Full text of Annual Report : Budget Review : 1995-1996

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Board of Governors of the Federal Reserve System

1995–96

Board of Governors of the Federal Reserve System

1995–96

July 1996
This publication is available from Publications Services, Board of Governors
of the Federal Reserve System, Washington, DC 20551

Contents
1

Introduction
FEDERAL RESERVE BUDGET PROCESS
AND OPERATIONAL AREAS

The 1996 Budgets
9
9
11
12
13

Chapter 1
FEDERAL RESERVE SYSTEM
Net Expenses
Trends in Expenses and Employment
Operational Areas
1996 Budget Initiatives

15
15
15
18
19
23
24
26

Chapter 2
BOARD OF GOVERNORS
Overview of the Budget
Highlights of the Budget
Operations Budget by Division and Object of Expense
Operations Budget by Operational Area
Capital Budget
Trends in Expenses and Employment
Extraordinary Items

27
27
29
31
34
35
37
38
39

Chapter 3
FEDERAL RESERVE BANKS
Major Initiatives
1996 Budget Objective
Budget by Operational Area
Budget by Object of Expense
Capital Outlays
Trends in Expenses and Employment
Volume and Unit Costs
1995 Budget Performance

Appendixes
43
43
46
46
47

Appendix A
SPECIAL CATEGORIES OF SYSTEM EXPENSE
Priced Services
Capital Outlays
Special Projects
Currency Printing and Circulation

51

Appendix B
SOURCES AND USES OF FUNDS

53
53
57

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

59

Appendix D
EXPENSES AND EMPLOYMENT
AT THE FEDERAL RESERVE BANKS

66

MAPS OF THE FEDERAL RESERVE SYSTEM

1

Introduction

Federal Reserve Budget Process
and Operational Areas
The Federal Reserve System comprises
the seven-member Board of Governors
in Washington, D.C., the twelve Federal
Reserve Banks with their twenty-five
Branches in Districts around the nation,
the Federal Open Market Committee
(FOMC), and three advisory groups—
the Federal Advisory Council, the
Consumer Advisory Council, and the
Thrift Institutions Advisory Council.
The System was created in 1913 to
establish a safe and flexible monetary
and banking system. Over the years, the
Congress has given the Federal Reserve
more authority and responsibility for
achieving broad national economic and
financial objectives.
As the nation’s central bank, the
Federal Reserve has many, varied
responsibilities: It acts to ensure growth
of the nation’s economy consistent with
price stability; it serves as the nation’s
lender of last resort, with responsibility
for forestalling national liquidity crises;
and it is involved in bank supervision
and regulation, with responsibilities for
bank holding companies, state-chartered
banks that are members of the Federal
Reserve System, the foreign activities of
U.S. banks, and the U.S. activities of
foreign banks. The Federal Reserve also
administers the nation’s consumer credit
protection laws.
The Federal Reserve System plays a
major role in the nation’s payments
mechanism. The Reserve Banks distribute currency and coin, provide wire
and automated clearinghouse transfers
of funds and securities, and process
domestic checks. In addition, the Federal Reserve serves as the fiscal agent

for the U.S. Treasury and provides a
variety of other financial services for
the Treasury and other government
agencies.
In carrying out its responsibilities in
1995, the Federal Reserve System spent
an estimated $1.1 billion in net operating expenses. Total spending of an
estimated $2.0 billion was offset by an
estimated $922 million in revenue from
priced services, reimbursements, and
other income. The major source of
Federal Reserve income is earnings on
the portfolio of U.S. government securities in the System Open Market Account,
estimated at $23.8 billion in 1995.
Earnings in excess of expenses, dividends, and surplus—in 1995, an estimated $23.4 billion—are transferred to
the U.S. Treasury. (These earnings are
treated as receipts in the U.S. budget
accounting system, and anticipated earnings projected by the Office of Management and Budget appear in the U.S.
budget.)

The Budget Process
The Board of Governors and the Reserve
Banks have separate budgets and budgeting processes.

Board of Governors
All levels of Board management are
involved in a planning and budgeting
process that begins in the spring with
development of a budget guideline and
extends through November of each year.
The administrative governor, under

2

Annual Report: Budget Review, 1995–96

authority delegated by the Chairman,
oversees the process until the budget is
submitted to the Board for action at an
open meeting in November.
The Board budget is structured in four
operational areas (described in the next
section). Costs for data processing are
distributed to the four areas according to
use; 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.
The Board, in accordance with generally
accepted accounting principles, capitalizes certain assets and depreciates their
value over appropriate time periods
instead of expensing them in their year
of purchase. Hence, the Board has both
an operations budget and a capital
budget.
The Board’s Office of Inspector General (OIG), in keeping with its statutory
independence, prepares its proposed
budget apart from the Board’s budget.
The OIG budget is also presented to the
Board of Governors for action at an
open meeting in November. (The OIG is
discussed in chapter 2 and appendix C.)
After the Board budget is approved,
the cash requirement for the first half
of the calendar year is estimated and
the amount is raised by an assessment
on each of the Reserve Banks in
proportion to its capital stock and
surplus. The cash requirement for the
second half of 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.

Reserve Banks
Each year the Federal Reserve Banks,
like the Board, establish major operating
goals for the coming year, devise strategies for their attainment, estimate required resources, and monitor results.

As with the Board, the process begins
with development of a budget guideline.
The Board of Governors reviews the
proposed level of spending and communicates the budget objective to the
Reserve Banks for their guidance. Each
Bank then develops its own budget. The
budgets are reviewed at the Board by a
committee of three governors—the Bank
Activities Committee—both as separate
documents and in light of Systemwide
issues and the plans of the other Banks,
before they are presented to the full
Board of Governors for final action at an
open meeting in December.
The Banks’ budgets are also structured in four operational areas (described in the next section), with support
and overhead charged to the operational
areas. Approved separately from the
budget process, which focuses on
operational costs, are special projects,
which are long-range research and
development efforts that have the
potential to make a major improvement
in the nation’s payments mechanism
or in the Federal Reserve’s ability to
provide services (special projects for
1996 are described in appendix A).
The operations and financial performance of the Reserve Banks are
monitored throughout the year via a
cost-accounting system, the Planning
and Control System (PACS), which was
implemented by the Banks in 1977.
Under PACS, the costs of all Reserve
Bank services, both priced and nonpriced, are grouped by operational area,
and the costs of support and overhead
are charged to the four areas. (The
services assigned to each of the operational areas are listed in chapter 3, tables
3.7 through 3.10.) PACS makes it
possible to compare budgets with actual
expenses and enables the Board of
Governors to compare the financial and
operating performances of the Reserve
Banks.

Introduction

3

Operational Areas

Supervision and Regulation

For budgeting purposes, the Board of
Governors and the Reserve Banks
account for their activities in four major
operational areas. Three of the areas—
monetary and economic policy, supervision and regulation of financial
institutions, and services to financial
institutions and the public—are common to the Board and the Banks. The
Banks’ fourth operational area is services to the U.S. Treasury and other
government agencies, and the Board’s
fourth area is System policy direction
and oversight.

The Federal Reserve System plays a
major role in the supervision and regulation of banks and bank holding companies. The Board of Governors adopts
regulations to carry out statutory directives and establishes System supervisory
and regulatory policies; the Reserve
Banks conduct on-site examinations and
inspections of state member banks and
bank holding companies, review applications for mergers, acquisitions, and
changes in control from banks and bank
holding companies, and take formal
supervisory actions. In 1995 the Board
and the Reserve Banks conducted
approximately 613 state member bank
examinations and approximately 1,929
bank holding company inspections and
acted on a total of 3,508 international
and domestic applications.
The Board also enforces compliance
by state member banks with the federal
laws protecting consumers in their use
of credit. In 1995 the System conducted approximately 540 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.
Beyond these activities, the Federal
Reserve maintains continuous oversight
of the banking industry to ensure the
overall safety and soundness of the
financial system. This broader responsibility is reflected in the System’s presence in financial markets, through open
market operations, and in the Federal
Reserve’s role as lender of last resort.

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

Services to Financial Institutions
and the Public
The Federal Reserve System plays a
central role in the nation’s payments

4

Annual Report: Budget Review, 1995–96

mechanism, which is composed of many
independent systems that move funds
among financial institutions across the
country. The Reserve Banks obtain
currency and coin from the Bureau of
Engraving and Printing and from the
Mint and distribute it to the public
through depository institutions; they
also identify counterfeits and destroy
currency that is unfit for circulation. In
1995 the Reserve Banks distributed
$363.6 billion in currency and $4.6 billion in coin and destroyed $113.8 billion
in unfit currency.
The Reserve Banks (along with their
Branches and regional centers) also
process checks for collection—
approximately 14 billion checks in
1995 with a total value of more than
$11 trillion.
The Federal Reserve also plays a
central role in the nation’s payments
mechanism through its wire transfer
system, Fedwire. Through Fedwire,
depository institutions can draw on
their reserves or clearing accounts at
the Reserve Banks and transfer funds
anywhere in the country. Approximately
8,000 depository institutions use Fedwire through direct computer connections with Reserve Banks, and another
2,300 institutions use Fedwire through
off-line means such as telephone. In
1995, approximately 78 million transfers valued at about $223 trillion were
sent over Fedwire, an average of
$3.1 million per transfer and $892 billion per day.
The Federal Reserve allows participants in private clearing arrangements
to exchange and settle transactions on a
net basis through reserve or clearing
account balances. Users of net settlement services include local check
clearinghouse associations, automated
clearinghouse (ACH) networks, credit
card processors, automated teller
machine networks, and national and

regional funds transfer and securities
transfer networks. In 1995, approximately 900,000 net settlement entries
for participants in small-dollar clearing
arrangements were processed by the
Reserve Banks.
Approximately 25,140 depository
institutions participate in the Federal
Reserve’s ACH service, which allows
them to send or receive payments electronically instead of by check. The institutions use the ACH service for credit
and debit transactions. As of July 1995,
all of the approximately 7,450 ACH
endpoints had electronic connections
with the Federal Reserve. In 1995 the
Reserve Banks processed approximately
2.78 billion ACH transactions valued
at about $9.2 trillion; approximately
22 percent of the transactions were for
the federal government, and the rest
were for commercial establishments.
The securities services provided by
the Reserve Banks cover the handling of
book-entry and definitive securities and
the collection of coupons and miscellaneous items. The book-entry service,
begun in 1968, enables holders of
Treasury and government agency securities to transfer the securities electronically to other institutions throughout the country. In 1995 the Reserve
Banks processed approximately 13.7 million securities transfers valued at
$158 trillion.
Until 1994, the Federal Reserve
provided two paper-based securities services, definitive securities safekeeping
and noncash collection. The priced
definitive securities safekeeping service,
a custodial service, was discontinued at
the end of 1993, however, because of
declining volume. The noncash collection service, through which maturing
coupons and bonds are presented for
collection, processed about 1.8 million
transactions in 1994 and about 0.8 million transactions in 1995.

Introduction

Services to the U.S. Treasury
and Other Government Agencies
The U.S. government uses the Federal
Reserve as its bank. Through deposit
accounts at the Reserve Banks, the
government issues checks and payments
and collects receipts. The Reserve Banks
also process wire transfers of funds and
automated clearinghouse payments and
give the Treasury daily statements of
account activity.
Beyond these typical depository
activities, the Reserve Banks provide
several unique services to the federal
government. They monitor the tax
receipts deposited in the more than
10,000 tax and loan accounts that are
maintained by depository institutions
designated to perform this function, they
hold the collateral that those institutions
pledge to support these and other government deposits, and they transfer funds to
the Treasury’s account at its request.

5

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. The Reserve Banks also redeem
food coupons for the U.S. Department
of Agriculture and destroy redeemed
coupons.

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

The 1996 Budgets

9

Chapter 1

Federal Reserve System
For 1996, the Federal Reserve System
has budgeted net operating expenses of
$1,121.6 million. Revenue from priced
services provided to depository institutions is expected to total $791.4 million,
or 37.1 percent of total budgeted operating expenses. Total operating expenses
are budgeted at $2,134.5 million, an
increase of 5.1 percent over estimated
1995 expenses. Of this total, $1,968.8 million is for the Reserve Banks and
$165.7 million is for the Board of
Governors (table 1.1).
Not included in the budget for operations are expenses for Reserve Bank
special projects, which are budgeted at
$36.9 million for 1996, down from
$43.2 million estimated for 1995.1 Also
excluded is the cost of currency,
budgeted at $442.3 million for 1996, an
increase of 18.5 percent over the
estimated 1995 cost of $373.2 million.2
The distribution of expenses is similar to
that in previous years, with the Reserve
Banks accounting for approximately
three-fourths of the total (chart 1.1).
System employment (including staff
for the special projects) is budgeted at
25,468 for 1996, a decline of 8 from the

1. As research and development efforts, special
projects are separate from the continuing operations of the System and are therefore not included
in the System operations budget. 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 project
approved for 1996 appears in appendix A.
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 A.

estimated 1995 level. (Details are given
in chapters 2 and 3.)

Net Expenses
The System expects to recover 47.5 percent of its budgeted 1996 operating
expenses. The budget includes revenue
from priced services, other income, and
claims for reimbursement. After these
items are deducted from budgeted 1996
operating expenses, the net expenses
of the System show an increase of
6.7 percent over estimated 1995 net
operating expenses (table 1.2).
Revenue from priced services represents fees that are set so as to recover the
full cost of providing the services (as
required by the Monetary Control Act of
1980), including the imputed cost of
float and the return on capital that would
have been received, and the taxes that
would have been paid, had a commercial
entity in the private sector furnished the
services. Projected revenue from priced
services is detailed in table 1.3; the
constraint imposed on Federal Reserve
Chart 1.1
Distribution of Expenses of the
Federal Reserve System, 1996 1
Special Projects, 1.4%
Currency, 16.9%

Board of
Governors, 6.4%

Reserve Banks, 75.3%
1. See text notes 1 and 2.

10

Annual Report: Budget Review, 1995–96

budgets by the need to keep such
services competitive and the calculation
of fees are discussed in appendix A.
‘‘Other income’’ comes from services
provided on behalf of the U.S. Treasury
that are paid for by the depository
institutions using the services; included

are fees for such services as the settlement of transfers among depository
institutions and the wire transfer of
funds between depository institutions
and the Treasury. Claims for reimbursement represent the expenses incurred by
Reserve Banks in providing fiscal agency

Table 1.1
Expenses of the Federal Reserve System for Operations, Special Projects,
and Currency, 1994–96 1
Millions of dollars, except as noted
Percentage change

Entity and
type of expense

1994
actual

1995
estimate

1996
budget

Operating expenses
Reserve Banks 3 . . . . . . . . . . . . . . . . . . . . . . . . .
Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonpersonnel . . . . . . . . . . . . . . . . . . . . . . . . .
Board of Governors 4 . . . . . . . . . . . . . . . . . . . .
Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonpersonnel . . . . . . . . . . . . . . . . . . . . . . . . .

1,796.9
1,168.3
628.6
144.8
108.9
35.9

1,873.6
1,188.2
685.4
158.0
118.0
40.0

1,968.8
1,234.0
734.8
165.7
122.8
42.9

4.3
1.7
9.0
9.1
8.4
11.4

5.1
3.9
7.2
4.9
4.1
7.3

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

1,941.7
1,277.2
664.5

2,031.6
1,306.2
725.4

2,134.5
1,356.8
777.7

4.6
2.3
9.2

5.1
3.9
7.2

Special projects 5 . . . . . . . . . . . . . . . . . . . . . . . . .

61.4

43.2

36.9

. . .

. . .

Currency 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

368.2

373.2

442.3

1.4

18.5

1994 to 1995 1995 to 1996

2

1. In this and subsequent tables in this volume,
components may not sum to totals and may not yield
percentages shown because of rounding.
2. Operating expenses reflect all redistributions for
support and allocations for overhead and exclude capital
outlays (as well as Reserve Bank special projects, which
are shown separately).

3. For detailed information, see chapter 3.
4. Includes extraordinary items and expenses of the
Office of Inspector General. For detailed information, see
chapter 2.
5. See text note 1 and appendix A.
6. See text note 2 and appendix A.

