[Federal Register Volume 62, Number 217 (Monday, November 10, 1997)]
[Notices]
[Pages 60513-60525]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-29634]


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FEDERAL RESERVE SYSTEM

[Docket No. R-0986]


Federal Reserve Bank Services

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice.

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SUMMARY: The Board has approved a Private Sector Adjustment Factor 
(PSAF) for 1998 of $108.5 million, as well as the fee schedules for 
Federal Reserve priced services and electronic connections. These 
actions were taken in accordance with the requirements of the Monetary 
Control Act of 1980, which requires that, over the long run, fees for 
Federal Reserve priced services be established on the basis of all 
direct and indirect costs, including the PSAF.

DATES: The PSAF and the fee schedules become effective on January 2, 
1998.

FOR FURTHER INFORMATION CONTACT: For questions regarding the Private 
Sector Adjustment Factor: Martha Stallard, Senior Accountant, (202/452-
3758), Division of Reserve Bank Operations and Payment Systems; For 
questions regarding the fee schedules: Jeff Yeganeh, Senior Financial 
Services Analyst, Check Payments, (202/728-5801); Riaz Ahmed, Financial 
Services Analyst, ACH Payments, (202/452-3959); Stephen Cohen, 
Financial Services Analyst, Funds Transfer and Book-Entry Securities 
Services, (202/452-3480); Anne Paulin, Senior Information Technology 
Analyst

[[Page 60514]]

(electronic connections), (202/452-2560); Michael Bermudez, Financial 
Services Analyst, Noncash Collection Service, (202/452-2216); or Kate 
Connor, Senior Financial Services Analyst, Special Cash Services, (202/
452-3917), Division of Reserve Bank Operations and Payment Systems. For 
users of Telecommunications Device for the Deaf (TDD) only, please 
contact Diane Jenkins (202/452-3544).
    Copies of the 1998 fee schedules for the check, automated clearing 
house (ACH), funds transfer and net settlement, book-entry securities, 
noncash collection, and special cash services, as well as electronic 
connections to Reserve Banks, are available from the Reserve Banks.

SUPPLEMENTARY INFORMATION:

I. Private Sector Adjustment Factor

A. Overview

    The Board has approved a 1998 PSAF for Federal Reserve priced 
services of $108.5 million. This amount represents an increase of $7.0 
million, or 6.9 percent, from the PSAF of $101.5 million targeted for 
1997.
    As required by the Monetary Control Act (MCA) (12 U.S.C. 248a), the 
Federal Reserve's fee schedule for priced services includes ``taxes 
that would have been paid and the return on capital that would have 
been provided had the services been furnished by a private business 
firm.'' These imputed costs are based on data developed in part from a 
model comprised of consolidated financial data for the nation's 50 
largest (in asset size) bank holding companies (BHCs).
    The methodology first entails determining the value of Federal 
Reserve assets that will be used in producing priced services during 
the coming year. Short-term assets are assumed to be financed with 
short-term liabilities; long-term assets are assumed to be financed 
with a combination of long-term debt and equity derived from the BHC 
model.
    Imputed capital costs are determined by applying related interest 
rates and rates of return on equity (ROE) from the BHC model. The long-
term debt and equity rates are based on BHCs in the model for each of 
the last five years. Because short-term debt, by definition, matures 
within one year, only data for the most recent year are used for 
computing the short-term debt rate.
    The PSAF comprises these capital costs, as well as imputed sales 
taxes, expenses of the Board of Governors related to priced services, 
and an imputed FDIC insurance assessment on clearing balances held with 
the Federal Reserve Banks to settle transactions.

B. Asset Base

    The total estimated value of Federal Reserve assets to be used in 
providing priced services in 1998 is reflected in Table A-1. Table A-2 
shows that the assets assumed to be financed through debt and equity 
are projected to total $616.3 million. This represents a net decrease 
of $7.2 million, or 1.2 percent, from 1997 assets of $623.5 million, as 
shown in Table A-3. This decrease results from lower priced asset 
levels of Federal Reserve Automation Services (FRAS), slightly offset 
by an increase in the Reserve Banks' priced asset base.

C. Cost of Capital, Taxes, and Other Imputed Costs

    Table A-3 also shows the financing and tax rates and the other 
required PSAF recoveries proposed for 1998 and compares the 1998 rates 
with the rates used for developing the PSAF for 1997. The pre-tax ROE 
rate increased from 19.1 percent for 1997 to 22.4 percent for 1998. The 
increase is a result of stronger 1996 BHC financial performance 
included in the 1998 BHC model, relative to the 1991 BHC financial 
performance used in the 1997 BHC model.
    The increase in the FDIC insurance assessment from $2.0 million in 
1997 to $2.6 million in 1998, as shown in Table A-3, is attributable to 
higher clearing balance levels.

D. Capital Adequacy

    As shown in Table A-4, the amount of capital imputed for the 
proposed 1998 PSAF totals 30.0 percent of risk-weighted assets and 3.1 
percent of total assets. The capital to risk-weighted asset ratio well 
exceeds the 8 percent guideline for adequately capitalized state member 
banks and BHCs. The capital to total asset ratio exceeds the 3 percent 
guideline for adequately capitalized institutions that are rated 
composite 1 under the CAMELS rating system.

II. Priced Services

A. Overview

    Overall, prices for Reserve Bank services are projected to decline 
by approximately 4.0 percent in 1998, reflecting slight price increases 
in paper-based payment services (i.e., check, noncash collection, and 
special cash services) of 0.2 percent and price decreases in electronic 
payment services (i.e., payor bank check services, automated clearing 
house, funds transfer, and book-entry securities services) of 11.4 
percent. \1\ This compares to an overall price decline of 3.7 percent 
in 1997, reflecting price increases in paper-based payment services of 
0.1 percent and price decreases in electronic payment services of 11.9 
percent. Figure 1 provides a graphical comparison of the Federal 
Reserve's price index for priced services to the gross domestic product 
price deflator.
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    \1\ These estimates are based on a chained Fisher Ideal price 
index. This index was not adjusted for quality changes in Federal 
Reserve priced services. Because the index was not adjusted for 
quality and due to lack of data in electronic check services, the 
index may overstate the price effects of paper-based services.

