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 Developments in Federal Reserve Priced Services
      Developments in Currency and Coin
      Developments in Fiscal Agency and Government Depository Services
      Electronic Access to Reserve Bank Services
      Information Technology
      Examinations of the Federal Reserve Banks
      Income and Expenses
      Holdings of Securities and Loans
      Volume of Operations
      Federal Reserve Bank Premises
      Pro Forma Financial Statements for Federal Reserve Priced Service
 Federal Reserve Banks
 In addition to contributing to the setting of national
      monetary policy and supervising and regulating banks and other
      financial entities (discussedFRB: Annual Report 2006 in preceding chapters), the Federal
      Reserve Banks provide payment services to depository and certain other
      institutions, distribute the nation's currency and coin, and serve as
      fiscal agents and depositories for the United States. Developments in Federal Reserve Priced Services The Federal Reserve Banks provide a range of payment and related
      services to depository institutions, including collecting checks,
      operating an automated clearinghouse service, transferring funds and
      securities, and providing a multilateral settlement service. The
      Reserve Banks charge fees for providing these "priced services." The Monetary Control Act of 1980 requires that the Federal
      Reserve establish fees for priced services provided to depository
      institutions so as to recover, over the long run, all direct and
      indirect costs actually incurred as well as the imputed costs that
      would have been incurred, including financing costs, taxes, and certain
      other expenses, and the return on equity (profit) that would have been
      earned if a private business firm had provided the services. The
      imputed costs and imputed profit are collectively referred to as the
      private-sector adjustment factor (PSAF).
      1
      Over the past ten
      years, the Reserve Banks have recovered 99.0 percent of their priced
      services costs, including the PSAF (table).
      2
      In 2006, the
      Board implemented changes to the method for calculating the target
      return on equity measure in the PSAF.
      3 Overall, the price index for priced services increased 2.4 percent from 2005 to 2006. Revenue from priced services amounted to
      $908.4 million, other income was $122.8 million, and costs were $875.5 million, resulting in net income from priced services of $155.7 million. In 2006, the Reserve Banks recovered 108.8 percent of total
      costs of $947.5 million, including the PSAF.
      4 Priced Services Cost Recovery, 1997-2006
        Millions of dollars except as notedYear
          Revenue from
            services
            1
          Operating
            expenses and
            imputed costs
            2
          Targeted return
            on equity
          Total costs
          Cost recovery
            (percent)
            3
            , 41997
          818.8
          752.8
          54.3
          807.1
          101.51998
          839.8
          743.2
          66.8
          809.9
          103.71999
          867.6
          775.7
          57.2
          832.9
          104.22000
          922.8
          818.2
          98.4
          916.6
          100.72001
          960.4
          901.9
          109.2
          1,011.10
          95.02002
          918.3
          891.7
          92.5
          984.3
          93.32003
          881.7
          931.3
          104.7
          1,036.10
          85.12004
          914.6
          842.6
          112.4
          955.0
          95.82005
          994.7
          834.7
          103.0
          937.7
          106.12006
          1,031.2
          875.5
          72.0
          947.5
          108.81997-2006
          9,149.9
          8,367.5
          870.5
          9,238.1
          99.0 Note:
        Here and elsewhere in this chapter, components may not sum to totals or yield percentages shown because of rounding.
        1. For the ten-year period, includes revenue from services of $8,727.4 million and other income and expense (net) of $422.5 million.  
        Return to table
        
        2. For the ten-year period, includes operating expenses of $7,722.6 million, imputed costs of $296.4 million, and imputed income taxes of $348.5 million.  
        Return to table
        
        3. Revenue from services divided by total costs.  
        Return to table
		 
        4. For the ten-year period, cost recovery is 95.5 percent, including the reduction in equity related to FAS 158 reported by the priced services in 2006.
        Return to table
 Commercial Check Collection Service In 2006, operating expenses and imputed costs for the Reserve
      Banks' commercial check collection service totaled $716.9 million, of
      which $35.4 million was attributable to the transportation of
      commercial checks between Reserve Bank check-processing centers.
      Revenue amounted to $745.0 million, of which $34.2 million was
      attributable
      