Table 1.2
Operating Expenses of the Federal Reserve System, Net of Receipts
and Claims for Reimbursement, 1994–96
Millions of dollars, except as noted
Percentage change

Item

1994
actual

1995
estimate

1996
budget

Total System operating expenses . . . . . . . . .
Less
Revenue from priced services . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . .
Claims for reimbursement 1 . . . . . . . . . . . .

1,941.7

2,031.6

2,134.5

4.6

5.1

767.2
5.7
211.0

757.6
5.8
216.9

791.4
6.1
215.4

−1.2
1.8
2.8

4.5
5.2
−.7

1,051.3

1,121.6

9.8

6.7

Equals
Net System operating expenses . . . . . . .

957.8

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

1994 to 1995 1995 to 1996

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

Federal Reserve System
Table 1.3
Revenue from Priced Services, 1994–96
Millions of dollars
1994
1995
1996
actual estimate budget

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

91.6

89.0

90.5

66.9
582.4

74.6
569.2

78.4
595.2

15.9
4.1
6.3

15.8
3.8
5.2

15.7
4.8
6.8

767.2

757.6

791.4

services to the Treasury and other
government agencies for which the
agencies have agreed to reimburse the
Federal Reserve.
Sources and uses of funds are
presented in appendix B, and the audits
of the System are listed in appendix C.

Trends in Expenses
and Employment
From actual 1986 to budgeted 1996
amounts, the operating expenses of the
Federal Reserve System (excluding
special projects) have increased an
Chart 1.2
Operating Expenses of the
Federal Reserve System, 1986–96 1

11

average of 5.5 percent a year (2.3 percent a year when adjusted for inflation)
(chart 1.2). Over the same period, total
System expenditures, including special
projects, have increased an average of
5.7 percent a year, the same as the rate
of growth of nondefense discretionary
spending by the federal government
(chart 1.3). Federal Reserve System
employment, including staff working
on special projects and Federal Reserve
Automation Services (FRAS), has
increased 745 over the period
(chart 1.4).
From 1982, when the transition to the
requirements of the Monetary Control
Act of 1980 was completed, through
1984, System expenses remained
essentially flat when adjusted for inflation, and employment declined. In 1985,
the staffing level was increased in a
pronounced effort to strengthen supervision and regulation of member banks
and bank holding companies. The
System was able to partially offset the
increase in staff through reductions in
employment in other areas, mainly

Chart 1.3
Cumulative Change in Federal Reserve
System Expenses and Federal Government
Expenses, 1987–96 1
Percent

80

Billions of dollars

60

Federal Reserve
Current dollars

40
1.8
20
+
0_

Federal government

1.4
1986 dollars 2

1986

1991

1. For 1995, estimate; for 1996, budget.
2. Calculated with the GDP price deflator.

1988
1996

1990

1992

1994

1996

1. Federal Reserve System expenses are operating
expenses plus the cost of special projects; federal
government expenses are discretionary spending less
expenditures on defense. For 1995, estimate; for 1996,
budget.

12

Annual Report: Budget Review, 1995–96

Chart 1.4
Employment in the
Federal Reserve System, 1986–96 1
Thousands of persons

26
25
24

1986

1991

1996

1. Includes FRAS staff.

services to financial institutions and the
public, support, and overhead.
In 1988, the Expedited Funds Availability Act, which requires the Federal
Reserve to issue regulations to ensure
the prompt availability of funds and the

expeditious return of checks, became
effective. Increases in staff throughout
the System in 1988 and 1989 resulted
from implementation of the provisions
of this legislation. In 1991 and continuing through projected 1996, spending on
bank supervision expanded, reflecting
an increase in the number and complexity of examinations, greater attention to
problem institutions, and the requirements of the Financial Institutions
Reform, Recovery, and Enforcement
Act of 1989 (FIRREA) and the Federal
Deposit Insurance Corporation Improvement Act of 1991 (FDICIA).

Operational Areas
For budgeting purposes, the expenses of
the Federal Reserve are classified according to the four major operational areas
of the System (table 1.4). The costs of

Table 1.4
Operating Expenses of the Federal Reserve System, by Operational Area, 1994–96 1
Millions of dollars, except as noted
Operational area
and entity

1994
actual

1995
estimate

1996
budget

Percentage change
1994 to 1995 1995 to 1996

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

196.2
120.9
75.3

210.8
127.5
83.3

224.1
136.6
87.5

7.4
5.5
10.6

6.3
7.1
5.1

Services to the U.S. Treasury and
other government agencies 2 . . . . . . . . .

209.4

222.2

223.6

6.1

.6

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

1,108.3
1,105.1
3.2

1,131.2
1,127.6
3.6

1,181.5
1,177.6
3.9

2.1
2.0
12.5

4.4
4.4
8.0

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

427.8
361.5
66.3

467.5
396.3
71.2

505.3
431.0
74.3

9.3
9.6
7.4

8.1
8.8
4.4

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve Banks . . . . . . . . . . . . . . . . . . . . . . .
Board of Governors 3 . . . . . . . . . . . . . . . . .

1,941.7
1,796.9
144.8

2,031.6
1,873.6
158.0

2,134.5
1,968.8
165.7

4.6
4.3
9.1

5.1
5.1
4.8

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

a result, the numbers for the operational areas in chapter
2 are not the same as the numbers shown in this table.
2. Reserve Banks only. The Board of Governors does
not provide these services.
3. Includes expenses of the Office of Inspector General
and extraordinary items.

Federal Reserve System
support and overhead (including Board
expenditures for System policy direction
and oversight, considered an overhead
expense of the System) are redistributed
or allocated to these four areas.

1996 Budget Initiatives
Several major initiatives that have an
impact on System budgets will continue
or begin in 1996:
• Consolidation of System automation
• Installation of high-speed currency
processors
• Installation of equipment and software
to support image processing of commercial and Treasury checks and
archival of Treasury checks.
Partly offsetting the greater expenditures associated with these initiatives
are lower costs associated with staff
reductions that are resulting from
the consolidation of savings bonds
operations, from downsizing due to
volume declines, and from automation
consolidation.

13

15

Chapter 2

Board of Governors
The 1996 budget for the Board of
Governors provides $161.1 million for
operations, $1.6 million for extraordinary items (projects of a unique
nature), and $3.0 million for the Office
of Inspector General. The Board has
authorized 1,721 staff positions for
operational areas and 31 positions for
the Office of Inspector General; no
positions are required for the extraordinary items. The total of 1,752 positions is 8 more than the number authorized at the end of 1995; however, the
total is down from the number authorized in the original 1995 budget, as
positions were eliminated during the
year in support of the President’s program to reduce government staffing.

Extraordinary Items
Inclusion of certain periodic or one-time
projects in the operations budget can
result in undue volatility in the size of
the budget and create competition for
funds needed to carry out the Board’s
basic mission; therefore, for the past few
years, funds for these ‘‘extraordinary
items’’ have been set apart from the
operations budget. For 1996, $1.6 million has been budgeted for two extraordinary items: a program to develop new
training courses for examination staff
and completion of a major survey begun
in 1994. Details are given at the end of
this chapter.

Office of Inspector General
Overview of the Budget
Board Operations
The operations budget of $161.1 million, which covers the Board’s four
operational areas (described in the
Introduction), is 5.2 percent larger than
estimated 1995 expenses. Increased
expenditures to maintain operations at
the 1995 level—expenses such as salary
increases, rate increases for benefits, the
full-year cost of rental space added in
1995, and increases in the cost of goods
and services—account for 2.8 percentage points of the increase. Initiatives to
expand training in the Division of
Banking Supervision and Regulation,
enhance office automation, maintain
facilities, and support several smaller
projects account for 3.1 percentage
points, for a total increase of 5.9 percent.
The imposition of a $1 million savings
target, which is high by historical
standards, reduces the increase over
estimated 1995 expenses to 5.2 percent.

The 1996 budget for the Office of
Inspector General, $3.0 million, is
0.9 percent lower than estimated 1995
expenses. The completion of an automation project and the elimination of one
position during 1995 are the main
factors in the decrease.

Highlights of the Budget
Efforts in several areas have a major
effect on the Board’s 1996 operations
budget.

Consumer and Community Affairs
Community Reinvestment Act
Now that regulations for the Community
Reinvestment Act have been written,
new challenges lie ahead. Board staff
will be addressing such issues as the
way in which the new data collection
and distribution systems will be organized, the extent to which the public will

16

Annual Report: Budget Review, 1995–96

be allowed access to the data, and the
types of analytical tools that will be used
by examiners.
Fair Lending
The issue of whether creditors should be
required to collect data on race and
gender is currently being reviewed.
Because fair lending is an important and
sensitive area and because judicial guidance is lacking, examination of this
issue will continue to absorb significant
Board resources in 1996.

Regulatory Review
In 1996, staff members will be working
to meet the requirements of the Riegle
Community Development and Regulatory Improvement Act of 1994, section
303, that the Board review its regulations and policies to improve efficiency;
reduce unnecessary costs and remove
inconsistent or duplicative requirements; work with the other banking
agencies to make the regulations and
guidelines implementing common statutory and supervisory policies uniform;
and, jointly with the other banking
agencies, report to Congress on progress
in these endeavors. Staff members will
also be pursuing alternatives to legislative and regulatory intervention: Significant resources will be devoted to carrying out the Board’s consumer protection
responsibilities through national education campaigns in the financial services
area.

Reserve Bank Support
Training Activities
The Board’s 1996 budget includes funds
for a major effort to enhance examiner
training. The ongoing costs of the
program—expenses associated with

administering training and presenting
individual courses—are expected to
remain approximately the same as in
1995. One-time projects to develop new
courses or to significantly revise existing courses are included in the extraordinary items budget.
Reserve Bank Audits
While the new program for the auditing
of Reserve Banks by an outside firm was
being developed and evaluated, funding
was included in the extraordinary items
budget. Now that the developmental and
evaluation work has been completed,
funding is included in the Board’s
operations budget.

Economic Analysis
The Board’s 1996 budget includes funds
for foreign travel to enable staff members
to develop broader, better focused
interaction with foreign governments,
central banks, and private-sector individuals. The main objectives are to
enhance staff members’ understanding
of the issues facing other nations, to
familiarize staff members with the
structure and function of supervisory
agencies and the payment and securities
clearing systems abroad, and to better
maintain relationships with key individuals in other nations.

Automation
Administrative Systems
Automation Project
The Administrative Systems Automation Project (ASAP) is intended to
improve personnel and financial management systems at the Board. A major
focus during 1996 will be human
resources and position management.

Board of Governors
Accounting for information management resources will be simplified through
implementation of a commercial, off-theshelf project accounting module. Also,
software to manage the Board’s publications inventory, subscriptions, and sales
will be developed.
Statistics and Reserves System
The Statistics and Reserves System
(STAR), a centralized software system
supporting both the Reserve Banks and
the Board that will provide financial and
statistical data for the administration of
the Board’s monetary, regulatory, and
supervisory policies, will be implemented in 1996. STAR will replace
both the STAT (statistics) system and
the CRR (contemporaneous reserve
requirements) system.
Recabling and Automation
Infrastructure Activities
A major part of the premisewide network
currently supporting the flow of data
throughout the Board was designed ten
years ago to take advantage of the
existing wire installed for the telephone
system. Steadily increasing storage of
critical data on file servers and databases,
the transfer of mainframe applications
to a network environment, videoconferencing, and expanded Internet access
require the installation of fiber optic
cable. The 1996 budget also includes
funds to expand and enhance the Board’s
premisewide network and its services;
the infrastructure will be augmented to
handle growing requirements for distributed processing, backup and recovery
capabilities will be expanded, system
reliability and availability will be
improved, and remote access to network
resources for staff members working
from home and while traveling will be
improved.

17

Facilities
The 1996 budget includes funds for
several initiatives related to the maintenance of the Board’s aging facilities,
including resolution of a structural
problem in office space that was added
during building renovations in the late
1970s. A structural engineer is determining the extent of the problem and will
recommend alternative solutions. Preliminary funding for repair work, based
on internal estimates, is included in the
budget.
Work will continue in 1996 to solve
persistent problems with the air handling
system in the Eccles Building to ensure
that proper heating, cooling, and air
quality can be maintained. A threephase capital project to replace air
handling equipment was begun in 1994,
and work in the east and central portions
of the building has been completed. The
1996 budget provides funds for the
replacement of the aging equipment in
the west side of the building. This work
will complete the project.
The 1996 budget also provides funds
to ensure proper maintenance of the
facilities and compliance with the Clean
Air Act and the Americans with Disabilities Act.

Potential Requirements Not Funded
in the 1996 Budget
Two potential developments that would
have significant implications for funding
are not included in the 1996 budget
because legislation is still pending or the
requirements are not yet fully defined.
• The transfer of regulatory authority
for the Real Estate Settlement Procedures Act (RESPA) from the Department of Housing and Urban Development to the Board is becoming more
likely. If the transfer does take place,

18

Annual Report: Budget Review, 1995–96

the Board will assume difficult and
complex rulewriting responsibilities.
A portion of the work could be
absorbed by current staff members,
but some new positions may be
required.
• When the mainframe computer was
acquired in 1994, the decision was
made to purchase capacity to service
only known demand and to rely on
modular expansions as necessary.
There is little surplus disk capacity to
meet requirements for data storage
resulting from the collection of CRA
data and installation of the new STAR

system. Sporadic peaks of demand
noted by the technical staff may
indicate that additional capacity will
be needed in 1996.

Operations Budget by Division
and Object of Expense
The overall operations budget, detailed
by Board division, is shown in table 2.1,
and the number of authorized staff
positions for Board operations is shown
in table 2.2. The trend in operating
expenses over the past ten years, by
object of expense, is shown in table 2.3.

Table 2.1
Expenses of the Board of Governors, by Division, Office, or Special Account, 1994–96
Dollars, except as noted
Change, 1994 to 1995

Change, 1995 to 1996

Amount

Percent

Amount

Percent

Board Members . . . . . . . . . 3,800,329 4,346,642 4,373,225
Secretary . . . . . . . . . . . . . . . 3,778,925 4,224,496 4,381,020
Legal . . . . . . . . . . . . . . . . . . . 7,208,178 7,572,909 7,911,196
Research and Statistics . . 23,427,877 25,049,624 26,624,840
International Finance . . . . 8,714,489 9,553,638 9,831,012
Banking Supervision
and Regulation . . . . . 24,470,056 26,004,974 26,089,392
Human Resources
Management . . . . . . . 4,604,717 5,407,355 5,489,397
Support Services . . . . . . . . 25,965,692 27,111,377 28,138,299

546,313
445,571
364,731
1,621,747
839,149

14.4
11.8
5.1
6.9
9.6

26,583
156,524
338,287
1,575,216
277,374

.6
3.7
4.5
6.3
2.9

1,534,918

6.3

84,418

.3

802,638
1,145,685

17.4
4.4

82,042
1,026,922

1.5
3.8

Controller . . . . . . . . . . . . . . 2,309,882 2,817,185 3,167,052
Consumer and
Community
Affairs . . . . . . . . . . . . . 4,856,659 5,771,190 6,321,350
Staff Director for
Management . . . . . . . 2,058,193 1,979,910 2,163,076
Reserve Bank
Operations
and Payment
Systems . . . . . . . . . . . 11,974,263 13,030,430 13,645,481
Information Resources
Management (IRM) . 23,598,877 25,681,058 27,784,557
Monetary Affairs . . . . . . . . 8,124,502 8,554,999 8,826,525
Special projects . . . . . . . . . 2,117,719 1,523,566 2,213,285
IRM income account 1 . . . −16,273,186 −15,563,553 −15,859,789

507,303

22.0

349,867

12.4

914,531

18.8

550,160

9.5

−78,283

−3.8

183,166

9.3

1,056,167

8.8

615,051

4.7

2,082,181
430,497
−594,153
709,633

8.8
5.3
−28.1
−4.4

2,103,499
271,526
689,719
−296,236

8.2
3.2
45.3
1.9

Total, Board
operations . . . . . . . . . 140,737,172 153,065,800 161,099,918 12,328,628

8.8

8,034,118

5.2

−299,450

. . .

