[Federal Register Volume 69, Number 216 (Tuesday, November 9, 2004)]
[Notices]
[Pages 64933-64954]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-24967]


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FEDERAL RESERVE SYSTEM

[Docket No. OP-1216]


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 2005 fee schedules for Federal 
Reserve priced services and electronic access and a private-sector 
adjustment factor (PSAF) for 2005 of $161 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. The Board has also approved 
changing the earnings credit rate on clearing balances from 90 percent 
of the three-month Treasury bill rate to 80 percent of the three-month 
Treasury bill rate.

DATES: The new fee schedules become effective January 3, 2005, except 
Fedwire funds transaction fees, which become effective July 1, 2005. 
The change in the earnings credit rate on clearing balances becomes 
effective January 6, 2005.

FOR FURTHER INFORMATION CONTACT: For questions regarding the fee 
schedules: Jack K. Walton II, Assistant Director, (202/452-2660); 
Gregory E. Cannella, Financial Services Analyst, (202/530-6214), 
Division of Reserve Bank Operations and Payment Systems. For questions 
regarding the PSAF and earnings credits on clearing balances: Gregory 
L. Evans, Manager, Financial Accounting, (202/452-3945); or Brenda 
Richards, Financial Project Leader, (202/452-2753); or Jonathan 
Mueller, Financial Analyst, (202/530-6291), Division of Reserve Bank 
Operations and Payment Systems. For users of Telecommunications Device 
for the Deaf (TDD) only, please call 202/263-4869. Copies of the 2005 
fee schedules for the check service are available from the Board, the 
Federal Reserve Banks, or the Reserve Banks' financial services Web 
site at http://www.frbservices.org.

SUPPLEMENTARY INFORMATION:

I. Priced Services

    A. Discussion--From 1994 through 2003, the Reserve Banks recovered 
97.8 percent of their total costs for providing priced services, 
including special project costs, imputed expenses, and targeted after-
tax profits or return on equity (ROE).\1\
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    \1\ These imputed expenses, such as taxes that would have been 
paid, and the return on equity that would have to be earned had the 
services been furnished by a private business firm, are referred to 
as the private-sector adjustment factor (PSAF). The ten-year 
recovery rate is based upon the pro forma income statements for 
Federal Reserve Banks' priced services published in the Board's 
Annual Report. Beginning in 2000, the PSAF has included additional 
financing costs associated with pension assets attributable to 
priced services. This ten-year cost recovery rate has been computed 
as if these costs were not included in the PSAF calculations prior 
to 2000. If these costs were included in the calculations, and 
assuming that the Reserve Banks would not have made any 
contemporaneous cost or revenue adjustments, the ten-year recovery 
rate would be 96.9 percent.
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    Table 1 summarizes 2003 actual, 2004 estimated, and 2005 budgeted 
cost recovery rates for priced services. Cost recovery is estimated to 
be 94.6 percent in 2004 and budgeted to be 100.1 percent in 2005. The 
performance of the check service heavily influences the aggregate cost 
recovery rates, and accounts for approximately 80 percent of the total 
cost of priced services. The electronic services (FedACH, Fedwire funds 
and national settlement (NSS), and Fedwire securities) account for 
approximately 20 percent of costs, while the noncash collection service 
represents a de minimis amount.

                               Table 1.--Pro Forma Cost and Revenue Performance a
                                                  [$ millions]
----------------------------------------------------------------------------------------------------------------
                                                                                                    5 Recovery
                                                    2 \c\ Total    3 Net income    4 \d\ Target     rate after
              Year                 1 \b\ Revenue      expense       (ROE) [1-2]         ROE       target ROE [1/
                                                                                                      (2+4)]
----------------------------------------------------------------------------------------------------------------
2003\e\.........................           881.7           931.3           -49.6           104.7           85.1%
2004 (Estimate).................           910.8           850.6            60.2           112.4           94.6%
2005 (Budget)...................           900.6           796.9           103.7           102.9         100.1%
----------------------------------------------------------------------------------------------------------------
\a\ Calculations in this table and subsequent pro forma cost and revenue tables may be affected by rounding.
\b\ Revenue includes net income on clearing balances (NICB). For 2003, clearing balances, net of imputed reserve
  requirements and balances used to finance priced services assets, are assumed to be invested in three-month
  Treasury bills. For 2004 and 2005, net clearing balances are assumed to be invested in a broader portfolio of
  investments. Based on the historical average return on the broader portfolio, income is imputed as a constant
  return over the rate used to determine the cost of clearing balances. NICB equals the imputed income from
  these investments less earnings credits granted to holders of clearing balances. For 2003, the cost of
  clearing balances was based on the federal funds rate, and for 2004 and 2005 the cost is based on the
  discounted three-month Treasury bill rate.
\c\ The calculation of total expense includes operating, imputed, and other expenses. Imputed and other expenses
  include taxes, FDIC insurance, Board of Governors' priced services expenses, the cost of float, and interest
  on imputed debt, if any. Credits or debits related to the accounting for pensions under FAS 87 are also
  included.
\d\ Target ROE is the after-tax ROE included in the PSAF.
\e\ 2003 calculations include special cash services, which are no longer offered by the Reserve Banks.

    Table 2 presents an overview of the 2003 actual, 2004 budget, 2004 
estimate, and 2005 budget cost recovery performance by priced service.

[[Page 64934]]



                                     Table 2.--Priced Services Cost Recovery
                                                    [percent]
----------------------------------------------------------------------------------------------------------------
                                                                                            2004     2005 Budget
                       Priced service                             2003     2004 Budget    Estimate       \a\
----------------------------------------------------------------------------------------------------------------
All services................................................         85.1         92.9         94.6        100.1
Check.......................................................         82.7         91.5         93.5        100.0
FedACH......................................................        100.3         99.7        101.0        100.4
Fedwire funds & NSS.........................................         97.4        100.9         98.1        100.0
Fedwire securities..........................................        106.1        104.0        102.4        102.3
Noncash collection..........................................        123.1        112.0        110.2        76.0
----------------------------------------------------------------------------------------------------------------
\a\ 2005 budget figures reflect the latest data from Reserve Banks. Reserve Banks will report final budget data
  to the Board by the end of November 2004.

