Federal Register / Vol. 74, No. 64 / Monday, April 6, 2009 / Notices 15481 

1These priced services include the check, 

automated clearinghouse, Fedwire® Funds, and 

Fedwire® Securities (for activity not related to 

Treasury securities) services. 

2 12 U.S.C. 248a(c)(3). 

STATUS: A portion of the meeting will be 

in Open Session and the remainder of 

the meeting will be in Closed Session. 

MATTERS TO BE CONSIDERED: 

Open Session 

1. Docket No. 02–15—Passenger 

Vessel Financial Responsibility— 

Request of Commissioner Brennan. 

2. Docket No. 06–06—EuroUSA 

Shipping, Inc., Tober Group, Inc., and 

Container Innovations, Inc., et al. 

3. Docket No. 06–09—Parks 

International Shipping, Inc., Cargo 

Express International Shipping, Inc., et 

al. 

4. Docket No. 07–04—Norland 

Industries, Inc., Linna Textiles 

Manufacturing Limited, Medcorp 

Distributors, Inc., Malan Garment 

Limited, et al. v. Reliable Logistic, LLC 

and Washington International Insurance 

Company. 

5. Docket No. 02–08—Odyssea 

Stevedoring of Puerto Rico, Inc. v. 

Puerto Rico Ports Authority; Docket No. 

04–01—International Shipping Agency, 

Inc. v. the Puerto Rico Ports Authority; 

and Docket No. 04–06—San Antonio 

Maritime Corp. & Antilles Cement Corp. 

v. Puerto Rico Ports Authority. 

6. FMC Agreement No. 011982–003: 

The Evergreen Line Joint Service 

Agreement. 

Closed Session 

1. FMC Agreement No. 201143: West 

Coast Marine Terminal Operator 

Agreement. 

2. Staff Briefing Regarding Global 

Economic Downturn and Potential 

Impact on Stakeholders. 

3. Termination of Escrow Account 

Establishing Section 3 Public Law 89– 

777 Coverage with respect to 

Abercrombie and Kent, Inc. 

4. Internal Administrative Practices 

and Personnel Matters. 

CONTACT PERSON FOR MORE INFORMATION: 

Karen V. Gregory, Secretary, (202) 523– 

5725. 

Karen V. Gregory, 

Secretary. 

[FR Doc. E9–7712 Filed 4–2–09; 8:45 am] 

BILLING CODE 

FEDERAL RESERVE SYSTEM 

[Docket No. OP–1354] 

Federal Reserve Bank Services Private 

Sector Adjustment Factor 

AGENCY: Board of Governors of the 

Federal Reserve System. 

ACTION: Notice and request for public 

comment. 

SUMMARY: The Board requests comment 

on proposed modifications to its method 

for calculating the private-sector 

adjustment factor (PSAF). The PSAF is 

part of the Board’s calculation, as 

required by the Monetary Control Act of 

1980 (MCA), to establish the fees that 

Federal Reserve Banks (Reserve Banks) 

charge for certain financial services 

provided to depository institutions 

(DIs). Consideration of a new PSAF 

methodology was prompted by the 

reduction in clearing balances held by 

DIs at Reserve Banks following the 

Board’s recent implementation of the 

payment of interest on required reserve 

balances and excess balances held at 

Reserve Banks, as well as by long-term 

changes in the structure of the market 

for providing payment services to DIs. 

The existing PSAF calculation model, 

which is built upon a correspondent 

bank framework, is driven primarily by 

the level of clearing balances held by 

DIs at Reserve Banks. The expected 

continued reduction in clearing 

balances will make the current PSAF 

calculation methodology less 

meaningful. Accordingly, the Board 

requests comment on the prospective 

need to change its methodology and its 

proposal to replace the current 

correspondent bank model for 

calculating the PSAF with a publicly 

traded firm model as described in this 

notice. If approved, use of this new 

model could be reflected in priced 

services fees as early as 2010. 

DATES: Comments must be submitted on 

or before May 29, 2009. 

ADDRESSES: You may submit comments, 

identified by Docket No. OP–1354, by 

any of the following methods: 

• Agency Web Site: http:// 

www.federalreserve.gov. Follow the 

instructions for submitting comments at 

http://www.federalreserve.gov/ 

generalinfo/foia/ProposedRegs.cfm. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• E-mail: 

regs.comments@federalreserve.gov. 

• FAX: 202/452–3819 or 202/452– 

3102. 

• Mail: Jennifer J. Johnson, Secretary, 

Board of Governors of the Federal 

Reserve System, 20th Street and 

Constitution Avenue, NW., Washington, 

DC 20551. 

All public comments are available on 

the Board’s Web site at http:// 

www.federalreserve.gov/generalinfo/ 

foia/ProposedRegs.cfm as submitted, 

except as necessary for technical 

reasons. Accordingly, your comments 

will not be edited to remove any 

identifying or contact information. 

Public comments may also be viewed 

electronically or on paper in Room MP– 

500 of the Board’s Martin Building (20th 

and C Streets, NW.) between 9 a.m. and 

5 p.m. on weekdays. 

FOR FURTHER INFORMATION CONTACT: 

Gregory L. Evans, Deputy Associate 

Director (202/452–3945), Brenda L. 

Richards, Manager (202/452–2753), 

Jonathan Mueller, Senior Financial 

Analyst (202/530–6253), or Rebekah 

Ellsworth, Financial Analyst (202/452– 

3480); Division of Reserve Bank 

Operations and Payment Systems. 

Telecommunications Device for the Deaf 

(TDD) users may contact 202/263–4869. 

SUPPLEMENTARY INFORMATION: 

I. Background 

Under MCA, the Federal Reserve 

Banks must charge fees to DIs for certain 

financial services, known collectively as 

‘‘priced services,’’ so as to recover, over 

the long run, all direct and indirect 

costs actually incurred in providing 

these services as well as the imputed 

costs that would have been incurred had 

the services been provided by a privatesector firm.1 2MCA specifically 

identifies certain imputed costs that 

must be recovered via priced services 

fees, including taxes and return on 

equity (profit). 

To set priced services fees in 

accordance with the requirements of 

MCA, the Board not only must estimate 

all actual direct and indirect costs 

incurred in providing priced services 

but also must impute costs that the 

Reserve Banks do not incur but would 

incur as private-sector entities. In 

determining a methodology for 

imputing these costs, the Board 

recognizes that there is no perfect 

private-sector proxy for the Reserve 

Bank priced services, but seeks a 

methodology that is theoretically sound 

and represents a reasonable 

approximation of the costs the Reserve 

Banks would incur if operating as 

private-sector providers. Because of the 

similarity between the services provided 

by Reserve Banks and many of the 

services offered by private-sector 

correspondent banks, the Board 

historically has derived these imputed 

costs, collectively known as the PSAF, 

and offsetting imputed revenue, known 

as net income on clearing balances 

(NICB), using a correspondent bank 

model. The PSAF and NICB are 

estimated annually, and the resulting 

net cost is incorporated each year when 


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3 In 2008, actual direct and indirect costs 

represented approximately 88 percent of total 

priced services costs and the PSAF represented the 

remaining 12 percent. The PSAF constituted an 

estimated $108.3 million of the overall costs 

recovered by priced services activities, and was 

offset by approximately $101.7 million of NICB. 

4The 2007 priced services balance sheet can be 

found in the Federal Reserve Board’s 2007 Annual 

Report at http://www.federalreserve.gov/boarddocs/ 

rptcongress/annual07/sec2/c3.htm#nl12. 

5Using clearing balances as a financing source is 

consistent with private-sector correspondent banks’ 

use of their respondent balances to fund short- and 

long-term assets. In the correspondent bank model 

only the portion of clearing balances that has 

remained stable over time (core clearing balances), 

historically set at $4 billion, is used to fund longterm assets on the priced services balance sheet. 

6Equity is imputed based on the FDIC definition 

of a well-capitalized depository institution for 

insurance premium purposes. The FDIC 

requirements for a well-capitalized depository 

institution are (1) a ratio of total capital to riskweighted assets of 10 percent or greater, (2) a ratio 

of Tier 1 capital to risk-weighted assets of 6 percent 

or greater, and (3) a leverage ratio of Tier 1 capital 

to total assets of 5 percent or greater. Because the 

total capital on the priced services balance sheet 

has no components of Tier 1 or total capital other 

than equity, requirements 1 and 2 are essentially 

the same measurement. In addition, because riskweighted assets have historically been considerably 

below actual assets on the priced services balance 

sheet, typically only requirement 3 has been 

binding for the priced services. 

