[Federal Register Volume 60, Number 217 (Thursday, November 9, 1995)]
[Notices]
[Pages 56591-56600]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-27631]



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FEDERAL RESERVE SYSTEM

[Docket No. R-0899]


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 1996 of $85.8 million, as well as fee schedules for Federal 
Reserve priced services and electronic connections. These actions were 
taken in accordance with the requirements of the Monetary Control Act 
of 1980, which requires that, over the long run, fees for Federal 
Reserve priced services be established on the basis of all direct and 
indirect costs, including the PSAF.

DATES: The PSAF and the fee schedules become effective January 2, 1996.

FOR FURTHER INFORMATION CONTACT: For questions regarding the private 
sector adjustment factor: Elizabeth Tacik, Accounting Analyst (202/452-
2303), Division of Reserve Bank Operations and Payment Systems; for 
questions regarding fees schedules: Scott Knudson, Senior Financial 
Services Analyst, ACH Payments (202/452-3959), Michele Braun, Senior 
Financial Services Analyst, Check Payments (202/452-2819), Darrell Mak, 
Financial Services Analyst, Funds Transfer and Book-Entry Securities 
Services, (202/452-3223), Ken Buckley, Manager, Information Technology 
(electronic connections), (202/452-3646), Michael Bermudez, Financial 
Services Analyst, (202/452-2216), or Marianne Hansberry, Financial 
Services Analyst, Cash Section, (202/452-2760), Division of Reserve 
Bank Operations and Payment Systems. For users of Telecommunications 
Device for the Deaf only, please contact Dorothea Thompson (202/452-
3544).
    Copies of the 1996 fee schedules for the check, automated clearing 
house (ACH), funds transfer and net settlement, book-entry securities, 
noncash collection, and special cash services, as well as electronic 
connections to Reserve Banks, are available from the Reserve Banks.

SUPPLEMENTARY INFORMATION:

I. Private Sector Adjustment Factor

    A. Overview--The Board has approved a 1996 PSAF for Federal Reserve 
priced services of $85.8 million. This amount represents a decrease of 
$8.9 million or 9.4 percent from the PSAF of $94.7 million targeted for 
1995.
    As required by the Monetary Control Act (MCA) (12 U.S.C. 248a), the 
Federal Reserve's fee schedules for priced services include ``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; and long-term assets are assumed to be financed by a 
combination of long-term debt and equity derived from the BHC model. 
For 1995, 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 206.5). This was not necessary for 1996.
    Imputed capital costs are determined by applying related interest 
rates and rates of return on equity (ROE) derived from the BHC model to 
assets used in providing priced services. 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.
    In addition to capital costs, the PSAF includes imputed sales 
taxes, expenses of the Board of Governors related to priced services, 
and an imputed Federal 

[[Page 56592]]
Deposit Insurance Corporation (FDIC) insurance assessment on clearing 
balances held with the Federal Reserve to settle transactions.
    B. Asset Base--The estimated value of Federal Reserve assets to be 
used in providing priced services in 1996 is reflected in table A-1. 
Table A-2 shows that the assets assumed to be financed through debt and 
equity are projected to total $637.3 million. As shown in table A-3, 
this represents a net increase of $14.4 million or 2.3 percent from 
1995. This increase results primarily from a higher priced asset base 
at the Reserve Banks. A decrease of $10.6 million or 14.3 percent in 
the FRAS priced asset base due to a reduction in capital purchases and 
a reduction in the FRAS priced percentage sightly offset the increase 
in Reserve Bank asset levels.
    C. 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 1996, and compares the 1996 rates with the 
rates used for developing the PSAF for 1995. The pre-tax return on 
equity rate increased from 12.1 percent in 1995 to 14.2 percent for 
1996. The increase is a result of stronger 1994 BHC financial 
performance included in the 1996 BHC model, relative to the 1989 BHC 
financial performance in the 1995 BHC model.
    The decrease in the FDIC insurance assessment from $19.0 million in 
1995 to $2.2 million in 1996, as shown in table A-3, is attributable to 
the impact of the new lower rate for deposit insurance and lower 
clearing balances. The FDIC rate of $0.26 for every $100 in clearing 
balances was reduced to $0.04 as of June 1, 1995.
    D. Capital Adequacy--As shown on table A-4, the amount of capital 
imputed for the proposed 1996 PSAF totals 34.4 percent of risk-weighted 
assets, well in excess of the 8 percent capital guideline for state 
member banks and BHCs.

II. Priced Services

    A. Overview--Over the period 1985 through 1994, the Reserve Banks 
recovered 100.7 percent of the total costs of providing priced 
services, including special project costs that were budgeted for 
recovery and targeted ROE.\1\ Table 1 summarizes the cost and revenue 
performance for priced services since 1985.

    \1\ Certain offsets to costs and certain costs are treated 
differently in the pro forma income statement for Federal Reserve 
priced services that is published in the Board's Annual Report than 
they are for purposes of setting fees. For example, off-sets to 
costs associated with the transition to and retroactive application 
of the Financial Accounting Standards Board's Statement of Financial 
Accounting Standards No. 87 (SFAS 87), pension accounting, and SFAS 
106, other post-retirement employee benefits accounting, have not 
been considered in setting fees for priced services. Under the 
procedures used to prepare the pro forma income statement, the 
Reserve Banks recovered 101.4 percent of the expenses incurred in 
providing priced services, including targeted ROE, from 1985 through 
1994.
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    B. 1995 Performance--The 1995 fees approved by the Board were 
expected to recover 100.6 percent of the costs of providing priced 
services, including imputed expenses, automation consolidation special 
project costs budgeted for recovery, and targeted ROE. Through August 
1995, the System recovered 98.7 percent of total priced services 
expenses, including automation consolidation special project costs and 
targeted ROE. The Reserve Banks now estimate that priced services 
revenues will yield a net income of $25.8 million for the year, 
compared with a targeted ROE of $31.5 million. The recovery rate after 
ROE is expected to be 99.3 percent. Approximately $19.8 million in 
automation consolidation special project costs will be recovered in 
1995, leaving $36.0 million in accumulated costs to be financed and 
recovered later.\2\