    1. 2004 Estimated Performance--In 2004, the Reserve Banks estimate 
that they will recover 94.6 of the costs of providing priced services, 
including imputed expenses and targeted ROE, compared with a targeted 
recovery rate of 92.9 percent, as shown in table 2. The Reserve Banks 
exceeded the 2004 budget targets for the check and FedACH services. The 
98.1 percent estimated recovery rate for the Fedwire funds and national 
settlement service, however, is below the targeted recovery rate of 
100.9 percent. This difference is due to both lower revenue, associated 
with less-than-anticipated volume growth, and greater costs, associated 
with a movement to an Internet-based distribution channel for these and 
other electronic services. While achieving full cost recovery, the 
Fedwire securities and noncash collection services' shortfalls relative 
to the budgeted recovery rates are primarily attributed to lower-than-
expected volume. Although the estimated 2004 overall recovery rate for 
priced services is below 100 percent, the Reserve Banks estimate that 
they will fully recover actual and imputed expenses and earn net income 
of $60.2 million compared with a targeted ROE of $112.4 million. This 
ROE shortfall is largely driven by the accrual of one-time costs 
associated with the second round of Reserve Banks' check restructuring 
efforts, lower-than-expected check service revenues due to a greater-
than-anticipated decline in check volumes, and by lower-than-expected 
net income from clearing balances (NICB).\2\
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    \2\ The first round of the Reserve Banks' check restructuring 
initiative will have reduced Federal Reserve check processing 
locations from 45 to 32 sites and streamlined check adjustments 
functions by the end of 2004. Additionally, in August 2004, the 
Reserve Banks announced further changes to increase the efficiency 
of their check processing operations and will reduce further the 
number of check operations from 32 to 23 sites by early 2006. (See 
http://www.federalreserve.gov/boarddocs/press/other/2004/20040802/default.htm.)
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    Recent anecdotal information from the industry suggests that check 
use in the United States continues to decline.\3\ Additionally, an 
increasing proportion of checks are being converted to automated 
clearinghouse transactions at retail lockboxes, which results in fewer 
interbank checks. As a result of these factors, check volume processed 
by the Reserve Banks has declined about 10 percent year-to-date. In 
response to volume declines, the Reserve Banks have continued to 
restructure their check processing operations and in 2004 incurred 
additional one-time costs associated with further restructurings in 
2005. This initiative will provide ongoing operational and cost 
efficiencies for the Reserve Banks and is expected to enable the 
Reserve Banks to achieve full cost recovery in 2005.
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    \3\ The Federal Reserve's 2001 retail payments research 
indicated that check use began declining in the mid 1990s. See 
Gerdes, Geoffrey R. and Jack K. Walton II, ``The Use of Checks and 
Other Noncash Payment Instruments in the United States,'' Federal 
Reserve Bulletin, August 2002, pp. 360-374. (See http://www.federalreserve.gov/pubs/bulletin/default.htm.) This study is 
being updated and the results are forthcoming by early December 
2004.
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    2. 2005 Projected Performance--For 2005, the Reserve Banks project 
a priced services cost recovery rate of 100.1 percent. The 2005 fees 
for priced services are projected to result in a net income of $103.7 
million or $0.8 million above the targeted ROE. The primary risks to 
the Reserve Banks' ability to achieve their budget targets are (1) 
greater-than-expected costs associated with the check restructuring 
initiatives, (2) a greater falloff in the Reserve Banks' check volume 
than the projected 15.8 percent decrease, and (3) a greater-than-
expected shift from higher margin products to lower margin products. In 
light of these risks and the changing payments landscape, the Reserve 
Banks will continue to modify their business and operational strategies 
to improve efficiency, reduce excess capacity and other costs, and 
position themselves to achieve their financial and payment system 
objectives and statutory requirements over the long term.
    3. 2005 Pricing--The following summarizes the changes in the 
Reserve Banks' fee structures and levels for priced services in 2005, 
and indicates the overall experience with prices in each service line 
since 1996: \4\
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    \4\ Data elements used in calculating the price index for 2003 
and previous years include explicit fee revenue from priced services 
and volumes associated with those services. For 2004 and 2005, the 
year-over-year percentage changes are based on comparisons of the 
2003 results, 2004 estimates, and 2005 projections.
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Check
     The Reserve Banks will raise fees for forward-collection 
check products 7.9 percent, return-check products 8.1 percent, and 
payor bank check products 2.8 percent compared with January 2004 fees.
     With the 2005 fee changes, the price index for the check 
service will have increased 40 percent since 1996.
FedACH
     The Reserve Banks will retain fees at their current 
levels.
     With the 2005 fee changes, the price index for the FedACH 
service will have decreased 66 percent since 1996.
Fedwire funds and national settlement
     The Reserve Banks will increase Fedwire funds per transfer 
fees by one cent in all volume tiers, effective July 1, 2005.
     With the 2005 fee changes, the price index for the Fedwire 
funds and national settlement service will have decreased 59 percent 
since 1996.
Fedwire Securities
     The Reserve Banks will increase the off-line surcharge 
from $28 to $33 per transfer and increase the joint custody surcharge 
from $30 to $35. The Reserve Banks will retain all other fees at their 
current levels.
     With the 2005 fee changes, the price index for the Fedwire 
securities service will have decreased 43 percent since 1996.

[[Page 64935]]

    4. 2005 Price Index--Figure 1 compares indexes of fees for the 
Federal Reserve's priced services with the GDP price deflator. Compared 
with the price index for 2004, the price index for all Federal Reserve 
Bank priced services is projected to increase 7.3 percent in 2005. The 
price index for electronic payment services (FedACH, Fedwire funds and 
national settlement, Fedwire securities, and electronic check 
products), as well as electronic access to Federal Reserve Banks' 
priced services, is projected to increase 2.6 percent in 2005. The 
price index for paper-based payment services (check and noncash 
collection) is expected to increase 7.9 percent in 2005. Since 1996, 
the price index for all priced services has increased a total of 10.6 
percent.
BILLING CODE 6210-01-P
[GRAPHIC] [TIFF OMITTED] TN09NO04.000

BILLING CODE 6210-01-C

[[Page 64936]]

