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FEDERAL RESERVE BANK
OF N E W YORK
[
Circular No. 9716 "1
August 20, 1984
PRICED SERVICES
— Federal Reserve’s Role in the Payment System
— Standards Related to Priced Services Activities
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:
The Federal Reserve Board has approved two policy papers regarding the Federal Reserve Sys
tem’s role in the nation’s payment mechanism and the System’s policies and procedures designed to
carry out provisions of the Monetary Control Act respecting providing services to depository institu
tions.
One paper, entitled “ The Federal Reserve in the Payment System’’ sets forth the rationale for the
Federal Reserve’s participation in the payment mechanism, describes the System’s procedures for
evaluating Federal Reserve priced services to depository institutions and states the System’s objectives,
including cost recovery, for the pricing of such services as directed by the Monetary Control Act.
The other paper — “ Standards Related to Priced Services Activities of the Federal Reserve
Banks” — is concerned with System safeguards for avoiding any internal conflict of interest between
the exercise of the Federal Reserve’s responsibilities for the provision of priced services to depository
institutions, and its other principal responsibilities in the fields of monetary policy, bank supervision
and lending to depository institutions.
The primary responsibility for assuring that the standards are applied is entrusted to the manage
ment of each Reserve Bank. The Board exercises oversight over standards for provision of priced ser
vices through review and approval of changes in the level of pricing and services, and through frequent
on-site reviews by Board staff of Reserve Bank activities. In addition, the Board specified in approving
its policy statement that the Board member serving as chairman of the Board’s Federal Reserve Bank
Activities Committee is responsible for overseeing investigation and responses to complaints in this
area. Vice Chairman Martin is the current chairman of this committee and inquiries may be directed to
his attention.
Printed on the following pages is the text of the Board’s policy statements. Questions regarding
these statements may be directed to our Public Information Department (Tel. No. 212-791-6136).
A n t h o n y M. S o l o m o n ,
President.
August 14, 1984
THE FEDERAL RESERVE I N THE PAYMENT SYSTEM
T h is
R eserve
to
in
th e
c la r ify
paym ent
a ll
paper
paym ent
th e
in
paym ent
th e
in
procedure
th e
to
The
s e r v i c e s «,
Federal
paper
w ill
th e
Federal
paper
r o le
in
is
th e
am ong
sy stem
to
and
a lso
and
p r o v id e r s
o u tlin e s
In r e v i e w i n g
use
th e
c o o p e r a tio n
paym ent
users
of
of
and
c lo se r
of
The
R eserve
r o le
purpose
th e
p la n n in g
and
o b je c tiv e
encourage
im p r o v in g
b u sin e ss
m e c h a n ism
m issio n
R e se r v e 's
order
p a r tic ip a n ts
th e
s y ste m ,,
Federal
sy stem
fa c ilita te
d e fin e s
its
of
th e
se r v ic e
o ffe r in g s.
In
p r o v id in g
paym ent
e ffic ie n c y
of
of
paym ent
e q u ita b le
of
sum m ary,
even
th e paym ent
b a sis.
m ore
is
th e
th an
of
to
Federal
and
siz e ,
was
w ill
w hen
R eserve
in te g r ity
ensure
th e
in stitu tio n s
speed,
and
th e
to
d e p o sito r y
is,
it
th e
p ro m o te
m ec h a n ism
a ll
m issio n
im p o r ta n t
and
and
p r o v isio n
on
an
in te r d e p e n d e n c ie s
lik e ly
th e
in
c o n tin u e
Federal
to
R eserve
be,
was
1913.
in
I .
th e
of
to
G iv e n
th is
e sta b lish e d
R o le
m is s io n
se r v ic e s
se r v ic e s
p a y m en ts,
th e
Federal
R eserve
Background
For
70
years,
active
involvement
by
the
Federal
Reserve in p a y m e n t s p r o cess i n g has b e e n an integral p art of the
- 2 -
d e v e lo p m e n t
r e sp o n d in g
of
in
part
sy stem
in
th e
1913o
At
th at
R eserve
of
th e
1980*
to
p la y
its
r o le
as
The
w r itte n
in
th is
c o lle c tio n
of
check
bonds*
and b a n k e r s '
an
th a t
a
w id e
R eserve
th e
and
has*
th is
c o lle c tio n
Federal
o p era to r
to
C on gress^
check
th e
C ongress
a
a
as
dual
in
Federal
r e g u la to r
r e c e n tly
r o le
se c u r itie s
se r v ic e
fo r
and
n etw ork
p r o v id e s
of
net
The
e le c tr o n ic
Federal
of
for
as
th e
as
d o lla r s
a lso
se ttle m e n t
(ACH)
th e
of
th e
n etw ork
th rou gh
coupons*
R eserve
sy stem
n etw ork .
a s siste d
and
now
D e p o sito r y
in
p a y m en ts
each
w ir e
tra n sfer
sy stem
o p era tes
and
s e c u r itie s ,,
account
m a tu red
H ouse
ACH
in
percent
p r o c e ssin g
Federal
sa fe k e e p in g
agency
35
r o le
a n a tio n w id e
for
n a tio n w id e
R eserve
th e
about
such
C le a r in g
R e se r v e 's
governm ent
n a tio n w id e
c h a n n e ls*
b illio n s
r a n g in g
and p r o v id e
a ccep ta n ces.
