Federal Reserve System: Current and Future Challenges Require Systemwide
Attention (Chapter Report, 06/17/96, GAO/GGD-96-128).

Pursuant to a congressional request, GAO reviewed the operations of the
Federal Reserve System, focusing on: (1) its finances and levels of
spending; (2) areas where spending could be reduced; and (3) actions the
Federal Reserve could take to meet future challenges in systemwide
management.

GAO found that: (1) Federal Reserve operating expenses increased from
$1.36 billion in 1988 to $2 billion in 1994; (2) the most significant
operating cost increases were for bank supervision and regulation,
personnel pay and benefits, and extensive modernization and
consolidation of information systems; (3) operating costs vary among
reserve banks because the Federal Reserve has not established consistent
policies; (4) the Federal Reserve could reduce its personnel benefits
and travel-related reimbursements, and realign its contracting and
procurement practices; (5) a reduction or elimination of the Federal
Reserve surplus account, which increased from $2.1 billion in 1988 to
$3.7 billion in 1994, would increase federal budgetary receipts in the
year that the reduction or elimination occurs; (6) major developments
such as increased competition from private-sector suppliers, use of
electronic banking, and consolidation of the banking industry, are
likely to affect the Federal Reserve's operations, future role, and
management structures; and (7) the Federal Reserve must eliminate the
weaknesses in its planning, budgeting, oversight, and audit processes
that impede its cost control efforts.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-96-128
     TITLE:  Federal Reserve System: Current and Future Challenges 
             Require Systemwide Attention
      DATE:  06/17/96
   SUBJECT:  Federal reserve banks
             Financial institutions
             Administrative costs
             Cost control
             Federal agency reorganization
             Strategic information systems planning
             Internal controls
             Bank examination
             Banking regulation
             Monetary policies
IDENTIFIER:  International Monetary Fund
             Exchange Stabilization Fund
             Gramm-Rudman
             Social Security Program
             Federal Reserve Board Retirement System
             Civil Service Retirement System
             Federal Employees Retirement System
             FEDNET
             Federal Reserve Financial Examination Program
             
Federal Reserve System: Current and Future Challenges Require Systemwide
Attention (Chapter Report, 06/17/96, GAO/GGD-96-128).

Pursuant to a congressional request, GAO reviewed the operations of the
Federal Reserve System, focusing on: (1) its finances and levels of
spending; (2) areas where spending could be reduced; and (3) actions the
Federal Reserve could take to meet future challenges in systemwide
management.

GAO found that: (1) Federal Reserve operating expenses increased from
$1.36 billion in 1988 to $2 billion in 1994; (2) the most significant
operating cost increases were for bank supervision and regulation,
personnel pay and benefits, and extensive modernization and
consolidation of information systems; (3) operating costs vary among
reserve banks because the Federal Reserve has not established consistent
policies; (4) the Federal Reserve could reduce its personnel benefits
and travel-related reimbursements, and realign its contracting and
procurement practices; (5) a reduction or elimination of the Federal
Reserve surplus account, which increased from $2.1 billion in 1988 to
$3.7 billion in 1994, would increase federal budgetary receipts in the
year that the reduction or elimination occurs; (6) major developments
such as increased competition from private-sector suppliers, use of
electronic banking, and consolidation of the banking industry, are
likely to affect the Federal Reserve's operations, future role, and
management structures; and (7) the Federal Reserve must eliminate the
weaknesses in its planning, budgeting, oversight, and audit processes
that impede its cost control efforts.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-96-128
     TITLE:  Federal Reserve System: Current and Future Challenges 
             Require Systemwide Attention
      DATE:  06/17/96
   SUBJECT:  Federal reserve banks
             Financial institutions
             Administrative costs
             Cost control
             Federal agency reorganization
             Strategic information systems planning
             Internal controls
             Bank examination
             Banking regulation
             Monetary policies
IDENTIFIER:  International Monetary Fund
             Exchange Stabilization Fund
             Gramm-Rudman
             Social Security Program
             Federal Reserve Board Retirement System
             Civil Service Retirement System
             Federal Employees Retirement System
             FEDNET
             Federal Reserve Financial Examination Program
             
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Cover
================================================================ COVER


Report to Congressional Requesters

June 1996

FEDERAL RESERVE SYSTEM - CURRENT
AND FUTURE CHALLENGES REQUIRE
SYSTEMWIDE ATTENTION

GAO/GGD-96-128

Challenges Require Systemwide Attention

(233416)


Abbreviations
=============================================================== ABBREV

  ACH - automated clearinghouse
  A&E - architecture and engineering
  ATM - Automated Teller Machine
  BEA - Budget Enforcement Act of 1990
  CBD - Central Business District
  COFVP - Conference of First Vice Presidents
  COP - Conference of Presidents
  CSRS - Civil Service Retirement System
  DBS&R - Division of Banking Supervision and Regulation
  DHRM - Division of Human Resources Management
  DRBOPS - Division of Reserve Bank Operations and Payment Systems
  EBT - Electronic Benefits Transfer
  FAR - Federal Acquisition Regulations
  FDIC - Federal Deposit Insurance Corporation
  FDICIA - Federal Deposit Insurance Corporation Improvement Act of
     1991
  FEPCA - Federal Employees Pay Comparability Act
  FERS - Federal Employees' Retirement System
  FIRREA - Financial Institutions Reform, Recovery, and Enforcement
     Act of 1989
  FOMC - Federal Open Market Committee
  FRAS - Federal Reserve Automation Services
  FRBRS - Federal Reserve Board Retirement System
  GRH - Gramm-Rudman-Hollings Act
  GS - general schedule
  IMF - International Monetary Fund
  NPR - National Performance Review
  OCC - Office of the Comptroller of the Currency
  OIG - Office of the Inspector General
  PAYGO - pay-as-you-go
  POS - point-of-sale
  SDR - special drawing rights
  SEC - Securities and Exchange Commission
  SPCG - Strategic Planning Coordination Group
  UAG - Uniform Acquisition Guidelines

Letter
=============================================================== LETTER


B-259961

June 17, 1996

The Honorable Harry Reid
The Honorable Byron L.  Dorgan
United States Senate

This report responds to your request asking us to review the
operations of the Federal Reserve System (Federal Reserve).  The
report discusses the Federal Reserve's finances, including levels of
spending and factors that could affect its finances.  We also
reviewed the Federal Reserve's major expenditures and discussed areas
where spending may possibly be reduced.  Additionally, the report
discusses how the Federal Reserve's unique structure presents
challenges in systemwide management.  The report contains matters for
congressional consideration and recommendations to the Board of
Governors of the Federal Reserve System for reducing Federal Reserve
spending and improving operations. 

We are sending copies of this report to the Chairman of the Board of
Governors of the Federal Reserve System, the other Governors, and the
Presidents of the Federal Reserve Banks.  We are also sending copies
to members of the banking committees and other interested parties. 

Major contributors to this report are listed in appendix VI. 

James L.  Bothwell
Director, Financial Institutions
 and Market Issues


EXECUTIVE SUMMARY
============================================================ Chapter 0


   PURPOSE
---------------------------------------------------------- Chapter 0:1

The Federal Reserve System (Federal Reserve or System), our nation's
central bank, is unique among governmental entities in its mission,
structure, and especially its finances.  Unlike federal agencies
funded through congressional appropriations, the Federal Reserve is a
self-financing entity that deducts its expenses from its revenue and
transfers the remaining amount to the U.S.  Department of the
Treasury.  Although the Federal Reserve's primary mission is to
support a stable economy, not to maximize the amount transferred to
Treasury, System revenues contribute to total U.S.  revenues and
deductions from System revenues thus represent a cost to U.S. 
taxpayers.  In view of today's constrained budget environment,
Senators Reid and Dorgan requested GAO's assistance in analyzing
Federal Reserve finances, including levels of spending; factors that
could affect Federal Reserve finances in the future; and mechanisms
used to control the cost of the Federal Reserve to taxpayers. 

Specifically, GAO sought to (1) analyze trends in the cost of Federal
Reserve operations during 1988 to 1994 and the System's management
processes for controlling spending and overseeing operations, (2)
identify opportunities to increase the System's efficiency without
adversely affecting its effectiveness, (3) identify ongoing and
future developments that could significantly affect the Federal
Reserve's mission and finances, and (4) assess the System's strategic
management processes and identify actions the Federal Reserve could
take to successfully meet future challenges and ensure the efficiency
and effectiveness of its operations. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:2


      THE FEDERAL RESERVE'S
      MISSION AND STRUCTURE
-------------------------------------------------------- Chapter 0:2.1

The Federal Reserve is responsible for conducting monetary policy,
maintaining the stability of financial markets, providing services to
financial institutions and government agencies, and supervising and
regulating banks and bank-holding companies.  The Federal Reserve Act
of 1913 established the Federal Reserve as an independent,
decentralized central bank to better ensure that monetary policy was
based on a broad economic perspective from all regions of the country
and was not unduly influenced by political pressures. 

One major component of the System's structure is a federal agency in
Washington, D.C.--the Board of Governors of the Federal Reserve
System.  The top officials of the Board are seven Board members who
are appointed by the president and confirmed by the U.S.  Senate. 
Although the Federal Reserve is required to report to Congress on its
activities, its decisions do not have to be approved by either the
president or Congress. 

The other major components are 12 federally chartered corporations
located throughout the United States, which are known as the Federal
Reserve Banks.  The Reserve Banks, with a total of 25 branches, are
not federal agencies and are structured to function with a measure of
autonomy.  The stock of the Reserve Banks is held by those commercial
banks that are members of the Federal Reserve, but that stock does
not carry all of the usual incidents of stock ownership.  Each
Reserve Bank has its own management structure and board of directors. 
The Board of Governors appoints three of the nine directors of each
Reserve Bank, including the Chairman, and approves the appointments
and salaries of each Reserve Bank president and first vice president. 

The Reserve Banks are also subject to the "general supervision" of
the Board.  With certain exceptions, such as a requirement that the
Board order an annual financial examination of each Reserve Bank, the
Federal Reserve Act does not specifically define this general
supervisory authority.  The Federal Reserve Act also limits this
authority in certain ways.  For example, the Board cannot close a
Reserve Bank or establish a new one without congressional approval. 
Generally, the Board exercises its supervisory role through
operations reviews, financial examinations, budget reviews and
approvals, and year-end evaluations. 


      THE FEDERAL RESERVE'S
      FINANCES
-------------------------------------------------------- Chapter 0:2.2

Over the 1988 to 1994 period, the Federal Reserve's annual revenue
averaged $22.0 billion and greatly exceeded its average annual
expenses and other deductions of $2.5 billion.  Consequently, the
annual amount returned to Treasury during this period ranged from
about $16 billion to $24 billion.  The return of these remaining
revenues to Treasury is in accordance with a policy established by
the Board of Governors, and is not required by statute. 

The most significant source of Federal Reserve revenue each year is
the interest earned on U.S.  securities held by the Reserve Banks as
backing or "collateral" for the Federal Reserve notes that circulate
as paper money.  It is this revenue, which accounted for almost 90
percent of the total Federal Reserve revenue in 1994, that virtually
guarantees a substantial annual "profit" for the System.  The second
largest source of revenue is the fees that the Federal Reserve
charges banks and other financial institutions for providing "priced
services," such as check-clearing and electronic funds transfers.  As
required by the Monetary Control Act of 1980, the Reserve Banks are
to assess fees on the basis of, among other things, all direct and
indirect costs incurred in providing such services.  The Federal
Reserve is reimbursed, in part, by Treasury and in full by other
agencies for the services the System provides to them. 

The most significant deduction from its revenue that the Federal
Reserve makes each year is for the operating expenses of the Reserve
Banks and the Board.  The amount of this deduction, which is the
major focus of this report, totaled $2.0 billion in 1994.  About 70
percent of these operating expenses is for payment system and other
financial services provided to banks and agencies, about 20 percent
is for supervision and regulation, and about 10 percent is for
monetary policy activities.  Pay and benefits for the Federal
Reserve's workforce of over 25,000 employees accounted for almost 70
percent of its total operating expenses in 1994. 


   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3

The Federal Reserve has unquestionably played a major role in
promoting the nation's economic well-being.  Although the Federal
Reserve's cost of operations has rarely emerged as a visible public
issue because of its self-financing nature, increasing constraints on
the federal budget require increased scrutiny of this cost, just as
all costs that affect U.S.  taxpayers.  Over the 7-year period of
1988 to 1994, the cost of Federal Reserve operations increased
steadily and substantially.  Specifically, operating expenses for the
Board and Reserve Banks increased by about 50 percent, with the
greatest increases occurring in the areas of bank supervision,
personnel costs, and data-processing modernization.  The costs of
providing priced services have been rising faster than the
corresponding revenues received.  Overall, these cost increases
exceeded the 25-percent inflation that occurred during this period. 

With the current budgetary climate, the Federal Reserve could do more
to increase its cost consciousness and ensure that it is operating as
efficiently as possible in its day-to-day operations.  GAO's review
identified several inefficiencies in the Federal Reserve's policies
and practices that have increased the cost of providing its current
services, including its costs for travel, personnel benefits,
building acquisition, and contracting and procurement.  Many of these
inefficiencies relate to the decentralized nature of the Federal
Reserve, which allows each Reserve Bank to set many of its own
policies, and to the absence of traditional cost-minimizing forces
that are commonplace in entities that are either purely private or
public sector in nature.  The Federal Reserve also retains a $3.7
billion surplus account that GAO believes could be safely reduced or
returned to the Treasury.  While many of these areas have some
potential for reducing its costs, GAO believes that achieving major
cost reductions ultimately depends on the Federal Reserve's carefully
reexamining its mission, structure, and work processes. 