−27,116

−.9

Division, office,
or special account

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

1994
actual

1995
estimate

1996
budget

1,254,451

1,868,000

1,568,550

613,549

2,820,613

3,062,162

3,035,046

241,549

1. Income from various Board divisions for use of central IRM resources.

. . .
8.6

Board of Governors
The increment necessary to maintain
Board operations at the 1995 level is
$4.3 million, or 2.8 percent over estimated 1995 expenses. Personnel costs
for current positions (those not added in
the 1996 budget) are increasing $4.5 million, largely for salaries: The budget
includes $3.9 million to provide an
average 4.0 percent increase in salaries;
the cost of providing fringe benefits is
up only $0.5 million, significantly less
than in previous years, mainly because
health insurance costs have stayed
relatively constant. The cost of obtaining goods and services at the 1995 level
is increasing only slightly; most of the
overall increase, $3.2 million, is attributable to new initiatives approved during

19

the budget process, mainly initiatives
related to automation projects or facilities maintenance. The savings target is
offsetting a portion of the increases for
1996.

Operations Budget by
Operational Area
The Board’s operations budget supports
activities in four broadly defined areas:
monetary and economic policy, supervision and regulation, services to financial
institutions and the public, and System
policy direction and oversight. Data on
expenses and positions for each operational area for 1994–96 are shown in
tables 2.4 and 2.5.

Table 2.2
Positions Authorized at the Board of Governors, by Division or Office, 1994–96
Division or office

1994
actual

1995
estimate

1996
budget

Change
1994 to 1995 1995 to 1996

Board Members . . . . . . . . . . . . . . . . . . . . . . .
Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and Statistics . . . . . . . . . . . . . . . . .
International Finance . . . . . . . . . . . . . . . . . .
Banking Supervision and
Regulation . . . . . . . . . . . . . . . . . . . . . . . .
Human Resources Management . . . . . . . .
Concern 1 . . . . . . . . . . . . . . . . . . . . . . . . . . .

41
61
85
276
110

43
62
83
274
108

43
62
83
274
109

2
1
−2
−2
−2

0
0
0
0
1

247
48
22

244
49
22

244
47
22

−3
1
0

0
−2
0

Support Services . . . . . . . . . . . . . . . . . . . . . .
Controller . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer and Community Affairs . . . . . .
Staff Director for Management . . . . . . . . .
Reserve Bank Operations and
Payment Systems . . . . . . . . . . . . . . . . .
Information Resources Management 2 . . .
Monetary Affairs . . . . . . . . . . . . . . . . . . . . . .

260
33
57
10

261
34
66
10

261
34
66
10

1
1
9
0

0
0
0
0

126
249
67

125
245
67

125
249
67

−1
−4
0

0
4
0

Subtotal 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,692

1,693

1,696

1

3

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

17

20

25

3

5

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

1,709

1,713

1,721

4

8

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

32

31

31

−1

0

Reimbursable IRM

support 2

1. EEO Concern positions managed by the Division of
Human Resources Management.
2. Positions that provide IRM support to the Federal
Financial Institutions Examination Council for HMDA

processing on a reimbursable basis are shown separately,
as reimbursable IRM support.
3. Includes eleven summer intern positions and
seventeen youth positions.

20

Annual Report: Budget Review, 1995–96

Monetary and Economic Policy
The 1996 budget for monetary and
economic policy is $69,363,000, an
increase of $3,578,000, or 5.4 percent,
over estimated 1995 expenses. Activi-

ties in this operational area include the
Board’s monitoring and analysis of
developments in the money and credit
markets, setting of reserve requirements,
approval of changes in the discount rate,
and other activities related to the

Table 2.3
Operating Expenses of the Board of Governors, by Object of Expense, 1986–96
Dollars, except as noted

Object of expense

1986
actual

1987
actual

1988
actual

1989
actual

1990
actual

Personnel services
Salaries . . . . . . . . . . . . . . . 53,907,104 53,897,434 56,148,964 61,282,747
Retirement . . . . . . . . . . . . 2,669,919 3,040,162 3,432,541 3,895,063
Insurance . . . . . . . . . . . . . 2,793,075 3,360,712 3,704,162 4,412,059
Subtotal . . . . . . . . . . . . 59,370,098 60,298,308 63,285,667 69,589,869
Goods and services
Travel . . . . . . . . . . . . . . . . 2,541,080 2,839,098 3,160,877 3,328,569
Postage and
expressage . . . . . . . 1,011,146 1,003,675 1,155,989 1,070,114
Telecommunications . . 1,481,210 1,589,541 1,570,881 1,543,082
Printing and binding . .
919,417 1,044,007 1,089,282 1,110,232
Publications . . . . . . . . . .
9,736
−553,721
−399,780
−363,868
Stationery and
supplies . . . . . . . . . .
823,700
882,518
718,675
748,374
Software . . . . . . . . . . . . . 2,336,462 2,698,215 2,511,195 2,505,712
Furniture and
equipment . . . . . . .
804,473
912,190
683,986
527,403
Rentals . . . . . . . . . . . . . . . 2,358,492 1,077,223
526,797
−53,281
Books and
subscriptions . . . . .
437,607
453,194
505,042
581,957
Utilities . . . . . . . . . . . . . . 1,489,504 1,606,458 1,599,072 1,570,807
Building repairs
and alterations . . .
891,762 1,146,201 1,043,950
849,336
Building repairs
and maintenance . 1,208,295 1,711,866 2,001,771 1,904,533
Contingency
Processing
Center expenses . .
0
0
0
142,409
Contractual
professional
services . . . . . . . . . . 2,067,158 2,262,974 3,128,128 3,353,702
Tuition/registration
and membership
fees . . . . . . . . . . . . .
591,255
533,136
564,406
512,829
Subsidies and
contributions . . . . .
703,213
657,451
697,237
413,020
Depreciation . . . . . . . . . . 5,792,926 7,463,035 7,528,810 6,740,169
All other . . . . . . . . . . . . . −841,893 −1,433,861 −1,446,788
−781,803
Subtotal . . . . . . . . . . . . 24,625,543 25,893,200 26,639,531 25,703,297

1991
actual

1992
actual

68,565,290 73,814,229 79,624,065
4,600,876 5,061,514 6,297,728
4,931,007 6,498,143 6,701,386
78,097,173 85,373,886 92,623,179
3,402,408

3,461,161

3,866,956

1,141,989
1,758,280
1,153,340
−558,890

1,205,177
1,605,383
1,042,125
−928,376

1,116,289
1,799,049
1,102,529
−487,119

897,458
2,100,705

720,201
2,428,141

766,724
2,789,229

827,093
−964,521

693,850
−930,489

1,185,164
−923,096

578,255
1,701,944

608,422
1,685,659

695,953
1,805,394

943,208

1,001,932

2,071,284

1,837,383

1,896,945

1,969,385

236,866

190,571

263,578

2,685,647

2,669,270

4,491,285

601,730

671,010

842,216

529,289
638,975
735,835
5,881,928 5,607,265 6,010,707
−451,910
167,698
85,482
24,302,202 24,434,920 30,186,844

Total, Board
operations . . . . . . . 83,995,641 86,191,508 89,925,198 95,293,166 102,399,375 109,808,806 122,810,023
Extraordinary items . . .
Office of Inspector
General . . . . . . . . . .

0

0

0

0

0

373,333

3,147,319

0

127,369

579,512

718,224

1,341,281

1,568,102

1,930,243

Board of Governors
management of the nation’s monetary
policy. The percentage increase for this
area is slightly higher than the percentage increase for the overall budget
because of automation initiatives.

21

Supervision and Regulation
The 1996 budget for supervision and
regulation is $58,907,000, an increase of
$3,196,000, or 5.7 percent, over esti-

Table 2.3
Continued
Dollars, except as noted
Percentage
change,
1995 to 1996

Average
annual
percentage
change,
1986 to 1996

1994
actual

1995
estimate

1996
budget

90,527,712
7,535,217
8,407,540
106,470,469

98,997,942
7,752,905
8,734,404
115,485,251

103,519,724
7,618,500
9,198,987
120,337,211

4.6
−1.7
5.3
4.2

6.7
11.1
12.7
7.3

4,585,941

4,640,006

4,764,535

5,189,664

8.9

7.4

1,210,452
1,866,344
1,052,358
−334,756

1,246,922
2,034,521
1,244,795
−15,861

1,235,000
2,069,000
1,349,208
−240,634

1,287,000
2,099,000
1,460,000
−266,500

4.2
1.4
8.2
10.7

2.4
3.5
4.7
. . .

847,364
2,826,065

801,978
3,003,361

1,042,840
3,864,015

1,098,271
4,333,033

5.3
12.1

2.9
6.4

1,257,199
231,014

1,177,826
554,320

1,366,288
3,880,937

1,170,791
4,289,365

−14.3
10.5

3.8
6.2

754,896
1,877,818

923,363
2,124,129

997,658
2,090,000

1,072,599
2,215,000

7.5
6.0

9.4
4.0

1,330,905

1,742,693

1,915,750

1,449,500

−24.3

5.0

2,102,307

2,108,816

2,286,257

2,304,969

.8

6.7

201,100

185,197

35,400

0

−100.0

.0

5,175,207

6,306,314

8,375,561

9,651,940

15.2

16.7

981,023

1,054,888

1,501,696

1,530,917

1.9

10.0

768,186
6,563,369
631,885
33,928,677

676,989
6,967,751
−2,511,306
34,266,702

786,672
7,408,182
−7,147,816
37,580,549

745,900
8,207,774
−7,076,516
40,762,707

−5.2
10.8
. . .
8.5

.6
3.5
. . .
5.2

Total, Board
operations . . . . . . . 136,302,595

140,737,172

153,065,800

161,099,918

5.2

6.7

436,473

1,254,451

1,868,000

1,568,550

. . .

. . .

2,709,794

2,820,613

3,062,162

3,035,046

−.9

42.2

Object of expense

1993
actual

Personnel services
Salaries . . . . . . . . . . . . . . . 87,599,597
Retirement . . . . . . . . . . . .
7,068,246
Insurance . . . . . . . . . . . . .
7,706,077
Subtotal . . . . . . . . . . . . 102,373,920
Goods and services
Travel . . . . . . . . . . . . . . . .
Postage and
expressage . . . . . . .
Telecommunications . .
Printing and binding . .
Publications . . . . . . . . . .
Stationery and
supplies . . . . . . . . . .
Software . . . . . . . . . . . . .
Furniture and
equipment . . . . . . .
Rentals . . . . . . . . . . . . . . .
Books and
subscriptions . . . . .
Utilities . . . . . . . . . . . . . .
Building repairs
and alterations . . .
Building repairs
and maintenance .
Contingency
Processing
Center expenses . .
Contractual
professional
services . . . . . . . . . .
Tuition/registration
and membership
fees . . . . . . . . . . . . .
Subsidies and
contributions . . . . .
Depreciation . . . . . . . . . .
All other . . . . . . . . . . . . .
Subtotal . . . . . . . . . . . .

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

22

Annual Report: Budget Review, 1995–96

mated 1995 expenses. Supervision
includes review of examination reports
on state member banks and inspection
reports on bank holding companies
prepared by the Reserve Banks, preparation of special studies related to
international applications, direction of
enforcement actions, and regulation of
trust activities. Regulation includes the
formulation of regulations, oversight of
mergers and foreign banking activities,
enforcement of consumer protection
regulations, and the regulation of securities credit. The percentage increase for
this operational area is greater than that
for the overall budget because of major
investments to improve training for
Reserve Bank examiners in capital
markets instruments, interest rate risk
assessment, internal model evaluation,
and asset and liability management.
Holding down the overall rate of
increase for this operational area are
savings related to charges for use of the
mainframe computer: A change in the
accounting treatment of the National
Information Center (NIC) is reducing
charges to the area by almost $1 million;
also, the development of software for

use with the NIC database, which will
replace software used with the previous
structure and financial databases, will be
completed in 1996, resulting in a savings of $700,000.

Services to Financial Institutions
and the Public
The 1996 budget for services to financial institutions and the public is
$3,208,000, an increase of $229,000,
or 7.7 percent, over estimated 1995
expenses. This operational area covers
support to and oversight of the payment
mechanism activities of the Reserve
Banks and Branches, specifically, evaluation of the operational and pricing
performance of the check payment
activities of the Reserve Banks; oversight
of the electronic payments mechanism;
and annual evaluation of the System’s
currency, coin, and food coupon
operations.
The percentage increase for this
operational area is greater than that for
the overall budget because of the fullyear cost of position vacancies filled
during 1995. Some of these positions are

Table 2.4
Expenses of the Board of Governors for Operational Areas,
Extraordinary Items, and Office of Inspector General, 1994–96 1
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 . . . . . . . . . . . . .

1994
actual

1995
estimate

1996
budget

59,901
52,619

65,785
55,711

2,647

2,979

Change, 1994 to 1995

Change, 1995 to 1996

Amount

Percent

Amount

Percent

69,363
58,907

5,884
3,092

9.8
5.9

3,578
3,196

5.4
5.7

3,208

332

12.5

229

7.7

25,570

28,590

29,622

3,020

11.8

1,032

3.6

Total, Board operations . . .

140,737

153,065

161,100

12,328

8.8

8,035

5.2

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

1,254
2,821

1,868
3,062

1,569
3,035

614
241

. . .
8.6

−299
−27

. . .
−.9

1. Operating expenses include allocations for support and overhead.

Board of Governors
at higher levels, and the increased costs
have a large effect on the area’s relatively
small budget.

23

extraordinary items budget to this area
of the operations budget.

Capital Budget
System Policy Direction
and Oversight
The 1996 budget for System policy
direction and oversight is $29,622,000,
an increase of $1,032,000, or 3.6 percent, over estimated 1995 expenses.
This operational area covers oversight,
direction, and supervision of System and
Board programs. Included are oversight
of Reserve Bank programs that directly
support Board members in carrying out
their functions and operations; budgeting and accounting; financial examinations; audit and operations reviews; and
automation and communications. Salary
increases are the major reason for the
higher costs for this operational area. A
lesser factor is the transfer of the cost of
the audits of the Reserve Banks from the

The Board’s 1996 capital budget of
$9.9 million provides for facilities
improvements and improved office
automation and automation infrastructure.
Approximately $4.0 million is budgeted for several critical projects to
maintain the integrity of the existing
buildings: $1.6 million for completion
of a project to improve heating, ventilation, and air conditioning; $0.5 million
for the 1996 portion of the cost to
replace the chiller system; $0.7 million
for ongoing modifications to bring the
buildings into compliance with the
Americans with Disabilities Act; and
$1.2 million for other building projects.
A total of $4.8 million is budgeted for
automation projects, including $1.2 mil-

Table 2.5
Positions Authorized at the Board of Governors for Operational Areas,
Support and Overhead, and Office of Inspector General, 1994–96
1994
actual

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

1995
estimate

1996
budget

Change, 1994 to 1995 Change, 1995 to 1996
Amount

Percent

Amount

Percent

437
384

433
392

434
392

−4
8

−.9
2.1

1
0

.2
.0

21

21

21

0

.0

0

.0

162

163

163

1

.6

0

.0

Support and overhead . . . . . . . .

688

684

686

−4

−.6

2

.3

Subtotal 1 . . . . . . . . . . . . . . . . . . .

1,692

1,693

1,696

1

.1

3

.2

Reimbursable IRM support . .

17

20

25

3

17.6

5

25.0

Total, Board operations . . . . .

1,709

1,713

1,721

4

.2

8

.5

Office of Inspector General . . .

32

31

31

−1

−3.1

0

.0

2

1. Includes eleven summer intern positions and seventeen youth positions.
2. Positions that provide IRM support to the Federal Financial Institutions Examination Council,
on a reimbursable basis, for processing of HMDA data.