tra n sfer
The
p rocess
in e lig ib le
A u to m a ted
Federal
(F e d w ir e ),
Banks
item s
n a tio n w id e
in stitu tio n s
th e
th e
has
co u n try
c o lle c tio n
d e v e lo p in g
p r o v id e s
R eserve
R eserve
norm al
R eserve
th e
e n v isio n e d
co m m itm en t
Federal
s y ste m ,,
th e
S ta tes
of
e sta b lish e d
C ongress
a dual
sy ste m ,,
R eserve,
paym ent
over
th e
fin a n c ia l
breakdow n
m ec h a n ism ,,
r e a ffir m e d
The
in
th e
1900s*
tim e
paym ent
checks
n a t i o n Be
e a r ly
w o u ld
Federal
fo r
th e
a
b ook = en try
tra n sfer
F in a lly *
r e la tio n sh ip s*
fo r
a
v a r ie ty
has
served
day
of
U n ite d
th rou gh
th e
Federal
of
c le a r in g
its
a rra n g em en ts o
T h is
p a r tic ip a to r y
w e11“ ^ c o n t r ib u t in g
d ir e c tly
r o le
and
in d ir e c tly
th e
to
U n ite d
S ta tes
w id e sp r e a d
-3 p u b lic
co n fid en ce
e ffic ie n t,,
The
w ell-su ited
to
in d u stry ,,
system
in
a paym ent
Federal
th e
T his
R e s e rv e ’s
stru ctu re
country
spread
over
system
has
w ide
of
a
th at
U n ited
h ig h ly
banking
d ifferin g
w ith
o rg an iz atio n
d ep o sits
or
offers
If
and
in te rsta te
ratio n ale
paym ent
d iffe re n t
concern
for
efficien cy *
rela tin g
to
ex pected
safety
and
m echanism w i l l
to
b rin g
to
access,,
rem ain a t
th e
reg io n s0
paym ents
of
the
th e
m arkets
of
th o se
to
F ederal
o p eratio n
to tal
such
p u b lic
th e
prom otion
access
of
as
p o licy
in
im p o rtan t
now*
cred it
p riv ate
presence
as
as
of
and
changes
u n d erly in g
be
and
core
regarding
all
Indeed*
e ffic ien cy
banking
one
percent
Then*
soundness*
eq u itab le
resp o n sib ilities
to
is
ty p es
four
o p eratio n al
today,,
and
in teg rity *
th e
co n tin u e
is
in
Mo
and
fin an c ial
in stitu tio n s
stru ctu ra l
R eserve
w ill
it
th an
serv ices
ro le
S tates
needs0
authorized*
Federal
as
m ore
g en eralized
are
m echanism
R eserve can be
and
when
a
co n sid eratio n
h o ld s
d ep o sit
banking
for
paym ents
sure,
fractio n alized
i n s t i t u t i o n s — com m ercial b a n k e f s a v in g s
u n io n s--h av in g
quick*
p articip a to ry
the
areas
is
the
a
Federal
an o v e r a l l
o p eratin g
co n sid era tio n s
th e
paym ent
R e s e rv e ’s
ro le
of
th e
paym ent
to
th e
econom ic
mechanism ,,
In te g rity
of
A reliab le
grow th
and
m ark ets
for
the
Paym ent System
paym ent
sta b ility
v irtu ally
of
th e
every
system
is
cru cial
n atio n ,,
The
good
serv ice
and
sm ooth
is
fu n ctio n in g
dependent
of
upon
-4 the s m o o t h f u n c t i o n i n g of b a n k i n g
in t u r n is d e p e n d e n t u p o n the
mechanism*,
of
History
tells
a country's payment
general
economic
m a c h i n e r y in
helped
to
system
crisis.
precipitate
and
the
institutions
in
demonstrated
value
concern
th e
tra n sfe r
serv ice
in stitu tio n
in stitu tio n so
d o llar
financial
the
intensify
the
payment
of
Federal
the
Reserve
1974 f a i l u r e of
Bankhouse
uncertainty
networks,
regarding
temporarily caused
States
financial
payment
failures
the p a y m e n t
a
1907— which
institution,
United
that
funds
of
as
able
th e
systento
can have
system,
enhances
be
risk
effort
netw orks
in
The
the
fin al
rap id ly
current
paym ent
th e
is
so
to
a
financial
and
F ederal
the
R e s e rv e 's
of
the
re lia b ility ,,
failu re
co n tro l
no
ensure
irrev o cab le
th a t
another
to
th at
o p eratio n
tran sm itted
to
larg e
ad eq u ately
in teg rity
R e s e rv e 's
reduces
could
its
is
system*,
p a rticip a tio n
F ederal
The
tran sferred
p erceiv ed
ongoing
exam ple,
of
is
p ay m en t m echanism
larg e
the
More recently,
via
and r e l i a b i l i t y
and
of
fragility
in all p a r t s of the w o r l d 0
The
d irec t
of
which
or
the p a n i c
consequent
d r a m a t i c r i p p l i n g ef fect,
in te g rity
vividly==that
breakdown
clearing
markets,
the n a t i o n ’s p a y m e n t
precipitate
creation
German
disruption
clearly
p riv ate
can
The
the
through private
substantial
This
small
Herstatt,
payments
too
the U n i t e d S t a t e s d u r i n g
relatively
LDof
financial
i n t e g r i t y of
us— all
S y s t e m — is a c a s e in p o i n t c
a
and
to
F edw ire
of
one
o th er
in tra d a y
exam ple
For
of
a
risk
on
F ederal
-5
=
Reserve initiative* in conjunction with the private sector, to
enhance the integrity of the payment system0
E ffic ien cy
Federal
prom otes
seek in g
for
F ederal
to
the
R eserve
effic ien cy
The
in
of
P aym ent S ystem
in v o lv em en t, in
a v ariety
R eserve
stim u late
has
The F e d e r a l
o th e r
paym ent
u tiliz e
of
advancem ents
its
d ay -to -d ay
has
th e
to
to
prom ote
tru e
in
advancem ents
th a t
in v o lv e
F ederal
R eserve
ap p ro p riate
for
co o p eratio n
among
in tro d u c tio n
and
M oreover*
Federal
in term ed iary
im prove
th e
e ffic ien cies
p articip a tio n
th e
may
of
such
of
sig n ifican t
from
th e
d evelop
ma y
of
req u ire
as
paym ent
of
t h e p a y m e n t m echanism .,
a
of
it
as
w ell
T his
as
is
m echanism
such
as
th e
p articu la rly
w id esp read
(for
exam ple*
of
n eu tral
checks)0
and
in n o v atio n s
m echanism .,
th e
and
m echanism *
MICR e n c o d i n g
acceptance
scope
be
w ith
of
paym ent
also
th e
B ecause
resources*
in stitu tio n s
the
to
paym ent
of
clo sely
im plem entation.,
involvem ent
fa c ilita te
w orked
advancem ents
th a t
im plem entation
effic ien cy
serv ices
su b stan tial
d ep o sito ry
resu lt
in
case
th e
the
th e ir
advancem ents
effic ien cy
in
to
system
m o tiv atio n
and p r o c e d u r e s 0
in v o lv em en t
R eserve
in
in te re st
R eserve has
presence
p a rtic u la rly
ACHo
p u b lic
m echanism
co n trib u te
h elp
a
tech n o lo g y
o p eratin g
know -how
the^ a b i l i t y
in
paym ent
reaso n s.,
im provem ents
p a y m e n t m echanism .,
p ro v id ers
of
th e
F ederal
tru ste d
th at
A d d itio n al
R e s e r v e 0s
6As C o n g r e s s
1980?
c o m p e titio n
p r o v id e r s
paym ent
of
th ree
have
years
im p ro v e
trim
is
e ffic ie n c y
th e
of
m ost
w id e sp r e a d
as
th e
im p e d im en t
to
e le c tr o n ic
p a y m en ts?
