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Board of Governors of the Federal Reserve System




1988-89

Contents
1

INTRODUCTION

Parti

The 1989 Budgets

5
5
7
8
8

Chapter 1
FEDERAL RESERVE SYSTEM
Net Expenses
Trends in Expenses and Employment
Operational Areas
1989 Budget Initiatives

11
11
14

Chapter 2
BOARD OF GOVERNORS
The Budget by Operational Area
10-Year Trend

17
17
19
19
24
25
26
27
27
28

Chapter 3
FEDERAL RESERVE BANKS
Major Initiatives
Budget Objective for 1989
Operational Areas
Objects of Expense
Capital Outlays
Trends in Expenses and Employment
Volume and Unit Cost
1988 Budget Performance
1988 Budget Performance on Expedited Funds

Part II
31
31
32

Special Analysis

Chapter 4
THE AUTOMATED CURRENCY PROCESSING SYSTEM
History of Currency Processing Technology
The New Automated Currency Processing System




Appendixes

35
35
36
38

Appendix A
MISSION A N D OPERATIONAL AREAS
OF THE 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

39
39
40

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

43
43
46
46
48

Appendix C
SPECIAL CATEGORIES OF SYSTEM EXPENSE
Priced Services
Capital Outlays
Special Projects
Currency Printing

51

Appendix D
SOURCES A N D USES OF FUNDS

53

Appendix E
FEDERAL RESERVE SYSTEM AUDITS

35

57

Appendix F
EXPENSES A N D EMPLOYMENT
AT THE FEDERAL RESERVE BANKS

65

MAP OF THE FEDERAL RESERVE SYSTEM




1

Introduction
This report describes the budgeted expenses of the Federal Reserve System for
1989 and compares them with expenses
for 1987 and 1988. In addition, to provide
some insight into the technology of a
major function of the System and the
budgetary implications of keeping that
technology current, this report examines
the development of the automated currency processing equipment used at the
Reserve Banks.
The Federal Reserve System was created by the Federal Reserve Act, passed
by the Congress in 1913 to establish a
safer and more flexible monetary and
banking system. With time, it became
clear that these original purposes were
part of broader national economic and
financial objectives. Growth of the economy, stable prices, and reasonable balance in transactions with foreign countries have come to be recognized as
primary objectives of governmental
economic policy. Over the years, such
objectives have been articulated by
the Congress in legislation giving the
Federal Reserve more authority and
responsibility.
The Board of Governors, together with
the 12 Federal Reserve Banks and their
25 Branches, serves as the nation's central
bank and lender of last resort. In addition,
the Board has broad supervisory and
regulatory responsibilities covering
banks that are members of the Federal
Reserve System, bank holding companies, international banking facilities in
the United States, Edge act and agreement corporations, foreign activities of
member banks, and activities of U.S.
branches and agencies of foreign banks.
In addition, the System is responsible for




implementing major federal laws governing consumer credit.
The Federal Reserve System also plays
a major role in the nation's payments
mechanism. The Federal Reserve Banks
distribute currency and coin, provide
both wire and automated clearinghouse
transfers of funds and securities, and
process 35 percent of all domestic checks.
The Federal Reserve serves as the fiscal
agent for the U.S. Treasury and provides
a variety of other financial services for
the Treasury and other government
agencies.
To carry out these responsibilities, the
Federal Reserve System spent an estimated $1,352 million in 1988 and has
budgeted expenses for 1989 of $1,427
million. These are the gross operating
expenses for the Board of Governors and
the Federal Reserve Banks and their
Branches. Offsetting them in 1988 was an
estimated $783 million in revenue from
priced services, reimbursements, and
other income, which brought 1988 net
operating expenses to $568 million. Net
spending for 1989 is expected to total
$597 million.
The major source of Federal Reserve
income, estimated at $18.2 billion in
1988, 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. Losses on
foreign exchange transactions approached $500 million.
Each year the Federal Reserve returns
to the U. S. Treasury its earnings in excess
of expenses, dividends, and surplus—in
1988, an estimated $17.4 billion. These
earnings are treated as receipts in the

2

Introduction

U.S. budget accounting system; projections of these earnings by the Office of
Management and Budget appear in the
U.S. budget.
Part I of this report discusses Federal
Reserve budgeted expenses for 1989 for
the System as a whole and for the Board
of Governors and the Reserve Banks
taken separately. Part II is a discussion of
the currency operations of the Reserve
Banks and of the new generation of currency processing equipment to begin
arriving at the Banks in 1990. Appendixes provide additional information on
System operations, budget processes,
special categories of System expense,
sources and uses of funds, Federal Reserve System audits, and trends in Bank
expenses and employment.
This report, which discusses the System's budget in detail, is a companion to
the Board's 75th Annual Report, 1988.
That document covers all activities and
initiatives of the Federal Reserve System
during the year.
•




Parti
The 1989 Budgets




5

Chapter 1

Federal Reserve System
The Federal Reserve System has budgeted operating expenses of $1,426.5
million for 1989, an increase of 5.5
percent over 1988 estimated expenses.
The budgeted operating expenses of the
System comprise those of the Reserve
Banks, $1,330.5 million, and the Board
of Governors, $96.0 million (table 1.1).
Not included in these costs are special
projects, budgeted at $11.1 million for
1989, up from $4.9 million estimated for
1988.1 Also excluded is the budget for the
cost of currency, $171.0 million, an
increase of 3.9 percent from the estimated
1988 cost.2 With special projects and the
cost of currency added to operating
expenses, the Reserve Banks account for
82.7 percent of the total; the Board, 6.0
percent; special projects, 0.7 percent;
and currency, 10.6 percent (chart 1.1).
This distribution of expenses is essentially the same as in 1988.
Chapter 2 discusses the budget for the
Board of Governors; chapter 3 details the
budgets of the Reserve Banks. The budget
by operational area is provided later in
this chapter. The operational areas are
described in more detail in appendix A;

appendix B describes the budget processes of the Board and of the Reserve
Banks.
Net Expenses
The System expects to recover 58 percent
of the expense it incurs during 1989. The
following items are deducted from System operating expenses to derive 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 fiscal
agency services. After deducting these
items, net expenses of the System are
expected to equal $597 million, or 42
percent of total budgeted operating expenses, the same percentage as in 1988
(table 1.2).

Chart 1.1
Distribution of Expenses of the
Federal Reserve System, 19891
1. As research and development efforts, special
projects are separate from the continuing operations
of the System and hence are not included in System
operating expenses. These relatively costly, shortterm projects are expected to benefit both the
System and the banking industry as a whole. A
description of the special projects for 1989 appears
in appendix C.
2. The cost of currency to the Federal Reserve is
determined largely by public demand for new currency and by the cost of printing at the Bureau of
Engraving and Printing; therefore the cost of currency is not included in Federal Reserve operating
expenses. See appendix C.



Special Projects, 0.7%
Currency, 10.6%
y ^ V Board of Governors, 6.0%

Reserve Banks, 82.7%
1. See text notes 1 and 2.

6

Federal Reserve System

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 the imputed
costs offloatand the return on capital that
would have been provided and the taxes
that would have been paid had the services been furnished by a business firm in
the private sector. The revenue from
priced services is detailed in table 1.3;
the constraint imposed on Federal Re-

serve budgets by the need to keep such
services competitive and the calculation
of fees are discussed in appendix C. All
sources and uses of funds are presented in
appendix D; the audits of the System are
listed in appendix E.
The "other income" category in table
1.2 includes fees from services such as
the transfer of book-entry U.S. Treasury
securities in the secondary market, the
settlement of such transfers among depository institutions, and the wire transfer of

Table 1.1
Operating Expenses, Special Projects, and Cost of Currency
of the Federal Reserve System, 1987-89 1
Millions of dollars, except as noted
Entity and
type of expense
2

Reserve Banks
Personnel
Nonpersonnel
Board of Governors3
Personnel
Nonpersonnel
System operating expenses
Personnel
Nonpersonnel

1988
estimate

1989
budget

1,191.8
743.2
448.7

1,261.3
788.8
472.5

1,330.5
834.6
495.9

5.8
6.1
5.3

5.5
5.8
4.9

86.3
60.4
25.9

90.6
63.6
27.0

96.0
69.1
26.9

5.0
5.3
4.3

5.9
8.6
-.4

1,278.1
803.6
474.6

1,351.9
852.4
499.5

1,426.5
903.7
522.8

5.8
6.1
5.3

5.5
6.0
4.7

4.9

11.1

164.5

171.0

-3.6

3.9

Special projects4
5

170.7

Currency

Percent change

1987
actual

1. In this and subsequent tables in this volume, details
may not add to totals and may not yield percentage changes
shown because of rounding.
2. For detailed information see chap. 3.

1987-88

1988-89

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

Table 1.2
Operating Expenses of the Federal Reserve System, Net of Receipts
and Claims for Reimbursement, 1987-89
Millions of dollars, except as noted

Item
Total System operating expenses

Percent change

1987
actual

1988
estimate

1989
budget

1,278

1,352

1,427

5.8

5.5

650
15
109

664
16
103

704
17
109

2.2
9.3
-5.4

6.0
3.7
5.1

568

597

12.7

5.1

1987-88

1988-89

LESS

Revenue from priced services
Other income
Claims for reimbursement1
EQUALS

Net System operating expenses

504

1. The costs of fiscal agency services to the U.S.
Treasury and other government agencies for which the




agencies have agreed to reimburse the Federal Reserve. In
practice, not all these claims are paid.

Federal Reserve System

7

period, System employment increased a
total of 381, or 0.2 percent per year
(chart 1.3).
Millions of dollars
Several initiatives during the decade
1987
1988
1989
Service
had a pronounced effect on System exactual estimate budget
penses and employment. The Monetary
Funds transfer and
Control Act of 1980 (MCA) extended
net settlement
70
71
68
37
42
Automated clearinghouse ..
48
reserve requirements to all nonmember
501
512
543
Commercial check
banks and thrift institutions, requiring
Book-entry securities
8
9
10
Definitive securities
7
6
7
the Federal Reserve to establish new
Noncash collection
12
12
12
systems for the collection of data and the
14
Cash services
15
15
maintenance of deposit accounts. The
664
704
Total
650
MCA also extended access to Federal
Reserve services to all depository institufunds between a depository institution tions. Accordingly, System employment
and the Treasury.
rose significantly during 1980 and 1981.
Claims for reimbursement represent
From 1982, when the transition to the
the expenses incurred by Reserve Banks requirements of the MCA was comin providingfiscalagency services to the pleted, through 1984, System expenses
U.S. Treasury or to other government remained essentially flat when adjusted
agencies and for which the agencies have for inflation, and employment declined.
agreed to reimburse the Federal Reserve. In 1985 the Federal Reserve increased
staff in a concerted effort to strengthen
the supervision and regulation of member
Trends in Expenses
banks and bank holding companies. The
and Employment
System was able to offset partially the
From 1979 to 1989, operating expenses increase in staff through reductions in
of the System increased an average of 6.7 employment in other areas, primarily in
percent per year in current dollars and services to financial institutions and the
1.8 percent per year when adjusted for public and in support and overhead.
inflation (chart 1.2). Over the same
In August 1987 the Congress passed
Table 1.3
Revenue from Priced Services, 1987-89

Chart 1.2
Operating Expenses of the Federal
Reserve System, 1979-891
Billions of dollars

Chart 1.3
Employment in the Federal Reserve
System, 1979-891
Thousands of persons

1.3

1.1
.9

I
1. For 1988, estimate; for 1989, budget.
2. Calculated with the GNP implicit price deflator.




1979

1

1

1

I

I

I

I

1984

1. For 1988, estimate; for 1989, budget.

1

I
1989

8

Federal Reserve System

the Expedited Funds Availability Act
(title VI of Public Law 100-86, the
Competitive Equality Banking Act of
1987). The act, which became effective
on September 1, 1988, requires the Federal Reserve to issue regulations to ensure
the prompt availability of funds and the
expeditious return of checks. Staff increases throughout the System were
necessary to meet this mandate and to
handle anticipated increases in the volumes of returned checks processed
through the Reserve Banks.

allocated to the four operational areas.
Only the Reserve Banks perform services to 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).
1989 Budget Initiatives

The Reserve Banks and the Board are
beginning or continuing several major
initiatives for 1989. Several such projects
involve savings bonds on behalf of the
Operational Areas
U.S. Treasury: expansion of a project
Federal Reserve expenses are classified within the Fourth District for centralized
for budgeting purposes according to the issuance of over-the-counter savings
major operational areas of the System: bonds; accounting for, and printing,
monetary and economic policy, supervi- bonds on behalf of companies with emsion and regulation, services to financial ployee payroll deduction plans; and
institutions and the public, and services processing retired savings bonds on
to the U.S. Treasury and other govern- check-sorting equipment. The Treasury
ment agencies (table 1.4). Costs for has also asked die Federal Reserve for
support and overhead are redistributed or improvements in Treasury Direct, a
Table 1.4
Operating Expenses of the Federal Reserve System, by Operational Area, 1987-89 1
Millions of dollars, except as noted
Operational area
and entity

1987
actual

1988
estimate

1989
budget

Percent change
1987-88

1988-89

Monetary and economic policy
Reserve Banks
Board of Governors

143.6
86.5
57.1

149.4
88.8
60.6

159.8
95.8
64.0

4.0
2.7
6.0

7.0
7.9
5.6

Supervision and regulation
Reserve Banks
Board of Governors

197.3
170.4
26.9

214.1
187.1
27.0

230.5
201.5
28.9

8.5
9.8
.6

7.6
7.7
7.1

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

801.6
779.2
2.3

846.0
842.9
3.0

887.9
884.9
3.1

5.5
5.5
29.1

5.0
5.0
3.7

Services to the U.S. Treasury and
other government agencies2

135.7

142.4

148.4

5.0

4.2

1,278.1
1,191.8
86.3

1,351.9
1,261.3
90.6

1,426.5
1,330.5
96.0

5.8
5.8
5.0

5.5
5.5
5.9

Total
Reserve Banks
Board of Governors

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 operational




areas shown above. As a result, the numbers in chap. 2 for
the operational areas are not the same as those shown here.
2. Reserve Banks only. The Board of Governors does
not provide these services,

9 Federal Reserve System

system begun in 1987 to handle in bookentry (computerized) form all Treasury
securities bought and sold by individuals.
Automation initiatives continue to
have a large effect on the System's
operating budgets. The Board and Reserve Banks are expanding office automation systems, several Districts are anticipating the expansion of their computer
capacity, and many Reserve Banks are
working on contingency processing for
critical operations.
Supervision and regulation efforts also
continue to receive a major emphasis in
the budgets. Spending in this area will be
larger than 1988 estimated expenses to
accommodate the greater complexity of
examinations, more holding company
examinations, and Regulation CC (Expedited Funds Availability). In addition,
the Board and Reserve Banks are developing a National Information Center to
provide a single source for much of the
information needed to review applications, monitor safety and soundness, and
maintain the integrity of data in an era of
wider interstate banking and growing
complexity in the financial markets.
Last, the Board is reevaluating its
compensation structure with a view to
improving its ability to attract and retain
high-quality staff and to meet critical
responsibilities.
•