24

Annual Report: Budget Review, 1995–96

lion for the research divisions to upgrade
and expand network capabilities,
$0.8 million to begin the Boardwide
data recabling project, $0.7 million for
enterprise network enhancements,
$0.6 million to continue the development and implementation of ASAP, and
$0.3 million for the modernization of the
Central Automation/Telecommunications
Operations (CATO) center. The remaining funds are for smaller projects,
mainly office automation.

Trends in Expenses
and Employment
The increase in the 1996 operations
budget, 5.2 percent, is lower than the
Chart 2.1
Operating Expenses of the
Board of Governors, 1986–96 1
Millions of dollars

150
Current dollars

130
110
1986 dollars 2

8.8 percent increase from 1994 to 1995
mainly because of a smaller merit
increase (4.0 percent for 1996 versus
5.5 percent for 1995), a smaller increase
for rental space ($400,000 versus
$1.2 million), and continuing significant
efforts to hold down costs. The 5.2 percent increase is also lower than the
8.0 percent average annual rate of
increase over the past five years and the
6.7 percent average rate over the past ten
years. The lower growth for 1996
reflects a slowing of the high rate of
growth in recent years attributable to the
supervision and regulation operational
area. Charts 2.1 through 2.5 show trends
over 1986–96.
Approximately three-fourths of the
Board’s operating expenses are for
personnel; consequently, analysis of
trends is heavily tied to staffing levels.
Over the past ten years the number of
positions authorized for Board operations has increased from 1,568 to 1,721,
an increase of 153, or 9.8 percent. The
increase in positions over the period was
largely in the supervision and regulation
operational area (increase of 127 positions). In 1990, the number of positions
was at a low of 1,557. Since then, the

90

1986

1991

1996

Expenses in millions of

Chart 2.2
Expenses for Personnel Services
at the Board of Governors, 1986–96 1

Year
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996

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

Current dollars

1986 dollars

84.0
86.2
89.9
95.3 3
102.4
109.8
122.8
136.3
140.7 3
153.1
161.1

84.0
83.5
84.0
85.0
87.6
90.4
98.2
106.9
108.2
114.5
117.5

1. Excludes the Office of Inspector General and
extraordinary items. For 1995, estimate; for 1996, budget.
2. Calculated with the GDP price deflator.
3. Number slightly revised from earlier edition.

Millions of dollars

110

Current dollars

90
70
1986 dollars 2

1986

1991

1996

1. Excludes the Office of Inspector General and
extraordinary items. For 1995, estimate; for 1996, budget.
2. Calculated with the GDP price deflator.

Board of Governors
number has increased because of
increased workload, primarily in the
areas of supervision and regulation and
consumer and community affairs. The
original 1995 budget authorized 1,731
positions but included a commitment to
continue a program to reduce positions
begun in 1993. By the end of 1995 the
number was 1,713 (a figure that would
have been lower except for new requirements in 1995 for 3 new positions
related to the CRA and 5 overhead
positions associated with the rental
space). Although the 1996 operations
budget adds 8 new positions, the total
for operations, 1,721, is 10 less than the
number authorized in the original 1995
budget.
Although the number of authorized
positions has fluctuated during the tenyear period, the proportion of the Board’s
budget devoted to salaries (excluding
benefits) has remained relatively stable
at roughly 65 percent. The proportion
devoted to retirement and insurance has
increased, largely because of increases
in health insurance costs, a change in
the law that applies Medicare costs to
federal employees, and changes in the
rate of the Board’s contribution to the
thrift plan.

Chart 2.4
Annual Rate of Change in Operating
Expenses of the Board of Governors,
1986–96 1
Percent

12
9
6
3

1986

1991

Millions of dollars

40
Current dollars

30
1986 dollars 2

20
1986

1991

1996

1. Excludes the Office of Inspector General and
extraordinary items. For 1995, estimate; for 1996, budget.
2. Calculated with the GDP price deflator.

1996

1. Year-end data. Excludes the Office of Inspector
General and extraordinary items. For 1995, estimate; for
1996, budget.

Chart 2.5
Employment and Authorized Positions
at the Board of Governors, 1986–96 1
Number in thousands

1.7
Authorized positions

1.6

1.5
Employment

1986

Chart 2.3
Expenses for Goods and Services
at the Board of Governors, 1986–96 1

25

1991

1996

Year

Employment

Authorized
positions

1986 . . . . . . . . . . . .
1987 . . . . . . . . . . . .
1988 . . . . . . . . . . . .
1989 . . . . . . . . . . . .
1990 . . . . . . . . . . . .
1991 . . . . . . . . . . . .
1992 . . . . . . . . . . . .
1993 . . . . . . . . . . . .
1994 2 . . . . . . . . . . .
1995 2 . . . . . . . . . . .
1996 . . . . . . . . . . . .

1,484
1,457
1,484
1,477
1,505
1,517
1,563
1,636
1,635
1,644
1,644

1,540
1,529
1,534
1,533
1,529
1,542
1,639
1,664
1,664
1,665
1,668

1. Year-end data. Excludes summer intern and youth
positions as well as positions for the Office of Inspector
General, which for 1996 number 28 and 31 positions
respectively; 1996 figures also exclude 25 positions that
provide support to the FFIEC for processing of HMDA
data.
2. Numbers slightly revised from earlier edition.

26

Annual Report: Budget Review, 1995–96

Extraordinary Items
The 1996 extraordinary items budget
provides $1,568,550 for two projects.
Included is $556,500 for the final stage
of the Survey of Consumer Finances,
which will provide financial data to
serve a variety of policy analysis and
monetary policy purposes. This effort
reflects the Board’s interest in enhancing the quality of economic data by
obtaining information on income, assets,
debts, pensions, employment, use of
financial services, saving behavior, and
other characteristics of U.S. households.
Cross-categorization of the data will
allow important statistical observations
useful in a variety of economic studies.
The second project, which accounts for
the remaining $1,012,050, is for development of training courses for bank
examiners.
Two items that were included in the
1995 extraordinary items budget have
been moved to the operations budget
for 1996. One is the annual audits of
approximately two Reserve Banks and
of the consolidated financial statement
for the twelve Reserve Banks. The other
is a survey to help determine the amount
of currency held abroad and the degree
to which counterfeit currency is a
problem in foreign countries.

27

Chapter 3

Federal Reserve Banks
The 1996 operating budgets for the
twelve Reserve Banks approved by the
Board of Governors total $1,968.8 million, an increase of $95.2 million, or
5.1 percent, over estimated 1995
expenses (table 3.1). Not included in the
budgets is the cost of the Automation
Consolidation special project ($36.9 million).1 Including the cost of this special
project, the Reserve Banks’ 1996 budgets
total $2,005.7 million, an increase of
$88.9 million, or 4.6 percent.
Employment, including the staff
associated with FRAS, is budgeted at
23,824 ANP (average number of personnel), a decrease of 143 ANP, or
0.6 percent, from estimated 1995
employment. Reserve Bank employment is expected to decrease by
113 ANP, and FRAS employment by
30 ANP.2
1. The budget for the Automation Consolidation special project includes transition expenses
associated with the move to a centralized environment and expenses for FRAS (Federal Reserve
automation Services, the unit responsible for
consolidated data processing for the Reserve
Banks). FRAS charges to the Automation
Consolidation special project in 1996 are budgeted
at $25.8 million.
2. The term average number of personnel
describes levels and changes in employment at the
Reserve Banks. ANP measures the number of
employees in terms of full-time positions for the
time period. For instance, a full-time employee
who starts work July 1 counts as 0.5 ANP for that
calendar year; two half-time employees who start
January 1 count as 1 ANP. Because the Reserve
Banks’ accounting system carries calculations
related to employment to two decimal places but
employment in this volume is expressed in whole
numbers, rounding error may result in slight
discrepancies in employment figures among the
tables and charts in this volume.

Expenses for personnel (salaries and
benefits) account for $1,234.0 million,
or 63 percent of the 1996 operations
budget, an increase of $45.8 million, or
3.9 percent, over estimated 1995 personnel expenses (table 3.2). Nonpersonnel
expenses (mainly for building and
automation projects) are budgeted at
$734.8 million, an increase of $49.4 million, or 7.2 percent, over estimated 1995
nonpersonnel expenses.
The following two sections discuss
major initiatives and the budget objective for the Reserve Banks in 1996.
Subsequent sections provide details for
the four operational areas as well as for
objects of expense, capital outlays, and
long-term trends. Appendix A gives
more information on capital outlays, the
special project, and other special categories of expense, and appendix D gives
additional data by District and operational area.

Major Initiatives
The 1996 Reserve Bank budgets provide
for the following initiatives (table 3.3):
• Consolidation of data processing and
data communications
• Installation of new high-speed currency processors
• Installation of equipment and software
to support image processing of commercial and Treasury checks and
archival of Treasury checks
• Changes to ensure compliance with
generally accepted accounting principles for self-insured medical and
postemployment benefits and compensated absences

28

Annual Report: Budget Review, 1995–96

• Application of the recently adopted
regulations implementing the Community Reinvestment Act
• Office automation, and upgrading of
local area networks
• New building programs
Charges to the Reserve Banks by
FRAS are expected to increase $20.5 million, mostly because of increases related
to data processing ($17.3 million), but
also for additional equipment and support as customers are added to the
Fednet data communications network
($3.2 million).
Expenditures on new projects related
to currency are budgeted to increase
$16.8 million over estimated 1995
expenses. Most of the increase is
earmarked for the installation of thirty-

four new currency processors in eleven
Districts; the remainder is associated
with higher depreciation and maintenance expenses, additional staff at two
Reserve Banks to operate the new
currency processors, and renovation and
remodeling of cash areas to accommodate the equipment.
The budget includes $8.0 million for
the check imaging initiative, $5.0 million more than estimated 1995 expenses.
Approximately one-third of the funds
are for the imaging project for Treasury
checks: In 1996, the Federal Reserve
will begin to provide image-supported
check truncation services to the Treasury.
Also, many Reserve Banks are upgrading their check sorters and their software
for processing checks with imagecapable equipment in anticipation of

Table 3.1
Expenses and Employment at the Federal Reserve Banks, 1995 and 1996 1
Category

1996
budget

1,873.6
43.2
1,916.8

1,968.8
36.9
2,005.7

Expenses (millions of dollars)
Operations 2 . . . . . . . . . . . . . . . . . . . . . . . . .
Special project . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . .
Employment (average number
of personnel) 3
Operations 2 . . . . . . . . . . . . . . . . . . . . . . . . .
FRAS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . .

Change

1995
estimate

23,375
593
23,967

Amount
95.2
−6.3
88.9

−113
−30
−143

23,261
563
23,824

Percent
5.1
. . .
4.6

−.5
. . .
−.6

1. Excludes capital outlays.
2. Includes support and overhead (see appendix D, table D.3, note 1, for definitions).
3. See text note 1 for definition of average number of personnel.

Table 3.2
Operating Expenses of the Federal Reserve Banks, by Object, 1994–96 1
Millions of dollars, except as noted
1994
actual

1995
estimate

1996
budget

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

1,168.3
628.6

1,188.2
685.4

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

1,796.9

1,873.6

Object

Percentage change
1994 to 1995

1995 to 1996

1,234.0
734.8

1.7
9.0

3.9
7.2

1,968.8

4.3

5.1

1. Includes the costs of support and overhead (see appendix D, table D.3, note 1,
for definitions). Excludes special projects.

Federal Reserve Banks
offering commercial check image products to depository institutions.
In 1994, the Board decided that the
Reserve Banks should conform to generally accepted accounting principles
(GAAP) for transactions similar to those
in the private sector. Therefore, Reserve
Bank accounting has been modified to
provide for the accrual of self-insured
expenses (medical and dental benefits
and workers compensation), of compensated absences, and of postretirement
benefits, including life and disability
insurance. The change has added
$5.6 million to the 1996 budget.
The Reserve Banks have budgeted
$1.5 million and 23 ANP for implementation of the recently adopted Community Reinvestment Act (CRA)
regulations—an increase of $1.0 million
and 15 ANP over resources expended on
this initiative estimated for 1995.

1996 Budget Objective
In 1995, the Board approved a 1996
Reserve Bank budget objective that
provided for an increase in total
expenses, including special projects, of
$103.6 million, or 5.4 percent, over

29

estimated 1995 expenses. Excluding
expenses for special projects, which
were expected to decline in 1996, the
increase was projected to be 5.8 percent.
The Board anticipated that within this
guideline, expenses for ongoing Reserve
Bank operations would increase
3.5 percent over estimated 1995 expenses. Expenses for several initiatives—
automation consolidation, installation of
new currency processors, check imaging
activities, and CRA implementation—
would account for $47.5 million of the
projected 1996 increase. Partly offsetting the increase was an anticipated
decrease of $3.9 million due to the nonrecurring transition expense of the move
to conform with GAAP for privatesector-like transactions. The objective
also included a savings target of
$2.5 million. Table 3.4 compares
the 1996 budget objective with the
approved 1996 budget.
The 1996 increase for ongoing
Reserve Bank operations (when the
savings target is included) is $19.1 million less than anticipated in the budget
objective. The increase is less than the
3.5 percent objective in part because the
New York Reserve Bank shifted $4 mil-

Table 3.3
Major Initiatives of the Federal Reserve Banks, 1996
Million of dollars, except as noted

Initiative

1995 estimate

1996 budget

Change,
1995 to 1996

Contribution to
total 1996 operating
expense increase
(percentage points)

FRAS production charges . . . . . . . . . . . .
Currency processors . . . . . . . . . . . . . . . . .
Check imaging projects . . . . . . . . . . . . . .
Compliance with GAAP . . . . . . . . . . . . .
Implementation of CRA regulations . .
Office automation/LAN upgrades . . . . .
New building programs . . . . . . . . . . . . . .

143.8
26.5
3.0
3.9
.5
1.8
.9

164.3
43.3
8.0
9.5
1.5
5.5
3.8

20.5
16.8
5.0
5.6
1.0
3.7
2.9

1.1
.9
.3
.3
.1
.2
.1

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

180.4

235.9

55.5

3.0

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

1,873.6

1,968.8

95.2

5.1

30

Annual Report: Budget Review, 1995–96

Table 3.4
1996 Budget Objective and Budget
of the Federal Reserve Banks 1
Percent change from 1995 expenses
Item

Budget
objective

Budget

Continuing operating expenses . . .
Initiatives . . . . . . . . . . . . . . . . . . . . . . .
Total excluding special projects .

3.5
2.3
5.8

2.1
3.0
5.1

Memo
Special project . . . . . . . . . . . . . . . . . .

−.4

−.5

Total including special projects . .

5.4

4.6

1. See data on expenses in table 3.1.

lion more than expected from ongoing
operations to the special project. Also,
expenses for retirement and other benefits are $4.3 million lower than expected
because of lower hospital and medical
costs as Reserve Banks changed their
health plans and benefit plans were
reevaluated. In addition, other personnel expenses in 1995 were much higher
than budgeted for; this nonrecurring
increase in overtime expenses and in the
use of outside agency help in 1995 contributed $11.9 million to the difference
between the budget objective for ongoing operations and the approved budget.
The increase of $48.9 million for
Reserve Bank initiatives is contributing
$5.3 million above the target approved

by the Board. The cost of compliance
with GAAP is increasing from $3.9 million to $9.5 million, instead of decreasing from the $12.2 million to $8.3 million as was anticipated in the budget
objective, owing to better information.
Also, the cost of installing the new
currency processors is $6.0 million
greater than anticipated; although the
new processors are expected to eventually result in lower staffing levels,
staffing levels are expected to increase
during the transition period to address
inventory backlogs and to staff additional work shifts in two Reserve Banks.
In contrast, FRAS production charges
are $4.1 million lower than the budget objective: Costs for equipment and
software are lower than expected because
of a delay in the project to develop ACH
application software for use in the
consolidation environment.
The 1996 budget objective for special
projects was $33.6 million, $5.4 million
less than estimated 1995 expenses. The
1996 budget, at $36.9 million, is
$3.3 million more than the budget
objective, largely because the New York
Reserve Bank’s charges to the special
project are increasing $4.7 million; the
elimination in 1996 of the special
project on currency authentication is
partly offsetting these higher charges.

