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federal reserve Ba n k DALLAS, TEXAS of Dallas 75222 Circular No. 82-89 July 29, 1982 CORRIGAN STATEMENT ON PRICING TO ALL FINANCIAL INSTITUTIONS IN THE ELEVENTH FEDERAL RESERVE DISTRICT: Enclosed for your inform ation is a copy o f an overview o f Federal R eserve System pricing r e le a se d today by E. Gerald Corrigan, Chairman o f the Federal R eserve S ystem Pricing P olicy C o m m itte e and President o f the Federal R ese r v e Bank o f Minneapolis. The s ta t e m e n t discu sses the Federal R ese r v e Banks' e x p e r ie n c e during the first year o f pricing and in d ica tes future plans for priced s e r v ic e s a c tiv itie s . The Board intends to consider n ext w eek a proposal to se ek public c o m m e n t on the issue o f noon p resen tm en t the Board's decision in this, and perhaps in other m atters, will have an im pact on the e f f e c t i v e d a tes m entioned in the pricing policy docum ent. Q uestions regarding the s ta t e m e n t should be addressed to Jack A. Clym er at this Bank, Ext. 6337; R obert W. Schultz o f the El Paso Branch, (915)544-4730; Vernon L. B artee a t the H ouston Branch, (713)659-4433; or John A. Bullock a t the San Antonio Branch, (512)224-2141. Additional cop ies o f this circular will be furnished upon request to the D e p a r tm e n t o f C om m unications, Financial and Com m unity A ffa ir s o f this Bank, Ext. 6289. Sincerely yours, William H. Wallace First Vice President Enclosure Banks and others are encouraged to use the following incoming W A T S numbers in contacting this Bank: 1-800-442-7140 (intrastate) and 1-800-527-9200 (interstate). For calls placed locally, please use 651 plus the extension referred to above. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) FEDERALRESERVEprBS^elease For im m ed ia te r e le a s e July 29, 1982 The Federal R eserve Board today announced planned revisions in priced s e r v ic e s o f fe r e d to depository institu tions. The ch anges w ere announced by E. Gerald Corrigan, President o f the F ederal R e serv e Bank o f M inneapolis and Chairman o f the S y stem 's Pricing P olicy C o m m itte e . The ch anges will be phased in over a number o f months beginning in August. Am ong the changes announced are te c h n ic a l revisions in the m ethod for pricing Federal R eserve s e r v ic e s and a c c e le r a tio n s in the c o lle c tio n o f certain c la s s e s o f checks. Also announced were plans for further reduction o f Federal R e serv e flo a t and pricing o f a u tom ated clearinghouse (ACH) se r v ic e s. Plans for an e le c tr o n ic check c o lle c tio n (ECC) program that had been under discussion will be discontinued. In announcing the pricing and se rv ic e changes, Mr. Corrigan em p hasized that the Federal R ese r v e S y stem 's continuing o b je c tiv e is to enhance the e f f ic ie n c y o f the p aym en ts m echanism in a manner c o n siste n t with the Fed's overall public resp onsibilities. The S ystem 's initial pricing str a te g y was based on d eta iled c o s t e s tim a t e s and involved c a lc u la tin g individual product c o sts, then adding a private se c to r adjustm ent factor (PSAF). The revised pricing technique r e c o g n iz e s that the value o f som e s e r v ic e s might be d iffe r e n t from their c o s ts and tak es into accou n t prevailing market p r a c tic e s. The m ost im portant and widespread use o f this technique will be r e f le c t e d in prices for handling certain ty p es o f cash l e t t e r deposits (checks deposited with the Federal R ese r v e for clearan ce) where major im provem en ts have been made in the availab ility o f funds to depositing institutions. A tta c h m e n t For use at noon E.D.T. Thursday, July 29. 1982 FEDERAL RESERVE SYSTEM PRICING: AN OVERVIEW Presented by E. Gerald Corrigan Chairman, Pricing Policy Committee and President, Federal Reserve Bank of Minneapolis July 29, 1982 I. Introduction My purpose today is to provide an o v e r v i e w of the Federal Reserve Banks' experience during the first year of pricing and to share with you our plans for the next y e a r or so with respect to our priced services activities. I am sensitive to our responsibilit ies to keep depository institutions i n f o r m ed of our intentions in this area. Now, with a y e a r or so of pricing e x p e r ience behind us, we are in a position to better formulate and articulate a reasonably comprehensive o v e r v i e w of those plans. Before getting into the specific elements of our plans, let me begin by providing perspective on where we are right now and a brief o v e r v i e w of how we see our role in the payments area. II. The Role of the Fed in the Priced Services Environment The basic purpose to be served by a continued Federal Reserve pres ence in the payments s e r v i c e - - i n d e e d , the purpose intended by the Congress-is to contribute to the effic i e n c y and integrity of the payments mechanism. As a corollary to this, it is simple enough to say that as long as we are serving that purpose, we should remain in the business and, on the contrary, if we are not serving that purpose, we should get out of the business. While the logic of this proposition is clear enough, it is not as simple to develop an operational and functional approach that should guide our day-to-day actions. On the surface, the issue would seem to come down to the question, Ho w will we know if we are contributing to the e f f i c i e n c y of the payments mechanism? In one sense the "market" should answer that question. If there are enough takers of our services at prices that will generate sufficient revenue to cover our costs in a highly competitive market, the presumption would be strong that our presence in the market is contributing to that underlying goal of efficiency. However, even that seemingly acid test cannot be a sufficient guide to our conduct. For example, the Monetary Control Act of 1980 (MCA) speaks of costs matching revenues "over the long-run," giving due regard to "competitive factors and the provision of an adequate level of such services nationwide." That language alone suggests to me--as does our initial experience with pricing--that there is no cookbook-like formula that can or should serve as a one dimensional guide to our actions - - p a r t i c u l a r l y in a context in which it is recognized that we remain a public entity. Taken in historical perspective, the Federal Reserve also has inescapable r e sponsibili ties for the safety of the payments m e c h a n i s m as well as for insuring the overall adequacy of payments services. We cannot back away from these responsibilities even in the so-called pricing environment. Since we do not have the luxury of a one-dimensional guide to our actions, it will, I am sure, come as no surprise to most of you that we in the Fed have given extensive thought to