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FEDERAL RESERVE BANK
OF NEW YORK
[
Circular No.
10304 1
July 7 , 1989
FEDERAL RESERVE PRICED SERVICES
Private Sector Adjustment Factor
To All Depository Institutions, and Others Concerned,
in the Second Federal Reserve District:
Following is the text of a statement issued by the Board of Governors of the Federal Reserve
System:
T h e F e d e r a l R e s e r v e B o a r d h a s a n n o u n c e d r e v is io n s to th e m e t h o d o l o g y fo r c o m p u t in g t h e P r iv a te
S e c t o r A d j u s t m e n t F a c to r (P S A F ). T h e m e t h o d o l o g y is e s s e n t i a l ly th a t a s p r o p o s e d fo r p u b lic c o m m e n t
o n J a n u a ry 2 3 , 1 9 8 9 ( D o c k e t N o . R - 0 6 5 6 ) .
T h e P S A F is in te n d e d to r e f le c t an a llo c a t io n o f im p u te d c o s t s th a t ta k e s in to a c c o u n t th e ta x e s
th a t w o u ld h a v e b e e n p a id a n d th e r etu rn o n c a p ita l th a t w o u ld h a v e b e e n p r o v id e d h a d th e s e r v ic e s b e e n
f u r n is h e d b y a p r iv a te b u s in e s s fir m a s r e q u ir e d b y th e M o n e ta r y C o n tr o l A c t.
T h e r e v is io n s are d e s i g n e d to r e d u c e th e n e c e s s i t y fo r a d h o c a d ju s tm e n ts a n d to r e s p o n d to in d u s tr y
q u e s t io n s r e g a r d in g th e P S A F c a lc u la t io n .
T h e r e v is io n s b e c o m e e f f e c t i v e w ith th e c o m p u ta tio n o f t h e P S A F fo r 1 9 9 0 .
Printed on the following pages is the text of the Board’s notice in this matter, as published in
the Federal Register o f June 22. Questions thereon may be directed to Nirmal V. Manerikar,
Assistant Vice President (Tel. No. 212-720-5262).
E. G erald C o r r ig a n ,
President.
FEDERAL RESER V E SYSTEM
[Docket No. R-0656]
Private Sector Adjustment Factor
a g e n c y : B o a r d o f G o v e r n o r s o f th e
F ed era l R e se r v e S y stem .
a c t io n : N o t ic e .
s u m m a r y : T h e B oard h a s a p p ro v ed
r e v i s i o n s to th e m e th o d o lo g y for
c o m p u tin g th e P r iv a te S e c t o r
A d j u s t m e n t F a c to r (" P S A F ” ). T h e P S A F
is a c o m p u t a t io n o f im p u te d c o s t s th a t
t a k e s in to a c c o u n t th e t a x e s th a t w o u ld
h a v e b e e n p a id a n d th e retu rn o n c a p it a l
th a t w o u ld h a v e b e e n p r o v id e d h a d th e
F e d e r a l R e s e r v e ’s p r ic e d s e r v i c e s b e e n
f u r n is h e d b y a p r iv a te b u s i n e s s firm .
T h e r e v is io n s w ill r e d u c e v o la t il i t y a n d
th e n e e d for a d h o c a d j u s t m e n t s in th e
P S A F a n d w ill m o d ify c e r ta in
c a lc u la t io n s to c o n fo r m m o r e c l o s e l y
w it h c o m m e r c ia l b a n k p r a c t ic e s .
EFFECTIVE DATE: Jun e
16. 1989.
FOR FURTHER INFORMATION CONTACT:
Clyde H. Farnsworth, Director (202/4522787) or Paul Bettge, Program Leader
(202/452-3174), Division o f Federal
Reserve Bank Operations: for the
hearing impaired only:
Telecommunications Device for the
Deaf, Eamestine Hill or Dorothea
Thompson (202/452-3544).
SUPPLEMENTARY INFORMATION:
B ackground
The Monetary Control Act of 1980
requires that fee schedules for the
Federal Reserve’s priced services
include an allocation of imputed costs
for “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.” These imputed costs, referred to
as the private sector adjustment factor
(“PSAF"), are incorporated into the cost
base on which fees for Federal Reserve
priced services are established.
