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F ederal

reserve bank of

DALLAS. TEXAS

Dallas

75222

Circular No. 83-127
October 26, 1983

PRIVATE SECTOR ADJUSTMENT FACTOR
PROPOSED REVISIONS IN CALCULATION METHODOLOGY
TO ALL DEPOSITORY INSTITUTIONS IN THE
ELEVENTH FEDERAL RESERVE DISTRICT:
The Board of Governors of the Federal Reserve System has requested
comment on proposed revisions to its procedure for calculation of the private
sector adjustment factor (PSAF). As provided in the Monetary Control Act of
1980, the PSAF is that component of the prices charged for Federal Reserve
services which represents the taxes and cost of capital that would have been
paid had the services been furnished by a private business firm.
A copy of the Board’s press release and notice as published in the
Federal Register are attached. Any views or comments concerning the proposals
should be submitted in writing to the Secretary, Board of Governors of the
Federal Reserve System, Washington, D.C., 20551. All materials submitted
should refer to Docket No. R-0485, and should be received by November 30,
1983.
Questions regarding the contents of this circular should be directed
to Lyne H. Carter, (214) 651-6175 or Michael N. Turner, (214) 651-6460 at the
Head Office.
Additional copies of this circular will be furnished upon request to
the Public Affairs Department, Extension 6289.
Sincerely yours,

William H. Wallace
First Vice President

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
Banks and others are encouraged to use the following incoming W ATS 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.

m

.r
*

•

FEDERAL RESERVE press release
For immediate release

October

13, 1983

The Federal Reserve Board today requested comment on proposed revisions
to its procedure for calculation of the private sector adjustment factor
As provided in the Monetary Control Act of 1980,

(PSAF).

the PSAF is an allowance for the

taxes that would have been paid and a return on capital had the Federal R e s e r v e ’s
priced services been furnished by a private sector firm.
The Board requested comment by November 30,
The proposed revisions to the procedure used

1983.
in calculating the PSAF for

1984 include:
o

Use of data directly linking single-purpose assets to Federal
services.

Reserve

o

Expansion of the sample used to calculate the PSAF from 12 to the 25
largest bank holding companies.

o

Calculation of the Federal R e s e r v e ’s asset base to reflect the value
of assets expected to be acquired and disposed of in 1984.

o

Removal of the financing costs of net adjustment float from the
asset base.

o

Recovery of the estimated sales taxes that would have been paid on
the purchases of certain goods and services if the Reserve Banks
were subject to such taxes.

o

Recovery of expenses incurred by Board staff working directly on the
development of priced services and inclusion
of the portion of theBoard
assets employed in this specific activity in
the PSAF asset base.
In addition to these revisions,

the Board is requesting comment on an

alternative method of determining the income tax rate used in calculating the PSAF
The Board's notice is attached.

-0Attachment

FEDERAL RESERVE SYSTEM

[Docket No. R-0485]
Private Sector Adjustment Factor

AGENCY:

Board of Governors of the Federal Reserve System.

ACTION:

Request for comments.

SUMMARY:
The Board of Governors is requesting public comment
on the methodology for calculating the Private Sector
Adjustment Factor ("PSAF") for 1984.
DATE:

Comments must be received b y November 30, 1983.

