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The Government Performance and Results Act
Before the Committee on Banking and Financial Services, U.S. House of
July 29, 1997
Mr. Chairman and members of the Committee, I am pleased to be here today to discuss the
Federal Reserve’s planning process and the efforts we are making to measure and improve
our performance in the spirit of the Government Performance and Results Act (GPRA). I am
personally a long-term proponent of GPRA and worked hard on its implementation when I
was at the Office of Management and Budget. While the Federal Reserve does not receive
appropriated funds and is not, strictly speaking, covered by the Act, we are eager to
participate in the processes and activities set forth in the Act. GPRA fits well with the new
efforts the Federal Reserve has undertaken to plan further ahead, use our resources more
effectively and to coordinate activities across the whole system more explicitly. The
testimony is a brief progress report on those efforts.
Planning at the Fed
In its briefest form, the Federal Reserve’s mission is to "foster the stability, integrity and
efficiency of the nation’s financial and payment systems so as to promote optimal
macroeconomic performance." This mission derives directly from the Federal Reserve Act
of 1913, which established the Federal Reserve as the nation’s central bank, and has three
main elements:
To formulate and conduct monetary policy toward the achievement of maximum
sustainable long-term growth; price stability fosters that goal.
To promote a safe, sound, competitive, and accessible banking system and stable
financial markets through supervision and regulation of the nation’s banking and
financial systems; through its function as the lender of last resort; and through
effective implementation of statutes designed to inform and protect the consumer.
To foster the integrity, efficiency, and accessibility of U.S. dollar payments and
settlement systems, issue a uniform currency, and act as the fiscal agent and
depository of the U.S. government.
The activities involved in carrying out this broad mission are extremely diverse, ranging from
setting short-term interest rates to processing checks and cash, to examining depository
institutions. Allocation of the resources the Federal Reserve uses to do its job depends
heavily on the state of the economy (both national and international), how well or badly the
financial services system is functioning, and what additional tasks (such as implementation
of the Community Reinvestment Act and expansion of our oversight of foreign banks
operating in the U.S. pursuant to the Foreign Bank Supervision Enhancement Act of 1991)
the Congress assigns to us.

To carry out this multi-faceted mission, the Congress established a highly decentralized
Federal Reserve System with a complex governance structure. Leadership and direction are
vested in the Board of Governors, but only about 1,700 staff (out of about 24,900) work for
the Board in Washington. The regional Reserve Banks carry out the bulk of operations and
have substantial autonomy. As a result, planning and resource allocation at the Federal
Reserve have historically been quite decentralized, and major changes have required
painstaking consensus building across the Board/Bank structure.
The regional structure of the Federal Reserve is one of its great strengths. The twelve
regional Federal Banks work closely with the banks in their region and are closely tied into
their regional economies. The development of Federal Reserve policy is greatly enriched by
the in-depth knowledge that the regional banks have of the industrial, agricultural and
financial forces shaping different parts of the economy. The challenge confronting strategic
planning at the Federal Reserve is to find a balance between decentralized regional planning,
which preserves the strengths of the regional structure, and the need for a more
comprehensive national plan aimed at increasing efficiency by rationalizing the allocation of
resources across regions and functions.
In recent years, major changes have occurred in the allocation of Federal Reserve resources
in response to unfolding events. When serious problems developed in the banking industry in
the 1980s and in response to increased supervisory responsibility for foreign banking
entities, more Federal Reserve resources were channeled into supervision and regulation.
Rapidly changing technology, especially telecommunications and automation, has
revolutionized Federal Reserve operations and required considerable investment in
hardware, software and expertise. Consolidation of the banking industry, evolution of
payment systems patterns and technology, growth in derivatives, globalization of financial
services, concerns about equal credit opportunity and fair housing issues, efforts to reduce
systemic risk in the payments area, and changes in monetary aggregates, have all caused
planning and resource adjustments.
Rapid technological change has also created opportunities for system-wide efficiencies
resulting from consolidation of activities in one or more Reserve Banks. A number of the
twelve regional banks have developed specialized activities serving other regions. This
consolidation and specialization has enabled the Reserve Banks to centralize operations of
many of their mission critical applications, such as Fedwire, Automated Clearing House
(ACH), and accounting. Continued technological advance, as well as further consolidation in
the financial services industry, is likely to lead to further specialization among regional
Federal Reserve Banks.
New Strategic Planning Activities
In the face of accelerating change, the Federal Reserve recently recognized the need for a
more comprehensive planning framework. In 1995, a System Strategic Planning
Coordinating Group was appointed, consisting of Board members, Reserve Bank Presidents
and senior managers, representing the full range of the Federal Reserve’s activities. This
group produced an "umbrella" framework, designed to enable the Board, the Reserve Banks
and product and support offices to produce their own more detailed plans and decision
documents under the "umbrella."
This framework, which is the basis for the document submitted to the House and Senate
Banking Committees, sets forth the mission of the Federal Reserve referred to above. It also
discusses the "values" of the Federal Reserve, the goals and objectives of the Fed, key

