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Board of Governors of the Federal Reserve System

1996–97

Board of Governors of the Federal Reserve System

1996–97

Contents
1

Introduction
FEDERAL RESERVE BUDGET PROCESS
AND OPERATIONAL AREAS

Part I The 1997 Budgets
9
9
11
13
13

Chapter 1
FEDERAL RESERVE SYSTEM
Net Expenses
Trends in Expenses and Employment
Operational Areas
Major Projects for 1997

15
15
15
18
19
23
23
25

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

27
27
29
31
35
36
38
39
40

Chapter 3
FEDERAL RESERVE BANKS
Major Projects
1997 Budget Objective
Budget by Operational Area
Budget by Object of Expense
Capital Outlays
Trends in Expenses and Employment
Volume and Unit Costs
1996 Budget Performance

Part II Special Analysis
43
43
45
46
47

Chapter 4
RECENT CHANGES IN THE FEDERAL RESERVE’S
APPROACH TO BANKING SUPERVISION
Growth of the Federal Reserve’s Responsibilities
A Changing Approach to Supervision
Other Changes in Federal Reserve Supervision
International Supervisory Policies

Appendixes
51
51
54
54
55

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

59

Appendix B
SOURCES AND USES OF FUNDS

61
61
61
66

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

67

Appendix D
EXPENSES AND EMPLOYMENT
AT THE FEDERAL RESERVE BANKS

74

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
1996, the Federal Reserve System spent
an estimated $1.1 billion in net operating expenses. Total spending of an
estimated $2.1 billion was offset by an
estimated $1.0 billion 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 $23.9 billion in 1996.
Earnings in excess of expenses, dividends, and surplus—in 1996 an estimated $20.1 billion—are transferred to
the U.S. Treasury. (These earnings are
treated as receipts in the U.S. budget
accounting system and as anticipated
earnings projected by the Office of
Management and Budget 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, 1996–97

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
is currently planning to move to a twoyear budget cycle, commencing with the
1998–99 budget, in conjunction with a
four-year planning cycle.
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.

Reserve Banks
Each year the Federal Reserve Banks,
like the Board, establish major operating
goals for the coming year, devise strat-

egies 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 Committee on Federal Reserve Bank Affairs—
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
operations budgets are special projects,
which are long-range research and development efforts that have the potential
to make major improvements in the
nation’s payments mechanism or in the
Federal Reserve’s ability to provide
services (the special project for 1997 is
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
3.7–3.9 and 3.11.) PACS makes it
possible to compare budgets with actual
expenses and enables the Board of
Governors to compare the financial and

Introduction
operating performances of the Reserve
Banks.

Operational Areas
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.

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

3

projections for the domestic economy
and international markets. They also
conduct longer-run economic studies on
regional, national, and international
issues.

Supervision and Regulation
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 1996 the Federal
Reserve conducted approximately 606
state member bank examinations and
approximately 1,922 bank holding company inspections and acted on a total
of 4,390 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 1996 the System conducted approximately 589 compliance
examinations.
The Board’s supervisory responsibilities also extend to the foreign operations of U.S. banks and, under the
International Banking Act, to the 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.

4

Annual Report: Budget Review, 1996–97

Services to Financial Institutions
and the Public
The Federal Reserve System plays a
central role in the nation’s payments
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
1996 the Reserve Banks distributed
$406.2 billion in currency and $4.7 billion in coin and destroyed $148.4 billion
in unfit currency.
The Reserve Banks (along with their
Branches and regional centers) also
process checks for collection—
approximately 15 billion checks in
1996 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
7,900 depository institutions use Fedwire through direct computer connections with Reserve Banks, and another
2,100 institutions use Fedwire through
off-line means such as telephone. In
1996, approximately 82 million transfers valued at about $246 trillion were
sent over Fedwire, an average of $3 million per transfer and $983 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 settle-

ment 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.
Approximately 28,600 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 September 1996, all of the approximately 8,190
ACH endpoints had electronic connections with the Federal Reserve. In 1996
the Reserve Banks processed approximately 3.04 billion ACH transactions
valued at about $9.9 trillion; approximately 21 percent of the transactions
were for the federal government, and the
rest were for commercial establishments.
The securities services provided by
the Reserve Banks include 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 1996 the Reserve
Banks processed approximately 14.2 million securities transfers valued at
$170 trillion. The noncash collection
service, through which maturing coupons
and bonds are presented for collection,
processed about 1.2 million transactions
in 1995 and about 1.6 million transactions in 1996.

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

Introduction
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
11,000 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.
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
in supervising 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.

5

Part I
The 1997 Budgets

9

Chapter 1

Federal Reserve System
For 1997, the Federal Reserve System
has budgeted net operating expenses of
$1,139.4 million. Revenue from priced
services provided to depository institutions is expected to total $810.4 million,
or 37.4 percent of total budgeted operating expenses. Total operating expenses
are budgeted at $2,168.6 million, an
increase of 2.1 percent over estimated
1996 expenses. Of this total, $1,997.2 million is for the Reserve Banks and
$171.4 million is for the Board of
Governors (table 1.1).
Not included in the budget for operations is a Reserve Bank special project
for automation consolidation, which is
budgeted at $34.7 million for 1997,
down from $38.4 million estimated for
1996.1 Also excluded is the cost of
currency, budgeted at $405.6 million for
1997, an increase of 0.8 percent over the
estimated 1996 cost of $402.4 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 project) is budgeted at
24,916 for 1997, a decline of 321 from

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’s operations budget. These relatively
costly, short-term projects are expected to benefit
both the System and the banking industry as a
whole. The special project approved for 1997 is
described 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.

the estimated 1996 level. (Details are
given in chapters 2 and 3.)

Net Expenses
The System expects to recover 47.5 percent of its budgeted 1997 operating
expenses through revenue from priced
services, other income, and claims for
reimbursement. After these items are
deducted from budgeted 1997 operating
expenses, the net expenses of the System
show an increase of 2.3 percent over
estimated 1996 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, 1997 1
Special Projects, 1.3%
Currency, 15.5%

Board of
Governors, 6.6%

Reserve Banks, 76.6%
1. See text notes 1 and 2.

10

Annual Report: Budget Review, 1996–97

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 reimburse-

Table 1.1
Expenses of the Federal Reserve System for Operations, Special Projects,
and Currency, 1995–97 1
Millions of dollars, except as noted
Percentage change

Entity and
type of expense

1995
actual

1996
estimate

1997
budget

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

1,864.7
1,183.5
681.2
157.0
117.4
39.6

1,959.3
1,228.0
731.3
165.6
122.7
42.9

1,997.2
1,252.3
744.9
171.4
127.8
43.6

5.1
3.8
7.4
5.5
4.5
8.3

1.9
2.0
1.9
3.5
4.2
1.6

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

2,021.7
1,300.9
720.8

2,124.9
1,350.7
774.2

2,168.6
1,380.1
788.5

5.1
3.8
7.4

2.1
2.2
1.8

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

43.7

38.4

34.7

−12.1

−9.7

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

369.9

402.4

405.6

8.8

.8

1995 to 1996 1996 to 1997

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, 1995–97
Millions of dollars, except as noted
Item
Total System operating expenses . . . . . . . . .
Less
Revenue from priced services . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . .
Claims for reimbursement 1 . . . . . . . . . . . .
Equals
Net System operating expenses . . . . . . .

Percentage change

1995
actual

1996
estimate

1997
budget

2,021.7

2,124.9

2,168.6

5.1

2.1

765.2
5.8
221.4

791.4
5.8
213.5

810.4
5.8
213.0

3.4
*
−3.6

2.4
*
−.2

1,029.3

1,114.3

1,139.4

8.3

2.3

1. Cost of fiscal agency and depository services
provided to the U.S. Treasury and other government
agencies that are billed to these agencies. In practice, not
all these claims are paid.

* Less than 0.05.

1995 to 1996 1996 to 1997

Federal Reserve System
Table 1.3
Revenue from Priced Services, 1995–97
Millions of dollars
1995
1996
1997
actual estimate budget

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

90.6

90.5

97.3

75.6
574.0

78.4
595.2

79.8
605.1

15.9
4.0
5.2

15.7
4.8
6.8

16.9
5.6
5.7

765.2

791.4

810.4

ment represent the expenses incurred by
the Reserve Banks in providing fiscal
agency and depository services to the
Treasury and other government agencies
that are billed to these agencies.
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 1987 to budgeted 1997
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, 1987–97 1

11

average of 5.4 percent a year (2.4 percent a year when adjusted for inflation)
(chart 1.2) and total System expenditures
(including special projects) have
increased an average of 5.6 percent a
year (2.5 percent a year when adjusted
for inflation). Over the same period,
nondefense discretionary spending by
the federal government has increased an
average of 5.8 percent a year (chart 1.3).
Federal Reserve System employment,
including staff working on special
projects and Federal Reserve Automation Services (FRAS), has increased by
420 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, 1987–97 1
Percent

80

Billions of dollars
Federal government

60
Current dollars

40
2.0
20
+
0_

Federal Reserve

1.6
1987 dollars 2

1987

1992

1. For 1996, estimate; for 1997, budget.
2. Calculated with the GDP price deflator.

1997

1987

1992

1997

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 1996, estimate; for 1997,
budget.

12

Annual Report: Budget Review, 1996–97

Chart 1.4
Employment in the
Federal Reserve System, 1987–97 1
Thousands of persons

26
25
24

1987

1992

1997

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 1997, spending
on bank supervision has 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).
The System has been able to partially
offset these increases by reducing staff
in other operational areas, mainly services to the U.S. Treasury and services
to financial institutions and the public.

Table 1.4
Operating Expenses of the Federal Reserve System, by Operational Area, 1995–97 1
Millions of dollars, except as noted
Operational area
and entity

1995
actual

1996
estimate

1997
budget

Percentage change
1995 to 1996 1996 to 1997

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

211.7
128.3
83.4

226.4
138.1
88.3

235.2
145.7
89.5

7.0
7.7
5.9

3.9
5.5
1.4

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

216.8

217.2

213.1

.2

−1.9

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

1,131.0
1,127.3
3.7

1,181.6
1,177.6
4.0

1,198.2
1,194.0
4.2

4.5
4.5
8.1

1.4
1.4
5.0

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

462.2
392.3
69.9

499.7
426.4
73.3

522.1
444.4
77.7

8.1
8.7
4.9

4.5
4.2
6.0

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

2,021.7
1,864.7
157.0

2,124.9
1,959.3
165.6

2,168.6
1,997.2
171.4

5.1
5.1
5.5

2.1
1.9
3.5

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

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
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.

Major Projects for 1997
Several major projects that have an
impact on Board or Reserve Bank
budgets will continue or begin in 1997:
• Consolidation of System automation
• Installation of high-speed currency
processors
• Installation of equipment and software
to support the image processing of
commercial and Treasury checks and
the archival of Treasury checks
• Extraordinary repairs to and maintenance of facilities.
Partly offsetting the greater expenditures associated with these projects are
lower costs associated with staff reductions made possible by several reengineering initiatives and programs to
increase efficiency in Federal Reserve
operations.

13

15

Chapter 2

Board of Governors
The 1997 budget for the Board of
Governors provides $165.6 million for
operations, $2.9 million for extraordinary items (projects of a unique
nature), and $3.0 million for the Office
of Inspector General. The Board has
authorized 1,746 staff positions for
operational areas and 32 positions for
the Office of Inspector General; no
positions are required for the extraordinary items. The total of 1,778 positions is an increase of 14 over the
number authorized at the end of 1996
and includes 16 temporary positions that
will be abolished in 1998.

Overview of the Budget
Board Operations
The 1997 operations budget of $165.6
million is 2.8 percent larger than
estimated 1996 expenses. Despite
increases in salaries and the costs of
goods and services, expenses to maintain
core operations at the 1996 level were
more than offset by reductions in core
level activities, resulting in a net decrease
of 0.3 percentage point in the cost of
core activities. Initiatives to improve
customer service and to increase operating efficiency through the enhancement
of automation systems, projects to
maintain facilities, and various smaller
projects increased the budget 3.1 percentage points, for an overall increase of
2.8 percent.

Extraordinary Items
Inclusion of certain periodic or one-time
expenses in the Board’s operations budget can result in undue volatility in the
size of the budget. Therefore, funds for

such extraordinary items are set apart
from the operations budget. For 1997,
$2.9 million in operating funds and
$420,000 in capital funds have been
budgeted for three extraordinary items:
modification or replacement of software
to ensure its operation after the century
date change and two major economic
surveys. These projects are discussed in
detail at the end of this chapter.

Office of Inspector General
The 1997 budget for the Office of
Inspector General of $3.0 million is
0.8 percent higher than estimated 1996
expenses.

Highlights of the Budget
Decreases for Core Level Activities
Initial division budget requests to support core level activities in 1997 were
reduced by approximately $3.5 million
to provide funding for higher-priority
initiatives. Eleven positions were eliminated; funding for travel, training, and
automation labor was reduced; and
several facilities maintenance projects
were deferred. The largest reductions in
core level activity will occur in the
Divisions of Information Resources
Management, Banking Supervision and
Regulation, Support Services, Research
and Statistics, and Reserve Bank Operations and Payment Systems.