ADDRESS:
Comments, which should refer to Docket No. R-0485,
may be mailed to Mr. William W. Wiles, Secretary, Board of
Governors of the Federal Reserve System, 20th Street and
Constitution Avenue, N . W . , Washington, D.C. 20551, or delivered
to Room B-2223 between 8:45 a.m. and 5:15 p.m.
Comments
received may be inspected at Room B-1122 between 8:45 a.m. and
5:15 p.m., except as provided in § 261.6(a) of the Board's
Rules Regarding the Availability of Information,
12 CFR
§ 261.6(a).
FOR FURTHER INFORMATION CONTACT:
Earl Hamilton, Assistant
Director (202/452-3874), Division of Federal Reserve Bank
Operations; Gilbert T. Schwartz, Associate General Counsel
(202/452-362 5) or Robert G. Ballen (202/452-3265), Attorney,
Legal Division, Board of Governors of the Federal Reserve
System, Washington, D.C. 20551.
SUPPLEMENTARY INFORMATION:
The Monetary Control Act of 1980
(Pub. L. 96-221) provides that over the long run, fees for the
Federal Reserve's priced services are to be based upon costs,
including the "taxes that would have been paid and the return
on capital that would have been provided had the services been
furnished by a private business firm."
Accordingly, the PSAF
should be thought of as a financial or accounting yardstick
that facilitates the imputation of capital costs and taxes to
the Federal Reserve.
Over time, however, the pricing process
more generally should seek to ensure that economic resources
are allocated and payments services are provided in the most
efficient ways possible.
The Board has examined the issues relating to the
current methodology that has been used in calculating the PSAF
and requests comment on the following:

-2-

a.
Choice of M o d e l . Since Federal Reserve Banks are
unique organizations, it is not possible to find totally
comparable private sector firms to use as a model for imputing
the cost of capital and taxes.
In view of the unique nature of
the Federal Reserve, the PSAF could be calculated by abandoning
reference to the actual experience of any private sector firm,
and judgments could be made regarding the Federal Reserve's
cost of capital and taxes had it been a private firm.
However,
in view of the fact that there would be no basis upon which to
determine the appropriateness of any judgments made among the
infinite number of costs of capital and tax possibilities, the
Board proposes that those entities most closely comparable to
the Federal Reserve with regard to its priced services continue
to be used as a model for purposes of calculating the PSAF.
In reaching this decision four alternative types of
entities were analyzed:
public utilities, government-sponsored
organizations
such
as
the
Federal
National
Mortgage
Association, nonbank data processing companies,
and bank
holding companies.
Bank holding companies are currently used
as the model for the PSAF.
The Board rejected public utilities as a model because
services provided by these entities generally do not resemble
those of the Federal Reserve.
Moreover, their capital costs
and structure are such as to result in a PSAF that probably
would be lower than that derived from a bank holding company
model.
Government-sponsored entities also were determined not
to be appropriate as a model because their services generally
are not comparable to those of the Federal Reserve.
The
services
provided
by
government-sponsored
entities
predominantly relate to extensions of credit, rather than to
payments-related services of the Federal Reserve.
In addition,
the cost of capital of government-sponsored entities, in part
because of their government sponsorship, would result in a
lower cost of capital for the PSAF calculation than using the
bank holding company model.
While use of nonbank data processing companies as a
model was considered and pre viously rejected,
a more
comprehensive review of the data processing company model was
undertaken in view of the suggestion that such companies
provide the appropriate model for the PSAF.
The Board
continues to believe that data processing companies do not
provide the appropriate model given the dissimilarity between
their services and those of the Federal Reserve.
Although both
the Federal Reserve and data processing companies use
computers, a detailed analysis of the services of six data

-3processing companies that others have suggested be used as a
model for the PSAF indicated that their service offerings are
significantly different from the priced services activities of
the Reserve Banks and that they are not the appropriate model.
First, the prospects of these data processors are tied
to developments in activities far removed from those of the
Federal Reserve.
Second, the different services provided by
the Federal Reserve and these data processors necessitated
different inputs into the production process.
For example, the
data processors specified do not collect checks like the
Federal Reserve and other depository institutions.
Third, to
the limited extent to which the activities of the data
processors are at all comparable to those of the Federal
Reserve, the data processors generally only perform a portion
only one step in the payments p r o c e s s — the recording and
transfer of payments information.
The Federal Reserve, in
contrast, performs many, and in some cases all, of the steps
that take place as payments are made.
Finally, none of these
six data processing companies that others have suggested be
used as a model included the Federal Reserve as a competitor in
its discussion of competitors in its 1982 Form 10-K filings
with the Securities and Exchange Commission.
Further, only one
of the six has commented on a single occasion on the Federal
Reserve's pricing proposals, and that comment was limited to a
narrow point.
It has been suggested that since large bank holding
companies engage in a number of activities other than
correspondent banking, their capital costs do not provide an
appropriate model for the Federal Reserve.
Clearly, large
banking
organizations
engage
in
a
wide
range
of
activities— many of which are related to the activities of
correspondent divisions.
The fact that the correspondent
banking division does not raise capital on its own and
interacts with the totality of the banking organization
generally reinforces the logic of using the bank holding
company model.
Thus, taking into account the services offered, and
the obvious fact that large banking organizations are the
competitors of the Federal Reserve, the Board proposes that
large bank holding companies continue to be the appropriate
model upon which to construct the PSAF.
The Eoard is also considering the risk that might be
associated with the correspondent operations of the banking
organization on a stand-alone basis and, in turn, what that
might imply for the discount or premium of the market price of
its stock relative to book value.
Unfortunately, there is