    \2\ 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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    The variation in the cost recovery performance from the original 
1995 projections can be attributed to the following major factors. 
First, the pre-tax credits arising from accounting for pensions under 
the Financial Accounting Standards Board's Statement of Financial 
Accounting Standards No. 87 (SFAS 87) were revised downward by $16.1 
million from the estimate used to set 1995 fees. This reduction was due 
primarily to a lower return on assets in 1994 and a slightly lower 
discount rate for valuing pension plan assets. On the other hand, the 
FDIC insurance assessment was reduced, which lowered imputed expenses 
by $9.4 million. If these two changes had not occurred, the Reserve 
Banks' estimated 1995 recovery rate would have been 99.8 percent, or 
0.5 percentage points higher than now forecast.

                                                  Table 1.--Pro Forma Cost and Revenue Performance (a)                                                  
                                                                      [$ millions]                                                                      
                                                                                                                                                        
                                                                                                                                              8  Special
                                                                    2        3  Special                                         7  Recovery    project  
                                                                Operating     project      4  Total      5  Net     6  Target    rate after     costs   
                      Year                         1  Revenue   costs and      costs       expense       income        ROE       target ROE    deferred 
                                                                 imputed     recovered                   (ROE)                   (percent)       and    
                                                                 expenses                                                                      financed 
                                                          (b)          (c)          (d)        [2+3]        [1-4]          (e)    [1/(4+6)]          (f)
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1985............................................        613.8        555.3          0.0        555.3         58.5         23.9        106.0          0.0
1986............................................        627.7        571.6          0.0        571.6         56.1         27.3        104.8          0.0
1987............................................        649.7        598.2          0.0        598.2         51.5         29.3        103.5          0.0
1988............................................        667.7        641.1          3.2        644.3         23.4         32.7         98.6          0.0
1989............................................        718.6        692.1          4.6        696.7         21.9         32.9         98.5          0.0
1990............................................        746.5        698.1          2.8        700.9         45.6         33.6        101.6          0.0
1991............................................        750.2        710.0          1.6        711.6         38.6         32.5        100.8          0.0
1992............................................        760.8        731.0         11.2        742.2         18.6         26.0         99.0          1.6
1993............................................        774.5        722.4         27.1        749.5         25.0         24.9        100.0         12.5
1994............................................        767.2        748.3          8.8        757.1         10.1         34.6         96.9         33.9
1995 (Est)......................................        757.7        712.1         19.8        731.9         25.8         31.5         99.3        36.0 

[[Page 56593]]
                                                                                                                                                        
1996 (Bud)......................................        791.6        723.7         25.5        749.3         42.3         36.7        100.7        33.1 
(a) Details may not sum to totals because of rounding. The revenues and expenses for 1985 through 1993 include the definitive safekeeping service, which
  was discontinued in 1993. The table includes revised revenue and expense data for 1992 and 1993.                                                      
(b) Beginning in 1987, net income on clearing balances is included in revenue.                                                                          
(c) Imputed expenses include interest on debt, taxes, FDIC insurance, and the cost of float. Credits for prepaid pension costs under SFAS 87 and the    
  charges for post-retirement benefits in accordance with SFAS 106 are included beginning in 1993.                                                      
(d) Special project costs include Electronic Payment System (EPS) costs from 1988 through 1990, check image project costs from 1988 through 1993, and   
  certain categories of automation consolidation costs from 1992 through 1996.                                                                          
(e) Targeted ROE is based on the ROE included in the PSAF and has been adjusted for taxes, which are included in column 2. Targeted ROE has not been    
  adjusted to reflect automation consolidation special project costs deferred and financed. The Reserve Banks plan to recover these costs in the future.
                                                                                                                                                        
(f) Totals are cumulative and include financing costs.                                                                                                  


    Second, for the second year, the check service's volume losses were 
greater than anticipated, reflecting increasing use of direct 
presentments and continuing consolidation in the banking industry. The 
Reserve Banks' current estimates indicate that check revenues will be 
about $10.0 million lower than original projections. Conversely, ACH 
volume has grown more rapidly than the Reserve Banks initially 
projected and revenues are nearly $4.0 million higher than anticipated.
    C. 1996 Projection--In 1996, all priced services expect to recover 
operating costs and imputed expenses, including targeted ROE. Total 
revenues in 1996 are projected to increase 4.5 percent compared with 
1995 estimated revenues.3 Based on the Reserve Banks' budgeted 
costs, volumes, and revenues, the proposed 1996 fees will yield net 
income of $42.3 million for the year, compared with a targeted ROE of 
$36.7 million. These estimates result in a 100.7 percent cost recovery 
rate, including automation consolidation special project costs budgeted 
for recovery and targeted ROE. Priced services expenses before special 
project costs are projected to increase 1.6 percent compared with 
estimated 1995 levels. Approximately $25.5 million in automated 
consolidation special project costs will be recovered, leaving $33.1 
million of accumulated special project costs to be recovered in the 
future. The following sections discuss the 1994 and 1995 year-to-date 
performance for each priced service, as well as the changes to fees 
that were approved by the Board.

    \3\  The projected revenues include net income on clearing 
balances.
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    D. Check--Table 2 presents the actual 1994, estimated 1995, and 
projected 1996 cost recovery performance for the check service.