The need for such a reexamination is underscored by a number of major
legislative, technological, and marketplace developments that could
profoundly affect the nature, size, and distribution of the Federal
Reserve's activities and resources.  For example, the Reserve Banks
are facing a major challenge in the form of increasing competition
from private sector suppliers of financial services.  In addition, a
continuing switch from paper-based to electronic payment services and
the rapid consolidation that is currently occurring in the banking
industry could significantly affect both the magnitude and
distribution of the Reserve Banks' workloads and resources.  Since
almost 90 percent of the Reserve Banks' costs is currently associated
with the delivery of payment system and other financial services and
bank supervision, these developments raise important questions
regarding the future role of the Reserve Banks, their management
structures, and their locations. 

For the Federal Reserve to most effectively meet these challenges and
streamline its operations, the Board and Reserve Banks must work
together to strategically plan for the future.  Prior GAO reviews of
public and private sector organizations, which have successfully
faced similar challenges, indicated that these organizations
effectively implemented initiatives to focus on their primary
missions and business lines, realign their structures to fit their
missions, and apply technology to streamline their work processes. 
If the Federal Reserve is to effectively follow this strategy, it
will need the Board's sustained leadership and the Reserve Banks'
commitment.  The Federal Reserve will also need to address certain
weaknesses that GAO identified in its existing oversight and
budgetary processes.  Such weaknesses include a budgetary process
that assumed continued incremental growth and oversight mechanisms
that appeared fragmented, inefficient, or lacking in independence. 
The Federal Reserve has begun to show that it can address operational
issues strategically and work in a systemwide manner when necessary. 
As the Federal Reserve enters the next century, it is vital that it
continues such efforts so that it can accomplish its mission as
efficiently and effectively as possible. 


   PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4


      FEDERAL RESERVE OPERATING
      COSTS HAVE INCREASED RAPIDLY
-------------------------------------------------------- Chapter 0:4.1

Federal Reserve operating expenses increased from $1.36 billion in
1988 to $2.00 billion in 1994, or 48 percent.  This represents a
significant increase in the real cost of Federal Reserve operations
as it exceeded the 25-percent inflation that occurred during this
period.  In addition, as shown in figure 1, the 48- percent increase
in the Federal Reserve's operating costs from 1988 to 1994 was also
greater than the 17-percent increase in overall federal discretionary
spending and somewhat less than the 51-percent increase in federal
discretionary spending adjusted to exclude the effects of the "peace
dividend."

   Figure 1:  Cumulative Increases
   in Federal Reserve Expenses,
   1988-1994

   (See figure in printed
   edition.)

Sources:  Federal Reserve Board and the budget of the United States. 

The most significant increases occurred in expenses for bank
supervision and regulation, personnel costs, and an extensive
automation modernization and consolidation effort.  The number of
Federal Reserve staff increased 4 percent over this period, rising
from 24,829 staff in 1988 to 25,744 in 1994.  The largest increase in
staffing was in bank supervision and regulation and, according to
Federal Reserve officials, resulted from changes in bank supervision
mandated by banking reform laws.  System personnel expenditures
accounted for about two-thirds of the Federal Reserve's total
operating costs and increased by about 53 percent during the period. 
This increase was due to rising salary and benefit costs, staffing
levels, and the changing composition of the Federal Reserve
workforce. 

The Federal Reserve's capital expenditures during the 1988 to 1994
period totaled about $1.7 billion, resulting from (1) a more than
doubling of the book value of the System's data-processing and other
equipment and capitalized leases and (2) the construction of a new
Reserve Bank building in Dallas.  Much of the investment in
data-processing equipment was incurred as a part of a large-scale
project to consolidate Reserve Bank mainframe computer services into
a centrally managed facility known as Federal Reserve Automated
Services. 


      OPPORTUNITIES EXIST TO
      REDUCE COSTS
-------------------------------------------------------- Chapter 0:4.2

With the current budgetary climate, the Federal Reserve could do more
to increase its cost consciousness and ensure that it is operating as
efficiently as possible in its day-to-day operations.  For example,
personnel benefit packages varied among Reserve Banks and certain
benefits--such as leave policies and savings plans--were generous
compared to those of federal financial regulatory agencies with
similar personnel requirements.  To some extent, these benefit
packages could be necessary to recruit and retain highly skilled
professional staff, such as lawyers, economists, and financial
analysts.  However, more than half of the Federal Reserve's staff
were administrative and clerical employees providing support services
to financial institutions and government agencies. 

Travel-related reimbursement policies also varied among Reserve
Banks, resulting in significant differences in the reimbursable
amounts allowed for lodging and meals.  In addition, contracting and
procurement practices at some Reserve Banks that GAO reviewed favored
certain sources over others, despite Systemwide guidance that
prohibits these practices.  Such practices raise concerns about
conflicts of interest and favoritism and about whether the Federal
Reserve is receiving the most favorable prices.  Innovative methods
of managing and controlling contracting and procurement costs, which
GAO identified as "best practices" at some Reserve Banks, had not
been formally disseminated among the other Reserve Banks.  For
example, GAO found that one Reserve Bank, in negotiating the award of
large contracts, provided refined contract specifications on major
contract components that, according to Reserve Bank officials, helped
the Reserve Bank better negotiate the bids. 

Any downward adjustment to the size of the Federal Reserve's surplus
account--or perhaps its elimination--while not representing a
reduction in the real cost of the Federal Reserve to taxpayers, would
result in an increase in federal budgetary receipts in the year that
the adjustment or elimination occurs.\1

Although the surplus account is intended to absorb possible losses,
the Federal Reserve has recorded substantial net profits for 79
consecutive years.  Even though the likelihood of the Federal
Reserve's incurring losses exceeding its revenues appears remote, the
total surplus increased 79 percent during 1988 to 1994, rising from
$2.1 billion to $3.7 billion. 


--------------------
\1 The Joint Explanatory Statement accompanying the Fiscal Year 1996
Budget Resolution directed the Congressional Budget Office not to
score for fiscal year 1996 any savings for new legislation that might
affect the Federal Reserve's transfer of the surplus account to the
U.S.  Treasury.  (H.R.  Rep.  No.  104-159 at 51 (June 26, 1995).)
Accordingly, if such legislation had been passed, the transfer would
not have been counted for purposes of determining compliance with the
Budget Enforcement Act for Fiscal Year 1996. 


      MAJOR DEVELOPMENTS LIKELY TO
      AFFECT THE FEDERAL RESERVE'S
      MISSION AND FINANCES
-------------------------------------------------------- Chapter 0:4.3

A number of major legislative, technological, and marketplace
developments could profoundly affect the nature, size, and
distribution of the Federal Reserve's activities and resources. 
About 90 percent of the Reserve Banks' operating expenses in 1994
were associated with the delivery of payment system and financial
services and bank supervision--the two areas that are most likely to
be affected by these developments. 

For example, as a result of increased competition from private sector
suppliers and a continued shift to electronic banking, the Federal
Reserve has experienced a decline in the volume of its check-clearing
activity.  The Federal Reserve's costs have been rising faster than
corresponding revenues in several of its other service lines as well,
and, in 1994, the System did not meet its cost recovery target for
its priced services overall.  If these trends continue and the
Federal Reserve is not able to recover all of its costs over the long
run, it could be compelled to pursue other options.  These options
may include the Federal Reserve's (1) reducing its uneconomical
activities--perhaps by establishing a separate, private corporation
to provide those priced services--and focusing more on regulation and
standard-setting in many areas of the payments system or (2)
subsidizing operations deemed essential to provide adequate
nationwide service. 

A major consolidation is also currently occurring in the banking
industry that could significantly affect the magnitude and
distribution of the Federal Reserve's supervisory activities.  In
particular, changes in the number and location of the bank-holding
companies the Federal Reserve examines could require adjustments in
the examination staffs of the various Reserve Banks.  Current
legislative proposals could also require the Federal Reserve to
charge banks fees to cover the cost of its examinations.  Although
the Federal Reserve Act authorizes the System to charge fees for bank
examinations, the Federal Reserve has decided not to do so because it
would impose additional costs on state-chartered member banks.  Thus,
taxpayers in effect bear the cost of these examinations, which
totaled $368 million in 1994. 

Collectively, these developments present significant challenges to
the Federal Reserve to rethink many aspects of its operations and
raise important questions regarding the future role of the Reserve
Banks, their management structures, and locations.  Such a rethinking
is also needed because the Federal Reserve's basic structure of 12
Reserve Banks and 25 branches has changed remarkably little since it
was first established in 1913, despite the significant shifts in
demographics and economic activity that have occurred since then. 


      FEDERAL RESERVE COULD
      BENEFIT FROM MAJOR
      SYSTEMWIDE REVIEW OF
      OPERATIONS
-------------------------------------------------------- Chapter 0:4.4

Congress and the administration are pursuing efforts to reduce
federal government discretionary spending, an effort that parallels
corporate restructuring developments in banking and other industries. 
GAO's prior work in public and private-sector management reform
showed that organizations that have been successful in improving
their efficiency have done so by effectively implementing certain
initiatives.  These organizations' initiatives were implemented to
focus on their primary missions and business lines, realign their
structures to fit their mission, and apply technology to streamline
their work processes.  The Board's sustained leadership and the
Reserve Banks' commitment will be needed if the Federal Reserve is to
effectively follow such a strategy. 

Without strong external pressure to minimize overall costs, the
Federal Reserve must create the necessary self-discipline for the
institution to adequately control its costs and respond effectively
to future challenges.  However, GAO found weaknesses in the planning
and budgeting processes that are key mechanisms for helping
accomplish these goals.  The Federal Reserve requires Board divisions
and Reserve Banks to set priorities and prepare plans, and the System
has recently formed a strategic planning coordination group. 
However, the Federal Reserve did not have an integrated, systemwide
strategic plan that identified the emerging issues and challenges
affecting the entire System and how to effectively address them.  In
addition, the Federal Reserve's budgeting process assumed continued
incremental growth in the Federal Reserve's budget and, thus, did not
help contain costs as much as it could have. 

GAO also found weaknesses in some of the Federal Reserve's oversight
processes.  The Federal Reserve had many oversight tools that were
used to monitor and evaluate Reserve Bank activities.  However, the
combination of the Board's general supervisory responsibilities for
Reserve Bank operations and the autonomy of the Reserve Banks has
resulted in oversight that, in some areas, appears fragmented,
inefficient, or lacking in independence.  For example, GAO found
issues that were either not adequately covered or were reviewed by
both the Board's and the Reserve Banks' oversight organizations. 
Furthermore, some Systemwide internal auditing lacked clear
independence.  The Board's Office of the Inspector General, while
independent, is not authorized to directly audit Reserve Bank
operations.  However, the Federal Reserve has recently decided to
contract out for independent audits of its combined financial
statements for the years 1995 through 1999.  GAO commends this
approach and urges that it be permanently instituted. 

A major effort to review the Federal Reserve's operations could
present it with profound challenges in planning and confronting
possible changes.  The essential missions as well as the locations of
the Reserve Banks are set by law, and the autonomy of the Reserve
Banks generally necessitates a consensus-oriented decisionmaking in
systemwide planning.  However, despite its unique structure, the
Federal Reserve has begun to show that it can address operational
issues strategically and work in a systemwide manner when necessary. 
This is evidenced by the recent establishment of a new Financial
Services Committee to examine priced services and the consolidation
of its data-processing facilities.  As the Federal Reserve enters the
next century, it is vital that both the Board and the Reserve Banks
continue to foster a systemwide focus so that the Federal Reserve can
fulfill its mission in an efficient and effective manner. 


   RECOMMENDATIONS AND MATTERS FOR
   CONSIDERATION
---------------------------------------------------------- Chapter 0:5

In analyzing opportunities to reduce the cost of Federal Reserve
operations to the taxpayer, any potential adverse impact on the
independence of monetary policy or on the Federal Reserve's ability
to meet its key responsibilities should be considered carefully. 
However, GAO sees no inherent conflict between the Federal Reserve's
independence or effectiveness and efforts to improve efficiency. 
Many of the functions performed by the Federal Reserve have little
direct relation to monetary policy, and the Board, working with the
Reserve Banks, has the authority and ability to take many cost-saving
actions without jeopardizing the System's mission effectiveness. 
However, any decision to close Reserve Banks or establish a separate
corporation for priced services would require congressional approval. 
Thus, GAO makes recommendations to the Board and suggests several
matters for congressional consideration. 


      RECOMMENDATIONS TO THE BOARD
      OF GOVERNORS
-------------------------------------------------------- Chapter 0:5.1

GAO recommends that the Board undertake a fundamental review of
Federal Reserve operations focusing on the primary mission, business
lines, and structure that would best support its overall mandate. 
Such an organizational review should include an assessment of

  -- the Federal Reserve's role in providing financial services to
     banks and government agencies and an analysis of the costs and
     benefits to the System and the taxpayers of various options for
     delivering such services (such options could include: 
     discontinuing delivery of certain priced services to financial
     institutions; privatizing the delivery of other services by
     establishing a private corporation for delivering such services;
     or retaining responsibility for being the primary service
     provider);

  -- cost-saving opportunities that could result from streamlining
     its existing management structures and consolidating Federal
     Reserve operations, including possible mergers among the 12
     Reserve Banks and 25 branches; and

  -- the potential for technology to support streamlined work
     processes in the Reserve Banks and reduce costs and improve
     quality. 