11

Chapter 2

Board of Governors
For 1989 the Board of Governors has budget for centralized IRM resources has
budgeted operating expenses of $96.0 been reduced: user requirements have
million, an increase of $5.4 million, or diminished, and productivity and quality
5.9 percent, over estimated expenses for in the IRM provider divisions have
1988. These expenses are 6.0 percent of improved. Under the Board's chargethe total for the Federal Reserve System back procedures for using IRM reas a whole, including the costs of special sources, such resources can be exprojects and of currency (see chapter 1). changed, within certain constraints, for
The growth in Board expenses between alternative means to attain objectives, a
1988 and 1989 is attributable to a number choice that gives both the operating
of factors. The general pay increase and program manager and the provider of the
routine salary actions add $3.2 million to resources a strong incentive to be more
salaries. First-year costs for the imple- efficient. The Board, through its budget
mentation of a new compensation struc- process, continues to refine these chargeture require $900,000, a portion of which back procedures.
The following sections analyze the
will be offset over time by savings
associated with reduced turnover. Be- operating budgets for the Board's four
cause of rate increases, costs for health operational areas and discuss trends in
insurance are $700,000 higher, and be- expenses and employment. Appendix A
cause of the greater proportion of employ- describes the operational areas of the
ees covered by Social Security in 1989, Board and the Banks, appendix B disretirement expenses increase $300,000. cusses the Board's budgeting process,
The $700,000 cost of a study of consumer and appendix C presents, among other
finances, when netted against the expense topics, the Board's capital outlays.
of other surveys completed in 1988, will
raise the net expense allocated for such
The Budget by Operational Area
work $100,000. Costs for the development of software for the National Infor- The Board's activities fall into four
mation Center, a Systemwide, standard- broadly defined operational areas: monized database on the structure and finances etary and economic policy, supervision
of the nation's banking industry, will rise and regulation of financial institutions,
$300,000 in 1989, to $700,000. Also services to financial institutions and the
included in the budget are funds for the public, and System policy direction and
continued strengthening of the supervi- oversight (see also chapter 1 and appension function plus an upgrade of the dix A).
Table 2.1 shows the operating exresources available to the Board to perform audits of the automation systems at penses, and table 2.2 shows the number
of authorized positions, for each of the
the Reserve Banks.
Central automation services provided Board's operational areas for the years
to the operating divisions by the Informa- 1987-89. The costs include those for
tion Resources Management (IRM) divi- support and overhead, allocated to each
sions account for a significant part of the operational area according to that area's
Board's costs. As it was last year, the proportion of total direct expenses. The



12

Board of Governors

budgets for the operational areas include
general factors that influence all operational areas in 1989 (such as the general
pay increase and the increases in health
insurance rates), as well as changes
unique to each area.
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. This function is expected to cost $50.8 million in 1989, an
increase of $2.4 million, or 4.9 percent,
over 1988.

Beyond maintaining the quality of economic analysis and forecasts, the budget
in this area provides for a major research
survey of consumerfinances,a portion of
the investment in the National Information Center, and continued initiatives in
end-user computing. These are discussed
in turn.
The Survey of Consumer Finances is a
major update of data, last obtained in
1983, on the income, assets, debts,
pensions, employment, and use of financial services by U. S. households. The
Board's 1989 share of the survey will be
$700,000. The Survey of Household Use
of Financial Services, originally scheduled for 1988, will be part of this project
and will give the Board data on the
traditional and nontraditional sources of

Table 2.1
Operating Expenses of the Board of Governors, by Operational Area, 1987-89 1
Thousands of dollars, except as noted
1987
actual

1988
estimate

1989
budget

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

45,670
21,468

48,389
21,584

Total

86,331

Operational area

Percent change
1987-88

1988-89

50,752
22,955

6.0
.5

4.9
6.4

1,864

2,405

2,477

29.0

3.0

17,329

18,252

19,839

5.3

8.7

90,630

96,023

5.0

5.9

1. Operating expenses reflect all allocations for support
and overhead. They exclude capital outlays. Services to
the U.S. Treasury and other government agencies is an

operational area unique to the Reserve Banks and is not
shown here; see chaps. 1 and 3.

Table 2.2
Positions Authorized at the Board of Governors, by Activity, 1987-89
Percent change

1987
actual

1988
estimate

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

396
261

397
264

399
265

22

22

22

0

149

148

148

-.7

Support and overhead

741

742

739

.1

-.4

1,569

1,573

1,573

.3

0

Activity

Total




1989
budget

1987-88

1988-89

.3
1.1

.5
.4
0
0

13 Board of Governors

financial services to households. Combin- prepared by the Reserve Banks, special
ing the surveys yields significant savings. studies related to international applicaIn 1988 the Board approved the cre- tions, direction of enforcement actions,
ation of the National Information Center and regulation of trust activities. Regulato provide a cost-effective and high- tion includes the following activities: the
quality database on the structure and formulation of regulations; the oversight
finances of the nation's banks and bank of mergers, foreign banking activities,
holding companies. The staff made and compliance with consumer regulaprogress in 1988 to define the require- tions; and the regulation of securities
ments of the project and prepare the credit.
necessary software. The 1989 budget
The $23.0 million budget for superviprovides $737,000 to continue the devel- sion and regulation is $ 1.4 million, or 6.4
opment of the software and prepare the percent, greater than estimated expenses
data. When completed, the National for 1988. The size of the increase in this
Information Center will provide the operational area would have been larger
Board and the Reserve Banks a single except for the one-time $450,000 expense
source for much of the information for the Small Business Survey, which
needed to review applications, monitor was charged to this category in 1988 and
the safety and soundness of financial does not recur in 1989. The budget funds
institutions, and maintain the integrity of the known costs of the project on riskdata in an era of increasing interstate based capital standards, but additional
banking andfinancialmarket complexity. resources, not included in this budget,
The budget provides for thefinalphase may be required for software developof the research automation project. The ment to support this initiative.
1989 operating costs of this project,
The 1989 budget supports the contin$245,000, are offset by reductions, for ued strengthening of supervision and
the second year in a row, in expenses for regulation through the creation of six
centrally provided automation services. new positions: two positions are to revise
The decrease in mainframe charges is examination manuals for banks and bank
tied to lower rates charged by the divi- holding companies; the remaining four
sions providing the mainframe resources, are to manage a growing database for
to progress made in transferring work country exposure and risk-based capital,
from the mainframe to the local network, improve the accounting review of public
and to software that allows more efficient disclosure documents, increase emphasis
programming and data manipulation on on the Regulatory Improvement Project,
the departmental computer. The savings and help establish the National Informaalso help offset the costs of two positions tion Center. The new positions are almost
added to this operational area to improve completely offset by the elimination of
the data and analysis concerning the debt five administrative positions, a reduction
problems of developing countries, the permitted by the greater productivity
U.S. foreign trade deficit, and other key derived from office automation.
issues.
Supervision and Regulation

Services to Financial Institutions
and the Public

Supervision of financial institutions in- The $2.5 million budgeted for services to
cludes reviews of examination and inspec- financial institutions and the public is
tion reports on state member banks $72,000, or 3.0 percent, higher than



14

Board of Governors

1988 estimated expenses. This operational area is composed almost entirely of
programs supporting the payments function of the Federal Reserve System.
The 3.0 percent increase for 1989 is
small because the 1988 budget included a
large one-time increment to improve the
management of currency operations
through automation. The 1989 budget
includes $283,000 to continue the project
at approximately the same level as in
1988. Costs should fall in 1990, when all
development is complete and expenses
decline to the maintenance level. The
automation project allows managers to
make more informed and timely decisions on ordering and transporting currency. Efficiencies generated by the
project will reduce the volume of currency ordered and the number of shipments required, potentially saving the
System's currency budget about $500,000
per year.

10-Year Trend
During the period from 1979 through
1989 the Board's operating expenses have
grown from $53.2 million to $96.0
million, an average increase of 6.1
percent per year in current dollars and
1.4 percent in constant dollars (chart
2.1). During this period, the costs for
personnel have increased at an average of
5.2 percent per year in current dollars
(chart 2.2), while expenses for goods and
services have risen at 8.8 percent (chart
2.3). When measured in inflation-adjusted dollars, expenses for personnel

Chart 2.1
Operating Expenses of the Board of
Governors, 1979-891
Millions of dollars

System Policy Direction
and Oversight
The $19.8 million budget for System
policy direction and oversight is $1.6
million, or 8.7 percent, more than estimated 1988 expenses. Three factors
caused the increase. First, the number
and length of position vacancies in the
Office of Board Members and in the
Office of the Inspector General was high
in 1988, causing actual salary expenses
that year to be low relative to the 1989
budget for the same number of positions.
Second, the budget includes development
of software to enhance the administration
of the Board's compensation program.
Third, the budget funds several new
projects, including the records management initiative and an effort to improve
the frequency and thoroughness of audits
of automation systems at the Reserve
Banks.



1979

1984

1989

1. For 1988, estimate; for 1989, budget.
2. Calculated with the GNP implicit price deflator.

Chart 2.2
Expenses for Personnel Services at
the Board of Governors, 1979-891
Millions of dollars

l
1979

I

I

l

I

I

1984

I

1

I

I
1989

1. For 1988, estimate; for 1989, budget.
2. Calculated with the GNP implicit price deflator.

Board of Governors

rose even more slowly relative to those
for goods and services, 0.6 percent per
year and 4.0 percent per year respectively. The markedly faster pace for
goods and services reflects the substantial
investment in automation during the
period and successful efforts to limit the
number of positions at the Board.
The size of the actual annual increases
in expenses has varied greatly (chart
2.4): periods of major growth in the
workload required additional resources,
which were then scaled back as the new
work was assimilated, productivityenhancing technology was acquired, and
lower-priority tasks discontinued. This
variation is demonstrated by the changes
in staffing during the 10-year period. At
one point nearly 150 positions had been
added, but by 1989 the net increase had
been reduced to 37 positions, an increase
of 2.5 percent (chart 2.5).
The following discussion breaks the
10-year period into three segments:
1979-84, when resources, particularly
for data collection and storage, were
added to meet the requirements of major
legislation; 1985-87, when adjustments
by the Board reduced the number of
positions added during the previous
period; and 1988-89, when the year-toChart 2.3
Expenses for Goods and Services at
the Board of Governors, 1979-891
Millions of dollars

15

year decreases associated with the position reductions of the earlier period
ended, allowing the rate of increase to
return to a more normal pace.
1979-84
Expenses rose sharply in the first five
years. Federal pay increases during these
years, although markedly below those in
the private sector, were high compared
with the federal increases approved later
in the decade. More significant, however, were the costs of resources added to
meet the requirements of new legislation.
The average increase in expenses for
thesefirstfiveyears, 8.1 percent, derived
mainly from the Monetary Control Act
(MCA) and was the highest during the
10-year period.
Under the MCA, the number of institutions directly or indirectly reporting
financial data to the Federal Reserve
tripled, from about 14,000 to about
45,000, and the number of items all
institutions were required to report grew
substantially. This surge in the volume of
work handled at the Federal Reserve
required a new mainframe computer and
large additions to the staff for data
processing and for monetary policy. The
Chart 2.4
Annual Rate of Change in Operating
Expenses of the Board of Governors,
1979-891
Percent

1979

1984

1989

1. For 1988, estimate; for 1989, budget.
2. Calculated with the GNP implicit price deflator.




1. For 1988, estimate; for 1989, budget.

16

Board of Governors

requirement of the MCA that the Federal
Reserve price many services it had previously provided without explicit charge
and expand their availability also imposed costs of implementation. Also
during this period, the deregulation and
other changes in the banking industry
arising from the Financial Institutions
Regulatory and Interest Rate Control Act
required additional supervisory staff at
the Federal Reserve. To meet all of these
requirements the number of positions
jumped from 1,508 to 1,653, an increase
of almost 10 percent, over the five years.
Employment grew by a like percentage,
from 1,447 to 1,588.
1985-87
In mid-1984 the Board established the
Program Improvement Project (PIP) with
the goal of reducing the number of
positions at the Board 7 percent by the
end of 1986. PIP made large changes in
the structure and size of the data processing divisions; somewhat lesser reductions were made throughout the rest of
the Board's staff.
Although PIP gave careful consideration to exempting areas addressing
problems such as the trade deficit and the

Chart 2.5
Employment and Positions at the
Board of Governors, 1979-891
Number, in thousands

1. Year-end data. For 1988, estimate; for 1989, budget.
Excludes interns and summer positions for youth.




debt positions of developing countries,
the only area excluded from the overall
reduction program was supervision and
regulation. After six positions supporting
lower-priority functions in the supervision and regulation area were abolished,
29 positions were added to the programs
in the area directly concerned with the
growing number of problems in the
nation's banking industry. Even with this
increase, the net number of positions
Board-wide declined by 73 in 1985.
The one-time costs of implementing
PIP, coupled with enhanced efforts to
automate critical functions, limited the
effect of these reductions on the Board's
expenses in 1985. PIP yielded a further
decrease of 40 positions in 1986. The
effect of these reductions was clearly
evident in 1986 and 1987, when the
growth of expenses was 2.4 percent and
2.0 percent respectively.
1988-89
Without the legislative demands of the
earlier years of the decade or the onetime increment in savings from the staff
reductions of the middle years, increases
in the Board's expenses returned to a
more normal average of 5.4 percent per
year in 1988 and 1989. In response to the
continued pressures in the supervision
function and to the problems of the trade
deficit and the debt of developing countries, the Board has authorized expenditures to improve automation and has
approved minor, selected increases in
staff. Pressures in other areas, such as the
programs responsible for financial markets, have been met by a growing volume
of overtime and a reduction in the level of
long-term research that is funded within
the budget. Overall, the reductions in
staff level accomplished by PIP have
been maintained.

17

Chapter 3

Federal Reserve Banks
The Board of Governors has approved a
1989 operating budget of 51,330.5 million for the Reserve Banks, an increase of
$69.2 million, or 5.5 percent, over 1988
estimated expenses. The Reserve Banks
have excluded from their budgets, as
they did last year, the costs for research
and development related to special
projects. This year these costs, totaling
$11.1 million, are for check image
processing ($1.7 million), a system for
the optical detection of counterfeiting
($3.3 million), and an electronic payments processor ($6.1 million). When
the costs of special projects are included,
the Reserve Banks' budgets total $1,341.6
million, an increase of $75.4 million, or
6.0 percent, over 1988 estimated expenses (table 3.1).
Employment, excluding special
projects, is budgeted at 23,441 average
number of personnel (ANP), an increase
of 62 ANP, or 0.3 percent, from the
estimated 1988 employment levels.1
When the effect of special projects is
included, 1989 employment at the Reserve Banks is budgeted at 23,476 ANP,
an increase of 87 ANP, or 0.4 percent
(table 3.1). In 1989, the Expedited Funds
Availability Act accounts for an addition
of 134 ANP; excluding this increment,
Reserve Bank employment is down 47
ANP.
1. The term average number of personnel describes levels and changes in employment at the
Reserve Banks. ANP 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 ANP for that
year; two half-time employees who start January 1
count as one ANP. The ANP for any given year is
the average of the number of full-time employees
(measured in this way) in the months of that year.




Expenses for personnel, which comprise salaries and other compensation,
account for $834.6 million, or 63 percent, of Bank expenses in 1989, an
increase of $45.8 million, or 5.8 percent,
over 1988 (table 3.2). Nonpersonnel
expenses, influenced primarily by spending on automation equipment and building projects, are budgeted at $495.9
million, an increase of $23.4 million, or
5.0 percent.
The following two sections discuss the
major initiatives and the budget objective
for the Reserve Banks in 1989. Subsequent sections provide details for the four
operational areas as well as objects of
expense, capital outlays, and long-term
trends. Appendix C gives details on
capital outlays, special projects, and
other special categories of expense.
Appendix F gives further data by District
and by operational area.