Table 3.5
Operating Expenses of the Federal Reserve Banks, by Operational Area, 1994–96 1
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1. Excludes special projects.

1994
actual

1995
estimate

1996
budget

Percentage change
1994 to 1995 1995 to 1996

120,869

127,528

136,618

5.5

7.1

209,453

222,176

223,590

6.1

.6

1,105,140
361,458

1,127,573
396,298

1,177,579
430,984

2.0
9.6

4.4
8.8

1,796,920

1,873,575

1,968,770

4.3

5.1

Federal Reserve Banks

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

Monetary and Economic Policy
The 1996 budget for the monetary and
economic policy operational area is
$9.1 million, or 7.1 percent, more than
estimated 1995 expenses. The increase
is due to merit salary increases, higher
charges by FRAS for data processing,
the dollar impact of additional staff, and
higher costs for developing and support-

31

ing client-server applications. Overhead
expenses are increasing $2.1 million, or
6.0 percent, mainly because of the
increases in expenses and the number of
personnel and because of higher costs
for the library activity, which includes
responding to specific inquiries for
information. The staffing level will
increase by 8 ANP, or 1.1 percent,
largely because of the full-year impact
of filling vacant positions.

Services to the U.S. Treasury
and Other Government Agencies
The 1996 budget for services to the
Treasury and other government agencies

Table 3.6
Employment at the Federal Reserve Banks, by Activity, 1994–96 1
Average number of personnel, except as noted 2
Activity

Percentage change

1994
actual

1995
estimate

1996
budget

729

728

736

−.1

1.1

1994 to 1995 1995 to 1996

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

1,754

1,719

1,627

−2.0

−5.4

8,302
3,079

8,249
3,115

8,161
3,226

−.6
1.2

−1.1
3.6

Support and overhead 3
Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4,603
5,163

4,578
4,985

4,534
4,976

−.5
−3.5

−1.0
−.2

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

23,630

23,375

23,261

−1.1

−.5

1. Excludes special project and FRAS ANP.
2. See text note 2 for definition of average number of personnel.
3. See appendix D, table D.3, note 1, for definitions.

Table 3.7
Expenses of the Federal Reserve Banks for Monetary and Economic Policy, 1994–961
Thousands of dollars, except as noted
Percentage change

1994
actual

1995
estimate

1996
budget

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

96,192
24,677

99,780
27,748

107,025
29,593

3.7
12.4

7.3
6.6

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

120,869

127,528

136,618

5.5

7.1

Service

1. Excludes special projects.

1994 to 1995 1995 to 1996

32

Annual Report: Budget Review, 1995–96

is $1.4 million, or 0.6 percent, more than
estimated 1995 expenses. Data processing charges by FRAS are the largest
contributor to the increase. Overhead
costs are also increasing, owing to
increases resulting from initiatives in the
bank administration and personnel areas
and increases in security and telephone
costs. The regionalization of savings
bonds operations is partly offsetting

the increases; the staffing level for this
service is expected to decline by
50 ANP, or 6.8 percent, in 1996.

Services to Financial Institutions
and the Public
Expenses for this operational area, which
encompasses both priced and nonpriced
services, are budgeted to increase

Table 3.8
Expenses of the Federal Reserve Banks for Services to the U.S. Treasury
and Other Government Agencies, 1994–96 1
Thousands of dollars, except as noted
Percentage change

1994
actual

1995
estimate

1996
budget

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

14,082
62,930
19,655

0
72,144
22,579

0
69,344
22,456

. . .
14.6
14.9

. . .
−3.9
−.5

2,325

2,593

2,794

11.5

7.8

23,830
33,854
22,654
30,123

27,501
38,060
24,241
35,057

30,455
37,152
25,143
36,245

15.4
12.4
7.0
16.4

10.7
−2.4
3.7
3.4

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

209,453

222,176

223,590

6.1

.6

Service

1994 to 1995 1995 to 1996

1. Excludes special projects.

Table 3.9
Expenses of the Federal Reserve Banks for Services to Financial Institutions
and the Public, 1994–96 1
Thousands of dollars, except as noted
Service

1994
actual

1995
estimate

1996
budget

Percentage change
1994 to 1995 1995 to 1996

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

198,003
26,939
5,939
531,854
35,936
72,577
83,795
35,654
8,293
18,458
59,022
28,669

223,596
26,804
5,010
518,174
38,315
68,610
84,622
38,484
7,391
20,596
66,483
29,489

249,729
28,696
5,929
529,157
41,336
67,546
83,829
38,875
7,911
21,877
71,652
31,043

12.9
−.5
−15.7
−2.6
6.6
−5.5
1.0
7.9
−10.9
11.6
12.6
2.9

11.7
7.1
18.3
2.1
7.9
−1.6
−.9
1.0
7.0
6.2
7.8
5.3

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

1,105,140

1,127,573

1,177,579

2.0

4.4

1. Excludes special projects.

Federal Reserve Banks
$50.0 million, or 4.4 percent, in 1996.
The staffing level is budgeted to decrease
by 88 ANP; a decline for the commercial check service (160 ANP) is
being partially offset by increases for
public programs (28 ANP) and for the
noncash collection service (14 ANP).
The commercial check service
accounts for nearly half of the amount
budgeted for this operational area and
employs 4,748 ANP. The 1996 budget
for this service is increasing $11.0 million, or 2.1 percent, a result of the
installation of equipment and software
to support check imaging and higher
Fednet costs to support increased
electronic products and services to
paying financial institutions. Although
forecasts differ by District, check volume
has continued to stabilize from the
substantial losses in 1994. The staffing
level for this service is expected to
decline by 160 ANP, or 3.2 percent,
from the estimated 1995 level.
Expenses for the currency and coin
services are budgeted to increase
$28.0 million, or 11 percent, in 1996,
mainly because of the installation of
new currency processors: Offices that
have completed installation of the new
processors are trimming staff owing to
improved efficiencies, but those that are

33

in the transition phase are temporarily
increasing staff.
The budget for the funds transfer
service is declining $1.1 million, or
1.6 percent, and the budget for the
automated clearinghouse (ACH) service
is declining $0.8 million, or 0.9 percent,
primarily because of the movement
toward a centralized-applications operating environment.
Expenses for public programs in the
Reserve Banks are expected to increase
$5.2 million, or 7.8 percent, because of
increased publications, expanded community affairs programs and other
outreach programs, additional education for financial institutions about the
new CRA regulations, and other economics education and public speaking
requirements.

Supervision and Regulation
The 1996 budget increase for the supervision and regulation operational area
of $34.7 million, or 8.8 percent, over
estimated 1995 expenses reflects a staff
increase of 111 ANP. At the New York
Reserve Bank, additional staff will
support a multiyear document-imaging
initiative and expansion in the foreign banking division. Increases at

Table 3.10
Expenses of the Federal Reserve Banks for Supervision and Regulation, 1994–96 1
Thousands of dollars, except as noted
Service
Supervision of District
financial institutions . . . . . . . . . . . . . . . . .
Consumer affairs . . . . . . . . . . . . . . . . . . . . . . . .
Administration of laws and regulations
related to banking . . . . . . . . . . . . . . . . . . .
Studies of banking and financial
market structures . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1. Excludes special projects.

Percentage change

1994
actual

1995
estimate

1996
budget

219,941
28,959

236,598
37,074

256,663
42,577

7.6
28.0

8.5
14.8

95,953

104,069

111,697

8.5

7.3

16,605

18,557

20,046

11.8

8.0

361,458

396,298

430,984

9.6

8.8

1994 to 1995 1995 to 1996

34

Annual Report: Budget Review, 1995–96

other Reserve Banks are a result of
state member bank growth; morecomprehensive supervision; the complexities of reviewing nontraditional
banking products, regulatory changes,
industry consolidation, and geographic
expansion; and the full-year impact of
filling vacancies in 1995.

Budget by Object of Expense
Personnel expenses—officer and employee salaries, other compensation to
personnel, and retirement and other
benefits—account for 63 percent of
Reserve Bank operating expenses budgeted for 1996. The amount budgeted
for 1996 is 3.9 percent more than
estimated 1995 expenses (table 3.11).
Salaries and other personnel expenses,
which account for 49 percent of budgeted
1996 operating expenses, are expected

to be $32.3 million, or 3.5 percent,
greater than estimated 1995 expenses.
Expenses for salaries are budgeted to
increase $43.3 million, or 4.8 percent.
Merit pay accounts for a large portion of
the increase; also contributing to higher
salary expenses are promotions, reclassifications, changes in the mix of staff,
and structure adjustments. Increases for
salaries are being partially offset by a
reduction of $4.6 million in overtime
expenses due to volume declines and
the conclusion of some 1995 initiatives
in the check area; short-term position
vacancies (lag) are also partly offsetting
salary increases. The decrease in other
personnel expenses ($11.0 million) is
due to a decline in outside agency help.
Expenditures for retirement and other
benefits, which account for 14 percent
of budgeted 1996 operating expenses,
are expected to be $13.5 million, or

Table 3.11
Operating Expenses of the Federal Reserve Banks, by Object, 1994–96 1
Thousands of dollars, except as noted
Percentage change

1994
actual

1995
estimate

1996
budget

Personnel
Officers’ salaries . . . . . . . . . . . . . . . . . . . . . . . . .
Employees’ salaries . . . . . . . . . . . . . . . . . . . . . .
Other personnel 2 . . . . . . . . . . . . . . . . . . . . . . . .
Retirement and other benefits . . . . . . . . . . . .
Total personnel . . . . . . . . . . . . . . . . . . . . .

90,716
782,238
38,810
256,572
1,168,337

95,007
809,289
30,002
253,874
1,188,172

98,758
848,844
18,977
267,422
1,234,000

4.7
3.5
−22.7
−1.1
1.7

3.9
4.9
−36.7
5.3
3.9

Nonpersonnel
Forms and supplies . . . . . . . . . . . . . . . . . . . . . .
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shipping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Travel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total nonpersonnel . . . . . . . . . . . . . . . . . .

54,621
183,915
31,101
78,419
40,667
154,403
−49,964
135,420
628,582

55,567
154,568
31,221
79,157
45,488
157,561
−51,319
213,160
685,403

57,467
178,688
34,949
78,952
46,575
166,134
−51,799
223,805
734,771

1.7
−16.0
.4
.9
11.9
2.0
2.7
57.4
9.0

3.4
15.6
11.9
−.3
2.4
5.4
.9
5.0
7.2

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

1,796,919

1,873,575

1,968,770

4.3

5.1

Object

1994 to 1995 1995 to 1996

1. Excludes special projects.
2. Expenses for certain contractual arrangements, and miscellaneous personnel expenses.
3. Communications, fees, contra-expenses, shared costs distributed and received,
excess capacity, and other.

Federal Reserve Banks
5.3 percent, greater than estimated 1995
expenses. Approximately 40 percent of
the 1996 increase is due to compliance
with GAAP; other contributing factors
are higher social security payments and
thrift plan contributions, a reflection of
higher salaries and staffing levels. Medical expenses are also contributing to the
increase.
Nonpersonnel expenses, which account
for 37 percent of budgeted 1996 operating expenses, are projected to increase
7.2 percent over estimated 1995 nonpersonnel expenses.
Expenditures on equipment are budgeted to increase 15.6 percent, accounting for approximately 9 percent of
budgeted 1996 operating expenses. More
than half the increase is due to the
installation of the new high-speed currency processors. Equipment depreciation and maintenance costs are also
increasing, owing mainly to the installation of check imaging, check processing, and end-user computing equipment.
Shipping expenses, which account for
approximately 4 percent of Reserve
Bank budgeted 1996 operating expenses,
are expected to remain flat.
Building expenses, which account for
about 8 percent of budgeted 1996
operating expenses, are expected to
increase 5.4 percent over estimated 1995
building expenses. The increase is being
driven by increased property depreciation resulting from building improvements and renovations, building projects
related to the installation of new currency processors, and the new building
projects in Minneapolis and Cleveland.
‘‘Other’’ nonpersonnel expenses are
budgeted to increase $10.6 million over
estimated 1995 expenses, accounting
for approximately 11 percent of budgeted 1996 expenses. The increase is
due mainly to higher charges by
FRAS for data processing and data
communications.

35

Capital Outlays
For the next several years, the Reserve
Banks’ capital budget will be dominated
by building projects. The New York
Reserve Bank will continue the renovation of its head office building, a project
that will be spread over ten years or
more and will result in upgrading of the
entire building. In Cleveland, an annex
will be constructed adjacent to the
existing building to house a new operations center. This project is scheduled to
be completed in late 1996, followed by a
complete renovation of the existing
building to extend its useful life, improve
life safety systems, and enhance the
security of valuables handled by the
Bank. In 1995, new building programs
were approved for the head office in
Atlanta and its Branch office in
Birmingham; both projects are scheduled
to be completed around the end of the
century. In Minneapolis, the new office
building will be ready for occupancy in
July 1997.
For 1996, capital outlays (including
funding for FRAS) are budgeted at
$411.0 million, an increase of $45.4 million, or 12.4 percent over estimated
1995 outlays (excluding FRAS, the
increase is $64.9 million) (table 3.12).
Outlays for buildings in 1996 are
budgeted at $125.6 million, about
30 percent of total capital outlays.
Included in the budget are the new
building programs in Minneapolis
($40.8 million), Atlanta ($3.7 million),
and Birmingham ($2.4 million); the
renovation and expansion project in
Cleveland ($35.3 million); the floorby-floor modernization and renovations
in New York ($13.6 million); and
general renovation and modification
projects in several other Districts
($16.4 million). Renovations in
currency-processing areas are adding
$3.4 million.

36

Annual Report: Budget Review, 1995–96

Outlays for data processing and data
communications are budgeted at
$113.3 million, approximately 28 percent of total capital outlays. Included in
the budget is check-imaging equipment
for eleven Districts ($24.8 million). In
1996, the Federal Reserve will begin to
provide image-supported check truncation services to the U.S. Treasury. The
budget includes funds for the System’s
image archival and retrieval system, for
high-speed image-processing systems,
and for other equipment and upgrades
related to the Treasury’s effort ($9.8 million). The remainder of the checkimaging capital budget covers upgrades
to medium- and high-speed sorters and
the installation of image-enhanced
truncation equipment to support the
Treasury and to position the Banks
to provide commercial check image
processing.
Other major data processing and data
communications outlays budgeted for
1996 include $21.8 million for input
devices—mainly PC workstations—in
all Districts. More than $8 million is
earmarked for CPU equipment, mostly

for CPU upgrades at FRAS to meet
production, testing, and contingency
processing requirements ($6.1 million);
the remainder of the CPU outlays is
related to check operations in five
Districts. Storage devices account for
$11.4 million, including $6.2 million for
DASD and tape equipment at FRAS;
support for check-processing operations
in several Districts will require an
additional $5.1 million. Outlays of
$12.1 million are needed to replace
existing LAN communications equipment and to implement several upgrades.
FRAS has budgeted $7.2 million for
operations equipment for the Fednet
network; the final milestone for the
Fednet project, the conversion of District
leased-line connections to Fednet, is
scheduled to be completed in 1996. In
addition, FRAS has budgeted $4.7 million for parallel sysplex equipment,
which is expected to help manage
workloads more efficiently, improve
application availability, and reduce
software costs. The remaining data
processing and data communications
outlays include $5.8 million for several

Table 3.12
Capital Outlays of the Federal Reserve Banks, by Class of Outlay, 1994–96
Thousands of dollars, except as noted
Class of outlay
Data processing and data
communications equipment 1 . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture, furnishings,
and fixtures . . . . . . . . . . . . . . . . . . . . . . . . .
Other equipment 2 . . . . . . . . . . . . . . . . . . . . . . . .
Land and other real estate . . . . . . . . . . . . . . . .
Building machinery and equipment . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . .
Software 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Percentage change

1994
actual

1995
estimate

1996
budget

143,121
43,385

113,405
108,045

113,345
125,609

−20.8
149.0

−.1
16.3

12,487
45,330
6,866
5,194
304
10,431

16,555
78,888
22,761
12,822
1,209
11,901

27,997
85,069
11,526
21,286
3,503
22,643

32.6
74.0
231.5
146.8
298.1
14.1

69.1
7.8
−49.4
66.0
189.9
90.3

267,117

365,584

410,979

36.9

12.4

1. Includes FRAS capital of $63,959 thousand in 1994,
$48,995 thousand in 1995, and $27,747 thousand in 1996.
2. Includes FRAS capital of $1,820 thousand in 1994,
$38 thousand in 1995, and $111 thousand in 1996.

