[Federal Register Volume 61, Number 233 (Tuesday, December 3, 1996)]
[Notices]
[Pages 64087-64097]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-30705]


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FEDERAL RESERVE SYSTEM
[Docket No. R-0941]

Federal Reserve Bank Services; Notice
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 1997 of $101.5 million, as well as the fee schedules for 
Federal Reserve priced services and electronic connections. These 
actions were taken in accordance with the requirements of the Monetary 
Control Act of 1980, which requires that, over the long run, fees for 
Federal Reserve priced services be established on the basis of all 
direct and indirect costs, including the PSAF.

DATES: The PSAF and the fee schedules become effective on January 2, 
1997.

FOR FURTHER INFORMATION CONTACT: For questions regarding the private 
sector adjustment factor: Elizabeth Tacik, Accountant, (202/452-2303), 
Division of Reserve Bank Operations and Payment Systems; for questions 
regarding the fee schedules: Julius Weyman, Financial Services Analyst, 
Check Payments, (202/452- 5223), Scott Knudson, Senior Financial 
Services Analyst, ACH Payments, (202/452-3959), Darrell Mak, Financial 
Services Analyst, Funds Transfer and Book-Entry Securities Services, 
(202/452-3223), Anne Paulin, Senior Information Technology Analyst 
(electronic connections), (202/452-2560), Michael Bermudez, Financial 
Services Analyst, Noncash Collection Service, (202/452-2216), or Kate 
Connor, Senior Financial Services Analyst, Special Cash Services, (202/
452-3917), Division of Reserve Bank Operations and Payment Systems. For 
users of Telecommunications Device for the Deaf (TDD) only, please 
contact Dorothea Thompson (202/452-3544).
    Copies of the 1997 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 1997 PSAF for Federal Reserve priced 
services of $101.5 million. This amount represents an increase of $15.7 
million or 18.3 percent from the PSAF of $85.8 million targeted for 
1996.
    As required by the Monetary Control Act (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.
    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

[[Page 64088]]

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 taxes, expenses of the 
Board of Governors related to priced services, and an imputed FDIC 
insurance assessment on clearing balances held with the Federal Reserve 
to settle transactions.

B. Asset Base

    The estimated value of Federal Reserve assets to be used in 
providing priced services in 1997 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 $623.5 million. As shown in Table A-3, this 
represents a net decrease of $13.8 million or 2.2 percent from 1996. 
This decrease results from lower priced asset base levels at the 
Federal Reserve Automation Services (FRAS), slightly offset by an 
increase in the Reserve Banks' priced asset base due to building 
projects in three districts and increased long-term prepayments.

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 1997 and compares the 1997 rates 
with the rates used for developing the PSAF for 1996. The pre-tax 
return on equity rate increased from 14.2 percent in 1996 to 19.1 
percent for 1997. The increase is a result of stronger 1995 BHC 
financial performance included in the 1997 BHC model, which replaces 
the 1990 BHC financial performance in the 1996 BHC model.
    The decrease in the FDIC insurance assessment from $2.2 million in 
1996 to $2.0 million in 1997, as shown in Table A-3, is attributable to 
the impact of the new lower rate for deposit insurance. The FDIC rate 
for adequately capitalized institutions of $0.04 on every $100 in 
clearing balances was reduced to $0.03 in January 1996.

D. Capital Adequacy

    As shown on Table A-4, the amount of capital imputed for the 
proposed 1997 PSAF totals 32.6 percent of risk-weighted assets and 4.1 
percent of total assets. While the capital to risk-weighted asset ratio 
is well in excess of the 8 percent capital guideline for adequately 
capitalized state member banks and BHCs, the Federal Reserve is treated 
as an adequately capitalized bank for FDIC assessment purposes based on 
its capital to total asset ratio.

II. Priced Services

A. Overview

    Over the period 1986 through 1995, the Reserve Banks recovered 
100.1 percent of their total costs of providing priced services, 
including special project costs that were budgeted for recovery and 
targeted after-tax profit, i.e., ROE.1 2 Because the revenue from 
the Reserve Banks' priced services recovers imputed costs that are not 
actually incurred, the Federal Reserve's provision of priced services 
has consistently had a positive effect on the level of earnings 
transferred by the Federal Reserve to the Treasury. Over the past 10 
years, priced services revenue has exceeded operating costs by more 
than $872 million. This net revenue contributes to the amount 
transferred to the Treasury. Table 1 summarizes the cost and revenue 
performance for priced services since 1986.
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    \1\ The Monetary Control Act requires that, over the long run, 
the Federal Reserve set fees for priced services to recover all 
direct and indirect costs of providing the services plus imputed 
costs, such as taxes that would have been paid and the return on 
capital that would have been earned had the services been provided 
by a private business firm. The targeted ROE is the budgeted after-
tax profit that the Federal Reserve would have earned, as required 
by law, had it been a private business firm. The targeted ROE is 
derived from the BHC model based on consolidated financial data for 
each of the last five years.
    \2\ 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, offsets 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 100.7 percent of the expenses incurred in 
providing priced services, including targeted ROE, from 1986 through 
1995.
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    During 1994 and 1995, the Reserve Banks did not fully recover their 
targeted ROE due primarily to declining check volumes resulting from 
the new same-day settlement rule. In response to declining volumes, the 
Reserve Banks adjusted the resources devoted to the check service and 
increased prices selectively. In 1996, the Reserve Banks estimate that 
priced services revenue will yield an after-tax net income of $55.6 
million, compared with a targeted return on equity of $36.6 million. 
The 1996 recovery rate is estimated to be 102.4 percent of the costs of 
providing priced services, including imputed expenses, automation 
consolidation special project costs budgeted for recovery, and targeted 
ROE.3 Approximately $26.8 million in automation consolidation 
special project costs will be recovered in 1996, leaving $30.8 million 
in accumulated costs to be financed and recovered in future 
years.4
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    \3\ Through August 1996, the Reserve Banks recovered 103.2 
percent of total priced services expenses, including automation 
consolidation special project costs and targeted ROE.
    \4\ Under an existing Board policy, the Reserve Banks may defer 
and finance development costs if the development costs would have a 
material effect on unit costs, provided that a conservative time 
period is set for full cost recovery and a financing factor is 
applied to the deferred portion of development costs. The 1996 and 
1997 financing rates are 12.0 and 15.1 percent, respectively, which 
are the weighted-average imputed costs of the Federal Reserve's 
long-term debt and equity. This methodology is similar to the 
approach a private firm would use in financing such costs. Starting 
in 1992, the Reserve Banks deferred and financed special project 
costs for automation consolidation that were associated with 
employee retention and severance and excess mainframe computer 
capacity. Each priced service is expected to recover fully its 
portion of these deferred expenses and accumulated finance charges 
within five years after that service has completed its transition to 
the consolidated automation environment. Most services have been 
able to recover these expenses more quickly than the five-year 
deadline.
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    The variation from the Reserve Banks' original budget is 
attributable to two factors. First, volumes have been higher than 
expected in the funds transfer, book-entry securities transfer, and 
noncash collection services, resulting in higher net revenue. Second, 
costs have been lower than budgeted in the funds transfer and automated 
clearing house (ACH) services, largely due to efficiency gains from 
automation consolidation.5
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    \5\ The Reserve Banks have substantially completed the transfer 
of mainframe computer operations to the System's consolidated data 
centers, managed by the Federal Reserve Automation Services (FRAS) 
and also have completed significant milestones in the centralization 
of certain key software applications, such as ACH, Fedwire funds 
transfers, and the Integrated Accounting System.
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    In 1997, the Reserve Banks project to recover 100.5 percent of 
total expenses, including special project costs and targeted ROE. The 
proposed 1997 fees for priced services will yield a projected net 
income of $49.8 million for the year, compared with a targeted ROE of 
$45.8 million. Approximately $27.7 million of automation consolidation 
special project expenses will be recovered, leaving an accumulated 
balance of special project costs of $22.0 million to be recovered in 
future years. The Reserve Banks have indicated that the most 
significant risk associated with the proposed fee schedules is the 
uncertainty of 1997 volume estimates given the current competitive 
environment and the effects of interstate branch banking.
    Overall, prices across all services are projected to decline by 
approximately

