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Board of Governors of the Federal Reserve System




1990-91

February 1991
This publication is available from Publications Services, Board of Governors of the Federal
Reserve System, Washington, DC 20551.




Contents
1

INTRODUCTION

Parti

The 1991 Budgets
Chapter 1

5
5
7
8
8

FEDERAL RESERVE SYSTEM
Net Expenses
Trends in Expenses and Employment
Operational Areas
1991 Budget Initiatives

11
11
11
12
15
15
16
19

BOARD OF GOVERNORS
Major Initiatives
Extraordinary Items
Operational Areas
Objects of Expense
Capital Outlays
Ten-Year Trend
Budget of the Office of Inspector General

21
21
23
24
28
29
30
31
31

FEDERAL RESERVE BANKS
Major Initiatives
1991 Budget Objective
Operational Areas
Objects of Expense
Capital Outlays
Trends in Expenses and Employment
Volume and Unit Costs
1990 Budget Performance

Chapter 2

Chapter 3

Part II

Special Analysis

Chapter 4
35
35
36
36
37
38

THE FEDERAL RESERVE BANK
SUPERVISION ENHANCEMENT PROGRAM
Intensified Frequency of Examinations and Inspections
and Cooperation with State Agencies
Communication with Management and Boards of Directors
Examiner Training
Prudential Supervision Policies
Resource Allocations




Appendixes
Appendix A
41
41
41
42
43

MISSION AND OPERATIONAL AREAS
OF THE FEDERAL RESERVE SYSTEM
Monetary and Economic Policy
Services to the U. S. Treasury and Other Government Agencies
Services to Financial Institutions and the Public
Supervision and Regulation

Appendix B
45
45
46

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

Appendix C
49
49
51
52
53

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

Appendix D
55

SOURCES AND USES OF FUNDS

Appendix E
57
57
59

FEDERAL RESERVE SYSTEM AUDITS
General Accounting Office
Office of Inspector General

Appendix F
61

EXPENSES AND EMPLOYMENT
AT THE FEDERAL RESERVE BANKS

68

MAPS OF THE FEDERAL RESERVE SYSTEM




1

Introduction
This report describes the budgeted expenses of the Federal Reserve System for
1991 and compares them with expenses
for 1989 and 1990. For 1991, the Federal
Reserve System has budgeted net operating expenses of $675.4 million. During
this year, the System expects to realize
$779.4 million, or 48 percent of its total
operating expenses, from its priced services. Total operating expenses are budgeted at $1,613.6 million, an increase
of 6.2 percent over 1990 estimated
expenses.
This report discusses the System's
Banking and Supervision Enhancement
Program, which was initiated in 1985.
The goals of this program have been to
help identify banking problems early at
state member banks and bank holding
companies through examinations and
inspections; to help correct these problems; and to aid in preventing further
problems by strengthening prudential
standards. Besides these basic objectives,
the goals of the program have been to
augment the size and improve the training
of supervisory staff and to promote
greater coordination with other federal
and state supervisory agencies. The
special analysis in part II outlines this
program in greater detail.
The Federal Reserve System consists
of the Board of Governors in Washington,
D.C., the twelve Federal Reserve Banks
with their twenty-five Branches, the Federal Open Market Committee, and three
advisory groups—the Federal Advisory
Council, the Consumer Advisory Council, and the Thrift Institutions Advisory
Council.
The System was created by the Federal
Reserve Act, passed by the Congress in
1913 to establish a safer and more flexible



monetary and banking system. After the
inception of the Federal Reserve System,
it became clear that these original purposes were part of broader national economic andfinancialobjectives. Stability
and growth of the economy, stability in
the purchasing power of the dollar, and
reasonable balance in transactions with
foreign countries have come to be recognized as primary objectives of governmental economic policy. Over the years,
such objectives have been articulated by
the Congress in legislation giving the
Federal Reserve more authority and
responsibility.
As the nation's central bank, the Federal Reserve, through its conduct of
monetary policy, attempts to ensure
growth of the economy consistent with
price stability. As the nation's lender of
last resort, the Federal Reserve also has
the responsibility to forestall national
liquidity crises.
Because a soundfinancialstructure is
essential to an effective monetary policy
and a growing and prosperous economy,
the Congress has entrusted the Federal
Reserve with a variety of bank supervisory and regulatory functions. Among
other things, the Federal Reserve administers the laws that regulate all bank
holding companies; it supervises statechartered banks that are members of the
Federal Reserve System; it regulates the
foreign activities of U.S. banks and the
U.S. activities of foreign banks; and it
establishes rules to ensure that consumers
are informed adequately and treated fairly
in credit transactions.
The Federal Reserve System also plays
a major role in the nation's payments
mechanism. Federal Reserve Banks distribute currency and coin, provide both

2

Annual Report: Budget Review, 1989-90

wire and automated clearinghouse transfers of funds and securities, and process
32 percent of all domestic checks. The
Federal Reserve serves as thefiscalagent
for the U.S. Treasury and provides a
variety of otherfinancialservices for the
Treasury and other government agencies.
To carry out these responsibilities in
1990, the Federal Reserve System spent
an estimated $1.5 billion and earned
an estimated $905 million in revenue
from priced services, reimbursements,
and other income, for a 1990 total of
$614 million in net operating expenses.
The major source of Federal Reserve
income is earnings on the portfolio of
U.S. government securities in the System
Open Market Account, estimated at $20
billion in 1990. The System uses purchases and sales from this portfolio to
implement monetary policy. Gains on
foreign exchange transactions approximated $2.2 billion.
Each year the Federal Reserve returns
to the U. S. Treasury its earnings in excess
of expenses, dividends, and surplus —in
1990, an estimated $23.6 billion. These
earnings are treated as receipts in the
U.S. budget accounting system; projections of these earnings by the Office of
Management and Budget appear in the
U.S. budget.
Part I of this report discusses Federal
Reserve budgeted expenses for 1991 for
the System as a whole and for the Board
of Governors and the Reserve Banks
taken separately. Part II is a special
analysis of changes in the Federal Reserve's supervision and regulation program. 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, a complete discussion of
the System's budget, is a companion to
the Board's 77th Annual Report, 1990.

That document covers activities and
initiatives of the Federal Reserve System
during the year.
•

Parti
The 1991 Budgets




5

Chapter 1

Federal Reserve System
For 1991, the Federal Reserve System
has budgeted net operating expenses of
$675.4 million. It expects to realize
$779.4 million, or 48 percent of total
budgeted operating expenses, from revenues for priced services. Total operating
expenses are budgeted at $1,613.6 million, an increase of 6.2 percent over 1990
estimated expenses. The budgeted operating expenses of the System comprise
those of the Reserve Banks, $1,501.0
million, and the Board of Governors,
$112.6 million (tables 1.1 and 1.2).
Not included in these costs are special
projects, budgeted at $7.6 million for
1991, up from $6.6 million estimated for
1990.1 Also excluded is the budgeted cost
of currency at $259.2 million for 1991,
an increase of 36.3 percent from the
estimated 1990 cost of $190.1 million.2
When special projects and the cost of
currency are added to operating expenses, the Reserve Banks account for
79.8 percent of the total; the Board,
6.0 percent; special projects, 0.4 percent;
and currency, 13.8 percent (chart 1.1).
This distribution of expenses is similar to
that in 1990.

Net Expenses
The System expects to recover 58 percent
of the expenses it incurs during 1991.
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, the net expenses of the System
of $675.4 million show an increase of
10.1 percent over net System operating
expenses for 1990.
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
of float and the return on capital that
would have been provided and the taxes

Chart 1.1
Distribution of Expenses of the
Federal Reserve System, 19911
1. As research and development efforts, special
projects are separate from the continuing operations
of the System and, therefore, are not included in
System operating expenses. These relatively costly,
short- term projects are expected to benefit both the
System and the banking industry as a whole. A
description of the special projects for 1991 appears
in appendix C.
2. The Federal Reserve bears the cost associated
with the printing of new currency at the Bureau of
Engraving and Printing. Because this cost is
determined largely by public demand for new currency, it is not included in Federal Reserve
operating expenses. See appendix C.



Special Projects, 0.4%
Currency, 13.8%
-Board of Governors, 6.0%

Reserve Banks, 79.8%
1. See text notes 1 and 2.

6

Annual Report: Budget Review, 1989-90

that would have been paid had a commercial entity in the private sector furnished
the services. The revenue from priced
services is detailed in table 1.3; the
constraint imposed on Federal Reserve
budgets by the need to keep such services
competitive and the calculation of fees
are discussed in appendix C. All sources
and uses of funds are presented in appendix D; the audits of the System are listed
in appendix E.

The category "other income" in table
1.2 includes fees from services such as
the transfer of U.S. Treasury book-entry
securities in the secondary market, the
settlement of such transfers among depository institutions, and wire transfer of
funds between a depository institution
and the Treasury.
Claims for reimbursement represent
the expenses incurred by Reserve Banks
in providing fiscal agency services to the

Table 1.1
Operating Expenses, Special Projects, and Cost of Currency
of the Federal Reserve System, 1989-911
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
Special projects4
Currency5

Percent change

1989
actual

1990
estimate

1991
budget

1,350.5
851.3
499.2

1,414.6
901.5
513.1

1,501.0
969.1
531.8

4.7
5.9
2.8

6.1
7.5
3.7

96.0
70.2
25.8

104.4
79.0
25.4

112.6
86.0
26.6

8.8
12.5
-1.5

7.9
8.9
4.7

1,446.5
921.5
525.0

1,519.0
980.5
538.5

1,613.6
1,055.1
558.5

5.0
6.4
2.6

6.2
7.6
3.7

9.0

36.3

7.5

6.6

7.6

174.4

190.1

259.2

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

1989-90

1990-91

3. Includes expenses ofthe Office of Inspector General,
For detailed information, see chapter 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, 1989-91
Millions of dollars, except as noted

Item
Total System operating expenses

Percent change

1989
actual

1990
estimate

1991
budget

1,446.5

1,519.0

1,613.6

5.0

6.2

718.7
18.9
127.1

754.9
18.3
132.2

779.4
17.9
140.9

5.0
-3.2
4.1

3.2
-2.2
6.5

613.6

675.4

5.5

10.1

1989-90

1990-91

LESS

Revenue from priced services
Other income
Claims for reimbursement1
EQUALS

Net System operating expenses

581.8

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

affected System expenses and employment. By extending reserve requirements
to all nonmember banks and thrift instituMillions of dollars
tions, it required the Federal Reserve to
1989
1990
1991
Service
establish new systems for collecting data
actual estimate budget
and maintaining deposit accounts. The
Funds transfer and
MCA also extended access to Federal
80.2
net settlement
77.6
82.6
Automated clearinghouse ..
49.5
52.8
57.7
Reserve services to all depository instituCommercial check
580.3
549.3
596.9
tions. Accordingly, System employment
Book-entry securities
10.4
10.8
11.2
5.4
6.0
Definitive securities
4.9
rose significantly during 1980 and 1981.
Noncash collection
10.6
11.3
10.5
Cash services
14.7
14.6
15.6
From 1982, when the transition to the
requirement of the MCA was completed,
718.7
754.9
779.4
Total
through 1984, System expenses remained
U.S. Treasury or to other government essentially flat when adjusted for inflation, and employment declined. In 1985,
agencies and for which the agencies have
the Federal Reserve increased the staff in
agreed to reimburse the Federal Reserve.
a pronounced effort to strengthen supervision and regulation of member banks
Trends in Expenses and
and bank holding companies. The System
Employment
was able partially to offset the increase in
From expenditures in 1981 to the level staff through reductions in employment
budgeted for 1991, the expenses of the in other areas, primarily in services to
Federal Reserve System have increased financial institutions and the public and in
an average of 5.5 percent per year in support and overhead.
current dollars and 3.8 percent when
In 1988, the Expedited Funds Availadjusted for inflation (chart 1.2). Over ability Act (title VI of Public Law 100-86,
the same ten-year period, System em- the Competitive Equality Banking Act of
ployment has increased by only 114 1987) became effective. The act requires
(chart 1.3).
the Federal Reserve to issue regulations
Over the past decade, the Monetary to ensure the prompt availability of funds
Control Act of 1980 (MCA) has greatly and the expeditious return of checks.
Table 1.3
Revenue from Priced Services, 1989-91

Chart 1.2
Operating Expenses of the Federal
Reserve System, 1981-911
Billions of dollars

Chart 1.3
Employment in the Federal Reserve
System, 1981-911
Thousands of persons

1.5
26
1.3

1.1

I
1. For 1990, estimate; for 1991, budget.
2. Calculated with the GNP price deflator.




1981

I

I

I

I

I

I

I

1986

1. For 1989, estimate; for 1990, budget.

l

i
1991

8

Annual Report: Budget Review, 1989-90

Increases in staff throughout the System
in 1988 and 1989 resulted from implementing the provisions of this legislation.
In 1990, several major factors influenced expenses and staffing levels in the
System. The System continued to expand
nationwide the Regional Delivery System
to centralize the issuance of over-thecounter savings bonds. An increase in the
number and complexity of examinations,
greater attention to problem institutions,
and the passage of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) caused
spending on bank supervision to expand.

cial institutions and the public, and
supervision and regulation (table 1.4).
Costs for support and overhead are
redistributed or allocated to these four
areas. Only the Reserve Banks perform
services for 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).
1991 Budget Initiatives

Several major initiatives will continue or
will begin in 1991. The move toward
nationwide implementation of the ReOperational Areas
gional Delivery System for savings bonds
Federal Reserve expenses are classified continues in 1991, with full implementafor budgeting purposes according to the tion scheduled for 1993.
four major operational areas of the
The System will continue to improve
System: monetary and economic policy, facilities at several head office and branch
services to the U.S. Treasury and other buildings. Recently completed projects
government agencies, services to finan- will be subject to real estate tax increases.
Table 1.4
Operating Expenses of the Federal Reserve System, by Operational Area, 1989-911
Millions of dollars, except as noted
Operational area
and entity

1989
actual

1990
estimate

1991
budget

Percent change
1989-90

1990-91

Monetary and economic policy
Reserve Banks
Board of Governors

156.9
93.6
63.3

167.1
99.7
67.4

177.7
107.5
70.2

6.5
6.5
6.5

6.3
7.9
4.2

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

145.5

156.1

167.2

7.3

7.1

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

919.3
916.3
3.0

947.6
944.4
3.2

995.7
992.1
3.6

3.1
3.1
6.7

5.1
5.0
12.5

Supervision and regulation
Reserve Banks
Board of Governors

224.8
195.1
29.7

248.2
214.4
33.8

273.0
234.2
38.8

10.4
9.9
13.8

10.0
9.2
14.8

1,446.5
1,350.5
96.0

1,519.0
1,414.6
104.4

1,613.6
1,501.0
112.6

5.0
4.7
8.8

6.2
6.1
7.9

Total
Reserve Banks
Board of Governors3

1. Operating expenses reflect all allocations for support
and overhead and exclude capital oudays. The operational
area unique to the Board of Governors, System policy
direction and oversight, which is shown separately in
chapter 2, has been allocated across the operational areas
shown above. As a result, the numbers in chapter 2 for the




operational areas are not the same as the ones listed in this
table.
2. Reserve Banks only. The Board of Governors does
not provide these services.
3. Includes expenses of the Office of Inspector General.

Federal Reserve System

Automation projects related to contingency, expansion of computer capacity,
and office automation will continue.
Several offices that upgraded CPUs in
1990 will incur higher operating expenses.
The upward pressures on expenses and
staffing associated with supervision and
regulation activities will carry over from
1990 into 1991.
Finally, in 1991 several Reserve Banks
will upgrade cash operations and software to improve the efficiency of check
processing.
Besides these initiatives, the continued
rise in health care costs and an increase in
the matching contribution under the thrift
plan for System employees have contributed to the 1991 budget increase.