                                                 Table 2.--Check Pro Forma Cost and Revenue Performance                                                 
                                                                      [$ millions]                                                                      
                                                                                                                                                        
                                                                                                                                              8  Special
                                                                    2        3  Special                                         7  Recovery    project  
                                                                Operating     project      4  Total      5  Net     6  Target    rate after     costs   
                      Year                         1  Revenue   costs and      costs       expense       income        ROE       target ROE    deferred 
                                                                 imputed     recovered                   (ROE)                   (percent)       and    
                                                                 expenses                                                                      financed 
                                                                                                                                                        
  ---------------------------------------------------------  -----------  -----------  --------[2+3]--------[1-4]-----------  ----[1/(4+6)]-----------  
1994............................................        582.4        579.8          0.0        579.8          2.6         26.3         96.1         11.3
1995 (Est)......................................        569.2        548.9          5.3        554.2         15.0         24.0         98.4         12.0
1996 (Bud)......................................        595.0        561.3          5.6        566.9         28.1         28.0        100.0         10.9

    1. 1994 Performance--The check service recovered 96.1 percent of 
total expenses in 1994, including targeted ROE. The volume of checks 
collected decreased 13.3 percent from 1993 levels as a result of the 
implementation of the same-day settlement regulation, as well as bank 
consolidation and merger activity. Return item volume decreased 1.7 
percent.
    2. 1995 Performance--Through August 1995, the check service 
recovered 98.2 percent of total expenses, including automation 
consolidation special projects costs and targeted ROE, compared with 
the targeted 1995 recovery rate of 100.0 percent. The volume of checks 
collected decreased 7.0 percent from 1994 levels, reflecting a 3.7 
percent decrease in processed volume and a 19.2 percent decrease in 
fine sort volume. Return item volume increased 2.6 percent.
    The Reserve Banks now estimate that 1995 net income will amount to 
$15.0 million, compared with the $24.0 million budgeted. Two 
significant factors contribute to the variation. First, the decline in 
check collection volume experienced through August is expected to 
accelerate. The Reserve Banks now expect volume to decline by 9.3 
percent for the year, versus the budgeted volume loss of 2.4 percent. 
As a result, check revenues are expected to be 

[[Page 56594]]
approximately $10 million lower than the Reserve Banks' original 
projections. Second, although the Reserve Banks took steps to reduce 
production costs, those steps were largely offset by a net increase in 
other expenses of $5.2 million. This increase is due to a $12.4 million 
pre-tax reduction in pension credits, which increased expenses, offset 
by a $7.2 million reduction in the FDIC insurance assessment. As a 
result, several Reserve Banks implemented selective price increases 
during the year to address the revenue shortfall. On a volume-weighted 
average basis, forward collection and return check fees were increased 
by about 1.5 percent and about 9.5 percent, respectively, since January 
1995.
    In addition, the Federal Reserve Bank of Chicago opened a new check 
processing facility in Peoria, Illinois in September, which is expected 
to contribute to processing efficiency over the long run.
    3. 1996 Issues--As in 1995, the Reserve Banks will be challenged by 
the changes occurring in the check processing environment. In 
particular, the evolution to interstate banking is likely to lead to 
significant changes in the interbank check collection market. To ensure 
that the Reserve Banks will be able to provide efficient, fairly priced 
check services and to contribute to improving the efficiency of the 
payments system, the Banks will (1) emphasize the use of electronic 
check products that increase the efficiency of the check collection 
process, (2) introduce a set of consistent national products, and (3) 
continue to pursue operational efficiencies.
    To encourage the use of electronics, the Reserve Banks will 
continue to promote electronic check presentment (ECP) products. In 
addition, by year-end 1996, all Reserve offices will offer electronic 
cash letter (ECL) deposit products. These products reduce Reserve Bank 
operating costs by reducing manual processing. As a result, the Reserve 
Banks will offer ECL deposit products at lower per-item fees or later 
deposit deadlines than traditional check deposit products. The Reserve 
Banks believe that widespread use of ECL and ECP products ultimately 
will reduce the costs incurred in transporting and handling paper 
checks and, thus, will reduce the total costs of the check collection 
system.
    To address the needs of multi-district depository institutions, the 
Reserve Banks will implement a set of national core check products. The 
core products will have identical features and names, although fees for 
the products will be set at the local office level to reflect the 
difference in the Reserve Banks' cost structures. In addition, Reserve 
Banks are expanding the use of tiered prices to ensure that fees take 
into consideration the cost of collecting checks drawn on various 
paying institutions, adding low-priced group sort products to provide 
depositing institutions increased options for reducing check collection 
costs, and improving deposit deadlines to improve funds availability.
    Several Reserve Banks are also introducing digital image technology 
into their commercial check operations and offering image-enhanced 
check products to payor banks. The use of image technology has the 
potential to reduce Reserve Banks' operating costs and increase the 
acceptance of ECP and check truncation.
    Total check service operating costs plus imputed expenses are 
projected to increase by $12.4 million, or 2.3 percent above estimated 
1995 expenses. Total check collection volume is expected to decline by 
1.1 percent in 1996. The Reserve Banks project an increase of 
approximately 0.7 percent in processed volume, a decrease of 9.5 
percent in fine sort volume, and a decrease of 1.1 percent in return 
item volume.
    4. 1996 Fees--The check fees approved by the Board reflect more 
accurately the fixed and variable costs of providing check services. In 
addition, the fees reflect the Reserve Banks' continued efforts to 
encourage the use of electronics to improve the efficiency of the check 
collection mechanism.
    Overall, 1996 fees for forward collection products will increase by 
about 1.8 percent on a volume-weighted average basis, compared with 
current prices.4 The most significant increases are in processed 
cash-letter and fine sort per-item fees, which are increasing 10.6 
percent and 5.9 percent, respectively. Forward processed per-item fee 
increases are modest. Of the 2,166 forward collection and fine sort 
fees, about 69 percent will remain unchanged, 22 percent will increase, 
5 percent will be for new products, and 4 percent will be reduced. 
About 125 fees that were in place in 1995 will be discontinued.

