[Federal Register Volume 59, Number 227 (Monday, November 28, 1994)]
[Unknown Section]
[Page ]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-29176]


[Federal Register: November 28, 1994]


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FEDERAL RESERVE SYSTEM
[Docket No. R-0856]


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 1995 of $94.7 million, as well as 1995 fee schedules for 
Federal Reserve priced services. 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 January 3, 1995.

FOR FURTHER INFORMATION CONTACT: For questions regarding the private 
sector adjustment factor: Elizabeth Averill, Accounting Analyst (202/
452-2303), or Gwendolyn Mitchell, Senior Accounting Analyst (202/452-
3841), Division of Reserve Bank Operations and Payment Systems; for 
questions regarding fee schedules: Edith Collis, Financial Services 
Analyst, Check Payments (202/452-3638), Michele Braun, Senior Financial 
Services Analyst, Automated Clearing House (202/452-2819), Darrell Mak, 
Financial Services Analyst, Funds Transfer and Book-Entry Securities 
(202/452-3223), Ken Buckley, Manager, Information Technology 
(electronic connections) (202/452-3646), Michael Bermudez, Financial 
Services Analyst, Noncash Collection (202/452-2216), Ruth Robinson, 
Senior Financial Services Analyst, Cash (202/452-3944), Division of 
Reserve Bank Operations and Payment Systems; for the hearing impaired 
only: Telecommunication Device for the Deaf, Dorothea Thompson (202/
452-3544).
    Copies of the 1995 fee schedules for check, automated clearing 
house, funds transfer and net settlement, book-entry securities, 
noncash collection, special cash services, and electronic connections 
to the Federal Reserve are available from the Reserve Banks.

SUPPLEMENTARY INFORMATION:

Private Sector Adjustment Factor

    The Board has approved a 1995 PSAF for Federal Reserve Bank priced 
services of $94.7 million. This amount represents a decrease of $8.9 
million or 8.6 percent from the PSAF of $103.6 million targeted for 
1994.
    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 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 by short-
term liabilities; long-term assets are assumed to be financed by a 
combination of long-term debt and equity derived from the BHC model. 
The mix of long-term debt and equity was modified slightly to ensure an 
imputed equity to asset ratio of 4 percent as required for adequately 
capitalized institutions under provisions of Regulation F (12 CFR 206).
    Imputed capital costs are determined by applying related interest 
rates and rates of return on equity (ROE) derived from the bank holding 
company model. The rates drawn from the BHC model are based on 
consolidated financial data for the 50 largest BHCs in 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 capital costs, imputed sales taxes, expenses of 
the Board of Governors related to priced services, and an imputed 
Federal Deposit Insurance Corporation (FDIC) insurance assessment on 
clearing balances held with the Federal Reserve to settle transactions.

Asset Base

    The estimated value of Federal Reserve assets to be used in 
providing priced services in 1995 is reflected in Attachment Table A-1. 
Table A-2 shows that the assets assumed to be financed through debt and 
equity are projected to total $622.9 million. As shown in Table A-3, 
this represents a net decrease of $28.6 million or 4.4 percent from 
1994. This decrease results primarily from lower priced asset base 
levels at the Reserve Banks and Federal Reserve Automation Services 
(FRAS).

Cost of Capital, Taxes, and Other Imputed Costs

    Table A-3 shows the financing and tax rates, as well as the other 
required PSAF recoveries proposed for 1995, and compares the 1995 rates 
with the rates used for developing the PSAF for 1994. The pre-tax 
return on equity rate decreased from 12.7 percent in 1994 to 12.1 
percent for 1995. The decrease is a result of 1993 BHC financial 
performance included in the 1995 BHC model, relative to the stronger 
1988 BHC financial performance in the 1994 BHC model.
    The decrease in the FDIC insurance assessment from $19.8 million in 
1994 to $19.0 million in 1995, shown in Table A-3, is attributable to 
lower adjusted gross cash items in process of collection (CIPC) and 
lower clearing balances. The FDIC rate of $0.26 for every $100 in 
clearing balances remains unchanged from the rate used in the 1994 
final PSAF.
    Net income on clearing balances for 1995 is projected to be $21.3 
million, down from $25.4 million estimated for 1994. This decrease of 
$4.1 million is due to the decrease in excess clearing balance levels, 
partially offset by a wider spread between income, which is earned at 
the 90-day Treasury bill rate, and expense or interest, which is paid 
at the federal funds rate.

Capital Adequacy

    As shown in Table A-4, the amount of capital imputed for the 
proposed 1995 PSAF totals 35.9 percent of risk-weighted assets, well in 
excess of the 8 percent capital guideline for state member banks and 
BHCs.