9

11

Chapter 2

Board of Governors
The 1991 budget of the Board of Governors totals $110.2 million for its four
operational areas, $0.6 million for extraordinary items, and $1.8 million for
the Office of Inspector General (OIG).
The Board authorized 1,557 positions for
its operational areas and 19 for the OIG.
The authorized positions in the operational areas increased by three despite
reductions in support and overhead
largely because of increases in supervision and regulation and in System policy
direction and oversight. These increases
resulted from continued growth in workload due to problems in the financial
industry, continuing implementation of
the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
(FIRREA), and changes occurring in the
payments system mechanism. The number of positions authorized for the OIG,
which expanded late in 1990 to handle an
increase in the scope and depth of coverage it gives to Board operations, has not
changed in the 1991 budget.
Beginning in 1990, the OIG budget
was approved separately in a more formal
recognition of the OIG's budgetary independence. In the analysis that follows,
the 1988,1989, and 1990 expenses of the
OIG have been removed from the Board's
regular operating expenses to ensure the
consistent presentation of data.
Major Initiatives
The proposed budget contains sufficient
funding to meet the major Board objectives in each division, including expanding the Board's oversight of the
condition of the nation'sfinancialinstitutions; implementing risk-based capital
standards; supporting FIRREA; improv


ing payments system operations while
reducing payments system risk; continuing to invest in productivity initiatives,
including office automation and records
management; developing the National
Information Center to provide relevant banking-structure data; and maintaining a safe and effective working
environment.
Funding for initiatives amounted to
approximately half the level that the divisions requested. Initiatives to perform
additional electronic-data-processing audits and to improve automation, the
management of distributed processing,
and the appearance of facilities could not
be fully funded within the level of funding
acceptable to the Board.
Extraordinary Items
As of 1991, the costs of extraordinary
items are no longer subsumed under the
Board's basic operating accounts. Despite
good reasons for the practice, the Board's
funding of certain System-related expenses, coupled with the costs of items
such as large interagency surveys, has
created undue swings in the budget and
has resulted in competition for funds
between these initiatives and the requirements of the Board's basic mission. It has
also distorted the analyses of the Board's
stewardship of resources in conducting
its own operations. Therefore, this budget presents three such items separately:
a survey of System officers' salaries, an
audit by an outside firm of one Reserve
Bank, and Board participation in a Census
Bureau survey of plant capacity.
As part of a System project to ensure
appropriate levels of compensation, a
periodic survey of officer salaries is

12

Annual Report: Budget Review, 1989-90

conducted. According to the schedule,
the next survey is to be accomplished in
1991 and will review the salaries of
positions in industry similar to those of
officers at the twelve Reserve Banks and
the Board to promote consistency with
local markets.
The second project will be an audit of
one Reserve Bank by a public accounting
firm. The Financial Examinations Program in the Division of Reserve Bank
Operations and Payment Systems will
audit the remaining Banks as usual. The
objective of the outside audit is to assure
the Board, through an independent audi-

tor, that controls and procedures are
being maintained in accordance with
industry standards.
The final project is to participate in a
survey of plant capacity being conducted
by the Census Bureau. This effort reflects
the Board's interest in the economic data
to be collected.
Operational Areas
The Board's activities fall into four
broadly defined operational areas: monetary and economic policy, supervision
and regulation of financial institutions,

Table 2.1
Expenses of the Board of Governors for Operational Areas
and Office of Inspector General, 1989-91'
Thousands of dollars, except as noted

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

1989
actual

1990
estimate

1991
budget

50,200
23,532

52,000
28,946

54,242
32,781

1989-90 change

1990-91 change

Amount

Percent

Amount

Percent

1,800
5,414

3.6
23.0

2,242
3,835

4.3
13.2

2,462

2,626

2,872

164

6.7

246

9.4

19,099

19,509

20,320

410

2.1

811

4.2

Total, operational areas ...

95,293

103,081

110,215

7,788

8.2

7,134

6.9

Office of Inspector General..

718

1,382

1,773

664

92.5

391

28.3

1. Operating expenses include allocations for support and overhead.

Table 2.2
Positions Authorized at the Board of Governors for Operational Areas, Support and Overhead,
and Office of Inspector General, 1989-91
Type of expense

1988
actual

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

1990
budget

1989-90 change
Amount

398
264

399
277

399
285

1
13

20

20

22

0

Percent

1990-91 change
Amount

Percent

.3
4.9

0
8

0
2.9

0

2

0

152

155

153

3

2.0

-2

-1.3

722

703

698

-19

-2.6

-15

-.7

1,556

1,554

1,557

-2

-.1

3

9

19

19

111.1

0

Support and overhead
Total

1989
estimate

Office of Inspector General..




10

.2
0

Board of Governors

services to financial institutions and the
public, and System policy direction and
oversight (see also chapter 1 and appendix A). The costs include those for
support and overhead, allocated to each
operational area according to its proportion of total direct expenses. Tables 2.1
and 2.2 display respectively the operating
expenses and the number of authorized
positions in each of the operational areas
for 1989-91.
For 1991, the Board of Governors has
budgeted operating expenses of $110.2
million, an increase of $7.1 million, or
6.9 percent, over estimated expenses for
1990. This amount does not include the
budget for the Office of Inspector General or the extraordinary items.
The growth in Board expenses between
1990 and 1991 is less than the 1989-90
increase. The 1991 budget increase is
influenced by the need to strengthen
supervision and regulation further, to
raise the level of salaries to remain
competitive in the marketplace, and to
meet increased expenses for health insurance, Medicare, and the Board's thrift
plan.

13

Besides maintaining the quality of economic analyses and forecasts, this budget
continues major commitments of resources to implement FIRREA, develop
the National Information Center (NIC),
and support analyses of changes in the
economy and the financial system.
The enactment of FIRREA has required substantial resources on issues
relating to deposit insurance, monitoring
of the savings and loan industry, and
support to the Oversight Board of the
Resolution Trust Corporation.
Development of the NIC, discussed in
detail under supervision and regulation,
will continue to require resources from
the monetary and economic policy area.
During 1990, requirements and plans for
modifying current software to gain access
to the NIC database will be finalized, and
some software will be modified.
The economic and financial situation
in 1991 will demand particularly close
monitoring and accurate analysis in
support of monetary policy. At the same
time, the structure and regulation of the
nation's financial system are under review, and the research divisions are
analyzing the policy issues. Such support
and policy analyses are also important in
Monetary and Economic Policy
the Board's efforts to improve payments
Under its monetary and economic policy system operations and reduce payments
function, the Board monitors and ana- system risk.
lyzes developments in the money and
The growth of expenses in the monecredit markets, sets reserve require- tary and economic policy area is held
ments, approves changes in the discount down because earlier investments in
rate, participates in the deliberations of distributed processing systems have rethe Federal Open Market Committee, duced the costs of centrally provided
and otherwise manages the nation's mon- automation services. The successful auetary policy. This function is expected to tomation program has also limited the
cost $54.2 million in 1991, an increase of growth of costs by allowing the existing
$2.2 million, or 4.3 percent, over 1990. staff to carry the increasing workload.
Most of this change results from the
increase in pay and benefits and the 1991
component of the automation plan sup- Supervision and Regulation
porting this function. Despite continuing Supervision of financial institutions ingrowth in the workload, no new positions cludes reviews of examination and inare budgeted for this function.
spection reports on state member banks



14

Annual Report: Budget Review, 1989-90

prepared by the Reserve Banks, special
studies related to international applications, the direction of enforcement actions, and the regulation of trust activities. Regulation includes the formulation
of regulations; the oversight of mergers,
foreign banking activities, and compliance with consumer regulations; and the
regulation of securities credit.
The 1991 budget funds considerable
growth in this operational area. The
budget of $32.8 million is $3.8 million,
or 13.2 percent, greater than estimated
expenses for 1990. Eight new positions
have been added, related primarily to
development and implementation of policy, supervision of money center banks,
and increased consumer compliance.
Most of the positions are related to
FIRREA and to underlying problems
and new developments in the financial
industry.
Besides the direct cost associated with
the new positions, the budget continues
to fund the Board's share of the automation costs for the development of the
NIC. In 1988, the Board approved the
creation of the NIC to provide a database
on the structure and finances of the
nation's banks and bank holding companies. The staff has made substantial
progress since 1988 to define the requirements of the project and to develop the
database. The 1991 budget provides
funds to complete the establishment of
the NIC by May. Further efforts in this
important area will continue in 1991 as
current software is revised to operate
using the NIC database. This project, as
the only source of consolidated structure
and financial data, is needed for proper
supervision and regulation of the banking
and financial industry. It will reduce
Systemwide costs, improve the integrity
of the data, and lead to more timely and
meaningful analysis of applications,
merger requests, and other actions in a
rapidly changing environment.



The office automation networks supporting this functional area will be substantially upgraded during 1991. The
budget includes funds for improving
document storage and retrieval facilities
and database management facilities on
the network. On a much smaller scale,
the Division of Consumer and Community Affairs will also replace old and
inefficient microcomputers.
Services to Financial Institutions
and the Public
This operational area is composed of
programs supporting the payments mechanism function of the Federal Reserve
System. Its budget of $2.9 million is
$246,000, or 9.4 percent, higher than
1990 estimated expenses.
A major factor in the higher costs is the
continued emphasis on reducing risk in
the payments system and ensuring that
the payments system responds quickly
and efficiently to changes in the financial
system. The budget includes two new
positions to develop policies and procedures to reduce payments system risk by
analyzing characteristics and risks associated with national and international
payment and settlement systems.
A large project to develop software for
managing currency orders and cash shipments was completed in 1990. Although
this project will not result in operating
savings for the Board, it will yield savings
for the Reserve Banks from smaller
orders for currency and reduced costs for
transportation. The completion of this
project in 1990 limits the overall increase
in the 1991 budget.
System Policy Direction
and Oversight
This budgetary area includes resources
for supervising System and Board programs; it has been partially redefined as a

Board of Governors

result of the removal of the budget of the
Office of Inspector General. The financial
data reflect this adjustment.
The $20.3 million budget for System
policy direction and oversight in 1991 is
$811,000, or 4.2 percent, more than
estimated 1990 expenses. It has no major
increases for mission. Staffing for Reserve Bank examinations continues to
increase with the addition of an electronicdata-processing auditor, which has been
added to help ensure that internal controls
over the major automation systems of the
Reserve Banks are adequate.
The budget for this area funds the
replacement of old microcomputer equipment and some initiatives relating to the
network in the Division of Federal Reserve Bank Operations.

15

bution to the thrift plan, in the wage base
subject to social security taxes, and in the
proportion of staff covered by social
security.
For the third consecutive year, health
insurance costs have risen sharply. The
increase for 1991 is $0.8 million, or
15.7 percent. The cost of medical insurance for retirees, which has gone from
$362,000 in 1990 to $529,000 in the
1991 budget, has also had an effect. A
further cause of the increase was the
increase in the salary base subject to the
1.45 percent Medicare tax from $51,300
to $125,000.
Capital Outlays

The capital budget request is $5,131,700,
which is $1.1 million more than 1990
estimated expenditures. The budget funds
Objects of Expense
requirements in the areas of automation
In the 1991 budget, the most significant and telecommunication, facilities imincrease in expenses relates to salary. provements, and equipment replaceThe increase, $5.0 million, is signifi- ments.
cantly less than that in 1990 when the new
A major element of the capital budget
compensation program was imple- is $1.0 million to replace the analog
mented. The successful implementation telephone switching equipment with a
of the compensation program has reduced digital private branch exchange. Maintethe number of vacancies and thus has nance of the old equipment has become
increased projections of salary costs for excessive, and the risk to the Board from
1991.
failure of this equipment is unacceptable.
The largest element of the salary
Continued investment in the workstaincrease is $4.2 million for the merit pay tion, network, and office automation
raises. Reduced lapse, associated with a systems throughout the Board will rehigher percentage of filled positions in quire $2,275,000. Such investments,
1991, adds $0.6 million. The cost of the which have been critical in limiting the
salaries for eleven new positions ex- need for additional staff to meet the
ceeded the savings of $0.3 million asso- Board's increasing workload, are in line
ciated with the deletion of eight unrelated with the Board's automation-telecommpositions. A small amount is for routine unication plan. Within the $2.3 million
reclassifications and promotions. A total, the largest element is the workstahigher level of income for reimbursement tion network in the Divisions of Research
for services to the FFIEC reduces the and Statistics and Monetary Affairs,
budgeted increase by $0.2 million.
which will cost $950,000. These funds
Retirement costs are up $884,400, or will provide new equipment to improve
19.8 percent, primarily because of the communications over the backbone netincreases in the Board's matching contri- work and will replace equipment that is



16

Annual Report: Budget Review, 1989-90

physically worn out or technologically
obsolete. The funds will also be used to
acquire equipment that will improve the
security and backup capabilities of the
system. The network provides a lessexpensive way for the divisions to perform certain kinds of research computing. The Division of Banking Supervision
and Regulation has been allocated
$450,000 to improve its network capabilities and to replace aging microcomputers
that cannot process the division's large
volumes of data and text on a timely
basis. The records management project
will require $250,000 to automate and
improve the Board's ability to store,
retrieve, and index official records.
Smaller automation requests throughout
the Board account for the remaining
$625,000.
Improvements of facilities require a
total of $1,080,000. The replacement of
the Martin Building roof will cost
$430,000. The replacement of heat exchange equipment and corroded steam
coils will cost $320,000. The dishwasher
conveyor system in the cafeteria will be
replaced at a cost of $160,000. The fire
and intrusion alarm system, begun in
1990, will be completed at a 1991 cost of
$170,000. This system will improve
security and safety while reducing staffing requirements in the guard force.
Ten-Year Trend
From 1981 through 1991, the Board's
operating expenses have grown from
$61.8 million to $110.2 million, an
average increase of 6.0 percent per year
in current dollars and 2.2 percent in
constant dollars (chart 2.1). During this
period, the costs for personnel have
increased at an average of 6.0 percent per
year in current dollars (chart 2.2), while
expenses for goods and services have
increased by 5.7 percent a year (chart
2.3). When measured in constant dollars,



expenses for personnel rose more quickly
relative to those for goods and services,
2.3 percent per year and 1.9 percent per
year respectively. The faster pace for
personnel costs reflects the substantial
investment in the Board's new compensation program.
The size of the actual annual increases
in expenses has varied greatly (chart
2.4): Periods of major growth in the
workload have required additional resources, which have then been scaled

Chart 2.1
Operating Expenses of the Board
of Governors, 1981-911
Millions of dollars

1. Excludes the Office of Inspector General and 1991
extraordinary items. For 1990, estimate; for 1991, budget.
2. Calculated with the GNP price deflator.

Chart 2.2
Expenses for Personnel Services at
the Board of Governors, 1981-911
Millions of dollars

1 1 i
1981

I

I
1986

I

1 I

1 i
1991

1. Excludes the Office of Inspector General. For 1990,
estimate; for 1991, budget.
2. Calculated with the GNP price deflator.

Board of Governors

back as the new work has been assimilated, productivity-enhancing technology
acquired, and lower-priority tasks discontinued. This variation is reflected also in
the changes in staffing during the first
half of the ten-year period (chart 2.5).
While staffing has been lower during
the latter portion of the period, the
workload of Board staff has continued to
increase. Staffing has been controlled
because of productivity gains from office
automation.

Chart 2.3
Expenses for Goods and Services at
the Board of Governors, 1981-911
Millions of dollars

25

20

15

1. Excludes the Office of Inspector General and 1991
extraordinary items. For 1990, estimate; for 1991, budget.
2. Calculated with the GNP price deflator.

Chart 2.4
Annual Rate of Change in Operating
Expenses of the Board of Governors,
1981-911

17

The following discussion breaks the
ten years from 1981 through 1991 into
three segments: 1981-84, 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 1988-91,
when the year-to-year decreases associated with the position reductions of the
earlier period ended and the new compensation program, with its correction of
salary levels, caused the rate of increase
to return to a more normal pace.
1981-84
Expenses rose sharply during this period.
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 these
years, 7.4 percent, derived from legislation such as the Monetary Control Act

Chart 2.5
Employment and Positions at the
Board of Governors, 1981-911
Number, in thousands
Percent

rn
7.5
-

—

p
5.0

2.5

1 1. 1 1 1 1 1 1 1 1
1981

1986

1991

1. Excludes the Office of Inspector General. For 1990,
estimate; for 1991, budget.




I
1981

I

I

I

I
1986

I

I

I

I

I
1991

1. Year-end data. Excludes summer intern and youth
positions, the Office of Inspector General, and the FFIEC.
For 1990, estimate; for 1991, budget.