Major Automation Enhancements
Division Automation Systems
The 1997 budget provides approximately
$1.0 million in operating funds and

16

Annual Report: Budget Review, 1996–97

$2.7 million in capital funds to improve
division information systems. The
improvements include replacement of
outdated personal computers, an increase
in disk capacity, expansion of memory,
and upgrading of operating systems and
other software. The majority of the
funds ($0.6 million in operating funds
and $1.8 million in capital funds) will
be used for four divisions: Banking
Supervision and Regulation, Information Resources Management, Research
and Statistics, and Monetary Affairs.
Boardwide Network
Approximately $0.3 million in operating
funds and $1.0 million in capital funds
are provided to maintain the reliability
and efficiency of existing network
devices and services. This investment is
necessary to handle growing distributed
system requirements, including provisions for restoring operations in the
event of a catastrophic failure.
Mainframe Computer
The 1997 budget also provides $0.3 million in operating funds and $0.7 million
in capital funds to upgrade the Board’s
mainframe computer. The upgrade will
improve access to mainframe databases
such as those used for the National
Information Center (NIC) and for
administration of Home Mortgage
Disclosure Act (HMDA) responsibilities. Additional direct access storage
will be made available to clients and for
such activities as providing distributed
data backup on the mainframe, moving
frequently used financial data to and
from tape, and implementing the new
System Statistics and Reserves (STAR)
system, a centralized software system
that will provide financial and statistical
data for the administration of the Board’s
monetary, regulatory, and supervisory
policies.

Boardwide Cable Plant
Approximately $0.2 million in operating
funds and $2.2 million in capital funds
are included in the budget to cover the
1997 costs of a multiyear project to
replace the Board’s cable plant. Designed
in accordance with decade-old standards
for voice systems, the current cable
plant uses copper cable, which supports
only low-speed data transmission, while
advances in information technology are
driving network data communications to
higher speed requirements. The recabling
project will reduce downtime and help
meet the demand for increased capacity.
Internet
In keeping with the federal government
objective of improving access to
information via electronic means, the
1997 budget includes approximately
$0.4 million in operating funds, $0.3 million in capital funds, and one position
to develop and maintain the Board’s
World Wide Web site. This initiative
will provide immediate electronic access
to data, documents, and publications
that the public would otherwise have to
obtain in paper form. It is expected that
this effort will reduce demand for
printed publications, eventually leading
to lower printing and postage expenses.
Revisions to Bank and
Bank Holding Company Reports
The 1997 budget provides approximately
$0.3 million in operating funds to
implement changes to the automated
systems that produce the quarterly
Reports of Condition and Income (Call
Reports) and Bank Holding Company
Financial Statements (FR Y-9 and Y-11
reports). The Federal Financial Institutions Examination Council recently
approved significant changes to the Call

Board of Governors
Reports in order to reduce the reporting
burden on financial institutions, improve
the monitoring of interest rate risk, and
move from the use of regulatory accounting principles (RAP) to the use of
generally accepted accounting principles
(GAAP). The Federal Reserve has
recently proposed similar revisions to
the bank holding company reports. The
changes to both types of report stem in
part from requirements of the Riegle
Community Development and Regulatory Improvement Act of 1994.
Foreign Banking Organization
Workstation
The 1997 budget provides approximately
$0.3 million in operating funds and
$0.1 million in capital funds for a major
initiative to develop an automated system
that will improve the supervision of the
domestic activities of foreign banking
organizations. The system will contain a
docketing workflow module, a document management module, and a
financial–analytical module that will
allow the Board to better coordinate and
further enhance the supervision of the
U.S. operations of foreign financial
institutions.
Home Mortgage Disclosure Act and
Community Reinvestment Act

17

window glass in critical areas of the
Martin and Eccles Buildings with
explosive-resistant safety glass. This is
the first phase of a multiyear project in
which all of the exterior glass in the
complex will be replaced. The project is
a response to Department of Justice
recommendations on the safety and
security of federal office buildings.
Air Handling System
The 1997 budget also provides approximately $0.8 million in capital funds to
continue a multiyear project to replace
components of the Board’s air handling
system to improve efficiency and promote energy savings. In this phase of
the project, ventilation will be improved
and more efficient cooling will be
provided for the lower levels of the
Martin Building.
Martin Building Exterior
The 1997 operations budget provides
approximately $0.4 million for repairs to
the exterior of the Martin Building. As a
result of aging and weather exposure,
moisture is entering the envelope of the
building. Structural engineers have
recommended that the seams in the
stone facade and all of the windows be
recaulked to prevent serious damage to
the building.

Approximately $0.3 million is provided
in the budget for a project to enhance the
HMDA and CRA (Community Reinvestment Act) analysis systems used in fair
lending and CRA examinations and to
develop the compliance portion of the
Board’s examiner workstation software.

Martin Building Roof

Facilities Improvements
Exterior Window Glass

Potential Requirements Not Funded
in the 1997 Budget

The 1997 budget provides approximately
$0.8 million in capital funds to replace

Several issues that may have implications for funding are not addressed in the

Included in the 1997 capital budget is
approximately $0.3 million to replace a
portion of the Martin Building roofing
membrane, which has begun to leak.
The project will prevent serious water
damage to the building.

18

Annual Report: Budget Review, 1996–97

1997 budget because the impact of new
requirements has not been fully determined. The most significant of these
issues stem from passage of the
Electronic Freedom of Information Act
Amendments of 1996. This legislation
requires that federal agencies make
information requested by the public
available via electronic means such as
the Internet. A task force is expected to
make recommendations in 1997 on the
resources needed to comply with the
legislation.

Operations Budget by Division
and Accounting Classification
The Board’s overall operations budget is
detailed by division in table 2.1, and the
number of authorized staff positions for
Board operations is shown in table 2.2.
The ten-year trend in operating expenses,
by accounting classification, is shown in
table 2.3.
The largest increase in the 1997
budget is in the area of personnel
services. The 1997 budget for personnel

Table 2.1
Expenses of the Board of Governors, by Division, Office, or Special Account, 1995–97
Thousands of dollars, except as noted
Change, 1995 to 1996

Change, 1996 to 1997

Amount

Percent

Amount

373
85
555
1,783
435

8.8
2.0
7.4
7.2
4.7

9
154
516
−37
204

.2
3.6
6.4
−.1
2.1

26,540

933

3.7

432

1.7

5,424
28,473

5,540
28,186

157
1,988

3.0
7.5

116
−287

2.1
−1.0

2,805

3,264

3,320

459

16.4

56

1.7

6,000

6,504

7,173

504

8.4

669

10.3

1,883

2,199

2,198

316

16.8

−1

*

13,129

13,664

13,855

536

4.1

191

1.4

25,337
8,453
2,037
−15,216

27,185
8,795
2,457
−16,081

27,994
8,817
3,367
−15,349

1,847
342
420
−865

7.3
4.0
20.7
5.7

809
22
910
732

3.0
.2
37.0
−4.6

151,230

161,100

165,594

9,870

6.5

4,494

2.8

2,681

1,487

2,890

1,194

. . .

1,403

. . .

3,060

2,941

2,965

−119

−3.9

24

.8

Division, office,
or special account

1995
actual

1996
estimate

1997
budget

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

4,218
4,180
7,501
24,629
9,346

4,592
4,265
8,056
26,412
9,782

4,600
4,419
8,572
26,375
9,986

25,176

26,109

5,267
26,485

Controller . . . . . . . . . . . . . .
Consumer and
Community
Affairs . . . . . . . . . . . . .
Staff Director for
Management . . . . . . .
Reserve Bank
Operations
and Payment
Systems . . . . . . . . . . .
Information Resources
Management (IRM) .
Monetary Affairs . . . . . . . .
Special projects . . . . . . . . .
IRM income account 1 . . .
Total, Board
operations . . . . . . . . .
Extraordinary items . . . . .
Office of Inspector
General . . . . . . . . . . . .

1. Income from various Board divisions for use of central IRM resources.
* Less than 0.05.

Percent

Board of Governors
services (salaries, retirement, and insurance) is $4.1 million, or 3.4 percent,
greater than estimated 1996 expenses.
The 1997 budget for goods and services
is $0.4 million, or 0.9 percent, greater
than estimated 1996 expenses. The
increase in the area of goods and services is attributable to a $1.0 million, or
11.4 percent, increase in depreciation
expenses associated with the capital
portion of the automation system
enhancement and facilities improvement
initiatives described earlier, as well as
increases for software and other items.
Partially offsetting these increases are

19

reductions in core level activities in the
areas of building repairs and alterations,
travel, contractual professional services,
and furniture and equipment and
increased income from external clients
for use of the mainframe computer.

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

Table 2.2
Positions Authorized at the Board of Governors, by Division or Office, 1995–97
Division or office

1995
actual

1996
estimate

1997
budget

Change
1995 to 1996 1996 to 1997

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

42
62
83
274
108

42
63
84
275
110

42
63
84
275
111

0
1
1
1
2

0
0
0
0
1

244
50
22

243
47
21

236
47
21

−1
−3
−1

−7
0
0

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

261
34
65
10

261
35
66
10

263
35
69
7

0
1
1
0

2
0
3
−3

125
247
66

125
259
66

125
277
66

0
12
0

0
18
0

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

1,693

1,707

1,721

14

14

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

20

25

25

5

0

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

1,713

1,732

1,746

19

14

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

31

32

32

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; 1997 figure also includes
sixteen temporary (two-year) positions that will be
abolished by year-end 1998.

20

Annual Report: Budget Review, 1996–97

institutions and the public, and System
policy direction and oversight. Data on
expenses and positions for each operational area for 1995–97 are shown in
tables 2.4 and 2.5.

Monetary and Economic Policy
The 1997 budget for the monetary and
economic policy operational area is
approximately $70.4 million, an increase

Table 2.3
Operating Expenses of the Board of Governors, by Accounting Classification, 1987–97
Thousands of dollars, except as noted

Classification

1987
actual

1988
actual

1989
actual

1990
actual

1991
actual

1992
actual

1993
actual

Personnel services
Salaries . . . . . . . . . . . . . . . . .
Retirement . . . . . . . . . . . . . .
Insurance . . . . . . . . . . . . . . .
Subtotal . . . . . . . . . . . . . .

53,897
3,040
3,361
60,298

56,149
3,433
3,704
63,286

61,283
3,895
4,412
69,590

68,565
4,601
4,931
78,097

73,814
5,062
6,498
85,374

79,624
6,298
6,701
92,623

87,600
7,068
7,706
102,374

2,839

3,161

3,329

3,402

3,461

3,867

4,586

1,004
1,590
1,044
−554

1,156
1,571
1,089
−400

1,070
1,543
1,110
−364

1,142
1,758
1,153
−559

1,205
1,605
1,042
−928

1,116
1,799
1,103
−487

1,210
1,866
1,052
−335

883
2,698

719
2,511

748
2,506

897
2,101

720
2,428

767
2,789

847
2,826

912
1,077

684
527

527
−53

827
−965

694
−930

1,185
−923

1,257
231

453
1,606

505
1,599

582
1,571

578
1,702

608
1,686

696
1,805

755
1,878

1,146

1,044

849

943

1,002

2,071

1,331

1,712

2,002

1,905

1,837

1,897

1,969

2,102

0

0

142

237

191

264

201

2,263

3,128

3,354

2,686

2,669

4,491

5,175

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 . . . . . .
Furniture and
equipment repairs
and maintenance . . . .
Contingency
Processing
Center expenses . . . .
Contractual
professional
services . . . . . . . . . . . .
Tuition/registration
and membership
fees . . . . . . . . . . . . . . . .
Subsidies and
contributions . . . . . . .
Depreciation . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . .
Subtotal . . . . . . . . . . . . . .

533

564

513

602

671

842

981

657
7,463
−1,434
25,893

697
7,529
−1,447
26,640

413
6,740
−782
25,703

529
5,882
−452
24,302

639
5,607
168
24,435

736
6,011
85
30,187

768
6,563
632
33,929

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

86,192

89,925

95,293

102,399

109,809

122,810

136,303

0

0

0

0

373

3,147

436

127

580

718

1,341

1,568

1,930

2,710

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

Board of Governors
of $1.0 million, or 1.5 percent, over
estimated 1996 expenses. Activities in
this operational area include the Board’s
monitoring and analysis of developments in the money and credit markets,

21

setting of reserve requirements, approval
of changes in the discount rate, and
other activities related to the management of the nation’s monetary policy.
The budget increase for this area is

Table 2.3
Continued
Thousands of dollars, except as noted
Percentage
change,
1996 to 1997

Average
annual
percentage
change,
1987 to 1997

Classification

1994
actual

1995
actual

1996
estimate

1997
budget

Personnel services
Salaries . . . . . . . . . . . . . . . . .
Retirement . . . . . . . . . . . . . .
Insurance . . . . . . . . . . . . . . .
Subtotal . . . . . . . . . . . . . .

90,528
7,535
8,408
106,470

98,418
8,029
8,455
114,902

104,111
7,984
9,078
121,174

107,753
8,438
9,098
125,289

3.5
5.7
.2
3.4

7.2
10.8
10.5
7.6

4,640

4,759

5,251

4,967

−5.4

5.8

1,247
2,035
1,245
−16

1,236
2,134
1,581
1,460

1,122
2,209
1,375
1,642

1,081
2,177
1,405
1,547

−3.7
−1.5
2.1
−5.8

.7
3.2
3.0
. . .

802
3,003

949
3,449

952
4,185

957
4,382

.5
4.7

.8
5.0

1,178
554

1,320
3,854

1,309
4,365

1,091
4,350

−16.7
−.3

1.8
15.0

923
2,124

989
2,021

1,096
2,005

1,104
2,035

.7
1.5

9.3
2.4

1,743

1,530

1,585

1,229

−22.5

.7

2,109

2,089

1,820

1,799

−1.2

.5

185

21

0

0

6,306

7,491

10,354

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 . . . . . .
Furniture and
equipment repairs
and maintenance . . . .
Contingency
Processing
Center expenses . . . .
Contractual
professional
services . . . . . . . . . . . .
Tuition/registration
and membership
fees . . . . . . . . . . . . . . . .
Subsidies and
contributions . . . . . . .
Depreciation . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . .
Subtotal . . . . . . . . . . . . . .

1,055

1,339

677
6,968
−2,511
34,267

Total, Board
operations . . . . . . . . .
Extraordinary items . . . . .
Office of Inspector
General . . . . . . . . . . . .

