[Federal Register Volume 66, Number 216 (Wednesday, November 7, 2001)]
[Notices]
[Pages 56310-56329]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-27779]


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FEDERAL RESERVE SYSTEM

[Docket No. R-1115]


Federal Reserve Bank Services

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice.

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SUMMARY: The Board has approved the fee schedules for Federal Reserve 
priced services and electronic connections and a private-sector 
adjustment factor (PSAF) for 2002 of $150.1 million. 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 new fee schedules become effective January 2, 2002.

FOR FURTHER INFORMATION CONTACT: For questions regarding the fee 
schedules: Cynthia Yablon, Financial Services Analyst, Wholesale 
Payments, (202/452-2046); Joseph Baressi, Financial Services Analyst, 
ACH Payments, (202/452-3959); Gina Sellitto, Senior Financial Services 
Analyst, Funds Transfer, Book-Entry Securities, Noncash Collection 
Services, (202/728-5848); Marybeth Butkus, Senior Financial Services 
Analyst, Special Cash Services, (202/452-3917); or Wes Horn, 
Information Technology Project Leader (electronic connections), (202/
452-2756), Division of Reserve Bank Operations and Payment Systems. For 
questions regarding the PSAF: Brenda Richards, Senior Financial 
Analyst, (202/452-2753) or Gregory Evans, Manager, Financial 
Accounting, (202/452-3945), Division of Reserve Bank Operations and 
Payment Systems. For users of Telecommunications Device for the Deaf 
(TDD) only, please contact 202/263-4869. Copies of the 2002 fee 
schedules for the check service are available from the Board, the 
Reserve Banks, or the Federal Reserve Banks' financial services web 
site at www.frbservices.org.

SUPPLEMENTARY INFORMATION:

I. Priced Services

    A. Discussion--Over the period 1991 through 2000, the Reserve Banks 
recovered 100.8 percent of their total costs for providing priced 
services, including imputed expenses, special project costs budgeted 
for recovery, and targeted after-tax profits or return on equity 
(ROE).\1\
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    \1\ These imputed costs, such as 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, are referred to 
as the PSAF. The PSAF is based on consolidated financial data for 
the nation's fifty largest bank and financial holding companies for 
each of the last five years. The targeted ROE is the budgeted profit 
that the Federal Reserve would have earned had it been a private 
business firm. The ten-year recovery rate is based upon the pro 
forma income statement for Federal Reserve priced services published 
in the Board's Annual Report. Beginning in 2000, the PSAF included 
additional financing costs associated with pension assets 
attributable to priced services. This ten-year cost recovery amount 
has been retroactively computed as if these costs were not 
historically included in the PSAF calculations. If such costs were 
included in the calculations, the ten-year recovery rate would have 
been 99.5 percent.
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    Table 1 summarizes the actual, estimated, and budgeted cost and 
revenue performance and cost recovery rates for priced services for 
2000, 2001, and 2002 respectively. For 2001, the cost recovery rate is 
currently estimated to be 94.0 percent and for 2002, the cost recovery 
rate is targeted to be 96.2 percent. The aggregate cost recovery rates 
are heavily influenced by the performance of the check service, which 
accounts for approximately 83 percent of the total cost of priced 
services. The electronic services (FedACH, Fedwire funds transfer and 
net settlement, and Fedwire book-entry securities transfer) account for 
approximately 17 percent of costs, while the noncash collection and 
special cash services represent a de minimis percentage.

                                                  Table 1.--Pro Forma Cost and Revenue Performance \a\
                                                                [In millions of dollars]
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                                                                                                                                          Recovery rate
                                Year                                     Revenue       Total expense    Net income ROE     Target ROE      after target
                                                                                                            [1-2]                         ROE  [1/(2+4)]
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                                                                                 1 b            2 c,f                3              4 d                5
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2000...............................................................            922.8            818.2            104.6             98.4           100.7%
2001 (Estimate)....................................................            951.6            902.6             48.9            109.3            94.0%
2002 (Budget) e....................................................            955.9            900.9             55.1             92.5            96.2%
a Calculations on this table and subsequent pro forma cost and revenue tables may be affected by rounding.
b Includes net income on clearing balances (NICB).
c The calculation of total expense on this and subsequent pro forma cost and revenue tables includes operating expenses and imputed costs plus special
  project costs recovered during the year. Imputed costs include interest on debt, taxes, FDIC insurance, Board of Governors priced services expenses,
  and the cost of float. Credits for prepaid pension costs under FAS 87 are also included. In 2001, the check service estimates that it will incur $13.1
  million in special project costs related to the ongoing check modernization initiative. In 2002, the check service projects that it will incur $11.4
  million in special project costs related to check modernization.
d Targeted ROE is the pre-tax ROE included in the PSAF, adjusted for taxes. The taxes are included in column 2.

[[Page 56311]]

 
e Changes in the PSAF and NICB methodology for 2002 reduce both revenue and expenses. As a result, 2002 budgeted revenue is reduced by a loss on NICB of
  $18.1 million as compared to an NICB related revenue increase of $20.5 million included in the 2001 estimate. Total expenses include PSAF of $150.1
  million in the 2002 budget as compared with $206.9 million in the 2001 estimate.
f Corporate overhead costs are allocated to Reserve Bank activities on a dollar-ratio basis (based on their proportion of total Reserve Bank costs).
  Because corporate overhead costs are not closely related to any particular priced service, the priced-services portion of these costs is assigned
  among the individual services to facilitate the funding of significant multiyear strategic investments that would otherwise result in short-term price
  fluctuations, subject to established minimum and maximum amounts. In 2000, the assignment of corporate overhead costs to individual priced services
  supported the Reserve Banks' strategic check modernization project. In 2001 and 2002 the corporate overhead allocation among priced services is on a
  dollar-ratio basis. Table 1a below shows the assignment of corporate overhead costs for the years 2000-2002.


                                              Table 1a.--Corporate Overhead Allocations to Priced Services
                                                                [In millions of dollars]
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                                                                                            Funds                    Noncash      Special
                             Year                                 Check         ACH        transfer    Book-entry   collection      cash        Total
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2000 Actual..................................................         36.0          8.0          4.3          1.1          0.1          0.1         49.7
2001 (Estimate)..............................................         43.4          3.4          2.7          1.1          0.1          0.1         50.8
2002 (Budget)................................................         44.6          4.0          3.3          1.2          0.1          0.1         53.4
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    Table 2 presents an overview of the budgeted 2001, estimated 2001, 
and projected 2002 cost recovery performance by category of priced 
service.

                                     Table 2.--Priced Services Cost Recovery
                                                  [In percent]
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                        Priced service                           2001 Budget     2001 Estimate     2002 Budget
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All services.................................................             98.1         94.0 \4\             96.2
Check........................................................             97.6             93.3             95.4
ACH..........................................................            101.3            100.3            101.0
Funds transfer...............................................            101.2             98.3            100.8
Book-entry...................................................             95.6             87.1            100.2
Noncash collection...........................................            102.5            106.7             92.6
Special cash.................................................            100.5            104.4            103.8
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    1. 2001 Estimated Performance--In 2001, the Reserve Banks estimate 
that they will recover 94.0 percent of the costs of providing priced 
services, including imputed expenses, check modernization special 
project costs, and targeted ROE, compared with a targeted recovery rate 
of 98.1 percent.\2\ Through August 2001, the Reserve Banks recovered 
95.6 percent of total priced services expenses, including imputed 
expenses, check modernization special project costs, and targeted ROE. 
Although the estimated 2001 recovery rate is below 100 percent, the 
Reserve Banks estimate that they will fully recover actual and imputed 
expenses and earn net income of $48.9 million, $60.4 million less than 
the targeted ROE of $109.3 million. The 2001 shortfall from the 2001 
budget target is largely driven by three factors:
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    \2\ Includes float costs, but excludes higher net income on 
clearing balances, associated with the events of September 11.
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     Lower-than-expected performance in the check service is 
due to both lower revenue and higher expenses than budgeted. Check 
service revenues will be $9.8 million lower than budgeted due to lower 
volume growth than budgeted, customers shifting to the use of lower-
priced products, and implementation delays of two quality improvement 
products. Local check costs will be $10.5 million more than budgeted 
and national support costs allocated to check (excluding check 
modernization costs) will be $6.9 million more than budgeted; these 
increased expenses will be partly offset by lower-than-budgeted check 
modernization costs of $6.0 million.\3\ The Reserve Banks also incurred 
unbudgeted expenses associated with the September 11 terrorist attacks; 
these totaled approximately $19 million and are primarily float costs 
resulting from a policy decision to grant funds availability according 
to published schedules despite the delays in presenting checks due to 
the shutdown of air traffic. Other costs associated with the September 
11 event included expenses related to arrangements for ground 
transportation and overtime and related expenses.\4\
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    \3\ Check modernization is a multi-year initiative to 
standardize the processing of checks at all Reserve Banks, adopt a 
common platform for processing and researching check-adjustment 
cases, create a national system for archiving and retrieving check 
images, and deliver check services to depository institutions using 
web technology.
    \4\ Expenses associated with September 11 may be offset by 
increased NICB resulting from large excess clearing balances held 
during the September 11--21 period.
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     The 2001 estimated net income on clearing balances (NICB), 
an imputed income, is significantly lower than the budgeted amount.\5\ 
For the year, it was originally projected to be $40.7 million, but the 
estimate has been revised downward to $20.5 million. The decline is the 
result of a larger difference between the rate at which earnings 
credits are paid to depository institutions and the imputed earnings 
rate on clearing balances in 2001 than budgeted.
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    \5\ NICB consists of imputed net income on clearing balances, 
assuming investment of clearing balances in three-month Treasury 
bills, minus the cost of earnings credits granted to clearing 
balance holders at the federal funds rate.
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     The 2001 estimated pension credit, an offset to expenses, 
is lower than budgeted. It was budgeted at $117.1 million, but the 
estimate is $101.0 million. The decrease in the estimate is generally 
due to lower-than-anticipated return on pension plan assets in 2000.
    2. 2002 Projected Performance--For 2002, the Reserve Banks project 
that they will recover 96.2 percent of total priced services' expense, 
including imputed expenses and targeted ROE. The 2002 fees for priced 
services are projected to result in a net income of $55.1 million, 
compared with a targeted ROE of $92.5 million. Factors affecting

[[Page 56312]]