18

Annual Report: Budget Review, 1989-90

(MCA), the International Banking Act
(IBA), and the Financial Institutions
Regulatory and Interest Rate Control Act
(FIRA) and was at its highest point during
the ten-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. The 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.
During this period, also, deregulation
and other changes in the banking industry
arising from the Financial Institutions
Regulatory and Interest Rate Control Act
required additional staff in the supervisory function throughout the System. To
meet all of these requirements, the number of positions grew from 1,543 to
1,653, an average increase of 2.3 percent
per year, over the period.

vision and regulation. Six positions supporting lower-priority functions in the
supervision and regulation area were
abolished, and twenty-nine positions
were added to the programs directly
concerned with the growing problems in
the nation's banking industry. Even with
this increase, the net decrease in positions
at the Board in 1985 was seventy-three.
The one-time costs of implementing
PIP, plus greater efforts to automate
critical functions, limited the effect of
these reductions on the Board's expenses
in 1985. In 1986, PIP decreased staffing
by another forty positions. 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.
1988-91

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 mid-1989, management of the Contingency Processing Center (CPC), the
relocation facility for the Board and the
1985-87
backup data-processing facility for the
In mid-1984, the Board established the System, was transferred from the Board
Program Improvement Project (PIP) with to the Federal Reserve Bank of Richthe goal of reducing the number of mond. The decision for the transfer was
positions at the Board 7 percent by the based on the increasing Reserve Bank
end of 1986. PIP made large changes in requirements for backup facilities and
the structure and size of the data- support. The decision reduced Board
processing divisions; somewhat fewer expenses in 1989 and 1990. It also
reductions occurred throughout the rest allowed ten CPC positions to be abolished
of the Board.
from the Board's 1989 budget and eight
Under PIP, careful consideration was positions to be abolished from the Board's
given to exempting areas addressing 1990 budget.
problems such as the trade deficit and the
In 1990, expenses rose because of the
debt positions of developing countries; full implementation of the compensation
however, the only area excluded from program, the added legislative requirethe overall reduction program was super- ments associated with FIRREA, and the




Board of Governors

continued pressures in supervision. Ten
positions were authorized in supervision
in 1990 although, because of the redirection of staff resources and positions,
Board employment has remained essentially constant. Pressure in other areas,
such as programs dealing with financial
markets, has been met through overtime
and a reduction in long-term research
that is funded within the budget.
The 1991 budget has returned to the
lower levels of growth seen in recent
years. Even with the lower percentage
growth level, resource demands in supervision and regulation and in services to
financial institutions and the public grew
for reasons discussed earlier.
Budget of the Office
of Inspector General
The Board created the Office of Inspector
General in July 1987. In 1989, the OIG's
reporting relationships, duties, and responsibilities were formalized by the
Inspector General Act Amendments of
1988. The OIG's budget is managed
differently from the other Board budgets
to ensure its independence. It is also
presented to the Board separately from
the regular operating budget. It is, however, subject to the same administrative
processes and the same schedule of
submission that other Board budgets are.
The 1991 budget for the OIG is
$1.8 million, which is $391,000, or
28.3 percent, more than estimated 1990
expenses. The increased resources are
necessary to phase-in broader audit and
investigation coverage of the Board's
mission areas and to review new and
existing laws and regulations for their
effect on the economy and efficiency of
Board programs and operations.




19

The Office's 1991 budget provides for
no increase in staffing, which remains at
nineteen positions, the level attained
when four positions were added in late
1990.
The $391,000 increase is tied largely
to staff increases and the full-year cost
of four positions added late in 1990.
An increase of $55,000 in the travel
budget is associated with auditing functions delegated by the Board to Reserve
Banks.

21

Chapter 3

Federal Reserve Banks
The 1991 operating budget approved by
the Board of Governors for the Federal
Reserve Banks is $1,501.0 million, an
increase of $86.4 million, or 6.1 percent,
over 1990 estimated expenses. The operating budget of the Reserve Banks excludes the Systemwide costs of special
research and development projects relating to the digital imaging of checks ($3.7
million) and the authentication of currency ($3.9 million). Including the costs
of these special projects, the System's
1991 budget is $1,508.6 million, an
increase of $87.4 million (table 3.1).
Employment excluding the staff associated with the special projects is budgeted at 23,861 average number of personnel (ANP), an increase of 163, or
0.7 percent, over estimated 1990
employment.1 Including the special
projects, total budgeted employment is
23,862.
Expenses for personnel, which consist
of salaries and benefits, account for
$969.1 million, or 65 percent, of Reserve
Bank expense in 1991—an increase of
$67.6 million, or 7.5 percent, over 1990.
Of the increases in overall benefits,
medical insurance is increasing $10.6
million, or 16.2 percent. Nonpersonnel
expenses are budgeted at $531.9 million,
an increase of $18.8 million, or 3.7
percent. These expenses are influenced

primarily by automation and building
projects (table 3.2).
The following two sections discuss the
major initiatives and the budget objective for the Reserve Banks in 1991. Subsequent sections provide details for the
four operational areas as well as objects
of expense, capital outlays, and longterm 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
The 1991 increase in total expenses
includes $30.0 million in Reserve Bank
initiatives (table 3.3):
• Projects to enhance facilities at head
offices and branches
• Expanded programs for the U.S.
Treasury Department
• Enhanced automation efforts
• Increased supervisory examinations
and inspections of banks and bank holding companies
• Enhanced check and cash operations.

Improvements in facilities throughout
the System will add $8.2 million in 1991.
Of this increase, projects relating to
buildings account for $2.7 million. Tran1. The term average number of personnel de- sitional costs associated with New York's
scribes levels and changes in employment at the
East Rutherford Operations Center
Reserve Banks. ANP measures the number of
(EROC) are largely responsible for this
employees in terms of full-time positions for the
time period. For instance, a full-time employee
increase. Other contributors are greater
who starts work July 1 counts as 0.5 ANP for that operating expenses at the Charlotte
year; two half-time employees who start January 1
count as one ANP. The ANP for any given year is Branch and ongoing projects to improve
facilities at the Cleveland, St. Louis, and
the average number of full-time employees (measured in this way) in the months of that year.
Kansas City offices. Projected increases



22

Annual Report: Budget Review,

1990-91

in real estate taxes, due primarily to
recently completed building projects, will
add $5.5 million in building-related
expenses.
Expenses for fiscal services are projected to increase $4.9 million. Of the
overall increase, $4.2 million will be
incurred as the System moves toward
nationwide implementation of the Regional Delivery System (RDS), which
involves centralized issuance of over-thecounter savings bonds. Full implementation of this project will continue through
1993. A staff increase of 141 ANP is
expected in 1991, and a total staff increase
of 350 ANP is projected by the time the
RDS project is fully implemented. Increases in RDS staff will be partially
offset by decreases in staff in other
savings bond activities. Expense in-

creases relating to improved services for
the Treasury include (1) an additional 15
ANP to handle the processing of savings
bonds at the Pittsburgh Branch on highspeed check-processing equipment (EZ
Clear) and (2) expense increases related
to the continued growth in the Masterfile
program in Minneapolis. This Masterfile
program involves the centralized processing for corporations of payroll deductions
for savings bonds. Expenses incurred in
connection with the savings bond initiatives are fully reimbursable.
The System will partially offset increased expenses related to fiscal services by improvements in operations and
by the centralization of definitive and
noncash operations. These initiatives will
reduce expenses by $1.2 million and
staffing by 35 ANP in 1991. Most savings

Table 3.1
Expenses and Employment at the Federal Reserve Banks, 1990-911
Category

1990
estimate

Expenses (millions of dollars)
Operations2
Special projects
Total
Employment (average number
of personnel)3
Operations2
Special projects
Total

Change

1991
budget

1,414.6
6.6
1,421.2

Amount

1,501.0
7.6
1,508.6

23,698
26
23,724

23,861
1
23,862

1. Excludes capital outlays.
2. Includes support and overhead (see appendix F, table
F.3, note 1, for definition).

Percent

86.4
1.0
87.4

6.1
6.1

163
-25
138

.7
.6

3. See text note 1 for the definition of average number of
personnel.

Table 3.2
Operating Expenses of the Federal Reserve Banks, by Object, 1989-911
Thousands of dollars, except as noted

Object
Personnel
Nonpersonnel
Total

1989
actual

1990
estimate

Percent change
1989-90

1990-91

851,330
499,156

901,463
513,102

969,121
531,844

5.9
2.8

7.5
3.7

1,350,486

1,414,565

1,500,965

4.7

6.1

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




1991
budget

Federal Reserve Banks

are due to operational improvements in
San Francisco resulting primarily from
continued efforts at centralization.
The System will continue automation
projects relating to contingency, increased computer capacity, and office
automation. These initiatives are projected to increase 1991 expenses $4.7
million. A computer upgrade will occur
at Richmond. The New York, Chicago,
and Minneapolis offices will have increased operating expenses associated
with new control processing units (CPUs)
purchased in 1990.
Several Reserve Banks have identified
initiatives in supervision and regulation.
Totaling $4.0 million, these initiatives
stem primarily from the need for additional staff to handle increases in workloads due to the greater complexity of
examinations, more holding company
examinations, increased examination of
foreign banks, and more problem institutions. Related expenses, such as travel,
will also contribute to the increase in this
area.
Table 3.3
Operating Expenses Budgeted
for Major Initiatives of the Federal
Reserve Banks in 1991
Millions
of dollars

Percent
of 1991
operating
budget

Facility improvements
Fiscal initiatives
Fiscal consolidation efforts ...
Contingency and automation
initiatives
Supervision and regulation
Enhanced check operations . . .
Check operational
improvements
Currency initiatives
Thrift plan

8.2
4.9
-1.2

.6
.3
-.1

4.7
4.0
5.5

.3
.3
.4

-2.8
2.2
4.5

-.2
.2
.3

Total

30.0

2.1

86.4

6.1

MEMO




Five Banks have budgeted a total of
$4.5 million to upgrade existing check
system software to improve efficiency. In
addition, San Francisco has budgeted
$ 1.0 million to improve check-processing
operations through programs for developing efficiency and effectiveness and
through the expanded use of automation
in adjustments. The increase in the cost in
check operations is partially offset by
staff reductions of 97 ANP resulting from
the experience gained in the handling of
return items, reductions in adjustment
backlogs, automated adjustment systems,
and the pilot on return-item intermingling
in Minneapolis and Dallas.
The System anticipates spending
$2.2 million in 1991 related to expanded
initiatives in currency processing. Increases are primarily in San Francisco
for expansion in processing and storage
capacity in response to continued growth
in volume and for cash-automation
projects to improve custody controls and
management information.
The increase in the Reserve Banks'
share of the matching contribution for the
thrift plan is estimated to add $4.5 million
to System expenses in 1991.
1991 Budget Objective

Area of
initiative

Increase in total operating
expenses, 1990 estimate
to 1991 budget

23

Earlier this year, the Board approved a
1991 objective for Reserve Bank budgets
that targeted the increase in total operating expenses over 1990 projected expenses at 6.6 percent. This objective
excluded two special projects, check
imaging and counterfeit deterrence,
whose expenses were projected to increase slightly in 1991. Including the
costs of the special projects did not
change the overall projected growth in
expenses.
The 1991 budget increase compares
favorably with the budget objective.
Total operating expenses are projected to
increase by $86.4 million, or 6.1 percent,

24

Annual Report: Budget Review, 1989-90

office space for supervision. However,
the increase in expenses for financial
services, which is $10.8 million less than
projected in the budget objective, more
Change, percent
than offsets the incremental increase in
supervision and regulation.
1991
1991
budget
Item
The System plans in 1991 to rewrite its
budget
objective
software to account for operating exOperating expenses
6.6
6.1
penses. PACS provides a uniform acSpecial projects
0.0
0.0
counting and reporting structure so that
6.6
6.1
Total
the operating expenses of all Federal
1. See data on expenses in table 3.1.
Reserve Banks will be collected and
reported on a comparable basis. The
budget objective had not included funds
and the expenses associated with the for rewriting the PACS software, and
special projects are increasing by $1.0 this project is expected to increase System
million (tables 3.1 and 3.4). Overall, the expenses in 1991 by $1.0 million.
increase in the 1991 budget is $6.9
million less than projected when the
Board approved the budget objective, Operational Areas
which had not included sufficient funding Tables 3.5 and 3.6 summarize Reserve
for supervision and regulation. Also, a Bank expenses and employment in each
project to rewrite the software of the of the four operational areas. Tables 3.7
planning and control system (PACS), though 3.10 show expense details for
which was not included in the System each area.
budget objective, is now planned for
1991.
Monetary and Economic Policy
The increase in the expense for supervision and regulation is $6.0 million more The 1991 budget increase of $7.9 million,
than projected during the 1991 budget or 7.9 percent, above the 1990 estimate
objective setting. The condition of banks of expense reflects an increase in staff of
in the Northeast and the expansion of 14 ANP, salary administration actions,
examination programs throughout the increased equipment and data-processing
System will require additional staff and costs associated with automation initia-

Table 3.4
Comparison of 1991 Budget Objective
and Budget of the Reserve Banks
with 1990 Estimated Expenses1

Table 3.5
Operating Expenses of the Federal Reserve Banks, by Operational Area, 1989-91
Thousands of dollars, except as noted

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




1989
actual

1990
estimate

1991
budget

Percent change
1989-90

1990-91

93,554

99,660

107,512

6.5

7.9

145,546

156,137

167,223

7.3

7.1

916,310
195,076

944,392
214,376

992,076
234,155

3.1
9.9

5.0
9.2

1,350,486

1,414,565

1,500,965

4.7

6.1

Federal Reserve Banks

tives, and the allocated costs of various
System Projects (Fedline II, Automation
Consolidation, and the National Information Center). The addition of personnel
brings the 1991 level of staff to that
approved in the 1990 budget. The 1990
estimate is below the approved budget
because of attrition and the lag in finding
qualified replacements.
At the District level, New York has
budgeted for automation initiatives that
include equipment upgrades to its office
and analytical support system (OSS),
increased maintenance costs for the new
security trading and clearing system
(STACS), and the development of a foreign exchange replacement system.

25

Services to the U.S. Treasury and
Other Government Agencies
The 1991 budget is projected to be $11.1
million, or 7.1 percent, greater than the
1990 estimate of expenses. Staffing levels
are expected to increase by 75 ANP. The
major initiative driving the increases in
both expenses and staff is the nationwide
expansion of the RDS, which consolidates the issuance of over-the-counter
savings bonds at one office in each
District. RDS volume is expected to
increase by 5.4 million bonds in 1991.
Partially offsetting this increase is the
shift of the volume of retired savings
bonds from the fiscal area to the other

Table 3.6
Employment at the Federal Reserve Banks, by Activity, 1989-91
Average number of personnel, except as noted1

Activity

1989
actual

1990
estimate

1991
budget

Percent change
1989-90

1990-91

-1.2

1.7

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

1,771

1,837

1,912

3.7

4.1

9,423
2,198

9,304
2,229

9,227
2,305

-1.3
1.4

-.8
3.4

Support and overhead2
Support
Overhead

4,552
4,948

4,583
4,973

4,646
4,986

.7
.5

1.4
.3

23,674

23,698

23,861

.1

.7

Total

783

1. See text note 1 for the definition of average number of
personnel.

773

786

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

Table 3.7
Expenses of the Federal Reserve Banks for Monetary and Economic Policy, 1989-91
Thousands of dollars, except as noted
1989
actual

1990
estimate

Economic policy determination
Open market trading

76,865
16,689

81,232
18,428

Total

93,554

99,660

Service




1991
budget

Percent change
1989-90

1990-91

87,574
19,938

5.7
10.4

7.8
8.2

107,512

6.5

7.9

26

Annual Report: Budget Review, 1989-90

check area (EZ Clear Activity). This
shift in cost occurs because savings bonds
under EZ Clear are processed on check
equipment. The processing of redeemed
bonds through EZ Clear becomes mandatory on February 1, 1991.
Services to Financial Institutions
and the Public
The 1991 budget for these services,
which include both the priced and nonpriced operations, is expected to total
$992.1 million, an increase of $47.7
million, or 5.0 percent, above 1990

estimates. Staffing levels are to be reduced 77 ANP, primarily in commercial
check processing (—97 ANP) and noncash collection ( — 11 ANP). These decreases are partially offset by staff increases in other check processing (30
ANP) associated with the government
check and the EZ Clear operations.
Commercial check processing is by far
the largest component of this category of
services ($492.0 million); it composes
half of the category's budgeted expenses
and employs 5,686 ANP. The anticipated
increase in expenses is $15.5 million, or
3.3 percent, over estimated 1990 levels.