[[Page 64089]]

3.4 percent in 1997, reflecting increases in paper-based check product 
prices and selected electronic access fees, price reductions for ACH, 
Fedwire funds transfers, and selected electronic check products, and 
stable prices for the book-entry securities transfer and noncash 
collection services.6
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    \6\ This estimate is based on a chained Fisher Ideal price 
index. This index was not adjusted for quality changes in Federal 
Reserve priced services. Because the index was not adjusted for 
quality and due to data deficiencies in certain electronic services, 
the index may overstate the price effects of paper-based services. 
Generally, processing costs (and hence prices) have risen in 
services that are paper-based, such as check collection, but have 
declined in those services that are mostly electronic, such as ACH, 
funds transfer, and check payor bank services.
    \7\ Calculations on this table and subsequent pro forma cost and 
revenue tables may be affected by rounding.

                                                 Table 1. \7\--Pro Forma Cost and Revenue Performance a                                                 
                                                                      [$ millions]                                                                      
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                                                               2 Operating                                                       7 Recovery   8 Special 
                                                                 costs &     3 Special     4 Total       5 Net                   rate after    project  
                      Year                        1 Revenue b    imputed      project      expense     income ROE    6 Target    target ROE     costs   
                                                                expenses c     costs        [2+3]        [1-4]        ROE e      (percent)    deferred &
                                                                            recovered d                                          [1/(4+6)]    financed f
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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............................................        765.2        724.0         19.8        743.8         21.4         31.5         98.7         36.3
1996 (Est)......................................        810.4        728.0         26.8        754.8         55.6         36.6        102.4         30.8
1997 (Bud)......................................        813.9        736.4         27.7        764.1         49.8         45.8        100.5        22.0 
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a The revenues and expenses for 1986 through 1993 include the definitive securities 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 premiums, 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 research and development expenses for evaluating a different computer processing platform for electronic payments from  
  1988 through 1990, check image project costs from 1988 through 1993, and automation consolidation costs from 1992 through 1997.                       
e Targeted ROE is based on the ROE included in the private sector adjustment factor and has been adjusted for taxes, which are included in column 2.    
  Targeted ROE has not been adjusted to reflect automation consolidation special project costs deferred and financed.                                   
f Totals are cumulative and include financing costs.                                                                                                    

    B. Check--Table 2 presents the actual 1995, estimated 1996, and 
projected 1997 cost recovery performance for the check service.

                                                 Table 2.--Check Pro Forma Cost and Revenue Performance                                                 
                                                                      ($ millions)                                                                      
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                                                                                                                                              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      [2+3]      (ROE)  [1-                (percent)       and    
                                                                 expenses                                  4]                    [1/(4+6)]     financed 
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1995............................................        574.0        558.9          5.3        564.2          9.8         24.0         97.6         12.4
1996 (Est)......................................        605.1        569.7          6.5        576.2         28.9         28.0        100.1         10.4
1997 (Bud)......................................        616.7        572.9          7.5        580.4         36.3         35.3        100.2          7.4
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1. 1995 Performance
    The check service recovered 97.6 percent of total expenses in 1995, 
including targeted ROE. The volume of checks collected decreased 5.3 
percent from 1994 levels, as volume losses associated with bank 
consolidations and the implementation of the same-day settlement 
regulation continued. In 1995, however, volume losses were less 
substantial than the double-digit losses that accompanied the 
introduction of the same-day settlement regulation in 1994. Return item 
volume increased 3.8 percent in 1995 compared to 1994 levels.
2. 1996 Performance
    Through August 1996, the check service recovered 101.2 percent of 
total expenses, including automation consolidation special projects 
costs budgeted for recovery and targeted ROE. The Reserve Banks 
estimate that they will recover 100.1 percent of their costs for the 
full year, compared with the targeted 1996 recovery rate of 100.0 
percent. Check collection volumes appear to be stabilizing compared to 
the relatively significant volume losses in 1994 and 1995. The Reserve 
Banks now project that the volume of checks collected during 1996 will 
decline by 0.4 percent from 1995 levels, reflecting a 1.6 percent 
increase in processed volume and a 9.1 percent decrease in