1995 Fee Schedules

Overview

    Based on the Reserve Banks' estimates of costs, volumes, and 
revenues, the proposed 1995 fees for priced services are expected to 
yield net income of $36.0 million for the year, compared with a 
targeted ROE of $31.5 million. Thus, the Reserve Banks project that 
100.6 percent of total expenses, including targeted ROE, will be 
recovered. In addition, during 1995, approximately $19.1 million of 
automation consolidation special project costs, including about $0.8 
million that were deferred in prior years, will be recovered. 
Additional finance charges for 1995 on accumulated deferred special 
project balances will be $2.5 million, resulting in accumulated special 
project costs to be recovered in the future of $36.7 million.\1\
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    \1\In 1981, the Board adopted a policy that permits the Reserve 
Banks to defer and finance development costs if the development 
costs would have a material effect on unit costs, provided a 
conservative time period is set for full cost recovery and a 
financing factor is applied to the deferred portion of development 
costs.
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    For the most part, 1995 fees approved by the Board do not include 
significant changes in the level or structure of fees for priced 
services. For the electronic payment services--funds transfer, book-
entry securities, and the automated clearing house (ACH)--all operating 
costs and imputed expenses, including targeted ROE, are expected to be 
recovered. Some electronic connection fees will be raised to reflect 
the higher costs associated with the higher service levels available 
through the Fednet communications network. The Board, 
however, has approved a modest reduction in the funds transfer fee.
    The check service also is expected to achieve full cost recovery, 
including targeted ROE, in 1995. Although continued volume losses are 
anticipated due to depository institutions' growing use of direct 
presentments under the same-day settlement rule and continued 
consolidation of the banking industry, the Reserve Banks expect the 
decline in volume to be more moderate than it was in 1994. The Board 
was able to approve modest increases in fees because the Reserve Banks 
are taking aggressive steps to reduce costs. For example, the Reserve 
Banks are reducing staff and making greater use of automation to 
improve operating efficiency. In addition, the Reserve Banks are 
improving deposit deadlines, promoting electronic presentment and 
deposit products, and developing products using image technology.
    The noncash collection service has faced rapidly declining volume 
levels since the Tax Equity and Fiscal Responsibility Act of 1982 
(TEFRA) was enacted. Due to significant volume losses, the Reserve 
Banks incurred an operating loss in 1993 and project operating losses 
in 1994 and 1995. The service should realize lower and more stable 
costs once all operations are consolidated at two sites in 1995.
    In November 1993, when the Board considered the 1994 fee schedules, 
volume-based fees were approved for selected check products and the 
noncash collection service. The Board also has requested the staff to 
develop criteria for the use of volume-based fees.\2\ Econometric 
studies of the cost structure of Federal Reserve payment services are 
being conducted to determine if criteria based on scale efficiency are 
relevant. Preliminary results indicate that the use of volume-based 
fees is not appropriate for paper-based check services. A similar study 
of the cost structure of the noncash collection service was deemed 
impractical because of the rapidly declining volume levels. Analysis of 
the cost structure of electronic payment products is in progress. The 
Board has approved:
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    \2\For the notice approving the use of volume-based fees for 
certain check and noncash products, see 58 FR 60649, November 17, 
1993. For the announcement of the 1994 PSAF and fee schedules, see 
58 FR 60639, November 17, 1993.
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    (1) Eliminating the volume-based fees for paper check products, 
which were introduced by the Minneapolis Reserve Bank in 1994;
    (2) Permitting the Richmond and Minneapolis Reserve Banks to retain 
the volume-based fees for the selected electronic check products that 
were approved by the Board until scale efficiency studies of electronic 
payment products are completed; and
    (3) Retaining the present volume-based fees for the noncash 
collection service because they are enabling the Federal Reserve to 
maintain a stabilizing presence in the noncash collection market.

The Board expects the results of its econometric studies to be 
available during 1995.
    Although the Reserve Banks acknowledge that their cost, volume, and 
revenue projections are somewhat uncertain due to the continuing 
changes in the interbank check collection market and the implementation 
of FRAS, as well as Fednet, the Board believes that the 
Reserve Banks' proposed 1995 fee schedules are reasonable.

Discussion

    The 1994 fees approved by the Board were expected to recover 98.2 
percent of the costs of providing priced services, including imputed 
expenses, automation consolidation special project costs budgeted for 
recovery, and targeted ROE. Through September 1994, the System 
recovered 97.1 percent of total priced services expenses, including 
targeted ROE. The Reserve Banks now estimate that priced services 
revenues will yield net income of $2.5 million for the year, compared 
with a targeted ROE of $34.6 million. The recovery rate after targeted 
ROE is expected to be 96.0 percent. Approximately $8.8 million in 
automation consolidation special project costs will be recovered in 
1994 and an additional $20.5 million will be financed and recovered 
later.
    Although the Reserve Banks' current estimate of 1994 performance 
appears conservative, two significant factors contribute to the 
expected shortfall compared to the original plan. First, credits 
arising from accounting for pensions under FASB Statement 87 were 
revised downward by $21.3 million, pre-tax, from the estimate used to 
set fees. Final actuarial data became available following the adoption 
of 1994 fees that reflected (1) a lower discount rate used to value 
pension plan assets and (2) the costs of early retirement plans offered 
by the Reserve Banks during 1993 and 1994. If the actual pension credit 
had not changed from the estimate, the Reserve Banks' estimated full-
year cost recovery would have been 97.8 percent, or 1.8 percentage 
points higher than now forecast. Estimated net income would have been 
$17.3 million, compared with the $20.2 million originally budgeted.
    Second, the check service's volume loss due to the implementation 
of the same-day settlement regulation in January 1994 and the 
continuing consolidation of the banking industry has been greater than 
anticipated. The lower check volume levels account for most of the 
Reserve Banks' $12 million shortfall in revenues compared to the 
original projections.
    In 1995, priced services expenses before special project costs are 
projected to decrease 5.7 percent compared with estimated 1994 levels. 
Approximately $18.3 million of current automation consolidation special 
project costs and $0.8 million of costs that were deferred and financed 
in prior years will be recovered, leaving $36.7 million of accumulated 
special project costs to be recovered in the future.
    Total revenues in 1995 are projected to increase by 0.2 percent 
compared with 1994 revenues.\3\ Based on the Reserve Banks' estimates 
of costs, volumes, and revenues, the proposed 1995 fees will yield net 
income of $36.0 million for the year, compared with a targeted return 
on equity of $31.5 million. These estimates result in a 100.6 percent 
recovery rate, including targeted ROE.
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    \3\The revenue forecasts include net income on clearing balances 
(NICB) based on the methodology used in previous years. The Board 
requested public comment on a proposed change to the NICB 
methodology on August 16, 1994. The Board's staff is currently 
analyzing several issues raised by the proposal.
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    Table 1 summarizes the cost and revenue performance for priced 
services since 1989.