    \4\ Selected price increases were implemented during 1995. 
Combining the Reserve Banks' recommended price changes for January 
1996 with the price increases that were implemented since January 
1995, the volume-weighted average increase in fees for forward 
collection products is approximately 3 percent.
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    Compared with current prices, the volume-weighted average increase 
in fees for return item products will increase approximately 4.0 
percent.5 Of the 1,442 return item fees, 63 percent will remain 
unchanged, 34 percent will increase, 2 percent will be for new 
products, and 1 percent will decline. About 76 fees that were in place 
in 1995 will be discontinued. No changes in the fees for the 
Interdistrict Transportation Service (ITS) are recommended.

    \5\ Combining the Reserve Banks' recommended price changes for 
January 1996 with the price increases that were implemented since 
January 1995, the volume-weighted average increase in return fees is 
about 14 percent.
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    Table 3 highlights selected 1995 and 1996 check fees.

                                          Table 3.--Selected Check Fees                                         
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               Products                          1995 price ranges                    1996 price ranges         
----------------------------------------------------------------------------------------------------------------
Items:                                               (per item)                           (per item)            
    Forward processed                                                                                           
        City..........................  $0.003 to 0.049....................  $0.003 to 0.080                    
        Regional Check Procesing        0.003 to 0.069.....................  0.003 to 0.079                     
         Center (RCPC).                                                                                         
    Fine Sort                                                                                                   
        City..........................  0.002 to 0.012.....................  0.003 to 0.012                     
        RCPC..........................  0.002 to 0.017.....................  0.002 to 0.017                     
    Qualified return items                                                                                      
        City..........................  0.100 to 0.740.....................  0.100 to 1.110                     
        RCPC..........................  0.120 to 1.040.....................  0.120 to 1.560                     
    Raw return items                                                                                            
        City..........................  0.580 to 2.180.....................  0.580 to 4.000                     
        RCPC..........................  0.800 to 2.180.....................  0.900 to 4.000                     

[[Page 56595]]
                                                                                                                
Cash letters:                                    (per cash letter)                    (per cash letter)         
    Forward processed.................  $1.50 to 8.00......................  $1.50 to 9.00                      
    Forward fine-sort package.........  2.50 to 11.00......................  2.50 to 11.00                      
    Return items: raw and qualified...  1.50 to 8.00.......................  1.50 to 8.00                       
----------------------------------------------------------------------------------------------------------------


    Payor bank service revenue is expected to grow by approximately 22 
percent in 1996, primarily due to more widespread acceptance of the 
Reserve Banks' electronic presentment and image-enhanced check 
products.
    The Reserve Banks project that the check service will recover 100 
percent of total costs, including $5.6 million in automation 
consolidation special project costs and targeted ROE. Approximately 
$10.9 million in automation consolidation special project costs will be 
deferred and financed for recovery in future years.
    While most Reserve Banks' plans for 1996 are conservative, several 
Reserve Banks have adopted fairly aggressive pricing and product 
development strategies and plan significant operational changes aimed 
at improving efficiency and reducing costs. Because of the 
aggressiveness of some plans, the Board believes that there are risks 
in achieving the Reserve Banks' aggregate volume projections, in 
particular. Because additional steps could be taken during 1996 to 
reduce operating costs if volume projections were not met, the Board 
approved the 1996 check fees proposed by the Reserve Banks.
    E. Automated Clearing House (ACH)--Table 4 presents the actual 
1994, estimated 1995, and projected 1996 cost recovery performance for 
the commercial ACH service.

                                                  Table 4.--ACH Pro Forma Cost and Revenue Performance                                                  
                                                                      [$ millions]                                                                      
                                                                                                                                                        
                                                                                                                                              8 Special 
                                                               2 Operating   3 Special                                           7 Recovery    project  
                                                                costs and     project      4 Total       5 Net       6 Target    rate after     costs   
                      Year                         1 Revenue     imputed       costs       expenses      income        ROE       Target ROE    deferred 
                                                                 expenses    recovered                   (ROE)                   (percent)       and    
                                                                                                                                               financed 
                                                                                               [2+3]        [1-4]                 [1/(4+6)]             
--------------------------------------------------------------------------------------------------------------------------------------------------------
1994............................................         66.9         64.6          0.0         64.6          2.3          3.4         98.3         19.6
1995 (Est)......................................         74.7         66.3          4.0         70.2          4.5          3.1        101.9         21.5
1996 (Bud)......................................         78.9         66.0          9.2         75.2          3.6          3.6        100.0         17.3

    1. 1994 Performance--Revenues from the ACH service recovered 98.3 
percent of total expenses, including targeted ROE, during 1994. The 
factors contributing to the net revenue shortfall included the costs 
associated with the transition to FRAS and Fednet and the expenses 
associated with the development of the new Fed ACH application 
software. Commercial ACH volume increased by 16.8 percent over the 1993 
volume level.
    2. 1995 Performance--Through August 1995, the ACH service recovered 
103.2 percent of total expenses, including automation consolidation 
special project costs and targeted ROE, compared with the targeted 1995 
recovery rate of 100.0 percent. The higher cost recovery rate is due 
primarily to a higher than expected commercial volume growth rate. 
Year-to-date commercial ACH volume increased 18.4 percent over the 1994 
level, compared with the projected 1995 increase of 12.9 percent. The 
Reserve Banks now project net income of $4.5 million, compared with the 
$3.1 million budgeted for 1995. Commercial ACH volume is expected to 
increase 17.5 percent over the 1994 level.
    3. 1996 Issues--During 1996, the Reserve Banks plan to complete 
implementation of the Fed ACH application software, which was developed 
over the last several years. Because no Reserve Banks had completed 
their transition to Fed ACH when the 1996 budgets were prepared, there 
is some uncertainty about the ongoing costs of operating the new 
software in the FRAS automation environment. The projected commercial 
volume growth rate of 17.5 percent may be aggressive in light of the 
continuing consolidation in the banking industry. The Reserve Banks 
believe, however, that their marketing efforts with the National 
Automated Clearing House Association have the potential to spur volume 
growth.
    4. 1996 Fees--The ACH service is capital intensive and demonstrates 
increasing returns to scale over wide volume ranges. As a result, the 
volume growth realized over the last several years has resulted in 
declining per-item processing costs. The Board anticipates that per-
item costs will decline further after all ACH processing is 
consolidated, following the implementation of Fed ACH. The Board has 
approved several modifications to the current ACH fees for 1996. These 
modifications are shown in table 5.