Major Initiatives
Several Bank-specific projects and two
Systemwide initiatives account for a large
portion of the budgeted increase in Reserve Bank expenses. The projects within
specific Banks are automation initiatives,
facility improvements, increased supervision of banks and bank holding companies, initiatives for the U.S. Treasury,
contingency back-up for critical operations, and enhanced check operations.
The two Systemwide initiatives are the
establishment of a National Information
Center for data on depository institutions
and improvements to the Federal Reserve's electronic payments system. Table
3.3 shows that, excluding the expenses
for these programs ($26.4 million), the

18

Federal Reserve Banks

total expenses of the Reserve Banks
increase 3.6 percent in 1989.
Automation efforts include the
expansion of computer capacity in
several Districts, the development of an
information display system and
continued expansion of an office
automation system at New York, improved communications and electronic
networks at Chicago, and the continued
conversion of operating systems at San
Francisco. Many District budgets
include funds for automation projects
related to contingency back-up and
efforts to improve the availability of
systems, shown separately in table 3.3.
Building projects of the Reserve
Banks account for an incremental
expense of $5.7 million. The largest such
expenditures in 1989 are for building
projects in Charlotte, Atlanta, and
Chicago. Minneapolis is continuing an
asbestos containment project and plans

to start the complete removal of asbestos
in 1989. The net increase attributable to
these projects is reduced by the
completion of $2.1 million of building
projects in 1988; these include New
York's relocation expenses to move
check operations to its regional check
processing centers, the expenses to move
into the new Charlotte building, and
moving expenses and rent associated
with the Chicago building project.
Expenses increase in supervision and
regulation because of the greater
complexity of examinations, more
holding company examinations, more
problem institutions, and the implementation of Regulation CC (Expedited
Funds Availability). Increases in
employment and costs occur in most
Reserve Districts.
Expenses for services to the U.S.
Treasury increase primarily because of
expansion of the Ohio Project, which is

Table 3.1
Expenses and Employment at the Federal Reserve Banks, 1988-89
1988
estimate

Category
Expenses (millions of dollars)
Operations
Special projects
Total

1,261.3
4.9
1,266.2

Employment (average number
ofpersonnel)
Operations
Special projects
Total

Change

1989
budget

1,330.5
11.1
1,341.6

23,379
10
23,389

23,441
35
23,476

Amount

Percent

69.2

5.5

75.4

6.0

62

.3

87

.4

Table 3.2
Operating Expenses of the Federal Reserve Banks, 1987-89 1
Thousands of dollars. exceDt as noted

Object
Personnel
Nonpersonnel
Total

1987
actual

1988
estimate

Percent change
1987-88

1988-89

743,168
448,665

788,807
472,491

834,626
495,861

6.1
5.3

5.8
4.9

1,191,833

1,261,298

1,330,487

5.8

5.5

1. Including the costs of support and overhead (see
appendix F, table F.3, note 1, for definition).




1989
budget

Federal Reserve Banks

centralizing issuance of over-the-counter
savings bonds; its expansion throughout the Fourth District will add $1.2
million in expenses and 17 ANR Two
other savings bond projects in Cleveland
and enhancements to the Treasury Direct system at Philadelphia will also
contribute to the 1989 increase in
expenses.
Several Districts are improving the
efficiency of check operations. Philadelphia is reviewing its needs for a new
check processing system and plans to
begin conversion in 1990. Atlanta will be
replacing old equipment and software to
respond to a strong growth in volume.
Two new System initiatives, the National Information Center and the electronic payments system project, will
together add $2.3 million and 15 ANP.
The National Information Center ($1.2
million, 7 ANP) will maintain informaTable 3.3
Effect of Major Initiatives on the 1989
Operating Expenses of the Reserve Banks
Thousands of dollars, except as noted
Item
1

1988 estimate
1989 budget ..
Increase, 1988 to 1989
Amount
Percent

Amount
1,259,164
1,330,487

71,323
5.7

LESS

Major 1989 initiatives:
Automation
Facility improvements
Increased supervisory and
regulatory activities
Programs for the U.S. Treasury .
Contingency back-up
Improved check operations
National Information Center
Electronic payments system
Total

9,770
5,663
3,130
2,214
1,834
1,541
1,162
1,115
26,429

19

tion on the structure and finances of
banks. This database will be available to
Reserve Banks, the Board, and possibly
other regulatory agencies. The electronic
payments system project ($1.1 million, 8
ANP) aims to improve the availability of
these systems at all the Banks.
Unusually large cost increases and the
loss of rental income also contribute to
the 1989 increment: health insurance
premiums increase $6.0 million; expenses to implement the Expedited Funds
Availability Act, adjusted for one-time
costs for training and postage, increase
$5.4 million in 1989; and Boston will
forego rental income of $1.0 million
during the period that construction is
done on the top three floors of the Bank.
In the aggregate, these items represent
about one-sixth of the overall increase in
operating expenses and more than onefourth of the increase excluding major
initiatives.
Budget Objective for 1989
The Board approved a 5.5 percent increase in 1989 for Reserve Bank operating expenses (covering central bank and
Treasury services and priced services,
including the expedited availability of
funds). At the time this budget objective
was approved, it was anticipated that the
Board would be requested to approve an
additional $11.1 million for research and
development on special projects (see
appendix C).
Total operating expenses, including
those for expedited availability of funds,
increase $69.2 million, or 5.5 percent;
excluding expedited funds, these expenses increase 5.1 percent (table 3.4).

EQUALS

Increase excluding major
1989 initiatives
Amount
Percent

Operational Areas
44,894
3.6

1. Excludes one-time expenses of $2,134 million for
improvements to facilities.




Tables 3.5 and 3.6 summarize Reserve
Bank expenses and employment in each
of the four operational areas. Tables 3.7

20

Federal Reserve System

through 3.9 show expense details for
each area.
Monetary and Economic Policy
Expenses at the Reserve Banks for monetary and economic policy are budgeted
at $95.8 million, about 7.2 percent of the
Banks' operating expenses (table 3.7).
The increase over 1988 estimated expenses is $7.0 million, or 7.9 percent.
Employment in this area is 786 ANP, an
increase of 18 ANP, or 2.3 percent, over
1988.
Net additions to the Banks' staff (primarily economists), salary actions, and
automation initiatives are the main
sources of higher spending. The 1989
staffing level is slightly lower than that
budgeted for 1988.
Dallas plans to expand its staff by 6
ANP over the 1988 estimate of 39 ANP
to better address regional issues and to
improve its monetary policy research.
Richmond plans to add 2 ANP (the
current level is 33) to enhance its work in
international and regional studies. Automation initiatives, all at the New York
Bank, include a new system to display
information on the markets for govern-

Table 3.4
Comparison of 1989 Budget of the Reserve
Banks with 1989 Budget Objective
Percent increase from 1988 estimated expenses

Item

1989
budget
objective

1989
budget

Supervision and Regulation
Expenses for supervision and regulation,
$201.5 million, increase $14.4 million,
or 7.7 percent, over 1988 (table 3.8).
This area now comprises 15.1 percent of
total expenses for the Reserve Banks,
compared with 13.2 percent in 1984. The
1989 staff level of 2,250 ANP is an
increase of 27, or 1.2 percent, over 1988.
Since 1984, staffing has increased 365
ANP.
The 1989 increase in costs and ANP
are the result of continued growth in the
number of bank holding companies;
increases in the number of de novo banks
that, under Board guidelines, require
more frequent examinations; the System's enhanced program for examinations of international operations of U.S.
banks and U.S. offices of foreign banks;
and monitoring for compliance with
Regulation CC. The increase for staff,
spread over most Districts, is moderate
compared with that in recent years. Other
factors contributing to the cost increment
are a greater emphasis on monitoring
reserve accounts with respect to daylight
and overnight overdrafts, the full year
effects of the development of the National
Information Center, and the continued
expansion in the use of microcomputers.
Services to Financial Institutions
and the Public

Operating expenses
excluding those
related to the
Expedited Funds
Availability Act
Expenses related to the
Expedited Funds
Availability Act
Total operating expenses
Special Projects

4.7

5.1

.8
5.5
.3

.4
5.5
.5

Total

5.8

6.0




ment and corporate securities and foreign exchange; a new system of trading
and clearing securities; and streamlining
the reporting series for government
securities dealers.

Expenses for services to financial institutions and the public include both priced
and nonpriced services (table 3.9). They
are budgeted at $884.8 million and
account for two-thirds of total expenses,
a ratio only slightly higher than in 1984.

Federal ReserveSystemAudits21

The budget is $41.8 million, or 5.0
percent, larger than 1988 estimated expenses. Staffing is budgeted at 9,049
ANP, up 35, or 0.4 percent, from 1988.
Expenses of priced services, budgeted at
$579.0 million, are increasing 5.1 percent; expenses of nonpriced services, at
$305.8 million, are increasing 4.8
percent.
Commercial check processing is by far
the largest service ($440.1 million),
comprising almost half the budgeted
expenses of this operational area and
employing 5,478 ANP. Expenses for this
service are increasing $19.3 million, or
4.6 percent, over 1988, and the number
of staff members will increase 42 ANP.
The Banks expect to process 15.4 billion

commercial checks in 1989, an increase
of 2.8 percent, while unit cost is expected
to increase 2.2 percent. Added expenses
of $5.4 million and additional staff of 134
ANP can be attributed to the full-year
effect of the Expedited Funds Availability
Act, which went into effect in September
1988. This increase in staff is largely
offset by the 1988 consolidation of check
operations in the New York District in
the regional check processing centers.
The consolidation and the dropping of
temporary workers used for the consolidation allowed New York to reduce its
ANP by 53 in 1989.
Expenses for the currency and coin
service are expected to rise $5.5 million,
or 3.5 percent, in 1989 and to constitute

Table 3.5
Operating Expenses of the Federal Reserve Banks, by Operational Area, 1987-89
Thousands of dollars, except as noted
1987
actual

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
Total

1988
estimate

1989
budget

Percent change
1987-88

1988-89

2.7
9.8

7.9
7.7

86,484
170,428

88,788
187,123

95,812
201,539

799,227

842,947

884,784

5.5

5.0

135,693

142,440

148,352

5.0

4.2

1,191,832

1,261,298

1,330,487

5.8

5.5

Table 3.6
Employment at the Federal Reserve Banks, by Activity, 1987-89
Average number of personnel, except as noted1

Activity
Operational areas
Monetary and economic policy
Supervision and regulation
Services to financial institutions
and the public
Services to the U.S. Treasury
and other government agencies
Support and overhead2
Support
Overhead
Total
1. See text note 1 for definition of ANP.




Percent change

1987
actual

1988
estimate

1989
budget

775
2,147

768
2,223

786
2,250

-.9
3.5

8,776

9,014

9,049

2.7

.4

1,836

1,844

1,805

.5

-2.1

4,452
5,024

4,565
4,964

4,597
4,954

2.5
-1.2

.7
-.2

23,010

23,378

23,441

1.6

.3

1987-88

1988-89
2.3
1.2

2. See appendix F, table F.3, note 1, for definitions.

22

Federal Reserve Banks

18.3 percent of the budget for this
operational area. The Banks have budgeted 1,717 ANP in this service, a
decrease of 22, or 1.3 percent. Volume is
expected to increase 4.2 percent and unit
cost to decline 1.3 percent.
Expenses for the automated clearinghouse service in 1989 increase $5.1
million, or 7.4 percent, and employment
increases 18 ANP. The staff will expand
primarily to accommodate a service the
System intends to offer in 1989 called
Government Notification of Change.
Requested by the Treasury and the banking industry, this service converts paper
documents to electronic form at the
Reserve Banks. Volume for the ACH
service is expected to increase 14.7
percent and unit cost to decrease 7.2
percent.
Expenses for the funds transfer service
increase $3.5 million, or 5.6 percent,
reflecting a staff reduction of 3 ANP

and an increase in volume of 4.0 percent. The growth of volume in this
service has slowed because of mergers
of bank holding companies and bank
consolidations.
Expenses for the book-entry securities
service will increase $3.0 million, or
11.2 percent, while ANP and volume
remain about steady. Unit cost is increasing 9.9 percent and can be attributed to
two factors, higher costs to test and
maintain the book-entry securities system and improvements in contingency
capabilities.
Bank and public relations costs are
expected to rise $2.1 million, or 5.3
percent, and the associated staff is expanding by 4 ANP. These increases are
primarily the result of the growth of
community affairs programs in several
Districts. Also, the "other" service category is rising $1.1 million, or 5.4 percent,
reflecting automation efforts in the New

Table 3. 7
Expenses of the Federal Reserve Banks for Monetary and Economic Policy, 1987-89
Thousands of dollars, except as noted
1987
actual

1988
estimate

1989
budget

Economic policy determination
Open market trading

74,069
12,415

74,635
14,153

Total

86,484

88,788

Percent change
1987-88

1988-89

78,659
17,153

.8
14.0

5.4
21.2

95,812

2.7

7.9

Table 3.8
Expenses of the Federal Reserve Banks for Supervision and Regulation, 1987-89
Thousands of dollars, except as noted

Supervision of District
financial institutions
Administration of laws and regulations
related to banking
Studies of banking and financial
market structures

Total




1987
actual

1988
estimate

1989
budget

100,813

111,688

62,999

67,028

Percent change
1987-88

1988-89

122,123

10.8

9.3

69,483

6.4

3.7

6,617

8,408

9,934

27.1

18.2

170,428

187,123

201,539

9.8

7.7

Federal ReserveSystemAudits23

efforts over several years by the Reserve
Banks and the Treasury to promote
efficiency, generally through consolidation of operations and the expansion of
automation. Most Districts have budServices to the U.S. Treasury
geted reductions for 1989.
and Other Government Agencies
Major operational changes are taking
Expenses for services to the U.S. Trea- place in the savings bonds area: the Ohio
sury and other government agencies are Project, in the Cleveland District, featurbudgeted at $148.4 million, about 11 ing centralized issuance of over-thepercent of total operating expenses of the counter savings bonds; the Masterfile
Banks. The increase is $5.9 million, or Payroll program, which involves ac4.2 percent, over 1988 (table 3.10). Total counting for, and printing, bonds purstaffing is budgeted to decrease 39 ANP, chased through payroll deduction plans,
a project also in the Cleveland District,
or 2.1 percent, to 1,805 ANP.
The reduction in ANP reflects major with the Richmond and Minneapolis
York District for services to other central
banks. Staff in this service area is expected to decline by 6 ANR

Table 3.9
Expenses of the Federal Reserve Banks for Services to Financial Institutions
and the Public, 1987-89
Thousands of dollars, except as noted
1987
actual

1988
estimate

1989
budget

Currency and coin
Commercial checks
Other checks
Funds transfers
Automated clearinghouse
Book-entry securities transfers
Definitive securities safekeeping
and noncash collections
Loans to members and others
Bank and public relations
Other