-4-

virtually no reasonable basis for determining whether, in fact,
correspondent services would be perceived as more or less risky
by the market than other banking operations--in part because
the correspondent services are tied together with the entire
bank.
Moreover, even if that determination could be made,
there is no way to anticipate how the market would respond.
The Board also considered the issue of the selection
of the specific bank holding companies to be included within
the PSAF model.
Currently, the model is comprised of the 12
largest bank holding companies in the United States.
These
institutions were chosen primarily because of their size and
their importance in the correspondent banking business.
It has
been suggested that this sample is inappropriate because it is,
in general, too small and because the market value of the stock
of these companies may be materially below book value, which in
turn lowers the cost of equity capital in the PSAF calculation.
The Board believes that the suggestion to expand the
size of the sample has merit.
Such an expansion would reduce
the potential that overall results will be biased by individual
institutions, and provide greater geographic representation.
Accordingly, he Board proposes to expand the sample to include
the 25 largest bank holding companies.
With regard to the suggestion that the market value of
the stock of the bank holding companies in the sample is too
low relative to book value, the Board noted that the stock of
very few large bank holding companies currently is selling at
or above book value.
However, using the proposed sample of 25
large bank holding companies does raise the market-to-book
ratio of the sample.
For example, as of mid-1983, the
market-to-book ratio for the 25 companies was about 83 percent
versus about 75 percent for the smaller sample of 12 holding
companies.
On balance, there is no basis for judging why these
firms' stock sells below book, or for knowing whether their
correspondent divisions on a stand-alone basis (to the extent
they could be segregated from the rest of the company) could
command a stock market valuation at or near book.
Similarly,
there is no basis for judging how the market would value the
Federal Reserve's payments services business.
The Board
believes that the market-book relationship in the proposed
sample of the 25 largest holding companies would provide a
reasonable basis for estimating the cost of equity in the PSAF
calculation.
Accordingly, for purposes of the PSAF model, the
Board proposes to use the cost of equity of the 25 largest bank
holding companies, which are the major alternative suppliers of
the priced services offered by the Fed.

-5b.
Long-Term A s s e t s . The Federal Reserve faces
same judgments as other firms in apportioning the cost of
shared assets (primarily long-term assets such as property,
buildings and equipment) among different operations.
The Federal Reserve currently apportions long-term
assets on the basis of the ratio of operating expenses for
priced services to total operating expenses.
This expense
ratio is approximately 40 percent.
While this expense ratio
provides a reasonable proxy for the assets employed in priced
services and is administratively simple to implement, direct
determination of the uses of assets based upon the Federal
Reserve's Planning and Control System ("PACS") would more
precisely identify the assets used in the provision of priced
services.
Accordingly, the Board proposes that the expense
ratio method for asset determination be replaced by the direct
determination method.
The proposed direct determination method would use the
PACS accounting system, which provides data that can directly
link single-purpose assets to either priced or non-priced
services.
In addition, PACS provides the same information for
assets, such as buildings and centralized computers, that are
used jointly in the provision of priced and non-priced
services.
For example, depreciation is a component of total
occupancy costs,
which are redistributed
to all
PACS
activities.
Since this depreciation is linked directly to
assets carried on the Federal Reserve's balance sheet, the
assets can be linked to the production of priced and non-priced
services.
The Board believes this procedure would result in a
more precise determination of the asset base than the current
method.
As indicated in Tables 1 and 2, the total value of
assets attributable to priced services declines under the
direct determination method.
Although the value of furniture
and equipment increases under the proposed methodology, the
increase is more than offset by a decline in the value of
buildings allocated to priced services.
This occurs because
the percentage of building space directly and indirectly used
by priced services is, in fact, smaller than that which was
estimated using the 40 percent expense ratio for priced
services.
In part, this is because staff of the System's data
collection activities in support of monetary and economic
policy and supervision and regulation functions, as well as
bank examination and other non-priced and central bank
functions occupy space arranged in the traditional office
setting.
On the other hand, check processing and other priced
services
functions
predominantly
occupy
production-type
facilities and make intensive use of space and other