In addition, GAO recommends that the Board

  -- strengthen its existing control and oversight mechanisms by,
     among other things, (1) reviewing the appropriateness of current
     budget assumptions that assume steady annual growth; (2) taking
     steps to better ensure the independence of the Federal Reserve's
     internal audit function and to expand the scope of its Inspector
     General's authority; and (3) ensuring that an independent
     financial audit of the Reserve Banks' combined financial
     statements is conducted every year;

  -- review benefit levels at the Board and the Reserve Banks to
     determine if these levels can continue to be justified,
     considering today's environment of increased governmental and
     private-sector cost containment and the composition of the
     Federal Reserve's workforce;

  -- assess whether there is any compelling need for the surplus
     account and whether the size of the account can be safely
     reduced; and

  -- reconsider its policy not to charge for bank examinations. 

GAO is also making additional recommendations concerning the Federal
Reserve's policies on travel, contracting, procurement, and other
operational matters. 


      MATTERS FOR CONGRESSIONAL
      CONSIDERATION
-------------------------------------------------------- Chapter 0:5.2

Congress should consider the results of the Federal Reserve's
assessments and determine

  -- whether it would be desirable to merge or close any of the 12
     Reserve Banks or 25 branches;

  -- whether there is a continued need for the Federal Reserve's
     surplus account and, if so, what the appropriate amount of the
     account should be; and

  -- which of the various options for delivering priced services to
     financial institutions are in the best interests of public
     policy and represent the best balance between achieving cost
     savings and serving the nation's financial interests. 

Congress should also consider

  -- requiring an annual independent audit of the Reserve Banks'
     combined financial statements;

  -- requiring the Federal Reserve to charge for bank examinations;
     and

  -- establishing a statutory requirement that the Federal Reserve
     annually return its remaining revenues to the Treasury. 


   FEDERAL RESERVE'S COMMENTS AND
   GAO'S EVALUATION
---------------------------------------------------------- Chapter 0:6

GAO requested comments on a draft of this report from the Federal
Reserve Board of Governors.  GAO's responses to the Board's comments
on the specific recommendations contained in this report appear at
the end of the chapters where those recommendations are made. 
Additional responses are contained in appendix V.  In addition, the
staff of the Board of Governors provided technical comments that were
incorporated in this report as appropriate. 

The Board took exception to what it termed the broad implication of
the draft report that the Federal Reserve has not exercised
appropriate budget constraint and has not adequately addressed the
changing technological and financial environment within which it
operates.  The Board stated its belief that the Federal Reserve had
exercised diligence in managing the cost of the System, and the
System was as cost effective as the most efficient public and private
sector institutions.  As evidence of its cost control, the Board
noted that, despite an increase in its supervisory responsibilities
and a costly computer upgrade, its cost growth over the period of
1988 to 1994 was somewhat less than the increase in federal
nondefense discretionary expenditures that occurred over the same
years.  This was one of the three standards of comparison that GAO
used in this report.  The Board also stated that the Federal
Reserve's revenues from the provision of financial services to
depository institutions consistently exceeded its direct and indirect
costs, and thus earned money for the Treasury. 

The Board recognized that the Federal Reserve could be made more
efficient and effective, and stated that it would evaluate and
implement some of GAO's specific cost-saving recommendations where
appropriate.  However, the Board noted that while some activities
appear to be more cost effective if consolidated, deciding on the
appropriate degree of consolidation was a difficult issue. 
Specifically, the Board agreed with GAO's recommendations to review
the Federal Reserve's policies and practices regarding travel,
contracting, and procurement, and agreed to consider managing health
care benefits on a systemwide basis.  The Board did not agree with
GAO that it has significant opportunities to reduce its costs in such
areas as personnel compensation and its management of large-scale
building projects. 

The Board also did not agree with most of GAO's broader
recommendations, including the recommendations to assess whether
cost-saving opportunities exist in streamlining its current
management structure and consolidating Federal Reserve operations; to
take steps to strengthen existing oversight and control mechanisms
and improve its budgetary processes; to assess the costs and benefits
of various options for providing financial services; and to
reconsider its policy not to charge for bank examinations.  With
regard to the surplus account, the Board agreed that the appropriate
level of the surplus is open to debate, but did not agree to consider
reducing or eliminating the surplus, arguing in part that such a
transfer would have no economic impact. 

The Board believed that the Federal Reserve adequately planned for
future significant changes affecting financial services and bank
supervision.  With regard to opportunities for streamlining
operations, the Board stated that savings were most likely in the
consolidation of electronic financial services, and that paper-based
services offered only modest potential savings.  Concerning
consolidation of Reserve Banks and branches, the Board noted that
their locations would likely be different if established today, but
stated that relocations or realignments would have to result in
substantial long-term savings to offset high transition costs. 

GAO continues to believe that the Federal Reserve has significant
opportunities to reduce its costs, that the major technological and
marketplace developments discussed in this report are likely to have
profound implications for the System's activities, and that the
Federal Reserve could benefit from a major Systemwide review of its
operations and structure.  GAO agrees that such an undertaking would
be difficult, but believes that a broad rethinking of the Federal
Reserve's mission, structure, lines of business, and its strategic
management processes is needed for the Federal Reserve to be as
efficient and effective as it can be in fulfilling its critical role
as our nation's central bank.  GAO believes that without such a
systemwide review, the Federal Reserve will be increasingly less
competitive with private sector suppliers of financial services and
less cost effective in its overall operations. 

GAO commends the Federal Reserve for taking actions to consolidate
some of its operations, such as its mainframe computer operations and
its savings bond program, and to consider other potential cost-saving
opportunities, such as managing health care benefits on a systemwide
basis.  However, GAO notes that these efforts fall far short of the
broad rethinking GAO believes is needed and are unlikely to yield the
truly significant savings that could result from such an effort.  In
particular, while GAO agrees that realigning and consolidating
facilities would involve short-term transition costs, GAO believes
that such costs could be outweighed by long-term savings from having
a more rational and efficient structure. 


INTRODUCTION
============================================================ Chapter 1

The Federal Reserve System (Federal Reserve or System), our nation's
central bank, is unique among governmental entities in many respects,
particularly in its finances.  Unlike many government agencies whose
operations are funded through the Congressional appropriations
process, the Federal Reserve deducts operations and other expenses
from its revenues and transfers the remaining amount to the U.S. 
Department of the Treasury (Treasury).  Although the primary mission
of the Federal Reserve is to support a stable economy, not to make a
profit or maximize its transfer to Treasury, System revenues
contribute to total U.S.  revenues; thus, deductions from System
revenues represent a cost to U.S.  taxpayers.  In today's constrained
budget environment, Congress seeks to be well informed on all
activities that affect the government's finances.  For this reason,
Members of Congress have requested our assistance in providing
information about the revenues and costs of the Federal Reserve,
factors that could affect Federal Reserve finances, and about the
mechanisms used to control costs and conduct strategic planning. 


   THE FEDERAL RESERVE'S UNIQUE
   STRUCTURE REFLECTS EFFORTS TO
   BALANCE DIFFERING INTERESTS
---------------------------------------------------------- Chapter 1:1

The Federal Reserve was created by the Federal Reserve Act of 1913
".  .  .  to provide for the establishment of Federal reserve banks,
to furnish an elastic currency, to afford means of rediscounting
commercial paper, to establish a more effective supervision of
banking in the United States, and for other purposes."

The Federal Reserve's basic structure includes a federal agency in
Washington, D.C.--the Board of Governors of the Federal Reserve
System (Board), whose seven members are appointed by the president
and confirmed by the Senate.\1 Figure 1.1 shows the organizational
structure of the Board.  The structure also includes 12 federally
chartered corporations, located in various regions of the country
(Federal Reserve districts), known as Federal Reserve Banks (Reserve
Banks).  Figure 1.2 shows the boundaries of the Federal Reserve
districts. 

The Federal Reserve is unusual in many respects compared to other
entities established to carry out public purposes.  It is a federal
system that is part public and part private; although the Board is a
government agency, the Reserve Banks are not.  Also, the Federal
Reserve does not follow the familiar federal structure of a
"top-down" hierarchy, with all policymaking powers centralized in
Washington, D.C.  Instead, the Board and the Reserve Banks have
shared responsibilities and policymaking authority in many areas of
operation. 

   Figure 1.1:  Organizational
   Chart of the Federal Reserve
   Board

   (See figure in printed
   edition.)



   (See figure in printed
   edition.)

Note 1:  The Federal Reserve officially identifies districts by
number and by Reserve Bank city. 

Note 2:  In District 12, the Seattle Branch serves Alaska, and the
San Francisco Bank serves Hawaii. 

Source:  Federal Reserve System. 

   Figure 1.2:  Map of the Federal
   Reserve Districts

   (See figure in printed
   edition.)

   Source:  Federal Reserve Board.

   (See figure in printed
   edition.)


--------------------
\1 Each of the seven Governors is appointed to serve all or the
expired portion of staggered 14-year terms.  No 2 members can be from
the same region of the country, as defined by the boundaries of the
12 Federal Reserve districts. 


      THE FEDERAL RESERVE IS PART
      PUBLIC, PART PRIVATE
-------------------------------------------------------- Chapter 1:1.1

The Federal Reserve's part-public, part-private composition evolved
from efforts to ensure our central bank's balanced consideration of
public and private interests at national and regional levels.  A
related feature is the Federal Reserve's structural independence from
political influence and direct taxpayer support.  The Federal
Reserve's budget is not subject to the approval of Congress or the
administration, and the central bank receives no government
appropriations.  The Reserve Banks are structured as self-supporting
corporations, and the Board is financed by a levy on the Reserve
Banks. 

The Reserve Banks are federally chartered corporations wholly owned
by private-sector commercial banks (which, as members of the Federal
Reserve, are known as member banks.)\2 In terms of assets and
personnel, most of the Federal Reserve is in the Reserve Banks: 
virtually all of the Federal Reserve's assets, liabilities, revenues,
and expenses are carried on the books of the Reserve Banks, and 94
percent of the over 25,000 employees of the Federal Reserve are
employed by the Reserve Banks.  As of December 31, 1994, the assets
of the Reserve Banks were $437.0 billion, and their liabilities and
equity were $429.5 and $7.4 billion, respectively. 

Although the Reserve Banks are privately owned corporations, they
differ from most such entities in important ways.  The ownership of
all stock of the Reserve Banks confers on member banks only some of
the typical attributes of control and financial interest.  For
example, member banks receive dividends on Federal Reserve stock, but
these dividends are set by law at 6 percent of paid-in capital. 
Member banks may not sell the stock or pledge the stock as collateral
for loans.  Also, member banks elect six directors of the Reserve
Banks' boards of directors; the Board appoints three directors and
designates one of these as chairman and another as deputy chairman of
the board.\3 Finally, the Reserve Banks have been considered
instrumentalities of the federal government in at least one
context.\4


--------------------
\2 At year-end 1994, the member banks of the Federal Reserve numbered
4,115.  These banks accounted for about 80 percent of the assets of
the U.S.  banking system. 

\3 Member banks in each district elect three Class A directors, who
represent member banks, and three Class B directors, who represent
the public.  The Board appoints three Class C directors who also
represent the public.  Each of the 25 branch offices of the Reserve
Banks also has its own board of directors. 

\4 For example, in Brink's, Inc.  v.  Board of Governors of the
Federal Reserve System, 466 F.  Supp.  116 (D.  D.C.  1979), the
Federal District Court held that certain "governmental" functions
exercised by the Federal Reserve Bank of Richmond rendered the
Reserve Bank a government entity for purposes of the Service Contract
Act, 41 U.S.C.  section 351 et seq. 


      THE BOARD AND THE RESERVE
      BANKS SHARE RESPONSIBILITIES
      AND DECISIONMAKING
-------------------------------------------------------- Chapter 1:1.2

Although the Federal Reserve must report to Congress annually on its
operations, decisions of System policymakers generally are not
subject to ratification by the president or any presidential
appointees in the executive branch or by Congress.  The Federal
Reserve Act not only gives the board of directors at each of the
Reserve Banks powers of supervision and control over the Reserve
Bank, but it also grants the Board of Governors the power to exercise
general supervision over the Reserve Banks.  For example, the board
of directors at each Reserve Bank appoint and determine the
compensation of the top official of each Reserve Bank; however, the
Board of Governors is authorized to approve or disapprove these
decisions.  The Federal Reserve Act does not specifically define the
general supervisory responsibilities of the Board of Governors. 


      THE FEDERAL RESERVE USES A
      CONFERENCE SYSTEM TO
      COORDINATE DECISIONMAKING
-------------------------------------------------------- Chapter 1:1.3

To help systemwide planning and decisionmaking in a system of shared
responsibilities, the Board and the Reserve Banks participate in
systemwide conferences.  In 1994, the conference structure consisted
of three major conferences:\5 the Conference of Presidents (COP), the
Conference of First Vice Presidents (COFVP), and the Conference of
General Auditors, as described in table 1.1.  Each of these
conferences is supported by committees, subcommittees, and task
forces, involving many Federal Reserve officials and staff. 