devising an operational approach that will permit us to best meet the pricing provisions of the M C A while continuing to serve our historical public responsibilities regarding the payments mechanism. Our first a t t e m p t — as reflected in our initial schedule of feeswas rather simple. We essent i a l l y calculated our costs for each individual - 2 - p r o d u c t, added on the p r i v a t e s e c t o r adj us t ment f a c t o r (PSAF), mailed out the r e s u l t i n g p r i c e schedule and, in e f f e c t , l e t n a t u r e run i t s c o u r s e . D espite our c o n s e r v a t i v e but r eas o n a b l e i n i t i a l a p p ro a c h - -o r perhaps because of the approach--we have lea r ned much in our f i r s t y e ar of p r i c i n g . Let me mention a few t h i n g s t h a t s t an d o u t in my mind. F i r s t , i t does appear t h a t Fed p r i c e s are g e n e r a l l y w i t h i n t h e range o f p r i v a t e s u p p l i e r s ' p r i c e s . Tha t, in t u r n , im p l i es t h a t t h e v i s i b l e pres ence o f our p r i c e s in the m arke tpla ce should be working in t h e d i r e c t i o n o f lowering t h e o v e r a l l c o s t s to s o c i e t y o f payment s e r v i c e s . Second, al th ou gh we have l o s t volume, t h e r e ar e 1i t e r a l l y thousands o f i n s t i t u t i o n s - - i n c l u d i n g ap p rox i mat el y 3,000 nonmember i n s t i t u t i o n s t h a t h e r e t o f o r e did n ot have f u l l a cce s s t o Fed s e r v i c e s - t h a t are s e c ur in g a t l e a s t some s e r v i c e s from t h e Fed. The f a c t t h a t so many i n s t i t u t i o n s choose to o b t a i n s e r v i c e s from the Fed when a l t e r n a t i v e s a r e o f t e n so r e a d i l y a v a i l a b l e a l s o says somet hing. We want Fed p r i c i n g t o have th e d e s i r a b l e e f f e c t o f ca u s i n g a l l market p a r t i c i p a n t s - - t h e Fed i n c l u d e d—to sharpen t h e i r p e n c i l s in s ea rch o f lower c o s t s and b e t t e r s e r v i c e s . I f we accomplish t h i s , the Fe d ' s o p e r a t i o n a l pres ence in t he payments mechan ism w ill c o n t r i b u t e f u r t h e r to t h e e f f i c i e n c y and i n t e g r i t y o f t h e payments mechanism, while p e r m i t t i n g us t o r e t a i n t h e c a p a b i l i t y o f p ro v i d i n g minimal l e v e l s o f s e r v i c e s a t re a so na b l e p r i c e s in t he ev ent such s e r v i c e s might not other wis e be a v a i l a b l e . III. The T r a n s i t i o n to P r i c i n g As you a re aware, Fed p r i c i n g i s only about a y e a r o l d . As I have im pli ed, the t r a n s i t i o n from an environment o f " g i v i n g i t away" t o t he p r i c e d and c om pe tit iv e s e t t i n g has no t been e a s y . However, I s u s p e ct t h a t our s i t u a t i o n , while more d i f f i c u l t in d e g r e e , has something in common with the problems faced by many f i n a n c i a l i n s t i t u t i o n s in l e a r n i n g t o p r i c e t h e i r products in a d e r e g u la t e d s e t t i n g as well as something in common with t he problems the a i r l i n e i n d u s t r y i s g ra p p l i n g with in t he face o f d e r e g u l a t i o n . But whatever problems th e banks and t h e a i r l i n e i n d u s t r y have had in a d j u s t i n g to d e r e g u l a t i o n , our problems have been d i f f e r e n t . In p a r t our problems a r e d i f f e r e n t because p r i c i n g i s e n t i r e l y new to the Fed, and in p a r t because we must n o t , in the i n t e r e s t s o f p r i c i n g , back away from our e s s e n t i a l and ongoing pu bl ic r e s p o n s i b i l i t i e s . To some e x t e n t , the s i t u a t i o n we have faced in making t h e t r a n s i t i o n to p r i c i n g was h e a v i l y c o n d it i o n e d by developments t h a t p r e - d a t e d p r i c i n g . For example, f o r reasons q u i t e a p a r t from t he p r o s p e ct o f p r i c i n g , t h e Federal Reserve Banks h a d - - in the y e a r s p r i o r t o 1980 when t h e MCA was e n ac t e d -- d o n e q u i t e a good job of re so urc e management. For example, between 1974 and 1980, employment in our payments s e r v i c e o p e r a t i o n s was reduced by more than 17 p er c en t and our expense growth was held s i g n i f i c a n t l y below t h e r a t e o f i n f l a t i o n . During t h a t same p e r i o d , p r o d u c t i v i t y ros e by a r a t h e r remarkable 77 p e r c e n t . Thus, long be fore p r i c i n g was upon u s , t h e Fed had been moving a g g r e s s i v e l y in a d i r e c t i o n t h a t would s erve i t w e l l , from a c o s t p o i n t o f view, in the p r i c i n g e nvironment . - 3 - I f t h a t was th e good news, t h e r e was a l s o some bad news. For e x ample, in the 1978-1979 p e r i o d , t h e Fed made a commitment t o expend t e n s of m i l l i o n s of d o l l a r s on i t s lon g -ran g e automation program. The r a t i o n a l e f o r t h i s d e c i s io n was h e a v i l y , i f not t o t a l l y , d i c t a t e d by c o n s i d e r a t i o n s r e l a t i n g t o the e f f e c t i v e d is c h a r g e o f our p u b l i c r e s p o n s i b i 1i t i e s - - i n c l u d i n g t h o s e r e l a t e d t o monetary p o l i c y — r a t h e r than in a n t i c i p a t i o n o f p r i c i n g our pay ments s e r v i c e s . That program, taken in t h e c o n t e x t o f t h e s h arp re d u c t i o n s in personnel over the 1974-1980 p e r i o d , has had t he e f f e c t of s i g n i f i c a n t l y s h i f t i n g the weight of our c o s t s t o t h e " fi x e d " o r "overhead" v a r i e t y . Thus, our c u r r e n t c o s t s t r u c t u r e i s one in which, in most c a s e s , making quick adjustme nts to even r e l a t i v e l y modest changes in volume i s n o t eas y n o r , in some c a s e s , even d e s i r a b l e . I f th e t r a n s i t i o n t o p r i c i n g has had i t s u n c e r t a i n t i e s — and i t s u r e l y h a s —none were g r e a t e r than t h o s e r e l a t i n g t o what would happen to Fed p r o c e s s in g volume under p r i c i n g . And, our i n i t i a l p r i c i n g en deav o r—wire t r a n s f e r s e r v i c e s - - w o u l d , because o f t h e n a t u re of t he p ro d u c t , t e l l us l i t t l e about t h i s phenomenon. The big t e s t would come with check p r i c i n g because i t c o n s t i t u t e s t h r e e - q u a r t e r s o f our o v e r a l l c o s t s of p ri c e d s e r v i c e s and because a l t e r n a t i v e s to Fed check s e r v i c e s a re so r e a d i l y a v a i l a b l e in v i r t u a l l y ever y l o c a t i o n in the c ou n tr y . In any e v e n t , I t h i n k i t i s f a i r t o say t h a t , on b a l a n c e , t h e volume drops we have e x pe rience d were f a s t e r than we a n t i c i p a t e d . We exp ect ed -a n d welcomed--a drop in check volume