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FEDERAL RESERVE BANK
OF NEW YORK

April 10,1987
1986 PRICED SERVICES REPORT
To AU 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:
The Federal Reserve Board has issued a report summarizing developments in the priced
services areas for 1986 and providing detailed financial results of providing those services.
The Board issues a report on priced services annually and a priced service balance sheet
and income statement quarterly. The financial statements are designed to reflect standard
accounting practices, taking into account the nature of the Federal Reserve’s activities and its
unique position in this field.

Copies of the report may be obtained upon request directed to our Circulars Division
(Tel. No. 212-720-5216).
E. Gerald Corrigan,

President.

AT / / s
oG.
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

ANNUAL REPORT ON
PRICED SERVICES ACTIVITIES
li§@

P R IN T E D IN N E W Y O R K

I.

OVERVIEW

The Reserve Banks fully recovered their costs of
providing priced services in 1986 , as required by the
Monetary Control Act of 1980.

The System recovered 104.7

percent of its operating expenses and imputed costs.
During 1986, the Federal Reserve implemented a
number of programs to improve the processing of payments and
further refine certain fee structures.

The Board approved a

standard format for Fedwire transfers and a two-tiered
pricing structure for check collection services in two
Federal Reserve offices.

Additional initiatives that may be

of future significance for the payments system were also
begun by the System.

II.

FINANCIAL PERFORMANCE

The Federal Reserve is required, under the Monetary
Control Act, to establish fees for its priced services.
These fees must, over the long run, cover the full costs of
providing such services, including the cost of float, and an
allocation of imputed costs which takes into account the
taxes that would have been paid and the return on capital

2

that would have been provided had the services been
furnished by a private firm.
For 1986, total revenues from Federal Reserve
priced services were $627.7 million, $13.9 million above
1985 revenues.

Production costs rose from $476.7 million in

1985 to $497.5 million in 1986.

The resulting $130.3

million in income from operations was reduced by imputed
costs, including float, interest on short and long term
debt, sales tax, and FDIC assessments, that in the aggregate
totaled $45.8 million.

Net interest income from clearing

balances amounted to $8.0 million, yielding income before
imputed income taxes of $92.4 million.

After-tax income for

1986 was $57.6 million, down from $62.5 million in 1985.
The increase in net income of $30.3 million from initial
projections was due primarily to greater than anticipated
volumes of ACH, wire transfer, and check transactions
processed by the System.
In 1986, the percent of overrecovery was reduced by
nearly 1 percent over 1985.

This reduction from 105.6

percent to 104.7 percent is consistent with the System’s
goal to match, as closely as possible, costs and revenues.
Various factors, such as volumes and float, are difficult to
anticipate and prevent an exact cost/revenne match from year
to year.

In 1986, prices were generally stable and certain

fee reductions were implemented.

3
A pro forma balance sheet and income statement for
Federal Reserve priced services are presented in Tables 1
and 2 „

IIIo

SERVICE HIGHLIGHTS

In June-1981, the Board adopted a pricing principle
that calls for cost recovery for each major service
category.

In 1986

,

all Federal Reserve service lines had

pre-tax income that covered total operating and imputed
costs.

System financial performance for each service line

is presented in Table 3 C

Table 4 provides district

financial results for locally priced services, and priced
services volumes for 1986 are presented in Table 5„
Significant developments in each service are
discussed in the sections that follow.

Check Collection
Check volume processed by the Federal Reserve
totalled 16,225o8 million transactions, an increase of 5.0
percent over 1985 volume.
The System continued to pursue initiatives to
improve the return item process during 1986.

For example,

the Federal Reserve and the banking industry jointly
conducted a test program to determine the benefits of using

4

the forward collection process to deliver return items to the
institution of first deposit.

Results of the test program

indicate that the procedure has the potential to speed the
return of many items.

The Federal Reserve and the banking

industry continue to pursue this initiative.

In addition,

the Board in November issued for public comment a proposal to
provide, a redeposit service for low~dollar checks that are
returned because of insufficient or uncollected funds.

Under

this service, which has been implemented on a pilot basis in
the St. Louis, Atlanta, and Cleveland districts,

Reserve

Banks would intercept dishonored checks and redeposit them
for a second presentment on behalf of the collecting
institution requesting the service.

This practice would

speed processing times and reduce costs.

Action on the

proposal to expand this service to all Federal Reserve
Districts is expected early in 1987.
The Board adopted several amendments to Regulation J
in May.

One change to the regulation permits Reserve Banks

to collect checks drawn on banks located in foreign
countries.

This service will be provided on a limited

basis, and the checks will be collected through
correspondent banks.

The other amendments relate primarily

to a Reserve Bank’s liabilities regarding check collection
and funds transfers.

5
In November,, the Board approved making permanent
the two-tiered pricing structure being piloted at the head
offices of the Federal Reserve Banks of Minneapolis and
Kansas City.

The Board also established criteria for

determining the conditions under which a tiered fee
structure would be extended to other Federal Reserve
offices.

In some cases, using a tiered pricing structure

would more accurately reflect Federal Reserve costs o f check
processing, because it allows different fees to be charged
to collecting institutions based on whether the checks are
sent to a high or low-cost presentment point.

Electronic Payment Services
The number of depository institutions having
electronic connections with Federal Reserve Banks increased
in 1986 by more than 770, to a total of approximately 6,300
by year-end.

Another major initiative was the encryption of

the Federal Reserve network, in support of the Federal
Reserve's objective to move the payment system toward a more
secure electronic environment.

Approximately 40 percent of

all electronic connections between depository institutions
and the Federal Reserve Systemwide had been encrypted by the
end of 1986, and most connections are expected to be
encrypted by the end of 1987.