2002 cost recovery include the following:
     Net costs of $86.0 million associated with the check 
modernization project.
     Methodology changes reduce imputed income in NICB and 
reduce imputed expenses in PSAF.\6\
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    \6\ The methodology for computing PSAF was modified in October 
2001 to include the following changes beginning with the 2002 
calculation: clearing balances were made available to finance long-
term priced-service assets; equity was imputed to meet the FDIC 
definition of a well-capitalized institution; target return on 
equity was determined using the results of three economic models; 
and the peer group of the fifty largest bank and financial holding 
companies was selected based on total deposits, rather than assets.
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     In the 2002 budget, the pension credit is about $22 
million lower than in 2001 primarily due to the full amortization in 
2001 of the initial pension asset as required by generally accepted 
accounting principles. The amortization of the initial pension asset 
contributed $15 million a year to the pension credit from 1987 through 
2001.
    The primary risks to the 2002 projection are the check volume and 
revenue growth projections, the potential for cost overruns or delays 
in the check modernization projects, and potential further reductions 
to NICB and priced pension credits.\7\ Additional risks include 
possible volume declines in the ACH and Fedwire funds transfer services 
due to increased competition.\8\ Although the check service will not 
achieve full cost recovery in 2001 or 2002, the Reserve Banks believe 
that they will achieve full cost recovery of the check service over the 
long run by aggressively managing local and national costs, taking 
advantage of efficiencies gained from check modernization, and 
increasing value-added product revenue.
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    \7\ If forward-processed volume were unchanged from the 2001 
level, revenue would decline $9.9 million from the budgeted level; 
if forward-processed volume declined one percent below the 2001 
level, revenue would decline $15.5 million. Similarly, payor bank 
service revenues would decline by $1.7 million and $2.6 million, 
respectively. If returned check volume were unchanged from the 2001 
level, revenue would decline $0.8 million from the budgeted level; 
if return volume were one percent below the 2001 level, revenue 
would decline $2.2 million. Savings in operational costs and 
variable PSAF would partially offset such revenue losses.
    \8\ In July 2001, pursuant to previously negotiated agreements, 
the Reserve Banks and private-sector operators (PSOs) implemented 
new deposit deadlines for ACH transactions that they exchange with 
each other. On October 1, the Reserve Banks and the PSOs implemented 
a new fee structure for these interoperator transactions. The new 
deposit deadlines and interoperator fee structure were intended to 
enhance competition in the provision of ACH services, which is 
likely to result in volume shifts from the Reserve Banks to other 
ACH operators in 2002. Staff believes that the Reserve Banks' 
ability to successfully recover their ACH costs in 2002 as a result 
of such volume shifts may be challenging; however, the Reserve Banks 
believe that they will be able to recover costs over the long run. 
The competitor to the Fedwire funds transfer service, Clearing House 
Interbank Payments System (CHIPS), implemented an intraday finality 
mechanism for its service in January 2001. While there has been 
little movement of funds transfer volume from Fedwire to CHIPS to 
date, we understand that some high-volume funds transfer customers 
have decided to begin shifting substantial funds transfer volume to 
CHIPS. Fedwire funds transfer volume is expected to decline as 
customers that are also CHIPS participants move volume from Fedwire 
to CHIPS.
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    3. 2002 Pricing--The following summarizes the Reserve Banks' 
changes in fee structures and levels for priced services:

Check

     Fees for all check products are increasing 3.7 percent 
compared with current prices or 4.0 percent compared with January 2001 
fees. Per-item and cash-letter fees for forward-collection check 
products are also increasing at this rate.
     Overall prices for electronic products overall are 
increasing faster than prices for paper check processing because 
margins for electronic products are currently lower than for paper 
check products. The increases reflect a Reserve Bank strategy to price 
these products to more fully reflect their value to customers. 
Transaction fees for payor bank services, which include electronic 
check products, will increase 4.5 percent relative to both current 
prices and January 2001 fees.
     Aggregate check service fee increases in 2002 are expected 
to cost depository institution customers approximately $30 million, 
assuming no changes to current customer processing choices.
     Since 1996, the price index for check has increased more 
than 35 percent.

FedACH

     The Reserve Banks will retain current prices for customers 
of the FedACH service.\9\ The Reserve Banks anticipate a reduction in 
fees mid-year 2002 as a part of the overall strategy to meet 
competitive challenges.
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    \9\ The Reserve Banks modified their fee structure for 
transactions exchanged with PSOs October 1, 2001. Under the new fee 
structure, the Reserve Banks and PSOs will charge each other fees 
for interoperator transactions. Other price changes effective 
October 1 were a $0.0005 decrease in the per item origination fee 
for items deposited in large files; a $0.0020 decrease in the per 
item receipt fee for all items; a single, standard input file 
processing fee of $5.00 which represents a decrease of $1.75 for 
large-volume files and an increase of $3.25 for small-volume files; 
and a new $20.00 per month fee for FedACH settlement.
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     Since 1996, the price index for the ACH service has 
decreased almost 55 percent.

Fedwire Funds Transfer and Net Settlement

     The Reserve Banks will institute fee reductions to funds 
transfer customers in all tiers: tier 1--two cent decrease to $0.31 
(6.1 percent decrease); tier 2--two cent decrease to $0.22 (8.3 percent 
decrease); and tier 3--one-cent decrease to $0.15 (6.3 percent 
decrease).\10\
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    \10\ The Reserve Banks reduced the per transfer fee for tier 3 
customers by one-cent to $0.16 on August 1, 2001.
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     Funds transfer fee decreases in 2002 are expected to save 
depository institution customers approximately $3 million.
     A realignment of net settlement service prices is planned 
to more accurately reflect costs. The Reserve Banks will institute the 
following: decrease the settlement entry fee 15.8 percent to $0.80; 
increase the settlement file fee 16.7 percent to $14.00; increase the 
off-line settlement statement subject to surcharge 66.7 percent to $25; 
eliminate the fee for telephone notification; and decrease the daily 
settlement fee for large-dollar Fedwire-based settlement arrangements 
42.9 percent to $100, the same as the fee for small-dollar Fedwire-
based settlement arrangements.
     The price index for Fedwire funds transfers and net 
settlement has declined almost 55 percent since 1996.

Fedwire Book-Entry Securities

     The Reserve Banks will lower the following fees as a 
result of projected increases in volumes due to the addition of Ginnie 
Mae securities: decrease the on-line origination and receipt fees by 
$0.04 to $0.66 (5.7 percent decrease) and decrease the monthly account 
maintenance fee per issue per account by $0.04 to $0.41 (8.9 percent 
decrease).
     In the second half of 2002, the Reserve Banks plan to 
introduce a fee for a new feature of the service--automated claims 
adjustments related to failed securities transactions, interim 
accounting for securities with an accrual date different from the 
record date, and repurchase agreement tracking. The Reserve Banks will 
introduce a fee for the new product and will determine this fee once 
volume projections can be confirmed by actual experience. Initially, 
the Reserve Banks plan to establish a uniform fee for all claims 
adjustments.
     Book-entry fee decreases in 2002 are expected to save 
depository institution customers approximately $1.4 million.

[[Page 56313]]

     Including the fee change for 2002, the price index for the 
book-entry securities service has declined about 30 percent since 1996.
    4. 2002 Price Index--In their 2002 fee schedules, the Reserve Banks 
include changes that continue to provide an economic incentive for 
depository institution customers to make greater use of electronic 
payment services. The price index for electronic payment services (ACH, 
funds transfer and net settlement, book-entry securities, and 
electronic check) and electronic connections is projected to decline 
approximately 5 percent in 2002.\11\ In contrast, the index for paper-
based payment services (check, special cash, and noncash collection) is 
expected to increase almost 5 percent in 2002. The overall 2002 price 
index for all Federal Reserve priced services is projected to increase 
slightly over 2 percent. Since 1996, the overall price index has 
increased approximately 3.5 percent.\12\ Figure 1 compares the Federal 
Reserve's price index for priced services with the gross domestic 
product price deflator, which shows that Federal Reserve priced 
services have historically increased more slowly than the deflator.
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    \11\ The decline in the price index for electronic payment 
services since 1996 has reflected, in large part, the ability of the 
Reserve Banks to capitalize on the operational efficiencies and 
scale economies inherent in providing payment services through 
centralized electronic payment processing applications.
    \12\ These estimates are based on a chained Fisher ideal price 
index. This index provides customers with a representation of the 
total price or cost of Reserve Bank services, offering a more 
complete picture than is possible solely from comparing changes in 
individual service fees over time. This index is not adjusted for 
quality changes in Federal Reserve priced services. Data elements 
used in calculating the index include explicit fee revenue from 
priced services products and services and electronic connections to 
the Reserve Banks and volumes associated with those products and 
services. The price index is calculated using the actual, estimated, 
or projected full-year revenues and volumes. For 2002, the year-
over-year percentage change in the index results from a comparison 
of the 2002 projections to the 2001 estimates for priced services 
revenues and volumes. The changes in the price index since 1996 are 
calculated with 1996-2000 actual, 2001 estimated, and 2002 projected 
revenues and volumes.
[GRAPHIC] [TIFF OMITTED] TN07NO01.000

    B. Check--Table 3 shows the actual 2000, estimated 2001, and 
projected 2002 cost recovery performance for the check service.

                                                 Table 3.--Check Pro Forma Cost and Revenue Performance
                                                                [In millions of dollars]
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                                                                                                                                          Recovery rate
                                Year                                     Revenue       Total expense      Net income       Target ROE      after target
                                                                                                         (ROE) [1-2]                      ROE [1/(2+4)]
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                                                                                   1                2                3                4                5
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2000...............................................................            763.3            680.1             83.2             80.8           100.3%

[[Page 56314]]

 
2001 (Estimate)....................................................            788.9            755.4             33.5             90.3            93.3%
2001 (Adjusted Estimate) a.........................................            788.9            737.0             51.9             90.3            95.4%
2002 (Budget)......................................................            807.0            772.1             34.9             73.7            95.4%
a Includes float costs, but excludes higher NICB, associated with the events of September 11.

    1. 2000 Performance--The check service recovered 100.3 percent of 
total costs in 2000, including imputed expenses and targeted ROE, 
exceeding the targeted recovery rate of 98.7 percent. The volume of 
checks collected decreased 0.5 percent from 1999 levels, partly because 
of price increases on the lowest-priced products and stabilization of 
market volumes as banks that had merged in previous years completed 
back office operational consolidation and participated in more direct 
clearing relationships. Revenue grew from 1999 levels because of price 
increases and increases in forward-processed and payor bank service 
volumes, but revenue did not meet the budgeted amount. Despite lower-
than-expected revenues, full cost recovery was achieved through an even 
greater level of cost savings, which were primarily the result of local 
cost reductions and postponed check modernization project costs.
    2. 2001 Performance--Through August 2001, the check service has 
recovered 94.9 percent of total costs, including imputed expenses and 
targeted ROE.\13\ The Reserve Banks estimate that the check service 
will recover 93.3 percent of its costs for the full year compared with 
the budgeted 2001 recovery rate of 97.6 percent, a $36.4 million 
shortfall, relative to the budget, in after-tax net income. The Reserve 
Banks expect to recover all direct and indirect costs of providing 
check services and part of the targeted return on equity. The lower-
than-budgeted recovery rate is explained by several factors. First, 
service revenue and NICB are estimated to be lower than budgeted. The 
service revenue shortfall results from delayed implementation of 
explicit quality-related fees for return items, lower-than-expected 
volume in forward-collection and electronic check products, and 
customers' use of lower-priced products. Second, costs are estimated to 
be higher than budgeted because of lower pension credits, somewhat 
offset by lower-than-budgeted check modernization costs. Third, cost 
recovery will be lower than budgeted because of expenses associated 
with the September 11 terrorist attacks. These expenses are primarily 
float costs resulting from a policy decision to grant funds 
availability according to published schedules despite the delays in 
presenting checks to paying banks due to the shutdown of air traffic. 
Other costs included supplemental ground transportation and 
overtime.\14\
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    \13\ Total costs include check standardization special project 
costs of $13.1 million. None of these costs are deferred.
    \14\ Normally the Reserve Banks recover the cost of float, 
including float generated when airports close due to inclement 
weather, through product fees or by adjusting when they grant credit 
for deposits to reflect their experience collecting funds from 
paying banks. The expenses associated with September 11 may be 
offset by increased NICB resulting from large excess clearing 
balances held during the September 11-21 period. The expenses and 
imputed NICB associated with the September 11 attack, however, will 
not be taken into consideration in setting prices for 2002 or future 
years.
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    The volume of checks handled by the Reserve Banks appears to be 
stabilizing. The volume received from the larger banks has decreased as 
these banks expand clearinghouse use and as merged banks have 
consolidated back office operations. Previous years' temporary volume 
increases following bank mergers, which shifted work to Reserve Banks 
while check-processing operations were streamlined, are now less of a 
factor because of fewer bank mergers. These volume declines have been 
offset by product improvements, which have continued to attract 
increased forward-collection volume.
    Forward-collection check product volume through August 2001 grew 
0.7 percent (including a 1.6 percent increase in processed volume and a 
9.5 percent decline in fine-sort volume), following the 0.5 percent 
decline in 2000. For the full-year 2001, the Reserve Banks estimate 
that forward-processed volume will grow 2.2 percent, which is below the 
budgeted 4.0 percent growth rate. Because the full-year growth rate 
exceeds the growth to date, the estimate may be optimistic. Return-item 
volume has been higher than anticipated and is expected to remain so 
for the rest of the year. Table 4 summarizes the year-to-date and full-
year estimated growth rates for paper check products.