To
e lim in a te
sh ift
th e
to
part
tw o
checks
lo c a tio n s.
As
in
checks
q u ic k e r
to
com e
of
th e
of
of
th is
ad van tage
and
th e
a r e su lt
of
th ese
th e
case
P r o v isio n
of
to
paym ent
w ill
effo rts?
h e lp
R eserve
c o lle c te d
and
a ll
th an
p a id
to
spur
has
of
An
p a y m en ts.
th e
d u r in g
checks?
r e la tiv e ly
m ore
to
flo a t
p a p er-b a sed
at
becom e
p a y m en ts
sig n ific a n t
th u s
of
lo c a tio n ,,
c o lle c tio n
in stitu tio n s
th a n was
and
a v a ila b le
or
Federal
on
b e in g
la st
a p p lic a tio n
p ap er-b a sed
in itia to r s
now
se r v ic e
th e
in
g a in s
siz e
som e
are
o th er
p a y m en ts
becom es
draw n
d a ily
e ffic ie n t
d u r in g
th e
T h ese
is
a c c e le r a te d
of
oth er
m ore
g a in s
from
r e g a r d le ss
th e
A ct
o ffered c
fu rth er
how ever?
and
and
p r o c e ssin g
of
C o n tro l
a
c o m p e titio n
te c h n o lo g y
p a y m en ts?
in
R eserve
by
years
in c lu d in g
r e su lte d
of
c o n v e r sio n
e le c tr o n ic
past
by
th a t
new
in stitu tio n s
en joyed
R eserve
te c h n o lo g y .
d e p o sito r y
ad van tage
Federal
se r v ic e s
lik e ly
th e
M o n eta ry
has
cost
th e
e le c tr o n ic
th e
Federal
r e c o g n iz e d
are
in
th e
p ro m p ted
q u a lity
It
m ore
been
in
th e
se r v ic e s
B oth
to
th e
advances
b etw een
paym ent
sy stem .
su p p lie r s
a n tic ip a te d
$3
rem ote
b illio n
one
day
p r e v io u sly .
Paym ent
S e r v ic e s
to
A ll
D e p o sito r y
In stitu tio n s
Federal
d e p o sito r y
R eserve
in stitu tio n s?
paym ent
se r v ic e s
in c lu d in g
are
sm a ller
a v a ila b le
in stitu tio n s
to
a ll
in
-7
rem ote
lo c a tio n s
serve.
Under
se r v ic e s
R eserve
le v e l
th e
to
lo a n
to
fo r
of
th e
of
a
Banks
and
can
be
to
opened
20*000
Federal
in v o lv e d .
its
r e so lv e d
in s o lv e n c y
an
to
sta n d s
h e lp s
o r d e r ly
th e
A ct*
R eserve
sa v in g s
th e
ite m s
and
R eserve
th at
are
in s titu tio n s ,,
to
or
p r o v id e
in stitu tio n s
serve
th at
p rocess
th e
fa sh io n
to
m ay n o t
ensure
m ake
th at
ready
d e p o sito r y
se r v ic e s
and
ad eq u ate
of
banks*
e le c tr o n ic
Federal
an
F u rth erm ore*
tr o u b le d
to
of
to
paym ent
th e
Federal
sa v in g s
a lso
paym ent
in stitu tio n
in
and
to
T h is
p r o v isio n
access
not
m a k in g
im p le m e n ta tio n
d e p o sito r y
se r v ic e s
of
th e
u n io n s.
R eserve
in
choose
in stitu tio n s*
m u tu a l
paper
m ig h t
A ct*
S in c e
c r e d it
h a n d le
over
d e p o sito r y
tr ig g e r
regard
have
p r o v id e r s
r isk s
not
d e p o sito r y
due
m e c h a n ism
oth er
C o n tro l
nonm em ber b a n k s *
The
paym ent
p r o v id e r s
n a tio n w id e ,,
c u r r e n tly
d e stin e d
th at
to
a sso c ia tio n s
Banks
o th er
M o n eta ry
g iv e
se r v ic e s
R eserve
se r v ic e s
th e
a v a ila b le
is
of
th a t
th e
because
in a b ility
p a y m en ts
in stitu tio n s
w ith
m in im u m
w ill
p r o b le m s
d isr u p tiv e
effects.
F isc a l
In
d e p o sito r y
A gency F u n c tio n s
a d d itio n
in stitu tio n s*
p r o v id e s
a v a r ie ty
T reasury
and
c r e a tio n *
e v id e n c in g
to
of
o th er
Federal
governm ent
of
g overn m en tal p a y m en ts0
th e
paym ent
se r v ic e s
sa fe k e e p in g *
o w n e r sh ip
th e
on
se r v ic e s
R eserve*
b e h a lf
a g e n c ie s.