7 Data on market returns are based on the French 

data series, which is the standard data series used 

to estimate the market risk premium (http:// 

mba.tuck.dartmouth.edu/pages/faculty/ken.french/ 

data_library.html). 

setting priced services fees and 

measuring cost recovery.3

The Clearing Balance Program 

The Reserve Bank clearing balance 

program was developed in connection 

with the implementation of MCA’s 

requirement to establish fees for priced 

services. This program allows DIs to 

hold at Reserve Banks an agreed-upon 

level of clearing balances which serve 

several purposes, including facilitating 

settlement of transactions, protecting 

against overnight overdrafts, and paying 

for priced services through the 

generation of earnings credits. The 

Reserve Bank clearing balance program 

is largely modeled after similar 

programs offered by private-sector 

correspondent banks, wherein 

respondent banks maintain balances 

with their correspondents for some or 

all of the purposes listed above. 

Under the Reserve Bank clearing 

balance program, a participating DI 

agrees to set and maintain a targeted 

minimum average clearing balance, 

known as the DI’s contractual clearing 

balance, over a set period. A DI may 

hold balances in excess of its 

contractual clearing balance and is 

charged for deficiencies below the 

contracted minimum. 

A DI accrues credits, known as 

earnings credits, on its contractual 

clearing balances (not on excess 

balances) held at a Reserve Bank at a 

rate currently equal to 80 percent of the 

13-week moving average of the 

annualized coupon equivalent yield of 

the three-month Treasury bill. Earnings 

credits can only be applied toward 

priced services fees, and unused credits 

expire if not used within one year. 

Calculating the PSAF 

The Board’s method for calculating 

the PSAF begins with developing a pro 

forma priced services balance sheet 

based on the projected average book 

value of Reserve Bank assets and 

liabilities to be used in providing priced 

services during the coming year.4

Additional elements on the priced 

services balance sheet are imputed as if 

the priced services were provided by a 

hypothetical private-sector 

correspondent bank. For example, a 

private-sector correspondent bank 

would be able to use the balances that 

its respondents deposit with it as a 

funding source for investments. 

Accordingly, the Board imputes 

investment income on clearing balances 

held at Reserve Banks based on an 

imputed portfolio of interest-bearing 

assets. Similarly, because private-sector 

correspondent banks are required to 

hold some portion of their deposit 

balances as vault cash or as balances at 

a Reserve Bank, the Board imputes a 

reserve requirement as a percentage of 

clearing balances. The imputed 

investment of clearing balances and the 

imputed reserve requirement both 

appear as assets on the priced services 

balance sheet. 

The liability and equity components 

of the priced services balance sheet 

consist of clearing balances, short- and 

long-term liabilities related to providing 

priced services, imputed debt (if 

necessary), and imputed equity. The 

level of clearing balances on the priced 

services balance sheet increases or 

decreases at the discretion of the DIs 

maintaining those balances and 

provides a source of long-term financing 

for priced services assets.5 Using the 

correspondent bank model results in 

imputed debt only when core clearing 

balances, long-term liabilities, and 

equity on the priced services balance 

sheet are not sufficient to fund longterm assets; or when an interest rate 

sensitivity analysis indicates that a 200 

basis point change in interest rates 

would change the percentage of priced 

services costs recovered (cost recovery) 

more than 2 percentage points. To 

satisfy the FDIC requirement for a ‘‘wellcapitalized’’ institution, equity is 

imputed at 5 percent of total assets.6

The imputed costs of the PSAF are 

derived from the priced services balance 

sheet. A target return on equity (ROE) 

rate is estimated and applied to the 

equity on the priced services balance 

sheet to determine the cost of equity. 

The ROE rate is estimated using the 

capital asset pricing model (CAPM), 

which calculates a firm’s required ROE 

rate as the sum of a risk-free rate of 

return and a risk premium. In this 

model, the risk premium is the product 

of a firm-specific sensitivity factor, 

known as beta, which expresses the 

correlation of the firm’s returns to the 

return of the market as a whole, and the 

expected return of the market in excess 

of the risk-free rate. In the PSAF 

calculation, the risk-free rate of return is 

based on the three-month Treasury bill 

rate, and the expected market risk 

premium is the average of the monthly 

returns of the market as a whole in 

excess of the risk-free rate over the most 

recent 40 years.7 The priced services 

beta of 1.0 assumes that, over time, 

priced services returns will be perfectly 

correlated with those of the overall 

market. 

Given that Federal corporate income 

tax rates are graduated, State income tax 

rates vary, and various credits and 

deductions can apply, the 

correspondent bank model does not 

include an actual income tax expense. 

Instead, the Board targets a pretax ROE 

that would provide sufficient income for 

the priced services to fulfill their 

imputed income tax obligation. The 

imputed income tax rate used to 

calculate the pretax ROE is the median 

of the rates paid over the past five years 

by the top 50 bank holding companies 

(BHCs) ranked by deposit balances, 

adjusted to exclude any investment in 

tax-free municipal bonds. The PSAF 

also includes the estimated share of 

Board expenses that supports the priced 

services, imputed sales tax, and an 

imputed FDIC insurance assessment 

based on current FDIC rates and the 

level of clearing balances held at 

Reserve Banks. 

Calculating NICB 

The correspondent bank model 

includes imputed revenue, known as 

NICB, which is calculated each year 

along with the imputed costs of the 

PSAF. The NICB calculation assumes 

that, similar to a correspondent bank, 

the priced services would invest 

clearing balances, net of the imputed 

reserve requirement and balances used 

to finance priced services assets, in 

interest-bearing assets. To impute 

investment income, a rate of return 


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8These investments include short-term Treasury 

securities, government agency securities, 

commercial paper, long-term corporate bonds, and 

money market funds. For additional details on the 

calculation of the constant spread, refer to the 

notice of approval of modifications to the method 

for calculating the PSAF, 68 FR 61413–61418 (Oct. 

28, 2003). 9Because clearing balances are voluntary, set by 

priced services customers, and held for clearing 

transactions or offsetting priced services fees, they 

are directly related to the priced services. The cost 

associated with holding clearing balances, 

therefore, is appropriately attributed to the priced 

services. 

10Although the largest portion of the PSAF, the 

target ROE, is fixed, two minor elements of the 

PSAF calculation are variable. The first adjusts the 

imputed income tax expense for the difference 

between the projected and actual priced services 

net income by applying the imputed effective 

income tax rate to any difference. The second 

recalculates the imputed FDIC assessment using 

actual clearing balance levels and assessment rates. 

11 In light of the uncertainty about the long-term 

effect that paying interest on required reserve and 

excess balances held at Reserve Banks will have on 

the level of clearing balances, the Board will adjust 

the PSAF used in the actual cost-recovery 

calculation for 2009 using the actual clearing 

balance levels maintained throughout 2009. 

12Historically, debt financing rates have been 

higher than the earnings credit rate, making debt a 

more costly source of financing for the priced 

services balance sheet. For the week ended 

February 11, 2009, the earnings credit rate paid on 

clearing balances held by DIs at the Reserve Banks 

was 0.09 percent versus 5.21 percent for the bond 

rate on Moody’s Aaa-rated corporate bonds for the 

week ended February 13, 2009 (see http:// 

www.federalreserve.gov/releases/h15/20090105/). 

13 73 FR 59482–59486 (Oct. 9, 2008), as amended 

by 73 FR 65506–65507 (Nov. 4, 2008), 73 FR 67713– 

67714 (Nov. 17, 2008), and 73 FR 78616 (Dec. 23, 

2008). 

14The recent plateau in clearing balance levels 

may be due to the small difference (often of less 

than 15 basis points) between the rates earned on 

excess balances and clearing balances in the current 

low interest rate environment. In a more normal 

rate environment, the absolute value of this 

difference will increase, giving DIs more incentive 

to shift from maintaining contractual clearing 

balances to maintaining interest-earning excess 

balances. 

equal to the yield on the three-month 

Treasury bill plus a constant spread is 

applied to the level of clearing balances 

available for investment on the priced 

services balance sheet. The constant 

spread is derived annually from a 

portfolio of investments comparable to 

the investment holdings of BHCs.8 The 

NICB calculation nets this imputed 

investment income against the actual 

cost of earnings credits, which represent 

the cost to the Reserve Banks of holding 

clearing balances.9

Calculating Cost Recovery 

The Board incorporates the PSAF and 

NICB into the projected and actual 

annual cost recovery calculations for 

Reserve Bank priced services. Cost 

recovery measures the percentage of 

priced services costs, including the 

PSAF, recovered through priced 

services fees and NICB. In the fall of 

each year, the Board projects the PSAF 

and NICB for the following year using 

the most recent clearing balance and 

rate data available (typically July data) 

during the process of establishing priced 

services fees. The Board also estimates 

cost recovery for the coming year using 

projected direct and indirect costs, 

revenue, and the net imputed cost 

generated from the estimated PSAF and 

NICB. 