the

-6resources.
In particular, check operations use less floor
space per person and use equipment and space 24 hours a day as
compared with a normal eight hour day in most non-priced
areas.
Further, fiscal agency and cash operations, which are
non-priced services, occupy a significant amount of space.
c.
The Tax Rate Used in the PSAF Ca l c u l a t i o n . The
tax rate currently used for the PSAF calculation is based on
the ratio of current taxes to total taxable income of the
holding companies included in the sample.
Deferred taxes are
excluded from this ratio.
In addition, an adjustment is made
to add the tax effect of tax-free interest income from state
and municipal securities.
Deferred taxes are not factored into
the ratio because they do not represent taxes paid during the
current year
and are likely not to be paid until far into
the
future.
The
adjustment for tax-free income is
made because it
is believed that holding such securities is related to he
investment strategy of the organization.
The Board proposes that the current method of
calculating the tax ratio with an adjustment to eliminate
extraordinary gains and losses, be used to calculate the 1984
PSAF.
This method is incorporated into the calculations shown
in Table 2.
With no changes in methodology, the 1984 tax rate
for the original sample of 12 bank holding companies would be
35.1 percent--down from 38.1 percent in 1983.
For the proposed
larger sample, the 1984 tax
rate would be 35.8
percent.
The
Board is also requesting
public
comment on an
alternative tax rate calculation method.
The alternative tax
rate would be based upon the financial statement provision for
income taxes which takes into account deferred taxes.
It has
been suggested that from an accounting perspective,
the
inclusion of deferred taxes would provide a more useful
representation of the overall tax liability of a firm.
Under
this method, the effective tax rate for 1984 would be
approximately 40 percent and the pre-tax rate on equity would
be approximately 23 percent, thus adding about $2 million to be
recovered from the PSAF.
d.
Date for the Asset Base E s t i m a t e .
The current
methodology uses the average asset base for the previous year,
although estimated expenses are based on the year in which the
PSAF is to be applied (e.g. the 1983 calculation used assets as
of September 29, 1982.)
The Board proposes that the asset base
for the year in which the PSAF would apply be adjusted to
reflect the value of assets expected to be acquired and
disposed of in that year.
Since the assets of the Reserve