and
tra n sfer
th e
p u b lic
of
debt
of
p r o v id e d
as
th e
T h ese
fis c a l
agen t*
U n ite d
S ta tes
in c lu d e
b oo k -en try
and
th e
to
th e
records
p r o c e ssin g
of
8
-
To
th e
ex ten t
r e q u ire d
to
p r o v id e
s im ila r
se r v ic e s
e ffic ie n c ie s
are
a g e n c ie s
at
I I „
lo w e r
to
A cts
th e
in
cost
th e
The F e d e r a l
s p e c ifie d
ad op ted
lo n g
by
th e
th e
to
th e
of
been
o b je c tiv e
e la b o r a te d
m ust c o v e r
1/
a ll
to
w ith
p r o v id e
for
cost
and
o ffer
w ere
no
th ese
recovery
co sts,
d e ta ils
th is
1980
added
B ased
of
at
revenues
flo a t
and
p r in c ip le s
th e
m ore
each
th an
each
on
tw o
se r v ic e s,
se r v ic e
fo r
a ll
retu rn
m ore
p r ic e d
on c a l c u l a t i o n
o b je c tiv e
(in c lu d in g
on
co sts,
co sts0
o b je c tiv e 0
p r ic in g
ta x es
m ust
C o n tro l
m a tch
recovery
recovery
p r o v isio n
th at
sh o u ld
th e
im p u te d
R eserve
M o n eta ry
cost
in
l i n e 0—^
th e
cost
o p e r a tin g
S e e A p p e n d ix
fu ll
se r v ic e
of
th ere
Federal
th e
A ct,
G overnors
co sts
e x p e r ie n c e
of
a g g reg a te
C o n tro l
and
in te r n a l
o b je c tiv e
th e
a c h ie v in g
o p e r a tin g
of
se r v ic e s,
c u r r e n tly
of
years
governm ent
if
to
paym ent
S e r v ic e s
is
o b je c tiv e
each
o th er
p r o d u c tio n
o th er
a lso
revenues
flo a t
produce
e le c tr o n ic
and
a g g reg a te
str in g e n t
fo r
and
run
Board
to
p o ssib le
R eserve
R eserve
M o n eta ry
c a p ita l)
used
e x p e r tise
in stitu tio n s„
paym ent
a d d itio n
in
paper
T reasury
Federal
and
in stitu tio n s,
t h a n w o u ld b e
recovery
R eserve
In
th e
Federal
o ffe r in g
can be
a d d itio n ,
to
d e p o sito r y
In
fa c ilitie s
se r v ic e s
In
th e
for
th e
d e p o sito r y
co sts
for
C r ite r ia
sa tisfy
for
su p p lie d
o p p o r tu n itie s
se r v ic e s
th ese
r e su lt,,
se r v ic e s
th at
-
lin e
se r v ic e
th is
has
lin e
and c e r t a i n
of
co sts
and f e e s 0
9-
-
im p u ted
co sts
lo n g -te r m
retu rn
debt
on
as
At
tra n sfer
net
th e
The
recovery
m a te r ia liz e
m eet
in c lu d e
cost
se r v ic e
to
be
in to
of
se r v ic e s
m ore
If
be
of
p r o v id in g
n a tio n w id e *
th e
and
it
becom es
th e
R eserve
w o u ld
to
o th er
For
access
e x a m p le ,
term s
of
m ig h t
a b ility
of
d e p o sito r y
d e v e lo p m e n ts
it
can
w o u ld
how ever,
th a t
cost
recovery
reassess
th e
th e
o b je c tiv e s,
e q u ita b le
in
c ir c u m sta n c e s
m a rk et,
m eet
p r o v id e
o b je c tiv e *
R eserv e’s
c le a r ,
to
su b sid y *
C ir c u m sta n c e s
su ch
ex p ected
m e e tin g
noncash
th is
c o n so lid a tio n
to
w ir e
a lso
and
Such
e x p e r ie n c in g
o v e r a ll
p la n n e d
Federal
in
recovery
e sta b lish e d
o b je c tiv e s*
c o n tin u in g
its
th e
v o lu m e*
r e sp o n siv e
Federal
account
r e q u ire m en t o f
je o p a r d iz e
cannot
th e
a p p r o p r ia te n e ss
ta rg eted
se r v ic e
is
m e e tin g
are
m u st,
se c u r itie s
cost
sa fe k e e p in g
o b je c tiv e s
o ffered *
sim p ly
o b je c tiv e s,
ta k in g
be
account
le a st
se r v ic e s,
lin e
not p r e se n tly
recovery
a
se r v ic e
p re-ta x
at
th e
b o o k -en try
and
th e
be
and
cash
secondary
in to
te c h n o lo g y
If
to
ACH
to
c o m b in e d
co sts,
th e
th is
sh o rt-
m ust
lin e s
c o lle c tio n ,
is
th a n
lin e
flo a t
and
on
c o n tr ib u tio n
se r v ic e
s e c u r itie s
c o u ld
c h a n g in g
im p r o v e d
a ll
co sts,
R eserve
th a t
its
c o n tin u e
se r v ic e
ta k in g
lin e
ra th er
in stitu tio n s*
be
each
c o m m e r cia l
se r v ic e
in te r e st
som e
m e e tin g
a fter
of
m ake
s e ttle m e n t,
Federal
to
a ll
d e fin itiv e
c o lle c tio n
cost
cost
check
are
o b je c tiv e ,
O n ly
as
T hus,
cover
lin e s
o b je c tiv e *
th is
w e ll
p resen t,
and
se r v ic e
th e
" p r o f i t a b l e ’0 a n d
a g g reg a te,
PSAFo
as
e q u ity D
m a r g in a lly
th e
su ch
se r v ic e
in c lu d in g
and
several
an
a fter
th e
a d eq u ate
R eserve
th e
le v e l
Banks
10
-
have
sto p p ed
w here
by
an
o ffe r in g
a d eq u ate
th e p r iv a te
from
an
p r o v id e rS c
Federal
w o u ld
have
to
o ffer
Federal
R eserve
d id
m eet
se r v ic e
cost
In
th a t
o b je c tiv e s
c o u ld
w o u ld
not
be
m ade
w h ic h
th ere
c le a r
a c tio n ,,
p a r tic u la r
o r d e r ly
way
a sso c ia te d
paym ent
th e
im p o r ta n t
in flu e n c e ,
w o u ld
regard
ex p ected
T e c h n o lo g ic a l
in c r e a se d
th e
R e se r v e 's
e v o lv e s.