    B. Earnings Credits on Clearing Balances--The Board has approved 
changing the rate used in calculating earnings credits on clearing 
balances from 90 percent of the three-month Treasury bill rate to 80 
percent of the three-month Treasury bill rate, effective January 6, 
2005.\5\ This change will lower the Reserve Banks' cost of clearing 
balances.
    Clearing balances were introduced in 1981, as a part of the Board's 
implementation of the Monetary Control Act, to facilitate access to 
Federal Reserve priced services by institutions that did not have 
sufficient reserve balances to support the settlement of their payment 
transactions. Beginning in 2004, the earnings credit calculation was 
changed from using the federal funds rate to using a percentage 
discount on a rolling thirteen-week average of the annualized coupon 
equivalent yield of three-month Treasury bills in the secondary market. 
Earnings credits can be used only to offset charges for priced 
services, are calculated monthly, and expire if not used within one 
year.\6\
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    \5\ Two adjustments are applied to the earnings credit rate so 
that the return on clearing balances at the Federal Reserve is 
comparable to what the depository institution would have earned had 
it maintained the same balances at a private-sector correspondent. 
The ``imputed reserve requirement'' adjustment is made because a 
private-sector correspondent would be required to hold reserves 
against the respondent's balance with it. As a result, the 
correspondent would reduce the balance on which it would base 
earnings credits for the respondent because it would be required to 
hold a portion, determined by its marginal reserve ratio, in the 
form of non-interest-bearing reserves. For example, if a depository 
institution held $1 million in clearing balances with a 
correspondent bank and the correspondent had a marginal reserve 
ratio of 10 percent, then the correspondent bank would be required 
to hold $100,000 in reserves, and it would grant credits to the 
respondent based on 90 percent of the balance, or $900,000. This 
adjustment imputes a marginal reserve ratio of 10 percent to the 
Reserve Bank.
    The ``marginal reserve requirement'' adjustment accounts for the 
fact that the respondent can deduct balances maintained at a 
correspondent, but not the Federal Reserve, from its reservable 
liabilities. This reduction has value to the respondent when it 
frees up balances that can be invested in interest-bearing 
instruments, such as federal funds. For example, a respondent 
placing $1 million with a correspondent rather than the Federal 
Reserve would free up $30,000 if its marginal reserve ratio were 3 
percent.
    The formula used by the Reserve Banks to calculate earnings 
credits can be expressed as e = [b * (1-FRR) * r] + [b * (MRR) * f]
    Where e is total earnings credits, b is the average clearing 
balance maintained, FRR is the assumed Reserve Bank marginal reserve 
ratio (10 percent), r is the earnings credit rate, MRR is the 
marginal reserve ratio of the depository institution holding the 
balance (either 0 percent, 3 percent, or 10 percent), and f is the 
average federal funds rate. A depository institution that meets its 
reserve requirement entirely with vault cash is assigned a marginal 
reserve requirement of zero.
    \6\ A band is established around the contracted clearing balance 
to determine the maximum balance on which credits are earned as well 
as any deficiency charges. The clearing balance allowance is 2 
percent of the contracted amount, or $25,000, whichever is greater. 
Earnings credits are based on the period-average balance maintained 
up to a maximum of the contracted amount plus the clearing balance 
allowance. Deficiency charges apply when the average balance falls 
below the contracted amount less the allowance, although credits are 
still earned on the average maintained balance.
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    C. Check--Table 3 below shows the 2003, 2004 estimate, and 2005 
budgeted cost recovery performance for the check service.

                             Table 3.--Check Pro Forma Cost and Revenue Performance
                                                  [$ millions]
----------------------------------------------------------------------------------------------------------------
                                                                                                    5 Recovery
                                                      2 Total      3 Net income                     rate after
              Year                   1 Revenue        expense       (ROE) [1-2]    4 Target ROE   target ROE [1/
                                                                                                      (2+4)]
----------------------------------------------------------------------------------------------------------------
2003............................           737.9           803.2           -65.3            89.4           82.7%
2004 (Estimate).................           756.0           714.9            41.1            93.6           93.5%
2005 (Budget)...................           731.6           649.2            82.4            82.0          100.0%
----------------------------------------------------------------------------------------------------------------

    1. 2004 Estimate--For 2004, the Reserve Banks estimate that the 
check service will recover 93.5 percent of total expenses, including 
imputed expenses, and targeted ROE, compared with the budgeted recovery 
rate of 91.5 percent (see table 4). Through August 2004, the check 
service has recovered 94.3 percent of total costs, including imputed 
expenses, and targeted ROE. For the full year, the Reserve Banks expect 
to recover all actual and imputed expenses of providing check services 
and earn net income of $41.1 million, representing a portion of the 
targeted ROE.

              Table 4.--Check 2004 Budget vs. 2004 Estimate
                          [millions of dollars]
------------------------------------------------------------------------
                                                    2004
                                   2004 Budget    Estimate     Variance
------------------------------------------------------------------------
Service revenue..................        727.1        718.1         -9.0
NICB.............................         43.6         37.9         -5.7
                                  --------------
    Total revenue................        770.7        756.0        -14.7
==================================
Local operating costs............        506.7        472.0        -34.7
Other operating costs............        224.7        225.3          0.6
RPO initiatives\a\...............         29.0         24.0         -5.0
Pension credits..................        -11.4         -6.4          5.0
                                  --------------
    Total expense................        749.0        714.9        -34.1
==================================
    Net Income...................         21.7         41.1         19.4
==================================
Target ROE.......................         93.6         93.6

[[Page 64937]]

 
Recovery rate (percent)..........         91.5        93.5
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\a\ These are primarily check restructuring and Check 21-related
  expenses.

    The higher-than-budgeted cost recovery is the result of lower-than-
anticipated costs of $34.1 million that were partially offset by 
revenue shortfalls of $14.7 million. The lower costs were largely due 
to Reserve Banks reducing local operating costs by $34.7 million. The 
shortfall in revenue is due to lower-than-anticipated service revenue 
and NICB. Service revenue is estimated to be $9.0 million below budget 
due to a greater-than-anticipated decline in check volumes.
    The volume of checks handled by the Reserve Banks has declined (as 
shown in table 5), reflecting broader market trends including 
alternative clearing methods and less frequent use of checks. Forward-
collection check volume through August, excluding electronic fine sort 
volume, declined 10.5 percent.\7\ For full-year 2004, the Reserve Banks 
estimate that forward-collection volume will decline 10.1 percent, 
compared with a budgeted decline of 8.9 percent. Return check volume 
has declined 11.7 percent through August 2004. The Reserve Banks expect 
that return check volume will decline 8.3 percent for the full year, 
compared with a budgeted decline of 7.0 percent. The Reserve Banks 
anticipate higher forward and return volume growth for the remainder of 
the year based additional new customer volumes. Board staff believes 
that these volume expectations for full-year 2004 may be somewhat 
optimistic.
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    \7\ Two Reserve Banks offer an electronic fine-sort product, 
which allows depository institutions to exchange fine-sort 
information electronically between themselves with paper checks to 
follow.

              Table 5.--Paper Check Product Volume Changes
                                [percent]
------------------------------------------------------------------------
                                                Year-to-date   Estimated
                                Budgeted 2004  change through     2004
                                   change        August 2004     change
------------------------------------------------------------------------
Total forward-collection\a\..            -8.9           -10.5  -10.1
    Forward-processed........            -8.9            -9.9   -9.7
    Fine-sort \a\............            -8.1           -19.6  -16.7
Returns......................            -7.0           -11.7  -8.3
------------------------------------------------------------------------
\a\ These rates exclude electronic fine-sort volume. Including the
  electronic fine-sort product, fine-sort volume was budgeted to decline
  32.9 percent in 2004 and is now estimated to decline 11.3 percent.

