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FEDERAL RESERVE BAWK OF MEW Y O R K fi r % C/ K i } July 3, 1984 FIRST QUARTER REPORT ON PRICED SERVICES 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 issued a report providing financial results of Fed eral Reserve priced service operations for the quarter ended March 31, 1984. The Board issues a report on priced services annually and a priced service bal ance 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. Printed on the following pages are the balance sheet and income statements for the quarter ended March 31, 1984. Additional copies of this circular will be fur nished upon request directed to our Circulars Division (Tel. No. 212-791-5216). Questions regarding the statements may be directed to Robert M. Abplanalp, Vice President (Tel. No. 212-791-5349). A nthony M. So lo m o n , President IfifO w -f Table 1 Pro F o m a Balance Sheet For Priced Services Federal Reserve Banks March 31, 1984 (in millions) Short=term assets Imputed reserve requirements on clearing balances Investment in marketable securities Recei vables Materials and supplies Prepaid expenses Net items in process of collection (float) Total short-term assets Long-term assets Premi ses Furniture and equipment Leases and leasehold improvements Total long-term assets $ 147.4 1,080c6 50.1 4.3 3.5 312.4 $1,598.3 169.1 99.2 2.3 270.6 $1,868.9 Total assets Short-term liabilities Clearing balances Balances arising from early credit of uncollected items Short-term debt Total short-term liabilities Long-term liabilities Obligations under capital leases Long-term debt Total long-term liabilities Total liabilities Equity Total liabilities and equity $1,228.0 312.4 57.9 $1,598.3 0.4 85.9 86.3 1,684.6 184.3 $1,868.9 Accompanying notes are an integral part of these financial statements. Table 2 Pro Forma Income Statement for Priced Services Federal Reserve Banks For the quarter ended March 31s 1984 (in millions) Income: Services provided to depository i nstitut ions Expenses: Production expenses Less: Board approved subsidies $139.6 $111.0 1.5 Income from operations Imputed costs: Interest on float Interest on short-term debt Interest on long-term debt Sales taxes FDIC insurance 30.1 12.2 0.8 2.2 1.2 0.3 Income from operations after imputed costs Other income and expenses: Investment income Earnings credits Income before income taxes Imputed income taxes 109.5 16.7 13.4 27.9 26.4 1.5 14.9 5.8 Net income $ 9.1 Memo: Targeted return on equity $ 5.9 Details may not add to totals due to rounding. Accompanying notes are an integral part of these financial statements. Notes to the Financial Statements Balance Sheet (Table 1) Federal Reserve assets are classified as short- or long-term. Short-term assets represent assets such as cash and due from balances, market able securities, receivables, materials and supplies, prepaid expenses, and items in the process of collection. Long-term assets are primarily fixed assets such as premises and equipment. The imputed reserve requirement on clearing balances and investment in marketable securities reflect the Federal Reserve's treatment of clearing balances maintained on deposit with Reserve Banks by depository institutions. For balance sheet and income statement presentation, clearing balances are reported comparable to reporting of compensating balances held by respondent institutions with correspondents. correspondent are subject Federal Reserve., This to a reserve That is, respondent balances held with a reserve requirement requirement must be as determined by the satisfied with either vault cash or with non-earning balances maintained at a Reserve Banko Follow ing this model, clearing balances maintained with Reserve Banks for priced service purposes should also be subject to reserve requirements„ Therefore, a portion of the clearing balances held with the Federal Reserve are identi fied on the balance sheet as imputed reserve requirements on clearing bal ances, representing vault cash and due from balances., would be available for investment., assumes that all such balances The remaining amount For these purposes, the Federal Reserve would be invested in three-month Treasury bills. Other short-term assets used in providing priced reflect the total services, of: 1) assets directly or 2) an allocation of the portion of joint assets used in providing priced services. Receivables primarily reflect - 2 amounts due the Reserve Banks for priced services which have been provided to institutions for which payment has not yet been received» Receivables also include that share of suspense account and difference account balances related to priced services «, Materials and supplies reflect short-term assets necessary for the ongoing operations of priced service areas for which payment has been made° Prepaid expenses represent other prepaid items such as salary advances and travel advances for priced service service leasehold improvements personnel which will and the portion be amortized to of priced current expense during the yearD Net items in the process of collection is the amount of float which will be added to the cost base subject to recovery0 Ihus9 it is the difference between cash items in the process of collection and deferred availability cash itemSo Therefores the asset item on the balance sheet corresponds to the amount of float that the Federal Reserve must recover through fees to satisfy the Monetary Control Acto Conventional accounting procedures would call for the gross amount of cash items and deferred availability items to be included on a balance sheet„ However^ because the gross amounts