areas
p r o v id e d
in te r sta te
and
any
to
to
th e
of
in
are
th e
as
to
th at
sh o r tfa ll
to
be
p r o v id e
m eet
th ese
B oard
o n ly
w ith d r a w
from
a
in
an
p ro b lem s
o ffe r in g s0
th e
c r e a tiv e
in
a
presen ce
be
a
su ch
u n d ertak en
lik e ly
can
The
w ith
tr a n sitio n
change
of
c ir c u m sta n c e s
se r v ic e
a lso
to
a sso c ia te d
o p e r a tio n a l
b e n e fits
c o u ld
R eserve
be
a
se r v ic e
c o n tin u e
d e c isio n
th e
fa cto rs,
revenue
th at
o n ly
have
to
a
ex p ected
b e n e fits
changes
b a n k in g ,
th e
to
se r v ic e
s h o r tfa ll.,
p r o v id e
if
a lso
d ir e c ts
p u b lic
th e
Federal
d e v e lo p m e n ts
but
to
be
d isc o n tin u a tio n
can be
th e
d e c isio n
p u b lic
due
Federal
sy stem
by
A ct
s itu a tio n
com m ent
lin e
g iv in g
w ith
The
in
m ay
o th er
c o m p e titiv e
o b je c tiv e s
S im ila r ly ,
se r v ic e
to
r e a so n a b ly
p u b lic
w ere
C o n tro l
c o n tin u e
any
of
ju stify
tem p orary
any e v e n t,
o b je c tiv e s
w h eth er
se r v ic e
recovery
so lic itin g
of
se r v ic e
o th e r w ise
p o lic y
regard
m ade
a lso
som e
p r ic in g
due
th e
a fter
course
is
recovery
M o n eta ry
be
m ig h t
by
co rrected .
se r v ic e
cost
th e
g iv e
caused
tr a n sp o r ta tio n
th is
a g g r e ssiv e
to
to
of
m eet
B ecause
c o n tin u in g
was
to
R eserve
d e c isio n
not
le v e l
cash
secto r.
F a ilu r e
r e su lt
th e
-=
in
paym ent
to
be
sy stem
th e
ex p ected
effo rts
th e
m ost
from
of
-
in d iv id u a l
d e p o sito r y
p a r tic ip a n ts
r e g u la tio n
in
m a jo r
th ese
Federal
en h a n cem en ts
in
new
in
la w
and
changes0
in tr o d u c e s
th e
of
and d e v e lo p m e n ts
and o th e r
R eserve
en try
fu tu re*
new
a ll
se r v ic e s
of
th e
or
fo llo w in g
(1)
The F e d e r a l R e s e r v e m ust e x p e c t t o a c h i e v e
r e c o v e r y o f c o s t s o v e r th e lo n g run*
(2)
The F e d e r a l R e s e r v e m u st e x p e c t i t s p r o v i s i o n o f
th e s e r v ic e to y i e l d
a c le a r p u b lic b e n e fit*
in c lu d in g *
f o r e x a m p le * p r o m o t in g t h e i n t e g r i t y
of
th e
paym ent
m ec h a n ism *
im p r o v in g
th e
e f f e c t i v e n e s s o f f i n a n c i a l m ark ets* r e d u c in g t h e
r isk
a sso c ia te d
w it h p a y m en ts and
se c u r itie s
tr a n sfe r se r v ic e s*
im p r o v in g t h e e f f i c i e n c y o f
t h e p a y m e n t m ec h a n ism o r r e d u c i n g t h e u s e o f r e a l
r e s o u r c e s s u c h a s t h r o u g h t h e i n t r o d u c t i o n o f new
te c h n o lo g y 0
(3)
The s e r v i c e s h o u ld b e o n e t h a t o t h e r p r o v id e r s
a lo n e
cannot
be
ex p ected
to
p r o v id e
w ith
r e a s o n a b le e f f e c t i v e n e s s * sco p e* and e q u i t y 0
For
e x a m p l e , ' i t m ay b e n e c e s s a r y f o r t h e F e d e r a l
R e s e r v e t o p r o v i d e a p a y m e n t m e c h a n ism s e r v i c e t o
e n s u r e t h a t an a d e q u a te l e v e l o f th e s e r v i c e i s
p r o v id e d n a tio n w id e or to a v o id undue d e la y in
th e d e v e lo p m e n t and im p le m e n ta tio n o f th e s e r v i c e „
The
Federal
c a r r ie s
w illin g n e ss
to
a n a ly sis*
u n d e r ly in g
sound ness
T hese
be
R eserve
w ith
it
and
a
u n iq u e
v iew e d
as
w ith
and
o th er
p r o v id e r s
e x te n sio n
im p r o v in g *
for
its
in
c o m m itm en t
r e sp o n sib ilitie s
an
th at
r e sp o n sib ilitie s*
fu n d a m en ta l
r e sp o n s ib ility
of*
r e c o g n iz e s
u n iq u e
co o p era te
m e c h a n ism
fa ir n e ss*
sy stem *
th e
m u s t b e m et?
p o sitio n
paym ent
th e paym ent
th e
se r v ic e
c r ite r ia
in stitu tio n s*
a c c o m m o d a tin g
As
11-
of
m u st*
th e
p r e se r v in g
th e paym ent s y s te m „
u n iq u e
in c lu d in g
im p r o v in g
to
in
Federal
th e
fu ll
a
th e
c o m p e titiv e
th e
fin a l
R e se r v e 's
sa fety
and
“ 12”
IIIo
P o ssib le
The
Paym ent S y stem
Federal
p a y m e n t m e c h a n ism ,,
by
som e
R eserve
se r v ic e s
and
sy stem *
In
b efore
p u b lic
R eserve
In
d e p o sito r y
Federal
such
new
such
fo r
cost
w ith
and m ajor
se r v ic e
se r v ic e s
m ig h t
in d e p e n d e n tly
and
o th er
m in d ,
b est
or
of
th ere
R eserve
b e lie v e s
year
tw o*
or
w ith
su ch
w ill
been
to
w ill
c o u ld
th e
exp ressed
h a v in g
be
th e
e x istin g
im p r o v e
stu d y
stu d y
th e
th e
m e c h a n ism ,
th ree
be
of
checks
th e
be
paym ent
r e q u ir e d
o ffered
paym ent
several
th e
on
c o m p a tib ility
for
te c h n ic a l
of
and
c o m p a tib ility
th e
for
new
s p e c ifie d
jo in tly
fo cu s
R e s e r v e 8s
c r ite r ia
and
w ill
Federal
d e v e lo p e d
w arrant
T hey
th a t
b e n e fits ,
a c tin g
are
in
en h a n cem en ts
se r v ic e s
en h a n cem en ts
p r o v id e r s
MICR e n c o d i n g
in
and
th e
im p r o v in g
has
o th ers
fu rth er
and
th in g s,
paym ent
in itia tiv e
in te r e st
and
m a jo r
to
im p le m e n ta tio n ,.