                               Table 4.-- Paper Check Product Volume Growth Rates
                                                    [percent]
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                                                                Budgeted 2001    Growth through   Estimated 2001
                                                                    growth        August 2001         growth
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Total forward-collection.....................................              3.7              0.7              1.6
    Forward-processed........................................              4.0              1.6              2.2
    Fine-sort a..............................................              0.6             -9.5             -5.5
Returns......................................................             -6.0              1.6              0.9
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a These rates exclude electronic fine-sort volume. Electronic fine-sort is a service offered by one Reserve Bank
  that allows depository institutions to exchange fine-sort information electronically among themselves with
  paper checks to follow. Including the electronic fine-sort product, fine-sort volume growth was budgeted to
  increase 0.5 percent in 2001 and is now estimated to decrease 5.0 percent.


[[Page 56315]]

    Continuing a trend over the last few years, demand for electronic 
check products has steadily increased. Reserve Banks provide payor 
banks with electronic check data or images for about 37 percent of the 
checks they collect. Year-to-date 2001 demand for image products has 
grown 19.6 percent to approximately 948 million check images, which 
represents a penetration rate of 6.2 percent of all checks collected by 
the Reserve Banks. Growth and penetration rates for electronic check 
products are summarized in table 5.

                         Table 5.--Electronic Check Product Penetration and Growth Rates
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                                                                 Penetration
                                                                 rate through
                                                                 August 2001     Volume growth      Estimated
                                                                 (percent of     through August    growth 2001
                                                                    checks      2001  (percent)     (percent)
                                                                 collected) a
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Electronic check presentment.................................             22.4              7.3              6.2
    Truncation...............................................              5.6              1.5              1.4
    Non-truncation...........................................             16.8              9.4              7.9
Electronic check information.................................              7.1             -6.9             -8.4
Images.......................................................              6.2             19.6             19.8
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a These percentages exclude electronic fine-sort volumes from the number of checks collected.

    3. 2002 Pricing--For the coming year, the Reserve Banks will 
continue to focus on the check modernization initiatives to standardize 
check processing across all Reserve Bank offices.\15\ The Reserve Banks 
will incur significant transition costs associated with these 
initiatives over the next several years. These initiatives are expected 
to reduce costs and improve service over the long term.
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    \15\ Check modernization is a multi-year initiative to 
standardize the processing and researching check-adjustment cases, 
create a national system for archiving and retrieving check images, 
and deliver check services to depository institutions using web 
technology. Check modernization should improve the operational 
efficiency and cost-effectiveness of the Reserve Banks' check 
services over the long run. It will also improve the consistency, 
quality, and uniformity of the check services that Reserve Banks 
deliver to their customers and allow new services to be developed 
and deployed more quickly.
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    In 2002, fees for all check products are increasing 4.0 percent on 
a volume-weighted basis compared with fees introduced in January 2001 
and 3.7 percent compared with current fees.\16\ Per-item and cash-
letter fees for forward-collection check products are also increasing 
at this rate. The average volume-weighted fees for payor bank services 
will increase 4.5 percent compared with both January 2001 and current 
fees. The Reserve Banks will increase fees for electronic check 
information products at a faster rate than for electronic check 
presentment products (ECP), thereby encouraging depository institutions 
to increase their use of ECP products. Overall prices for electronic 
check products are increasing faster than prices for paper check 
processing because margins for electronic products are currently lower 
than for paper check products, and the prices of electronic products do 
not yet reflect their full value to payor banks. Table 6 summarizes the 
Reserve Banks' 2002 price changes.
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    \16\ This discussion evaluates volume-weighted changes in the 
direct fees for check products. The price index, discussed in the 
cover memorandum, evaluates the average change in costs that would 
be incurred by a customer purchasing an average market basket of 
Federal Reserve check products, taking into account explicit fees 
and product substitution.

                      Table 6.--2002 Price Changes
                              [In percent]
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                                             2002 vs.
                Products                   January 2001      2002 vs.
                                               fees        current fees
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Total check service.....................             4.0             3.7
    Forward-collection..................             4.1             3.7
        Forward-processed...............             3.9             3.5
    Returns.............................             3.9             3.9
    Payor bank services.................             4.5             4.5
        Electronic check presentment....             4.5             4.5
        Electronic check information....             8.9             8.9
        Image services..................            -3.0            -3.0
------------------------------------------------------------------------

    Table 7 summarizes ranges of key check fees for 2001 and 2002.

                      Table 7.--Selected Check Fees
------------------------------------------------------------------------
                               2001 Current price
                                     ranges           2002 price ranges
------------------------------------------------------------------------
Items:                             (per item)            (per item)
    Forward-processed
        City................  $0.001 to 0.079.....  $0.001 to 0.079
        RCPC................  $0.003 to 0.200.....  $0.003 to 0.300
    Forward fine-sort
        City................  $0.003 to 0.021.....  $0.003 to 0.021
        RCPC................  $0.003 to 0.036.....  $0.004 to 0.036
    Qualified returned
     checks

[[Page 56316]]

 
        City................  $0.08 to 0.85.......  $0.08 to 0.85
        RCPC................  $0.10 to 1.15.......  $0.10 to 1.15
    Raw returned checks
        City................  $1.05 to 5.00.......  $1.05 to 5.00
        RCPC................  $1.05 to 5.00.......  $1.05 to 5.00
Cash letters:                   (per cash letter)     (per cash letter)
    Forward-processed a.....  $2.00 to 32.00......  $2.25 to 36.00
    Forward fine-sort.......  $3.00 to 14.00......  $3.50 to 14.00
    Returned checks: raw/     $2.00 to 14.00......  $2.00 to 14.50
     qualified.
    Payor bank services:....   (Fixed)  (per item)   (Fixed)  (per item)
        MICR information....  $2-15  $0.0020-0.007  $2-15  $0.0030-0.011
                               0.                    0
        Electronic            $1-11  $0.0005-0.010  $1-12  $0.0005-0.010
         presentment.          0.                    0
        Truncation..........   $2-7  $0.0020-0.018  $2-7  $0.0040-0.0180
                               0.
        Image capture.......  $2-15  $0.0020-0.02.  $2-15  $0.002-0.02
        Image delivery......  Varies b  $0.001-0.0  Varies b  $0.002-0.0
                               08.                   08
        Image archive.......  N/A  $0.001-0.01....  N/A  $0.001-0.01
        Image retrieval.....  N/A  $0.3-5.........  N/A  $0.3-5
------------------------------------------------------------------------
Note: Bold indicates change from 2001 prices.
a Cash letter fees for forward-processed items transported on Check
  Relay for 2001 and 2002 include a fifty-cent surcharge due to higher
  fuel costs.
b Fixed fee varies by media type.

    4. 2002 Projected Cost Recovery--For 2002, the Reserve Banks 
project that the check service will recover 95.4 percent of total 
costs, including imputed expenses, costs associated with the check 
modernization project, and targeted ROE. In total, the Reserve Banks 
expect to recover all direct and indirect costs of providing check 
services, but only a portion of targeted return on equity; thus net 
income is expected to fall short of the targeted ROE.
    Total expenses are projected to increase approximately $17.0 
million, or 2.3 percent, from estimated 2001 expenses. Total expenses 
for 2002 include approximately $86 million in costs for the four check 
modernization projects (including special project costs), representing 
an increase of $17.6 million over the 2001 estimate.
    Check service revenue is projected to increase $50.2 million, or 
6.5 percent, from the 2001 estimate, as a result of fee and volume 
increases, including a budgeted 1.5 percent increase in forward-
collection volume from the estimated 2001 level. In 2002, revenues from 
forward-collection and return-item processing, payor bank services and 
other operating and imputed revenues are expected to represent 87.6 
percent, 11.6 percent, and 0.8 percent, respectively, of the check 
services' budgeted $821.7 million in product related service revenue. 
Total revenue also reflects the decline in NICB, discussed previously.
    In 2002, forward-processed volume is projected to be 15.6 billion, 
an increase of 1.8 percent compared with the 2001 estimate, with the 
growth coming from additional weekend and off-peak Other Fed volume. 
Fine-sort volumes are expected to continue to decline 16 million, or 
1.3 percent, from the 2001 estimate. Total returns are projected to be 
179.8 million, an increase of 0.6 percent compared with the 2001 
estimate.
    The Reserve Banks anticipate further growth in payor bank services. 
The Reserve Banks project electronic presentment volume to be 3.2 
billion, reflecting growth of 16.7 percent in 2002, and truncation 
volume to be 978 million, an increase of 6.8 percent--significant 
increases in growth targets compared with 2001 growth. The Reserve 
Banks expect to meet these targets as a result of price changes that 
will raise electronic information fees compared with electronic 
presentment fees and through the launching of a national image service, 
which will provide additional tools for banks accepting electronic 
check presentments. Image services volume is projected to be 1.8 
billion, a projected growth of 19.7 percent in 2002, which is in line 
with 2001 growth and which may be driven by the increased functionality 
of the Image Services System (for example, electronic access to 
archived check images using web technology). MICR information is 
projected to decrease by 0.3 billion items or about 25 percent in 2002, 
which is in line with the 2001 decline.
    The Board believes that the greatest risks to achieving the 
projected cost recovery rate for the check service of 95.4 percent are 
(1) challenges in meeting Systemwide volume projections and related 
revenue projections, (2) potential changes in NICB and priced pension 
credits, and (3) potential check modernization cost overruns. The 
results of changes to elements of NICB and delays in the timing of the 
check modernization project could also improve the 2002 cost recovery.
    C. Automated Clearinghouse (ACH)--Table 8 presents the actual 2000, 
estimated 2001, and projected 2002 cost recovery performance for the 
commercial ACH service.