                              Table 1.--Pro Forma Cost and Revenue Performance (a)                              
                                            [In millions of dollars]                                            
                                                                                                                
                                                                                            Recovery    Special 
                                    Operating                                                 rate      project 
                                    costs and   Special     Total       Net                  after       costs  
          Year            Revenue    imputed    project    expense     income     Target     target    deferred 
                                     expenses    costs      [2+3]    (ROE) [1-   ROE (c)      ROE         and   
                                       (b)     recovered                 4]                (percent)   financed 
                                                                                           [1/(4+6)]      (d)   
                               (1)        (2)        (3)        (4)        (5)        (6)        (7)       (8)  
----------------------------------------------------------------------------------------------------------------
1989 (e)...............      718.6      692.1        4.6      696.7       21.9       32.9       98.5         0  
1990...................      746.5      698.1        2.8      700.9       45.6       33.6      101.6         0  
1991...................      750.2      710.0        1.6      711.6       38.6       32.5      100.8         0  
1992...................      760.8      728.4       11.2      739.6       21.2       26.0       99.4         1.6
1993...................      774.5      721.3       27.1      748.4       26.1       24.8      100.2        12.5
1994 (Est).............      762.0      750.7        8.8      759.5        2.5       34.6       96.0        34.9
1995 (Bud).............      763.4      708.3       19.1      727.4       36.0       31.5      100.6        36.7
(a) Details may not sum to totals because of rounding. The revenues and expenses for 1989-93 include the        
  definitive safekeeping service, which was discontinued in 1993. The table includes revised revenue and expense
  data for 1989-92.                                                                                             
(b) Imputed expenses include interest on debt, taxes, FDIC insurance, and the cost of float. Credits for prepaid
  pension costs under FASB 87 and the charges for post-retirement benefits in accordance with FASB 106 are      
  included beginning in 1993.                                                                                   
(c) Targeted ROE has not been adjusted to reflect automation consolidation expenses deferred and financed. The  
  Reserve Banks plan to recover these costs in the future.                                                      
(d) Totals are cumulative and include financing costs.                                                          
(e) Net income was less than targeted ROE during 1989 due to structural adjustments associated with implementing
  Regulation CC in 1988.                                                                                        

Check

    Table 2 presents actual 1993, estimated 1994, and projected 1995 
cost recovery performance for the check service.

                                Table 2.--Pro Forma Cost and Revenue Performance                                
                                            [In millions of dollars]                                            
                                                                                                                
                                                                                             Recovery           
                                                                                               rate     Special 
                                   Operating    Special     Total    Net income               after     project 
         Year            Revenue   costs and    project    expense    (ROE) [1-    Target     target     costs  
                                    imputed      costs      [2+3]        4]         ROE        ROE      deferred
                                    expenses   recovered                                    (percent)     and   
                                                                                            [1/(4+6)]   financed
                              (1)        (2)       (3)          (4)      (5)           (6)        (7)        (8)
----------------------------------------------------------------------------------------------------------------
1993..................      596.9      557.2        14.1      571.3       25.7        18.6      101.2        0.1
1994 (Est)............      578.9      579.8         0        579.8       (0.9)       26.3       95.5       11.3
1995 (Bud)............      579.1      550.0         5.0      555.0       24.0        24.0      100.0       12.0

1993 Performance

    Revenues from the check service recovered 101.2 percent of total 
expenses in 1993, including image and automation consolidation special 
project costs and targeted ROE. The volume of checks collected 
decreased 0.1 percent from 1992 levels and return item volume decreased 
1.3 percent.

1994 Performance

    Through September 1994, the check service recovered 96.4 percent of 
total expenses, including targeted ROE but excluding automation 
consolidation special projects costs. The volume of checks collected 
decreased 12 percent from 1993 levels, reflecting a 4 percent decrease 
in processed volume and a 33 percent decrease in fine sort volume.
    The Reserve Banks now project an operating loss of $0.9 million, 
compared with the $14.8 million return on equity budgeted for 1994. 
Although the Board believes that the Reserve Banks' current estimate of 
1994 performance is conservative, several significant factors are 
contributing to the variation. First, the check service's share of the 
pre-tax reduction in pension credits increased expenses by $16.8 
million, compared with the original budget estimate. Without this 
unexpected increase in expenses, the Reserve Banks would have been able 
to achieve the budgeted return on equity for the check service. Second, 
the Reserve Banks' volume losses due to the implementation of the same-
day settlement regulation on January 3 and the continuing consolidation 
of the banking industry have been greater than anticipated. In 
particular, the Reserve Banks now project that total check volume for 
1994 will decline by about 11 percent (processed check volume by 4 
percent and fine sort volume by 31 percent) and that return item volume 
will decline by 5 percent. Originally, the Reserve Banks projected that 
total volume would decline 10 percent (2 percent for processed check 
volume and 33 percent for fine sort volume) and that return item volume 
would decline 2 percent. Third, severe weather during early 1994 
contributed to higher than budgeted float costs.

1995 Issues

    The changes occurring in the check environment that will continue 
to challenge the Reserve Banks include additional volume losses due to 
increasing direct presentments of checks by depository institutions, 
expansions of private check clearing arrangements, and further 
consolidation of the banking industry. Despite these changes, the 
Reserve Banks are committed to providing efficient, fairly priced check 
services to the nation's depository institutions.
    To accomplish this objective, Reserve Banks are continuing to (1) 
reduce staff, (2) contain other costs, (3) control increases in fees, 
(4) improve deposit deadlines, and (5) emphasize the use of electronic 
presentment and deposit products, which increase the efficiency of the 
check collection process and can reduce its total costs. In addition, 
the Reserve Banks are beginning to use image technology in their 
commercial check operations. Image technology has the potential to 
increase the acceptance of check truncation and, over the long run, 
reduce the cost of clearing paper checks.
    Total check service operating costs plus imputed expenses are 
projected to be about 5.1 percent below estimated 1994 expenses. The 
decline in total check collection volume is expected to moderate 
somewhat in 1995. Based on the Reserve Banks' projections, a decrease 
in total volume of 2.4 percent is anticipated, reflecting no change in 
processed volume, an 11.5 percent decrease in fine sort volume, and a 
1.0 percent decrease in return item volume.