1

6
In 1986, all twelve Reserve Banks were certified at
the Contingency Processing Center (CPC) located in Culpeper,
Virginia.

The CPC would allow for continued operation of

major electronic payments and support services in the event
of an extended operating outage in a Reserve District.

Commercial Automated Clearing House Service
In 1986, the prices of automated clearing house

(A CH ) services were established to recover 100 percent of
the costs to provide these services for the first time.

A

partial subsidy had been in effect previously to encourage
acceptance and growth of the new service in its early years.
The System processed 362.6 million commercial transactions
during the year, an increase of 28.3 percent over 1985.
In September, the Board issued for public comment
an alternative method for recovering the cost, of float
generated by ACH transactions processed on the night cycle
with a corresponding reduction in the current per item
surcharges.

Currently, net debit float is recovered through

a surcharge that is applied to all debit transactions
processed at night.

The Board proposal would relate float

charges to the value of debit transactions originated by an
institution at night.
proposal in 1986.

No final action was taken.on the

7
On-line return item data base services were
by two Federal Reserve Banks.

o ffe re d

The service facilitates the

processing of automated return items by requiring less
manual processing by those initiating the return items.
Automated return item services based on intelligent terminal
originations were also offered.

Funds Transfer
Funds transfer volume grew 10.6 percent in 1986, to
a total of 49.9 million transactions.
In June, the Board published for public comment a
proposal to require that information contained in
third-party Fedwire messages be provided in a standard
format.

The current Fedwire format used by most depository

institutions for third-party payments does not permit
automated handling of the payments by receiving
institutions.

The use of a structured format would

facilitate the automated handling of Fedwire transfers.

In

November, the Board approved a $0.25 surcharge for funds
transfers not conforming to the standard format, beginning
April 1, 1988, as an incentive to encourage use of the
format, and mandatory use of the standard format beginning
April 3, 1989.
The System adopted a new Fedwire extension policy
in August 1986.

The extension policy establishes guidelines

8
for granting Fedwire extensions to ensure an orderly process
for extending Fedwire operating hours.

Net Settlement Service
In March, the Eoard approved a modification to the
interim terms for treating ACH net settlement entries for
credit transactions.

Pending adoption of policies to

address ACH and net settlement risk, net settlement entries
for ACH credit transactions are being treated as final at
6:00 p.m. Eastern time on the settlement date.

Net

settlement entries for ACH debit transactions are treated as
provisional until the business day following the settlement
date.
A net settlement service providing next-day
finality was approved for one automated teller machine
network in 1986.

Definitive Safekeeping and Noncash Collection Services
The average monthly number of issues and receipts
maintained was approximately 165,000, an increase of 3.8
percent over 1985.

Reversing the 1985 growth experience,

noncash collection volume decreased 7.0 percent to 4.3
million.
In November, the Board approved the consolidation
of the municipal bond and coupon collection activities of

9

the Federal Reserve Bank of San Francisco at the Minneapolis
Reserve Bank.

It also published for public comment a list

of factors to be considered when Reserve Banks propose
future consolidations of priced services across district
lines.

No action was taken on this proposal in 19860

Book-Entry Securities
In 1986, the Federal Reserve processed 5.9 million
on-line Treasury book-entry securities transfers as fiscal
agent.

The Federal Reserve processed 1.7 million on-line

federal agency book-entry securities transfers during the
year=

Comparable volume statistics for 1985 are not

available because of the October 1, 1985, reclassification
of Treasury•book-entry securities from a priced service to a
fiscal serviceo
Book-entry safekeeping and transfer of federal
agency mortgage-backed securities was expanded from the
Federal Reserve Bank of New York to all districts during
1986.

Float
Federal Reserve float increased to a daily average
of $446o5 million in 1986, up from a daily average of $440
million in 1985.
recovered.

The cost of all Federal Reserve float is

10
In May, the Board approved a standard holiday
schedule to be followed by Federal Reserve Banks, effective
January 1, 1987.

At that time, it also adopted proposals to

modify the procedures used by Federal Reserve Banks to
recover the cost of float generated by the receipt of ACH
debit and check transactions due to nonstandard holiday and
midweek closings.
In conjunction with proposals issued in December to
reduce risk in■the ACH system, the Board proposed procedures
to recover the cost of float generated by the origination of
ACH credit transactions.

IV.

No final action was taken in 1986.

OUTLOOK FOR 1987

The Board announced 1987 fees for priced services
in October 1986.

The 1987 schedule reflects relatively few

price changes from 1986.

Check processing fees remain

stable overall, with more than 90 percent of fees unchanged.
The 1987 fee schedules reflect changes in fees for
electronic connections, wire transfers, and selected nonautomated fee categories for ACH processing.

Fees for

dedicated leased line and multi-drop electronic connections
were increased modestly in 1987.

In the wire transfer

,^

service, the basic transfer fee was reduced by $.05 to $.50,
while certain nonautomated services fees were increased.

11
For the ACH service, over 80 percent of the fees for
nonautomated ACH services will remain the same and the
current basic transaction fees for processing automated
transactions were retained.

Automated return items,

automated notices of change, and prenotifications, which
historically have not been priced separately, will be priced
beginning in April 1987.
In securities services, 85 percent of the
definitive safekeeping fees will remain unchanged for 1987.
A change will be made in the fee schedule for the book-entry
service effective May 1, 1987 to reduce the overrecovery
rate for that service.
S.everal service enhancements intended to improve
the payments mechanism will be evaluated or implemented
during 1987.
The Federal Reserve continued its efforts to
provide a more reliable and flexible payment system.

In

this regard, the System completed the first phase of a
comprehensive long-range review of electronic payment
services.