BILLING CODE 6210-01-P

[[Page 60515]]

[GRAPHIC] [TIFF OMITTED] TN10NO97.019



BILLING CODE 6210-01-C

    The significant decline in fees for electronic payment services 
reflects, in large part, the efficiencies associated with the 
transition to a consolidated automation environment and centralized 
electronic payment processing applications. Beginning in 1992, the 
Reserve Banks' automation-processing functions were consolidated into 
three sites, greatly reducing the cost of providing electronic payment 
services. When transition to the consolidated environment is completed 
in early 1998, the priced services will have recovered $129.8 million 
in transition costs associated with the automation consolidation 
project (special project costs) and $11.7 million in deferred financing 
costs, while achieving $41.8 million in savings for depository 
institutions from lower fees for electronic payment services.\2\ In 
addition to the electronic payment fee reductions, the special project 
initiative has dramatically improved the Reserve Banks' disaster 
recovery and information security capabilities, increased the System's 
responsiveness to change, and enhanced the central bank's management of 
payment system risk.
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    \2\ Under an existing Board policy, the Reserve Banks may defer 
and finance development costs if the development costs would have a 
material effect on unit costs, provided that a conservative time 
period is set for full cost recovery and a financing factor is 
applied to the deferred portion of development costs. The 1997 and 
1998 financing rates of 15.1 and 16.9 percent, respectively, are the 
weighted-average imputed costs of the Federal Reserve's long-term 
debt and equity. This methodology is similar to the approach a 
private firm would use in financing such costs. Starting in 1992, 
the Reserve Banks deferred and financed special project costs for 
automation consolidation that were associated with employee 
retention and severance and excess mainframe computer capacity. Each 
priced service will recover fully its portion of these deferred 
expenses and accumulated finance charges within five years after the 
completion of the transition to the consolidated automation 
environment.
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    The Federal Reserve Banks continue to meet the provisions of the 
Monetary Control Act, which require the Federal Reserve to recover, 
over the long run, all direct and indirect costs, including imputed 
costs and profits, of priced services. Over the period 1987 through 
1996, the Reserve Banks recovered 99.9 percent of their total costs of 
providing priced services, including special project costs that were 
budgeted for recovery and targeted after-tax profits, that is, return 
on equity (ROE).\3\ \4\ Because the revenue from the Reserve Banks' 
priced services recovers imputed costs that are not actually incurred 
and imputed profits, the Federal Reserve's provision of priced services 
has consistently had a positive effect on the level of earnings 
transferred by the Federal Reserve to the Treasury. Over the past 10 
years, priced services revenue has exceeded operating costs by $886 
million. Table 1 summarizes the cost and revenue performance for priced 
services since 1987.
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    \3\ The Monetary Control Act requires that, over the long run, 
the Federal Reserve set fees for priced services to recover all 
direct and indirect costs of providing the services plus imputed 
costs, such as taxes that would have been paid and the return on 
capital that would have been earned had the services been provided 
by a private business firm. These imputed costs are based on data 
developed in part from a model comprised of the nation's 50 largest 
(in asset size) bank holding companies (BHCs). The targeted ROE is 
the budgeted after-tax profit that the Federal Reserve would have 
earned had it been a private business firm. The targeted ROE is 
derived from the BHC model based on consolidated financial data for 
each of the last five years.
    \4\ In setting fees, certain costs or adjustments to costs are 
treated differently in the pro forma income statement for priced 
services that is published in the Board's Annual report and the 
Board's annual Federal Register notice on priced service fees. In 
order to compare total expenses in the pro forma income statement 
with total expenses in Table 1 in this notice, the amortization of 
the initial retirement plan over funding required by Statement of 
Financial Accounting Standards No. 87, and the deferred costs of 
automation consolidation must be deducted from the pro forma 
expenses. These adjustments are detailed in Note 10 to the pro forma 
income statement in the Annual Report. Under the procedures used to 
prepare the pro forma income statement, the Reserve Banks recovered 
100.7 percent of priced services expenses, including targeted ROE, 
from the period 1987 to 1996.

[[Page 60516]]



                                                 Table 1.\5\--Pro Forma Cost and Revenue Performance (a)                                                
                                                                [In millions of dollars]                                                                
                                                                                                                                                        
                                                                                                                                              8 Special 
                                                               2 Operating   3 Special                                           7 Recovery    project  
                                                                costs and     project      4 Total       5 Net       6 Target    rate after     costs   
                      Year                         1 Revenue     imputed       costs       expenses      income        ROE       target ROE    deferred 
                                                                 expenses    recovered                   (ROE)                   (percent)       and    
                                                                                                                                               financed 
                                                          (b)          (c)          (d)          (e)                                                    
                                                                                               [2+3]        [1-4]          (f)    [1/(4+6)]          (g)
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1987............................................        649.7        598.2          0.0        598.2         51.5         29.3        103.5          0.0
1988............................................        667.7        641.1          3.2        644.3         23.4         32.7         98.6          0.0
1989............................................        718.6        692.1          4.6        696.7         21.9         32.9         98.5          0.0
1990............................................        746.5        698.1          2.8        700.9         45.6         33.6        101.6          0.0
1991............................................        750.2        710.0          1.6        711.6         38.6         32.5        100.8          0.0
1992............................................        760.8        731.0         11.2        742.2         18.6         26.0         99.0          1.6
1993............................................        774.5        722.4         27.1        749.5         25.0         24.9        100.0         12.5
1994............................................        767.2        748.3          8.8        757.1         10.1         34.6         96.9         33.9
1995............................................        765.2        724.0         19.8        743.8         21.4         31.5         98.7         36.3
1996............................................        815.9        736.4         26.8        763.2         52.7         36.7        102.0         30.1
1997 (Est)......................................        814.7        732.9         27.7        760.7         54.1         45.8        101.0         21.4
1998 (Bud)......................................        816.1        733.8         23.2        757.1         59.0         52.3        100.8          1.6
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(a) The revenues and expenses for 1987 through 1993 include the definitive securities safekeeping service, which was discontinued in 1993.              
(b) Includes net income on clearing balances.                                                                                                           
(c) Imputed expenses include interest on debt, taxes, FDIC insurance, and the cost of float. Credits for prepaid pension costs under SFAS 87 and the    
  charges for post-retirement benefits in accordance with SFAS106 are included beginning in 1993.                                                       
(d) Special project costs include research and development expenses for evaluating a different computer processing platform for electronic payments from
  1988 through 1990, check image project costs from 1988 through 1993, and automation consolidation costs from 1992 through 1998.                       
(e) To reconcile total expenses to the pro forma income statement in the Board's Annual Report, sum the operating expenses, imputed costs, and imputed  
  income taxes reflected in the pro forma income statement and subtract the adjustments shown in Note 10 to the pro forma income statement.             
(f) Targeted ROE is based on the ROE included in the private sector adjustment factor and has been adjusted for taxes, which are included in column 2.  
  Targeted ROE has not been adjusted to reflect automation consolidation special project costs deferred and financed.                                   
(g) Totals are cumulative and include financing costs.                                                                                                  