due t o t h e emergence o r reemergence o f l o c a l c l e a r i n g o p e r a t i o n s . We welcomed t h i s development because i t c o n t r i b u t e d t o e f f i c i e n c y even i f i t did cut i n t o our volume. Let me be s p e c i f i c . Since p r i c i n g began and t hrough t h e f i r s t q u a r t e r o f 1982, we e s t i m a t e t h a t t h e t o t a l volume o f our p ri c e d s e r v i c e s a c t i v i t i e s has dropped by about 20 p e r c e n t . To be even more s p e c i f i c , t h e volume of checks a c t u a l l y pro ces s ed by t h e Fed Banks has dropped by 22 percent. ” Almost h a l f of t h e drop in p ro ces sed check volume has been o f f s e t by a sharp r i s e in ha ndling o f f i n e s o r t o r packaged ch eck s . Most, i f not a l l , of the drop in proce ssed check volume o ccu rred in t h e p e ri o d August 1981 through February 1982. The speed with which check volume f e l l o f f , t o g e t h e r with the f a c t t h a t the volume drop has been very uneven from Fed o f f i c e t o Fed o f f i c e , s u gge st s t h a t , in f a c t , much o f i t has been due t o t h e res u rge nc e of loc al c l e a r i n g ar ra ng ement s . I t i s also relevant to note t h a t the gains in f i n e s o r t volume su gge st t h a t t h e Fed p ro vi des a n e ce s s a ry and v i t a l coup l i n g li n k between c o l l e c t i n g and paying banks t h a t f a c i l i t a t e s t h e d e l i v e r y and s e t t l e m e n t of th os e payments. Whatever i t s o r i g i n s , t h e volume drops have put the Fed in a d i f f i c u l t p o s i t i o n with r e s p e c t to t h e t a s k o f g e n e r a t i n g s u f f i c i e n t revenues t o cover i t s c o s t s and the PSAF. Sharp re s o u rc e ad j u s t m en t s have been made as i n d i c a t e d by th e f a c t t h a t our System-wide work f o r c e in check o p e r a t i o n s i s expected to drop by more than 10 p e r c e n t in 1982. However, whi le t h e amount - 4 of r e al r e s o u rc e s devoted to our p ri c e d s e r v i c e s a c t i v i t i e s has remained about f l a t in th e l a s t y e a r or s o , volume d e c l i n e s and t h e r i s e in nominal c o s t s have produced a s h o r t - r u n d iv erg en ce between our c o s t s ( i n c l u d i n g t he PSAF) and our re ve nues. For example, in February t h a t gap reached 28 p e r c e n t , but p r e li m i n a r y e s t i m a t e s su gg e s t t h a t by May t h e gap had been narrowed t o a l i t t l e b i t l e s s than 18 p e r c e n t . The l a t t e r , o f c o u r s e , means t h a t as of May, we were cove r ing a lmost a l l c o s t s but n o t t h e 16 p e rc e n t PSAF. As we see i t , however, our s h o r t f a l l does not so much r e f l e c t t h e f a c t t h a t we a re w i l d l y out of l i n e in c o s t s or p r i c e s as much as i t does t h e d i f f i c u l t i e s of a d j u s t i n g our c o s t s t r u c t u r e in t h e s h o r t - r u n and t h e "mechanical" problems a s s o c i a t e d with a f i r s t c ut a t p r i c i n g . Against t h i s background, in February we began a b a s i c reas s es s m e n t o f our approach t o p r i c i n g . In t h a t p r o c e s s , c o n s i d e r a b l e weight was given t o developing pl a n s which would p erm it an o r d e r l y narrowing and e l i m i n a t i o n o f th e c o s t- r e v e n u e gap growing ou t o f t h e volume d e c l i n e s e x p e r i e n c e d . Thus, t h e program we have embarked upon a n t i c i p a t e s t h a t by t h e f o u r t h q u a r t e r o f 1982 th e Reserve Banks, as a g roup, w i l l be g e n e r a t i n g s u f f i c i e n t revenues t o cover a l l c o s t s and p a r t of t h e PSAF. Several i n d i v i d u a l banks t h a t have exper ienced more modest volume drops are ex pect ed t o cover a l l c o s t s and t h e f u l l amount o f th e PSAF in t h a t time frame. On t h e o t h e r hand, a couple of banks which have had s u b s t a n t i a l volume drops w i l l t a k e l o n g er t o make t h e ad jus tm ent s needed to match re venues with c o s t s . In any e v e n t , we exp e c t t h a t a l l Reserve Banks w ill have made t h e t r a n s i t i o n t o a c o s t p lu s PSAF/ revenue match by l a t e 1983. The c o s t- re v e n u e gap s i t u a t i o n we faced brought i n t o s h arp focus a s e r i e s o f both s t r a t e g i c and t a c t i c a l q u e s t i o n s con cerni ng o ur approach t o pricing. Indeed, given th e drops in volume and t h e r e s u l t i n g c o s t / r e v e n u e gaps, we had t h r e e b a s i c c h o i c e s . F i r s t , we could simply concl ude t h a t we should begin a pla nne d, wholesal e withdrawal from t h e payments b u s i n e s s ; second, we could d r i f t along in much t h e same mode we had adopted in our f i r s t y e a r o f p r i c i n g and more o r l e s s l e t t h e card s f a l l as t h ey m i g h t; o r t h i r d , we could ta k e a more r e s p o n s i v e and f l e x i b l e approach t o p r i c i n g . A f te r due c o n s i d e r a t i o n , we have chosen t h e t h i r d a l t e r n a t i v e . We did so f o r a number o f r e a s o n s . On t h e one hand, a planned withdrawal from the payments b u s in e s s does not seem compati bl e with t h e o b j e c t i v e o f working toward t h e e f f i c i e n c y of th e payments mechanism nor i s i t comp ati bl e with thos e o t h e r e s s e n t i a l p u b li c r e s p o n s i b i l i t i e s mentioned e a r l i e r . Moreover, most f i n a n c i a l i n s t i t u t i o n s — smal 1 and l a rg e i n s t i t u t i o n s a l i k e — seem t o agr ee t h a t th e Fed must play a r o l e in t h e payments p r o c e s s . T h i s , o f c o u r s e , does not mean t h a t we w ill not drop an i n d i v i d u a l s e r v i c e component where t he market t e l l s us we have no thi ng t o o f f e r o r where t h e r e i s no p u b l i c b e n e f i t a s s o c i a t e d with our a c t i v i t i e s . Nor does i t mean t h a t , in t i m e , we would n o t drop f u l l l i n e s o f s e r v i c e i f ev en t s so d i c t a t e . However, i t does say t o us t h a t we should make an honest e f f o r t t o m ai n t ai n a v i a b l e p res en ce where t h a t pr es ence i s demonstrably c ompat i b l e with t h e e f f i c i e n c y goal and comp ati bl e with our o v e r a l l p u b li c r e s p o n s i b i l i t i e s . - 5 - We have a l s o concluded t h a t a c o n t i n u a t i o n o f t h e p a s s i v e - - i f not m e c h an is ti c -- a p p ro a c h we had i n i t i a l l y adopted was n o t l i k e l y t o p ro vi de much of a t e s t of th e e x t e n t to which t h e F e d ' s o p e r a t i o n a l p res en ce in payments a c t i v i t i e s was working to in c r e a s e o v e r a l l e f f i c i e n c y . Thus, i f we a r e t o ge nuine ly he l p in s u re t h a t payment s e r v i c e s are d e l i v e r e d in t h e most e f f e