When calculating actual cost recovery 

for the priced services at the end of each 

year, the Board historically has used the 

estimated PSAF derived during the 

price-setting process with only minimal 

adjustments for actual rates or balance 

levels.10 11 The Board adopted this 

approach because the PSAF largely 

represents the fixed financing costs 

associated with the assets on the priced 

services balance sheet, which is updated 

annually. This method has proven to be 

reasonable and transparent without 

being unduly complex or burdensome. 

The Board updates NICB, however, to 

reflect actual interest rates and clearing 

balance levels throughout the year when 

calculating actual priced services cost 

recovery. Actual NICB, therefore, can 

vary from the projected amount used to 

determine priced services fees for a 

given year. For example, while the 

projected and actual PSAF for 2007 

remained substantially unchanged at 

$132.5 million, actual 2007 NICB 

decreased from its $139.6 million 

projection to $133.8 million. 

The Interdependence of Clearing 

Balances, the PSAF, and NICB 

Changes in clearing balance levels 

directly affect the imputed costs and 

income that factor into priced services 

fees and cost recovery. Clearing 

balances not only represent the largest 

component of the priced services 

balance sheet but also drive the 

calculation of nearly all imputed 

elements included in priced services 

fees, including the financing costs, the 

cost of equity, and NICB. For example, 

clearing balances provide a major source 

of short- and long-term funding for the 

assets on the priced services balance 

sheet, representing 74 percent of total 

financing in 2007. Clearing balances 

thus reduce total imputed financing 

costs by eliminating the need to impute 

more costly forms of financing, such as 

debt.12 Clearing balances, in the form of 

imputed investments, also represent a 

significant portion of total priced 

services assets. Total assets, in turn, 

determine the level of imputed equity 

and the resultant imputed cost of that 

equity. In addition, the level of clearing 

balances influences the amount of funds 

available for investment in the imputed 

portfolio of investments and the cost of 

earnings credits, both of which are 

principal factors in the NICB 

calculation. These three elements— 

financing costs, the cost of equity, and 

NICB—are included in the net imputed 

cost that is recovered through priced 

services fees. Any change in the level of 

clearing balances, therefore, has a 

significant effect on the PSAF, NICB, 

and cost recovery. 

Interest on Balances Held at Reserve 

Banks 

Title II of the Financial Services 

Regulatory Relief Act of 2006 granted 

the Reserve Banks authority to pay 

earnings (interest) on balances 

maintained by or on behalf of DIs at 

Reserve Banks. Originally, this authority 

was to become effective in 2011. Section 

128 of the Emergency Economic 

Stabilization Act of 2008, enacted on 

October 3, 2008, made the authority 

effective upon enactment. On October 6, 

2008, the Board published an interim 

final rule amending Regulation D 

(Reserve Requirements of Depository 

Institutions). The interim rule directed 

the Reserve Banks to pay explicit 

interest on balances held at Reserve 

Banks to satisfy reserve requirements 

(required reserve balances) and on 

balances held in excess of both required 

reserve balances and contractual 

clearing balances (excess balances), 

effective October 9, 2008.13

The Board has observed a significant 

decline in the level of clearing balances 

held at Reserve Banks following the 

implementation of interest on required 

reserve balances and excess balances 

and anticipates that this trend will 

continue. The daily average level of 

clearing balances over the two-week 

reserve maintenance period ending 

October 8, 2008 was $7.7 billion. As 

shown in figure 1, by the reserve 

maintenance period ending February 11, 

2009, the daily average level of clearing 

balances had fallen to $4.6 billion. Over 

this period, the rate of interest paid on 

both required reserve balances and 

excess balances maintained at Reserve 

Banks was generally higher than the 

earnings credit rate paid on clearing 

balances.14 The interest rate on required 

reserve balances and excess balances as 

of March 2009 is 25 basis points, which 

is the top of the targeted range for the 

Federal funds rate and higher than the 

concurrent earnings credit rate for 

clearing balances. When the target 

Federal funds rate exceeds the earnings 

credit rate (the typical historical 


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scenario), and absent a significant 

preference by DIs for implicit interest on 

clearing balances over explicit interest 

on excess balances held at Reserve 

Banks, DIs will likely continue to 

reduce clearing balances in favor of 

increasing excess balances to receive 

higher, explicit returns. 

The expected continued decline in 

clearing balance levels could have 

significant implications for the imputed 

costs that factor into the Board’s pricesetting methodology. If clearing balance 

levels decline significantly, the priced 

services balance sheet will shrink 

dramatically, and the priced services 

will lose a major source of both funding 

and income. A continued reduction in 

clearing balance levels will decrease the 

similarities between the financial 

characteristics of the priced services and 

private-sector correspondent banks. 

Specifically, with low to zero clearing 

balance levels, it will be more difficult 

to draw the analogy between 

correspondent banks, whose balance 

sheets include large levels of deposit 

balances and related accounts, and the 

Reserve Bank priced services. Similarly, 

markedly reduced clearing balance 

levels will call into question the use of 

the FDIC’s regulatory structure for wellcapitalized depository institutions as a 

determinant of equity capital on the 

priced services balance sheet and will 

potentially nullify the calculation of an 

FDIC insurance assessment based on 

clearing balance levels. All of these 

factors challenge the continued 

applicability of a PSAF model based on 

a correspondent bank framework. 

The potential for such circumstances, 

in conjunction with the ongoing 

changes in the nature of priced services 

competitors discussed below, has 

prompted the Board to consider changes 

to its approach to imputing the costs 

that MCA requires to be recovered 

through priced services fees. If 

approved, these changes could be 

effective as early as the 2010 pricing 

process. In determining the appropriate 

timing of such changes, the Board will 

consider trends in the level of clearing 

balances held at Reserve Banks and the 

extent to which the nature of the 

Reserve Banks’ competitors, particularly 

in the check service, shifts away from 

correspondent banks. 

The Board requests comment on the 

following: 

If the explicit interest rate for required 

reserve balances and excess balances 

continues to be higher than the implicit 

rate paid on clearing balances in the 

form of earnings credits, is it reasonable 

to assume that DIs will continue to 

reduce or eliminate their level of 

contractual clearing balances in favor of 

holding additional excess balances? If 

not, why might DIs choose to maintain 

their clearing balances? 

Will DIs raise and lower the level of 

clearing balances they hold at Reserve 

Banks depending on whether the 

earnings credit rate is above or below 

the rate on excess balances? 

Are there any reasons why the Board 

should maintain its clearing balance 

program if demand for clearing balances 

continues to decline significantly? 

Trends in the Banking and Payment 

Systems Industries 

As noted above, when implementing 

the priced services provisions of MCA 

in the early 1980s, the Board identified 

private-sector correspondent banks as 

the most appropriate peer group for the 

priced services in adopting key 

elements of the policy. The Board 


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15Although MCA’s requirement for cost recovery 

over the long run allows the Board to set fees to 

over- or underrecover costs in a given year to 

minimize price volatility, volatility in imputed 

costs makes the pricing process more complex. As 

a result, the Board has typically preferred to adopt 

PSAF methodologies that provide for stable rather 

than volatile imputed costs. 

16 Value-weighted averages assign equal weight to 

each dollar, while equal-weighted averages assign 

equal weight to each firm. The Board opted to use 

value-weighted averages to reflect more accurately 

the financial characteristics of the market as a 

whole rather than those of the ‘‘average’’ firm in the 

market. 

17The two-year lag in the data used to calculate 

certain imputed costs in the PSAF is characteristic 

of the current model as well and is due in large part 

to the timing of the price-setting process. 

considered correspondent banks to be a 

reasonable proxy for private-sector 

providers of priced services because 

they are the primary competitors of the 

Reserve Banks’ check service, which 

historically has comprised more than 80 

percent of the cost of Reserve Bank 

priced services activities. In doing so, 

the Board recognized that BHCs offer 

diverse services that extend well beyond 

the payment services that are provided 

by the Reserve Banks, and that these 

services largely drive BHC financial 

results; however, given that Reserve 

Banks and BHCs both hold customer 

balances that facilitate payment 

services, the Board considered it a 

reasonable comparison. 