    In 1996, Reserve Bank priced service revenue yielded and after-tax 
net income of $52.7 million, compared with a targeted return on equity 
of $36.7 million. The Reserve Banks recovered 102.0 percent of total 
expenses, including automation consolidation special project costs 
budgeted for recovery an targeted ROE, compared to a targeted recovery 
rate of 100.7 percent. The Reserve Banks' better-than-targeted 
performance was due primarily to higher-than expected volumes in the 
check, funds transfer, book-entry securities transfer, and noncash 
collection services, resulting in higher net revenue. In particular, 
the volume of checks collected by the Reserve Banks in 1996 exceeded 
1995 levels, thereby reversing the downward trend of 1994 and 1995 that 
resulted from the new same-day settlement rule.
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    \5\ Calculations on this table and subsequent pro forma cost and 
revenue tables may be affected by rounding.
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    In 1997, the Reserve Banks estimate that priced services revenue 
will yield a net income of $54.1 million, compared with a targeted 
return on equity of $45.8 million. The 1997 recovery rate is estimated 
to be 101.0 percent of the costs of providing priced services, 
including imputed expenses, automation consolidation special project 
costs budgeted for recovery and targeted ROE, compared with a targeted 
recovery rate of 100.5 percent.\6\ Approximately $27.7 million in 
automation consolidation special project costs will be recovered in 
1997, leaving $21.4 million in accumulated costs to be financed and 
recovered in future years.
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    \6\ Through August 1997, the Reserve Banks recovered 101.1 
percent of total priced services expenses, including automation 
consolidation secial project costs and targeted ROE.
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    In 1998, the Reserve Banks project to recover 100.8 percent of 
total expenses, including automation consolidation special project 
costs budgeted for recovery and targeted ROE. The approved 1998 fees 
for priced services are projected to yield a net income of $59.0 
million, compared with a targeted ROE of $52.3 million. Approximately 
$23.2 million of automation consolidation special project expenses will 
be recovered, leaving an accumulated balance of $1.6 million to be 
recovered in future years.\7\
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    \7\ New charges for the automation consolidation special project 
are expected to end in 1998 with the completion of the transition to 
the centralized application environment. The $1.6 million balance 
must be recovered by the book-entry securities service.
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    Table 2 presents an overview of the projected 1997, estimated 1997, 
and projected 1998 cost recovery performance for individual priced 
services.

[[Page 60517]]



                                                     Table 2                                                    
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                                                            1997 budget       1997 estimate       1998 budget   
                     Priced service                          (percent)          (percent)          (percent)    
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All Services...........................................              100.5              101.0              100.8
Check..................................................              100.2              100.0              100.5
ACH....................................................              100.5              105.3              100.5
Funds Transfer.........................................              102.7              104.3              103.1
Book-Entry.............................................              100.0              100.1              100.0
Noncash................................................              103.8              116.0              125.9
Special Cash...........................................              102.3               99.7              102.4
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    The Reserve Banks have indicated that the most significant risk 
associated with the approved fee schedules is the uncertainty of 1998 
check volume estimates given the current competitive environment and 
the effects of continuing bank consolidations.

B. Check

    Table 3 presents the actual 1996, estimated 1997, and projected 
1998 cost recovery performance for the check service.

                                                 Table 3.--Check Pro Forma Cost and Revenue Performance                                                 
                                                                      [$ millions]                                                                      
                                                                                                                                                        
                                                                                                                                               8 Special
                                                                           2       3 Special                                      7 Recovery    project 
                                                                       Operating    project     4 Total      5 Net     6 Target   rate after     costs  
                          Year                             1 Revenue   costs and     costs      expense     income        ROE     target ROE   deferred 
                                                                        imputed    recovered                 (ROE)                 (percent)      and   
                                                                       expenses                                                                financed 
                                                                                                   [2+3]       [1-4]               [1/(4+6)]            
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1996....................................................       610.6       578.1         6.5       584.6        26.0        28.0        99.7        10.5
1997 (Est)..............................................       620.5       577.7         7.5       585.2        35.3        35.3       100.0         7.5
1998 (Bud)..............................................       636.4       584.2         8.4       592.6        43.8        40.9       100.5         0.0
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1. 1996 Performance
    The check service recovered 99.7 percent of total expense in 1996, 
including automation consolidation special project costs budgeted for 
recovery and targeted ROE. The volume of checks collected increased 0.1 
percent from 1995 levels, as volume losses associated with bank 
consolidations and the implementation of the same-day settlement 
regulation stabilized. Returned check volume increased 6.0 percent in 
1996 compared to 1995 levels.
2. 1997 Performance
    Through August 1997, the check service recovered 99.6 percent of 
total expenses, including automation consolidation special project 
costs budgeted for recovery and targeted ROE. The Reserve Banks 
estimate that they will recover 100.0 percent of their costs for the 
full year, compared with the targeted 1997 recovery rate of 100.2 
percent.
    Also through August 1997, the volume of checks collected has 
decreased by 0.2 percent while the volume of returned checks processed 
has increased by 5.1 percent from 1996 levels. The Reserve Banks now 
estimate that the volume of checks collected during 1997 will decrease 
by 0.7 percent from 1996 levels, reflecting a 2.1 percent increase in 
processed volume and a 15.5 percent decrease in fine sort volume. 
Returned check volume is estimated to increase by 3.9 percent.
3. 1998 Issues
    The total number of interbank checks will likely be flat or decline 
in 1998 as banks merge due to interstate branch banking and as banks 
continue to consolidate their payment processing operations. In 
addition, other service providers in the interbank check processing 
market are expected to compete aggressively for check collection and 
returned check volume. Despite the challenges posed by this 
environment, the Reserve Banks project modest volume increases in 1998. 
Total forward check collection volume is projected to increase by 1.0 
percent in 1998, reflecting a projected increase of 3.2 percent in 
processed volume and a decrease of 12.9 percent in fine sort volume. 
Returned check volume is projected to increase by 0.3 percent.
    The Reserve Banks continue to take steps that are expected to 
improve the efficiency of their check processing operations in 1998. 
For example, on October 24, 1997, the Federal Reserve Bank of Boston 
closed its Regional Check Processing Center in Lewiston, Maine, and 
consolidated those operations at its head office. In addition, on 
October 27, 1997, the System's Interdistrict Transportation System 
(ITS) moved one of its five airport hubs from Cleveland, Ohio to 
Cincinnati, Ohio. This move allows Reserve Banks to improve deposit 
deadlines and funds availability for many depositors. The Reserve Banks 
are also reviewing whether additional changes to the Federal Reserve's 
infrastructure would improve efficiency and are assessing the business 
case for a uniform software application to process check adjustment 
cases.
    The Reserve Banks will continue to promote electronic check 
products that are designed to increase operating efficiency and improve 
the speed of the check collection system. For example, the Reserve 
Banks are expanding the number of offices that offer and the number of 
deposit products that use electronic cash letters (ECLs).\8\ Further, 
in early 1998, the Reserve Banks are planning to begin sending ECLs for 
all cash letters exchanged among Federal

[[Page 60518]]

Reserve offices. The expanded use of ECLs is expected to improve the 
efficiency of the Reserve Banks' operations and may ultimately 
contribute to efficiencies in paying banks' operations by reducing 
rejects and minimizing adjustments. The Reserve Banks are also 
investigating the feasibility of offering standard electronic check 
products Systemwide during 1998 to meet the demand for greater 
uniformity in Reserve Bank check products.
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    \8\ Electronic cash letters (ECLs) are deposits that are 
accompanied by an electronic listing of all checks included in the 
deposits.
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    Further, the Reserve Banks are expanding their image-enhanced check 
products, which have the potential to increase the use of electronic 
check presentment and to reduce the risks associated with it. In 1998, 
an increasing number of Reserve Bank offices will be able to offer 
image services.
4. 1998 Fees
    The Reserve Banks are continuing the steps taken over the last 
several years to set check fees to reflect more accurately the fixed 
and variable costs associated with providing check services. The 
Reserve Banks' fees and product offerings are intended to encourage the 
use of electronics and to improve the efficiency of the check 
collection mechanism. Table 4 summarizes key check service fees.