in itia tiv e
th e
regard,
cases,
Am ong o t h e r
p a r tic u la r
c o m m itte d
se r v ic e s
en h a n cem en ts
fe a s ib ility ,
is
in stitu tio n s
o ffer
com m ent o r
r e g a r d in g
th is
in tr o d u c e
a ll
Im p ro v em en ts
by
w ith
in
th e
as
in tr o d u c tio n
p a r tic u la r
th is
areas
th e
of
ACH*
a tte n tio n
of
th e
o ffe r in g s
T hese
R eserve
in stitu tio n s
was
th a t
m is s io n
paper*
Federal
d e p o sito r y
se r v ic e s,
se r v ic e
se r v ic e
th e
th e
over
case
w ith
W ith
th is
Federal
th e
next
in c lu d e s
M in im iz a tio n o f th e
w ith
th e h a n d lin g
ite m s.
In itia tiv e s
c e r t a i n s h o r t term
o f th e i n s t i t u t i o n
d o lla r r e tu r n ite m s
the Board
in J u n e
c o s t s and t h e tim e a s s o c i a t e d
and p r o c e s s i n g
of
retu rn
in
th is
a r e a m ay e n t a i l
e f f o r t s such a s n o t if i c a t i o n
o f f i r s t d e p o sit o f la r g e
a lo n g th e l i n e s p ro p o sed by
1984*
L o n g t e r m e f f orts m a y
-
13-
r e q u i r e the a p p l i c a t i o n of n e w a n d h i g h e r
t e c h n o l o g y to r e t u r n i t e m p r o c e s s i n g ■as w e l l as
c o n t i n u e d e f f o r t s to a c c e l e r a t e the c o l l e c t i o n of
c h e c k s m o r e generally,,
In p a r t r e l a t e d to i m p r o v e m e n t s in the r e t u r n
i t e m pr o c e s s , e f f o r t s to s p e e d u p the c o l l e c t i o n
of c h e c k s as w e l l as e l i m i n a t e so m e of the
p h y s i c a l h a n d l i n g of p a p e r b y a p p l y i n g e l e c t r o n i c
t e c h n o l o g y to the e x i s t i n g p a p e r - b a s e d s y s t e m „
S o m e fo rm o f c h e c k t r u n ca ti on ,
for ex am pl e,
a p p e a r s to b e a l o g i c a l s t e p in the p r o g r e s s i o n
toward electronic p a y m e n t s „
B o o k - e n t r y s e r v i c e for s e l e c t i v e a n d l i m i t e d
c l a s s e s of s e c u r i t i e s n o t p r e s e n t l y h e l d in
b o o k - e n t r y form, s u c h as m u n i c i p a l s e c u r i t i e s ,
might offer attractive economies while improving
s e c u r i t y a n d the p a y m e n t f l o w Q
The Federal
R e s e r v e c o u l d p r o v i d e a c c e s s to a n u m b e r of
i n s t i t u t i o n s t h at m i g h t n o t h a v e a c c e s s to
existing al te rn at iv es.
E n h a n c e m e n t s to e x i s t i n g e l e c t r o n i c se r v i c e s ,
including
improved
electronic
delivery
and
s e c u r i t y of p a y m e n t s ,
*
The p a ym en t
*
*
*
system will
*
continue
new technologies and creating new risks
Federal
Reserve has
evolution.
As
opportunities
services
to
within
such,
the
improve
the
Federal
existing
framework
to p r o m o t e
the
payment
providing
an
nationwide,
evolve,
adopting
and o p p o r t u n i t i e s .
an i m p o r t a n t r o l e as a p a r t i c i p a n t
responsibilities
sy st em ,
to
Reserve
services
of
will
or
t h at
seek
offer
satisfying
in
The
new
its
i n t e g r i t y a n d e f f i c i e n c y of
adequate
level
of
the
services
a n d s e r v i n g the l o n g r a n g e i n t e r e s t s of the e c o n o m y 0
APPENDIX
Methodology for Computing Federal Reserve Bank Costs and Fees
In accordance with the Monetary Control Act, the Federal Reserye
establishes prices for its payment services in order to recover costs and
a private sector adjustment factor (PSAF)C
The PSAF is an allowance for
the taxes that would have been paid and the return on capital that would
have been provided had the Federal Reserve's priced services been furnished
by a private sector firm*
Costs for providing services are derived from the Federal Reserve's
Planning and Control System (PACS)a
PACS is the uniform financial accounting
system Reserve Banks use for determining the full costs of fulfilling their
four basic areas of responsibility: Monetary Policy, Supervision and Regula
tion, Treasury, and Financial Institutions and the Public (the latter includes
both priced and non priced services),
The system was developed in the mid-
1970's to serve as a cost accounting system, similar to systems used in
the private sector, and also to serve as a vehicle for evaluating the costeffectiveness and relative efficiency of Reserve Banks0
PACS provides the Federal Reserve with an important management
tool for budgeting and expense control by ensuring that similar expenditures
are recorded by Reserve Banks in the same way and that all Reserve Banks post
and report operating expenses under a set of common and uniform definitions0
Like most expense accounting systems used in the private sector,
expenses under PACS are classified by type or "object" of expense, such
as salaries, supplies, equipment and travel, and the reason or "output"
=2=
to which the expense is related,, such as fiscal service to the Treasury
or the provision of check collection services to depositing institutions,,
Classification of expenses by type enables the Federal Reserve to collect
necessary information for external and internal financial reporting and
control purposes,,
Classification of expenses by reason or output enables
Federal Reserve management to analyze the overall costs of Reserve Bank
operations in terms of on-going service responsibi1ities, the programs
instituted to fulfill these service responsibilities9 and the basic
activities or processes included in the provision of each service,,
Within each area of responsibility ("service line") there are sub
sidiary "services",,
The "Services to Financial Institutions and the Public"