-7Banks are expected to be higher in 1984 than in 1983, this
change would increase PSAF recoveries by approximately $1.6
million.
e.
Sales T a x e s .
The current methodology does not
include an imputation for the sales taxes that would have been
paid by the Reserve Banks if they were like other private
firms.
The Board proposes that the estimated sales taxes that
would have been paid were it not for the Reserve Banks'
statutory exemption be recovered as part of the PSAF for 1984.
This amount is tentatively estimated at approximately $4.9
million.
f.
Board
of
Governors
Assets
and
Expenses.
Currently, Board staff expenses are not subject to recovery and
Board assets are not included in the PSAF asset base.
The
Board proposes that the expenses incurred by Board staff
working directly on the development of prices be subject to
recovery.
Similarly, the Board proposes that the assets
employed in this specific activity be included in the PSAF
asset base.
It is estimated that in 1984, about $1.9 million
in operating expenses at the Board of Governors would be
included in expenses subject to recovery and that the asset
base would be raised by about $0.5 million to take account of
fixed assets of the Board of Governors used for this purpose.
g.
Shipping E x p e n s e s .
Shipping expenses currently
are excluded from the PSAF calculation because the assets
employed in the production of shipping services are not Federal
Reserve assets, but rather are owned by the various carriers
with whom the Reserve Banks deal.
It has been suggested that
this treatment is inappropriate, but the criticisms of this
treatment has been in the context of PSAF methodology in which
the PSAF asset base is determined on an expense ratio method.
When priced service assets are determined directly as the Board
is proposing instead of on an expense ratio basis, the removal
of shipping expenses from the calculation has no effect on
total recoveries.
Including shipping expenses in the PSAF
denominator would result in a lower PSAF being applied to a
higher expense base with the product of the two remaining
unchanged.
As a result, the Board has determined that the
original basis for excluding shipping expenses from the
calculation remains correct, and proposes no change in this
area.
h.
Leased A s s e t s . Currently, leases for space
equipment by the Federal Reserve Banks are not capitalized and
the value of such leases are not included in the asset base
used to calculate the PSAF.

and

-8Specific criteria have been established by the
Financial Accounting Standards Board (FASB) in its Rule 13 for
determining which leases should be capitalized.
The Federal
Reserve currently does not make a case-by-case determination as
to which of its leases meet FASB Rule 13.
However, in view of
the rule, it has been suggested that the Federal Reserve
capitalize its leases for purposes of determining the PSAF.
Accordingly, the Board proposes that all leases that become
effective on or after January
1, 1984, that meet
be capitalized.
In addition,
the Board proposes that current
leases be examined to determine if any adjustments are needed.
However, as indicated below, even if some such leases would be
capitalized, it is very unlikely that this would have an effect
on the dollars to be recovered via the PSAF.

FAS

Lease payments currently made by the Reserve Banks
include the implicit financing costs that are incurred by the
lessors for acquiring the assets.
If the value of leases were
capitalized and included in the PSAF, the financing costs would
be double-co unted— once in expenses to be recovered and once in
the cost of capital associated with the asset base.
Thus, to
avoid such double-counting, these leases should not be in the
asset base even if they meet
FASB Rule 13.
As a result,
capitalizing leases would have no effect on the PSAF.
The
pattern of expenses, however, might be affected, to a limited
extent, over the term of the leases because the proportion of
interest to principal included in the amount amortized is
higher in the early years and lower in the later years of the
lease.
i.
Book Value of Physical A s s e t s .
Currently,
purposes of calculating the PSAF, the Federal Reserve uses book
value— as opposed to some estimate of market value— for Federal
Reserve physical assets such as buildings and equipment.
The
Board proposes to continue to use the book value of fixed
assets in the calculation of the PSAF.
The use of book values
is universal in private business.
Furthermore, it is the
actual historical cost of acquiring assets that must be
financed--not their value at some later date.
The practice of
using book value for buildings, equipment, and property is
consistent with banking industry practices and consistent with
generally accepted accounting principles.
Determining a normal
rate of return on the basis of historical cost is the
prevailing practice
throughout the private
sector.
In
particular, the assets of the large bank holding companies used
as the source of the cost of capital are reported at book value.
A decision to value assets at market would essentially
require using a market value accounting system since it would
be necessary to take into account the income created by