[[Page 64090]]

fine sort volume. Return item volume is estimated to increase by 2.9 
percent.
3. 1997 Issues
    The total number of interbank checks will likely continue to 
decline as banks merge when interstate branch banking becomes effective 
nationwide in June 1997 and as banks continue to consolidate their 
payment processing operations. In addition, other service providers in 
the interbank check processing market are expected to compete 
aggressively for check collection and returned check volume. The 
Reserve Banks project modest volume increases in 1997 despite the 
challenges posed by this environment. Total forward check collection 
volume is expected to increase by 0.7 percent in 1997, reflecting a 
projected increase of 1.9 percent in processed volume and a decrease of 
5.5 percent in fine sort volume. Returned check volume is expected to 
increase 0.4 percent.
    The Reserve Banks continue to take steps to improve the efficiency 
of their check processing operations. For example, on October 15, the 
Federal Reserve Bank of New York closed its Regional Check Processing 
Center in Jericho, New York, and consolidated those operations at its 
East Rutherford (New Jersey) Operations Center. In addition, the New 
York Bank is centralizing the processing of adjustments at its Utica, 
New York, Regional Check Processing Center. In addition, on October 27, 
the System's Interdistrict Transportation Service (ITS) moved one of 
its five airport hubs from Teterboro, New Jersey, to Philadelphia, 
Pennsylvania. This move allows for improvements in deposit deadlines 
and funds availability for many depositors.
    The Reserve Banks will continue to promote electronic check 
products that are designed to increase operating efficiency and improve 
the speed of the check collection system. For example, Reserve Banks 
are expanding the range of deposit products that use electronic cash 
letters (ECL). The expanded use of these deposit products is expected 
to improve the efficiency of the Reserve Banks' operations and may 
ultimately contribute to efficiencies in paying banks' operations by 
reducing rejects and minimizing adjustments.
    The Reserve Banks also are expanding their image-enhanced check 
products, which have the potential to increase the use of electronic 
check presentment and to reduce the risks associated with it. At 
present, 19 Reserve Bank offices offer image-enhanced products; in 
1997, 34 Reserve Bank offices plan to offer these products.
    Total check service operating costs plus imputed expenses are 
projected to increase by $3.2 million, or 0.6 percent above estimated 
1996 expenses.
4. 1997 Fees
    The Reserve Banks are continuing the steps taken over the last 
several years to set check fees to reflect more accurately the fixed 
and variable costs associated with providing check services. The 1997 
fees and product offerings are intended to encourage the use of 
electronics and to improve the efficiency of the check collection 
mechanism. Table 3 summarizes key check service fees.

                      Table 3.--Selected Check Fees                     
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          Products              1996 price ranges     1997 price ranges 
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Items:                             (per item)             (per item)    
    Forward processed:                                                  
        City................  $0.003 to 0.080.....  $0.003 to 0.080.    
        RCPC................  $0.003 to 0.079.....  $0.004 to 0.090.    
    Fine sort:                                                          
        City................  $0.003 to 0.012.....  $0.003 to 0.012.    
        RCPC................  $0.002 to 0.017.....  $0.003 to 0.017.    
    Qualified return items:                                             
        City................  $0.100 to 1.110.....  $0.160 to 1.110.    
        RCPC................  $0.120 to 1.560.....  $0.017 to 1.560.    
    Raw return items:                                                   
        City................  $0.580 to 4.000.....  $0.580 to 4.000.    
        RCPC................  $0.900 to 4.000.....  $0.650 to 4.000.    
Cash letters:                   (per cash letter)     (per cash letter) 
    Forward processed.......  $1.500 to 9.000.....  $1.500 to 9.000.    
    Forward fine-sort         $2.500 to 11.000....  $2.500 to 13.000.   
     package.                                                           
    Return items: raw and     $1.500 to 8.000.....  $1.500 to 7.000.    
     qualified.                                                         
Payor bank services:          Min      Per item...  Min      Per item   
    MICR information........  $5-$30  $0.001-0.005  $5-$30  $0.001-0.005
                               0.                    0.                 
    Electronic presentment..  $3-$14  $0.001-0.004  $3-$14  $0.001-0.004
                               5.                    5.                 
    Truncation..............  $3-$25  $0.010-0.017  $3-$25  $0.010-0.017
                               0.                    0.                 
------------------------------------------------------------------------

    Overall, 1997 fees for forward collection products will increase by 
about 1.8 percent on a volume-weighted basis, compared with January 
1996 prices. For returned check products, the increase is 2.6 percent. 
The most significant increases are in fine sort fees, which are 
increasing by 7.8 percent.
    Fees for electronic check services will decline or remain stable. 
These fees include per-item fees for the Reserve Banks' electronic 
check presentment and payor bank information products as well as for 
ECL products. On average, the fees assessed for deposits made with a 
matching ECL file will result in per-item charges that are $0.002 less 
than the same deposit received without an accompanying ECL file. This 
price differential reflects the potential efficiencies from processing 
checks in conjunction with ECL data. Payor bank services revenue is 
expected to increase by 13.9 percent, primarily due to more widespread 
acceptance of electronic check presentment and image-enhanced check 
products.
    For the first time since 1993, the Reserve Banks will change some 
ITS fees. For 1997, ITS fees will increase about 11 percent on a 
volume-weighted basis. The price changes are designed to reflect more 
accurately the cost of servicing certain low-volume and remote routes. 
Fees for 12 percent of the routes, representing 47 percent of the check 
volume carried on ITS, will remain unchanged. The Reserve Banks are 
investigating, for possible implementation during 1997, alternative fee 
structures for the ITS.