                                    Table 1.1
                     
                     Three Conferences of the Federal Reserve
                                    as of 1994

Conference          Members             Purpose
------------------  ------------------  ----------------------------------------
Conference of       Presidents of the   The Conference is to consider managerial
Presidents          Reserve Banks       matters of common interest to Reserve
                                        Banks and consult with and advise the
                                        Board on these matters. These managerial
                                        matters include discounts and audits,
                                        management systems and budgets,
                                        strategic planning, personnel,
                                        legislation and regulations,
                                        supervision, and research.

Conference of       First vice          The Conference is to consider and
First Vice          presidents of the   coordinate Reserve Bank operations.
Presidents          Reserve Banks

Conference of       General auditors    The Conference is to enable general
General             of the Reserve      auditors to discuss matters of mutual
Auditors            Banks               concern and to adopt uniform policies
                                        and solutions to problems.
--------------------------------------------------------------------------------
Source:  Federal Reserve Board. 

In 1995, a new management structure for financial services took over
many of the duties of the COFVP that were related to priced services. 
The new committee was established to streamline the Federal Reserve's
decisionmaking process and to make the Reserve Bank first vice
presidents more accountable for strategic planning of major business
lines throughout the entire System.  This new structure and details
on the Federal Reserve's decisionmaking authority are discussed
further in chapter 5. 


--------------------
\5 The conference structure also includes the Conference of Chairmen,
which is composed of the chairman of each Reserve Bank.  However,
according to a Board official, the powers of this conference are
limited. 


   THE MISSION OF THE FEDERAL
   RESERVE
---------------------------------------------------------- Chapter 1:2

Many, but not all, of the responsibilities of the Federal Reserve are
shared by the Board and the Reserve Banks.  This is perhaps best
explained in the context of a discussion of the basic mission of the
Federal Reserve. 

The mission of the Federal Reserve today, which is critical to the
nation's economy, can be generally described in terms of four major
functions or responsibilities:  conducting monetary policy;
maintaining the stability of the financial system and containing
systemic risk that may arise in financial markets; providing services
to financial institutions and other governmental agencies; and
supervising and regulating banks and bank-holding companies.  Table
1.2 briefly describes the basic responsibilities of the Federal
Reserve and explains how these responsibilities are shared by
components of the System. 



                                    Table 1.2
                     
                     The Basic Mission of the Federal Reserve
                        System by Major Lines of Business

                                                        How responsibilities are
Responsibility                Explanation               carried out
----------------------------  ------------------------  ------------------------
Conduct monetary              The Federal Reserve       The Federal Reserve's
policy                        influences the money      Federal Open Market
                              supply and credit         Committee (FOMC) makes
                              conditions in the         monetary policy. Voting
                              economy in pursuit of     members are the seven
                              full employment and       Board members and five
                              stable prices. For        Reserve Bank presidents,
                              example, the System       including the president
                              affects the money supply  of the Reserve Bank of
                              by buying and selling     New York, a permanent
                              U.S. securities in the    member of the committee.
                              open-market (known as     Other Reserve Bank
                              open-market operations).  presidents are voting
                              The Federal Reserve also  members on a rotating
                              buys and sells foreign    basis. All Reserve Bank
                              currencies and            presidents participate
                              securities to affect the  in FOMC meetings. Staff
                              dollar's exchange rate    support is provided by
                              and help stabilize        Board and Reserve Bank
                              financial markets         employees.
                              internationally.




Maintain stability of         The Federal Reserve       FOMC carries this out
financial markets             increases the liquidity   through open-market
                              of markets by             operations.
                              temporarily supplying
                              extra reserves to the     Discount window
                              banking system through    operations are carried
                              open-market operations.   out by each of the
                                                        Reserve Banks in
                              The Federal Reserve       accordance with policies
                              lends to financial        approved by the Board.
                              entities through
                              discount window
                              operations. To stabilize
                              markets, the Federal
                              Reserve can lend
                              reserves directly to
                              certain entities in
                              financial difficulty by
                              making discount window
                              loans.\a


Provide services to           The Federal Reserve       Each of the Reserve
financial                     provides "priced          Banks provides check-
institutions                  services" to financial    clearing and funds
                              institutions, including   transfers, subject to
                              check-clearing and        the Board's supervisory
                              processing and            powers.
                              electronically
                              transferring funds        Subject to the Board's
                              between financial         supervision, each
                              institutions.             Reserve Bank issues
                                                        Federal Reserve notes
                              The System also           and coins; verifies
                              distributes and receives  deposits of financial
                              Federal Reserve notes     institutions; replaces
                              (paper money) and coins   and destroys unfit
                              and holds U.S.            currency; and identifies
                              securities to back        counterfeit currency.
                              issued Federal Reserve
                              notes. The System
                              ensures that enough
                              currency and coins are
                              in circulation to meet
                              public demand.


Provide services to           The Federal Reserve       The Reserve Banks
Treasury and other            issues and redeems        provide various services
government agencies           government securities     to Treasury and other
                              and performs other        government agencies
                              services for Treasury;    subject to the Board's
                              also, the System          supervision.
                              provides services to
                              other government
                              agencies. For example,
                              the Federal Reserve
                              processes food coupons
                              for the U.S. Department
                              of Agriculture.


Supervise and                 The Federal Reserve       The Reserve Banks
regulate banks and            supervises all U.S.       perform many supervisory
bank-holding                  bank-holding companies,   duties--such as bank-
companies                     state-chartered banks     holding company
                              that are members of the   inspections and bank
                              Federal Reserve, all      examinations--subject to
                              Edge Act\b and agreement  the Board's
                              corporations, the         supervision.
                              foreign activities of
                              member banks, and the     The Board is responsible
                              U.S. operations of        for establishing theses
                              foreign banks.            standards through
                                                        relations, rules, policy
                              The System establishes    guidelines, or
                              standards designed to     supervisory
                              ensure the safe and       interpretations, which
                              sound operation of        may be established under
                              financial institutions.   specific provisions of a
                                                        law or under more
                                                        general legal
                                                        authority.

--------------------------------------------------------------------------------
\a Any institution holding deposits subject to reserve requirements
(such as transaction accounts and nonpersonal time deposits) has
access to the discount window, subject to technical restrictions
imposed by the Federal Deposit Insurance Corporation Improvement Act. 

\b Edge Act corporations are corporations chartered by the Federal
Reserve to engage in international banking.  The Board Of Governors
acts on applications to establish Edge Act corporations and also
examines the corporations and their subsidiaries. 


   THE FEDERAL RESERVE'S INTERNAL
   BUDGETARY CONTROLS AND
   OVERSIGHT REFLECT THE SYSTEM'S
   STRUCTURE
---------------------------------------------------------- Chapter 1:3

The budgetary controls and oversight structures internal to the
Federal Reserve reflect the fact that each of the Reserve Banks has
its own management structure in addition to being supervised by the
Board.  Concerning budget controls--the primary control over
spending--the Reserve Banks and the Board have similar, but separate,
processes, and the Board approves all final budgets.  The Federal
Reserve's internal oversight structure includes general auditors at
each of the Reserve Banks and the Office of the Inspector General
(OIG) at the Board.  The OIG is authorized to audit activities for
which the Board has primary responsibility.  In addition, some Board
divisions, such as the Division of Reserve Bank Operations and
Payment Systems (DRBOPS), Division of Human Resources Management
(DHRM), and Division of Banking Supervision and Regulation (DBS&R),
conduct operations reviews using the Board's delegated authority to
supervise the Reserve Banks.  DRBOPS also conducts financial
examinations, operational audits, and annual performance evaluations
of the Reserve Banks.  The budgetary controls and oversight
structures of the Federal Reserve are discussed further in chapter 5. 

The Reserve Banks use accrual accounting to track expenses.  For this
reason, the Reserve Banks' operating expenses reflect only the
depreciation costs of capital acquisitions.  Each major unit of the
Reserve Banks has an operations budget and a capital asset budget,
and each is controlled by the same process. 


   THE FEDERAL RESERVE FINANCES
   ITS OPERATIONS FROM CURRENT
   REVENUE AND RETURNS REMAINING
   REVENUE TO TREASURY
---------------------------------------------------------- Chapter 1:4

Each year, the Federal Reserve deducts operations and other expenses
from current revenue and transfers the remaining amount to Treasury. 
For example, in 1994, the Federal Reserve deducted about $3.5 billion
from the current revenue of about $24 billion and returned about
$20.5 billion to Treasury.  The amount returned to Treasury has
varied during the period of 1988 to 1994, as shown in table 1.3.  The
return of these remaining revenues to Treasury is in accordance with
a policy established by the Board of Governors, and is not required
by statute. 



                               Table 1.3
                
                 The Amount Returned to Treasury by the
                       Federal Reserve, 1988-1994

                         (Dollars in billions)

Year                                                           Payment
----------------------------------------  ----------------------------
1998                                                             $17.4
1989                                                              21.6
1990                                                              23.6
1991                                                              20.8
1992                                                              16.8
1993                                                              16.0
1994                                                              20.5
----------------------------------------------------------------------
Source:  Federal Reserve System. 

The amount that the Federal Reserve transfers to Treasury each year
is a function of the amount of System revenues and deductions, which
are affected by a variety of factors. 


   SOURCES OF FEDERAL RESERVE
   REVENUE
---------------------------------------------------------- Chapter 1:5

The Federal Reserve has three major sources of recurring revenue: 
interest on U.S.  securities held primarily to collateralize currency
(currency-related securities), other interest earned, and fee income. 
Table 1.4 briefly identifies the sources of revenue and briefly
describes the primary factors that determine the amounts received
from each source.  As detailed in this table, only in the case of
priced services and net payments for fiscal agent services can the
Federal Reserve set fees in response to fluctuations in the costs it
incurs. 



                                    Table 1.4
                     
                      Primary Sources of Current Revenue of
                               the Federal Reserve

                Amount in
                1994 (in
                thousands)
                and
                percentage
Source of       of total                                Primary influences on
revenue         revenues      Definition                amount of income
--------------  ------------  ------------------------  ------------------------
U.S.            $18.4         Interest paid by          Public demand for
securities      billion       Treasury and other U.S.   currency and
held            (87.3%)       agencies on securities    fluctuations in interest
by Federal                    held by the Federal       rates.
Reserve to                    Reserve to collateralize
collateralize                 the currency.
currency


Other interest income
--------------------------------------------------------------------------------
Noncurrency-    $829.8        Interest paid by          Actions taken to
related         million       Treasury and other U.S.   implement monetary
U.S.            (3.9%)        agencies on securities    policy and fluctuations
securities                    held by the Federal       in interest rates.
                              Reserve that are not
                              used to collateralize
                              the currency.

Interest on     $894.5        Interest earned on        Fluctuations in the
foreign         million       account balances          value of the dollar
securities      (4.2%)        maintained with foreign   exchange rates and
                              banks. The accounts are   interest rates paid by
                              used to stabilize         foreign banks.
                              fluctuations in
                              international flows and
                              exchange values of
                              currencies.

Interest on     $34.7         Interest paid by          Changing market
loans           million       financial institutions    conditions and
                (0.2%)        on loans granted by       fluctuations in interest
                              Reserve Banks because of  rates.
                              liquidity needs,
                              financial trouble, or to
                              comply with reserve
                              requirements.


Fee income
--------------------------------------------------------------------------------
Priced          $734.4        Fees financial            Costs Reserve Banks
services        million       institutions pay for      incur to provide
                (3.5%)        services such as          institutions these
                              clearing checks,          services and the
                              electronic transfers of   competition from private
                              funds, and safekeeping    sector vendors offering
                              securities.               similar services.

Net payments    $176.9        Fees Treasury and other   Costs Reserve Banks
for             million       government agencies pay   incur to provide
fiscal agent    (0.8%)        for services needed.      agencies these services.
services

================================================================================
Total           $21.1         n/a                       n/a
                billion
--------------------------------------------------------------------------------
Legend:  n/a = not applicable. 

Source:  Federal Reserve System. 


      REVENUE IS DOMINATED BY
      INTEREST INCOME, PRIMARILY
      INTEREST ON SECURITIES
-------------------------------------------------------- Chapter 1:5.1

Most Federal Reserve revenue comes from interest earned on U.S. 
government securities that are held by Reserve Banks and used to
back, or collateralize, Federal Reserve notes.  The Federal Reserve
Act introduced Federal Reserve notes--the "paper money" that we use
today.  Before being issued to the public, Federal Reserve notes must
be secured by legally authorized collateral--gold certificates,
special drawing rights (SDR),\6 and U.S.  Treasury and federal agency
securities purchased through open- market operations.\7 About $381.5
billion in Federal Reserve notes were in circulation as of December
31, 1994, and as shown in table 1.4, the assets that collateralized
those notes accounted for about 87 percent of the Federal Reserve
assets at that time.  Those assets represented mainly U.S.  Treasury
and federal agency securities.  Throughout the 1988 to 1994 period,
interest received on such currency-related securities ranged from 79
to 87 percent of all System revenues. 


--------------------
\6 SDRs are created by the International Monetary Fund (IMF), after
agreement by a majority of the IMF members, to serve as a supplement
to the international monetary reserves of IMF members.  SDRs are
allocated to the members in accordance with the size of the members'
quota, but without any payment.  SDRs received by the U.S. 
government are, by law, held by the Secretary of the Treasury for the
account of the Exchange Stabilization Fund. 

\7 Almost all of the government securities held by the Federal
Reserve are Treasury securities purchased in the open market, but the
Federal Reserve also has purchased some agency securities that
comprise less than 2 percent of the government securities portfolio. 