    Electronic check presentment volumes are estimated to decline for 
full-year 2004, as summarized in table 6. Reserve Banks provide paying 
banks with electronic check data or images for approximately 41 percent 
of the checks they collect. Image volumes are estimated to decline 4.7 
percent to approximately 1.4 billion check images, which represent 
about 10.7 percent of all checks collected by the Reserve Banks. The 
aggregate decline in electronic check data and image volumes is less 
than that of check volume more generally, and as a proportion of total 
check volume, the use of electronic check data and images is growing.

                           Table 6.--Electronic Check Product Share and Volume Changes
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                                                                                                     Share of
                                                                   Volume change  Estimated 2004      checks
                                                                      through         change         collected
                                                                    August 2004      (percent)    through August
                                                                     (percent)                    2004 (percent)
----------------------------------------------------------------------------------------------------------------
Electronic check presentment \a\................................           -10.2            -8.3            24.2
    Truncation..................................................           -11.1            -9.9             5.7
    Non-truncation..............................................            -9.9            -7.7            18.6
Electronic check information....................................           -12.7           -11.2             6.4
Images..........................................................            -1.6            -4.7           10.7
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\a\ ECP consists of truncated and non-truncated checks. Non-truncated checks include checks presented through
  the MICR presentment and MICR presentment plus products.

    2. 2005 Projection--The Reserve Banks are planning to return to 
full cost recovery in 2005 by focusing on further opportunities to 
streamline check processing and administrative activities across the 
System, as well as expanding their Check 21-related product offerings. 
A number of cost reduction initiatives have been identified and are 
currently in various stages of implementation. In 2005, the service 
will achieve the full cost savings with the decisions made in

[[Page 64938]]

2003 and 2004 to discontinue processing checks at thirteen sites 
nationwide. The Reserve Banks will eliminate nine more processing sites 
by early 2006, reducing excess processing capacity and lowering ongoing 
operating costs by $14 million. Additionally, the Reserve Banks are in 
the process of centralizing their float management function and their 
pricing and product management activities.
    The Reserve Banks plan to offer a comprehensive suite of Check 21-
related products in 2005. These products will include image cash letter 
receipt and delivery products as well as substitute check printing. The 
pricing of these products will reflect the value to customers of later 
deposit deadlines and improved availability. The Reserve Banks will 
also modify the pricing structure of existing paper products to 
encourage the use of the new Check 21-related products. As the Check 
21-related products mature, the pricing of paper products will be 
strategically raised to encourage adoption of electronic collection and 
presentment alternatives.
    There is also a continuing effort in 2005 to set fees to achieve 
greater pricing consistency across Reserve Bank product lines. Reserve 
Banks will also increase prices of selected products in 2005 to enhance 
service revenue. Most of the price increases are targeted at markets 
that are costly for the Reserve Banks to serve. Fees to present and 
return checks to depository institutions that are distant from Federal 
Reserve check processing offices will be increased to better align with 
the Reserve Banks' costs to deliver checks to these institutions. The 
fee changes will enhance the Reserve Banks' ability to recover costs, 
while maintaining the competitiveness of these products.
    For 2005, the Reserve Banks are targeting an overall price increase 
of 7.9 percent, as shown in table 7. This increase consists of a 7.9 
percent increase in forward check-collection fees, composed of a 7.6 
percent increase in forward cash letter fees and a 7.9 percent increase 
in per-item fees. Fees for return services will increase by 8.1 
percent, which is composed of a 4.8 percent increase in return cash 
letter fees and an 8.7 percent increase in per-item fees. The average 
volume-weighted fees for payor bank services will increase 2.8 percent 
compared with current fees.

                       Table 7.--2005 Fee Changes
                                [percent]
------------------------------------------------------------------------
                          Product                             Fee change
------------------------------------------------------------------------
Total check service........................................          7.9
Forward-collection.........................................          7.9
  Cash letter..............................................          7.6
  Item.....................................................          7.9
Returns....................................................          8.1
  Cash letter..............................................          4.8
  Item.....................................................          8.7
  Payor bank services......................................          2.8
------------------------------------------------------------------------

    3. 2005 Cost Recovery--For 2005, projected cost recovery will be 
100.0 percent of total costs, including imputed expenses, and targeted 
ROE.

              Table 8.--Check 2004 Estimate vs. 2005 Budget
                          [millions of dollars]
------------------------------------------------------------------------
                                       2004
                                     Estimate   2005 Budget    Variance
------------------------------------------------------------------------
Service revenue..................        718.1        681.9        -36.2
NICB.............................         37.9         49.7         11.8
                                  --------------
    Total revenue................        756.0        731.6        -24.4
 
dLocal operating costs...........        472.0        349.9       -122.1
Other operating costs............        225.3        295.6         70.3
RPO initiativesa.................         24.0         10.0        -14.0
Pension credits..................         -6.4         -6.3          0.1
                                  --------------
    Total expense................        714.9        649.2        -65.7
 
    dNet Income..................         41.1         82.4         41.3
 
dTarget ROE......................         93.6         82.0
Recovery rate (percent)..........         93.5       100.0
------------------------------------------------------------------------
a These are primarily check restructuring and Check 21-related expenses.

    Total expenses are projected to decrease approximately $65.7 
million, or 9.2 percent, from the 2004 estimate. The decrease owes 
largely to the decline in local operating costs, which are expected to 
decrease $122.1 million, or 25.9 percent. This decline reflects 
significant reductions in personnel costs, full-year savings associated 
with discontinuing the processing of checks at thirteen Federal Reserve 
offices as well as partial-year savings associated with discontinuing 
the processing of checks at six offices, and a shift of adjustment 
costs resulting from a transition to the national management of the 
adjustments function. Additional reductions include centralizing float 
management and check product development and pricing activities.
    Total check revenue is projected to decline $24.4 million, or 3.2 
percent, compared with the 2004 estimate. The revenue decline is driven 
by a $36.2 million, or 5.0 percent, reduction in service revenue, 
largely attributable to a continued downtrend in the Reserve Banks' 
check volumes due to the nationwide decline in check use. The price 
changes will somewhat attenuate the effect of volume losses on check 
revenue. Also partially offsetting the decline in service revenue is a 
projected $11.8 million increase in NICB.
    In 2005, forward-processed check volume is projected to be 10.6 
billion, a decrease of 15.8 percent compared with the 2004 estimate. 
The decline in the volume of checks is attributed to the continued 
decline in the use of paper checks in the United States, the increasing 
use of the ACH to collect payments that were previously processed as 
checks, price increases, and the reduction in the number of check 
processing sites. Fine-sort check volume is expected to decline 16.7 
percent from the 2004 estimate. Total return volume is projected to 
decrease 10.1 percent compared with the 2004 estimate.