That preliminary work, which continues in 1987,

highlights the potential desirability ofs
o

increasing the reliability of electronic payment
services

o

developing improved contingency and backup capabilities

12
o

designing new and more flexible services

o

improving formats used for electronic payment services
to facilitate more end-to-end automation.
The current pricing structure for electronic

connection fees will be evaluated in 1987,

The objective of

the study is to determine if the current electronic
connection fee structure provides the aggregate cost-based
price incentives for the efficient use of communication
resources.
The System will continue efforts to improve
security in its electronic connection network.

The Reserve

Banks plan to substantially complete efforts to encrypt all
communication lines in 1987.

Further, a study of the use of

message authentication (MAC) as an additional security
enhancement has been started.

A policy regarding MAC may be

forthcoming in late 1987.
Contingency planning and backup for payment
services will receive continued attention.

A separate site

for contingency processing for the New York District was
approved.

Another alternative the System is studying is the

concept of remote logging of transactions of one Reserve
Bank at another Reserve Bank

to be used for quick

restart

and recovery in case of a computer or communication failure.
Major industry users of Federal Reserve electronic services
are also being encouraged to study and implement

13
improvements in their reliability and contingency
arrangements.
As part of the Board's payments system risk
reduction program, a new ACH return item service is being
investigated.

The potential outcome of the study could be

the offering of new services, such as telephone acceptance
of return item information for large dollar transactions.
A new policy on the extension of Fedwire operating
hours for book-entry securities transfers will be considered
in 1987 to introduce greater discipline and predictability
into the process of granting extensions.

Such a policy for

wire transfers over Fedwire was implemented in August 1986,
and has reduced the number of extensions.
The System will develop a strategic plan to address
declining noncash/definitive securities volumes, as more
definitive securities are converted to book-entry form.
In 1987, the Federal Reserve will continue its
multi-year effort begun in 1985 to assess digitized image
capture and processing for its applicability to check
collection operations.

This technology allows for the

automated capture, storage, and retrieval of document
images.

Actual testing of the basic capabilities of the

technology is scheduled for completion during 1987 with
subsequent testing and evaluation of possible applications
in a live environment to follow.

«

14
The System will continue its initiatives in
evaluating the legal, operational and economic issues
related to truncation of both business and consumer checks.
The System will direct its efforts to improve
further the return item process for check collection.

While

legislation is currently under review to address the issue
of delayed availability, the System will explore several
initiatives to improve the operational processing of return
items.

These include using forward collection systems,

contributing to the development of an improved endorsement
standard, and transporting images of returned checks via
electronic technology.

Table 1

Pro Forma Balance Sheet
For P riced S erv ices
Federal Reserve System
(in m illio n s)
December 31,
1986
Short-term a s s e ts (Note 1)
Imputed reserve requirem ents
on c le a r in g balances
Investm ent in m arketable
s e c u r itie s
R eceivab les
M aterials and su p p lies
Prepaid expenses
Net item s in process o f
c o lle c tio n
T otal short-term a s s e ts

$251.8

$211.8

1 ,8 4 6 .2
59.7
5 .1
6 .0

1 ,5 5 3 .2
54.5
5 .2
6.6

300.1

Long-term a s s e ts (Note 2)
Prem ises
F urniture and equipment
L eases and lea seh o ld improvements
T otal long-term a s s e ts

200.3
118.2
4.3

$2,468.8

322.8

307.9

$ 2,398.1
70.7

Long-term l i a b i l i t i e s
O b lig a tio n s under c a p ita l le a s e s
Long-term debt
T otal long-term l i a b i l i t i e s
T otal l i a b i l i t i e s
Equity
T otal l i a b i l i t i e s and eq u ity (Note 3)

1.6
102.1

$ 2,468.8

$2,1 3 9 .1

181.6
113.3
1.9

296.9
$2,4 3 6 .0

$2,7 9 1 .6

T otal a s s e ts
Short-term l i a b i l i t i e s
C learin g b alances and balances
a r is in g frcm e a r ly c r e d it
o f u n c o lle c te d item s
Short-term debt
T otal short-term l i a b i l i t i e s

December 31,
1985

$2,072.9
66.3

$2,1 3 9 .1

0 .3
94.3

103.7

94.6

2 ,5 7 2 .5

2 ,2 3 3 .7

219.1

202.3

$2,7 9 1 .6

“V* - • T

$2,4 3 6 .0

D e ta ils may n ot add due to rounding.
Accompanying n o tes are an in te g r a l p art o f th ese fin a n c ia l statem en ts.

Table 2
Pro Forma Income Statem ent
For P riced S erv ices
F ederal Reserve System
For th e Years Ending December 31, 1986 and 1985
(in m illio n s)
1986
Income (Note 4 ) s
S erv ices provided to d ep o sito ry
in s titu tio n s
Expenses (Note 5):
Production expenses
L ess s Board approved su b sid ies

1985

$627.7
$497.5

Income from op eration s

497.5

$613.8
$481.4
4 .7

476.7

130.3

137.1

Imputed c o s ts (Note 6) :
I n te r e s t on flo a t
I n te r e s t on debt
S a les ta x es
FDIC insurance

23.8
13.3
7 .3
1.5

Income from op eration s a fte r
imputed c o s ts
Other income and expenses (Note 7 ) z
Investm ent income
Earnings c r e d its

45 o8

31.6
13.2
5 .4
1.4

51.6

84.5
114.2
106.3

8 .0

85.5
119.1
105.6

13.5

Income b efore income ta x es

92.4

99.0

Imputed income ta x es (Note 8)

34.8

36.5

$57.6

$62.5

$27.3

$23.9

N et income
Memos
Targeted return on eq u ity (Note 8)
D e ta ils may n ot add due to rounding.

Accompanying n otes are an in te g r -1 p art o f th ese fin a n c ia l statem en ts.

