of dollars, except as noted
Entity and
type of expense
2

Reserve Banks
Personnel
Nonpersonnel
Board of Governors'
Personnel
Nonpersonnel
System operating expenses
Personnel
Nonpersonnel
Currency 4

1985
actual

1986
estimate

1987
budget

1,117.4
697.4
420.0

1,164.1
730.6
433.5

82.0
59.7
22.3

1986-87

1,197.8
738.8
459.0

4.2
4.8
3.2

2.9
1.1
5.9

85.2
60.2
24.9

86.3
60.1
26.1

3.9
.8
11.9

1.3
- .3
4.8

1,199.4
757.2
442.3

1,249.3
790.8
458.4

1,284.1
798.9
485.1

4.2
4.4
3.7

2.8
1.0
5.8

171.8

181.2

190.8

6.0

4.7

1. Details may not add to totals because of rounding.
2. For detailed information see chap. 3.




Percent change
1985-86

3. For detailed information see chap. 2.
4. See text note 1 and appendix D.

6

Federal Reserve System

the level budgeted for 1987 an average of 6.7 percent per year in current
dollars and 0.9 percent per year when
adjusted for inflation (chart 1.2).
Over the same period, System employment decreased by 1,132, or 4.4
percent (chart 1.3).
During this period, both expenses
and employment were heavily affected by the Monetary Control Act
of 1980 (MCA). The MCA 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. The M C A also extended access to Federal Reserve services to all
depository institutions.
For several years before implementation of the M C A , System employment and expenses adjusted for inflation had been declining. During the
transition to put in place systems to
meet the requirements of the M C A ,
employment and nominal expenses
increased significantly, although in
real terms expenses increased only
about 3 percent.
In the period following the transition to the M C A (1982 to the 1987

Chart 1.2
Operating Expenses of the Federal
Reserve System, 1977-871
Billions of dollars

budget year), System expenses increased an average of 4.3 percent per
year in current dollars and 1.0 percent
per year in real terms, and System
employment declined by 114, or 0.5
percent. Overall employment was cut
despite the concentrated effort by the
System since 1985 to strengthen examinations of member banks and inspections of bank holding companies
by increasing the staff involved in
supervision and regulation. The major reductions in employment have
been in services provided to financial
institutions and the public and in support and overhead.
Operational Areas
Federal Reserve expenses are classified for budgeting purposes according to the major 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 1.2). Costs for support and
overhead are redistributed or allocated to the four operational areas.
Only the Banks perform services to

Chart 1.3
Employment in the Federal Reserve
System, 1977-87 1
Thousands o f persons

1977

1982

1987

1. For 1986, estimate; for 1987, budget.
2. Calculated with the G N P implicit price deflator.




I
1977

I

I

,

,
,
1982

,

,

,

1. For 1986, estimate; for 1987, budget.

,
1987

7 Federal Reserve System
Table 1.2
Operating Expenses of the Federal Reserve System, by Operational Area, 1985-87'
Millions of dollars, except as noted
Operational area
and entity

1985
actual

1986
estimate

1987
budget

Percent change
1985-86

1986-87

Monetary and economic policy
Reserve Banks
Board of Governors

146.2
90.9
55.3

148.0
92.0
56.0

147.4
90.8
56.6

1.2
1.1
1.3

-.4
- 1.3
1.1

Supervision and regulation
Reserve Banks
Board of Governors

175.6
152.0
23.6

190.7
164.3
26.4

198.9
171.7
27.2

8.6
8.1
11.9

4.3
4.5
3.0

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

746.1
742.9
3.2

773.5
770.7
2.8

801.9
799.4
2.5

3.7
3.7
- 12.5

3.7
3.7
- 10.7

Services to the U.S. Treasury and
other government agencies2 . . .
Total
Reserve Banks
Board of Governors

131.5

137.0

135.9

4.2

-.8

1,199.4
1,117.4
82.0

1,249.3
1,164.1
85.2

1,284.1
1,197.8
86.3

4.2
4.2
3.9

2.8
2.9
1.3

1. Operating expenses reflect all allocations for support and overhead and exclude capital outlays. The
operational area unique to the Board of Governors,
System policy direction and oversight, which is shown
separately in chap. 2, has been allocated across the

the Treasury and other government
agencies. The operational area unique
to the Board of Governors, System
policy direction and oversight, is considered an overhead expense of the
System (see chapter 2).
The operational areas of the System are described more fully in appendix A. Appendix B describes the
System's budget process, and appendix C discusses the adjustments made
by the System in the 1986 and 1987
budgets as a voluntary response to the
Gramm-Rudman-Hollings legislation.
Net Expense
In 1987, the net cost to the public of
operating the Federal Reserve System
is expected to be $547 million, or only
43 percent of total expenses (table
1.3). The following items are deducted from total System expenses to de


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 of Governors
does not operate in this area.

rive the net cost: (1) receipts for
payments-mechanism services provided to depository institutions; (2) other
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 fiscalagency services.
As required by the Monetary Control Act, receipts for priced services
represent fees that are set to recover
the full cost of providing these services to depository institutions, including 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 private business
firm. These services and their effect
on Federal Reserve budgets are discussed in appendix D; the revenue

8

Federal Reserve System

Table 1.3
Operating Expenses of the Federal Reserve System, Net of Receipts, 1985-87'
Millions of dollars, except as noted

Item
Total System operating expenses

Percent change

1985

1986

1987

actual

estimate

budget

1,199

1,249

1,284

614
1
97

630
1
101

635
12:
90

2.6

.8

3.3

- 10.3

487

518

547

6.4

5.5

1986-87

1985-86
4.2

2.8

LESS

Revenue from priced services
Other income
Reimbursements
EQUALS

Net System operating expenses

1. Details may not add to totals because of rounding.
2. Beginning in 1987, about $10 million charged to
depository institutions for Treasury services will be re-

corded as Federal Reserve income rather than transferred directly to the U.S. Treasury and claimed as a
reimbursement.

from such services is detailed in table
1.4. A l l sources and uses of funds are
presented in appendix E, and the audits to which the System is subject are
discussed in appendix F.
"Other income" includes fees from
services such as the transfer of U.S.
Treasury book-entry 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.
In October 1986, the Board requested public comment on a proposal to
charge for the supervision of Edge act
corporations and for processing bank
and bank holding company applications. If adopted, the proposal would
yield approximately $23 million in additional receipts in 1987. This amount
is not included in 1987 budget data.

To facilitate planning for 1987,
Federal Reserve budgets were formulated at the outset to conform with
the spirit of Gramm-Rudman-Hollings. Many of the resulting cuts are
targeted on personnel costs. To the
extent possible, the costs of staffing,
training, cash awards, and recruiting
will be reduced and the lag in filling
vacant positions lengthened. Reductions are also planned in public information programs; consumer affairs
regulation; and library expenses, thus
reducing support to research economists. In other areas, the development of software applications has
been scaled back and capital acquisitions have been deferred, requiring
Table 1.4
Revenue from Priced Services, 1985-87'
Millions of dollars
1985

1986

1987

actual

estimate

budget

Funds transfer and
net settlement
Automated clearinghouse..
Commercial check
Book-entry securities
Definitive securities
Noncash collection
Cash services

65
23
465
24
7
14
16

70
31
486
8
7
14
14

70
34
486
9
7
13
15

Total

614

630

635

Service

1987 Budget Initiatives
A major factor in Federal Reserve
System budgeted expenses for 1987
was the Board's decision to reduce
System expenses in a manner consistent with the intent of the GrammRudman-Hollings legislation, passed
in late 1985 (see appendix C).



1. Details may not add to totals because of rounding.

9 Federal Reserve System
the extended use and continued depreciation of existing furniture and
equipment. In addition, certain building repairs have been deferred.
The System is also studying means
through which it can recover more of
its expenses by charging fees for some
services that are now provided without charge. One proposal, noted earlier, is charging for the supervision of
Edge act corporations and for processing bank and bank holding company applications. Some Reserve
Banks are also attempting to consolidate operations so that additional
space can be leased to outside tenants, and the System is planning to
add to the list of publications for
which there is a charge.
Also affecting the 1987 budget is
the continued emphasis on enhancing
the System's supervision and regulation program. The effort involves increasing the frequency and scope of
Federal Reserve on-site examinations
and strengthening the procedures for
reporting deficiencies to bank managements and boards of directors
through on-site meetings. These steps
are intended to promote early identification of problems in banking
organizations and expeditious correction of weaknesses through more frequent and clearer communications between bank supervisors and bank
boards of directors. The Board believes this initiative is of such importance that it asked the Reserve Banks
to target their Gramm-Rudman-Hollings reductions for 1986 and 1987 on
other areas. For 1987, the Board also
allowed a higher percentage increase
in expenses for the supervision and
regulation area at the Board than it
allowed for other areas.
Additional expenses will arise from
the continued implementation of the
Treasury Direct Access Book-Entry
System (Treasury Direct). A program



for the safekeeping of marketable
Treasury securities for individual investors, Treasury Direct allows more
efficient processing of investor accounts and lowers costs to the U.S.
Treasury. The system now covers
Treasury notes and bonds; Treasury
bills are to be added in early 1987.
Another initiative in services to the
U.S. Treasury is the development of a
Public Debt Accounting and Reporting System and the centralization of
processing for payroll bonds and
book-entry savings bonds.
Automation is another area in which
expenses grew more than the average
in 1987. At the Board, the development of office automation is continuing with the purchase of personal
computers. The full-year effect of depreciation of a new Board mainframe
computer and the expiration of warranties on data processing equipment
will also contribute to higher incremental automation expenses. At the
Reserve Banks, an increase in automation expenses is expected to result
from shifts to equipment that is compatible with the System's long-range
automation plan; the improvement of
check equipment; office automation;
encryption of communications links;
and the purchase of personal computers used in communication networks with financial institutions. The
costs of these programs are partially
offset by scaling down efforts to develop common software applications
among the Reserve Banks.
As a final matter, when the Board
and the Reserve Banks prepared their
1987 budgets, no consideration was
given to the effect of a new standard
dealing with employers' accounting
for pensions (Financial Accounting
Standard 87). Implementation of this
standard will likely result in a reduction in Federal Reserve System expenses in 1987.

11

Chapter 2

Board of Governors
This chapter analyzes the operating
and capital budgets of the Board of
Governors of the Federal Reserve System and then examines 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. Trend data and a discussion of the Board's budget process
appear in the appendixes.
An Overview of the Board's
1987 Budget
The 1987 operating budget of the
Board of Governors totals $86.3
million, an increase of $1.1 million,
or 1.3 percent, over 1986 estimated
expenses. The Board's budget accounts for 5.9 percent of the System's
budget (including currency costs).
The relatively low rate of growth in
Board expenses between 1986 and
1987 is the result of the Program Improvement Project (PIP); measures
adopted by the Board to comply voluntarily with the spirit of the GrammRudman-Hollings legislation; and a
carefully controlled program of automation. The Board instituted PIP in
mid-1984 to reduce expenses by scaling back lower-priority functions and
improving productivity. Although the
program was systematically implemented over 1985 and 1986, 1987 is
the first budget year in which its full
annual savings will be realized. The
1987 increase in savings tied to the
PIP program amounts to $2.2 million; the savings from the program




over the 1985-87 period total $5.6
million.
Measures adopted by the Board in
1986 to comply voluntarily with the
spirit of the Gramm-Rudman-Hollings legislation produced $1.4 million in budget reductions. Rather
than eliminate approved programs,
the Board decided to reduce their
scope and thus the resources they require. Reduction in personnel expenses, made possible by slowing the
pace of hiring, accounted for more
than 50 percent of the $1.4 million.
A spirit of restraint imbued the
planning for the 1987 budget. After
extensive meetings to set priorities
and to seek ways to generate income
and reduce expenses, the Board developed a guideline authorizing a 2.6
percent limit to growth in the budget.
The difference between the guideline
and the authorized increase of only
1.3 percent results from several factors: savings of $550,000 from acquisition of the Board's mainframe
computer at a cost lower than anticipated; $486,000 anticipated from
new charges for Board publications;
and savings of about $500,000 from
the reduction of 22 positions beyond the PIP-related cuts in the three
divisions of Information Resources
Management.
Two major goals of the 1987 budget
are to strengthen the supervision
function and to sustain the effort to
automate functions when doing so
will reduce staffing needs or permit
faster response and more flexibility.
Most of the 1987 initiatives in automation are in the monetary and eco-

Board of Governors 12
nomic policy area. The major effort
to automate began in 1985 in the supervision and regulation area, which
has faced unprecedented growth in
workload and in demands for rapid
responses to financial problems in the
banking industry.
Centrally provided resources for
data processing account for 23.3 percent of the expenses of the Board of
Governors. With the 1987 budget, the
Board changed its procedure for budgeting and accounting for such resources to better ensure that their use
is an integral and justified part of
each manager's budget. To accomplish this objective, the Board introduced a system of charges that recognize these expenses as direct costs to
the users of the resources. Since, for
certain objectives, there are alternatives to data processing, both the operating program manager and the data
processing manager now have a stronger incentive to be more efficient.
As a result of policy decisions in
late 1985, the banking supervision
and regulation operational area exhibits the greatest growth in 1987. Increases in staffing, training and development, and automation support
needed to strengthen the banking

supervision and surveillance functions are responsible for the increase
in this area.
1987 Budget by Operational Area
Tables 2.1 and 2.2 display respectively the operating expenses and number
of authorized positions in each of the
Board's four operational areas for
the years 1985-87. In addition to the
major influences on all operational
areas in 1987—PIP savings, the general pay increase of 3.0 percent, and
inclusion of data processing costs as a
direct charge to users—each area has
experienced a shift in priority.
For example, the increased activity
in supervision of financial institutions
is producing a 2.8 percent increase in
this operational area; closer review of
Reserve Bank operations will cause a
1.6 percent increase for System policy direction and Board oversight; a
large-scale automation network is an
important part of the 1.1 percent increase for the formulation of monetary and economic policy; and completion in 1986 of projects to develop
major data processing systems will
reduce expenses for services to financial institutions and the public 12.1

Table 2.1
Operating Expenses of the Board of Governors, by Operational Area, 1985-87
Thousands of dollars, except as noted
Percent change

1985
actual

1986
estimate

1987
budget

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

45,136
19,259

45,475
21,474

45,985
22,080

2,589
15,051

2,293
15,955

2,015
16,213

11.4
6.0

12.1

Tolal

82,035

85,197

86,293

3.9

1.3

Operational area

1. Operating expenses reflect all allocations for support and overhead, including data processing support.
They exclude capital outlays. The operational area,




1985-86

1986-87

2.8
1.6

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.

Board of Governors

13

Table 2.2
Positions Authorized at the Board of Governors, by Activity, 1985-87
Number, except as noted

Acii\ 1 ly

1985
actual

Operational area
Monetary and economic policv
Superv ision and regulation
Services 10 financial institutions and
[lie public
Svsiem policv direction and oversight

1986
estimate

1987
budget

Percent change
1985-86

1986-87

41 1
242

396
262

396
263

- 3.6
8.3

0
.4

22
152

20
150

20
151

-9.1
1.3

0
.7

781

736

734

5.8

- .3

1,608

1.564

1.564

2.7

0

Support and overhead
Support and overhead
Total

percent. Table 2.2 also shows the
relatively large decrease between 1985
and 1987 in positions classified as
support and overhead.
Monetary and Economic Policy
Under its monetary and economic
policy function, 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 $46.0 million in 1987,
an increase of $0.5 million, or 1.1
percent, over the estimate for 1986
(table 2.3). The 1987 budget will
allow continued funding of current

programs within this function. The
budget also will support initiatives in
end-user computing that include the
acquisition of 125 workstations and
their integration with a departmental
computer with an operating cost in
1987 of $865,000. The microcomputer network will foster more efficient
collection and analysis of data at a
cost lower than the present Board
mainframe configuration allows. It
will also free capacity on the mainframe and permit more efficient processing for other users. Equally important is the anticipated gain in job
satisfaction for professionals, who increasingly depend on such equipment
for research and analysis.
Expenses for program direction rose
sharply in 1986 and will rise almost 5

Table 2.3
Expenses of the Board of Governors for Monetary and Economic Policy, 1985-87
Thousands of dollars, except as noted
Perceni change

1985
actual

1986
estimate

1987
budgei

1985-86

1986-87

Development and dissemination of
economic information
Proaram direction

35,303
9,833

31,921
13,554

31,773
14,212

-9.6
37.8

- s
4.9

Total

45.136

45,475

45,985

.8

I.I

Category




Board of Governors 14
percent in 1987. The 1986 increase
was matched by a decrease in development and dissemination of economic
information. That change is related
to the decision to centralize computing resources in program direction in
1986; thus the 1986 and 1987 operating costs of the new office automation and departmental computing system are placed in program direction.
During 1986, 15 positions in monetary and economic policy were abolished as part of the Program Improvement Project; the positions
directly associated with this operational area therefore will be 2.0 percent fewer on average during 1987.
Efficiencies stemming from automation will compensate for part of the
decrease; however, some flexibility
will be lost in long-term domestic and
international research.
Supervision and Regulation
Supervision and regulation of financial institutions at the Board consists
of three activities. Supervision includes reviews of examination and inspection reports from the Reserve
Banks, special studies related to international applications, direction of enforcement actions, and regulation of
trust activities. Regulation involves
writing regulations; overseeing merg-

ers, foreign banking activities, and
compliance with consumer regulations;
and regulating securities credit. The
third activity, program direction, consists of management and administration.
Expenses for supervision and regulation are expected to be $22.1 million
in 1987, 2.8 percent above the 1986
estimate (table 2.4). The condition of
the nation's banking industry has
called for intensified supervision,
surveillance, and enforcement, and
meeting these needs continues to be a
priority in 1987.
One problem in handling the heavier
workload in this operational area is
the difficulty in recruiting staff members with specialized training in bank
examination and financial analysis.
The Board is handling this problem
through enhanced training courses to
address recent developments in the
banking industry and the expanded
scope of bank holding company
supervision.
Supervision and regulation is prominent in the Board's automation plans
for 1987. Implementation in 1985 and
1986 of a major office automation
system and communication network
has reduced costs and provided the
tools for improved analysis. By providing better and more timely data on
bank structure, automation has also

Table 2.4
Expenses of the Board of Governors for Supervision and Regulation
of Financial Institutions, 1985-87
Thousands of dollars, except as noted
Percent change

1985
actual

1986
estimate

1987
budget

1985-86

1986-87

Supervision
Regulation
Program direction

13,181
2,552
3,526

13,401
2,536
5,537

13,825
2,731
5,524

1.7
-.6
57.0

3.2
7.7
-.2

Total

19,259

21,474

22,080

11.5

2.8

Category




Board of Governors
improved the Board's ability to process complicated applications and to
analyze potential mergers more
quickly.
In 1986, 20 positions (net) were
added to this area in connection with
the reorganization and strengthening
of the supervision function. Another
position is added in 1987, bringing to
263 the number of positions directly
associated with this operational area.
Funds for program direction in
banking supervision and regulation
increased $2 million from 1985 to
1986; they remain comparatively
stable between 1986 and 1987. The
1986 increment resulted from the expansion of the training program to
accommodate current needs and objectives, the addition of two functional areas (strategic planning and
liaison and information resources
management), and a major automation initiative.
Services to Financial Institutions
and the Public
Services to financial institutions and
the public involve support and oversight of the payments-mechanism
functions of the Federal Reserve
Banks. These functions include check
payments, electronic payments, and
the currency and food coupon operations. The Board's staff provides
oversight and control in these areas;

15

the Reserve Banks provide direct
management of operations.
The 1987 budget of $2 million for
services to financial institutions and
the public is 12.1 percent less than
estimated 1986 expenses (table 2.5).
This decrease is made possible by the
completion of a portion of a project
to minimize risk in the payments
mechanism.
The number of positions in this operational area remains at 20 in 1987.
If legislation on delayed funds availability is approved in 1987, an additional position may be required to
meet the Board's responsibilities.

System Policy Direction
and Oversight
System policy direction and oversight
includes resources for the supervision
of System and Board programs. The
1987 budget of $16.2 million is 1.6
percent higher than 1986 estimated
expenses (table 2.6). A significant
part of this increase lies in oversight
of Federal Reserve Bank operations.
System policy direction includes
the Office of Board Members and the
management and support of Board
functions. Expenses in this area will
grow 0.6 percent in 1987. The rate of
growth would have been lower except
for the cost of reinstating the Operations Review Program now that the

Table 2.5
Expenses of the Board of Governors for Services to Financial Institutions
and the Public, 1985-87
Thousands of dollars, except as noted

Category

Services to financial institutions
and the public




Percent change

1985
actual

1986
estimate

1987
budget

1985-86

1986-87

2,589

2.293

2.015

- 11.4

-12.1

Board of Governors 16
Table 2.6
Expenses of the Board of Governors for System Policy Direction
and Oversight, 1985-87
Thousands of dollars, except as noted
Percent change

1985
actual

1986
estimate

1987
budget

1985-86

1986-87

System policy direction
Oversight

4,600
10,451

5,611
10,344

5,642
10,571

22.0
- 1.0

.6
2.2

Total

15,051

15,955

16,213

6.0

1.6

Category

Program Improvement Project has
ended.
The System oversight element recognizes the need to reinforce, by improved automation, the ability of the
Board to examine the electronic data
processing controls at the Federal
Reserve Banks. This improvement
also helps the Board to comply with
the Federal Reserve Act requirement
to examine each Bank annually. The
incremental costs of enhancing oversight of Bank operations are largely
offset by the savings from completing
in 1986 part of a project in the System's planning and accounting system.
One position (net) is added for this
operational area, for a total of 151.
Trends in Board Expenses
and Positions
The 1987 Board budget represents an
increase of 1.3 percent over estimated
1986 expenses. As chart 2.1 shows,
this rate of increase is markedly lower
than those of recent years. Over the
past 10 years, the greatest rate of increase occurred in 1977, when a large
general pay increase and a large payment to cover retirees' cost-of-living
adjustments (COLA) worked to increase the Board's operating expenses
12.8 percent. The 3.3 percent increase in 1981 was attributable to the
Board's program to reduce spending



and positions as well as to a dramatic
reduction in the COLA for retirees.
Without that one-time reduction in
COLA expense, the rate of growth
rose again in 1982, and it remained
relatively stable until 1985. A decrease in the rate of growth for personnel expenses in 1985 was offset by
higher costs for automation, including those of the Contingency Processing Center, which was begun in 1984.
A further drop in the growth rate of
personnel expenses in 1986 and a
drop in such expenses in 1987 have
offset higher automation costs, yielding a rate of growth in expenses for
1986 and 1987 that is lower than that
for any two years in the last ten.