1995 Fees

    Overall, the 1995 check fees approved by the Board will increase 
1.2 percent on a weighted average basis, compared with 1994. For 1995, 
the Reserve Banks are continuing to adjust fees to reflect more 
accurately the fixed and variable costs of providing check services. 
Thus, cash-letter fees and fine sort package fees will increase 5.7 
percent and 1.6 percent, respectively. Forward processed item fees will 
decrease 0.4 percent, on average, while fine sort item fees will 
increase 2.0 percent, on average. Of the 2,180 forward collection and 
fine sort fees, almost 68 percent will remain unchanged, 19 percent 
will increase, and 7 percent will decrease. Additionally, 2.6 percent 
of all fees represent new products, while 3.7 percent of the fees have 
been discontinued, due to the elimination of the last remaining blended 
fees associated with tiered pricing and the elimination of some 
deadlines.
    Fees for return items are increasing 6.2 percent overall, 
reflecting increases in return cash-letter and package fees. Of the 
1,494 return fees, 59 percent are unchanged, 36 percent increased, and 
2 percent decreased. The fees for the Interdistrict Transportation 
System (ITS) are unchanged.
    Table 3 highlights selected 1994 and 1995 check collection fees.

                         Table 3.--Price Ranges                         
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      Products          1994 price ranges         1995 price ranges     
------------------------------------------------------------------------
Items:                     (per item)                (per item)         
  Forward processed:                                                    
      City..........  $0.003 to 0.049.....  $0.003 to 0.049             
      RCPC..........  $0.005 to 0.077.....  $0.003 to 0.069             
  Fine Sort:                                                            
      City..........  $0.002 to 0.012.....  $0.002 to 0.012             
      RCPC..........  $0.002 to 0.012.....  $0.002 to 0.017             
  Qualified return                                                      
   items:                                                               
      City..........  $0.100 to 0.530.....  $0.100 to 0.740             
      RCPC..........  $0.120 to 0.600.....  $0.120 to 1.040             
  Raw return items:                                                     
      City..........  $0.580 to 1.680.....  $0.580 to 2.180             
      RCPC..........  $0.800 to 1.680.....  $0.800 to 2.180             
Cash Letters:           (per cash letter)         (per cash letter)     
    Forward           $1.50 to 7.50.......  $1.50 to 8.00               
     processed.                                                         
    Forward fine-     $3.00 to 11.00......  $2.50 to 11.00              
     sort package.                                                      
    Return items:     $1.50 to 7.50.......  $1.50 to 8.00               
     raw and                                                            
     qualified.                                                         
------------------------------------------------------------------------

    In 1994, the Minneapolis Office introduced ``option'' prices for 
its Other Fed and city fine sort products.\4\ The Minneapolis and 
Richmond Reserve Banks also adopted option pricing for some electronic 
payor bank services. The Board has determined that there is no 
empirical justification to support the use of option pricing for paper 
check products. As a result, the Minneapolis Office will eliminate its 
option prices for Other Fed and city fine sort products. Further 
analysis of the cost structure for electronic products is in progress. 
At this time, the Board will permit the Richmond and Minneapolis Banks 
to continue using the option prices adopted for electronic check 
products in 1994.
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    \4\Under option pricing, depositors have a choice of paying a 
relatively low cash-letter fee and a relatively high per-item fee, 
or a relatively high cash-letter fee and a relatively low per-item 
fee.
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    Payor bank service revenue is estimated to have grown approximately 
16 percent in 1994 and is expected to expand at the same pace in 1995. 
In 1995, Reserve Banks will continue to encourage the use of basic 
electronic check presentment products by setting fees for those 
products at lower levels than fees for electronic information products. 
In addition, several Federal Reserve offices will be offering 
electronic cash-letter (ECL) deposit products, which reduce Reserve 
Bank processing costs by reducing the number of rejects, adjustments, 
and other exceptions. To encourage the use of ECL deposit products, 
Federal Reserve offices will offer either lower per-item fees or later 
deposit deadlines to depositors than they offer for deposits that are 
not accompanied by electronic data.
    The Reserve Banks project that 1995 revenues will recover 100.0 
percent of expenses, including targeted ROE and $5.0 million in 
automation consolidation special project costs. Approximately $0.2 
million of automation consolidation special project costs that were 
deferred and financed in prior years will be recovered, leaving $12.0 
million of accumulated special project costs to be recovered in the 
future.

Automated Clearing House (ACH)

    Table 4 presents the actual 1993, estimated 1994, and projected 
1995 cost recovery performance for the commercial ACH service.

                                Table 4.--Pro Forma Cost and Revenue Performance                                
                                            [In millions of dollars]                                            
                                                                                                                
                                                                                             Recovery           
                                                                                               rate     Special 
                                    Operating   Special     Total    Net income               after     project 
          Year            Revenue   costs and   project    expense    (ROE) [1-    Target     target     costs  
                                     imputed     costs      [2+3]        4]         ROE        ROE      deferred
                                     expenses  recovered                                    (percent)     and   
                                                                                            [1/(4+6)]   financed
                               (1)        (2)        (3)        (4)      (5)           (6)        (7)        (8)
----------------------------------------------------------------------------------------------------------------
1993...................       60.1       62.2        0.0       62.2       (2.1)        2.5       92.9       10.9
1994 (Est).............       65.2       66.0        0.0       66.0       (0.8)        3.4       94.0       19.6
1995 (Bud).............       70.3       63.9        3.4       67.3        3.1         3.1      100.0       21.8

1993 Performance

    Revenues from the ACH service recovered 92.9 percent of total 
expenses, including targeted ROE, during 1993. The principal factors 
contributing to the revenue shortfall were (1) higher than planned 
costs for the development of new ACH processing software to operate in 
the consolidated automation environment and (2) lower than expected 
non-automated revenues. Overall, commercial volume increased by 16.4 
percent over the 1992 volume level.

1994 Performance

    Through September 1994, revenues from the ACH service recovered 
97.4 percent of total expenses, including targeted ROE, compared with a 
targeted recovery rate of 96.9 percent for the year. Due to the planned 
underrecovery, all $7.6 million of automation consolidation special 
project costs are being deferred and financed. Year-to-date commercial 
volume increased 16.9 percent, compared to the same period in 1993.
    For 1994, the Reserve Banks now forecast that revenues will recover 
94.0 percent of commercial ACH costs, based on estimated volume growth 
of 14.5 percent for the year. While the Reserve Banks' current estimate 
may be conservative, the following factors contribute to the Reserve 
Banks' projected variation from plan:
    (1) The ACH service's $1.9 million share of the pre-tax reduction 
in pension credits;
    (2) Faster-than-planned conversion of paper returns and 
notifications of change (NOCs) to electronic alternatives; and
    (3) Lower revenues due to shifting commercial volume from the 
premium exchange to an earlier exchange, which was made possible by the 
addition of two ACH processing cycles beginning October 1, 1993.

