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For release on delivery Expected at 9:30 a.m. EST April 11, 1984 Statement by E. Gerald Corrigan, President Federal Reserve Bank of Minneapolis before the Committee on Banking, Housing and Urban Affairs United States Senate April 11, 1984 Mr. Chairman, I am pleased to have this opportunity to review developments over the past three years regarding the priced services activities of the Federal Reserve Banks. My prepared statement is divided into four parts: the first provides an overview of the role of the Federal Reserve in the provi sion of payments services to depository institutions; the next section provides a general review of our experience with the pricing of such services as required by the Monetary Control Act of 1980; the third section comments on the draft report on such activities prepared by the General Accounting Office at the request of members of this Committee; and, the last section contains some brief remarks on the subject of delayed availability of funds associated with some check deposits. I. THE ROLE OF THE FEDERAL RESERVE IN THE PAYMENTS MECHANISM The operation of the nation's payments mechanism is a vast and complex undertaking which daily— directly citizen, every business, millions of others or indi rectly--affects and every financial abroad. virtually every institution in this country and For most of us, the act of making or receiving payment is as routine as getting out of bed in the morning. However, because literally hundreds of billions of dollars change hands daily with such reliabil ity and efficiency we should not take for granted the smooth workings of the payments mechanism. The safe, efficient, and trusted operation of the payments system is clearly a matter of high public interest here in the United and around the world. States Indeed, these very considerations relating to the safety and efficiency of the payments mechanism were a central element in the decision of the Congress to create the Federal Reserve more than 70 years ago. - 2 - Reflecting in part the legacy of 70 years of experience, I believe there is virtually unanimous agreement that the Federal Reserve, as the nation's central bank, has a natural and continuing interest in the efficient and safe functioning of the payments mechanism. In part, that natural interest arises from the fact that disruptions in the payments mechanism— regardless of their origins— can threaten the safety and soundness of financial institutions, finan cial markets large. and, in the extreme, the smooth functioning of the economy at However great those concerns may have been 70 years ago, they take on even greater importance in the context of today's highly interdependent domestic and international banking and financial markets. The point should also be made that transactions balances at depository institutions and the associated and the same time, the bedrock upon which all reserve balances held at the Fed are, at one vehicle through other financial which monetary policy is conducted. the reasons that banks have, in which flows most payments are made, the rest, and the mechanism through This trilogy of unique functions is one of effect, had an exclusive franchise on the operation of the payments mechanism and it is one of the reasons why I believe that banks are special. That trilogy points, in my judgment, to the imperatives of strong banks, strong financial markets, and a strong and efficient clearing system. To put it more pointedly, degree of public confidence. the payments system demands the highest It simply would not be possible to make hundreds of billions of dollars in payments daily if public confidence in the certainty of payments and the payments process were shaken or undermined. While perhaps 3 - - not of the same order of importance, the operation of the payments mechanism inevitably involves other public policy considerations to the ease and terms with which located institutions and The question, relating, for example, smaller economic entities and more remotely individuals therefore, have is access not to whether the the payments central system. bank has a responsibility to promote the safety and efficiency of the payments mechanism, but rather it discharged. is one of how that More particularly, policy objectives by responsibility should the Fed regulation alone; should can be most effectively seek to achieve these public it act as a processor of last resort, taking on only those functions that others are unwilling to provide or unable to provide at reasonable fees and conditions; or should it maintain an operational presence in the payments mechanism along the broad lines that have prevailed for the past 70 years? policy point From my perspective, the dictates of public strongly in the direction of preserving the operational of the Fed in the payments mechanism--recognizing, presence of course, that the exact configuration of that presence need not, and probably will not, remain as it is today. In saying this I should also stress that an operational presence for the central bank along the general lines of the Fed's current activities is by no means unique among central banks in the industrialized countries of the world. The processor of last resort concept is deceptively appealing but, in my judgment, is not workable. The Federal Reserve Banks could not maintain the standby facilities, equipment and personnel that would be needed to function on an on-again, off-again basis or to step into those situations in which an - 4 - adequate level of payments services might not be available nationwide at reason able costs and terms. Moreover, even the simplest aspects of the payments mechanism require a continuity of expertise and working knowledge that would be very difficult to maintain in such an environment. cost to the taxpayers would be high. Even if feasible, the Therefore, assigning to the Fed a role as processor of last resort is simply not viable. In my opinion the United States has— taking account of the size of our economy and the size of our country— the most efficient payments system in the world. That surely cannot fact cannot be attributed to technological superiority; it be attributed to the presence of a neat and clean banking and financial structure. While many factors may be involved, I would suggest that the side-by-side presence of the Federal Reserve and the private banking system in the operation of the payments mechanism has been one of the primary factors that has permitted and encouraged the payments system in the United States to achieve this lofty status. One can speculate as to whether the result would have been different had the historic role of the Fed been confined to that of a regulator of the payments system. That speculation— however interesting— cannot alter 70 years of experience and it cannot alter the fact of where we are today. Let me cite a few examples that may help to illustrate my point. — Is it reasonable to conclude that the book-entry system for U.S. government securities would have been developed as quickly as it w a s — if at all— if the Fed had been only a regulator rather than a participant in the payments mechanism? - — 5 - Is it reasonable to assume that one or more private entities could, or would even want to, fully displace the Fed's funds transfer network? — Is it reasonable to assume that absent a Federal tional presence 99 percent of the checks written Reserve opera in this vast country with its 40,000 depository institutions would be collected in two days or less? — On the other side of the coin, as late as 1979, the Federal Reserve attempted, in the form of a Board policy statement, to put a halt to delayed disbursement of checks. delayed disbursement of However, we probably have more checks today than we did in 1979. Federal Reserve— through the so-called "high dollar group The sort program" which will