                                                  Table 8.--ACH Pro Forma Cost and Revenue Performance
                                                                [In millions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                          Recovery rate
                                Year                                     Revenue       Total expense      Net income       Target ROE      after target
                                                                                                         (ROE)  [1-2]                     ROE  [1/(2+4)]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                   1                2                3                4                5
--------------------------------------------------------------------------------------------------------------------------------------------------------
2000...............................................................             71.7             61.6             10.1              8.0           103.1%

[[Page 56317]]

 
2001 (Estimate)....................................................             76.4             67.3              9.1              8.9           100.3%
2002 (Budget)......................................................             66.4             59.3              7.1              6.5           101.0%

    1. 2000 Performance--In 2000, the ACH service recovered 103.1 
percent of total expenses, including imputed costs and targeted ROE, 
versus a targeted recovery rate of 100.0 percent. Commercial ACH volume 
was 13.6 percent higher than 1999 volume, compared with the 11.6 
percent increase originally projected for 2000. The Reserve Banks' 
prices did not change over the course of the year.
    2. 2001 Performance--Through August 2001, the ACH service recovered 
101.6 percent of total expenses. The Reserve Banks estimate that the 
ACH service will recover 100.3 percent of total expenses in 2001, 
compared with the targeted recovery rate of 101.3 percent. The variance 
from targeted recovery is partially due to lower-than-expected NICB and 
pension credits. The year-over-year increase in expense from $61.6 
million in 2000 to $67.3 million in 2001 is attributable to higher 
national support costs, and to transition costs associated with 
consolidating the twelve Districts' ACH operations into two offices, 
Minneapolis and Atlanta.
    The Reserve Banks estimate that their 2001 commercial ACH volume 
will be 11.1 percent higher than in 2000, compared with the budgeted 
10.0 percent increase. Through August 2001, by contrast, the Reserve 
Banks' commercial ACH volume had increased 17.2 percent from the same 
period in 2000. The difference between the volume growth through August 
and the volume growth for all of 2001 is due to the Reserve Banks' 
expectation that some large-volume customers will begin to originate 
their ACH transactions through a private-sector ACH operator. The 
Reserve Banks also expect that other large-volume customers may split 
their transactions between the Federal Reserve and other ACH operators.
    On October 1, 2001, the Reserve Banks implemented a modified ACH 
fee structure with decreased per-item fees for large-volume files and 
increased monthly fixed fees that will likely result in lower overall 
fees to large and medium-sized customers. These fee-structure 
modifications are the first phase of an overall strategy to meet 
competitive challenges facing the Reserve Banks' ACH service. The 
modified fee structure is designed to better reflect the ACH service's 
cost structure, which is characterized by high fixed and low variable 
costs.
    Also on October 1, the Reserve Banks implemented pricing agreements 
with other operators for interoperator ACH transactions. Under the new 
interoperator agreements, the Reserve Banks will no longer charge per-
item fees to depository institutions for ACH transactions that the 
depository institutions originate or receive through another operator. 
Instead, the Reserve Banks and the other operators will charge each 
other fees for the interoperator transactions. Thus, for ACH items 
originated by a Reserve Bank customer and destined for the customer of 
a private-sector operator, the Reserve Banks will pay a fee to the 
private-sector operator and will no longer receive fees from the 
receiving depository institution.
    3. 2002 Pricing--The Reserve Banks project that the ACH service 
will recover 101.0 percent of its costs in 2002, including imputed 
expenses and targeted ROE. Expenses are projected to decrease $8.0 
million, or 11.9 percent, from the 2001 estimate. The decrease in 
expense results primarily from consolidating ACH operations, which 
should be completed in February 2002, and from the Reserve Banks' 
reduction of ACH business development costs.
    The Reserve Banks project that 2002 ACH revenue will decrease $10.0 
million, or 13.1 percent, from the 2001 estimate due to decreases in 
fees and expected transaction volume. In addition to the October 1, 
2001 pricing structure changes, the Reserve Banks expect to further 
reduce fees in mid-year 2002. Although the Reserve Banks have not 
finalized the details of the mid-year 2002 fee changes, the Reserve 
Banks expect to offer volume-based discounts to their ACH transaction 
fees.
    The Reserve Banks project that ACH volume will be 5.1 percent lower 
in 2002 than in 2001. While the Reserve Banks expect total ACH volume 
to grow substantially, the projected 5.1 percent decline in Federal 
Reserve ACH volume assumes many of the Reserve Banks' largest 
customers' shifting at least a portion of their volume to another 
operator. The Board believes there is some risk that transaction volume 
will decline more than projected.
    D. Funds Transfer and Net Settlement--Table 9 presents the actual 
2000, estimated 2001, and projected 2002 cost recovery performance for 
the funds transfer and net settlement services.

                                   Table 9.--Funds Transfer and Net Settlement Pro Forma Cost and Revenue Performance
                                                                [In millions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                          Recovery rate
                                Year                                     Revenue       Total expense      Net incomc       Targe ROE       after target
                                                                                                         (ROE)  [1-2]                     ROE  [1/(2+4)]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                   1                2                3                4                5
--------------------------------------------------------------------------------------------------------------------------------------------------------
2000...............................................................             64.6             56.4              8.2              7.5           101.1%
2001 (Estimate)....................................................             63.0             56.7              6.3              7.5            98.3%
2002 (Budget)......................................................             56.1             50.2              5.9              5.5           100.8%


[[Page 56318]]

    1. 2000 Performance--The funds transfer and net settlement service 
recovered 101.1 percent of total costs in 2000, including imputed 
expenses and targeted ROE, and exceeding the targeted recovery rate of 
100.4 percent. Although expenses for 2000 were $1.7 million (2.5 
percent) less-than-original budget projections, service revenue was 
$1.4 million (2.2 percent) less-than-original budget projections. The 
shortfall in service revenue was attributed to $0.8 million (8.7 
percent) less-than-expected electronic connection revenue and 1.2 
percent lower-than-expected funds transfer volume.
    2. 2001 Performance--Through August 2001, the funds transfer and 
net settlement services recovered 99.5 percent of total costs, 
including imputed expenses and targeted ROE. For full-year 2001, the 
Reserve Banks estimate that the funds transfer and net settlement 
services will recover 98.3 percent of total expenses, compared with a 
targeted recovery rate of 101.2 percent. The underrecovery is 
attributed to several factors, including lower-than-expected NICB and 
pension credit, and higher-than-budgeted operating costs, which were 
primarily due to higher-than-anticipated automation costs.
    Funds transfer volume through August 2001 has increased 4.5 percent 
relative to the same period in 2000. For the full-year, the Reserve 
Banks estimate a 3.0 percent volume increase over 2000 compared to a 
budgeted decline of 1.2 percent. The Reserve Banks anticipated a 
decline in funds volume in 2001 because of potential shifts in volume 
from Fedwire to CHIPS.\17\ These shifts, however, have not been 
realized fully to date, but the Reserve Banks expect some shifts in 
volume to CHIPS during the remaining months of the year.
---------------------------------------------------------------------------

    \17\ The New York Clearing House implemented an intraday 
finality mechanism for its CHIPS service in January 2001. While 
there has been little movement of funds transfer volume from Fedwire 
to CHIPS to date, the New York Clearing House has increased its 
marketing efforts and we understand that some high-volume funds 
transfer customers have decided to begin shifting substantial funds 
transfer volume to CHIPS. Fedwire funds transfer volume is expected 
to decline as customers that are also CHIPS participants move volume 
from Fedwire to CHIPS.
---------------------------------------------------------------------------

    3. 2002 Fedwire Funds Transfer Pricing--The Reserve Banks will 
maintain the thresholds for volume-based discounts but reducing the 
per-transfer fees for each threshold. Specifically, the Reserve Banks 
will lower the transfer fee for the first volume tier (2,500 
transfers per month) by two cents from $0.33 to $0.31 (6.1 percent), 
lower the transfer fee for the second volume tier (2,501-80,000 
transfers per month) by two cents from $0.24 to $0.22 (8.3 percent), 
and lower the transfer fee for the third volume tier (> 80,000 
transfers per month) by one cent from $0.16 to $0.15 (6.3 percent).\18\ 
The average (volume-weighted) per-transfer price would decline from its 
current level of $0.216 to $0.201 (6.8 percent). In addition, the 
Reserve Banks will retain the off-line surcharge at its current level.
---------------------------------------------------------------------------

    \18\ The Reserve Banks reduced the per transfer fee for the 
highest-volume tier (tier 3) from $0.17 to $0.16 on August 1, 2001.
---------------------------------------------------------------------------

    Reserve Banks project that the Fedwire funds transfer service will 
recover 100.8 percent of total costs in 2002, including imputed 
expenses and targeted ROE. Total costs are expected to decline $8.5 
million (13.2 percent) from the 2001 estimate, primarily due to 
operating cost reductions of $4.9 million (8.5 percent). The reduction 
in operating costs is due to cost savings associated with the 
consolidation of the majority of funds transfer activities to the 
Federal Reserve Banks of Boston, New York, Richmond, and Kansas 
City.\19\
---------------------------------------------------------------------------

    \19\ Specifically, the Reserve Banks will consolidate on-line 
funds operations to the Federal Reserve Banks of Boston and Kansas 
City, and fund computer interface testing to the Central Business 
Administration Function at the Federal Reserve Banks of New York and 
Richmond. The consolidation began in September 2001 and will be 
completed in August 2002.
---------------------------------------------------------------------------

    Funds transfer volume is expected to decline 1.1 percent from the 
2001 estimate as customers that are also CHIPS participants move volume 
from Fedwire to CHIPS. Since the implementation of volume-based 
pricing, volume growth in the high-volume pricing tier (tier 3) has 
outpaced growth in the other two tiers. In 2002, however, the Reserve 
Banks project that any trend growth in tier 3 volume will be offset by 
the migration of transfers to CHIPS. The Reserve Banks also expect that 
the loss of volume in tier 3 will be somewhat offset by movement of 
volume from the mid-volume pricing tier (tier 2) to tier 3 due to 
merger activity and the consolidation of master/sub-account 
relationships. Therefore, the Reserve Banks project that in 2002 tier 3 
volume will remain relatively stable at 48.8 percent of total volume 
and tier 2 volume will decline by 0.7 percent to 33.9 percent of total 
volume. The Reserve Banks also project that volume in the low-volume 
pricing tier (tier 1) will increase 0.5 percent to 17.3 percent of 
total volume.
    The Reserve Banks project total funds transfer revenue to decline 
by $6.9 million (11.0 percent) in 2002 from the 2001 estimate primarily 
because of the full-year effect of the August 2001 and proposed 2002 
price reductions.
    4. 2002 Net Settlement Pricing--By year-end 2001, all local net 
settlement arrangements will have been converted to the enhanced net 
settlement service. The Reserve Banks will increase the per settlement 
file fee by $2.00 from $12.00 to $14.00 (16.7 percent) and reduce the 
per-settlement entry fee by $0.15 from $0.95 to $0.80 (15.8 percent); 
these changes will lower the costs for the larger arrangements while 
only marginally increasing the costs for a few of the smaller 
arrangements. The revenue loss is minimal--a net of $10,000 or 1.4 
percent of the previous fee level. The Reserve Banks will eliminate the 
off-line notification service and associated surcharge in 2002. In 
addition, the Reserve Banks will raise the off-line origination 
surcharge by $10.00 from $15.00 to $25.00 (66.7 percent) to better 
reflect the work involved in providing this service; budgeted revenue, 
however, will not be affected because this service is only offered as a 
contingency to the arrangements.\20\ Further, the Reserve Banks will 
standardize the fee for all Fedwire-based settlements at $100. 
Previously, small arrangements were charged $100 and large arrangements 
were charged $175. There will be no effect on revenue because the only 
arrangement that was being charged $175 made changes early in 2001 to 
its file structure to fit the criteria for the $100 fee. Finally, the 
Reserve Banks will retain the $60 minimum account maintenance fee per 
arrangement.\21\ The Reserve Banks expect settlement entry and file 
volumes to remain stable in 2002 compared with the 2001 estimate.
---------------------------------------------------------------------------

    \20\ While the Reserve Banks encourage net settlement 
arrangements to maintain their own contingency procedures, they will 
provide off-line contingency services in the event of the failure of 
an arrangement's primary contingency backup arrangement.
    \21\ The monthly account maintenance fee will only be assessed 
if total settlement charges during a calendar month are less than 
$60.00. In addition, the fee will be reduced by the total amount of 
any per entry and per settlement charges incurred during the month.
---------------------------------------------------------------------------

    E. Book-Entry Securities--Book-entry securities includes purchase 
and sale activity. Table 10 presents the actual 2000, estimated 2001, 
and projected 2002 cost recovery performance for the book-entry 
securities service.\22\
---------------------------------------------------------------------------

    \22\ The Reserve Banks provide securities transfer services for 
securities issued by the U.S. Treasury Department, federal 
government agencies, government-sponsored enterprises, and certain 
international institutions. The priced component of this service, 
reflected in this memorandum, consists of revenues, expenses, and 
volumes associated with the transfer of all non-Treasury securities. 
For Treasury securities, the Treasury Department assesses fees for 
the securities transfer component of the service. The Reserve Banks 
assess a fee for the money settlement component of a Treasury 
securities transfer; this component is not treated as a priced 
service.

