Federal Register, Volume 62 Issue 217 (Monday, November 10, 1997)

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

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FEDERAL RESERVE SYSTEM

[Docket No. R-0986]

Federal Reserve Bank Services

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice.

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

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

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

[[Page 60514]]

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

SUPPLEMENTARY INFORMATION:

I. Private Sector Adjustment Factor

A. Overview

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

B. Asset Base

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

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

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

D. Capital Adequacy

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

II. Priced Services

A. Overview

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

BILLING CODE 6210-01-P

[[Page 60515]]

[GRAPHIC] [TIFF OMITTED] TN10NO97.019

BILLING CODE 6210-01-C

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

[[Page 60516]]

Table 1.\5\--Pro Forma Cost and Revenue Performance (a)
[In millions of dollars]

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

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

[[Page 60517]]

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

B. Check

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

Table 3.--Check Pro Forma Cost and Revenue Performance
[$ millions]

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

[[Page 60518]]

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

Table 4.--Selected Check Fees
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Products 1997 price ranges 1998 price ranges
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Items: (per item) (per item)

Forward processed:
City......................... $0.003 to 0.080.............................. $0.002 to 0.080
RCPC......................... 0.004 to 0.090............................... 0.003 to 0.180
Fine sort:
City......................... 0.003 to 0.012............................... 0.002 to 0.013
RCPC......................... 0.003 to 0.017............................... 0.003 to 0.018
Qualified returned checks:
City......................... 0.065 to 1.110............................... 0.065 to 1.110
RCPC......................... 0.068 to 1.560............................... 0.068 to 1.560
Raw returned checks:
City......................... 0.580 to 4.000............................... 0.900 to 5.000
RCPC......................... 0.650 to 4.000............................... 0.900 to 5.000
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Cash letters: (per cash letter) (per cash letter)

Forward processed................ 1.50 to 9.00................................. 1.50 to 9.00
Forward fine-sort package........ 2.50 to 13.00................................ 3.00 to 14.00
Returned checks: raw and 1.50 to 7.00................................. 1.75 to 12.00
qualified.
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Payor bank services: Min Per item Min Per item

MICR information................. 5-30 0.001-0.0050........................... 5-30 0.001-0.0060
Electronic presentment........... 3-14 0.001-0.0045........................... 2-14 0.001-0.0045
Truncation....................... 3-25 0.010-0.0170........................... 2-25 0.004-0.0170
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Overall, 1998 fees for paper-based check products are expected to
increase by about 0.2 percent on a volume-weighted basis, compared with
January 1997 prices.\9\ Paper-based check products include both forward
and return check products and are expected to account for about 80
percent of total check service revenues in 1998.
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\9\ This volume-weighted fee increase includes an increase in
ITS fees of approximately 10.0 percent on weekday routes. The
Reserve Banks are continuing to investigate the possible
implementation of an alternative fee structure for the ITS.
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Fees for payor bank services will decline, on average, by 0.1
percent. These fees include the Reserve Banks' fees for electronic
check presentment and payor bank information products, as well as for
image products. Payor bank services revenue is expected to increase by
12.9 percent, however, primarily due to more widespread acceptance of
electronic check presentment and image-enhanced check products. It is
expected that payor bank services will account for about 10 percent of
the check service's total revenues in 1998. Other operating and imputed
revenues account for the remaining 10 percent of check service
revenues.
The Reserve Banks project that the check service will recover 100.5
percent of total costs in 1998, including targeted ROE and all of the
remaining $8.4 million in automation consolidation special project
costs. Total check service operating costs plus imputed expenses are
projected to increase by $6.5 million, or 1.1 percent above estimated
1997 expenses. Total check service revenues are expected to increase by
$15.9 million, or 2.6 percent above estimated 1997 revenues.
The Reserve Banks view the effect of interstate branch banking and
the growing competition in the interbank check collection market as
potential risk factors in their volume projections. Nevertheless,
despite this increasingly competitive market environment, the Reserve
Banks believe that their projected 1998 volume levels are attainable.