c t i v e and chea pe st manner p o s s i b l e , we should emphasize a c o o rd i n a t e d program o f c o s t conta inme nt, product enhancement and product pro mot i on . This does not mean t h a t we w ill behave l i k e a p r i v a t e co rre s p o n d en t bank. We are a p u b l i c i n s t i t u t i o n and we w ill remain s o . S i m i l a r l y , t h i s approach does no t mean t h a t we covet any p a r t i c u l a r s h are o f t h e market . Our fundamental m i s s i o n , as we see i t , i s to c o n t r i b u t e t o t h e e f f i c i e n c y and s a f e t y o f t he payments mechanism and the program I w i l l o u t l i n e below has been developed with t h i s under lyin g o b j e c t i v e f u l l y in mind. IV. P r o s p e c ti v e Changes in Check S e rv i c e s and P r i c e s In mid-August, the Federal Reserve Banks w i l l be announcing new check p r i c e s and s e r v i c e s which w i l l t a k e e f f e c t on September 30, 1982. In the same general time frame we w i l l be implementing a number o f i mp o r t a n t changes in s e r v i c e l e v e l s , a modified approach t o p r i c e d e t e r m i n a t i o n , and completing the job of e l i m i n a t i n g o r p r i c i n g Federal Reserve f l o a t . To put the o v e r a ll program i n t o p e r s p e c t i v e , l e t me comment b r i e f l y on t h o s e major elements of the check r e p r i c i n g e f f o r t . A. P r ic e S e t t i n g Methodology The new check p r i c e s which wi ll be promulgated in mid-August r e f l e c t some d e p a r tu re from our e a r l i e r p r i c i n g methodology. As I mentioned e a r l i e r , our i n i t i a l p r i c e s e t t i n g e x e r c i s e was r i g i d , m e c h a n i s t i c , and s o l e l y d ri v e n by c o s t s . No e f f o r t was made t o p r i c e in a manner t h a t reco g n i zed t h a t t he value of some s e r v i c e s might be d i f f e r e n t than t h e i r " c o s t s " nor was any e f f o r t made to ta ke account of p r e v a i l i n g market p r a c t i c e s . E s s e n t i a l l y , t h e new p r i c i n g approach s t a r t s with t h e p r o p o s i t i o n t h a t , f o r the f u l l l i n e of check p ro ce s s i n g s e r v i c e s , c o s t s ( i n c l u d i n g t he PSAF) and revenue must match. However, w i t h i n t h e o v e r a l l check s e r v i c e l i n e , we wanted t o b u il d in more f l e x i b i l i t y t o vary p r i c e s in l i n e with market f o r c e s . T h e r e f o r e , th e approach we have adopted i s one which says t h a t f o r any in d iv id u a l product w i t h i n an o v e r a l l s e r v i c e l i n e t h e p r i c e s must a t l e a s t c over d i r e c t pro d u ct i o n c o s t s . Of co u rs e any s h o r t f a l l from t o t a l c o s t re covery fo r one pro du ct in t h e check s e r v i c e l i n e must be compensated f o r in the p r i c e s o f o t h e r check p ro d u c t s . In e f f e c t , t h e r e f o r e , we have b u i l t an element of f l e x i b i l i t y i n t o the p r i c i n g methodology which per mits overhead c o s t s to be spread among i n d i v i d u a l components o f an o v e r a l l s e r v i c e l i n e in accordance with judgments co ncern ing t h e r e l a t i v e demand f o r th e s e in d iv id u a l s e r v i c e components. Rigorous c o n t r o l and mo n it ori ng p r o c e dur es have been e s t a b l i s h e d to i n s u r e t h a t t h i s added degree o f f l e x i b i l i t y i s used c o n s e r v a t i v e l y and j u d i c i o u s l y . We b e l i e v e t h a t t h i s i s a more a p p r o p r i a t e approach to p r i c i n g and t h a t i t i s more in l i n e with t y p i c a l pricing p ra c tic es. - 6 - The adoption of t h i s approach t o p r i c i n g w i l l , o f c o u r s e , mean t h a t our p r i c e s , when pu bli sh ed in mid-August, w i l l look a b i t d i f f e r e n t than t he y do to d a y . I t a l s o means t h a t t h e r e could be more v a r i a b i l i t y in s p e c i f i c p r i c e s among Federal Reserve o f f i c e s . By and l a r g e , however, t h e e x t e n t to which t h i s added f l e x i b i l i t y has been used by t h e Reserve Banks w i l l be q u i t e l i m i t e d . The most important and widespread use of t h i s t ech ni que w i l l be r e f l e c t e d in p r i c e s f o r c e r t a i n t y p e s o f cash l e t t e r d e p o s i t s where we have made major improvements in a v a i l a b i l i t y and have t h e re b y v a s t l y enhanced t he value of the s e r v i c e . Thus, t h e modified approach t o p r i c e d e t e rm i n a t i o n i s not only one t h a t provi de s somewhat more f l e x i b i l i t y , but more i m p o r t a n t l y , i t w ill provide the o p p o r t u n i t y t o c r e a t e p r i c e i n c e n t i v e s t h a t w i l l work in the d i r e c t i o n of making the payments system work b e t t e r . B. Improvements in A v a i l a b i l i t y While the in d iv id u a l Federal Reserve Banks have a l r e a d y implemented or ar e planning to implement a number o f enhancements in check p ro ce ss i n g s e r v i c e s , the most important change w i l l come about due t o d ramat i c a c c e l e r a t i o n s in the c o l l e c t i o n of c e r t a i n c l a s s e s o f checks . The p r i n c i p a l c a t a l y s t f o r th e s e enhancemnents will be a r e c o n f i g u r a t i o n of t he I n t e r d i s t r i c t T r a n s p o r ta ti o n Network (ITS) used by t h e Fed in moving checks around t he c ou n tr y . The new ITS network--which w i l l be o p e ra t e d fo r about t h e same o v e r a ll c o s t as th e F e d ' s c u r r e n t o v e r a l l a i r t r a n s p o r t a t i o n network—w i ll be phased i n t o o p e ra ti o n be ginni ng August 1, 1982. The new t r a n s p o r t a t i o n network i s s t r u c t u r e d on a "spoke and hub" c o n ce pt . That i s , f i v e hubs around t h e co u n t ry w i l l s erve a s e r i e s o f s p o k es , the end po int of each being a Fed o f f i c e . C h ar t e r p l an es w i l l make m u l t i p l e f l i g h t s n i g h t l y between the r e s p e c t i v e hubs and t h e i r spoke e n d p o i n t s . Checks w ill be exchanged a t th e hubs fo r d e l i v e r y e i t h e r t o en d p o i n t s con necte d to the same hub a n d /o r f o r shipment t o o t h e r hubs with s u bsequent d i s p a t c h t o en dp oi nt s a t t h o s e more d i s t a n t hubs. By using t h e s e t r a n s p o r t a t i o n arr an g em en t s , and by moving t o l a t e r d e p o s i t d e a d l in e s fo r i n t e r - z o n e checks t h a t are d e p o s i t ed with and t r a n s p o r t ed by the Fed f o r n e x t-d a y o r same-day c r e d i t , we ex p ect t o e f f e c t major enhancements to the check c o l l e c t i o n p r o c e s s . For example, under c u r r e n t Fed t r a n s p o r t a t i o n arrange ments and with Fed c o l l e c t i o n s c h e d u l e s , most i n t e r d i s t r i c t RCPC items are two-day a v a i l a b i l i t y p o i n t s . Under t h e new a r r a n g e ments, we e xpect t h a t 50 t o 70 p e rc e n t o f t h e s e i n t e r - d i s t r i c t items w i l l be c o l l e c t e d and c r e d i t e d w ith in one d a y - - t h e r e b y a c c e l e r a t i n g by 24 hours t he c o l l e c t i o n of ite ms valued a t between $1. 