N o te s t o t h e F i n a n c i a l S t a t e m e n t s
The B a la n c e S h e e t (T a b le 1)
N o te 1:

S h o r t-te r m A s s e t s
The im p u ted r e s e r v e r e q u ir e m e n t on c l e a r i n g

b a la n c e s and in v e s t m e n t in m a r k e ta b le s e c u r i t i e s r e f l e c t th e
F e d e r a l R e s e r v e 's t r e a t m e n t o f c l e a r i n g b a la n c e s m a in ta in e d
on d e p o s i t w it h R e s e r v e B anks b y d e p o s i t o r y i n s t i t u t i o n s .
F o r b a la n c e s h e e t and in co m e s t a t e m e n t p r e s e n t a t i o n ,
c l e a r i n g b a la n c e s a r e r e p o r t e d in a m anner c o m p a r a b le t o t h e
w ay c o r r e s p o n d e n t b a n k s r e p o r t c o m p e n s a tin g b a la n c e s h e ld
w it h them b y r e s p o n d e n t i n s t i t u t i o n s .

T hat i s , resp o n d en t

b a la n c e s h e ld w it h a c o r r e s p o n d e n t a r e s u b j e c t t o a r e s e r v e
r e q u ir e m e n t e s t a b l i s h e d b y t h e F e d e r a l R e s e r v e .

T h is

r e s e r v e r e q u ir e m e n t m u st b e s a t i s f i e d w it h e i t h e r v a u l t c a s h
o r w it h n o n - e a r n in g b a la n c e s m a in ta in e d a t a R e s e r v e B an k .
F o llo w in g t h i s m o d e l, c l e a r i n g b a la n c e s m a in ta in e d w ith
R e s e r v e B an k s f o r p r ic e d s e r v i c e p u r p o s e s a r e s u b j e c t e d t o
im p u ted r e s e r v e r e q u ir e m e n t s .

T h e r e f o r e , a p o r t io n o f th e

c l e a r i n g b a la n c e s h e ld w it h t h e F e d e r a l R e s e r v e i s
c l a s s i f i e d on t h e a s s e t s i d e o f t h e b a la n c e s h e e t a s
r e q u ir e d r e s e r v e s and i s r e f l e c t e d in a m anner s i m i l a r t o
v a u l t c a s h and d u e from b ank b a la n c e s n o r m a lly show n on a
c o r r e s p o n d e n t b a n k 's b a la n c e s h e e t .

The r e m a in d e r o f

c l e a r i n g b a la n c e s i s a ssu m ed t o b e a v a i l a b l e f o r in v e s t m e n t .

-

2

F or t h e s e p u r p o s e s , t h e F e d e r a l R e s e r v e a ssu m e s t h a t a l l
su c h b a la n c e s a r e in v e s t e d in th r e e -m o n th T r e a s u r y b i l l s .
R e c e iv a b le s r e p r e s e n t :

1)

am ou n ts d u e th e R e s e r v e

B an k s f o r p r ic e d s e r v i c e s t h a t h a v e b e e n p r o v id e d t o
i n s t i t u t i o n s f o r w h ic h p aym en t h a s n o t y e t b e e n r e c e iv e d ;
a n d , 2)

t h a t s h a r e o f s u s p e n s e a c c o u n t and d i f f e r e n c e

a c c o u n t b a la n c e s r e l a t e d t o p r ic e d s e r v i c e s .
The am ount show n f o r m a t e r i a l s and s u p p l i e s
r e p r e s e n t s th e in v e n t o r y v a lu e o f su c h s h o r t - t e r m a s s e t s
n e c e s s a r y f o r t h e o n g o in g o p e r a t io n s o f p r ic e d s e r v i c e
areas.

P r e p a id e x p e n s e s r e p r e s e n t ite m s su c h a s s a l a r y

a d v a n c e s and t r a v e l a d v a n c e s f o r p r ic e d s e r v i c e p e r s o n n e l.
N e t it e m s in t h e p r o c e s s o f c o l l e c t i o n r e p r e s e n t s
t h e am ount o f f l o a t a s o f t h e b a la n c e s h e e t d a t e and i s t h e
d i f f e r e n c e b e tw e e n t h e v a lu e o f it e m s in t h e p r o c e s s o f
c o l l e c t i o n ( i n c l u d i n g c h e c k s , c o u p o n s , s e c u r i t i e s , w ir e
t r a n s f e r s , and ACH t r a n s a c t i o n s ) and th e v a lu e o f d e f e r r e d
a v a i l a b i l i t y it e m s .

The c o s t b a s e f o r p r o v id in g s e r v i c e s

t h a t m u st b e r e c o v e r e d u n d e r t h e M o n eta ry C o n tr o l. A c t
in c l u d e s t h e c o s t o f f l o a t in c u r r e d b y t h e F e d e r a l R e s e r v e
d u r in g t h e p e r io d v a lu e d a t t h e F e d e r a l fu n d s r a t e .
C o n v e n tio n a l a c c o u n t in g p r o c e d u r e s w o u ld c a l l f o r t h e g r o s s
am ount o f ite m s in t h e p r o c e s s o f c o l l e c t i o n and

d eferred

a v a i l a b i l i t y ite m s t o b e in c lu d e d on a b a la n c e s h e e t .
H o w ev er, b e c a u s e t h e g r o s s am ou n ts h a v e no i m p l i c a t i o n s f o r

3
in c o m e , c o s t s , o r t h e p r i v a t e s e c t o r a d ju s tm e n t f a c t o r
(PSAF) , and b e c a u s e t h e i n c l u s i o n o f t h e s e a m ou n ts c o u ld
le a d t o d i s t o r t i o n s and m i s i n t e r p r e t a t i o n s o f th e a s s e t s
e m p lo y e d in th e p r o v i s i o n o f p r ic e d s e r v i c e s t h a t m u st be
f in a n c e d , o n ly t h e n e t am ount i s sh o w n .