for

-9increases in asset values.
Such an accounting system does not
now exist.
If such an accounting system were developed, the
capital associated with increases in asset values would be
generated automatically.
In this event it would
not be
necessary to raise new funds to support the higher asset values.
Judging the relationship between market and book
values
is not easy. However,
in considering the
Federal
Reserve's equipment (which is approximately $75 million or
almost 30 percent of total long-term assets),
it seems
reasonable to conclude that market value is not likely to
exceed book value and, in fact, book values might exceed market
values.
This would follow from the fact that such equipment is
predominantly processing equipment where declining prices for
new equipment and technological changes may reduce the market
value of existing equipment at a faster rate than is provided
for in the relevant depreciation schedules.
With regard to building
assets, there is
little
question that, in the aggregate, the market value of Federal
Reserve buildings is greater than adjusted book value.
However, when considering the value of the space used by the
Reserve Banks for priced service activities, it is important to
recognize that the portions of the buildings used for priced
services are not considered premium space.
Therefore, the test
of whether the book value of space devoted to Federal Reserve
priced services is significantly at odds with market value
cannot be judged by looking at the book value/market value
relationship for the building as a whole, but rather should be
judged by looking at the market value of the specific space
used for priced services versus its adjusted book value.
Even
this more limited comparison is not easy to make.
However, in
looking at the prevailing rents charged by some of the Reserve
Banks to outside tenants in relationship to the PACS charges
for space devoted to priced services, it appears that such PACS
charges are, on average, in line with this proxy for the market
value of such space.
On this basis, it would appear that market values of
space in Federal Reserve buildings devoted to priced service
activities are approximately in line with the adjusted book
values of such space.
However, even if they were out of line,
it is not c l e a r — even from the perspective of overall economic
efficiency as opposed to accounting n o r m s — that market values
should be used in calculating the cost of capital for Federal
Reserve priced services.
That is, if the Federal Reserve used
market values and its competitors did not (assuming the market
value of the competitors' assets also exceeded book value), all
other things being equal, this could produce a less efficient
allocation of societal resources.

-10-

It is because neither economics nor accounting can
provide perfect guidance on these issues that the approach
taken with regard to the acquisition of new assets takes on
special importance.
That is, decisions to acquire or not to
acquire a particular asset must be undertaken within the
context of rigorous capital budgeting procedures.
The Federal
Reserve has had such procedures in place for a number of
years.
However, in view of their increased importance in the
proceed service environment and to ensure that such procedures
are consistent with the PSAF calculation,
it has been
determined to undertake a review of all such procedures to
ensure that the methods used are appropriate and are
consistently applied in all cases.
j.
Short-Term Assets.
For 1982 and 1983, the largest
component (about $60 m i l l i o n ) of short term assets was net
adjustment float, which was included in the PSAF calculation as
a proxy for liquid assets that the Reserve Banks would use for
priced services.
Since the value of all Federal Reserve check
float--including net adjustment float— will be recovered though
service fees in 1984, the Board proposes to remove the
financing costs of net adjustment float from the asset base
that is used to calculate the PSAF.
It should be clearly
emphasized that the effect of this change is essentially a
shift from one class of recovery to another, which has only a
small effect on the total dollars to be recovered.
As in past years, Federal Reserve short-term assets
will include receivables, supplies, and deferred charges.
In
1984 these items aggregate to about $27 million as opposed to
about $20 million in 1983.
Under the proposed methodology, clearing balances that
depository institutions maintain at the Reserve Banks to pay
for services would be considered a short term asset.
During
the past year, the amount of clearing balances has grown
considerably.
Total clearing balances averaged $978 million
between July 20 and August 10, 1983.
The growth in clearing
balances can be attributed to two factors.
First, more
depository institutions are finding clearing balances a
convenient way of compensating for services and interterritory
check
float.
Second,
the number of
small depository
institutions using Federal Reserve services has increased and
many of them prefer to compensate for services with clearing
balances.
Because of the significant
growth
in clearing
balances, the financing aspects of clearing balances and the
methodology used to calculate earnings credits on clearing
balances were reevaluated.
In general, the income earned by