                                 Table 5                                
------------------------------------------------------------------------
                                                                Fees as 
                                                     Current       of   
                   Fee category                        fees     January 
                                                                  1996  
------------------------------------------------------------------------
Interdistrict Items...............................     $0.014     $0.012
Presorted Items...................................     $0.012     $0.010
Interdistrict Addenda.............................     $0.005     $0.004
Account Servicing Fee.............................     $20.00     $25.00
Nonautomated Services.............................     $10.00     $15.00
------------------------------------------------------------------------

    As table 5 indicates, the Board has approved per-item fees 
reductions for unsorted and presorted interdistrict transactions of 
$0.002. In addition, the interdistrict fee for addenda items, which 
provide supplementary payment-related data, will be reduced by $0.001, 
eliminating the differential between local and interdistrict addenda 
items. Because of the high fixed costs 

[[Page 56596]]
associated with providing the ACH service, the Board has approved an 
increase of $5.00 per month in the account servicing fee. Finally, the 
Board has approved a $5.00 increase in the fees for paper return items 
and notifications of change (NOC), government paper NOCs, telephone 
return items, and telephone advices to reflect the labor intensive 
nature of processing, and to provide an incentive for depository 
institutions to automate these processes.
    After the Reserve Banks have fully implemented Fed ACH, they plan 
to propose further reductions in per-item fees and to offer a number of 
new products, including products designed to assist receiving 
institutions, as well as products designed to permit high-volume 
originating institutions to obtain lower fees by sorting transactions 
before transmitting them to the Federal Reserve. The Board anticipates 
that it will be requested to approve additional fee reductions and 
service enhancements in mid-1996.
    Based on the fee schedule proposed by the Reserve Banks, they are 
projecting that the ACH service will recover 100.0 percent of costs, 
including $9.2 in automation consolidation special project costs and 
targeted ROE. Approximately $17.3 million in automation consolidation 
special project costs will continue to be deferred and financed for 
recovery in future years. The Board has approved the 1996 fees proposed 
by the Reserve Banks.
    F. Funds Transfer and Net Settlement--Table 6 presents the actual 
1994, estimated 1995, and projected 1996 cost recovery performance for 
the funds transfer and net settlement service.

                                             Table 6.--Funds Transfer Pro Forma Cost and Revenue Performance                                            
                                                                  [Dollars in millions]                                                                 
                                                                                                                                                        
                                                                                                                                              8  Special
                                                                    2        3  Special                                         7  Recovery    project  
                                                                Operating     project      4  Total      5  Net     6  Target    rate after     costs   
                      Year                         1  Revenue   costs and      costs       expense       income        ROE       target ROE    deferred 
                                                                 imputed     recovered                   (ROE)                   (percent)       and    
                                                                 expenses                                                                      financed 
                                                  ...........  ...........  ...........        [2+3]        [1-4]  ...........    [1/(4+6)]             
--------------------------------------------------------------------------------------------------------------------------------------------------------
1994............................................         91.6         79.1          7.1         86.2          5.4          3.8        101.7          2.1
1995 (Est)......................................         89.0         73.2          9.7         82.9          6.1          3.4        103.1          0.0
1996 (Bud)......................................         90.5         71.8          9.3         81.1          9.4          3.8        106.6          0.0

    1. 1994 Performance--For 1994, the funds transfer and net 
settlement service recovered 101.7 percent of total expenses, including 
automation consolidation special project costs and targeted ROE. The 
net revenue surplus was largely due to lower data communications and 
accounting overhead costs. Funds transfer volume increased 3.4 percent 
over the 1993 volume level.
    2. 1995 Performance--Through August 1995, the funds transfer and 
net settlement service recovered 99.2 percent of total expenses, 
including automation consolidation special project costs and targeted 
ROE, compared with the targeted 1995 recovery rate of 106.5 percent. 
The lower cost recovery rate is due in part to the lower than expected 
pension credit and delays in the conversion of several Reserve Banks to 
the centralized funds transfer application software. This conversion 
has now been completed. The Reserve Banks now project net income of 
$6.1 million, compared with the $8.2 million budgeted for 1995. Funds 
transfer volume is expected to increase 3.1 percent over the 1994 
volume level, which is consistent with the growth rate through August.
    3. 1996 Issues--The Reserve Banks expect continuing consolidation 
of the banking industry to affect funds transfer volume growth. For 
1996, an increase of 2.1 percent over the 1995 level is projected, 
which is somewhat lower than historical trends. The Reserve Banks 
project that operating costs will decline modestly, reflecting the full 
year effect of consolidated processing.
    4. 1996 Fees--Based on retaining the 1995 fee schedule, the Reserve 
Banks project that revenues will recover 106.6 percent of total 
expenses, including $9.3 million in automation consolidation special 
project costs and targeted ROE. Although the Reserve Banks' net income 
projection exceeds the targeted ROE by $5.6 million, lower than 
projected volume growth could reduce revenues significantly. The Board 
has approved retaining the 1995 funds transfer fees for 1996.
    G. Book-Entry Securities 6--Table 7 presents the actual 1994, 
estimated 1995, and projected 1996 cost recovery performance for the 
book-entry securities service.