be implemented on April 23 of this y e a r — is now seeking to achieve through its operations what it could not achieve through "regulation." The point, of course, is that the payments mechanism is so complex, legally and operationally, that it is far from clear that public policy objec tives could be achieved simply by writing regulations. Moreover, it is quite possible that absent the "hands on" working knowledge gained through operations, regulatory efforts would quickly take on an ivory tower character that would be ineffective or impair the efficiency of the payments mechanism or both. There is no doubt in my mind the Fed's operational presence in the payments mechanism is a better alternative than costly regulatory apparatus. what otherwise would be a cumbersome and very - While I am skeptical that 6 - regulation alone could provide a cost- effective and efficient method of ensuring that the public policy objectives associated with the operation of the payments mechanism would be well served, there are other aspects of the Fed's operational presence that would be very difficult to duplicate if it were simply a regulator of the payments For example, the Fed can be thought intermediary in the payments process. collectors and payors in the fastest system. of as something of a neutral and trusted Its only interest is bringing together and safest manner possible. It has no particular interest in whether a check is large or small, whether the collecting or paying institution is large or small, or whether the writer of a check is an otherwise valued customer. relationships with feature that makes bank it Indeed, the fact that the Federal customers an Reserve has no that are not depository institutions attractive source of payments services is a for many depository institutions. This role as a trusted and neutral intermediary is reinforced by the fact that the Fed is also the bankers' bank whose solvency is never in question. This feature permits the Fed prudentially to assume risks such as the intra-day credit exposure on Fedwire or to act as a correspondent for problem banks when others may be unable or unwilling to accept such risks. intermediary and the ever-solvent bankers' In tandem, the neutral bank are aspects of the Fed's role in the payments mechanism which contribute, in no small way, to that essential public confidence in the payments system. None of the above should be construed to mean that the Fed's opera tional presence should remain exactly what it is today. ments, the advent of interstate banking, the Technological develop creative efforts of individual - 7 - banks and a host of other factors, no doubt, will change that role over time. Moreover, the Congress may wish to provide different direction to the Federal Reserve asking that we do more, that we do less, or that we do nothing. At this juncture, however, I personally would urge that we retain the legislative status quo. The bottom line, as I see it, Mr. system, the business community, Chairman, is that the financial and the public at large have been the clear beneficiaries of the Fed's role— in partnership with the banking community— in promoting the highly efficient and safe payments United States. system that we enjoy in the Alternative configurations are easy to conceive but may not be so easy to operate in a way that is appropriately sensitive to those public interest considerations I spoke of earlier. Much of what I have said about the role of the Federal Reserve is germane to one of the most basic issues raised by the GAO draft report. whether there is a conflict of interest between the Fed's provider and a regulator of the payments mechanism. that there is a potential conflict Namely, role as a service I will readily concede of interest between the Fed's role as a regulator and as a provider of payments services in a competitive environment. However, there are powerful insure that potential forces which conflicts will seem to me to more than adequately never become actual conflicts. These powerful countervailing forces include the generalized public scrutiny of Fed actions, the oversight and general supervisory role of the Board of Governors, the public comment process, the activities of the GAO, and the oversight by the Congress itself. 8 - - Moreover, I think the point should be stressed that removal of the Fed from an operational conflicts of role in the payments system will interest— it will sources of conflict. mately look first in fact create not eliminate potential or intensify other potential That is, private suppliers of payments services legiti to their customers' and their shareholders' interests in determining the operational posture they will take in providing such services. That is wholly appropriate, but at times it may not yield results that are in the public interest. The payments collisions of interests: process is, inevitably, one that entails payors want to slow it down; collectors want to speed it up; large economic agents have more clout and flexibility than do the small ones. These potential conflicts are subtle and not easy to detect or resolve. The potential conflicts associated with Fed activities— to the extent they are real— are highly visible and readily subject to remedy if abuses were to develop. Having said all of that, I should hasten to add that there will always be situations in which operational activities of the impinge on "regulatory" considerations and vice-versa. Federal Reserve Banks Let me cite a couple of very contemporary examples: — Just two weeks ago, the Federal Reserve Board requested public comment on a wide variety of possible measures for reducing risk in the operation of large-dollar wire transfer systems, including FedWire itself. — Beginning on April 23, the Federal Reserve will commence an opera tional program designed to accelerate the collection of checks - 9 - drawn on certain institutions located outside of Federal Reserve cities. In certain instances, the practice of drawing checks on such institutions could undermine the efficiency of the check collection system, raises questions of equity and, in the extreme, also raises questions of safety and soundness. — Later in this statement I will make reference to a possible opera tional change by the Fed that could provide a major step forward in coping with the delayed availability problem on certain check deposits. In all of these areas, and in others I could mention, we must very carefully weigh operational our actions and policy considerations. In the final analysis, should have a powerful public interest motivation. However, even when the case for a particular action makes overwhelming sense on both opera tional and public policy grounds some market participants may object to our initiatives on the grounds that our action may be harmful to them or to their customers. I do not think we can or should avoid those problems, but I do believe that the system of checks and balances I referred to earlier provides more than adequate protection against the misuse of regulatory power by the Federal Reserve. Indeed, as I see it those tilted that there is the danger of the Federal checks and balances may be so Reserve not doing things that would serve the public interest simply to avoid "rocking the boat." II. EXPERIENCE WITH THE PRICING PROVISION OF THE MONETARY CONTROL ACT During 1983, the Federal Reserve essentially completed the transition to pricing of its payments services to depository institutions as called for in - the Monetary Control Act of 1980. 