[[Page 56319]]



                                    Table 10.--Book-Entry Securities Transfer Pro Forma Cost and Revenue Performance
                                                                 In millions of dollars
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                          Recovery rate
                                Year                                     Revenue       Total expense      Net income       Target ROE      after target
                                                                                                         (ROE)  [1-2]                     ROE  [1/(2+4)]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                   1                2                3                4                5
--------------------------------------------------------------------------------------------------------------------------------------------------------
2000...............................................................             18.5             16.0              2.6              1.9           103.9%
2001 (Estimate)....................................................             19.0             19.5             -0.5              2.3            87.1%
2002 (Budget)......................................................             22.6             20.3              2.3              2.2           100.2%

    1. 2000 Performance--The book-entry securities service recovered 
103.9 percent of total costs in 2000, including imputed expenses and 
targeted ROE, exceeding the target recovery rate of 101.3 percent. 
Total costs for 2000 were $1.1 million (6.6 percent) higher than 
budgeted, and service revenue was approximately $1.5 million (9.0 
percent) more than budgeted. The additional revenue was due to higher-
than-expected on-line volume and account and issue maintenance volume. 
Total book-entry transfer volume increased 15.2 percent from the 1999 
level.
    2. 2001 Performance--Through August 2001, the book-entry securities 
service recovered 90.0 percent of total costs, including imputed 
expenses and targeted ROE. For full-year 2001, the Reserve Banks 
estimate that the book-entry securities service will recover 87.1 
percent of total costs, compared with a targeted recovery rate of 95.6 
percent. The underrecovery is attributed to several factors, including 
higher-than-budgeted operating costs, mostly due to higher-than-
anticipated automation costs and higher-than-anticipated volume, and a 
less-than-expected pension credit. In addition, NICB is lower than 
budgeted and the book-entry service is projected to take in less 
revenue due to the delay of the conversion of Government National 
Mortgage Association (Ginnie Mae) securities to the National Book-Entry 
System (NBES), which was planned for the fourth quarter 2001, but, 
because of the events of September 11, will be delayed until the first 
quarter 2002.
    Through August 2001, total book-entry securities transfer volume 
has increased 19.6 percent compared with the same period in 2000. For 
the full year, the Reserve Banks estimate that total book-entry volume 
will increase 15.4 percent from the 2000 level, compared with a 
budgeted 8.7 percent increase. The increased volume is primarily due to 
higher-than-anticipated mortgage refinancing activity, but the Reserve 
Banks expect this activity to slow down in the remaining months of the 
year.
    3. 2002 Pricing--The Reserve Banks will reduce the on-line transfer 
origination and receipt fee by four cents from $0.70 to $0.66 (5.7 
percent), and lower the per-issue per-account maintenance fee by four 
cents from $0.45 to $0.41 (8.9 percent). The Reserve Banks will retain 
the off-line surcharge and account maintenance fee at their current 
levels. The Reserve Banks will implement new functionality to support 
automated claim adjustments related to failed securities transactions, 
interim accounting for securities with an accrual date different than 
the record date, and repurchase agreement tracking.\23\ The Reserve 
Banks will implement fail tracking in December 2001, but have not yet 
announced the implementation dates for interim-accounting adjustment 
processing and repurchase agreement tracking. The Reserve Banks will 
determine a fee for the new functionality once volume projections can 
be confirmed by actual experience, and plan to implement this fee in 
the second half of 2002. Initially, the Reserve Banks plan to establish 
a uniform fee for all claims adjustments.
---------------------------------------------------------------------------

    \23\ 23 Initially, the new functionality will be available only 
for mortgage-backed securities, while functionality for Treasury 
securities and other agency debt may be incorporated later.
---------------------------------------------------------------------------

    The purchase and sale activity represents less than 0.5 percent of 
the costs and revenues of the book-entry securities service line. 
Provision of this activity, which facilitates the purchase and sale of 
Treasury and government agency securities by depository institutions on 
the secondary market, is consolidated at the Federal Reserve Bank of 
Chicago. Steadily declining volume over the past six years strongly 
suggests there is no longer a need for the Federal Reserve Banks to 
provide this activity and private-sector alternatives exist. The 
Reserve Banks' Wholesale Payments Product Office (WPPO) will develop an 
exit strategy for the product by year-end 2001. In the interim, the 
Reserve Banks will maintain the $40 transaction fee for securities 
purchases and sales.
    The Reserve Banks project that the book-entry securities service 
will recover 100.2 percent of costs in 2002, including imputed expenses 
and targeted ROE. The Reserve Banks project that total costs for the 
service will increase 3.1 percent--a $0.4 million decrease in the 
pension credit combined with a $0.9 million increase in costs 
associated with the agency portion of the service will be partially 
offset by $0.9 million costs savings associated with the consolidation 
of the majority of securities activities to the Federal Reserve Banks 
of Boston, New York, and Kansas City.\24\
---------------------------------------------------------------------------

    \24\ Specifically, the Reserve Banks will consolidate on-line 
securities operations at the Federal Reserve Banks of Boston and 
Kansas City, joint custody collateral processing at the Federal 
Reserve Bank of Boston, and securities computer interface testing at 
the Central Business Administration Function at the Federal Reserve 
Bank of New York. Theconsolidation began in September 2001 and will 
be completed in August 2002.
---------------------------------------------------------------------------

    The Reserve Banks project the volume of agency securities transfers 
in 2002 will increase 19.8 percent from the 2001 estimate and total 
revenue will increase 18.7 percent from the 2001 estimate. The volume 
increase is due to the scheduled move of Ginnie Mae securities to NBES 
by March 2002. The influx of more than 325,000 Ginnie Mae securities 
also will dramatically increase the number of securities issues held in 
customers' securities accounts; the number of issues maintained is 
projected to nearly double. Additional securities issues from the 
Federal National Mortgage Association (Fannie Mae), the Federal Home 
Loan Mortgage Corporation (Freddie Mac), and the Veterans 
Administration will also move to the service in 2002, albeit in much 
smaller numbers, as the securities processing system of the former 
Participants Trust Company is retired.

[[Page 56320]]

    F. Noncash Collection--Table 11 lists the actual 2000, estimated 
2001, and projected 2002 cost recovery performance for the noncash 
collection service.

                                          Table 11.--Noncash Collection Pro Forma Cost and Revenue Performance
                                                                [In millions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                          Recovery rate
                                Year                                     Revenue       Total expense      Net income       Target ROE      after target
                                                                                                         (ROE)  [1-2]                     ROE  [1/(2+4)]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                   1                2                3                4                5
--------------------------------------------------------------------------------------------------------------------------------------------------------
2000...............................................................              2.4              2.1              0.4              0.2           108.6%
2001 (Estimate)....................................................              2.0              1.7              0.3              0.2           106.7%
2002 (Budget)......................................................              1.5              1.4              0.0              0.1            92.6%

    1. 2000 Performance--The noncash collection service recovered 108.6 
percent of total expenses in 2000, including imputed expenses and 
targeted ROE, slightly exceeding the targeted recovery rate of 108.1 
percent. Volume for 2000 declined 15.3 percent from 1999 levels, 
compared with a budgeted decline of 29.3 percent, and revenue declined 
20.1 percent from 1999 levels, compared with a budgeted decline of 31.6 
percent. Total costs for 2000 increased 3.6 percent over 1999 levels, 
compared with an 11.3 percent budgeted decline. The increase was 
primarily due to additional costs associated with the purchase of 
computer equipment.
    2. 2001 Performance--Through August 2001, the noncash collection 
service recovered 118.1 percent of its costs. For full-year 2001, the 
Reserve Banks estimate that the noncash collection service will recover 
106.7 percent of costs, including imputed expenses and targeted ROE, 
compared with the targeted recovery rate of 102.5 percent. Through 
August, volume declined 20.2 percent compared with the same period in 
2000. The Reserve Banks estimate that full-year 2001 volume and revenue 
will decrease 20.8 percent and 18.6 percent, respectively, from the 
2000 levels; these estimates are consistent with the budgeted decline. 
In addition, the Reserve Banks anticipate that full-year total costs 
will decrease 17.3 percent from 2000 levels, compared with a 12.4 
percent budgeted decline.
    3. 2002 Pricing--The Reserve Banks will retain all fees in 2002 at 
their current levels. The Reserve Banks project that the noncash 
collection service will recover 92.6 percent of total costs, including 
imputed expenses and targeted ROE, in 2002. The underrecovery is the 
result of continuing volume decline within the service. The Reserve 
Banks project a volume decline of 22.8 percent in 2002, from the 2001 
estimate, resulting in a revenue decline of $0.5 million (25.6 
percent). The Reserve Banks project that total costs will decline $0.3 
million (14.3 percent) in 2002 compared with the 2001 estimate.
    New issues of bearer municipal securities effectively ceased in 
1983 when the Tax Equity and Fiscal Responsibility Act of 1982 removed 
the tax advantage for investors. Volume decline will continue as the 
number of outstanding physical securities diminishes and other service 
providers compete for the remaining coupon redemption and bond-
collection activity.
    G. Special Cash--Priced special cash services represent a very 
small portion (less than one percent) of overall cash services provided 
by the Reserve Banks to depository institutions. Special cash services 
include providing wrapped coin, packaging nonstandard currency orders 
and deposits, and making registered mail shipments of currency and 
coin. Table 12 presents the actual 2000, estimated 2001, and projected 
2002 cost recovery performance for special cash services.