      to estimated revenues derived from
      
      the
      transportation of commercial
      
      checks between Reserve Bank
      check-processing centers, and other income was $100.7 million. The
      resulting net income was $128.7 million. Check service revenue in 2006
      increased $4.7 million from 2005, largely because of price increases
      and faster-than-anticipated adoption of check-processing services
      associated with the Check Clearing for the 21st Century Act (Check
      21).
      5 The Reserve Banks handled 11.0 billion checks in 2006, a decrease
      of 9.9 percent from 2005 (table). The decline in Reserve Bank check
      volume is consistent with nationwide trends away from the use of checks
      and toward greater use of electronic payment methods.
      6
      Of
      all the checks presented by the Reserve Banks to paying banks in 2006,
      14.0 percent of the checks were deposited and 4.3 percent were
      presented using Check 21 products, compared with 1.8 percent and 0.0 percent, respectively, in 2005.
      7
      Overall, the price index
      for check services increased 3.6 percent from 2005. Activity in Federal Reserve Priced Services, 2004-2006
        Thousands of itemsService
          2006
          2005
          2004
          Percent change2005 to 2006
          2004 to 2005Commercial check
          10,982,367
          12,195,301
          13,904,382
          -9.9
          -12.3Commercial ACH
          8,230,782
          7,338,950
          6,486,0911
          12.2
          13.1Funds transfer
          136,399
          135,227
          128,270
          0.9
          5.4Multilateral settlement
          470
          440
          435
          6.8
          1.3Securities transfer
          9,053
          9,235
          9,208
          -2.0
          0.3 Note:Note: Activity in 
        *commercial check*        is the total number
of commercial checks collected, including processed
and fine-sort items; in 
        *commercial ACH*, the total number
of commercial items processed; in 
        *funds transfer*        and
        *securities transfer*, the number of transactions originated
online and offline; and in 
        *multilateral settlement*, the
number of settlement entries processed.
 In response to the continuing decline in check volume, the
      Reserve Banks in 2006 continued to reduce check service operating costs
      through a combination of measures, including consolidating some
      check-processing sites. Check processing at New Orleans has now been
      consolidated to Atlanta; New York's East Rutherford Operations Center
      to Philadelphia; Columbus to Cleveland; and Boston to Windsor Locks,
      Connecticut. Additional consolidations are planned for 2007 and beyond. Commercial Automated Clearinghouse Services Reserve Bank operating expenses and imputed costs for commercial
      automated clearinghouse (ACH) services totaled $80.1 million in 2006.
      Revenue from ACH operations totaled $80.5 million and other income
      totaled $10.9 million, resulting in net income of $11.3 million. The
      Banks processed 8.2 billion commercial ACH transactions (worth $13.1 trillion), an increase of 12.2 percent from 2005. Overall, the price
      index for ACH services decreased 9.1 percent from 2005. In 2006, the Reserve Banks began offering ACH risk-management
      services to all depository institutions. These services help
      originating institutions manage the operational and credit risk
      associated with originating ACH payments. By the end of 2006, 76
      financial institutions subscribed to these services. Fedwire Funds and National Settlement Services Reserve Bank operating expenses and imputed costs for the Fedwire
      Funds and National Settlement Services totaled $59.3 million in 2006.
      Revenue from these operations totaled $63.6 million and other income
      amounted to $8.6 million, resulting in net income of $13.0 million. Fedwire Funds Service The Fedwire Funds Service allows participants to draw on their
      reserve or clearing balances at the Reserve Banks and transfer funds to
      other institutions that maintain accounts at the Banks. In 2006, the
      number of Fedwire funds transfers originated by depository institutions
      increased 0.9 percent from 2005, to approximately 136.4 million. The
      average daily value of Fedwire funds transfers in 2006 was $2.3 trillion. Overall, the price index for the Fedwire Funds and National
      Settlement Services increased 3.4 percent from 2005. Last year, the Reserve Banks collaborated with The Clearing House
      Payments Company to study the use of funds transfers for
      business-to-business payments. The study examined why businesses select
      one payment type over another and what changes are needed to make funds
      transfers a more attractive payment alternative. Key findings from the
      study suggested that businesses wanted a more streamlined process for
      making funds transfers and favored the inclusion of remittance
      information in funds transfer orders. National Settlement Service The National Settlement Service is a multilateral settlement
      system that allows participants in private-sector clearing arrangements
      to exchange and settle transactions on a net basis using reserve or
      clearing balances. In 2006, the service processed settlement files for
      approximately fifty-four local and national private arrangements,
      primarily check clearinghouse associations. The Reserve Banks processed
      slightly more than 17,300 files that contained more than 470,000
      settlement entries for these arrangements in 2006. Fedwire Securities Service The Fedwire Securities Service allows participants to transfer
      electronically securities issued by the U.S. Treasury, federal
      government agencies, government-sponsored enterprises, and certain
      international organizations to other participants in the
      service.
      8
      Reserve Bank operating expenses and imputed costs
      for providing this service totaled $19.1 million in 2006. Revenue from
      the service totaled $19.2 million, and other income totaled $2.6 million, resulting in net income of $2.7 million. Overall, the price
      index for the service increased 2.8 percent from 2005. In 2006, approximately 9.1 million non-Treasury securities
      transfers were processed by the service, slightly lower than in 2005.
      Last year, the Reserve Banks also implemented technical changes to the
      Fedwire Securities Service applications to support changes to the
      Federal Reserve Policy on Payments System Risk (PSR). The PSR policy
      changes require that government-sponsored enterprises and certain
      international organizations fund principal and interest payments before
      the Reserve Banks distribute those payments in order to limit the
      credit exposure of the Reserve Banks. Float The Federal Reserve had daily average credit float of $85.9 million in 2006, compared with debit float of $133.4 million in
      2005.
      9 Return to menu Developments in Currency and Coin The Federal Reserve Banks distribute the nation's currency (in
      the form of Federal Reserve notes) and coin through depository
      institutions and also receive currency and coin from circulation
      through these institutions. As currency flows into the Reserve Banks,
      the Banks inspect the notes and destroy those that are unfit for
      recirculation. The Reserve Banks received 38.5 billion Federal Reserve notes
      from circulation in 2006, a 3.5 percent increase from 2005, and made
      payments of 39.1 billion notes into circulation in 2006, a 1.5 percent increase from 2005. They received 59.7 billion coins from
      circulation in 2006, a 6.5 percent increase from 2005, and made
      payments of 73.9 billion coins into circulation, a 2.7 percent increase
      from 2005. In March, the Board approved a policy that provides
      incentives to encourage depository institutions to recirculate fit
      currency to their customers rather than return it to the Federal
      Reserve for processing. Under the policy, the Federal Reserve
      implemented a custodial inventory program that allows depository
      institutions to transfer a portion of the currency holdings in their
      vaults to the books of a Reserve Bank. As of December 31, the Reserve
      Banks had established twenty-nine custodial inventory sites with
      depository institutions. Beginning in July 2007, the Reserve Banks will
      charge fees to institutions that, within a one-week period, deposit fit
      $10 or $20 notes and reorder currency of the same denomination, above a
      de minimis amount, within the same Reserve Bank office's service area. In March, the Reserve Banks began issuing the redesigned $10
      Federal Reserve note that includes enhanced security features and
      subtle background colors. The Presidential $1 Coin Act requires, among other things, that
      the Federal Reserve and the Mint take steps to ensure that an adequate
      supply of $1 coins is available for commerce. To that end, the Federal
      Reserve worked with the United States Mint to develop an effective
      distribution strategy for Presidential $1 coins, the first of which was
      issued by the Mint in February 2007. Consistent with the requirements
      of the Presidential $1 Coin Act, the Federal Reserve and the Mint
      conducted outreach to depository institutions and coin users in an
      effort to gauge demand for the coins and to anticipate and eliminate
      obstacles to the efficient circulation of $1 coins. The Reserve Banks conducted extensive testing of a prototype
      upgrade to the high-speed currency-processing machines. The Reserve
      Banks will begin implementing the upgrades on their machines in 2007;
      the upgrades are scheduled to be completed in 2009. The Federal Reserve developed the requirements for an automation
      system to replace the current platform used to support and facilitate
      the System's provision of cash services. The Reserve Banks issued a
      preview request for proposal for development of the new automation
      system and held an orientation with potential vendors in December. The Reserve Banks completed a comprehensive study of
      cost-effective alternatives to the existing infrastructure for
      providing cash services. The study resulted in the elimination of cash