Recently, however, the analogy 

between private-sector correspondent 

banks and the priced services has 

become less applicable. The payment 

systems industry has sharply decreased 

its use of traditional check services and 

increased its use of electronic payment 

services. As a result, user-owned 

utilities, the Reserve Banks’ typical 

competitors in electronic payment 

services, have increasingly replaced 

correspondent banks as the 

predominant competitors of the Reserve 

Banks in providing priced services. 

These user-owned utilities include such 

entities as the Clearing House Interbank 

Payment System (CHIPS), which is the 

primary competitor for Fedwire® funds 

transfer services, and the Electronic 

Payments Network (EPN), which is the 

only private-sector automated 

clearinghouse (ACH) operator. Both of 

these entities are part of a larger 

cooperative, The Clearing House 

Payments Company, LLC (TCH), which 

is owned entirely by its principal users. 

Unlike private-sector correspondent 

banks, user-owned utilities do not hold 

overnight balances for their participants. 

As paper check processing volumes 

continue to decline and the check 

service becomes more electronic, 

utilities will likely increasingly be key 

competitors of the Reserve Banks in 

providing priced services. These trends, 

in conjunction with the potential 

continued significant decline in clearing 

balances resulting from the ability of DIs 

to receive explicit interest on balances 

held at Reserve Banks, raise questions 

about the continued appropriateness of 

the correspondent bank model as the 

basis for the imputed costs that factor 

into the Board’s pricing methodology. 

II. The Proposed PSAF Model 

The Publicly Traded Firm Model 

The Board seeks to replace the current 

correspondent bank model with a model 

that is transparent, consistent with 

current financial theory and practice, 

and conceptually sound as a basis for 

efficient pricing in the market of 

payment services. To achieve these 

objectives, and given the difficulty in 

identifying and obtaining data for an 

applicable peer group, the Board 

proposes to replace the correspondent 

bank model with a ‘‘publicly traded firm 

model’’ for calculating the imputed 

costs that factor into priced services fees 

and cost recovery. This model 

recognizes the shift, in the priced 

services’ financial characteristics and 

competitors, away from correspondent 

banks, as well as the difficulties 

inherent in a user-owned utility model 

as discussed below, and instead 

compares the priced services to the 

entire market of U.S. publicly traded 

firms. 

Under the publicly traded firm model, 

the asset side of the priced services 

balance sheet would reflect only the 

projected portion of actual Reserve Bank 

assets used to provide priced services; 

no additional assets would be imputed. 

Any residual clearing balances 

maintained by DIs at Reserve Banks 

would not be included in the priced 

services balance sheet or in the 

calculation of the PSAF. Consequently, 

imputed investments and NICB would 

be zero by definition, and the priced 

services would impute additional equity 

and debt to meet the funding need on 

the priced services balance sheet. The 

publicly traded firm model would not 

include an imputed FDIC assessment, 

because the priced services’ peer group 

would no longer be limited to privatesector correspondent banks and 

because, as noted above, any residual 

clearing balances would not be included 

in the priced services balance sheet or 

in the PSAF calculation. The imputed 

capital structure, debt and equity 

financing rates, and effective income tax 

rate would be based on data for the U.S. 

market as a whole and would be 

calculated using the various market data 

sources and time frames discussed 

below. The time frame selected for each 

of these imputed elements was chosen 

to minimize volatility in the PSAF from 

year to year. A one-year time frame was 

selected for elements that historically 

have been more stable; a five-year 

average was selected when data were 

more volatile historically or when 

changes in that element would have a 

larger impact on the PSAF.15 When 

averaging data for individual U.S. firms, 

the model would use value-weighted 

rather than equal-weighted averages.16

The priced services imputed capital 

structure would be based on the most 

recent full-year value-weighted average 

capital structure (that is, total long-term 

debt to total long-term debt plus equity) 

of all U.S. publicly traded firms 

included in a commercially available 

financial database. The Board initially 

proposes using Standard & Poor’s 

Compustat® database as the source for 

the capital structure and effective 

income tax rate of all U.S. publicly 

traded firms. The Standard & Poor’s 

Compustat® database contains 

information on more than 6,000 U.S. 

publicly traded firms, which 

approximate the entirety of the U.S. 

market. Because of the timing of the 

price-setting process and the availability 

of relevant data, there would be a twoyear lag in the data used in the PSAF 

calculation: for example, 2010 priced 

services fees, set in late 2009, would be 

based upon full-year 2008 data.17 Table 

1 shows the value-weighted average 

capital structures for all U.S. publicly 

traded firms in the Standard & Poor’s 

Compustat® database from 2003 to 2007. 

In 2007, based on the foregoing, the 

value-weighted average capital structure 

was 54 percent. 


pwalker on PROD1PC71 with NOTICES
15486 Federal Register / Vol. 74, No. 64 / Monday, April 6, 2009 / Notices 

18F. Modigliani and M.H. Miller (1958), ‘‘The 

Cost of Capital, Corporation Finance, and the 

Theory of Investment,’’ American Economic 

Review, 48, pp. 261–97. The Modigliani-Miller 

Theorem states that under some conditions and in 

an efficient market the value of a firm is unaffected 

by how that firm is financed. 

19Although attachment 1 shows low levels of 

volatility in the average Moody’s bond rates from 

2003 to 2007, this stability has not been the historic 

norm. Given the PSAF’s sensitivity even to small 

changes in the debt financing rate, the Board plans 

to use a five-year average to minimize volatility in 

the PSAF. 20http://www.federalreserve.gov/releases/H15/ 

data.htm. Moody’s Aaa and Baa bond ratings 

represent the upper and lower limits of the range 

of investment-grade bonds. 21While the firms in this sample included only 

approximately 20 percent of publicly traded firms 

in the database, they represented more than 85 

percent of the assets and debt of the complete 

population of over 6,000 firms. Analysis of data for 

this sample from 2003 to 2007 showed that 82 

percent of outstanding long-term debt (which 

represents over 70 percent of the outstanding longterm debt for all firms in the database during that 

period) was investment grade. 

22Alternatively, the Board could calculate an 

average investment-grade bond yield using five-year 

average annual bond yields for each investment 

grade, weighted by the relative proportion of debt 

outstanding for each grade in the population of 

approximately 1,400 firms. For 2003 to 2007, the 

weighted average bond yield using this technique 

differed from the five-year mean of the Aaa and Baa 

Moody’s bond yields by 2 basis points. 

TABLE 1—CAPITAL STRUCTURE (CAPITALIZATION RATIO) OF U.S. PUBLICLY TRADED FIRMS

2003 2004 2005 2006 2007 Five-year 

average 

Standard 

deviation 

55% 53% 53% 52% 54% 53% 1.0% 

Source: Standard & Poor’s Compustat® data. 

Because the PSAF resulting from the 

publicly traded firm model is not highly 

sensitive to capital structure and 

because the value-weighted average 

capital structure does not vary 

significantly from year to year, the 

Board believes that a one-year time 

frame is appropriate when imputing the 

priced services capital structure. This 

conclusion is supported both by 

financial theory, which states that 

changes in capital structure should not 

significantly affect the value of a firm, 

and by sensitivity analysis as shown in 

attachment 1.18

The imputed effective income tax rate 

would be the five-year mean of the 

value-weighted average ratios of current 

tax expense to total net income for all 

U.S. publicly traded firms in the 

financial database. Table 2 shows the 

annual value-weighted average effective 

tax rates for all U.S. publicly traded 

firms in the Standard & Poor’s 

Compustat® database from 2003 to 2007. 

For that period, the five-year mean of 

these tax rates was 24 percent. A fiveyear mean would be used because of the 

volatility of the annual effective tax rate 

from year to year and the sensitivity of 

the PSAF to this input, as shown in 

attachment 1. 

TABLE 2—EFFECTIVE TAX RATE OF U.S. PUBLICLY TRADED FIRMS

2003 2004 2005 2006 2007 Five-year 

average 

Standard 

deviation 

19% 23% 27% 24% 29% 24% 3.4% 

Source: Standard & Poor’s Compustat® data. 