1994 to 1995 1995 to 1996

3. Includes FRAS capital of $6,275 thousand in 1994,
$3,171 thousand in 1995, and $4,808 thousand in 1996.

Federal Reserve Banks
projects at the New York Reserve Bank,
$3.9 million for telephone systems, and
$3.6 million for printers.
Furniture and other equipment purchases are budgeted at $113.1 million,
about 27 percent of total capital outlays.
The continued installation of new currency processors and associated equipment accounts for about half of the total
($57.4 million). The Reserve Banks
plan to spend another $13.1 million
on other cash-related equipment and
$23.1 million to replace furniture and
workstations.
Building machinery and equipment
outlays are budgeted at $21.3 million.
Included are items related to Minneapolis’s new building ($5.9 million)
and replacements and upgrades in several
Districts, including chiller replacements
and upgrades ($3.2 million), boilergenerator upgrades ($1.0 million),
elevator upgrades ($2.0 million), and
an HVAC computer in Richmond
($2.6 million).
Land and other real estate purchases
are budgeted at $11.5 million, for the
new building in Birmingham and for the
Dallas Reserve Bank’s purchase of a lot
adjacent to its building to improve the
security of the building’s perimeter.
Chart 3.1
Operating Expenses of the
Federal Reserve Banks, 1986–96 1

37

Software purchases in 1996 are
budgeted at $22.6 million. Check-image
software accounts for more than half of
the total ($11.6 million). FRAS has
budgeted $4.8 million for software
associated mainly with the CPUs that
will be upgraded.

Trends in Expenses
and Employment
Over the ten years ending with the
1996 budget, Reserve Bank operating
expenses have increased an average
of 5.4 percent a year (chart 3.1). The
number of employees at the Reserve
Banks, excluding FRAS staff, has
increased from 23,240 in 1986 to 23,261
in 1996, an increase of 21 ANP
(chart 3.2). Since 1986, staffing has
increased in supervision and regulation
owing to the implementation of the
Federal Deposit Insurance Corporation
Improvement Act (1,139 ANP), in the
currency service owing to volume growth
(113 ANP), and in public programs
owing to enhanced communications with
the public (115 ANP). Partly offsetting
these increases have been decreases
in the commercial check service
(403 ANP), the overhead services
Chart 3.2
Employment at the
Federal Reserve Banks, 1986–96 1

Billions of dollars

ANP, in thousands

1.9

25

1.6

24

1.3

23

Current dollars

1986 dollars 2

1986

1991

1996

1. Excludes expenses for special projects. For 1995,
estimate; for 1996, budget.
2. Calculated with the GDP price deflator.

1986

1991

1996

1. Includes staff for special projects and FRAS. For
1995, estimate; for 1996, budget. See text note 2 for
definition of ANP.

38

Annual Report: Budget Review, 1995–96

(297 ANP), securities and noncash
operations (204 ANP), the ACH and
funds transfer services (225 ANP), fiscal
agency services (192 ANP), and the
monetary policy service (55 ANP).
These decreases are due largely to consolidation of operations and to operational efficiencies throughout the System.
Over the five years ending with the
1996 budget, Reserve Bank operating
expenses have increased an average of
5.7 percent a year. Increases have been
higher since 1991 because of expanded
bank supervision and the transition to
a consolidated data processing environment. Nonpersonnel costs have been
increasing at a much faster rate than
personnel costs as the Reserve Banks
downsize labor-intensive operations and
substitute technology for labor: Since
1991, nonpersonnel expenses have
grown an average of 6.9 percent a year,
and personnel expenses an average of
5.0 percent a year.
Over the five years, increases have
been highest for the supervision and
regulation operational area—an average
of 12.7 percent a year—as the area
continues to expand. Expenses for services to the U.S. Treasury and other
government agencies have increased at
the five-year average of 5.7 percent a
year. Before 1993, when regionalization
of savings bonds operations took place,
the savings bond service accounted for
the bulk of the annual increase for this
operational area; since then, the consolidation of savings bonds processing sites
has resulted in savings. The monetary
and economic policy operational area
has grown at an average rate of
5.1 percent a year, reflecting increases in
overhead and support. The services to
financial institutions and the public
operational area has had the lowest
average annual increase over the five
years, 3.7 percent. Expenses for the
currency service have grown an average

of 12.0 percent a year, primarily because
of installation of the currency processors, and expenses for public programs
have grown an average of 8.4 percent a
year. These increases have been partly
offset by downsizing in the commercial
check service due to volume declines
and by centralization efforts in the funds
transfer and ACH services.
About half of the expenses in the
Reserve Banks’ 1996 budget are recoverable through pricing or are reimbursable
from the Treasury and other agencies.
The proportion of recoverable expenses
is down from 60 percent in 1991
because recoverable services have been
growing at a slower rate than nonrecoverable services: Between 1991 and 1996,
recoverable services have grown an
average of 2.2 percent a year, and
nonrecoverable services an average of
10.1 percent a year.

Volume and Unit Costs
In 1996, the volume of measured services as a whole is expected to increase
2.1 percent over 1995 volume, and the
unit cost is expected to increase
0.8 percent (table 3.13). Since 1991,
volume has increased at an average
Table 3.13
Volume and Unit Costs of Measured
Federal Reserve Bank Services
Percentage change from 1995 to 1996
Service

Volume

Unit cost

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

3.0
.7
16.1
2.9
.9

−2.2
.0
−14.7
−4.4
7.0

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

3.9

6.5

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

−6.1

4.8

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

3.4

−1.8

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

2.1

.8

1. Includes currency and coin services.

Federal Reserve Banks
annual rate of 1.9 percent and unit cost
at an average annual rate of 1.5 percent.
The increase in unit cost expected for
1996 reflects a net decrease for the
payments services. For the commercial
check service, the largest component
of the overall index, the unit cost is
expected to remain essentially flat, and
for the cash service, the second largest
component, to increase 6.5 percent.

1995 Budget Performance
The Reserve Banks estimate that 1995
expenses were $1,873.6 million—
$4.3 million, or 0.2 percent, over the
approved budget. At this estimated level
of spending, the increase over actual
1994 spending on operations was
4.3 percent.
Seven Reserve Banks expect to be
within 1.0 percent of their approved
1995 budgets. Three Banks expect overruns of 1.0 percent or more—Cleveland
(2.2 percent), Minneapolis (1.4 percent),
and San Francisco (1.0 percent). Major
factors in Cleveland’s overrun were
higher-than-expected costs for Fednet
and FRAS production and unbudgeted
accounting changes related to the GAAP
compliance initiative; in Minneapolis,
the most significant reason for the
overrun was the GAAP accounting
changes; and in San Francisco, backlogs
during transition to the new currency
processing equipment required the
addition of unbudgeted resources. Two
Banks expect underruns of more than
1.0 percent—Atlanta (2.0 percent) and
Boston (1.2 percent). Atlanta’s expenses
were lower in 1995 because of the
recognition of credits for self-insured
medical related to the GAAP compliance initiative; Boston’s expenses were
lower because the cost of transporting
checks within the System, a Systemwide
cost included in Boston’s budget, was
lower than expected.

39

Appendixes

43

Appendix A

Special Categories of System Expense
Fees for priced services and treatment of
capital outlays are explained in this
appendix. Also described are the Reserve
Bank special project for 1996 and
Federal Reserve expenses for currency
printing.

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

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

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

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

44

Annual Report: Budget Review, 1995–96

by the Federal Deposit Insurance Corporation (FDIC) (based on expected
clearing balances and amounts deferred
to depository institutions for items
deposited for collection with the Reserve
Banks); and the portion of the expenses
of the Board of Governors that is
directly related to the development of
priced services.
The inclusion of all these costs means
the Federal Reserve offers its priced

services on a basis comparable with
that in the private sector, and the
discipline of the market ensures that the
prices charged will be no higher than
necessary.

Calculation of the PSAF for 1996
In 1995 the Board approved a 1996
private sector adjustment factor for
Reserve Bank priced services of

Table A.1
Pro Forma Balance Sheet for Federal Reserve Priced Services, 1995 and 1996 1
Millions of dollars
Item

1995

Assets
Short-term assets
Imputed reserve requirement on clearing balances . . . . . . . .
619.8
Investment in marketable securities . . . . . . . . . . . . . . . . . . . . . 5,577.9
62.8
Receivables 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.7
Materials and supplies 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
.1
Suspense and difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
16.1
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Items in process of collection . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,592.5
Total short-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1996

409.6
3,686.7
64.4
8.6
.0
13.9
2,413.2
8,874.9

6,596.4

Long-term assets
Premises 2 ,3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
337.7
187.8
Furniture and equipment 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12.6
Leasehold improvements and long-term prepayments 2 . . . .
Capital leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.8
Total long-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

541.9

552.7

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

9,416.8

7,149.1

346.4
189.4
14.6
2.3

Liabilities
Short-term liabilities
Clearing balances and balances arising
from early credit of uncollected items . . . . . . . . . . . . . . 6,197.7
Deferred-credit items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,592.5
84.7
Short-term debt 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total short-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4,096.3
2,413.2
86.8
8,874.9

6,596.3

Long-term liabilities
Obligations under capital leases . . . . . . . . . . . . . . . . . . . . . . . . .
3.8
Long-term debt 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
161.6
Total long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

165.4

185.0

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

9,040.3

6,781.3

Equity 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

376.5

367.8

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

9,416.8

7,149.1

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

2.3
182.7

to priced services of $0.4 million for 1995 and $0.5
million for 1996.
4. Imputed figures representing the source of financing
for certain priced-service assets.

Special Categories of System Expense
$85.8 million, a decrease of $8.9 million, or 9.4 percent, from the PSAF of
$94.7 million targeted for 1995.
Asset Base
The value of Federal Reserve assets to
be used in providing priced services in

45

1996 is estimated at $7,149.1 million
(table A.1). The value of assets assumed
to be financed through debt and equity
in 1996 is $637.3 million, an increase
of $14.4 million, or 2.3 percent, from
1995 (table A.2); the increase is due
primarily to higher priced asset levels at
the Reserve Banks.

Table A.2
Derivation of the Private Sector Adjustment Factor (PSAF), 1995 and 1996
Millions of dollars, except as noted
Item

1995

1996

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

84.7
538.2
622.9

86.9
550.4
637.3

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

3.5
8.2
12.1
10.9

3.9
7.6
14.2
12.0

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

15.4
25.4
59.2

13.6
28.7
57.7

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

31.0

29.9

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

3.0
13.2
45.6
61.7

3.4
13.8
52.3
69.5

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

11.3
19.0
2.7
33.0

11.3
2.2
2.8
16.3

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

94.7
15.2
15.7

85.8
13.5
14.1

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 fifty largest bank holding companies (determined by
size).

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 1990–94
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.

46

Annual Report: Budget Review, 1995–96

Cost of Capital, Taxes,
and Other Imputed Costs
For 1996, a pretax rate of return on
equity of 14.2 percent, or $52.3 million,
is planned. Other required PSAF recoveries for 1996—imputed sales taxes,
imputed FDIC insurance assessment,
and Board expenses—total $16.3 million (table A.2). The $8.9 million decrease in PSAF recoveries is attributable
mainly to the new lower rate for deposit
insurance and lower clearing balances
anticipated for 1996.

Capital Outlays
In accordance with generally accepted
accounting principles (GAAP), the Federal Reserve System depreciates the cost
of fixed assets over their estimated
useful lives. In the federal government,
where no requirement for depreciation
accounting exists, the cost of fixed
assets is typically recorded as an
expense at the time of purchase. However, the Policy and Procedures Manual
for Guidance of Federal Agencies of
the General Accounting Office, which
governs accounting procedures in the
federal government, specifies in title 2
the use of depreciation accounting for
business types of operations and for
activities that recover costs from reimbursements or user charges. Certain
activities of the Federal Reserve meet
both these criteria. Under GAAP, the
cost of acquiring an asset that is
expected to benefit an entity over future
periods should be allocated over those
periods. Such treatment allows a more
realistic measurement of operating
performance.
The Banks capitalize and depreciate
all assets that cost $1,500 or more; they
may either capitalize or expense assets
costing less. The capitalization guideline
for the Board is $1,000.

The Banks maintain a multiyear plan
for capital spending. The Board, in turn,
requires the Banks to budget annually
for capital outlays by capital class to
estimate the effect of total operating and
capital spending. During the budget
year, the Banks must submit proposals
for major purchases of assets to the
Board for further review and approval.
The Board of Governors reviews capital
expenditures for the Board.

Special Projects
Special projects are research and
development activities that are expected
to provide long-range benefits to the
Federal Reserve System and the banking
industry as a whole. Because spending
on special projects is relatively high
and short term, the Federal Reserve
accounts for them separately from its
operating expenses. For 1996, the Board
of Governors has approved one special
project.

Automation Consolidation
In 1992, the Federal Reserve System
began to incur expenses for a major
effort to consolidate all mainframe
computer operations at three sites within
the System—Richmond, Dallas, and
New York. The Automation Consolidation special project was created to
capture the extraordinary costs associated with this effort. In 1992, work
focused on establishing a project plan
and on staffing and equipping the three
data centers. In 1993 and 1994, the
emphasis was on the conversion of
District workloads and the transition of
District EPS images to the production
environment. In 1995, funds transfer
processing was moved into the centralized environment, and the San Francisco and New York Reserve Banks
completed the System’s move into the

Special Categories of System Expense
District-unique environment. In 1996,
consolidation efforts will center around
the implementation of the centralized
ACH and new book entry applications.
The 1996 budget provides $36.9 million in support of these efforts. Including 1996 funding, expenditures on
this special project to date total
$234.2 million.

47

Chart A.1
Federal Reserve Budget for
Supplying U.S. Currency, 1991–96 1
Millions of dollars

400

200

Currency Printing
and Circulation

1991

The Bureau of Engraving and Printing
prints U.S. currency; the Federal Reserve
Banks put it into circulation through
depository institutions and destroy it
as it wears out (table A.3). The Board
of Governors establishes the annual
budget for the printing of new notes
and ancillary costs and subsequently
assesses the Federal Reserve Banks
through an accounting procedure similar
to that used in assessing the Reserve
Banks for Board operating expenses.
The Federal Reserve’s 1996 currency
budget is $442.3 million, an increase
of 18.5 percent over estimated 1995
expenditures (chart A.1).
Table A.3
Currency in Circulation, New Notes Issued,
and Notes Destroyed, 1995 Estimate
Millions of pieces
New
notes
issued 2

Notes
destroyed

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

6,202
519
1,473
1,374
4,073
896
2,392

4,196
29
1,035
848
2,053
251
544

4,529
6
1,001
842
1,855
182
496

Total . . . . . . . . .