10 - Specifically, the Act required that the Federal Reserve begin by September 1981 to price its payments services so that over the long-run, providing such fees services would be including established the cost based upon the of float, full taxes, costs and of capital the Federal Reserve would incur if it were a private firm. Within little more than two years of the date which the MCA required the Federal Reserve to commence pricing: -- all payments services provided to depository institutions been priced and are now generating sufficient total cover the full costs of providing such services, have revenues to including the costs of float, taxes, and capital the Fed would incur if it were a private firm. — Federal Reserve services have been opened to all depository insti tutions regardless of size and location. — operational improvements by the Federal Reserve have dramatically reduced the daily average amount of Federal from $4.5 billion Reserve check float in 1980 to a daily average of $1.2 billion in the fourth quarter of 1983. was recovered through Of the latter amount, $500 million "as of" adjustments the cost of $700 million in "residual" and explicit fees and check float was added to the cost base subject to recovery through per-item fees. A major thrust of the Federal Reserve's activities over the past two years was to reduce float to the extent possible through operational - improvements that added 11 - only modestly to operating costs. approach serves both equity and efficiency. This If the value of all check float as of 1982 and 1983 had simply been added--across the board— to costs and prices, sizable incentives to increase float— particularly by the writers of large dollar checks— would have been created and the costs of such float shifted to the collection system generally, rather than being borne by those who create and benefit from float. The transition to the priced services environment was managed not only with a view toward satisfying cost-recovery objectives, but also with a view toward seeking to enhance and improve the efficiency of the payments mechanism. The goal of greater efficiency was served in a number of important respects including, but not limited to, the following: — Federal Reserve pricing served as a further catalyst for moving in the direction of electronic payments. — Federal Reserve pricing spurred the re-emergence of local clearing arrangements among private depositories. This tended to one step in the processing cycle for many local remove checks, thereby resulting in faster and cheaper clearing services. — Changed deposit deadlines, processing cycles, and presentment times at many Federal Reserve offices permitted the shift of checks valued at about $2 billion per day from two-day collection to oneday collection. - 12 - -- It would appear that the amount of society’ real resources devoted s to the payments mechanism has declined. -- The Federal Reserve has deployed almost 3,000 low-cost terminals in small- and medium-sized depository institutions, thus providing these institutions with convenient and inexpensive access to a wide range of payments and related services. These achievements and the rapid transition to a "profitable" base of operations did not come easily. Indeed, I believe it is entirely fair to suggest that the transition to the priced services environment was more difficult and complex— and more contentious— than most of us anticipated at the time the MCA was enacted. do it Speaking for myself, I think I can also say that if I had to over again, balance, however, there are some things I would have done differently. I believe that the net effect On of Fed pricing has been good for the Fed, good for the banking industry, and good for the public at large. I also believe that with the difficult initial transition to pricing now largely behind us, we in the Federal Reserve are better positioned to turn our attention to the more important questions tion with the banking efficiency, safety, industry— to foster and integrity of the of what we can do— in coopera still further improvements payments mechanism. These in the issues loom all the more important in the face of the financial interdependencies that are now such a prominent markets. feature of contemporary financial institutions and - III. 13 - THE GAO REPORT ON FED CHECK CLEARING ACTIVITIES At the request of members of this Committee, the General Accounting Office has prepared a comprehensive draft Federal Reserve check clearing services. report regarding the pricing of The draft report covers a wide range of issues raised by members of the Committee and still others raised by a few commercial banks. The Committee, I believe, is also aware that the Federal Reserve engaged the services of a major accounting firm to take an even more detailed look at other aspects of our priced service activities. That report is a couple of months away from completion, and we will submit the conclusions of the report for the record at that time. Based on my reading already taken by the Federal of the GAO report, Reserve suggestions or recommendations. to the overall GAO report. it seems to me that respond to most of the report's steps major We will, of course, submit a detailed response There are, however, several areas in which I would offer some further comments at this time. — First, we fully agree with the need for more and better disclosure on the part of the Federal Reserve regarding its priced services activities. Toward that end, we have recently issued a "Report on Priced Service Activities for 1983" and contemplate that a similar report— augmented by abbreviated quarterly pared annually. A copy of the 1983 reports— will report is appended be pre to my statement (Appendix A). — Second, the GAO report question of presentment strikes me as fees and on somewhat the cautious specific on the question of - 14 - whether— in some situations— the Federal Reserve should be required to pay presentment fees. I have very This is an area, Mr. Chairman, in which strong views. subject the Federal Reserve to presentment case for legislative action argue that such presented to a I believe it would be a mistake to fees fees. If there is a regarding presentment fees, I would should be banned altogether for any check payor institution in advance of the cut-off hour established in the Uniform Commercial 2:00 Code. p.m. I have also appended to my statement some supplementary comments on this subject (Appendix B). — Third, the 6A0 suggests several areas in which our internal proce dures for allocating services might be certain overhead improved. We are costs looking to specific priced closely at these suggestions and others made by our own staff and our accounting firm. Some changes in these procedures have already been made and others will be made but— like the GAO— I do not believe such changes will have a material effect on costs or prices. While these and other issues raised in the GAO report are important, there are two questions raised in the chapter of the report on Issues" which I believe are central. "Competitive The first is the question of how to assure that the Federal Reserve— with its central bank status and ability to influence the market it serves— continues to exercise its authority responsibly. spoken to that issue earlier. I have The second of these central questions is what response the Federal Reserve should make if it becomes clear that the price the - market will be ultimately 15 - willing to pay for a service the Federal Reserve provides is less than what the Federal Reserve must charge to recover its full costs. That latter question comes down to what should the Fed do if it cannot cover its costs in a particular operation? question is very easy but service we provide In one sense, the answer to that in another sense it is very difficult. or might provide has the considerations associated with it. same degree Not every of public interest For example, in considering the efficiency, safety, and integrity of the payments mechanism, nobody would seriously argue that there are great public policy considerations associated with coin wrapping. On the other extreme, I think most everyone would are significant public policy considerations readily concede that there associated