      processing at the Oklahoma City and Birmingham offices in March and
      May, respectively, and the replacement of these offices with outsourced
      cash depots. In these cash depot arrangements, armored carrier
      facilities serve as collection and distribution points for depository
      institutions' currency deposits and orders. The deposits and orders are
      transported to and from the nearest Reserve Bank by armored carrier for
      processing. Return to menu Expenses of the Federal Reserve Banks for Fiscal Agency and Depository Services, 2004-2006
        Thousands of dollarsAgency and service
          2005
          2004
          2003Department of the TreasuryBureau of the Public DebtTreasury retail securities
          73,931.4
          86,503.2
          103,257.7Treasury securities safekeeping and transfer
          7,535.2
          6,055.8
          6,267.0Treasury auction
          23,594.9
          17,553.5
          17,159.5Computer infrastructure development and support
          3,853.1
          2,575.5
          5,935.1Other services
          1,578.7
          1,806.5
          1,709.8Total
          110,493.2
          114,494.5
          134,329.1Financial Management ServicePayment servicesGovernment check processing
          20,918.6
          20,988.0
          24,245.4Automated clearinghouse
          5,823.1
          5,709.5
          5,352.9Fedwire funds transfers
          123.1
          109.4
          111.6Other payment-related services
          69,696.8
          49,366.0
          33,646.9Collection servicesTax and other revenue collections
          37,095.5
          39,736.0
          34,248.4Other collection-related services
          14,122.6
          14,354.2
          12,922.8Cash management services
          48,320.2
          40,496.7
          21,835.8Computer infrastructure development and support
          67,046.4
          67,703.3
          52,673.3Other services
          7,414.8
          2,332.2
          6,931.6Total
          270,561.2
          240,795.4
          191,968.6Other TreasuryTotal
          16,786.6
          15,726.7
          15,106.1Total, Treasury
          397,840.7
          371,016.6
          341,403.7Other Federal AgenciesDepartment of AgricultureFood coupons
          2,929.8
          2,642.4
          4,519.0U.S. Postal ServicePostal money orders
          9,334.4
          7,647.8
          7,774.6Other agenciesOther services
          15,977.1
          14,870.2
          16,104.0Total, other agencies
          28,241.4
          25,160.4
          28,397.5Total reimbursable expenses
          426,082.1
          369,177.0
          369,801.2
 Developments in Fiscal Agency and Government
      Depository Services As fiscal agents and depositories for the federal
      government, the Federal Reserve Banks provide services related to the
      federal debt, help the Treasury collect funds owed to the federal
      government, process electronic and check payments for the Treasury,
      maintain the Treasury's bank account, and invest excess Treasury
      balances. The Reserve Banks also provide limited fiscal agency and
      depository services to other entities. The total cost of providing fiscal agency and depository services
      to the Treasury and other entities in 2006 amounted to $426.1 million,
      compared with $396.2 million in 2005 (table). Treasury-related costs
      were $397.8 million in 2006, compared with $371.0 million in 2005, an
      increase of 7.2 percent. The cost of providing services to other
      entities was $28.2 million, compared with $25.2 million in 2005. In
      2006, as in 2005, the Treasury and other entities reimbursed the
      Reserve Banks for the costs of providing these services. Debt Services The Reserve Banks auction, provide safekeeping for, and transfer
      Treasury securities. Reserve Bank operating expenses for these
      activities totaled $31.1 million in 2006, compared with $23.6 million in 2005. The Banks processed 148,000 commercial tenders for
      Treasury securities, compared with 169,000 in 2005. They originated
      12.9 million transfers of Treasury securities in 2006, a 1.8 percent increase from 2005. The Reserve Banks are developing a new
      Treasury auction application and infrastructure that will provide
      increased functionality and security. The application will be
      operational in late 2007. The Reserve Banks also operate computer applications and provide
      customer service and back-office support for the Treasury's retail
      securities programs. Reserve Bank operating expenses for these
      activities were $73.9 million in 2006, compared with $86.5 million in
      2005. The Reserve Banks operate Legacy Treasury Direct, a program that
      allows investors to purchase and hold Treasury securities directly with
      the Treasury through the Reserve Banks instead of through a broker. The
      program held $72 billion (par value) of Treasury securities as of
      December 31. Because the program was designed for investors who plan to
      hold their securities to maturity, it does not provide transfer
      services. Investors may, however, sell their securities for a fee
      through Sell Direct, a program operated by one of the Reserve Banks.
      Approximately 13,000 securities worth $678.9 million were sold through
      Sell Direct in 2006, compared with 14,000 securities worth $874.8 million in 2005. The Banks printed and mailed more than 28.9 million
      savings bonds in 2006, a 10 percent decrease from 2005. They issued
      more than 5.3 million Series I (inflation-indexed) bonds and 23.1 million Series EE bonds. Payments Services The Reserve Banks process both electronic and check payments for
      the Treasury. Reserve Bank operating expenses for processing government
      payments and for payments-related programs totaled $96.6 million in
      2006, compared with $76.2 million in 2005. The Banks processed 991.6 million ACH payments for the Treasury, an increase of 2.8 percent from
      2005, and more than 855,000 Fedwire funds transfers. They also
      processed 192 million paper government checks, a decline of 11 percent
      from 2005. In addition, the Banks issued more than 170,000 fiscal
      agency checks, a decrease of 17.4 percent from 2005. Collection Services The Reserve Banks support several Treasury programs to collect
      funds owed the federal government. Reserve Bank operating expenses
      related to these programs totaled $51.2 million in 2006, compared with
      $54.1 million in 2005. The Banks operate the Federal Reserve Electronic
      Tax Application (FR-ETA) as an adjunct to the Treasury's Electronic
      Federal Tax Payment System (EFTPS). EFTPS allows businesses and
      individual taxpayers to pay their taxes electronically. It uses the
      automated clearinghouse (ACH) to collect funds, so tax payments must be
      scheduled at least one day in advance. Some business taxpayers,
      however, do not know their tax liability until the tax due date. FR-ETA
      allows these taxpayers to use EFTPS by providing a same-day electronic
      federal tax payment alternative. FR-ETA collected $456.3 billion for
      the Treasury in 2006, compared with $409.2 billion in 2005. In addition, the Reserve Banks operate Pay.gov, a Treasury
      program that allows members of the public to pay for goods and services
      offered by the federal government over the Internet. They also operate
      the Treasury's Paper Check Conversion and Electronic Check Processing
      programs, whereby checks written to government agencies are converted
      into ACH transactions at the point of sale or at lockbox locations. In
      2006, the Reserve Banks originated more than 2.6 million ACH
      transactions through these programs, roughly the same number of
      transactions as in 2005. Cash-Management Services The Treasury maintains its bank account at the Reserve Banks and
      invests the funds it does not need for current payments with qualified
      depository institutions through the Treasury Tax and Loan (TT&L)
      program, which the Reserve Banks operate. Reserve Bank operating
      expenses related to this program and other cash-management initiatives
      totaled $48.3 million in 2006, compared with $40.5 million in 2005. The
      investments either are callable on demand or are for a set term. In
      2006, the Reserve Banks placed a total of $309.2 billion in immediately
      callable investments, which includes funds invested through retained
      tax deposits and direct, special direct, and dynamic investments, and
      $508 billion in term investments. The rate for term investments is set
      by auction; the Reserve Banks held 104 such auctions in 2006, roughly
      the same number of auctions as in 2005. In 2006, the Treasury's income
      from the TT&L program was $1.04 billion. In March, Treasury launched
      the Repurchase Agreement Program, a pilot program that allows Treasury
      to place a portion of its excess operating funds directly with TT&L
      depositaries through a repurchase transaction for a set period at an
      agreed-on interest rate. In 2006, the Reserve Banks placed a total of
      $478.9 billion of investments through repurchase agreements. Services Provided to Other Entities The Reserve Banks provide fiscal agency and depository services
      to other domestic and international entities when required to do so by
      the Secretary of the Treasury or when required or permitted to do so by
      federal statute. The majority of the work is securities-related. Return to menu Electronic Access to Reserve Bank Services In 2006, the Federal Reserve Banks completed the migration of
      their FedLine DOS customers to FedLine Advantage. About 6,200 customers
      were converted to FedLine Advantage, a web-based access delivery
      channel typically used by small and medium-sized depository
      institutions to access critical payment services, such as the Fedwire
      Funds, Fedwire Securities, National Settlement, and FedACH Services. In
      addition, the Reserve Banks began migrating their high-volume
      computer-interface customers, which are typically large depository
      institutions, to FedLine Direct, an internet-protocol-based
      computer-to-computer access delivery channel for critical payment
      services. Also in 2006, the Reserve Banks announced a new option,
      FedLine
      