1995 Issues

    The slower, 12.9 percent, rate of increase in commercial ACH 
transaction volume projected for 1995 reflects anticipated, increased 
competition from private-sector ACH operators and continued 
consolidation in the banking industry, which creates more ``on-us'' 
transfers. While the volume of commercial ACH transactions has been 
growing at a decreasing rate, dropping from 24 percent in 1990 to 17 
percent for the first nine months of 1994, it is likely that the 
Reserve Banks' forecast for 1995 understates the potential growth rate.
    The Reserve Banks' cost control programs are expected to result in 
a 3 percent reduction in operating expenses. During 1995, the Reserve 
Banks will test the new ACH application software developed over the 
last several years and begin to implement it. Although all Reserve 
Banks expect to make the transition to the new processing software by 
year-end 1995, the precise schedule of that transition remains 
uncertain. Delays in the implementation schedule may cause costs to 
vary significantly from budget.

1995 Fees

    The Board has approved only one change to the current ACH fees for 
1995, an increase in the fee for processing government paper NOCs from 
$5.00 to $10.00, the current fee for commercial paper NOCs.\5\ The 
higher fee better reflects the cost of providing this manual service 
and would provide an additional incentive for depository institutions 
to migrate to a more fully electronic ACH processing environment.
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    \5\On October 26, 1994, the Department of the Treasury agreed 
that the Federal Reserve Banks may assess a fee of $10.00 for 
government paper NOCs beginning in 1995.
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    Based on the approved fee schedule, the Reserve Banks forecast that 
the commercial ACH service will recover 100.0 percent of costs, 
including targeted ROE and $3.4 million of the current year's 
automation consolidation special project costs. The remaining $0.6 
million of current year automation consolidation special project costs 
and the charges that were incurred and deferred in prior years will 
continue to be deferred for recovery in future years.

Funds Transfer and Net Settlement

    Table 5 presents the actual 1993, estimated 1994, and budgeted 1995 
cost recovery performance for the funds transfer and net settlement 
service.

                                Table 5.--Pro Forma Cost and Revenue Performance                                
                                            [In millions of dollars]                                            
                                                                                                                
                                                                                             Recovery           
                                                                                               rate     Special 
                                     Operating   Special     Total       Net                  after     project 
          Year             Revenue   costs and   project    expense     income     Target     target     costs  
                                      imputed     costs      [2+3]    (ROE) [1-     ROE        ROE      deferred
                                      expenses  recovered                 4]                (percent)     and   
                                                                                            [1/(4+6)]   financed
                                (1)        (2)        (3)        (4)        (5)        (6)        (7)        (8)
----------------------------------------------------------------------------------------------------------------
1993....................       90.2       74.2       11.2       85.4        4.8        2.9      102.2        0.6
1994 (Est)..............       92.1       80.2        7.1       87.3        4.8        3.8      101.1        2.2
1995 (Bud)..............       89.2       71.2        9.7       80.9        8.2        3.4      105.8        0.0

1993 Performance

    Revenues from the funds transfer service recovered 102.2 percent of 
total expenses, including targeted ROE. Funds transfer volume increased 
2.0 percent over 1992 levels.

1994 Performance

    Through September 1994, revenues from the funds transfer service 
recovered 101.8 percent of total expenses, including targeted ROE, 
compared with a targeted recovery rate of 100.0 percent for the year. 
During the same period, funds transfer volume increased 4.6 percent 
over the 1993 volume level.
    The Reserve Banks estimate that, in 1994, the funds transfer and 
net settlement service will recover 101.1 percent after targeted ROE 
and automation consolidation special project costs that the service had 
planned to recover, based on estimated transaction volume growth of 4.8 
percent for the year. Revenue is 6.5 percent higher than budgeted, 
primarily because anticipated volume reductions as a result of daylight 
overdraft pricing did not materialize. Total costs are estimated to be 
6.1 percent over budget, due to (1) higher-than-anticipated data 
processing costs, offset partially by lower data communications costs 
and (2) the funds transfer services' $2.0 million share of the pre-tax 
reduction in pension credits.

1995 Issues

    The Reserve Banks estimate that funds transfer origination volume 
will increase 2.8 percent over 1994 levels. Without price changes, the 
Reserve Banks project that revenues would recover 109.4 percent of 
expenses, including all current year and deferred automation 
consolidation special project costs.

1995 Fees

    The Board reduced the funds transfer fee to $0.50 from the current 
$0.53. After this reduction, the service is expected to recover 105.8 
percent of its costs, after paying all current year and deferred 
charges for the automation consolidation special project. Uncertainties 
remain in the cost projections for 1995, however, because of the 
continued implementation of the centralized funds transfer application 
software.

Book-entry Securities\6\

    Table 6 presents the actual 1993, estimated 1994, and budgeted 1995 
cost recovery performance for the book-entry securities service.
---------------------------------------------------------------------------

    \6\Includes Purchase and Sale activity beginning in 1994.

                                Table 6.--Pro Forma Cost and Revenue Performance                                
                                            [In millions of dollars]                                            
                                                                                                                
                                                                                             Recovery           
                                                                                               rate     Special 
                                     Operating   Special     Total       Net                  after     project 
          Year             Revenue   costs and   project    expense     income     Target     target     costs  
                                      imputed     costs      [2+3]    (ROE) [1-     ROE        ROE      deferred
                                      expenses  recovered                 4]                (percent)     and   
                                                                                            [1/(4+6)]   financed
                                (1)        (2)        (3)        (4)        (5)        (6)        (7)        (8)
----------------------------------------------------------------------------------------------------------------
1993....................       14.4       12.2        1.8       14.0        0.4        0.4      100.0        0.8
1994 (Est)..............       15.5       13.9        1.7       15.6        0.0        0.7       95.5        1.5
1995 (Bud)..............       15.7       14.0        1.0       15.0        0.7        0.7      100.1        2.6

1993 Performance

    Revenues from the book-entry securities service recovered 100.0 
percent of total expenses, including targeted ROE in 1993. The volume 
of government agency securities transfers increased 10.4 percent over 
the 1992 volume level.