                                          Table 4.--Selected Check Fees                                         
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             Products                            1997 price ranges                       1998 price ranges      
----------------------------------------------------------------------------------------------------------------
              Items:                                 (per item)                             (per item)          
                                                                                                                
Forward processed:                                                                                              
    City.........................  $0.003 to 0.080..............................  $0.002 to 0.080               
    RCPC.........................  0.004 to 0.090...............................  0.003 to 0.180                
Fine sort:                                                                                                      
    City.........................  0.003 to 0.012...............................  0.002 to 0.013                
    RCPC.........................  0.003 to 0.017...............................  0.003 to 0.018                
Qualified returned checks:                                                                                      
    City.........................  0.065 to 1.110...............................  0.065 to 1.110                
    RCPC.........................  0.068 to 1.560...............................  0.068 to 1.560                
Raw returned checks:                                                                                            
    City.........................  0.580 to 4.000...............................  0.900 to 5.000                
    RCPC.........................  0.650 to 4.000...............................  0.900 to 5.000                
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          Cash letters:                          (per cash letter)                       (per cash letter)      
                                                                                                                
Forward processed................  1.50 to 9.00.................................  1.50 to 9.00                  
Forward fine-sort package........  2.50 to 13.00................................  3.00 to 14.00                 
Returned checks: raw and           1.50 to 7.00.................................  1.75 to 12.00                 
 qualified.                                                                                                     
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       Payor bank services:        Min  Per item                                  Min  Per item                 
                                                                                                                
MICR information.................  5-30  0.001-0.0050...........................  5-30  0.001-0.0060            
Electronic presentment...........  3-14  0.001-0.0045...........................  2-14  0.001-0.0045            
Truncation.......................  3-25  0.010-0.0170...........................  2-25  0.004-0.0170            
----------------------------------------------------------------------------------------------------------------

    Overall, 1998 fees for paper-based check products are expected to 
increase by about 0.2 percent on a volume-weighted basis, compared with 
January 1997 prices.\9\ Paper-based check products include both forward 
and return check products and are expected to account for about 80 
percent of total check service revenues in 1998.
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    \9\ This volume-weighted fee increase includes an increase in 
ITS fees of approximately 10.0 percent on weekday routes. The 
Reserve Banks are continuing to investigate the possible 
implementation of an alternative fee structure for the ITS.
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    Fees for payor bank services will decline, on average, by 0.1 
percent. These fees include the Reserve Banks' fees for electronic 
check presentment and payor bank information products, as well as for 
image products. Payor bank services revenue is expected to increase by 
12.9 percent, however, primarily due to more widespread acceptance of 
electronic check presentment and image-enhanced check products. It is 
expected that payor bank services will account for about 10 percent of 
the check service's total revenues in 1998. Other operating and imputed 
revenues account for the remaining 10 percent of check service 
revenues.
    The Reserve Banks project that the check service will recover 100.5 
percent of total costs in 1998, including targeted ROE and all of the 
remaining $8.4 million in automation consolidation special project 
costs. Total check service operating costs plus imputed expenses are 
projected to increase by $6.5 million, or 1.1 percent above estimated 
1997 expenses. Total check service revenues are expected to increase by 
$15.9 million, or 2.6 percent above estimated 1997 revenues.
    The Reserve Banks view the effect of interstate branch banking and 
the growing competition in the interbank check collection market as 
potential risk factors in their volume projections. Nevertheless, 
despite this increasingly competitive market environment, the Reserve 
Banks believe that their projected 1998 volume levels are attainable.

C. Automated Clearing House (ACH)

    Table 5 presents the actual 1996, estimated 1997, and projected 
1998 cost recovery performance for the commercial ACH service.

[[Page 60519]]



                                                  Table 5.--ACH Pro Forma Cost and Revenue Performance                                                  
                                                                      [$ millions]                                                                      
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                                                                                                                                              8  Special
                                                                           2      3  Special                                           7        project 
                                                                       Operating    project                 5  Net                 Recovery      costs  
                          Year                            1  Revenue   costs and     costs     4  Total     income     6  Target  rate after   deferred 
                                                                        imputed    recovered    expense      (ROE)        ROE     target ROE      and   
                                                                       expenses                                                    (percent)   financed 
                                                                                                                                                        
                                                                                                   [2+3]       [1-4]                [1/4+6)]            
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1996....................................................        79.8        63.7         9.2        72.9         6.9         3.6       104.3        16.6
1997 (Est)..............................................        72.5        53.7        11.1        64.8         7.6         4.0       105.3        10.8
1998 (Bud)..............................................        68.5        52.1        12.0        64.1         4.4         4.0       100.5         0.0
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1. 1996 Performance
    Revenues from the ACH service recovered 104.3 percent of total 
expenses, including automation consolidation special project costs 
budgeted for recovery and targeted ROE, during 1996. This over recovery 
was attributable primarily to lower-than-expected data processing costs 
resulting from the efficiencies realized with the new Fed ACH 
application software.
2. 1997 Performance
    Through August 1997, the ACH service recovered 106.4 percent of 
total expenses, including automation consolidation special project 
costs budgeted for recovery and targeted ROE. For the full year, 
Reserve Banks estimate that they will recover 105.3 percent of total 
expenses, compared with the targeted 1997 recovery rate of 100.5 
percent. The over recovery is attributed to lower-than-budgeted ACH 
overhead costs, lower-than-expected data processing costs resulting 
from efficiency improvements to the Fed ACH application software, and 
the revised pension credit.
    On May 1, 1997, the Reserve Banks implemented a volume-based fee 
schedule for the ACH service. As a result, the cost to depository 
institutions to originate ACH transactions declined by an average of 17 
percent and the cost to receive ACH transactions declined by 10 
percent. In addition, effective October 1, 1997, the Reserve Banks 
changed to regular billing deposit deadline for ACH items from 8:00 
p.m. to 1:00 a.m. Eastern Time. The extension of the deadline reduces 
fees paid by customers depositing items between 8:00 p.m. and 1:00 a.m. 
Eastern Time by approximately $0.6 million in 1997.
    Through August 1997, commercial ACH volume has increased 12.7 
percent over the 1996 level. For the full year, the Reserve Banks 
expect commercial volume to increase 11.3 percent, compared to the 18.3 
percent increase originally projected. The revised projection reflects 
the effects of consolidation in the banking industry and some increased 
use of private-sector ACH processors.
3. 1998 Issues
    The Fed ACH processing environment continues to allow the Reserve 
Banks to improve operating efficiencies. In 1998, the Reserve Banks 
plan to expand their efforts to educate depository institutions and end 
users about the benefits of the ACH. The Reserve Banks believe that 
Federal Reserve and industry marketing efforts will spur commercial ACH 
volume growth. As a result, the projected commercial volume growth rate 
for 1998 is 15.4 percent.
4. 1998 Fees
    The Reserve Banks are reducing several fees effective January 2, 
1998. These changes support the System's strategic direction to 
encourage the migration from a paper-based to an electronic payments 
system and recognize the technological and operational changes 
implemented during the past year.