T h e c u r re n t m e th o d o lo g y u s e d to
c o m p u te c a p it a l c o s t s in th e P S A F
i n v o l v e s th r e e s t e p s . T h e first s t e p is to
d e t e m in e th e v a lu e o f F e d e r a l R e s e r v e
a s s e t s th a t w i l l b e u s e d d ir e c tly in
p r o d u c in g p r ic e d s e r v ic e s d u rin g th e
c o m in g y e a r , in c lu d in g th e n e t e f f e c t o f
a s s e t s p la n n e d to b e a c q u ir e d or
d i s p o s e d o f d u rin g th e y e a r . T h e s e c o n d
s t e p is to d e t e r m in e th e fin a n c in g
m e th o d . S h o r t-te r m a s s e t s a r e a s s u m e d
to b e f in a n c e d b y sh o r t-te r m lia b ilitie s :
lo n g -te r m a s s e t s a r e a s s u m e d to b e
f in a n c e d b y a c o m b in a t io n o f lo n g -te r m
d e b t a n d e q u ity . T h ir d , im p u t e d c a p it a l
c o s t s a r e d e t e r m in e d b y a p p ly in g sh o r t
a n d lo n g -te r m in t e r e s t r a t e s a n d a r a te
of return on equity derived from a
sample of bank holding companies
(“BHCs’’) to the assumed debt and
equity values. The consolidated
financial data for the BHCs are drawn
from the 25 largest BHCs (in terms of
asset size), with all factors except the
short-term debt rate averaged over three
years. Because short-term debt, by
definition, matures within one year, only
data for the most recent year are used
for computing the short-term debt rate.
Capital costs, together with imputations
for estimated sales taxes, FDIC
insurance assessment on clearing
accounts (or the clearing portion of
mixed reserve/clearing accounts) held
with the Federal Reserve to settle
transactions, and expenses of the Board
of Governors related to priced services,
comprise the PSAF.
Discussion
In January the Board requested
comment on four proposed revisions to
the methodology for computing the
PSAF (54 FR 4074, January 27,1989):
1.
Increasing the size of the BHC
sample from the 25 largest BHCs to the
50 largest BHCs:
2 /Extending the sample period from
three years to five years:
3. Ensuring that sufficient capital is
imputed to meet the risk-based capital
guidelines of 8 percent capital to riskweighted assets, including in assets a
computation of gross cash items in the
process of collection: and
4. Calculating the imputed FDIC
insurance assessment on the basis of
clearing balances plus an esimate of
deferred credits calculated on a basis
similar to a commercial bank.
The Board received seven public
comments in response to the proposals,
two from trade associations and five
from bank holding companies. The
Board has considered the comments and
has approved the revisions to the PSAF
methodology as proposed with one
modification. The Board has approved
the inclusion of gross cash items in the
process of collection (“CIPC"), rather
than net CIPC as proposed, measured on
a basis comparable with commercial
bank on the pro forma priced services
balance sheet. These revisions will
become effective with the computation
of the PSAF for 1990.
Expansion o f Sample Size and Period.
The Board has revised the PSAF
methodology to extend the sample
period to five years and increase the
sample size to include the 50 largest
bank holding companies each year. The
commenters generally endorsed both
expanding the sample size of BHCs used
2
in the PSAF calculation from the 25 to
the 50 largest privately-owned BHCs in
each year and averaging the most recent
five years of BHC data to determine the
pre-tax return on equity, the long-term
debt rate, and the ratio of long-term debt
and equity used to compute the PSAF.
Two commenters disagreed with the use
of a historic five year sample period. As
an alternative, one commenter
suggested that the Board use projected
data, and the other proposed using five
years of data but eliminating the highest
and lowest years and averaging the
three remaining years to minimize
disruptions and neutralize the effect
those years have on the data. The Board
believes that use of historical data is
appropriate because it captures the
underlying long-term trend of industry
rates of return. To measure the long
term results of BHC operations, the
Board believes it is necessary to reflect
the activities of all years. In addition,
because the Monetary Control Act
requires that fees be set to recover costi
over the long run, the use of historical
data in the PSAF computation will, over
time, include the results of each year
and fees will be established
appropriately. The Board believes that
only historical data should be used in
the computation as it is more objective
than the use of projections and allows
verification of the Board’s computations
T h e e x p a n s io n o f th e s a m p le s i z e a n d
p e r io d s h o u ld s i g n if ic a n t ly r e d u c e th e
v o la t ilit y o f th e P S A F , a s e a c h B H C w ill
h a v e a l e s s d r a m a tic im p a c t u p o n th e
o v e r a ll a v e r a g e . T h is c h a n g e s h o u ld
r e d u c e th e fr e q u e n c y o f a d h o c
a d ju s tm e n ts . T h e la r g e r s a m p le s i z e w il
also serve to include a number of
regional correspondent banks and will
increase the geographical diversity of
the group.
Two commenters suggested that the
BHC model provides an inappropriate
basis for determining the components of
the PSAF. Public comment on this issue
has been requested on two prior
occasions. On both occasions, the Board
considered the comments offered and
decided that the BHC model was the
most appropriate. The Board, however,
again considered alternative models
upon which to base the PSAF and
determined that none offered clear
benefits over the BHC model and, in
some instances, introduced additional
implementation difficulties. The Board
continues to believe that the BHC model
is appropriate because BHCs offer
services most comparable to those
offered by the Federal Reserve Banks.
The two commenters generally endorse
the plan to expand both the sample size
and period if the Board continues use of
the BHC model.