1994 Performance

    Through September 1994, revenues from the book-entry securities 
service recovered 99.1 percent of total expenses plus targeted ROE, 
compared with a targeted recovery rate of 100.3 percent for the year. 
During the same period, book-entry securities transfer volume increased 
5.9 percent compared with the 1993 level.
    The Reserve Banks' staff now expects the book-entry securities 
service to recover 95.5 percent of total expenses after targeted ROE, 
based on approximately the same transaction volume as in 1993. The 
estimated recovery rate is lower than originally projected due to two 
factors. First, securities transfer volume declined unexpectedly. The 
increase in mortgage interest rates during 1994 has resulted in less 
refinancing activity and, as a result, fewer mortgages are available to 
issue additional mortgage-backed security. Higher interest rates have 
caused securities firms to reconsider investments in existing mortgage-
backed securities, resulting in less trading activity. Second, expenses 
are higher than planned, due to the reduction in pension credits and 
higher-than-anticipated data processing costs.

1995 Issues

    The Reserve Banks believe that mortgage-backed securities volume 
will stabilize by year-end 1994 and increase modestly in 1995 from the 
reduced 1994 volume level. This conservative volume increase is 
reflected in the 3.1 percent volume growth rate forecast for 1995.

1995 Fees

    The Board has approved retaining the current fees for the book-
entry security service, based on the Reserve Banks' forecast that they 
will produce sufficient revenue to recover 100.1 percent of costs, 
including targeted ROE and $1.0 million in automation consolidation 
special project costs. The remaining $1.0 million of current year 
automation consolidation special project costs and the charges that 
were incurred and deferred in prior years will continue to be deferred 
for recovery in future years.

Electronic Connections

    The Federal Reserve charges fees for electronic connections to 
depository institutions for accessing priced services. The costs and 
revenues associated with electronic access are allocated to the various 
priced services based on the relative number of endpoints that access 
each service.
    Electronic connection fees have not increased since 1989, with the 
exception of the 1991 $100 increase in the monthly dedicated leased-
line fee. In light of the increasing costs due to the implementation of 
Fednet, the Board has approved increased fees for three types 
of electronic connections in 1995. The fees for four other types of 
connections would remain unchanged. Specifically, the Board raised the 
following fees: 1) receive and send dial connections from $65 to $75; 
2) multi-drop leased-line connections from $300 to $450; and 3) 
dedicated leased-line connections from $700 to $750. Monthly electronic 
connection fees for receive-only dial, high-speed dial, high-speed 19.2 
kbps leased-line, and high-speed 56 kbps leased-line will remain at 
$30, $350, $850, and $1,000, respectively.
    In 1994, the Federal Reserve Board established standard fees for 
dedicated high-speed 56 kbps and 19.2 kbps connections and high-speed 
dial 56 kbps connections. In response to requests from several 
depository institutions that Reserve Banks support connections at 
speeds higher than 56 kbps for transmission of large data files, the 
Board has approved standard connection fees for two new categories of 
high-speed connections: $1,800 and $2,000 per month for high-speed 
leased connections of 128 kbps and 256 kbps, respectively. These new 
high-speed connection categories require more expensive signalling, 
encryption, and circuit components than the 56 kbps and 19.2 kbps 
connections.
    Finally, the Board has approved two new standard connection options 
to support contingency testing by depository institutions that use 
dedicated leased-line connections for their production traffic. A 
dedicated dial test connection will provide additional dial connection 
equipment to address the needs of those institutions that conduct their 
contingency testing simultaneously with their production work. A shared 
dial test connection will address the needs of institutions that test 
only during off-hours and will provide a necessary subset of dial 
connection components. These new contingency connection options will be 
lower cost alternatives to depository institutions than a second 
dedicated leased-line connection. For these test options, a usage 
guideline of 120 hours per year will be established. Institutions that 
exceed this guideline will be asked to establish a dedicated leased-
line connection for testing purposes and pay the standard connection 
fee. The monthly fees for the dedicated and shared contingency testing 
options are $250 and $150, respectively.

Noncash Collection

    Table 7 summarizes actual 1993, estimated 1994, and projected 1995 
cost recovery performance for the noncash collection service.

                                Table 7.--Pro Forma Cost and Revenue Performance                                
                                            [In millions of dollars]                                            
                                                                                                                
                                                                                             Recovery           
                                                                                               rate     Special 
                                     Operating   Special     Total       Net                  after     project 
          Year             Revenue   costs and   project    expense     income     Target     target     costs  
                                      imputed     costs      [2+3]    (ROE) [1-     ROE        ROE      deferred
                                      expenses  recovered                 4]                (percent)     and   
                                                                                            [1/(4+6)]   financed
                                  1          2          3          4          5          6          7          8
----------------------------------------------------------------------------------------------------------------
1993....................        5.0        5.7        0.0        5.7      (0.7)        0.2       84.4        0.2
1994 (Est)..............        4.1        4.9        0.0        4.9      (0.8)        0.2       79.1        0.2
1995 (Bud)..............        3.9        4.0        0.0        4.0      (0.2)        0.2       91.6        0.3

1993 Performance

    Revenues from the noncash collection service recovered 84.4 percent 
of total expenses, including targeted ROE, in 1993. The principal 
factor contributing to the revenue shortfall was a 38 percent decline 
in transaction volume caused, in part, by increased called bond 
activity.

1994 Performance

    Through September 1994, the noncash collection service recovered 
85.4 percent of total expenses including targeted ROE, compared with a 
targeted recovery rate of 85.5 percent for the year. During the same 
period, noncash collection volume decreased 40.1 percent, compared with 
the 1993 level.
    The three Reserve Banks providing noncash collection services now 
project a recovery rate of 79.1 percent. Although anticipated volume 
losses are expected to be more moderate, 37.8 percent, through the end 
of the year due to gaining a new customer, the costs associated with 
consolidating operations and the $0.2 million reduction in the noncash 
service's share of the pension credits are expected to reduce the 
service's recovery rate compared with year-to-date performance.