[[Page 64091]]

    The Reserve Banks project that the check service will recover 100.2 
percent of total costs in 1997, including targeted ROE and $7.5 million 
in automation consolidation special project costs. Approximately $7.4 
million in accumulated automation consolidation special project costs 
will be deferred and financed for recovery in future years.
    The Reserve Banks continue to take steps to control costs, and 
their volume projections for 1997 are relatively conservative. It is 
difficult, however, to project the effect of interstate branch banking 
on the Reserve Banks' check service. The Board believes that steps 
could be taken during 1997 to reduce operating costs if volume 
projections were not realized. The Board approved the proposed 1997 
check service fees, including ITS fees, and the deposit deadlines.

C. Automated Clearing House (ACH)

    Table 4 presents the actual 1995, estimated 1996, and projected 
1997 cost recovery performance for the commercial ACH service.

                                                  Table 4.--ACH Pro Forma Cost and Revenue Performance                                                  
                                                                      [$ millions]                                                                      
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                                                                    2                                                           7  Recovery   8  special
                                                                Operating    3  Special    4  Total      5  Net                  rate after    project  
                      Year                         1  Revenue    costs &      project      expense       income     6  Target    target ROE     costs   
                                                                 imputed       costs        [2+3]      (ROE)  [1-      ROE       (percent)    deferred &
                                                                 expenses    recovered                     4]                    [1/(4+6)]     financed 
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1995............................................         75.6         66.6          4.0         70.6          5.0          3.1        102.6         21.3
1996 (Est)......................................         79.8         63.6          9.2         72.8          7.0          3.6        104.5         16.7
1997 (Bud)......................................         75.4         59.9         11.1         71.0          4.3          4.0        100.5         10.8
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1. 1995 Performance
    Revenues from the ACH service recovered 102.6 percent of total 
expenses, including automation consolidation special project costs and 
targeted ROE, during 1995. The overrecovery was due primarily to 
higher-than-expected growth in commercial ACH volume. Commercial volume 
increased 17.8 percent, compared to a projected growth rate of 12.9 
percent. As a result, total ACH revenue was 6.7 percent above target.
2. 1996 Performance
    Through August 1996, the ACH service recovered 104.6 percent of 
total expenses, including automation consolidation special project 
costs budgeted for recovery and targeted ROE. The Reserve Banks 
estimate that they will recover 104.5 percent of their costs for the 
full year, compared with the targeted 1996 recovery rate of 100.0 
percent. This overrecovery is attributable primarily to lower-than-
expected data processing costs resulting from the efficiencies realized 
with the new Fed ACH application software. The conversion to Fed ACH 
began in late 1995 and was completed in August 1996.
    On October 1, the Reserve Banks implemented a number of changes to 
their ACH fees and products, which were approved under delegated 
authority by the Director of the Board's Division of Reserve Bank 
Operations and Payment Systems. The changes included combining the 
interregional and intraregional fee into one basic fee of $0.01 per 
item, representing a 16.7 percent reduction from the former $0.012 
interregional fee; reducing the presort deposit fee by 10 percent to 
0.9 cent from 1.0 cent; and eliminating the interregional and presort 
deposit deadlines, as well as one local deposit deadline. The reduction 
in fees is expected to result in substantial savings to the banking 
industry, and the changes in the deadlines will provide originators of 
ACH transactions an additional one to one and one-half hours of 
processing time.
    Through August, commercial ACH volume has increased 16.1 percent 
over the 1995 level. For the full year, the Reserve Banks expect 
commercial volume to increase 15.2 percent, compared to the 17.5 
percent increase originally projected. The revised projection reflects 
the effect of consolidation in the banking industry and some increased 
use of private-sector processors.
3. 1997 Issues
    1997 will be the first full year that all Reserve Banks operate in 
the Fed ACH environment. The projected reduction in ACH operating costs 
reflects the expected cost savings that should be realized from 
centralized processing. Beginning in January 1997, several new features 
will be made available to depository institutions, including additional 
file delivery options and automated trace and research request 
capabilities. The projected volume growth rate of 18.5 percent is very 
aggressive in light of 1996 volume estimates. The Reserve Banks 
believe, however, that Federal Reserve and industry marketing efforts 
will spur commercial ACH volume growth. Moreover, the recent 
requirement that most federal government payments be made 
electronically by January 1999 may indirectly increase commercial ACH 
volume.8
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    \8\ The Debt Collection Improvement Act of 1996 mandates the use 
of electronic funds transfers for federal government payments to 
recipients who become eligible after July 26, 1996. The Act also 
mandates that all federal government payments, with limited 
exceptions, be made electronically after January 1, 1999.
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4. 1997 Fees
    The new Fed ACH processing environment is expected to enable the 
Federal Reserve to realize significant operating efficiencies. The 
Board has approved several fee reductions effective January 1997. These 
changes support the System's strategic direction of moving from a 
paper-based to an electronic payments system and recognize the 
technological and operational changes implemented during the past year.

                                 Table 5                                
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                                                          Proposed 1997 
            Fee category                Current fee            fee      
------------------------------------------------------------------------
Premium surcharge..................  $0.01              $0.005          
Addenda fee........................  0.004              0.003           
Discrete/commingled file fee.......  10.00              Eliminate.      
------------------------------------------------------------------------

    As Table 5 indicates, the Reserve Banks will reduce the premium 
surcharge by 50 percent on items deposited after 8:00 p.m. Eastern 
Time. Reducing the premium cycle surcharge recognizes the improvements 
made in the Federal Reserve's processing of ACH transactions that 
reduce operational and

[[Page 64092]]

float risk. The Reserve Banks will continue to review originating 
institutions' deposit patterns to determine whether the current premium 
deposit deadline can be extended. In addition, the Reserve Banks will 
reduce the fee for addenda records by $0.001, or 25 percent. The 
reduction in the addenda record fee is intended to promote the use of 
electronic payments for financial electronic data interchange 
applications. Finally, the Reserve Banks will eliminate the monthly 
discrete/commingled file receipt fee. The discrete/commingled file fee, 
which is charged to receiving points that receive multiple files 
segregated by routing number, is being eliminated because of the new 
delivery features that are available in Fed ACH.
    In addition to the above changes, the Reserve Banks plan to propose 
a new fee schedule during 1997 that fully reflects the efficiencies of 
the Fed ACH processing environment.
    To determine the nature and extent of the expected efficiencies, 
the Reserve Banks are studying their processing costs in the new 
environment. It is anticipated that, under delegated authority, the 
Director of the Board's Division of Reserve Bank Operations and Payment 
Systems will be requested to approve a new ACH fee schedule by mid-
1997.
    The Reserve Banks project that the ACH service will recover 100.5 
percent of its 1997 costs, including $11.1 million in automation 
consolidation special project costs and targeted ROE. Approximately 
$10.8 million in automation consolidation special project costs will 
continue to be deferred and financed for recovery in future years.