16,929

8,956

8,911

1
2
5
10
20
50
100

1993

1994

1995

1996

Printing of Federal Reserve Notes
The 1996 budget for the printing of
Federal Reserve notes is $429.3 million,
an increase of 18.6 percent over
estimated 1995 expenditures (table A.4).
The most significant factor influencing
the budget is the number of notes
printed. The budget provides for the
printing of an estimated 10.7 billion
notes, 9 percent more than estimated
1995 production. This figure is based on
the anticipated destruction of 9 billion
notes, an expected increase of 1.2 billion
notes in circulation, and a planned
increase of 500 million notes in Reserve
Bank inventories (chart A.2). The
Chart A.2
Use of Currency Printed in 1991–96 1
Millions of dollars

Notes
in
circulation 1

Dollar
denomination

1992

1. For 1995, estimate; for 1996, budget.

1. As of November 1995.
2. Figures for new notes issued do not include
additions to inventory at the Reserve Banks.

Inventory increase
Circulation increase
Currency replacement
2

12
8
4

1991

1992

1993

1994

1995

1996

1. For 1996, estimate.
2. Reserve Bank inventories decreased in 1992.

48

Annual Report: Budget Review, 1995–96

Chart A.3
Cost of Printing New Currency, 1991–96
Dollars per thousand notes

40

20

1991

1992

1993

1994

1995

1996

increase in the number of notes printed
is due primarily to the upcoming
introduction of the newly designed
$100 note, which is scheduled to be
released to the public in early 1996. To
meet demand, the Reserve Banks plan to
have 500 million of the new $100 notes
in inventory before the introduction.
Along with the increase in the number
of notes printed, the cost of printing the
notes is rising. In January 1996, the unit
cost for printing notes increased 8.1 percent, to $40 per thousand notes
(chart A.3). The unit cost is the blended
costs of printing three types of notes. Of
the notes printed in 1996, 12.4 percent
will be the newly designed $100 notes,
45.0 percent will be other threaded
currency, and the remaining 42.6 per-

cent will be $1 notes, which have no
thread. The average production cost per
thousand notes is $49.54 for the new
$100 notes, $35.24 for the other threaded
currency, and $32.09 for the $1 notes.
Two-thirds of the unit cost increase
from 1995 to 1996 ($2 per thousand
notes) is attributable to increases in the
cost of materials and labor (table A.5).
The remaining one-third is earmarked
for a worldwide public education program about the new currency design.
The public education program will
emphasize several points: (1) U.S. currency will still be easily recognizable as
‘‘American’’ (the size and colors will
not change, and the portraits and
vignettes will remain); (2) The new
design maintains the security of the
currency by staying ahead of advances
in counterfeit technology; and (3) Currency now in circulation will remain
legal tender; the U.S. has never recalled
its currency and will not do so now. The
program will be carried out through
numerous channels, including print and
radio announcements, training films,
and informational leaflets enclosed with
bank statements. The U.S. Treasury will
publish and broadcast information in a
number of languages, including French,
German, Russian, Chinese, Hebrew, and
Arabic. In September 1995, the Treasury

Table A.4
Federal Reserve Costs of Supplying Currency, 1995 and 1996
Dollars, except as noted
Item

1995
estimated

1996
budget

Percentage
change

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

361,860,000
7,500,000
850,000
0
430,000

429,312,000
8,800,000
800,000
645,000
0

18.6
17.3
−5.9
. . .
. . .

20,000
2,500,000

25,000
2,700,000

25.0
8.0

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

373,160,000

442,282,000

18.5

Special Categories of System Expense
Table A.5
Cost of Printing New Federal Reserve Notes,
1996
Dollars
Item

Cost per
thousand
notes

Total cost

1995 printing cost . . . . . . . . . .
1996 labor cost increase . . . .
1996 materials cost increase .
Public eductation program . .

37.00
.50
1.50
1.00

397,113,600
5,366,400
16,099,200
10,732,800

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

40.00

429,312,000

contracted with Young & Rubicam, Inc.,
a New York advertising agency, to help
develop the program.

Shipping Costs
Using competitive bidding, the Board
contracts with armored carriers to
transport new currency from the Bureau
of Engraving and Printing’s Washington, D.C., and Western facilities to the
Federal Reserve Banks and their
Branches. The 1996 budget for transporting new currency is $8.8 million, a
17.3 percent increase over estimated
1995 expenditures. Carrier costs are
increasing 7.8 percent, reflecting
increased costs in such areas as insurance and air freight as well as the
9 percent increase in the number of new
notes shipped. The production of the
newly designed $100 notes is having a
disproportional effect on shipping costs:
The new $100 notes constitute only
12.4 percent of the notes to be printed
in 1996 but account for approximately
24 percent of the budget for transporting
new currency in 1996; in contrast, the $1
notes constitute 42.6 percent of planned
1996 note production but account for
only 10 percent of the 1996 budget for
transporting new currency.
The 1996 currency budget also
includes $0.8 million for shipment of
fit (usable) currency within the Federal

49

Reserve System, 5.9 percent less than
estimated 1995 expenditures. Such shipments move currency from offices with
excess fit currency to offices that would
otherwise require new currency. The
1996 budget is lower because the
number of intra-System shipments of fit
$50s projected for 1996, in anticipation
of the introduction of the newly designed
$50 note in 1997, is less than the number
of intra-System shipments of fit $100s
that were necessary in 1995, in anticipation of the newly designed $100 note.

Extended Custodial Inventory
Program
The extended custodial inventory (ECI)
program, developed by the Federal
Reserve Bank of New York and
approved by the Reserve Banks’ Cash/
Fiscal Product Office, is a pilot program
to facilitate the introduction of redesigned U.S. currency to the international
U.S. banknote market. It is intended to
enhance the current distribution system
by providing an efficient means of
introducing the redesigned currency.
The New York Reserve Bank will
establish the ECI operation to stockpile
inventories of the currency at several
banks in strategic European locations.
The 1996 budget for the ECI program is
$0.6 million.

Reimbursement to the Treasury
Unfit currency is canceled, destroyed,
and accounted for according to procedures prescribed by the U.S. Treasury’s
Office of Currency Standards. The
Bureau of Engraving and Printing
processes claims for the redemption of
damaged or mutilated currency. The
1996 currency budget includes $2.7 million to reimburse the Treasury for this
service, an 8 percent increase over
estimated 1995 expenditures.

51

Appendix B

Sources and Uses of Funds
The Federal Reserve System, in accordance with generally accepted accounting principles, accrues income and
expenses and capitalizes acquisitions of
assets whose useful lives extend over
several years (see appendix A).
The System derives its income primarily from earnings on U.S. government securities that the Federal Reserve
has acquired through open market operations, one of the tools of monetary
policy. These earnings account for
approximately 94 percent of current
income (table B.1).
The current expenses of the Reserve
Banks consist of their operating expenses
and the costs of the earnings credits
granted to depository institutions on
clearing balances held with the Reserve
Banks (table B.2). The Reserve Banks
record extraordinary adjustments to
current net income in a profit and loss
account. The primary entries in the
account are for gains or losses on the
sale of U.S. government securities and
for gains or losses on assets denominated
in foreign currencies that result either
Table B.1
Income of the Federal Reserve System,
1994 and 1995
Millions of dollars
Source

1994
actual

1995
estimate

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

11.5
19,247.1
894.5
734.4
23.3

11.3
23,825.6
783.8
739.1
35.4

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

20,910.7

25,395.1

from the sale of those assets or from
their revaluation at market exchange
rates.
The Reserve Banks maintain a surplus
account to absorb unexpected losses,
much as commercial establishments
retain earnings. The Board of Governors
requires that the surplus account at
year-end be an amount equal to the
capital paid in by the member banks.
Since the end of 1964, the Board’s
policy has been to transfer to the U.S.
Treasury all net income after paying the
statutory dividend to member banks and
the amount necessary to equate surplus
to paid-in capital. The amount transferred
is classified as interest on Federal
Reserve notes. Such payments were
$20.5 billion for 1994 and are estimated
to be $23.4 billion for 1995.

52

Annual Report: Budget Review, 1995–96

Table B.2
Distribution of the Income of the Federal Reserve Banks, 1994 and 1995
Millions of dollars
Item

1994
actual

1995
estimate

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

20,911

25,395

1,572
224

1,577
249

19,115

23,570

2,398

894

34

37

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

147
368

161
370

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

212
282

231
283

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

20,470

23,383

1. See table B.1.
2. Net of reimbursements due from the U.S. Treasury
and other government agencies. Also reflects reductions
of $75.6 million in 1994 and $119.2 million in 1995 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 Federal
Reserve Banks’’ in the Statistical Tables section of the
Board’s Annual Report and includes realized and
unrealized gains on assets denominated in foreign
currencies, gains on sales of U.S. government securities,
and miscellaneous gains and losses.

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

53

Appendix C

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
Reserve Bank Operations and Payment
Systems, acting on behalf of the Board
of Governors, regularly audits the financial operations of each of the Banks
and periodically reviews all other Bank
operations. The Office of Inspector
General (OIG) 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 Reserve System under
the purview of the General Accounting
Office (GAO). The GAO, which currently has 22 projects in various stages
of completion, since 1979 has completed 131 reports on selected aspects
of Federal Reserve operations (tables
C.1 and C.2). The GAO has also
involved the Federal Reserve in about
78 other reviews not directly related to
the System and has terminated 52
others before completion. The reports
are available directly from the GAO.

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

Date initiated

Financial crises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Relationship of the operations of the Federal Reserve System to the federal budget . . . . . . . . . . . . . . .
Foreign banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Audit of the Federal Reserve Bank of Dallas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank mutual fund profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDICIA provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OTC derivative sales practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CFTC’s exemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interstate banking data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Concessions contracts in federal agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial derivatives update . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico’s financial crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BHC Act prohibition on tying . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal regulatory burden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proposals to consolidate U.S. bank regulatory structures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Counterfeit U.S. currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Clearance and settlement systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Daiwa Bank activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank regulatory system in Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FR fiscal agency functions for the Treasury Department . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade and financial flows between Panama and Cuba . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Oversight of foreign banks’ U.S. operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10/27/92
10/8/93
3/31/94
4/11/94
6/1/94
6/24/94
7/20/94
9/1/94
2/16/95
2/27/95
3/2/95
3/7/95
3/20/95
3/31/95
6/12/95
9/25/95
11/2/95
11/21/95
11/30/95
12/22/95
12/22/95
12/28/95

54

Annual Report: Budget Review, 1995–96

Table C.2
Completed GAO Reports Relating to the Federal Reserve System
Report
Comparing Policies and Procedures of the Three Bank
Regulatory Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Are OPEC Financial Holdings a Danger to U.S. Banks or the Economy? .
Federal Systems Not Designed to Collect Data on All Foreign
Investments in U.S. Depository Institutions . . . . . . . . . . . . . . . . . . . . . . .
Considerable Increase in Foreign Banking in United States since 1972 .
Investment Policies, Practices and Performance
of Federal Retirement Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Supervision of Bank Holding Companies Needs Better, More
Formalized Supervision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Federal Reserve Should Assure Compliance
with the 1970 Bank Holding Company Act Amendments . . . . . . . . .
Federal Agencies’ Initial Problems with the Right to Financial
Privacy Act of 1978 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Internal Auditing Can Be Strengthened in the Federal Reserve System .
Despite Positive Effects, Further Foreign Acquisitions of U.S. Banks
Should Be Limited until Policy Conflicts Are Fully Addressed . . . .
Federal Examinations of Financial Institutions: Issues That
Need to Be Resolved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Examinations of Financial Institutions Do Not Assure Compliance
with Consumer Credit Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disappointing Progress in Improving Systems for Resolving
Billions in Audit Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
An Economic Overview of Bank Solvency Regulation . . . . . . . . . . . . . . . . .
Federal Reserve Security over Currency Transportation Is Adequate . . . .
The Federal Structure for Examining Financial Institutions
Can Be Improved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Response to Questions Bearing on the Feasibility
of Closing the Federal Reserve Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank Secrecy Act Reporting Requirements Have Not Met
Expectations, Suggesting Need for Amendment . . . . . . . . . . . . . . . . . . .
Federal Reserve Could Improve the Efficiency of Bank Holding
Company Inspections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Institution Regulatory Agencies Should Perform Internal Audit
Reviews of their Examination and Supervision Activities . . . . . . . . .
Information on Selected Aspects of Federal Reserve System Expenditures .
Federal Review of Intrastate Branching Can Be Reduced . . . . . . . . . . . . . .
Despite Improvements, Recent Bank Supervision Could
Be More Effective and Less Burdensome . . . . . . . . . . . . . . . . . . . . . . . .
Issues to Be Considered while Debating Interstate Bank Branching . . . . .
The Federal Reserve Should Move Faster to Eliminate Subsidy
of Check-Clearing Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Information about Depository Institutions’ Ancillary Activities Is Not
Adequate for Policy Purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank Merger Process Should Be Modernized and Simplified . . . . . . . . . . .
An Analysis of Fiscal and Monetary Policies . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank Examination for Country Risk and International Lending . . . . . . . . .
Credit Insurance Disclosure Provisions of the Truth-in-Lending Act
Consistently Enforced Except When Decisions Appealed . . . . . . . . . .
Survey of Investor Protection and the Regulation
of Financial Intermediaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Institutions Regulatory Agencies Can Make Better Use
of Consumer Complaint Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expediting Tax Deposits Can Increase the Government’s
Interest Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unauthorized Disclosure of the Federal Reserve’s
Monetary Policy Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Financial Institutions Examination Council Has Made Limited
Progress toward Accomplishing Its Mission . . . . . . . . . . . . . . . . . . . . . .
Control Improvements Needed in Accounting for Treasury Securities
at the Federal Reserve Bank of New York . . . . . . . . . . . . . . . . . . . . . . . .

Number

Date issued

GGD-79-27
EMD-79-45

3/29/79
6/11/79

GGD-79-42
GGD-79-75

6/19/79
8/1/79

FPCD-79-17

8/31/79

GGD-80-20

2/12/80

GGD-80-21

3/12/80

GGD-80-64
GGD-80-59

5/29/80
8/8/80

GGD-80-66

8/26/80

GGD-81-12

1/6/81

GGD-81-13

1/21/81

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

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

GGD-81-21

4/24/81

GGD-81-49

5/21/81

GGD-81-80

7/23/81

GGD-81-79

8/18/81

GGD-82-5

10/19/81

GGD-82-33
GGD-82-31

2/12/82
2/24/82

GGD-82-21
GGD-82-36

2/26/82
4/9/82

GGD-82-22

5/7/82

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

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

GGD-83-3

10/25/82

GGD-83-30

7/13/83

GGD-83-13

8/25/83

GGD-84-14

11/21/83

GGD-84-40

2/3/84

GGD-84-4

2/3/84

AFMD-84-10

5/2/84

Federal Reserve System Audits

55

Table C.2
Continued
Report
Statutory Requirements for Examining International Banking
Institutions Need Attention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supervisory Examinations of International Banking Facilities
Need to Be Improved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
An Examination of Concerns Expressed about the Federal Reserve’s
Pricing of Check-Clearing Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Difficulties in Evaluating the Effectiveness of the Community
Reinvestment Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Number

Date issued

GGD-84-39

7/11/84

GGD-84-65

9/30/84

GGD-85-9A

1/14/85

OCE-86-1

11/4/85

International Coordination of Bank Supervision: The Record to Date . . .
Implementation of the Export Trading Company Act of 1982 . . . . . . . . . .
Information on Independent Public Accountant Audits
of Financial Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
An Analysis of Two Types of Pooled Investment Funds . . . . . . . . . . . . . . .
How the Markets Are Developed and How They Are Regulated . . . . . . .
U.S. Banking Supervision and International Supervisory Principles . . . . .
Financial Institution Regulators’ Compliance Examination . . . . . . . . . . . . .
The Market’s Structure, Risks, and Regulation . . . . . . . . . . . . . . . . . . . . . . . .
Dealer Views on Market Operations and Federal Reserve
Securities Transfer System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Questions about the Federal Reserve’s Securities Transfer System . . . . . .

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

Federal Reserve Board Opposition to Credit Card Interest Rate Limits .
Insulating Banks from the Potential Risk of Expanded Activities . . . . . . .
The Federal Reserve Response Regarding Its Market-Making Standard .
Change in Fees and Deposit Account Interest Rates since Deregulation .
An Examination of Views Expressed about Access to Brokers’ Services .