153,764
398,051
18,979
56,668
61,425
22,837

156,434
420,830
17,911
61,376
68,828
26,672

18,148
13,086
36,194
20,076

Total

799,227

Service

Percent change
1987-88

1988-89

161,942
440,143
20,064
64,843
73,890
29,661

1.7
5.7
-5.6
8.3
12.1
16.8

3.5
4.6
12.0
5.6
7.4
11.2

17,105
13,996
40,219
19,571

16,585
14,651
42,368
20,637

-5.7
6.9
11.1
-2.5

-3.0
4.7
5.3
5.4

842,947

884,784

5.5

5.0

Table 3.10
Expenses of the Federal Reserve Banks for Services to the U.S. Treasury
and Other Government Agencies, 1987-89
Thousands of dollars, except as noted

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




Percent change

1987
actual

1988
estimate

1989
budget

40,215
20,902

41,656
17,382

47,958
18,353

3.6
-16.8

15.1
5.6

20,270
19,677
12,217
22,412

25,493
20,402
12,903
24,605

22,011
22,792
13,030
24,209

25.8
3.7
5.6
9.8

-13.7
11.7
1.0
-1.6

135,693

142,440

148,352

5.0

4.2

1987-88

1988-89

24

Federal Reserve System

Districts participating on a smaller scale; account for almost 63 percent of Reserve
and consolidated operations of Series Bank expenses and are expected to inHH/H payments in the Philadelphia crease 5.8 percent in 1989.
Total personnel expenses except those
District.
for retirement and other benefits account
for nearly 52 percent of 1989 budgeted
Objects of Expense
expenses and anticipated growth is $31.5
The operating expenses of the Federal million, or 4.6 percent. Salaries are
Reserve Banks for personnel and nonper- expected to increase $35.7 million, or
5.5 percent, and will be offset partially by
sonnel are detailed in table 3.11.
Personnel expenses comprise salaries a decline of $4.2 million, or 32.5 percent,
for officers and employees, compensa- in expenses for other personnel. Merit
tion to other personnel, and retirement increases are the primary source of higher
and other benefits. Total personnel costs expenses for salaries. Also contributing
Table 3.11
Operating Expenses of the Federal Reserve Banks, by Object, 1987-89
Thousands of dollars, except as noted

Object

1987
actual

1988
estimate

1989
budget

Percent change
1987-88

1988-89

PERSONNEL
Officers'salaries
Employees' salaries
Other personnel
Retirement and benefits
Total personnel

60,010
545,358
16,335
121,465
743,168

63,685
579,838
12,956
132,327
788,807

67,345
611,844
8,750
146,687
834,626

6.1
6.3
-20.7
8.9
6.1

5.7
5.5
-32.5
10.9
5.8

NONPERSONNEL
Equipment
Purchases
Rentals
Depreciation
Repairs and maintenance
Total equipment

4,694
33,857
75,802
42,467
156,820

3,829
27,004
78,432
47,453
156,717

3,447
24,740
85,619
51,810
165,616

-18.4
-20.2
3.5
11.7
-.1

-10.0
-8.4
9.2
9.2
5.7

Buildings
Insurance
Taxes on Real Estate
Property Depreciation
Utilities
Rent
Other
Total buildings

842
21,710
26,078
22.906
17,119
18,726
107,381

760
25,005
28,911
23,387
21,611
18,217
117,890

761
27,181
32,125
25,113
21,500
19.009
125,687

-9.8
15.2
10.9
2.1
26.2
-2.7
9.8

.1
8.7
11.1
7.4
-.5
4.3
6.6

Shipping
Postage
Other
Total shipping

12,150
69,200
81,350

13,638
68,979
82,617

13,631
70,180
83,811

12.3
-.3
1.6

-.1
1.7
1.4

47,282
22,155
12,291
11,357
10,029
103,114

49,333
24,717
11,976
11,308
17,933
115,267

51,077
25,466
12,009
12,652
19,544
120,747

4.3
11.6
-2.6
-.4
78.8
11.8

3.5
3.0
.3
11.9
9.0
4.8

448,665

472,491

495,861

5.3

4.9

1,261,298

1,330,487

5.8

5.5

Other
Supplies
Travel
Communications
Fees
Other
Total other
Total nonpersonnel
Total




1,191,833

Federal ReserveSystemAudits25

are promotions, reclassifications, and
higher levels of staffing. These increases
are partially offset by position vacancies
(lag), by the replacement of a departing
employee with one at lower pay (turnover), and reduced expenses for overtime. The decrease in expenses for other
personnel results from declining use of
contract computer programmers and
decreased need for temporary help in
check operations.
Expenses for retirement and other
benefits, which account for 11 percent of
the Banks' budget, are anticipated to
increase $14.4 million, or 10.9 percent,
in 1989. This increase is a result of the
continued escalation in hospital and
medical costs, a rise in the maximum
salary subject to Social Security tax, and
increased participation in the System's
thrift plan.
Nonpersonnel expenses account for 37
percent of the Reserve Banks' expenses
and are projected to increase 4.9 percent
in 1989. Equipment expenses are 5.7
percent higher for 1989 and will account
for 12.4 percent of total operating costs.
The increase results from the purchase of
data processing and data communications
equipment to handle increased workloads
and improve contingency functions, the
full-year impact of equipment purchased
to meet the demands of the Expedited
Funds Availability Act, and a shift from
leasing to purchasing of equipment.
Building expenses will rise 6.6 percent
for 1989 and account for 9.4 percent of
total expenses. Building expansion and
renovation projects at Chicago and Atlanta and construction of a new building
for the Charlotte Branch of the Richmond
Bank contribute to increased expenses
for property depreciation, real estate
taxes, utilities, and other building operations. Depreciation expenses will also
increase in 1989 as numerous smaller
renovation and repair projects are completed. Offsetting increased rental ex


pense at New York and Atlanta is a
decrease of $900,000 in Chicago as the
Bank gives up rental space and moves
back to its newly expanded main building.
Shipping costs account for 6.3 percent
of the 1989 budget and will increase 1.4
percent next year. This increase is primarily the result of expanded check
routes necessary for expedited funds.
Partially offsetting the 1989 increase is
the reduction in postage expenses incurred in 1988 to inform depository
institutions of the requirements for expedited funds.
Expenses for other nonpersonnel will
increase 4.8 percent to accommodate
additional software and the higher cost of
supplies.

Capital Outlays
Capital outlays of the Reserve Banks are
budgeted at $231.7 million, an increase
of $28.4 million, or 14.0 percent, over
the estimate for 1988 (table 3.12). The
capital budgets of the Reserve Banks
continue to be dominated by equipment
for data processing and data communications and by building projects.
Outlays for data processing and data
communications equipment total $87.6
million in 1989, approximately 38 percent of the capital budget. The machines
include mainframes or upgrades for New
York ($6.4 million), Cleveland ($4.9
million), Richmond ($2.6 million), and
Kansas City ($7.4 million); new or
upgraded check processing equipment
for Cleveland ($1.0 million), Richmond
($2.6 million), and Atlanta ($3.0 million); peripheral computer equipment
and upgrades for New York ($4.2 million), Chicago ($1.7 million), and San
Francisco ($1.3 million); and data processing equipment to support the asbestos
abatement project at Minneapolis ($4.6
million).

26

Federal Reserve System

Building outlays amount to $57.0
million in 1989, approximately 25 percent of total capital outlays. The major
items in this account are the building
additions and improvements in Boston
($1.3 million), New York ($3.8 million),
Cleveland ($4.1 million), and Kansas
City ($1.2 million); consulting fees for
the New York District's East Rutherford
operations center ($2.3 million); a new
building design in Dallas ($4.9 million);
the new Helena site, in the Minneapolis
District ($7.6 million); and the new
building at Charlotte, in the Richmond
District ($5.1 million).
Major purchases of furniture and other
equipment, which total $30.2 million for
1989, are planned for Boston ($1.0
million), Richmond ($800,000), Atlanta
($2.7 million), New York ($1.2 million),
and Minneapolis ($1.2 million).
Outlays for building machinery and
equipment are budgeted at $ 13.3 million.
Improvements to facilities for emergency
power are planned at Cleveland ($1.8
million) and Dallas ($1.4 million), and
Kansas City is updating its building
support systems ($3.1 million).
Purchases of land and other real estate,
at $34.4 million, are primarily for the
acquisition of land if a proposal for a new
building at Dallas is approved ($23
million) and for the purchase and site

preparation for New York's East Rutherford operations center ($10.7 million).
Leasehold improvements, which total
$9.1 million, are primarily at the Minneapolis Bank and are related to its asbestos
removal project ($6.6 million).
Trends in Expenses
and Employment
From 1979 to 1989, expenses of the
Reserve Banks have increased an average
of 6.7 percent per year in current dollars
(chart 3.1). In the 1980-83 period, when
the Banks began implementing the Monetary Control Act (MCA) and inflation
drove up wages, the annual average
change was 9.1 percent. The average for
the 1984-89 period is 4.5 percent per
year. Figured in constant (1979) dollars,
the annual rate of growth was fairly
steady over the decade, averaging 1.8
percent.
Over the last decade the number of
employees at the Reserve Banks has
increased 337 ANP, or 0.1 percent per
year (chart 3.2). From 1974, when the
average number of personnel at the
Reserve Banks was at its peak of 26,567,
employment declined 3,624 ANP, or 13.6
percent, to 22,943 in 1979 under a
Systemwide program to increase productivity. Employment increased in 1980

Table 3.12
Capital Outlays of the Federal Reserve Banks, by Class of Outlay, 1987-89
Thousands of dollars, except as noted

Class
Data processing and data
communications equipment
Furniture and other equipment
Land and other real estate
Buildings
Building machinery and equipment
Leasehold improvements
Total




1987
actual

1988
estimate

45,162
22,394
1,759
58,715
6,163
4,121

86,404
23,511
2,262
78,178
9,678
3,275

138,314

203,308

1989
budget

Percent change
1987-88

1988-89

87,638
30,237
34,419
56,964
13,311
9,105

91.3
5.0
28.6
33.1
57.0
-20.5

1.4
28.6
1,421.5
-27.1
37.5
178.0

231,673

47.0

14.0

Federal ReserveSystemAudits27

Volume and Unit Cost

Chart 3.1
Operating Expenses of the Federal
Reserve Banks, 1979-891
Billions of dollars

1.2

1.0
.8

1979

1984

1989

1. For 1988, estimate; for 1989, budget.
2. Calculated with the GNP implicit price deflator.

Chart 3.2
Employment at the Federal Reserve
Banks, 1979-891

Volume for all measured operations is
budgeted to increase 3.2 percent over
1988, and unit cost is expected to rise
by 1.8 percent (table 3.13). With this
expectation for 1989, the five year
(1984-89) average annual growth rate
will be 3.5 percent for volume and 1.5
percent for unit cost. Implementation of
the Expedited Funds Availability Act is
the major reason for the increase in unit
cost in 1989, although efforts to improve
availability in the funds transfer service
and declining volumes in many of the
fiscal services also contribute to the
increase in unit cost.
1988 Budget Performance

ANP, in thousands

The 1988 Bank budgets, excluding provisions for implementation of operations
related to the Expedited Funds Availability Act, were approved in December
1987 for a total of $1,245.1 million, an
increase of $48.9 million, or 4.1 percent,
from estimated 1987 expenses. The ReTable 3.13

1979

1984

1989

1. For 1988, estimate; for 1989, budget. See text note 1
for definition of ANP.

Changes from 1988 to 1989 in Volumes
and Unit Costs of Federal Reserve
Bank Services
Percent

and 1981 because of the MCA; however,
over the next three years, employment
declined a total of 1,320, or 5.5 percent,
reaching 22,669 in 1984, its lowest level
in the 1979-89 period. Employment rose
again in 1985 and 1986 as bank examiners
were added and actions were taken to
handle increasing volume. Employment
declined in 1987 by 229 ANP, in part
because of the budget restraint attending
the Gramm-Rudman-Hollings legislation. Employment was budgeted to increase 369 ANP in 1988 and 62 in 1989,
primarily to implement the Expedited
Funds Availability Act.



Service

Volume

Unit cost

4.3
2.8
14.7
4.0
.4

1.1
2.2
-7.2
3.2
2.9

Cash
Currency

4.2
5.7
-5.3

-1.3
-2.4
6.7

Fiscal agency
Savings bonds
Other Treasury issues
Other fiscal agency
Treasury Direct

-2.6
-3.6
-9.1
.5
1.3

8.1
6.7
14.4
8.5
2.8

-.8

7.4

3.2

1.8

Commercial checks
Automated clearinghouse
Funds transfers
Other

Securities
and noncash services
All

28

Federal Reserve System

serve Banks now estimate 1988 expenses
will be $1,249.7 million (again excluding
provisions for operational aspects of
expedited funds), which is $4.6 million,
or 0.4 percent, over the approved budget.
One-half of this overrun is attributable to
incremental expenses for (nonoperational) educational efforts and postage
related to the expedited funds mandate,
which the Reserve Banks were unable to
absorb completely within approved budgets. Of the Districts estimated to be over
their approved budgets, five of them
notified the Board of their expected
overrun. The budget overruns of the
remaining Districts are within the guideline allowed by the Board.
The Reserve Banks, while attempting
to hold down costs overall, have found it
necessary to direct additional resources
in several areas. Problems with check
operations in Boston, New York, and
Cleveland required additional staff, as
did increased responsibilities in Philadelphia and Dallas for supervision and
regulation. The 1988 budget proposed by
Dallas had been reduced with the understanding that the Bank could exceed its
budget provided that resources were
needed for supervision. Efforts to improve the availability of automated functions and support for programming has
increased expenses and staffing levels at
Richmond and Kansas City.
1988 Budget Performance
on Expedited Funds
In early 1988, the Director of the Division
of Federal Reserve Bank Operations,
acting under authority delegated by the
Board, approved supplemental expense
budgets, totaling $12.5 million, for the
12 Districts to carry out the Expedited
Funds Availability Act. The Reserve
Banks now estimate these supplemental
expenses at $11.6 million, which is $0.9



million, or 7.8 percent, less than the
approved amount. The Boston District
expects to exceed its supplemental budget; all other Districts anticipate spending
an amount equal to, or less than, their
approved amounts.
•

Part II
Special Analysis




31

Chapter 4

The Automated Currency Processing System
Although the public's use of checks,
credit cards, and electronic means of
payment is expanding, its demand for
currency continues to rise (table 4.1). An
important function of the Federal Reserve
is to satisfy this demand for currency and
for coin. Depository institutions circulate
their currency through the Reserve
Banks, which in turn remove worn and
counterfeit bills and recirculate the fit
currency. Under the terms of the Federal
Reserve Act, the System orders from the
Bureau of Engraving and Printing the
amount of currency it deems necessary to
supplement the recirculated bills.1 Over
the years, the Federal Reserve has looked
to improvements in technology to meet at
the lowest cost the public's demand for
currency.