D. Funds Transfer and Net Settlement

    Table 6 presents the actual 1995, estimated 1996, and projected 
1997 cost recovery performance for the funds transfer and net 
settlement service.

                                   Table 6.--Funds Transfer and Net Settlement Pro Forma Cost and Revenue Performance                                   
                                                                      [$ millions]                                                                      
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                    2                                                           7  Recovery   8  Special
                                                                Operating    3  Special    4  Total      5  Net                  rate after    project  
                      Year                         1  Revenue    costs &      project      expense       Income     6  Target    target ROE     costs   
                                                                 imputed       costs        [2+3]      (ROE)  [1-      ROE       (percent)   deferred  &
                                                                 expenses    recovered                     4]                    [1/(4+6)]     financed 
--------------------------------------------------------------------------------------------------------------------------------------------------------
1995............................................         90.6         74.1          9.7         83.8          6.8          3.4        103.8          0.0
1996 (Est)......................................         97.3         69.6          9.3         78.8         18.5          3.8        117.7          0.3
1997 (Bud)......................................         95.2         80.2          7.4         87.6          7.6          5.1        102.7          0.0
--------------------------------------------------------------------------------------------------------------------------------------------------------

1. 1995 Performance
    For 1995, the funds transfer and net settlement service recovered 
103.8 percent of total expenses, including automation consolidation 
special project costs and targeted ROE. Basic funds transfer 
origination volume increased 5.6 percent over the 1994 level, resulting 
in higher revenues.
2. 1996 Performance
    Through August 1996, the funds transfer and net settlement service 
recovered 117.9 percent of total expenses, including automation 
consolidation special project costs budgeted for recovery and targeted 
ROE. For full-year 1996, the Reserve Banks estimate that the funds 
transfer service will recover 117.7 percent of total expenses, compared 
to a targeted recovery rate of 106.0 percent. This difference is 
attributable to both lower-than-anticipated costs and higher-than-
anticipated revenue. The Reserve Banks estimate that operating costs 
will be lower than the original budget estimates due to lower-than-
budgeted allocations of local and national data communications costs. 
In addition, the Reserve Banks are beginning to realize the 
efficiencies from processing funds transfers in a centralized software 
environment.
    Total revenue is estimated to be $6.4 million (or 7.1 percent) over 
the original budget, due to higher-than-expected on-line funds transfer 
volume. Basic origination volume growth is estimated to be 8.3 percent 
in 1996 compared to original budget projections of 2.1 percent. The 
higher volume has been attributed to sharply increased mutual fund 
activity, aggressive marketing of cash management services by 
depository institutions to their customers, and, to a lesser extent, 
increased mortgage activity and securities-related settlement payments 
(the latter due to the market's move to a T+3 settlement cycle and 
same-day funds settlement on securities trades).
3. 1997 Issues
    The Reserve Banks expect funds transfer origination volume to 
increase 5.3 percent over 1996 estimated levels. This projected growth 
rate is lower than the 1996 estimated growth rate but slightly above 
the ten-year historical average annual growth rate of 5.0 percent. 
Uncertainties in achieving the projected volume growth include the 
effects of increased bank mergers and consolidations as interstate 
branch banking takes effect in 1997 and the level of mutual fund and 
cash management activity in 1997.
    Operating costs also are anticipated to increase in 1997 due 
primarily to two changes to the Reserve Banks' cost accounting 
methodology that become effective in 1997.\9\ Partially offsetting this 
increase is a projected decline in data processing costs due to the 
conversion of the New York Reserve Bank's funds transfer application to 
the consolidated FRAS environment in spring 1997.
---------------------------------------------------------------------------

    \9\ The Reserve Banks have modified their methodology for 
allocating FRAS data processing and data communications (DP/DC) 
costs to provide more incentives for the efficient use of DP/DC 
resources, and for allocating certain joint overhead costs to 
recognize that these costs are not closely related to particular 
services. These cost accounting changes are consistent with general 
industry practices.
---------------------------------------------------------------------------

4. 1997 Fees
    Despite projected increased costs in 1997, the benefits of 
automation consolidation combined with strong volume growth will enable 
the Reserve Banks to reduce the basic funds transfer fee by 10 percent 
from $0.50 to $0.45. All other funds transfer and net settlement fees 
will remain unchanged. The Reserve Banks project that revenues will 
recover 102.7 percent of total funds transfer expenses, including 
targeted ROE and all allocated automation consolidation special project 
costs.

E. Book-Entry Securities \10\

    Table 7 presents the actual 1995, estimated 1996, and projected 
1997 cost

[[Page 64093]]

recovery performance for the book-entry securities service.\11\
---------------------------------------------------------------------------

    \10\ Includes Purchase and Sale Activity.
    \11\ The Reserve Banks provide securities transfer services for 
securities issued by the U.S. Treasury, federal government agencies, 
government sponsored enterprises, and certain international 
institutions. The priced component of this service, reflected in 
this memorandum, consists of the revenues, expenses, and volumes 
associated with the transfer of all non-Treasury securities. For 
Treasury securities, the Reserve Banks act as fiscal agents and the 
Treasury Department assesses fees for those transfer services.