    \6\ Includes Purchase and Sale Activity.

                                         Table 7.--Book-Entry Securities Pro Forma Cost and Revenue Performance                                         
                                                                [In millions of dollars]                                                                
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                              8 Special 
                                                               2 Operating   3 Special                                           7 Recovery    project  
                                                                costs and     project      4 Total       5 Net       6 Target    rate after     costs   
                      Year                         1 Revenue     imputed       costs       expense       income        ROE       target ROE    deferred 
                                                                 expenses    recovered                   (ROE)                   (percent)       and    
                                                                                                                                               financed 
                                                                                               [2+3]        [1-4]                 [1/(4+6)]             
--------------------------------------------------------------------------------------------------------------------------------------------------------
1994............................................         15.8         13.7          1.7         15.4          0.4          0.7         98.1          1.2
1995 (Est)......................................         15.8         14.2          0.9         15.1          0.7          0.7        100.1          2.5
1996 (Bud)......................................         15.8         13.6          1.4         15.0          0.7          0.8        100.0          4.5
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 56597]]


    1. 1994 Performance--Revenues from the book-entry securities 
service recovered 98.1 percent of total expenses, including automation 
consolidation special project costs and targeted ROE during 1994. Book-
entry securities transfer volume increased only 1.6 percent over 1993 
levels due to a sharp decline in trading activity associated with 
increasing mortgage interest rates in mid-1994.
    2. 1995 Performance--Through August 1995, the book-entry securities 
service recovered 99.3 percent of total expenses, including automation 
consolidation special project costs and targeted ROE, compared with the 
targeted 1995 recovery rate of 100.1 percent. During the same period, 
book-entry securities transfer volume decreased 4.2 percent compared 
with the 1994 level, reflecting the continuing decline in the volume of 
mortgage-backed securities activity. Although operating expenses are 
now expected to be slightly higher than originally projected, the 
Reserve Banks expect to achieve their targeted recovery rate for 1995. 
This projection is based on two factors. First, the volume of book-
entry securities transfers, which declined through mid-1995, has begun 
to increase over 1994 levels. The Reserve Banks now project a decrease 
in book-entry securities transfers of only 0.8 percent for the year. 
Second, the number of accounts maintained and securities issues held, 
as well as the volume of off-line transfers, are expected to be higher 
than budgeted.
    3. 1996 Issues--The Reserve Banks expect book-entry securities 
transfer volume to remain at approximately the 1995 level. Participants 
Trust Company (PTC) announced its intent to expand its mortgage-backed 
securities business to include securities issued by the Federal Home 
Loan Mortgage Corporation and the Federal National Mortgage 
Association. PTC, however, has not indicated when these securities will 
be included in their system. The Reserve Banks anticipate that the 
effect on 1996 volume will be minimal, but the effect on volume levels 
in the future could be substantial.
    The Reserve Banks plan to begin their conversion to the National 
Book-Entry System (NBES) in April 1996. Once the conversion is 
complete, the Reserve Banks expect to reduce data processing costs 
substantially. Unlike the current system, the NBES requires that 
securities held as collateral be held in separate securities accounts, 
rather than combined into one account. The Reserve Banks plan to 
analyze the effect of this change and recommend that the Board approve 
a modified fee in mid-1996.
    4. 1996 Fees--Although there are uncertainties with respect to 
volume projections beyond 1996, based on the approved fee schedule, the 
Reserve Banks project that the book-entry securities service will 
recover 100.0 percent of costs, including $1.4 million in automation 
consolidation special project costs and targeted ROE. The Board has 
approved retaining the 1995 book-entry securities fees for 1996.
    H. Electronic Connections--The Federal Reserve Banks charge fees 
for the electronic connections used by depository institutions to 
access priced services. The costs and revenues associated with 
electronic connections are allocated to the various priced services 
based on the relative number of connections that are used to access 
each service.
    In 1995, the Federal Reserve Board increased fees for several types 
of electronic connections due to the increasing costs of implementing 
Fednet. The Board also approved two new categories of electronic 
connections--(1) high-speed dedicated leased-line connections of 128 
kilobits per second (kbps) and 256 kbps and (2) standard dedicated and 
shared options to support contingency testing by depository 
institutions with dedicated leased-line connections.
     The Board has approved retaining the 1995 fees for electronic 
connections during 1996.
    I. Noncash Collection--Table 8 presents the actual 1994, estimated 
1995, and projected 1996 cost recovery performance for the noncash 
collection service.

                                           Table 8.--Noncash Collection Pro Forma Cost and Revenue Performance                                          
                                                                      [$ millions]                                                                      
                                                                                                                                                        
                                                                                                                                              8 Special 
                                                               2 Operating   3  Special                                         7  Recovery    project  
                                                                costs and     project      4  Total      5  Net     6  Target    rate after     costs   
                      Year                         1  Revenue    imputed       costs       expense       income        ROE       target ROE    deferred 
                                                                 expenses    recovered                   (ROE)                   (percent)       and    
                                                                                                                                               financed 
                                                                                               [2+3]        [1-4]                 [1/(4+6)]             
--------------------------------------------------------------------------------------------------------------------------------------------------------
1994............................................          4.1          4.9          0.0          4.9        (0.8)          0.2         80.1          0.2
1995 (Est)......................................          3.8          4.2          0.0          4.2        (0.4)          0.2         86.3          0.2
1996 (Bud)......................................          4.8          4.5          0.0          4.5          0.2          0.2        100.0          0.2