- l i ­

the assets attributable to clearing balances should be at least
equal the earnings credits provided on these balances.
Using
the average three-month U. S. Treasury bill rate over the first
half of 1983 and assuming clearing balances in 1984 average
$1 billion/ the total income earned for 1984 would be $82.5
mi 11 i o n .
Under current policy the Reserve Banks apply earnings
credits only to the required clearing balance level, not the
actual level.
The earnings credits are calculated at the
federal funds rate.
For 1984, it is estimated that about $800
million of the approximately $1 billion in clearing balances
would be required balances.
Excess balances arise in part
because of sharp short run swings and seasonal peaks in the use
of Federal Reserve services.
Using the average federal funds
rate for the first half of 1983 and assuming $800 million in
required clearing balances in 1984, the cost of such balances
to the Federal Reserve would be $69.3 million.
Thus, the
System income on clearing balances is anticipated to exceed
expenses by $13.2 million ($82.5 million - $69.3 million).
The Board also studied the methodology used by
correspondent banks to calculate the rate of return they
provide on correspondent balances, which are analytically
similar to clearing balances.
If a correspondent balance is
maintained at a correspondent bank, the correspondent would be
required to maintain reserves on the balances held.
In most
cases, the correspondent would be at a marginal reserve
requirement rate of 12 percent.
Generally, the correspondent
bank takes this factor into consideration when it calculates
the rate paid on the balance.
Because correspondent banks
generally adjust the earnings rate by the marginal reserve
requirement, maintaining clearing balances at a Reserve Bank
may be more attractive to a respondent bank.
However, when
maintaining a balance at a correspondent bank, the respondent
bank is permitted to deduct the balance from its reservable
liabilities.
Therefore, the difference between the rate the
Reserve Banks apply is not the 12 percent marginal reserve
requirement rate but rather the difference between this 12
percent rate and the respondent banks 1 marginal reserve
requirement rate, which is a "due from" deduction for the
respondent.
It has been estimated that the earnings rate
applied by Reserve Banks should be reduced by about 7 percent
on average for it to be comparable to the value generally
received by respondent banks on clearing balances.
Had this
adjustment been made, the earnings credit rate would have been
reduced approximately 7 percent on average.
This reduction
would result in revenues being $5 million less than the $13.2
million net interest revenue from clearing balances (see

-12-

Table 4).
Accordingly, the Board proposes that the rate the
Reserve Banks apply to clearing balances be adjusted to reflect
the net value of the balances to the respondent, which takes
into account the correspondent's marginal reserve requirement
and the respondent's due from deduction.
The amount of excess clearing balances are expected to
be reduced in 1984 because of new procedures being adopted by
the Reserve Banks.
Reserve Banks are in the process of
developing a new
service
that will allow
depository
institutions to transfer their excess balances more readily to
other institutions, which could then invest them in the federal
funds market.
If the excess balances are reduced to the point
that the System income on
such balances will be
less than
expenses, the rate paid on
such balances may be adjusted.
One
adjustment under consideration in that event would be to
calculate the earnings credit at the U.
S. Treasury bill rate
rather than at the
federal funds rate. In any event, clearing
balances and their
corresponding assets
could be managed such
that the total income to the Federal Reserve at least equals
the cost of such balances to the Federal Reserve.
Net Effect of Proposed C h a r g e s . The net effect of the above
proposed changes on the estimated dollars which must be
recovered via the PSAF is modest.
As indicated in Table 2, if
the 1984 calculations were made using the present methodology,
the percentage of these costs to capital would be
15.9 percent,
the dollars to be recovered
via the PSAF would be $59.4 million
and the ratio of the dollars to be recovered to estimated
expenses would be
15.34 percent.
Using
the proposed
methodology, these magnitudes are 18.86 percent, $56.2 million,
and 14.51, percent respectively.
By order of the Board of Governors,

(Signed)

October 12,

1983.