                                         Table 7.--Book-Entry Securities Pro Forma Cost and Revenue Performance                                         
                                                                      [$ millions]                                                                      
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                    2                                                           7  Recovery   8  Special
                                                                Operating    3  Special                  5  Net                  rate after    project  
                      Year                         1  Revenue    costs &      project      4  Total      income     6  Target    target ROE     costs   
                                                                 imputed       costs       expense       (ROE)         ROE       (percent)    deferred &
                                                                 expenses    recovered                                           [1/(4+6)]     financed 
--------------------------------------------------------------------------------------------------------------------------------------------------------
1995............................................         15.9         14.6          0.9         15.5          0.4          0.7         97.8          2.4
1996 (Est)......................................         16.9         14.3          1.7         16.0          0.9          0.8        100.7          3.2
1997 (Bud)......................................         16.7         14.4          1.5         15.8          0.9          0.9        100.1          3.8
--------------------------------------------------------------------------------------------------------------------------------------------------------

1. 1995 Performance
    The book-entry securities service recovered 97.8 percent of total 
expenses in 1995, including automation consolidation special project 
costs budgeted for recovery and targeted ROE. Origination volume 
declined 0.3 percent from the 1994 level, compared to a budgeted 
increase of 3.1 percent. Total costs were over budget due to higher-
than-expected data communication costs as a result of increased circuit 
expenses and lower-than-expected savings from reductions in local data 
processing operations.
2. 1996 Performance
    Through August 1996, the book-entry securities service recovered 
100.6 percent of total expenses, including automation consolidation 
special project costs and targeted ROE. For the full-year 1996, the 
Reserve Banks estimate that revenues will recover 100.7 percent of 
total costs compared to a budgeted recovery rate of 100.0 percent. 
Total revenue is expected to be $1.1 million higher than budget due 
primarily to higher-than-anticipated growth in on-line origination 
volume. Volume in 1996 is estimated to grow 9.7 percent, compared to a 
budgeted decline of 0.4 percent. This unexpected growth partially 
reflects the one-time movement of securities associated with mergers 
and higher-than-expected mortgage-backed securities activity.
3. 1997 Issues
    The Reserve Banks expect book-entry securities transfer origination 
volume to decline 1.3 percent in 1997 from the 1996 estimated level. 
Participants Trust Company (PTC) expects to expand its mortgage-backed 
securities business by mid-1997 to include Fedwire-eligible securities 
issued by the Federal Home Loan Mortgage Corporation and the Federal 
National Mortgage Association. In addition, Reserve Banks may face 
potential volume reductions resulting from bank mergers and 
consolidations as interstate branch banking takes effect in 1997. The 
Board believes that there is some risk in achieving the volume levels 
projected by the Reserve Banks because of uncertainties regarding the 
extent to which Reserve Banks' mortgage-backed securities transfer 
volume will move to PTC's new service.
4. 1997 Fees
    The Reserve Banks will maintain 1997 book-entry securities fees at 
the 1996 level. The Reserve Banks project that the book-entry 
securities service will recover 100.1 percent of costs, including 
targeted ROE and $1.5 million in automation consolidation special 
project costs.

F. Electronic Connections

    The Reserve Banks charge fees for the electronic connections used 
by depository institutions to access priced services and allocate the 
cost and revenue associated with electronic access to the various 
priced services. The Reserve Banks will retain the current monthly fees 
for electronic access for all connection types in 1997 without 
modification but increase the fees for installation and training.
    Currently, the Reserve Banks assess an installation and training 
fee of $300 for new Fedline customers and a $300 fee for the 
installation of new computer-interface connections. These fees have not 
changed since 1986. The current fees assessed for customer training and 
installation do not reflect fully the costs of these activities, 
particularly for computer-interface customers.
    In 1997, the Reserve Banks will charge separate fees for 
installation and training activities. Compared to the current combined 
installation and training fee of $300, the Reserve Banks will assess a 
fee of $150 for the training of new Fedline customers and a fee of $300 
for Fedline installations; the $150 fee for retraining is unchanged. In 
addition, the Reserve Banks will increase the one-time computer-
interface installation fee from $300 to $800.

G. Noncash Collection

    Table 8 presents the actual 1995, estimated 1996, and projected 
1997 cost recovery performance for the noncash collection service.

[[Page 64094]]



                                           Table 8.--Noncash Collection Pro Forma Cost and Revenue Performance                                          
                                                                      [$ millions]                                                                      
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                    2                                                           7  Recovery   8  Special
                                                                Operating    3  Special    4  Total      5  Net                  rate after    project  
                      Year                         1  Revenue    costs &      project      expense       income     6  Target    target ROE     costs   
                                                                 imputed       costs        [2+3]      (ROE)  [1-      ROE       (percent)    deferred &
                                                                 expenses    recovered                     4]                    [1/(4+6)]     financed 
--------------------------------------------------------------------------------------------------------------------------------------------------------
1995............................................          4.0          4.5          0.0          4.5        (0.5)          0.2         84.7          0.3
1996 (Est)......................................          5.6          5.2          0.0          5.2          0.4          0.2        103.0          0.3
1997 (Bud)......................................          4.5          3.8          0.3          4.1          0.3          0.2        102.8          0.0
--------------------------------------------------------------------------------------------------------------------------------------------------------

1. 1995 Performance
    The noncash collection service recovered 84.7 percent of total 
expenses, including targeted ROE, in 1995. Volume increased 23.2 
percent compared to an original budgeted growth rate of 16.6 percent. 
The cost recovery shortfall was attributed to transition costs 
associated with consolidation of the Federal Reserve's noncash 
collection service at two processing sites--the Cleveland Reserve Bank 
and the Jacksonville Branch of the Federal Reserve Bank of Atlanta.
2. 1996 Performance
    Through August 1996, the noncash collection service recovered 103.3 
percent of total expenses, including targeted ROE. For the year, 
Reserve Banks now estimate that the noncash collection service will 
recover 103.0 percent of total expenses, including targeted ROE, 
compared with the targeted full-year recovery rate of 100.0 percent. 
Noncash collection volume is expected to continue its long-term 
contraction.12 The Reserve Banks estimate that 1996 volume will be 
less than 24 percent of the peak volume processed in 1985. Due to this 
declining demand, most national providers have withdrawn from providing 
noncash collection services. As a result, the Reserve Banks estimate 
that volume will increase 31.8 percent in 1996, compared to the 
budgeted increase of 22.5 percent. The combined effect of higher than 
budgeted volume, fee increases, and cost containment efforts account 
for the better-than-anticipated cost recovery.
---------------------------------------------------------------------------