Two commenters also suggested that
the sample for the PSAF be comprised of
the 50 largest check processors and
BHCs that provide check collection
services. Specific data clearly
identifying these organizations does not
appear to be readily available. Using the
largest banks, in terms of domestic
correspondent balances, as a proxy for
these organizations, the Board has found
that there is a great deal of overlap
between the two samples. Further, the
Board believes the 50 largest BHCs is
the appropriate sample because these
organizations, as well as the Reserve
Banks, provide payments services other
than check collection.
Capital Adequacy. The Board has
determined that the Federal Reserve will
meet the risk-based capital guideline of
8 percent capital to risk-weighted assets
and that the Federal Reserve will
disclose on its pro forma priced services
balance sheet gross CIPC, a basis
comparable with a commercial bank.
Commenters endorsed the proposal that
the Federal Reserve meet the Board’s
risk-based capital guideline of 8 percent
capital to risk-weighted assets for state
member banks and BHCs. In meeting
this guideline, the Board proposed that
the Federal Reserve include in assets a
computation of CIPC on a basis
comparable to a commercial bank. On
this basis, the amount of capital imputed
for the 1989 PSAF totaled nearly 22
percent of risk-weighted assets. Had the
newly-approved modifications to the
PSAF been used for 1989, this
percentage would have been nearly 25
percent.
The Board had proposed that net.
rather than gross, CIPC should be
included on the Federal Reserve’s
consolidated pro forma priced services
balance sheet because the balance sheet
is intended to identify priced services
assets, and only the net amount of CIPC
(float) requires financing. Some
commenters suggested that gross CIPC
should be reflected on the priced
services balance sheet because
generally accepted accounting principles
require such treatment by the BHCs.
The Board believes that reflecting
gross CIPC on the pro forma priced
services balance sheet is acceptable, as
long as readers of the statements
understand that the majority of gross
CIPC is offset by deferred credits. The
portion of CIPC not offset by deferred
credits represents float and, as required
by the Monetary' Control Act, is valued
at the Federal funds rate for recovery
and does not affect the PSAF. In
determining the amount of CIPC to be
shown on the pro forma priced services
balance sheet, the same adjustments
should be made to gross CIPC as
discussed in the FDIC assessment
section below. That is, CIPC arising
from central bank activities, items that
would otherwise be double-counted on a
consolidated Federal Reserve balance
sheet, and items that have been
recorded prior to actual receipt and
processing would be excluded from
gross CIPC.
In the past, some groups have
suggested that the Federal Reserve
should impute a level of equity on its pro
forma priced services balance sheet
sufficient to meet the current equity to
total assets ratio including CIPC, stated
on a basis similar to that reported by
commercial banks. The Federal Reserve
imputes equity for priced services by
assuming that long-term assets are
financed by long-term debt and equity in
the proportion of long-term debt and
equity of the BHCs in the model. Using
the proposed sample size and sample
period, this imputation will result in
over 70 percent of depreciable priced
services assets being financed by equity.
Because of the high percentage of
depreciable assets that will be financed
with equity, the Board believes that the
current methodology for imputing equity
capital is appropriate and results in a
level of equity capital that is sufficient
PR IN T E D IN NEW YORK, FROM
F E D E R A L R E G IS T E R ,
3
to support priced services operaitons.
FDIC Assessment. The Board has
approved a modification, as proposed,
to calculate the imputed FDIC
assessment on the basis required of a
commercial bank. The computation will
include applying the required FDIC
assessment rate to the projected level of
clearing balances held with the Federal
Reserve plus a projection of deferred
credits. Accordingly, the following
deferred credits will be excluded: intraSystem deferred credits that would
otherwise be double-counted on a
consolidated Federal Reserve balance
sheet: deferred credits associated with
nonpriced items, such as deferred
credits to government agencies: and
deferred credits associated with
providing fixed availability or credit
prior to receipt and processing of items.
In general, the commenters endorsed the
conceptual approach to the calculation
of the imputed FDIC insurance
assessment.
This change in methodology for
computing the FDIC insurance and
calculation of a consolidated priced
CIPC amount will result in an increase
to the PSAF amount to be recovered.
One commenter suggested that the
Board ‘‘phase-in this increase over a
three year period to avoid unnecessary
volatility in a component of the PSAF
and be more consistent with the Board’s
intention of decreasing overall volatility
of the PSAF." The Board believes that,
although the percentage increase in this
one component of the PSAF will be quite
large, the dollar impact of making this
change on the overall PSAF will be
fairly small, and should not result in
significant price changes. Therefore, the
Board will not phase-in the modification.
By order of the Board of Governors of the
Federal Reserve System, June 16,1989.
William W. Wiles,
Secretary of the Board.
(FR Doc. 89-14744 Filed 6-21-89; 8:45 am)
B ILLIN G COOC (210-01-41
VOL. 54, NO. 119, pp.26250-26251
@FedFRASER