The n e t am ount

r e p r e s e n t s t h e a s s e t s t h a t in v o lv e a f in a n c in g c o s t .
N o te 2:

L o n g -te r m A s s e t s
L o n g -te r m a s s e t s r e f l e c t e d on t h e b a la n c e s h e e t

h a v e b e e n a l l o c a t e d t o p r ic e d s e r v i c e s u s in g a d i r e c t
d e t e r m in a t io n b a s .is .

The d i r e c t d e t e r m in a t io n m eth od u s e s

t h e F e d e r a l R e s e r v e 's P la n n in g and C o n tr o l S y ste m (PACS) t o
a s c e r t a i n d i r e c t l y t h e v a lu e o f a s s e t s u s e d s o l e l y in p r ic e d
s e r v i c e s o p e r a t io n s and t o a p p o r t io n t h e v a lu e o f
j o i n t l y - u s e d a s s e t s b e tw e e n p r ic e d and n o n - p r ic e d s e r v i c e s .
A d d i t i o n a l l y , an e s t i m a t e o f t h e a s s e t s o f t h e B oard o f
G o v e r n o r s d i r e c t l y in v o lv e d in t h e d e v e lo p m e n t o f p r ic e d
s e r v i c e s i s in c lu d e d in lo n g - t e r m a s s e t s in t h e p r e m is e s
a c c o u n t.
L o n g -te r m a s s e t s a l s o in c lu d e an am ount f o r c a p i t a l
le a s e s .

In a c c o r d a n c e w it h g e n e r a l l y a c c e p t e d a c c o u n t in g

p r in c ip le s , th e F e d e r a l R eserv e c a p it a liz e s le a s e s th a t
q u a lify fo r c a p it a liz a t io n .
l e a s e h o l d im p r o v e m e n ts.

T h e se a s s e t s a l s o in c lu d e

4

N o te 3s

L i a b i l i t i e s and E q u ity
A m a tc h e d -b o o k c a p i t a l s t r u c t u r e f o r t h o s e a s s e t s

t h a t a r e n o t " s e l f - f i n a n c i n g " h a s b e e n u se d t o d e te r m in e t h e
l i a b i l i t y and e q u i t y a m o u n ts.

S h o r t-te r m a s s e t s are

f in a n c e d w it h s h o r t - t e r m d e b t .

L o n g -te r m a s s e t s a r e

f in a n c e d w it h lo n g - t e r m d e b t and e q u i t y in a p r o p o r t io n
e q u a l t o t h e r a t i o o f lo n g - t e r m d e b t and e q u i t y o f t h e bank
h o ld in g c o m p a n ie s u s e d in t h e PSAF m o d e l„
O th er s h o r t - t e r m l i a b i l i t i e s in c lu d e c l e a r i n g
b a la n c e s m a in ta in e d a t R e s e r v e B anks and d e p o s i t b a la n c e s
a r i s i n g from f l o a t .

O th e r lo n g - t e r m l i a b i l i t i e s c o n s i s t o f

o b l i g a t i o n s on c a p i t a l l e a s e s .
The In com e S ta te m e n t (T a b le 2)
The in co m e s t a t e m e n t r e f l e c t s in co m e and e x p e n s e s
f o r p r ic e d s e r v i c e s .

I n c lu d e d in t h e s e a m ou n ts a r e B oard

a p p r o v e d s u b s i d i e s , im p u te d f l o a t c o s t s , im p u ted f in a n c in g
c o s t s , and in co m e r e l a t e d t o c l e a r i n g b a la n c e s .
N o te 4?

Incom e
Incom e r e p r e s e n t s c h a r g e s t o d e p o s it o r y

i n s t i t u t i o n s f o r p r ic e d s e r v i c e s .
th r o u g h o n e o f tw o m eth o d s?

T h is in co m e i s r e a l i z e d

d i r e c t c h a r g e s t o an

i n s t i t u t i o n ' s a c c o u n t o r c h a r g e s a g a i n s t a c c u m u la te d
e a r n in g s c r e d i t s .

In com e i n c l u d e s c h a r g e s f o r p e r - it e m

f e e s , f i x e d f e e s , p a c k a g e f e e s , e x p l i c i t l y p r ic e d f l o a t ,

5
a c c o u n t m a in te n a n c e f e e s , s h ip p in g and in s u r a n c e f e e s , and
su rch arges.
N o te 5;

P r o d u c tio n E x p e n se s and S u b s id ie s
P r o d u c tio n e x p e n s e s in c lu d e d i r e c t , i n d i r e c t , and

o th e r g e n e r a l a d m in is tr a tiv e e x p e n se s o f th e F e d e r a l R eserv e
B anks f o r p r o v id in g p r ic e d s e r v i c e s .

A ls o in c lu d e d in

e x p e n s e s a r e th e e x p e n s e s o f s t a f f o f t h e B oard o f G o v e r n o r s
w o r k in g d i r e c t l y on t h e d e v e lo p m e n t o f p r ic e d s e r v i c e s w h ic h
am ounted t o $ 1 .7 m i l l i o n f o r b o th 1986 and 1 9 8 5 .
B o a r d -a p p r o v e d s u b s i d i e s c o n s i s t e d o f a p rogram
e s t a b l i s h e d f o r t h e c o m m e r c ia l a u to m a te d c le a r in g h o u s e
s e r v ic e .

The i n c e n t i v e p r i c i n g p rogram e s t a b l i s h e d f o r t h e

ACH s e r v i c e p r o v id e d f o r f e e s t r u c t u r e s d e s ig n e d t o r e c o v e r
an i n c r e a s i n g s h a r e o f e x p e n s e s .