have no implications for income or costs and no implications for the PSAF calculations they are not reflected on the pro-forma balance sheeto Long-term assets that are reflected on the balance sheet have been allocated to priced services using a direct determination basis® This ap proach was adopted along with other changes in calculating the PSAF for 1984o The direct determination method utilizes the Federal Control System (PACS) to directly associate Reserve's Planning and single-purpose assets and to - 3 - apportion assets used jointly in the provision of different services to priced and non-priced services. Additionally, also resulting from changes to the PSAF methodology, an estimate of the assets of the Board of Governors related to the development of priced services has been included in long-term assets in the premises account. Long-term assets also include an amount for capital leaseSo In accordance with generally accepted accounting principles, the Federal Reserve in 1984 has begun to capitalize leases that qualify for capitalization. Leases had not been shown previously on Federal Reserve balance sheets due to immateriality. While the impact in the future is also likely to be im material, procedures have been established in order to disclose these assets on a basis consistent sector firms. with accounting and disclosure practices of private These assets also include leasehold improvements. portion of leasehold improvements A matched-book capital has been structure included for those in The current prepaid assets expenses. that are not "self-financing," has been used to determine the liability and equity amounts. Short-term assets are financed with short-term debt. Long-term assets are financed with long-term debt and equity in a proportion equal to the ratio of long-term debt and equity of the bank holding companies used in the pri vate sector adjustment model. Other short-term liabilities include clearing balances maintained at Reserve Banks and deposit balances arising from float. Other long-term liabilities consist of obligations on capital leases. System Income Statement (Table 2) The income statement services. reflects the income and expenses for priced Included in these amounts are Board approved subsidies, imputed - 4 - float costs, imputed financing costss and the income and cost related to clearing balances. Revenues reflect charges to depository institutions viceso to an These revenues are realized through one of two methods: direct charges institution's deposit creditSo account or charges against accumulated earnings Income includes charges for per-item fees, package fees, explicitly priced interterritory check float9 account insurance fees, and surcharges. and other general ities. for priced ser- maintenance fees, shipping and Production expenses include directs indirect, administrative expenses generated by priced service activ Other expenses relate to the expenses of Board staff working directly on the development of priced services and amounted to $0.4 million in the first quarter of 1984. Board approved subsidies consist commercial automated clearinghouse established for ACH the service service. provides recover an increasing share of expenses. to recover 60 percent incentive pricing of costs program is of a program established plus being The for incentive fee pricing structures for the program designed to In 1984, ACH revenues are intended the private phased out sector with adjustment. complete This elimination planned in 1985. Imputed float to be recovered, costs either 1984 include the explicitly for the or value through first quarter of commercial and book-entry securities transfer services. of float that was per-item check, fees, automated intended during the clearinghouse, In the second quarter of 1984, float recovery for the noncash coupon collection service will be implemented. Also included in imputed costs is the interest on short and long-term debt used to finance priced service assets through the PSAF and the sales taxes and FDIC insurance which the Federal sector firm. Reserve would have paid had it been a private - 5 - Other income and expenses are comprised of income on clearing bal ances and the cost of earnings credits granted to depository institutions. Income represents the average coupon equivalent yield on three-month Treasury bills applied to the total clearing balance maintained, adjusted for the effect of reserve requirements. Expenses for earnings credits were derived by applying the average Federal funds rate to the required portion of the clear ing balances. The Federal Reserve is committed to adjusting the Federal funds rate at which earnings credits are paid on clearing balances in order to take into account the effect of reserve requirements. The software changes necessary to implement this adjustment are complex and will take some time to complete; however, the adjustment is expected to be made starting November 19 1984c Had the reserve adjustment to earnings credits been in place in the first quarter, and assuming expenses of earnings resulting increase credits in net no resulting would clearing have shift in been about balance income clearing balances, the $24o6 million with a of $1.8 million and an increase in net income of $1.2 million to $10„3 minion. Imputed income taxes are calculated at the effective tax rate used in the PSAF calculation applied to the net income before taxes. The targeted return on equity represents the after-tax rate of return on equity that the Federal Reserve would have earned based on a model of bank holding companies.
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