Chart 2.1
Annual Rate of Change in Operating
Expenses of the Board of Governors,
1977-87 1
Percent

1
1977

I

I

I

I
i
1982

I

I

1. For 1986, estimate; 1987, budget.

!

I
1987

Board of Governors
Chart 2.2 compares the Board's
operating expenses in current and
constant dollars over the 1977-87
period. Although Board expenses
have increased 92.6 percent in current
dollars between 1977 and 1987, the
increase in terms of 1977 dollars is
only 0.9 percent. Note that 1987 is the
first year since 1981 to exhibit a decrease, about 2.2 percent, in the
constant-dollar measure.
Five-Year Trend o f Expenses
Table 2.7 presents the Board's operating expenses by operational area for

Chart 2.2
Operating Expenses of the Board of
Governors, 1977-87 1
Millions of dollars

Current dollars

40
t
1977

i

i

i

i
i
1982

i

i

I I
1987

1. For 1986, estimate; 1987, budget.
2. Calculated with the GNP implicit price deflator.

17

the years 1982 through 1987. The
1986-87 increase of 1.3 percent is
substantially lower than the 5.1 percent average annual rate of growth
for the 1982-87 period. This reduction in the rate of growth, reflected in
each of the operational areas, is tied
directly to the Program Improvement
Project. The PIP program reduced
staffing from the levels that would
have prevailed in its absence and thus
reduced annual personnel expenses
$5.6 million. In 1977 dollars, the 1987
budget is smaller than estimated expenses for 1986.
Besides the PIP program, factors
that have been important in all of the
operational areas over the last five
years are the general pay increases in
October 1982 and January 1984, 1985,
and 1987 and the increases in insurance costs associated with medicare
and health insurance. This section
will focus on unique factors in each
operational area.
Monetary and Economic Policy
Expenses in the monetary and economic policy area show an average
rise of 4.2 percent per year in the
1982-87 period. This is somewhat
under the Board average of 5.1 percent for the period. The annual rate

Table 2.7
Operating Expenses of the Board of Governors, by Operational Area, 1982-87
Thousands of dollars, except as noted

Operational area

1982

1983

1984

1985

Percent change

1986
estimate

1987
budget

1982-87'

1986-87

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

37,350

38,574

41,916

45,136

45,475

45,985

4.2

1.1

17,255

18,721

18,034

19,259

21,474

22,080

5.1

2.8

2,062

1,948

2,493

2,589

2,293

2,015

-.5

- 12.1

10,764

12,382

14,032

15,051

15,955

16,213

8.5

1.6

Total

67,431

71,625

76,475

82,035

85,197

86,293

5.1

1.3

1. Annual average.




Board of Governors 18
of growth from 1985 through 1987
will be less than 1.0 percent and will
reflect declines in expenses for staffing that have been partially offset by
the expenses for automation. In 1987,
those expenses support the installation
of a large-scale office automation
system begun in 1986. The system will
pay for itself through reduced use of
more expensive mainframe resources
as well as through greater productivity of the streamlined work force.
The position complement has fallen
sharply in five years. The reductions
are spread over all functions, although
management has borne a disproportionate share. No functions have been
eliminated as automation has enhanced staff productivity. However,
some loss in flexibility has been associated with the lower staffing level,
appearing mainly in a decrease in
long-term research.

and the public is associated with the
elimination in 1985, as part of the
PIP program, of the Service Pricing
Program and the completion of a portion of a project designed to reduce
risk in the electronic payments mechanism. These actions had a dramatic
effect on this operational area, which
is the smallest at the Board.
System Policy Direction and Oversight
The relatively high rate of growth in
expenses over the last five years for
System policy direction and oversight
is tied to the development costs for
improved office automation and for
management of administrative data,
as well as new procedures and resources to strengthen oversight of key
Reserve Bank operations. These costs
have now started to decline. In the
1985-86 period, and to a lesser extent
in 1987, development costs have
fallen for data processing projects
associated with oversight of the accounting and planning functions at
the Reserve Banks. Costs associated
with administrative management of
data have also started to decline and
should fall further in 1988. In the
meantime, savings generated by the
investment in this area are starting to
be reflected in savings in overhead
and in improved efficiency within the
other operational areas.

Supervision and Regulation
Expenses for supervision and regulation rose in 1983, reflecting support
for the Neighborhood Reinvestment
Corporation and an increase in the
volume of data processing for application processing, examinations, and
surveillance. Expenses fell in 1984
as these projects were partly completed and as activity in the consumer
regulation area declined. From 1985
through 1987, expenses in this area
will rise 14.6 percent, while expenses
for the remainder of the Board's
activities will rise only 2.3 percent.
The advance reflects the new positions authorized for supervision in
1986 and the cost of the 1985 automation initiative to meet the tremendous growth in workload.

This section covers experience in both
personnel and nonpersonnel services
over the 1977-87 period.

Services to Financial Institutions
and the Public
The low rate of increase in expenses
for services to financial institutions

Personnel Services
Between 1977 and 1987, costs of personnel services rose 74.7 percent in
current dollars and declined slightly in




10-Year Trend
of Expenses and Positions

Board of Governors
1977 dollars (see appendix chart G.l).
Until recently, much of the growth in
this area related to general pay increases (GPIs) for Board staff and
cost-of-living adjustments for retirees, both of which responded to
relatively high inflation rates. For example, a GPI of 5.5 percent in October 1978, followed by a 7.0 percent
GPI in October 1979 and an increase
in the COLA allowance for annuitants, produced an increase in the
costs of personnel services of more
than $4 million, or 12.7 percent, in
1979. GPIs of between 7.0 and 9.0
percent continued to drive costs of
personnel services upward until 1983,
when the GPI was only 4.0 percent.
The rate of growth in personnel expenses began to decline in 1984, as
GPIs and COLAs fell and Board
managers began holding vacancies
open under the PIP program.
Employment and Positions
There are eight fewer positions budgeted at the Board for 1987 than there
were in 1977, even though the Board
assimilated a heavier workload (appendix chart G.2).
The Board began to reduce positions in 1979, cutting 36 in that year.
In 1980, however, 67 positions were
added, most in response to the work
generated by the Monetary Control
Act. In 1981, 32 of those positions
were abolished as the MCA workload
was assimilated and lower-priority
work was eliminated. A resumption
of increases in the workload—much
of it associated with further implementation of the MCA—caused a
steady rise in positions from 1981
through 1984 (in all, 110 positions, or
7.0 percent). The largest portion of
this increase took place in centralized
data processing (50 positions); the
next largest increases were in oversight in the System policy direction



19

and oversight operational area (15
positions) and in supervision and regulation (6 positions). The establishment of the Contingency Processing
Center, a support function, required
an increase of 17 positions in 1984.
The remaining 22 positions were added to various functions throughout
the Board.
The Program Improvement Project, started in late 1984, is responsible
for the sharp decline in positions and
employment during 1985 and 1986.
During those two years, the program
abolished 143 positions. Levels of
positions and employment at yearend 1986 are expected to hold steady
in 1987.
Nonpersonnel Services
From 1977 to the level budgeted for
1987, nonpersonnel expenses rose 152
percent in current dollars and 42 percent in 1977 dollars (appendix chart
G.3). The current-dollar increase is
large compared with that in personnel
services. The increase stems largely
from automation initiatives, including the purchase of a new mainframe
computer and office automation
equipment and creation of the Contingency Processing Center. Much of
the remaining increase is derived
from higher rates for utilities, airfare,
postage, and printing.
Characteristics of the 1987 Budget
This section provides detail on the
changes in expenses for personnel and
nonpersonnel services and for data
processing for 1987.
Personnel Services
The budgeted costs of personnel services for 1987 are down $157,000 (0.3
percent) from 1986. A major decrease
of $2.2 million is associated with the

Board of Governors 20
Program Improvement Project: in
1986, that program involved one-time
outlays of $942,000 in severance payments to employees and $1.3 million
in expenses for salaries and lump-sum
leave for employees whose positions
were abolished. Further savings of
$500,000 resulted from the reduction
of 22 positions in centralized data
processing; a reduction of $650,000
came from the increase in the time
that vacant positions throughout the
Board remain open and from a onetime outlay of back pay in 1986 to
senior level managers.
Offsetting these savings are the
costs associated with a 3.0 percent
general pay increase ($1.6 million);
routine salary actions taken in 1986
and planned for 1987 ($1.2 million); a
net increase of $49,000 in the retirement plan (1.8 percent); and an increase of $291,000 in insurance payments (10.2 percent). The last derives
partially from a 15 percent increase in
the rates for the Board's health insurance plan and partially from expenses
stemming from the growing number
of retirees that are participants in the
Board health plan.
Chart 2.3 depicts the gradual but
steady decline in the proportion of
the Board's operating budget that is
devoted to personnel services. In 1982,
more than 76 percent of the Board's
total expenses covered salaries, retirement, and insurance, about the same
proportion as in the previous five
years. In 1987, this proportion is a little less than 70 percent. The PIP program, which constrained personnel
costs, and the establishment of the
Contingency Processing Center, with
its heavy proportion of nonpersonnel
expense, are largely responsible for
this trend. In addition, automation
allows divisions to manage heavier
workloads without staff increases.



Chart 2.3
Proportion of Operating Expenses of
the Board of Governors Devoted to
Personnel Services, 1982-87 1
Percent

• • • • • • • • • • • • • • • • • • • • • H I
1983
1985
1987
1. For 1986, estimate; 1987, budget.

Nonpersonnel Services
Chart 2.4 depicts the major elements
of the Board's 1987 budget by object
of expense. About 30 percent of the
budget funds nonpersonnel services.
The largest categories of nonpersonnel services are discussed below.
Depreciation
Depreciation is the largest category of
nonpersonnel expense in 1987, as it
was in 1986. The $1.7 million increase
between 1986 and 1987 reflects capital investments of approximately $17.4
million by the Board in 1986, which
Chart 2.4
Operating Budget of the Board of
Governors, by Object, 1987

I
/
\
/B^X

\

8.7%

5.1%

Travel

/
/

Depreciation
Contractual
professional
services

3.2%

Repairs and
^Hr
maintenance
L — other

N.

'

2.4%
10.9%

Personnel services

69.6%

Board of Governors
included the costs of the new mainframe computer and disk-access devices. The budget for depreciation for
the Division of Hardware and Software Systems will increase 58 percent
to $2.6 million in 1987, reflecting the
purchase of this equipment, while its
budget for rental of equipment will
fall $900,000. Depreciation for the
Contingency Processing Center (CPC)
will increase 14 percent to $1.7 million to accommodate the costs associated with new equipment for contingency processing at the Federal
Reserve Banks. The Banks reimburse
the Board for a portion of the CPC
expense through the Board's CPC income account.
Contractual Professional Services
Contractual services, the second largest category of nonpersonnel expense,
is budgeted to increase $236,000, or
5.6 percent, over 1986. It consists of
four major components: (1) contractual support related to mainframe
software, for $2.7 million (60 percent
of the total); (2) legal and consulting
fees of $544,000 (12 percent); (3) custodial fees of $332,000 (7.5 percent);
and (4) outside computing services
for on-line data services and ad hoc
support, $179,000 (4.0 percent).
Smaller accounts make up the remaining $702,000. Contractual support
for improvements in automation in
the monetary and economic policy
function accounts for the most growth;
it is partially offset by savings in consultant fees in other functions.
Travel
Travel expenses are budgeted at $2.8
million in 1987, an increase of
$110,000 (4.1 percent) over 1986 estimated expenses. All but $12,000 of
the increase is accounted for by two
new positions for improved financial



21

examinations of Reserve Banks and
by the growing number of trips related to supervision activities.
The oversight portion of System
policy direction and oversight accounts for 43 percent of the Board's
1987 travel budget. Most of this travel involves financial examinations.
Training and relocation costs account
for 10 percent.
Repairs and Maintenance
The Board's 1987 budget for repairs
and maintenance is $2 million, half
again as much as 1986 estimated expenses. The Board's mainframe computer accounts for about half of the
1987 total and the CPC for another
quarter. The 1987 increment reflects
the transition from warranty service
on the new mainframe computer to a
maintenance contract.
Chargeback and Accountability
for Information Resources
Management
In 1987, costs of support from centralized data processing appear explicitly in division budgets. This process ensures that managers plan the
most efficient mix of resources necessary to attain their objectives.1
The importance of centralized information resources management in
the budgets of the Board's largest
divisions is shown in chart 2.5. The
reductions in positions under the PIP
program, the gains in productivity
that allowed other reductions in positions, and budgetary restraint by divisions will reduce the cost of these resources in 1987. This decrease reverses
1. Centralized data processing is handled by
the three divisions of Information Resources
Management: Office of the Executive Director,
Applications Development and Statistical Services, and Hardware and Software Systems.

Board of Governors 22
Chart 2.5
Operating Costs
Data Processing
Operating Costs
Divisions of the

for Centralized
and Total
in the Largest
Board of Governors1

Chart 2.6
Proportion of Expenses and Positions at
the Board of Governors Devoted to
Centralized Data Processing, 1982-87 1
Percent

Millions o f dollars
• Centralized data
processing costs
Research and
Statistics
Support Services
18
Banking Supervision
and Regulation
Federal Reserve
Bank Operations
International
Finance
A l l other

1. See text note 1.

the recent pattern of steady growth,
attributable largely to the Monetary
Control Act of 1980. Chart 2.6 depicts the proportion of expenses and
positions at the Board accounted for
by the three divisions of Information
Resources Management for 1982-87.
Positions in the 1987 Budget
The 1987 budget provides 1,564 positions (table 2.8). It adds positions to
some divisions and deletes them from
others for a net change of zero from
the number authorized at the end of
1986. In that year a net of 44 positions were abolished through the following combination of actions: Boardwide cuts stemming from the PIP
program; reductions permitted by
automation in the divisions of Information Resources Management; ad


I

I
1983

;

4'

:

I

I

1985

1987

1. See text note 1. For 1986, estimate; 1987, budget.

ditions to the bank supervision program; and miscellaneous additions
and reductions. Here are the changes
in the number of positions between
year-end 1985 and year-end 1986 resulting from these actions:
PIP program
IRM reductions
Bank supervision
Miscellaneous (net)

-50
-22
+ 29
-1

Total

-44

Table 2.9 shows staffing levels in
1985 and 1987 by operational area.
The budget includes three new
positions. One will support the information resources function in the Division of Banking Supervision and
Regulation. The remaining two are in
the Division of Federal Reserve Bank
Operations: one will work directly on
examinations and the other will provide support for the bank examination program for electronic data processing reviews at the Federal Reserve
Banks and for training other examiners in EDP techniques. The examination program lost several senior
employees in 1986 and needs to com-

Board of Governors

23

Table 2.8
Positions at the Board of Governors, by Division, 1985-87
Number

Division
Office of Board Members
Office of Staff Director for Management
Office of Staff Director
for Monetary and Financial Policy
Office of Staff Director
for Federal Reserve Bank Activities
Office of the Secretary
Legal
Research and Statistics
International Finance
Banking Supervision and Regulation
Consumer and Community Affairs
Federal Reserve Bank Operations
Personnel
Support Services
Office of the Controller
Office of the Executive Director
for Information Resources Management
Applications Development
and Statistical Services
Hardware and Software Systems
Contingency Processing Center
Total

pensate for the reductions in audit
staffs at the Federal Reserve Banks
resulting from their efforts to follow
Gramm-Rudman-Hollings.
Three positions are abolished in the
1987 budget. Two are accounted for
by productivity improvements tied to
automation projects in the Office of
the Secretary and in the Office of the
Controller, and the third by a reassessment of staffing in the Office of Board
Members.

1985
year-end

1986
year-end

1987
budget

Change
1985-86

36
12

36
11

35
11

0
- 1

9

7

7

-2

9
59
63
322
102
138
43
107
67
268
32

5
57
64
310
100
159
42
107
67
259
32

5
56
64
310
100
160
42
109
67
259
31

1986-87
- 1
0
0

-4
-2
1
- 12
-2
21
- 1
0
0
-9
0

0
- 1
0
0
0
1
0
2
0
0
-1

2

46

46

44

0

229
91
19

171
72
19

171
72
19

-58
19
0

0
0
0

1,608

1,564

1,564

-44

0

economic policy operational area.
Acquisitions planned for 1987 include
a network of 125 workstations, which
offer desktop computing to one-third
of the research economists, and improvements and upgrades to existing
equipment and systems in support of
professionals and clerical personnel.

Chart 2.7
Capital Budget of the Board of
Governors, by Type of Expense, 1987

Capital Budget
Chart 2.7 depicts the composition of
the $4.6 million budgeted by the
Board for capital requirements for
1987. Approximately $1.9 million (41
percent) will provide office automation support for 13 of the Board's 19
offices and divisions. The largest
single initiative in this category is the
$1 million effort in the monetary and



- Office
automation

41.1%

Contingency
Processing
Center
19.4%
Buildings and
grounds
17.5%
16.6%
Other

5.4%

Board of Governors 24
Table 2.9
Distribution of Division Positions at the Board of Governors,
by Activity, 1985 and 1987'
Number

Division

Monetary and
economic policy

Supervision and
regulation

1985
Office of Board Members
Office of Staff Director
for Management
Office of Staff Director
for Monetary
and Financial Policy
Office of Staff Director
for Federal Reserve
Bank Activities
Office of the Secretary
Legal
Research and Statistics
International Finance
Banking Supervision
and Regulation
Consumer and Community
Affairs
Federal Reserve
Bank Operations
Personnel
Support Services
Office of the Controller
Office of the Executive Director
for Information
Resources Management
Applications Development
and Statistical Services
Hardware and Software Systems
Contingency Processing Center
Total

1987

1985

0

0

0

0

0

0

0

0

9

7

0

0

0
0
0
300
102

0
0
0
289
100

0
3
36
22
0

0
2
38
21
0

0

0

138

160

1987

1985

1987

20
0
0
0

20
0
0
0

0

0

43

42

0
0
0
0

0
0
0
0

0
0
0
0

0
0
0
0

0

0

0

0

0
0
0

0
0
0

0
0
0

0
0
0

0
0
0

0
0
0

411

396

242

263

22

20

The three divisions of Information
Resources Management plan a joint
office automation effort in 1987
costing $500,000. Other automation
efforts are on a smaller scale, and
many, such as the equipment acquisitions proposed by the Division of
Banking Supervision and Regulation
and the Division of Federal Reserve
Bank Operations, are continuations
of programs initiated during the past
few years.
Capital requirements for the Contingency Processing Center included in
the Board's budget will cost $900,000,
about one-fifth of the Board's requirement for capital funds. The Fed


Services to
financial
institutions
and the public

eral Reserve Banks will reimburse the
Board for the expense associated with
this equipment through payments that
equal the annual depreciation charge.
The Division of Support Services
has proposed programs of improvement and upkeep of the Board's
physical plant costing $813,000, or
17.4 percent of the 1987 capital request. Of the total, $560,000 will pay
for a new roof for the Eccles Building; $135,000 for more efficient cooling of Board facilities, thus ensuring
lower utility costs; and $58,000 for an
ink-jet printer that will yield more efficient production of press releases
and other printed material.

Board of Governors
Table

25

2.9—Continued

Division

System policy
direction and
oversight

Support
and overhead

Total

1985
Office of Board Members
Office of Staff Director
for Management
Office of Staff Director
for Monetary
and Financial Policy
Office of Staff Director
for Federal Reserve
Bank Activities
Office of the Secretary
Legal
Research and Statistics
International Finance
Banking Supervision
and Regulation
Consumer and Community
Affairs
Federal Reserve
Bank Operations
Personnel
Support Services
Office of the Controller
Office of the Executive Director
for Information
Resources Management
Applications Development
and Statistical Services
Hardware and Software Systems...
Contingency Processing C e n t e r . . . .
Total

1987

1985

1987

1985

1987

36

35

0

0

36

35

6

7

6

4

12

11

0

0

0

0

9

7

7
10
0
0
0

5
9
0
0
0

0
46
27
0
0

0
45
26
0
0

9
59
63
322
102

5
56
64
310
100

0

0

0

0

138

160

0

0

0

0

43

42

87
6
0
0

89
6
0
0

0
61
268
32

0
61
259
31

107
67
268
32

109
67
259
31

0

0

2

46

2

46

0
0
0

0
0
0

229
91
19

171
72
19

229
91
19

171
72
19

152

151

781

734

1,608

1,564

1. The data for 1985 are as of December 31; the
data for 1987 are budgeted numbers.

Computer operations will require
capital outlays of approximately
$770,000, or 15.2 percent of the
1987 capital request. Major acquisitions in this category are a laser
printer ($362,000) to meet growing
volume and provide a backup to the
current printer, and tape drives
($153,000) to support technological
advances in the computer center.
Expenditures for miscellaneous
furniture and equipment ($252,000)
account for 5.5 percent of the capital
budget.



1987 Operating Budget by Division
The final budgets of most of the offices and divisions are within the
guideline the Board set. Table 2.10
compares each division's estimated
1986 expenses with its 1987 budget.
Table 2.11 shows the cash requirement—which adds capital needs to
the operating budget and subtracts
depreciation expense—of each division; the cash budget provides data
comparable to those used in presentations of the federal budget.