    \12\ The Tax Equity and Fiscal Responsibility Act of 1982 
(TEFRA) imposed a tax disadvantage to the holding of bearer 
securities, which has resulted in the virtual elimination of new 
issues. Following the enactment of TEFRA, many bearer municipal 
securities were ``immobilized'' in depositories, such as DTC, 
further reducing the demand for noncash collection services.
---------------------------------------------------------------------------

3. 1997 Issues
    The Depository Trust Company (DTC) has recently entered the noncash 
collection business. The Reserve Banks believe that DTC's entrance into 
this service will not materially affect the Reserve Banks' 1997 noncash 
volume, since DTC's noncash collection service is limited to its 
participants. For 1997, the Reserve Banks project a 19.6 percent volume 
decline from the 1996 estimated volume.
4. 1997 Fees
    The current fees will be retained in 1997. At these fee levels, the 
Reserve Banks project a cost recovery of 102.8 percent for 1997.

H. Special Cash Services

    Priced special cash services represent a very small portion 
(approximately 2 percent) of overall cash services provided by the 
Reserve Banks to depository institutions. Special cash services include 
cash transportation, coin wrapping, nonstandard packaging of currency 
orders and deposits, and nonstandard frequency of access to cash 
services.
    Table 9 presents the actual 1995, estimated 1996, and projected 
1997 cost recovery performance for special cash services.

                                                  Table 9.--Cash Pro Forma Cost and Revenue Performance                                                 
                                                                      [$ millions]                                                                      
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                    2                                                           7  Recovery   8  Special
                                                                Operating    3  Special    4  Total      5  Net                  rate after    project  
                      Year                         1  Revenue    costs &      project      expense       income     6  Target    target ROE     costs   
                                                                 imputed       costs        [2+3]      (ROE)  [1-      ROE       (percent)    deferred &
                                                                 expenses    recovered                     4]                    [1/(4+6)]     financed 
--------------------------------------------------------------------------------------------------------------------------------------------------------
1995............................................          5.2          5.2          0.0          5.2          0.0          0.1         97.7          0.0
1996 (Est)......................................          5.7          5.7          0.0          5.7          0.0          0.2         96.9          0.0
1997 (Bud)......................................          5.5          5.2          0.0          5.2          0.4          0.3        102.1          0.0
--------------------------------------------------------------------------------------------------------------------------------------------------------

1. 1995 Performance
    The special cash services recovered 97.7 percent of total expenses, 
including targeted ROE, in 1995.
2. 1996 Performance
    Through August 1996, the special cash services recovered 98.1 
percent of total expenses, including targeted ROE. For full-year 1996, 
the Reserve Banks estimate that special cash services will recover 96.9 
percent of total expenses, compared to a targeted recovery rate of 
102.2 percent. Costs were higher than budgeted and priced volumes were 
lower than budgeted in certain offices. In March 1996, the Director of 
the Board's Division of Reserve Bank Operations and Payment Systems, 
under delegated authority from the Board, approved a proposal from the 
Federal Reserve Bank of San Francisco to charge fees for access to cash 
services beyond the basic service level.13 Estimated

[[Page 64095]]

revenues are lower than budgeted for 1996 because of lower-than-
anticipated volume levels in the San Francisco District.
---------------------------------------------------------------------------

    \13\ In April 1996, the Board approved a new cash access policy 
for the Federal Reserve Banks that becomes effective on May 1, 1998. 
The policy provides for a base level of free currency access to all 
depository institutions, but restricts the number of offices served 
and the frequency of access. Depository institutions that meet 
minimum volume thresholds will be able to obtain more frequent free 
access. Additional access, beyond the free level, will be priced.
---------------------------------------------------------------------------

3. 1997 Fees
    For 1997, the Reserve Banks project that special cash services will 
recover 102.1 percent of costs, including targeted ROE. Several Reserve 
Banks will increase fees for wrapped coin.

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 will not have a direct and material adverse effect on the 
ability of other service providers to compete with the Reserve Banks in 
providing similar services. The 1997 fees proposed by the Reserve Banks 
result in a projected return on equity that meets the targeted return 
on equity, based on the 50 bank holding company model. Over the long 
term, the Reserve Banks have recovered their total costs of providing 
priced services, including imputed costs and targeted return on equity. 
Other service providers have pricing flexibility that is equal to, or 
greater than, that used by the Reserve Banks.

  Table A-1--Comparison of Pro Forma Balance Sheets for Federal Reserve 
                             Priced Services                            
                 [Millions of dollars--average for year]                
------------------------------------------------------------------------
                                                    1997         1996   
------------------------------------------------------------------------
Short-term assets:                                                      
    Imputed reserve requirement on clearing                             
     balances.................................       $545.7        409.6
    Investment in marketable securities.......      4,911.3      3,686.7
    Receivables \1\...........................         64.3         64.4
    Materials and supplies \1\................         11.6          8.6
    Suspense & Difference \1\.................          0.0          0.0
    Prepaid expenses \1\......................         14.6         13.9
    Items in process of collection............      2,548.2      2,413.2
                                               -------------------------
        Total short-term assets...............      8,095.7      6,596.4
                                               -------------------------
Long-term assets:                                                       
    Premises \1\ \2\..........................        348.0        346.4
    Furniture and equipment \1\...............        167.0        189.4
    Leasehold improvements and long-term                                
     prepayments \1\..........................         18.0         14.6
    Capital leases............................          0.7          2.3
                                               -------------------------
        Total long-term assets................        533.7        552.7
                                               =========================
        Total assets..........................      8,629.4      7,149.1
                                               =========================
Short-term liabilities:                                                 
    Clearing balances and balances arising                              
     from early credit of uncollected items...      5,457.0      4,096.3
    Deferred credit items.....................      2,548.2      2,413.2
    Short-term debt \3\.......................         90.5         86.8
                                               -------------------------
        Total short-term liabilities..........      8,095.7      6,596.3
                                               -------------------------
Long-term liabilities:                                                  
    Obligations under capital leases..........          0.7          2.3
    Long-term debt \3\........................        180.5        182.7
                                               -------------------------
        Total long-term liabilities...........        181.2        185.0
                                               -------------------------
        Total liabilities.....................      8,276.9      6,781.3
                                               -------------------------
Equity \3\....................................        352.5        367.8
                                               -------------------------
    Total liabilities and equity..............      8,629.4      7,149.1
------------------------------------------------------------------------
\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 1997 and $0.5 million for 1996.          
\3\ Imputed figures represent the source of financing for certain priced
  services assets.                                                      
                                                                        