[[Page 64939]]

    The Reserve Banks expect payor bank volumes to decrease. Electronic 
presentment volume is expected to decline 6.1 percent in 2005. Image 
volume is projected to decline 1.8 percent in 2005, compared with 
estimated 2004 volumes. The proportion of processed checks that the 
Reserve Banks provide to paying banks with electronic data or images is 
projected to rise in 2005 to about 47 percent.
    The primary risks to the Reserve Banks' ability to achieve their 
budget targets are (1) greater-than-expected costs associated with the 
restructuring initiatives, (2) a steeper decline in the Reserve Banks' 
check volume than the projected 15.8 percent decrease, and (3) a 
greater-than-expected shift from higher margin products to lower margin 
products.
    D. Automated Clearinghouse (FedACH)--Table 9 below shows the 2003, 
2004 estimate, and 2005 budgeted cost recovery performance for the 
commercial FedACH service.

                             Table 9.--FedACH Pro Forma Cost and Revenue Performance
                                                  [$ millions]
----------------------------------------------------------------------------------------------------------------
                                                                                                    5  Recovery
                                                     2  Total      3  Net income                    rate after
              Year                  1  Revenue        expense       (ROE) [1-2]    4  Target ROE  target ROE [1/
                                                                                                      (2+4)]
----------------------------------------------------------------------------------------------------------------
2003............................            68.2            60.5             7.7             7.5          100.3%
2004 (Estimate).................            74.9            65.2             9.7             8.9          101.0%
2005 (Budget)...................            82.1            71.8            10.3            10.0          100.4%
----------------------------------------------------------------------------------------------------------------

    1. 2004 Estimate--For 2004, the Reserve Banks estimate that the 
FedACH service will recover 101.0 percent of total expenses, including 
imputed expenses, and targeted ROE, compared with the budgeted recovery 
rate of 99.7 percent. Both ACH revenue and cost estimates were better 
than budgeted. Total revenue is estimated to be $0.1 million greater 
than budgeted, and total expenses are lower than budgeted by about $0.9 
million. Through August 2004, origination volume was 3.1 percent higher 
than budgeted.
    2. 2005 Pricing--The Reserve Banks project that the FedACH service 
will recover 100.4 percent of costs in 2005, including imputed 
expenses, and targeted ROE. The Reserve Banks' fees for the FedACH 
service will remain unchanged. The Reserve Banks consider continued 
price stability important to remaining competitive in the ACH market.
    Total revenue is budgeted to increase $7.2 million over the 2004 
estimate, reflecting an increase in electronic access fees and service 
revenues. Total expenses, including imputed expenses, and targeted ROE 
are budgeted to increase $7.6 million over the 2004 estimate because of 
an increase in the cost of national support projects, specifically 
costs associated with the movement to the Internet-based distribution 
channel. In addition, the Reserve Banks have budgeted increased costs 
for product development and service initiatives, including FedACH 
International and FedACH risk-management services.
    The Reserve Banks estimate that national ACH volume will grow 20 
percent in 2005. This growth is largely attributable to new one-time 
ACH debit transactions, such as check conversion and Internet-initiated 
payments. The Reserve Banks, however, generally believe that FedACH 
origination volume will grow at a slower rate of 7.7 percent as a 
greater proportion of volume shifts to the private-sector ACH operator.
    E. Fedwire Funds and National Settlement Service--Table 10 below 
shows the 2003, 2004 estimate, and 2005 budgeted cost recovery 
performance for the Fedwire funds and national settlement service.

         Table 10.--Fedwire Funds and National Settlement Service Pro Forma Cost and Revenue Performance
                                                  [$ millions]
----------------------------------------------------------------------------------------------------------------
                                                                                                    5  Recovery
                                                     2  Total      3  Net income                    rate after
              Year                  1  Revenue        expense       (ROE) [1-2]    4  Target ROE  target ROE [1/
                                                                                                      (2+4)]
----------------------------------------------------------------------------------------------------------------
2003............................            51.1            47.1             4.0             5.4           97.4%
2004 (Estimate).................            57.5            51.8             5.7             6.8           98.1%
2005 (Budget)...................            64.2            56.3             7.9             7.9          100.0%
----------------------------------------------------------------------------------------------------------------

    1. 2004 Estimate--For 2004, the Reserve Banks estimate that the 
Fedwire funds and national settlement service will recover 98.1 percent 
of total expenses, including imputed expenses, and targeted ROE, 
compared with a 2004 budgeted recovery rate of 100.9 percent. The 
underrecovery is primarily attributed to lower-than-expected on-line 
funds transfer volume. Funds transfer volume through August 2004 has 
increased 0.2 percent relative to the same period in 2003. The Reserve 
Banks had originally projected a 6.8 percent growth in on-line funds 
volume for 2004, which was based on historical volume growth. Volume 
growth has been weaker than expected, and the Reserve Banks experienced 
a slight loss of market share in 2004 to a competitor. For the full 
year, the Reserve Banks estimate that volume will increase 2.0 percent 
compared with 2003. With respect to the national settlement service, 
the Reserve Banks estimate that the volume of settlement entries 
processed during 2004 will be slightly higher than the 2004 budget 
projection.
    2. 2005 Pricing--The Reserve Banks will increase on-line transfer 
fees for each Fedwire funds service price tier $0.01, effective July 1, 
2005. The surcharge for off-line Fedwire funds transfers and fees for 
the national settlement service will remain unchanged.
    The Reserve Banks project that the Fedwire funds and national 
settlement service will recover 100.0 percent of

[[Page 64940]]

total costs in 2005, including imputed expenses, and targeted ROE. 
Total costs for 2005, including imputed expenses, and targeted ROE are 
expected to increase $5.6 million from the 2004 estimate primarily 
because of rising national costs associated with a movement to an 
Internet-based distribution channel, as well as a higher PSAF. Funds 
transfer volume for 2005 is expected to increase 2.8 percent compared 
with the 2004 estimate. National settlement volume for 2005 is expected 
to remain flat compared with the 2004 estimate. The Reserve Banks 
project 2005 total revenue to increase by $6.7 million over the 2004 
estimate primarily because of mid-year price increases, modest volume 
growth, increased NICB, and higher electronic access revenue.
    F. Fedwire Securities Service--Table 11 below shows the 2003, 2004 
estimate, and 2005 budgeted cost recovery performance for the Fedwire 
securities service.\8\
---------------------------------------------------------------------------

    \8\ The Reserve Banks provide transfer services for securities 
issued by the U.S. Treasury, federal government agencies, 
government-sponsored enterprises, and certain international 
institutions. The priced component of this service, reflected in 
this memorandum, consists of revenues, expenses, and volumes 
associated with the transfer of all non-Treasury securities. For 
Treasury securities, the U.S. Treasury assesses fees for the 
securities transfer component of the service. The Reserve Banks 
assess a fee for the funds settlement component of a Treasury 
securities transfer; this component is not treated as a priced 
service.