Board of Governors 26
Table 2.10
Operating Expenses of the Board o f Governors, by Division or Account, 1986-87
Dollars, except as noted

Item
Division
Office of Board Members
Office of Staff Director for Management
Office of Staff Director
for Monetary and Financial Policy
Office of Staff Director
for Federal Reserve Bank Activities
Office of the Secretary
Legal
Research Statistics
International Finance
Banking Supervision and Regulation
Consumer and Community Affairs
Federal Reserve Bank Operations
Personnel
Support Services
Office of the Controller
Office of the Executive Director
for Information Resources Management
Applications Development
and Statistical Services
Hardware and Software Systems
Contingency Processing Center (Board cost)
Account
Residual retirement and insurance
Special projects
Information Resources Management income
Special salary actions
Savings and reallocations
Total




1986
estimate

1987
budget

Change, 1986-87
Amount

Percent

112,395
- 1,360,317

4.9
- 19.8

2,283,433
6,881,651

2,395,828
5,521,334

518,464

392,458

- 126,006

-24.3

396,827
2,335,903
3,141,928
22,857,997
5,790,366
8,086,913
1,946,511
8,099,203
3,056,537
15,718,937
1,517,323

273,859
2,384,835
3,304,289
23,415,137
5,966,944
8,588,199
1,928,086
8,006,406
3,154,039
15,644,370
1,551,983

- 122,968
48,932
162,361
557,140
176,578
501,286
-18,425
-92,797
97,502
-74,567
34,660

-31.0
2.1
5.2
2.4
3.0
6.2
-.9
-1.1
3.2
-.5
2.3

3,175,872

3,007,401

- 168,471

-5.3

7,091,306
9,456,132
2,350,361

7,017,744
10,053,288
2,530,914

-73,562
597,156
180,553

- 1.0
6.3
7.7

467,338
680,705
-20,480,300
530,000
- 708,029

552,317
621,296
-20,122,453
605,000
-500,000

84,979
-59,409
357,847
75,000
208,029

18.2
-8.7
-1.7
14.2
-29.4

85,195,378

86,293,274

1,097,896

1.3

Board o f Governors

27

Table 2.11
Cash Budget of the Board of Governors, by Division or Account, 1987
Dollars

Division
Office of Board Members
Office of Staff Director for Management
Office of Staff Director
for Monetary and Financial Policy
Office of Staff Director
for Federal Reserve Bank Activities
Office of the Secretary
Legal
Research and Statistics
International Finance
Banking Supervision and Regulation
Consumer and Community Affairs
Federal Reserve Bank Operations
Personnel
Support Services
Office of the Controller
Office of the Executive Director
for Information Resources Management
Applications Development
and Statistical Services
Hardware and Software Systems
Contingency Processing Center (Board cost)
Account
Residual retirement and insurance
Special projects
Information Resources Management income
Special salary actions
Savings and reallocations
Total




Operating
budget

Depreciation

Capital
budget

Cash
budget

(1)

Item

(2)

(3)

( l ) - ( 2 ) + (3)

2,395,828
5,521,334

25,194
10,519

16,646
16,102

392,458

980

273,859
2,384,835
3,304,289
23,415,137
5,966,944
8,588,199
1,928,086
8,006,406
3,154,039
15,644,370
1,551,983

4,303
48,457
56,252
230,230
87,160
318,414
28,147
119,562
27,279
2,091,588
28,284

3,442
0
35,260
1,105,750
161,031
58,951
33,600
58,062
0
996,610
0

3,007,401

148,069

388,110

3,247,442

7,017,744
10,053,288
2,530,914

111,180
2,637,519
1,655,848

167,000
697,507
899,805

7,073,564
8,113,276
1,774,871

552,317
621,296
-20,122,453
605,000
-500,000
86,293,274

0

0
0
0
0
0

0
0
0
0
0

7,628,985

4,637,876

2,387,280
5,526,917
391,478
272,998
2,336,378
3,283,297
24,290,657
6,040,815
8,328,736
1,933,539
7,944,906
3,126,760
14,549,392
1,523,699

552,317
621,296
-20,122,453
605,000
-500,000
83,302,165

29

Chapter 3

Federal Reserve Banks
This chapter examines the expenses
and budgets of the Federal Reserve
Banks. An overview presents 1987 operating expenses for all the Districts,
1987 major initiatives, actions taken
to reduce spending, and the 1987 budget objective. This is followed by
budgets for the four operational areas
and for objects of expense, capital
outlays, and long-term trends.
Appendix H gives additional data,
including a summary of the budget
performance of the Reserve Banks in
1986 and trends in expenses by operational area.
An Overview of the 1987
Budget Year
For 1987, the Board of Governors has
approved $1,197.8 million in operating expenses for the Federal Reserve
Banks, an increase of $33.7 million,
or 2.9 percent, over estimated expenses in 1986 (table 3.1).1 The increase in expenses over the last five
years, from 1982 to the level budgeted
for 1987, averages 4.2 percent per
year in current dollars and 1.0 percent
per year in 1982 dollars.
1. Appendix B describes the budget process
for the Reserve Banks.

Personnel expenses, comprising salaries and benefits, account for $738.9
million, or 62 percent, of the Banks'
expenses in 1987, an increase of $8.3
million, or 1.1 percent, over 1986.
The small increase derives mainly
from a staff reduction of 219, or
almost 1 percent, and a reduction in
retirement and other benefit costs due
primarily to the elimination for 1987
of contributions to the overfunded
retirement plan. Staff reductions are
planned in overhead services, System
projects, priced and nonpriced services to financial institutions, and
monetary and economic policy. Staff
increases are budgeted in supervision
and regulation and services to the
U.S. Treasury. Employment at the
Banks is budgeted at 23,162 average
number of personnel (ANP). 2
Nonpersonnel expenses are budget2. The term "average number of personnel"
describes levels and changes in employment at
the Reserve Banks. A N P measures the number
of employees in terms of full-time positions for
the time period. For instance, a full-time employee who starts work July 1 counts as 0.5
A N P for that year; two half-time employees
who start January 1 count as one A N P . The
A N P for any given year is the average of the
number of full-time employees (measured in
this way) in the months of that year.

Table 3.1
Operating Expenses of the Federal Reserve Banks, 1985-87
Thousands of dollars, except as noted

Expense
Personnel
Nonpersonnel
Total




1985
actual

1986
estimate

1987
budget

Percent change
1985-86

1986-87

697,411
419,966

730,589
433,478

738,842
458,972

4.8
3.2

1.1
5.9

1,117,377

1,164,068

1.197.813

4.2

2.9

30

Federal Reserve System

ed at $459 million, an increase of
$25.5 million, or 5.9 percent, over
1986. The increase can be attributed
primarily to the following: depreciation and maintenance of equipment,
property depreciation and real estate
taxes (primarily at two new Branch
buildings, Los Angeles and Jacksonville), and the renovation and addition to the building at Chicago.
Major Initiatives in 1987
Several major programs account for
most of the budgeted increase in
Bank expenses: enhanced supervision
of banks and bank holding companies, a new computer contingency
center, improved payment services,
improved physical facilities, and initiatives for the U.S. Treasury. Table
3.2 shows the 1987 budgeted expense
for each of these initiatives and the
amount by which expenses would have

Table 3.2
Increase in the Operating Expenses of the
Reserve Banks, Excluding the Increases
from Major Initiatives, 1986-87
Thousands of dollars, except as noted
Expense item
Operating expenses
1986 total, estimate
1987 total, budget
Increase, 1986 to 1987
Thousands of dollars

Amount
1,164,068
1,197,813

33,746
2.9

LESS

Increases from major 1987 initiatives
Enhanced supervision of banks
and bank holding companies . . .
Computer contingency center
Payment services
Physical facilities
Initiatives for the U.S. Treasury
Total

6,661
3,908
3,507
4,858
4,758
23,692

EQUALS

Increase excluding
major 1987 initiatives
Thousands of dollars
Percent




10,054
.9

exceeded those in 1986 in the absence
of the initiatives. The following discussion briefly describes each program.
The Board of Governors decided in
1985 to intensify System oversight of
state member banks and of bank
holding companies and to strengthen
the procedures for reporting to bank
management. These efforts will cost
$6.7 million more in 1987 than they
did in 1986. Employment in the supervision service is budgeted at 1,412
ANP, an increase of 23.1 percent
over 1985.
A computer contingency center will
provide emergency data processing
for the New York Bank's electronic
transfers of large-dollar funds and
securities. The center cost $2.1 million in 1986 and will cost $3.9 million
in 1987.
Several Districts are improving their
electronic delivery and receipt of payment information and their checkclearing services at a cost of $3.5 million in 1987.
Building projects will cost $4.9
million in 1987: $2.1 million for the
renovation and addition at Chicago;
$1.1 million for the move into the
new Jacksonville building in 1987 and
the increase in taxes, property depreciation, and utilities there in 1987;
$900,000 for the renovation and repair projects at Kansas City and St.
Louis; and $400,000 for the move of
a department in Atlanta to temporary
rental quarters.
A full year of operations and completion of the Treasury Direct Access
Book-Entry System (Treasury Direct)
will increase expenses by $4.4 million
in 1987 and increase staff at the central site in Philadelphia by 24 ANP,
bringing total staff there to 69 A N P
in 1987. The Cleveland Bank is continuing the development of a Public

Federal Reserve Banks
Debt Accounting and Reporting System at a cost of $285,000 more than
in 1986 and is maintaining two savings bonds projects at the Pittsburgh
Branch at a 1987 cost of $97,000.
The total increase in expenses for
these special projects is $24 million in
1987. Excluding this increase, the 1987
budget for the Reserve Banks would
be 0.9 percent greater than expenses
estimated for 1986 (table 3.2).
Reductions in Expenses in
1986 and 1987
In the spirit of the Gramm-RudmanHollings legislation, the Reserve
Banks have made special efforts to
limit the growth of expenses in 1986
and 1987.
Reserve Bank expenses for 1986 are
estimated to be $18.1 million less than
the amount originally approved. This
means the Banks achieved the reduction of $16.7 million targeted by the
Board in early 1986, after the budget
was approved, and further reduced
expenses by $1.3 million (table 3.3).
Staffing for 1986 is estimated at

23,381 ANP, 150 fewer than the approved level of 23,531.
For 1987, the Reserve Banks have
reduced previously planned growth in
expenses by $21.1 million. The reduction made by the Reserve Banks to
1986 and 1987 spending plans thus
totals $39 million. As a result, 1987
expenditures are only $15.7 million,
or 1.3 percent, more than those in the
1986 original budget.
The 1987 reductions were concentrated in overhead, certain Systemwide programs, and deferments in
purchases of equipment and software
and in building repairs. Recoveries
were increased by increasing the space
available for rental and raising the
rental rates in some Districts and by
charging for certain services (table
3.4).
Administrative expenses are an
overhead item that will be reduced by
lowering employment levels, curtail-

Table 3.4
Reductions in Expenses of the Federal
Reserve Banks, by Program, 1987
Thousands of dollars
Item

Table 3.3
Reductions in Expenses of the Federal
Reserve Banks, 1986 and 1987'
Thousands of dollars
Item
1986 original budget

Amount
1,182,137

LESS

Board-approved reduction
Additional Bank reductions

16,732
1,337

EQUALS

1986 estimate
1987 budget before reductions

1,164,068
1,218,927

LESS

Bank reductions

21,114

EQUALS

1987 budget

1,197,813

1. Reductions include increased recoveries.




31

District program
Administration
Protection
Public programs
Personnel
Research
Library

reductions

District deferments
Furniture and equipment
Software
Building repairs
System wide reductions
System automation projects and
centrally provided services .
Audit
Currency
Treasury initiatives
Consumer affairs examinations .
Increased recoveries
Total

32

Federal Reserve System

ing product development, and reducing travel for System meetings. Protection costs will be reduced through
efficiencies in new and renovated
buildings and the installation of automated security systems. Public programs will be reduced through curtailments in staff and publications.
Personnel costs will be scaled back
through reductions in cafeteria service, training, cash awards, and recruitment costs. Also, staff in the research function will be reduced, and
the libraries will reduce expenses primarily by providing less support to
research economists.
Systemwide reductions in automation projects and centrally provided
services were achieved by action of
the Conference of First Vice Presidents. Other Systemwide savings were
obtained by delaying the replacement
of first-generation currency equipment, eliminating several enhancements to the Treasury Direct system,
and changing the frequency and scope
of internal audits and of consumer
affairs examinations.
Budget Objective for 1987
The 1987 budget objective approved
by the Board provides for an increase
of 2.7 percent in total expenses for
Central Bank and Treasury services

Table 3.5
Comparison of 1987 Increases in Budgeted
Expenses of the Federal Reserve Banks
with 1987 Budget Objective
Percent increase from 1986 estimated expenses
1987
budget

1987 budget
objective

Central Bank and
Treasury services
Priced services

1.6
4.7

2.7
3.8

Total

2.9

3.1

Expense item




(table 3.5) and zero growth in net expenses for these services.3 The income
with which to achieve the zero net increase is to be obtained by charging
fees for certain supervisory functions
and for some Treasury services.4
Expenses for Central Bank and
Treasury services are budgeted to increase 1.6 percent, or $10.4 million,
an amount lower than that allowed by
the budget target. Income from Treasury services will rise in 1987, primarily because of an accounting modification to begin properly reflecting
fees for the transfer of Treasury
book-entry securities as current income to the Federal Reserve System.
At present, the Federal Reserve's expenses reflect the cost of this service
but its income does not reflect the
offsetting fees. Claims are submitted
by the Reserve Banks to the Treasury
for reimbursement. Crediting the fees
to current income will allow the Reserve Banks to lower their claims for
reimbursement from the Treasury.
This modification is expected to yield
income of $10 million in 1987.
Additional income of $1 million in
1987 will arise from charges to depository institutions for transfers of
funds to and from the Treasury and
from charges for converting definitive stripped coupons into book-entry
form.
3. Expenses for Central Bank and Treasury
services are the total expenses of the Federal
Reserve Banks less those for priced services.
Fees for priced services are based on expenses
plus the imputed cost of float and the private
sector adjustment factor (see appendix D).
4. In October 1986, the Board issued for
public comment a proposal to charge for supervising Edge act corporations and for processing
bank and bank holding company applications.
If adopted, the proposal would yield about $23
million in annual income to the Federal Reserve System in 1987, but the proposed income
is not included in the 1987 budget.

Federal Reserve Banks
The wide differences between the
budget and the targets for both priced
and nonpriced services have occurred
because the budget objective was developed on the assumption that the
1986 accounting rules would be in
place in 1987. The subsequent review
of the applicability of 1986 accounting rules in 1987, however, resulted in
a shift of about $6 million of support
and overhead from Central Bank and
Treasury services to priced services in

33

order to charge costs to the areas directly benefitting from specific work
to be done in 1987. The accounting
rule changes appear in appendix H.
Operational Areas
Tables 3.6 and 3.7 show Reserve Bank
expenses and employment by operational area. The following discussion
describes major programs in each
area.

Table 3.6
Operating Expenses of the Federal Reserve Banks, by Operational Area, 1985-87'
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... .

1985
actual

1986
estimate

1987
budget

Percent change
1985-86

1986-87

91,965

90,802

1.1

- 1.3

151,991

164,331

171,690

8.1

4.5

742,896

770,745

799,379

3.7

3.7

131,544

137,027

135,943

4.2

-.8

1,117,377

Total

90,945

1,164,068

1,197,813

4.2

2.9

1. Including the costs of support and overhead
services.

Table 3.7
Employment at the Federal Reserve Banks, by Activity, 1985-87
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 overhead
Support
Overhead
Total

1986
estimate

1987
budget

816
1,912

790
2,104

780
2,181

8,754

8,833

1,781

1,805

4,398
5,323
22,984

1985
actual

1. See text note 2 for definition of ANP.




Percent change
1985-86

1986-87

-3.1
10.1

- 1.3
3.7

8,722

.9

- 1.3

1,841

1.3

2.0

4,504
5,346

4,511
5,127

2.4
.4

.2
-4.1

23,381

23,162

1.7

-.9

34

Federal Reserve System

Monetary and Economic Policy
Expenses at the Federal Reserve Banks
for monetary and economic policy
total $91 million and account for approximately 8 percent of their 1987
budgets. Expenses are expected to decline by $1.2 million, or 1.3 percent,
from 1986 (table 3.8). Employment is
expected to be at 780 ANP, a decline
of 10 ANP from 1986.
The drop in expenses results from
the following developments: the expected completion in 1987 of a banking statistics project, which will enhance the System's capacity to process
and analyze financial data from depository institutions; a reduction in
staff for economic policy determination; and the change in accounting
rules. These decreases are partially
offset by increases for salary adminis-

tration, office automation, and initiatives at New York in securities trading
and in the analysis of the financial
problems of developing countries.
Supervision and Regulation
Expenses for supervision and regulation, which total $172 million, constitute 14 percent of the Banks' 1987
budgets and are budgeted to increase
$7.4 million, or 4.5 percent, over 1986
(table 3.9). A major factor in the increase is the continuation of a program instituted in 1985 to strengthen
the supervision of financial institutions and improve communications
with bank management and directors.
The supervision service, which includes the examination activities, is
budgeted to increase $6.7 million, or

Table 3.8
Expenses of the Federal Reserve Banks for Monetary and Economic Policy, 1985-87
Thousands of dollars, except as noted
1985
actual

1986
estimate

1987
budget

Economic policy determination
Open market trading

80,933
10,012

80,816
11,149

Total

90,945

91,965

Category

Percent change
1985-86

1986-87

78,011
12,791

-.1
11.4

-3.5
14.7

90,802

1.1

-1.3

Table 3.9
Expenses of the Federal Reserve Banks for Supervision and Regulation, 1985-87
Thousands of dollars, except as noted

Category
Supervision of District
financial institutions
Administration of
laws and regulations
related to banking
Studies of banking and financial
market structure
Total




1985
actual

1986
estimate

1987
budget

Percent change
1985-86

1986-87

79,847

93,082

99,743

16.6

7.2

65,738

64,912

65,100

-1.3

.3

6,406

6,337

6,847

-1.1

8.0

151,991

164,331

171,690

8.1

4.5

Federal Reserve Banks
7.2 percent. The enhanced supervisory program will be fully implemented by the end of 1987.
Employment in supervision and
regulation is budgeted to increase 77
ANP, or 3.7 percent, almost all in
the supervisory activities. Most of the
Banks have focused their hiring efforts on candidates with significant
experience and advanced degrees to
maximize the immediate results of the
expanded program. Also, they have
designed aggressive training and development programs to develop junior staff more rapidly and to train
new staff.
To fund the enhanced supervisory
program with the least effect on budgeted resources, the Reserve Banks
are shifting resources from other
supervisory areas. For example, the
Banks will reduce the frequency of
examination of smaller banking organizations with satisfactory ratings;
they will reduce the frequency of trust
examinations and examinations for
compliance with consumer regulations; and they will rely more heavily
on state examinations. Also, the

35

Banks are improving productivity
through continued use of automation, including the use of portable
personal computers in the field, lessintensive inspections for low-risk institutions, and in-house analysis in
certain cases.
Even without the enhanced supervisory program, the workload in
supervision and regulation would be
expanding to handle the normal growth
in the formation of new state member
banks and bank holding companies.
The growing number of mergers in
some Districts, the continued expansion of investment banking activities
by multinational banking organizations, the number of problem banks,
and the Board's payment risk reduction program are all placing demands
on resources.
Services to Financial Institutions
and the Public
Expenses for services to financial institutions and the public, which include both priced and nonpriced services, total $799 million and account

Table 3.10
Expenses of the Federal Reserve Banks for Services to Financial Institutions
and the Public, 1985-87
Thousands of dollars, except as noted
Percent change

1985
actual

1986
estimate

1987
budget

1985-86

1986-87

Currency and coin services
Commercial 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

137,516
358,911
52,929
52,531
19,257

136,036
378,381
58,526
55,310
20,479

137,100
394,029
61,237
60,727
23,493

- 1.1
5.4
10.6
5.3
6.3

.8
4.1
4.6
9.8
14.7

20,059
12,262
33,575
55,857

19,747
12,555
36,748
52,963

19,204
13,330
36,546
53,712

1.6
2.4
9.5
-5.2

-2.7
6.2
-.5
1.4

Total

742.896

770.745

799,379

3.7

3.7

Service




36

Federal Reserve System

for almost two-thirds of the Reserve
Banks' 1987 budgets. Expenses are
increasing $28.6 million, or 3.7 percent, over 1986 (table 3.10). A greater
volume of items to be handled is expected in all major operations, and
employment is budgeted at 8,772 ANP,
a decline of 111, or 1.3 percent.
Declines in the number of staff members are consistent with productivity
gains in the processing of checks and
currency and with reductions made in
the spirit of budgetary restraint conveyed by the Gramm-Rudman-Hollings legislation.
Almost half of the expenses in this
operational area are related to commercial check processing. The budget
increase of $15 million, or 4.1 percent, for this service accounts for
most of the increase for the area as a
whole and results from growth in volume and in equipment expenses. In
1987, the System expects to process
14.8 billion commercial checks, 330
million more than 1986. The staff to
handle commercial checks is budgeted
to decline 75 ANP, or 1.4 percent, as
the result of greater efficiency. System initiatives focus on offering new
or improved services such as notification of the return of large-dollar
checks; truncation (under which
checks are not returned to the writer);
and the accelerated availability of
funds through the development of
new products, the enhancement of existing ones, and the expansion of
check-clearing zones.
Expenses for currency processing
are expected to increase by $1.0 million, or 0.9 percent, and constitute 14
percent of this area's 1987 budget.
High-speed processing of more than
14 billion notes is expected next year,
an increase of 4.7 percent, and 18 billion notes are expected to be put in
circulation.