. . .

. . .

10,089

−2.6

16.1

1,425

1,385

−2.8

10.0

756
7,379
−8,030
36,328

736
8,358
−9,863
39,926

730
9,309
−9,331
40,304

−.9
11.4
−5.4
.9

1.1
2.2
20.6
4.5

140,737

151,230

161,100

165,594

2.8

6.7

1,254

2,681

1,487

2,890

. . .

. . .

2,821

3,060

2,941

2,965

.8

37.0

22

Annual Report: Budget Review, 1996–97

primarily the result of planned investments in automation.

Supervision and Regulation
The 1997 budget for supervision and
regulation is approximately $61.5 million, an increase of $2.6 million, or
4.4 percent, over estimated 1996
expenses. Supervision includes the
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
regulation of securities credit. The
increase for this operational area is due
largely to investments in automation and
training and to the addition of staff
positions. The budget provides increased
funding for information systems hardware and software as well as for three
new positions to meet expanded CRA

and HMDA requirements. Additional
funds are also provided for training for
Reserve Bank examiners in such areas
as capital markets instruments, interest
rate risk assessment, and asset and
liability management. The foreign banking organization workstation project, a
major new initiative to improve the
supervision of foreign banking organizations (discussed earlier), is also contributing to the budget increase.

Services to Financial Institutions
and the Public
The 1997 budget for services to financial institutions and the public is
approximately $3.4 million, an increase
of $0.2 million, or 6.2 percent, over estimated 1996 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 their check payment activities); oversight of the electronic payments mechanism; and annual
evaluation of the System’s currency, coin,
and food coupon operations. The budget

Table 2.4
Expenses of the Board of Governors for Operational Areas,
Extraordinary Items, and Office of Inspector General, 1995–97 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 . . . . . . . . . . . . .

1995
actual

1996
estimate

1997
budget

63,348
56,677

69,363
58,907

2,986

3,208

Change, 1995 to 1996

Change, 1996 to 1997

Amount

Percent

Amount

Percent

70,389
61,488

6,015
2,230

9.5
3.9

1,026
2,581

1.5
4.4

3,408

222

7.4

200

6.2

28,219

29,622

30,309

1,403

5.0

687

2.3

Total, Board operations . . .

151,230

161,100

165,594

9,870

6.5

4,494

2.8

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

2,681
3,060

1,487
2,941

2,890
2,965

−1,950
−119

. . .
−3.9

1,403
24

. . .
.8

1. Operating expenses include allocations for support and overhead.

Board of Governors

23

increase for this area is due mainly to the
full-year costs of 1996 salary actions and
increased automation expenses.

systems as the Financial Exams System
for the Division of Reserve Bank Operations and Payment Systems.

System Policy Direction
and Oversight

Capital Budget

The 1997 budget for System policy
direction and oversight is approximately
$30.3 million, an increase of $0.7 million, or 2.3 percent, over estimated 1996
expenses. This operational area covers
oversight, direction, and supervision of
System and Board programs. Included
are programs that directly support Board
members in overseeing Reserve Bank
operations, budgeting and accounting,
financial examinations, audit and operations reviews, and automation and communications. The budget increase for
this operational area is due mainly to
increased investments in automation,
including hardware, software, and other
costs associated with implementing such

The Board’s 1997 capital budget of
$12.2 million provides for automation
infrastructure improvements, facility
improvements, and office automation
improvements (see ‘‘Highlights of the
Budget’’).

Trends in Expenses
and Employment
The increase in the 1997 operations
budget, 2.8 percent, is lower than the
estimated 6.5 percent increase from
1995 to 1996 mainly because of a
smaller salary increase (3.0 percent for
1997 versus 4.0 percent for 1996) and
continuing efforts to hold down costs.
The 2.8 percent increase is also lower

Table 2.5
Positions Authorized at the Board of Governors for Operational Areas,
Support and Overhead, and Office of Inspector General, 1995–97
1995
actual

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

1996
estimate

1997
budget

Change, 1995 to 1996 Change, 1996 to 1997
Amount

Percent

Amount

Percent

433
392

434
393

435
389

1
1

.2
.3

1
−4

.2
−1.0

21

21

21

0

.0

0

.0

163

163

163

0

.0

0

.0

Support and overhead 1 . . . . . . .

684

696

713

12

1.8

17

2.4

Subtotal . . . . . . . . . . . . . . . . . . . .

1,693

1,707

1,721

14

.8

14

.8

Reimbursable IRM support . .

20

25

25

5

25.0

0

.0

Total, Board operations . . . . .

1,713

1,732

1,746

19

1.1

14

.8

Office of Inspector General . . .

31

32

32

1

3.2

0

.0

2

1. Includes eleven summer intern positions and
seventeen youth positions; 1997 figure also includes
sixteen temporary (two-year) positions that will be
abolished by year-end 1998.

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, 1996–97

than the 6.2 percent average annual rate
of increase over the past five years and
the 6.7 percent average increase over the
past ten years. The slowing of expense
growth is largely attributable to moderating growth in the supervision and
regulation operational area. Charts 2.1
through 2.5 show trends over 1987–97.
Because historically approximately
three-fourths of the Board’s operating
expenses have been for personnel
services, trends are closely related to
staffing levels. As chart 2.5 shows, the
number of positions authorized for
Board operations over the past ten years
has increased by 164 (10.7 percent),
from 1,529 in 1987 to 1,693 in 1997.
The increase has taken place mainly in

Chart 2.1
Operating Expenses of the
Board of Governors, 1987–97 1
Millions of dollars

150
Current dollars

130
110

the supervision and regulation operational area (129 additional positions, an
increase of 49.6 percent in that area).
In 1987 and 1990, the number of
authorized positions was at a low of
1,529. The number increased significantly during the early 1990s, mainly
because of an increasing workload due
in large part to expanded responsibilities
and requirements. Passage of legislation
emphasizing regulatory and consumer
issues has significantly increased staffing requirements in the areas of supervision and regulation and consumer and
community affairs. Over the past several
years, the increase in positions has been
moderated by a program to reduce
positions that eliminated more than
30 positions between 1993 and 1996.
The 1997 increase is the result of the
establishment of 16 temporary (twoyear) positions in the Division of
Information Resources Management to
replace contract labor at an annual cost
savings of $350,000.
Although the number of authorized
positions has fluctuated over the tenyear period, the proportion of the Board’s
budget devoted to salaries (excluding
retirement and insurance benefits) has

1987 dollars 2

90

1987

1992

1997

Chart 2.2
Expenses for Personnel Services
at the Board of Governors, 1987–97 1
Millions of dollars

Expenses in millions of
Year
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997

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

Current dollars

1987 dollars

86.2
89.9
95.3
102.4
109.8
122.8
136.3
140.7
151.2
161.1
165.6

86.2
86.8
88.2
90.9
93.8
102.0
110.4
111.4
116.9
122.2
122.4

1. Excludes the Office of Inspector General and
extraordinary items. For 1996, estimate; for 1997, budget.
2. Calculated with the GDP price deflator.

110

Current dollars

90
1987 dollars 2

70

1987

1992

1997

1. Excludes the Office of Inspector General and
extraordinary items. For 1996, estimate; for 1997, budget.
2. Calculated with the GDP price deflator.

Board of Governors
remained relatively stable at roughly
65 percent. The proportion devoted to
retirement and insurance has increased
as a result 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. The increases have been partly
offset by factors eliminating the Board’s
contribution to the retirement plan and
the transfer of most employees in the
Civil Service Retirement Plan to the
Board Retirement Plan.

The 1997 extraordinary items budget
provides $2.9 million in operating funds
and $420,000 in capital funds for three
unique projects. Included is $2.4 million
in operating funds and $420,000 in
capital funds to modify or replace
software to ensure that it will operate
properly after 1999. The century date
change poses a significant challenge for
the information systems industry. The
problem is the absence in most information systems of the two-digit century
value that distinguishes dates as either

Percent

12
9
6
3

1987

1992

1997

Chart 2.5
Employment and Authorized Positions
at the Board of Governors, 1987–97 1
Number in thousands

1.7
Authorized positions

1.6

1.5
Employment

1987

Chart 2.3
Expenses for Goods and Services
at the Board of Governors, 1987–97 1

1992
Year

Millions of dollars

40
Current dollars

30
1987 dollars 2

20
1992

Chart 2.4
Annual Rate of Change in Operating
Expenses of the Board of Governors,
1987–97 1

1. Year-end data. Excludes the Office of Inspector
General and extraordinary items. For 1996, estimate; for
1997, budget.

Extraordinary Items

1987

25

1997

1. Excludes the Office of Inspector General and
extraordinary items. For 1996, estimate; for 1997, budget.
2. Calculated with the GDP price deflator.

1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997

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

1997

Employment

Authorized
positions

1,457
1,484
1,477
1,505
1,517
1,563
1,636
1,635
1,644
1,644
1,658

1,529
1,534
1,533
1,529
1,542
1,639
1,664
1,664
1,665
1,668
1,693

1. Year-end data. Excludes summer intern and youth
positions as well as positions for the Office of Inspector
General, which for 1997 number 28 and 32 positions
respectively; figures for 1993–97 also exclude positions
that provide support to the FFIEC for processing of
HMDA data.

26

Annual Report: Budget Review, 1996–97

the twentieth or the twenty-first century.
Information systems for which dates are
critical, such as regulatory reporting
systems, deposit and loan systems,
payments applications, and even building control systems, are subject to
century date failure. Systems designed
in recent years have addressed this
problem, but older software applications
must be evaluated and modified. The
Board is participating in a Systemwide,
multiyear project to make certain the
Federal Reserve is prepared for the
change by 1999.
The extraordinary items budget also
provides $350,000 for preliminary work
on the 1998 Survey of Consumer
Finances. The survey will gather
information on the income, assets, debts,
pensions, employment, use of financial
services, saving behavior, and other
financial characteristics of U.S. households. Cross-categorization of the data
will make possible important statistical
observations that are useful in a wide
variety of economic studies.
Finally, the extraordinary items budget
provides $139,900 for the Board’s portion of a Survey of Plant Capacity being
conducted by the Bureau of the Census.
The survey will obtain 1995 benchmarking data and 1996 capacity utilization
estimates for manufacturing. This
information will be published monthly
in the Board’s G.17 (410) statistical
release, ‘‘Industrial Production and
Capacity Utilization.’’

27

Chapter 3

Federal Reserve Banks
The 1997 budgets for the twelve Reserve
Banks approved by the Board of
Governors total $2,031.9 million, an
increase of $34.2 million, or 1.7 percent,
over estimated 1996 expenditures
(table 3.1). Excluding the cost of the
Automation Consolidation special project ($34.7 million), the Reserve
Banks’ 1997 operating budgets total
$1,997.2 million, an increase of
$37.9 million, or 1.9 percent.1
Employment, including the staff
associated with FRAS, is budgeted at
23,258 ANP (average number of personnel), a decrease of 335 ANP, or
1.4 percent, from estimated 1996
employment.2 Reserve Bank employment is expected to decline by 292 ANP,
and FRAS employment by 43 ANP.
Expenses for personnel account for
$1,252.3 million, or 63 percent of the
1997 operations budget, an increase of
$24.3 million, or 2.0 percent, over

estimated 1996 personnel expenses
(table 3.2). Nonpersonnel expenses
(mainly for building and automation
projects) are budgeted at $744.9 million, an increase of $13.6 million, or
1.9 percent, over estimated 1996 nonpersonnel expenses.
The following two sections discuss
major projects and the budget objective
for the Reserve Banks in 1997. 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 Federal Reserve
District and operational area.

Major Projects
The 1997 Reserve Bank budgets provide
for the following major projects
(table 3.3):

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 and data communications for the Reserve Banks). FRAS charges to the
Automation Consolidation special project in 1997
are budgeted at $24.5 million.
2. Average number of personnel (ANP) is a
measure of the number of employees in terms of
full-time equivalents for the time period. For
instance, a full-time employee who starts work on
July 1 counts as 0.5 ANP for that calendar year;
two half-time employees who start on January 1
count as 1 ANP. Because the Reserve Banks carry
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.

• Installation of new high-speed currency processors
• Installation of equipment and software
to support image processing of commercial and government checks
• Building construction programs
• Office automation and upgrading of
local area networks
• Reengineering programs
• Consolidation of data processing and
data communications.
The ongoing project to replace oldergeneration currency processors that
have been in use since 1978 with new
high-speed processors is adding
$40.7 million to the 1997 operations

28

Annual Report: Budget Review, 1996–97

budget, an increase of $0.9 million over
estimated 1996 expenditures. This
project is in its final phase, and the last
of the new processors will be installed
in early 1997. In addition to the new
processors, the project provides for the
installation of reconciliation stations,
sensors and detectors, and upgraded
software to accommodate the newly
designed currency. Of the total, $0.8 million is associated with software upgrades,
approximately the same amount as was
budgeted for 1996.
Expenses for the ongoing checkimaging project are budgeted at
$15.8 million, an increase of approximately $10.8 million over estimated
1996 expenditures. The budget increase
for 1997 is associated with additional

equipment depreciation and maintenance, software amortization, and related
programming and data processing
requirements for both commercial and
government check processing. Approximately 40 percent of the funds are
earmarked for a government checkimaging project requested by the U.S.
Treasury whereby the Federal Reserve
will begin to provide image-supported
check truncation services to the Treasury
in early 1997. Also, in keeping with the
System’s effort to expand the electronic
delivery of check services, many Reserve
Banks plan to offer imaging of commercial checks to depository institutions
and are upgrading sorters and checkprocessing control software to make
them image-capable.

Table 3.1
Expenses and Employment at the Federal Reserve Banks, 1996 and 1997 1
Change

1996
estimate

1997
budget

Expenses (millions of dollars)
Operations 2 . . . . . . . . . . . . . . . . . . . . . . . . .
Special project . . . . . . . . . . . . . . . . . . . . . .