                                             Table 12.--Special Cash Pro Forma Cost and Revenue Performance
                                                                [In millions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                          Recovery rate
                                Year                                     Revenue       Total expense      Net income       Target ROE      after target
                                                                                                         (ROE)  (1-2)                     ROE  [1/(2+4)]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                   1                2                3                4                5
--------------------------------------------------------------------------------------------------------------------------------------------------------
2000...............................................................              2.2              2.2              0.1              0.1             98.8
2001 (Estimate)....................................................              2.2              2.1              0.2              0.1            104.4
2002 (Budget)......................................................              2.3              2.2              0.2              0.1            103.8

    1. 2000 Performance--In 2000, special cash services recovered 98.8 
percent of total expenses, including imputed expenses and targeted ROE, 
compared with a targeted recovery rate of 101.7 percent. This 
underrecovery was due primarily to the increase in the costs associated 
with the registered mail service in Kansas City.
    2. 2001 Performance--Through August 2001, special cash services 
recovered 103.7 percent of total expenses, including imputed expenses 
and targeted ROE. For full-year 2001, the Reserve Banks estimate that 
special cash services will recover 104.4 percent of total expenses 
compared with a targeted recovery rate of 100.5 percent. The 
overrecovery is primarily due to higher-than-anticipated volumes of 
nonstandard packages in Chicago along with mid-year price increases for 
coin wrapping and registered-mail services in Helena. The additional 
revenue is offset slightly by the discontinuation of nonstandard 
packaging in El Paso and registered mail services in Boston.

[[Page 56321]]

    3. 2002 Pricing--For 2002, the Reserve Banks project that special 
cash services will recover 103.8 percent of costs, including imputed 
expenses and targeted ROE. Total costs are projected to increase $0.1 
million or 6.2 percent from the 2001 level, and revenue is expected to 
increase $0.1 million or 5.5 percent from the 2001 level. The 
anticipated cost increase is due to an increase in direct and support 
costs associated with the Kansas City registered mail service; the 
anticipated revenue increase is due to the full-year effect of the mid-
year repricing for coin wrapping and registered mail in Helena and the 
increase in the registered mail surcharge in the Tenth District.
    Beginning in January 2002, the Tenth District will increase the 
insurance fee from $0.32 to $0.45 and increase the surcharge for 
registered mail from $16 to $24. The increase in the insurance fees 
will offset an increase in registered mail insurance costs, and the 
increase in the registered mail surcharge reflects higher projected 
costs to manage insurance issues for this service. The Tenth District 
expects registered mail volume to decrease approximately 12 percent 
because of an active campaign to encourage the use of armored-carrier 
service.

II. Private-Sector Adjustment Factor

    A. Background--Each year, as required by the Monetary Control Act 
of 1980, the Reserve Banks set fees for priced services provided to 
depository institutions. These fees are set to recover all direct and 
indirect costs and imputed costs, including financing costs, return on 
equity (profit), taxes, and certain other expenses that would have been 
incurred if a private business firm provided the services. These 
imputed costs are based on data developed in part from a model 
comprising consolidated financial data for the nation's fifty largest 
bank holding companies (BHCs). The imputed costs and imputed profit are 
collectively referred to as the PSAF. In a comparable fashion, 
investment income is imputed and netted with related direct costs 
associated with clearing balances to estimate net income on clearing 
balances (NICB).
    The Board approved the following method changes, which are 
incorporated in the 2002 PSAF and NICB calculations:
     A portion of clearing balances is used as a funding source 
for priced services assets. Long-term assets are partially funded from 
an initial core amount of $4 billion clearing balances.\25\ The new 
method requires an analysis of interest rate risk sensitivity, which 
compares rate-sensitive assets with rate-sensitive liabilities and 
measures the effect on cost recovery of a change in interest rates of 
up to 200 basis points.
---------------------------------------------------------------------------

    \25\ Core clearing balances are considered the portion of the 
balances that have remained stable over time without regard to the 
magnitude of actual clearing balances. The remainder of the balances 
is considered non-core clearing balances and shore term in duration.
---------------------------------------------------------------------------

     Equity is imputed at 5 percent of total assets in order to 
meet the FDIC definition of a well-capitalized institution in its 
classification for assessing insurance premiums.
     The pre-tax return on equity (ROE) is determined using the 
results of the comparable accounting earnings model (CAE), the 
discounted cash-flow model (DCF), and the capital asset pricing model 
(CAPM). Within the CAPM and DCF models, the ROE is weighted based on 
market capitalization, and within the CAE model, the ROE calculation is 
equally weighted. The results of the three models are averaged to 
impute the PSAF pre-tax ROE.
     The peer group of the fifty largest bank holding companies 
is selected based on total deposits.
    The new method reduces both the amount of imputed debt and its 
associated costs included in the PSAF and the imputed investments and 
related income included in the NICB. Following is a description of the 
PSAF and NICB calculations:
    1. Private Sector Adjustment Factor--The method for calculating the 
financing and equity costs in the PSAF requires determining the 
appropriate levels of debt and equity to impute and applying the 
applicable financing rates. This requires developing a pro forma priced 
services balance sheet using actual Reserve Bank assets and liabilities 
associated with priced services and imputing the remaining elements 
that would exist if the Reserve Banks' priced services were provided by 
a private sector business firm.
    The amount of the Reserve Banks' assets that will be used to 
provide priced services during the coming year is determined using 
Reserve Bank information on actual assets and projected disposals and 
acquisitions. The priced portion of mixed-use assets is determined 
based on the allocation of the related depreciation expense. The priced 
portion of actual Reserve Bank liabilities consists of balances held by 
Reserve Banks for clearing priced services transactions (clearing 
balances), estimated based on historical data, and other liabilities 
such as accounts payable and accrued expenses.
    Short-term debt is imputed only when non-core clearing balances and 
short-term liabilities are not sufficient to fund short-term assets. 
Long-term debt is imputed only when core clearing balances and long-
term liabilities are not sufficient to fund long-term assets or if the 
interest rate risk sensitivity analysis indicates that estimated risk 
will exceed a change in cost recovery of more than two percentage 
points. Equity is imputed to meet regulatory requirements for a well-
capitalized institution, which is currently 5 percent of total assets 
and 10 percent of risk-weighted assets.
    a. Financing rates--When needed to impute short- and long-term 
debt, the debt rates are derived based on these elements in the BHC 
model. Equity financing rates are based on the average of the return on 
equity (ROE) results of three economic models using data from the BHC 
model.
    For simplicity, given that federal corporate tax rates are 
graduated, state tax rates vary, and various credits and deductions can 
apply, a specific tax rate is not calculated for Reserve Bank priced 
services. Instead, the use of a pre-tax ROE captures imputed taxes. The 
resulting ROE influences the dollar level of the PSAF and Federal 
Reserve price levels because this is the return a shareholder would 
expect in order to invest in a private business firm. The use of the 
pre-tax return on equity assumes 100 percent recovery of expenses, 
including the targeted return on equity. The recommended PSAF is, 
therefore, based on a precise matching of revenues and actual and 
imputed costs. Should the pre-tax earnings be greater or less than the 
targeted ROE, the PSAF is adjusted for the tax expense or savings 
associated with the adjusted recovery. The imputed tax rate is the 
median of the rates paid by the BHCs over the past five years adjusted 
to the extent that BHCs are invested in municipal bonds.
    b. Other Costs--The PSAF also includes the estimated priced 
services expenses of the Board of Governors and imputed sales taxes 
based on Reserve Bank expenses. An assessment for FDIC insurance, when 
required, is imputed based on current FDIC rates and projected clearing 
balances held with the Federal Reserve.
    2. Net Income on Clearing Balances--The NICB calculation is made 
each year along with the PSAF calculation and is based on the 
assumption that Reserve Banks invest clearing balances net of balances 
used to finance priced-services assets and imputed reserves. Based on

[[Page 56322]]

these net clearing balance levels, Reserve Banks impute an equal 
investment in three-month Treasury bills. The calculation also involves 
determining the actual priced services cost of earnings credits 
(amounts available to offset future service fees) on contracted 
clearing balances held, net of expired earnings credits, based on the 
federal funds rate. The rates and clearing balance levels used in the 
NICB estimate are based on the actual rates and balances from the six 
months before the calculation date. Because clearing balances are held 
for clearing priced services transactions, they are directly related to 
priced services. Therefore, the net earnings or expense attributed to 
the imputed Treasury-bill investments and the cost associated with 
holding clearing balances are considered income for priced services 
activities.
    B. Discussion--The decrease in the 2002 PSAF is primarily due to 
the recent method changes. Because core clearing balances, rather than 
imputed debt, are funding long-term priced services assets, there is a 
decline in PSAF expenses associated with debt financing. In addition, a 
reduction in required imputed equity results in a reduction of equity 
costs. The decline in debt financing expenses and equity costs in the 
PSAF is offset by a reduction in imputed Treasury-bill investment 
earnings in the NICB.
    1. Asset Base--The total estimated cost of Federal Reserve assets 
to be used in providing priced services is reflected in table 13. While 
total priced services assets have decreased, the pension asset and 
other assets financed through the PSAF including premises, receivables, 
and prepaid expenses have increased. Table 14 shows that the short-term 
assets funded with short-term payables and non-core clearing balances 
total $113.3 million. This amount represents an increase of $9 million, 
or 8.6 percent, from the short-term assets funded in 2001. Long-term 
assets funded with long-term liabilities, core clearing balances, and 
equity are projected to total $1,479.3 million. This amount represents 
an increase of $83.9 million, or 6 percent, from the long-term assets 
funded in 2001. Growth of $81.6 million in the pension asset explains 
the majority of the increase, while increases in Board and Reserve Bank 
building assets explain an additional $13.6 million. These increases 
are offset by a decrease of $11.3 million in other Reserve Bank fixed 
assets.
    2. Debt and Equity Costs and Taxes--As previously mentioned, core 
clearing balances from the NICB calculation are available as a funding 
source for priced services assets. Table 14 shows that $633.0 million 
in clearing balances are used to fund priced services assets in 2002. 
The interest rate sensitivity analysis in table 15 indicates that 
potential T-bill and federal funds rate decreases of 200 basis points 
produce a decrease in cost recovery of 0.2 percentage points. The 
established threshold for change to cost recovery is two percentage 
points; therefore, interest rate risk associated with using these 
balances is within acceptable levels and no long-term debt is imputed.
    Table 16 shows the imputed PSAF elements, the pre-tax return on 
equity, and other required PSAF recoveries proposed for 2002 along with 
the financing and tax rates used for developing the 2002 PSAF. The 
elimination of imputed short- and long-term debt results in a decline 
in expenses associated with debt financing of $32.0 million. The pre-
tax return on equity rate decreased from 24.0 percent for 2001 to 22.1 
percent for 2002. As a result of this rate decrease and reduced imputed 
equity, the pre-tax return on equity declined $28.6 million. As 
indicated previously, the 2002 pre-tax return on equity was calculated 
using the combined results of three models, while 2001 PSAF pre-tax 
return on equity was calculated using the single CAE method. The 
effective tax rate used in 2002 also decreased to 29.3 percent from 
31.5 percent in 2001.
    3. Capital Adequacy and FDIC Assessment--As shown in table 17, the 
amount of equity imputed for the proposed 2002 PSAF is $592.3 million, 
a decrease of $72.1 million from imputed equity of $664.4 in 2001. As 
noted above, the 2002 equity is based on 5 percent of total assets, as 
required by the FDIC for a well-capitalized institution in its 
definition for purposes of assessing insurance premiums. In both 2002 
and 2001, the capital to risk-weighted asset ratio and the capital to 
total assets ratio both exceed regulatory guidelines. As a result, no 
FDIC assessment is imputed for either year.
    4. Peer Group--Using total deposits instead of total assets as the 
basis of selection of the peer group marginally changed the peer group 
composition. Three new holding companies are represented for 2000 data, 
the last year for which audited data are available.