6 and $2. 6 b i l l i o n p er day. At c u r r e n t i n t e r e s t r a t e s , th e valu e o f t h e i r a c c e l e r a t i o n in c o l l e c t i o n can be as much as $1 m i l l i o n pe r day o r a s t a g g e r i n g $360 m i l l i o n p er y e a r . This change --while c l e a r l y in t h e i n t e r e s t o f improving t h e speed and e f f i c i e n c y of the o v e r a l l check c o l l e c t i o n p r o c e s s - - i s n o t one wi tho ut i t s own problems and t r a n s i t i o n a l d i f f i c u l t i e s . At t h e Federal Reserve Banks, f o r example, p ro c e ss in g windows f o r l a t e d e l i v e r y work w i l l be s h o r t e n e d . - 7 - S i m i l a r l y , with the r e l a t e d s h i f t t o 12:00 noon presentment f o r c i t y ch ec k s, the pr oce ssing windows f o r a t l e a s t some banking o r g a n i z a t i o n s w i l l a l s o be s h o r te n e d . Over t i m e , a more g e n e r a l i z e d s h i f t t o a l a t e r present ment may a l s o c r e a t e some t r a n s i t i o n a l problems f o r o t h e r c l a s s e s o f payor banks and to c e r t a i n of t h e i r c o r p o r a t e cu s t o m ers . On t h e o t h e r hand, many d e p o s i t i n g banks w ill have c o n s i d e r a b l y more time t o g e t i n t e r z o n e checks i n t o t h e Fed network f or same day or ne xt day pres entment and c r e d i t . For example, under c u r r e n t ar ra n gme nts, checks d e p o s i t e d a t t he New York Fed drawn on a Chicago c i t y bank must be a t the New York Fed by 12:30 a.m. fo r same-day a v a i l a b i l i t y . With the r e s t r u c t u r e d t r a n s p o r t a t i o n arrangement s such checks can be d e p o s i t e d a t the New York Fed as l a t e as 3:00 a.m. Let me d i g r e s s here f o r a b i t and speak d i r e c t l y t o t h e 12:00 noon presentment is su e which I know has been a source o f co n t e n t i o n t o some i n s t i t u t i o n s . While we have t a l k e d i n fo r m a l l y about moving t o l a t e r p resent ment f o r q u i t e sometime, and have provided re as o n a b l e advance n o t i c e o f our i n t e n t to s h i f t to 12:00 noon presentmen t f o r c i t y i t e m s , we did not n e c e s s a r i l y do e i t h e r of th e s e t h i n g s wit hin a c o n t e x t t h a t made r e a d i l y ap p ar en t t h e r a t i o n a le f o r changing presentme nt ho u rs . In some ways, t h e most e s s e n t i a l i n g r e d i e n t in t h a t missing c o n te x t i s , o f c o u r s e , t he o v e r a l l a c c e l e r a t i o n in check c o l l e c t i o n we exp e ct to ac hieve by a combination of i n i t i a t i v e s - i n c l u d i n g , but not l im i te d t o , 12:00 noon p re s en t m en t . Al so, i t was n o t n e c e s s a r i l y ap par ent to a l l t h a t the s h i f t t o l a t e r p res ent men t would be accompanied by s u b s t a n t i a l l y l a t e r d e p o s i t hours f o r c e r t a i n c l a s s e s o f cash l e t t e r s . In any e v e n t , a number of banks and some o f t h e i r c o rp o ra t e customers have i n d i c a t e d t h a t the y may have some t r a n s i t i o n a l problems a s s o c i a t e d with 12:00 noon pre se n tmen t. While we a re s e n s i t i v e t o t h o s e problems, we a l s o b e li e v e t h a t the y a re manageable, because most checks w i l l s t i l l be p res en t e d to c i t y banks much in acc orda nc e with e x i s t i n g s c h e d u l e s . Indeed, the noon pre sen tment hour should be viewed as t h e l a t e s t hour a t which time presentment w i l l t ake p l a c e . In p r a c t i c e , t h e p resen tment of most checks by v i r t u a l l y a l l Federal Reserve o f f i c e s w i l l t a k e p l ace in advance of the noon d e a d l i n e . However, in o r d e r t o en su re t h a t t h e s e changes in check c o l l e c t i o n procedure s a re d i g e s t e d by banks and t h e i r customers with a minimal amount of d i f f i c u l t y , we have modified t h e s chedule f o r implementa t i o n of l a t e r presentment to p ro vi de a f u r t h e r six-week p e ri o d over which th e changes w ill be phased i n . The f i r s t phase o f implementation w i l l s t a r t on August 2, when t h e Reserve Banks w ill begin p r e s e n t i n g checks t o r e s e r v e c i t y banks no l a t e r than 11:00 a . m . , u n l e s s the Reserve Bank i s c u r r e n t l y p r e s e n t i n g checks a f t e r t h a t ti m e . P r e s e n t l y , Federal Reserve o f f i c e s in a t l e a s t fo u r D i s t r i c t s p r e s e n t checks as l a t e as 12:00 noon t o some c i t y b an ks , and o f f i c e s in e i g h t D i s t r i c t s p re s e n t checks to some banks o u t s i d e o f t h e re s e rv e c i t y a t 12:00 noon or l a t e r . The second s t e p in the p h a s e -i n w i l l occur on August 16 when t h e Reserve Banks w ill s h i f t to l a t e r d e p o s i t d e a d l i n e s f o r i n t e r - z o n e RCPC checks . Of c o u r s e , t h e s e l a t e r d e p o s i t t imes w i l l t r a n s l a t e i n t o more ra p i d c o l l e c t i o n of t h e s e ite ms. - 8 - The f i n a l s t e p of t h e i mplementation w i l l o ccur on September 16 when d e p o s i t d e a d l i n e s fo r i n t e r - z o n e c i t y checks w i l l be moved forward. At t h i s ti m e , 12:00 noon presentmen t w i l l be implemented, but even then we f u l l y expect t h a t th e presentment o f most c i t y items by Fed o f f i c e s w i l l occur p r i o r t o the noon d e a d l i n e . This m o d i f i c a t i o n in t h e program should h el p minimize t r a n s i t i o n a l problems a s s o c i a t e d with t h i s change in check c o l l e c t i o n p r o c e d u re s . Even t h e n , some problems may remain, but I b e l i e v e t h e s e problems must be co n s i d e r e d and r e s o lve d in the c o n te x t o f t h e o v e r a l l b e n e f i t s o f t h e program in i t s e n t i r e t y — in c lu d in g th e f a c t t h a t a c c e l e r a t i n g t h e c o l l e c t i o n of checks should encourage f u r t h e r s h i f t s to e l e c t r o n i c payments. In t h i s l a r g e r c o n t e x t , we ar e obviou sly convinced t h a t t h e program i s a p p r o p r i a t e and c o n s i s t e n t with our c o n tin u in g o b j e c t i v e o f improving t he payments p r o c e s s . C. F lo a t Reduction and El im in at i o n Program Fin a nc ia l i n s t i t u t i o n s around t h e co u n try a re q u i t e f a m i l i a r with the f a c t t h a t the Fed has made d ram ati c p ro g res s in redu cin g fl o a t - - s o m e I s us pect are a l l too f a m i l i a r with our p r o g r e s s . The record speaks f o r i t s e l f . In th e f i r s t q u a r t e r of 1980, Fed f l o a t averaged $4. 