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

Issues Related to Repeal of the Glass–Steagall Act . . . . . . . . . . . . . . . . . . . .
Preliminary Observations on the October 1987 Crash . . . . . . . . . . . . . . . . . .
Supervision of Overseas Lending Is Inadequate . . . . . . . . . . . . . . . . . . . . . . .
Competitive Concerns of Foreign Financial Firms in Japan,
the United Kingdom and the United States . . . . . . . . . . . . . . . . . . . . . . .
Administrative Expenses at FHLBB and FRB for 1985 and 1986 . . . . . .
Government in the Sunshine Act Compliance at Selected Agencies . . . .
Trends in Commercial Bank Performance, December 1976–June 1987 . .
U.S. Commercial Banks’ Securities Activities in London . . . . . . . . . . . . . . .
Lending to Troubled Sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Government Check-Cashing Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

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

GGD-89-35
GGD-89-61

1/27/89
5/12/89

AFMD-89-25
GGD-90-17

5/31/89
12/15/89

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

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

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

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

GGD-90-114
GGD-90-113

9/14/90
9/25/90

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

56

Annual Report: Budget Review, 1995–96

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

Number

Date issued

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

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

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

GGD-91-128

9/16/91

GGD-91-131

9/20/91

GGD-91-132
AFMD-92-19

9/30/91
10/21/91

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

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

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

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

9/14/92
9/30/92
10/30/92

GGD-93-48

1/8/93

AFMD-93-13
AFMD-93-15

2/16/93
2/16/93

Bank and Thrift Criminal Fraud: The Federal Commitment
Could Be Broadened . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FRB Examinations and Inspections Do Not Fully Assess Bank Safety
and Soundness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Improvements Needed in Examination Quality and Regulatory Structure .
Personnel Engaged in Public and Congressional Affairs
in Federal Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit Availability Guidance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury Automation: Automated Auction May Not Achieve Benefits
or Operate Properly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IRS Can Improve the Federal Tax Deposit System . . . . . . . . . . . . . . . . . . . .
Funding Foreign Bank Examinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preliminary Information Related to a Futures Transaction Fee . . . . . . . . . .
The Business Environment in the United States, Japan, and Germany . .
Regulatory Impediments to Small Business Lending Should Be
Removed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recent Developments in Foreign Exchange Markets . . . . . . . . . . . . . . . . . . .
Benefits and Risks of Removing Regulatory Restrictions . . . . . . . . . . . . . . .
Regulatory Burden: Recent Studies, Industry Issues,
and Agency Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Strengthening the Framework for Supervising International Banks . . . . . .
Insider Problems and Violations Indicate Broader Management
Deficiencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Credit Card Industry: Competitive Developments Need to be
Closely Monitored . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Better Guidance Is Needed for Real Estate Evaluations . . . . . . . . . . . . . . . .
Treasury Securities Auction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Divergent Loan Loss Methods Undermine Usefulness
of Financial Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interstate Banking: Experiences in Three Western States . . . . . . . . . . . . . . .
Lessons Learned from Resolving First City Bancorporation of Texas . . .
Investment of Trust Assets in Bank Proprietary Mutual Funds . . . . . . . . .
Status Report on the Initiative to Improve Economic Statistics . . . . . . . . .

GGD-93-71FS
GGD-93-15R

3/8/93
3/30/93

IMTEC-93-28
AFMD-93-40
GGD-93-35R
GGD-93-108
GGD-93-124

4/27/93
4/28/93
5/4/93
5/17/93
8/9/93

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

9/7/93
9/24/93
11/2/93

GGD-94-28

12/13/93

GGD-94-68

3/21/94

GGD-94-88

3/30/94

GGD-94-23
GGD-94-144
AIMD-94-165R

4/28/94
5/24/94
8/25/94

AIMD-95-8
GGD-95-35

10/31/94
12/30/94

GGD-95-37
GGD-95-21
GGD-95-98

3/15/95
3/16/95
7/7/95

Federal Reserve System Audits

57

Table C.2
Continued
Report

Number

Date issued

Differences in Screening Bank Executives . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Banks’ Securities Activities: Oversight Differs Depending on Activity
and Regulator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mutual Funds: Impact on Bank Deposits and Credit Availability . . . . . . .
Bank Mutual Funds: Sales Practices and Regulatory Issues . . . . . . . . . . . .
Challenges Remain to Successfully Implement CRA . . . . . . . . . . . . . . . . . . .

GGD-95-181R

8/17/95

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

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

9/21/95
9/22/95
9/27/95
11/28/95

efforts with other governmental and
nongovernmental agencies to promote
economy and efficiency and to detect
and prevent fraud and abuse in activities
administered or financed by the Board.
The OIG keeps the Congress and the
Chairman of the Board fully informed
about serious abuses and deficiencies
and about the status of any corrective
actions.
During 1995, the OIG publicly
reported on seven audits (table C.3) and
conducted a number of follow-up and
other reviews. In addition, the OIG
closed six investigations and performed
numerous legislative and regulatory
reviews.

Table C.3
Completed OIG Audit Reports Relating to the Federal Reserve System, 1995
Report

Number

on the Failure of Pioneer Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
of the FFIEC’s Financial Statements (year ending 12/31/94) . . . . . . . . . . .
of the Board’s Financial Statements (year ending 12/31/94) . . . . . . . . . . . .
of the Office of the Secretary’s Records Services’
Image Processing System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Audit of the Federal Reserve Examination Policies and Procedures
for Commercial Real Estate Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Audit of the National Information Center’s Data Security . . . . . . . . . . . . . . . . . . . .
Audit of the Board’s Applications Processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

A9407
A9501
A9500

1/95
2/95
3/95

A9408

3/95

A9305
A9502
A9504

3/95
7/95
11/95

Audit
Audit
Audit
Audit

Month of issue

59

Appendix D

Expenses and Employment
at the Federal Reserve Banks
Table D.1
Operating Expenses of the Federal Reserve Banks, by District, 1995 and 1996 1
Thousands of dollars, except as noted
1995
estimate

1996
budget

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

128,640
387,063
100,945
110,122
140,010
176,291
207,186
88,391
93,245
120,871
119,673
201,139
1,873,575

Special projects
Currency Authentication Systems . . . .
Automation Consolidation . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

District

1. Excludes capital outlays.

Change
Amount

Percent

132,920
407,749
104,343
114,712
147,841
185,657
214,923
94,085
98,688
127,893
127,076
212,883
1,968,770

4,280
20,687
3,398
4,591
7,830
9,366
7,736
5,694
5,444
7,022
7,403
11,745
95,196

3.3
5.3
3.4
4.2
5.6
5.3
3.7
6.4
5.8
5.8
6.2
5.8
5.1

2,125
41,082
43,206

0
36,905
36,905

−2,125
−4,177
−6,301

. . .
. . .
. . .

1,916,781

2,005,675

88,894

4.6

60

Annual Report: Budget Review, 1995–96

Table D.2
Employment at the Federal Reserve Banks, by District, 1995 and 1996
Average number of personnel, except as noted 1
1995
estimate

1996
budget

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

1,292
4,254
1,305
1,434
2,061
2,418
2,407
1,181
1,303
1,673
1,562
2,485
23,375

FRAS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

District

Change
Amount

Percent

1,253
4,228
1,289
1,451
2,094
2,366
2,343
1,210
1,294
1,669
1,568
2,497
23,261

−39
−27
−16
17
33
−51
−63
28
−9
−4
6
12
−113

−3.0
−.6
−1.2
1.2
1.6
−2.1
−2.6
2.4
−.7
−.3
.4
.5
−.5

593

563

−30

. . .

23,967

23,824

−143

−.6

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

Table D.3
Expenses of the Federal Reserve Banks, by Operational Area, 1995 and 1996
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 . . . . . . . . . .

1995
estimate

1996
budget

Change
Amount

Percent

127,528

136,618

9,090

7.1

222,176

223,590

1,415

.6

1,127,573
396,298

1,177,579
430,984

50,006
34,686

4.4
8.8

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

1,873,575

1,968,770

95,196

5.1

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

680,082
503,464

715,510
525,968

35,429
22,504

5.2
4.5

1. The costs of support and overhead are included in
the expenses by operational area shown above. Support
refers to activities, such as data processing, whose costs
can be charged to users according to the amount of use.

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

Expenses and Employment

61

Table D.4
Expenses of the Federal Reserve Banks
for Salaries of Officers and Employees, by District, 1995 and 1996
Thousands of dollars, except as noted
1995
estimate

1996
budget

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

54,089
200,601
47,362
49,688
70,080
81,675
95,044
39,566
45,173
58,471
56,663
105,884

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

904,296

District

Change
Amount

Percent

56,018
211,017
49,554
52,002
74,044
82,965
98,011
43,101
48,254
60,636
59,503
112,498

1,929
10,416
2,192
2,314
3,965
1,290
2,967
3,534
3,081
2,165
2,840
6,614

3.6
5.2
4.6
4.7
5.7
1.6
3.1
8.9
6.8
3.7
5.0
6.2

947,602

43,305

4.8

Table D.5
Factors in the 1995-to-1996 Change in Salaries
of Officers and Employees of the Federal Reserve Banks, by District
Percentage points
District

Merit
adjustment

Structure
adjustment

Promotion
and reclassification

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

3.7
4.8
4.0
3.6
4.4
3.9
4.2
4.6
4.3
4.5
3.8
4.5

.5
.1
.5
.0
.0
.0
.8
.0
.0
.3
.7
.0

1.2
1.1
.6
.3
1.5
.5
1.5
.9
.5
1.2
.3
.6

−1.2
−.3
.9
2.2
2.3
−1.0
−1.6
4.0
1.4
−.1
.8
1.5

−.5
−1.2
−.2
−1.0
−2.1
−1.3
−.9
−.4
.0
−1.4
.0
−.1

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

4.3

.2

.9

.4

−.9

Change in Turnover Overtime
staffing
and lag 1

Other

Total
change

−.8
−.3
−1.1
−.4
−.7
−.6
−1.0
−.3
−.3
−.8
−.1
−.3

.7
.8
.0
.0
.1
.0
.1
.1
.8
.1
−.5
.0

3.6
5.2
4.6
4.7
5.7
1.6
3.1
8.9
6.8
3.7
5.0
6.2

−.5

.2

4.8

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

62

Annual Report: Budget Review, 1995–96

Table D.6
Capital Outlays of the Federal Reserve Banks, by District, 1995 and 1996
Thousands of dollars, except as noted
1995
estimate

1996
budget

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

11,384
44,199
7,723
53,963
23,843
46,210
24,038
9,121
28,449
15,196
22,452
26,802
313,379

FRAS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total, System . . . . . . . . . . . . . . . . . . . . . .

District

Change
Amount

Percent

14,644
69,988
15,342
48,684
26,251
47,667
23,000
8,672
59,397
12,893
16,961
34,816
378,313

3,260
25,788
7,619
−5,278
2,408
1,457
−1,038
−449
30,949
−2,303
−5,492
8,014
64,934

28.6
58.3
98.7
−9.8
10.1
3.2
−4.3
−4.9
108.8
−15.2
−24.5
29.9
20.7

52,205

32,665

−19,540

−37.4

365,584

410,979

45,394

12.4

Table D.7
Budget Performance of the Federal Reserve Banks,
Operating Expenses, by District, 1995 1
Thousands of dollars, except as noted
1995
budget

1995
estimate

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

130,202
383,487
100,399
107,702
140,624
179,970
207,801
87,628
91,987
120,290
120,176
199,052
1,869,318

Special projects
Currency Authentication Systems . . . .
Automation Consolidation . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

District

1. Excludes capital outlays.

Change
Amount

Percent

128,640
387,063
100,945
110,122
140,010
176,291
207,186
88,391
93,245
120,871
119,673
201,139
1,873,574

−1,562
3,576
545
2,420
−613
−3,680
−615
763
1,258
582
−504
2,086
4,257

−1.2
.9
.5
2.2
−.4
−2.0
−.3
.9
1.4
.5
−.4
1.0
.2

1,300
37,737
39,037

2,125
41,082
43,206

825
3,344
4,169

63.4
8.9
10.7

1,908,355

1,916,780

8,425

.4

Expenses and Employment

63

Table D.8
Budget Performance of the Federal Reserve Banks,
Employment, by District, 1995
Average number of personnel, except as noted 1
1995
budget

1995
estimate

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

1,277
4,250
1,287
1,443
2,047
2,392
2,416
1,155
1,323
1,644
1,580
2,428
23,240

FRAS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

District

Change
Amount

Percent

1,292
4,254
1,305
1,435
2,061
2,418
2,407
1,181
1,303
1,673
1,562
2,486
23,375

14
5
18
−8
14
26
−9
26
−20
29
−18
58
135

1.1
.1
1.4
−.6
.7
1.1
−.4
2.3
−1.5
1.8
−1.2
2.4
.6

592

593

1

.2

23,832

23,968

136

.6

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

Table D.9
Operating Expenses of the Federal Reserve Banks, by Operational Area, 1991–96 1
Thousands of dollars, except as noted
Monetary
and
economic
policy

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

Services to
financial
institutions
and the
public

Supervision
and
regulation

Total

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

106,699
109,954
114,617
120,869
127,528
136,618

169,483
182,307
193,621
209,453
222,176
223,590

980,379
1,020,974
1,076,914
1,105,140
1,127,573
1,177,579

237,369
276,038
326,334
361,458
396,298
430,984

1,493,930
1,589,272
1,711,486
1,796,920
1,873,575
1,968,770

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

5.1

5.7

3.7

12.7

Year

1991
1992
1993
1994
1995
1996

1. Excludes special projects.

5.7

64

Annual Report: Budget Review, 1995–96

Table D.10
Employment at the Federal Reserve Banks, by Operational Area, 1991–96
Average number of personnel, except as noted 1
Monetary
and
economic
policy

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

Services to
financial
institutions
and the
public

Supervision
and
regulation

Support 2

Overhead 2

Total

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

784
776
751
729
728
736

1,870
1,832
1,780
1,754
1,719
1,627

9,044
8,878
8,609
8,301
8,249
8,161

2,343
2,587
2,910
3,079
3,115
3,226

4,629
4,711
4,762
4,603
4,578
4,534

4,924
4,998
5,182
5,162
4,985
4,976

23,594
23,782
23,995
23,627
23,375
23,261

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

−1.3

−2.8

−2.0

6.6

−.4

.2

−.3

Year

1991
1992
1993
1994
1995
1996

1. Excludes special projects and FRAS. See chapter 3, note 2, for definition of average number of personnel.
2. See table D.3, note 1, for definition.

Maps of the
Federal Reserve System

66

Annual Report: Budget Review, 1995–96

The Federal Reserve System

1

9
MINNEAPOLIS

12

SAN FRANCISCO

2

7

CHICAGO

10

CLEVELAND

4

KANSAS CITY

ST. LOUIS

8
11 DALLAS

6ATLANTA

BOSTON

NEW YORK
3PHILADELPHIA

RICHMOND

5

ALASKA
HAWAII

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

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

Facing page

•

Federal Reserve Branch city
Branch boundary

Bank serves the Commonwealth of
Puerto Rico and the U.S. Virgin Islands;
the San Francisco Bank serves American
Samoa, Guam, and the Commonwealth
of the Northern Mariana Islands. The
maps show the boundaries within the
System as of February 1996.

Maps of the Federal Reserve System
1–A

2–B

ME

4–D

3–C
NJ

PA

CT

NH

Buffalo

CT

BOSTON

NC

Charlotte

KY

SC

RICHMOND

CLEVELAND

PHILADELPHIA
7–G

Nashville

TN

WV

WV

Cincinnati

NY

NEW YORK

6–F

MD

VA

OH

DE
NJ

RI

Baltimore

PA

VT

MA

5–E

Pittsburgh

NY

67

8–H
KY

Birmingham

AL

MI

WI

MS

Detroit

IA

GA

New Orleans

IL

Miami

Memphis
MS

ST. LOUIS

CHICAGO

ATLANTA
9–I

TN

Little
Rock

IN

FL

IN

Louisville

MO
AR

Jacksonville

LA

IL

MT

Helena

ND

MN

WI

MI

SD

MINNEAPOLIS
10–J

12–L

WY

NE

Omaha

CO

Denver

MO

KS

ALASKA

WA

Seattle

NM

Oklahoma City

Portland

OK

OR

KANSAS CITY

ID
CA
NV

11–K

TX

Salt Lake City

NM
LA

El Paso

UT

Houston

Los Angeles

San Antonio
HAWAII

DALLAS

AZ

SAN FRANCISCO