         OTHER INTEREST INCOME
------------------------------------------------------ Chapter 1:5.1.1

Interest on noncurrency-related U.S.  securities refers to interest
earned on securities purchased to implement monetary policy.  The
Federal Reserve influences the economy mainly through a system of
managed reserves.\8 The Monetary Control Act of 1980 requires all
depository institutions to hold reserve balances in accounts with the
Reserve Bank for their Federal Reserve districts or other designated
institutions or, as permitted by Board regulations, in the form of
cash in their vaults.  The Federal Reserve sets reserve requirements
for depository institutions and determines the total of reserves for
the banking system.  By purchasing securities in the market, the
Federal Reserve expands reserves when it wants to lower interest
rates and encourage more credit in the economy.\9 Conversely, by
selling securities, the Federal Reserve reduces reserves when it
wants to raise interest rates and restrict the amount of credit. 

The Federal Reserve's control over bank reserves enables it to play a
major role in protecting the economy against systemic risk--that is,
excessive disruption from financial market disturbances.  In the
event of a financial crisis, such as a plunge in stock prices, the
Federal Reserve may increase the liquidity of markets by temporarily
supplying extra reserves to the banking system through open-market
operations. 

Interest on foreign securities was an additional source of revenue. 
In 1994, the Federal Reserve held $20.5 billion in foreign
securities.  The Federal Reserve also has a reciprocal swap network
with different central banks, which is not included on the balance
sheet.\10 The Federal Reserve earns interest on foreign-denominated
assets, but also faces risks in that it can gain or lose on trades. 

The Federal Reserve earns interest on loans provided to depository
institutions through its discount window.  Through the discount
window, commercial banks and other depository institutions may borrow
reserves from the Federal Reserve.  These institutions are expected
to draw on all other reasonably available sources of funds before
coming to the discount window.  The loans are made at a rate of
interest--the discount rate--set by the Reserve Banks and approved by
the Board. 


--------------------
\8 To a lesser extent, the Federal Reserve also influences the amount
of reserves through adjustments to the discount rate (which affects
the cost of borrowing) and, on occasion, changes in reserve
requirement ratios. 

\9 For example, to expand reserves, the Federal Reserve buys
government securities through its open-market operations, which adds
to reserves.  When the Federal Reserve purchases securities, it pays
by issuing a check on itself, in effect.  On receipt of the check,
the seller's bank presents it to the Federal Reserve for payment. 
The Federal Reserve honors the check by increasing the reserve
account at the Reserve Bank of the seller's bank.  The reserves of
the seller's bank rise with no offsetting decline in reserves
elsewhere; thus, the total volume of reserves increases.  By adding
to bank reserves, the Federal Reserve can seek to lower interest
rates and expand the supply of money and credit available in the
economy. 

\10 The swap network consists of reciprocal short-term arrangements
(comparable to repurchase and matched sale-purchase agreements in the
domestic government securities market) among the Federal Reserve,
other central banks, and the Bank of International Settlements. 
These arrangements, which have been used infrequently in recent
years, give the Federal Reserve temporary access to the foreign
currencies it needs for intervention operations to support the dollar
and give the partner foreign central banks temporary access to
dollars they need to support their own currencies. 


      THE FEDERAL RESERVE IS
      REQUIRED TO SET FEES FOR
      PRICED SERVICES TO RECOVER
      COST OF SERVICES
-------------------------------------------------------- Chapter 1:5.2

The Monetary Control Act requires the Federal Reserve to charge
depository institutions for its services to financial institutions,
setting fees in such a way that, over the long run, the revenues from
these services will recover the costs of providing them.  The act
also requires all depository institutions to meet the Federal
Reserve's reserve requirements and grants these same institutions
access to System services at market prices as well as access to
short-term or discount loans.\11 In addition to the services
mentioned in table 1.2, the Federal Reserve provides securities
safekeeping and transfer and noncash collection services.  Services
to financial institutions and Treasury constitute a large portion of
the Federal Reserve expenses. 


--------------------
\11 Before 1980, only banks that were members of the Federal Reserve
had access to Federal Reserve services and discount loans at
subsidized prices and interest rates.  Nonmember banks, which had no
direct access to System services and loans, could receive such
services only by maintaining correspondent relationships with
commercial banks that belonged to the System. 


   FEDERAL RESERVE EXPENSES AND
   OTHER DEDUCTIONS
---------------------------------------------------------- Chapter 1:6

From current revenues, the Federal Reserve deducts the cost of
operating the 12 Reserve Banks and the Board and other expenses
before transferring the remaining revenues to Treasury.  Generally,
these deductions can be categorized as expenses; other deductions;
and losses, gains, and other adjustments.  Table 1.5 briefly
describes these deductions.  For purposes of this report, operating
expenses of the Federal Reserve include the cost of operating the
Reserve Banks and the Board. 



                                    Table 1.5
                     
                       Deductions the Federal Reserve Makes
                                  From Revenues

                                 1994 Amount
Deduction                      (000 omitted)  Definition
----------------------------  --------------  ----------------------------------
Operating expenses
--------------------------------------------------------------------------------
Operating expenses of            -$1,858,319  Under limits set by the Board,
 Reserve Banks                                 operating expenses for Reserve
                                               Banks' personnel, materials and
                                               supplies, equipment/software,
                                               shipping, travel, communications,
                                               and building depreciation.
Assessments for Board               -146,866  Expenses of the Board of Governors
 expenditures                                  are financed through an
                                               assessment levied on the Reserve
                                               Banks.
================================================================================
Total                             -2,005,185  n/a

Other deductions
--------------------------------------------------------------------------------
Interest on required                -223,623  The Federal Reserve pays interest
 clearing balances                             on the clearing balances that
                                               financial institutions maintain
                                               at Reserve Banks to protect
                                               against settlement risk. The
                                               Federal Reserve pays interest in
                                               the form of credits that
                                               financial institutions may use to
                                               defray check-clearing and other
                                               costs.
Purchase of currency from           -368,187  In response to public demand for
 Treasury                                      currency and the need to replace
                                               unfit currency, the Federal
                                               Reserve pays Treasury for
                                               printing Federal Reserve notes.
Transfer to surplus                 -282,122  At the discretion of the Board,
                                               the Reserve Banks retain from
                                               their net earnings amounts that
                                               would adjust their surplus
                                               account to equal their Paid-in
                                               Capital Account.
Dividends to stockholders           -212,090  As established by statute, the
                                               Federal Reserve pays an annual
                                               dividend of 6 percent to member
                                               banks that own Federal Reserve
                                               stock. The amount of dividends
                                               paid automatically increases when
                                               member banks' equity increases.
================================================================================
Total                            -$1,086,022  n/a
--------------------------------------------------------------------------------
Legend:  n/a = not applicable

Note:  Deductions from revenues are shown as negative numbers. 

Source:  Federal Reserve System. 


      ADJUSTMENTS TO CURRENT
      REVENUE MAY INCREASE OR
      DECREASE TOTAL CURRENT
      REVENUE
-------------------------------------------------------- Chapter 1:6.1

As shown in table 1.6, the Federal Reserve makes other adjustments to
current revenue. 



                                    Table 1.6
                     
                        Losses, Gains, and Adjustments to
                        Federal Reserve Revenue as of 1994

Losses, gains, and other         1994 amount
adjustments                    (000 omitted)  Definition
----------------------------  --------------  ----------------------------------
Sales of U.S. Treasury and          -$24,286  As the result of actions taken to
 agency securities                             implement monetary policy,
                                               respond to public demand for
                                               currency, and fluctuations in
                                               interest rates, the net profit
                                               (or loss) resulting from FOMC
                                               trading of U.S. government
                                               securities.
Sales or changes in value of      +2,422,626  As the result of actions taken to
 foreign exchange or assets                    stabilize U.S. and foreign
 denominated in foreign                        currencies, the net profit (or
 currency                                      loss) resulting from the trading
                                               or holding of assets denominated
                                               in foreign currencies, as
                                               authorized by FOMC. Trading gains
                                               or losses occur when assets
                                               denominated in foreign currencies
                                               are sold. Reserve Banks also
                                               record translation gains or
                                               losses when fluctuations in
                                               exchange rates change the value
                                               of assets denominated in foreign
                                               currencies.
Adjustment to revenue for            +75,246  In response to changes in
 accounting rule changes and                   accounting principles or other
 other items                                   items, additions and subtractions
                                               to current revenue.
================================================================================
Total                            +$2,473,586  n/a
--------------------------------------------------------------------------------
Legend:

FOMC = Federal Open Market Committee
n/a = not applicable

Note:  Deductions from revenues are shown as negative numbers.  In a
few cases, adjustments may either be deductions from or additions to
revenues, depending on Federal Reserve actions and market conditions
during the year.  These items are shown as negative or positive
numbers, as appropriate. 

Source:  Federal Reserve System. 

For example, gains and losses resulting from sales of U.S.  Treasury
and agency securities or changes in value of foreign exchange or
assets denominated in foreign currencies are accounted for in
adjustments to current revenue.  Other gains or losses, such as those
realized as the result of changes to accounting rules, are also
accounted for in this way.  In 1993, the Federal Reserve experienced
a significant one-time deduction to revenues, primarily the result of
the initial accrual of postretirement employee benefits required by a
change in accounting rules.\12 In recent years, adjustments have been
volatile because of gains or losses on assets denominated in foreign
currencies, both from actual transactions and from revaluation to
dollars of assets held in portfolio. 


--------------------
\12 This change was the adoption of the Statement of Financial
Accounting Standards No.  106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions."


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
---------------------------------------------------------- Chapter 1:7

Our objectives were to (1) analyze trends in the cost of Federal
Reserve operations during 1988 to 1994 and the System's management
processes for controlling spending and overseeing operations, (2)
identify opportunities to increase the System's efficiency without
adversely affecting its effectiveness, (3) identify ongoing and
future developments that could significantly affect the Federal
Reserve's mission and finances, and (4) assess the System's strategic
management processes and identify actions the Federal Reserve could
take to successfully meet future challenges and ensure the efficiency
and effectiveness of its operations. 

To analyze trends in the Federal Reserve's spending during 1988 to
1994, we developed a 7-year trend analysis on the expenses of the
Federal Reserve.  In addition, we examined the Reserve Banks' and the
Board's cost-accounting systems to identify trends in the Federal
Reserve's operating expenses by mission-related activity (such as
services to financial institutions and Treasury) and types of expense
(such as salaries, benefits, and travel).  However, we did not audit
these numbers and did not verify their accuracy.  We reviewed a
variety of financial-accounting, cost- accounting, staffing, and
budgetary reports prepared by the Board and the individual Reserve
Banks.  To analyze the Federal Reserve's spending trends, we compared
the System's levels of spending to inflation and levels of
discretionary spending of the federal government during the same
period.  Due to the limitations of our audit authority, we did not
analyze direct costs relating to the buying, selling, and holding of
securities and foreign currency or other valuables in connection with
the implementation of monetary policy. 

To identify opportunities that exist to increase the System's
efficiency without adversely affecting its effectiveness, we
concentrated our work on personnel compensation, travel, and
procurement and contracting.  More specifically, we

  -- reviewed Board and Reserve Bank personnel compensation data and
     policies, travel policies, and samples of travel vouchers;

  -- compared personnel compensation policies and regulations to
     those of selected federal agencies;

  -- developed and mailed a standardized data collection instrument,
     or questionnaire, to obtain pay and benefits information from
     the human resource officers at the eight Reserve Banks where we
     did not do detailed audit work in these areas;\13

  -- contacted questionnaire respondents by telephone to further
     clarify questionnaire responses;\14

  -- did an in-depth review of the procurement process at the San
     Francisco Reserve Bank, focusing on items with a cost of more
     than $25,000; and

  -- interviewed officials at three Reserve Banks who were
     responsible for procurement, reviewed procurement guidance,
     traced purchases through the payment process, and reviewed
     selected contracts. 

To identify ongoing and future developments that could significantly
affect the Federal Reserve's mission and finances, we

  -- analyzed studies, data, and other information and interviewed
     knowledgeable officials of the Federal Reserve on issues related
     to check clearing, currency processing, and bank supervision and

  -- interviewed officials and analyzed supporting documentation from
     the Federal Reserve Bank of Kansas City to determine how the
     automation consolidation project, the Federal Reserve Automation
     Services (FRAS), had affected its check-clearing priced service. 

To assess the System's strategic management processes and identify
actions the Federal Reserve could take to successfully meet these
challenges and ensure the efficiency and effectiveness of its
operations in the future, we

  -- reviewed and analyzed current and potential future trends in the
     workload of, and the cost of operating, the System's major
     services and lines of business;

  -- reviewed Federal Reserve planning documents and interviewed
     System officials about planning and management processes;

  -- reviewed the Federal Reserve's budgeting process, including the
     various budget proposals made throughout the budgeting cycle at
     the Board and the Reserve Banks (Chicago, Dallas, New York, and
     San Francisco) for the years 1988 through 1993;

  -- compared each of the Banks' budget proposal within a cycle to
     the previous proposal to determine whether the process promoted
     reduction in the size of the budget proposals;

  -- compared the Federal Reserve's actual expenses to the operating
     budgets and actual expenditures to capital budgets for the years
     reviewed to determine whether the System operated within its
     approved spending limits;

  -- obtained an understanding of the controls on major capital
     acquisitions by reviewing the process the Reserve Bank of Dallas
     used to obtain approval from the Board to construct its new bank
     building and compared the results of the process to the
     initially approved plans;

  -- conducted interviews focused on oversight with officials from
     the Board's OIG and DRBOPS;

  -- reviewed a number of OIG reports and analyzed the Federal
     Reserve Act and the Inspector General Act of 1978 and its
     subsequent amendments;

  -- interviewed Board officials who managed the Financial
     Examination Program and the Annual Performance Evaluation;
     DRBOPS managers who oversee the operating areas at the Reserve
     Banks; and the general auditors of the Reserve Banks at Chicago,
     Dallas, New York, San Francisco, and Richmond;

  -- reviewed the 1989 to 1993 financial examination reports and the
     1989 to 1993 annual performance evaluation reports for the
     Reserve Banks of Chicago, Dallas, New York, and San Francisco;
     and

  -- reviewed the operations review reports conducted by DRBOPS,
     DHRM, and DBS&R. 