William W. Wiles

William W. Wiles
Secretary of the Board
[SEAL]

TABLE 1
Pro Forma Ba l an c e Sheet
Priced Services
1984
( in m i l l i o n s )
Pr oposed
Method

Cu r re n t
Method
Assets
Current Assets
Recei v a b l e s
A d j u s t m e n t s , Net
Supplies
D e f e r r e d Charges

$ 23.6
4 5. 5
3.9
2.0
S 75. 0

$

$

23. 6
—
1. 9
1. 6
27.1

—

1,000.0

$220.5
7 8. 2
S298.7

$ 183. 2*
87. 7
$ 270. 9

Government S e c u r i t i e s
Long-Term A s s e t s
Bank P r emi se s
Equipment and F u r n i t u r e

Total Assets

$373. 7

$1,298.0

L i a b i l i t i e s and E q u i t i e s
L i a b i 1i t i e s
C le a rin g Balances
S h o r t- Te r m Debt
Long-Term Debt
Total L i a b i l i t i e s
Equi ty
T o t a l L i a b i l i t i e s and E q u i t i e s

*

75.0
101. 9

$1,000.0
27.1
7 9. 1

$ 176. 9

$1,106.2

196. 8

191. 8

$373. 7

$1,298.0

$

I n c l u d e s an a l l o c a t i o n o f s p a c e f o r t h e Board b u i l d i n g .

TABLE 2
P r i v a t e S e c t o r Adjustment F actor

1983

1984_________

Estimated
I.

Proposed

$ 80.3
$288.5

$ 75.0
$298.7

$ 27.1
$270.9

A s s e t s t o be Fin anc ed ( m i l l i o n )
Current
Long-Term

II.

Current

Cost o f C a p i t a l
Shor t- Term Debt Ra t e
Long-Term Debt Rate
Pre-Tax Equ i ty Ra t e
Weighted Average Cost
of C a p i t a l

13.06%
10.63%
20.53%

9.63%
10.33%
21.17%

9.48%
10.01%
21.25%

16.35%

15.90%

17.20%

III.

Tax Rate

38.1 %

3 5. 1 %

35.8 %

IV.

Capital S tr u c t u r e
21.8 %
25.8 %
52.4 %

20.0 %
27.3 %
52. 7 %

9 .1 %
2 6. 5 %
64.4 %

Shor t- Term Debt
Long-Tenn Debt
Eq ui ty
PSAF
Recovery ( m i l l i o n s )
As P e r c e n t o f C a p i t a l
As P e r c e n t of Expenses

$60. 3
16. 35
16.01

$ 59. 4
15. 90
1 5. 34

$ 56. 2
18.86
14.51

TABLE 3
PSAF and O t h e r R e c o v e r i e s
C a l e n d a r Year 1984
(mil 1 i o n s )

I.

PSAF R e c o v e r i e s

_________ 1984_______________
Current

Tot al

PSAF R e c o v e r i e s

Proposed

$ 59 . 4

Changes Due To:
-

E x p l i c i t P r i c i n g of A d j u s t m e n t s , Net
D i r e c t D e t e r m i n a t i o n o f A s s et s
Changes in t h e Sample
Use of P r o s p e c t i v e As s et s
S a l e s Taxes
A l l o c a t i o n o f Board A ss et s

-4.4
-6.8
+1. 4
+1.6
+4.9
+ .1

Net Changes
Tot al
II.

-3.2

PSAF R e c o v e r i e s

$56. 2

Ot her R e c o v e r i e s
- E s t i m a t e d Expenses
- Board of Governors Expenses
- T r a n s p o r t a t i o n Expenses

$387. 3
-78.8

Tot al O t h e r Revenues
III.

$387. 3
1.9
78. 8
$466.1

$468. 0

F l o a t Recovery
- Value of " Re s id u a l F l o a t "
- Value o f A d j u s t m e n t s , Net
Tot al F l o a t R e c o v e r i e s
Grand Tot al

of Recoveries

$ 39. 3
_______

$ 39. 3
4.0
$39.3

$43.3

$564. 8

$5 67. 5

TABLE 4
C l e a r i n g Bal ance Revenue and Expense
(mi 1 l i o n s )

1984
T o t a l C l e a r i n g Ba l ance Income

$82.5

T o t al C l e a r i n g B al an ce C r e d i t s Used

-69.3

Net Revenue from C l e a r i n g B al a n ce s

13.2

A dj u s tme nt s f o r Re s er ve Re qu i re me n t s

-5.0

Net C l e a r i n g B al a n ce Income

$8.2


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102