able to inspect the notes processed by
these machines, which performed a simple count of a stack of notes, typically
100 at a time. As a result, the quality of
notes in circulation fell and the detection
of counterfeits suffered. Marginally more
advanced machines were introduced over
the years, but currency processing remained labor-intensive, the ability to cull
notes remained low, and the volume of
notes in circulation continued to expand.
In 1977 the Federal Reserve introduced a technologically far more advanced generation of equipment called
Currency Verification, Counting, and
Sorting (CVCS) machines. CVCS machines can process up to 60 thousand
notes per hour and are equipped with
sensors that detect the denomination,
quality, and authenticity of each note.
Today, the 37 Federal Reserve Banks and
History of Currency Processing
Branches operate 116 CVCS machines.
Technology
In the face of rising demand for curA simple counting machine called the rency, the Federal Reserve increased
Federal Bill Counter was one of the first productivity through more intensive use
pieces of equipment used to sort currency of the CVCS machines and through
at the Reserve Banks. While hand-sorting improvements in the machines thembills into various pockets on this machine, selves. For example, the Banks' managtellers would visually inspect the quality ers and processing staff developed more
of the notes and look for counterfeits.
efficient processing teams, reduced idle
As the volume of notes increased, the time, and added shifts. Also, the Banks
Federal Reserve shifted to mechanical installed new sensors on the machines
counting devices. Employees were un- during 1982 and 1983 to better detect
worn bills; use of the machines slowed
during the installation, but by 1984,
output per person was 13 percent above
1. The Federal Reserve assumes the cost of
producing and distributing the currency. The the level for 1981. Thanks to such efforts,
expense of producing and distributing coin, which the number of notes processed by each
the Federal Reserve receives from the Bureau of the employee has grown 43 percent between
Mint at face value, remains a liability of the U.S.
1979 and 1988, from about 13 million to
Treasury. Coin accounts for a minor portion of the
more
than 19 million. As a result, since
value of cash in the nation's payments system. See
pp. 5,13-14, table 3.13 on p. 27, and pp. 48-49 for 1979 the Banks have held the increase in
other information on currency and coin.
the staffing level for currency processing



32

The Automated Currency Processing System

to 38 percent, while the volume of notes 20 percent increase in output and a 40
processed has increased 98 percent (chart percent reduction in labor costs. In
4.1).
addition, the ACPS machines will be
more accurate, provide better security,
and destroy unfit notes more thoroughly
The New Automated Currency
to make disposal easier. The purchase is
Processing System
thus a major step in the continuing effort
The CVCS machines are reaching the by the Federal Reserve to minimize the
limits of their efficiency and of their cost of providing the public with highuseful life. At the same time, the Banks quality currency.
expect the economy's need for processed
currency to continue growing, to more
than 34 billion pieces by the year 2000. In
1982 the Federal Reserve engaged sev- Chart 4.1
1
eral domestic and foreign vendors to Trends in Currency Processing
1979 = 100
begin developing a new generation of
equipment. In November 1987 the Board
of Governors approved the machines
developed by Recognition Equipment,
Inc, of Irving, Texas, and authorized $40
million for their purchase. The first units
will be delivered in mid-1990.
The new equipment, called the Automated Currency Processing System
(ACPS), is the next step in the technolog1. For 1988, estimate.
ical evolution of currency processing in
2. Billions of pieces.
the Federal Reserve System. Among the
3. Average number of personel; for definition of ANP,
advantages of the new machines will be a see chap. 3, note 1.
Table 4.1
Currency Processed and Paid into Circulation by the Reserve Banks, 1979-88
Billions

Year

Notes paid
into circulation 2

Notes received from circulation
and processed (pieces)1
Pieces

Dollars
(face value)

8.9
9.5

10.2
11.0

109.1
124.6

..
..
..
..
..

10.3
10.6
11.5
13.4
14.6

11.8
12.1
13.1
14.4
15.4

137.5
146.1
161.5
181.4
199.7

1986 ..
1987 ..
1988 3 .

15.4
16.9
17.6

16.4
17.7
18.3

216.1
233.8
243.3

1979 ..
1980 ..
1981
1982
1983
1984
1985

1. Excludes new currency.
2. Includes new currency.
3. Estimate.




Appendixes




35

Appendix A

Mission and Operational Areas
of the Federal Reserve System
The Federal Reserve Banks and the Board
of Governors have established four major
operational areas to account for their
activities: monetary and economic policy, supervision and regulation of financial institutions, services to financial
institutions and the public, and services
to the U.S. Treasury and other government agencies.1 This appendix describes
each of these areas in detail.
Monetary and Economic Policy
The Federal Reserve contributes to the
attainment of the nation's economic and
financial goals through its ability to
influence money and credit in the economy. The System has several tools to
affect the availability and cost of the
nation's money and credit: setting of
reserve requirements; setting of the
discount rate (which affects the cost of
borrowing); and the primary tool of
monetary policy, open market operations.
The seven-member Board of Governors sets reserve requirements, and it
acts on requests from the Federal Reserve
Banks to adjust the discount rate. The
Federal Open Market Committee
(FOMC) meets in Washington eight times
per year, usually twice each business
quarter, to set policies for System open
market operations; it comprises the
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 Bank programs
and is discussed in chap. 2.




Board, the President of the Federal
Reserve Bank of New York, and, on a
rotating basis, the presidents of four other
Reserve Banks.
A vast amount of banking and financial
data flows through the Reserve Banks to
the Board, where it is compiled and made
available to the public in weekly and
monthly statistical releases in such areas
as the monetary aggregates, interest
rates, bank credit, and exchange rates.
The research staffs at the Board and the
Reserve Banks use this information,
along with data collected by other public
and private institutions, to assess the state
of the economy and the relationships
between the financial markets and economic activity. Staff members provide
background for the Board and for each
meeting of the FOMC by preparing
detailed economic andfinancialanalyses
and projections for the domestic economy and international markets. In addition, they conduct longer-run economic
studies of issues at the regional, national,
and international levels.
Supervision and Regulation
Under the authority of the Federal Reserve Act and the Bank Holding Company Act, the Federal Reserve System
plays a major role in the supervision and
regulation of banks and bank holding
companies. 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."
The Board of Governors adopts regulations to carry out statutory directives and

36

Mission and Operational Areas

establishes System supervisory and regulatory policies; the Reserve Banks conduct on-site examinations and inspections
of state member banks and bank holding
companies; review applications for
mergers, acquisitions, and changes in
control from banks and bank holding
companies; and take formal supervisory
actions. The System makes available to
the public nonidentifying information it
periodically collects on the condition and
income of banks and bank holding
companies.
Beyond these activities, the Federal
Reserve maintains continuous oversight
of the banking industry to ensure the
overall safety and soundness of the
financial system. This broader responsibility is reflected in the System's presence
infinancialmarkets, through open market operations, and in the Federal Reserve's role as lender of last resort. Toward
that goal, the Federal Reserve, together
with the Office of the Comptroller of the
Currency and the Federal Deposit Insurance Corporation, in March 1988 introduced to the G-10 countries a proposal
regarding capital requirements that employs the risk-based framework developed by the Basle Supervisors' Committee. The principal objective of the
proposal is to achieve greater convergence in the measurement and assessment
of capital positions of major international
banking organizations.
The Board's staff believes that adoption
of risk-based capital requirements will
achieve important objectives long sought
by the Federal Reserve. First, it will
make regulatory capital requirements
more sensitive to differences in risk
profiles among banking organizations.
Second, it will take an important step in
the factoring of off-balance-sheet risks
into the assessment of capital adequacy.
Third, it will minimize disincentives to
holding liquid, low-risk assets.




The development of a risk-based framework in conjunction with supervisory
officials from other industrial countries
acknowledges the growing internationalization of major banking and financial
markets. The harmonization and strengthening of capital standards worldwide
should contribute to a more stable and
resilient international banking system and
help mitigate a source of competitive
inequality for international banks stemming from differences in national supervisory requirements.
Over the past two years, the System
has intensified its supervision of state
member banks and bank holding companies in light of the rising number of
failing and problem banks. In 1988 the
Board and the Banks conducted 875
examinations of state member banks, an
increase of 4.8 percent over 1987, and
2,726 inspections of bank holding companies and their subsidiaries, an increase
of 3.5 percent over 1987. The System reviewed 2,247 applications from foreign
and domestic bank holding companies.
The Board enforces compliance by
state member banks with the federal laws
protecting consumers in their use of
credit. In 1988 the System conducted
examinations for such compliance at an
estimated 605 banks.
The Board's supervisory responsibilities also extend to foreign operations of
U.S. banks and, under the International
Banking Act, to U.S. operations of foreign banks.
Services to Financial Institutions
and the Public
The Federal Reserve System plays a
central role in the nation's payments
mechanism, which consists of many
independent systems designed to move
funds among financial institutions. The
Federal Reserve distributes currency and

37 Mission and Operational Areas

coin, processes checks for collection,
operates electronic funds transfer networks, and provides for transfers of
securities and for coupon collection.
Ensuring that the supply of currency
and coin meets the public's demand for
cash is the responsibility of the Federal
Reserve. The Reserve Banks obtain currency and coin from the Bureau of Engraving and Printing and the Mint and
distribute them through depository institutions. The Banks use highly sophisticated equipment to count cash, identify
counterfeits, and destroy currency that is
unfit for circulation. In 1988, the Reserve
Banks paid out $243.3 billion in currency
and $4.5 billion in coin and destroyed
$53.9 billion of unfit currency.
The Reserve Banks collect and clear
checks under the specific authority of the
Federal Reserve Act of 1913. The Banks,
Branches, and regional check-processing
centers currently clear approximately 15
billion checks each year with an average
daily value of more than $41 billion.
Most checks deposited with the Federal
Reserve by financial institutions are
collected on the day they are deposited or
on the next business day.
In 1987 the Congress adopted the
Expedited Funds Availability Act (title
VI of Public Law 100-86, the Competitive Equality Banking Act). The law,
which became effective on September 1,
1988, is intended to balance the risk to
financial institutions with the needs of
customers by limiting the time an institution may delay the access of customers to
their deposited funds. To implement the
act, the Federal Reserve adopted Regulation CC, which sets out schedules of
access to different types of deposits in
various types of accounts.
The Federal Reserve also plays a
central role in the nation's payments
mechanism through its electronic wire
transfer system, Fedwire. Depository




institutions can draw on their reserves or
clearing accounts at the Reserve Banks
through Fedwire and transfer funds anywhere in the country within minutes.
Approximately 5,800 depository institutions use Fedwire through direct computer connections with Federal Reserve
Banks, and another 5,400 institutions use
Fedwire through off-line means such as
telephone and telex. During 1988, approximately 56 million transfers valued
at about $160 trillion were sent over
Fedwire, an average of $29 million per
transfer and $639 billion per day.
The Federal Reserve allows participants in private clearing arrangements to
exchange and settle transactions on a net
basis through reserve or clearing-account
balances. Users of this net settlement
service include local check clearinghouse
associations, credit card processors,
networks of automated teller machines,
and national and regional funds transfer
networks. In 1988, about 695,000 net
settlement entries were processed by the
Reserve Banks.
Approximately 22,000 depository institutions use the automated clearinghouse, which makes recurring payments
electronically instead of by check. The
institutions use the ACH primarily to pay
salaries and pensions and to make preauthorized bill payments, such as those for
insurance premiums and mortgages.
About 3,700 of the institutions using the
ACH originate and receive transactions
via electronic connections with the Federal Reserve; the others use machinereadable magnetic tapes. In 1988 the
Reserve Banks processed about 1 billion
ACH transactions; about 40 percent were
governmental, largely disbursements of
Social Security benefits and civilian and
military pay.
The securities services provided by the
Reserve Banks cover the handling of
book-entry securities and definitive secu-

38

Mission and Operational Areas

rities and the collection of coupons and
miscellaneous items. The book-entry
service, begun in 1968, enables holders
of government agency securities to transfer them to other institutions throughout
the country. The Reserve Banks maintained 40,117 book-entry accounts in
1988 and processed 10.3 million security
transfers.
In the definitive securities service, the
Banks store physical securities ineligible
for maintenance on the book-entry system. The Federal Reserve held approximately $25 billion of such securities at
the end of 1988.
In its noncash collection service, the
Federal Reserve processes coupons,
bonds, and miscellaneous items such as
bankers acceptances and certain checks
and drafts. Coupon collection, which
accounts for approximately 95 percent of
the transactions in this service, amounted
to about 4.2 million coupons in 1987 and
about 3.3 million in 1988.
Services to the U.S. Treasury
and Other Government Agencies
The U.S. government uses the Federal
Reserve as its bank. Through deposit
accounts at the Federal Reserve Banks,
the government issues its checks and
payments and collects its receipts. The
Reserve Banks also process wire transfers of funds and automated clearinghouse payments and give the Treasury
daily statements of account activity.
Beyond these typical depository activities, the Federal Reserve Banks provide
several unique services to the government. They monitor the tax receipts
deposited in the 14,883 tax and loan
accounts maintained by depository institutions designated by the Treasury to
perform this function; and they hold the
collateral that those institutions pledge to
support those deposits and transfer funds
to the Treasury's account at its request.



The Reserve Banks assist the Treasury in
itsfinancingof the public debt by issuing,
servicing, and redeeming all marketable
Treasury securities as well as all Treasury
savings bonds and retirement plan bonds.
In another unique fiscal service, the
Reserve Banks redeem food coupons for
the Department of Agriculture and destroy them.
•

39

Appendix B

Budget Processes
As a group, the Reserve Banks follow a
budgeting process distinct from that of
the Board of Governors. This appendix
describes those processes and explains
PACS, the planning and control system
that the Banks use for accounting.
The Budget and Control Process
of the Board of Governors
All levels of management at the Board
take part in a planning, budget, and
control process based on the calendar
year. To ensure that all elements are
coordinated and objectives are achieved,
the Administrative Governor oversees
the process under authority delegated by
the Chairman.
The Board places expenses and employment in four operational areas: economic and monetary policy, supervision
and regulation of financial institutions,
services to financial institutions and the
public, and System policy direction and
oversight. Costs for data processing are
charged as direct expenses to the four
major areas according to usage. Expenses
for other elements of support and overhead are allocated to the four areas in
proportion to the shares of direct costs
attributable to each area.

pares a budget estimate based on the
current level of operation, taking into
account anticipated initiatives discussed
at the meetings and other factors such as
wage increases, changes in costs of
employee benefits, and inflation.
Using this projection of expenses, the
Controller prepares a proposed guideline
for approval of the Board in June. The
approved guideline is then used by the
divisions for preparation of their budget
proposals in the fall.
The objectives and budgets prepared
by the divisions are reviewed with the
Controller, the Staff Director for Management, and the oversight committees.
After appropriate adjustments, the Controller in coordination with the Staff
Director for Management prepares a
consolidated budget for the Administrative Governor to present to the Board for
final approval at a public meeting in
December.
Treatment of Capital Expenditures

In 1985 the Board began capitalizing
certain assets and depreciating their value
over appropriate time periods, instead of
expensing them in their year of purchase.
Capitalizing, which is in accordance with
generally accepted accounting principles, more closely aligns the cost of
The Budget Schedule
capital assets with their periods of service
Early each year, the divisions at the Board and is consistent with the accounting
conduct strategic planning meetings. In practices followed by the Reserve Banks.
The capital budget is developed conMay, the Board's functional oversight
committees review, for the divisions currently with the operating budget,
under their purview, the plans for the following the same procedures. Although
following year and beyond. The Board's the capital budget is not covered by the
Controller and Staff Director for Manage- guideline for the operating budget, deprement coordinate the oversight meetings ciation and other costs such as mainand the Controller simultaneously pre- tenance that are associated with capital



40

Budget Processes

assets fall under the guideline because
they are operating costs.
Financial Monitoring and Control
Each division constructs quarterly operating plans, which managers monitor and
review throughout the year. The Controller observes performance against budgeted targets and submits quarterly reports to the Board.
After a midyear review of current
expenses with each division director, the
Controller and the Staff Director for
Management estimate expenses for the
entire year and submit the estimate to the
Board along with any recommendations
for reallocations. The midyear review
helps control current expenses and provides a baseline for analyzing budget
requests. At the beginning of the next
year, the Controller and the Staff Director
for Management report to the Board on
the previous year's performance against
budget and operating goals.