                                 Table 6                                
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                                                               Approved 
                 Fee category                   Current fee    1998 fee 
------------------------------------------------------------------------
Items Originated in Small Files \10\.........        $0.009       $0.008
Items Originated in Large Files \13\.........         0.007        0.006
Items Received...............................         0.009        0.008
Agenda (Originated and Received).............         0.003        0.002
Telephone Advice.............................        15.00         (\1\)
------------------------------------------------------------------------
\1\ Eliminate.                                                          

    As  Table 6 indicates, the Reserve Banks will reduce origination 
and receipt item fees by one mill, which will decrease the total fee 
for each item by as much as 12.5 percent. In addition, the Reserve 
Banks are reducing the fee for addenda records by one mill or one-
third. The reduction in the addenda record fee is intended to promote 
the use of the ACH for financial electronic data interchange. Finally, 
the telephone advice fee, which is assessed to customers seeking 
settlement information about processed files, is being eliminated 
because depository institutions are using other delivery mechanisms to 
obtain this information.
---------------------------------------------------------------------------

    \10\ Small files contain less than 2,500 items; large files 
contain 2,500 items or more.
---------------------------------------------------------------------------

    All customers, including customers of the private-sector ACH 
operators, will benefit from the approved 1998 price changes. Based on 
the 1998 volume projections, these changes will reduce fees to 
depository institutions by $6.6 million, compared to the Federal 
Reserve's current ACH fees.
    During 1998, the Reserve Banks plan to explore options to reduce 
fees further and to reduce paper processing. Board staff anticipates 
that the Director of the Board's Division of Reserve Bank Operations 
and Payment Systems, under delegated authority, will be requested to

[[Page 60520]]

approve further modifications to the ACH fee schedule during 1998.
    The Reserve Banks project that the ACH service will recover 100.5 
percent of its 1998 costs, including targeted ROE, and all of the 
remaining $12.0 million in automation consolidation special project 
costs.

D. Funds Transfer and Net Settlement

    Table 7 presents the actual 1996, estimated 1997, and projected 
1998 cost recovery performance for the funds transfer and net 
settlement service.

                                             Table 7.--Funds Transfer Pro Forma Cost and Revenue Performance                                            
                                                                      [$ millions]                                                                      
                                                                                                                                                        
                                                                                                                                              8 Special 
                                                                          2       3 Special                                      7 Recovery    project  
                                                                      Operating    project     4 Total      5 Net     6 Target   rate after     costs   
                          Year                            1 Revenue   costs and     costs      expense     income        ROE     target ROE    deferred 
                                                                       imputed    recovered                 (ROE)                 (percent)      and    
                                                                      expenses                                                                 financed 
                                                                                                  [2+3]       [1-4]               [1/(4+6)]             
--------------------------------------------------------------------------------------------------------------------------------------------------------
1996...................................................        97.6        69.9         9.3        79.2        18.4         3.8       117.6         0.0 
1997 (Est).............................................        95.3        78.9         7.4        86.3         9.1         5.1       104.3        (0.5)
1998 (Bud).............................................        88.8        79.7         0.3        79.9         8.9         6.2       103.1         0.0 
--------------------------------------------------------------------------------------------------------------------------------------------------------

1. 1996 Performance
    For 1996, the funds transfer and net settlement service recovered 
117.6 percent of total expenses, including automation consolidation 
special project costs budgeted for recovery and targeted ROE. Funds 
transfer origination and receipt volume increased 9.1 percent over the 
1995 level, compared to a budgeted increase of 2.1 percent.
2. 1997 Performance
    Through August 1997, the funds transfer and net settlement service 
recovered 106.5 percent of total expenses, including automation 
consolidation special project costs budgeted for recovery and targeted 
ROE. For full-year 1997, the Reserve Banks estimate that the funds 
transfer service will recover 104.3 percent of total expenses, compared 
to a targeted recovery rate of 102.7 percent. The Reserve Banks now 
estimate that operating costs will be lower than the original budget 
estimates due to the efficiencies realized from processing funds 
transfer in a centralized processing environment, a decrease in 
allocated overhead costs, and an increase in the estimated 1997 pension 
credit.
    Through August 1997, funds transfer volume has increased 7.7 
percent relative to the same period in 1996. For the full year, the 
Reserve Banks expect volume to increase 4.3 percent, compared to the 
4.2 percent increase originally projected. Board staff believes the 
Reserve Banks, 1997 volume estimate is conservative based on year-to-
date experience.
3. 1998 Issues
    Funds transfer origination and receipt volume is expected to 
increase 3.8 percent over 1997 estimated levels, lower than the ten-
year average annual growth rate of 4.7 percent. The Reserve Banks 
consider the strong volume growth of the last two years to be 
unsustainable due to the effects of interstate branch banking and 
continuing bank merger activity. Board staff believes the anticipated 
1998 volume effects of such merger activity may be overstated.
    Total costs are expected to decrease 6.1 percent from the 1997 
estimate due in part to lower special project costs allocated to the 
service as well as to operating efficiencies associated with automation 
consolidation. The Fedwire funds transfer operating hours will be 
expanded from a ten-hour to an eighteen-hour day beginning in December 
1997. The Reserve Banks expect that this expansion of operating hours 
will not materially increase the service's costs.
4. 1998 Fees
    The projection of lower total expenses combined with continued 
volume growth will enable the Reserve Banks to reduce the funds 
transfer fee by 11.1 percent from $0.45 to $0.40 in 1998. Additionally, 
the Reserve Banks will increase the off-line transaction surcharge from 
$10.00 to $12.00 to reflect more fully the costs of processing off-line 
transfers and to encourage higher volume off-line customers to install 
electronic connections. Based on 1998 volume projections, these fee 
changes will reduce fees to depository institutions by approximately 
$9.0 million, compared to the Federal Reserve's current funds transfer 
fees. All net settlement fees will remain unchanged.
    Reserve Banks project that 1998 revenues will recover 103.1 percent 
of total funds transfer expenses, including targeted ROE and all 
automation consolidation special project costs.

E. Book-Entry Securities \11\

    Table 8 presents the actual 1996, estimated 1997, and projected 
1998 cost recovery performance for the book-entry securities 
service.\12\
---------------------------------------------------------------------------

    \11\ Includes purchase and sale activity.
    \12\ The Reserve Banks provide securities transfer services for 
securities issued by the U.S. Treasury, federal government agencies, 
government sponsored enterprises, and certain international 
institutions. The priced component of this service, reflected in 
this memorandum, consists of the revenues, expenses, and volumes 
associated with the transfer of all non-Treasury securities. For 
Treasury securities, the Reserve Banks act as fiscal agents for the 
Treasury Department, which assesses fees for those transfer 
services.