Table 3.8
Expenses of the Federal Reserve Banks for Services to the U.S. Treasury
and Other Government Agencies, 1989-91
Thousands of dollars, except as noted
Percent change

Service

1989
actual

1990
estimate

1991
budget

1989-90

1990-91

Savings bonds
Central operations, savings bonds
Other Treasury issues
Central operations, other Treasury issues ..
Central Treasury and agency services
Government accounts
Food coupons
Other

40,512
5,075
16,474
1,439
22,601
21,616
13,328
24,501

40,085
13,554
15,803
1,425
21,987
23,455
14,887
24,941

39,117
21,676
16,288
1,369
22,452
23,878
15,562
26,880

-1.1
167.1
-4.1
-1.0
-2.7
8.5
11.7
1.8

-2.4
59.9
3.1
-4.0
2.1
1.8
4.5
7.8

145,546

156,137

167,223

7.3

7.1

Total

Table 3.9
Expenses of the Federal Reserve Banks for Services to Financial Institutions
and the Public, 1989-91
Thousands of dollars, except as noted
1989
actual

1990
estimate

1991
budget

Currency and coin
Special cash
Commercial checks
Other checks
Funds transfers
Automated clearinghouse
Book-entry securities transfers
Definitive securities safekeeping
and noncash collection
Loans to members and others
Public programs
Other

147,717
13,693
470,200
21,098
63,153
74,364
29,145

157,316
13,500
476,516
25,074
64,672
78,840
30,117

16,048
15,135
42,471
23,286

Total

916,310

Service




Percent change
1989-90

1990-91

166,656
14,734
492,044
27,521
70,035
83,437
34,157

6.5
-1.4
1.3
18.8
2.4
6.0
3.3

5.9
9.1
3.3
9.8
8.3
5.8
13.4

14,884
15,216
44,764
23,492

14,470
15,911
48,704
24,408

-7.3
.5
5.4
.9

-2.8
4.6
8.8
3.9

944,392

992,076

3.1

5.0

Federal Reserve Banks

The reduction of 97 ANP in commercial
check processing results from experience
gained in the handling of return items,
reductions in adjustment backlogs, efficiencies gained through the implementation of automated adjustment systems in
several Districts, and the return item
intermingling pilot in Minneapolis and
Dallas. Also contributing to the low
expense growth is the return to a more
normal level of check write-offs associated with unlocated differences, primarily at the Federal Reserve Bank of
Philadelphia. Commercial check volume
and unit cost are both budgeted to increase
1.3 percent.
Expenses for the currency service are
expected to increase $8.1 million, or 6.1
percent. Staffing levels will increase 6
ANP primarily because of increases in
San Francisco (16 ANP) and Cleveland
(4 ANP) that are associated with adding
shifts to process currency. Partially
offsetting these increases are productivity
gains in several other Districts. The
major initiative affecting this service is
the second generation currency equipment project.
The automated clearinghouse (ACH)
service is budgeted to increase $4.6 million, or 5.8 percent. Total ACH volume
is projected to have an increase of 15.0
percent in 1991, which will result in a 7.5
percent decrease in unit cost. Major
initiatives affecting this service are the

conversion to an all-electronic ACH and
the Future ACH System project.
Expenses for the transfer of reserve
account balances are expected to increase
by $5.4 million, or 8.3 percent. The staff
level will increase by 3 ANP. The increase
in costs results primarily from increases
in personnel costs; increases in data
communications costs due to a change in
the accounting rules; and procedural
changes resulting from the implementation of the UCC-4A regulations, which
will require the Federal Reserve to
improve its security procedures for offline banks.
Supervision and Regulation
The expense increase of $19.8 million,
or 9.2 percent, is centered on the addition
of 76 ANP and on increases in compensation, travel, training, and automation.
The effect over a full year of special
salary adjustments given examiners in
several Districts during 1990 also contributes to the year-over-year increase in
expense. The additional demands on the
Federal Reserve's examination staff have
necessitated increases in personnel. These
increased demands on staff include expanded bank examination programs,
improved supervision of foreign banking
agencies in the United States, the broadening level of detail covered in the
examination process, compliance with

Table 3.10
Expenses of the Federal Reserve Banks for Supervision and Regulation, 1989-91
Thousands of dollars, except as noted

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




27

1989
actual

1990
estimate

1991
budget

119,983

133,874

64,899

69,305

10,194
195,076

Percent change
1989-91

1990-91

146,597

11.6

9.5

75,663

6.8

9.2

11,197

11,895

9.8

6.2

214,376

234,155

9.9

9.2

28

Annual Report: Budget Review, 1989-90

the Financial Institution Referral and
Recovery Enforcement Act (FIRREA)
and Bank Secrecy Act, intensified surveillance of problem financial institutions,
and increased focus on the requirements
of the Community Reinvestment Act.
Expenses are also affected by the initiative addressing payments system risk
and that addressing daylight overdraft
pricing.

Bank expenses and are expected to increase 7.5 percent in 1991 (table 3.11).
Salaries and other personnel expenses
account for nearly 52.2 percent of 1991
budgeted expenses and anticipated growth
is $45.8 million, or 6.2 percent. Salaries
are expected to increase $47.5 million,
or 6.5 percent, and will be partially offset
by a decline of $1.7 million in other
personnel expenses resulting from the
decreasing use of outside agency help.
Merit pay increases of $37.1 million, or
Objects of Expense
5.1 percent, are the primary reason for
Personnel expenses are composed of salary expense growth. Also contributing
salaries for officers and employees, other to additional salary expenses are promocompensation to personnel, and retire- tions, reclassifications, structure adjustment and other benefits. Total personnel ments, and increases in staffing levels.
costs account for 64.5 percent of Reserve These increases are partially offset by

Table 3.11
Operating Expenses of the Federal Reserve Banks, by Object, 1989-91
Thousands of dollars, except as noted
Object

1989
actual

1990
estimate

1991
budget

Percent change
1989-90

1990-91

PERSONNEL

Officers'salaries
Employees' salaries
Other personnel1
Retirement and benefits
Total personnel

68,114
617,745
14,946
150,524
851,330

73,470
652,894
11,352
163,748
901,463

79,280
694,599
9,633
185,610
969,121

7.9
5.7
-24.0
8.8
5.9

7.9
6.4
-15.1
13.4
7.5

54,372
158,131

55,682
174,525
31,497
86,920
30,471

-.2
3.2

82,159
27,214

54,275
163,229
31,433
83,789
29,506

2.6
6.9
.2
3.7
3.3

661
23,302
30,712
24,831
21,245
19,734
120,485

737
22,594
34,022
26,346
22,065
18,536
124,300

770
28,529
37,087
27,443
23,861
18,647
136,336

11.6
-3.0
10.8
3.9
-6.1
3.2

4.4
26.3
9.0
4.2
8.1
.6
9.7

-34,609
91,404

-34,289
60,860

-35,265
51,678

-.9
-33.4

2.8
-15.1

499,155

513,102

531,844

2.8

3.7

1,414,565

1,500,965

4.7

6.1

NONPERSONNEL

Forms and supplies
Equipment
Software
Shipping
Travel
Buildings
Insurance
Taxes on real estate
Property depreciation
Utilities
Rent
Other
Total buildings
Recoveries
Allother 2
Total nonpersonnel
Total

1,350,486

1. Expenses for certain contractual arrangements, and
miscellaneous personnel expenses.
2. Communications, fees, contra-expenses, shared




2.0
8.4

6.1

costs received, shared costs distributed, support cost
distributed, support cost received, and other.

Federal Reserve Banks

short-term position vacancies due to lags
in hiring and by reductions in expenses
for overtime.
Expenses for retirement and other
benefits, which account for 12.3 percent
of Reserve Bank budgets, are anticipated
to increase $21.9 million, or 13.4 percent, in 1991. This increase is the result
of continued escalation in hospital and
medical costs, a rise in the Social Security
tax, and an increase in the thrift plan
match in 1991.
Nonpersonnel expenses account for
35.5 percent of Reserve Bank expenses
and are projected to increase 3.7 percent
in 1991.
Equipment expenses are expected to
increase 6.9 percent and account for 11.6
percent of total expenses in 1991. The
$9.7 million, or 11.4 percent, increase in
depreciation results from acquisitions
to expand data-processing and datacommunications capabilities because of
increased workloads and the full-year
effect of equipment purchased in 1990.
Shipping costs account for 5.8 percent
of the 1991 budget and are projected to
increase 3.7 percent in 1991. The increase is primarily the result of a substantial increase in postal rates scheduled for
early 1991, an increase in the shared cost
of operating the interdistrict transportation system (ITS), and some cost in-

creases that result from rebidding local
transportation contracts.
Building expenses, which account for
9.1 percent of total expenses, are expected to increase 9.7 percent in 1991
because of higher real estate taxes in
several Districts and the full-year effect
of recently completed capital projects.
Recoveries are expected to increase
$1.0 million, or 2.8 percent, in 1991.
Other nonpersonnel expenses are projected to decrease $6.7 million, or 3.8
percent.

Capital Outlays
Capital outlays are budgeted at $328.4
million, an increase of $68.7 million, or
26.5 percent, above the 1990 estimate
(table 3.12). The Reserve Banks' capital
budgets continue to be dominated by
outlays for data-processing and datacommunications equipment and for building projects.
Outlays for data-processing and datacommunications equipment total $77.0
million in 1991, approximately 23 percent of total capital outlays. These expenses include outlays for storage devices
such as tapes and disks ($20.3 million);
for CPUs, including processors, channels, and memory ($12.2 million); and

Table 3.12
Capital Outlays of the Federal Reserve Banks, by Class of Outlay, 1989-91
Thousands of dollars, except as noted

Class of outlay
Data-processing and datacommunications equipment
Buildings
Furniture, furnishings,
and fixtures
Other equipment
Land and other real estate
Building machinery and equipment
Leasehold improvements
Total




29

Percent change

1989
actual

1990
estimate

1991
budget

62,183
36,645

114,657
73,170

77,043
139,514

84.4
99.7

-32.8
90.7

14,664
10,940
25,297
8,454
1,652

13,390
18,106
29,754
9,840
754

16,746
21,331
42,733
27,605
3,437

-8.7
65.5
17.6
16.4
-54.4

25.1
17.8
43.6
180.5
355.8

159,834

259,671

328,408

62.5

26.5

1989-90

1990-91

30

Annual Report: Budget Review,

1990-91

for check equipment ($7.7 million) in
several Districts. In addition, Chicago
has budgeted $6.9 million for the purchase and installation of modems, dynamic bandwidth management controllers, and technical control equipment as
part of the development of the new Fednet
communications system.
Building outlays total $139.5 million
in 1991, about 42.5 percent of total
capital outlays. Two major construction
projects are budgeted in 1991: the new
Dallas building ($55.0 million) and the
New York operations center in East
Rutherford ($50.5 million). The rest of
the outlays are in additions or improvements to existing buildings. Also, the
Boston, Cleveland, Richmond, Chicago,
and San Francisco Banks have budgeted a total of $5.0 million for tenant
improvements.
Furniture and other equipment purchases are budgeted for $38.1 million.
Major outlays are planned in Boston,
New York, Atlanta, Chicago, St. Louis,
Kansas City, Dallas, and San Francisco
for various refurbishment and relocation
efforts. In addition, Cleveland, Richmond, Chicago, Minneapolis, and Dallas
are installing uninterruptible-powersupply systems to support computer
operations should a power outage occur,
at a total cost of $1.3 million. Materialshandling systems will be installed at
the East Rutherford Operations Center
($2.8 million), San Francisco ($0.3
million), and Los Angeles ($0.3 million).
New York will install second-generation
currency equipment ($1.1 million).
Building machinery and equipment
outlays are budgeted for $27.6 million.
The majority of these outlays are related
to the Dallas building project ($16.2
million). The remaining outlays are
planned in several Districts to upgrade or
replace existing machinery and equipment, such as security systems ($1.5
million), elevators ($1.8 million), and



emergency systems to support the building's power supply ($2.6 million).
Land and other real estate purchases
are budgeted for $42.7 million, of which
$35 million is for land for the new
Minneapolis building. Also, $3.3 million
is budgeted for a building expansion in
Cleveland, $1.8 million for the new
building project in Dallas, and $1.4
million for the East Rutherford Operations Center.
Outlays for leasehold improvements
are $3.4 million, of which $2.4 million is
for renovation of the supervision and
regulation work spaces in New York.
Trends in Expenses and
Employment
For the ten years ending in 1991, expenses of the Reserve Banks will have
increased an average of 5.4 percent per
year (chart 3.1). From 1986 to 1991, the
System's expense growth has been lower
(5.3 percent per year). Increases in
expenses were slightly higher (5.6 percent) in the early 1980s as Banks began
implementing the requirements of the
Monetary Control Act (MCA).
Over the past decade, the number of
employees at the Reserve Banks has
Chart 3.1
Operating Expenses of the Federal
Reserve Banks, 1981-911
Billions of dollars

1981

1986

1. For 1990, estimate; for 1991, budget.
2. Calculated with the GNP price deflator.

1991

Federal Reserve Banks

31

Table 3.13
Changes from 1990 to 1991 in Volume
and Unit Costs of Federal Reserve
Bank Services

Chart 3.2
Employment at the Federal Reserve
Banks, 1981-911
ANP, in thousands

Percent
Service

24

Volume

Unit cost

3.5
1.3
15.0
4.8
3.6

.4
1.3
-7.5
3.2
5.0

Cash

1.6

4.5

Fiscal

2.3

5.9

-2.6

10.9

2.7

2.2

Payments
Commercial checks
Automated clearinghouse
Funds transfers
Other checks

23

Securities and noncash
1. For 1990, estimate; for 1991, budget. See text note 1
for definition of ANP.

All

decreased from 23,989 in 1981 to 23,861
in 1991, a reduction of 128 ANP (chart
3.2). Since 1981, staff has decreased in
overhead services (759 ANP) and services to financial institutions and the
public (252 ANP) because of a Systemwide effort to increase productivity in
overhead services and because of staff
reductions in priced services associated
with the post-implementation phase of
the MCA. These reductions are partially
offset with staffing increases in supervision and regulation (571 ANP) and
support services (212 ANP) associated
with the additional requirements for
resources related to the expanding responsibilities in these areas.

operational area, are expected to increase
1.3 percent.
In 1991, the expected volume increase
for the payments areas is 3.5 percent, an
increase close to the five-year overall
average. However, the lower growth
anticipated for volume in cash and fiscal
services (1.6 percent and 2.3 percent
respectively) and the decrease anticipated
for securities and noncash services
(2.6 percent) result in an overall anticipated increase for 1991 of 2.7 percent,
which is lower than the anticipated
average.