Expenses in the funds transfer service are projected to increase $2.7
million, or 4.6 percent, largely because of the implementation of new
software and the expansion of electronic networks in several Districts.
The System expects to process 85 million transfers in 1987, a rise of 6.2
percent over 1986.
An increase of $5.4 million, or 10
percent, is expected in expenses for
the automated clearinghouse service
because of the growth in workload
(21 percent) and higher costs associated with expanding the electronic
networks. Staff reductions of 11 ANP
are planned in noncash collection as
the growth in volume continues to
decline.
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 $136 million for
1987 and account for 11 percent of all
Bank expenses. Expenses will decline
$1.1 million, or 0.8 percent, from
1986 (table 3.11), primarily because
of the effect of accounting changes
and the cost efficiencies due to lower
workloads. Partially offsetting these
declines is the increased expense of
$4.4 million in 1987 for the Treasury
Direct system, which is operated by
the Philadelphia District. Treasury
Direct requires a staff of 69 ANP at
the central site in Philadelphia in
1987, an increase of 25 from 1986.
The Cleveland Bank is developing a
Public Debt Accounting and Reporting System for the U.S. Treasury at a
cost of $483,000 in 1987, $285,000
more than in 1986; and the Pittsburgh
Branch will serve as the System's central site for processing payroll bonds
and book-entry savings bonds at a cost

Federal Reserve Banks

37

Table 3.11
Expenses of the Federal Reserve Banks for Services to the U.S. Treasury
and Other Government Agencies, 1985-87
Thousands of dollars, except as noted

Service
Savings bonds
Other Treasury issues
Centrally provided
Treasury agency services
Government accounts
Food coupons
Other
Total

1985
actual

1987
budget

Percent change
1985-86

1986-87

37,655
31,234

39,000
28,862

38,427
24,208

3.6
-7.6

- 1.5
- 16.1

7,450
19,959
12,119
23,127

13,819
20,848
12,466
22,034

18,576
21,200
12,169
21,363

85.5
4.5
2.9
-4.7

34.4
1.7
-2.4
-3.0

131,544

137,027

135,943

4.2

.8

of $97,000 in 1987. A n increase of 5
A N P is budgeted for these programs.
Objects of Expense
The expenses of the Federal Reserve
Districts by object are shown in table
3.12.
Personnel expenses comprise salaries of officers and employees, other
expenses to compensate personnel,
and retirement and other benefits.
Total personnel expenses account for
62 percent of the 1987 budget and
have increased 1.1 percent over 1986.
Salaries budgeted for 1987 increased
4.4 percent from 1986, while other
personnel expenses (such as cash
awards and temporary-employment
contracts) declined 27.2 percent; together they total $619 million, or 52
percent of all Bank expenses. Merit
pay increases are partially offset by
reductions in staff and overtime expenses. Higher salary costs arose from
adjustments in the structure of employee salaries; from promotions;
and from reclassifications. These
were offset by an increase in turnover
(the replacement of a departing employee with one having a lower salary



1986
estimate

grade) and 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 Bank bases
its structure of employee (non-officer)
salaries on annual surveys of major
employers in its community. Banks
rely on nationwide surveys 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 fall $13.9 million, or
10.3 percent, from 1986. This decrease resulted primarily because no
contributions are to be made to the
overfunded retirement plan in 1987
and because contributions to group
life insurance will decline; these
decreases were partially offset by increases in expenses for medical and
dental insurance, social security, the
thrift plan, workmen's compensation, and unemployment insurance.
Nonpersonnel expenses account for
38 percent of the Banks' expenses in
1987 and are 5.9 percent above those
in 1986. Equipment costs account for
14 percent of total expenses and are

38

Federal Reserve System

Table 3.12
Operating Expenses of the Federal Reserve Banks, by Object, 1985-87
T h o u s a n d s o f d o l l a r s , except as n o t e d

Object

1985
actual

1986
estimate

1987
budget

Percent change
1985-86

1986-87

PERSONNEL
O f f i c e r s ' salaries
E m p l o y e e s ' salaries
Other personnel
Retirement a n d benefits
T o t a l personnel

51,677
494,110
17,357
134,267
697,411

56,197
526,394
13,839
134,159
730,589

58,954
549,536
10,072
120,279
738,842

8.7
6.5
-20.3
-.1
4.8

4.9
4.4
-27.2
-10.3
1.1

NONPERSONNEL
Equipment
Purchases
Rentals
Depreciation
Repairs a n d m a i n t e n a n c e . . . .
Total equipment

2,572
46,280
60,309
34,261
143,422

2,865
41,196
67,278
39,235
150,574

2,577
36,171
78,843
44,485
162,077

11.4
- 11.0
11.6
14.5
5.0

-10.0
- 12.2
17.2
13.4
7.6

Buildings
Insurance
Taxes o n real estate
Depreciation
Utilities
Rent
Other
Total buildings

283
21,079
21,088
22,946
13,100
13,536
92,032

569
22,936
22,837
23,376
15,185
13,285
98,188

729
24,530
26,838
24,489
16,610
16,204
109,400

101.1
8.8
8.3
1.9
15.9
-1.9
6.7

28.1
6.9
17.5
4.8
9.4
22.0
11.4

Shipping
Postage
Other
Total shipping

13,794
68,975
82,769

13,780
68,645
82,426

13,569
71,196
84,765

-.1
-.5
-.4

- 1.5
3.7
2.8

45,037
20,877
15,396
14,330
6,103
101,743

46,263
20,697
15,711
11,471
8,148
102,290

47,481
21,919
13,679
10,658
8,993
102,730

2.7
- .9
2.0
- 19.9
33.5
.5

2.6
5.9
- 12.9
-7.1
10.3
.4

419,966

433,478

458,972

3.2

5.9

1,117,377

1,164,068

1,197,813

4.2

2.9

Other
Supplies
Travel
Communications
Fees
Other
T o t a l other
Total nonpersonnel
Total

budgeted to increase 7.6 percent. The
increase results from replacements to
ensure compatibility with the System's long-range automation plan
and with automation and communications standards; upgrading, replacement, and reconfiguration of check
equipment; continued implementation of office automation systems;
encryption of communication links;
and purchase of personal computers
to be used in communication networks
with financial institutions.



Building expenses, which constitute
9 percent of total expenses, are expected to increase 11.4 percent, reflecting increases in local tax rates
and assessments, increases in utility
rates and consumption, renovations
and refurbishments, higher rentals in
some Districts, and the full-year effect of new buildings in Jacksonville
and Los Angeles.
Shipping costs, 7 percent of total
expenses, are budgeted to increase 2.8
percent in 1987 because of higher

Federal Reserve Banks
costs of the interdistrict transportation system and anticipated increases
in courier rates.
Other nonpersonnel expenses are
expected to increase by $439,000, or
0.4 percent, reflecting increases in
travel; in expenditures for supplies;
and in other expenses, primarily for
software purchases. These increases
are partially offset by decreases in
communication costs and fees.
Capital Outlays
Table 3.13 shows the plans of the
Reserve Banks for capital spending in
1987.
Capital outlays are budgeted at
$183.5 million, a decrease of $5.3 million, or 2.8 percent, from the 1986
level. Outlays for buildings and for
data processing and communications
equipment continue to dominate the
Reserve Banks' capital budgets.
Building outlays total $74.8 million
in 1987, about 40 percent of total outlays. They include $27.9 million for
the renovation and expansion at Chicago; $13.8 million for construction
of a new building for the Charlotte
Branch; $5.4 million for final work
on the Los Angeles building; $4.8
million for renovations at the Federal

39

Reserve Bank of New York; and $6.1
million for an addition to the Atlanta
Bank and for completion of the Jacksonville building.
Data processing and data communication are budgeted for outlays of
$64.6 million in 1987, about 35 percent of total capital outlays. These include $10.5 million at Chicago for
mainframe processors, a District
communications network, disk drives
and controllers, encryption devices,
and office automation equipment;
$12.1 million at New York for a
new mainframe computer, associated
mainframe peripherals, an office support system, and various replacements
and upgrades for current systems;
$8.5 million at Atlanta for a new
mainframe and peripherals, upgrades
of Branch-office mainframes, minicomputers and office automation systems, and check-processing equipment for the Branch offices; and $7.0
million at Richmond, primarily for
mainframe peripherals, office automation equipment, and replacement
of the District's check processing
equipment.
Furniture and other equipment purchases are budgeted at $18.6 million,
of which $8.1 million is for furniture
and other furnishings. Much of the

Table 3.13
Capital Outlays of the Federal Reserve Banks, by Class of Outlay, 1985-87
Thousands of dollars, except as noted

Capital class
Data processing and data
communications equipment . . .
Furniture and other equipment . . . .
Land and other real estate
Buildines
Building machinery
and equipment
Leasehold improvements
Total




1985

actual

1986
estimate

1987
budget

Percent change
1985-86

1986-87

71,727
21,378
1,093
49,553

83,825
21,826
1,810
72,147

64,617
18,588
14,437
74,785

16.9
2.1
65.6
45.6

-22.9
- 14.8
697.8
3.7

3,766
701

6,249
3,005

7,608
3,506

65.9
328.7

21.8
16.7

148,217

188,861

183,540

27.4

-2.8

40

Federal Reserve System

latter is for small items related to
renovation projects in the Districts of
New York ($1.7 million), Chicago
($1.6 million), and Cleveland ($1.1
million). Of the $10.5 million for
other equipment, the largest expenditures are $2.5 million at New York,
primarily for currency containers and
carts; $1.7 million at San Francisco,
mainly for various replacements; and
$1.3 million at Richmond, primarily
for a printing press.
Building machinery and equipment
are budgeted at $7.6 million, mainly
for fixed items. The major expenditures are $2.1 million at Chicago for
backup power generators and the replacement of Detroit's heating and
cooling system; $1.9 million at Philadelphia, primarily to replace transformers containing PCBs; $1.2 million at San Francisco, largely for an
uninterruptable power system and
emergency generators; and $1.0 million at Cleveland mainly for the renovation of elevators.
Land and other real estate purchases are budgeted at $14.4 million,
primarily to house a computer contingency center and other operations
in the New York District.
Leasehold improvements total $3.5
million and are primarily at San Francisco ($2.2 million) and in the Chicago
District ($0.9 million).

the high rate of inflation drove up
wages. During the period 1980 to
1983, nominal expenses increased an
average of 9.1 percent per year while
the rate of inflation averaged 6.6 percent. The most recent period, 1983 to
1987, shows a return to the pre-MCA
trends, with nominal expenses rising
an average of 3.9 per year and the
rate of inflation averaging 3.1 percent.
Over the last decade the number of
employees at the Reserve Banks has
declined 1,138 ANP, or 4.7 percent
(chart 3.2). In 1974, employment at
the Reserve Banks peaked at 26,567
employees; it then 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 MCA; however, over
the next three years, employment declined a total of 1,320, or 5.5 percent.
It reached 22,669 in 1984, its lowest
level in the 1977-87 period. Employment rose again in 1985 and 1986 as
bank supervisory examiners were added and actions were taken to handle
increasing volume. Employment is

Chart 3.1
Operating Expenses of the Federal
Reserve Banks, 1977-87 1
Billions o f dollars

Trends in Expenses and
Employment
For the 10 years ending in 1987, expenses of the Reserve Banks have increased an average of 6.7 percent per
year in current dollars and 0.9 percent
per year in 1977 dollars (chart 3.1).
Increases were largest during the early
1980s, when the Banks began implementing the requirements of the
Monetary Control Act (MCA) and



1977

1982

1987

1. For 1986, estimate; 1987, budget.
2. Calculated with the G N P implicit price deflator.

Federal Reserve Banks
Chart 3.2

Volumes and Unit Costs

E m p l o y m e n t at t h e F e d e r a l
Banks,

1977-87

Reserve

1

A N P , in thousands 2

I
1977

I

41

t

t

i
I
1982

I

I

t

t
1987

1. For 1986, estimate; 1987, budget.
2. See text note 2 for definition of ANP.

budgeted to decline in 1987 by 219
ANP in part because of budget restraint in the spirit of the GrammRudman-Hollings legislation.
Staff increases in bank supervision
and regulation of 77, or 3.7 percent,
and in fiscal services of 36, or 2.0 percent, are offset by declines in other
operational areas. The increase in
bank supervision and regulation follows a 1986 staff increase of 192 ANP
and brings the two-year growth in this
area to 269, or 14.1 percent. The largest staff decline for 1987, 212 ANP,
or 2.2 percent, will occur in support
and overhead. Staff in the monetary
and economic policy operational area
will decline in 1987 by 10, or 1.3 percent, following a decline of 26, or 3.1
percent, in 1986. And employment in
services to financial institutions and
the public will decline in 1987 by 111,
or 1.3 percent.




Table 3.14 shows the changes in volumes and unit costs in the major services of the Reserve Banks between
1986 and 1987. Total volume for all
measured services is budgeted to increase 3.0 percent over 1986. The decline in unit costs, expected to be 0.7
percent, is concentrated in check collection, the automated clearinghouse,
cash, and securities services. The rise
in unit costs in fiscal services is due
to declining volumes. Over the five
years from 1982 to the level budgeted
for 1987, volume increased an average of 4.4 percent per year, while unit
costs in current dollars increased 0.4
percent.
Table 3.14
C h a n g e s f r o m 1 9 8 6 t o 1987
in Volumes a n d U n i t Costs
o f F e d e r a l R e s e r v e B a n k Services
Percent
Service
Payments
Commercial checks
Automated clearinghouse
Funds transfers
Other

Volume

Unit cost

2.2
20.7
6.2
1.0

- 1.8
-7.4
8.5
3.8

5.3
2.3

- 1.8
2.1

4.9
-29.3
-.7

- 1.8
16.6
4.5

Securities and noncash services. .

4.3

-3.0

All

3.0

-.7

Cash
Currency
Coin
Fiscal agency
Savings bonds
Other Treasury issues
Other

Part II
Special Analysis




45

Chapter 4

Productivity

at the Federal Reserve Banks

An important and continuing objective of the Federal Reserve System is
to provide efficient, high-quality services to the public. To achieve this
objective, the System uses several
tools, the foremost of which is the
Board's review of the Reserve Banks'
annual budgets. In addition, a variety
of statistical measures are used to
evaluate the performance of each Reserve Bank. These statistical measures
also provide the basis for competition
among the Reserve Banks. Finally,
the staff of the Board of Governors
conducts on-site reviews of the Reserve Banks to evaluate their performance and to recommend approaches
for improving operating techniques.
Overview
Since the implementation of the Monetary Control Act of 1980 (MCA), the
Reserve Banks' payment services have
had to compete with private-sector
check clearing, electronic funds transfer, and securities services. The Federal Reserve's successful competition
in the marketplace is one of the best
measures of its operating effectiveness. In addition to being subject to
the test of the marketplace, the Federal Reserve monitors the efficiency
of its services through several measures of productivity.
Factors Affecting Productivity
Several factors influence an organization's productivity, broadly defined
as output per unit of input. One of
the principal sources of productivity
gains is improvement in management.



Better management can make the use
of both labor and capital more efficient. Productivity can also be improved through employee training
and more efficient operating procedures. A larger scale or scope of activities may also raise productivity if
it intensifies the use of fixed assets,
such as buildings and computer equipment. Further, improvements in technology—like the recent advances in
the computer industry that have increased equipment capacity, speed,
and efficiency—raise the productivity
of the users of the technology and reduce operating costs. In general,
whenever any supplier of inputs reduces prices or improves quality,
these gains may lead to improvements
in productivity for the users of those
inputs.
Issues in Measuring Productivity
All the techniques available to measure productivity have limitations.
One critical problem is that changes
in the quality of output, or workload,
generally cannot be captured in workload measures. For example, a reduction in the time taken to clear checks
permits collecting institutions to obtain and use funds for other purposes
sooner. Such a change is clearly an
improvement in quality, but it is not
reflected in workload measures, such
as the number of checks processed.
Because resources must be expended
to achieve faster collection times, performance statistics may show little
change despite the better quality.
Similarly, a bigger staff may be
needed to comply with new laws or

46

Productivity at the Federal Reserve Banks

regulations. In such cases, costs may
rise initially and measured productivity may appear to decline because the
benefits of implementing procedures
to comply with the new laws or regulations cannot be measured. For the
Federal Reserve, implementing the
MCA required the addition of staff
members to administer reserve requirements for all depository institutions, to make Federal Reserve services available to a new group of
institutions that previously had not
been able to use them, to establish
fees for services, and to develop and
implement billing systems. Thus,
while the requirements of the MCA
were being implemented, operating
costs rose. However, the benefits of
increased competition and economies
of scale in the provision of payment
services are long-term benefits that
are now being realized.
Finally, productivity measures can
fluctuate widely in the short term because of the ebb and flow of volume,
which may be beyond the control of
an organization. For example, when
the Reserve Banks began assessing
fees for services, volume fell and
measures of output efficiency declined. Over time, resources were adjusted to improve performance. Thus,
measures of performance over the
short term can be misleading; longterm trends are more reliable.
Measuring Productivity
at the Reserve Banks
The focus of productivity measures at
the Reserve Banks has been the six
major Reserve Bank activities with
quantifiable outputs—check collection, wire transfer of funds, automated clearinghouse (ACH), securities
and noncash collection, currency and
coin, and certain fiscal agency ser


vices. These activities account for
about 70 percent of all Reserve Bank
expenses. Expenses for support functions, such as data processing, and
for overhead activities, such as Reserve Bank management, accounting,
and auditing, are allocated to output
activities to ensure that the full cost
of providing these services is included
in productivity measures.
The Federal Reserve uses the following definitions in measuring Reserve Bank performance:
(1) Employment is the average
number of personnel (ANP), which is
the average annual number of fulltime employees assigned to a specific
activity. Under this definition, two
half-time employees who work for a
full year count as 1 ANP; one fulltime employee who works for onehalf of the year counts as 0.5 ANP.
(2) Manhours are the actual hours
employees work on a defined output
and exclude lunch time, annual leave,
and sick leave.
(3) Workloads are the physical
units of the work performed in a specific activity, such as the number of
checks processed or the number of
savings bonds issued, also called
volume.
(4) Units per manhour, the measure of labor efficiency or productivity, is the workload measure for an
activity divided by the manhours devoted to the activity.
(5) Real unit cost, a measure of
cost efficiency, is the total cost of production, including equipment, building space, and personnel for a specific
activity, divided by the workload for
the activity. The GNP implicit price
deflator is used to adjust costs for
inflation.
(6) Composite labor productivity
and unit cost are measured using
composite workloads. Total costs for

47 Productivity at the Federal Reserve Banks
the six major activities and several
minor ones are divided by the composite workload to calculate the composite unit cost, and the composite
workload is divided by total manhours to arrive at the composite measure of labor productivity. Composite
workloads are developed by assigning
the greatest weight to the workloads
that have the largest effect on total
cost. As a result, trends in costs and
workloads in the larger operating
areas have the greatest influence on
the composite performance measures.
The supervisors and managers of
Reserve Banks use the first four measures to evaluate the specific activities
that they oversee. The fifth measure,
which includes both direct and allocated costs, is used by senior officials
to measure the overall effectiveness
of an activity and to compare each
Bank's performance with that of
other Reserve Banks. The Federal Reserve uses the composite measures to
assess the overall performance of the
Reserve Banks.
Unit costs, a convenient measure of
an organization's efficiency, can serve
as a proxy for productivity; hence,
that measure is charted here for the
major Reserve Bank services, along
with data on employment and the volume of output. The tables display the
annual changes in both unit cost
and labor productivity for each service. Improvements in the trend of
unit costs can arise from the factors
affecting productivity, mentioned
above, as well as from changes in the
relative prices of inputs. On one hand,
the improvements are understated to
the extent that an improved or higherquality product is produced. On the
other hand, some of the reduction in
unit costs may have come from lower
prices or improvements in the quality
of inputs produced by others; thus,



not all of the improved efficiency can
be claimed by the organization producing the final output. Nonetheless,
to the extent that management takes
advantage of changes in relative price
movements to lower the structure of
input costs, an organization's profitability—or, in the case of the Federal
Reserve, its cost efficiency—has improved.
The following discussion presents
composite measures of the Federal
Reserve Banks' performance from
1977 through 1986.' It then considers
productivity developments in each of
the six major activities with measurable outputs.
Reserve Bank Performance
Reserve Bank operations changed significantly in the nine years from 1977
through 1986. On average, employment declined 1.6 percent per year,
composite volume rose 3.9 percent
per year, and the composite unit cost
of all functions declined, after adjustment for inflation, 3.5 percent per
year. Labor productivity increased
5.6 percent (chart 4.1 and tables 4.1
and 4.2).
Although the average performance
during the past nine years was positive, there have been significant fluctuations. From 1977 through 1979,
real unit cost declined at an average
annual rate of 12.6 percent. This
result was achieved through strict
budget controls and spirited competition among the Reserve Banks. On
average, employment declined at an
annual rate of 2.8 percent, while composite volume rose at a 9.2 percent
rate.
1. Data for 1986 are based on estimates submitted to the Board of Governors in November
1986.

48

Productivity at the Federal Reserve Banks

Chart 4.1

Table 4.1

T r e n d s in F e d e r a l Reserve B a n k

A v e r a g e A n n u a l C h a n g e in U n i t Cost
and Labor Productivity of Federal
Reserve B a n k s , by Service, 1 9 7 7 - 8 6 '

Services, C o m p o s i t e M e a s u r e s ,

1977-861
1977= 100

Percent

Workload

Unit
cost

Service

125

Labor
productivity

Percent of
composite

-1.3
-7.1

2.3
17.9

47.0
6.9

MEMO:

75

1977

1981

1986

1. The composite workload is derived by weighting
the workload, or physical units produced, in each
component service according to that activity's share of
total costs. See table 4.1 for the component services
and their weights.
The composite unit cost is the total cost of the activities divided by the composite workload. Costs are
adjusted with the 1977 GNP implicit price deflator.
Employment is the average number of personnel.
See chap. 3, note 2, for definition of A N P .
Data for 1986 are estimates.

Commercial c h e c k s . . . .
Funds transfer
Automated
clearinghouse . . . .
Securities and noncash
collection
Currency and coin . . . .
Fiscal agency

-5.7

10.6

6.9

-7.0
-7.9
-2.1

13.1
9.6
3.9

5.2
18.0
13.7

Composite measure2 . .

100

-3.5

5.6

100

1. Unit cost is total cost divided by workload, or
physical units produced; costs are adjusted with 1977
GNP implicit price deflator. Labor productivity is
workload divided by manhours. Data for 1986 are
estimates.
2. Composite measures are based on composite
workloads, derived by weighting the workload in each
component service according to that activity's share of
total costs. Weights here are based on cost of function
in 1985. Several smaller operations, not listed, make
up about 2 percent of composite.

Table 4.2

Staffing levels rose about 1.3 percent in 1980 as the Reserve Banks prepared for the requirements of the
M C A . In 1981, the Reserve Banks began assessing fees for services. Although staffing levels were reduced,
the nearly 4 percent drop in volume
that year contributed to higher unit
cost. Volume continued to decline in
1982 and, despite further staff reductions, unit cost again rose. While lower volume, especially in the check collection services, was contributing to
the deterioration in unit cost, the Reserve Banks were making technological changes that also raised costs. In
1982, they implemented a sophisticated, distributed, packet-switching network for the communication of data.
Called the Federal Reserve Communications System for the Eighties
(FRCS-80), the network contributed



Composite Measure of U n i t Cost
and Labor Productivity,
F e d e r a l Reserve B a n k Services, 1 9 7 7 - 8 6 '
Unit cost

Labor
productivity

Year
Index

Percent
change

Index

Percent
change

1977
1978
1979
1980
1981

100
88.55
76.32
73.13
75.05

- 11.5
-13.8
-4.2
2.6

100
113.88
126.34
135.14
133.71

13.9
10.9
7.0
-1.1

1982
1983
1984
1985
1986

83.23
81.79
77.04
75.02
72.73

10.9
- 1.7
-5.8
-2.6
-3.1

136.73
144.95
155.70
159.55
163.74

2.3
6.1
7.4
2.5
2.6

Annual average. .