[[Page 60521]]



                                         Table 8.--Book-Entry Securities Pro Forma Cost and Revenue Performance                                         
                                                                      [$ millions]                                                                      
                                                                                                                                                        
                                                                                                                                               8 Special
                                                                           2       3 Special                                      7 Recovery    project 
                                                                       Operating    project     4 Total      5 Net     6 Target   rate after     costs  
                          Year                             1 Revenue   costs and     costs      expense     income        ROE     target ROE   deferred 
                                                                        imputed    recovered                 (ROE)                 (percent)      and   
                                                                       expenses                                                                financed 
                                                                                                   [2+3]       [1-4]               [1/(4+6)]            
--------------------------------------------------------------------------------------------------------------------------------------------------------
1996....................................................        17.1        14.5         1.7        16.2         0.9         0.8       100.9         3.0
1997 (Est)..............................................        16.8        14.4         1.5        15.8         1.0         0.9       100.1         3.6
1998 (Bud)..............................................        16.3        12.9         2.5        15.3         1.0         1.0       100.0         1.6
--------------------------------------------------------------------------------------------------------------------------------------------------------

1. 1996 Performance
    The book-entry securities service recovered 100.9 percent of total 
expenses in 1996, including automation consolidation special project 
costs budgeted for recovery and targeted ROE. Origination volume 
increased 11.8 percent above the 1995 level, compared to a budgeted 
decrease of 0.4 percent. This substantial volume increase is partially 
the result of increased securities movements associated with mergers, 
and higher-than-expected mortgage refinancing activity, which in turn 
affects activity in the mortgage-backed securities market.
2. 1997 Performance
    Through August 1997, the book-entry securities service recovered 
102.4 percent of total expenses, including automation consolidation 
special project costs budgeted for recovery and targeted ROE. For the 
full-year 1997, the Reserve Banks estimate that revenues will recover 
100.1 percent of total costs, compared to a targeted recovery rate of 
100.0 percent.
    Through August 1997, book-entry securities volume declined 1 
percent, compared to the same period in 1996. For the full year, the 
Reserve Banks estimate that transfer volume will decline 3.3 percent, 
which is consistent with the budgeted target.
3. 1998 Issues
    The Reserve Banks expect book-entry securities transfer origination 
volume to decline 0.8 percent in 1998 from the 1997 estimated level. 
This volume projection reflects the potential effect of Participants 
Trust Company's (PTC) expansion of its mortgage-backed securities 
business to include Fedwire-eligible securities issued by the Federal 
Home Loan Mortgage Corporation and the Federal National Mortgage 
Association. PTC's service expansion is currently expected to occur by 
late 1998 and, depending on the timing of the implementation, may not 
have a material effect on 1998 book-entry securities volume.
    Book-entry service revenue is expected to decline 2.4 percent in 
1998 from the 1997 estimate as both account maintenance and transaction 
revenues decrease.\13\ Total expenses are projected to decrease 3.1 
percent in 1998 versus the 1997 estimate. Centralized and local data 
processing costs are expected to decrease by almost $1 million compared 
to the 1997 estimate reflecting the benefits from the transition to the 
centralized application environment.
---------------------------------------------------------------------------

    \13\ The decrease in account maintenance revenue is associated 
with a 1997 decision to waive certain joint custody account 
maintenance fees during the Reserve Banks conversion to the National 
Book-Entry System.
---------------------------------------------------------------------------

4. 1998 Fees
    The Reserve Banks are retaining 1997 fees in 1998. The Reserve 
Banks project that the book-entry securities service will recover 100.0 
percent of costs, including targeted ROE and $2.5 million in automation 
consolidation special project costs.

F. Electronic Connections

    The Reserve Banks charge fees for the electronic connections used 
by depository institutions to access priced services and allocate the 
cost and revenue associated with electronic access to the various 
proceed services. The Reserve Banks are retaining the current 1997 
electronic access fee schedule in 1998 with the addition of a new 
connection fee for Link Encrypted Dial connections.
    Currently, Link Encrypted Dial connections are assessed the same 
standard fee as that used for Receive and Send Dial connections. This 
$75 per month fee does not reflect fully the costs to install, 
configure, and maintain the unique hardware equipment required by Link 
Encrypted Dial connections. Accordingly, the Reserve Banks are 
establishing a new connection fee of $200 per month for Link Encrypted 
Dial connections. Only twelve of the approximately 12,000 current 
connections would be affected by this change.
    In addition, the Reserve Banks plan to change their policy for 
ownership of the encryption boards used by depository institutions with 
dial and multi-drop connections. These encryption boards are currently 
purchased and owned by the depository institutions. With the 
replacement of the encryption boards beginning in the second half of 
1998 to enhance the security of the Federal Reserve's communications 
network, the Reserve Banks plan to purchase and assume ownership of 
these boards. This approach is consistent with Reserve Bank ownership 
of other equipment at depository institutions that is required for 
electronic connections to the Federal Reserve, specifically link 
encryptors and signaling equipment. Reserve Bank ownership should 
improve management of the security of the network and facilitate the 
implementation of an all-electronic key distribution system. This 
change in policy may affect future-year electronic connection fees, as 
priced services must recover depreciation costs associated with the new 
encryption boards.

G. Noncash Collection

    Table 9 presents the actual 1996, estimated 1997, and projected 
1998 cost recovery performance for the noncash collection service.

[[Page 60522]]



                                           Table 9.--Noncash Collection Pro Forma Cost and Revenue Performance                                          
                                                                      [$ millions]                                                                      
                                                                                                                                                        
                                                                                                                                              8  Special
                                                                           2      3  Special                                           7        project 
                                                                       Operating    project                 5  Net                 Recovery      costs  
                          Year                            1  Revenue   costs and     costs     4  Total     income     6  Target  rate after   deferred 
                                                                        imputed    recovered    expense      (ROE)        ROE     target ROE      and   
                                                                       expenses                                                    (percent)   financed 
                                                                                                                                                        
                                                                                                   [2+3]       [1-4]               [1/(4+6)]            
--------------------------------------------------------------------------------------------------------------------------------------------------------
1996....................................................         5.4         5.0         0.0         5.0         0.4         0.2       102.4         0.3
1997 (Est)..............................................         4.5         3.3         0.3         3.6         0.8         0.2       116.0         0.0
1998 (Bud)..............................................         3.4         2.5         0.0         2.5         0.9         0.2       125.9         0.0
--------------------------------------------------------------------------------------------------------------------------------------------------------

1. 1996 Performance
    The noncash collection service recovered 102.4 percent of total 
expenses, including automation consolidation special project costs 
budgeted for recovery and targeted ROE, compared to a target of 100.0 
percent. Volume increased 34.2 percent over 1995 levels, compared to 
the budgeted increased of 22.5 percent. This volume increase was 
attributable to the withdrawal of other service providers from this 
business. Effective cost containment measures enabled the Reserve Banks 
to recover fully all service costs, including targeted ROE, for the 
first time since 1990.
 2. 1997 Performance
    Through August 1997, the noncash collection service recovered 118.5 
percent of total expenses including automation consolidation special 
project costs budgeted for recovery and targeted ROE. For the year, the 
Reserve Banks now estimate that the noncash collection service will 
recover 116.0 percent of total costs, including automation 
consolidation special project costs budgeted for recovery and targeted 
ROE, compared with the targeted full-year recovery rate of 103.8 
percent. The higher recovery rate reflects aggressive cost-containment 
and recognized efficiency gains from the centralization to one office, 
the Jacksonville Branch of the Federal Reserve Bank of Atlanta. Noncash 
collection volume continues its long-term contraction and all of the 
former national providers, except the Depository Trust Company (DTC) 
have withdrawn from providing noncash collection services.\14\ The 
Reserve Banks estimate that 1997 volume will decline by 17.6 percent 
from 1996 levels, slightly less than the 19.6 percent decline 
originally budgeted; estimated 1997 volume is less than 20 percent of 
the peak volume processed in 1985.
---------------------------------------------------------------------------