Volume and Unit Costs
Volume for all measured operations is
expected to increase 2.7 percent over that
for 1990, while unit costs are expected to
rise 2.2 percent (table 3.13). Over the
five years from 1986 to 1991, the average
annual growth rate will be 3.4 percent for
volume and 0.4 percent for unit costs.
The increase in unit costs expected for
1991 reflects a rise in unit costs in all
areas except ACH. Unit costs for commercial check processing, the largest



1990 Budget Performance
In December 1989, the Board approved
the 1990 Reserve Bank budgets at a total
of $1,419.0 million, an expected increase
of $77.6 million, or 5.8 percent, over
estimated 1989 expenses. In January
1990, the approved budget was reduced
$4.1 million in the spirit of GrammRudman-Hollings (GRH).
The Reserve Banks now estimate that
1990 expenses will be $1,414.6 million,
$0.3 million under the GRH-adjusted
budget. At this level of spending, the
increase over the actual 1989 level will
be 4.7 percent. For 1990, only the

32

Annual Report: Budget Review, 1989-90

Philadelphia Reserve Bank expects a
budget overrun; it does so primarily
because of unanticipated check writeoffs and salary expenses resulting from
forward and return item adjustments that
were higher than anticipated. All but
three Banks expect underruns of approximately 1 percent or less of the approved
budgets. Cleveland expects an underrun
of $1.6 million, or 1.9 percent. This
underrun is due mostly to lower-thanexpected medical claims and to delays in
the acquisition of major pieces of equipment. Chicago now projects an underrun
of $3.2 million, or 1.9 percent, due
primarily to a 1990 real estate tax bill
lower than originally budgeted. Minneapolis anticipates an underrun of $1.4
million, or 2.0 percent, due to a 1989
refund on real estate taxes received in
1990. The refund was based on the
decline in market value of the Minneapolis building and is partially offset by
the acceleration to 1990 of some 1991
plans.
•




Part II
Special Analysis




35

Chapter 4

The Federal Reserve Bank Supervision
Enhancement Program
In 1985, the Federal Reserve initiated a ments had been that state member banks
program to improve the effectiveness of judged to be in sound condition on their
its supervision and regulation of banking most recent examination were to be
organizations. The program had the examined at least every eighteen months
and that bank holding companies were to
following basic goals:
be inspected once every three years
• Early identification of banking prob- (except for small, trouble-free, shell
lems through more frequent on-site ex- holding companies which were visited
aminations of state member banks and
when time permitted). The new policy
inspections of bank holding companies
mandated that state member banks and
and more intensive off-site surveillance
bank holding companies must be examof these organizations
ined or inspected at least once each year;
• Expeditious correction of problems and the largest institutions and those with
identified in examinations and inspections
significant problems, every six months.
through clear and succinct oral and
The policy specified exceptions for the
written communication with the managesmallest companies, which are selected
ment and boards of directors of organizafor inspection on a sampling basis, and
tions and, when necessary, through apfor intermediate-sized, noncomplex holdpropriate enforcement actions
ing companies, which are inspected every
• More effective prevention of prob- two to three years.
lems by strengthening prudential stanCoincident with the adoption of the
dards that banking organizations must
new policy regarding examinations and
meet.
inspections, the Board instructed Reserve
The program had two other important Bank officials to promote greater cooperelements: augmenting the size and im- ation with the state banking authorities in
proving the training of supervisory their Districts. To that end, meetings
staff and promoting greater coordination were held with state bank supervisors to
with other federal and state supervisory reaffirm existing cooperative arrangeagencies.
ments for examining and otherwise supervising state-chartered banks and bank
holding companies and to establish new
arrangements where possible. These
Intensified Frequency of
arrangements call for a Reserve Bank
Examinations and Inspections
and a state agency either to alternate
and Cooperation
years in examining institutions and to
with State Agencies
share resulting reports or to conduct
In late 1985, the Board adopted a policy examinations jointly and to prepare a
specifying a general increase in the common report. In either case, both
required frequency of examinations of parties are directly involved in supervisstate member banks and inspections of ing an organization and are informed
bank holding companies. System require- about its condition. At the same time, the



36

Annual Report: Budget Review, 1989-90

avoidance of duplicated work results in
economies.
The Reserve Bank officials also informed the state supervisors of the Federal Reserve's intention to provide financial assistance for the training of state
examiners. Subsequently, the Board gave
contributions to the Education Foundation of State Bank Supervisors, and the
Reserve Banks financially assisted state
examiners to attend training courses
offered by the Federal Reserve and by the
Federal Financial Institutions Examination Council (FFIEC).
In 1990, the Federal Reserve Banks
completed, independently or jointly with
the states, 764 examinations of state
member banks. The states, under
alternate-year arrangements, independently completed another 301 examinations of state member banks. Reflecting
the mandate that large and troubled
organizations are to be examined more
than once annually, the total examinations
in 1990 exceeded the number of state
member banks (1,047). The Federal
Reserve also completed 2,080 bank holding company inspections in 1990, somewhat exceeding the number mandated by
the System's inspection policy.
In recent years, the Federal Reserve,
in carrying out its central banking role,
has on occasion diverted examiner resources to assist in resolving important
problems in the thrift industry. In 1985,
the Federal Reserve sent a large team of
examiners to Ohio to help the state with
state-insured thrift institutions. Later the
same year, the Federal Reserve sent
examiners to help resolve similar problems that had arisen with state-insured
savings and loan institutions in Maryland.
As a result of these experiences, the
System established, as an element of the
enhanced supervision program, a Special
Examination Response team. In 1989,
this team helped examine troubled thrift
institutions before they were placed in



conservatorship first by the Federal
Savings and Loan Insurance Corporation
and then by its successor in this activity,
the Resolution Trust Corporation. It has
also been used when the System has
needed to marshal its resources to deal
with acute problems in a single District.
Communication with
Management and
Boards of Directors
The Federal Reserve has long had examiners prepare written reports on their
examinations and inspections for distribution to the institution's management
and board of directors. As part of the
supervisory enhancement program, the
Board strengthened these procedures
by instructing that the summary section
of examination reports be written with
more precision and by requiring that a
separate "Summary of Findings," which
spelled out identified problems clearly
and succinctly, be distributed to each
member of an organization's board of
directors. The Board also directed that,
when problems of large organizations
were deemed to be relatively serious,
meetings traditionally held with an institution's management and board of directors following an examination or
inspection be attended not only by examiners but also by senior Reserve Bank
officials. The purpose of these initiatives
was to make sure that directors as well
as senior management were fully informed of problems uncovered in the
examination or inspection of their institution and to emphasize their responsibility to take immediate steps to correct
the problems.
Examiner Training
To enhance the ability of examiners to
communicate, the Federal Reserve introduced an effective writing course in its

The Federal Reserve Bank Supervision Enhancement Program
examiner training. The FFIEC added to reviewed and endorsed the proposal in
its training program a course on making mid-1988; and, by year-end 1988, all
effective oral presentations to boards of G-10 countries plus Luxembourg had
directors. The Federal Reserve also adopted it.
bolstered the traditional "core" courses in
This standard offers several advantages
its examiner training program by adding over the primary capital standard that it
a range of new topics, including risk- replaces. It broadly differentiates among
based capital, derivative products, asset the relative riskiness of banking assets
and liability management, and lending and takes into account off-balance-sheet
related to real estate; and it introduced a risk exposures of banking organizations.
seminar for senior examiners on current Also, because many countries in addition
supervisory issues and problems.
to those in the G-10 have adopted the
standard, it will be applicable to banking
organizations in all countries with imporPrudential Supervision Policies
tantfinancialcenters and will thus help to
The Board adopted many policies over promote a level playing field for U.S.
the latter half of the decade to strengthen organizations as they compete with banks
its supervision program. Of considerable in other countries. The first phase of the
importance was the adoption of a policy standard was introduced at year-end
that added emphasis to the System's 1990, and the standard is scheduled to be
traditional policy that dividend payments fully phased in at year-end 1992.
The risk-based standard has been
should be made only from current and
recently retained earnings, not from refined and supplemented since its adopborrowings or nonrecurring sources of tion. Of most significance, a leverage
income. It was also stressed that, in ratio that compares a bank's capital
formulating their dividend policy, bank- position, as defined under the risk-based
ing organizations should carefully con- standard, with its total assets has been
sider their overall financial condition, adopted by the Federal Reserve and
particularly the sufficiency of their capital the OCC and is under final considerabase, and that bank holding companies tion by the FDIC. The leverage ratio
should review the adequacy of their sub- addresses certain banking risks not
sidiary banks' capital before declaring captured by the risk-based standard.
Also, the Basle Supervisors Committee
dividends to the parent company.
The policy in the supervision enhance- is studying ways to incorporate a measure
ment program of perhaps the greatest for interest rate risk into the risk-based
importance and with the farthest reaching capital framework.
The Board has adopted other important
consequences is the International Riskbased Capital Standard. The Federal supervisory policies as part of the superReserve cooperated with the Office of the vision enhancement program, including
Comptroller of the Currency (OCC) and a policy on defining heavily leveraged
the Federal Deposit Insurance Corpora- transaction; a policy on less-developedtion (FDIC) to develop an early version country debt that, among other elements,
of this standard, and subsequently the established strict conditions for taking
three agencies worked with members of such debt out of nonaccrual status; and a
the Basle Supervisors Committee on a policy to discourage holding companies
version that would be acceptable to from inappropriately relying on commercountries in the Group of Ten (G-10). cial paper and other short-term debt in
The Central Bank Governors in the G-10 funding their operations.



37

38

Annual Report: Budget Review, 1989-90

Resource Allocations
When approving the supervision enhancement program in 1985, the Board recognized that to implement and carry out the
expanding supervisory activities would
require a major augmentation of supervisory resources. Reserve Banks have thus
been encouraged to increase supervision
staff, in particular examiner staff. The
Board also authorized a sizable increase

in staff in its Division of Banking Supervision and Regulation.
As table 4.1 shows, Federal Reserve
resources devoted to bank supervision
and regulation increased materially between 1985 and 1990. The Federal Reserve has budgeted further sizable increases for 1991 because of the heavy
workload resulting from the continued
problems in the banking industry.

Table 4.1
Expenses and Personnel of the Federal Reserve System, for Supervision, 1985-91
Entity

1985
actual

1990
actual

1991
budget

Average annual
percent change
1985-90

1990-91

Expenses (millions of dollars, except as noted)
Reserve Banks
Percent of total
Board of Governors1
Percent of total

152
13.6
5.9
7.2

Reserve Banks
Percent of total .
Examiners
Board of Governors1
Percent of total..

1,192
8.3
835
138
8.6

214
15.2
11.8
11.4

235
15.6
13.3
12.1

7.4

9.8

14.0

12.7

Personnel (number, except as noted)

1. Division of Banking Supervision and Regulation
only. Excludes supervision-related expenses and personnel




2,228
9.4
1,016
174
11.2

2,304
9.7
1,075
181
11.6

3.1

3.4

4.0
4.6

5.8
4.0

in the Consumer Affairs, Legal, and Research Divisions.

Appendixes




41

Appendix A

Mission and Operational Areas
of the Federal Reserve System
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
Monetary and Economic Policy
Reserve Banks use this information,
The Federal Reserve contributes to the along with data collected by other public
attainment of the nation's economic and and private institutions, to assess the state
financial goals through its ability to of the economy and the relationships
influence money and credit in the econ- between the financial markets and ecoomy. The System has several tools to nomic activity. Staff members provide
affect the availability and cost of the background for the Board and for each
nation's money and credit: setting reserve meeting of the FOMC by preparing
requirements; setting the discount rate detailed economic andfinancialanalyses
(which affects the cost of borrowing); and projections for the domestic econand the primary tool of monetary policy, omy and international markets. In addiopen market operations.
tion, they conduct longer-run economic
The seven-member Board of Gover- studies of issues at the regional, national,
nors sets reserve requirements, and it and international levels.
acts on requests from the Federal Reserve
Banks to adjust the discount rate. The
Services to the U.S. Treasury
Federal Open Market Committee
and Other Government Agencies
(FOMC) meets in Washington eight times
per year, usually twice each business The U.S. government uses the Federal
quarter, to set policies for System open Reserve as its bank. Through deposit
market operations; it comprises the accounts at the Federal Reserve Banks,
the government issues its checks and
payments and collects its receipts. The
Reserve Banks also process wire transfers
1. Services to the U.S. Treasury and other
government agencies is an operational area unique of funds and automated clearinghouse
to the Federal Reserve Banks. The fourth operapayments and give the Treasury daily
tional area for the Board of Governors, System
statements of account activity.
policy direction and oversight, provides resources
Beyond these typical depository activfor the supervision of Board and Bank programs
and is discussed in chap. 2.
ities, the Federal Reserve Banks provide
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.




42

Annual Report: Budget Review, 1989-90

several unique services to the government. They monitor the tax receipts
deposited in the 12,833 tax and loan
accounts maintained by depository institutions designated to perform this function, they hold the collateral that those
institutions pledge to support those and
other government deposits, and they
transfer funds to the Treasury's account
at its request. The Reserve Banks assist
the Treasury in its financing of the public
debt by issuing, servicing, and redeeming
all marketable Treasury securities as well
as all U.S. savings and retirement plan
bonds. In another unique fiscal service,
the Reserve Banks redeem food coupons
for the Department of Agriculture and
destroy them.

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
18.5 billion checks each year with an
average daily value of more than $50 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.
The Federal Reserve also plays a
central role in the nation's payments
mechanism through its 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. Approximately 6,653
depository institutions use Fedwire
Services to Financial Institutions
through direct computer connections
and the Public
with Federal Reserve Banks, and another
The Federal Reserve System plays a 4,696 institutions use Fedwire through
central role in the nation's payments off-line means such as telephone. During
mechanism, which consists of many 1990, approximately 64 million transfers
independent systems designed to move valued at about $199 trillion were sent
funds among financial institutions across over Fedwire, an average of $3.1 million
the country. The Federal Reserve distrib- per transfer and $793 billion per day.
The Federal Reserve allows particiutes currency and coin, processes checks
for collection, operates electronic funds pants in private clearing arrangements to
transfer networks, and provides for exchange and settle transactions on a net
transfers of securities and for coupon basis through reserve or clearing-account
balances. Users of net settlement service
collection.
Ensuring that the supply of currency include local check clearinghouse associand coin meets the public's demand for ations, automated clearinghouse (ACH)
cash is the responsibility of the Federal networks, credit card processors, autoReserve. The Reserve Banks obtain cur- mated teller machine networks, and narency and coin from the Bureau of tional and regional funds and securities
Engraving and Printing and from the transfer networks. In 1990, approxiMint and distribute it to the public mately 850,000 net settlement entries
through depository institutions. The were processed by the Reserve Banks.
Banks use highly sophisticated equipment
Approximately 29,700 depository
to count cash, identify counterfeits, and institutions participate in the Federal
destroy currency that is unfit for circu- Reserve's ACH service, which makes
lation. In 1990 the Reserve Banks paid one-time and recurring payments
out $277.8 billion in currency and electronically instead of by check. The
$4.4 billion in coin and destroyed depository institutions use the ACH for
$65.9 billion of unfit currency.
credit transactions, primarily to pay



Mission and Operational Areas

salaries and pensions, and for debit
transactions such as preauthorized bill
payments and cash concentration debits.
Of the approximately 12,300 ACH
endpoints, 2,600 have electronic connections with the Federal Reserve; the
others receive payment data via magnetic
tapes or paper registers. In 1990 the
Reserve Banks processed more than
1.3 billion ACH transactions valued at
about $4.3 trillion; thirty-seven percent of the transactions were for the
federal government, and the rest were
commercial.
The securities services provided by
the Reserve Banks cover the handling of
book-entry securities and definitive
securities and the collection of coupons
and miscellaneous items. The bookentry service, begun in 1968, enables
holders of government agency securities
to transfer them electronically to other
institutions throughout the country. The
Reserve Banks maintained approximately 15,600 book-entry accounts in
1990 and processed approximately
10.9 million securities transfers.
In the definitive securities service, the
Banks store physical securities ineligible
for maintenance on the Federal Reserve's
book-entry system. The Federal Reserve
held about $18.4 billion of such securities
in priced accounts at the end of 1990.
In its noncash collection service, the
Federal Reserve presents coupons,
bonds, and miscellaneous items, such as
bankers acceptances and certain checks
and drafts, for collection. Coupon collection, which accounts for approximately
98 percent of the transactions in this
service, amounted to 3.2 million coupon
envelopes in 1989 and about 2.9 million
coupon envelopes in 1990.
Supervision and Regulation
Under the authority of the Federal Reserve Act and the Bank Holding Com