service line9 for example, encompasses priced services such as commercial
checks electronic funds transfers securities and non-cash collection,,
Within
each of these subsidiary services9 PACS identifies specific "activities"
which reflect the basic operations or processes within the services,,
PACS classifies all costs into three categories:
direct costs9
support costs and overhead costs,,
Direct costs are those costs directly
attributable to a given service,,
Support costs are those costs9 such as
computer programming and building maintenance that, although not directly
used in priced service operations, are required to support such activities,,
All support costs are fully charged to the benefiting activities on a usage
basiSo
Overhead costs represent all remaining Federal Reserve costs that
cannot be charged directly to an output service on a usage basis,,
Examples
of overhead functions include personnel, protection and budget control„
Overhead costs are allocated to benefiting services based upon formulas
that reflect relative usage,,
Each years all Federal Reserve fees are reviewed and revised„
if necessary0
the year0
The annual review takes place during the third quarter of
Each Reserve Bank forecasts its costs and volumes for each
priced service for the upcoming year„
Included in the cost estimate is
all direct, support* overheads and float costs that are to be allocated
to each priced service 1ine0
The cost and volume estimates are based on
a combination of historical experiences and projections0
At the same times
the Federal Reserve calculates a proposed PSAF for the year„
Services that
have Systemwide uniform prices are based upon the aggregate cost and volume
estimates of the 12 Reserve Banks,,
Fees for other priced services (checks
safekeepings etc„) are based upon cost and volume estimates of the individual
Reserve Banks,,
The proposed fees of the Reserve Banks are reviewed by the System's
Pricing Policy Committee and the staff of the Board of Governors,,
The purpose
of the review is to ensure that the cost and volume estimates are reasonables
the PSAF calculation is consistent with System guidelines,, and that proposed
prices meet the cost recovery policies of the Board of GovernorSo
the Board of Governors reviews the proposed prices and PSAF„
Finally9
August 14, 1984
STANDARDS RELATED TO PRICED SERVICE A C T I V I T I E S
OF THE FEDERAL RESERVE BANKS
Io
Background
S in c e
r o le
as
b oth
1913,
an
th e
Federal
o p era to r
in
and
p a y m e n t m e c h a n ism ,,
O ver
1980-= C on gress
r e a ffir m e d
R eserveo
th e
The
Federal
p r o v id e
e q u ita b le
M o n eta ry
R e se r v e 's
its
ad eq u ate
has
le v e l
ta k in g
of
apparent
and
its
th e
Federal
r o le
p ro m o te
as
e x e r c ise s
As
care
m anner
Federal
th a t
to
sa feg u a rd s
th at
of
of
1980
account
dual
n a t i o n 8s
r e c e n tly
th e
as
Federal
has
Federal
expanded
R eserve
in stitu tio n s
on
th e
need
to
ensure
care
to
a v o id
its
r o le
ca refu l
and
to
a p r o v id e r
and
ensure
e ffic ie n c y
th at
th is ,
it
p r o v id e s
on
an
fa ir n e ss
are
th a t
a lso
o th er
in
th ese
p la c e
its
th e
to
an
an
paym ent
and
paym ent
R eserve
se r v ic e s
to
im p a r tia l
p r o v id e r s
of
ex tern a l
and
are
se r v ic e s
F u rth er,
im p le m e n te d
o b je c tiv e s
a ctu a l
a c tio n s
Federal
e q u ita b le
are
to
th at
th e
of
le n d e r ,,
of
of
a c tio n s
th ere
as
su p e r v iso r
e x te n sio n
ensure
as
(MCA)
th e
b etw een
R eserve
M oreover,
r o le
e x e r c ise d
is
th e
a
n a tio n w id e ,,
in stitu tio n s
se r v ic e s.
th is
A ct
of
y e a r s — and
has
ensure
ensures
70
d e p o sito r y
in to
p erfo rm ed
r e g u la to r
r e q u ir in g
r e g u la to r ,
an
has
R eserve
in te g r ity
d e p o sito r y
b a siso
a
R eserve
th e
m e c h a n ism .
a ll
c o n flic t
by
a ll
se r v ic e s
The F e d e r a l
or
to
a
la st
C o n tro l
se r v ic e s
b a sis,
th e
r o le
R eserve
in
a
paym ent
in te r n a l
a c h ie v e d o
-
E x te r n a lly *
d ir e c tly
and
sta tu to ry
p r o v id e d
a ll
c o n tr o ls ,,
by
of
d ir e c to r s
e x a m in e r s
Federal
conduct
of
To
fo llo w in g
le v e l
th e
Board
The
of
Bank
its e lf
ex tern a l
to
and
R eserve
in c lu d in g
in te r n a l
a u d ito r s ,,
r e str ic tio n s
in te n d ed
r e v ie w
is
on
sa feg u a rd s
m eans*
im p o se s
and
com m ent
in te r n a l
G overnors
e m p lo y e e s— r e s t r i c t i o n s
of
of
o v e r sig h t*
O ffic e *
o p p o r tu n ity
v a r io u s
R eserve
Bank
use
of
F in a lly *
upon
to
th e
th e
a v o id
even
im p r o p r ie ty ,,
ensure
in
A c c o u n tin g
p r o p o sa ls0
th rou gh
and
its
th rou gh
th e
R eserve
appearance
param ount
by
c o n g r e ssio n a l
G eneral
An a d d i t i o n a l
Board
o v e r sig h t
-
in c lu d e
th e
s ig n ific a n t
Board
IIo
th rou gh
p u b lic
boards
th e
sa feg u a rd s
th e
in c lu d e
th e
th e
2
fu rth er
p r o v id in g
a d d itio n a l
th at
p r ic e d
sta n d a rd s
its
p u b lic
se r v ic e s
in te r e st
under
have been
th e
r o le
is
MCA*
th e
r e sp o n sib ility
fo r
a d o p te d ,,
S ta n d a rd s
Ao
lo
O r g a n iz a tio n
Wo
R eserve
p r ic e d
and O p e r a tio n s
Bank
person n el
se r v ic e s*
P r e sid e n t
or
r e sp o n sib le
u n le ss
F ir st
for
m o n eta ry
le n d in g
areas.
p o lic y
d e c isio n s
su p e r v isio n
or
V ic e
P r ice d
w ith
a c tin g
th e
P r e sid e n t*
p o lic y *
se r v ic e
a ffe c tin g
le n d in g
in
bank
w ill
a lso
of
be
su p e r v isio n *
personnel
m o n eta ry
m a tters.