      Command, a lower-cost computer-to-computer access delivery
      channel for FedACH customers. The Reserve Banks will continue to
      migrate customers to FedLine Direct and FedLine Command in 2007. Return to menu Information Technology In early 2006, the Federal Reserve Banks initiated the first
      phase of the Information Security Architecture Framework (ISAF), a
      program that will cost $30.5 million by the end of 2008, when this
      phase of the program will be completed. The ISAF program is
      intended to respond to the continuing and increasingly
      sophisticated threats facing information technology systems and to
      improve information security at all points in the Federal Reserve
      System's networks. ISAF is a portfolio of initiatives to improve (1)
      targeted security services by ensuring that overall risks are reduced
      and the residual risks of these services are acceptable and (2) the
      overall efficiency and coherence of the provisioning of these services. The System established a National Information Security Assurance
      (NISA) function in 2006 to enhance information security governance. By
      managing and coordinating information security at the enterprise level,
      NISA will have an integrated view of information security compliance
      across the Reserve Banks. NISA will implement a business-oriented model
      of information security responsibility and accountability and will
      establish comprehensive information security standards and processes
      for all the Reserve Banks. In mid-2006, the Federal Reserve System adopted the Technology
      Project Standards (TPS), a set of standards for managing information
      technology projects. The standards are based on the Project Management
      Book of Knowledge (PMBOK), a recognized industry best practice. All
      Reserve Banks are expected to train their staff members who are
      involved in information technology projects and to fully transition to
      the TPS by January 1, 2008. Also in 2006, the Federal Reserve Bank of New York migrated its
      primary dealers (banks and securities broker-dealers) to the FedTrade
      application, which provides increased functionality and security. The
      FedTrade application is used to execute various forms of open market
      operations using electronic auctions with the primary dealers as
      bidders. Throughout 2006, the Reserve Banks continued to focus on
      initiatives to reduce IT costs over the long term by standardizing
      processes, increasing productivity, and strengthening the Federal
      Reserve's ability to respond to cyber security threats. Return to menu Examinations of the Federal Reserve Banks Section 21 of the Federal Reserve Act requires the Board of
      Governors to order an examination of each Federal Reserve Bank at least
      once a year. The Board performs its own reviews and engages a public
      accounting firm. The public accounting firm performs an annual audit of
      the combined financial statements of the Reserve Banks (see the section
      "
      Federal Reserve Banks Combined Financial Statements
      ") and audits
      the annual financial statements of each of the twelve Banks. The
      Reserve Banks use the framework established by the Committee of
      Sponsoring Organizations of the Treadway Commission (COSO) in assessing
      their internal controls over financial reporting, including the
      safeguarding of assets. The Reserve Banks have further enhanced their
      assessments under the COSO framework to strengthen the key control
      assertion process and in 2006 met the requirements of the
      Sarbanes-Oxley Act of 2002. Within this framework, management of each
      Reserve Bank provides an assertion letter to its board of directors
      annually confirming adherence to COSO standards, and a public
      accounting firm confirms management's assertion and issues an
      attestation report to the Bank's board of directors and to the Board of
      Governors. The firm engaged for the audits of the individual and combined
      financial statements of the Reserve Banks for 2006 was
      PricewaterhouseCoopers LLP (PwC). Fees for these services totaled $4.2 million. To ensure auditor independence, the Board requires that PwC be
      independent in all matters relating to the audit. Specifically, PwC may
      not perform services for the Reserve Banks or others that would place
      it in a position of auditing its own work, making management decisions
      on behalf of the Reserve Banks, or in any other way impairing its audit
      independence. In 2006, the Reserve Banks did not engage PwC for
      nonaudit services. The Board's annual examination of the Reserve Banks includes a
      wide range of off-site and on-site oversight activities conducted by
      the Division of Reserve Bank Operations and Payment Systems. Division
      personnel monitor the activities of each Reserve Bank on an ongoing
      basis and conduct on-site reviews based on the division's
      risk-assessment methodology. The examinations also include assessing
      the efficiency and effectiveness of the internal audit function. To
      assess compliance with the policies established by the Federal
      Reserve's Federal Open Market Committee (FOMC), the division also
      reviews the accounts and holdings of the System Open Market Account at
      the Federal Reserve Bank of New York and the foreign currency
      operations conducted by that Bank. In addition, PwC audits the schedule
      of participated asset and liability accounts and the related schedule
      of participated income accounts at year-end. The FOMC receives the
      external audit reports and the report on the division's examination. Return to menu Income, Expenses, and Distribution of Net Earnings of the Federal Reserve Banks, 2006 and 2005
        Millions of dollarsItem
          2006
          2005Current income
          38,410
          30,729Current expenses
          3,264
          2,890Operating expenses
            1
          2,987
          2,677Earnings credits granted
          276
          213Current net income
          35,147
          27,840Net additions to (deductions from, - ) current net income
          -159
          -3,577Assessments by the Board of Governors
          793
          743For expenditures of Board
          301
          266For cost of currency
          492
          477Net income before payments to Treasury
          34,195
          23,520Dividends paid
          871
          781Transferred to surplus       2
          4,272
          1,272Payments to Treasury
          3
          29,052
          21,468 1. Includes net periodic pension expense of $53 million in 2006 and a net periodic pension credit of $11 million in 2005.
        Return to table
        