In 1 9 8 5 , ACH r e v e n u e s w ere

in t e n d e d t o r e c o v e r 80 p e r c e n t o f c o s t s p lu s t h e PSAF.

T h is

i n c e n t i v e p r i c i n g p rogram w as c o m p le t e ly e lim in a t e d a t th e
en d o f 1 9 8 5 .
N o te 6;

Im p u ted C o s ts
Im p u ted f l o a t c o s t s r e p r e s e n t t h e v a lu e o f f l o a t to

b e r e c o v e r e d , e i t h e r e x p l i c i t l y o r th r o u g h p e r - it e m . f e e s ,
d u r in g t h e p e r io d .

F lo a t c o s t s in c lu d e c h e c k , b o o k - e n t r y

s e c u r i t i e s , n o n c a sh c o l l e c t i o n , ACH, and w ir e t r a n s f e r
flo a t.
The f o l l o w i n g t a b l e d e p i c t s t h e F e d e r a l R e s e r v e ’ s
f l o a t p e r fo r m a n c e and f l o a t r e c o v e r y f o r 1 9 8 6 .

The am ount

6

o f f l o a t r e c o v e r e d th r o u g h c h a r g e s i s v a lu e d a t th e F e d e r a l
fu n d s r a t e .

The v a lu e o f t h i s f l o a t i s th e n b i l l e d d i r e c t l y

t o d e p o s it o r y i n s t i t u t i o n s o r a d d ed t o t h e c o s t b a s e s u b j e c t
t o r e c o v e r y f o r e a c h a p p r o p r ia t e s e r v i c e .
A ls o in c lu d e d in im p u ted c o s t s i s t h e i n t e r e s t on
d e b t a ssu m ed n e c e s s a r y t o f in a n c e p r ic e d s e r v i c e a s s e t s and
t h e s a l e s t a x e s and FDIC in s u r a n c e a s s e s s m e n t t h a t th e
F e d e r a l R e s e r v e w o u ld h a v e p a id had i t b e e n a p r i v a t e
b u s in e s s fir m .
F lo a t R e c o v e r y
F e d e r a l R e s e r v e B anks
1986
( D a ily a v e r a g e f i g u r e s in m i l l i o n s )
T o ta l f lo a t
U n r e c o v e r e d f l o a t 1_/
F lo a t s u b j e c t t o r e c o v e r y
F lo a t r e c o v e r e d th r o u g h :
Incom e on c l e a r i n g b a la n c e s 2 /
As o f a d ju s t m e n t s 3 /
D ir e c t c h a r g e s 3 /
P e r - it e m f e e s 4 /

$ 7 5 8 .5
1 0 5 .6
6 5 2 .9
7 2 .1
3 1 2 .0
1 1 6 .4
1 5 2 .4

1 / I n c lu d e s f l o a t g e n e r a t e d in p r o v id in g s e r v i c e s t o

g o v e r n m e n t a g e n c ie s o r in o t h e r c e n t r a l b ank s e r v i c e s .

2J T h is am ount r e p r e s e n t s in c r e a s e d in co m e on c l e a r i n g
b a la n c e s a s a r e s u l t o f r e d u c in g im p u te d r e s e r v e
r e q u ir e m e n ts th r o u g h t h e u s e o f a CIPC d e d u c t io n f o r
f l o a t w hen c a l c u l a t i n g t h e r e s e r v e r e q u ir e m e n t . T h is
in co m e th e n r e d u c e s f l o a t r e q u ir e d t o b e r e c o v e r e d
th r o u g h o t h e r m e a n s.
3 / M idw eek c l o s i n g f l o a t and i n t e r t e r r i t o r y c h e c k f l o a t may
b e r e c o v e r e d from d e p o s i t i n g i n s t i t u t i o n s th r o u g h
a d j u s tm e n ts t o t h e i n s t i t u t i o n ' s r e s e r v e o r c l e a r i n g
b a la n c e o r by v a lu in g t h e f l o a t a t t h e F e d e r a l fu n d s r a t e
and b i l l i n g t h e i n s t i t u t i o n d i r e c t l y .
4 / T h is f l o a t i s v a lu e d a t t h e F e d e r a l fu n d s r a t e and h a s
b e e n a d d ed t o t h e c o s t b a s e s u b j e c t t o r e c o v e r y in 1 9 8 6 .

7
N o te 7:

O th er In com e and E x p e n se s
O th er in co m e and e x p e n s e s a r e c o m p r is e d o f in co m e

on c l e a r i n g b a la n c e s and t h e c o s t o f e a r n in g s c r e d i t s
g r a n te d t o d e p o s it o r y i n s t i t u t i o n s on t h e i r c l e a r i n g
b a la n c e s o

Incom e on c l e a r i n g b a la n c e s r e p r e s e n t s th e

a v e r a g e co u p o n e q u i v a l e n t y i e l d on th r e e -m o n th T r e a s u r y
b i l l s a p p lie d t o t h e t o t a l c l e a r i n g b a la n c e m a in ta in e d *
a d j u s t e d f o r t h e e f f e c t o f r e s e r v e r e q u ir e m e n ts on c l e a r i n g
b a la n c e s .