1,959.3
38.4

1,997.2
34.7

37.9
−3.7

1.9
−9.7

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

1,997.7

2,031.9

34.2

1.7

Category

Amount

Percent

Employment (average number
of personnel) 3
Operations 2 . . . . . . . . . . . . . . . . . . . . . . . . .
FRAS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

23,001
592

22,709
549

−292
−43

−1.3
−7.3

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

23,593

23,258

−335

−1.4

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

Table 3.2
Operating Expenses of the Federal Reserve Banks, by Object, 1995–97 1
Millions of dollars, except as noted
1995
actual

1996
estimate

1997
budget

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

1,183.5
681.2

1,228.0
731.3

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

1,864.7

1,959.3

Object

1. Excludes special projects.

Percentage change
1995 to 1996

1996 to 1997

1,252.3
744.9

3.8
7.4

2.0
1.9

1,997.2

5.1

1.9

Federal Reserve Banks
A total of $15.1 million has been
budgeted for Board-approved building
projects in Cleveland and Minneapolis,
an increase of $10.9 million over estimated 1996 expenditures.
Office automation projects are adding
an additional $3.2 million to the 1997
budget. Two Reserve Banks have identified plans to improve their local area
networks (LANs) by improving the
existing infrastructure and addressing
backup and contingency needs; these
projects account for $2.0 million of
the 1997 increase. Another Bank has
budgeted $1.2 million to convert the
District’s paper-based filing system to
electronic images.
Several Reserve Banks are projecting
savings, totaling $9.7 million and
168 ANP, associated with reengineering
projects (efforts to restructure business
processes) and other operational improvements. While three Districts have identified initiatives to pursue opportunities to improve operations and reduce
expenses, one District’s projections are
driving the savings. New York’s reengineering program is expected to reduce
expenses by $7.8 million and 130 ANP

29

below estimated 1996 levels. A significant portion of these savings is due to
the closing of the Jericho, New York,
check-processing facility in October
1996.
Reserve Bank data processing and
data communications operations have
been consolidated at FRAS. Charges to
the Reserve Banks by FRAS for these
two services are expected to decrease
$6.9 million, or 4.3 percent, from estimated 1996 charges. The reduction is
due to an overall cost reduction anticipated by FRAS as it moves closer to a
steady-state environment.

1997 Budget Objective
In 1996 the Board approved a 1997
Reserve Bank budget objective that
provided for an increase in total
expenses, including special projects,
of $64.3 million, or 3.2 percent, over
estimated 1996 expenditures. Excluding
special project expenses, which were
expected to decrease in 1997, the
increase was projected to be 3.5 percent.
The Board anticipated that within this
guideline, expenses for continuing

Table 3.3
Major Federal Reserve Bank Projects, 1997
Million of dollars, except as noted

Project

1996 estimate

1997 budget

Change,
1996 to 1997

Contribution to
total 1997 change
in operations budget
(percentage points)

Currency processors . . . . . . . . . . . . . . . . .
Check imaging projects . . . . . . . . . . . . . .
Building construction programs . . . . . .
Office automation/LAN upgrades . . . . .
Reengineering programs . . . . . . . . . . . . .
FRAS production charges . . . . . . . . . . . .

39.8
5.0
4.2
5.2
. . .
159.7

40.7
15.8
15.1
8.4
−9.7
152.8

.9
10.8
10.9
3.2
−9.7
−6.9

*
.6
.6
.2
−.5
−.4

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

213.9

223.1

9.2

.5

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

1,959.3

1,997.2

37.9

1.9

* Less than 0.05.

30

Annual Report: Budget Review, 1996–97

Table 3.4
Contribution to Total 1997 Change
in Reserve Bank Operations Budget
Percentage points
Item

Budget Approved
objective budget

Continuing operating expenses . . .
Major projects . . . . . . . . . . . . . . . . . . .

2.6
.9

1.1
.8

Total excluding special project . .

3.5

1.9

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

−.3

−.2

Total including special project . . .

3.2

1.7

Reserve Bank operations (including the
impact of an overall savings target of
$19.0 million) would increase 2.6 percent over estimated 1996 expenditures.
Two major projects, check imaging and
installation of new currency processors,
were expected to account for $18.0 million of the projected 1997 increase, and
another project, building construction in
two Districts, for $8.3 million. Partly
offsetting these increases would be a
decrease of $8.7 million due to lower
FRAS production charges, for a net
increase of $17.6 million. Table 3.4
compares the 1997 budget objective
with the approved 1997 budget.

The 1997 increase for continuing
Reserve Bank operations (when the
savings target is included) is $28.5 million less than anticipated in the budget
objective. The increase is less than the
2.6 percent target, by 1.5 percentage
points, for two main reasons: Expenses
for merit pay programs are budgeted
at 1.2 percentage points less than
projected (3.0 percent vs. 4.2 percent),
and expenses for retirement and other
benefits are budgeted at 2.5 percentage
points less than projected (1.7 percent
vs. 4.2 percent).
Major Reserve Bank projects are
expected to contribute $6.3 million less
than the target approved by the Board.
The decrease is due largely to a $6.7 million decrease in costs for the currencyprocessing project resulting from a
financial accounting change that extended
the useful life of the equipment and to
the renegotiation of the maintenance
contract.
Offsetting the expected lower costs
for the currency-processing project are
higher-than-expected costs for building
construction, which is adding $10.9 million to the budget instead of the $8.3 million anticipated in the budget objective.
The increase over the budget objective
is due primarily to the inclusion in the

Table 3.5
Operating Expenses of the Federal Reserve Banks, by Operational Area, 1995–97 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1995
actual

1996
estimate

1997
budget

Percentage change
1995 to 1996 1996 to 1997

128,303

138,143

145,693

7.7

5.5

216,790

217,200

213,090

.2

−1.9

1,127,320
392,294

1,177,565
426,385

1,194,002
444,431

4.5
8.7

1.4
4.2

1,864,707

1,959,294

1,997,216

5.1

1.9

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

Federal Reserve Banks
budget of real estate taxes for the new
buildings in Minneapolis and Cleveland,
the amounts for which were unknown at
the time the budget objective was
established. Also, FRAS production
charges are declining less than anticipated in 1997 because a larger portion of
expected long-term savings was realized
in 1996.
The 1997 budget objective for the
Automation Consolidation special project
was $33.0 million. The budgeted amount
is $34.6 million, somewhat more than
the target but considerably less than
estimated 1996 expenditures. Contributing to the 1997 budget are charges to the

31

special project of $10.0 million by the
New York Reserve Bank and $24.5 million by FRAS.

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
3.11 give details.

Monetary and Economic Policy
The 1997 budget for the monetary and
economic policy operational area is

Table 3.6
Employment at the Federal Reserve Banks, by Activity, 1995–97 1
Average number of personnel, except as noted 2
Activity

Percentage change

1995
actual

1996
estimate

1997
budget

737

728

731

−1.3

.5

1995 to 1996 1996 to 1997

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

1,683

1,566

1,524

−7.0

−2.7

8,209
3,074

8,099
3,126

7,851
3,100

−1.3
1.7

−3.1
−.8

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

4,511
4,949

4,531
4,952

4,540
4,963

.4
.1

.2
.2

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

23,162

23,001

22,709

−.7

−1.3

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, 1995–971
Thousands of dollars, except as noted
Percentage change

1995
actual

1996
estimate

1997
budget

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

100,616
27,687

108,864
29,279

113,805
31,887

8.2
5.8

4.5
8.9

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

128,303

138,143

145,693

7.7

5.5

Service

1. Excludes special projects.

1995 to 1996 1996 to 1997

32

Annual Report: Budget Review, 1996–97

$145.7 million, an increase of $7.5 million, or 5.5 percent, over estimated 1996
expenditures. The increase is due to
merit pay increases, higher charges by
FRAS, and higher costs for centralized
end-user automation related to enhancing client-server platforms. The staffing
level is increasing by 3 ANP, or
0.5 percent, over estimated 1996 employment, mainly because of the full-year

impact of filling positions that were
vacant during part of 1996.

Services to the U.S. Treasury
and Other Government Agencies
The 1997 budget for services to the U.S.
Treasury and other government agencies
of $213.1 million is $4.1 million, or
1.9 percent, below estimated 1996

Table 3.8
Expenses of the Federal Reserve Banks for Services to the U.S. Treasury
and Other Government Agencies, 1995–97 1
Thousands of dollars, except as noted
Percentage change

1995
actual

1996
estimate

1997
budget

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

70,240
22,493

69,525
21,855

63,019
14,412

−1.0
−2.8

−9.4
−34.1

2,394

1,970

1,950

−17.7

−1.0

29,552
34,186
24,202
33,724

26,343
37,016
25,789
34,702

34,348
33,209
26,659
39,493

−10.9
8.3
6.6
2.9

30.4
−10.3
3.4
13.8

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

216,790

217,200

213,090

.2

−1.9

Service

1995 to 1996 1996 to 1997

1. Excludes special projects.

Table 3.9
Expenses of the Federal Reserve Banks for Services to Financial Institutions
and the Public, 1995–97 1
Thousands of dollars, except as noted
Service

1995
actual

1996
estimate

1997
budget

Percentage change
1995 to 1996 1996 to 1997

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

224,729
26,803
5,155
519,337
38,656
68,361
83,879
38,338
7,710
20,595
64,159
29,598

246,513
28,921
5,600
541,943
37,887
62,001
78,917
37,396
8,041
22,037
74,184
34,125

248,101
29,264
4,943
540,375
41,876
68,352
76,940
38,972
7,201
23,019
78,313
36,647

9.7
7.9
8.6
4.4
−2.0
−9.3
−5.9
−2.5
4.3
7.0
15.6
15.3

.6
1.2
−11.7
−.3
10.5
10.2
−2.5
4.2
−10.5
4.5
5.6
7.4

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

1,127,320

1,177,565

1,194,002

4.5

1.4

1. Excludes special projects.

Federal Reserve Banks
expenditures. The reduction is due
mainly to staff reductions and lower
charges by FRAS. These reductions are
being partly offset by higher costs due
to merit pay increases and for software
being developed for the Treasury.
Employment is projected to be 42 ANP,
or 2.7 percent, lower than estimated
1996 employment. Staffing levels are
being reduced in nearly all services.
Staffing is declining by 15 ANP for the
government accounts service as a result
of anticipated lower volume associated
with new tax filing requirements and by
10 ANP for the food coupon service as a
result of expanded debit card programs.
Reductions for other services are resulting from reengineering efforts in several
Districts.

Services to Financial Institutions
and the Public
Expenses for providing services to
financial institutions and the public are
budgeted at $1,194.0 million, an increase
of $16.4 million, or 1.4 percent, over
estimated 1996 expenditures. The budget
for priced services is up $5.5 million,

33

or 0.8 percent, over estimated 1996
expenditures, and the budget for nonpriced services is up $10.9 million, or
2.2 percent. Staffing is budgeted to
decline by 248 ANP, or 3.1 percent,
from estimated 1996 employment.
Reductions are occurring in both priced
and nonpriced services, including a
decline of 173 ANP for the commercial
check service due to the closing of the
Jericho, New York, check-processing
facility and improved efficiency at
several Banks; a decline of 40 ANP
resulting from efficiency gains as experience with the new currency processors
increases; and a decline of 13 ANP for
the ACH and funds transfer services due
to improved efficiency resulting from
the transition to centralized applications
at FRAS. Partly offsetting these reductions are projected staff increases for
public programs (21 ANP) in support of
efforts to raise the Banks’ visibility,
improve the communication of economic policy, and expand community
outreach programs.
Expenses for the commercial check
and other check services are increasing
$2.4 million, or 0.4 percent, over
estimated 1996 expenses. Offsetting the

Table 3.10
Expenses of the Federal Reserve Banks for Services to the U.S. Treasury
and Other Government Agencies and to Financial Institutions and the Public, 1995–97 1
Thousands of dollars, except as noted
Service

1995
actual

U.S. government services 2 . . . . . . . . . . . . . . .
Cash services . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Priced services . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

310,061
251,532
668,166
114,351

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

1,344,109

1. Excludes special projects
2. The Federal Reserve Banks also incur some
expenses for the provision of services to the U.S. government that are recorded in the monetary and economic
policy operational area. These expenses for 1995 were

1996
estimate

1997
budget

Percentage change
1995 to 1996 1996 to 1997

303,893
275,434
685,092
130,346

301,119
277,365
690,630
137,978

−2.0
9.5
2.5
14.0

−.9
.7
.8
5.9

1,394,765

1,407,093

3.8

.9

$647 thousand, bringing the total cost of services provided to U.S. government agencies by the Reserve Banks
as fiscal agents and depositories of the United States to
$310,708 thousand.

34

Annual Report: Budget Review, 1996–97

savings associated with the staff reductions described above are greater
expenses for the check-imaging project
($5.3 million for commercial checks and
$5.5 million for government checks).
Also increasing is the budget for the
interdistrict transportation system (ITS),
a result of network enhancements, higher
fuel costs, and new contracts. The volume of commercial checks processed
(including return items) is projected to
increase 1.6 percent, with projections
for individual Districts ranging from a
decline of 2.4 percent to an increase of
7.8 percent. The volume of government
checks processed is projected to decline
1.1 percent.
Expenses for the funds transfer service
are budgeted to increase $6.4 million,
or 10.2 percent, over estimated 1996
expenditures, primarily because of higher
charges by FRAS resulting from a
change in the way data processing and
data communications costs are redistributed ($7.0 million). Expenses for the
ACH service are budgeted to decrease
$2.0 million from estimated 1996
expenditures; reductions due to a decline
in the staffing level (11 ANP) and lower
software development costs are being
partly offset by increased data processing and data communications expenses

associated with the change in the FRAS
cost accounting methodology.