        2. The implementation of FAS 158 in 2006 reduced surplus by $1,849 million and increased the amount of the transfer required to equate capital and surplus. Return to table
		 
        3. Interest on Federal Reserve notes.  
        Return to table
 Income and Expenses The accompanying table summarizes the income, expenses, and
      distributions of net earnings of the Federal Reserve Banks for 2005 and
      2006. Income in 2006 was $38,410 million, compared with $30,729 million
      in 2005. Expenses totaled $4,056 million ($2,987 million in operating
      expenses, $276 million in earnings credits granted to depository
      institutions, $301 million in assessments for expenditures by the Board
      of Governors, and $492 million for the cost of new currency). Revenue
      from priced services was $908 million. Net additions to and deductions
      from current net income showed a net loss of $159 million. The
      loss was due primarily to interest expense on securities sold under
      agreements to repurchase offset, in part, by unrealized gains on assets
      denominated in foreign currencies revalued to reflect current market
      exchange rates. Statutory dividends paid to member banks totaled $871 million, $90 million more than in 2005; the increase reflects an
      increase in the capital and surplus of member banks and a consequent
      increase in the paid-in capital stock of the Reserve Banks. Payments to the U.S. Treasury in the form of interest on Federal
      Reserve notes totaled $29,052 million in 2006, up from $21,468 million
      in 2005; the payments equal net income after the deduction of dividends
      paid and of the amount necessary to equate the Reserve Banks' surplus
      to paid-in capital. The implementation of FAS 158 required a reduction
      to surplus of $1,849 million and increased the amount necessary to
      equate surplus to paid-in capital in 2006. In the "Statistical Tables" section of this report, table 10
      details the income and expenses of each Reserve Bank for 2006 and table
      11 shows a condensed statement for each Bank for the years 1914 through
      2006; table 9 is a statement of condition for each Bank, and table 13
      gives the number and annual salaries of officers and employees for each
      Bank. A detailed account of the assessments and expenditures of the
      Board of Governors appears in the section "Board of Governors
      Financial Statements." Return to menu Securities and Loans of the Federal Reserve Banks, 2004-2006
        Millions of dollars except as notedItem and year
          Total
          U.S. government
            securities
            1
          Loans
            2Average daily holdings
            32004
          719,647
          719,494
          1532005
          761,509
          761,295
          2142006
          794,395
          794,174
          221Earnings
            42004
          22,347
          22,344
          32005
          28,966
          28,959
          72006
          36,464
          36,452
          12Average interest rate (percent)2004
          3.11
          3.11
          1.742005
          3.80
          3.80
          3.492006
          4.59
          4.59
          5.44 1. Includes federal agency obligations.
        Return to table
        