We did our work in accordance with generally accepted government
auditing standards at the Board of Governors in Washington, D.C., and
at the Federal Reserve Banks in Chicago; Dallas; Kansas City, MO; New
York; Richmond; and San Francisco from January 1994 through September
1995.  We obtained written comments on a draft of this report from
the Federal Reserve Board of Governors.  The comments are discussed
at the ends of chapters 3 and 5 and reprinted in appendix V.  Staff
of the Federal Reserve Board provided additional technical comments
on the draft report, which were incorporated as appropriate. 


--------------------
\13 We obtained data and information for the Reserve Banks only.  In
some cases, the 25 branch banks may have had different benefits, such
as different cafeteria or mass transit subsidies. 

\14 The questionnaires and interviews were completed in June and July
1994, and the information collected was for the calendar year 1993. 
In some cases we asked for cost estimates for various benefits. 
Where we were able to update these cost figures using the System's
cost-accounting information for calendar year 1994, we did so. 


THE FEDERAL RESERVE HAS BECOME
INCREASINGLY EXPENSIVE TO OPERATE
============================================================ Chapter 2

In the 7-year period from 1988 to 1994, as many commercial banks
restructured to reduce operating costs and increase revenues and
Congress and the Executive Branch acted to constrain discretionary
federal spending,\1 the cost to operate the Federal Reserve has
increased steadily and substantially--from $1.36 billion in 1988 to
$2.00 billion in 1994, or 48 percent.  This percentage increase
exceeded the 25-percent inflation that occurred during the same
period, was also greater than the 17- percent increase in overall
federal discretionary spending, and was almost the same as the
51-percent increase in federal nondefense spending.  The growth in
Federal Reserve expenses was caused by significant increases that
occurred in expenses for bank supervision and regulation, personnel
compensation, and extensive automation modernization and
consolidation. 


--------------------
\1 Discretionary spending is that spending controlled through the
appropriations process.  It excludes interest on the national debt
and entitlement programs.  Examples of entitlement programs are
Social Security, Food Stamps, and Medicaid. 


   IN RECENT YEARS, CONGRESS HAS
   ACTED TO CONTROL SPENDING AND
   BANKS HAVE SOUGHT TO INCREASE
   EFFICIENCY
---------------------------------------------------------- Chapter 2:1

Since the early 1980s, federal budgeting has been dominated by
concern about the budget deficit.  In the mid-1980s, the deficit was
greater than $200 billion; in the early 1990s, the deficit approached
$300 billion.  By 1985, the high deficit prompted the enactment of
the Gramm-Rudman-Hollings Act (GRH), which established deficit
targets for each year through fiscal year 1991, when the budget was
to be balanced.  GRH was amended in 1987.  In 1990, Congress revised
the GRH process with the Budget Enforcement Act of 1990 (BEA). 
Rather than focusing on fixed deficit targets, BEA was designed to
limit legislative actions by limiting appropriations and restricting
the creation or expansion of any entitlement program or tax cut. 

BEA categorizes all federal spending as either discretionary (funded
through annual appropriation acts) or direct (entitlements or
spending that results from laws other than appropriation acts).  BEA
set discretionary spending limits--called caps--to control the
aggregate amount that can be appropriated and expended for all
discretionary programs in a fiscal year.  Thus, all discretionary
programs compete with each other within the caps.  Direct spending
programs are controlled by BEA's pay-as-you-go (PAYGO) rules.  The
main PAYGO requirement is that legislation enacted during a session
of Congress which increases direct spending or decreases revenues,
must be offset by revenue increases or a cut in another direct
spending program.  If the legislative action increases the deficit
for a fiscal year, a sequestration from certain direct spending
accounts occurs. 

In addition to these budgetary control mechanisms, the administration
and Congress are attempting to make the federal government smaller
and more cost efficient by reforming or "reinventing" its agencies
and work processes.  For example, the National Performance Review
(NPR), under the direction of the Vice President, is an
administration initiative that seeks to propose recommendations on
how the federal government could work better and cost less. 

Throughout the 1980s and into the 1990s, many U.S.  banks also made
strategic decisions to restructure their activities, cut operating
costs, and generally develop more efficient operations.  The U.S. 
banking system underwent this transition in response to intense
domestic and international competition, technological and financial
innovations, and changing market conditions.\2

For several reasons, the Federal Reserve is not subject to the same
cost-reduction pressures that are affecting both public agencies and
private sector firms.  The Federal Reserve, for example, is not
subject to BEA, primarily because it operates without congressional
appropriations and funds its operations and pays other expenses from
the current revenue of the Reserve Banks.  Also, unlike private
firms, the Federal Reserve does not have a profit incentive to lower
costs and increase efficiency. 


--------------------
\2 Throughout the 1980s and into the 1990s, many U.S.  banks faced
serious asset quality problems resulting from problem loans to
developing countries, excessive commercial real estate lending, and
an economic recession and other factors. 


   THE INCREASE IN THE COST OF THE
   FEDERAL RESERVE OUTPACED
   INFLATION AND TOTAL FEDERAL
   DISCRETIONARY SPENDING
---------------------------------------------------------- Chapter 2:2

From 1988 to 1994, as shown in figure 2.1, Federal Reserve operating
expenses increased from $1.36 billion to $2.00 billion.  This was an
increase of about twice the amount of inflation and about 3 times the
increase in overall federal discretionary spending that occurred in
that period.  During this same period, Federal Reserve operating
expenses increased at about the same rate as the percentage increase
for nondefense federal discretionary spending. 

   Figure 2.1:  Cumulative
   Increases in Federal Reserve
   Operating Expenses, 1988-1994

   (See figure in printed
   edition.)

Sources:  Federal Reserve Board and the budget of the United States. 


      THE FEDERAL RESERVE
      ALLOCATES ITS OPERATING
      BUDGET TO MISSION-RELATED
      AREAS AND EXPENSE CATEGORIES
-------------------------------------------------------- Chapter 2:2.1

The Federal Reserve uses cost-accounting systems that allocate
operating budget expenditures to both mission-related categories and
expense categories.  For budgeting purposes and accounting,
expenditures of the Federal Reserve are accounted for in five major
mission-related areas of the System:  monetary policy, supervision
and regulation, services to financial institutions and the public,
services to Treasury and other government agencies, and System policy
and oversight.  Costs of support and overhead, including Board
expenditures for System policy direction and oversight, are allocated
to each Federal Reserve mission activity.\3 The costs are distributed
to the Federal Reserve mission activities in accordance with
predetermined ratios derived by estimated usage.  The Federal Reserve
also categorizes operating expenses by expense categories.  These
categories include personnel compensation, equipment and software,
buildings, travel, shipping, materials and supplies, and
communication. 


--------------------
\3 Support and overhead costs include, among other things, data
communication and data-processing expenses, and legal and accounting
expenses. 


   SUPERVISION AND REGULATION AREA
   EXPERIENCED THE HIGHEST GROWTH
   OF ALL THE FEDERAL RESERVE'S
   MISSION-RELATED ACTIVITIES
---------------------------------------------------------- Chapter 2:3

As shown in table 2.1, although spending in all five of the Federal
Reserve's mission-related activities increased during 1988 to 1994,
the supervision and regulation area experienced the highest spending
growth.  The rate of spending increases in mission-related activities
ranged from 34 percent (services to financial institutions and the
public) to 102 percent (supervision and regulation).  The growth in
the supervision and regulation area resulted from staff increases in
the area.  Services to financial institutions and the public,
services to government agencies, and bank supervision and regulation
accounted for almost 90 percent of the Federal Reserve's costs. 
Within the services to financial institutions activity, expenses for
priced services increased substantially less than those for nonpriced
services.  Priced services expenses increased the least of any
mission-related activity. 

According to Federal Reserve officials, growth in supervision and
regulation expenditures was driven primarily by staff increases. 
These staff increases resulted from the implementation of the
regulatory requirements mandated by banking reform laws, such as the
Federal Financial Institutions Reform, Recovery and Enforcement Act
of 1989 (FIRREA) and the Federal Deposit Insurance Corporation
Improvement Act (FDICIA) of 1991.\4 The supervision and regulation
area increased its staff over 42 percent during 1988 to 1994 from
2,456 to 3,498.\5 During the same period, both the Office of the
Comptroller of the Currency (OCC) and the Federal Deposit Insurance
Corporation (FDIC) had increased the size of their bank supervision
and regulation staff by about 24 percent and 45 percent,
respectively. 

As shown in table 2.1, costs related to priced services rose by the
smallest rate of growth during 1988 to 1994.  The Federal Reserve has
a significant incentive to restrain priced services costs because
under the Monetary Control Act, fees for services are to be based on
the recovery of expenses, and the System competes with the private
sector in providing services to financial institutions.  The Monetary
Control Act requires the Federal Reserve to charge financial
institutions for priced services, such as check processing, and to
recover its costs.  In addition, the Federal Reserve competes with
private check clearinghouses and automated clearinghouse (ACH)
networks in processing checks and conducting ACH transactions. 



                               Table 2.1
                
                    Federal Reserve's Calendar Year
                   Operating Costs by Mission-Related
                       Categories, 1988 and 1994

                                          1988        1994  Percentage
Activities                          (millions)  (millions)      change
----------------------------------  ----------  ----------  ----------
Monetary and economic                   $134.0      $185.4        38.4
 policy
Supervision and                          208.0       420.7       102.3
 regulation

Services to financial institutions
----------------------------------------------------------------------
Priced services\a                        559.2       712.3        27.4
Nonpriced services\b                     296.3       436.9        47.4
======================================================================
Subtotal                                 855.5     1,149.2        34.3
Services to government agencies          141.5       218.2        54.2
System policy and                         18.4        29.6        60.9
 direction
======================================================================
Total                                 $1,357.5    $2,003.1        47.6
----------------------------------------------------------------------
\a Priced services include Automated Clearinghouse, Fedwire, check,
and book entry securities. 

\b Nonpriced services are those services for which the Federal
Reserve does not charge financial institutions, such as currency
processing and the lending of the discount window. 

Source:  Federal Reserve System. 


--------------------
\4 According to Federal Reserve officials, about 200 examiners were
hired just to implement the Foreign Bank Supervision Enhancement Act,
Title 2 of FDICIA. 

\5 The number of staff is derived from the average number of
personnel, which measures the number of employees in terms of
full-time positions for the time period. 


   FEDERAL RESERVE OPERATING COSTS
   INCREASED SIGNIFICANTLY, WITH
   PERSONNEL COMPENSATION
   ACCOUNTING FOR MOST OF THE
   INCREASE
---------------------------------------------------------- Chapter 2:4

As shown in table 2.2, the three Federal Reserve expense categories
with the largest growth rates were equipment and software (85
percent), travel (66 percent), and personnel compensation\6 (53
percent) during 1988 to 1994.  The percentage growth in Federal
Reserve expenses for personnel compensation, equipment and software,
building, and travel all exceeded the amount of inflation (25
percent). 



                               Table 2.2
                
                Federal Reserve Expenditures by Expense
                 Categories for Calendar Years 1988 and
                1994 and Percentage Change During 1988-
                                  1994

                         (Dollars in thousands)

                                                 Amount of  Percentage
Expense category              1988        1994    increase      change
----------------------  ----------  ----------  ----------  ----------
Personnel                 $858,311  $1,314,200    $455,889       53.11
 compensation
Equipment and              157,016     290,962     133,946       85.31
 software\a
Building\a                 120,564     170,364      49,800       41.31
Travel                      28,519      47,238      18,719       65.64
Other\b                    193,061     180,366     -12,695       -6.58
======================================================================
Total                   $1,357,471  $2,003,130    $645,659       47.56
----------------------------------------------------------------------
\a The amounts and rates shown in these categories are derived from
amounts in the Federal Reserve's operating expenses, which, for
capital acquisitions, recognize only the cost of depreciation. 

\b The "Other" category includes expense categories for shipping,
materials and supplies, and communication. 

Source:  Federal Reserve System. 

The most significant expense category during the period of 1988 to
1994 was personnel compensation, which accounted, in 1994, for nearly
two-thirds of the Federal Reserve's operating budget and over 70
percent of the total growth in the System's operating budget.  (See
fig.  2.2.) Personnel compensation expenses increased from $858
million in 1988 to $1.3 billion in 1994--an increase of $456 million,
or about 53 percent. 

   Figure 2.2:  Federal Reserve's
   1994 Operating Expenses, by
   Expense Category

   (See figure in printed
   edition.)

Source:  Federal Reserve System. 