43

pany 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 ensuring 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
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
nonidentify ing 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.
During 1990 the System maintained
the intensified supervision program for
state member banks and bank holding
companies that was implemented five
years ago as a result of the increase in the
number of bank failures and problem
banks. In 1990 the Board and the Reserve
Banks examined approximately 764 state
member banks, inspected approximately
2,173 bank holding companies and their
subsidiaries, and reviewed approximately 2,676 international and domestic
applications.
The Board enforces compliance by
state member banks with the federal
laws protecting consumers in their use
of credit. In 1990 the System con-

44

Annual Report: Budget Review, 1989-90

ducted approximately 550 compliance
examinations.
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.
•




45

Appendix B

Budget Processes
As a group, the Reserve Banks follow a
budgeting process distinct from that of
the Board of Governors. This appendix
surveys 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
The Board involves all levels of its
management in a planning, budget, and
control process based on the calendar
year. Under authority delegated by the
Chairman, the administrative governor
oversees the process to ensure that all
elements are coordinated, objectives are
achieved, and duplication of effort is
avoided.
The Board structures its budget in four
operational areas: economic and monetary policy, supervision and regulation of
financial institutions, services to financial
institutions and the public, and System
policy direction and oversight. Costs for
data processing are distributed to the four
major areas according to usage. Expenses
for other elements of support and overhead are allocated to the four areas in
proportion to the share of direct costs
attributable to each area.

estimates budget changes associated with
those events. Simultaneously, the Office
of the Controller prepares a budget
estimate based on the current level of
operation, taking into account known or
anticipated factors such as wage and
benefit increases and changes in costs for
goods and services. The controller uses
this projection of expenses, with the
estimates from the other divisions and
guidance from the Board's oversight
committees, to estimate a budget guideline. The Chairman and the administrative governor review the proposed guideline before it is submitted to the Board
in June. Using the staff analyses, the
Board approves a guideline in an open
meeting, and the divisions use the guideline to develop their budgets.
During the summer, the divisions
prepare their budgets, andfirstthe Board's
controller and staff director for management and then the appropriate functional
oversight committees review them. These
reviews usually result in adjustments to
the proposed budgets. The administrative
governor then presents the consolidated
budget proposal to the Chairman for his
review and comments. In early December, at an open meeting, the budget is
presented to the Board of Governors for
action.

The Budget Schedule
In the spring, each division at the Board
reviews its goals and resource requirements by obtaining guidance from functional oversight committees made up of
Board Members, by participating in
System planning sessions, and by conducting division planning sessions. The
management of each division lists events
likely to affect the division's budget and



The Budget of the OIG
The Board's Office of Inspector General
(OIG), in accordance with its statutory
independence, prepares its proposed
budget apart from the oversight and
guideline process just described and
submits it directly to the Board without
formal staff review. The Board may seek
staff assistance in reviewing the budget of

46

Annual Report: Budget Review, 1989-90

the OIG before reviewing and approving monthly and submits quarterly reports to
it at the same open meeting as the regular the Board.
budget.1
At midyear, the controller and staff
director for management review current
expenses with each division director,
Treatment of Capital Expenditures
estimate expenses for the entire year, and
In 1985 the Board began capitalizing submit the estimate to the Board with any
certain assets and depreciating their recommendations for reallocations. The
value over appropriate time periods, midyear review helps control current
instead of expensing them in their year expenses and provides a baseline for
of purchase. Capitalizing, which is in analyzing budget requests. At the beginaccordance with generally accepted ning of the next year, the controller and
accounting principles, more closely the staff director for management report
aligns the cost of capital assets with their to the Board on the previous year's
periods of service and is consistent with performance against budget and operatthe accounting practices followed by the ing goals.
Reserve Banks.
Assessments
After the Board adopts its budget, the
cash requirement for the first half of the
year is estimated. The administrative
governor reviews and approves this
estimate in early January and, as the
Federal Reserve Act provides, the required amount is raised by an assessment
on each of the Reserve Banks in proportion to its capital stock and surplus. The
cash requirement for the second half of
the year is estimated in June, and the
second assessment is made in July. To
minimize cash balances held by the
Board, funds are transferred quarterly.

The Budget and Control Process
of the Federal Reserve Banks
Each year the Federal Reserve Banks,
like the Board, establish major operating 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
Financial Monitoring and Control
First Vice Presidents and the Conference
All levels of Board management monitor of Presidents of the Reserve Banks review
and review Board expenses throughout the work of the task force and, if necesthe budget year. To facilitate this process, sary, revise it before sending it to the
each division constructs quarterly oper- Board of Governors. The Board deterating plans. Administrative management mines the appropriateness of the proobserves performance against these plans posed level of spending and at about
midyear communicates the budget objective to the Reserve Banks for their
1. Operations of the OIG are also discussed in guidance in developing plans and budgets. To plan for priced services, the
chapter 2 and appendix E.




Budget Processes

Banks update a multiyear strategic
statement.
The management of each Bank department develops its budget based on
workloads, required initiatives, and the
budget objective. Senior Bank officials
review the departmental requests and,
with the president and first vice president, determine priorities for the overall
budget level to be recommended to the
Bank's board of directors. In the fall, the
Board of Governors approves the budget
of each Reserve Bank as well as the fee
schedule for priced services, which is
developed simultaneously with the
budget data.

41

Pricing Policy Committee examine the
budgets for priced services.2 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. Following review by the
committee of three governors, all Bank
budgets are sent to the Board of Governors for action at a public meeting in
December.

Special Projects

Special projects are those few research
and development efforts that have the
potential for a major improvement in the
nation's payments mechanism or in the
Federal Reserve's ability to provide serThe Capital Budget Process
vices . Because of their long-range imporThe Reserve Banks account for capital tance, special projects are approved
expenditures in accordance with gener- separately from the process described
ally accepted accounting principles and, above, which focuses on operational
therefore, include depreciation of capital costs. Although not included in the budget
assets in expenses. Technical staff mem- objective, these projects are individually
bers at the Board review all plans for approved by the conference of presidents
large capital expenditures, whether for and the Board of Governors, and their
buildings, automation equipment, fur- effect on total system outlays is carefully
nishings, or land. The staff members then reviewed. Two such projects, described
make recommendations to the director of in appendix C, have been approved for
the Division of Reserve Bank Operations 1991.
and Payment Systems or to the Board of
Governors, depending on the significance
of the item or project.
The Planning and Control System
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



The Planning and Control System
(PACS), implemented by the Reserve
Banks in 1977, is the fundamental cost
accounting system for all the services
provided by the Banks, whether priced or
2. The product directors are the first vice
presidents at selected Reserve Banks with responsibility for day-to-day policy guidance over specific
Systemwide priced services. The Pricing Policy
Committee comprises one governor, the Board's
staff director for Federal Reserve Bank activities,
the presidents of two Reserve Banks, and the first
vice presidents of two other Reserve Banks.

48

Annual Report: Budget Review, 1989-90

nonpriced, special or routine. Under
PACS, budgets can be compared with
actual expenses by service and object,
and the Board of Governors can compare
thefinancialand operating performances
of the Reserve Banks.
PACS groups all costs by major services, shown here under the four operational areas and support and overhead
(see the accompanying list). The costs of
support and overhead, in turn, are fully
allocated to the four operational areas.
PACS offers a detailed analysis of all
these services and activities, including
productivity statistics (primarily unit
costs and items per employee-hour),

"environmental" statistics (to clarify the
differences among the Banks' operating
environments), and "quality" statistics
(to measure performance).
PACS affords the Banks a review of
expenses, an audit trail, and expense
accountability. Through periodic on-site
reviews, the Board confirms that the
Reserve Banks are complying with PACS
instructions and also with System guidelines set by the Board. In addition, the
General Accounting Office and an outside
public accounting firm have determined
in independent examinations that PACS
is an appropriate and effective accounting
mechanism for the Federal Reserve.

Federal Reserve Bank Services
OPERATIONAL AREAS

SUPPORT AND OVERHEAD

Monetary and economic policy
Economic policy determination
Open market trading

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

Services to the U. S. Treasury
and other government agencies
Savings bonds
Centralized operations —savings bonds
Other Treasury issues
Centralized operations - other Treasury issues
Centrally provided Treasury and agency services
Government agency issues
Other Treasury and government agency services
Treasury and other government coupons
Food coupons
Government accounts
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
Supervision and regulation
Supervision of District financial institutions
Administration of laws and regulations
related to banking
Studies of banking and financial market structure




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

49

Appendix C

Special Categories of System Expense
This appendix discusses System expenses Board of Governors.1 If fees for any
for priced services, capital assets, special service are set so that the full recovery of
projects, and currency.
costs is not anticipated, the Board announces the rationale.
The cost of float is estimated by
Priced Services
applying the current federal funds rate to
The Monetary Control Act of 1980 the level of float expected in the coming
(MCA) requires the Federal Reserve year. Estimates for income taxes and the
to make available to all depository return on capital are based on tax and
institutions, for a fee, certain services financing rates derived from a model of
that the Federal Reserve had previously the fifty largest U.S. bank holding comprovided without explicit charge and panies; these rates are applied to the
only to member banks. As the act assets the Federal Reserve expects to use
requires, the cost of providing these ser- in providing priced services in the coming
vices includes all direct and indirect year. The other components of the PSAF
costs, the interest on items credited are derived from the budgets of the
before actual collection (float), and the Reserve Banks: the imputed sales tax
private sector adjustment factor (PSAF). (based on budgeted outlays for materials,
The PSAF is the return on capital that supplies, and capital assets); the assesswould have been provided and the taxes ment for insurance by the Federal Dethat would have been paid had the posit Insurance Corporation (FDIC) on
services been furnished by a private expected clearing balances and on deferred funds for items deposited for
business firm.
The Federal Reserve has developed an collection with the Reserve Banks; and
annual pricing process, which involves a the portion of the expenses of the Board
review of Reserve Bank expenses in of Governors that is related directly to the
addition to the one required by the budget development of priced services.
The inclusion of all these costs means
process, to meet the requirements for the
full recovery of costs. Use of the budgets the Federal Reserve offers its priced seris an integral part of the pricing exercise vices on a basis comparable to that in the
because most of the recoverable costs of private sector, and die discipline of the
priced services consist of direct and market ensures that the prices charged
indirect costs as determined by the bud- will be no higher than necessary.
gets. To assist depository institutions in
their planning to provide or use correspondent banking services, the Federal Calculation of the PSAF for 1991
Reserve usually sets each year's prices In 1990 the Board approved a 1991
only once, in the fourth quarter of the private sector adjustment factor of $85.8
preceding year.
Fees for Federal Reserve services must
be approved by the product director for
1. See appendix B, note 2, for a description of
the respective service, by the Pricing the position of product director and of the Pricing
Policy Committee, and ultimately by the Policy Committee.



50

Annual Report: Budget Review, 1989-90

million, an increase of $6.4 million, or
8.1 percent, from the PSAF of $79.4
targeted for 1990.
Asset Base
The estimated value of Federal Reserve
assets to be used in providing priced
services in 1991 is $6,203.0 million
(table C. 1). The value of assets assumed
to be financed through debt and equity
is $530.7 million in 1991, an increase
of $43.0, or 8.8 percent, from 1990

(table C.2). This increase results largely
from capital expenditures for bank premises planned by the Reserve Banks next
year and from an increase in short- and
long-term prepayments of equipment
maintenance costs.
Cost of Capital and Taxes
and Other Imputed Costs
For 1991, a pretax rate of return on
equity of 14.5 percent is planned. Other
required PSAF recoveries for 1991 —

Table C.l
Pro Forma Balance Sheet for Federal Reserve Priced Services, 1990-911
Millions of dollars
Asset or liability

1990

1991

ASSETS

Short-term assets
Imputed reserve requirement on clearing balances ,
Investment in marketable securities
Receivables2
Materials and supplies2
Prepaid expenses 2

Items in process of collection3
Total short-term assets
Long-term assets
Premises2'3
Furniture and equipment2
Leasehold improvements and long-term prepayments2
Capital leases
Total long-term assets

286.3
2,099.4
32.0
7.1
9.6
3,838.9

244.1
1.790.4
32.8
8.2

13.7
3.637.5
6,273.3

295.5
141.5
2.0
1.9

Total assets

5,726.7
305.3
146.8
23.9
.3

440.9

476.3

6,714.2

6,203.0

LIABILITIES

Short-term liabilities
Clearing balances and balances arising
from early credit of uncollected items
Deferred-credit items
Short-term debt4
Total short-term liabilities
Long-term liabilities
Obligations under capital leases.
Long-term debt4
Total long-term liabilities ..
Total liabilities
Equity 4
Total liabilities and equity
1. Data are averages for the year.
2. Financed through the PSAF; other assets are selffinancing.
3. Includes allocations of Board of Governors' assets to




2,838.7
3,385.9
48.7

2,466.7
3,205.3
54.7
6,273.3

2.0
139.1

5,726.7
.3
154.8

141.0

155.1

6,414.3

5,881.8

299.9

321.2

6,714.2

6,203.0

priced services of $0.3 million for 1990 and $0.5 million
for 1991.
4. Imputed figures representing the source of financing
for certain priced-service assets.

Special Categories of System Expense

imputed sales taxes, FDIC insurance,
and Board expenses—total $19.9 million,
up from $15.9 million approved for 1990
(table C.2). The increase in the PSAF of
$4.9 million is attributable primarily to a
rise in the rate assessed against deposits
in computing the imputed FDIC insurance assessment. It is offset partially by a
reduction of $ 1.2 million in imputed sales
taxes because of a lower assumed rate of
capital investment.

51

Capital Outlays
In accordance with generally accepted
accounting principles (GAAP), the Federal Reserve System depreciates the cost
offixedassets over their estimated useful
lives. In the federal government, where
no requirement exists for depreciation
accounting, the cost of fixed assets is
typically recorded as an expense at the
time of purchase. However, the Policy

Table C.2
Derivation of the Private Sector Adjustment Factor, 1990-91
Millions of dollars, except as noted
Item

1990

1991

48.7
439.0
487.7

54.7
476.0
530.7

7.3
9.6
15.5
13.6

8.6
9.4
14.5
12.9

10.0
28.5
61.5
100.0

10.3
29.2
60.5
100.0

27.8

30.5

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

3.5
13.3
46.6
63.5

4.7
14.5
46.7
65.9

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

9.9
4.3
1.7
15.9

8.7
9.2
2.0
19.9

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

79.4
16.3
14.2

85.8
16.2
14.7

P S A F COMPONENTS

Assets to be financed1
Short-term
Long-term 2
Total
Cost of capital (percent)3
Short-term debt
Long-term debt
Pretax return on equity 4
Weighted average ..
Capital structure (percent)
Short-term debt
Long-term debt
Equity
Total
Tax rate (percent)4

REQUIRED P S A F RECOVERIES

1. The asset base for priced services is directly determined.
2. Total long-term assets less capital leases that are
self-financing.
3. All short-term assets are assumed to be financed by
short-term debt. Of the total long-term assets, 33 percent
are assumed to be financed by long-term debt and 67
percent by equity. 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, adjusted by the
effective tax rate to yield the pretax rate of return on equity
for each bank holding company for each year. These data
are then averaged over the five years 1985-89 to yield the
pretax return on equity for use in the PSAF.
5. The calculations underlying these data use the dollar
value of assets to be financed, divided as described in note
3, and the rates for the cost of capital.