with the electronic transfer of reserve balances and securities by the Federal Reserve. Given these differences in the public interest content of our various services, our response to the question can, in some instance, be rather straight forward. Absent some particular service strong public purpose, area must a failure to lead to the discontinuation question by the Federal Reserve. cover costs of the in a service in Indeed, we may have to face that very situation with respect to certain of our paper securities safekeeping operations. In those circumstances, we are quite prepared to discontinue particular operations but in the process we will have to face some very difficult questions of how and with what speed such services are phased out. In the case of a service which does not cover costs but is perceived as having a clear public purpose it seems to me that we would have no choice but to consult with the Congress. In the near term, I do not see that situation - arising but over time sweeping changes it in the certainly structure 16 - could, particularly of our financial certain to occur over the next several years. in the system face that of the are almost Indeed, the potential for that situation arising is all the greater in a context in which we perceive a strong and continuing interest on the part of the Congress in ensuring that an adequate level of payments services are available to all institutions regardless of their size and location. There is one other point implied by the GAO report which is relevant to the preceding discussion and warrants a few words. We in the Federal Reserve need to articulate a clear statement of our future role in the operation of the payments system statement of accomplished. in a priced environment. this nature until the It was initial not possible to develop a transition to pricing had been Now that the transition is behind us, we are well positioned to proceed with that task and I would hope that such a statement would be adopted by the Federal Reserve Board by mid-year. IV. DELAYED AVAILABILITY Mr. Chairman, I am keenly aware that there is acute interest in this Committee and elsewhere in the Congress in finding ways to stop the practice of excessive delays by some depository customers on some check deposits. brief comments on this subject. — institutions in passing credit to their Allow me, therefore, to close with a few My comments are as follows: First, the incidence of abuse in delaying customer availability on check deposits varies considerably from market to market— and from institution to institution— and unfortunately in some cases is far too lengthy. Second, efforts by some states, efforts by depository institutions and their trade associations, interest on the part of the Congress and the recently issued institutions regulators policy statement represent of constructive Federal steps financial in dealing with the problem. Third, I have reservations about efforts to legislate availability schedules in part because there is a danger, however remote, that such legislated schedules could have the perverse effect of encour aging banks that do not delay availability to do so and in part because I believe our current procedures and under recently adopted some versions ability on objectives should be more ambitious than technology state regulations of proposed Federal some checks believe we can do much would of up to permit. For example, and as contemplated in legislation, delays in avail eight days are authorized. better and would not, therefore, I want to institutionalize delays of that duration. Fourth, in a context in which we are willing to provide some reasonable time for voluntary initiatives to take hold, the Federal Reserve is actively considering a phased in approach to a universal system of wire or telephonic advice of larger dollar return items. With such a system in place, the case for a depository institution delaying funds availability on all checks to protect against the risk of loss on the tiny fraction of items that are returned would be greatly diminished, particularly as the dollar cut-off for wire - 18 - advice is reduced over time. This is a good example of how advanc ing technology can work to produce better results than might be gained through legislatively imposed availability schedules which— to some extent— are captive to current procedures and techniques. While these steps can help solve or minimize the delayed availability problem, the only solution to the practice— and to the larger problems asso ciated with the mountains of paper payments made daily— is to continue and to accelerate the move toward electronic payments. that one of the benefits of the MCA was that I said earlier that I believe it helped reduce some of the barriers to the more widespread use of electronics in banking for consumers and businesses alike. say nothing of The technology is certainly there and our younger people— to our school-age terminals than are many of us. electronic payments electronics. continue children— are intimidated by computer Similarly, the relative costs of paper versus to Yet, the current less shift in a direction that paper-based system provides is real favorable to or perceived advantages to m a n y — advantages that in substantial ways grow out of the inefficiences of the paper based system including the substantial Federal Reserve float associated with its operations. opportunities associated with electronic payments will pushing the efficiency of the paper system to amounts of non- Thus, seizing require a dual its limit the effort while at the same time developing and exploiting the benefits of electronics. We in the Federal Reserve are strongly committed to those efforts and to the larger goal of promoting the safety and efficiency of the payments mechanism. We look forward to working closely with the banking industry and others in the furtherance of that goal. APPENDIX A FEDERAL RESERVE press release For immediate release April 9, 1984 The Federal Reserve Board today issued a report summarizing developments in the priced services areas for 1983 and providing detailed financial results of providing those services. A report on priced services is expected to be issued annually and a financial statement consisting of the Federal Reserve's priced service balance sheet and income statement will be issued quarterly. The pro forma 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. -0Attachments REPORT ON PRICED SERVICES ACTIVITIES FOR 1983 I. OVERVIEW During 1983, the Federal Reserve essentially completed the transition to pricing of its payments services to depository institutions as called for in the Monetary Control Act of 1980. Specifically, the Act required that the Federal Reserve begin by September 1981 to price its payments services so that over the long-run fees would be established to cover the full costs of pro viding such capital services including the cost of float, taxes, and costs the Federal Reserve would incur if it were a private firm. Within a little more than two years of the date which the MCA required the Federal Reserve to commence pricing: — All payments services provided to depository institutions have been priced and are now generating sufficient revenues to cover all costs and the private sector adjustment factor (PSAF). — Federal Reserve services have been opened to all depository insti tutions regardless of size and location. — Operational improvements by the Federal reduced the daily average amount $4.5 billion Reserve have dramatically of commercial in 1980 to a daily average of $1.2 billion fourth quarter of 1983. recovered through subject "as of" adjustments and explicit to from in the Of the latter amount, $500 million was cost of $700 million in "residual" check cost base check float recovery through fees and the float was added to the per-item fees. A major thrust of the Federal Reserve's activities