Thus, any increase in personnel compensation costs would have a
disproportionate impact on the overall increase in Federal Reserve
spending.  As shown in table 2.2, the overall increase in Federal
Reserve operating expenses from 1988 to 1994 was about $646 million;
personnel compensation accounted for about $456 million, or 71
percent, of this increase.  Figure 2.3 shows the contributions (by
percentage) of each major expense category to this $646 million
increase. 

   Figure 2.3:  Contributions of
   Expense Categories to the
   Overall Increase in System
   Expenses

   (See figure in printed
   edition.)

Source:  Federal Reserve System. 


--------------------
\6 Personnel compensation includes salaries; medical, dental, and
life insurance; retirement contributions; and other benefits, such as
transportation subsidies. 


      THREE FACTORS CONTRIBUTED TO
      THE INCREASE IN FEDERAL
      RESERVE PERSONNEL
      COMPENSATION COSTS
-------------------------------------------------------- Chapter 2:4.1

Increases in staffing levels and in the overall cost of benefits as
well as the changes in the workforce composition of the Federal
Reserve contributed to the rising cost of System personnel
compensation in the 1988 to 1994 period.  The percentage increases
for the Federal Reserve's staffing levels and its overall cost of
benefits exceeded the comparable percentages for the federal
government (see table 2.3).  Salary growth in the Federal Reserve and
the federal government was comparable during the period. 



                               Table 2.3
                
                  Percentage Increases in Staffing and
                 Overall Costs of Salaries and Benefits
                       in the Period of 1988-1994

                                   Federal Reserve
Factors                                     System  Federal government
------------------------------  ------------------  ------------------
Staffing levels                                 4%                 -2%
Benefits, per employee                        96\a                  62
Salaries, per employee                          39                  36
----------------------------------------------------------------------
\a To compare the cost of Federal Reserve benefits with the federal
government, we adjusted the data for the System benefits for
accounting standards not followed by the federal government. 

Source:  Federal Reserve System and the U.S.  budget. 

More specifically, System benefits have been adjusted to account for
the Federal Reserve's decision to start, in 1987, to amortize the
overfunded portion of its pension plan.  The effect of this action
has been to reduce the Federal Reserve's expenses.  In addition, the
Federal Reserve started in 1993 to accrue the cost of health benefits
for its retired employees.  The federal government's employee pension
program is prefunded, but it and postretirement health benefits have
an unfunded liability. 


         STAFFING AND SALARY
         LEVELS
------------------------------------------------------ Chapter 2:4.1.1

While the federal government's overall staffing level declined by 2
percent, the overall staffing level of the Federal Reserve increased
from 24,829 to 25,744, or by about 4 percent.  This percentage
increase is about the same as employment growth in the federal
government outside the Department of Defense.\7 Viewed in terms of
mission-related activities, the level of staffing shifted
considerably from 1988 to 1994, as shown in table 2.4. 



                               Table 2.4
                
                 Changes in Federal Reserve Staffing by
                          Activity, 1988-1994

                                                            Percentage
Category                            1988           1994         change
-------------------------  -------------  -------------  -------------
Board of Governors\a               1,484          1,635            +10

Reserve Banks, by activity
----------------------------------------------------------------------
Monetary and economic                766            729             -5
 policy
Services to Treasury and           1,819          1,754             -4
 other agencies
Services to financial              9,033          8,302             -8
 institutions
Supervision and                    2,209          3,079            +39
 regulation
Support                            4,562          5,062            +11
Overhead                           4,956          5,183             +5
Total Reserve Bank
 staffing                         23,345         24,109             +3
======================================================================
Total                             24,829         25,744             +4
----------------------------------------------------------------------
Note:  Table staffing numbers reflect the average number of persons. 

\a System accounting does not allocate Board staffing by
mission-related activity. 

Source:  Federal Reserve System. 

The largest increase in staffing occurred in supervision and
regulation, whose staff tend to be white-collar employees, primarily
bank examiners.  The second-largest increase occurred in support, due
primarily to new, automated data-processing professionals, also
white-collar staff.  The largest decrease in staffing occurred in
services to financial institutions, which is an area of activity with
a larger proportion of blue-collar workers who handle functions in
check and currency processing. 

Federal Reserve salary costs, which amounted to a total of about $1
billion in 1994, constituted 79 percent of System personnel
compensation costs in 1994.  During 1988 to 1994, the Federal Reserve
salary costs increased by 44 percent compared to an increase of 33
percent for the federal government.  Adjusting for the Federal
Reserve's increase in staffing, we compared the salary costs of the
System and the federal government on a per employee basis for the
period of 1988 to 1994.  The results showed that the 39-percent
increase in the per employee cost of Federal Reserve salaries was
slightly higher than the 36-percent increase in the per capita salary
cost in the federal government.  The growth in the Federal Reserve's
overall salary costs can be attributed to the increase in new
professional positions created by the Federal Reserve during 1988 to
1994. 


--------------------
\7 The decrease in federal government civilian employment reflects
primarily a 14-percent decrease in the Department of Defense. 
Employment in the rest of the government increased by 4 percent over
the 1988 to 1994 period.  (Federal government employment is measured
on a full-time equivalent basis.)


         COST OF BENEFITS
------------------------------------------------------ Chapter 2:4.1.2

During 1988 to 1994, the cost of benefits represented an increasingly
larger share of the Federal Reserve's personnel compensation
costs--16 percent in 1988 and 21 percent in 1994.  During this same
period, the cost of Federal Reserve benefits increased by 98 percent
compared to an increase of 59 percent for the federal government. 
Again, adjusting for the Federal Reserve's increase in staffing, we
compared the benefit costs of the System and the federal government
on a per employee basis for the period of 1988 to 1994.  The results
showed that the increase in the per employee cost of Federal Reserve
benefits (96 percent) was higher than the increase for the federal
government (62 percent).  The difference in the growth of Federal
Reserve and federal government benefits can be attributed to (1)
higher costs for benefits offered to existing staff and (2) the
additional cost of benefits for new positions created by the Federal
Reserve in the period. 


      TRAVEL AND EQUIPMENT AND
      SOFTWARE HAD THE GREATEST
      GROWTH IN THE FEDERAL
      RESERVE'S OPERATING EXPENSES
-------------------------------------------------------- Chapter 2:4.2

Although travel and equipment and software expenses constituted a
small portion of the System's operating expenses, during 1988 to
1994, these expenses had the highest growth rates in operating
expenses.  As previously mentioned, equipment and software and travel
expenses increased by 85 percent and 66 percent, respectively.  The
growth in the equipment and software expenses primarily resulted from
the depreciation/amortization expenses in equipment, including
computers and software. 

The cost of the Federal Reserve's travel expenses increased
significantly more than the federal government's travel expenses
during 1988 to 1994.  The Federal Reserve's travel expenses increased
by 66 percent compared to 26 percent for the federal government. 
This may be due, in part, to differences in the travel policies of
the Federal Reserve and the federal government. 


   AUTOMATION AND CONSTRUCTION
   PROJECTS ACCOUNTED FOR MUCH OF
   THE RESERVE BANKS' CAPITAL
   EXPENDITURES
---------------------------------------------------------- Chapter 2:5

During 1988 to 1994, the Reserve Banks spent about $1.7 billion on
capital acquisitions.  Costs for capital expenditures are allocated
to a budget separate from the Reserve Banks' operating budget. 
During 1994, the Reserve Banks spent approximately $270 million to
acquire capital assets, such as computer equipment and software for
the Federal Reserve's automation and consolidation project, which is
known as FRAS.  The Reserve Banks' 1994 capital expenditures
represented a 60-percent increase from the 1988 expenditures. 
However, unlike operating expenses, which increased steadily every
year, the growth in the capital expenditures was somewhat sporadic,
increasing in some years and decreasing in other years.  We did not
compare the Reserve Banks' capital acquisitions to the federal
government's capital acquisitions because of the differences in the
way capital spending is tracked. 

As previously mentioned, the large growth in the Reserve Bank's
capital expenditures was partially the result of FRAS.  Three
automation consolidation centers will consolidate most of the
independent mainframe operations of the 12 Reserve Banks, providing
consolidated mainframe and contingency support for, among other
things, the Federal Reserve's mission-critical payments system.  The
three FRAS centers are at the Dallas and Richmond Reserve Banks and
the East Rutherford Operations Center of the New York Federal
Reserve.  As of December 31, 1994, the total capital acquisition
cost, primarily for computer and software, was $242 million. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 2:6

While many commercial banks were downsizing their organizations and
the federal government was constraining spending, the Federal
Reserve's costs were steadily increasing.  During 1988 to 1994, the
cost of operating the Reserve Banks and the Board increased by 48
percent--nearly twice the amount of inflation.  The growth in the
Federal Reserve's operating budget was primarily produced by cost
increases in the supervision and regulation area and in the expense
categories of personnel compensation, travel, and equipment. 

Although the Federal Reserve's expenditures increased in all five
mission-related areas, supervision and regulation experienced the
most growth during 1988 to 1994.  The priced services area--where the
Monetary Control Act requires the Federal Reserve to recover costs
and the Federal Reserve competes with the private sector in providing
services to financial institutions--had the lowest cost growth. 
Thus, where the System had significant incentives to constrain costs,
it appeared to have done so. 

Personnel compensation costs, accounting for nearly two-thirds of the
operating budget, grew by 53 percent during 1988 to 1994.  Also,
personnel compensation costs represented over 70 percent of the
growth in the Federal Reserve's operating budget.  The growth in
Federal Reserve benefits and the increase of professional employment
at the Reserve Banks contributed to the rise in the Federal Reserve
personnel compensation costs. 


OPPORTUNITIES EXIST TO REDUCE
FEDERAL RESERVE OPERATING EXPENSES
============================================================ Chapter 3

The results of our review of many policies and practices of the Board
and Reserve Banks indicated that opportunities exist to reduce the
Federal Reserve's spending.  Federal Reserve personnel compensation
(pay and benefits) varied within the Federal Reserve and included
benefits that were relatively generous compared to those of
government agencies with similar responsibilities.  We also found
that improvements and greater uniformity in Reserve Bank policies and
practices relating to travel reimbursements, contracting and
procurement, and construction planning could reduce operating and
capital spending costs and reduce the Reserve Banks' risk of
potential conflict of interest and favoritism.  For example, we found
that the Federal Reserve overlooked opportunities to reduce costs in
planning and managing the design of the new Dallas Reserve Bank
building.  Finally, we found that a reduction in annual Federal
Reserve transfer to its surplus account, while not representing a
direct reduction in Federal Reserve expenditures, would have a
positive budgetary impact in the year that any such reductions
occurred. 


   THE FEDERAL RESERVE'S PERSONNEL
   COMPENSATION SYSTEM SEEKS TO
   COMPENSATE EMPLOYEES ON THE
   BASIS OF THE LOCAL LABOR
   MARKETS
---------------------------------------------------------- Chapter 3:1

The boards of directors of the 12 Reserve Banks supervise and control
the Reserve Banks, subject to the general supervision of the Board of
Governors.  The Board employs individuals who are necessary to
conduct the business of the Board.  It also sets employee salaries
and benefits; approves compensation paid by Reserve Banks to their
employees; and establishes regulations, policies, and practices
covering employee benefits.  The Reserve Banks and Board have
established differing employee pay levels and benefits.  Except for
the salaries of the Chairman and members of the Board, Federal
Reserve salaries are not limited by ceilings established by the civil
service pay system.  Salaries at some other federal financial
regulators, notably OCC and FDIC, also have not been limited by civil
service pay rules.\1

Two important objectives of the Federal Reserve's compensation system
are to (1) attract, retain, and motivate qualified employees at all
levels of responsibility and (2) be externally competitive with local
and/or regional labor markets.  To accomplish these objectives, the
Board and 12 Reserve Banks conduct individual salary surveys of
private and public institutions with related job positions in local
labor markets.  The Board and Reserve Banks also survey other
organizations periodically as they make benefit decisions.  While we
sought to understand the nature and scope of the Federal Reserve's
surveys, we did not verify or analyze the data and methodology used
in these surveys. 

To determine whether opportunities exist to reduce the Federal
Reserve's costs of operation, we reviewed personnel pay and benefits
at the Reserve Banks and Board.  We compared the general procedures
for setting Reserve Board and Banks' salaries to those of the federal
government.  We compared the specific benefits offered Board and
Reserve Bank employees to those of federal financial regulatory
agencies with responsibilities analogous to some responsibilities of
the Federal Reserve.  The federal agencies whose salaries and
benefits served as comparisons were FDIC, OCC, and the Securities and
Exchange Commission (SEC).  OCC and FDIC generally are not subject to
civil service limitations in providing salaries and benefits to their
employees, while SEC is subject to such limitations.  We did not
attempt to analyze differences in employee responsibilities when we
compared Federal Reserve salary levels and benefits to those of FDIC,
OCC, and SEC. 


--------------------
\1 For example, FDIC is not bound by either the Classification Act or
the general schedule (GS) pay scale.  It can administratively
establish its own salary structure.  The fifth paragraph of section
1819 of Title 12, the FDIC Act of 1950, grants authority to the FDIC
Board of Directors to fix compensation. 