Supervision and Regulation
The 1997 budget for the supervision and
regulation operational area is $444.4 million, an increase of $18.0 million,
or 4.2 percent, over estimated 1996
expenditures. Changes in individual
Reserve Bank budgets vary considerably from District to District and range
from a decline of 4.2 percent to an
increase of 14.2 percent. Overall, direct
expenses are increasing 2.7 percent,
mainly because of merit pay increases,
more travel due to an increased number
of foreign examinations, and greater
expenses for equipment and software
associated with a Systemwide effort
to standardize and upgrade PC equipment and software. Support expenses
are increasing 10.6 percent because of
automation projects and higher occupancy costs. The staffing level is
budgeted to decrease by 26 ANP, or
0.8 percent, from the estimated 1996
level; reductions associated with the
supervision of District financial institutions are being partly offset by a slight
increase associated with consumer affairs
examinations.

Table 3.11
Expenses of the Federal Reserve Banks for Supervision and Regulation, 1995–97 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

1995
actual

1996
estimate

1997
budget

234,029
37,257

251,974
44,884

263,526
48,617

7.7
20.5

4.6
8.3

102,329

108,858

111,138

6.4

2.1

18,679

20,669

21,151

10.7

2.3

392,294

426,385

444,431

8.7

4.2

1995 to 1996 1996 to 1997

Federal Reserve Banks

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 1997. The amount budgeted is
2.0 percent more than estimated 1996
personnel expenses (table 3.12).
Salaries and other personnel expenses,
which account for 49 percent of budgeted
1997 operating expenses, are expected
to be $20.0 million, or 2.1 percent,
greater than estimated 1996 expenses.
Salaries for officers and employees are
budgeted to increase $23.1 million, or
2.5 percent. Contributing to the increase
are merit increases (3.0 percent of salary
liability, or $28.6 million), promotions
and reclassifications ($8.5 million), and
structure adjustments ($0.8 million).
Partly offsetting these increases are a

35

reduction in overtime ($5.1 million),
lower expenses resulting from shortterm position vacancies or lag ($6.2 million), and a decline in the staffing level
of 292 ANP ($3.7 million). The decrease
in ‘‘other’’ personnel expenses ($3.1 million) is due to a decline in the use of
outside agency help.
Expenditures for retirement and other
benefits, which account for 14 percent
of budgeted 1997 operating expenses,
are expected to increase $4.4 million,
or 1.7 percent, over estimated 1996
expenses. Benefits tied to salaries, such
as social security payments and thrift
plan contributions, are budgeted to
increase 2.4 percent, and costs related to
health care for active employees and
retirees are budgeted to increase 1.0 percent. Other benefit expenses are increasing 0.9 percent.
Nonpersonnel expenses, which account
for 37 percent of Reserve Bank operat-

Table 3.12
Operating Expenses of the Federal Reserve Banks, by Object, 1995–97 1
Thousands of dollars, except as noted
Percentage change

1995
actual

1996
estimate

1997
budget

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

94,919
803,188
33,895
251,543
1,183,545

100,585
837,473
26,694
263,230
1,227,982

106,026
855,118
23,565
267,624
1,252,332

6.0
4.3
−21.2
4.6
3.8

5.4
2.1
−11.7
1.7
2.0

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

58,788
152,027
28,396
78,067
45,463
156,610
−51,306
213,119
681,162

58,847
164,683
34,630
79,028
46,728
167,163
−52,069
232,302
731,312

57,684
180,534
39,393
79,932
45,229
176,000
−53,031
219,144
744,884

.1
8.3
22.0
1.2
2.8
6.7
1.5
9.0
7.4

−2.0
9.6
13.8
1.1
−3.2
5.3
1.8
−5.7
1.9

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

1,864,707

1,959,294

1,997,216

5.1

1.9

Object

1995 to 1996 1996 to 1997

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.

36

Annual Report: Budget Review, 1996–97

ing expenses budgeted for 1997, are
projected to increase 1.9 percent over
estimated 1996 nonpersonnel expenses.
Expenditures for equipment are
expected to increase $15.9 million, or
9.6 percent, accounting for 9 percent
of budgeted 1997 operating expenses.
Depreciation and maintenance costs are
increasing for equipment related to
major Reserve Bank projects, including
check-imaging equipment and upgraded
local area networks and end-user
computing equipment. Expenses are
also increasing as a result of depreciation on upgraded check-processing
equipment, document-imaging equipment, and telephone and voice response
upgrades.
Shipping expenses, which account
for 4 percent of budgeted 1997 operating expenses, are expected to increase
$0.9 million, or 1.1 percent, mainly
because of increased costs for the ITS
network associated with new contracts,
enhancements to the network, and the
reinstatement of the federal airplane fuel
user fee.
Building expenses, which account for
9 percent of budgeted 1997 operating
expenses, are expected to increase
$8.8 million, or 5.3 percent. The increase
is due partly to increased property
depreciation subsequent to building
improvements and renovations ($3.6 million) and to increased real estate taxes
($6.1 million) associated with building
projects and with one-time credits in
1996 in two Districts for earlier overpayments. Also, the Cleveland Reserve
Bank has budgeted an additional
$1.5 million for rent while its main
building is being renovated.
‘‘Other’’ nonpersonnel expenses are
budgeted to decrease $13.2 million from
estimated 1996 expenses, accounting for
11 percent of budgeted 1997 operating
expenses. The decrease is due mainly to
lower charges by FRAS for data process-

ing and data communications services
and to a reduction in fees paid to outside
consultants.
Expenditures for foreign travel are
budgeted at $4.2 million, or 0.2 percent
of budgeted 1997 operating expenses.
The increase of $0.6 million, or
15 percent, over estimated 1996 expenses
is due largely to increased travel associated with the examination of foreign
banks.

Capital Outlays
Capital outlays for 1997 are budgeted at
$346.4 million, a decrease of $21.7 million, or 5.9 percent, from estimated 1996
expenses (table 3.13). The budget
includes FRAS capital outlays of
$32.4 million, an increase of $5.2 million, or 19.2 percent, over estimated
1996 expenses. The budgets of ten of the
twelve Reserve Banks are below
estimated 1996 outlays.
Building projects will continue to
dominate the Reserve Banks’ capital
budget over the next few years, with
outlays for buildings budgeted at
$120.9 million, accounting for about
35 percent of total capital outlays
budgeted for 1997. Included are funds
for building projects in Minneapolis
($26.2 million), Atlanta ($5.5 million),
and Birmingham ($8.3 million) and
funds for building renovation and a new
operations center in Cleveland ($44.0 million). Several major building refurbishment projects totaling approximately
$36.9 million are under way or planned
for 1997, including a floor-by-floor
renovation of the New York Reserve
Bank building ($7.9 million).
The building in Minneapolis will be
ready for occupancy in July 1997, and
occupancy of the operations center in
Cleveland adjacent to the existing building is scheduled to begin in early 1997.
Renovation of the existing Cleveland

Federal Reserve Banks
building is scheduled for completion
in 1998, and the building programs in
Atlanta and for the Birmingham Branch
should be completed around the end of
the century.
Outlays for data processing and data
communications equipment, budgeted at
$109.4 million, account for approximately 32 percent of capital outlays
budgeted for 1997. Included in the
budget is $22.9 million for input devices,
mainly personal computers and peripherals. More than $14.0 million is earmarked for CPU equipment, largely for
equipment at FRAS ($10.7 million),
including the acquisition of two processors ($5.8 million), the upgrading of
five processors ($3.0 million), and the
renewal of leases on two processors
($1.9 million). The other significant
CPU outlay ($2.2 million) is related
to government check operations in the
Atlanta District. Storage devices account
for $12.4 million in the 1997 budget,
including $4.2 million for equipment at
FRAS and $7.7 million for government
check image archive equipment. Other
major data processing and data com-

37

munications outlays budgeted for 1997
include $10.9 million for LAN equipment to replace existing equipment and
to upgrade equipment in several Districts
and $9.1 million for check operations
equipment unrelated to image services,
mainly for replacement of medium- and
high-speed sorters. The remaining data
processing and data communications
outlays include $3.1 million for telephone systems and $3.0 million for
printers. In addition, FRAS has budgeted $10.3 million for network operations equipment. Upgrading of backbone
equipment ($2.6 million) and data
transport node (DTN) equipment
($3.4 million) and expenditures on
access equipment ($3.0 million) will
provide increased service levels and
support for new customers. FRAS has
also budgeted $1.5 million for parallel
sysplex equipment to help manage
workloads more efficiently.
These figures reflect the $16.7 million
budgeted for check-imaging equipment,
including $7.6 million for the image
archive and retrieval system and related
equipment for government checks and

Table 3.13
Capital Outlays of the Federal Reserve Banks, by Class of Outlay, 1995–97
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

1995
actual

1996
estimate

1997
budget

97,474
89,086

97,528
110,951

109,414
120,864

.1
24.5

12.2
8.9

11,991
77,360
22,580
7,550
1,160
6,955

23,098
81,135
7,985
28,510
2,655
16,249

35,412
28,578
7,333
28,614
2,190
14,038

92.6
4.9
−64.6
277.6
128.8
133.6

53.3
−64.8
−8.2
.4
−17.5
−13.6

314,156

368,112

346,444

17.2

−5.9

1. Includes FRAS capital of $38,826 thousand in 1995,
$23,556 thousand in 1996, and $27,557 thousand in 1997.
2. Includes FRAS capital of $2,884 thousand in 1995,
$107 thousand in 1996, and $0 in 1997.

1995 to 1996 1996 to 1997

3. Includes FRAS capital of $2,440 thousand in 1995,
$3,503 thousand in 1996, and $4,812 thousand in 1997.

38

Annual Report: Budget Review, 1996–97

$9.1 million for image-enabled sorters
and other equipment for commercial
checks.
Purchases of furniture and other equipment are budgeted at $64.0 million, or
about 18 percent of total capital outlays.
The continuing installation of highspeed currency processors, reconciliation stations, and sensors and detectors
and the upgrading of other equipment
account for approximately 15 percent
of the total ($9.3 million). Another
$34.6 million is budgeted for new and
replacement furniture and workstations
associated mainly with the building
projects in Cleveland and Minneapolis
and the floor-by-floor renovation program in New York.
Building machinery and equipment
outlays are budgeted at $28.6 million, or
about 8 percent of total capital outlays.
Included are items related to the building projects in Cleveland ($9.4 million)
and Minneapolis ($1.6 million) and
replacements and upgrades in several
Districts, including chiller replacements
and upgrades ($5.3 million) and elevator
upgrades ($2.7 million).
Software purchases in 1997 are
budgeted at $14.0 million. Check-image

software accounts for about 35 percent
of the total ($5.0 million). FRAS has
budgeted $4.8 million for software associated mainly with the CPUs that will be
upgraded. The New York Reserve Bank
plans to replace its market data software ($0.8 million), and the Banks also
plan to purchase software for accounts
payable systems, check and adjustment
systems, and personnel systems.
Land and other real estate expenses
are budgeted at $7.3 million. The most
significant outlay is associated with
the building project in Birmingham
($3.1 million).

Chart 3.1
Operating Expenses of the
Federal Reserve Banks, 1987–97 1

Chart 3.2
Employment at the
Federal Reserve Banks, 1987–97 1

Trends in Expenses
and Employment
Over the ten years ending with the 1997
budget, Reserve Bank expenses have
increased an average of 5.3 percent a
year (chart 3.1). Over the same period,
employment at the Reserve Banks
(including FRAS) has increased by
248 ANP, from 23,010 in 1987 to 23,258
in 1997 (chart 3.2). Since 1987, staff
increases have occurred in supervision
and regulation mainly because of
implementation of the Federal Deposit

Billions of dollars

ANP, in thousands

1.9

25

1.6

24

1.3

23

Current dollars

1987 dollars 2

1987

1992

1997

1. Excludes expenses for special projects. For 1996,
estimate; for 1997, budget.
2. Calculated with the GDP price deflator.

1987

1992

1997

1. Includes staff for special projects and FRAS. For
1996, estimate; for 1997, budget. See text note 2 for
definition of ANP.

Federal Reserve Banks
Insurance Corporation Improvement Act
and the Community Reinvestment Act
(952 ANP), in data services because of
expanded automation requirements and
the transition to consolidated processing
at FRAS (444 ANP), in the currency
service because of volume growth
(80 ANP), and in public programs
because of efforts to enhance consumer
education and communications with the
public (128 ANP). Partly offsetting
these increases have been reductions in
the commercial check service
(610 ANP), the overhead services
(61 ANP), the securities safekeeping
and noncash services (184 ANP), the
ACH and funds transfer services
(270 ANP), services to the Treasury and
other government agencies (312 ANP),
and the monetary policy service
(44 ANP). These staff reductions have
been due largely to the consolidation
of operations and increased operational
efficiencies throughout the System.
The average annual growth of operating expenses has slowed in recent years
and is projected to be 4.7 percent over
the five years ending with the 1997
budget. Expanded bank supervision
needs and the transition to a consolidated data processing and data communications environment at FRAS
affected growth during this period.
Mainly because of production charges
from FRAS, nonpersonnel costs have
been increasing at a faster rate than
personnel costs—6.7 percent compared
with 3.6 percent—as the Reserve Banks
downsize labor-intensive and computer
operations and substitute technology for
labor. By operational area, expense
increases over the five years have been
highest for supervision and regulation
(average annual increase of 10.0 percent), followed by monetary and economic policy (5.8 percent, reflecting
increases in support and overhead services) and services to the Treasury and

39

other government agencies and services
to financial institutions and the public
(both 3.2 percent). The slowing of
growth in recent years has resulted from
several offsetting factors. Expenses for
the currency service have increased an
average of 8.7 percent a year, primarily
because of the installation of new
currency processors, and expenses for
public programs have risen an average
of 8.8 percent a year. Partly offsetting
these increases have been decreases due
to downsizing in the commercial check
service resulting from declining volume
and to centralization efforts in the funds
transfer and ACH services.
Just over half of the expenses in the
Reserve Banks’ 1997 budget (about
52 percent) are recoverable through
revenues or are reimbursable by the
Treasury and other government agencies. The proportion of recoverable
expenses is down from the 58 percent
that was recoverable in 1992 because
recoverable services are growing at a
slower rate than nonrecoverable services: Between 1992 and 1997, recoverable services have grown an average of
1.8 percent a year and nonrecoverable
services an average of 7.5 percent a year.