E x p e n se s f o r e a r n in g s c r e d i t s a r e d e r iv e d by

a p p ly in g t h e a v e r a g e F e d e r a l fu n d s r a t e t o t h e r e q u ir e d
p o r t io n o f t h e c l e a r i n g b a la n c e s * a d j u s t e d f o r t h e n e t
e f f e c t o f r e s e r v e r e q u ir e m e n ts on c l e a r i n g b a l a n c e s „
N o te 8;

Incom e T a x e s and R e tu r n on E q u ity
Im p u ted in co m e t a x e s a r e c a l c u l a t e d a t t h e

e f f e c t i v e t a x r a t e d e r iv e d from a m o d el c o n s i s t i n g o f th e 25
l a r g e s t bank h o ld in g c o m p a n ie s .
The t a r g e t e d r e t u r n on e q u i t y r e p r e s e n t s t h e
a f t e r = t a x r a t e o f r e t u r n on e q u i t y t h a t t h e F e d e r a l R e s e r v e
w o u ld h a v e e a r n e d h ad i t b e e n a p r i v a t e b u s i n e s s fir m b a se d
on t h e bank h o ld in g com pany m o d e l.
In com e S ta te m e n t b y S e r v ic e (T a b le 3)
(N o te 9)
The in co m e s t a t e m e n t b y s e r v i c e r e f l e c t s r e v e n u e ,
o p e r a t in g e x p e n s e s * and im p u ted c o s t s e x c e p t f o r in co m e
ta x e s.

- 8 -

Im p u ted c o s t s in c lu d e f l o a t and i n t e r e s t on d e b t ,
s a l e s t a x e s , and t h e FDIC a s s e s s m e n t .

F lo a t c o s t s a r e b a s e d

on t h e a c t u a l f l o a t in c u r r e d in e a c h p r ic e d s e r v i c e .

O th er

im p u ted c o s t s a r e a l l o c a t e d among p r ic e d s e r v i c e s b a s e d on
th e r a t i o o f t h e o p e r a t in g c o s t s l e s s s h ip p in g c o s t s in e a c h
p r ic e d s e r v i c e t o t h e t o t a l c o s t o f p r ic e d s e r v i c e s l e s s
t o t a l p r ic e d s e r v i c e s s h ip p in g c o s t s .
' O th er in co m e and e x p e n s e s c o n s i s t o f in co m e on
c l e a r i n g b a la n c e s and t h e c o s t o f e a r n in g s c r e d i t s f o r t h e
F ed eral R eserve.

B e c a u s e c l e a r i n g b a la n c e s r e l a t e d i r e c t l y

t o t h e F e d e r a l R e s e r v e 5s o f f e r i n g o f p r ic e d s e r v i c e s , t h e
in co m e and c o s t a s s o c i a t e d w it h t h e s e b a la n c e s a r e s p r e a d t o
e a c h s e r v i c e b a s e d on t h e r a t i o o f in c o m e . from e a c h s e r v i c e
t o t o t a l in c o m e .
T a x es and t h e a f t e r - t a x t a r g e t e d r a t e o f r e t u r n on
e q u i t y , a s show n on t h e a g g r e g a t e in co m e s t a t e m e n t , h a v e n o t
b e e n s p r e a d b y s e r v i c e s i n c e t h e s e e le m e n t s r e l a t e t o th e
o r g a n iz a t io n a s a w h o le .
T h is s t a t e m e n t d i f f e r s from t h e s e r v i c e by s e r v i c e
p r e s e n t a t i o n o f p r ic e d s e r v i c e s p e r fo r m a n c e in t h e B o a r d ’ s
A nnual R ep ort to C o n g r e ss.

The A n n u a l R e p o r t d a ta in c lu d e

g r o s s in co m e on c l e a r i n g b a la n c e b y s e r v i c e in R e v e n u e ,
g r o s s c o s t o f e a r n in g s c r e d i t s and th*- im p u te d c o s t o f f l o a t
in E x p e n s e s .

The e x p e n s e s o f s t a f f o f t h e B oard o f

G o v e r n o r s w o r k in g d i r e c t l y on t h e d e v e lo p m e n t o f p r ic e d
s e r v i c e s i s in c lu d e d in t h e P r iv a t e S e c t o r A d ju stm e n t F a c to r
( r a t h e r th a n P r o d u c tio n e x p e n s e s ) .

9
S ta te m e n t o f R ev en u e and E x p e n se
F or L o c a lly P r ic e d S e r v i c e s (T a b le 4)
(N o te 10)
T h is t a b l e d e p i c t s t h e f i n a n c i a l r e s u l t s f o r e a c h
R e s e r v e Bank in p r o v id in g l o c a l l y p r ic e d s e r v i c e s .,

The

f i n a n c i a l r e s u l t s f o r e a c h R e s e r v e Bank do n o t in c lu d e th e d o l l a r s t o b e r e c o v e r e d th r o u g h t h e PSAF and th e n e t
in v e s t m e n t on c l e a r i n g b a la n c e s .

As s u c h , in .o r d e r t o

r e c o n c i l e T a b le 4 n e t r e v e n u e d a ta w it h t h a t d i s c l o s e d in
T a b le 3 , a d ju s tm e n ts m u st b e made f o r im p u ted i n t e r e s t on
d e b t , s a l e s t a x e s , FDIC a s s e s s m e n t , p r ic e d s e r v i c e B oard
e x p e n s e s and n e t in co m e on c l e a r i n g b a l a n c e s .
S ta te m e n t o f P r ic e d S e r v i c e s V olu m es (T a b le 5)
(N o te .11)
T h is t a b l e sh o w s t h e a b s o lu t e v o lu m e and p e r c e n t a g e
c h a n g e in t h e num ber o f ite m s h a n d le d b y t h e F e d e r a l R e s e r v e
in i t s p r ic e d s e r v i c e o p e r a t i o n s .