9 b i l l i o n whereas in t he second q u a r t e r of 1982 f l o a t averaged $ 1 . 8 b i l l i o n . This r e d u c t i o n in f l o a t in c r e a s e d our payments to the Treas ury by about $350 m i l l i o n . However, t o the e x t e n t we have reduced f l o a t , someone e l s e - - b e i t a bank, a c o r p o r a t i o n , a s t a t e or lo c a l government, e t c . —has in one way o r a n o t h e r , picked up t he t a b . That i s one of the i r o n i e s o f f l o a t , whether i t i s Fed f l o a t o r one of th e many o t h e r forms of f l o a t t h a t , in t h e a g g r e g a t e , a re symptomatic of i n e f f i c i e n c i e s in the payment mechanism. Indeed, the g r e a t e s t i ro n y o f a l l i s t h a t t h e f l o a t game i s played with th e e x p e c t a t i o n t h a t t h e r e w i l l be n et winners when, in f a c t , floatis, by d e f i n i t i o n , a zero sum game. As a p r a c t i c a l m a t t e r , however, t h e r e a r e winners--some by a c c i d e n t of l o c a t i o n , some by c l e v e r d e s i g n , some by t he s he er weight of t h e i r r e l a t i v e economic power and even some by o u t r i g h t abuse. However, i t i s very ha rd — i f n o t v i r t u a l l y i m p o s s i b l e —t o i d e n t i f y the s p e c i f i c winners and th e s p e c i f i c n e t l o s e r s in f l o a t . That r e a l i t y has had, and w ill co ntinue to ha ve, an i m p ort an t impact on t h e F ed 's approach t o p r i c i n g or e l i m i n a t i n g f l o a t . Some would su ggest t h a t t h e s i m p l e s t way t o proceed would be f o r the Fed to immediately and d i r e c t l y p r i c e Fed f l o a t . A move in t h a t d i r e c t i o n could be achieved e i t h e r by charg i n g payor banks d i r e c t l y f o r " a c t u a l " f l o a t or by f o l d i n g the va lue o f Fed f l o a t i n t o our o v e r a l l check p r i c e s . The former approach e n t a i l s a morass o f t e c h n i c a l , a d m i n i s t r a t i v e , a c c o u n t i n g , and legal i s s u e s . The l a t t e r approach j u s t does n o t make good sens e t o us because i t would not c r e a t e any i n c e n t i v e t o g et r i d o f f l o a t . Indeed, t o the e x t e n t t h a t r e l a t i v e economic p o wer--t o say n o t h i n g o f abu sive p r a c t i c e s - - h a s anything t o do with who b e n e f i t s from f l o a t , t h i s approach could produce p erve rse r e s u l t s . To s t a t e t h e case more d i r e c t l y , we want t o go about th e t a s k of e l i m i n a t i n g o r p r i c i n g f l o a t in a way t h a t p l a c es the i n c e n t i v e s and t h e d i s i n c e n t i v e s where t h ey b el o n g . The c o s t s o f f l o a t or - 9 - f l o a t r e du c tio n should be bo rn e, t o t h e f u l l e s t e x t e n t p o s s i b l e , by t h o s e who " b e n e f i t " from f l o a t and p a r t i c u l a r l y by t h o s e who are engaged in d e l i b e r a t e e f f o r t s to c r e a t e f l o a t . I t i s p r i m a r i l y f o r t h i s reason t h a t t he Fed, in i t s f l o a t red u c t i o n e f f o r t s to d a t e , has pla ce d so much emphasis on f l o a t re d u c t i o n r a t h e r than pr em atur ely a t te m p ti n g to e x p l i c i t l y p r i c e f l o a t . Over t h e n ex t s i x t o nine months, we will c o ntinue to emphasize o p e r a t i o n a l improvements in our e f f o r t s to e l i m i n a t e f l o a t . However, begi nni ng in e a r l y 1983 t h e t h r u s t o f t he program w ill begin to move in some new d i r e c t i o n s in t h a t we w i l l begin t o a l t e r c r e d i t i n g proc edure s f o r i n t e r t e r r i t o r y cash l e t t e r s a n d / o r t o e x p l i c i t ly p r i c e holdover and i n t r a t e r r i t o r y t r a n s p o r t a t i o n f l o a t . S p e c i f i c a l l y , we have developed a comprehensive program which, by roughly the end of the f i r s t q u a r t e r o f 1983, should reduce t h e l ev el o f Fed f l o a t to a low f r i c t i o n a l l e v e l . (See Table I below. ) TABLE I SUMMARY OF PROPOSED SYSTEM FLOAT REDUCTION PLAN FOR 1982/1983 Approximate Target Date Proposed Action September 1982 Charge payor i n s t i t u t i o n s f o r cas h l e t t e r p res en tm en ts on mid-week c l o s i n g s . September 1982 Wire advice f o r r e t u r n items equal t o o r g r e a t e r than $50,000. September 1982 Wire advi ce o f ad j u s t m en t s equal t o o r g r e a t e r than $50,000 ( s h o r t - t e r m m easu re). Automate ad ju s t m en t pr oc ess (l o n g -t e rm m easu re). J anuary 1983 Change c r e d i t i n g p ro ced u res fo r i n t e r t e r r i t o r y cash l e t t e r deposits. Early 1983 Elimina te o r p r i c e hold ov er f l o a t . Ear ly 1983 Elimina te or p ric e i n t r a t e r r i t o r y t r a n s p o r t a t i o n Ear ly 1983 Elimina te o r p r i c e noncheck f l o a t . float. At p r e s e n t , t h e l a r g e s t remaining component o f Fed f l o a t r e s u l t s from th e shipment of i n t e r d i s t r i c t checks between Federal Reserve o f f i c e s . Such f l o a t now amounts t o about $1 b i l l i o n on a d a i l y average b a s i s . The c u r r e n t p r a c t i c e i s to give c r e d i t a v a i l a b i l i t y f o r each c a t e g o r y o f check d e p o s i t according t o a f ix e d (whole day) s c h e d u l e . As a r e s u l t , an y t h in g t h a t goes amiss in the usual t r a n s p o r t a t i o n c y c l e w i l l slow t h e c o l l e c t i o n o f - 10 - a po r t i o n of th e checks and f l o a t r e s u l t s . T h e r e f o r e , t h e key t o t h e s ucc e s s of our f l o a t program r e s t s with our s u cces s in d e a l i n g with t h i s element o f f l o a t . To some e x t e n t , we a n t i c i p a t e t h a t t h e major improvement o f t h e ITS t r a n s p o r t a t i o n network d i s c u s s e d e a r l i e r should g et t h i n g s moving in t he right direction. However, th e major changes which should do t h e j o b w i ll come in January 1983 when th e Reserve Banks modify t h e way in which they c r e d i t d e p o s i t o r s f o r i n t e r t e r r i t o r y cash l e t t e r d e p o s i t s . The Reserve Banks w il l be p e rm itt e d to o f f e r any o r a l l of t h e fo l l o wi n g methods: (1) Fixed a v a i l a b i l i t y i n i t i a l l y with c o r r e c t f o r f l o a t a f t e r i t o c cu r s ; (2) Actual a v a i l a b i l i t y where c r e d i t checks are re c ei v e d on a t i m e l y Federal Reserve o f f i c e ; (3) F r a c t i o n a l a v a i l a b i l i t y , in which fi x e d but f r a c t i o n a l day a v a i l a b i l i t y i s given so t h a t f l o a t i s zero