    1. 1994 Performance--Revenues from the noncash collection service 
recovered 80.1 percent of total expenses, including targeted ROE, in 
1994. The revenue shortfall is attributed to the costs associated with 
consolidating operations and a volume decline of approximately 37 
percent from 1993 levels.
    2. 1995 Performance--Through August 1995, the noncash collection 
service recovered 81.8 percent of total expenses including targeted 
ROE, compared with the targeted 1995 recovery rate of 91.4 percent. The 
volume of noncash collection items increased 12.2 percent, compared 
with the projected 1995 increase of 21.6 percent. A recovery rate of 
86.3 percent is now projected for 1995. The improvement compared with 
year-to-date performance reflects the Reserve Banks' projection of 
higher volume levels during the fourth quarter of 1995 because one of 
the major noncash collection service providers withdrew from the 
business in August. In addition, the consolidation of noncash 
collection operations at the Cleveland and Jacksonville offices was 
completed in July and should assist in controlling operating costs.
    3. 1996 Issues--The Reserve Banks are projecting an increase of 
22.5 percent in noncash collection volume for 1996. Several factors may 
affect 1996 volume growth. All of the major service providers 
discontinued providing noncash collection services during 1995. At the 
same time, several smaller entities continue to provide noncash 
collection services. In addition, the Depository Trust Company (DTC), 
the largest national securities depository, has proposed to collect 
municipal 

[[Page 56598]]
coupons on behalf of its participants. While some volume may shift to 
the Reserve Banks, the DTC's potential presence complicates forecasting 
1996 volume levels.
    Because of the changing environment, the Board believes that the 
Reserve Banks' presence in the business provides a degree of stability. 
In early 1996, the Reserve Banks plan to modify the geographical areas 
serviced by the two processing sites to increase processing efficiency 
and maintain high quality.
    4. 1996 Fees--The Reserve Banks proposed adoption of a national fee 
schedule for the noncash collection service. To standardize fees, the 
local and interregional coupon fees assessed by the Cleveland office 
will be increased by $0.50. In addition, to reflect more accurately the 
cost of collecting matured bonds, the bond collection fee will be 
increased from $40 to $50. Based on the proposed fee schedule, the 
Reserve Banks are projecting that the noncash collection service will 
recover 100.0 percent of total costs, including targeted ROE. The Board 
has approved the national fee schedule proposed by the Reserve Banks 
for the noncash collection service.
    J. Cash Services--Cash services provided 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.
    Table 9 presents actual 1994 performance, estimated 1995, and 
projected 1996 cost recovery performance for the priced cash services.

                                                  Table 9.--Cash Pro Forma Cost and Revenue Performance                                                 
                                                                      [$ millions]                                                                      
                                                                                                                                                        
                                                                                                                                              8 Special 
                                                               2 Operating   3 Special                                           7 Recovery    project  
                                                                costs and     project      4 Total       5 Net       6 Target    rate after     costs   
                      Year                         1 Revenue     imputed       costs       expense       income        ROE       target ROE    deferred 
                                                                 expenses    recovered                   (ROE)                   (percent)       and    
                                                                                                                                               financed 
                                                                                               [2+3]        [1-4]                 [1/(4+6)]             
--------------------------------------------------------------------------------------------------------------------------------------------------------
1994............................................          6.4          6.0          0.0          6.0          0.4          0.2        102.6          0.0
1995 (Est)......................................          5.2          5.1          0.0          5.1          0.1          0.1         99.5          0.0
1996 (Bud)......................................          6.7          6.3          0.0          6.3          0.4          0.2        102.2          0.0

    The Reserve Banks expect that 1996 revenues will recover all costs 
for cash services, including targeted ROE. Projected revenues and costs 
are higher for 1996 because the San Francisco District will begin to 
charge fees for access to cash services beyond the basic service level.

III. Competitive Impact Analysis

    All operational and legal changes considered by the Board that have 
a substantial effect on payment system participants are subject to the 
competitive impact analysis described in the March 1990 policy 
statement ``The Federal Reserve in the Payments System.'' In this 
analysis, 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 services 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 1996 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. 
Therefore, the Board believes that approval of the proposed fees would 
not 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]                
------------------------------------------------------------------------
                                 1996                  1995             
------------------------------------------------------------------------
Short-term assets:                                                      
    Imputed reserve                                                     
     requirement on clearing                                            
     balances...............   $  409.6              $  619.8           
    Investment in marketable                                            
     securities.............    3,686.7               5,577.9           
    Receivables \1\.........       64.4                  62.8           
    Materials and supplies                                              
     \1\....................        8.6                   5.7           
    Suspense & Difference                                               
     \1\....................        0.0                   0.1           
    Prepaid expenses \1\....       13.9                  16.1           
    Items in process of                                                 
     collection.............    2,413.2               2,592.5           
                             -----------           -----------          
      Total short-term                                                  
       assets...............  .........   $6,596.4  .........   $8,874.9
Long-term assets:                                                       
    Premises \1\ \2\........   $  346.4              $  337.7           
    Furniture and equipment                                             
     \1\....................      189.4                 187.8           
    Leasehold improvements                                              
     and long-term                                                      
     prepayments \1\........       14.6                  12.6           
    Capital leases..........        2.3                   3.8           
                             -----------           -----------          

[[Page 56599]]
                                                                        