-3.5

5.6

1. See table 4.1 for list of services and definition of
terms.

to greater speed and reliability in all
electronic payment services. The
Banks also began to implement a

49 Productivity at the Federal Reserve Banks
common automation environment and
to develop common, or standard, operating systems for all major functions. These efforts would result in
enhanced, standard services across all
Reserve Banks. The costs associated
with acquiring and installing equipment and developing software were
substantial during the early 1980s.
In 1982 and 1983, the Reserve
Banks began improving services to
meet the demands of depository institutions. From 1983 through 1986,
volume increased at an average annual rate of 5.1 percent. Employment
remained fairly steady, and real unit
cost fell at an average annual rate of
3.9 percent.
Check Collection Service
The Federal Reserve Act authorizes
the Federal Reserve Banks to collect
and clear checks for depository institutions nationwide. The M C A reaffirmed the intent of the Congress that
the Federal Reserve should provide
payment services to depository institutions. Although the Federal Reserve
is the only national organization that
clears checks, it does not handle the
majority of them; most checks are
cleared through regional clearinghouses and networks operated by correspondent banks.
The Federal Reserve operates 48
check clearing centers, which are
located at the Reserve Banks, their
branches, and 11 other offices, called
regional check processing centers. Together, these clearing centers process
approximately 60 million checks each
business day. Each Federal Reserve
office receives deposits of checks
from depository institutions and from
other Federal Reserve offices; most
are sorted using high-speed, computerized equipment. After accounting



entries are generated, the checks are
dispatched to the payor institution or
to the Reserve office serving the
payor institution.
About 1 percent of all checks written are dishonored by payor institutions and must be returned to the institutions where they were originally
deposited. Processing these returnitems is highly labor intensive, and
both the Federal Reserve and the
banking industry are seeking ways to
automate and expedite the process.
The volume of checks collected
through the Federal Reserve grew at
an average annual rate of about 1 percent from 1977 through 1986. Volume
growth averaged about 7 percent per
year from 1977 through 1980. When
fees were implemented for check services in 1981, volume declined as depository institutions sought less costly
means of clearing checks. For example, local clearing arrangements developed that permitted depository institutions within a geographic region
to exchange checks among themselves
to avoid Federal Reserve processing
fees. In addition, many depository institutions found it efficient to sort
their check deposits by payor bank
and submit the sorted deposits to the
Federal Reserve for collection. This
resulted in a change in the mix of
work processed by the Reserve Banks
—fewer checks were sorted and more
checks were handled in packages. Following these adjustments and related
pricing changes, the Federal Reserve's
check volume began to grow in 1983,
and it has grown at an average annual
rate of 1.3 percent since then.
During the 1977-86 period, employment in check collection activities declined at an average annual rate of 1.3
percent and labor productivity increased at an average annual rate of
2.3 percent (chart 4.2 and table 4.3).

50

Productivity at the Federal Reserve Banks

In fact, employment declined steadily
until 1985, when staff was added to
handle newly required notifications
of the return of large-dollar checks.
While this requirement benefits depository institutions by providing
timely information on return items,
the volume of notifications is not included in volume measures and thus
is not reflected in productivity
measures.
The average annual decrease in unit
cost of 1.3 percent from 1977 through

Chart 4.2
T r e n d s in C h e c k C o l l e c t i o n Service,
1977-86

1

1977 = 100
125

1977

1981

1986

1. Workload is physical units produced. Employment is average number of personnel; see chap. 3, note
2, for definition of A N P . Unit cost is total cost divided by workload; costs are adjusted with the 1977 GNP
implicit price deflator. Data for 1986 are estimates.

Table 4.3
C h e c k C o l l e c t i o n Service, U n i t Cost
and Labor Productivity, 1977-86'

Unit cost

Labor
productivity

Year
Index

Percent
change

Index

Percent
change

1977
1978
1979
1980
1981

100
89.13
81.14
80.83
83.37

- 10.9
-9.0
-.4
3.1

100
111.81
119.43
122.25
119.42

11.8
6.8
2.4
-2.3

1982
1983
1984
1985
1986

94.27
92.60
90.98
89.55
89.06

13.1
-1.8
- 1.7
- 1.6
-.5

114.84
120.95
123.51
124.15
123.07

-3.8
5.3
2.1
.5
-.9

Annual average..

- 1.3

1. See table 4.1, note 1.




2.3

1986 indicates that the Reserve Banks
have realized some efficiencies in
check operations. Fluctuations in unit
cost reflect changes in volume. However, the unit cost measure does not
fully reflect the improvements that
have been made in the quality of Federal Reserve check services. One key
indicator of the quality of check clearing is the amount of float it generates
(float measures the dollar value of
checks credited to depositing institutions and not yet charged against
payor institutions). In 1979, Federal
Reserve check float reached a daily
average peak of $6.3 billion; in 1982,
it was $2.3 billion, and in 1986 it was
$570 million. Moreover, the 1983 improvements made by the Reserve
Banks to their interdistrict transportation system allowed them to offer
later deposit deadlines to depository
institutions and to collect an estimated $3 billion of checks one day
earlier than previously. Because these
changes resulted in somewhat later
presentments, the Reserve Banks introduced new services to payor banks
that, among other things, assisted the
banks in providing cash management
services to their corporate customers.
The Reserve Banks now provide payor bank services to more than 225
institutions.
In 1984, the Federal Reserve took
steps to accelerate the collection of
large-dollar checks drawn on certain
institutions located outside Federal
Reserve cities. This program, called
the high-dollar group sort, is a relatively high-cost initiative because it
requires special transportation arrangements for distant payor institutions. It has expedited the collection
of approximately 290,000 items each
day, valued at about $2 billion.
In summary, the Federal Reserve
has achieved moderate gains in the

51 Productivity at the Federal Reserve Banks
productivity of its check collection
operations over the past nine years in
terms of unit cost. When measured by
improvements in collection times and
reductions in float, however, the productivity of check collection has increased dramatically.

Chart 4.3
Trends in Funds
Service,

Transfer

1977-861
1977= 100

Wire Transfer of Funds Service
The system for wire transfer of funds,
called Fedwire, was developed to permit depository institutions to make
use of funds held in their reserve accounts at the Federal Reserve Banks.
When a Reserve Bank receives a request to transfer funds between institutions, the Bank checks the message
for validity and then debits the reserve or clearing account of the sending institution. The Reserve Bank
then delivers the message almost instantaneously to the receiving institution and credits its account. When the
receiving institution is located in a
Federal Reserve District different
from that of the sender, the message
to the receiving District is transmitted
over FRCS-80. In 1986, the Reserve
Banks processed about 49.5 million
Fedwires with a total value of about
$123.8 trillion and an average value
of $2.5 million per transfer.
The volume of transfers processed
by the Federal Reserve has grown at
an average annual rate of 14.2 percent
from 1977 through 1986 (chart 4.3).
Although the implementation of fees
for the transfer of funds did not reduce volume, the rate of growth of
volume has declined over the last nine
years. For example, from 1977 through
1979, volume grew at an average annual rate of 20.3 percent. From 1980
through 1982, the growth rate declined to 16.0 percent; from 1983
through 1986, it fell again, to 8.7 percent. Assessing fees for this service



1977

1981

1986

1. See chart 4.2, note 1.

may have induced some institutions
to economize in their use of Fedwires.
The rate of growth for funds transfers, however, appears to be influenced by many other factors, including the level of interest rates,
economic activity, innovations in financial instruments, and changes in
banking structure.
Scale economies have been realized
in the Fedwire service. The staff
assigned to Fedwire has declined at an
average annual rate of 3.1 percent
during the last nine years. As volume
grew rapidly from 1977 through 1980,
staffing levels rose about 4 percent a
year. Since 1982, however, employment has declined at an average annual rate of 9 percent. Despite rising
staff levels in the first three years of
the period, the rapid volume growth

52

Productivity at the Federal Reserve Banks

resulted in an average annual increase
in labor productivity of almost 18
percent since 1977 (table 4.4). Real
unit cost declined 7.1 percent over the
period.
The difference between the changes
in labor productivity and in unit cost
is partially explained by the substitution of automated resources for personnel both at depository institutions
and at the Federal Reserve. For example, in 1979, fewer than 700 depository institutions used electronic connections to send Fedwires to, and
receive them from, the Federal Reserve. In 1982, the number increased
to almost 3,000, and today about
7,000 institutions use computers to
transmit and receive Fedwires. The
number of Fedwires originating over
the telephone rather than electronically has declined to 1 percent of all
Fedwires.
The Federal Reserve has taken several steps to improve the efficiency of
its operations. FRCS-80 was implemented in 1983. In addition, the Reserve Banks have developed and are
implementing an improved, standard
operating system for funds transfers.
Table 4.4
F u n d s T r a n s f e r Service, U n i t Cost and
Labor Productivity, 1977-861
Unit cost

Labor
productivity

Year
Index

Percent
change

-17.i
-13.8
-6.4
-1.2

100
111.35
128.69
154.16
172.29

11.4
15.6
19.8
11.8

3.8
-9.5
-10.7
-3.3
-4.1

228.34
272.33
348.65
408.96
440.12

32.5
19.3
28.0
17.3
7.6

Index

Percent
change

1977
1978
1979
1980
1981

100
82.95
71.54
66.99
66.20

1982
1983
1984
1985
1986

68.69
62.16
55.49
53.68
51.50

Annual average. .
1. See table 4.1, note 1.




-7.1

17.9

Further, the Banks are encrypting all
connections for data communications
with depository institutions to improve security. Finally, the Reserve
Banks are developing contingency
systems to avoid interrupting service
in the event of a breakdown.
In sum, the Reserve Banks have
greatly increased the productivity of
their funds transfer operations through
automation while at the same time
making those operations more secure
and reliable.
Automated Clearinghouse Service
The automated clearinghouse (ACH)
is an electronic payment mechanism
designed to handle recurring payments
that traditionally had been made by
paper check. The Federal Reserve has
been involved with the A C H since its
inception in the early 1970s. Today,
the Federal Reserve provides A C H
services nationwide both to depository institutions and to the U.S.
government.
The A C H is a semiautomated payment service. A C H transactions are
deposited with a Federal Reserve Bank
in machine-readable form via electronic transmission or on magnetic
tapes. The Bank edits, sorts, and accounts for the transactions in batches.
The Bank then delivers the payment
messages to receiving depository institutions via electronic transmissions, on magnetic tapes or diskettes,
or on paper. If the payments are destined for a depository institution
located in another Federal Reserve
District, they are transmitted over
FRCS-80.
In 1986, the Reserve Banks processed about 703 million A C H transactions; 48 percent of these transactions were government payments.
The volume of A C H transactions

53 Productivity at the Federal Reserve Banks
processed by the Reserve Banks has
grown at an average annual rate of
26 percent from 1977 through 1986
(chart 4.4). During that period, A C H
employment increased at an average
annual rate of 14 percent. Since 1982,
the growth in employment has moderated somewhat to a rate of about 12
percent. Labor productivity increased
at an average annual rate of 10.6 percent during the nine years (table 4.5).
Unit cost, however, declined at an
average annual rate of 5.7 percent
since 1977, reflecting, in part, an increasing use of capital. The benefits
of increased automation are most evi-

Chart 4.4
T r e n d s in A u t o m a t e d
Service,

Clearinghouse

1977-861
1977= 100

dent from 1983 through 1986, when
unit cost declined at an average annual rate of 10 percent.
As in the case of the Fedwire service, the Federal Reserve has realized
scale economies in its A C H service.
In 1977, 41 Federal Reserve offices
provided A C H services; offices have
since been consolidated, and now only
28 sites are involved. The Banks have
also made significant improvements
in quality. In 1977, virtually no depository institution transmitted A C H
transactions to the Federal Reserve
over data communications links; today, about 700 institutions do so. In
addition, the Banks have developed
and installed a new, more efficient
operating system at all Federal Reserve operating sites.
In 1984, the Reserve Banks offered
a new A C H product that enabled
high-volume A C H users to do some
sorting in order to obtain lower processing fees. Later that same year,
deposit deadlines were improved significantly to permit more types of
payments to flow over the A C H . In
1985, the Reserve Banks began con-

Table 4.5
A u t o m a t e d Clearinghouse Service, U n i t
Cost and L a b o r Productivity, 1 9 7 7 - 8 6 '
Unit cost

Labor
productivity

Year
Index

Percent
change

Index

Percent
change

1977
1978
1979
1980
1981

i
1977

t

t

i

i

t

1981

1. See chart 4.2, note 1.




i

i

i
1986

100
87.17
97.59
95.85
86.82

-12.8
12.0
- 1.8
-9.4

100
124.15
119.02
122.21
138.64

24.2
-4.1
2.7
13.4

1982
1983
1984
1985
1986

84.30
80.81
66.84
69.60
58.74

-2.9
-4.1
-17.3
4.1
-15.6

157.35
196.49
237.09
217.87
248.36

13.5
24.9
20.7
-8.1
14.0

Annual average..
1. See table 4.1, note 1.

-5.7

10.6

54

Productivity at the Federal Reserve Banks

verting all ACH paper return items to
automated form. In order to provide
this service, the Reserve Banks increased staffing levels substantially.
At the same time, this step reduced by
two to three days the time taken to
deliver return items to originating institutions. Because of the fee charged
by the Reserve Banks for paper return
items, many institutions began automating their returns, leading to additional improvements in handling.
In summary, the ACH is evolving
into a completely automated service.
Quality has improved substantially,
and resources are being used efficiently so that unit cost has fallen.
Securities and Noncash
Collection Services
The Federal Reserve provides three
securities-related services to depository institutions: book-entry securities safekeeping, definitive securities
safekeeping, and noncash collection.
A portion of the book-entry service—
the safekeeping and transfer of securities issued by the Treasury Department—is provided by the Reserve
Banks as fiscal agents of the United
States. The other securities-related
services are priced in accordance with
the Monetary Control Act.
A variety of securities issued by the
U.S. Treasury, other government
agencies, and international organizations are held in book-entry form,
that is, on computer records, and are
transferred by the Reserve Banks for
depository institutions. Maintaining
securities on computerized records
eliminates the need for physical certificates, reduces processing costs,
and permits the ownership of securities to be transferred efficiently. The
Reserve Banks automatically effect
payment of principal and interest by



crediting the reserve or clearing accounts of the appropriate depository
institutions and charging the issuer of
the securities. In 1986, the Federal
Reserve processed about 8.5 million
securities transfers, with an average
value of $7 million per transfer and a
total value of $59.5 trillion.
The Reserve Banks also keep the
physical securities themselves in their
vaults for depository institutions (definitive safekeeping). The definitive
safekeeping function is a labor-intensive process; the Reserve Banks maintain accounting records, process deposits and withdrawals, and clip and
ship maturing interest coupons and
securities. In 1986, volume was about
580,000 transactions.
The noncash collection service involves the collection of maturing or
matured state, municipal, and corporate definitive securities and interest
coupons. The Reserve Banks receive
deposits from depository institutions,
from other Reserve Banks, and from
their own vaults. The Banks prove
and balance the deposits, sort them
by paying agents, and prepare them
for shipment. The Banks also post
related accounting entries to accounts
of depository institutions. In 1986,
volume amounted to about 4.5 million transactions.
Although the composite volume of
transactions in the securities and noncash collection services has grown at
an average annual rate of 5 percent
since 1977 (chart 4.5), the growth in
volume has varied dramatically among
the individual components of the service. For example, in the book-entry
activities, volume increased at an
average annual rate of 16.3 percent
from 1981 through 1986. Conversely,
during the same period, definitive
safekeeping transactions declined at
an average annual rate of 4.8 percent,

Productivity at the Federal Reserve Banks
Chart 4.5
T r e n d s in Securities
a n d N o n c a s h C o l l e c t i o n Services,
Composite Measures,

1977-861
1977 = 100
150

Workload
100

1977

1981

1986

1. See chart 4.1, note 1.

and noncash collection transactions
declined at an average annual rate of
2.7 percent. The Tax Equity and Fiscal Responsibility Act of 1982, which
prohibits the issuance of bearer securities, has contributed to the decline in
the processing of definitive securities.
In addition, the efforts of commercial
securities depositories to immobilize
securities and to effect transfers on
their books have also reduced the vol-

Table 4.6
Securities a n d N o n c a s h C o l l e c t i o n
Services, C o m p o s i t e U n i t Cost
and Labor Productivity, 1977-86'
Unit cost

Labor
productivity

Year
Index

Percent
change

Index

Percent
change

1977
1978
1979
1980
1981

100
80.48
68.68
59.42
90.01

- 19.5
- 14.7
- 13.5
51.5

100
125.49
155.62
185.22
129.42

25.5
24.0
19.0
-30.1

1982
1983
1984
1985
1986

88.03
76.55
64.28
55.18
52.22

-2.2
- 13.0
- 16.0
- 14.2
-5.4

158.00
189.03
237.18
279.12
302.72

22.1
19.6
25.5
17.7
8.5

Annual average. .
1. See notes to table 4.1.




-7.0

13.1

55

ume of definitive securities handled
by the Reserve Banks.
Employment in the securities and
noncash collection services declined
at an average annual rate of 7.1 percent from 1977 through 1986. Composite labor productivity rose an
average of 13.1 percent per year during the period, and composite unit
cost declined at a 7 percent rate (table
4.6). These improvements reflect the
decline in the volume of definitive
securities transactions, which require
manual processing, and the relative
increase in book-entry securities transactions, which are highly automated.
Currency and Coin Service
The Federal Reserve Act declares that
one of the fundamental purposes of
the Federal Reserve System is to provide the nation an elastic supply of
currency. In 1986, the Federal Reserve Banks processed 15.8 billion
banknotes with a face value of $200
billion, of which 5.8 billion with a
face value of $51.6 billion were classified as unfit and destroyed. About
20.8 billion coins were processed in
1986.
Depository institutions deliver excess and unfit currency and coin to
the Reserve Banks and order currency
and coin when inventories decline.
Currency deposits are counted on
sophisticated, automated equipment,
which packages notes for redistribution, identifies counterfeit currency,
and destroys currency unfit for circulation. Not only has this equipment
improved the productivity of the Reserve Banks; it has enabled the Banks
to provide the consistently highquality currency needed by operators
of automated teller machines. Coin
deposits are sorted and counted on
less-sophisticated equipment.

56

Productivity at the Federal Reserve Banks

Since 1977, the volume of currency
and coin processed by the Reserve
Banks has increased at an average annual rate of about 7 percent (chart
4.6). During the same period, employment has declined at an average annual rate of 2.3 percent. The most significant reductions in staffing levels,
averaging 7.3 percent, occurred from
1977 to 1979, when the Reserve Banks
stopped counting currency by hand.
Over the nine-year period, labor productivity increased at an average annual rate of 9.6 percent, and unit cost
declined 7.9 percent, improvements
reflecting the benefits of automation
(table 4.7).
Fiscal-Agency Services
As fiscal agents, the Federal Reserve
Banks perform a variety of services,
primarily for the U.S. Treasury but
also for other government agencies
and various international organizations. The services to the U.S. Treasury fall into three categories—savings bonds, marketable securities,
and government accounting. In addition, the Reserve Banks provide cer-

Chart 4.6
T r e n d s in C u r r e n c y and C o i n
Service, 1 9 7 7 - 8 6

1

1977=100

•*
1977

i

i

i

i
1981

i

1. See table 4.1, note 1.




i

i

i
1986

Table 4. 7
C u r r e n c y a n d C o i n Service, U n i t Cost
and Labor Productivity, 1977-86'
Unit cost

Labor
productivity

Year
Index

Percent
change

Index

Percent
change

1977
1978
1979
1980
1981

100
89.98
63.00
58.00
54.31

-10.0
-30.0
-7.9
-6.4

100
115.61
134.53
152.30
165.44

15.6
16.4
13.2
8.6

1982
1983
1984
1985
1986

58.87
59.88
55.54
51.38
47.91

8.4
1.7
-7.2
-7.5
-6.8

175.93
184.13
203.20
215.85
227.69

6.3
4.7
10.4
6.2
5.5

Annual average..

-7.9

9.6

1. See table 4.1, note 1.

tain banking services to the Treasury,
such as check collection, funds transfers, and A C H services; productivity
in these services was covered in the
preceding discussion.
The Federal Reserve Banks issue,
service, and redeem U.S. savings
bonds for the general public, and they
perform several functions for depository institutions and corporations
that act as issuing and paying agents
for those bonds. These functions include qualifying agents according to
Treasury regulations, maintaining accounting records, shipping blank stock
to agents, processing sales reported
by agents, collecting the proceeds of
sales, and crediting the Treasury's account. The Reserve Banks also process retired (redeemed) bonds for
paying agents, credit the agents' accounts, and debit the Treasury's account for the redeemed bonds.
The Reserve Banks sell new issues
of marketable Treasury securities
(bonds, notes, and bills), service outstanding issues, and redeem maturing
issues for the general public and depository institutions. When Treasury
offers new issues of marketable secu-

57 Productivity at the Federal Reserve Banks
rities, the Reserve Banks disseminate
information regarding the issues, accept tenders from customers, collect
payments, credit the Treasury's account for the proceeds, and deliver
the securities in book-entry form. Reserve Banks serve the needs of owners
of outstanding issues by handling
such matters as transfers of ownership and name and address changes;
at maturity, the Banks debit the
Treasury's account and pay the proceeds to the owners via check, reserve
account credit, or A C H direct deposit.
In providing accounting services
for the Treasury, the Reserve Banks
maintain the Treasury's "checking
account," otherwise known as the
Treasury's general account, and the
accounts for various other government agencies. The Reserve Banks
make entries to these accounts, maintain accounting records and controls,
and prepare account statements and
transcripts.
The Treasury maintains special
interest-earning accounts, called
Treasury tax and loan accounts, at
more than 15,000 depository institutions throughout the country. These
institutions accept tax receipts directly from small businesses and corporations. The Reserve Banks receive and
process daily tax receipt reports from
each depository institution, maintain
memoranda Treasury tax and loan
accounts, process accounting adjustments for the Internal Revenue Service, and transfer receipts to the Treasury's account.
Finally, the Reserve Banks perform
certain functions for the Food Coupon Program of the Department of
Agriculture: they prepare instructions, process and verify food coupon
deposits, dispose of used food coupons, maintain accounting records,
and process adjustments.



The composite volume of all fiscal
services increased at an average annual rate of 1.5 percent from 1977 to
1986, while employment in fiscal services fell at an average of 3 percent
per year (chart 4.7). Growth in the
volumes of both the savings bond and
marketable securities activities have
fluctuated widely over the nine-year
period, largely because of changes in
interest rates. Since 1981, the composite volume has declined as the
Treasury's general-account entries
have been consolidated and transactions in food coupons and marketable
Treasury securities have declined.
Labor productivity rose an average
of 3.9 percent per year over the nineyear period, and unit cost decreased
2.1 percent (chart 4.7 and table 4.8).
Unit cost has been volatile since 1981
because of shifts in the mix of workloads as well as declining volumes.
The Banks' handling of Treasury
marketable securities has changed
dramatically in the transition from
manual to automated processing. In
1976, the Treasury began issuing
Treasury bills in book-entry form
only, reducing the volume of definitive Treasury securities processed by
the Reserve Banks. In 1983, the Reserve Banks began developing an

Chart 4.7
T r e n d s in F i s c a l - A g e n c y

Services,

1977-861

Composite Measures,

1977 = 100

t
1977

i

i

i

i
1981

1. See table 4.1, note 1.

t

i

t

i
1986

58

Productivity at the Federal Reserve Banks
the Treasury the responsibility for
distributing stock to Reserve Banks
and to all issuing agents.