on a v e ra g e; and (4) Payment Banks. for float "as o f" ad j u s t m en t s to i s passed only when t he b a s i s by t h e payor banks' by h o l di ng a c l e a r i n g b al an ce a t Reserve We a r e providi ng t h e s e fo u r o p t i o n s in t h e i n t e r e s t o f t r y i n g t o s a t i s f y th e d i f f e r i n g needs o f t h e v a ri o u s t y p e s and s i z e s o f banking o r g a n i z a t i o n s t h a t r e c e iv e checks from t h e Fed. However, as a p r a c t i c a l m a t t e r , we b e l i e v e even ts w il l g r a v i t a t e in t h e d i r e c t i o n o f a c t u a l a v a i l a b i i t y and the use of c l e a r i n g b a l a n c e s . In o r d e r to e xe c u te t h i s program, t h e Federal Reserve Banks a re now developin g a Systemwide, automated "cash l e t t e r m on i t ori n g s y s t em . " That system w il l permit us to t r a c k and p i n p o i n t almost i n s t a n t a n e o u s l y t h e l o c a t i o n of any cash l e t t e r in the Fed c o l l e c t i o n network. We b e l i e v e t h a t t h i s system w ill provide major b e n e f i t s t o u s , t o banking o r g a n i z a t i o n s , and t o the payments network g e n e r a l l y . I t may even h el p us in t h e ex ec u t i o n o f monetary p o li c y as i t should permit us t o p rov id e t h e Open Market Tradi ng Desk in New York with more a c c u r a t e and ti m e l y e s t i m a t e s o f t h e amount o f f l o a t t h a t open market o p e r a t i o n s must o f f s e t o r accommodate in managing t h e r e s e r v e p o s i t i o n of th e banking system as a whole. More t o t h e p o i n t in t h e c u r r e n t c o n t e x t , however, th e cash l e t t e r moni t o r i n g system w i l l p ermi t us t o t ak e t h e next and l a s t major s t e p in th e f l o a t r e d u c t i o n / p r i c i n g program in a manner t h a t i s c o n s i s t e n t with the o b j e c t i v e s I o u t l i n e d e a r l i e r . Assuming th e s e programs, in t h e a g g r e g a t e , succeed in g e t t i n g f l o a t down to some low le ve l around mid-1983, we w i l l have a n o t h e r b r i d g e t o c r o s s . Namely, what t o do about th e remaining o r f r i c t i o n a l l e v e l s o f f l o a t ? We have not y e t made t h a t d e c i s i o n , in p a r t because we a re j u s t now b eginning t o focus on the q u e st i o n of whether t h e r e i s some low l ev el o f Fed f l o a t which might p r o p e rl y be viewed as a n e ce s s a ry l u b r i c a n t f o r t h e payments mechanism. That, of c o u r s e , i s a ve ry complex and undoubtedly c o n t r o v e r s i a l q u e s t i o n , and i t i s a ls o one t h a t in t h e f i n a l a n a l y s i s might r e q u i r e a change in t h e s t a t u t e . For now, however, we must wai t t o e v a l u a t e how t h e s e o t h e r i n i t i a t i v e s work. We w il l then be in a b e t t e r p o s i t i o n t o determi ne t h e amount of r e s i d u a l f l o a t we are l e f t with and what s hould b e s t be done with t h a t r e s i d u a l . - D. 11 - Other Near Term P r ic i n g I n i t i a t i v e s While most of what I have s ai d i s r e l a t e d t o t h e check p ro ce s s i n g a c t i v i t i e s of the Federal Reserve Banks, t h e r e are a number o f o t h e r n ear and i n te r m e d ia te term pla ns in o t h e r a re a s o f which f i n a n c i a l i n s t i t u t i o n s should be aware. Let me, t h e r e f o r e , comment b r i e f l y on t h e s e pending devel opment s. 1. ACH P r i c e s : On o r about August 16, t h e Reserv announcing th e new schedule o f ACH p r i c e s . These p r i c e s w i ll r e p r e s e n t the f i r s t s t e p in our s t a t e d o b j e c t i v e o f reco v er i n g f u l l c o s t s of ACH o p e r a t i o n s in 1985. At t h i s t i m e , we f u l l y e xpect t h a t t h e r e w i l l be no f u r t h e r ACH p r i c e i n c r e a s e s u n t i l August o f 1983. I t i s contemplated t h a t t h e new ACH p r i c e schedules w ill a ls o d i f f e r from t he c u r r e n t p r i c e s ch ed u l e s in t h a t the y w ill i n c o r p o r a t e a d i f f e r e n t i a l p r i c e f o r o r i g i n a t o r s of d e b i t s and the r e c e i v e r s o f c r e d i t s and w i l l a l s o i n c o r p o r a t e a n i g h t c y c l e "premium" p r i c e . I should a l s o t e l l you t h a t we have commissioned a number of l o n g e r term s t u d i e s o f what can be do ne --i n c o o pe ra t i o n with t he p r i v a t e s e c t o r t o promote t h e use of the ACH. 2. S e c u r i t i e s and Noncash C o l l e c t i o n R e p r i c i n g : At the p re s e n t time we contempla t e t h a t new p r i c e s ched ul es f o r our s e c u r i t i e s pro ce ssi ng and saf ek eep i n g s e r v i c e s , along with coupon c o l l e c t i o n s e r v i c e s , w il l be announced on o r about November 15 t o take e f f e c t as o f t h e f i r s t o f t h e y e a r , 1983. At t h i s t i m e , we a re s t i l l an a l y z i n g our ex p er i en ce with s e c u r i t i e s p r i c i n g and what m o d i f i c a t i o n s in p r i c e s and t h e s t r u c t u r e o f p r i c e s would seem most a p p r o p r i a t e . 3. Cash T r a n s p o r t a t i o n S e r v i c e s : We have not y e t begun t o focus in d e t a i l on the casTi s e r v i c e area as i t was no t i n i t i a l l y pri ce d u n t i l e a r l i e r t h i s y e a r . However, I t e n t a t i v e l y ex p ec t t h a t we would announce new p r i c e s and any s e r v i c e l eve l m o d i f i c a t i o n s e a r l y in 1983. 4. C l e aring B a l a n c e s : With t he phase-down in member bank re s e r v e re quirements c a l l e d f o r in t he MCA, and given c e r t a i n element s of our f l o a t r e d u c t i o n p l a n , an i n c r e a s i n g l y l a r g e number of i n s t i t u t i o n s may want o r need t o e s t a b l i s h c l e a r i n g balance r e l a t i o n s h i p s with t h e i r r e s p e c t i v e Federal Reserve Banks. T h e re fo r e , in mid-August, we w i l l be announcing a s e r i e s of changes in our r u l e s governing e l i g i b i l i t y and a d m i n i s t r a t i o n o f c l e a r i n g b a l a n c e s . These changes a re aimed a t p ro v i d i n g a g r e a t e r degree of f l e x i b i l i t y t o d e p o s i t o r y i n s t i t u t i o n s and t o the Reserve Banks in t h e e s t a b l i s h m e n t and use of c l e a r i n g ba la n c e s. 5. E l e c t r o n i c Check C o l l e c t i o n : For a number o f months t h e Fed has been involve d in d esi gn work fo r a p a r t i c u l a r form of e l e c t r o n i c check c o l l e c t i o n (E . C . C . ) . While t h a t a n a l y s i s has - 12 - provided many v a l u a b l e i n s i g h t s i n t o t h e problems and oppor t u n i t i e s a s s o c i a t e d with s h i f t i n g paper payments t o an e l e c t r o n i c form, the E.C.C. program t h a t has been d i s c u s s e d with t h e banking i n d u s t r y w i l l no t be pursued f u r t h e r by t he Fed a t t h i s ti m e . N e v e r t h e l e s s , some o f t he problems t o which E.C.C. had been d i r e c t e d ( l a r g e checks) and some o f i t s o b j e c t i v e s (e nc oura ging the s h i f t t o e l e c t r o n i c payments) remain ever y b i t a s v a l i d today as t hey were a y e a r ago or f i v e y e a r s ago. Thus, we w ill co nt i n u e our e f f o r t s t o devel op programs and i n i t i a t i v e s which can e f f e c t i v e l y s erve t h o s e o b j e c t i v e s . 