The imputed long-term debt financing 

rate under the publicly traded firm 

model would be the five-year mean of 

an estimated average annual bond yield 

for the market as a whole. The Board 

proposes to use a five-year mean when 

imputing a long-term debt financing rate 

to be consistent with the treatment of 

the tax rate (both of these inputs are 

cost-related) and to reduce year-to-year 

volatility in the PSAF.19

The Board initially proposes 

calculating the imputed long-term debt 

rate as the five-year mean of the Aaa and 

Baa Moody’s bond yields published on 

the Federal Reserve Board’s H.15 

Statistical Release.20 The inclusion of 

only investment-grade debt is based on 

analysis of data on approximately 1,400 

publicly traded firms in the Compustat 

database for which bond rating data are 

available.21 Given that the majority of 

outstanding debt for this population was 

investment grade, the Board considered 

an average investment-grade bond yield 

to be a reasonable proxy for the imputed 

priced services long-term debt financing 

rate. The Board considered two 

averaging techniques to determine the 

average investment-grade bond yield, 

which provided nearly identical results. 

Of these two approaches, the five-year 

mean of the Aaa and Baa Moody’s bond 

yields was more simple and 

transparent.22 Table 3 shows the annual 

average yield from 2003 to 2007 using 

this methodology. For this period, the 

five-year mean was 6.0 percent. 

TABLE 3—AVERAGE OF ANNUAL MOODY’S AAA AND BAA BOND YIELDS

2003 2004 2005 2006 2007 Five-year 

average 

Standard 

deviation 

6.2% 6.0% 5.7% 6.0% 6.0% 6.0% 0.2% 

Using an average investment-grade 

bond yield as the imputed priced 

services long-term debt financing rate, 

however, does not take into account the 

effect of non-investment-grade debt on 

the average bond yield for the market as 

a whole. Inclusion of non-investmentgrade debt would result in a somewhat 

higher imputed long-term debt 

financing rate. Accordingly, the Board 

could also calculate an average bond 

yield for U.S. publicly traded firms 

using five-year average yields for each 

bond rating, weighted by the relative 


pwalker on PROD1PC71 with NOTICES
Federal Register / Vol. 74, No. 64 / Monday, April 6, 2009 / Notices 15487 

23The relative proportions of outstanding debt 

would be based on the most recent five years of 

Standard & Poor’s Compustat® data for which bond 

rating data are available. 

24http://www.federalreserve.gov/releases/cp/. AA 

and A2/P2 ratings for commercial paper 

approximate the same credit ratings as Moody’s Aaa 

and Baa ratings for bonds. Since 2002, the priced 

services short-term funding need has been met by 

clearing balances, eliminating the need to impute 

short-term debt. 25Current corporate income tax rates can be 

found in the 2008 instructions for IRS Form 1120 

at http://www.irs.gov/pub/irs-pdf/i1120.pdf. 

26 70 FR 60347 (Oct. 17, 2005). NICB is based on 

an average three-month Treasury bill rate, while the 

target ROE CAPM calculation uses a current threemonth Treasury bill rate for the risk-free rate. 

27The baseline PSAF of $62.2 million, projected 

NICB of $48.8 million, and net imputed cost of 

$13.4 million are the Board-approved projected 

2009 values using the correspondent bank model. 

73 FR 65329–65340 (Nov. 3, 2008). 

proportion of debt outstanding in the 

market at each bond rating.23

If short-term assets exceed short-term 

liabilities on the priced services balance 

sheet, short-term debt would be 

imputed at the average of the threemonth AA and A2/P2 nonfinancial 

commercial paper rates as published on 

the Federal Reserve Board’s Commercial 

Paper Release.24 This methodology is 

simple, transparent, consistent with the 

proposed approach to calculating the 

long-term debt financing rate, and based 

on publicly available data. 

The Board considered other data 

sources for each of the imputed 

elements discussed above. These 

sources include the Flow of Funds 

Federal Reserve Board Statistical 

Release for capital structure, general 

corporate income tax rates as found on 

Internal Revenue Service (IRS) Form 

1120 for the effective tax rate, and the 

ratio of ‘‘interest and related expense’’ 

to total debt for all publicly traded U.S. 

firms in the Standard & Poor’s 

Compustat® database for the long-term 

debt financing rate.25 In each case, the 

Board considered the source set forth in 

the current proposal to be the superior 

alternative. The Flow of Funds release 

does not include data on U.S. publicly 

traded financial firms and provides only 

approximate market-value equity data. 

Use of the general corporate income tax 

rate published by the IRS would 

inappropriately exclude the effect of 

State and local taxes. A long-term debt 

financing rate calculated from the 

Standard & Poor’s Compustat® database 

would be artificially high because of the 

inclusion of ‘‘related expense,’’ which 

includes items such as interest on 

deposits held at DIs, in the interest 

expense measure used in the numerator. 

Under the publicly traded firm model, 

the imputed ROE rate would continue to 

be calculated using the CAPM with a 

beta of 1.0 and a 40-year average 

historical market premium. Given the 

sensitivity of the PSAF to the risk-free 

rate used in the CAPM, and because 

short-term Treasury bill rates are 

generally more sensitive to interest rate 

changes than longer-term rates, the 

Board considered replacing the current 

short-term risk-free rate with a longerterm risk-free rate. As shown in 

attachment 1, changes in the risk-free 

rate used in the calculation of the target 

ROE rate affect the PSAF more than any 

other imputed element. In 2005, the 

Board decided to use a three-month 

Treasury bill rate as the risk-free rate to 

impute the target ROE because this rate 

was consistent with that used to 

calculate NICB and would help 

minimize volatility in the net imputed 

cost caused by changes in interest 

rates.26 With the elimination of NICB 

under the proposed publicly traded firm 

model, however, using a longer-term 

Treasury rate, such as the 10-year 

Treasury bond rate, may be an 

appropriate way to minimize volatility 

in the calculation of the target ROE rate. 

A longer-term rate more closely matches 

the duration of stock market indexes 

used to estimate a beta, the expected life 

of the assets on the priced services 

balance sheet, and the investment 

horizon of a long-term investor. 

Table 4 compares certain components 

for 2009 derived under the publicly 

traded firm model with the same 

components as derived under the 

baseline case.27 Using the elements 

discussed above, the publicly traded 

firm model returns a PSAF of $55.4 

million compared with a baseline PSAF 

of $62.2 million (NICB of $48.8 million, 

net imputed cost of $13.4 million). 

The baseline net imputed cost reflects 

clearing balance levels and interest rates 

as of July 2008. The correspondent bank 

model is highly sensitive to both of 

these variables. For example, using the 

lower clearing balance levels and 

interest rates from February 2009, 

projected 2009 NICB is less than half the 

amount that was projected for pricing 

purposes, leading to an increase in the 

2009 net imputed cost. If clearing 

balances continue to decline, the 

variance between the PSAF calculated 

using the proposed methodology and 

the net imputed cost using the 

correspondent bank model will likely be 

significantly smaller than noted above. 

In contrast, as interest rates rise, the 

income generated on each dollar of 

clearing balances in the NICB 

calculation of the correspondent bank 

model will increase. Rising interest 

rates, however, will widen the spread 

between the interest rate on excess 

balances and the earnings credits rate, 

giving DIs more incentive to shift from 

maintaining clearing balances to 

maintaining additional excess balances. 

This expected reduction in clearing 

balances will reduce NICB, 

counteracting the effect of higher perdollar earnings and likely leading to a 

net decrease in NICB. Consequently, 

rising interest rates could cause an 

overall increase of the net imputed cost 

of the correspondent bank model 

throughout the year. This increase could 

substantially shrink the variance 

between the PSAF of the proposed 

model and the net imputed cost of the 

current model. 

TABLE 4—COMPARISON OF CURRENT AND PROPOSED MODEL

Balance 

sheet assets 

(billions) 

Financing 

composition 

Financing 

cost 

Tax rate 

(percent) 

Debt rate 

(percent) 

PSAF 

(millions) 

NICB 

(millions) 

Baseline case: correspondent bank 

model.

$9.2 Equity per FDIC 

guidelines.

ROE of $46.2 M ..... 32 .6 (1) $62.2 $48 .8 

Publicly traded firm 

model.

1.3 54% long-term debt, 

46% equity.

$40.3M (ROE of 

$22.3M; debt cost 

of $18.0M).