                  Table 11.--Fedwire Securities Service Pro Forma Cost and Revenue Performance
                                                  [$ millions]
----------------------------------------------------------------------------------------------------------------
                                                                                                    5  Recovery
                                                     2  Total      3  Net income                    rate after
              Year                  1  Revenue        expense       (ROE) [1-2]    4  Target ROE  target ROE [1/
                                                                                                      (2+4)]
----------------------------------------------------------------------------------------------------------------
2003............................            21.8            18.3             3.4             2.2          106.1%
2004 (Estimate).................            20.7            17.3             3.4             2.9          102.4%
2005 (Budget)...................            21.4            18.1             3.3             2.9          102.3%
----------------------------------------------------------------------------------------------------------------

    1. 2004 Estimate--For 2004, the Reserve Banks estimate that the 
Fedwire securities service will recover 102.4 percent of total 
expenses, including imputed expenses, and targeted ROE, compared with a 
2004 budgeted recovery rate of 104.0 percent. Through August 2004, the 
Fedwire securities service recovered 100.6 percent of total costs, 
including imputed expenses, and targeted ROE. The lower-than-budgeted 
recovery is primarily attributed to lower-than-expected revenue from 
transfer volume. Through August 2004, total Fedwire securities transfer 
volume has decreased 8.8 percent relative to the same period in 2003. 
For the full year, the Reserve Banks estimate that total Fedwire 
securities volume will decrease 8.8 percent from 2003, compared with a 
2004 budget estimate of 6.8 percent volume growth. The lower-than-
expected volume growth is primarily attributed to the slowdown in the 
growth of the mortgage financing market.
    2. 2005 Pricing--The Reserve Banks will raise the off-line transfer 
origination and receipt surcharge from $28 to $33 and raise the joint 
custody origination surcharge from $30 to $35. The Reserve Banks will 
retain all other fees at their current levels. The surcharge increases 
will more closely align the fee with the costs of these transactions.
    The Reserve Banks project that the Fedwire securities service will 
recover 102.3 percent of costs in 2005, including imputed expenses, and 
targeted ROE. Total costs, including imputed expenses, and targeted ROE 
are expected to increase $0.8 million from the 2004 estimate. The 
Reserve Banks project that total securities volume in 2005 will 
increase 2.0 percent from the 2004 estimate. Total revenue is projected 
to increase $0.8 million from the 2004 estimate primarily due to 
projected modest volume increases, as well as higher NICB.
    G. Noncash Collection--Table 12 below shows the 2003, 2004 
estimate, and 2005 budgeted cost recovery performance for the noncash 
collection service.

                      Table 12.--Noncash Collection Pro Forma Cost and Revenue Performance
                                                  [$ millions]
----------------------------------------------------------------------------------------------------------------
                                                                                                    5  Recovery
                                                     2  Total      3  Net income                    rate after
              Year                  1  Revenue        expense       (ROE) [1-2]    4  Target ROE  target ROE [1/
                                                                                                      (2+4)]
----------------------------------------------------------------------------------------------------------------
2003............................             2.3             1.7              .6              .2          123.1%
2004 (Estimate).................             1.7             1.4              .3              .2          110.2%
2005 (Budget)...................             1.3             1.5             -.2              .2           76.0%
----------------------------------------------------------------------------------------------------------------

    1. 2004 Estimate--For 2004, the Reserve Banks estimate that the 
noncash collection service will recover 110.2 percent of costs, 
including imputed expenses, and targeted ROE, compared with the 
budgeted recovery rate of 112.0 percent. This lower-than-budgeted 
recovery is due to higher-than-expected volume declines. Through August 
2004, noncash collection volume decreased 24.3 percent compared with 
volume during the same period in 2003, and the service recovered 126.4 
percent of its costs. For the full year, the Reserve Banks estimate 
that 2004 volume will decrease 28.2 percent from 2003, compared with a 
2004 budgeted decline of 18.9 percent.
    2. 2005 Pricing--The Board recently requested comment on a proposal 
to withdraw from the noncash collection service at year-end 2005(69 FR 
60496, October 19, 2004). The Reserve Banks' fees for the noncash 
collection service will remain unchanged from 2004. New issues of 
bearer municipal securities effectively ceased in 1983 after the Tax

[[Page 64941]]

Equity and Fiscal Responsibility Act of 1982 removed tax advantages for 
investors. As the number of outstanding physical municipal securities 
continues to decline, the volume of coupons and bonds presented for 
collection also will decline. The Reserve Banks project that volume 
will decrease 31.8 percent from the 2004 estimate. In 2005, the Reserve 
Banks project that the noncash collection service will recover 76.0 
percent of total costs, including imputed expenses, targeted ROE, and 
costs associated with exiting the business.
    H. Electronic Access--There are four types of electronic access 
options through which depository institutions can access the Reserve 
Banks' priced services: FedLine, FedMail, FedPhone, and computer 
interface (mainframe to mainframe).\9\ The Reserve Banks allocate the 
costs and revenues associated with these electronic access options to 
the Reserve Banks' priced services.\10\ For 2005, the Reserve Banks 
will change the FedLine connection fees only. Depository institutions 
currently use DOS-based terminals with either a dial connection or a 
frame relay connection to access the Reserve Banks' services. The 
Reserve Banks are in the process of migrating their customers to a 
tiered web-based access. This migration is scheduled to be completed by 
mid-year 2006. At that time, FedLine customers will only be able to 
access services via web-based applications.
---------------------------------------------------------------------------

    \9\ These connections may also be used to access non-priced 
services provided by the Reserve Banks. No fee is assessed if a 
particular connection is used only to access non-priced services.
    \10\ The remaining costs are allocated to non-priced services 
that use electronic access options.
---------------------------------------------------------------------------

    In the interim, those customers that have not yet migrated to the 
web-based access can continue to use DOS-based terminals. For customers 
selecting a dial connection, the Reserve Banks bundle a FedLine DOS 
connection and web-based access into a single FedLine Select package, 
which includes one DOS-based FedLine dial connection and FedLine Web 
institution-level access with three digital certificates for individual 
subscribers. In this arrangement, customers will use their DOS-based 
connection to access transaction services and FedLine Web to access 
information services. The Reserve Banks will increase the FedLine 
Select fee from $150 to $200. For customers selecting a frame relay 
connection, the Reserve Banks will raise the connection fee from $500 
to $825.
    Those customers using the tiered web-based access can choose either 
FedLine Web to access information services or FedLine Advantage to 
access both transaction services and information services. The Reserve 
Banks will increase the standalone FedLine Web fee from $25 to $50 per 
month. FedLine Advantage offers customers access to value-transaction 
applications.\11\ A FedLine Advantage subscription will include the 
FedLine Advantage institution fee and three FedLine Advantage digital 
certificates for individual subscribers. The Reserve Banks will 
introduce FedLine Advantage at a monthly fee of $250. FedLine Select 
and FedLine Advantage support the Reserve Banks' strategic direction of 
moving to web-based electronic access, consistent with and in response 
to customers' preferences.
---------------------------------------------------------------------------