C. Automated Clearing House (ACH)

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

[[Page 60519]]

Table 5.--ACH Pro Forma Cost and Revenue Performance
[$ millions]
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8 Special
2 3 Special 7 project
Operating project 5 Net Recovery costs
Year 1 Revenue costs and costs 4 Total income 6 Target rate after deferred
imputed recovered expense (ROE) ROE target ROE and
expenses (percent) financed

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

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

As Table 6 indicates, the Reserve Banks will reduce origination
and receipt item fees by one mill, which will decrease the total fee
for each item by as much as 12.5 percent. In addition, the Reserve
Banks are reducing the fee for addenda records by one mill or one-
third. The reduction in the addenda record fee is intended to promote
the use of the ACH for financial electronic data interchange. Finally,
the telephone advice fee, which is assessed to customers seeking
settlement information about processed files, is being eliminated
because depository institutions are using other delivery mechanisms to
obtain this information.
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\10\ Small files contain less than 2,500 items; large files
contain 2,500 items or more.
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All customers, including customers of the private-sector ACH
operators, will benefit from the approved 1998 price changes. Based on
the 1998 volume projections, these changes will reduce fees to
depository institutions by $6.6 million, compared to the Federal
Reserve's current ACH fees.
During 1998, the Reserve Banks plan to explore options to reduce
fees further and to reduce paper processing. Board staff anticipates
that the Director of the Board's Division of Reserve Bank Operations
and Payment Systems, under delegated authority, will be requested to

[[Page 60520]]

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

D. Funds Transfer and Net Settlement

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

Table 7.--Funds Transfer Pro Forma Cost and Revenue Performance
[$ millions]

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

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

E. Book-Entry Securities \11\

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

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

[[Page 60521]]

Table 8.--Book-Entry Securities Pro Forma Cost and Revenue Performance
[$ millions]

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

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

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

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

F. Electronic Connections

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

G. Noncash Collection

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

[[Page 60522]]

Table 9.--Noncash Collection Pro Forma Cost and Revenue Performance
[$ millions]

8 Special
2 3 Special 7 project
Operating project 5 Net Recovery costs
Year 1 Revenue costs and costs 4 Total income 6 Target rate after deferred
imputed recovered expense (ROE) ROE target ROE and
expenses (percent) financed

[2+3] [1-4] [1/(4+6)]
--------------------------------------------------------------------------------------------------------------------------------------------------------
1996.................................................... 5.4 5.0 0.0 5.0 0.4 0.2 102.4 0.3
1997 (Est).............................................. 4.5 3.3 0.3 3.6 0.8 0.2 116.0 0.0
1998 (Bud).............................................. 3.4 2.5 0.0 2.5 0.9 0.2 125.9 0.0
--------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

H. Special Case Service

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

Table 10.--Cash Pro Forma Cost and Revenue Performance
[$ millions]

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

[[Page 60523]]

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

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

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

III. Competitive Impact Analysis

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

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

[[Page 60524]]

Total long-term liabilities......................... 185.1 ........... 181.2
------------- ------------
Total liabilities................................... ........... 10,699.2 ........... 8,276.9
Equity \3\.................................................. ........... 343.8 ........... 352.5
------------- ------------
Total liabilities and equity............................ ........... 11,043.0 ........... 8,629,4
============= ============

----------------------------------------------------------------------------------------------------------------
Note: Details may not add to totals due to rounding.
\1\ Financed through PSAF, other assets are self-financing.
\2\ Includes allocations of Board of Governors' assets to priced services of $0.5 million for 1998 and 1997.
\3\ Imputed figures represent the source of financing for certain priced services assets.

Table A-2.--Derivation of the 1998 PSAF
[Millions of dollars]
------------------------------------------------------------------------

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

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

[[Page 60525]]

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

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

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