1995 Issues

    Since the mid 1980s, the noncash collection service has faced 
rapidly declining volume levels. Following enactment of TEFRA, many 
bearer municipal securities were ``immobilized,'' or converted to book-
entry form, thus eliminating interest coupons. To improve the System's 
ability to recover costs in a declining market, the Reserve Banks 
reduced the number of noncash processing sites from four to three in 
1994 and will complete the planned consolidation to two sites in 1995. 
Because of remaining transition costs in New York and the consolidation 
of Chicago's noncash operation during 1995, the Reserve Banks do not 
expect to recover costs fully during 1995.
    In 1994, the Reserve Banks implemented a new volume-based fee 
structure with fixed cash-letter and per-envelope fees. The levels of 
cash-letter and per-envelope fees were based on the number of coupon 
envelopes contained in the cash letters.\7\ The use of a fee structure 
that includes fixed and variable fees more accurately reflects the 
structure of costs the Reserve Banks incur in providing noncash 
collection services than the fee structure that was in place before 
1994, which relied solely on variable fees. A detailed study of the 
cost structure of the noncash collection services, which would be 
needed to justify the use of volume-based fees, was deemed impractical 
because of the rapidly declining volume levels. Volume-based fees, 
however, have been well received by depositors. In addition, they 
provide incentives for larger institutions to increase the size of 
their deposits and moderate the impact of the fixed costs of the 
service for smaller institutions. As a result, the use of volume-based 
fees permits the Federal Reserve to maintain a presence in the noncash 
collection business and adds a measure of stability as other service 
providers continue to withdraw.
---------------------------------------------------------------------------

    \7\Small deposits were assessed relatively low cash-letter and 
high per-envelope fees, while larger deposits were charged higher 
cash-letter but lower per-envelope fees.
---------------------------------------------------------------------------

1995 Fees

    For 1995, the Board has approved a reduction in the return item 
fees to $15.00 from $20.00 in Cleveland and from $25.00 in Jacksonville 
and Chicago. The proposed national fee more accurately reflects the 
costs of return processing at the regional processing sites and is 
consistent with fees charged by other service providers. All other fees 
were retained for 1995.
    The Reserve Banks forecast the number of noncash coupon envelopes 
processed to increase 21.5 percent, primarily as a result of new 
deposits attracted by the lower and uniform return item fee. The 
proposed 1995 fee schedule is expected to enable the noncash collection 
service to recover 91.6 percent of its costs, including targeted ROE. 
Once the consolidation of noncash services is completed, the Reserve 
Banks' staff believes that the service will be able to reverse the 
continuing operating losses and to achieve low and stable operating 
costs.

Cash Services

    Cash services that are priced by the Federal Reserve Banks include 
cash transportation, coin wrapping, nonstandard packaging of currency 
orders and deposits, and nonstandard frequency of access to cash 
services.
    Data on priced cash services are being included to provide a 
complete view of Reserve Bank priced service performance. Cash 
transportation fee changes do not require Board approval. The Board, 
however, is notified when changes occur. The fees for the other priced 
cash services have been approved by the Director of the Division of 
Reserve Bank Operations and Payment Systems under delegated authority.
    Table 8 presents actual 1993, estimated 1994, and projected 1995 
cost recovery performance for the priced cash services.

                                Table 8.--Pro Forma Cost and Revenue Performance                                
                                            [In millions of dollars]                                            
                                                                                                                
                                                                                             Recovery           
                                                                                               rate     Special 
                                     Operating   Special     Total       Net                  after     project 
          Year             Revenue   costs and   project    expense     income     Target     target     costs  
                                      imputed     costs      [2+3]    (ROE) [1-     ROE        ROE      deferred
                                      expenses  recovered                 4]                (percent)     and   
                                                                                            [1/(4+6)]   financed
                                  1          2          3          4          5          6          7          8
----------------------------------------------------------------------------------------------------------------
1993....................        6.4        6.3        0.0        6.3        0.1        0.1      100.2        0.0
1994 (Est)..............        6.2        6.0        0.0        6.0        0.2        0.1      101.7        0.0
1995 (Bud)..............        5.3        5.1        0.0        5.1        0.1        0.1      100.7        0.0

    The Reserve Banks expect that revenues will recover all costs for 
cash services, including targeted ROE. Projected revenue for 1995 is 
less than for 1994 because the number of Reserve Banks that provide 
priced armored carrier transportation services has declined.
    The 1995 fees for wrapped coin, nonstandard packaging, and 
nonstandard access are shown in Attachment VIII. Fees for other cash 
transportation services and registered mail fees can be obtained by 
contacting the individual Federal Reserve offices.

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, the Board 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 service due to differing legal powers or constraints or due to 
a dominant market position of the Federal Reserve deriving from such 
legal differences.
    The Board believes that the recommended price and service level 
changes would not have a substantial effect on payments system 
participants and would not have a direct and material effect on the 
ability of other service providers to compete effectively with the 
Federal Reserve in providing similar services. The 1995 fees approved 
by the Board result in a projected return on equity that meets the 
target return on equity based on the 50 bank holding company model. The 
Board believes that the recommended fees for the noncash collection 
services are consistent with the approach that would be used by a 
private-sector firm, which would absorb the results of structural 
changes through its retained earnings account. Therefore, the Board 
does not believe that approval of the proposed fees would have an 
adverse effect on the ability of other service providers to compete 
with the Reserve Banks.