52

Annual Report: Budget Review, 1989-90

and Procedures Manual for Guidance of technologies to record check images for
Federal Agencies of the General Account- use in various check processing funcing Office, which governs accounting tions. The applications chosen for the
procedures in the federal government, testing were the archiving of check
specifies in title 2 the use of depreciation payment information for the Department
accounting for business types of opera- of the Treasury and the processing of
tions and for activities that recover costs return items. These check processes
from reimbursements or user charges. involve the storage of large amounts of
Certain activities of the Federal Reserve data and require a high level of quality in
meet both of these criteria. Under GAAP, the retrieved image.
the cost of acquiring an asset that is
The research and development project
expected to benefit an entity over future on the processing of check images will
periods should be allocated over those continue to build upon the first five years
periods. Such treatment allows a more of results. The focus during 1991 will be
realistic measurement of operating on the systems development of a highperformance.
speed government-check archival sysThe Banks capitalize and depreciate all tem; of personal computer systems for
assets that cost $1,500 or more; they can potential applications such as return item
either capitalize or expense assets costing processing; and of low-speed systems
less. The capitalization guideline for the that will be efficient in very low-volume
Board is $1,000.
applications in the near term. The 1991
The Banks maintain a multiyear plan budget for these efforts is $3.7 million.
for capital spending. The Board, in turn,
requires the Banks to budget annually for
capital outlays by capital class to estimate Authentication of Currency
the effect of total operating and capital In 1988 the Federal Reserve initiated
spending. During the budget year, the a special project for the development
Banks must submit proposed major pur- of an optical counterfeit-detection syschases of assets to the Board for further tem (OCDS). During 1989 the project
review and approval. The Board of was renamed "Development of CurGovernors reviews capital expenditures
for the Board.
TableC.3
Special Projects
For 1990 the Board of Governors has
approved research and development for
two projects intended to provide longrange benefits to the Federal Reserve and
the banking industry. Because the spending on such projects is relatively high and
short-term, the Federal Reserve accounts
for it separately from its operating
expenses.
Digital Imaging of Checks
In mid-1985 the Conference of First Vice
Presidents authorized the testing of digital



Currency in Circulation, New Notes Issued,
and Notes Destroyed, 1990 Estimate
Millions of pieces

Dollar
denomination

Notes
in
circulation1

New
notes
paid
out2

Notes
destroyed2

1
2
5
10
20
50
100

4,776
415
1,170
1,172
3,249
643
1,327

3,185
16
889
792
1,704
176
319

3,061
4
834
791
1,632
128
112

Total

12,752

7,081

6,562

1. As of September 1990.
2. Based on actual levels through November 1990 and
expected levels for December 1990. Notes paid out do not
include additions to inventory at the Reserve Banks.

Special Categories of System Expense

rency Authentication Systems" because
research efforts included not only
OCDS but also other alternatives for
authentication.
OCDS is an effort to improve capabilities for counterfeit detection for enhancing the currency service provided to
financial institutions and the public. Other
development efforts under way in counterfeit deterrence include long- and shortterm authentication alternatives that are
expected to increase the Federal Reserve's ability to detect counterfeit currency. All of these efforts should produce
counterfeit detector devices to be placed
on the Federal Reserve's high speed
currency-processing equipment.
The 1991 special project budget includes $3.9 million in support of these
efforts.
Currency Printing
The Bureau of Engraving and Printing
produces currency; the Federal Reserve

53

Banks put it into circulation through
depository institutions and destroy it as it
wears out. 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.3).
New currency is printed to replace
worn notes and to accommodate increases
in the demand for circulating currency
(table C.4). Notes are also required for
inventories held by the Reserve Banks to
meet changes in demand.
To minimize the number of new notes
ordered and the cost of their printing, the
Board consults with the Bureau of Engraving and Printing to ensure that it
uses efficient methods, maintains System guidelines on the quality of notes,
and sees that Reserve Banks do not
destroy notes prematurely. The Board
and the Banks also monitor all related
costs, such as those for transportation
and packaging.

Table C.4
Costs to the Federal Reserve of New Currency, 1989-91
Millions of dollars, except as noted
1989
actual

1990
estimated

1991
budget

Percent
change,
1990-91

Printing1
Shipping from Washington
Reimbursement to the Treasury
for issuance and retirement

168.2
4.0

183.7
5.0

252.0
5.5

37.2
10.0

2.0

1.4

1.7

21.4

Total costs of currency

174.4

190.1

259.2

36.3

Item

1. Based on 6.3 billion notes in 1989, 7 billion notes in
1990, and 8 billion notes in 1991.




55

Appendix D

Sources and Uses ofFunds
The Federal Reserve System, in accordance with generally accepted accounting
principles, accrues income and expenses
and capitalizes acquisitions of assets
whose useful lives extend over several
years (see appendix C).
The System derives its income primarily from U.S. government securities
that die Federal Reserve has acquired
through open market operations, one of
the tools of monetary policy. These earnings account for approximately 85 percent of current income (table D.l).
The current expenses of the Reserve
Banks consist of their operating expenses
Table D.l
Income of the Federal Reserve System,
1990-91
Millions of dollars
Source

1989
actual

1990
estimate

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

396.9
20,064.6
1,037.4
702.4
47.9

117.9
19,994.5
2,603.8
729.5
28.9

Total

22,249.3

23,474.6




and the costs of the earnings credits
granted to depository institutions on
clearing balances held with the Reserve
Banks (table D.2). The Reserve Banks
record extraordinary adjustments to current net income in a profit and loss
account. The primary entries in the
account are for gains or losses on the sale
of U.S. government securities and for
gains or losses that result either from the
sale of assets denominated in foreign
currencies or from the revaluation of
those assets at market exchange rates.
The Reserve Banks retain a surplus to
cushion unexpected losses, much as
commercial establishments retain earnings. The Board of Governors requires
that the surplus equal the capital paid in
by the member banks. Since the end of
1964, the Board's policy has been to
transfer to the Treasury all net income
after paying the statutory dividend to
member banks and the amount necessary
to equate surplus to paid-in capital. The
amount transferred is classified as interest
on Federal Reserve notes. Such payments
were $21.6 billion in 1989 and are
estimated to be $23.6 billion in 1990.

56

Annual Report: Budget Review, 1989-90

Table D.2
Distribution of the Income of the Federal Reserve System, 1989-90
Millions of dollars
1989
actual

1990
estimate

22,249

23,475

1,184
148

1,211
134

20,917

22,130

1,296

2,220

41

100

Assessments by Board
Board expenses
Cost of currency

90
175

104
193

Other distributions
Dividends paid to member banks 5 ..
Transfers to, or from ( - ) , surplus6.

130
131

141

21,646

23,633

Item
Current income 1
LESS
2

Current expenses of Reserve Banks
Operating expenses
Costs of earnings credits
EQUALS

Current net income
PLUS
3

Net additions to, or deductions from (—), current net income .
LESS

Cost of unreimbursed Treasury services4

180

EQUALS

Payment to U.S. Treasury
1. See table D . l .
2. Net of reimbursements due from the U.S. Treasury
and other government agencies. Reflects reductions of
$46.7 million in 1989 and $60.5 million in 1990 in credits
for net periodic pension cost.
3. 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.
4. The cost of services provided to the U.S. Treasury
that are reimbursable under agreements with the Treasury
and for which reimbursement is not anticipated.
5. The Federal Reserve Act requires the Federal Reserve
to pay dividends to member banks at the rate of
6 percent of paid-in capital.
6. Each year the Federal Reserve transfers to its surplus
account an amount sufficient to equate surplus to paid-in
capital to provide a reserve against losses.

57

Appendix E

Federal Reserve System Audits
The Board of Governors, each of the
Reserve Banks taken separately, and the
Federal Reserve System as a whole are
all subject to several levels of audit and
review. 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 Office of Inspector General conducts audits, operations reviews,
and investigations of the programs and
operations of the Board and those Board
functions delegated to the Federal
Reserve Banks. The OIG retains an
independent auditor each year to certify
the fairness of the Board's financial

statements and its compliance with laws
and regulations affecting those financial
statements.

General Accounting Office
The 1978 passage of the Federal Banking
Agency Audit Act (Public Law 95-320)
brought most of the operations of the
Federal System under the purview of the
General Accounting Office (GAO). The
GAO, which currently has 21 projects in
various stages of completion, since 1979
has completed 81 reports on selected
aspects of Federal Reserve operations
(tables E . l and E.2). The GAO has also
involved the Federal Reserve in about
61 other reviews not directly related to
the System and has terminated 35 others
before completion. The reports are
available directly from the GAO.

Table E.l
Active GAO Projects Relating to the Federal Reserve
Subject
Proposals for dealing w i t h the international debt crisis
Economic sanctions imposed on Panama
Foreign direct investment
International money laundering
Capital adequacy
Fraud backlog cases
East-West financial relations
Deposit insurance outside the U n i t e d States
Deposit insurance issues
Anticompetitive service contracts
Capital adequacy standards for internationl banks
Capital adequacy standards for securities brokers-dealers
Foreign affiliates o f U.S. brokers-dealers
Expedited funds availability requirement
Federal tax deposit system
Agencies' information collecting o f foreign economies and trade
C C C control over foreign institutions
Federal agencies' drug-testing programs
Collecting and disseminating t h r i f t and bank call report data
C r i m i n a l cases f r o m financial-institution fraud
GSE's capital and regulation




Date initiated
10/27/88
1/19/89
2/9/89
3/8/89
10/6/89
11/8/89
12/1/89
12/15/89
12/20/89
2/21/90
3/14/90
3/14/90
3/14/90
3/28/90
4/9/90
4/19/90
5/15/90
8/8/90
9/4/90
11/2/90
12/5/90

58

Annual Report: Budget Review, 1989-90

Table E. 2
Completed GAO Reports Relating to the Federal Reserve System
Report
Comparing Policies and Procedures o f the Three Bank
Regulatory Agencies
A r e OPEC Financial Holdings a Danger to U.S. Banks or the Economy?
Federal Systems Not Designed to Collect Data on A l l Foreign
Investments in U.S. Depository Institutions
Considerable Increase i n Foreign Banking in United States since 1972 ..
Investment Policies, Practices and Performance
o f Federal Retirement Systems
Federal Supervision o f Bank Holding Companies Needs Better, More
Formalized Supervision
The Federal Reserve Should Assure Compliance
w i t h the 1970 Bank Holding Company Act Amendments
Federal Agencies' Initial Problems w i t h the Right to Financial
Privacy Act o f 1978
Internal Auditing Can Be Strengthened in the Federal Reserve System
Despite Positive Effects, Further Foreign Acquisitions o f U.S. Banks
Should Be Limited until Policy Conflicts A r e Fully Addressed . . .
Federal Examinations o f Financial Institutions: Issues That
Need to Be Resolved
Examinations o f Financial Institutions D o Not Assure Compliance
w i t h Consumer Credit Laws
Disappointing Progress i n Improving Systems for Resolving
Billions in Audit Findings
A n Economic Overview o f Bank Solvency Regulation
Federal Reserve Security over Currency Transportation Is Adequate
The Federal Structure for Examining Financial Institutions
Can Be Improved
Response to Questions Bearing on the Feasibility
o f Closing the Federal Reserve Banks
Bank Secrecy Act Reporting Requirements Have Not Met
Expectations, Suggesting Need for Amendment
Federal Reserve Could Improve the Efficiency o f Bank Holding
Company Inspections
Financial Institution Regulatory Agencies Should Perform Internal Audit
Reviews o f their Examination and Supervision Activities
Information on Selected Aspects o f Federal Reserve System Expenditures.
Federal Review o f 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
o f Check-Clearing Operations
Information about Depository Institutions' Ancillary Activities Is Not
Adequate for Policy Purposes
Bank Merger Process Should Be Modernized and Simplified
A n Analysis o f Fiscal and Monetary Policies
Bank Examination for Country Risk and International Lending
Credit Insurance Disclosure Provisions o f the Truth-in-Lending Act
Consistently Enforced Except When Decisions Appealed
Survey o f Investor Protection and the Regulation
o f Financial Intermediaries
Financial Institutions Regulatory Agencies Can Make Better Use
o f Consumer Complaint Information
Expediting Tax Deposits Can Increase the Government's
Interest Earnings
Unauthorized Disclosure o f 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 o f New York
Statutory Requirements for Examining International Banking
Institutions Need Attention




Number

Date

GGD-79-27
EMD-79-45

3/29/79
6/11/79

GGD-79-42
GGD-79-75

6/19/79
8/1/79

FPCD-79-17

8/31/79

GGD-80-20

2/12/80

GGD-80-21

3/12/80

GGD-80-64
GGD-80-59

5/29/80
8/8/80

GGD-80-66

8/26/80

GGD-81-12

1/6/81

GGD-81-13

1/21/81

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

1/23/81
2/13/81
2/23/81

GGD-81-21

4/24/81

GGD-81-49

5/21/81

GGD-81-80

7/23/81

GGD-81-79
GGD-82-5

8/18/81
10/19/81

GGD-82-33
GGD-82-31

2/12/82
2/24/82

GGD-82-21
GGD-82-36

2/26/82
4/9/82

GGD-82-22

5/7/82

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

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

GGD-83-3

GGD-83-30

10/25/82

7/13/83

GGD-83-13

8/25/83

GGD-84-14

11/21/83

GGD-84-40

2/3/84

GGD-84-4

2/3/84

AFMD-84-10

5/2/84

GGD-84-39

7/11/84

Federal Reserve System Audits

59

Table E. 2
Continued
Report

Number

Supervisory Examinations o f International Banking Facilities
Need to Be Improved
A n Examination o f Concerns Expressed about the Federal Reserve's
Pricing o f Check-Clearing Activities
Difficulties i n Evaluating the Effectiveness o f the C o m m u n i t y
Reinvestment A c t
International Coordination o f Bank Supervision: The Record to Date
Implementation o f the Export Trading Company A c t o f 1982
I n f o r m a t i o n on Independent Public Accountant Audits
o f Financial Institutions
A n Analysis o f T w o Types o f Pooled Investment Funds
H o w the Markets A r e Developed and H o w They A r e Regulated
U . S . Banking Supervision and International Supervisory Principles
Financial Institution Regulators' Compliance Examination
The Market's Structure, Risks, and Regulation
Dealer V i e w s on M a r k e t 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 L i m i t s
Insulating Banks f r o m the Potential Risk o f Expanded Activities
The Federal Reserve Response Regarding Its M a r k e t - M a k i n g Standard
Change i n Fees and Deposit Account Interest Rates since Deregulation
A n Examination o f V i e w s Expressed about Access to Brokers' Services

..
.
.
.