III. Analysis of Competitive Effect

    All operational and legal changes considered by the Board that have 
a substantial effect on payments system participants are subject to the 
competitive impact analysis described in the March 1990 policy 
statement ``The Federal Reserve in the Payments System.'' \26\ Under 
this policy, the Board assesses whether the 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 because of differing legal powers or constraints or because of 
a dominant market position of the Federal Reserve deriving from such 
legal differences. If the fees or fee structures create such an effect, 
staff must further evaluate the changes to assess whether their 
benefits--such as contributions to payment system efficiency, payment 
system integrity, or other Board objectives--can be retained while 
reducing the hindrances to competition.
---------------------------------------------------------------------------

    \26\ FRRS 7-145.2.
---------------------------------------------------------------------------

    The Board does not believe that these fees or fee structures will 
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. Assuming the Reserve Banks' volume and cost 
projections are accurate, these fees are set to provide the Federal 
Reserve a return on equity similar to that earned by the large BHCs and 
provide for full cost recovery over the long run.

[[Page 56323]]



  Table 13.--Comparison of Pro Forma Balance Sheets for Federal Reserve
                             Priced Services
                 [Millions of dollars--average for year]
------------------------------------------------------------------------
                                               2002            2001
------------------------------------------------------------------------
Short-term assets:
    Imputed reserve requirement on               $ 678.5         $ 742.4
     clearing balances\27\..............
    Investment in marketable                     5,473.0         6,681.9
     securities\27\.....................
    Receivables.........................            81.7            77.3
    Materials and supplies..............             3.8             3.6
    Prepaid expenses....................            27.8            23.4
    Items in process of collection\28\..         4,102.8         3,606.7
                                         -------------------------------
        Total short-term assets.........        10,367.6        11,135.3
Long-term assets:
    Premises\29\........................           431.1           417.5
    Furniture and equipment.............           177.7           185.5
    Leasehold improvements and long-term            70.4            73.9
     prepayments........................
    Prepaid pension costs...............           800.1           718.5
                                         -------------------------------
        Total long-term assets..........         1,479.3         1,395.4
                                         -------------------------------
        Total assets....................       $11,846.9       $12,530.7
                                         ===============================
Short-term liabilities:
    Clearing balances and balances             $ 7,377.5       $ 7,424.3
     arising from early credit of
     uncollected items..................
    Deferred credit items\28\...........         3,509.8         3,606.7
    Short-term debt\30\.................             0.0            18.9
    Short-term payables.................           103.9            85.4
                                         -------------------------------
        Total short-term liabilities....        10,991.2        11,135.3
Long-term liabilities:
    Postemployment/retirement benefits..           263.4           251.9
Long-term debt\30\......................             0.0           479.1
                                         -------------------------------
        Total long-term liabilities.....           263.4           731.0
                                         -------------------------------
        Total liabilities...............        11,254.6        11,866.3
    Equity..............................           592.3           664.4
                                         -------------------------------
        Total liabilities and equity....       $11,846.9       $12,530.7
                                         ===============================
------------------------------------------------------------------------
\27\Funded with clearing balances.
\28\Represents float costs that are directly estimated at the service
  level.
\29\Includes allocations of Board of Governors' assets to priced
  services of $1.1 million for 2002 and $0.7 million for 2001.
\30\No debt is imputed in 2002 because clearing balances are used as an
  available funding source.


[[Page 56324]]


  Table 14.--Portion of clearing balances used to fund priced services
                             assets in 2002
                      [Dollar amounts in millions]
A. Short-term asset funding:
    Short-term assets to be funded:
        Receivables.........................................       $81.7
        Materials and supplies..............................         3.8
        Prepaid expenses....................................        27.8
                                                             -----------
            Total short-term assets to be funded............       113.3
    Short-term funding sources: Short-term payables.........       103.9
                                                             -----------
    Portion of short-term assets funded with imputed short-          9.4
     term debt or non-core clearing balances \31\...........
                                                             ===========
B. Long-term asset funding:
    Long-term assets to be funded:
        Premises............................................      $431.1
        Furniture and equipment.............................       177.7
        Leasehold improvements and long-term prepayments....        70.4
        Prepaid pension cost................................       800.1
                                                             -----------
            Total long-term assets to be funded.............
    Long-term funding sources:
        Postemployment/retirement benefits liability........       263.4
        Imputed equity \32\.................................       592.3
                                                             -----------
                                                                   855.7
                                                             ===========
    Portion of long-term assets funded with imputed long-          623.6
     term debt or core clearing balances \31\...............
                                                             -----------
C. Total clearing balances used for funding priced-services
 assets.....................................................
 
\31\ Clearing balances shown on table 13 are available for funding
  priced-services assets. Using these balances reduces the amount
  available for investment in Treasury bills for the net income on
  clearing balances calculation. Short-term assets are funded with non-
  core clearing balances. Long-term assets are funded with core clearing
  balances; a total of $4 billion in balances is available for this
  purpose. No short-or long-term debt is imputed.
\32\ See table 16 for calculation of required imputed equity amount.


[[Page 56325]]


                               Table 15.--2002 Interest Rate Sensitivity Analysis
                                          [Dollar amounts in millions]
----------------------------------------------------------------------------------------------------------------
                                                         Rate sensitive       Rate insensitive        Total
----------------------------------------------------------------------------------------------------------------
Assets:
    Imputed reserve requirement on clearing balances  ....................              $678.5             $78.5
    Investment in marketable securities.............           $5,473.0     ...................          5,473.0
    Receivables.....................................  ....................                81.7              81.7
    Materials and supplies..........................  ....................                 3.8               3.8
    Prepaid expenses................................  ....................                27.8              27.8
    Items in process of collection \33\.............              593.0                3,509.8           4,102.8
    Long-term assets................................  ....................             1,479.3           1,479.3
                                                     -----------------------------------------------------------
        Total assets................................           $6,066.0               $5,780.9         $11,846.9
                                                     ===========================================================
Liabilities:
    Clearing balances and balances arising from                $5,892.2               $1,485.3          $7,377.5
     early credit of uncollected items \34\.........
    Deferred credit items...........................  ....................             3,509.8           3,509.8
    Short-term payables.............................  ....................               103.9             103.9
    Long-term liabilities...........................  ....................               263.4             263.4
                                                     -----------------------------------------------------------
        Total liabilities...........................           $5,892.2               $5,362.4         $11,254.6
                                                     ===========================================================
Rate change results:                                                          200 basis point
                                                                              decrease in both
                                                                                   rates
    Asset yield ($6,066.0x-.02).....................  ....................             $(121.3)  ...............
    Liability cost ($5,892.2x-.02)..................  ....................              (117.8)  ...............
    Effect of 200 basis point decrease..............  ....................               $(3.5)  ...............
    2002 budgeted revenue...........................             $955.9     ...................  ...............
    Effect of decrease..............................               (3.5)    ...................  ...............
                                                     -----------------------------------------------------------
        Revenue adjusted for effect of interest rate             $952.4     ...................  ...............
         decrease...................................
                                                     ===========================================================
    2002 budgeted total expenses....................             $900.9     ...................  ...............
    2002 budgeted target ROE........................               92.5     ...................  ...............
    Tax effect of interest rate decrease ($-3.5  x                 (1.0)    ...................  ...............
     29.3%).........................................
                                                     -----------------------------------------------------------
        Total recovery amounts......................             $992.4     ...................  ...............
                                                     ===========================================================
    Recovery rate before interest rate decrease.....               96.2%    ...................  ...............
    Recovery rate after interest rate decrease......               96.0%    ...................  ...............
                                                     -----------------------------------------------------------
        Effect of interest rate decrease on cost                     .2%    ...................  ...............
         recovery \35\..............................
----------------------------------------------------------------------------------------------------------------
\33\ The amount designated rate sensitive represents the amount of cash items in process of collection that are
  invested in three-month Treasury bills.
\34\ The amount designated rate insensitive represents clearing balances on which earnings credits are not paid.
\35\ Effect of a potential change in rates is less than a 2 percentage point change in cost recovery, therefore,
  no long-term debt is imputed for 2002.


                  Table 16.--Derivation of the 2002 and 2001 PSAF [Dollar amounts in millions]
----------------------------------------------------------------------------------------------------------------
                                                                       2002                       2001
----------------------------------------------------------------------------------------------------------------
A. Imputed elements:
    Short-term debt \36\..................................                       $0.0                      $18.9
    Long-term debt \37\...................................                       $0.0                     $479.1
Equity:
    Total assets from table 13............................                  $11,846.9  .........................
    Required capital ratio \38\...........................                         5%  .........................
                                                           -----------------------------------------------------
        Total equity......................................                     $592.3                     $664.4
                                                           =====================================================
B. Cost of Capital:
    1. Financing rates/costs:
        Short-term debt...................................                        N/A                       4.7%
        Long-term debt....................................                        N/A                       6.5%
        Pre-tax return on equity \39\.....................                      22.1%                      24.0%
    2. Elements of capital costs: \40\
        Short-term debt...................................                       $0.0         $18.9 x 4.7% = $.9
        Long-term debt....................................                        0.0        479.1 x 6.5% = 31.1
        Equity............................................     $592.3 x 22.1% = 130.9      664.4 x 24.0% = 159.5
                                                           -----------------------------------------------------

[[Page 56326]]

 
            Total equity..................................                     $130.9                     $191.5
                                                           =====================================================
C. Other required PSAF recoveries:
    Sales taxes...........................................                      $14.1                      $10.5
    Federal deposit insurance assessment..................                        0.0                        0.0
    Board of Governors expenses...........................                        5.1                        4.9
                                                           -----------------------------------------------------
                                                                                 19.2                       15.4
                                                           -----------------------------------------------------
D. Total PSAF recoveries                                                       $150.1                     $206.9
                                                           =====================================================
    As a percent of assets................................                       1.3%                       1.7%
    As a percent of expenses \41\.........................                      19.0%                      28.5%
E. Tax rates..............................................                      29.3%                      31.5%
----------------------------------------------------------------------------------------------------------------
\36\ No short-term debt is imputed in 2002 because clearing balances are used as a funding source. For 2001,
  short-term debt is imputed to finance only those assets that are not funded with short-term payables.
\37\ No long-term debt is imputed in 2002 because clearing balances are used as a funding source. For 2001, long-
  term debt consists of total priced long-term assets less postretirement/postemployment benefit liabilities.
\38\ Based on the Federal Deposit Insurance Corporation's definition of a well-capitalized institution for
  purposes of assessing insurance premiums.
\39\ For 2001, 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. For 2002, the pre-tax rate of return on equity is determined averaging the result from the method
  used for 2001 (23.5%), along with results from a capital asset pricing model (21.4%), and a discounted cash
  flow model (21.4%).
\40\ The division of financing between debt and equity for 2001 was determined using the debt-to-equity ratio
  from the bank holding company model.
\41\ System 2002 budgeted priced services expenses less shipping are $791.9 million.