over the past two years was to reduce float to the extent possible through operational 2 - improvements that added - only modestly to operating costs. approach serves both equity and efficiency. This If the value of all check float as of 1982 or 1983 had simply been added— across the board--to costs and prices, sizable incentives to increase float-particularly by the writers of large dollar checks— would have been created and the costs of such float shifted to the collection system generally. The transition to the priced services environment was managed with a view toward satisfying cost-recovery objectives, but also with a view toward seeking to enhance and improve the efficiency of the payments mechanism. The goal of greater efficiency was served in a number of important respects includ ing, but not limited to, the following: — Federal Reserve pricing served as a further catalyst for moving banking in the direction of electronic payments. -- Federal Reserve pricing spurred the re-emergence of local clearing arrangements among private one step in the processing depositories. This tended to cycle for many local checks remove thereby resulting in faster and cheaper clearing services. — Changed deposit deadlines, processing cycles, and presentment times at many Federal valued at about Reserve offices $2 billion permitted per day the shift from two-day of checks collection to one-day collection. -- The dramatic reduction in Federal Reserve float, in effect, largely eliminated one of the barriers to more widespread acceptance and use of electronic funds transfers. - — The Federal 3 - Reserve has deployed almost 3,000 low-cost terminals in small- and medium-sized depository institutions, thus providing these institutions with convenient and inexpensive access to a wide range of payments services. II. FINANCIAL RESULTS In considering the priced service activities Federal for 1983, Reserve's financial performance four important qualifications in its should be kept in mind: o First, the PSAF methodology used for 1983 has been revised for 1984. Thus, the PSAF recoveries targeted by the Federal Reserve in 1983 are modestly different in composition and amount than those targeted for 1984. o Second, early reduction and in 1983, the pricing Federal efforts with Reserve accelerated a toward view its float eliminating or pricing all check float by the fourth quarter of 1983 rather than in early 1984 as had been contemplated earlier. figures for 1983 include the value of all Thus, the cost/revenue "residual" float for the fourth quarter ]_/ but do not include the value of such float for the first three quarters of the year. 1983, the amount of check During the first three quarters of float that was not priced or otherwise recovered amounted to $1.4 billion and was valued at $98.5 million. During 1984, all residual check float will be priced. 1/ the data for 1983 include the cost of all check float in the fourth quarter and any holdover check float in excess of one percent of the total dollar value of checks received for the period February 24 to June 30 and any holdover check float in excess of 0.5 percent of the total dollar value of checks received for the period July 1 to September 30. - o Third, the processing of 4 - securities transfers, ACH entries, and coupons from definitive securities can also result in modest amounts of float. Book-entry securities transfer float was added to the cost base as of January 1, 1984; coupon collection float will be added to cost base as of May 1, 1984, and ACH float will be phased in during 1984. o Fourth, during 1983, the cost/revenue comparisons were influenced by the presence of modest and designed subsidies that have been approved by the Federal Reserve Board for ACH and cash transportation services. The cash transportation subsidy— which was terminated as of December 31, 1983--amounted to $1.6 million in 1983 and the ACH subsidy, which will be phased out by 1985, amounted With those qualifications in mind, to overall $8.1 million in 1983. fee-generated income for Federal Reserve priced services in 1983 amounted to $496.2 million (see Table 2). Total production costs, net of approved subsidies, amounted to million thus yielding $63.8 million in income from operations. $432.4 Imputed costs, including the value of "residual" check float and the interest cost on short term and long-term debt associated with the 1983 PSAF, amounted to $40.2 million, while the net interest income from clearing balances amounted to $13.1 million. Thus, the income before allowance for imputed income taxes was $36.8 million. Given the income tax assumption in the PSAF, estimated after-tax income was $22.8 million. For the year 1983, the Federal Reserve's targeted recoveries for the PSAF were $60.3 million including $20.5 million in interest costs and $39.8 million in pre-tax income. Results for the year as a whole were in line with - 5 - the operating targets particularly in the light of the decision to accelerate float pricing. Of course, as noted earlier, since 1983 was the second and last full year in the transition to pricing, the value of float for the full year was not reflected in the cost base or the operating targets. III. SERVICE-BY-SERVICE RESULTS As a matter of policy, the Federal pricing principle requiring each of the Reserve Board adopted in 1980 a Federal Reserve's seven service lines £/ to be managed with a view toward cost/revenue matching for each such service line. This performance standard is a very rigorous one, and it is also one for which financial yardsticks are more difficult to develop. That is, in addition to all the judgments that must be made to arrive at an aggregate pro forma income statement, the service-by-service analysis requires, among things, that services. clearing balance income and expense be allocated to other specific Moreover, since there is no reasonable method for allocating income taxes among service categories, the financial results for each service line are taken to the level of estimated income before tax. it can be said— allowing for designed With this in mind, however, subsidies--that all Federal Reserve service lines (see Table 3) except definitive securities and noncash collection had pre-tax income in 1983 which was in line with operating targets and, as noted earlier, the aggregate pre-tax income was slightly below the overall PSAF recoveries targeted for the year. In the case of definitive securities— which account for only about four percent of Federal Reserve revenues and which were not repriced until TJ mid-1983— the deficit before taxes is about $2.7 million. The service lines are: (1) commercial check collection; (2) wire transfer of funds and net settlement; (3) commercial automated clearinghouse opera tions; (4) safekeeping of definitive securities and the collection of noncash items such as interest coupons on municipal securities; (5) the safekeeping and transfer of book-entry securities; (6) cash transportation; and (7) coin wrapping. 