Table 4.8
F i s c a l - A g e n c y Services, C o m p o s i t e
Unit Cost and L a b o r Productivity,
1977-86'
Unit cost

Labor
productivity

Year
Index

Percent
change

Index

Percent
change

1977
1978
1979
1980
1981

100
82.41
70.38
64.52
65.97

- 17.6
- 14.6
-8.3
2.2

100
121.11
145.91
155.06
142.67

21.1
20.5
6.3
-8.0

1982
1983
1984
1985
1986

82.14
84.74
79.65
81.03
82.43

24.5
3.2
-6.0
1.7
1.7

137.27
134.04
144.34
140.19
141.15

-3.8
- 2.4
7.7
-2.9
.7

Annual average..

-2.1

3.9

1. See table 4.1, note 1.

automated system, called Treasury
Direct, so that all Treasury securities
issued to individual investors would
be in book-entry form. The system
was implemented in August 1986.
The handling of savings bonds has
also changed. In 1980 and 1981, the
Treasury introduced two new series
of savings bonds, EE and H H , and
required agents to accelerate their remittances of savings bond sales. Introduction of the two series required
the Reserve Banks to recall, reconcile,
and exchange unissued E and H stock
for new EE and H H stock; these actions involved more than 40,000 issuing agents. The acceleration of remittances required the Reserve Banks to
increase the level of accounting detail
and to process remittances more frequently. In 1982, following a recommendation of the General Accounting
Office, the Treasury ordered more
frequent reconcilements of unissued
stocks of savings bonds held by issuing agents; this new program fell directly to the Reserve Banks. In 1985,
the Federal Reserve took over from



Comparison with Other Sectors
Observations of one organization's
performance over time provide a useful measure of the quality of its management. Comparisons of that organization's performance with other,
similar organizations provide another
such measure.
The many unique functions of the
Federal Reserve make it difficult to
find organizations with which to
compare it. Table 4.9 compares the
changes in labor productivity at the
Federal Reserve Banks with those for
all commercial banks, for the federal
government, and for the nonfarm
economy from 1977 to 1984 (the latest year for which all data are available). The relative performance of the
Banks is good, but it is important to
recognize that the Federal Reserve
has been able to substitute capital,

Table 4.9
L a b o r P r o d u c t i v i t y o f the Federal
Reserve B a n k s a n d o f Selected
E c o n o m i c Sectors, 1 9 7 8 - 8 4
Percent change from previous year, except as noted
Economic sector
Year

Federal
Reserve
Banks'

Commercial
banks

Federal
government

Nonfarm

1978
1979
1980

13.9
10.9
7.0

1.2
-1.8
-6.6

1.7
.6
2.1

.8
-1.5
-.5

1981
1982
1983
1984

-1.1
2.3
6.1
7.4

-2.4
3.0
9.1
2.9

2.4
1.4
1.6
.2

1.0
-.6
3.2
1.9

6.5

.7

1.4

.6

Annual average

1. See table 4.2.
SOURCE. For economic sectors, Department
Commerce, Bureau of Labor Statistics.

of

59 Productivity at the Federal Reserve Banks
especially computers, for labor during the period. Many of the services
and products offered by the commercial banking sector, the federal
government, and the nonfarm sector




do not lend themselves to automation. Therefore, it is reasonable that
labor productivity would not increase
as rapidly in those sectors as at the
Federal Reserve.

Appendixes




63
Appendix

A

Mission and Operational Areas
of the Federal Reserve System
For budgeting purposes the activities
of the Federal Reserve Banks and the
Board of Governors are divided into
four 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
operational areas to provide a detailed discussion of the functions performed by the Federal Reserve System.
Monetary and Economic Policy
The monetary and economic policy
function comprises the activities of
the Board and the Reserve Banks that
support the formulation and implementation of monetary policy. The
System has several tools to affect the
availability and cost of money and
credit. The Federal Open Market
Committee (FOMC), which consists
of the seven Board members and five
Reserve Banks presidents, meets twice
each business quarter in Washington
to set policies for System open market operations. The Board acts on requests from the Federal Reserve Banks
to adjust discount rates and is respon-

sible for making changes in reserve
requirements.
The Federal Reserve collects and
publishes a vast amount of banking
and financial data that are used internally and by market participants to
help analyze conditions in the banking, money, and capital markets. This
information 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 subjects such as the
monetary aggregates, interest rates,
bank credit, and exchange rates. The
research staffs at the Board and the
Reserve Banks regularly use this information, as well as other data collected by federal agencies and private
institutions, to assess the state of the
economy and the relationships between the financial markets and economic activity. To provide background for each meeting of the
FOMC, staff members prepare detailed economic and financial analyses and projections for the domestic
economy and international markets.
In addition, they conduct longer-run
economic studies on a broad array of
issues.
Supervision and Regulation

1. Services to the U.S. Treasury and other
government agencies is an operational area
unique to the Federal Reserve Banks. The
fourth operational area for the Board of
Governors, System policy direction and oversight, provides resources for the supervision of
Board and System programs and is discussed in
chap. 2.




The Federal Reserve System plays a
major role in the supervision and regulation of banks and bank holding
companies. This function is accomplished through on-site examinations
and inspections of member banks and
bank holding companies; off-site sur-

64

Mission and Operational Areas

veillance 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. In addition, under the
Bank Holding Company Act, the
Board is responsible for assuring that
all activities of bank holding companies are "closely related to banking
and a proper incident thereto." Beyond these activities, the supervisory
process entails continuous oversight
of the banking industry to ensure the
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
Supervisory and regulatory activities are carried out by both the Board
of Governors and the Federal Reserve
Banks. The Board is responsible for
rulemaking and for establishing System supervisory 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.
In 1985, the Board and the Banks
conducted 744 examinations of state
member banks, 1,779 inspections of
bank holding companies and their
subsidiaries, and 2,270 reviews of

2. Depository institutions are commercial
banks, savings banks, savings and loan associations, and credit unions.




bank holding company applications.
In 1986, there were 806 examinations,
2,341 inspections, and 2,176 reviews
of applications. The increase in examinations and inspections is due
largely to intensified supervision of
state member banks and bank holding companies. Such action has been
deemed necessary in light of trends
within the banking industry over the
past several years, including the increase in the number of failing and
problem banks.
The Board enforces compliance by
state member banks with the federal
laws protecting consumers in their use
of credit. In 1986, the System conducted examinations for such compliance at about 700 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 is a major
participant in the nation's payments
mechanism. The payments mechanism
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
securities transfers and coupon collection. The Federal Reserve's automated clearinghouse (ACH) has had
the most rapid growth. Chapter 4 discusses the volume and costs of these
services and of the Banks' fiscalagency services for the 1977-86 period.
The Federal Reserve is responsible
for ensuring that the economy has
sufficient currency and coin to meet

65 Mission and Operational Areas
the public's demand for cash. The
Reserve Banks obtain currency and
coin from the Bureau of Engraving
and Printing and the Mint and distribute it through depository institutions. Highly sophisticated automated equipment is used to count cash,
identify counterfeits, and destroy currency that is unfit for circulation. In
1986, the Reserve Banks paid out
$216.1 billion in currency and $3.9
billion in coin and destroyed $49.1
billion of unfit currency, an increase
of roughly 80 percent over 1980 in all
three activities.
The Federal Reserve Act of 1913
specifically authorizes the Reserve
Banks to collect and clear checks.
Today the 12 Reserve Banks, their
branches, and their regional checkprocessing centers 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's electronic
wire transfer system, Fedwire, is an
essential element of the nation's payments mechanism. Through Fedwire,
depository institutions can draw on
their reserves or clearing accounts at
the Reserve Banks and transfer funds
anywhere in the country within minutes. Approximately 6,800 depository
institutions use Fedwire through direct electronic connections with Federal Reserve Banks, and another 2,500
institutions have off-line access to the
system through the Reserve Banks.
During 1986, approximately 50 million transfers valued at about $124
trillion were sent over Fedwire, an
average of $2.5 million per transfer
and $495 billion per day.
The Federal Reserve allows participants in private clearing arrange


ments to exchange and settle transactions on a net basis through reserve
or clearing-account 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 1986, about 550,000 net
settlement entries were processed by
the Reserve Banks.
For recurring payments, the automated clearinghouse is an electronic
alternative to checks. The information that would appear on a check is
placed in electronic form on a computer tape and processed directly
bank to bank. ACHs are used primarily to pay salaries and pensions and to
make preauthorized bill payments,
such as those for insurance premiums
and mortgages. Approximately 22,000
depository institutions participate in
the Federal Reserve's A C H . About
3,700 of these institutions originate
and receive transactions via electronic
connections with the Federal Reserve;
the others use machine-readable magnetic tapes. In 1986, the Reserve
Banks processed about 600 million
A C H transactions; about 50 percent
were governmental, largely disbursements of social security benefits and
civilian and military pay.
The Reserve Banks also provide
securities services. The book-entry
securities service, begun in 1968,
maintains a computer record of government agency securities, mostly
Treasury issues, and enables their
holders to transfer them to other institutions throughout the country.
The Reserve Banks maintained about
44,000 book-entry accounts in 1986
and processed 7.6 million security
transfers.
The definitive securities safekeeping service consists of the physical

66

Mission and Operational Areas

storage of securities ineligible for
maintenance on the Federal Reserve's
book-entry system. The Federal Reserve, one of the large holders of definitive securities in the country, held
an amount worth approximately $25
billion at the end of 1986.
The noncash collection service involves the collection of coupons,
bonds, and miscellaneous items such
as bankers acceptances and certain
checks and drafts. Coupon collection
accounts for approximately 95 percent of the transactions; the Federal
Reserve processed about 4.6 million
coupons in 1985 and 4.2 million in
1986.
Services to the U.S. Treasury
and Other Government Agencies
The Federal Reserve Act designates
the Federal Reserve Banks as fiscal
agents for the U.S. government. As
the government's bank, the Federal
Reserve supplies a wide range of services to the Treasury Department and
other agencies, including deposit accounts that are used to pay all government checks, disburse government




payments, and collect government receipts. The Reserve Banks also process wire transfers of funds and automated clearinghouse payments and
give the Treasury daily statements of
account activity.
The Federal Reserve provides several unique services to the Treasury.
For example, in administering the
Treasury tax and loan program, the
Reserve Banks monitor the tax receipts deposited in the 15,600 tax and
loan accounts maintained by depository institutions designated by the
Treasury to perform this function;
hold collateral that those institutions
pledge to support those deposits; and
transfer funds to the Treasury's account at its request. The Reserve
Banks also assist the Treasury in its
financing of the public debt. Both
marketable Treasury securities (bills,
notes, and bonds) and nonmarketable
Treasury securities (savings bonds and
retirement plan bonds) are issued, serviced, and redeemed by the Reserve
Banks.
The Reserve Banks also redeem
and ultimately destroy food coupons
for the Department of Agriculture.

67
Appendix

B

Budget Processes
This appendix surveys the budget
processes of the Federal Reserve
Board and Banks and explains PACS,
an accounting system used by the
Banks.
The Budget and Control Process
of the Board of Governors
The Board involves all levels of its
management in a planning, budget,
and control process based on the calendar year. The Administrative Governor, under authority delegated by
the Chairman, oversees the process to
ensure that all elements are coordinated, objectives are achieved, and
duplication of effort is avoided.
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 distributed 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
share of direct cost attributable to
each area.
The Budget Schedule
In the spring, each division at the
Board reviews its current and future
needs by obtaining guidance from
functional oversight committees made
up of Board Members, by participating in System planning sessions, and
by conducting division planning sessions. Division management lists



events likely to affect the division's
budget and estimates budget changes
associated with those events. Simultaneously, the Office of the Controller prepares a budget estimate based
on the current level of operation, taking into account known or anticipated
factors such as a general pay increase
and changes in costs for retirement
and for hospital and medical insurance. The controller uses this projection of expenses, along with the estimates from the other divisions and
guidelines from the Board's oversight
committees, to prepare estimates for
a budget guideline. The Chairman and
the Administrative Governor review
the guideline before it is submitted to
the Board in June. The guideline approved by the Board is used by the
Board's divisions to develop their
budgets.
During the summer, the divisions
prepare their objectives and budgets,
which are reviewed first by the Board's
Controller and Staff Director for
Management and then by the appropriate functional oversight committees. These reviews often result in adjustments to division budgets. The
Administrative Governor then examines the consolidated budget and
discusses it with the Chairman. In
early December the budget is presented to the Board of Governors for action at an open meeting.
Treatment of Capital Expenditures
Until 1985, the Board of Governors
expensed purchases of all assets in the
year of purchase. In 1985, the Board
began capitalizing certain assets and

68

Budget Processes

depreciating their value over appropriate time periods in accordance with
generally accepted accounting principles. This approach more closely
aligns the cost of capital assets with
their periods of service and is consistent with the accounting practices followed by the Reserve Banks.

the Reserve Banks in proportion to its
capital stock and surplus. The cash
requirements for the second half of
the year are estimated in June, and
the second assessment is made in July.
To minimize cash balances held by
the Board, funds are transferred
quarterly.

Financial Monitoring and Control

The Budget and Control Process
of the Federal Reserve Banks

Board expenses are monitored and reviewed throughout the budget year by
all levels of Board management. To
facilitate this process, each division
constructs quarterly operating plans.
Actual performance against budgeted
targets is observed monthly by administrative management, and quarterly reports are submitted to the
Board.
At midyear the Controller and the
Staff Director for Management review current expenses with each division director, 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 present a comprehensive report to the Board on the previous year's performance against budget and operating goals.
Assessments
After the Board adopts its budget, the
cash requirement for the first half of
the year is estimated. The Administrative Governor reviews and approves this estimate in early January,
and as provided by the Federal Reserve Act, the required amount is
raised by an assessment on each of



Like the Board, the Federal Reserve
Banks use a calendar-year planning,
budget, and control process to identify major goals and strategies, approve resources needed to achieve the
goals, and monitor operating results
and financial performance.
The Planning and Control System
In 1977, the Federal Reserve Banks
implemented the Planning and Control System (PACS), an accounting
and budgeting system that affords a
review of expenses, an expense audit
"trail," and expense accountability
and thus enables the Board of Governors to compare the financial and operating performance of the Reserve
Banks.
The PACS offers a detailed analysis of all services and activities. Costs
are accumulated by major services
(which are grouped in this document
under the four primary operational
areas previously described and under
support and overhead—see the accompanying list). Support and overhead
costs are fully allocated to the four
operational areas. The PACS includes
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 (measures of performance.)

69 Budget Processes
The PACS also allows for the separate accounting and reporting of costs
for projects outside routine activities
and services. It serves as the fundamental cost accounting system for all
the services provided by the Federal
Reserve Banks, whether priced or
nonpriced.
Periodic audits by the Board
through on-site reviews have confirmed compliance by the Reserve
Banks with the PACS instructions
and also with System guidelines set by
the Board. Independent examinations
—by the General Accounting Office
of the Congress and by an outside
public accounting firm—have determined that the PACS is an appropriate and effective accounting mechanism for the Federal Reserve.
The Budget Process
Planning for each year's Bank budgets starts at the outset of the preceding year, when the staff of the Board
and the staffs of the Banks develop
guidelines based on forecasts of
changes in Bank workload and productivity. These guidelines are then
approved by the Board in the spring;
they are separate from the guidelines,
mentioned previously, for the Board's
divisions. The annual budget objective follows these guidelines and is
used by the Reserve Banks in developing plans and budgets. In addition,
each year the Banks update a strategic
directional statement for the next
three years, prepared for use in planning for priced services. In the spring,
the Banks develop their own goals,
objectives, and strategies and begin
their budget process.
At each of the 12 Reserve Banks,
the management of each department
is expected to use a zero-base budget
procedure whenever possible, espe


cially for travel and training. During
the summer, senior Bank officials review departmental requests, and the
President and First Vice President decide which requests to recommend to
the Bank's Board of Directors. The
Bank's board acts on the budget, and
in the fall the Board of Governors
acts on fee schedules for priced services
and on the Reserve Bank budgets.
The Capital Budget Process
Capital expenditures at the Banks are
managed through the planning, budgeting, and control process. Each
year the Banks evaluate their needs
for buildings, automation equipment,
furnishings, and land. In accordance
with generally accepted accounting
principles, depreciation of capital
assets is included in the expenses of
the Banks. All large capital expenditures receive a thorough review separate from the planning, budgeting,
and control process. Acquisitions of
mainframe computers and peripheral
equipment costing more than a certain amount must be specifically approved by the Board of Governors.
Technical staff at the Board review
all proposals for capital acquisitions
and 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 of Bank Budgets
at the Board of Governors
When Reserve Bank budgets are forwarded to the Board in the fall, analysts review them and note Systemwide issues to be addressed during the
budget review. The executive summaries and the statements of objectives in each budget are analyzed in

70

Budget Processes

light of the Bank's own trends, plans
at the other Banks, and compliance
with the System budget objective and
cost-recovery objectives for priced
services. The Reserve Bank budgets
for priced services are examined by
the Product Directors, the Pricing
Policy Committee, and the Board.3
The various reviews yield issues and
questions, the most important of
which become the agenda for the
meetings held in the fall with each
Reserve Bank President by the Board's
Committee on Federal Reserve Bank
Activities.
Board A p p r o v a l
When the Committee on Federal Reserve Bank Activities is satisfied with
all Reserve Bank budgets, they are
sent to the Board of Governors for action at an open meeting of the Board,
which normally occurs in December.

F e d e ra l Reserve B a n k Services,
by Activity
OPERATIONAL A R E A

Monetary and economic policy
Economic policy determination
Open market trading
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 service
Coin service
Transfer of account balances
Automated clearinghouse
Commercial check service
Other check service
Book-entry securities
Definitive securities
Loans to depository institutions
Noncash programs
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 agency coupons
Food coupons
Government accounts

SUPPORT A N D O V E R H E A D

Support
Data processing
Centrally provided support
Occupancy service
Printing and supplies
Centralized planning
District projects

3. T h e Product Directors are the First Vice
Presidents at selected Reserve Banks with responsibility for day-to-day policy guidance
over specific Systemwide priced services. T h e
Pricing Policy Committee comprises one Governor, the Board's Staff Director for Federal
Reserve Bank Activities, the Presidents o f two
Reserve Banks, and the First Vice Presidents of
two other Reserve Banks.




Overhead
Administration
System projects
Mail
Legal
General books and budgets and expense control
Files and record storage
Personnel
Purchasing
Protection
Financial services
Motor vehicles
Library
Telephone and telegraph
Audits

71
Appendix

C

Response of the Federal Reserve System
to the
Gramm-Rudman-Hollings
Legislation
The Federal Reserve is not covered by
the Balanced Budget and Emergency
Deficit Control Act of 1985, commonly known as Gramm-RudmanHollings. However, the Board of
Governors strongly supports the objectives of the legislation, passed by
the Congress in late 1985. The Board
therefore decided to reduce 1986 System expenses, which had already been
budgeted, in a manner consistent with
the spirit of the law and, accordingly,
directed its staff to propose rules for
the System similar to those in the new
legislation.
The 1987 budget reflects continued
adherence to the spirit of the act.
Gramm-Rudman-Hollings set progressively tighter ceilings on the size
of the projected annual federal deficits from 1986 through 1990. The
Congress directed that spending for
nondefense programs in the already
approved 1986 budget be cut by 4.3
percent. The base against which this
percentage was applied in each agency
was calculated by the Office of Management and Budget and the Congressional Budget Office. The General Accounting Office then reviewed
these baselines and resolved any differences, frequently by using the midpoint between the figures.
After thoroughly reviewing the
manner in which the legislation affected agencies whose status and mission are comparable to those of the
Federal Reserve, the staff prepared
four options for the Board. The op


tions hinged on the procedures to be
used in determining the base of expenses against which a reduction of
4.3 percent would be applied; depending on the option selected, the result
would be a reduction ranging from
$15.4 million to $20.7 million. The
staff also recommended a method for
allocating the reduction among the
Board and the 12 Reserve Banks.
At a public meeting on February 24,
1986, the Board reviewed the staff's
proposals and took three actions.
First, the Board approved a reduction. Second, finding that all four options were plausible given the actions
of the Congressional Budget Office
and the Office of Management and
Budget in assigning an expense base
to other agencies, it selected a reduction midway between the largest and
smallest—$18 million for System expenses in 1986. Finally, the Board
allocated the reduction among the
Board and the 12 Reserve Banks on
the basis of both the current size of
their budgets and the increases in
their budgets over the preceeding
three years (table C.l). The Board
provided guidance on the areas in
which cuts were to be avoided if possible, especially bank supervision, and
it allowed the managers of each Reserve Bank and of the Board to be flexible in making the targeted reductions.
The Banks submitted their proposed
cuts to the Board's Division of Federal Reserve Bank Operations, and
the directors of the Board's divisions

72

Response to Gramm-Rudman-Hollings

Table C. 1

Tab/e C.2

Reductions in 1986 Budgeted Expenses
o f the F e d e r a l Reserve System
in V o l u n t a r y Response to the
G r a m m - R u d m a n - H o l l i n g s Legislation'

R e d u c t i o n s i n 1986 B u d g e t e d E x p e n s e s
o f the B o a r d o f G o v e r n o r s
in V o l u n t a r y R e s p o n s e t o t h e
G r a m m - R u d m a n - H o l l i n g s Legislation,
by O b j e c t '

Thousands of dollars

Thousands of dollars
Entity
Board of Governors
District
Boston
New York
Philadelphia ..
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis ..
Kansas C i t y . . .
Dallas
San Francisco .
Total

Reduction
Object

905

2,600
1,240
1,035
1,420
1,708

1,616
732

800
1,065
1,279
2,332

18,128

1. The Federal Reserve is not covered by the legislation. See text of appendix C.

submitted their plans to the Board's
Office of the Controller. A l l proposals were then presented to the appropriate Board oversight committees.
As modified by the oversight committees, the reduction proposed for
the budget of the Board of Governors
was $1.4 million (table C.2). Because
of the constraints placed on growth in
the 1986 budget, there was little room
for reduction in most division budgets
except for cuts in staffing levels,
which yielded a savings of $510,000.
The next largest reduction, $320,000,
was in contractual support for surveys, studies, and mainframe software. Several divisions cut automation plans. The travel budget was
reduced $100,000, and plans to improve the Board's facilities were delayed or canceled.
The reductions by the Reserve
Banks totaled $16.7 million, of which
$5.8 million came from holding vacant positions open, reducing over


Reduction

1,396

Personnel
Salary
Retirement
Insurance
Total personnel
Nonpersonnel
Fees
Travel
Publications committee . . .
Supplies
Furniture and equipment ..
Rental
Books and subscriptions . . .
New projects
Contracts
Tuition
Subsidies and contributions
Official dinners
Depreciation
Other
Total nonpersonnel...
Total

485

10
14
510

50
76
16
52
3
92
320
5
33
25
31
79

1,396

1. See table C . l , note 1.

time, and cutting back on outside
contracting (table C.3). Delaying
equipment purchases and extending
depreciation schedules on existing
equipment yielded $3.2 million. The
reduction in staffing coupled with
reductions in training and participation in seminars and conferences lowered the travel budget $1.5 million.
Smaller cuts in other areas produced
the balance of the Reserve Banks'
reductions.
On March 25, the Board approved
the plans and directed that the restraint they embodied be carried over
into the 1987 budget. This decision
was fully reflected in the 1987 budget
guidelines, presented to the Board in
June 1986, and in the 1987 budgets,
approved by the Board in December
1986.