24 6.0 55.4 0 

1 No debt. 


pwalker on PROD1PC71 with NOTICES
15488 Federal Register / Vol. 74, No. 64 / Monday, April 6, 2009 / Notices 

The Board believes that the publicly 

traded firm model would be an 

appropriate replacement for the current 

PSAF model for a variety of reasons. 

The publicly traded firm model is 

relatively simple to calculate and 

understand, easily replicable by the 

public, and uses objective, publiclyavailable data for all imputed inputs. 

Unlike the correspondent bank model, 

the publicly traded firm model is not 

linked to the level of clearing balances 

held at Reserve Banks. This 

characteristic is important given the 

uncertainty surrounding future clearing 

balance levels. Substantially lower 

clearing balances would not only affect 

the funding and income of the priced 

services but also undermine the basis 

for the use of an FDIC-based regulatory 

structure for depository institutions as a 

determinate of the priced services 

capital structure. A model that is not 

dependent on clearing balance levels is 

also appropriate in an environment 

where clearing balances are not relevant 

to a growing proportion of the Reserve 

Banks’ competitors in providing priced 

services. Another advantage of the 

publicly traded firm model is its 

independence from a narrowly defined 

peer group, such as private-sector 

correspondent banks, that may become 

less relevant to the priced services over 

time. Unlike other models considered, 

the publicly traded firm model does not 

incorporate data from a limited number 

of comparable firms but rather from the 

entire U.S. market of publicly traded 

firms. This independence decreases the 

risk of price volatility that could result 

from changes in the characteristics or 

financial results of a limited peer group. 

The publicly traded firm model also is 

consistent with financial theory 

regarding capital structure and 

financing costs and is conceptually 

sound. In addition, the publicly traded 

firm model is consistent with the 

current approach to calculating the ROE 

using CAPM with a beta of 1.0, which 

compares the priced services to the 

market as a whole. 

The publicly traded firm model also 

has a few drawbacks. If some level of 

clearing balances persists at Reserve 

Banks over the long term, excluding 

these priced-services-related balances 

from the calculation of the PSAF would 

depart from the Board’s past practice of 

including all actual priced services 

assets and liabilities in the calculation 

of the PSAF and would disregard 

potential imputed income from these 

balances. A publicly traded firm model 

also departs from a model based 

specifically on the banking industry. 

This change in direction may conflict 

with the fact that the priced services are 

provided by Reserve Banks, which are, 

by definition, banks. 

The Board specifically requests 

comment on the following: 

Is using the U.S. market as a whole as 

a basis for the imputed capital structure, 

tax rate, and debt financing rates of the 

priced services reasonable? Is 

discontinuing the use of a 

correspondent bank model reasonable? 

Are the proposed approaches to 

imputing the capital structure, effective 

tax rate, and long- and short-term debt 

financing rates appropriate? 

Is it reasonable to include only 

investment-grade bond yields in the 

calculation of the imputed long-term 

debt financing rate? If not, what 

approach should the Board take to 

include other yields or rates in the 

calculation? What publicly-available 

data sources are best suited for 

obtaining data on non-investment-grade 

debt? 

Is it reasonable to limit the calculation 

of the short-term debt financing rate to 

include only rated commercial paper 

even if the long-term debt financing rate 

calculation were expanded to include 

non-investment-grade debt, given the 

expectation that the need for short-term 

funding on the priced services balance 

sheet will be relatively small? If not, 

what approach should the Board take to 

include other rates in the calculation? 

What publicly-available data sources 

are best suited for determining the 

effective tax rate, capital structure, and 

short- and long-term debt financing 

rates of the U.S. market? 

Should the Board consider using a 

longer-term risk-free rate to calculate the 

target ROE to decrease the ROE 

calculation’s sensitivity to changes in 

interest rates? 

III. Other PSAF Models Considered 

The User-Owned Utility Model 

The Reserve Banks’ major competitors 

in the provision of priced services 

increasingly are user-owned utilities 

rather than traditional correspondent 

banks. Accordingly, one approach to 

revise the methodology for imputing 

costs might be to model the priced 

services balance sheet and imputed 

capital structure, financing rates, tax 

rate, and other applicable costs on a 

user-owned utility. Under this 

methodology, the priced services 

balance sheet and imputed costs would 

reflect either the financial 

characteristics of a peer group of userowned utilities currently existing in the 

market or theoretical assumptions about 

the behavior and characteristics of this 

type of organization. 

A user-owned utility model is 

conceptually appealing because the 

Reserve Banks’ competitors in the 

Fedwire® Funds, FedACH®, and, to a 

lesser extent, check services are 

increasingly user-owned utilities. Such 

a model also recognizes that, as clearing 

balance levels decline, providing priced 

services to DIs that do not maintain 

clearing balances could more closely 

resemble the operation of a user-owned 

utility than that of a traditional 

correspondent bank. 

Selecting an appropriate peer group 

for this approach, however, is 

challenging. User-owned utilities 

typically provide a diverse array of 

services using various operational 

approaches. Although choosing a 

narrowly defined peer group of userowned utilities, specifically one 

consisting of peers that provide services 

more closely resembling the priced 

services, could provide a morecomparable peer group, this approach 

may also introduce greater volatility in 

the PSAF because of the dependence on 

data from a small number of firms. 

A user-owned utility peer group could 

present other problems as well. Publicly 

available financial data on user-owned 

utilities are often not published. For 

example, CHIPS and EPN provide 

services that compete with the priced 

services provided by Reserve Banks. 

These two entities, however, are both 

components of TCH, which does not 

publicly report its financial statements 

either by product line or in aggregate. 

Although data are more readily 

available to the public from several 

other user-owned utilities (such as 

SWIFT and the Depository Trust & 

Clearing Corporation), the services 

provided by these firms are less 

comparable to those provided by the 

Reserve Banks. 

Basing this model on theoretical 

characteristics of user-owned utilities 

rather than on the actual data of a 

specific peer group could also prove 

challenging. User-owned utilities, by 

definition, lack incentive for profit 

maximization because the owners of 

these utilities are also their primary 

customers. Consequently, user-owned 

utilities tend to seek to maximize the 

benefit afforded to their users by 

providing low-cost services while 

remaining financially viable. Although 

the assumption that this characteristic 

could result in a lower required rate of 

return on equity is reasonable, 

establishing a methodology to calculate 

that rate using the limited economic 

literature available on the subject could 

be difficult. Further, establishing the 

means to calculate the other requisite 

imputed elements—capital structure, 


pwalker on PROD1PC71 with NOTICES
Federal Register / Vol. 74, No. 64 / Monday, April 6, 2009 / Notices 15489 

28The Board discarded the idea of basing the 

markup ratio on data for more narrowly-defined 

peer groups because of the challenges of 

comparability and data availability discussed 

previously. 

29The Board could calculate a markup over 

expenses ratio using two averaging techniques: 

equal weighting and value weighting. The Board 

believes value weighting is more appropriate 

because it would yield less-volatile results and 

would better capture the characteristics of the 

market as a whole. 

30For example, if clearing balances fall to zero, 

applying the FDIC regulatory structure to determine 

the capital structure on the priced services balance 

sheet would result in a capitalization ratio of over 

85 percent. 

31The results presented in Table 5 are based on 

a risk-free rate as of July 2008 of 1.67 percent. As 

interest rates increase, both the ROE costs of the 

Continued 

debt financing rates, and income taxes— 

using theoretical assumptions or 

academic studies could be similarly 

challenging. 

The user-owned utility model exhibits 

some of the same drawbacks of the 

publicly traded firm model that the 

Board is proposing. For example, a userowned utility model represents the 

same significant departure from a model 

based specifically on the banking 

industry. A user-owned utility model 

also would not include residual clearing 

balances, which departs from the 

Board’s past practice of basing the PSAF 

on actual priced services assets and 

liabilities. 

The Board specifically requests 

comment on the following: 

Given that user-owned utilities reflect 

a significant portion of the Reserve 

Banks’ competitors in providing priced 

services, would a user-owned utility 

model be more appropriate? If yes, are 

there approaches the Board should 

consider that would address the 

identified obstacles? 

The Cost-Plus Model 

In 2005, while commenting on 

proposed changes to the PSAF 

methodology for calculating the ROE, 

two commenters suggested a cost-plus 

model as a simple, straightforward 

method for calculating the PSAF. 