ing goals for the calendar year, devise
strategies for their attainment, estimate
required resources, and monitor results
of current operations and financial
performance.
The Budget Process

A task force drawn from staff members
of the Board and the Reserve Banks
develops a proposed budget guideline for
the coming year based on forecasts of
changes in workload and productivity at
the Reserve Banks. The Conference of
First Vice Presidents and the Conference
of Presidents of the Reserve Banks review
the work of the task force, and revise it if
necessary, before sending it to the Board
of Governors. The Board determines the
appropriateness of the proposed level of
spending and at about midyear communicates the budget objective to the Reserve
Banks for their guidance in developing
plans and budgets. To plan for priced
services, the Banks update a multiyear
strategic statement.
The management of each Bank departAssessments
ment develops its budget based on workThe cash requirement for operations loads, required initiatives, and the budget
during the first half of the year, which is objective. Senior Bank officials review
estimated after the Board adopts its the departmental requests and together
budget, is approved by the Administra- with the President and First Vice Presitive Governor in early January. As the dent determine priorities for the overall
Federal Reserve Act provides, the re- budget level to be recommended to the
quired amount is raised by an assessment Bank's Board of Directors. In the fall the
on each of the Reserve Banks in propor- Board of Governors approves the budget
tion to its capital stock and surplus. For of each Reserve Bank as well as the fee
the second half of the year, the cash schedule for priced services, which is
requirement is estimated in June, and the developed simultaneously with the budsecond assessment is made in July. Funds get data.
are transferred quarterly to minimize
cash balances held by the Board.
The Capital Budget Process

The Budget and Control Process
of the Federal Reserve Banks
Each year the Federal Reserve Banks,
like the Board, establish major operat


The Reserve Banks account for capital
expenditures in accordance with generally accepted accounting principles and,
therefore, include depreciation of capital
assets in expenses. Technical staff mem-

41 Budget Processes

bers at the Board review all plans for
large capital expenditures, whether for
buildings, automation equipment, furnishings, or land. The staff members then
make recommendations to the Director
of the Division of Federal Reserve Bank
Operations or to the Board of Governors,
depending on the significance of the item
or project.
Review at the Board of Governors
In the fall, analysts at the Board review
the budgets of each Reserve Bank and
note Systemwide issues to be addressed
during the budget review. They analyze
the executive summary and the statement
of objectives in each budget in light of the
Bank's own trends, plans at the other
Banks, the System budget objective and
the cost-recovery objectives for priced
services. The Product Directors and the
Pricing Policy Committee examine the
budgets for priced services.1 A committee of three governors reviews the budget
of each Reserve Bank and meets directly
with the President and First Vice President of each Bank to discuss issues and
directions.

potential for a major improvement in the
nation's payments mechanism or in the
Federal Reserve's ability to provide services . Because of their long-range importance, special projects are approved
separately from the process described
above, which focuses on operational
costs. Although not included in the
budget objective, these projects are individually approved by the Conference of
Presidents and the Board of Governors,
and their effect on total system outlays is
carefully reviewed. Three such projects,
described in appendix C, have been
approved for 1989.
The Planning and Control System

The Planning and Control System
(PACS), implemented by the Reserve
Banks in 1977, serves as the fundamental
cost accounting system for all the services provided by the Banks, whether
priced or nonpriced, special or routine.
Because PACS serves as the structure for
budgeting, budgets can be compared to
actual expenses by service and object.
PACS also enables the Board of Governors to compare the financial and operating performance of the Reserve Banks.
Board Approval
PACS groups all costs by major serFollowing review by the Committee of vices, shown here under the four operathree governors, all Bank budgets are tional areas and under support and oversent to the Board of Governors for action head (see the accompanying list). The
costs of support and overhead, in turn,
at a public meeting in December.
are fully allocated to the four operational
areas. PACS offers a detailed analysis of
Special Projects
all these services and activities, including
Special projects are those few research productivity statistics (primarily unit
and development efforts that have the costs and items per employee hour),
"environmental" statistics (to clarify the
1. The Product Directors are the First Vice differences among the Banks' operating
environments), and "quality" statistics
Presidents at selected Reserve Banks with responsibility for day-to-day policy guidance over specific (to measure performance).
Systemwide priced services. The Pricing Policy
PACS affords the Banks a review of
Committee comprises one Governor, the Board's
Staff Director for Federal Reserve Bank Activities, expenses, an audit trail, and expense
the Presidents of two Reserve Banks, and the First accountability. Through periodic on-site
Vice Presidents of two other Reserve Banks.
reviews, the Board confirms that the



42

Budget Processes

Reserve Banks are complying with PACS
instructions and also with System guidelines set by the Board. In addition, the
General Accounting Office and an outside

public accounting firm have determined
in independent examinations that PACS
is an appropriate and effective accounting
mechanism for the Federal Reserve.

Federal Reserve Bank Activities
OPERATIONAL AREAS

SUPPORT AND OVERHEAD

Monetary and economic policy
Economic policy determination
Open market trading

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

Supervision and regulation
Supervision of District financial institutions
Administration of laws and regulations
related to banking
Studies of banking and financial market structure
Services to financial institutions and the public
Special cash service
Currency
Coin
Transfer of account balances
Automated clearinghouse
Commercial check
Other check
Book-entry securities
Definitive securities
Loans to depository institutions and others
Noncash collection
Public programs
Other
Services

to the U. S.

Treasury

and other government agencies
Savings bonds
Other Treasury issues
Centrally provided Treasury and agency services
Government agency issues
Other Treasury and government agency services
Treasury and government coupons
Food coupons
Government accounts




Overhead
Administration
System projects and contingency processing center
Special projects
Mail
Legal
General books and budget and expense control
Files and records storage
Personnel
Purchasing
Protection
Motor vehicles
Library
Telephone
Audit

43

Appendix C

Special Categories of System Expense
This appendix discusses System expenses Board's implementation of the Expedited
for priced services, capital assets, special Funds Availability Act. The Federal
projects, and currency.
Reserve anticipates resuming its normal
schedule, announcing prices for 1990 in
the fourth quarter of 1989.
Priced Services
Fees for Federal Reserve services must
The Monetary Control Act of 1980 be approved by the Product Director for
(MCA) requires the Federal Reserve to the respective service, by the Pricing
make available to all depository institu- Policy Committee, and ultimately by the
tions, for a fee, certain services that the Board of Governors.1 If fees for any
Federal Reserve had previously provided service are set so that the full recovery of
without explicit charge and only to mem- costs is not anticipated, the Board anber banks. Under the act, the fees must nounces the rationale.
recover the full costs of providing the
The cost of float is determined by
services, including all direct and indirect applying the current rate for federal funds
costs, the interest on items credited to the level offloatexpected in the coming
before collection (float), and the return year. Income taxes and the return on
on capital and the taxes that would have capital are determined by applying tax
been paid had the services been furnished and financing rates to the assets the Fedby a private business firm. The cost of eral Reserve expects to use in its priced
capital and taxes is referred to as the services operations in the coming year.
private sector adjustment factor (PSAF). The tax and financing rates are derived
The Federal Reserve has developed an from a model of the nation's 25 largest
annual pricing process, which involves a bank holding companies. The other comreview of Reserve Bank expenses in ponents of the PSAF are derived from the
addition to the one required by the budget budgets of the Reserve Banks: the improcess, to meet the requirements for the puted sales tax (based on budgeted outfull recovery of costs. Use of the budgets lays for materials, supplies, and capital
is an integral part of the pricing exercise assets); the assessment for FDIC insurbecause most of the recoverable costs of ance on expected clearing balances mainpriced services consist of direct and tained with the Federal Reserve to settle
indirect costs as determined by the transactions; and the portion of the
expenses of the Board of Governors that
budgets.
Generally, fees are set only once a is related directly to the development of
year, in the fourth quarter for the next priced services.
The inclusion of all these costs means
calendar year, so that depository institutions can more easily plan their own the Federal Reserve offers its priced sercorrespondent banking services. The vices on a basis comparable with that in
Federal Reserve temporarily deviated the private sector, and the discipline of
from this schedule in June 1988, when it
announced explicit fees for check collec1. See appendix B, note 1, for a description of
tion return items to be effective in Sep- the position of Product Director and of the Pricing
tember. These new fees are part of the Policy Committee.



44

Special Categories of System Expense

the market ensures that the prices charged services in 1989 is $3,240.3 million
will be no higher than necessary.
(table C.l). The value of assets assumed
to befinancedthrough debt and equity is
$445.2 million in 1989, an increase of
Calculation of the PSAF for 1989
$28.0 million, or 6.7 percent, from 1988
In 1988 the Board approved a 1989 (table C.2). The rise is attributable
private sector adjustment factor of $69.7 largely to capital expenditures for bank
million, a decrease of $6.5 million, or premises, furniture, and equipment.2
8.5 percent, from the PSAF of $76.2
million targeted for 1988.
Asset Base
The estimated value of Federal Reserve
assets to be used in providing priced

2. Short-term assets are assumed to be financed
by short-term liabilities; long-term assets are
assumed to be financed by a combination of equity
and long-term debt.

Table C.l
Pro Forma Balance Sheet for Federal Reserve Priced Services, 1988-89 1
Millions of dollars
Asset or liability

1988

1989

ASSETS

Short-term assets
Imputed reserve requirement 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
Premises23
Furniture and equipment2 .
Capital leases
Leasehold improvements2.
Total long-term assets.

268.2
1,967.0
28.0
6.4
5.8
438.3

283.3
2,077.9
29.6
7.1
6.2
432.8
2,713.7

245.4
129.5
2.5
2.2

Total assets

2,836.8
259.9
137.9
1.1
4.7

379.6

403.6

3,093.3

3,240.3

LIABILITIES

Short-term liabilities
Clearing balances
Balance arising from early credit
of uncollected items
Short-term debt4

2,235.2

2,361.2

438.3
40.1

432.8
42.8
2,713.6

Total short-term liabilities
Long-term liabilities
Obligations under capital leases
Long-term debt4
Total long-term liabilities
Total liabilities
Equity4
Total liabilities and equity
1. Data are averages for the year.
2. Financed through the private sector adjustment
factor; other assets are self-financing.
3. Includes $0.4 million in allocations of assets of the




2.5
136.4

2,836.8

1.1
156.8
138.9

158.0

2,852.5

2,994.7

240.7

245.6

3,093.2

3,240.3

Board of Governors to priced services for 1989 and $0.5
million for 1988.
4. Imputedfiguresrepresenting the source of financing
for certain priced-service assets.

45 Special Categories of System Expense

Cost of Capital and Taxes
In 1987 the Board approved the use of a
three-year average of rates of return on
equity for calculating the PSAF. Because
of abnormally low earnings by bank
holding companies in 1987, however, the
Board approved the use of five-year
average rates of return on equity for use
in the 1989 PSAF computation. Use
of a three-year average for 1989 would

have resulted in a PSAF that is significantly below the PSAF approved by the
Board.
Changes in the relative sizes of bank
holding companies have changed somewhat the composition of the 25-company
sample used to calculate the PSAF. As in
the past, the sampled bank holding companies with the highest and lowest rates
of return on equity before taxes were

Table C. 2
Derivation of the Private Sector Adjustment Factor, 1988-89
Millions of dollars, except as noted

Item

1988

1989

40.1
377.1
417.2

42.8
402.4
445.2

7.1
9.7
20.1
15.4

6.6
9.0
16.9
13.8

9.6
32.7
57.7

9.6
35.2
55.2

100.0

100.0

32.3

20.5

Capital costs5
Short-term debt
Long-term debt
Equity
Total

2.8
13.3
48.3
64.4

2.8
14.0
41.4
58.3

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

8.2
1.9
1.7
11.8

8.0
1.9
1.4
11.4

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

76.2
18.3
16.3

69.7
15.7
13.8

P S A F COMPONENTS

Assets to be financed1
Short-term
Long-term2
Total
Cost of capital (percent)3
Short-term debt
Long-term debt
Pretax return on equity4
Weighted average ..
Capital structure (percent)
Short-term debt
Long-term debt
Equity
Total
4

Tax rate (percent) .
REQUIRED P S A F RECOVERIES

1. The asset base for priced services is directly
determined.
2. Total long-term assets less capital leases that are
self-financing.
3. All short-term assets are assumed to befinancedby
short-term debt. Of the total long-term assets, 39 percent
are assumed to be financed by long-term debt and 61
percent by equity in 1989. The data are average rates paid
by the bank holding companies included in the sample.




4. The pretax rate of return on equity is based on
average after-tax rates of return on equity for the sample of
bank holding companies, adjusted by the effective tax rate.
The 1989figuresfor pretax equity and the tax rate are based
on the average of these rates for the five years 1983-87.
5. The calculations underlying these data use the dollar
value of assets to befinanced,divided as described in note
3, and the rates for the cost of capital.

46

Special Categories of System Expense

excluded, and calculations were based on either capitalize or expense those assets
the remaining 23 firms.
costing less. The capitalization guideline
for the Board is $1,000.
The Banks maintain a multiyear plan
Other Imputed Costs
Other required PSAF recoveries for for capital spending. The Board, in turn,
1989—imputed sales taxes, FDIC insur- requires the Banks to budget annually for
ance, and Board expenses—total $11.4 capital outlays by capital class to estimate
million, down $0.4 million from 1988 the effect of total operating and capital
(table C.2). The reduction is due to a spending. During the budget year, the
decline from 1988 to 1989 in projected Banks must submit proposed major purcapital expenditures, which in turn low- chases of assets to the Board for further
ered imputed sales taxes. The decline is review and approval. The Board of
also attributable to a reduction in the Governors reviews capital expenditures
proportion of time Board staff members for the Board.
Table C.3 shows total System outlays
work on the development of priced serfor
recent years based on the federal
vices as the proportion of time spent on
implementing the Expedited Funds Avail- government's typical practice of expensing assets. Total outlays for each year are
ability Act increases.
derived from operating expenses less
depreciation costs plus capital outlays.
Capital Outlays
Because capital outlays are thus shown in
In accordance with generally accepted total in the year of purchase rather than
accounting principles (GAAP), the Fed- spread over the useful lives of the assets,
eral Reserve System depreciates the cost the amounts and percent changes vary
of fixed assets over their estimated useful widely from year to year.
lives. In the federal government, where
no requirement exists for depreciation
Special Projects
accounting, the cost of fixed assets is
typically recorded as an expense at the For 1989 the Board of Governors has
time of purchase. However, the Policy approved research and development on
and Procedures Manual for Guidance of three projects intended to provide longFederal Agencies of the General Account- range benefits to the Federal Reserve and
ing Office, which governs accounting the banking industry. Because the spendprocedures in the federal government, ing on such projects is relatively high and
specifies in title 2 the use of depreciation short-term, the Federal Reserve accounts
accounting for business types of opera- for it separately from its operating
tions and for activities that recover costs expenses.
from reimbursements or user charges.
Certain activities of the Federal Reserve
Digital Imaging of Checks
meet both of these criteria. Under GAAP,
the cost of acquiring an asset that is In mid-1985 the Conference of First Vice
expected to benefit an entity over future Presidents approved the concept of testperiods should be allocated over those ing the technology for making digital
periods. Such treatment allows a more images as it might be applied to check
realistic measurement of operating per- processing. The archiving of information
formance.
on checks written by the U.S. Treasury
The Banks capitalize and depreciate all and the processing of bad checks (return
assets that cost $1,500 or more; they can items) are the potential applications with