    \14\ The Tax Equity and Fiscal Responsibility Act of 1982 
(TEFRA) imposed a tax disadvantage to the holding of bearer 
securities, which has resulted in the virtual elimation of new 
issues. Following the enactment of TEFRA, many bearer municipal 
securities were ``immobilized'' in depositories, such as DTC, 
further reducing the demand for noncash collection services.
---------------------------------------------------------------------------

3. 1998 Issues
    The Reserve Banks project that 1998 volume will decline 20 percent 
from estimated 1997 levels. This decline generally reflects the decline 
in total noncash collection volume, rather than a shift in volume from 
the Federal Reserve to other service providers. The centralization of 
the noncash collection service in one office will enable the Reserve 
Banks to improve the cost effectiveness of this service in a declining 
market.
4. 1998 Fees
    Centralization of the noncash service in one Reserve Bank office 
eliminates the need to distinguish between local and out-of-region 
items; therefore, the Reserve Banks are eliminating the out-of-region 
fees in 1998 and retaining other fees at their current levels, 
effectively reducing the price of collecting noncash collection items 
previously categorized as out-of-region. The Reserve Banks project that 
1998 revenue will recover 125.9 percent of total costs, including 
targeted return on equity. Wile the projected 1998 recovery rate is 
high, if achieved the service's ten-year recovery rate will be 95.5 
percent. Given the focus of the Monetary Control Act and the Board's 
pricing principles on long-run cost recovery, the Board believes the 
1988 fees are reasonable.

H. Special Case Service

    Priced special cash services represent a very small portion 
(approximately 1.0 percent) of overall cash services provided by the 
Reserve Banks to depository institutions. Special cash services include 
cash transportation, coin wrapping, and nonstandard packaging of 
currency orders and deposits.
    Table 10 presents the actual 1996, estimated 1997, and projected 
1998 cost recover performances for the special cash services.

                                                 Table 10.--Cash Pro Forma Cost and Revenue Performance                                                 
                                                                      [$ millions]                                                                      
                                                                                                                                                        
                                                                                                                                               8 Special
                                                                           2       3 Special                                      7 Recovery    project 
                                                                       Operating    project     4 Total      5 Net     6 Target   rate after     costs  
                          Year                             1 Revenue   costs and     costs     expenses     income        ROE     target ROE   deferred 
                                                                        imputed    recovered                 (ROE)                 (percent)      and   
                                                                       expenses                                                                financed 
                                                                                                   [2+3]       [1-4]               [1/(4+6)]            
--------------------------------------------------------------------------------------------------------------------------------------------------------
1996....................................................         5.4         5.3         0.0         5.3         0.1         0.2        97.5         0.0
1997 (Est.).............................................         5.1         4.9         0.0         4.0         0.2         0.3        99.7         0.0
1998 (Bud)..............................................         2.7         2.5         0.0         2.5         0.1         0.1       102.4         0.0
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 60523]]

1. 1996 Performance
    The special cash services recovered 97.5 percent of total expenses, 
including targeted ROE, in 1996. Costs were higher than budgeted and 
priced volumes were lower than budgeted in certain offices.
2. 1997 Performance
    Through August 1997, the special cash services recovered 102.6 
percent of total expenses, including targeted ROE. For full-year 1997, 
the Reserve Banks estimate that special cash services will recover 99.7 
percent of total expenses, compared to a targeted recovery rate of 
102.3 percent. Priced volumes are lower than budgeted in certain 
offices.
3. 1998 Issues
    Projected revenue is expected to decrease by approximately 45 
percent due to plans to discontinue special cash services at some 
Reserve Bank offices in 1998, and the reclassification of cash access 
as a nonpriced service. Several Reserve Bank offices currently assess 
fees for access to cash services above the free standard level; this 
nonstandard access has been treated as a priced service.\15\ In light 
of the upcoming implementation of the uniform cash access policy for 
all Reserve Banks, Board staff has determined that, due to the 
governmental nature of this service, the costs and income associated 
with nonstandard access more appropriately should be treated as a 
nonpriced service.\16\
---------------------------------------------------------------------------

    \15\ Priced cash access services are currently offered by the 
Detroit Branch and all Ninth and Twelfth District offices.
    \16\ In April 1996, the Board approved a new cash access policy 
for the Reserve Banks that becomes effective on May 4, 1998. The 
policy provides for a base level of free currency access to all 
depository institutions, but restricts the number of offices served 
and the frequency of access. Depository institutions that meet 
minimum volume thresholds will be able to obtain more frequent free 
access. Fees will be charged for additional access beyond the free 
level.
---------------------------------------------------------------------------

4. 1998 Fees
    For 1998, the Reserve Banks project that special cash services will 
recover 102.4 percent of costs, including targeted ROE. The Detroit 
office is increasing its nonstandard packaging fee from $5.00 to $12.00 
per order or deposit to reflect more accurately the cost of providing 
this service.

III. Competitive Impact Analysis

    All operational and legal changes considered by the Board that have 
a substantial effect on payment system participants are subject to the 
competitive impact analysis described in the March 1990 policy 
statement ``The Federal Reserve in the Payments System.'' In this 
analysis, Board staff assesses whether the proposed change would have a 
direct and material adverse effect on the ability of other service 
providers to compete effectively with the Federal Reserve in providing 
similar services due to differing legal powers or constraints or due to 
a dominant market position of the Federal Reserve deriving from such 
legal differences.
    Assuming the Reserve Banks' volume and cost projections are 
accurate, the proposed fees are set to provide the Federal Reserve a 
return on equity at least equal to that earned by large bank holding 
companies during the past five years. Moreover, the recommended 1998 
fee schedules enable the Reserve Banks to continue to recover all 
actual and imputed costs of providing priced services over the long run 
(i.e., 1989 through 1998); these proposed fees also provide for 
projected full cost recovery in 1998. Therefore, the Board believes the 
recommended 1998 Reserve Bank price and service levels will not 
adversely affect the ability of other service providers to compete 
effectively with the Reserve Banks in providing similar services.