Accordingly, the Board investigated the 

possibility of using a cost-plus PSAF 

model based on priced services 

operating expenses. A cost-plus PSAF 

model would add a markup to the 

priced services operating expenses for 

the year. The markup would be 

calculated by applying an internal 

benchmark or market rate of return to 

the level of budgeted priced services 

operating expenses. Regardless of the 

method used to calculate the markup, 

residual clearing balances held at 

Reserve Banks would not be included in 

the calculation of net imputed cost, and 

NICB would therefore be zero by 

definition. 

Calculating the markup for a cost-plus 

model requires a data source from 

which to develop the internal 

benchmark or market rate of return to be 

applied to budgeted operating expenses. 

In the case of an internal benchmark, 

the Board considered using an average 

of historical PSAF values. Such values, 

however, would not take current data 

into account and would reflect a 

correspondent bank model that is 

increasingly inapplicable given recent 

trends in the payments industries and 

the expected continued decline in the 

level of clearing balances. In addition, a 

static internal benchmark based on 

historical PSAF values would fail to 

reflect ongoing changes in the 

marketplace. 

Alternatively, the Board could base 

the markup ratio applied to the priced 

services operating expenses on an 

external benchmark, such as the average 

markup over operating expenses for the 

U.S. market as a whole.28 Specifically, 

the Board could calculate the markup as 

the ratio of pretax income and interest 

expense to operating expense for all 

U.S. publicly traded firms. This markup 

could then be applied to the projected 

level of priced services operating 

expense, including imputed operating 

expenses such as sales tax, to determine 

the value of the imputed profit, debt 

financing cost, and income taxes to be 

factored into priced services fees. 

Applying a markup over expenses ratio 

based on value-weighted average data 

for all publicly traded U.S. firms in the 

Standard & Poor’s Compustat® database 

to the 2009 budgeted priced services 

operating expense yields a projected 

2009 PSAF of $157.5 million.29

Although a cost-plus model is simple, 

transparent, and replicable by the 

public, it also has several weaknesses. A 

cost-plus model based on historical 

PSAF values is static and assumes 

continued use of the current 

correspondent bank model, which is 

increasingly inapplicable. In addition, 

basing a cost-plus model on accountingbased values captures only book, not 

market, values of financing and other 

costs. Such a model is also not 

consistent with current finance theory. 

As with the models discussed 

previously, a cost-plus model represents 

a departure from a model based 

specifically on the banking industry. 

The Board specifically requests 

comment on the following: 

Should the Board consider 

implementing a cost-plus model? 

Are there other sources of data that 

the Board should consider using to 

calculate an appropriate markup over 

operating expenses or over another 

financial characteristic of the priced 

services? 

Are there other approaches that the 

Board should consider to address the 

identified obstacles? 

Continuation of the Current 

Correspondent Bank Model 

The Board also considered the 

continued use of the current 

correspondent bank model to impute 

costs, with minor modifications. Using 

this model while also paying interest on 

required reserve balances and excess 

balances would result in a significantly 

smaller priced services balance sheet 

because of the anticipated decline in 

clearing balances and the associated 

imputed investment assets. Equity, 

which would still be imputed at the 

FDIC regulatory minimum for a wellcapitalized depository institution, 

would shrink because of the reduction 

in size of the overall priced services 

balance sheet. 

Residual clearing balances would 

continue to serve as a funding source for 

the priced services. If residual balances 

were not sufficient to meet the funding 

need, net of equity, on the priced 

services balance sheet, debt would be 

imputed. The imputed short- and longterm debt financing rates would be 

calculated using the same 

methodologies outlined for the imputed 

debt financing rates of the publicly 

traded firm model. Using average 

market debt financing rates in the 

correspondent bank model recognizes 

that as clearing balances fall and debt 

rises as a percentage of total priced 

services assets, the priced services 

balance sheet would look increasingly 

like that of a publicly traded firm and 

less like that of a correspondent bank.30

An average debt financing rate would 

also use readily-available public data 

and could be calculated with greater 

administrative ease. If residual clearing 

balances exceeded the funding need on 

the priced services balance sheet, NICB 

would be imputed. 

Table 5 compares certain components 

for 2009 as derived under a 

continuation of the current 

correspondent bank model, with 

assumed residual clearing balance levels 

ranging from $0 to $4 billion, to the 

same components as derived under the 

baseline case. Using the values listed 

below, a continuation of the current 

correspondent bank model would return 

a net imputed cost between $50.7 

million (PSAF of $50.7 million, NICB of 

$0) and $19.5 million (PSAF of $40.6 

million net of $21.1 million in NICB).31


pwalker on PROD1PC71 with NOTICES
15490 Federal Register / Vol. 74, No. 64 / Monday, April 6, 2009 / Notices 

PSAF and the earnings of the NICB portfolio would 

increase. The net effect of this increase would 

depend on the size and character of the priced 

services balance sheet. 

32The decrease in total financing costs is offset 

in part by the cost of financing priced services 

assets with higher-cost debt instead of low-cost 

clearing balances. 

33FRRS 9–1558. 

The increase in net cost is largely the 

result of the reduction or elimination of 

NICB caused by the decline in clearing 

balances levels. This increase is 

partially offset by a reduction in the cost 

of equity as a result of the reduced level 

of total assets and, consequently, of 

imputed equity on the priced services 

balance sheet.32

TABLE 5—CORRESPONDENT BANK MODEL UNDER DIFFERENT CLEARING BALANCE ASSUMPTIONS

Assumed clearing 

balance level 

Balance 

sheet 

assets 

(billions) 

Financing composition Financing cost Tax rate 

percent 

Debt rate 

percent 

PSAF 

(millions) 

NICB 

(millions) 

Net imputed 

cost 

(millions) 

Baseline case: 

$7.4 B ($4 B in 

core clearing 

balances).

$9.2 Equity per FDIC 

guidelines; remainder clearing 

balances.

ROE of $46.2 M ... 32.6 (1) $62.2 $48.8 $13.4 

$4 B ($2 B in core 

clearing balances).

5.0 Equity per FDIC 

guidelines; remainder clearing 

balances.

ROE of $25.0 M ... 32.6 .................. 40.6 21.1 19.5 

No clearing balances.1.3 Equity per FDIC 

guidelines; remainder debt.

$35.6 M (ROE of 

$6.4 M; debt 

cost of $29.2 M).

32.6 6.0 50.7 0 50.7 

1 No debt. 

Continued use of the correspondent 

bank model for imputing costs would 

provide several advantages. Among 

these is its ability to draw upon a welldefined FDIC regulatory structure and a 

peer group with readily available data 

when establishing key imputed 

elements such as capital structure and 

rates. This model also would afford a 

means by which possible residual 

clearing balances held at Reserve Banks 

could continue to provide a low-cost 

funding source and potential source of 

imputed income. 

A principal disadvantage of this 

model is the decreasing similarity 

between the financial and operational 

characteristics of the Reserve Bank 

priced services and traditional 

correspondent banks if the level of 

clearing balances held at Reserve Banks 

continues to fall. Historically, the Board 

has recognized that the financial 

characteristics of BHCs are not driven 

primarily by the payment services that 

compete with those offered by Reserve 

Banks, but has considered BHCs an 

appropriate peer group because they are 

the primary competitors to the Reserve 

Banks’ check services and because both 

entities hold customer balances for the 

purpose of facilitating payments 

services. If clearing balance levels 

approach zero and as the check service 

declines as a percentage of priced 

services revenue and expenses, 

comparing priced services to 

correspondent banks for the purpose of 

establishing a PSAF model will be 

increasingly difficult. Dramatically 

reduced clearing balance levels will also 

call into question the applicability of an 

FDIC-based regulatory structure 

designed for depository institutions as 

the determinant of the priced services 

capital structure. Specifically, in an 

environment of low to zero clearing 

balance levels, applying the FDIC’s 

regulatory structure could result in a 

priced services capitalization ratio of 

more than 85 percent, which seems 

unreasonable when compared to 

correspondent banks that are primarily 

funded by balances rather than longterm debt. 

The Board specifically requests 

comment on the following: 

Would continued use of the 

correspondent bank model to calculate 

the PSAF be appropriate given the 

expected reduction in clearing balances 

and changes in priced services 

competitors? If so, is the proposed 

approach for calculating a debt 

financing rate in the correspondent bank 

model reasonable? 