      Total long-term assets  .........      552.7  .........      541.9
                                        -----------           ----------
      Total assets..........  .........   $7,149.1  .........   $9,416.8
                                        ===========           ==========
Short-term liabilities:                                                 
    Clearing balances and                                               
     balances arising from                                              
     early credit of                                                    
     uncollected items......   $4,096.3              $6,197.7           
    Deferred credit items...    2,413.2               2,592.5           
    Short-term debt \3\.....       86.8                  84.7           
                             -----------           -----------          
      Total short-term                                                  
       liabilities..........  .........   $6,596.3  .........   $8,874.9
Long-term liabilities:                                                  
    Obligations under                                                   
     capital leases.........     $  2.3                $  3.8           
    Long-term debt \3\......      182.7                 161.6           
                             -----------           -----------          
      Total long-term                                                   
       liabilities..........  .........      185.0  .........      165.4
                                        -----------           ----------
      Total liabilities.....  .........   $6,781.3  .........   $9,040.3
      Equity \3\............  .........      367.8  .........      376.5
                                        -----------           ----------
      Total liabilities and                                             
       equity...............  .........   $7,149.1  .........   $9,416.8
                                        ===========           ==========
------------------------------------------------------------------------
\1\ Financed through PSAF; other assets are self-financing.             
\2\ Includes allocations of Board of Governors' assets to priced        
  services of $0.5 million for 1996 and $0.4 million for 1995.          
\3\ Imputed figures represent the source of financing for certain priced
  services assets.                                                      
                                                                        
Note: Details may not add to totals due to rounding.                    



                 Table A-2.--Derivation of the 1996 PSAF                
                          [Millions of dollars]                         
------------------------------------------------------------------------
                                                                        
------------------------------------------------------------------------
A. Assets to be Financed: \1\                                           
    Short-term.....................     $86.9                           
    Long-term \2\..................     550.4                   $637.3  
                                    ------------                        
B. Weighted Average Cost:                                               
    1. Capital Structure \3\                                            
      Short-term Debt..............      13.6%                          
      Long-term Debt...............      28.7%                          
      Equity.......................      57.7%                          
    2. Financing Rates/Costs \3\                                        
      Short-term Debt..............       3.9%                          
      Long-term Debt...............       7.6%                          
      Pre-tax Equity \4\...........      14.2%                          
    3. Elements of Capital Costs                                        
      Short-term Debt..............     $86.9      x  3.9% =      $3.4  
      Long-term Debt...............     182.7      x  7.6% =      13.8  
      Equity.......................     367.8     x  14.2% =      52.3  
                                                             -----------
                                                                 $69.5  
C. Other Required PSAF Recoveries:                                      
    Sales Taxes....................     $11.3                           
    Federal Deposit Insurance                                           
     Assessment....................       2.2                           
    Board of Governors Expenses....       2.8                    $16.3  
                                                             -----------
D. Total PSAF Recoveries...........  ..........  ...........     $85.8  
                                    ------------             -----------
    As a percent of capital........  ..........  ...........      13.5% 
    As a percent of expenses \5\...  ..........  ...........      14.1% 
------------------------------------------------------------------------
\1\ Priced service asset base is based on the direct determination of   
  assets method.                                                        
\2\ Consists of total long-term assets, including the priced portion of 
  FRAS assets, less self financing capital leases.                      
\3\ All short-term assets are assumed to be financed by short-term debt.
  Of the total long-term assets, 33 percent are assumed to be financed  
  by long-term debt and 67 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  
  $610.3 million.                                                       


                                                                        

[[Page 56600]]
      Table A-3.--Comparison Between 1996 and 1995 PSAF Components      
------------------------------------------------------------------------
                                                      1996        1995  
------------------------------------------------------------------------
A. Assets to be Financed (millions of dollars):                         
    Short-term..................................     $86.9       $84.7  
    Long-term...................................     550.4       538.2  
                                                 -----------------------
      Total.....................................    $637.3      $622.9  
B. Cost of Capital:                                                     
    Short-term Debt Rate........................       3.9%        3.5% 
    Long-term Debt Rate.........................       7.6%        8.2% 
    Pre-tax Return on Equity....................      14.2%       12.1% 
    Weighted Average Long-term Cost of Capital..      12.0%       10.9% 
C. Tax Rate.....................................      29.9%       31.0% 
D. Capital Structure:                                                   
    Short-term Debt.............................      13.6%       15.4% 
    Long-term Debt..............................      28.7%       25.4% 
    Equity......................................      57.7%       59.2% 
E. Other Required PSAF Recoveries (millions of                          
 dollars):                                                              
    Sales Taxes.................................     $11.3       $11.3  
    Federal Deposit Insurance Assessment........       2.2        19.0  
    Board of Governors Expenses.................       2.8         2.7  
F. Total PSAF:                                                          
    Required Recovery...........................     $85.8       $94.7  
    As Percent of Capital.......................      13.5%       15.2% 
    As Percent of Expenses......................      14.1%       15.7% 
------------------------------------------------------------------------



  Table A-4--Computation of Capital Adequacy for Federal Reserve Priced 
                                Services                                
                          [millions of dollars]                         
------------------------------------------------------------------------
                                                       Risk     Weighted
                                          Assets      weight     assets 
------------------------------------------------------------------------
Imputed reserve requirement on                                          
 clearing balances....................    $409.6          0.0       $0.0
Investment in marketable securities...   3,686.7          0.0        0.0
Receivables...........................      64.4          0.2       12.9
Materials and supplies................       8.6          1.0        8.6
Suspense & Difference.................       0.0          0.2        0.0
Prepaid expenses......................      13.9          1.0       13.9
Items in process of collection........   2,413.2          0.2      482.6
Premises..............................     346.4          1.0      346.4
Furniture and equipment...............     189.4          1.0      189.4
Leases & long-term prepayments........      16.9          1.0       16.9
                                       ------------           ----------
      Total...........................  $7,149.1                $1,070.7
Imputed Equity for 1995...............    $367.8                        
Capital to Risk-Weighted Assets.......      34.4%                       
Capital to Total Assets...............       5.1%                       
------------------------------------------------------------------------

    By order of the Board of Governors of the Federal Reserve 
System, November 2, 1995.
William W. Wiles,
Secretary of the Board.
[FR Doc. 95-27631 Filed 11-8-95; 8:45 am]
BILLING CODE 6210-01-P