        2. Does not include indebtedness assumed by the Federal Deposit Insurance Corporation.
        Return to table
        
        3. Based on holdings at opening of business.
        Return to table
        
        4. Earnings have not been netted with the interest expense on securities sold under agreements to repurchase.
        Return to table
 Holdings of Securities and Loans The Federal Reserve Banks' average daily holdings of securities
      and loans during 2006 amounted to $794,395 million, an increase of
      $32,886 million from 2005 (table). Holdings of U.S. government
      securities increased $32,879 million, and holdings of loans increased
      $7 million. The average rate of interest earned on the Reserve Banks'
      holdings of government securities increased to 4.59 percent, from 3.80 percent in 2005, and the average rate of interest earned on loans
      increased to 5.44 percent, from 3.49 percent. Return to menu Volume of Operations Table 12 in the "Statistical Tables" section shows the volume
      of operations in the principal departments of the Federal Reserve Banks
      for the years 2003 through 2006. Return to menu Federal Reserve Bank Premises In 2006, construction continued on the Kansas City Bank's new
      headquarters building and construction began on the San Francisco
      Bank's new Seattle Branch building after the Board approved the
      project's final design. The multiyear renovation program at the New
      York Bank's headquarters building continued, as did facility renovation
      projects at several Reserve Bank offices to accommodate the
      consolidation of check activities. A long-term facility redevelopment
      program at the St. Louis Bank continued. Construction of a new
      pedestrian-screening vestibule was completed, and construction of an
      addition to the Board's headquarters building began. Security enhancement programs continue at several facilities. One
      such project is the recently completed external perimeter security
      improvement project at the Boston Bank. In addition, the Richmond Bank
      continued construction of additional security improvements to its
      headquarters building. The Dallas Bank completed the purchase of
      property behind its headquarters building for the construction of a
      remote vehicle-screening and shipping/receiving facility. Planning
      continues for a similar screening facility at the Philadelphia Bank. Also during 2006, the Board approved the Richmond Bank's purchase
      of property adjacent to its headquarters building for construction of a
      new parking garage. The sales of the Chicago Bank's former Detroit
      Branch building, the Kansas City Bank's Oklahoma City Branch building,
      and the San Francisco Bank's Portland Branch building were finalized.
      Efforts to sell the St. Louis Bank's Little Rock Branch building
      continued, as did efforts by the Dallas Bank to sell excess land at its
      Houston Branch. Activities for the Portland Branch were moved to leased
      facilities. The Kansas City Bank sold its Oklahoma City Branch building
      and is leasing space in the building for the Branch's administrative
      activity. The Birmingham Branch check and cash operations were
      relocated to the head office in Atlanta. The Birmingham building will
      house the remaining Branch activities, and available space will be
      leased. Return to menu Pro Forma Financial Statements for Federal Reserve Priced Service Pro Forma Balance Sheet for Priced Services, December 31, 2006 and 2005  Millions of dollarsItem
          2006
          2005Short-term assets
            (
            Note 1
            
            )Imputed reserve requirements on clearing balances
          821.7
          
          993.2Imputed investments
          7,245.7
          
          8,626.4Receivables
          73.6
          
          77.0Materials and supplies
          0.9
          
          1.3Prepaid expenses
          24.2
          
          25.6Items in process of collection
          3,391.0
          
          5,934.4Total short-term assets
          
          11,557.1
          
          15,657.7Long-term assets
            (
            Note 2
            
            )Premises
          424.9
          
          424.5Furniture and equipment
          127.9
          
          156.1Leases, leasehold improvements, and long-term prepayments
          83.3
          
          88.5Prepaid pension costs
          399.0
          
          796.8Deferred tax asset
          146.0
          
          0.0Total long-term assets
          
          1,181.0
          
          1,465.9Total assets
          
          12,738.1
          
          17,123.6Short-term liabilitiesClearing balances and balances arising from early credit of uncollected items
          8,015.6
          
          10,703.2Deferred-availability items
          3,592.5
          
          5,163.0Short-term debt
          .0
          
          .0Short-term payables
          100.4
          
          126.2Total short-term liabilities
          
          11,708.4
          
          15,992.4Long-term liabilitiesLong-term debt
          .0
          
          .0Postretirement/postemployment benefits obligation
          392.8
          
          275.0Total long-term liabilities
          
          392.8
          
          275.0Total liabilities
          
          12,101.5
          
          16,267.4Equity (including accumulated other
comprehensive loss of
$343.9 million at
December 31, 2006)
          
          636.9
          
          856.2Total liabilities and equity
            (
            Note 3
            
            )
          
          12,738.1
          
          17,123.6 Note:
        Components may not sum to totals because of rounding. 
        The accompanying 
        notes 
        are an integral part of these pro forma priced services financial statements.
 Pro Forma Income Statement for Federal Reserve Priced Services, 2006 and 2005 Millions of dollarsItem
          2006
          2005Revenue from services provided to depository institutions
            (
            Note 4
            
            )
          
          908.4
          
          901.0Operating expenses
            (
            Note 5
            
            )
          
          803.5
          
          750.0Income from operations
          
          104.8
          
          150.9Imputed costs
            (
            Note 6
            
            )Interest on float
          -4.9
          
          6.1Interest on debt
          .0
          
          .0Sales taxes
          10.8
          
          11.3FDIC insurance
          .0
          5.9
          .0
          17.4Income from operations after imputed costs
          
          98.9
          
          133.5Other income and expenses
            (
            Note 7
            
            )Investment income
          383.6
          
          292.7Earnings credits
          -260.8
          122.8
          -199.0
          93.7Income before income taxes
          
          221.8
          
          227.2Imputed income taxes
            (
            Note 6
            )
          
          66.1
          
          67.3Net income
          
          155.7
          
          160.0Memo:
            Targeted return on equity
            (
            Note 6
            
            )
          
          72.0
          
          103.0 Note:
        Components may not sum to totals because of rounding.
        The accompanying 
        notes
        are an integral part of these pro forma priced services financial statements.
 Pro Forma Income Statement for Federal Reserve Priced Services, by Service, 2006Millions of dollarsItem
          Total
          Commercial
            check
            collection
          Commercial
            ACH
          Fedwire
            funds
          Fedwire
            securitiesRevenue from services (
            Note 4
            