Note: Details may not add to totals due to rounding.                    


[[Page 64096]]


                                     Table A-2--Derivation of the 1997 PSAF                                     
                                              [Millions of dollars]                                             
A. Assets to be Financed: \1\                                                                                   
    Short-term.........................................................                                    $90.5
    Long-term \2\......................................................                                    533.0
                                                                        ----------------------------------------
      Total............................................................                                   $623.5
                                                                        ========================================
B. Weighted Average Cost:                                                                                       
  1. Capital Structure: \3\                                                                                     
    Short-term Debt....................................................                                    14.5%
    Long-term Debt.....................................................                                    28.9%
    Equity.............................................................                                    56.5%
  2. Financing Rates/Costs: \3\                                                                                 
    Short-term Debt....................................................                                     5.2%
    Long-term Debt.....................................................                                     7.1%
    Pre-tax Equity \4\.................................................                                    19.1%
  3. Elements of Capital Costs:                                                                                 
    Short-term Debt....................................................                        $90.5 x 5.2%=$4.7
    Long-term Debt.....................................................                        180.5 x 7.1%=12.8
    Equity.............................................................                       352.5 x 19.1%=67.5
                                                                        ----------------------------------------
      Total............................................................                                     85.0
                                                                        ========================================
C. Other Required PSAF Recoveries:                                                                              
    Sales Taxes........................................................                                    $11.6
    Federal Deposit Insurance Assessment...............................                                      2.0
    Board of Governors Expenses........................................                                      2.9
                                                                        ----------------------------------------
        Total..........................................................                                    $16.5
                                                                        ========================================
D. Total PSAF Recoveries...............................................                                   $101.5
    As a percent of capital............................................                                    16.3%
    As a percent of expenses \5\.......................................                                    16.6%
----------------------------------------------------------------------------------------------------------------
\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 1997 budgeted priced service expenses less shipping are $613.1 million.                          


      Table A-3.--Comparison Between 1997 and 1996 PSAF Components      
------------------------------------------------------------------------
                                                       1997       1996  
------------------------------------------------------------------------
A. Assets to be Financed (millions of dollars):                         
    Short-term....................................    $90.5      $86.9  
    Long-term.....................................    533.0      550.4  
                                                   ---------------------
      Total.......................................   $623.5     $637.3  
                                                   ---------------------
B. Cost of Capital:                                                     
    Short-term Debt Rate..........................      5.2%       3.9% 
    Long-term Debt Rate...........................      7.1%       7.6% 
    Pre-tax Return on Equity......................     19.1%      14.2% 
     Weighted Average Long-term Cost of Capital...     15.1%      12.0% 
C. Tax Rate.......................................     32.1%      29.9% 
D. Capital Structure:                                                   
    Short-term Debt...............................     14.5%      13.6% 
    Long-term Debt................................     29.0%      28.7% 
    Equity........................................     56.5%      57.7% 
E. Other Required PSAF Recoveries (millions of                          
 dollars):                                                              
    Sales Taxes...................................    $11.6      $11.3  
    Federal Deposit Insurance Assessment..........      2.0        2.2  
    Board of Governors Expenses...................      2.9        2.8  
F. Total PSAF:                                                          
    Required Recovery.............................   $101.5      $85.8  
    As Percent of Capital.........................     16.3%      13.5% 
    As Percent of Expenses........................     16.6%      14.1% 
------------------------------------------------------------------------


                 Table A-4.--Computation of Capital Adequacy for Federal Reserve Priced Services                
                                              [Millions of dollars]                                             
----------------------------------------------------------------------------------------------------------------
                                                                                                       Weighted 
                                                                              Assets    Risk weight     assets  
----------------------------------------------------------------------------------------------------------------
Imputed reserve requirement on clearing balances.........................       $545.7          0.0         $0.0
Investment in marketable securities......................................      4,911.3          0.0          0.0
Receivables..............................................................         64.3          0.2         12.9
Materials and supplies...................................................         11.6          1.0         11.6

[[Page 64097]]

                                                                                                                
Suspense & Difference....................................................          0.0          0.2          0.0
Prepaid expenses.........................................................         14.6          1.0         14.6
Items in process of collection...........................................      2,548.2          0.2        509.6
Premises.................................................................        348.0          1.0        348.0
Furniture and equipment..................................................        167.0          1.0        167.0
Leases & long-term prepayments...........................................         18.7          1.0         18.7
                                                                          -------------             ------------
    Total................................................................     $8,629.5  ...........      1,082.4
                                                                          -------------             ------------
Imputed Equity for 1996..................................................       $352.5  ...........  ...........
Capital to Risk-Weighted Assets (percent)................................         32.6  ...........  ...........
Capital to Total Assets (percent)........................................          4.1  ...........  ...........
----------------------------------------------------------------------------------------------------------------

    By order of the Board of Governors of the Federal Reserve 
System.

    Dated: November 26, 1996.
William W. Wiles,
Secretary of the Board.
[FR Doc. 96-30705 Filed 12-2-96; 8:45 am]
BILLING CODE 6210-01-P