Volume and Unit Costs
The volume of measured services in
1997 is expected to increase 1.4 percent over estimated 1996 volume, and
the unit cost is expected to decrease
0.7 percent (table 3.14). Since 1992,
volume has grown at an average annual
rate of 1.6 percent and unit cost at an
average annual rate of 0.9 percent. The
decrease in unit cost between 1996
and 1997 reflects net decreases for the
payments, cash, and fiscal services.
Commercial checks, the largest component of the payments service (and of the
overall index), anticipates a 2.4 percent
decline in unit cost in 1997, and cash

40

Annual Report: Budget Review, 1996–97

Table 3.14
Volume and Unit Cost of Measured
Federal Reserve Bank Services
Percentage change from 1996 to 1997
Service

Volume

Unit cost

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

1.9
1.6
4.2
1.7

−.8
−2.4
5.8
8.7

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

1.6

−.7

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

1.8

−5.5

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

−7.0

9.1

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

1.4

−.7

1. Includes currency and coin services.

services, the second largest component,
a 0.7 percent decline.

1996 Budget Performance
In mid-1996 the Reserve Banks estimated that their expenses for the calendar
year would be $1,959.3 million—
$9.5 million, or 0.5 percent, less than the
approved 1996 budget of $1,968.8 million. The 1996 budget approved by the
Board in December 1995 represented an
increase of $95.2 million, or 5.1 percent,
over estimated 1995 expenses; at the
estimated 1996 level of spending, the
increase over actual 1995 expenditures
would also be 5.1 percent.
Eight Reserve Banks expect to be
under their approved 1996 District
budgets, by as much as $3.0 million.
The other four banks expect overruns of
less than 1.0 percent, none more than
$0.7 million.

Part II
Special Analysis

43

Chapter 4

Recent Changes in the Federal Reserve’s
Approach to Banking Supervision
The Federal Reserve has long had
significant responsibilities for supervising and regulating the domestic and
international activities of U.S. banking
organizations, principally through its
role in supervising state-chartered banks
that are members of the Federal Reserve
System, bank holding companies, and
Edge Act and agreement corporations
(corporations chartered to engage in
international banking). In 1991, Congress
expanded the Federal Reserve’s supervisory authority over the U.S. activities
of foreign banking organizations to fill
certain gaps in their supervision and
regulation and to ensure that the banking
policies established by the Congress are
implemented fairly and consistently
with respect to all entities, domestic and
foreign, that conduct banking business
in the United States. That expanded
authority, combined with trends within

the financial services industry, has led to
refinements in the Federal Reserve’s
approach to banking supervision.

Growth of the Federal Reserve’s
Responsibilities
The recent increase in the Federal
Reserve’s supervisory responsibilities
can best be illustrated by numbers
showing the growth of financial assets
subject to primary supervision by the
Federal Reserve. From 1990 through
1995, aggregate assets under the Federal
Reserve’s supervision more than doubled, in large part because of the
addition of the U.S. banking assets of
foreign banking organizations to its
jurisdiction (table 4.1). Moreover, the
number of institutions supervised
remained relatively stable, at approximately 7,000, despite a dramatic con-

Table 4.1
Assets Supervised by the Federal Reserve, by Type of Institution, 1990–95
Billions of dollars
Type of institution

1990

1991

1992

1993

1994

1995

State member banks . . . . . . . . . . . . . . . . . . . . . . .
Bank holding companies (parent only) . . . . . .
Nonbank subsidiaries of bank holding
companies 1 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Edge Act and agreement corporations 2 . . . . .
U.S. branches and agencies of foreign
banking organizations 3 . . . . . . . . . . . . . . . .

557
328

593
337

638
370

727
423

845
454

984
507

174
57

169
69

179
64

217
67

237
84

266
94

0

0

659

644

685

703

Total 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,116

1,168

1,910

2,078

2,305

2,554

1. Includes nonbank subsidiaries of only those domestic bank holding companies that have material activity;
excludes nonbank subsidiaries of foreign banking
organizations.
2. Excludes the assets of such institutions that are
subsidiaries of state member banks, which are included
in the figures for state member banks; includes the

third-party assets of all other such institutions and their
foreign subsidiaries.
3. Includes only state-licensed, uninsured branches
and agencies of foreign banking organizations.
4. Excludes several hundred U.S. nonbank subsidiaries
of foreign banking organizations, which at year-end 1995
had assets of approximately $500 billion.

44

Annual Report: Budget Review, 1996–97

solidation within the U.S. banking system
during that period (table 4.2). Thirdquarter data (the latest available) suggest a continuation of these trends
through last year.
State member banks account for a
large portion of the Federal Reserve’s
oversight responsibility. While the
number of state member banks remained
relatively stable between 1990 and
1995, at around 1,000, the assets of
these banks increased 77 percent. The
slight increase in the number of state
member banks, about 3 percent, contrasts
sharply with the 18 percent decline in
the total number of insured commercial
banks over the period. The stability
in the number of state member banks
was due in part to a greater number of
mergers among national and state
nonmember banks than among state
member banks.
Although the number of bank holding
companies and their nonbank subsidiaries declined between 1990 and
1995, the assets of these groups grew
markedly over the period (54 percent);
the securities activities of nonbank
subsidiaries engaged in underwriting
corporate securities, referred to as section 20 companies, accounted for most
of the growth. Likewise, the assets
of Edge Act and agreement corpora-

tions related to national banks, nonmember state banks, and foreign
banking organizations grew more than
60 percent between 1990 and 1995,
despite a decline in the number of such
institutions.
The Foreign Bank Supervision
Enhancement Act of 1991 (FBSEA)
greatly expanded the Federal Reserve’s
oversight role by assigning it primary
supervisory and regulatory authority
over the U.S. operations of foreign
banking organizations. The legislation
increased the number of banking institutions for which the Federal Reserve
has direct responsibility by more than
400, with assets at year-end 1995 of
more than $700 billion.1 In addition (and
not reflected in the tables), foreign
banking organizations operate several
hundred nonbank subsidiaries in the
United States for which the Federal
Reserve has supervisory responsibilities. Although comparable historical
1. Before passage of FBSEA, primary responsibility for supervising and examining the U.S.
branches and agencies of foreign banking organizations lay with the licensing agencies—the states or
the Office of the Comptroller of the Currency. In
carrying out its responsibilities for foreign banking
organizations before FBSEA, the Federal Reserve
relied mainly on examinations conducted by the
states.

Table 4.2
Number of Institutions Supervised by the Federal Reserve, by Type of Institution, 1990–95
Type of institution

1990

1991

1992

1993

1994

1995

State member banks . . . . . . . . . . . . . . . . . . . . . . .
Bank holding companies (parent only) 1 . . . . .
Nonbank subsidiaries of bank holding
companies 2 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Edge Act and agreement corporations 3 . . . . .
U.S. branches and agencies of foreign
banking organizations 4 . . . . . . . . . . . . . . . .

1,008
5,804

974
5,769

956
5,663

969
5,488

975
5,344

1,042
5,299

244
101

251
94

227
88

206
79

199
77

180
79

0

0

473

459

444

437

Total 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7,157

7,088

7,407

7,201

7,039

7,037

1. A significant number of bank holding companies are
‘‘shell’’ companies that require only periodic monitoring.
2. See table 4.1, note 1.

3. Includes all such institutions.
4. See table 4.1, note 3.
5. See table 4.1, note 4.

Recent Changes in Banking Supervision
data are not available for these entities, their assets are sizable, totaling
approximately $500 billion at year-end
1995.
The growth of the Federal Reserve’s
supervisory responsibilities has increased
demands on the System’s resources.
The Federal Reserve is required by
law to examine state member banks
every twelve to eighteen months. Federal Reserve policy is to inspect annually those bank holding companies that
have significant credit-extending nonbank subsidiaries or that have severe
problems; in any case, all bank holding
companies are monitored for regulatory
compliance and to ensure that they
do not present undue risks to their
affiliated banks. Edge Act corporations
are examined annually.
Supervision of the U.S. operations of
foreign banking organizations is done
within a comprehensive program that
includes a review of the home country’s
financial system and significant accounting practices; an assessment of the
strength of support a foreign bank can
provide to its U.S. operations; and an
assessment of the adequacy and appropriateness of the risk-management
systems, operational controls, and regulatory compliance of the foreign bank’s
U.S. operations. The U.S. operations of
foreign banking organizations, like those
of U.S. insured commercial banks, must
be examined every twelve to eighteen
months. Under FBSEA, the Federal
Reserve must also review and approve
all applications by foreign banking
organizations to acquire a U.S. bank
or to establish a branch, agency, commercial lending company subsidiary, or
representative office in the United States.
As part of this process, a review is made
of the degree to which the bank’s home
country regulator supervises the bank’s
worldwide operations on a consolidated
basis.

45

A Changing Approach
to Supervision
Examinations and inspections are
conducted to evaluate the condition,
management processes, and prospects of
financial institutions; to identify deficiencies that may threaten their soundness;
to assess compliance with applicable
laws and regulations; and, when necessary, to develop recommendations for
corrective action. In the past, examinations and inspections have focused on
regulatory compliance and on assessing
the financial strength of an institution
by reconciling accounts, reviewing
individual transactions, and analyzing
the institution’s financial condition.
In recent years, however, improved
technology and financial innovations
have enabled banks to develop financial
products that can quickly alter their
balance sheets and change their exposure
to risk. As a result, supervisory authorities can no longer rely solely on periodic
assessments of an institution’s balance
sheet position at a point in time, but
must ensure that the institution has
adequate procedures to identify, measure,
monitor, and control its risk exposure.
To meet these challenges, the Federal
Reserve has reassessed and refined its
approach to supervision to ensure that
examinations and inspections are conducted efficiently and effectively, while
taking into account new and emerging
developments.
Important changes have been implemented or are in the process of being
adopted based on a fundamental review
of the Federal Reserve’s examination
procedures that included interviews
with bank examiners and supervisors
and with senior executives of banking
organizations. These changes are intended to reflect the dramatic developments taking place in the financial
services industry and to make the

46

Annual Report: Budget Review, 1996–97

examination process more risk-focused,
burden-sensitive, and cost-effective. The
changes include
• Refocusing on the areas of greatest
risk to a bank and on an assessment
of the bank’s risk-management procedures and capabilities
• Customizing examinations to fit the
size, activities, and risks of the
institution
• Developing a streamlined examination program for smaller institutions
• Adapting the existing approach to
examination, which is based on an
institution’s legal structure, to a
framework based on the institution’s
functional or business lines
• Conducting a greater portion of an
examination off-site
• Improving communications with
examined institutions
• Cooperating more closely with internal
auditors and outside accountants
• Placing greater emphasis on market
discipline, and using positive incentives to encourage prudent oversight
by management.
The Federal Reserve has adopted a
risk-focused approach to examinations
as the principal vehicle for implementing these changes. The risk-focused
approach highlights the importance of
the management process for identifying,
measuring, monitoring, and controlling
risk. It gives examiners more flexibility
in planning and conducting examinations. The risk-focused approach also
places more attention on an institution’s
internal controls and on analysis and
planning before the on-site examination
begins.

Other Changes in Federal
Reserve Supervision
The Federal Reserve has taken a number
of other steps to strengthen its super-

vision of U.S. banks, bank holding
companies, and the U.S. operations of
foreign banking organizations and to
make its supervisory processes more
efficient.

Use of Automation
To increase efficiency in the examination of state member banks, the Federal
Reserve has applied new technology to
many routine aspects of an examiner’s
work. This effort has led to development
of an automated system, referred to as
the Examiner Workstation, that automates much of the quantitative analysis
of banking organizations, including
sampling and evaluation of loan and
investment portfolios. Automation has
also been applied to the planning and
documentation of examinations. These
changes should help examiners identify
and evaluate risks more efficiently.
To assist in the supervision of U.S.
branches and agencies of foreign banking organizations (FBOs), the Federal
Reserve is developing an automated
system, referred to as the FBO Desktop,
that provides information for use in
off-site reviews, including information
on foreign financial systems, foreign
accounting standards, and the financial
performance of FBOs with U.S. operations. Supervisory staff throughout the
System will be able to access this
information electronically and will be
able to review and comment on performance reports online.

Coordination with Other Agencies
In preparing for the elimination of
federal barriers to interstate banking, the
Federal Reserve is working with the
Conference of State Bank Supervisors,
the Federal Deposit Insurance Corporation, and the various state banking
agencies to develop a seamless, risk-

Recent Changes in Banking Supervision
focused, and consistent supervisory
program for state-chartered banks. In
November 1996, the Federal Reserve,
the Federal Deposit Insurance Corporation, and all of the state banking
departments signed an agreement for
coordinating the supervision and examination of state-chartered banks operating across state lines.