assumptions, as well as the external and internal factors that could affect the achievement of
those goals and objectives. With the overall framework as a reference point, strategic
planning activities are proceeding with new energy at the Reserve Banks, at the Board, and
with respect to cross-cutting major functions such as the payments system and bank
supervision and regulation.
Individual Reserve Banks have reviewed their operations from the ground up and reassessed
their structure and effectiveness in carrying out their missions. Some of the Banks have
launched fundamental re-engineering efforts that are resulting in substantial changes in
management structure and operations. The Federal Reserve Bank of Chicago calls its effort
"Fresh Look"; the Federal Reserve Bank of Cleveland is engaged in "Transformation: 2000."
Board Planning and Budgeting
At the Board, we have restructured the annual planning and budget process to put more
emphasis on planning (and less on detailed line-item budgeting), to lengthen the planning and
budgeting horizon, and to involve the Board itself more heavily in setting priorities. To this
end, we have established a Budget Committee of the Board (consisting of myself and
Governors Phillips and Kelley) assisted by a staff planning group drawn from across the
major functions of the Board. We are working with a four-year planning horizon and intend
to produce the Board’s first biennial budget (1998/1999) to go into effect on January 1,
1998. Our hope is that the new process and structure will give the Board a better
understanding of the options it faces with respect to alternative ways of carrying out the
Federal Reserve’s mission, and a clearer basis for deciding on priorities.
Payments System Study
A major study of the Federal Reserve’s role in the Payments System, currently underway, is
another example of strategic planning with respect to a major portion of the Federal
Reserve’s activities, under the general umbrella of the strategic planning framework.
Since payments technology and the structure of the financial services industry are changing
rapidly, it seemed important to focus both on how the payment system was evolving (and
should evolve) and what role the Federal Reserve should play in that evolution. The United
States is amazingly dependent on paper checks--Americans wrote 64 billion checks in
1996--while most of the industrial world is shifting rapidly to more efficient electronic based
The study, directed by a committee of two Governors and two Federal Reserve Bank
Presidents, has drawn on analytic resources across the Federal Reserve System and outside.
We began by examining the consequences of substantially altering the role of the Federal
Reserve in the retail payments system (checks and wire transfer system know as ACH). We
analyzed the impact of scenarios ranging from withdrawal of the Federal Reserve from the
check and ACH markets to more aggressive leadership by the Federal Reserve in making the
payment system more efficient and less dependent on paper.
To get maximum input from the participants in the payment system--banks, clearinghouses,
vendors, consumers and others--in helping us assess alternatives for the future, we held a
series of "forums" around the country in May and June. We had enthusiastic and extremely
helpful participation from a wide range of institutions. We learned a lot from the process and
are now reassessing the alternatives, conducting additional analyses and preparing to present
preliminary options to the Board. I look forward to sharing the study with this Committee.
The payments area is a good example of the dilemma posed for planners by rapid

technological change. While rapidly evolving technology makes focusing on future options
imperative, it also makes it extremely important to remain flexible. Laying out a blueprint
for the payments system of the next ten or even five years, and rigidly following it, would
almost certainly be a mistake. The technology is moving so rapidly that investments made
now may well be obsolete in a short time.
Performance Measures
A major theme of GPRA is the identification of specific measures of performance of
projects and programs which can be used to evaluate their effectiveness. As in most
organizations, performance measurement at the Federal Reserve is more advanced--and
more feasible--in some types of activities than in others.
In the payment services areas, the Reserve Banks have measured their performance through
various financial measures for many years. For example, the Monetary Control Act of 1980
imposes market discipline on the Federal Reserve by requiring it fully to cover its costs of
providing services to depository institutions, and compliance with this requirement is
monitored closely. Frequently private competitors provide or could provide these services,
and our ability to recover our costs, adjusted to include a factor for imputed profits, taxes
and cost of capital, help determine whether it is beneficial for the economy that we stay in
the business. In addition, the Federal Reserve has traditionally measured unit costs for its
financial services and has developed various indices that allow a Reserve Bank to measure
its cost performance over time and in comparison to other Reserve Banks. Private sector
benchmarks are also being developed. The Federal Reserve also tracks quality measures for
many Reserve Bank services. Finally, the Federal Reserve monitors the progress of the
Reserve Banks against various strategic objectives.
Similarly, in bank supervision, the Federal Reserve has long used a variety of measures of
the effectiveness of its examination process, but the measurement challenge has taken on
new importance as supervision becomes more automated and more focused on analyzing
risk. To meet this challenge, the Federal Reserve is working closely with other regulators to
standardize and improve examination techniques, and has established a Steering Committee
to oversee implementation of a risk-focused examination program and to design a
management information system that will permit the Board to evaluate better the efficient
use of examination resources among the Reserve Banks. For instance, supervisory data are
used to determine in advance of on-site examinations what factors (CAMELS rating, asset
size, location, and loan types) are most predictive as to the resources needed for
examinations, and which institutions, particular lending areas or other service lines may
require more intensive review. Such programs are low-cost because they use information
that we already collect, and are effective and cost-saving because they provide a systematic
way to plan and prioritize our time and resources.
In other areas, such as the research and statistical analysis on which monetary policy is
based, performance measurement is--and will remain--far more problematic. The
performance of the economy itself is not so hard to measure and right now is highly positive.
But it is not clear how much of the economic progress can be attributed to monetary policy,
and even less clear how particular monetary policy actions are related to the quality and
quantity of research and analysis produced by the Fed’s research staff.
GPRA provides the opportunity for a major improvement in the management and
effectiveness of Federal agencies. It provides the impetus for agencies to clarify their

missions and objectives, measure their performance better and improve their efficiency and
effectiveness. It must, however, avoid the risk of becoming, like some previous efforts to
improve government management, largely a paper exercise which produces many numbers
and reports but few real results.
The Federal Reserve welcomes the opportunity to participate in the GPRA process. We will
work hard to fulfill the vision of the framers of the Act and avoid the pitfalls. We will have
to respond in ways that are appropriate to the Federal Reserve’s diverse missions and
decentralized structure. I believe we have made significant progress toward the GPRA-type
strategic planning and are on the track to making more in the immediate future.
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1997 Testimony
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