73 Response to Gramm-Rudman-Hollings
Table C.3
R e d u c t i o n s in 1986 B u d g e t e d E x p e n s e s
o f the F e d e r a l Reserve B a n k s
in V o l u n t a r y R e s p o n s e t o t h e
G r a m m - R u d m a n - H o l l i n g s Legislation,
b y O b j e c t a n d by A c t i v i t y '
Thousands of dollars
Item
OBJECT

Personnel
Equipment
Travel
Building
Supplies
Fees
Communications
Shipping
Miscellaneous
Total
ACTIVITY

Operational area
Nonpriced services to
financial institutions
and the public
Supervision and regulation
Monetary and economic policy
Priced services to financial
institutions and the public
Services to the U.S. Treasury
and other government agencies
Support and overhead
Support
Overhead
Total
1. See table C. I, note 1.




75
Appendix

D

Special Categories of System Expense
This appendix discusses System expenses for priced services, capital
equipment, and currency printing.
Federal Reserve Priced Services
The Monetary Control Act of 1980
(MCA) requires the Federal Reserve
to charge all depository institutions
explicitly for their use of certain Federal Reserve services that had previously been provided without explicit
charge to member banks only. Since
the enactment of the MCA, the Federal Reserve has developed an annual
pricing process in conjunction with
the annual budgeting process of the
Reserve Banks. In contrast to the
budget process, whose focus is on
cost containment, the objective in the
pricing process is to establish fees that
recover the full costs of providing services. As the MCA requires, these
costs include all direct and indirect
costs, the interest on items credited
before actual collection (float), and
the return on capital and the taxes
that would have been paid had the
services been furnished by a private
business firm. The cost of capital and
taxes is referred to as the private sector adjustment factor (PSAF).
The determination of prices has resulted in additional review of Reserve
Bank expenses. Details on the services
provided are needed to establish appropriate prices. Use of the budgets is
an integral part of the pricing exercise
because most of the recoverable costs
of priced services consist of direct and
indirect costs as determined by the
annual budget process. Generally,
prices are changed only once a year,



in the fourth quarter for the next calendar year, so that depository institutions can plan their own correspondent banking services more easily.
Prices for Federal Reserve services
must be approved by the Product
Director for the respective service, by
the System Pricing Policy Committee, and ultimately by the Board of
Governors.1 If prices for any service
are set so that the full recovery of
costs is not anticipated, the Board announces the rationale for establishing
prices at that level.2
The cost of float is determined by
applying the current federal funds
rate to the level of float expected to
be generated in the coming year. Income taxes and the return on capital
are determined by applying tax and
financing rates, derived from a model
of the nation's 25 largest bank holding companies, to the assets the
Federal Reserve expects to use in its
priced services operations in the coming year. Other components of the
PSAF are calculated using budget
data: the imputed sales tax, based on
budgeted outlays for materials, supplies, and capital assets; the assessment for FDIC insurance on expected
clearing balances maintained with the
Federal Reserve to settle transactions;
and the portion of the expenses of the
1. See appendix B, note 3, for a description
of the position of Product Director and of the
System Pricing Policy Committee.
2. A n example is the pricing program announced to encourage use of the automated
clearinghouse service, under which prices were
established to recover an increasing percentage
of full costs each year, reaching 100 percent in
1986.

76

Special Categories of System Expense

Board of Governors that is related to
the provision of priced services.
The inclusion of all these costs
makes the Federal Reserve's priced
services competitive with the private
market, and the discipline of the market ensures that the prices charged
will be no higher than necessary.
Calculation o f the P S A F for 1987
In 1986, the Board approved a 1987
private sector adjustment factor for
Federal Reserve priced services of
$70.9 million, an increase of $2.8
million, or 4.1 percent, from the
PSAF of $68.1 million targeted for
1986.
Asset Base
The estimated value of Federal
Reserve assets to be used in providing
priced services in 1987 is $2,752 million (table D . l ) . The value of assets
assumed to be financed through debt
and equity will total $393.8 million in
1987, which represents an increase of
$43.3 million, or 12 percent, from
1986 (table D.2). The rise is attributable largely to capital expenditures
for bank premises, furniture, and
equipment.3
Cost of Capital and Taxes
Because of periodically abnormal
earnings by bank holding companies
included in the model, the Board has
approved the use of a three-year average of rates of return on equity for
calculating the PSAF. The Board has
also approved the use of three-year
averages for determining imputed in-

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.




terest costs for long-term debt and for
income taxes.
The sample of 25 bank holding
companies used to calculate the PSAF
for 1987 is the same one used for
1986. One large bank holding company is still excluded from the sample
because of its unique experience in
recent years. The holding companies
with the highest and lowest rates of
return on equity before taxes were excluded, and calculations were based
on the remaining 23 bank holding
companies.
Other Imputed Costs
Other required PSAF recoveries for
1987—imputed sales taxes, FDIC insurance, and Board expenses—total
$10.6 million, down $0.4 million
from 1986 (table D.2). Most of the
decrease is in imputed sales taxes,
primarily because of the projected
reduction in capital expenditures in
1987. This decline is partially offset
by an increase in imputed costs for
FDIC insurance resulting from the
expected rise in clearing balances
(table D . l ) .
Capital Outlays
The Federal Reserve System accounts
for its operations in accordance with
the private sector's generally accepted
accounting principles (GAAP). Federal government accounting, controlled by title 2 of the General
Accounting Office's Policy and Procedures Manual for Guidance of Federal Agencies, is for the most part in
agreement with GAAP. One notable
exception is in the area of depreciation of fixed assets.
No requirement exists for depreciation accounting throughout the federal government, and the cost of fixed
assets is typically recorded as an ex-

77 Special Categories of System Expense
Table D. 1
P r o F o r m a B a l a n c e Sheet f o r F e d e r a l R e s e r v e P r i c e d Services, 1 9 8 6 a n d

1987

Millions of dollars
Asset or liability

1987

1986

ASSETS

Short-term assets
Imputed reserve requirements on clearing balances .
Investment in marketable securities
Receivables2
Materials and supplies2
Prepaid expenses2
Net items in process of collection (float)
Total short-term assets
Long-term assets
Premises2-3
Furniture and e q u i p m e n t 2 . . .
Leases
Leasehold improvements 2 ...
Total long-term assets.

239.2
1,753.8
26.8
4.4
4.2
363.5

204.0
1,496.0
25.9
4.2
4.2
334.0

2,391.9

2,068.3
229.6
126.8
1.8
2.0

191.0
123.4
.2
1.8
316.4
2,384.7

Total assets

360.2
2,752.1

LIABILITIES

Short-term
liabilities
Clearing balances
Balances arising from early
credit of uncollected items...
Short-term debt 4
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

1,700.0

1,993.0

334.0
34.3

363.5
35.4
2,391.9

2,068.3
.2
94.9

126.2
95.1

128.0

2,163.4

2,519.9

221.3

232.2

2,384.7

2,752.1

1. Data are averages for the year. Details may not
add to totals because of rounding.
2. Financed through the PSAF; other assets are selffinancing.

3. Includes allocations of $500,000 in Board of
Governors' assets to priced services for 1986 and
$600,000 for 1987.
4. Imputed figures, representing the source of financing for certain priced-service assets.

pense at the time of purchase. However, title 2 specifies the use of depreciation accounting for business-like
operations and for activities that recover costs from reimbursements or
user charges. The Federal Reserve
meets both these criteria, and the
Banks and the Board depreciate the
cost of fixed assets over their estimated useful lives.

The Federal Reserve Banks capitalize and depreciate all captial assets
that cost $1,500 or more and, at their
option, capitalize or expense capital
assets costing less than $1,500; the
capitalization guideline for the Board
of Governors is $1,000. The capitalization and depreciation of assets is
consistent with GAAP, which recognize that the cost of acquiring an




78

Special Categories of System Expense

Table D.2
D e r i v a t i o n o f t h e P r i v a t e S e c t o r A d j u s t m e n t F a c t o r , 1986 a n d 1987 1
Millions of dollars, except as noted
Item

1986

1987

34.3
316.2
350.5

35.4
358.4
393.8

9.8
27.1
63.1
100

9.0
31.9
59.1
100

Cost of capital* (percent)
Short-term debt
Long-term debt
Pretax equity 5
Weighted average

10.3
10.3
19.8
16.3

8.5
10.2
19.1
15.3

Tax rate (percent) 5

37.6

33.9

Capital costs6
Short-term debt
Long-term debt
Equity
Total

3.5
9.8
43.8
57.1

3.0
12.8
44.5
60.3

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

7.9
1.4
1.7
11.0

7.3
1.6
1.7
10.6

Total PSAF recoveries
Millions of dollars
As a percent of capital
As a percent of expenses

68.1
19.4
15.7

70.9
18.0
15.8

P S A F COMPONENTS

Assets to be financed2
Short-term
Long-term 3
Total
Capital structure
Short-term
Long-term
Equity
Total

(percent)

REQUIRED P S A F

RECOVERIES

1. Details may not add to totals because of rounding.
2. The asset base for priced services is directly determined.
3. Total long-term assets less capital leases that are
self-financing.
4. A l l short-term assets are assumed to be financed
by short-term debt. Of the total long-term assets, 35
percent are assumed to be financed by long-term debt
and 65 percent by equity in 1987. The data are average
rates paid by the bank holding companies included in
the sample.

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.
Capital budgeting by the Reserve



5. 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 1987 figures for pretax equity and
the tax rate are based on a three-year average of
these rates, for 1983-85.
6. The calculations underlying these data use the
dollar values of assets to be financed, divided as
described in note 4, and the rates for the cost of
capital.

Banks is part of a multiyear process
of identifying long-term capital requirements. The Banks are required
to budget annually for capital outlays
by capital class in order to provide the
Board with the estimated effect of
total operating and capital spending.

79 Special Categories of System Expense
During the budget year, major capital
purchases must be submitted to the
Board for further review and approval. Capital expenditures for the
Board are reviewed by the Board of
Governors during the budget process.
Table D.3 displays the pattern of
total System outlays in recent years
based on the practice followed most
often in the federal government. To

obtain total outlays, depreciation
costs were subtracted from total expenses for each year and capital
outlays (actual or projected) were
added. As a result, capital outlays are
shown in total in the year of purchase
rather than spread over the useful
lives of the assets, and thus the
amounts and percent changes vary
widely from year to year.

Table D.3
T o t a l Expenses o f the Federal Reserve System,
Federal Government Accounting M e t h o d , 1982-87'
Millions of dollars, except as noted

Year and entity

Total
expenses

Depreciation 2
Equipment

(2)

(1)

Total
outlays

(3)

Property

Capital
outlays

Percent
change
from
previous
year

( l ) - ( 2 ) + (3)

1982
Reserve Banks
Board of Governors
Total

973.6
67.4
1,041.0

32.7
1.6
34.3

14.8
1.6
16.4

138.4
1.8
140.2

1,064.5
66.1
1,130.6

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

.2
4.2
.5

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 3
96.6

1,084.5
81.1
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 3
152.4

1,184.2
81.3
1,265.5

9.2
.6
8.6

1986 estimate
Reserve Banks
Board of Governors
Total

1,164.1
85.2
1,249.3

67.3
4.3
71.6

22.8
1.6
24.4

188.94
17.4
206.3

1,262.9
96.7
1,359.6

6.6
18.9
7.4

1987 budget
Reserve Banks
Board of Governors
Total

1,197.8
86.3
1,284.1

78.8
6.0
84.8

26.8
1.6
28.4

183.5
4.6
188.1

1,275.7
83.3
1,359.0

1.0
-13.9

* Less than .05.
1. Details may not add to totals because of rounding.
2. The Board of Governors did not depreciate capital assets before 1985; data for earlier years are estimated and subject to change (see text).
3. The Board's capital expenditures increased sharp-




ly in 1984 as a result of outlays for equipment for the
Contingency Processing Center. The establishment of
this facility also affected expenditures in 1985.
4. Includes an estimated $14 million for a new computer system.

80

Special Categories of System Expense

Table D.4
Costs to the Federal Reserve o f N e w C u r r e n c y ,

1985-87

Millions of dollars, except as noted

Type of cost

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 6.2 billion notes in 1985, 6.5 billion
notes in 1986, and 6.9 billion notes in 1987.

Currency Printing
Currency is produced by the Bureau
of Engraving and Printing and put
into or retired from circulation by the
Federal Reserve Banks, which use depository institutions as the channel of
distribution. New currency is printed
to replace worn notes and to accommodate increases in the demand for
circulating currency. Notes are also
required for increases in Federal
Reserve Bank inventories, which are
held to meet unanticipated increases
in demand. In the past several years
the demand for currency has increased because of the proliferation
of automatic teller machines and because of the Federal Reserve's effort
to improve the quality of currency in
circulation. The Federal Reserve Act
stipulates that the costs associated
with acquiring Federal Reserve notes
and issuing and retiring them be assumed by the Federal Reserve System.
The Board controls currency expenditures as much as possible: it
consults with the Bureau of Engraving
and Printing to ensure that the lowestcost printing methods are used, it
monitors operations at the Reserve
Banks to ensure that no currency is
destroyed prematurely, and it sees



1985
actual

1986
estimate

1987
budget

Percent
change,
1986-87

160.4
5.0

173.5
4.8

183.6
5.5

5.8
14.6

1.5

1.7

1.7

4.9

2.2

0

171.8

182.2

0
-100

190.8

4.7

2. Includes purchasing pouches and seals for Bureau
of Engraving and Printing.

that System guidelines on the quality
of currency are being met. In this
way, only the minimum number of
new notes is ordered, and printing
costs are minimized in total and on
average. A l l related costs, such as
those for transportation and packaging, are similarly monitored.
Costs associated with new currency
are shown in table D.4. Currency in
circulation, new notes issued, and
notes destroyed are shown in table
D.5.

Table D.5
C u r r e n c y in C i r c u l a t i o n , N e w Notes
Issued, a n d N o t e s Destroyed,
1986 E s t i m a t e
Millions of pieces

Notes in
circulation

New notes
paid out 1

Notes
destroyed 1

1
5
10
20
50
100

3,572
988
1,136
2,579
434
756

2,822
697
716
1,412
139
149

2,845
745
755
1,244
102
82

Total

9,465

5,935

5,773

Denomination

1. Based on actual levels through the third quarter
and expected levels for the fourth quarter of 1986.
Notes paid out do not include additions to inventory
at the Reserve Banks.

81
Appendix

E

Sources and Uses of Funds
The Federal Reserve Banks follow
generally accepted accounting principles, as do commercial financial institutions, accruing income and expenses and capitalizing acquisitions
of assets whose useful lives extend
over future years. The Banks depart
from GAAP only in those cases
unique to a central bank.
The income of the Reserve Banks is
derived primarily from U.S. government securities that the Federal Reserve has acquired through open market operations, one of the tools of
monetary policy. On average these
earnings account for approximately
95 percent of current income. Table
E.l shows the sources and estimated
amounts of income for 1986.
Current expenses include operating
expenses and the cost of earnings
credits granted to depository institutions on clearing balances held by the
Reserve Banks. A profit and loss account is used by the Reserve Banks to
record extraordinary gains or deductions from current net income. The

Table E. 1
I n c o m e o f the Federal Reserve System,
1985 a n d 1 9 8 6 '
Millions of dollars
Item

1985
actual

1986
estimate

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

427.9
16,843.1
228.7
613.8
18.4

279.2
16,141.5
393.8
629.8
20.4

Total

18,132.0

17,464.7

1. Details may not add to totals because of rounding.




primary entries are for gains or losses
on the sale of U.S. government securities and for gains or losses on assets
denominated in foreign currencies
that result either from the sale of
those assets or from their revaluation
at market exchange rates.
The Reserve Banks maintain a
surplus account to cushion unexpected losses, much as commercial
establishments retain earnings. The
surplus account is increased or decreased in order to keep it at an
amount equal to the paid-in capital of
the member banks, which is the current level of the account stipulated by
the Board of Governors.
Table E.2 summarizes the income
and expenses for 1985 and the estimates for 1986. Under the policy established by the Board of Governors
at the end of 1964, all net income
after the statutory dividend to member banks and the amount necessary
to equate surplus to paid-in capital is
transferred to the Treasury as interest
on Federal Reserve notes. Preliminary figures indicate that in 1986,
current income before expenses, dividends, additions to surplus, and payments to the Treasury totaled $17.5
billion. This was somewhat less than
in 1985 ($18.1 billion) because of
lower rates of interest on U.S. government securities. Additions to current net income from profit and loss
entries totaled $2.0 billion. In 1986,
preliminary figures show statutory
dividends to member banks of $110
million; additions to surplus of $92
million; and payments to the Treasury of $17.8 billion.

82

Sources and Uses of Funds

Table E.2
D i s t r i b u t i o n o f t h e I n c o m e o f t h e F e d e r a l R e s e r v e S y s t e m , 1985 a n d

1986'

Millions of dollars
1985

1986

actual

estimate

18,132

17,465

1,023
105

1,051
105

17,004

16,309

1,301

1,978

77
174

97
181

103
155

110
92

17,7%

Item

17,807

LESS

Current net expenses of Reserve Banks3
Operating expenses
Earnings credit cost
EQUALS

Current net income
PLUS

Net additions to or deductions from ( - ) current net income

J

LESS

Assessments by Board

Other distributions
Dividends paid to member banks 5
Transfers to or from ( - ) surplus 6
EQUALS

Payments to U.S. Treasury
1. Details may not add to totals because of rounding.
2. Includes income from U.S. government securities, loans, priced services, and foreign currencies.
3. Net of reimbursements from the Treasury and
other government agencies.
4. This account is the same as that reported under
the same name in table 8 of the Board's Annual Report to the Congress and includes gains or losses on
foreign exchange transactions due mainly to revaluations at market exchange rates; gains or losses on sales




of U.S. government securities; and miscellaneous
gains or losses.
5. The Federal Reserve Act requires the Federal Reserve to pay dividends to member banks at the rate of
6 percent of paid-in capital.
6. Each year the Federal Reserve transfers to its
surplus account an amount sufficient to equate surplus
to paid-in capital. The purpose of this account is to
provide a reserve against losses.

83
Appendix

F

Federal Reserve System Audits
The Federal Reserve System is subject
to several levels of audit and review.
Each Federal Reserve Bank employs a
full-time staff of auditors who report
directly to its board of directors. The
Federal Reserve Board regularly audits the financial operations of the
Reserve Banks and conducts periodic
reviews of all other operations of the
Banks. The Board itself is subject to
review by its own internal staff of
auditors and operations reviewers,
and its financial operations are examined annually by an independent
auditor.
Beginning in 1978, most of the operations of the Federal Reserve Sys-

tem became subject to review by the
General Accounting Office (GAO)
with the passage of Public Law
95-320, the Federal Banking Agency
Audit Act. The GAO currently has 19
projects in various stages of completion, and since 1979 it has completed
35 reports dealing with various aspects of Federal Reserve operations.
These projects and reports are shown
in tables F.l and F.2 respectively. In
addition, the GAO has involved the
Federal Reserve in more than 50 other
reviews not directly related to the System and has terminated 20 others before completion. Copies of the reports
are available directly from the GAO.

Table F. I
A c t i v e G A O Projects Related to the Federal Reserve
Subject
Federal Reserve market oversight
U.S. government function as lender of last resort
Bank-insulation strategies
Risks in the commercial banking industry
Regulation of banks' foreign exchange rate
Impact of changing fee structure
Federal banking agencies' uniform country risk examination system
Role of credit assurances
Analysis of government securities market
Adequacy of Treasury's investment accounting process
Credit cards
Potential information abuses
Food stamps redemption process
Sectoral problems in banking
Regulation Q
Internationalization of capital markets
Government securities secondary market trading system
Deposit insurance
Supervision of banks' use of short-term funding




84

Federal Reserve System Audits

Table F.2
C o m p l e t e d G A O Reports Related to the F e d e r a l Reserve System
Report
Comparing Policies and Procedures
of the Three Bank Regulatory Agencies
Federal Systems Not Designed to Collect Data
on A l l 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 Reserve 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
Despite Improvements, Recent Bank Supervision
Could Be More Effective and Less Burdensome
Issues to Be Considered while Debating
Interstate Bank Branching
The Federal Reserve Should Move Faster
to Eliminate Subsidy of Check Clearing Operations
Information about Depository Institutions' Ancillary
Activities Is Not Adequate for Policy Purposes
Bank Merger Process Should Be Modernized and Simplified
A n 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
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
A n Examination of Concerns Expressed about the Federal
Reserve's Pricing of Check Clearing Activities




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-8I-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

GGD-82-21

2/26/82

GGD-82-36

4/9/82

GGD-82-22

5/7/82

GGD-82-57
GGD-82-53

6/1/82
8/16/82

PAD-82-45

8/31/82

ID-82-52

9/2/82

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-85-9
GGD-85-9A

1/14/85

Federal Reserve System Audits
Table

85

F.2—Continued

Report
Information on Independent Public Accountant Audits
o f Financial Institutions
A n Analysis of T w o 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




Number

GGD-84-44FS
GGD-86-63
GGD-86-26
NS1AD-86-93
GGD-86-94

Date

4/21/86
5/12/86
5/15/86
7/25/86
8/1/86

87
Appendix

G

Trends in Expenses and Employment
at the Board of Governors
Chart

G.l

Chart G.3

E x p e n s e s f o r P e r s o n n e l Services at

Expenses for N o n p e r s o n n e l

1977-871

at t h e B o a r d o f G o v e r n o r s ,

the B o a r d o f Governors,

I

i

i

I •
" • i '
1982

I

i
1987

1. Excluding accrued expense for increased value of
unused annual leave. For 1986, estimate; 1987, budget.
2. Calculated with the GNP implicit price deflator.