6 - - Major developments in each service line are discussed below. Funds Transfers and Net Settlements Funds transfer and net settlement services were first priced in early 1981 and were repriced in the spring of 1982. Thus, this ser vice has been operating with unchanged prices for almost two years. During 1983, the daily average volume percent— a very modest increase growth rate of almost 20 percent. service in 1983 was production costs the net of transfers relative to the increased by 7 pre-pricing trend Total income for the wire transfer $57.4 million— up 16 percent from 1982— while rose by 2 percent to $48.8 million. income before taxes associated with During 1983, wire transfer and net settlement services was $7.2 million. Commercial Check Operations Commercial check operations repriced in August 1982. February 1983 due serve's changes service level took effect to originally scheduled the controversy and February to be The 1982 repricing was delayed until late surrounding the Federal in deposit deadlines and presentment times. changes on were corresponding 24, 1983. increases The decision early 1983 to accelerate the Federal Reserve's Re Those in check prices was also made in float reduction and pricing efforts with a view toward completing that task by the fourth quarter of 1983. The decision to accelerate the float pricing/reduc tion efforts also required the annual check repricing scheduled for early 1984 to be moved up to December 1983 since the value of "resi dual" float was built into the cost base earlier than initially - 7 anticipated. Thus, in December 1983, check prices were raised by about seven percent on average with the expectation that such prices would carry through the full year 1984. Federal Reserve check processing volume grew at a modest rate of 2 percent during 1983. than the Such growth was, in all likelihood, smaller growth in overall check volume during 1983, such that the percentage of all checks cleared by the Federal Reserve continued to drop modestly in 1983 following the sharp decline registered in late 1981 and early 1982. with the However, the modest growth in volume, together service enhancements made February and December price increase in revenues year. for by the Federal increases, check Reserve and the yielded a sharp services 32 percent to $372.9 million Reflecting in part the cost of float reduction for the initiatives, operating expenses for check processing rose by 5 percent to $320.0 million. For the year, pre-tax net income for commercial check operations amounted to $27.8 million. Commercial ACH The Board of Governors has adopted a policy to phase out the subsidy for ACH operations over a three-year period ending in 1985. ACH prices were established in early 1983 with a view toward generat ing revenues that would cover 40 percent of costs and the PSAF with the understanding annually in that the increments of cost 20 recovery targets percentage would points. be raised Commercial ACH volume grew by a robust rate of 48 percent in 1983 and revenue in creased by 407 percent to $6.6 million. Commercial ACH operating costs rose by 40 percent to $13.5 million in 1983 and— reflecting the move to the 40 percent recovery rate— ACH costs subject to recovery - 8 - rose by $3.5 million to $5.4 million in 1983. Pre-tax net income— after allowance for the designated subsidy— was $1.2 million in 1983. Definitive Safekeeping and Noncash Collection Definitive safekeeping and coupon collection is the one area in which the Federal Reserve has not yet been able to generate financial results that are in line with the pricing principles developed by the Board of Governors. These activities were initially priced in late 1981 and were repriced in the fall of 1983. tion in particular experienced sharp The safekeeping opera volume losses following the advent of pricing, and in many locations volume attrition continues. Coupon collection activities, perienced a sharp rise in on the other hand, have volume. Nevertheless recently e x during 1983, service line had an overall pre-tax loss of about $2.7 million. the Thus, for 1983, the service line fell well short of the goal of full cost recovery. Over the course of the year, the combination of (1) the implemen tation of revised priced schedules in October; (2) rigorous cost c on tainment measures; and (3) the sharp turnaround in coupon collection volume yielded some improvement that fourth quarter results. in the cost recovery picture such results were markedly better than first quarter Pending results during 1984, the role of the Federal Re serve in these activities will be re-appraised. Book-Entry Securities The Federal Reserve's book-entry safekeeping and securities transfers services were first priced in late 1981 and were repriced in early 1983. For the year 1983, the daily average volume of securities - transfers rose by to $18.6 very modest increase relative to Income from book-entry operations rose by million. million or by 5 percent. IV. - 1 percent— a the repricing experience. 40 percent 9 Operating costs declined to $15.3 Net income before taxes was $2.9 million. OUTLOOK FOR 1984 In the wake of the almost breakneck pace of developments over the past two years, 1984 should provide the Federal Reserve and the banking industry a period for some consolidation regarding the Federal Reserve's payment services activities. For one thing, at this juncture, it seems likely that the frequency of changes in Federal Reserve prices or service levels in 1984 will be greatly reduced compared to 1982 and 1983. Indeed, barring the unforeseen, the only major changes now slated for 1984 are the repricing of ACH services, the possi ble adoption of changes in the fee structure for wire transfer, and the imple mentation of the program to accelerate the collection of checks drawn on non city institutions. The Federal Reserve is studying the feasibility of adopting steps in 1984 designed to expedite the processing of return items. The Federal Reserve is also studying a proposal for the direct exchange of checks by collec ting and paying banks. However, except for selective price changes that might occur from time to time, book-entry securities, no major price definitive transportation services during changes are now planned for check, securities, 1984. noncash Similarly, it collection, is also and cash expected that volume trends in 1984 will be very much in line with 1983 results, except for the possibility of diminished growth in ACH activities. The Federal will cover all float. Reserve expects that 1984 revenues costs, all For the year as for priced services elements of the PSAF, and the value of "residual" a whole, service income should rise by 10 to 15 percent, reflecting in large part the full year impact of 1983 price increases. - 10 - Production costs are projected to rise by five to seven percent while imputed costs will rise by approximately $20 million, or about 50 percent. The sharp rise in imputed costs reflects the cost of a full year of "residual" float and the addition to the PSAF recoveries of an allowance for sales taxes and FOIC insurance. Assuming net clearing balance income in 1984 is similar to 1983, the Federal Reserve's income and after-tax return on equity should meet that contemplated by the PSAF methodology adopted 1984. by the Board of Governors for Table 1 Pro Forma Balance Sheet For Priced Services Federal Reserve Banks December 31, 1983 (in millions) Short-term assets Imputed reserve requirements on clearing balances Investment in marketable securities Receivables Materials and supplies Prepaid expenses Net items in process of collection (float) Total short-term assets Long-term assets Premises Furniture and equipment Leases and leasehold improvements Total long-term assets $147.4 1,080.6 49.0 4.4 2.3 720.7 $2,004.4 168.7 91.9 2.5 263.1 Total assets Short-term liabilities Clearing balances Balances arising from early credit of uncollected items Short-term debt Total short-term liabilities $2,267.5 $ 1,228.0 720.7 55.7 $2,004.4 Long-term liabilities Obligations under capital leases Long-term debt Total long-term liabilities Total liabilities Equi ty Total liabilities and equity $2,267.5 Accompanying notes are an integral part of these financial statements. iaDie c Pro Forma Income Statement for Priced Services Federal Reserve Banks For the year ended December 31, 1983 (in mil lions) Income: Services provided to depository i nstitutions Expenses: Production expenses Less: Board approved subsidies $496.2 $442.1 9.7 63.8 Income from operations Imputed costs: Interest on float Interest on short-term debt Interest on long-term debt 19.7 10.4 10.1 Income from operations after imputed costs Other income and expenses: Investment income Earnings credits 432.4 40.2 23.7 84.9 71.8 13.1 Income before income taxes 36.8 Imputed income taxes 14.0 Net income $22.8 Memo: Targeted return on equity $24.6 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, items in the receivables, materials and supplies, prepaid expenses, and 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 as be determined satisfied with vault cash or with non-earning balances maintained at a Reserve Bank. ing this model, by the either Follow 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 travel advances represent for other prepaid items such as salary advances and priced service service leasehold improvements which personnel will and the portion be amortized to of priced current expense during the year. Net items in the process of collection is the amount of float which will be added to the cost base subject to recovery. Thus, it is the difference between cash items in the process of collection and deferred availability cash items. Therefore, 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 Act. 