  Table 17.--Computation of 2002 Proposed Capital Adequacy for Federal
                         Reserve Priced Services
                          [Millions of dollars]
------------------------------------------------------------------------
                                                    Risk       Weighted
                                      Assets       weight       assets
------------------------------------------------------------------------
Imputed reserve requirement on          $678.5          0.0          0.0
 clearing balances...............
Investment in marketable               5,473.0          0.0          0.0
 securities......................
Receivables......................         81.7           .2         16.3
Materials and supplies...........          3.8          1.0          3.8
Prepaid expenses.................         27.8          1.0         27.8
Items in process of collection...      4,102.8           .2        820.6
Premises.........................        431.1          1.0        431.1
Furniture and equipment..........        177.7          1.0        177.7
Leases, leasehold improvements &          70.4          1.0         70.4
 long-term prepayments...........
Prepaid pension costs............        800.1          1.0        800.1
                                  -------------             ------------
    Total........................    $11,846.9                  $2,347.8
                                  =============             ============
Imputed equity for 2002:
 $592.3
Capital to risk-weighted assets:
   25.2%
Capital to total assets:    5.0%
------------------------------------------------------------------------


               Automated Clearing House Fee Schedule \42\
------------------------------------------------------------------------
                                                                 Fees
------------------------------------------------------------------------
Origination (per item or record): \43\
    Items in small files...................................      $0.0055
    Items in large files...................................       0.0040
    Addenda record.........................................       0.0020
Receipt (per item or record):
    Item...................................................        0.005
    Addenda record.........................................        0.002
Input file-processing fees (per file)......................         5.00
Monthly fees (per routing number):
    Account servicing fee \44\.............................        25.00
    FedACH settlement \45\.................................        20.00
    Information extract file...............................        10.00
Voice response return item/notification of change (NOC)             2.00
 fees \46\.................................................
Nonelectronic input/output fees: \47\
    Tape input/output......................................        25.00
    Paper output...........................................        15.00
    Diskette output........................................        15.00

[[Page 56327]]

 
    Facsimile return/NOC \48\..............................        15.00
Cross-border fees:
    Cross-border item surcharge \49\.......................        0.039
    Same-day recall of item at receiving gateway operator..         3.50
    Same-day recall of item not at receiving gateway                5.00
     operator..............................................
    Item trace.............................................         5.00
    Microfiche.............................................         3.00
    Delivery by courier....................................        10.00
------------------------------------------------------------------------
\42\ This fee schedule does not include the Reserve Banks' charges to
  private-sector operators for interoperator transactions.
\43\ Small files contain fewer than 2,500 items and large files contain
  2,500 or more items.
\44\ The account servicing fee applies only to routing numbers that have
  received or originated transactions that are processed by the Federal
  Reserve. Institutions that have a ``government only'' receiver status
  or that elect to use a PSO exclusively are not assessed the account
  servicing fee.
\45\ The fee for FedACH settlement is applied to any routing number with
  activity during a month. This fee does not apply to routing numbers
  that use the Federal Reserve for government transactions only.
\46\ The fee includes the transaction fee in addition to the voice-
  response fee. The Reserve Banks also assess a $15 fee for every
  government paper return/NOC they process. This service is not
  considered a priced service. The fee includes the transaction fee in
  addition to the conversion fee.
\47\ These services are offered in contingency situations only.
\48\ The fee includes the transaction fee in addition to the conversion
  fee.
\49\ The cross-border item surcharge is a per-item surcharge in addition
  to the standard item, addenda, and input processing fees.


             Funds Transfer and Net Settlement Fee Schedule
------------------------------------------------------------------------
                                                                 Fees
------------------------------------------------------------------------
Funds transfer:
    Volume-based pricing fees (originations and receipts):
        Per transfer for the first 2,500 transfers per             $0.31
         month.............................................
        Per transfer for additional transfers up to 80,000          0.22
         per month.........................................
        Per transfer for every transfer over 80,000 per             0.15
         month.............................................
    Surcharge:
        Off-line transfer originated.......................        15.00
        Telephone notification.............................        15.00
Net settlement:
    Basic fee:
        Settlement charge per entry........................         0.80
        Settlement file charge.............................        14.00
    Surcharge: Off-line origination per file...............        25.00
    Monthly account maintenance \50\.......................        60.00
    Fedwire-based net settlement: \51\ Settlement charge          100.00
     per day...............................................
------------------------------------------------------------------------
\50\ The monthly account maintenance fee will only be assessed if total
  settlement charges during a calendar month are less than $60. The fee
  will be reduced by the total amount of any per entry and per
  settlement charges incurred during the month.
\51\ Participants in arrangements and settlement agents are also charged
  the applicable Fedwire funds transfer fee for each transfer into and
  out of the settlement account.


                   Book-Entry Securities Fee Schedule
                           [Agency Securities]
------------------------------------------------------------------------
                                                                 Fees
------------------------------------------------------------------------
Book-entry securities transfer:
    Basic transfer fee: Transfer or reversal originated or         $0.66
     received..............................................
    Surcharge: Off-line transfer or reversal originated or         25.00
     received..............................................
    Monthly maintenance fees:
        Account maintenance (per account)..................        15.00
        Issues maintained (per issue/per account)..........         0.41
Purchase & sale: Transaction fee...........................        40.00
------------------------------------------------------------------------


                     Noncash Collection Fee Schedule
------------------------------------------------------------------------
                                                                 Fees
------------------------------------------------------------------------
Coupon collection:
    Cash letters:
        With five or fewer coupon envelopes................        $7.50
        With six to fifty coupon envelopes.................        15.00
    Coupon envelopes:
        With five or fewer coupon envelopes................         4.75
        With six to fifty coupon envelopes.................         2.50
    Return items...........................................        20.00

[[Page 56328]]

 
Bond collection (per bond).................................    \52\40.00
------------------------------------------------------------------------
\52\ Plus actual shipping costs.


                   Special Cash Services Fee Schedule
------------------------------------------------------------------------
                                                    Fees
------------------------------------------------------------------------
Wrapped coin (per box \53\)
    Helena.......................  $3.25
Nonstandard packaging
    Seventh District offices (per   $12.00 \54\
     currency order or deposit).
    Helena (per coin bag           Will be discontinued December 2001
     deposited).
    El Paso (Express Cash orders)  Discontinued October 2001
------------------------------------------------------------------------
\53\ There are 50 rolls of coin in each box.
\54\ This service only applies to the $1 through $20 denominations.


 
                                      Surcharge       Insurance Fee \56\
------------------------------------------------------------------------
Registered Mail Fees \55\
    First District.............          Discontinued April 2001
    Helena \57\................  $30.00
    Tenth District Offices.....  $24.00               $0.45
------------------------------------------------------------------------
\55\ Depository institutions also pay any postage fees incurred for
  registered mail. Postage fees are billed separately from Federal
  Reserve Bank surcharges and insurance fees.
\56\ Insurance fees are based on every $1,000 shipped via the registered
  mail service in excess of the first $25,000, which is covered by the
  U.S. Postal Service.
\57\ The Helena Office only ships registered mail packages valued up to
  $25,000, so no additional insurance is needed in excess of the $25,000
  covered by the U.S. Postal Service.


                 Electronic Connection Fee Schedule \58\
   [The Reserve Banks charge fees for the electronic connections that
  depository institutions use to access priced services; Banks allocate
cost and revenue associated with electronic access to the various priced
                               services.]
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Current Fednet network:
    Dial--receive and send                  $75.00 per month
     (FedLine).
    Link encrypted dial...................  $200.00 per month
    High-speed dial @ 56 kbps.............  $350.00 per month
    Multi-drop leased line................  $500.00 per month
    Dedicated leased line (to 9.6 kbps)...  $750.00 per month
    High-speed leased line @ 19.2 kbps....  $850.00 per month
    High-speed leased line @ 56 kbps......  $1,000.00 per month
    High-speed leased line @ 128 kbps.....  $1,800.00 per month
    High-speed leased line @ 256 kbps.....  $2,000.00 per month
    Premium dedicated dial test connection  $500.00 per month
    Basic dedicated dial test connection..  $250.00 per month
    Shared dial test connection...........  $150.00 per month
    Third party contingency site dial test  $45.00 per month
     connection.
    Additional backup modem/DSU...........  $25.00 per month
    Additional backup link encryptor......  $20.00 per month
    Cross-district........................  Actual cost \59\
Frame relay network:
    Frame Relay-FedLine @ up to 19.2 kbps   $500.00 per month
     \60\.
    Frame Relay-Computer Interface (CI) @   $1,000.00 per month
     56 kbps.
    Frame Relay-CI @ 256 kbps.............  $2,000.00 per month
    Frame Relay-CI T1.....................  $2,500.00 per month
------------------------------------------------------------------------
\58\ Installation, training, contingency hardware, and software
  certification are not considered priced services, and the fees for
  these services are not listed here. For a copy of the full electronic
  access fee schedule, contact the local Federal Reserve Bank.
\59\ The customer will pay the actual costs of the circuit and a monthly
  surcharge to cover an equitable share of expenses associated with
  customer support, depreciation of hardware (that is, link encryption
  units), and other overhead expenses. This fee must be, at a minimum,
  equivalent to the standard fee for the particular type of leased line
  connection.
\60\ The frame relay FedLine 19.2 kbps connection is identical to the
  frame relay 56 kbps connection except for the following: (a) Redundant
  equipment is not included with the 19.2 kbps option; and (b) the speed
  limitation of 19.2 kbps is imposed by FedLine. This connection is
  otherwise capable of operating at 56 kbps.


[[Page 56329]]

Test adn Contingency Options\63\

----------------------------------------------------------------------------------------------------------------
                                                                                       Frame
            Connection type                   Logical split        Full circuit     connection       Redundant
                                                                      backup           only        component set
----------------------------------------------------------------------------------------------------------------
FedLine @ up to 19.2 kbps.............  No charge...............            $500            $420            $155
CI @ 56 kbps..........................  No charge...............             845             765             N/A
CI @ 256 kbps.........................  No charge...............           1,750           1,585             N/A
CI T1.................................  No charge...............           2,230           2,010             N/A
----------------------------------------------------------------------------------------------------------------
\61\ Test and contingency options, including redundant parts, are only available to customers with a primary
  connection. The exception is a third party vendor.

    Logical split: Applies to production and test systems that are 
located together at the same facility. The institution could use the 
production equipment with a logical split (different port) in its 
router as a test or contingency facility. There is no additional cost 
for this option.
    Full-circuit backup: Applies to production and test systems, or 
production and contingency systems, that are located at separate 
facilities, including another bank office or a third-party contingency 
site.\62\ This option replicates full production technology and costs; 
only one set of equipment components is provided.
---------------------------------------------------------------------------

    \62\ Prices shown are for full-circuit backup only located at 
the customer site. Multiple customers sharing a single disaster-
recovery connection at a third-party provider will result in custom 
implementations. Districts will bill the vendor's bank for the 
contingency circuit
---------------------------------------------------------------------------

    Frame connection only: Applies to production and test systems, or 
production and contingency systems, that are located at separate 
facilities. The institution uses a frame relay link connection with no 
ISDN dial-up backup. Only one set of equipment components is 
provided.\63\
---------------------------------------------------------------------------

    \63\ Prices shown are for frame connection only located at the 
customer site. Multiple customers sharing a single disaster recovery 
connection at a third-party provider will result in custom 
implementations. Districts will bill the vendor's bank for the 
contingency circuit.
---------------------------------------------------------------------------

    Redundant components: Includes a Cisco router, a DSU and a link 
encryptor.

    By order of the Board of Governors of the Federal Reserve 
System, October 31, 2001.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 01-27779 Filed 11-6-01; 8:45 am]
BILLING CODE 6210-01-P