             Table A-1.--Comparison of Pro Forma Balance Sheets for Federal Reserve Priced Services             
                                     [Millions of dollars--average for year]                                    
----------------------------------------------------------------------------------------------------------------
                                                                  1998                      1997                
----------------------------------------------------------------------------------------------------------------
Short-term assets:                                                                                              
    Imputed reserve requirement on clearing balances........       $750.4  ...........       $545.7             
    Investment in marketable securities.....................      6,753.5  ...........      4,911.3             
    Receivables \1\.........................................         69.0  ...........         64.3             
    Materials and supplies \1\..............................          4.3  ...........         11.6             
    Prepaid expenses \1\....................................         14.1  ...........         14.6             
    Items in process of collection..........................      2,922.8  ...........      2,548.2             
                                                             -------------             -------------            
        Total short-term assets.............................    $10,514.1  ...........     $8,095.7             
                                                             -------------             -------------            
Long-term assets:                                                                                               
    Premises <SUP>1, <SUP>2...........................................        360.4  .........<SUP>..        348.0             
    Furniture and equipment \1\.............................        145.2  ...........        167.0             
    Leasehold improvements and long-term prepayments \1\....         23.3  ...........         18.0             
    Capital leases..........................................  ...........  ...........          0.7             
                                                             -------------             --------------           
        Total long-term assets..............................        528.9  ...........        533.7             
                                                             -------------             --------------           
        Total assets........................................     11,043.0  ...........      8,629.4             
                                                             =============             =============            
Short-term liabilities:                                                                                         
    Clearing balances and balances arising from early credit                                                    
     of uncollected items...................................      7,503.9  ...........      5,457.0             
    Deferred credit items...................................      2,922.8  ...........      2,548.2             
    Short-term debt \3\.....................................         87.4  ...........         90.5             
                                                             -------------             -------------            
        Total short-term liabilities........................     10,514.1  ...........      8,095.7             
                                                             -------------             -------------            
Long-term liabilities:                                                                                          
    Obligations under capital leases........................  ...........  ...........          0.7             
    Long-term debt \3\......................................        185.1  ...........        180.5             
                                                             -------------             --------------           

[[Page 60524]]

                                                                                                                
        Total long-term liabilities.........................        185.1  ...........        181.2             
                                                                          -------------             ------------
        Total liabilities...................................  ...........     10,699.2  ...........      8,276.9
Equity \3\..................................................  ...........        343.8  ...........        352.5
                                                                          -------------             ------------
    Total liabilities and equity............................  ...........     11,043.0  ...........      8,629,4
                                                                          =============             ============
                                                                                                                
----------------------------------------------------------------------------------------------------------------
Note: Details may not add to totals due to rounding.                                                            
\1\ Financed through PSAF, other assets are self-financing.                                                     
\2\ Includes allocations of Board of Governors' assets to priced services of $0.5 million for 1998 and 1997.    
\3\ Imputed figures represent the source of financing for certain priced services assets.                       


                 Table A-2.--Derivation of the 1998 PSAF                
                          [Millions of dollars]                         
------------------------------------------------------------------------
                                                                        
------------------------------------------------------------------------
A. Assets to be Financed \1\                                            
    Short-term.............................................        $87.4
    Long-term \2\..........................................        528.9
                                                            ------------
                                                                  $616.3
B. Weighted Average Cost:                                               
    1. Capital Structure \3\                                            
        Short-term debt....................................        14.2%
        Long-term debt.....................................        30.0%
        Equity.............................................        55.8%
    2. Financing Rates/Costs \3\                                        
        Short-term debt....................................         5.1%
        Long-term debt.....................................         6.8%
        Pre-tax equity \4\.................................        22.4%
    3. Elements of Capital Costs                                        
        Short-term debt, $87.4 x 5.18=.....................         $4.5
        Long-term debt, $185.1 x 6.8%=.....................        $12.5
        Equity, $343.8 x 22.4%=............................        $77.0
                                                            ------------
                                                                   $94.0
C. Other Required PSAF Recoveries:                                      
    Sales taxes............................................         $9.1
    Federal Deposit Insurance assessment...................         $2.6
    Board of Governors expenses............................         $2.8
                                                            ------------
                                                                   $14.5
                                                            ------------
                                                                   108.5
                                                            ============
D. Total PSAF Recoveries:                                               
    As a percent of capital................................        17.6%
    As a percent of expenses \5\...........................        18.1%
------------------------------------------------------------------------
\1\ Priced service asset base is based on the direct determination of   
  assets method.                                                        
\2\ Consists of total long-term assets, including the priced portion of 
  FRAS assets, less self financing capital leases.                      
\3\ All short-term assets are assumed to be financed with short-term    
  debt. Of the total long-term assets, 35% are assumed to be financed   
  with long-term debt and 65% with equity.                              
\4\ The pre-tax rate of return on equity is based on the average after- 
  tax rate of return on equity, adjusted by the effective tax rate to   
  yield the pre-tax rate of return on equity for each bank holding      
  company for each year. These data are then averaged over five years to
  yield the pre-tax return on equity for use in the FSAF.               
\5\ Systemwide 1998 budgeted priced service expenses less shipping are  
  $598.1 million.                                                       


      Table A-3.--Comparison Between 1998 and 1997 PSAF Components      
------------------------------------------------------------------------
                                                    1998         1997   
------------------------------------------------------------------------
A. Assets to be Financed (millions of                                   
 dollars):                                                              
    Short-term................................        $87.4        $90.5
    Long-term.................................       $528.9       $533.0
                                               -------------------------

[[Page 60525]]

                                                                        
        Total.................................       $616.3       $623.5
B. Cost of Capital:                                                     
    Short-term Debt Rate......................         5.1%         5.2%
    Long-term Debt Rate.......................         6.8%         7.1%
    Pre-tax Return on Equity..................        22.4%        19.1%
    Weighted Average Long-term Cost of Capital        16.9%        15.1%
C. Tax Rate...................................        32.1%        32.1%
D. Capital Structure:                                                   
    Short-term Debt...........................        14.2%        14.5%
    Long-term Debt............................        30.0%        29.0%
    Equity....................................        55.8%        56.5%
E. Other Required PSAF Recoveries (millions of                          
 dollars):                                                              
    Sales Taxes...............................         $9.1        $11.6
    Federal Deposit Insurance Assessment......         $2.6         $2.0
    Board of Governors Expenses...............         $2.8         $2.9
F. Total PSAF:                                                          
    Required Recovery.........................       $108.5       $101.5
    As Percent of Capital.....................        17.6%        16.3%
    As Percent of Expenses....................        18.1%        16.6%
------------------------------------------------------------------------


 Table A-4.--Computation of Capital Adequacy for Federal Reserve Priced 
                                Services                                
                          [Millions of dollars]                         
------------------------------------------------------------------------
                                                               Weighted 
                                      Assets    Risk Weight     Assets  
------------------------------------------------------------------------
Imputed reserve requirement on                                          
 clearing balances...............       $750.4          0.0         $0.0
Investment in marketable                                                
 securities......................      6,753.5          0.0          0.0
Receivables......................         69.0          0.2         13.8
Materials and supplies...........          4.3          1.0          4.3
Prepaid expenses.................         14.1          1.0         14.1
Items in process of collection...      2,922.8          0.2        584.6
Premises.........................        360.4          1.0        360.4
Furniture and equipment..........        145.2          1.0        145.2
Leases and long-term prepayments.         23.3          1.0         23.3
                                  -------------             ------------
    Total........................     11,043.0  ...........      1,145.7
Imputed Equity for 1996..........  ...........       $343.8             
Capital to Risk-Weighted Assets..  ...........        30.0%             
Capital Total Assets.............  ...........         3.1%             
------------------------------------------------------------------------

    By order of the Board of Governors of the Federal Reserve 
System, November 5, 1997.
Jennifer J. Johnson,
Deputy Secretary of the Board.
[FR Doc. 97-29634 Filed 11-7-97; 8:45 am]
BILLING CODE 6210-01-P-M