International Supervisory Policies
The Federal Reserve takes an active part
in the international supervisory community as a member of the Basle Committee on Banking Supervision, operating
under the auspices of the Bank for
International Settlements in Basle,
Switzerland. Representing the G-10
countries, the committee has developed
numerous bank regulatory and supervisory standards that have strengthened
bank operating practices throughout the
world and have led to a more equitable
basis for international competition.
The committee is currently focusing
on evaluating the capital adequacy of
banking organizations and on promoting
more complete and consistent disclosure
of information, improved accounting
practices, and sound principles of risk
management. The committee has also
undertaken new initiatives with bank
supervisors from non–G-10 countries to
strengthen supervisory practices worldwide. A notable accomplishment in
1996 was the adoption of capital
standards for market risk in trading and
foreign exchange activities that rely on
the results of a bank’s internal riskassessment models. Other efforts helped
to promote greater public disclosure of
bank trading and derivatives activities
and standards for managing interest rate
risk.

47

Appendixes

51

Appendix A

Special Categories of System Expense
Fees for priced services and the 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 System’s budget processes. 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 three Reserve Banks, the first vice
presidents of three other Reserve Banks, and, as
liaison, the director of the Board’s Division of
Reserve Bank Operations and Payment Systems.

52

Annual Report: Budget Review, 1996–97

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
that 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 1997
In 1996 the Board approved a 1997
private sector adjustment factor for
Reserve Bank priced services of

Table A.1
Pro Forma Balance Sheet for Federal Reserve Priced Services, 1996 and 1997 1
Millions of dollars
Item

1996

Assets
Short-term assets
Imputed reserve requirement on clearing balances . . . . . . . .
409.6
Investment in marketable securities . . . . . . . . . . . . . . . . . . . . . 3,686.7
64.4
Receivables 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8.6
Materials and supplies 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
.0
Suspense and difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
13.9
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Items in process of collection . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,413.2
Total short-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1997

545.7
4,911.3
64.3
11.6
.0
14.6
2,548.2
6,596.4

8,095.7

Long-term assets
Premises 2 ,3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
346.4
189.4
Furniture and equipment 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14.6
Leasehold improvements and long-term prepayments 2 . . . .
Capital leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.3
Total long-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

552.7

533.7

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

7,149.1

8,629.4

348.0
167.0
18.0
.7

Liabilities
Short-term liabilities
Clearing balances and balances arising
from early credit of uncollected items . . . . . . . . . . . . . . 4,096.3
Deferred-credit items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,413.2
86.8
Short-term debt 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total short-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5,457.0
2,548.2
90.5
6,596.3

8,095.7

Long-term liabilities
Obligations under capital leases . . . . . . . . . . . . . . . . . . . . . . . . .
2.3
Long-term debt 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
182.7
Total long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

185.0

181.2

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

6,781.3

8,276.9

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

367.8

352.5

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

7,149.1

8,629.4

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

.7
180.5

to priced services of $0.5 million for both 1996 and
1997.
4. Imputed figures representing the source of financing
for certain priced-service assets.

Special Categories of System Expense
$101.5 million, an increase of $15.7 million, or 18.3 percent, over the PSAF of
$85.8 million targeted for 1996.
Asset Base
The value of Federal Reserve assets to
be used in providing priced services in

53

1997 is estimated at $8,629.4 million
(table A.1). The value of assets assumed
to be financed through debt and equity
in 1997 is $623.5 million, a decrease
of $13.8 million, or 2.2 percent, from
1996 (table A.2); the decrease is due
primarily to lower priced asset base
levels at FRAS.

Table A.2
Derivation of the Private Sector Adjustment Factor (PSAF), 1996 and 1997
Millions of dollars, except as noted
Item

1996

1997

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

86.9
550.4
637.3

90.5
533.0
623.5

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

3.9
7.6
14.2
12.0

5.2
7.1
19.1
15.1

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

13.6
28.7
57.7

14.5
29.0
56.5

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

29.9

32.1

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

3.4
13.8
52.3
69.5

4.7
12.8
67.5
85.0

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

11.3
2.2
2.8
16.3

11.6
2.0
2.9
16.5

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

85.8
13.5
14.1

101.5
16.3
16.6

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 1997 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 1991–95
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.

54

Annual Report: Budget Review, 1996–97

Cost of Capital, Taxes,
and Other Imputed Costs
For 1997, a pretax rate of return on
equity of 19.1 percent, or $67.5 million,
is planned. Other required PSAF recoveries for 1997—imputed sales taxes,
imputed FDIC insurance assessment,
and Board expenses—total $16.5 million (table A.2). The $15.7 million increase in PSAF recoveries is attributable
mainly to the increase in the pretax rate
of return on equity, which in turn is
a result of stronger 1995 bank holding
company (BHC) financial performance
included in the 1996 BHC model.

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 1997, 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
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 Fran-

Special Categories of System Expense
cisco and New York Reserve Banks
completed the System’s move into the
District-unique environment. In 1996,
consolidation efforts centered around
implementation of the centralized ACH
and new book entry applications. In
1997, the banks will continue to implement the new book entry application,
and the New York Bank will complete
its transition to the centralized funds
application.
The 1997 budget provides $34.7 million in support of these efforts. Including 1997 funding, expenditures on
this special project to date total
$271.3 million.

Currency Printing
and Circulation
The Department of the Treasury’s
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
Table A.3
Currency in Circulation, New Notes Issued,
and Notes Destroyed, 1996
Millions of pieces
Notes
in
circulation 1

New
notes
issued 2

Notes
destroyed

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

6,219
538
1,464
1,351
4,103
941
2,523

4,441
32
1,008
883
2,085
269
1,044

4,097
9
923
865
1,733
176
876

Total . . . . . . . . .

17,139

9,762

8,679

Dollar
denomination
1
2
5
10
20
50
100

1. As of October 1996.
2. Figures for new notes issued do not include
additions to inventory at the Reserve Banks.

55

Chart A.1
Federal Reserve Budget for
Supplying U.S. Currency, 1992–97 1
Millions of dollars

400

200

1992

1993

1994

1995

1996

1997

1. For 1996, estimate; for 1997, budget.

through an accounting procedure similar
to that used in assessing the Reserve
Banks for Board operating expenses.
In 1996, Federal Reserve expenditures
related to supplying currency totaled an
estimated $402.4 million, about 9 percent less than the budgeted amount,
primarily because fewer new notes were
produced than originally projected. The
1997 currency budget is $405.6 million,
an increase of 0.8 percent over estimated
1996 expenditures (chart A.1).

Printing of Federal Reserve Notes
By far the largest expense in the currency budget is the cost of printing new
Federal Reserve notes. The 1997 budget for the printing of new notes is
$392 million, a 0.6 percent increase over
estimated 1996 expenditures (table A.4).
Several factors influence the size of this
portion of the currency budget. The
most important is the number of notes
printed. The 1997 budget provides for
the printing of 9.8 billion notes. This
figure is based on the anticipated destruction of an estimated 8.8 billion notes, an
expected increase of about 625 million
notes in circulation, and a planned
increase of 375 million notes in Reserve
Bank inventories (chart A.2).

56

Annual Report: Budget Review, 1996–97

Chart A.2
Use of Currency Printed in 1992–97 1

Chart A.3
Cost of Printing New Currency, 1992–97

Millions of dollars

Inventory increase
Circulation increase
Currency replacement

Dollars per thousand notes

2

12
40
8
20
4

1992

1993

1994

1995

1996

1997

1. For 1997, projections.
2. Reserve Bank inventories decreased in 1992.

The cost of printing the notes also
influences the budget. The unit cost of
producing Federal Reserve notes in
1997 will remain at the 1996 rate of
$40 per thousand notes (chart A.3). The
unit cost, which is established by the
Bureau of Engraving and Printing, is a
blend of the costs of producing three
types of notes. In 1997, 15 percent of
the notes produced will be in the new
design, 40 percent will be other threaded
currency, and the remaining 45 percent
will be $1 notes, which have no thread.
The unit cost also reflects the cost of
a continuing initiative to educate the
public about the new currency design.
The amount budgeted for this program
for 1997 is $4 million, a decrease of

1992

1993

1994

1995

1996

1997

57 percent from estimated 1996 expenditures on this program of $9.5 million.

Shipment of Currency
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 1997 budget for
transporting new Federal Reserve notes
is $10 million, a 12.1 percent increase
over estimated 1996 expenditures. The
increase is due to a decrease in the
standard size of air shipments and
increases in air freight charges and in the
number of notes shipped.
The 1997 currency budget also
includes $0.7 million for shipment of fit

Table A.4
Federal Reserve Costs of Supplying Currency, 1996 and 1997
Dollars, except as noted
Item

1996
estimate

1997
budget

Percentage
change

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

389,760,000
8,920,000
658,000
435,000

392,000,000
10,000,000
700,000
200,000

.6
12.1
6.4
−54.0

19,000
2,600,000

25,000
2,700,000

31.6
3.9

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

402,392,000

405,625,000

.8

Special Categories of System Expense
(usable) currency within the Federal
Reserve System, an increase of 6.4 percent over estimated 1996 expenditures.
Such shipments move currency from
offices with excess fit currency to
offices that would otherwise require new
currency.

Extended Custodial Inventory
Program
The extended custodial inventory (ECI)
program was established in 1996 to
facilitate the introduction of redesigned
U.S. currency to the international U.S.
banknote market. The Federal Reserve
Bank of New York, which manages the
program, maintains inventories of
redesigned U.S. currency at several
banks in selected locations abroad (currently London, Frankfurt, and Zurich).
These banks verify and sort incoming deposits to assist in repatriation
and destruction of pre-1996 series
$100 notes; they also work to develop
an international market for fit Series
1996 $100 notes.
The ECI program may be expanded,
reduced, or discontinued in 1997 depending on the results of a review of its
effectiveness. For purposes of the 1997
budget, expenses for the program are
budgeted at $0.2 million, 54 percent less
than estimated 1996 expenditures. This
amount represents the continuation of
the ECI program at its current level of
operation.

Return of Storage Pallets
The Bureau of Engraving and Printing
stores currency in its vaults on aluminum
pallets and uses the pallets in the shipment of currency to Federal Reserve
offices. The pallets are also used in
several Reserve Bank offices with
automated currency vaults. The 1997
budget for returning empty pallets to the

57

Bureau of Engraving and Printing is
$25,000, an increase of 31.6 percent
over estimated 1996 expenditures.

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 redemption of
damaged or mutilated currency. The
Federal Reserve’s 1997 currency budget includes $2.7 million to reimburse
the Treasury for this service, a 3.9 percent increase over estimated 1996
expenses.

59

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 95 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,
1995 and 1996
Millions of dollars
Source

1995
actual

1996
estimate

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

11.3
23,825.6
783.9
738.8
35.5

10.8
23,883.7
442.8
787.7
38.3

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

25,395.1

25,163.3

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
$23.4 billion for 1995 and are estimated
to be $20.1 billion for 1996. The latter
figure does not include the special
transfer of $106 million of surplus from
the Federal Reserve System to the
Treasury on October 1, 1996, as statutorily required.

60

Annual Report: Budget Review, 1996–97

Table B.2
Distribution of the Income of the Federal Reserve Banks, 1995 and 1996
Millions of dollars
Item

1995
actual

1996
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

25,395

25,163

1,568
251

1,641
307

23,577

23,215

896

−1,639

38

37

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

161
370

163
403

Other distributions
Dividends paid to member banks 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers to, or from (−), surplus 6,7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

231
283

256
635

Equals
Payment to U.S. Treasury 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

23,389

20,083

1. See table B.1.
2. Net of reimbursements due from the U.S. Treasury
and other government agencies. Also reflects reductions
of $119.2 million in 1995 and $139.5 million in 1996 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.
7. Does not reflect the special transfer of $106 million
of surplus from the Federal Reserve System to the
Treasury on October 1, 1996.

61

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. In addition, the financial
statements of the Reserve Banks are
audited annually by an independent
outside auditor.
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.

Independent Audit
The Board of Governors last year
expanded its audit contract with Coopers
& Lybrand to include an annual financial audit of each of the twelve Federal
Reserve Banks beginning in 1997. These
audits will be in addition to the annual
audit of the combined Reserve Bank
financial statements that Coopers &
Lybrand has done previously.

Since 1995, Coopers & Lybrand has
conducted year-end audits of the
combined Reserve Bank financial statement and of the individual financial
statements of two or three Reserve
Banks a year. The audit of the 1995
combined Reserve Bank financial statement represented the first such audit
conducted by an independent accounting firm. On the basis of the success of
that program, the Board decided to
extend the outside audit to all twelve
Reserve Banks. The Reserve Banks will
continue to be audited by each Bank’s
internal audit function and by the
Board’s financial examiners.

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 16 projects in various stages
of completion, since 1979 has completed 147 reports on selected aspects
of Federal Reserve operations (tables
C.1 and C.2). The GAO has also
involved the Federal Reserve in about
85 other reviews not directly related
to the System and has terminated 52
others before completion. The reports
are available directly from the GAO.

62

Annual Report: Budget Review, 1996–97

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

Date initiated

Financial crises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OTC derivative sales practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CFTC’s exemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interstate banking data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BHC Act prohibition on tying . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Clearance and settlement systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International financial crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International counterfeiting of U.S. currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proposed transfer of HUD responsibilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign bank internal/external controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign bank organization program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenditures for news subscriptions/services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenditures for Internet/Web site/bulletin board services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
On-line banking services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-based capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Merger of bank and thrift charters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10/27/92
7/20/94
9/1/94
2/16/95
3/20/95
11/2/95
3/6/96
5/28/96
6/10/96
7/22/96
8/8/96
10/16/96
10/16/96
10/16/96
11/6/96
11/8/96

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

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

Federal Reserve System Audits

63

Table C.2
Continued
Report
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 . . . . . . . . . . . . . . . . . . . . . . . .
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-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

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 . . . NSIAD-86-40
Implementation of the Export Trading Company Act of 1982 . . . . . . . . . . NSIAD-86-42
Information on Independent Public Accountant Audits
of Financial Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
GGD-84-44FS
An Analysis of Two Types of Pooled Investment Funds . . . . . . . . . . . . . . .
GGD-86-63
How the Markets Are Developed and How They Are Regulated . . . . . . .
GGD-86-26
U.S. Banking Supervision and International Supervisory Principles . . . . . NSIAD-86-93
Financial Institution Regulators’ Compliance Examination . . . . . . . . . . . . .
GGD-86-94
The Market’s Structure, Risks, and Regulation . . . . . . . . . . . . . . . . . . . . . . . .
GGD-86-80BR
Dealer Views on Market Operations and Federal Reserve
Securities Transfer System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
GGD-86-147FS
Questions about the Federal Reserve’s Securities Transfer System . . . . . .
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 .