IV. Competitive Impact 

In its March 1990 policy statement 

‘‘The Federal Reserve in the Payments 

System,’’ the Board stated that all 

operational and legal changes 

considered by the Board that could have 

a substantial effect on payment system 

participants are subject to a competitiveimpact analysis.33 Under this policy, the 

Board evaluates whether a proposed 

change would have a direct and material 

adverse effect on the ability of other 

service providers to compete effectively 

with the Reserve Banks in providing 

similar services. These effects could be 

caused by differences in legal authority 

or constraints between Reserve Banks 

and private-sector competitors or by a 

dominant market position that the 

Reserve Banks might derive from such 

legal differences. If the proposed change 

creates such an effect, the Board must 

further evaluate the changes to 

determine whether its benefits—such as 

contributions to payment system 

efficiency, payment system integrity, or 

other Board objectives—can be retained 

while reducing the hindrances to 

competition. 

The intent of the PSAF, and of setting 

priced services fees in general to fully 

recover the costs (including imputed 

costs and profits) to provide them, is to 

facilitate competition between Reserve 

Banks and private-sector providers of 

payment services to foster a more 

efficient payment system. Identifying a 

meaningful private-sector peer group for 

the purpose of calculating the PSAF, 

however, has been difficult given the 

specific nature of the priced services 

provided by the Reserve Banks. The 

correspondent bank model historically 

has provided a reasonable proxy for 

Reserve Bank priced services, although 

the Board recognizes that correspondent 

bank balance sheets and ROE are 

typically driven largely by services that 

are not similar to those provided by the 

Reserve Banks. As the Reserve Banks’ 

check service becomes a smaller 

proportion of total priced services 

revenues and costs, user-owned utilities 

are increasingly becoming the Reserve 

Banks’ key priced services competitors. 

Because correspondent banks will no 


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Federal Register / Vol. 74, No. 64 / Monday, April 6, 2009 / Notices 15491 

longer represent the primary 

competitors of Reserve Banks in 

providing priced services, and because 

no reliable comparative data are 

available for the user-owned utilities, 

the Board believes modeling the PSAF 

on a publicly traded firm model is 

appropriate. Accordingly, the Board 

believes that such a change in the PSAF 

model, if made, would not have a direct 

and material adverse effect on the 

ability of other service providers to 

compete effectively with Reserve Banks 

in providing similar services. 

V. Paperwork Reduction Act 

In accordance with the Paperwork 

Reduction Act of 1995 (44 U.S.C. ch. 

3506; 5 CFR 1320 appendix A.1), the 

Board has reviewed the proposal under 

the authority delegated to the Board by 

the Office of Management and Budget. 

The proposal contains no provisions 

subject to the Paperwork Reduction Act. 

By order of the Board of Governors of the 

Federal Reserve System, March 30, 2009. 

Jennifer J. Johnson, 

Secretary of the Board. 

BILLING CODE 6210–02–P 


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Federal Register / Vol. 74, No. 64 / Monday, April 6, 2009 / Notices 15495 

[FR Doc. E9–7473 Filed 4–3–09; 8:45 am] 

BILLING CODE 6210–02–C 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Office of the Secretary 

[Document Identifier: OS–0990—New; 30- 

day Notice] 

Agency Information Collection 

Request; 30-Day Public Comment 

Request 

AGENCY: Office of the Secretary, HHS. 

In compliance with the requirement 

of section 3506(c)(2)(A) of the 

Paperwork Reduction Act of 1995, the 

Office of the Secretary (OS), Department 

of Health and Human Services, is 

publishing the following summary of a 

proposed collection for public 

comment. Interested persons are invited 

to send comments regarding this burden 

estimate or any other aspect of this 

collection of information, including any 

of the following subjects: (1) The 

necessity and utility of the proposed 

information collection for the proper 

performance of the agency’s functions; 

(2) the accuracy of the estimated 

burden; (3) ways to enhance the quality, 

utility, and clarity of the information to 

be collected; and (4) the use of 

automated collection techniques or 

other forms of information technology to 

minimize the information collection 

burden. 

To obtain copies of the supporting 

statement and any related forms for the 

proposed paperwork collections 

referenced above, e-mail your request, 

including your address, phone number, 

OMB number, and OS document 

identifier, to 

Sherette.funncoleman@hhs.gov, or call 

the Reports Clearance Office on (202) 

690–5683. Send written comments and 

recommendations for the proposed 

information collections within 30 days 

of this notice directly to the OS OMB 

Desk Officer; faxed to OMB at 202–395– 

6974. 

Proposed Project: Evaluation of the 

Parents Speak Up National Campaign 

(PSUNC): National Media Tracking 

Surveys. OMB No. 0990–NEW—Office 

of Public Health and Science, Office of 

Population Affairs, Office of Adolescent 

Pregnancy Programs. 

Abstract: The OS proposes to conduct 

a national media tracking survey as part 

of the Parents Speak Up National 

Campaign. The U.S. Department of 

Health and Human Services (USDHHS) 

launched the Parents Speak Up National 

Campaign (PSUNC) in June 2007. This 

national public education campaign is 

designed to encourage parents of preteens and teens to talk to their children 

early and often about waiting to have 

sex. The campaign includes public 

service announcements (PSA) and print 

advertisements that guide parents to the 

http://4parents.gov Web site. 

The specific aim of this study is to 

determine the effectiveness of the 

PSUNC messages by measuring parents’ 

awareness of, reactions to, and 

receptivity to specific PSUNC 

advertising. In partnership with 

Knowledge Networks, an online panel 

based on a random-digit-dial sample of 

the full United States population, a 

probability baseline sample will be 

selected of 2,000 parents of children 

aged 10 to 14. 

Key research questions include 

changes in the following outcomes: 

Perceived risks from teen sexual 

activity, perceived susceptibility, 

attitudes towards teen sexual activity, 

self-efficacy to talk to their child, 

outcome efficacy, perceived value of 

delayed sexual activity, and parentchild communication about sex. Parents 

will self-administer the questionnaire at 

home on personal computers. 

ESTIMATED ONE-YEAR ANNUALIZED BURDEN TABLE

Forms 

(if necessary) Type of respondent Number of respondents 

Number of 

responses per 

respondent 

Average 

burden hours 

per response 

Total burden 

hours 

Fall 2009 Media Tracking Survey (un-retained for 

follow-up).

Parents of children 

ages 10–14.

1,000 1 24/60 400 

Fall 2009 and Spring/Fall 2010 Media Tracking 

Surveys (retained for follow-up).

Parents of children 

ages 10–14.

1,000 2 24/60 800 

Total ............................................................... ....................................... 2,000 ........................ ........................ 1,200 

Seleda Perryman, 

Office of the Secretary, Paperwork Reduction 

Act Reports Clearance Officer. 

[FR Doc. E9–7654 Filed 4–3–09; 8:45 am] 

BILLING CODE 4150–03–P 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Meeting of the Chronic Fatigue 

Syndrome Advisory Committee 

AGENCY: Department of Health and 

Human Services, Office of the Secretary, 

Office of Public Health and Science. 

ACTION: Notice. 

SUMMARY: As stipulated by the Federal 

Advisory Committee Act, the U.S. 

Department of Health and Human 

Services is hereby giving notice that the 

Chronic Fatigue Syndrome Advisory 

Committee (CFSAC) will hold a 

meeting. The meeting will be open to 

the public. 

DATES: The meeting will be held on 

Wednesday, May 27, 2009, and 

Thursday, May 28, 2009. The meeting 

will be held from 9 a.m. until 5 p.m. on 

both days. 

ADDRESSES: Department of Health and 

Human Services; Room 800 Hubert H. 

Humphrey Building; 200 Independence 

Avenue, SW.; Washington, DC 20201. 

FOR FURTHER INFORMATION CONTACT: 

Wanda K. Jones, Dr. P.H.; Deputy 

Assistant Secretary for Health (Women’s 

Health); Department of Health and 

Human Services; 200 Independence 

Avenue, SW.; Hubert Humphrey 

Building Room 712E; Washington, DC 

20201; (202) 690–7650. 

SUPPLEMENTARY INFORMATION: CFSAC 

was established on September 5, 2002. 

The Committee was established to 

advise, consult with, and make 

recommendations to the Secretary, 

through the Assistant Secretary for 

Health, on a broad range of topics 

including (1) The current state of the 

knowledge and research about the 

epidemiology and risk factors relating to 

chronic fatigue syndrome, and 

identifying potential opportunities in 

these areas; (2) current and proposed 

diagnosis and treatment methods for 

chronic fatigue syndrome; and (3) 

development and implementation of 

programs to inform the public, health 

care professionals, and the biomedical, 

academic, and research communities 

about chronic fatigue syndrome 

advances. 


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