            )
          908.4
          745.0
          80.5
          63.6
          19.2Operating expenses (
            Note 5
            
            )
          803.5
          658.2
          74.7
          52.9
          17.7Income from operations
          104.8
          86.8
          5.8
          10.7
          1.5Imputed costs (
            Note 6
            
            )
          5.9
          4.1
          0.6
          0.8
          0.3Income from operations after imputed costs
          98.9
          82.7
          5.2
          9.9
          1.3Other income and expenses, net (
            Note 7
            
            )
          122.8
          100.7
          10.9
          8.6
          2.6Income before income taxes
          221.8
          183.3
          16.1
          18.5
          3.9Imputed income taxes (
            Note 6
            )
          66.1
          54.6
          4.8
          5.5
          1.2Net income
          155.7
          128.7
          11.3
          13.0
          2.7Memo:
            Targeted return on equity (
            Note 6
            )
          72.0
          57.1
          7.5
          5.6
          1.8 Note:
        Components may not sum to totals because of rounding.
             The accompanying
        notes 
        are an integral part of these pro forma priced services financial statements.
 FEDERAL RESERVE BANKS Notes to Pro Forma Financial Statements for Priced Services (1) Short-Term Assets The imputed reserve requirement on
clearing balances held at Reserve Banks by depository institutions
reflects a treatment comparable to that of compensating balances held
at correspondent banks by respondent institutions. The reserve
requirement imposed on respondent balances must be held as vault cash
or as non-earning balances maintained at a Reserve Bank; thus, a
portion of priced services clearing balances held with the Federal
Reserve is shown as required reserves on the asset side of the balance
sheet. Another portion of the clearing balances is used to finance
short-term and long-term assets. The remainder of clearing balances is
assumed to be invested in a portfolio of investments, shown as imputed
investments. Receivables are (1) amounts due the Reserve
Banks for priced services and (2) the share of suspense-account and
difference-account balances related to priced services. Materials and supplies are the inventory value of
        short-term assets. Prepaid expenses include salary advances and
        travel advances for priced-service personnel. Items in process of collection is gross
Federal Reserve cash items in process of collection (CIPC) stated on a
basis comparable to that of a commercial bank. It reflects adjustments
for intra-System items that would otherwise be double-counted on a
consolidated Federal Reserve balance sheet; adjustments for items
associated with nonpriced items, such as those collected for government
agencies; and adjustments for items associated with providing fixed
availability or credit before items are received and processed. Among
the costs to be recovered under the Monetary Control Act is the cost of
float, or net CIPC during the period (the difference between gross CIPC
and deferred-availability items, which is the portion of gross CIPC
that involves a financing cost), valued at the federal funds rate.Return to table (2) Long-Term Assets Consists of
        long-term assets used solely in priced services, the priced-service
        portion of long-term assets shared with nonpriced services, and an
        estimate of the assets of the Board of Governors used in the
        development of priced services. Effective December 31, 2006, the
        Reserve Banks implemented FAS 158, which requires an employer to record
        the funded status of its benefit plans on its balance sheet, resulting
        in a reduction to the prepaid pension asset related to priced services
        and the recognition of an associated deferred tax asset with an
        offsetting adjustment, net of tax, to accumulated other comprehensive
        income (AOCI) (see note 3). (3) Liabilities and Equity Under the matched-book capital structure for
        assets, short-term assets are financed with short-term payables and
        clearing balances. Long-term assets are financed with long-term
        liabilities and clearing balances. As a result, no short- or long-term
        debt is imputed. Other short-term liabilities include clearing
        balances maintained at Reserve Banks and deposit balances arising from
        float. Other long-term liabilities consist of accrued postemployment,
        postretirement, and nonqualified pension benefits costs and obligations
        on capital leases. In order to reflect the funded status of its
        benefit plans as required by FAS 158, the Reserve Banks recognized the
        deferred items related to these plans, which include prior service
        costs and actuarial gains or losses, on the balance sheet. This
        resulted in an increase to the benefits obligation related to the
        priced services and an offsetting adjustment, net of tax, to AOCI,
        which is included in equity. Equity is imputed at 5 percent of
        total assets. (4) Revenue Revenue
represents charges to depository institutions for priced services and
is realized from each institution through one of two methods: direct
charges to an institution's account or charges against its accumulated
earnings credits.Return to table (5) Operating Expenses Operating expenses consist of the direct, indirect, and other
general administrative expenses of the Reserve Banks for priced
services plus the expenses for staff members of the Board of Governors
working directly on the development of priced services. The expenses
for Board staff members were $7.5 million in 2006 and $6.6 million in
2005. Effective January 1, 1987, the Reserve Banks implemented
the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 87, *Employers' Accounting for
Pensions* (FAS 87). Accordingly, the Reserve Banks recognized
operating expenses for the qualified pension plan of $11.5 million in
2006 and a credit to expenses of $1.3 million in 2005. Operating
expenses also include the nonqualified pension expense of $3.2 million
in 2006 and $1.0 million in 2005. The implementation of FAS 158 does
not change the systematic approach required by generally accepted
accounting principles to recognize the expenses associated with the
Reserve Banks' benefit plans in the income statement. The income
        statement by service reflects revenue, operating expenses, and imputed
        costs. Certain corporate overhead costs not closely related to any
        particular priced service are allocated to priced services based on an
        expense-ratio method. Corporate overhead was allocated among the priced
        services during 2006 and 2005 as follows (in millions): 2006
            2005Check...........................................
            30.6
            29.4ACH.............................................
            4.1
            3.7Fedwire funds..............................
            2.8
            2.6Fedwire securities.......................
            1.5
            1.3Total.............................................
            **39.0**
            **37.0**
 Return to table (6) Imputed Costs Imputed
costs consist of income taxes, return on equity, interest on debt,
sales taxes, the FDIC assessment, and interest on float. Many imputed
costs are derived from the private-sector adjustment factor (PSAF)
model. The cost of debt and the effective tax rate, which reflect bank
holding company data as the proxy for a private-sector firm, are used
to impute debt and income taxes in the PSAF model. The after-tax rate
of return on equity is based on the returns of the equity market as a
whole and is used to impute the profit that would have been earned had
the services been provided by a private-sector firm. Interest is
        imputed on the debt assumed necessary to finance priced-service assets;
        however, no debt was imputed in 2006 or 2005. The sales taxes and FDIC
        assessment that the Federal Reserve would have paid had it been a
      private-sector firm are also among the components of the PSAF. Interest on float is derived from the value of float to be recovered,
        either explicitly or through per-item fees, during the period. Float
        costs include costs for checks, book-entry securities, ACH, and funds
      transfers. Float cost or income is based on the actual float
        incurred for each priced service. Other imputed costs are allocated
        among priced services according to the ratio of operating expenses less
        shipping expenses for each service to the total expenses for all
        services less the total shipping expenses for all services. The
        following list shows the daily average recovery of actual float by the
        Reserve Banks for 2006 in millions of dollars: Total float
            -84.7Unrecovered float
            15.6Float subject to recovery
            -100.3Sources of recovery of floatIncome on clearing balances
            -10.0As-of adjustments
            -1.2Direct charges
            497.6Per-item fees
            -589.1
 Unrecovered float
includes float generated by services to government agencies and by
other central bank services. Float recovered through income on clearing
balances is the result of the increase in investable clearing balances;
the increase is produced by a deduction for float for cash items in
process of collection, which reduces imputed reserve requirements. The
income on clearing balances reduces the float to be recovered through
other means. As-of adjustments and direct charges refer to float that
is created by interterritory check transportation and the observance of
non-standard holidays by some depository institutions. Such float may
be recovered from the depository institutions through adjustments to
institution reserve or clearing balances or by billing institutions
directly. Float recovered through direct charges and per-item fees is
valued at the federal funds rate; credit float recovered through
per-item fees has been subtracted from the cost base subject to
recovery in 2006.Return to table (7) Other Income and Expenses Consists of investment income on clearing
balances and the cost of earnings credits. Investment income on
clearing balances for 2006 and 2005 represents the average
coupon-equivalent yield on three-month Treasury bills plus a constant
spread, based on the return on a portfolio of investments. In both
years, the return is applied to the total clearing balance maintained,
adjusted for the effect of reserve requirements on clearing balances.
Expenses for earnings credits granted to depository institutions on
their clearing balances are derived by applying a discounted average
coupon-equivalent yield on three-month Treasury bills to the
*required* portion of the clearing balances, adjusted for the
net effect of reserve requirements on clearing balances.
Return to table
  Table 14 in the "Statistical Tables" section of this report
      details the acquisition costs and net book value of the Federal Reserve
      Banks and Branches.
      Return to text
      