c a p a c ity
w ill
p o lic y *
not
or
m ake
bank
-320
Branch managers may administer p o l i c y d e c i s i o n s
Reserve
Bank
in
the
lend i n g
area b u t
ma y
not
of
a
make
p o l i c y decisions in this area„
3o
Federal
Reserve
institution
lending
in
actions
the
functions
relative
to
m o n e t a r y policy*
involving
institution will be
made
a
depository
supervisory*
a p a rticular
without
or
depository
regard
to
whether
that institution is a user of Reserve Bank services or
is an alternative prov i d e r of such s e r v i c e s Q
4o
Except for the President*
manager*
or
Reserve
Bank
bank
persons
Federal
acting
perso n n e l
supervision or
Reserve
personnel
involved
these ^ capacities*
in m o n e t a r y policy*
lending
function m a y discuss
the
institution o n l y where
in
branch
involved
priced
responsibilities,,
First Vice President*
services
w ith
necessary
With
the
in
priced
to
a
depository
carry
exceptions
services
out
noted
ma y
their
above*
discuss
matters rela t i n g to m o n e t a r y policy* b ank
supervision*
or
o n l y where
lending w i t h a dep o s i t o r y
the information d iscus s e d
institution
is general
in nature
or
is
publ ic o
50
Reserve
bank
Bank
p e rsonnel
s u p e rvision or
involved
the
lending
in m o n e t a r y
policy*
function m a y provide
confidential
information
their duties
to Reserve Bank priced services personnel
only
such
w here
action
obt a i n e d
fulfills
in
an
the
course
important
of
-4 -
supervisory objective,
payment
mechanism
Reserve
Banks.
p rovided on
pre s e r v e s
or
In
p rotects
such
the in t e g r i t y of the
the
cases,
assets
of
i n f o rmation
a n e e d - t o - k n o w basis
and
the
will
be
only with
the
approval of senior management.
Bo
1.
Business Practices
All
activities
incident
to
the p r o v i s i o n
of
services will be con d u c t e d
in a manner
consistent with
role and r e s p o n s i b i l it i e s
the p u b l i c
that
priced
is fully
of the Federal Reserve.
2„
Federal Reserve services will be o f f e r e d on a fair and
equitable
basis
to
all
depository
similar terms and conditions.
be
in accordance w i t h
institutions
on
The pr i c e s charged will
the requirements of
the M C A as
implemented b y pol i c i e s of the Board of Governors.
3.
Reserve
Banks
will
provide
full
and
accurate
information regarding the p r o v i s i o n of Federal Reserve
services,
opera t i n g
including
features,
requirements,
institutions
to make
to
quality,
enable
prices
and
d e pository
informed decisions.
Comparisons
of its services w i t h those of other p r o v i d e r s will be
fair and objective.
4.
When
introducing or
will announce
that
will
revising
such changes
ensure
that
services,
Rese r v e Banks
to the p u b l i c
c o m m u n i c a t i on s
in a manner
reach
all
-
5
-
interested d e p o s i t o r y institutions
in s u fficient
time
to enable them to make a p p r opriate a d j u s t m e n t s »
III.
Internal Oversight
The p r i m a r y r e s p o n s i b i l i t y for assuring that the above
standards are applied
Reserve Banko
that
these
policies,
is ent r u s t e d
to
the m a n a g e m e n t
each
A c c o r d i n g l y , Reserve Bank m a n a g e m e n t will ensure
standards
are
c l e a r l y repre s e n t e d
p r o cedures and c o n t r o l s D
responsibilities,
oversight of b u s i n e s s conduct
Bank's internal audit f u n c t i o n
Reserve
in R e s erve
Bank
maintains
Bank
Consi s t e n t w ith its o v e rall
each Reserve Bank's board of directors,
each
of
is p r o v i d e d b y
p r i n c i p a l l y through the
The internal audit func t i o n of
independence
from
operating
management b y reporting d i r e c t l y to the Reserve Bank's b o a r d of
directorSo
Oversight of Reserve Bank pr i c e d service activi t i e s
also
carried
out
by
the
Board
of
Governor s .
This
a ccomplished through r e vie w and approval at the Board
price
and
pric e d
service
service
level
changeso
activities
are
Furthermore,
e v a l uated
in
is
is
level of
Reserve
Bank
conjunction
w ith
on-site reviews b y the Board's o p e r a t i o n s r e v i e w and financial
e x a m ination
ensures
staffsD
that
Reserve
Board
Bank
oversight
activ i t i e s
through
are
these
co n s i s t e n t
means
with
the
M C A and w ith Board policie s w i t h regard to p r i c e d services,,
addition,
Board's
the
Board
Federal
member
Reserve
serving
Bank
as
the
Activities
Chairman
Committee
of
the
is
In
-
responsible
for
investigating
6-
and
re s p o n d i n g
concerning actions of R e s erve Bank p e r s o n n e l
to
be
inconsistent
with
Currently*
Vice
capacity,,
Accordingly*
the
Chai r m a n
standards
Pr e s t o n
complaints
that are
presented
Mar t i n
inquiries
to
serves
c o ncerning
a l l eged
above„
in
this
Reserve
Bank
actions may be directed to V ice C h a i r m a n M a r t i n 0s attention,.
The
internal
audit
and
Board
examination
focus on Reserve Bank compl i a n c e w ith policies*
controls*
service
including
standards
activities,.
encompasses
structure
A u dit
activities
and
and
staffing*
a l l ocation of costs*
of
and
conduct
functions
financial
such
to
p riced
attention
as
a c counting
info r m a t i o n flows*
p r o c e d u r e s and
related
e x a m ination
activities
also
o r g a n i z a t i o na l
and
reporting*
and a s sociated internal
controls,,
IVo
Conclusion
It
is the p o l i c y and p r a c t i c e of the Federal Reserve
System to conduct its a f f airs
maintain
the
effective
Federal
integrity
discharge
Reserve
and
credibility
its
public
believ e s
address questions
Federal Reserve
of
in a manner
that
of p o t e n t i a l
to fulfill
these
that will
e s s e ntial
serve
to
to
the
responsibilities»
The
standards
conflicts
effectively
while p e r m i t t i n g
its p u b l i c r e s p o n s i b i l it i e s
in
the
the
provi s i o n of services to the n a tion's d e p o s i t o r y i n s t i t u t i o n s «
@FedFRASER