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

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

Issues Related to Repeal of the Glass–Steagall Act . . . . . . . . . . . . . . . . . . . .
GGD-88-37
Preliminary Observations on the October 1987 Crash . . . . . . . . . . . . . . . . . .
GGD-88-38
Supervision of Overseas Lending Is Inadequate . . . . . . . . . . . . . . . . . . . . . . . NSIAD-88-87
Competitive Concerns of Foreign Financial Firms in Japan,
the United Kingdom and the United States . . . . . . . . . . . . . . . . . . . . . . . NSIAD-88-171
Administrative Expenses at FHLBB and FRB for 1985 and 1986 . . . . . . AFMD-88-33

2/6/86
2/27/86
4/21/86
5/12/86
5/15/86
7/25/86
8/1/86
8/20/86

1/22/88
1/26/88
5/5/88
6/2/88
6/15/88

64

Annual Report: Budget Review, 1996–97

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

Number

Date issued

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-88-97
GGD-88-106BR
NSIAD-88-238
GGD-88-126BR
GGD-89-12

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

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

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

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

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

GGD-93-48

1/8/93

AFMD-93-13
AFMD-93-15

2/16/93
2/16/93

GGD-93-71FS

3/8/93

Federal Reserve System Audits

65

Table C.2
Continued
Report
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 . . . . . . . . . . . . . . .

Number

Date issued

GGD-93-15R

3/30/93

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

4/27/93
4/28/93
5/4/93
5/17/93

GGD-93-124

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
AIMD-95-8
GGD-95-35

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 . . . . . . . . .
Mandated Studies to Review Costly Bank and Thrift Failures . . . . . . . . . .
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-95-37
GGD-95-21
GGD-95-98
GGD-95-126
GGD-95-181R

Foreign Banks: Assessing Their Role in the U.S. Banking System . . . . . .
Federal Reserve Banks: Internal Control, Accounting,
and Auditing Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico’s Financial Crisis: Origins, Awareness, Assistance,
and Initial Efforts to Recover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Counterfeit U.S. Currency Abroad: Issues and U.S. Deterrence Efforts . .
Money Laundering: A Framework for Understanding
U.S. Efforts Overseas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Reserve System: Current and Future Challenges
Require Systemwide Attention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair Lending: Federal Oversight and Enforcement Improved
but Some Challenges Remain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Reserve Banks: Inaccurate Reporting of Currency
at the Los Angeles Branch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Implementation of the Foreign Bank Supervision Enhancement
Act of 1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Derivatives: Actions Taken or Proposed since May 1994 . . . . .
Inspectors General: Mandated Studies to Review Costly Bank
and Thrift Failures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory Burden: Measurement Challenges and Concerns
Raised by Selected Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank Oversight Structure: U.S. and Foreign Experience May Offer
Lessons for Modernizing U.S. Structure . . . . . . . . . . . . . . . . . . . . . . . . . .
Implementation of FDICIA’s Prompt Regulatory Action Provisions . . . . .
Bank Regulatory Structure: Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

GGD-96-26

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

AIMD-96-5

4/28/94
5/24/94
8/25/94
10/31/94
12/30/94
3/15/95
3/16/95
7/7/95
7/31/95
8/17/95
9/21/95
9/22/95
9/27/95
11/28/95
2/7/96
2/9/96

GGD-96-56
GGD-96-11

2/23/96
2/26/96

GGD-96-105

5/24/96

GGD-96-128

6/17/96

GGD-96-145

8/13/96

AIMD-96-146

9/30/96

GGD-96-187
GGD/AIMD-97-8

9/30/96
11/1/96

GGD-97-4

11/7/96

GGD-97-2

11/18/96

GGD-97-23
GGD-97-18
GGD-97-5

11/20/96
11/21/96
12/27/96

66

Annual Report: Budget Review, 1996–97

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

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 1996, the OIG publicly
reported on thirteen audits (table C.3)
and conducted a number of follow-up
and other reviews. In addition, the OIG
closed five investigations and performed
numerous legislative and regulatory
reviews.

Table C.3
Completed OIG Audit Reports Relating to the Federal Reserve System, 1996
Report
Audit of Board Oversight of Federal Reserve Automation Consolidation . . . . .
Audit of the Division of Information Resources Management’s
Change Control Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Audit of the FFIEC’s Financial Statements (year ending 12/31/95) . . . . . . . . . . .
Audit of the Board’s Financial Statements (year ending 12/31/95) . . . . . . . . . . . .
Assistance to Financial Statement Audit of the Federal Reserve
Employee Benefits System (year ending 12/31/95) . . . . . . . . . . . . . . . . . . . . . .
Audit of the Board’s Consumer Compliance Examination Process . . . . . . . . . . . .
Audit of the Board’s InterFed Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Audit of the Division of Information Resources Management’s
Operating System (MVS) and Access Control Software (CA-ACF2) . . . . .
Audit of the Board’s Procurement and Contract Management Process . . . . . . . .
Audit of the Board’s Procurement and Contract Management Process:
Credit Card Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Audit of the Bank Holding Company Inspection Program . . . . . . . . . . . . . . . . . . . .
Report on the Failure of Guardian Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Audit of Board Oversight of Reserve Bank Procurement . . . . . . . . . . . . . . . . . . . . .

Number

Month issued

A9405

2/96

A9505
A9601
A9600

2/96
2/96
3/96

A9605
A9508
A9607

3/96
4/96
6/96

A9606
A9507-A

7/96
8/96

A9507-B
A9604
A9608
A9603

8/96
8/96
10/96
12/96

67

Appendix D

Expenses and Employment
at the Federal Reserve Banks
Table D.1
Operating Expenses of the Federal Reserve Banks, by District, 1996 and 1997 1
Thousands of dollars, except as noted
1996
estimate

1997
budget

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

132,045
407,930
102,165
114,348
148,378
182,654
212,587
94,745
98,668
127,466
125,183
213,125
1,959,294

Special project
Automation Consolidation . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

District

1. Excludes capital outlays.

Change
Amount

Percent

132,180
424,390
103,765
119,852
152,560
184,192
213,222
96,901
104,157
124,917
125,811
215,272
1,997,216

135
16,460
1,600
5,504
4,182
1,538
635
2,155
5,488
−2,549
628
2,147
37,922

.1
4.0
1.6
4.8
2.8
.8
.3
2.3
5.6
−2.0
.5
1.0
1.9

38,385

34,667

−3,718

−9.7

1,997,679

2,031,883

34,204

1.7

68

Annual Report: Budget Review, 1996–97

Table D.2
Employment at the Federal Reserve Banks, by District, 1996 and 1997
Average number of personnel, except as noted 1
1996
estimate

1997
budget

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

1,255
4,184
1,259
1,450
2,073
2,298
2,310
1,191
1,276
1,662
1,549
2,494
23,001

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

District

Change
Amount

Percent

1,241
4,067
1,254
1,438
2,078
2,299
2,244
1,210
1,263
1,607
1,545
2,463
22,709

−14
−117
−4
−12
5
2
−66
18
−13
−56
−4
−31
−292

−1.1
−2.8
−.3
−.8
.3
.1
−2.9
1.5
−1.0
−3.3
−.2
−1.3
−1.3

592

549

−43

−7.3

23,593

23,258

−335

−1.4

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, 1996 and 1997
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 . . . . . . . . . .

1996
estimate

1997
budget

Change
Amount

Percent

138,143

145,693

7,549

5.5

217,200

213,090

−4,110

−1.9

1,177,565
426,385

1,194,002
444,431

16,437
18,046

1.4
4.2

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

1,959,294

1,997,216

37,922

1.9

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

717,176
525,363

732,993
525,336

15,818
−27

2.2
*

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.
* Less than 0.05.

Expenses and Employment

69

Table D.4
Expenses of the Federal Reserve Banks
for Salaries of Officers and Employees, by District, 1996 and 1997
Thousands of dollars, except as noted
1996
estimate

1997
budget

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

56,247
208,972
49,605
51,285
73,773
80,298
97,583
42,642
47,507
60,322
58,662
111,162

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

938,058

District

Change
Amount

Percent

57,880
211,622
50,829
52,978
76,489
82,839
99,844
45,060
48,244
59,861
60,653
114,847

1,633
2,650
1,224
1,692
2,715
2,541
2,261
2,418
736
−461
1,992
3,685

2.9
1.3
2.5
3.3
3.7
3.2
2.3
5.7
1.5
−.8
3.4
3.3

961,144

23,086

2.5

Table D.5
Factors in the 1996-to-1997 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 . . . . . . . . . .

2.6
3.2
2.9
2.7
2.9
3.4
3.5
3.0
2.5
3.0
2.7
3.0

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

1.0
1.1
.7
.3
1.1
.5
1.2
.8
.5
1.1
.5
1.0

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

3.0

.1

.9

Change in Turnover Overtime
staffing
and lag 1

Other

Total
change

.2
−1.4
.2
1.6
1.7
.2
−2.0
2.4
−1.1
−2.8
.0
−.1

−.1
−1.0
−.7
−.7
−1.3
−.4
−.6
−.5
.0
−1.4
.3
−.5

−.6
−.6
−.6
−.5
−.8
−.6
−1.1
.0
.0
−.8
−.2
−.2

−.3
−.4
.0
.0
.0
.0
1.2
.0
−.4
.0
−.1
.0

2.9
1.3
2.5
3.3
3.7
3.2
2.3
5.7
1.5
−.8
3.4
3.3

−.4

−.7

−.5

.0

2.5

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

70

Annual Report: Budget Review, 1996–97

Table D.6
Capital Outlays of the Federal Reserve Banks, by District, 1996 and 1997
Thousands of dollars, except as noted
1996
estimate

1997
budget

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

15,828
60,712
13,990
45,308
24,830
34,556
14,197
9,176
62,227
14,540
14,693
30,892
340,947

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

District

Change
Amount

Percent

13,057
52,982
10,212
74,866
13,941
31,139
20,742
9,045
51,920
6,453
7,460
22,259
314,074

−2,770
−7,731
−3,778
29,558
−10,889
−3,417
6,545
−131
−10,308
−8,087
−7,232
−8,633
−26,873

−17.5
−12.7
−27.0
65.2
−43.9
−9.9
46.1
−1.4
−16.6
−55.6
−49.2
−27.9
−7.9

27,165

32,370

5,204

19.2

368,112

346,444

−21,669

−5.9

Table D.7
Budget Performance of the Federal Reserve Banks,
Operating Expenses, by District, 1996 1
Thousands of dollars, except as noted
1996
budget

1996
estimate

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

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

Special project
Automation Consolidation . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

District

1. Excludes capital outlays.
* Less than 0.05.

Change
Amount

Percent

132,045
407,930
102,165
114,348
148,378
182,654
212,587
94,745
98,668
127,466
125,183
213,125
1,959,294

−875
180
−2,178
−364
537
−3,003
−2,336
660
−20
−427
−1,893
242
−9,476

−.7
*
−2.1
−.3
.4
−1.6
−1.1
.7
*
−.3
−1.5
−.1
−.5

36,905

38,385

1,480

4.0

2,005,675

1,997,679

−7,996

−.4

Expenses and Employment

71

Table D.8
Budget Performance of the Federal Reserve Banks,
Employment, by District, 1996
Average number of personnel, except as noted 1
1996
budget

1996
estimate

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

1,253
4,228
1,289
1,451
2,094
2,366
2,343
1,209
1,294
1,668
1,568
2,497
23,261

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

District

Change
Amount

Percent

1,255
4,184
1,259
1,450
2,073
2,298
2,310
1,191
1,276
1,662
1,549
2,494
23,001

2
−44
−31
−2
−21
−68
−33
−18
−18
−6
−19
−3
−260

.2
−1.0
−2.4
−.1
−1.0
−2.9
−1.4
−1.5
−1.4
−.4
−1.2
−.1
−1.1

563

592

29

5.1

23,824

23,593

−231

−1.0

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, 1992–97 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 . . . . . . . . . . . . . . . . .

109,954
114,617
120,869
128,303
138,143
145,693

182,307
193,621
209,453
216,790
217,200
213,090

1,020,974
1,076,914
1,105,140
1,127,320
1,177,565
1,194,002

276,038
326,334
361,458
392,294
426,385
444,431

1,589,272
1,711,486
1,796,920
1,864,707
1,959,294
1,997,216

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

5.8

3.2

3.2

10.0

Year

1992
1993
1994
1995
1996
1997

1. Excludes special projects.

4.7

72

Annual Report: Budget Review, 1996–97

Table D.10
Employment at the Federal Reserve Banks, by Operational Area, 1992–97
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 . . . . . . . . . . . . . .

776
751
729
737
728
731

1,832
1,780
1,754
1,683
1,566
1,524

8,878
8,609
8,301
8,209
8,099
7,851

2,587
2,910
3,079
3,073
3,126
3,100

4,711
4,762
4,603
4,511
4,531
4,540

4,998
5,182
5,162
4,949
4,952
4,963

23,782
23,995
23,627
23,162
23,001
22,709

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

−1.2

−3.6

−2.4

3.7

−.7

−.1

−.9

Year

1992
1993
1994
1995
1996
1997

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.

73

Maps of the
Federal Reserve System

74

Annual Report: Budget Review, 1996–97

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 1997.

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

75

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