Issues Related to Repeal o f the Glass-Steagall A c t
Preliminary Observations on the October 1987 Crash
Supervision o f Overseas Lending Is Inadequate
Competitive Concerns o f Foreign Financial Firms in Japan,
the United K i n g d o m and the United States
Administrative Expenses at F H L B B and F R B for 1985 and 1986
Government i n the Sunshine A c t Compliance at Selected Agencies
Trends i n Commercial Bank Performance, December 1976-June 1987 .
U . S . Commercial Banks' Securities Activities i n London
Lending to Troubled Sectors
Government Check-Cashing Issues
Conflict o f Interest: Abuses i n Commercial Banking Institutions
Competitive Fairness Is an Elusive Goal
Independent Audits Needed to Strengthen Internal Control
and Bank Management
Information on the System's Check Collection Service
Oversight o f Critical Banking Systems Should Be Strengthened
Activities o f Securities o f Bank H o l d i n g Companies
The Stock, Options, and Futures Markets A r e Still at Risk
Update on U.S. Commercial Banks' Securities i n London
U . S . Financial Services' Competitiveness under the Single
M a r k e t Program
L i m i t e d Public Demand for N e w D o l l a r C o i n or Elimination o f Pennies.
Oversight o f Automation Used to Clear and Settle Trades Is Uneven
The Government's Exposure to Risks
Office o f Inspector General Operations at Financial Regulatory Agencies
A d d i t i o n a l Reserves and R e f o r m Needed to Strengthen the Fund
M o r e Transaction Information and Investor Protection Measures
A r e Needed
Issues Relating to Banks' Selling Insurance

Office of Inspector General
The Board's Office of Inspector General
functions in accordance with the Inspec


Date

GGD-84-65

9/30/84

GGD-85-9A

1/14/85

OCE-86-1

11/4/85

NSIAD-86-40
NSIAD-86-42

2/6/86
2/27/86

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

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

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

9/29/86
10/20/86

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

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

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

1/22/88
1/26/88
5/5/88

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

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

GGD-89-35
GGD-89-61

1/27/89
5/12/89

AFMD-89-25
GGD-90-17

5/31/89
12/15/89

IMTEC-90-14
GGD-90-48
GGD-90-33
NSIAD-90-98
NSIAD-90-99

1/14/90
3/14/90
4/11/90
5/7/90
5/21/90

GGD-90-88
IMTEC-90-47
GGD-90-97
AFMD-90-55FS
AFMD-90-100
GGD-90-114

5/23/90
7/12/90
8/15/90
8/24/90
9/11/90
9/14/90

GGD-90-113

9/25/90

tor General Act of 1978, as amended.
The OIG provides policy direction for
audits, operations reviews, and investigations of the programs and operations of

60

Annual Report: Budget Review, 1989-90

the Board and its delegated functions at
the Federal Reserve Banks, and plans
and conducts them. The OIG also reviews
existing and proposed legislation and
regulations for economy and efficiency,
and it recommends policies and supervises and conducts activities that promote
economy and efficiency and that prevent
and detect waste, fraud, and abuse in
Board and Board-delegated programs and
operations. In addition, it coordinates its
efforts with other governmental and
nongovernmental agencies to promote
economy and efficiency and detect and
prevent fraud and abuse in activities
administered or financed by the Board.
The OIG keeps the Congress and the
Chairman of the Board fully informed
about serious abuses and deficiencies and
about the status of any corrective actions.
During 1990, the OIG reported on six
audits and four operations reviews, closed
out four investigations, and conducted
584 legislative and regulatory reviews.
Audit reports issued during 1990 addressed the Board's information security
program; its computer-operating system
and the software to control computer
access; its revised compensation program
for regular staff; sensitive payments to
members of the Board and senior staff;
and the fairness of the financial statements
of the Board and the Federal Financial
Institutions Examination Council and
each agency's compliance with applicable laws and regulations. Operations
review reports were issued on the Offices
of the Staff Director for Federal Reserve
Bank Activities and the Executive Director for Information Resources Management and on the Divisions of Federal
Reserve Bank Operations and Applications Development and Statistical
Services.
•




61

Appendix F

Expenses and Employment
at the Federal Reserve Banks
Table F.l
Operating Expenses of the Federal Reserve Banks, by District, 1990-91 1
Thousands o f dollars, except as noted

District

Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
T o t a l , all Districts

1990
estimate

Change
Amount

Percent

83,548
274,843
86,577
83,141
110,083
134,365
160,038
65,037
66,560
91,881
92,570
165,921

88,742
296,931
82,398
87,956
116,644
143,128
171,018
69,261
70,520
97,753
98,680
177,935

5,194
22,088
-4,179
4,815
6,561
8,763
10,979
4,224
3,960
5,873
6,109
12,014

6.2
8.0
-4.8
5.8
6.0
6.5
6.9
6.5
5.9
6.4
6.6
7.2

1,414,565

1,500,965

86,400

6.1

6,617

7,647

1,031

1,421,182

1,508,612

87,430

Special projects
Total

1991
budget

6.1

1. Excludes capital outlays.

Table F.2
Employment at the Federal Reserve Banks, by District, 1990-91
Average number o f personnel, except as noted 1

District

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

1990
estimate

Change
Amount

Percent

1,466
4,059
1,329
1,487
2,045
2,342
2,611
1,219
1,108
1,707
1,697
2,629

1,485
4,080
1,366
1,499
2,073
2,387
2,628
1,222
1,099
1,697
1,714
2,611

20
20
37
12
28
45
18
3
-9
-10
18
-18

1.4
.5
2.8
.8
1.4
1.9
.7
.2
-.8
-.6
1.0
-.7

23,698

23,861

163

.7

26

1

-25

23,725

23,862

138

1. See chapter 3, note 1, for the definition o f average
number o f personnel ( A N P ) .




1991
budget

.6

62

Annual Report: Budget Review, 1989-90

Table F.3
Expenses of the Federal Reserve Banks, by Operational Area, 1990-91
Thousands o f dollars, except as noted

Operational area

M o n e t a r y and economic p o l i c y
Services to the U . S . Treasury and
other government agencies
Services to financial institutions
and the p u b l i c
Supervision and regulation

Total

1990
estimate
99,660

1991
budget
107,512

Change
Amount

Percent

7,852

7.9

156,137

167,223

11,086

7.1

944.392
214,376

992,076
234,155

47,683
19,779

5.0
9.2

1,414,564

1,500,965

86,400

6.1

443,939
389,081

479,070
411,811

35,131
22,731

7.9
5.8

1

MEMO
Support
Overhead

1. Costs o f support and overhead included i n expenses
b y operational area. Support refers to activities, such as
data processing, whose costs can be charged to users

according to the amount o f use. Overhead refers to activities, such as a u d i t i n g , whose costs are charged a c c o r d i n g to
the users'shares o f total direct costs.

Table F. 4
Expenses of the Federal Reserve Banks
for Monetary and Economic Policy, by District, 1990-91
Thousands o f dollars, except as noted

District

1990
estimate

1991
budget

Change
Amount

Percent

Boston
New York1
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. L o u i s
Minneapolis
Kansas C i t y
Dallas
San Francisco

4,954
38,776
3,962
4,782
4,869
5,998
7,504
5,231
4,988
4,751
5,504
8,340

5,169
41,828
4,293
5,071
5,361
6,607
7,855
5,389
5,369
5,055
6,105
9,409

215
3,052
331
289
492
609
352
159
381
304
600
1,069

4.3
7.9
8.3
6.0
10.1
10.2
4.7
3.0
7.6
6.4
10.9
12.8

Total

99,660

107,512

7,852

7.9

1. Expenses o f open market t r a d i n g operations, located
i n the D i s t r i c t , are $18.4 m i l l i o n f o r 1990 and $19.9
m i l l i o n f o r 1991.




Expenses and Employment
Table F. 5
Expenses of the Federal Reserve Banks
for Services to the U.S. Treasury and Other Government Agencies, by District, 1990-91
Thousands o f dollars, except as noted

District

Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas C i t y
Dallas
San Francisco

Total

1990
estimate

1991
budget

Change
Amount

Percent

7,447
34,964
17,843
13,441
10,115
12,286
15,332
7,413
5,319
9,349
7,601
15,028

8,459
37,209
18,512
13,595
10,600
13,440
16,638
8,367
6,154
10,070
8,862
15,319

1,012
2,246
669
154
484
1,154
1,306
953
835
721
1,261
291

13.6
6.4
3.8
1.1
4.8
9.4
8.5
12.9
15.7
7.7
16.6
1.9

156,137

167,223

11,086

7.1

Table F. 6
Expenses of the Federal Reserve Banks
for Services to Financial Institutions and the Public, by District, 1990-91
Thousands o f dollars, except as noted
1990
estimate

1991
budget

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

61,169
153,850
54,163
54,480
82,595
99,193
108,050
43,832
45,542
59,428
62,361
119,730

Total

944,392

District




Change
Amount

Percent

63,418
164,850
47,574
58,302
87,473
104,303
115,093
46,450
47,177
62,649
65,714
129,073

2,249
11,000
-6,589
3,822
4,878
5,110
7,043
2,618
1,635
3,221
3,353
9,343

3.7
7.1
-12.2
7.0
5.9
5.1
6.5
6.0
3.6
5.4
5.4
7.8

992,076

47,683

5.0

63

64

Annual Report: Budget Review, 1989-90

Table F. 7
Expenses of the Federal Reserve Banks
for Supervision and Regulation, by District, 1990-91
Thousands o f dollars, except as noted

District

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

Total

1990
estimate

1991
budget

Change
Amount

Percent

9,978
47,254
10,609
10,438
12,504
16,888
29,153
8,561
10,711
18.353
17,104
22,823

11,696
53,044
12,019
10,988
13,210
18,778
31,432
9,055
11,821
19,979
17,999
24,134

1,719
5,791
1,410
550
706
1,890
2,279
493
1,109
1,626
895
1,311

17.2
12.3
13.3
5.3
5.6
11.2
7.8
5.8
10.4
8.9
5.2
5.7

214,376

234,155

19,779

9.2

Table F. 8
Expenses of the Federal Reserve Banks
for Salaries of Officers and Employees, by District, 1990-91
Thousands o f dollars, except as noted
1990
estimate

1991
budget

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

47,233
143,686
39,050
41,745
56,255
65,865
80.178
33,324
32,827
49,464
50,262
86,474

Total

726,363

District




Change
Amount

Percent

50,827
154,174
42,320
43,957
60,261
70,317
84.806
35,367
34,721
52,524
52,995
91,607

3,594
10,488
3,270
2,213
4,006
4.452
4,628
2,043
1,895
3,061
2,732
5,133

7.6
7.3
8.4
5.3
7.1
6.8
5.8
6.1
5.8
6.2
5.4
5.9

773,878

47,515

6.5

Expenses and Employment

65

Table F. 9
Factors in the 1990-91 Change in Salaries
of Officers and Employees of the Federal Reserve Banks, by District
Percentage points
Merit
adjustment

Structure
adjustment

Promotion
and reclassification

Change i n
staffing

Turnover
and lag 1

Overtime

Other

Total
change

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

4.5
5.5
5.7
4.0
4.9
5.4
4.9
4.6
4.7
6.1
4.9
5.0

.2
.0
.3
.2
.0
.0
.0
.2
.5
.3
.1
.0

1.6
1.6
.4
.5
1.7
1.1
.8
.8
1.0
1.3
.5
1.7

1.9
1.3
3.1
2.1
2.4
1.7
.9
.0
-.4
.1
1.2
-.4

-.3
-1.7
-.4
-1.4
-1.5
-1.3
-.8
.5
.0
-1.5
-1.0
-.1

-.1
.2
-.8
-.2
-.5
-.2
-.1
-.3
-.1
-.1
-.3
-.4

.0
.2
.0
.1
.0
.0
.1
.2
.0
.0
.0
.0

7.6
7.3
8.4
5.3
7.1
6.8
5.8
6.1
5.8
6.2
5.4
5.9

Total

5.1

.1

1.2

1.1

-.9

-.2

.1

6.5

District

1. Turnover is the replacement o f a departing employee
w i t h one having a lower pay grade. Lag is the time during
w h i c h a position remains vacant.

Table F. 10
Capital Outlays of the Federal Reserve Banks, by District, 1990-91
Thousands o f dollars, except as noted

District

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

Total




1990
estimate

1991
budget

Change
Amount

Percent

9,904
47,743
24,370
13,419
17,516
19,851
21,243
13,905
12,725
7,395
51,596
20,005

8,303
86,513
6,820
12,446
14,291
16,280
28,737
5,877
39,208
6,583
80,415
22,935

-1,601
38,770
-17,550
-973
-3,225
-3,572
7,494
-8,028
26,483
-813
28,819
2,931

-16.2
81.2
-72.0
-7.2
-18.4
-18.0
35.3
-57.7
208.1
-11.0
55.9
14.7

259,671

328,408

68,737

26.5

66

Annual Report: Budget Review, 1989-90

Table F. 11
Budget Performance of the Federal Reserve Banks,
Operating Expenses, by District, 19901
Thousands o f dollars, except as noted

District

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

Total

1990
budget

1990
estimate

Change
Amount

Percent

84,492
276,013
76,577
84,789
110,180
134,560
163,192
65,673
67,939
92,289
92,590
166,551

83,548
274,843
86,577
83,141
110,083
134,365
160,038
65,037
66,560
91,881
92,570
165,921

-944
-1,170
10,000
-1,648
-97
-195
-3,154
-636
-1,379
-409
-20
-630

-1.1
-.4
13.1
-1.9
-.1
-.1
-1.9
-1.0
-2.0
-.4
.0
-.4

1,414,845

1,414,564

-281

.0

1. The 1990 approved budget includes the G r a m m - R u d m a n - H o l l i n g s reductions.

Table F. 12
Budget Performance of the Federal Reserve Banks,
Employment, by District, 1990
Average number o f personnel, except as noted 1

District

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

Total

1990
estimate

1,471
4,093
1,336
1,519
2,057
2,392
2,658
1,230
1,117
1,716
1,708
2,594

1,466
4,059
1,329
1,487
2,045
2,342
2,611
1,219
1,108
1,707
1,697
2,629

-6
-34
-7
-32
-12
-50
-47
-11
-9
-9
-11
35

-.4
-.8
-.5
-2.1
-.6
-2.1
-1.8
-.9
-.8
-.5
-.6
1.3

23,890

23,698

-192

-.8

1. See chapter 3, note 1, for the definition o f average number o f personnel.




Change

1990
budget

Amount

Percent

Expenses and Employment

67

Table F. 13
Expenses of the Federal Reserve Banks, by Operational Area, 1986-91
Thousands o f dollars, except as noted

Year

1986
1987
1988
1989
1990 estimate
1991 budget

Monetary
and
economic
policy

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

Services to
financial
institutions
and the
public

Supervision
and
regulation

Total

90,570
86,484
87,283
93,553
99,660
107,512

136,789
135,693
141,524
145,547
156,137
167,223

770,016
799,227
848,481
916,310
944,392
992,076

163,915
170,428
185,090
195,076
214,376
234,155

1,161,290
1,191,832
1,262,379
1,350,487
1,414,564
1,500,965

3.5

4.1

5.2

7.4

5.3

MEMO
Average annual
change, percent

Table F. 14
Employment at the Federal Reserve Banks, by Operational Area, 1986-91
A v e r a g e number o f personnel, except as n o t e d 1

Monetary
and
economic
policy

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

Services to
financial
institutions
and the
public

Supervision
and
regulation

Support2

Overhead2

Total

1986
1987
1988
1989
1990 estimate
1991 budget

791
776
766
783
773
786

1,820
1,837
1,819
1,771
1,837
1,912

8,800
8,777
9,033
9,423
9,304
9,227

2,088
2,148
2,209
2,198
2,229
2,305

4,470
4,452
4,562
4,552
4,584
4,646

5,275
5,026
4,961
4,948
4,973
4,986

23,243
23,014
23,348
23,674
23,698
23,861

MEMO
Average annual
change, percent

-.1

1.0

1.0

2.0

.8

-1.1

.5

Year

1. See chapter 3 , note 1, f o r the d e f i n i t i o n o f average n u m b e r o f personnel.
2. See table F.3, note 1, f o r definition.




68

Annual Report: Budget Review, 1989-90

Maps of the Federal Reserve System

9

1
BOSTON

MINNEAPOLIS!

12
SAN FRANCISCO

^.
B N H W YORK
L.
CLEVELAND U ^PHILADELPHIA

CHICAGO®

10

4

KANSAS C I T Y B

g
ST. LOUIS

n

g
RICHMOND

8

5
6

•
Atlanta

11 •
DALLAS

J P ^ ^ ^ J P

LEGEND

Both pages

Facing page

• Federal Reserve Branch city

• Federal Reserve Bank city
• Board of Governors of the Federal
Reserve System

—

Branch boundary

NOTE

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




Rico and the U.S. Virgin Islands; the San
Francisco Bank serves American Samoa,
Guam, and the Commonwealth of the
Northern Mariana Islands. The Board of
Governors revised the boundaries of the
System most recently in August 1986.

Maps of the Federal Reserve System

5-E

69

Baltimore

Pittsburgh

Charlotte
• Cincinnati

Buffalo

NEW

BOSTON

•

YORK

PHILADELPHIA

CLEVELAND

RICHMOND

Nashville

Birmingham.

Louisville

Detroit •
Jacksonville

•

Memphis

N e w Orleans
Miami
ATLANTA

CHICAGO

•

ST.

LOUIS

Helena

MINNEAPOLIS

Omaha*
ALASKA

Denver

Seattle
Portland
Oklahoma City

KANSAS

CITY

Houston

• L o s Angeles

San A n t o n i o i
HAWAII

DALLAS




SAN

FRANCISCO

FRB 1-2,000-0291 C