    \11\ FedLine Advantage offers customers access to the Reserve 
Banks' value-transaction applications: FedACH, the Fedwire funds and 
the national settlement service, and the Fedwire securities 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, over the long 
run, all direct and indirect costs and imputed costs, including 
financing costs, taxes, and certain other expenses, as well as return 
on equity (profit) that would have been earned 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).\12\ 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).
---------------------------------------------------------------------------

    \12\ The peer group of the fifty largest bank holding companies 
is selected based on total deposits.
---------------------------------------------------------------------------

    The method for calculating the financing and equity costs in the 
PSAF requires determining the appropriate levels of debt and equity to 
impute and then applying the applicable financing rates. This process 
requires developing a pro forma priced services balance sheet using 
estimated 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 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), projected based on historical data, and other liabilities 
such as accounts payable and accrued expenses.
    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, which measures the 
interest rate effect of the difference between interest rate sensitive 
assets and liabilities, indicates that a 200 basis point change in 
interest rates would change cost recovery more than two percentage 
points.13, 14 Short-term debt is imputed only when short-
term liabilities and clearing balances not used to finance long-term 
assets are insufficient to fund short-term assets. Equity is imputed to 
meet the FDIC definition of a well-capitalized institution, which is 
currently 5 percent of total assets and 10 percent of risk-weighted 
assets.
---------------------------------------------------------------------------

    \13\ A portion of clearing balances is used as a funding source 
for priced services assets. Long-term assets are partially funded 
from core clearing balances, currently $4 billion. Core clearing 
balances are considered the portion of the balances that has 
remained stable over time without regard to the magnitude of actual 
clearing balances.
    \14\ The PSAF methodology includes an analysis of interest rate 
risk sensitivity, which compares rate-sensitive assets with rate-
sensitive liabilities and measures the change in cost recovery of a 
change in interest rates of up to 200 basis points.
---------------------------------------------------------------------------

    1. Financing rates--Equity financing rates are based on the average 
of the return on equity (ROE) results of three economic models using 
data from the BHC peer group.15, 16 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, imputed taxes 
are captured using a pre-tax ROE. 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

[[Page 64942]]

use of the pre-tax return on equity assumes 100 percent recovery of 
expenses, including imputed costs and the targeted return on equity. 
The PSAF is, therefore, based on a matching of revenues with actual and 
imputed costs. If the pre-tax earnings are less than the targeted ROE, 
imputed expenses are adjusted for the tax 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 
have invested in tax-free municipal bonds.
---------------------------------------------------------------------------

    \15\ The pre-tax 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.
    \16\ When needed to impute short- and long-term debt, the debt 
rates are derived based on the short-term debt and long-term debt 
elements in the BHC peer group.
---------------------------------------------------------------------------

    2. Other Costs--The PSAF also includes the estimated priced 
services-related expenses of the Board of Governors and imputed sales 
taxes based on Reserve Bank estimated expenditures. An assessment for 
FDIC insurance, when required, is imputed based on current FDIC rates 
and projected clearing balances held with the Federal Reserve.
    B. 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 imputed 
reserve requirements and balances used to finance priced-services 
assets. Based on these net clearing balance levels, Reserve Banks 
impute a constant spread, determined by the return on a portfolio of 
investments, over the three-month Treasury bill rate.17, 18 
The calculation also involves determining the 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 a discounted Treasury bill rate. Beginning in 2005, rates and 
clearing balance levels used in the NICB estimate are based on the most 
recent rates and clearing balance levels. Recent clearing balance 
levels are adjusted using historical data on depository institution 
clearing balance management in a changing interest rate environment and 
applying the constant spread to the most recent three-month Treasury 
bill rate prior to the calculation date.\19\ Because clearing balances 
are held for clearing priced services transactions or offsetting priced 
services fees, they are directly related to priced services. The net 
earnings or expense attributed to the imputed Treasury-bill investments 
and the cost associated with holding clearing balances, therefore, are 
considered net income for priced services activities.
---------------------------------------------------------------------------

    \17\ The investment portfolio is composed of investments 
comparable to a BHC's investment holdings. In 2005, these 
investments were limited to federal funds, Treasury securities, 
government agency securities, commercial paper, municipal bonds, and 
money market and mutual funds.
    \18\ The 2004 constant spread was revised from 35 basis points 
to 30 basis points after correcting an error in the NICB portfolio 
model. The revised constant spread decreased the projected 2004 
final NICB from $52.7 million to $47.6 million. Using the average 
spread of 29 basis points over the three-month Treasury bill, 
applied to the clearing balance levels and rate assumptions used in 
the 2005 pricing process, NICB is projected to be $61.3 million for 
2005.
    \19\ Previously, the projected balances were based on the 
average of the most recent six months of data prior to NICB 
calculation date and the projected T-bill rate was the rolling 13-
week average of the three-month T-bill rate.
---------------------------------------------------------------------------