6. V. FRCS-80: As many o f you know, l a s t month t h e Fed began l i v e pr oc e ss ing on FRCS-80, t he F e d ' s new nationwide telecommunica t i o n s network. At p r e s e n t , t h e Reserve Banks a re in t h e mids t o f developing st a n d a rd s oftware packages t o r e p l a c e t h e e x i s t ing funds and s e c u r i t i e s t r a n s f e r s , bulk d a t a , a d m i n i s t r a t i v e messages and r e l a t e d systems t h a t w i l l use FRCS-80. Of c o u r s e , the network i s h i g h l y powerful and f l e x i b l e and should be a b l e to meet our e x i s t i n g a p p l i c a t i o n s fo r a t l e a s t t h e b al anc e of t h i s dec ade . Over a l o n g e r time frame we b e l i e v e FRCS-80 w i l l be a tool which can h el p meet t h e ev o l v i n g needs o f our n a ti o n a l payments mechanism. Longer-Term Plans I cannot t e l l you with any p r e c i s i o n what may devel op in t h e lo n ge r term with r e s p e c t to the n a t u r e and e x t e n t of t he F ed 's r o l e and p resenc e in the payments a r e a . I can r e p e a t t h a t we are very much i n c l i n e d t o t he view t h a t weshould seek to ma inta in a v i a b l e , o p e r a t i o n a l p resence in t h e payments bu s i nes s p r i m a r i l y because we b e l i e v e t h a t p res en ce i s c o n s i s t e n t with t h e goal of improving the e f f i c i e n c y and e f f e c t i v e n e s s o f t he payments mechanism. S i m i l a r l y , I can t e l l you t h a t t h e r e are a number o f r e l a t e d o b j e c t i v e s t o which we remain s t r o n g l y committed. These would i n cl u d e enco urag ing a con tin u e d s h i f t toward f a s t e r , c h e a p e r , and more c e r t a i n forms o f payment and, to th e maximum e x t e n t p o s s i b l e , encourag ing an e v o l u t i o n in payment p r a c t i c e s in which i n s t i t u t i o n s , small and l a r g e , and i n d i v i d u a l s w i l l be d i r e c t bene f i c i a r i e s of th os e c o n s t r u c t i v e changes we h el p t o f o s t e r . Achieving t h o s e o b j e c t i v e s may not r e q u i r e t h a t t h e Fed perform a l l o f t h e o p e r a t i o n a l f u n c t i o n s i t performs to d a y . On t h e o t h e r hand, i t may r e q u i r e t h a t we t a k e on some t h i n g s t h a t we do not do t o day . I f need b e, we a re prepared t o move in t h a t d i r e c t i o n as w e l l . The important p oi nt as I see i t , however, i s not so much t he p r e c i s e r o l e t h a t the Fed plays in t h i s p ro ces s o f change nor i s i t t h e p r e c i s e r o l e t h a t any one i n s t i t u t i o n , or group o f i n s t i t u t i o n s , p lays in t h a t p ro c e s s . To th e c o n t r a r y , th e ge nuinely imp ort an t p o i n t i s t o r e c o g n i z e - - a s I b e l i e v e we a l l do—t h a t we in the Fed and you in t he f i n a n c i a l i n d u s t r y have a common i n t e r e s t in see ing t h a t th e s e o b j e c t i v e s are well s erv ed . - 13 - Having s a i d t h a t , l e t me say something you a l r e a d y know. There s imply i s no way t h a t each t h i n g we do can p l e a s e 15,000 b anks, 4,000 S&LS, 400 s avings ba nks, and 20,000 c r e d i t u n i o n s . I f we speed up check c o l l e c t i o n and reduce f l o a t , i n e v i t a b l y , somebody i s " h u rt " and unhappy. But many o t h e r s ar e b e t t e r o f f . I f we adopt l a t e r p resent ment h o u rs , someone's ox i s perceive d as being g ored, but here t o o , many o t h e r s a re b e t t e r o f f . Those r e a l i t i e s should not d e t e r us nor you from seeki ng out t h o s e l a r g e r a r e a s where we have common i n t e r e s t s and from working t o g e t h e r t o achi eve t h o s e l a r g e r o b j e c t i v e s of which I spoke e a r l i e r . In c l o s i n g , l e t me say a few words on a r e l a t e d s u b j e c t . In v i r t u a l l y every form in which th e s u b j e c t o f Fed p r i c i n g i s d i s cu s s ed among f i n a n c i a l i n s t i t u t i o n s , the p o i n t i s made t h a t t h e Fed m i g h t , c o u l d , o r perhaps even h a s, used i t s r e g u l a t o r y a u t h o r i t y t o i t s c o m p e t i t i v e ad v ant a g e. We ar e ex tre me ly s e n s i t i v e to t h i s p o i n t o f view. I f i r m l y b e l i e v e our s af eg u a rd s a g a i n s t abuse o f our r e g u l a t o r y a u t h o r i t y a re more than a de qu a t e . Foremost o f t h o s e s af eg u a rd s i s our own extremely high leve l of s e n s i t i v i t y t o t h e i s s u e . In a d d i t i o n , t h e f a c t t h a t we o pe r a te under such c l o s e p u b l i c s c r u t i n y i s , in and o f i t s e l f , a powerful s a f e g u a r d . Beyond t h a t , we have a l s o taken s t e p s w i t h i n t h e Reserve Banks t o c r e a t e our own v e rs ion o f the "Chinese Wall" by s e g r e g a t i n g , t o t h e maximum e x t e n t p o s s i b l e , pric ed s e r v i c e a c t i v i t i e s from o t h e r a c t i v i t i e s wi t h i n t he Banks. F i n a l l y , i f d e s p i t e a l l o f t h i s , we appear t o c r o s s t h e l i n e , t h e r e ar e obviously numerous avenues of r e d r e s s a v a i l a b l e t o t h o s e who may p e rc ei v e t h a t the "Wall" has been bre ac he d . In my judgment, th e b e s t way t o i n s u re t h a t t h e problem does not a r i s e i s to seek out o p p o r t u n i t i e s fo r open and frank d i s c u s s i o n of our conce r ns , our p l a n s , our p r i o r i t i e s , and our i n t e n t i o n s . C o n s i s t e n t with t h a t , I b e l i e v e the time may be a t hand when some degree o f more formal and r e g u l a r communication between t h e Fed and t h e f i n a n c i a l i n d u s t r y — a t th e level o f the policyma kers—may be a p p r o p r i a t e , and I would welcome your views as to how t h a t might be accomp li s hed . E a r l i e r , I mentioned two a r e a s - - t h e f u t u r e of th e ACH and moving on with a v i a b l e form o f E. C.C. --which I b e l i e v e a r e r ip e c a n d i d a te s f o r such d i a l o g u e . In t h e meanwhile, I hope t h a t we in the Fed hav e, through t h i s v e h i c l e , begun t o more a d eq u a t e l y pro vid e i n s i g h t s i n t o our c u r r e n t p l a n s . Thank you.
@FedFRASER