Special Categories of System Expense

the most stringent requirements. The
information captured from such checks
must be especially detailed and of high
quality and therefore requires a large
capacity for data storage. These two
check processes were thus selected as the
most likely to reveal the feasibility of the
technology. If the technology is successful, it could replace the Federal Reserve's
current practice of microfilming government checks and could speed the handling
of return items.
In 1989 the check imaging project,
building upon the first three years of
results, will test an imaging system at two
Reserve Banks with high-speed check
processors. Total 1989 expenses for the

47

project are estimated to be $1.7 million.
The technology has been under consideration since December 1986 by a group
of commercial banks, primarily for check
processing within a single District. These
institutions believe that, in evaluating
this technology, the Federal Reserve has
a role to play similar to the one it played
in the 1950s in evaluating Magnetic Ink
Character Recognition (MICR). That is,
the System can determine whether the
technology can support inter-District
functions at the required speeds while
producing acceptable images; the Federal Reserve can also address the legal
issues associated with image capture.
The effort by the commercial banks might

Table C. 3
Total Outlays of the Federal Reserve System,
Federal Government Accounting Method, 1984-89 1
Millions of dollars, except as noted

Year and entity

Operating
expenses

Depreciation
Equipment

Total
outlays

(3)

( l ) - ( 2 ) + (3)

Property
(2)

(1)

Capital
outlays

Percent
change
from
previous
year

1984
Reserve Banks
Board of Governors
Total

1,067.8
76.5
1,144.3

51.4
2.0
53.4

20.6
1.6
22.2

88.7
7.9
96.6

1,084.5
80.8
1,165.3

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
152.4

1,184.2
81.3
1,265.5

9.2
.6
8.6

1986
Reserve Banks
Board of Governors
Total

1,161.3
84.0
1,245.3

68.0
4.2
72.2

23.5
1.6
25.1

164.1
16.5
180.6

1,233.9
94.7
1,328.6

4.2
16.5
5.0

1987
Reserve Banks
Board of Governors
Total

1,191.8
86.3
1,278.1

75.8
5.9
81.7

26.1
1.6
27.7

138.3
5.0
143.3

1,228.2
83.8
1,312.0

-.5
-11.5
-1.2

1988 estimate
Reserve Banks
Board of Governors
Total

1,261.3
90.6
1,351.9

78.4
6.0
84.4

28.9
1.6
30.5

203.3
3.4
206.7

1,357.3
86.4
1,443.7

10.5
3.1
10.0

1989 budget
Reserve Banks
Board of Governors
Total

1,330.5
96.0
1,426.5

85.6
5.9
91.5

32.1
1.6
33.7

231.7
3.3
235.0

1,444.5
91.8
1,536.3

6.4
6.3
6.4

1. Excludes the costs of special projects and currency.




48

Special Categories of System Expense

not have developed without the involvement of the Federal Reserve.
Optical Detection
of Counterfeit Currency
The Federal Reserve is using the technology of digital image processing
discussed above to develop optical sensors that can detect counterfeit U.S.
currency. The sensors would be integrated into the new generation of automated currency processing machines
to be used at the Reserve Banks (see
chapter 4).
In 1989, selected vendors will develop
a prototype system to be tested against
prescribed performance standards. The
Federal Reserve, which will share with
the vendors the cost of development, has
budgeted $3.3 million for the project in
1989.

clearinghouse service. The program,
budgeted at $6.1 million for 1989, will
also demonstrate the use of fault-tolerant
equipment for the transfer of funds and
securities.
Currency Printing

The Bureau of Engraving and Printing
produces currency; the Federal Reserve
Banks put it into circulation through
depository institutions and destroy it as it
wears out (table C.4). The Federal Reserve Act stipulates that the costs of
producing currency, as well as the costs
of putting it into circulation and destroying it, are to be assumed by the Federal
Reserve System (table C.5).
New currency is printed to replace
worn notes and to accommodate increases in the demand for circulating
currency. Notes are also required for
inventories held by the Reserve Banks to
meet changes in demand.
Processing Electronic Payments
To minimize the number of new notes
A study by the Federal Reserve has ordered and the cost of their printing, the
indicated that, to meet the needs of users, Board consults with the Bureau of Enthe System must extend the number of graving and Printing to ensure that it
hours it provides electronic payments uses efficient methods and maintains
services and that to better control risk in
the payments system, it must improve the
reliability of these services. The study
also indicated that users of electronic Table C.4
payments are looking for more flexibility Currency in Circulation, New Notes Issued,
and Notes Destroyed, 1988 Estimate
in the range of services offered as well as
Millions of pieces
cost-effectiveness.
In 1989 the Federal Reserve will
New
Notes
Dollar
notes
Notes
complete its testing of equipment to
in
denomination
paid
destroyed2
circulation1
out2
satisfy these requirements. The pilot
program, known as the Electronic Pay1
4,304
3,320
2,857
1,077
5
906
770
ments Processor, uses nonstop, fault10
1,169
832
777
tolerant equipment of the type used in 20
3,016
1,544
1,345
578
84
50
158
networks of automatic teller machines
1,061
73
198
and in payments processing at commer- 100
11,024
5,906
Total
6,958
cial banks.
1.
As
of
July.
The Federal Reserve is installing the
2. Based on actual levels through the third quarter and
equipment at three Reserve Banks and expected
levels for the fourth quarter. Notes paid out do not
developing software for the automated include additions to inventory at the Reserve Banks.



49 Special Categories of System Expense

System guidelines on the quality of notes; and the Banks monitor all related costs,
the Board also sees that Reserve Banks do such as those for transportation and
not destroy notes prematurely. The Board packaging.
Table C. 5
Costs to the Federal Reserve of New Currency, 1987-89
Millions of dollars, except as noted
1987
actual

1988
estimate

1989
budget

Percent
change,
1988-89

Printing1
Shipping from Washington2
Reimbursement to the Treasury
for issuance and retirement
System-Treasury programs to deter counterfeiting

164.2
4.3

158.0
4.8

164.5
4.8

4.1
-2.1

1.6
.6

1.6
0

1.6
0

Total costs of currency

170.7

164.5

171.0

Item

1. Based on 6.6billion notes in 1987,6.0 billion notes in
1988, and 6.3 billion notes in 1989.




0
0
3.9

2. Includes purchase of seals and labels for Bureau of
Engraving and Printing.

51

Appendix D

Sources and Uses of Funds
The Federal Reserve System follows
generally accepted accounting principles
in accruing income and expenses and in
capitalizing assets whose useful lives
extend over several years (see appendix

C).
The Reserve Banks receive income
primarily from U.S. government securities that the Federal Reserve has acquired
through open market operations, one of
the tools of monetary policy. These earnings account for approximately 95 percent of current income. Table D. 1 shows
that the Banks received $17.6 billion in
1987 and an estimated $19.5 billion in
1988 from these securities and other
sources.
Table D. 2 shows the distribution of the
current income of the Banks for 1987 and
Table D.l
Income of the Federal Reserve Banks,
1987-88
Millions of dollars
Source

1987
actual

1988
estimate

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

224.3
16,371.4
343.9
644.7
48.7

355.6
18,173.3
303.4
657.7
34.5

Total

17,633.0

19,524.5




1988. The current expenses of the Reserve Banks are their operating expenses
and the cost of the earnings credits they
grant to depository institutions on clearing balances held with the Banks. The
Reserve Banks record extraordinary
adjustments to current net income in a
profit-and-loss account. The primary
entries in the profit-and-loss account are
for gains or losses on the sale of U.S.
government securities and for gains or
losses on assets denominated in foreign
currencies that result either 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 organizations retain
earnings. As required by the Board of
Governors, the Reserve Banks adjust the
size of the surplus account to keep it
equal to the paid-in capital of the member
banks. Under the policy established by
the Board of Governors at the end of
1946, all income net of the statutory
dividend to member banks and net of the
amount necessary to equate surplus to
paid-in capital is transferred to the U.S.
Treasury as interest on Federal Reserve
notes. Such payments to the Treasury
were $17.7 billion in 1987 and are
estimated to be $17.4 billion for 1988.

52

Sources and Uses o f Funds

Table D. 2
Distribution of the Income of the Federal Reserve Banks, 1987-88
Millions of dollars
Item
Current income1

1987
actual

1988
estimate

17,633

19,524

1,033
114

1,081

16,486

18,316

1,844

-489

LESS

Current expenses of Reserve Banks2-3
Operating expenses
Earnings-credit costs

127

EQUALS

Current net income
PLUS

Net additions to, or deductions from ( - ) , current net income4.
LESS
5

Cost of unreimbursed Treasury services

47

31

Assessments by Board
Board expenses
Cost of currency

82
171

84
164

Other distributions
Dividends paid to member banks 6 .
Transfers to, or from (—), surplus1

117
174

126
65

17,739

17,356

EQUALS

Payments to U.S. Treasury
1. See table D . l .
2. Net of reimbursements due from the U.S. Treasury
and other government agencies.
3. Reflects reduction of$69.5 million in I988and$49.2
million in 1987 in credits for net periodic pension cost.
4. This account is the same as that reported under the
same name in the table "Income and Expenses of the
Federal Reserve Banks," in the Statistical Tables section of
the Board's Annual Report and includes gains and losses on
foreign exchange transactions due primarily to revaluations
at market exchange rates, gains and losses on sales of U. S.




government securities, and miscellaneous gains and losses.
5. This account reflects the cost of services provided to
the U.S. Treasury that are reimbursable under agreements
with the Treasury and for which reimbursement is not
anticipated.
6. The Federal Reserve Act requires the Federal
Reserve to pay dividends to member banks at the rate of 6
percent of paid-in capital.
7. Each year the Federal Reserve transfers to its surplus
account an amount sufficient to equate surplus to paid-in
capital to provide a reserve against losses.

53

Appendix E

Federal Reserve System Audits
The Federal Reserve System as a whole,
as well as the Board of Governors and
each of the Reserve Banks taken separately, are all subject to a variety of audits
and reviews. At each Federal Reserve
Bank, a full-time staff of auditors under
the direction of a general auditor reports
directly to the Bank's board of directors.
The Board's Division of Federal Reserve
Bank Operations, acting on behalf of the
Board of Governors, regularly audits the
financial operations of each of the Banks
and periodically reviews all other Bank
operations. The Board itself is reviewed
by its own staff of auditors and operations
reviewers; the responsibility for these
internal reviews at the Board was consolidated in 1987 by the creation of the Office
of the Inspector General. In addition, an
independent auditor annually examines

the fairness of the Board's financial
statements and its compliance with the
laws and regulations affecting those
statements.
The 1978 passage of the Federal Banking Agency Audit Act (Public Law
95-320) brought most of the operations
of the Federal Reserve System under the
purview of the General Accounting Office
(GAO). The GAO, which currently has
16 projects in various stages of completion, since 1979 has completed 49 reports
on selected aspects of Federal Reserve
operations (see tables E. 1 and E.2). The
GAO has also involved the Federal
Reserve in about 60 other reviews not
directly related to the System and has
terminated 29 others before completion.
The reports are available directly from
the GAO.

Table E.l
Active GAO Projects Related to the Federal Reserve System
Subject
Conflicts of interest
Food stamp redemption process
Food stamp program within the Federal Reserve banking system
Merging federal deposit insurance funds
Federal Reserve pricing of check clearing services
High-yield bond study
Government-in-the-Sunshine Act
Bank failures in 1987
Handling troubled financial institutions
Quality of U.S. monthly trade statistics
Clearance and settlement in stock, options and futures markets
Electronic funds transfer systems
International coordination of securities regulation
Food stamp program
CFTC reauthorization
Proposals for dealing with the international debt crisis




Date initiated
5/1/86
5/7/86
7/22/87
8/17/87
8/19/87
8/19/87
9/17/87
2/22/88
3/14/88
3/23/88
5/25/88
7/15/88
8/16/88
8/24/88
9/28/88
10/27/88

54

Federal Reserve System Audits

Table E. 2
Completed GAO Reports Related to the Federal Reserve System
Report
Comparing Policies and Procedures
of the Three Bank Regulatory Agencies
Federal Systems Not Designed to Collect Data
on All Foreign Investments in U.S. Depository Institutions...
The Federal Reserve Should Assure Compliance
with the 1970 Bank Holding Company Act Amendments
Internal Auditing Can Be Strengthened in the
Federal Reserve System
Despite Positive Effects, Further Foreign Acquisitions
of U.S. Banks Should be Limited
until Policy Conflicts are Fully Addressed
Federal Examinations of Financial Institutions:
Issues That Need to be Resolved
Examinations of Financial Institutions
Do Not Assure Compliance with Consumer Credit Laws
Disappointing Progress in Improving Systems
for Resolving Billions in Audit Findings
Federal Reserve Security over Currency
Transportation is Adequate
The Federal Structure for Examining
Financial Institutions Can be Improved
Response to Questions Bearing on the Feasibility
of Closing the Federal Banks
Bank Secrecy Act Reporting Requirements Have Not Yet Met
Expectations, Suggesting Need for Amendment
Federal Reserve Could Improve the Efficiency
of Bank Holding Company Inspections
Information on Selected Aspects of
Federal Reserve System Expenditures
Federal Review of Intrastate Branching Can Be Reduced
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
An Analysis of Fiscal and Monetary Policies
Bank Examination for Country Risk
and International Lending
Credit Insurance Disclosure Provisions
of the Truth-in-Lending Act Consistently
Enforced Except When Decisions Appealed
Financial Institutions Regulatory Agencies Can
Make Better Use of Consumer Complaint Information
Unauthorized Disclosure of the Federal Reserve's
Monetary Policy Decision
Federal Financial Institutions Examination Council Has Made
Limited Progress toward Accomplishing Its Mission
Control Improvements Needed in Accounting for Treasury
Securities at the Federal Reserve Bank of New York
Statutory Requirements for Examining
International Banking Institutions Need Attention
Supervisory Examinations of International Banking
Facilities Need to Be Improved
An Examination of Concerns Expressed about the Federal
Reserve's Pricing of Check Clearing Activities




Number

Date

GGD-79-27

3/29/79

GGD-79-42

6/19/79

GGD-80-21

3/12/80

GGD-80-59

8/8/80

GGD-80-66

8/26/80

GGD-81-12

1/6/81

GGD-81-13

1/21/81

AFMD-81-27

1/23/81

GGD-81-27

2/23/81

GGD-81-21

4/24/81

GGD-81-49

5/21/81

GGD-81-80

7/23/81

GGD-81-79

8/18/81

GGD-82-33
GGD-82-31

2/12/82
2/24/82

GGD-82-21
GGD-82-36

2/26/82
4/9/82

GGD-82-22

5/7/82

GGD-82-57
GGD-82-53

6/1/82
8/16/82

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-85-9A

1/14/85

Federal Reserve System Audits
Table E.2 — Continued
Report
Information on Independent Public Accountant Audits
of Financial Institutions
An Analysis of Two Types of Pooled Investment Funds
How the Markets Developed and How They Are Regulated
U.S. Banking Supervision and International
Supervisory Principles
Financial Institution Regulators' Compliance Examination
The Market's Structure, Risks, and Regulation
Dealer Views on Market Operations and Federal
Reserve Securities Transfer System
Questions About the Federal Reserve's Securities Transfer System
Federal Reserve Board Opposition to Credit Card Interest Rate Limits
Insulating Banks From the Potential Risk of Expanded Activities
The Federal Reserve Response Regarding its
Market-Making Standard
Change in Fees and Deposit Account Interest
Rates Since Deregulation
An Examination of Views Expressed about Access to Brokers' Services ..
Issues Related to Repeal of the Glass-Steagall Act
Supervision of Overseas Lending is Inadequate
Administrative Expenses at FHLBB and FRB for 1985 and 1986
Trends in Commercial Bank Performance, December 1976-June 1987 . . .
Lending to Troubled Sectors
Government Check Cashing Issues