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 calculation, they are not reflected on the pro-forma balance sheet. 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 1984. The direct determination method utilizes the Federal Control System (PACS) to directly associate Reserve's Planning and single-purpose assets and to - apportion assets used jointly in priced and non-priced services. 3 the - provision of different services to 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 will be included in,long-term assets in the premises account in 1984. Long-term assets also include an amount for capital leases. In accordance with generally accepted accounting principles, the Federal Reserve in 1984 will begin to capitalize leases that Leases had not been shown previously on Federal to immateriality. qualify for capitalization. Reserve balance sheets due 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. portion of with accounting and disclosure practices These assets also include leasehold improvements. leasehold improvements A matched-book capital has been structure included for those in of private 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. financed with long-term debt Long-term assets are 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 at Reserve Banks and deposit include clearing balances maintained 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 - costs, and the income and cost related to clearing balances. Revenues reflect services. to an charges to depository institutions for priced These charges are paid through one of two methods: direct charges institution's deposit charges for check float, surcharges. per-item fees, account account or earnings package maintenance fees, fees, credits. Income includes explicitly priced shipping and interterritory insurance fees, and Production expenses include direct, indirect, and other general administrative expenses generated by priced service activities. Board approved commercial automated subsidies consist clearinghouse and of programs established for the cash transportation services. incentive pricing program established for the ACH service provides structures designed to recover an increasing share of expenses. The for fee In 1983, ACH revenues were intended to recover 40 percent of costs plus the private sector adjustment. This incentive pricing program is being phased out with complete elimination planned in 1985. The transitional support program adopted for the cash transportation service was concluded at the end of 1983. 1983, the subsidy on ACH operations During amounted to $8.1 million and the cash transportation subsidy totalled $1.6 million. Imputed float costs to be recovered, period. either include the value of float that was intended explicitly or through per-item fees, during the In 1983, imputed costs for the commercial check service included the value of holdover check float in excess of one percent of the total dollar value of checks received for the period February 24 through June 30, 1983, the value of holdover check float in excess of one-half of one percent of the value of checks received and interterritory check float recovered through - 5 - explicit charges to depository institutions for the period July 1 to September 30, 1983, and the value of all float recovery tion services for book-entry check float from October 1, 1983. securities, will be implemented. ACH, and noncash coupon In 1984, collec The implementation of float recovery in 1983 follows float reduction efforts in the past two years that have reduced Federal Reserve float significantly. Total imputed check float costs were $121.7 million and float costs for all services were $137.5 million in 1983. Had all float been intended to be recovered in 1983, the cost of all float would not necessarily have been included in imputed costs since non-monetary charges are available to recover float costs. is the interest Also included in imputed costs on short and long-term debt used to finance priced service assets through the PSAF. Other income and expenses are comprised of income on clearing b al ances and the cost of earnings credits granted to depository institutions. For 1983, income represents the average coupon equivalent yield on three-month Treasury bills applied to the total clearing balance maintained. Expenses for earnings credits were derived by applying the average Federal funds rate to the required portion of the clearing balances. In 1984, both the income and expense are to be adjusted for the net effect of reserve requirements on clearing balances. 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 return on equity that the Federal private sector firm. equity represents the after-tax rate of Reserve would have earned had it been a - 6 - Supplemental Financial Data Service Income Statement (Table 3) The income statement by service reflects the revenues, operating expenses adjusted for Board approved subsidies, and imputed costs except for income taxes. Imputed costs include float and the interest on short- and long term debt as calculated for the private sector adjustment. Float costs are spread based service that on the actual intended to be recovered. float incurred in each priced is Interest on short- and long-term debt are spread based on the ratio of the operating costs less shipping costs in each priced service to the total cost of priced services less shipping costs. Other income and expenses consist of income on clearing balances and the cost of earnings credits for the Federal Reserve. Since clearing balances relate directly to the Federal Reserve's offering of priced services, the income and cost associated with these balances are spread to each service based on a total income ratio. Taxes and the after-tax targeted rate of return on equity, as shown on the aggregate income statement, have not been spread by service since these elements relate to the organization as a whole. Revenue and Expense of Locally Priced Services This table depicts the financial providing locally priced services. (Table 4) results for each Reserve Bank in The financial results for each Reserve Bank do not include the dollars to be recovered through the private sector adjustment factor and the net investment income on clearing balances. - 7 - As such, in order to reconcile Table 4 net revenue data with that disclosed in Table 3, adjustments must be made for the imputed interest on short- and long term debt and for the difference between income on clearing balances and the cost of earnings credits. Priced Service Volumes (Table 5) This table shows the year-to-year volume and percent changes in the number of items handled by the Federal Reserve in its priced service oper ations. Wire transfer of funds volume is the number of basic transactions originated; ACH volume is the total number of commercial items processed; commercial check reflects the total commercial checks collected; basic