   Attachments--Table A-1.--Comparison of Pro Forma Balance Sheets for  
                     Federal Reserve Priced Services                    
                 [Millions of dollars--average for year]                
------------------------------------------------------------------------
                                                    1995         1994   
------------------------------------------------------------------------
Short-term assets:                                                      
    Imputed reserve requirement on clearing                             
     balances.................................       $619.8       $593.6
    Investment in marketable securities.......      5,577.9      5,342.3
    Receivables\1\............................         62.8         64.3
    Materials and supplies\1\.................          5.7          5.5
    Suspense & Difference\1\..................          0.1          0.0
    Prepaid expenses\1\.......................         16.1         16.1
    Items in process of collection............      2,592.5      3,198.9
                                               -------------------------
      Total short-term assets.................      8,874.9      9,220.7
                                               =========================
Long-term assets:                                                       
    Premises\1\\2\............................        412.1        350.5
    Furniture and equipment\1\................        113.4        183.1
    Leasehold improvements and long-term                                
     prepayments\1\...........................         12.6         32.1
    Capital leases\1\.........................          3.8          0.6
                                               -------------------------
      Total long-term assets..................        541.9        566.3
                                               -------------------------
      Total assets............................      9,416.8      9,787.0
                                               =========================
Short-term liabilities:                                                 
    Clearing balances and balances arising                              
     from early credit of uncollected items...      6,197.7      5,935.9
    Deferred credit items.....................      2,592.5      3,198.9
    Short-term debt\3\........................         84.7         85.9
                                               -------------------------
      Total short-term liabilities............      8,874.9      9,220.7
                                               =========================
Long-term liabilities:                                                  
    Obligations under capital leases..........          3.8          0.6
    Long-term debt\3\.........................        161.6        174.1
                                               -------------------------
      Total long-term liabilities.............        165.4        174.7
                                               -------------------------
      Total liabilities.......................      9,040.3      9,395.4
Equity\3\.....................................        376.5        391.5
                                               -------------------------
      Total liabilities and equity............      9,416.8      9,787.0
                                                                        
------------------------------------------------------------------------
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 $0.4 million for 1995 and $0.4 million for 1994.                   
\3\Imputed figures represent the source of financing for certain priced 
  services assets.                                                      


                 Table A-2.--Derivation of the 1995 PSAF                
                          [Millions of dollars]                         
                                                                        
                                                                        
A. Assets to be Financed:\1\                                            
    Short-term...........................      $84.7                    
    Long-term\2\.........................      538.2              $622.9
                                          -----------                   
B. Weighted Average Cost:                                               
    1. Capital Structure:\3\                                            
        Short-term Debt..................      15.4%                    
        Long-term Debt...................      25.4%                    
        Equity...........................      59.2%                    
    2. Financing Rates/Costs:\3\                                        
        Short-term Debt..................       3.5%                    
        Long-term Debt...................       8.2%                    
        Pre-tax Equity...................      12.1%                    
    3. Elements of Capital Costs:                                       
        Short-term Debt..................       84.7       x  3.5% = 3.0
        Long-term Debt...................      161.6      x  8.2% = 13.2
        Equity...........................      376.5     x  12.1% = 45.6
                                                     -------------------
                                                                    61.7
C. Other Required PSAF Recoveries:                                      
    Sales Taxes..........................       11.3                    
    Federal Deposit Insurance Assessment.       19.0                    
    Board of Governors Expenses..........        2.7                33.0
                                          ------------------------------
D. Total PSAF Recoveries.................                           94.7
                                                     -------------------
    As a percent of capital..............                          15.3%
    As a percent of expenses\5\..........                         15.7% 
\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 capital leases, which are self financing.           
\3\All short-term assets are assumed to be financed by short-term debt. 
  Of the total long-term assets, 31 percent are assumed to be financed  
  by long-term debt and 69 percent by 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 PSAF.               
\5\Systemwide 1995 budgeted priced service expenses less shipping are   
  $608.5 million.                                                       


       Table A-3. Comparison Between 1995 and 1994 PSAF Components      
------------------------------------------------------------------------
                                                    1995         1994   
------------------------------------------------------------------------
A. Assets to be Financed (millions of                                   
 dollars):                                                              
    Short-term................................        $84.7        $85.9
    Long-term.................................        538.2        565.5
                                               -------------------------
      Total...................................        622.9        651.5
B. Cost of Capital:                                                     
    Short-term Debt Rate......................         3.5%         4.3%
    Long-term Debt Rate.......................         8.2%         8.7%
    Pre-tax Return on Equity..................        12.1%        12.7%
    Weighted Average Long-term Cost of Capital        10.9%        11.5%
C. Tax Rate...................................        31.0%        30.4%
D. Capital Structure:                                                   
    Short-term Debt...........................        15.4%        15.6%
    Long-term Debt............................        25.4%        26.0%
    Equity....................................        59.2%        58.4%
E. Other Required PSAF Recoveries (millions of                          
 dollars):                                                              
    Sales Taxes...............................         11.3         12.5
    Federal Deposit Insurance Assessment......         19.0         19.8
    Board of Governors Expenses...............          2.7          2.7
F. Total PSAF:                                                          
    Required Recovery.........................         94.7        103.6
    As Percent of Capital.....................        15.2%        15.9%
    As Percent of Expenses....................        15.7%        17.0%
------------------------------------------------------------------------


 Table A-4.--Computation of Capital Adequacy for Federal Reserve Priced 
                                Services                                
                          [Millions of dollars]                         
------------------------------------------------------------------------
                                                     Risk       Weight  
                                        Assets      weight      assets  
------------------------------------------------------------------------
Imputed reserve requirement on                                          
 clearing balances.................       $619.8        0.0         $0.0
Investment in marketable securities      5,577.9        0.0          0.0
Receivables........................         62.8        0.2         12.6
Materials and supplies.............          5.7        1.0          5.7
Suspense and Difference............          0.1        0.2          0.0
Prepaid expenses...................         16.1        1.0         16.1
Items in process of collection.....      2,592.5        0.2        518.5
Premises...........................        410.6        1.0        410.6
Furniture and equipment............        113.5        1.0        113.5
Leases and long-term prepayments...         14.1        1.0         14.1
                                    ------------------------------------
      Total........................      9,413.2  .........      1,091.1
Imputed Equity for 1995............        376.5                        
Capital to Risk-Weighted Assets....        34.5%                        
Capital to Total Assets............         4.0%                        
------------------------------------------------------------------------

    By order of the Board of Governors of the Federal Reserve 
System, November 21, 1994.
William W. Wiles,
Secretary of the Board.
[FR Doc. 94-29176 Filed 11-25-94; 8:45 am]
BILLING CODE 6210-01-P