W ire t r a n s f e r o f fu n d s

v o lu m e i s t h e num ber o f b a s i c t r a n s a c t i o n s o r i g i n a t e d ;

ACH

v o lu m e i s t h e t o t a l num ber o f c o m m e r c ia l it e m s p r o c e s s e d ;
c o m m e r c ia l c h e c k v o lu m e r e f l e c t s t h e t o t a l c o m m e r c ia l c h e c k s
c o l l e c t e d , in c lu d in g b o th p r o c e s s e d and f i n e s o r t it e m s ;
s e c u r i t i e s t r a n s f e r s v o lu m e c o n s i s t s o f t h e num ber o f b a s i c
t r a n s f e r s o r i g i n a t e d o n - l i n e ; d e f i n i t i v e s a f e k e e p in g i s th e
a v e r a g e num ber o f i s s u e s o r r e c e i p t s m a in ta in e d ; n o n c a sh
c o l l e c t i o n v o lu m e i s t h e num ber o f ite m s a s s e s s e d f e e s ; and
c a s h t r a n s p o r t a t i o n v o lu m e i s th e num ber o f arm ored c a r r i e r
sto p s.

T a b le

Income Statem ent fo r Priced S erv ices
F ederal Reserve System
For th e year ending December 31, 1986
(in m illio n s)
D e fin itiv e
Wire
Safekeeping BookCommercial T ransfer
Cash
Check
and Net Commercial and Noncash Entry
C o llectio n S e c u r itie s S erv ices
T otal C o lle c tio n S ettlem en t
ACH
Income from s e r v ic e s (Note 9)

$627.7

$483.4

$70.4

$31.1

$20.5

$8 .0

$14.3

O perating expenses

497.5

377.3

57.8

25.3

18.5

4 .8

13.9

Income from op eration s

130.3

106.1

12.7

5 .9

2 .0

3 .2

0 .5

Imputed c o s ts

45.8

40.4

2.3

1.8

0.9

0 .4

0.1

Income from op eration s
a fte r imputed c o s ts

84.5

65.7

10.4

4.1

1.1

2 .8

0 .4

8 .0

7.3

0 .3

0.1

0.1

0 .0

0.1

$92.4

$73.0

$10.7

$4.2

$1.2

$2.9

$0.5

Other income and ex p en ses, n et
Income before income
ta x es

D e ta ils may not add to t o t a ls due to rounding.
Accompanying n o tes are an in te g r a l p art o f th ese fin a n c ia l statem en ts.

Revalue and Expmse of locally Priced Services a t Federal Reserve Banks, 1986
T a b le

( Millions o f Dollars )

(Note 10)

Bostm
New York
Philadelphia
Cleveland
Richrcnd
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Systan Total

Otnnercaal
Definite ve Safekeeping
Check
and
Chdi Services
Cbllectim
Ncncadhi Chi lection
Tbtal Operating Float Total Net
Total Operating Float Tbtal Net
Tbtal Tbtal
Net
Revalue Gbst Cbst Cost Ife^eme Rsvanie Cbst Cbst Cbst Reverue Revalue , Cbst Ffevsnue
31.5
24.7
2.0
26.7
4.8
1.1
0.8
0.0
0.9
0.2
0.7
0.6
0.1
64.8
51.5
2.3
53.7
11.0
3.6
3.3
(0.0)
3.3
0.4
0.0
0.0
0.0
20.7
16.5
0.7
17.2
3.5
1.4
1.3
(0.0)
1.3
0.1
1.4
1.3
0.1
28.2
22.5
1.8
24.3
3.9
2.2
1.9
0.1
1.9
0.3
1.8
1.7
0.1
44.5
34.3
2.0
36.3
8.2
0.9
1.0
0.0
1.0
(0.1)
0.0
0.0
(0.0)
56.0
43.2
0.9
44.1
11.9
3.2
2.6
0.0
2.6
0.5
0.1
0.0
(0.0)
67.4
50.7
2.1
52.8
14.6
2.6
2.1
0.0
2.1
0.5
0.9
0.8
0.1
22.5
17.7
1.4
19.1
3.5
1.1
0.0
1.1
0.2
0.0
0.2
1.1
(0.0)
27.8
23.1
(0.7) 22.5
5.3
1.2
1.1
(0.0)
0.1
2.2
1.1
2.0
0.2
31.6
25.8
1.3
27.0
4.6
1.8
1.7
1.7
0.0
0.1
0.4
0.3
(0.1)
34.8
27.6
1.0
28.6
6.2
1.2
1.2
1.2
0.0
0.0
0.0
0.0
(0.0)
53.5
38.5
3.2
41.7
11.8
0.1
0.2
(0.0)
0.2
(0.2)
6.7
6.6
0.0
483.4 376.0
18.0 394.0
89.4
18.4
20.5
0.0
18.5
2.0
14.3
13.9
0.5

Details nay not add to totals due to roandirg.
Aecarpanying notes are an integral part of these financial statements.

Priced Services Volumes
Table

(Iten s in Thousands)
(Note 11)
Priced S erv ice
Funds T ransfers
Commercial ACH
Commercial Checks
S e c u r itie s T ransfers
D e fin itiv e Safekeeping
Noncash C o lle c tio n
Cash T ransportation

P ercent Change
1986 v s . 1985
10.6%

1985
45,110

362,557

282,528

28.3

214,401

31.8

16,225,812

15,450,612

5 .0

14,748,264

4 .8

1,719

' 5,498*

N/A

1984
41,603

P ercent Change
1985 v s . 1984
8.4%

1986
49,900

5,656*

N/A

165

159

3 .9

151

4 .7

4,312

4,637

-7 .0

4,302

7.8

363

376

-3 .6

503

-2 5 .3

* E ffectiv e October l r 1985, th e book-entry tr a n sfe r s o f government agency s e c u r itie s on ly are
considered p riced . S in ce th e 1985 (p a r tia l) and 1984 fig u r e s in clu d e U .S. Treasury and
government agency s e c u r itie s tr a n s fe r s , any comparison o f such volumes i s not a p p lica b le.
Accompanying n o tes are an in te g r a l p art o f th ese fin a n c ia l statem en ts.

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