trans fers originated on-line represent securities transfers volume; noncash c o l lection volume is the number of items assessed fees; and cash transportation volume is the number of armored carrier stops. Income Statement for Priced Services Federal Reserve Banks For the year ended December 31, 1983 (in mil lions) Total Wire Commercial Transfer Check and Net Collection Settlement Definitive Safekeeping BookCommercial and Noncash Entry ACH Collection Securities Cash Transportation Coin Wrapping $496.2 $372.9 $57.4 $6.6 $16.3 $18.6 $23.1 $1.4 Operating expenses, net of subsidies 432.4 320.0 48.8 5.4 18.4 15.3 23.4 1.2 Income from operations 63.8 53.0 8.5 1.2 (2.1) 3.3 (0.3) 0.2 Imputed costs 40.2 35.1 2.8 0.2 1.0 0.9 0.1 0.1 Income from operations after Imputed costs 23.7 17.9 5.7 1.0 (3.1) 2.4 (0.4) 0.1 Other income and expenses, net 13.1 9.9 1.5 0.2 0.4 0.5 0.6 0.0 $36.8 $27.8 $7.2 $1.2 $2.9 $0.2 $0.1 Income from services Income before income taxes Details may not add to totals due to rounding. Accompanying notes are an integral part of these financial statements. $(2.7) Revenue and Expense of Locally Priced Services at Federal Reserve Banks, 1983 Millions of Dollars Commerci al Definiltive Safekeeping Check Cash Services and Boa rd Col lection Non<:ash Coll ection Operating Float TotaK Operating Approved Total Total Total Total Net Total Net Net Cost Cost Subsidy Cost Revenue Revenu< Cost Cost Revenue Revenue Cost Revenue Revenue Boston New York Philadelphia Cleveland Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dal las San Francisco System Total 20.4 47.4 12.7 19.2 27.1 34.2 47.9 16.6 20.3 23.0 22.0 29.1 0.6 5.0 0.0 0.1 1.1 2.4 4.1 0.8 0.9 1.1 0.9 2.7 21.1 52.4 12.7 19.3 28.2 36.5 52.1 17.4 21.1 24.1 22.9 31.8 20.3 48.3 12.4 23.1 31.9 44.9 56.1 20.0 23.9 27.4 26.5 38.0 -0.7 -4.1 -0.4 3.8 3.7 8.4 4.0 2.6 2.8 3.4 3.6 6.2 0.7 3.6 1.2 1.6 0.8 1.8 3.9 1.0 0.8 1.7 0.9 0.4 0.9 2.7 1.0 1.5 0.9 2.3 2.9 0.8 0.6 1.6 0.7 0.4 0.2 -0.9 -0.2 -0.0 0.1 0.5 -1.0 -0.2 -0.3 -0.1 -0.1 -0.0 1.0 3.2 1.2 1.7 1.8 0.1 3.6 1.3 1.5 1.7 2.4 6.8 0.1 0.0 0.0 0.0 0.0 0.0 0.1 0.2 0.2 0.0 0.4 0.6 1.0 3.2 1.2 1.6 1.8 0.1 3.4 1.1 1.3 1.7 2.0 6.2 1.0 3.3 1.3 1.7 1.8 0.0 3.1 1.2 1.4 1.4 2.1 6.1 -0.0 0.2 0.0 0.1 -0.0 -0.0 -0.3 0.0 0.1 -0.2 0.1 -0.1 320.0 19.7 339.6 372.9 33.3 18.4 16.3 -2.1 26.2 1.6 24.6 24.5 -0.1 Details may not add to totals due to rounding. Accompanying notes are an integral part of these financial statements. PRICED SERVICE VOLUMES Total (Items in thousands) 1983 1982 Funds Transfers 38,021.0 155,955.0 105,243.0 14,276,096.0 Securities Transfers Noncash Collection Percent Change 35,381.0 Commercial ACH Dai 1y Average Commercial Checks Cash Transportation Number of armored carrier stops 7.5 % 1982 Percent Change 150.3 140.4 48.2 616.4 417.6 47.6 13,929,959.0 2.5 56,427.3 55,277.6 2.1 5,005.2 4,928.5 1.6 19.8 19.6 1.0 2,929.7 2,115.5 38.5 11.6 8.4 38.1 556.9 607.5 ( 8.3) 2.2 2.4 ( 8.3) Accompanying notes are an integral part of these financial statements. 1983 7.1 % APPENDIX B Presentment Fees It has been stated that the Federal advantage over Reserve Act, fee" correspondents Reserve by payor banks. Reserve Banks are Banks The because, Reserve has under the cannot be charged a GAO report draft prohibited by law an Federal "presentment confirms from being that charged a presentment fee. Congress enacted this statutory prohibition when nonpar payment inefficiencies in banks impose did not presenting banks, of the checks was common check-clearing presentment collecting was process. charges banks and that in 1917, causing Since uniformly would payor on otherwise all be subject to a presentment fee attempted to avoid such charges by routing checks sent for collection through a bank that would not be subject to a presentment fee. This circuitous routing of checks consumed unnecessary resources and extended the time period required to collect checks. objectives eliminate throughout in creating this obstacle the country the to by Federal the Indeed, one of Reserve speedy establishing system that does not permit payor banks check of was to checks collection to charge a fee for checks collected through the Federal Reserve. System collection a the major - 2 - In order to obtain additional practices with regard to presentment information on industry fees, the Federal Reserve retained a consultant, the ICS Group, to study the matter. ICS Group concluded that only typically charge presentment large fees. correspondent The banks They were advised that no small banks or thrifts charge presentment fees. Further, the ICS Group found that presentment fees are normally charged only on checks that are sent by the collecting bank directly to the payor bank. Presentment fees are not generally imposed upon checks presented through a clearing house to which the payor bank belongs, checks presented by the Federal checks presented under bilateral agreements bank agrees to forego the fees. from $.01 to $.10 per $.04 range. item, Reserve, or under which each The fees were found to range and cluster around the $.015 to The time of presentment (e.g., before or after 2:00 p.m.) was not found to affect whether or not a presentment fee was charged but was found to affect the size of the fee. As we have indicated previously, presentment fees on the Federal Reserve, rather than presentment impose fees— at least for checks presented before the Uniform Commercial Code's 2:00 p.m. cut off--should be banned altogether 1/ Under the Uniform Commercial Code, a payor bank has an obligation to pay a check presented to it for payment before 2:00 p.m. by its midnight deadline. The Federal Reserve presents no checks after the U.C.C. 2:00 p.m. cut off. - 3 - The practice of imposing presentment fees can result in inefficiency and delay in the check collection system to the extent that institutions attempt to avoid these fees through circuitous routings or by holding the check until the next day so it can be presented through a clearing house exchange. This means that checks that could otherwise have been processed and settled are. delayed. As the draft GAO report recognizes, presentment deadlines after which presentment generally are between 8 a.m. generally were initially unchanged the over and 10 set decades years. These These ago and have reevaluated to take account of advancements business practices and settlement fees are imposed a.m. deadlines the have cut offs remained not been in technology and that have dramatically improved processing times. Payor banks today clearly have little trouble processing and settling checks received later than 10 a.m. on the day of receipt. Indeed, the GAO draft report recognizes that the Federal Reserve's move to noon presentment has not resulted in significant operational problems for payor banks. These early presentment deadlines, established by an institution for its own convenience, are a source of delay and inefficiency. If a check is available for presentment and the payor bank is able to process and settle for that check that -4 — day, the check should be presented. Further, any cost that the payor bank incurs in paying a check that has been presented to it for payment (e.g., customer account) customer, processing the check to the individual should be borne by the person who wrote reason to transfer these costs, the the payor bank or check. We can its find no through a presentment fee, the collector and ultimately to the payee of the check. to In addition, transferring these payor bank costs to the collecting bank and minimize payee eliminates these costs, the payor thus undermining bank's incentive to the market discipline that helps to assure that the costs of effecting payments will be minimized. uniformly, Finally, since presentment fees are not imposed they encourage inefficient collection arrangements as collecting banks distort their check collection strategy in order to avoid presentment fees.
@FedFRASER