    C. Discussion--The decrease in the 2005 PSAF is primarily due to a 
decrease in clearing balances on which investments are imputed and the 
resulting decrease in total assets. Since required imputed equity is 
based on five percent of total assets, priced services equity and the 
cost of equity also decreased proportionally.
    1. Asset Base--The estimated Federal Reserve assets in 2005 to 
provide priced services, reflected in table 13, have decreased $1,056.0 
million, or 6.1 percent. The decline in total assets is primarily a 
result of a decrease in imputed investments in marketable securities of 
$1,064.3 million and a decrease in imputed reserve requirements of $119 
million. These elements are imputed based on the estimated level of 
clearing balances. As a result of consolidation and restructuring of 
several System functions, Bank premises assets are projected to 
decrease $38.8 million and leasehold improvements and long-term 
prepayments are projected to decrease $15.7 million. Offsetting these 
decreases in assets is an increase in items in process of collection of 
$201.1 million based on higher estimated float receivables.
    As shown in table 14, the assets financed through the PSAF have 
decreased. Short-term assets funded with short-term payables and 
clearing balances total $38.9 million. This amount represents a 
decrease of $1.4 million, or 3.5 percent, from the short-term assets 
funded in 2004. Long-term assets funded with long-term liabilities, 
equity, and core clearing balances are projected to total $361.7 
million. This amount represents a decrease of $5.2 million or 1.4 
percent from the long-term assets funded in 2004.
    2. Debt and Equity Costs and Taxes--As previously mentioned, core 
clearing balances are available as a funding source for priced service 
assets. Table 14 shows that $400.6 million in clearing balances is used 
to fund priced services assets in 2005. The interest rate sensitivity 
analysis in table 15 indicates that a 200 basis point decrease in 
interest rates affects the ratio of rate-sensitive assets to rate-
sensitive liabilities and produces a decrease in cost recovery of 0.8 
percentage points, while an increase of 200 basis points in interest 
rates increases cost recovery by 0.7 percentage points. The established 
threshold for a change in 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 ROE, and 
other required PSAF recoveries for 2004 and 2005. The decrease in 
clearing balances from which investments are imputed decreases total 
assets. The decrease in total assets, and the resulting decrease in 
imputed equity, decreases the estimated cost of equity in 2005. As 
indicated previously, the pre-tax return on equity is calculated using 
the combined results of three models. Contributing to the decrease in 
the overall imputed cost of equity is a decrease in the DCF component 
of the ROE calculation, resulting in the pre-tax ROE decreasing from 
18.6 percent in 2004 to 18.1 percent in 2005. Sales taxes decreased 
from $12.0 million in 2004 to $8.2 million in 2005. The effective 
income tax rate used in 2005 also decreased to 29.6 percent from 29.8 
percent in 2004. The priced service portion of the Board's expenses 
decreased $1 million from $7.6 million in 2004 to $6.6 million in 2005.
    3. Capital Adequacy and FDIC Assessment--As shown in table 13, the 
amount of equity imputed for the 2005 PSAF is $808.0 million, a 
decrease of $52.8 million from imputed equity of $860.8 million in 
2004. As noted above, equity is based on 5 percent of total assets, as 
required by the FDIC for a well-capitalized institution, as defined for 
purposes of assessing insurance premiums. In both 2005 and 2004, 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.

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.'' \20\ Under 
this policy, the Board assesses whether the change would have

[[Page 64943]]

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 deriving from such legal 
differences. If the change creates such an effect, the Board must 
further evaluate the change to assess whether its benefits--such as 
contributions to payment system efficiency, payment system integrity, 
or other Board objectives--can be retained while minimizing the adverse 
effect on competition.
---------------------------------------------------------------------------

    \20\ Federal Reserve Regulatory Service (FRRS) 9-1558.
---------------------------------------------------------------------------

    The Board believes that the 2005 fees and changes to the earnings 
credits on clearing balances will not 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. The 
changes will permit the Federal Reserve Banks to earn an ROE similar to 
that earned by the fifty largest BHCs.
BILLING CODE 6210-01-P

[[Page 64944]]

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[[Page 64953]]


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BILLING CODE 6210-01-C

[[Page 64954]]



             Federal Reserve Electronic Access Fee Schedule
  [Effective January 3, 2005. Bold indicates changes from 2004 prices]
------------------------------------------------------------------------
 
----------------------------------------------------------
FedLine
FedLine[reg] Select  $200.00
 Package (monthly)
Includes:
    One dial--DOS-
     based FedLine
    One FedLine Web
     institution
     fee
    Three
     individual
     subscriptions
    Additional       15.00
     FedLine Web
     individual
     subscriber fee
     (monthly).....
    Additional DOS-  100.00
     based FedLine--
     Dial (monthly)
    Additional DOS-  825.00
     based FedLine--
     Frame Relay
     less than 56
     kbps (monthly)
    Test and
     Contingency
     Options for
     Frame Relay:
        Full         825.00
         Circuit
         Backup
         \52\--less
         than 56
         kbps
         (monthly).
        Frame        693.00
         Connection
         Only \53\--
         less than
         56 kbps
         (monthly).
        Redundant    155.00
         Component
         Set \54\--
         less than
         56 kbps
         (monthly).
FedLine[reg] Web     50.00
 (monthly)
    Set-up fee (one  50.00
     time).........
    Individual       15.00
     subscriber fee
     (monthly).....
FedLine[reg]         250.00
 Advantage
 (monthly)
Includes:
    One FedLine
     Advantage
     institution
     fee
    Three FedLine
     Advantage
     individual
     subscriber
     digital
     certificates
    Set-up fee (one  400.00
     time).........
    VPN (monthly)..  50.00
    Individual       100.00
     subscriber fee
     beyond first
     three (one
     time).........
    Individual       20.00
     subscriber fee
     (monthly).....
FedPhone & FedMail
FedMail[reg] Fax     15.00
 (monthly per fax
 line) \55\
Computer Interface
 \56\
Frame Relay-         1,000.00
 Computer Interface
 (CI) @ 56 kbps
 (monthly)
Frame Relay-CI @     2,000.00
 256 kbps (monthly)
Frame Relay-CI T1    2,500.00
 (monthly)
------------------------------------------------------------------------


              Test and Contingency Options for Frame Relay
------------------------------------------------------------------------
                                                    Full        Frame
                Connection type                   circuit     connection
                                                backup \52\   only \53\
------------------------------------------------------------------------
CI @ 56 kbps..................................         $845         $765
CI @ 256 kbps.................................        1,750        1,585
CI T1.........................................        2,230        2,010
------------------------------------------------------------------------



    By order of the Board of Governors of the Federal Reserve 
System, November 4, 2004.
---------------------------------------------------------------------------

    \52\ This option applies to test systems or contingency systems 
that are located at separate facilities, including another bank 
office or a third-party contingency site. 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 require custom implementations.
    \53\ This option applies to test systems or contingency systems 
that are located at separate facilities. The institution uses a 
frame relay link connection with no ISDN dial-up backup. 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 require custom implementations.
    \54\ Includes a Cisco router, a digital service unit, and a link 
encryptor.
    \55\ FedPhone and FedMail e-mail are free options.
    \56\ Some large computer interface customers may be required to 
ensure that their contingency connections to the Federal Reserve are 
diversely routed, and they will be expected to defray the costs 
incurred by the Federal Reserve of providing this network diversity. 
Depending on the cost of providing specific circuits, one of five 
tiered price points would apply: $250/$500/$1,000/$2,000/$2,500 per 
month. Additionally, a group of the Reserve Banks' largest frame 
relay customers will incur a $1,000 per circuit supplemental fee to 
recover the additional costs associated with this effort. The 
Reserve Banks began charging this select group on September 30, 
2004.
---------------------------------------------------------------------------

Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 04-24967 Filed 11-8-04; 8:45 am]
BILLING CODE 6210-01-P