      1. In addition to income taxes and the return on equity, the PSAF
      is made up of three imputed costs: interest on debt, sales taxes, and
      assessments for deposit insurance by the Federal Deposit Insurance
      Corporation (FDIC). Board of Governors assets and costs that are
      related to priced services are also allocated to priced services; in
      the pro forma financial statements at the end of this chapter, Board
      assets are part of long-term assets, and Board expenses are included in
      operating expenses.
      Return to text
      
      2. Effective December 31, 2006, the Reserve Banks implemented the
      Financial Accounting Standards Board's Statement of Financial
      Accounting Standards No. 158, *Employers' Accounting for Defined
      Benefit Pension and Other Postretirement Plans* (FAS 158), which
      resulted in the recognition of a $343.9 million reduction in equity
      related to the priced services' benefit plans. Including this
      reduction in equity, which represents a decline in economic value,
      results in cost recovery of 95.5 percent for the ten-year period. For
      details on how implementing FAS 158 affected the pro forma financial
      statements, refer to notes 2, 3, and 5 at the end of this chapter.
      Return to text
      
      3. In 2005, the Board approved changing the method from using the
      average of the results of three analytical methods--the comparable
      accounting earnings model, the discounted cash-flow model, and the
      capital asset pricing model (CAPM)--to using only the CAPM.
      Return to text
      
      4. Financial data reported throughout this chapter--revenue,
      other income, cost, net revenue, and income before taxes--can be linked
      to the pro forma financial statements at the end of this chapter. *Other income* is revenue from investment of clearing balances
      net of earnings credits, an amount termed net income on clearing
      balances. *Total cost* is the sum of operating expenses,
      imputed costs (interest on debt, interest on float, sales taxes, and
      the FDIC assessment), imputed income taxes, and the targeted return on
      equity.
      Return to text
      
      5. The Reserve Banks' Check 21 product suite includes electronic
      alternatives to paper-check collection, return, and presentment.
      Return to text
      
      6. The Federal Reserve System's retail payments research
      suggests that the number of checks written in the United States has
      been declining since the mid-1990s. For details, see Federal
      Reserve System, "
      The 2004 Federal Reserve  
        Payments
        Study: Analysis of Noncash Payments Trends in the United States,
        2000-2003
      " (December 2004).
      (
      www.frbservices.org/Retail/pdf/2004PaymentResearchReport.pdf
      )
      Return to text
      
      7. The Reserve Banks also offer non-Check 21 electronic
      presentment products. In 2006, 25.2 percent of the Reserve Banks'
      deposit volume was presented to paying banks using these products.
      Return to text
      
      8. The expenses, revenues, volumes, and fees reported here are
      for transfers of securities issued by federal government agencies,
      government-sponsored enterprises, and certain international
      organizations. The Reserve Banks provide Treasury securities services
      in their role as the U.S. Treasury's fiscal agent. These services are
      not considered priced services. For details, see the section "Debt
        Services" later in this chapter.
      Return to text
      
      9. Credit float occurs when the Reserve Banks present items for
      collection to the paying bank prior to providing credit to the
      depositing bank, and debit float occurs when the Reserve Banks credit
      the depositing bank prior to presenting items for collection to the
      paying bank.
      Return to text Return to menu
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