Chart G.2
E m p l o y m e n t a n d P o s i t i o n s at t h e
Board of Governors,

1977-871
Number, in thousands

1977

1982

1987

I. Year-end data. For 1986, estimate; 1987, budget.




1977-871

Millions of dollars

Millions o f dollars

I
1977

Services

1977

1982

1987

1. For 1986, estimate; 1987, budget.
2. Calculated with the GNP implicit price deflator.

89
Appendix

H

Trends in Expenses and Employment
at the Federal Reserve Banks
Chart H. 1

Chart

Expenses o f the Federal Reserve
by Operational Area,

Banks,

1982-871

H.2

E m p l o y m e n t at t h e F e d e r a l
Banks, by Activity,

Reserve

1982-871
A N P , in thousands 2

Millions of dollars

Services to financial
institutions and the public
800
Services to
financial institutions^
and the public
700
Overhead services

200
Supervision and regulation
100
Monetary and economic policy
t

t

i

1983

i

i

1985

I
1987

Monetary and economic policy
I
i
1
I
1983
1985
1987

1. For 1986, estimate; for 1987, budget.
2. See chap. 3, note 2, for definition of ANP.

1. For 1986, estimate; for 1987, budget.

Table H. 1
O p e r a t i n g Expenses o f the Federal Reserve Banks, by District,

1986-87'

Thousands of dollars, except as noted

District
Boston
New York
Philadelphia 2
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Total

1986
estimate

Change
Amount

Percent

68,710
223,032
65,507
69,031
90,563
106,040
137,995
58,785
57,119
75,390
75,360
136,537

70,480
230,939
66,209
71,583
92,055
109,947
142,231
60,299
59,128
78,200
76,345
140,397

1,770
7,908
702
2,552
1,492
3,907
4,237
1,514
2,009
2,810
985
3,860

2.6
3.5
1.1
3.7
1.6
3.7
3.1
2.6
3.5
3.7
1.3
2.8

1,164,068

1,197,813

33,746

2.9

1. In this and the following tables, components may
not add to totals because of rounding.
2. Excluding incremental expenses associated with




1987
budget

the Treasury Direct program, which is located in the
District, Philadelphia's change is — S192 thousand or
- . 3 percent.

90

Trends at the Federal Reserve Banks

Table H.2
E m p l o y m e n t at t h e F e d e r a l R e s e r v e B a n k s , b y D i s t r i c t ,

1986-87

Average number of personnel, except as noted 1
1986
estimate

Change

Total
1. See chap. 3, note 2, for definition of A N P .
2. Excluding employment associated with the Trea-

Amount

1,460
4,047
1,256
1,399
1,963
2,196
2,803
1,322
1,079
1,621
1,563
2,453

-2
-76
16
-15
-5
-16
-40
4
-16
- 14
-32
-23

-.1
- 1.8
1.3
- 1.1
-.3
-.7
-1.4
.3
-1.5
-.9
-2.0
-.9

23,381

Boston
New York
Philadelphia 2
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco

1987
budget

1,462
4,123
1,240
1,414
1,968
2,212
2,843
1,318
1,095
1,635
1,595
2,476

District

23,162

-219

-.9

Percent

sury Direct program, which is located in the District,
Philadelphia's change is - 9 A N P or - . 8 percent.

Table H.3
Expenses o f the Federal Reserve Banks
for C e n t r a l B a n k a n d T r e a s u r y Services, by D i s t r i c t ,

1986-87'

Thousands of dollars, except as noted
1986
estimate

1987
budget

Boston
New York
Philadelphia 2
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco

37,502
154,032
43,099
38,150
48,916
52,061
73,454
35,541
25,880
41,313
39,270
80,501

Total

669,719

District

* Less than .05.
1. Includes direct, support, and overhead expenses
charged to monetary and economic policy, services to
the U.S. Treasury and other government agencies,
supervision and regulation, and nonpriced services to
financial institutions and the public.




Change
Amount

Percent

37,228
159,004
43,119
38,980
49,222
53,483
74,832
36,032
26,202
42,083
38,780
81,176

-275
4,972
20.8
830
306
1,422
1,378
491
322
770
-490
675

-.73.2
2.2
.6
2.7
1.9
1.4
1.2
1.9
-1.2
.8

680,139

10,421

1.6

*

2. Excluding incremental expenses associated with
the Treasury Direct program, which is located in the
District, Philadelphia's change is -$875 thousand or
- 2 . 4 percent.

91 Trends at the Federal Reserve Banks
Table H.4
Expenses o f the Federal Reserve B a n k s , by O p e r a t i o n a l A r e a ,

1986-87

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
estimate

1987
budget

Change
Amount

Percent

91,965
164,331

90,802
171,690

- 1,163
7,359

-1.3
4.5

770,745

799,379

28,634

3.7

135,943

- 1,084

-.8

1,197,813

33,746

2.9

368,033
361,933

Total

137,027
1,164,068

395,972
350,753

27,940
-11,181

7.6
-3.1

MEMO'

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.

Table H.5
Expenses o f the Federal Reserve B a n k s
for M o n e t a r y a n d E c o n o m i c P o l i c y , by District,

1986-87

Thousands of dollars, except as noted
Change

1987
budget

Amount

Percent

Boston
New York 1
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco

5,414
30,625
4,565
4,766
4,309
6,146
8,105
4,822
4,671
4,788
4,938
8,817

5,161
32,170
4,028
4,782
4,178
6,019
7,844
4,887
3,998
4,759
4,549
8,427

-253
1,545
-537
16
- 131
- 127
-261
65
-673
-28
-389
-390

-4.7
5.0
- 11.8
.3
-3.0
-2.1
-3.2
1.4
- 14.4
-.6
-7.9
-4.4

Total

91,965

90,802

- 1,163

-1.3

District

1986
estimate

1. Expenses of open market trading operations,
located in the District, are $11.1 million for 1986 and
$12.8 million for 1987.




92

Trends at the Federal Reserve Banks

Table H.6
Expenses o f the Federal Reserve Banks
for Supervision a n d R e g u l a t i o n , by District,

1986-87

Thousands of dollars, except as noted

District

1986
estimate

1987
budget

Change
Amount

Percent

7,879
32,397
7,548
9,692
9,476
13,663
23,844
7,283
7,805
14,197
11,816
18,732

7,652
34,418
7,383
10,346
10,151
13,950
24,563
7,215
8,187
14,948
12,324
20,553

-227
2,021
- 165
654
674
287
720
-68
382
751
508
1,821

-2.9
6.2
-2.2
6.8
7.1
2.1
3.0
-.9
4.9
5.3
4.3
9.7

164,331

171,690

7,359

4.5

Boston 1
New York
Philadelphia 1
Cleveland
Richmond
Atlanta
Chicago
St. Louis 1
Minneapolis
Kansas City
Dallas
San Francisco
Total

1. The reduction is related primarily to decreases in
services other than supervision.

Table H. 7
Expenses o f the Federal Reserve B a n k s
f o r Services t o F i n a n c i a l I n s t i t u t i o n s a n d t h e P u b l i c , b y D i s t r i c t ,

1986-87

Thousands of dollars, except as noted
Change

1986
estimate

1987
budget

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

48,510
129,422
37,499
45,605
68,164
76,582
90,049
38,574
40,762
49,614
51,749
94,216

50,895
134,542
38,383
47,429
69,120
79,991
94,280
40,081
42,809
51,950
52,839
97,060

2,386
5,121
884
1,825
955
3,409
4,231
1,507
2.046
2,336
1,090
2,845

4.9
4.0
2.4
4.0
1.4
4.5
4.7
3.9
5.0
4.7
2.1
3.0

Total

770,745

799,379

28,634

3.7

District




Amount

Percent

93 Trends at the Federal Reserve Banks
Table H.8
Expenses o f the Federal Reserve B a n k s
f o r Services t o t h e U . S . T r e a s u r y a n d O t h e r G o v e r n m e n t A g e n c i e s , b y D i s t r i c t ,

1986-87

Thousands of dollars, except as noted

District

1986
estimate

1987
budget

Change
Amount

Percent

6,907
30,588
15,895
8,969
8,614
9,649
15,998
8,105
3,882
6,791
6,858
14,773

6,772
29,809
16,415
9,026
8,607
9,987
15,544
8,115
4,135
6,543
6,632
14,358

- 135
-779
520
57
-6
339
-453
10
253
-248
-226
-415

-2.0
-2.5
3.3
.6
-.1
3.5
-2.8
.1
6.5
-3.7
-3.3
-2.8

137,027

135,943

-1,084

-.8

Boston
New York
Philadelphia 1
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Total

1. Excluding incremental expenses associated with
the Treasury Direct program, which is located in the

District, Philadelphia's change is -$375 thousand or
- 3 . 7 percent.

Table H.9
Expenses o f the Federal Reserve Banks
f o r Salaries o f O f f i c e r s a n d E m p l o y e e s , by District,

1986-87'

Thousands of dollars, except as noted
Change

1986
estimate

1987
budget

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

37,602
115,420
30,309
33,024
43,439
51,095
70,902
29,786
26,316
39,113
38,596
66,989

39,677
120,508
32,201
34,845
46,263
53,194
72,594
31,551
27,534
41,244
39,504
69,376

2,075
5,088
1,891
1,821
2,824
2,099
1,692
1,764
1,219
2,131
908
2,387

5.5
4.4
6.2
5.5
6.5
4.1
2.4
5.9
4.6
5.4
2.4
3.6

Total

582,591

608,490

25,899

4.4

District

1. Excluding incremental expenses associated with
the Treasury Direct program, which is located in the




Amount

Percent

District, Philadelphia's increase is $1.7 million or 6.1
percent.

94

Trends at the Federal Reserve Banks

Table H.10
F a c t o r s in t h e 1 9 8 6 - 8 7 C h a n g e in S a l a r i e s
o f O f f i c e r s a n d E m p l o y e e s o f the Federal Reserve B a n k s , by District
Percentage points
Merit
adjustment

Structure
adjustment

Promotions
and reclassifications

Change in
staffing

Turnover
and lag 1

Overtime

Other

Total
change

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

5.1
5.3
4.5
4.6
5.5
5.3
4.9
4.9
4.6
5.0
3.9
5.0

.1
.0
.0
.1
.0
.5
.1
.0
.0
.5
.1
-.4

1.4
.5
.8
.9
1.4
.7
1.6
.6
.8
1.2
.2
.5

-.5
-.7
1.6
1.6
1.0
- 1.4
- 1.7
.5
- 1.5
.4
- .9
- 1.4

-.9
- 1.0
.0
-1.6
-.9
-.4
- 1.9
-.1
.0
- 1.5
-.6
.4

-.3
-.3
-.6
-.2
-.6
-.6
-.4
-.2
-.1
-.1
-.4
-.5

.6
.6
.0
.1
.1
.0
.0
.2
.7
.1
.0
.0

5.5
4.4
6.2
5.5
6.5
4.1
2.4
5.9
4.6
5.4
2.4
3.6

Total

4.9

.1

.9

-.5

-.8

-.4

.2

4.4

District

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.

Table

H.ll

C a p i t a l O u t l a y s o f the F e d e r a l R e s e r v e B a n k s , b y D i s t r i c t ,

1986-87'

Thousands of dollars, except as noted

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




1986
estimate

1987
budget

Change
Amount

Percent

7,769
29,315
5,531
6,845
10,436
22,730
39,736
5,766
4,194
9,024
5,675
41,842

6,407
37,411
4,117
10,371
23,594
16,761
44,230
5,116
6,025
5,683
3,906
19,919

-1,362
8,096
-1,414
3,526
13,158
-5,969
4,494
-649
1,831
-3,341
- 1,768
-21,923

-17.5
27.6
-25.6
51.5
126.1
-26.3
11.3
-11.3
43.7
-37.0
-31.2
-52.4

188,861

183,540

-5,321

-2.8

95 Trends at the Federal Reserve Banks
Table H. 12
C a p i t a l O u t l a y s o f t h e F e d e r a l R e s e r v e B a n k s , b y Class o f O u t l a y , b y D i s t r i c t ,

1986-87

Thousands of dollars
Data processing and
data communication
equipment

District
and year

Boston
1986 estimate . . . .
1987 budget

Furniture,
furnishings, and
fixtures

Other
equipment

Land
and
other
real
estate

Buildings

Building
machinery
and
equipment

Leasehold
improvements

Total

5,544
4,505

177
177

817
487

0
0

1,140
1,219

90
20

0
0

7,769
6,407

18,812
12,120

1,812
1,723

2,581
2,472

1,000
14,000

2,994
6,810

39
0

2,076
287

29,315
37,411

4,348
1,157

251
432

546
462

0
0

90
145

0
1,921

295
0

5,531
4,117

Cleveland
1986 estimate
1987 budget

1,897
3,569

741
1,088

544
661

0
192

2,350
3,823

1,282
1,017

31
21

6,845
10,371

Richmond
1986 estimate
1987 budget

6,278
6,984

427
204

831
1,300

0
125

2,825
14,922

75
60

0
0

10,436
23,594

AI Ian ta
1986 estimate
1987 budget

14,030
8,467

2,427
1,088

1,373
737

568
100

3,668
6,070

664
300

0
0

22,730
16,761

Chicago
1986 estimate
1987 budget

11,252
10,460

1,194
1,586

947
778

0
0

26,022
28,368

208
2,127

113
910

39,736
44,230

St. Louis
1986 estimate . . . .
1987 budget

1,723
1,782

379
461

308
305

0
0

2,277
2,396

1,078
172

0
0

5,766
5,116

Minneapolis
1986 estimate
1987 budget

3,492
4,882

36
84

453
354

0
0

174
501

39
205

0
0

4,194
6,025

New York
1986 estimate
1987 budget
Philadelphia
1986 estimate
1987 budget

....

Kansas City
1986 estimate
1987 budget

....

3,316
2,751

1,280
401

1,418
847

241
0

1,588
1,152

1,181
531

0
0

9,024
5,683

Dallas
1986 estimate
1987 budget

....

2,643
1,987

628
323

498
409

0
20

864
998

973
100

70
70

5,675
3,906

San Francisco
1986 estimate . . . .
1987 budeet

10,489
5,954

892
544

1,268
1,667

0
0

28,155
8,381

618
1,155

420
2,218

41,842
19,919

Total
1986 estimate
1987 budget

83,825
64,617

10,243
8,110

11,583
10,478

1,810
14,437

72,147
74,785

6,249
7,608

3,005
3,506

188,861
183,540




96

Trends at the Federal Reserve Banks

Table H. 13
Budget P e r f o r m a n c e o f the Federal Reserve B a n k s ,
O p e r a t i n g Expenses, by District, 1986
Thousands of dollars, except as noted

District

1986
budget'

1986
estimate

Change
Amount

Percent

68,387
222,728
65,526
68,894
90,637
105,610
139,505
58,801
57,188
75,219
75,360
137,550

Total

68,710
223,032
65,507
69,031
90,563
106,040
137,995
58,785
57,119
75,390
75,360
136,537

323
304
- 19
137
-74
430
- 1,510
- 17
-69
171
0
- 1,012

.5
.1
.0
.2
-.1
.4
-1.1
.0
-.1
.2
.0
-.7

1,165,405

Boston-'
New York !
Philadelphia
Cleveland 4
Richmond
Atlanta 4
Chicago
St. Louis
Minneapolis
Kansas City 4
Dallas
San Francisco

1,164,068

-1,337

-.1

1. As revised in March 1986 in the wake of GrammRudman-Hollings (see appendix C). The Reserve
Banks were permitted to exceed their revised 1986
budgets in exempt areas: local real estate taxes, direct
expenses of priced services, and expenses of priced service projects.
2. Boston expects to exceed its revised budget because taxes on real estate and spending on priced services were greater than anticipated.

3. New York expects to exceed its revised budget because of substantial costs for establishing a District
computer contingency center.
4. Cleveland, Atlanta, and Kansas City expect to
exceed their revised budgets mainly because of greater
spending in direct expenses of priced services.

Table H. 14
Budget P e r f o r m a n c e o f the Federal Reserve Banks,
E m p l o y m e n t , b y D i s t r i c t , 1986
Average number of personnel, except as noted

District

1986
estimate

Amount

1,461
4,167
1,259
1,42)
1,981
2,215
2,888
1,324
1,108
1,630
1,578
2,499

1,462
4,123
1,240
1,414
1,968
2,212
2,843
1,318
1,095
1,635
1,595
2,476

1
-44
- 19
-7
- 13
-3
-45
-6
- 13
5
17
-23

.1
-1.1
-1.5
-.5
-.7
-.1
-1.6
-.5
- 1.2
.3
1.1
-.9

23,531

23,381

-150

-.6

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

1. See chap. 3, note 2, for definition of A N P .
2. The March 1986 reduction following Gramm-




Change

1986
budget 1

Percent

Rudman-Hollings did not alter the A N P budgeted for
1986.

97 Trends at the Federal Reserve Banks
Table H.15
Expenses o f the Federal Reserve Banks, by O p e r a t i o n a l A r e a ,

1982-87'

Thousands of dollars, except as noted

Monetary
and
economic
policy

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

Total

119,316
131,848
140,690
151,991
164,331
171,690

646,151
675,918
701,453
742,896
770,745
799,379

115,126
120,256
126,307
131,544
137,027
135,943

973,602
1,028,465
1,067,802
1,117,377
1,164,068
1,197,813

-.5

1982
1983
1984
1985
1986 estimate
1987 budget

Services to
financial
institutions
and the
public

93,010
100,443
99,351
90,945
91,965
90,802

Year

Supervision
and
regulation

7.5

4.3

3.4

4.2

Average annual
change, percent

1. Expenses for 1982 are adjusted for the cost of
currency. Until 1983, costs associated with procuring,
issuing, and retiring Federal Reserve notes were in-

eluded in Reserve Bank operating budgets. On January 1, 1983, the Board of Governors assumed responsibility for all currency expenses.

Table H. 16
E m p l o y m e n t at t h e F e d e r a l R e s e r v e B a n k s , b y A c t i v i t y ,

1982-87'

Average number of personnel, except as noted

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 2

Overhead :

Total

1982
1983
1984
1985
1986 estimate
1987 budget

743
804
826
816
790
780

1,796
1,862
1,885
1,912
2,104
2,181

8,566
8,424
8,395
8,754
8,833
8,722

1,851
1,838
1,798
1,781
1,805
1,841

4,599
4,367
4,340
4,398
4,504
4,511

5,676
5,589
5,424
5,323
5,346
5,127

23,230
22,883
22,669
22,984
23,381
23,162

Average annual
change, percent

1.0

4.0

0.4

-.1

-.4

-2.0

-.1

Year

1. See chap. 3, note 2, for definition of A N P .
2. See table H.4, note 1, for definition.

Accounting Changes
Several accounting rules that were
used in 1986 to allot costs for support
and overhead were changed to assign
those costs to the areas benefiting
from work to be done in 1987. Table
H.17 shows the effect of these
changes on the expenses for Central
Bank and Treasury services.
The category "centralized adminis


tration of Federal Reserve services"
has been renamed "administration of
priced Federal Reserve services," and
costs will be allocated only to priced
services. The cost of time spent on
Central Bank and Treasury services
will be distributed directly to the
benefiting activities.
The modular approach to developing the software for the Integrated
Accounting System permits costs for

98

Trends at the Federal Reserve Banks

each software module to be charged
to the benefiting services. The development of the interdistrict accounting
module, which includes the cash letter
monitoring system, primarily will
support priced services in 1987.
The System communication center
will distribute costs in 1987 to benefiting activities based upon actual hours
and standard hourly rates rather than
equally prorating costs to operational
areas.
In "Bank administration," the allocation rule will be modified to require 20 percent of the costs to be allocated equally to the four Central
Bank and Treasury service operational areas (monetary and economic policy, services to the U.S. Treasury and
other government agencies, supervision and regulation, and. nonpriced
services to financial institutions and
the public) and 20 percent to priced
services. In 1986, 25 percent of the
costs were allocated to each of the
first three operational areas, with
priced services and nonpriced services
to financial institutions and the public receiving a combined 25 percent.
The automation program office
will also redistribute costs in 1987 to
benefiting activities based upon actual hours and standard hourly rates
rather than equally prorating costs to
operational areas.
"Environmental transition" refers
to the conversion to production use
of the hardware and software acquired for the Long-Range Automation Program. Costs of the project in
1986 were apportioned equally
among operational areas; in 1987,
they will be allocated to benefiting ac-




tivities according to use and standard
hourly rates.
The costs of planning for contingency processing will be charged in
1987 to the benefiting areas. In 1986,
they were spread equally among operational areas.
Some expenses of the customer information system will be shifted away
from the economic policy determination area toward services for bookentry securities transfer and definitive
safekeeping based on expected shifts
in the 1987 benefits from the information system.

Table H.17
C o n t r i b u t i o n o f C h a n g e s in A c c o u n t i n g
R u l e s t o t h e 1987 E x p e n s e s o f t h e
Federal Reserve B a n k s for C e n t r a l
B a n k a n d T r e a s u r y Services
Millions of dollars, except as noted
Expense item
Central Bank and Treasury services
1986 estimate
1987 budget based on 1986
accounting rules
Increase before rule changes, 1986 to 1987
Millions of dollars
Percent
Adjustments for rule changes
Centralized administration of
Federal Reserve services
Standard application for integrated
accounting system
System communications center support.
Bank administration
Automation program office
Environmental transition
Planning for contingency processing .. .
Standard application for
customer information system
Other
Total
Increase after rule changes, 1986 to 1987
Millions of dollars
Percent

Amount
669.7
686.1
16.4
2.5

-2.0
- 1.2
-1.1
-.9
-.4
-.4
-.2
-.03

.2
-6.03
10.4
1.6

99

The Federal Reserve System
Boundaries of Federal Reserve Districts
and their Branch Territories

Helen,
Minneapolis
Detroit
Chicago
j s ' ' r Lake Ci,y

Omaha*

''*c/sCo
Kansas

Louis* |7

City

[».

Louis

Wof«J
Oklahoma City.
*

'tries
Mile Rock

Bi'mi'^"*Aflal,ta

Dallas®

j.ckso"'
Houston]

'Orieens

Antonio
Mitt"

HAWAII

<0

©

Legend
Boundaries of Federal Reserve Districts
Boundaries of Federal Reserve Branch Territories
o Board of Governors of the Federal Reserve System
® Federal Reserve Bank Cities
• Federal Reserve Branch Cities
• Federal Reserve Bank Facilities



FRB 1—2,000—0387 C