Number

Date

GGD-84-44FS
GGD-86-63
GGD-86-26

4/21/86
5/12/86
5/15/86

NSIAD-86-93
GGD-86-94

7/25/86
8/1/86

GGD-86-80BR

8/20/86

GGD-86-147FS
GGD-87-15BR
GGD-87-38BR
GGD-87-35

9/29/86
10/20/86
4/7/87
4/14/87

GGD-87-55FS

4/21/87

GGD-87-70
GGD-88-8
GGD-88-37
NSIAD-88-87
AFMD-88-33
GGD-88-106BR
GGD-88-126BR
GGD-89-12

7/13/87
12/18/87
1/22/88
5/5/88
6/15/88
7/28/88
9/26/88
10/7/88

55

57
Appendix F

Expenses and Employment
at the Federal Reserve Banks
Table F.l
Operating Expenses of the Federal Reserve Banks, by District, 1988-89
Thousands of dollars, except as noted

District
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Total, all Districts1
Special projects
Total

1988
estimate

1989
budget

Change
Amount

Percent

76,429
247,156
67,957
75,273
97,617
116,707
147,050
62,432
62,103
82,591
81,060
144,924

80,422
261,139
71,400
80,619
102,135
124,211
154,241
63,734
66,391
86,803
85,562
153,830

3,993
13,983
3,443
5,346
4,518
7,505
7,191
1,303
4,289
4,211
4,503
8,906

5.2
5.7
5.1
7.1
4.6
6.4
4.9
2.1
6.9
5.1
5.6
6.1

1,261,298

1,330,487

69,189

5.5

4,945

11,103

1,266,243

1,341,590

75,347

6.0

1. Includes $13.9 million in 1988 and $19.3 million in
1989 to implement the Expedited Funds Availability Act.

Table F.2
Employment at the Federal Reserve Banks, by District, 1988-89
Average number of personnel1

District
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Total, all Districts
Special projects
Total

1988
estimate

1989
budget

1,535
4,068
1,252
1,435
1,978
2,241
2,682
1,306
1,088
1,704
1,590
2,501
23,379




Percent

1,503
4,037
1,263
1,476
1,991
2,271
2,676
1,246
1,113
1,704
1,623
2,538

-32
-32
11
41
13
30
-6
-59
25
0
33
37

-2.1
-.8
.9
2.9
.7
1.3
-.2
-4.5
2.3
.0
2.1
1.5

23,441

62

.3

8

.4

10

35

23,389

23,476

1. See chap. 3, note 1, for definition of ANP.
2. Includes213.6ANPforANPin 1988and347.7ANP
in 1989 for implementation of the Expedited Funds
Availability Act.

Change
Amount

58

Expenses and Employment

Table F. 3
Expenses of the Federal Reserve Banks, by Operational Area, 1988-89
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
Total

1988
estimate

1989
budget

Change
Amount

Percent

88,788
187,123
842,947

95,812
201,539
884,784

7,024
14,417
41,836

7.9
7.7
5.0

142,440

148,352

5.912

4.2

1,261,298

1,330,487

69,189

5.5

405,949
352,855

432,382
374,445

26,433
21,590

6.5
6.1

MEMO 1

Support
Overhead

1. Costs of support and overhead included in expenses
by operational area. Support refers to activities, such as
data processing, whose costs can be charged to users

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

Table F. 4
Expenses of the Federal Reserve Banks
for Monetary and Economic Policy, by District, 1988-89
Thousands of dollars, except as noted
Change

1988
estimate

1989
budget

Amount

Percent

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

4,386
32,680
3,743
4,742
4.423
5,263
7,674
4,633
4,232
4,170
4,864
7,976

4,617
37,260
3,812
4,750
4,817
5,774
7,529
4,978
4,490
4,404
5,244
8,138

231
4,580
69
8
394
511
-146
345
258
234
380
162

5.3
14.0
1.8
.2
8.9
9.7
-1.9
7.4
6.1
5.6
7.8
2.0

Total

88,788

95,812

7,024

7.9

District

1. Expenses of open market trading operations, located
in the District, are $14.2 million for 1988 and $17.2
million for 1989.




59 Expenses and Employment
Table F. 5
Expenses of the Federal Reserve Banks
for Supervision and Regulation, by District, 1988-89
Thousands of dollars, except as noted

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

Change

1988
estimate

1989
budget

Amount

Percent

8,214
39,800
8,426
10,613
11,089
15,081
26,441
7,584
8,766
16,516
14,672
19,921

9,128
43,214
9,630
10,671
12,115
16,395
28,429
8,209
9,527
17,240
15,366
21,615

914
3,413
1,204
58
1,026
1,313
1,988
625
762
724
694
1,695

11.1
8.6
14.3
.5
9.3
8.7
7.5
8.2
8.7
4.4
4.7
8.5

187,123

201,539

14,417

7.7

Table F. 6
Expenses of the Federal Reserve Banks
for Services to Financial Institutions and the Public, by District, 1988-89
Thousands of dollars, except as noted
1988
estimate

1989
budget

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

57,172
142,497
38,695
48,260
73,379
86,157
97,064
42,678
44,524
55,256
54,954
102,314

Total

842,947

District




Change
Amount

Percent

59,406
146,652
40,527
52,596
76,356
91,458
101,907
43,173
47,534
58,211
58,076
108,887

2,235
4,155
1,832
4,336
2,978
5,302
4,844
495
3,011
2,955
3,122
6,572

3.9
2.9
4.7
9.0
4.1
6.2
5.0
1.2
6.8
5.3
5.7
6.4

884,784

41,836

5.0

60

Expenses and Employment

Table F. 7
Expenses of the Federal Reserve Banks
for Services to the U.S. Treasury and Other Government Agencies, by District, 1988-89
Thousands of dollars, except as noted

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

Change

1988
estimate

1989
budget

Amount

Percent

6,657
32,179
17,094
11,659
8,727
10,205
15,871
7,536
4,581
6,649
6,569
14,712

7,272
34,014
17,432
12,602
8,846
10,584
16,376
7,374
4,839
6,948
6,876
15,189

614
1,835
338
943
120
379
505
-162
258
298
307
477

9.2
5.7
2.0
8.1
1.4
3.7
3.2
-2.2
5.6
4.5
4.7
3.2

142,440

148,352

5,912

4.2

Table F. 8
Expenses of the Federal Reserve Banks
for Salaries of Officers and Employees, by District, 1988-89
Thousands of dollars, except as noted
Change

1988
estimate

1989
budget

Amount

Percent

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

43,947
126,457
33,820
36,896
49,253
56,677
73,353
32,847
29,097
44,389
43,081
73,772

44,930
135,442
35,358
39,390
51,540
60,168
76,117
32,969
31,410
46,731
46,350
78,853

984
8,985
1,539
2,495
2,287
3,491
2,764
122
2,312
2,342
3,270
5,081

2.2
7.1
4.6
6.8
4.6
6.2
3.8
.4
7.9
5.3
7.6
6.9

Total

643,587

679,257

35,670

5.5

District




61 Expenses and Employment
Table F. 9
Factors in the 1988-89 Change in Salaries
of Officers and Employees of the Federal Reserve Banks, by District
Percentage points
Merit
adjustment

Structure
adjustment

Promotion
and reclassification

Change in
staffing

Turnover
and lag'

Overtime

Other

Total
change

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

5.5
4.4
4.7
4.4
4.7
4.9
3.6
4.7
4.4
4.5
4.8
5.0

.2
.0
.1
.1
.0
.4
.0
.0
.1
.3
.1
.0

1.6
.8
.6
.8
1.8
1.3
1.1
.4
1.3
1.6
.7
.4

1.6
2.6
2.4
3.2
-.7
1.1
-.3
-3.9
2.0
.3
2.2
1.9

-2.0
-1.0
-2.4
-1.7
-.7
-1.1
-.1
-.5
-.2
-1.2
-.6
-.1

-1.5
-.1
-.8
.6
-.4
-.4
-.7
-.4
.4
-.2
.2
-.3

.0
.4
.0
.5
.0
.0
.2
.0
.0
.0
.2
.0

2.2
7.1
4.6
6.8
4.6
6.2
3.8
.4
7.9
5.3
7.6
6.9

Total

4.6

.1

1.0

1.0

-.9

-.4

.1

5.5

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 F. 10
Capital Outlays of the Federal Reserve Banks, by District, 1988-89
Thousands of dollars, except as noted

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




1988
estimate

1989
budget

8,646
26,834
5,041
11,211
26.350
15,784
62,872
5,086
4,964
6,183
17,663
12,674
203,308

Change
Amount

Percent

8,050
42,999
5,800
16,813
17,696
18,795
19,879
9,690
24,171
17,859
37,922
12,000

-596
16,164
759
5,602
-8,654
3,011
-42,993
4,605
19,207
11,676
20,259
-675

-6.9
60.2
15.1
50.0
-32.8
19.1
-68.4
90.5
386.9
188.8
114.7
-5.3

231,673

28,365

14.0

62

Expenses and Employment

Table F. 11
Capital Outlays of the Federal Reserve Banks, by District and Class of Outlay, 1988-89 1
Thousands of dollars

District
and year

Boston
1988
1989

Data processing and
data communication
equipment

Furniture,
furnishings, and
fixtures

Other
equipment

Land
and
other
real
estate

Buildings

Building
machinery
and
equipment

Leasehold
improvements

Total

5,876
3,615

198
1,151

615
409

0
0

1,151
1,928

807
113

0
835

8,646
8,050

14,553
20,780

2,055
2,869

3,847
1,499

1,580
10,734

2,639
6,302

85
571

2,076
244

26,834
42,999

Philadelphia
1988
1989

2,554
2,654

151
45

402
959

0
0

15
0

1,315
1,390

604
753

5,041
5,800

Cleveland
1988
1989

7,564
7,801

1,117
945

701
1,352

0
0

1,340
4,689

490
2,026

0
0

11,210
16,813

Richmond
1988
1989

6,251
7,834

233
799

1,117
1,810

25
275

18,619
6,836

105
142

0
0

26,350
17,696

Atlanta
1988
1989

7,996
9,420

2,726
4,457

1,015
2,868

142
0

2,667
1,452

1,063
598

176
0

15,784
18,795

Chicago
1988
1989

16,523
8,841

1,872
1,729

1,288
1,118

0
0

40,171
7,224

2,811
320

207
648

62,872
19,879

St. Louis
1988
1989

2,597
1,606

55
292

548
325

0
0

1,515
6,483

371
985

0
0

5,086
9,690

Minneapolis
1988
1989

2,720
7,164

72
1,394

444
544

263
0

1,264
8,479

200
0

0
6,591

4,964
24,171

Kansas City
1988
1989

2,208
9,481

687
924

1,127
1,214

108
382

1,423
1,915

630
3,944

0
0

6,183
17,859

10,769
4,014

387
90

312
604

144
22,953

4,374
7,934

1,652
2,292

25
35

17,663
37,922

6,794
4,429

858
927

1,685
1,915

0
75

3,000
3,722

150
931

188
0

12,674
.12,000

86,404
87,638

10,410
15,622

13,100
14,615

2,262
34,419

78,178
56,964

9,678
13,311

3,275
9,105

203,308
231,673

New York
1988
1989

Dallas
1988
1989
San Francisco
1988
1989
Total
1988
1989

1. For 1988, estimate; for 1989, budget.




63 Expenses and Employment
Table F. 12
Budget Performance of the Federal Reserve Banks,
Operating Expenses, by District, 19881
Thousands of dollars, except as noted

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

1988
budget

1988
estimate

Change
Amount

Percent

74,547
246,796
67,568
74,737
96,303
116,474
147,557
63,334
62,221
82,027
80,371
145,707

76,429
247,156
67,957
75,273
97,617
116,707
147,050
62,432
62,103
82,591
81,060
144,924

1,882
359
389
537
1,315
233
-507
-903
-118
565
689
-783

2.5
.1
.6
.7
1.4
.2
-.3
-1.4
-.2
.7
.9
-.5

1,257,642

1,261,298

3,656

.3

1. Includes expenses associated with the Expedited
Funds Availability Act.

Table F. 13
Budget Performance of the Federal Reserve Banks,
Employment, by District, 19881
Average number of personnel, except as noted2

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

1988
budget

1988
estimate

1,523
4,016
1,249
1,406
1,959
2,210
2,684
1,333
1,086
1,681
1,587
2,516
23,250

1. Includes personnel associated with the Expedited
Funds Availability Act.
2. See chap. 3, note 1, for the definition of ANP.




Change
Amount

Percent

1,535
4,068
1,252
1,435
1,978
2,241
2,682
1,306
1,088
1,704
1,590
2,501

12
52
3
29
19
31
-2
-27
2
23
3
-15

.8
2.2
.6
2.5
2.0
2.1
.3
-.6
1.1
3.6
.5
.8

23,379

129

1.5

64

Expenses and Employment

Table F. 14
Expenses of the Federal Reserve Banks, by Operational Area, 1984-89
Thousands of dollars, except as noted

Year

Monetary
and
economic
policy

Supervision
and
regulation

Services to
financial
institutions
and the
public

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

Total

99,351
90,945
90,570
86,484
88,788
95,812

140,690
151,991
163,915
170,428
187,123
201,539

701,453
742,896
770,016
799,227
842,945
884,783

126,307
131,544
136,789
135,693
142,440
148,352

1,067,802
1,117,377
1,161,290
1,191,832
1,261,295
1,330,487

-.7

7.5

4.8

3.3

4.5

1984
1985
1986
1987
1988 estimate
1989 budget
Average annual
change, percent

Table F. 15
Employment at the Federal Reserve Banks, by Operational Area, 1984-89
Average number of personnel, except as noted1

Year

1984
1985
1986
1987
1988 estimate
1989 budget
Average annual
change, percent

Monetary
and
economic
policy

Supervision
and
regulation

Services to
financial
institutions
and the
public

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

Support2

Overhead2

Total

826
816
791
776
768
786

1,885
1,912
2,087
2,148
2,223
2,250

8,395
8,754
8,799
8,777
9,014
9,049

1,798
1,781
1,819
1,837
1,844
1,805

4,340
4,398
4,469
4,452
4,565
4,597

5,424
5,323
5,274
5,025
4,964
4,954

22,668
22,984
23,239
23,015
23,379
23,441

-1.0

3.6

1.5

.1

1.2

-1.8

.7

1. See chap. 3, note 1, for definition of ANP.
2. See table F.3, note 1, for definition.




65

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

• • I

Hth„.
Minneapolis^
Detroit
Ckicagt

Kansas City

I r><hXfitfft
tMigj

cJ&ca
Iftirlol'V

<»te/es

*All""
®

>

Dallas®
HoustonJ

Mi'"'

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 1-2,000-0289 C