      FEDERAL RESERVE SALARY
      LEVELS WERE ADJUSTED TO BE
      COMPETITIVE WITH LOCAL LABOR
      MARKETS
-------------------------------------------------------- Chapter 3:1.1

The Federal Reserve attempts to offer salaries competitive with
private sector organizations.  The Federal Reserve is not constrained
by maximum limits when setting its salaries for most positions.  (The
notable exceptions are the salaries for the Governors of the Board,
including the Chairman.)\2 In addition, both Board and Reserve Bank
salaries are based on independent salary surveys of organizations
that have similar local labor forces.  As a result, the Federal
Reserve offers salaries that are competitive with private sector
organizations in a given locality.  In contrast, most civil service
salaries are subject to maximum levels, the highest of which is level
IV of the executive pay schedule, which was $115,700 in 1994. 

In 1990, Congress passed the Federal Employees Pay Comparability Act
(FEPCA), which provided for a comprehensive, long-term pay reform
program designed to ultimately make federal salaries more competitive
with the private sector.  Under FEPCA, locality pay adjustments were
to be phased in over a 9-year period beginning in 1994.  The goal was
to reduce pay disparities between federal white-collar workers and
nonfederal workers to no more than 5 percent by the year 2002. 
However, budget constraints have already resulted in reductions of
scheduled locality pay adjustments for federal workers for 1995 and
1996.  Thus, in contrast to the Federal Reserve, civil service
agencies, including SEC, have been unable to offer their employees
salaries comparable to those in local labor markets. 

Other federal financial regulators do not face these constraints. 
FDIC employees received salaries with geographic differentials that
amounted to up to 31 percent more than civil service basic pay
levels.  OCC's salary structure, which had a maximum base salary of
$166,400, also provided employees with geographic pay differentials
of up to 34 percent of OCC's base salary levels.  FDIC and OCC
salaries are, with some exceptions, not limited to ceilings
established by the civil service pay system; notable exceptions are
the salaries of members of FDIC's board of directors and the salary
of the Comptroller of the Currency. 

One interesting result of the statutory limits on the Governors'
salaries, coupled with the ability of the Federal Reserve to set
competitive salaries for other positions, is that a substantial
number of Federal Reserve employees are paid more than the Chairman
of the Board.  Specifically, 120 top-level Federal Reserve officials,
including all Reserve Bank presidents, earned more in 1994 than the
Chairman.  In 1994, the annual salaries of Reserve Bank presidents
ranged from $159,600 to $229,600, while the Board Chairman's salary
was $133,600 (the maximum allowed), and each of the other Board
members' salary was $123,100.  Appendix III provides the titles and
the number of Federal Reserve employees who earn more than the Board
Chairman and also shows the 1994 salaries for the presidents of the
12 Reserve Banks. 


--------------------
\2 Salaries of the Chairman and other Board members are established
by law (5 U.S.C.  5313 and 5314) under the Federal Executive Pay
Schedule. 


      THE BOARD AND RESERVE BANKS
      OFFERED A VARIETY OF
      BENEFITS
-------------------------------------------------------- Chapter 3:1.2

Although employee benefits at the Board and Reserve Banks differed in
many respects, some Federal Reserve benefits were systemwide and
available at the same levels to all Federal Reserve employees. 
Systemwide benefits included retirement plans, the thrift savings
plan, business travel/accident insurance, life and survivor
insurance, and a long-term disability income plan.  Other benefits
not offered on a systemwide basis included mass transit subsidies and
leave granted for marriage, bereavement, family care, and floating
holidays. 

From our review of the Federal Reserve's personnel policies and
practices, we found that a few Federal Reserve benefits were more
generous than those available to OCC and FDIC and many were more
generous than civil service benefits, such as those available to SEC. 
Also, the Federal Reserve provided additional benefits to some
high-level officials, including home security systems, bodyguards,
and home-to-work transportation in Federal Reserve- owned vehicles. 


      FEDERAL RESERVE HEALTH CARE
      BENEFITS WERE MANAGED ON A
      DECENTRALIZED BASIS
-------------------------------------------------------- Chapter 3:1.3

All 12 Reserve Banks offered their employees comprehensive health
insurance packages.  Although the Board paid the same health care
premiums as other federal agencies (payments that ranged from about
60 to 75 percent) the percentage of premiums paid by Reserve Banks
differed.  Most Reserve Banks paid 75 to 90 percent of health
insurance premiums.  Appendix III shows the percentage of health
insurance premiums paid by the Reserve Banks, the Board, FDIC, OCC,
and SEC.  The total health care cost paid by the Board and the
Reserve Banks in 1994 was $7.5 million and $64.9 million,
respectively. 

Recognizing that health care costs are escalating, Reserve Banks are
attempting to reduce health plan costs.  Federal Reserve health care
benefits were managed on a decentralized basis, with each Bank
negotiating its own health care coverage.  One Reserve Bank
eliminated its preferred provider option previously available to
employees, replaced it with a managed care network, and reduced the
number of available health maintenance organizations.  Federal
Reserve officials estimated that health care costs would have been
about $900,000 more for 1993 without these changes.  Another Reserve
Bank reduced the number of health care plans available to employees
to two effective in April 1994; officials estimated resulting savings
of about $2.3 million over the following 3 years.  Although the
Reserve Banks have individually made efforts to reduce health care
costs, the Reserve Banks have not worked together to determine
whether their combined bargaining powers would further reduce these
expenses. 


      SOME FEDERAL RESERVE LEAVE
      POLICIES DIFFERED FROM THOSE
      OF OTHER FEDERAL FINANCIAL
      REGULATORS AND CIVIL SERVICE
-------------------------------------------------------- Chapter 3:1.4

The number of days allowed for annual and sick leave differed
significantly among the Reserve Banks and between the Reserve Banks
and the Board.  The Board, along with FDIC, OCC, and SEC, followed
the civil service guidelines, which provide between 13 and 26 days
for annual leave and 13 days for sick leave each year.  The number of
annual leave days available to Reserve Bank employees ranged from 10
to a maximum of 23 to 32 days per year, depending on length of
service.  Thus, relatively junior Reserve Bank employees were granted
fewer annual leave days than civil service permits, but more senior
employees could accrue more annual leave days each year than civil
service permits.  However, some Reserve Banks offered additional paid
leave for certain purposes, such as bereavement or marriage, which
was in addition to annual leave.  Among the Reserve Banks, the number
of sick days employees accrue varied considerably.  Six Reserve Banks
offered fewer sick leave days annually than civil service employment
(ranging from 8-1/4 to 12 days), while two others offered sick leave
in the range of 15 to 18 days.  Other Reserve Banks appeared to offer
more generous sick leave policies.  Tables III.7 and III.9 in
appendix III show the leave benefits available at the Reserve Banks,
the Board, FDIC, OCC, and SEC. 


      COMPARISON OF FEDERAL
      RESERVE AND OTHER FEDERAL
      EMPLOYEE RETIREMENT PROGRAMS
-------------------------------------------------------- Chapter 3:1.5

Federal Reserve Board and Bank employees do not participate in the
retirement programs that cover most federal civilian employees. 
Separate retirement programs apply to Board and Reserve Bank
employees. 

Before 1983, Board employees, along with federal employees in
general, were not covered by the Social Security program.  Board
employees were under the Federal Reserve Board Retirement System
(FRBRS), and other federal employees were under the Civil Service
Retirement System (CSRS).  Even though they were separate, the two
systems' provisions were virtually identical.  In contrast, Reserve
Bank employees were not considered to be employed by the federal
government.  They were covered by Social Security and a separate
retirement system designed to complement their Social Security
benefits. 

The Social Security Amendments of 1983 required all federal
employees, including Board employees, first hired after December 1983
to participate in Social Security.  Accordingly, new retirement
systems had to be developed to recognize the availability of Social
Security benefits for the covered employees.  The Federal Employees'
Retirement System (FERS) was developed to cover federal employees in
general.  However, rather than develop a new retirement system for
future Board employees, the Federal Reserve decided that they would
be covered by the retirement system already in place for Reserve Bank
employees. 

In addition to the pension benefits available from the FRBRS and
Reserve Bank retirement systems, Board and Reserve Bank employees can
earn additional retirement income through participation in a thrift
plan sponsored by the Federal Reserve.  The thrift plan includes two
components--a savings account and a deferred compensation account. 
Employees may contribute to either or both accounts.  Employee
contributions to the savings account are made with after-tax dollars,
and contributions to the deferred compensation account are made with
pretax dollars.  For each dollar an employee contributes to the
thrift plan, up to 6 percent of salary, the Federal Reserve matches
80 percent of the employee's contributions.  Thus, the maximum
employer contribution to any employee's thrift plan is 4.8 percent of
salary.  Employees may contribute additional amounts to the thrift
plan with no matching contributions by the Federal Reserve. 

Even though the pension benefits available to other federal employees
in CSRS and Board employees in FRBRS are the same, Board employees
have the distinct advantage of being eligible to participate in the
thrift plan and receive matching contributions from the Federal
Reserve.  Employees in CSRS may contribute to a thrift plan, but
receive no contributions from their employing agencies. 

The Reserve Bank pension plan differs from the FERS pension plan that
applies to federal employees in general.  Some of the features of the
Reserve Bank plan are less generous than the counterpart features of
FERS.  For example, Reserve Bank plan's benefits are based on
employees' average salaries earned during their 5 highest-paid years,
while FERS' benefits are based on employees' average salaries earned
during their 3 highest-paid years.  Also, Reserve Bank employees must
be at least age 60 with 30 years of service to retire with unreduced
retirement benefits, while FERS provides unreduced benefits as early
as age 55 with 30 years of service.\3 However, these FERS advantages
are more than offset by a number of significant features of the
Reserve Bank plan that are superior to FERS.  Some of the features
where the Reserve Bank plan is more generous than FERS are as
follows: 

  -- The Reserve Bank plan is free to employees; FERS requires
     employees to contribute .8 percent of their salaries toward plan
     costs. 

  -- The Reserve Bank plan's benefit calculation formula provides
     considerably greater benefits than the FERS formula.  In the
     Reserve Bank plan, benefits are equal to 1.3 percent of average
     salary up to the Social Security integration level and 1.8
     percent of average salary over the integration level multiplied
     by total years of service.  (The integration level is the
     average of the maximum amounts of salary covered by Social
     Security from 1959 through the year of retirement.  For
     employees retiring in 1995, the integration level was $24,312). 
     In the FERS plan, the formula for each year of service is 1.1
     percent of average salary for retirees who are at least age 62
     with 20 years of service.  For retirees who are younger than age
     62, the FERS benefit formula is 1 percent of average salary for
     each year of service. 

  -- The Reserve Bank plan allows employees as young as age 50 to
     voluntarily retire early with reduced benefits.  FERS does not
     have a similar provision.  Under FERS, employees cannot
     voluntarily retire before age 55 unless they or their agencies
     are facing involuntary employee separations. 

FERS also includes a thrift plan to which covered employees and their
agencies can contribute to increase retirement income.  The FERS
thrift plan is designed somewhat differently from the Federal Reserve
thrift plan; overall, it provides slightly greater benefits to
participating employees.  Unlike the Federal Reserve thrift plan, all
employees in FERS receive agency contributions equal to 1 percent of
their salaries regardless of whether the employees make any
contributions.  The agencies then match, dollar-for-dollar, employee
pretax contributions of up to 3 percent of salary and 50 cents on the
dollar for the next 2 percent of salary that employees contribute to
the thrift plan.  Thus, compared to the maximum 4.8 percent of salary
the Federal Reserve will contribute to an employee's thrift plan,
employing agencies will contribute as much as 5 percent of employees'
salaries to the FERS thrift plan.  Also, to receive the maximum
employer contribution of 4.8 percent of salary, Board and Reserve
Bank employees must contribute 6 percent of their salaries. 
Employees in FERS can receive employer contributions of 5 percent of
salary by contributing 5 percent of their salaries to the FERS thrift
plan. 


--------------------
\3 Under provisions of the FERS Act, the FERS retirement age
advantage will be less in the future.  Retirement eligibility at age
55 is available under FERS only to employees who were born before
January 1, 1948.  The age requirement gradually increases until it
reaches age 57 for employees born after December 31, 1969. 


      A NUMBER OF OTHER FEDERAL
      RESERVE BENEFITS WERE NOT
      AVAILABLE TO CIVIL SERVICE
      EMPLOYEES
-------------------------------------------------------- Chapter 3:1.6

As shown in table 3.1, the Federal Reserve offered a few benefits to
its employees that are generally not offered to civil service
employees.  These benefits included separate dental insurance,
subsidized employee cafeterias, premium conversion accounts, flexible
spending accounts, matching contributions for savings accounts, and
mass transit subsidies.  In addition, some banks offered marriage,
bereavement, parental care, and floating holiday leave as leave
categories separate and distinct from the usual annual and sick leave
offered.  Appendix III provides a full description of these selected
Federal Reserve benefits and their availability at FDIC, OCC, and
SEC. 



                                    Table 3.1
                     
                      Benefits Available to Federal Reserve,
                     FDIC, OCC, and SEC Employees During 1993

                               Number of
              Board of     Reserve Banks                              SEC (civil
Benefits      Governors       (12 total)  FDIC          OCC           service)
------------  ----------  --------------  ------------  ------------  ----------
Health        Yes                     12  Yes           Yes           Yes
insurance

Dental        Yes                     12  Yes           Yes           No
insurance

Subsidized    Yes                     12  Yes           Yes           \a
cafeteria/
Dining room

Premium       Yes                     12  Yes           Yes           No
conversion
account

Flexible      Yes                     11  Yes           Yes           No
spending
account

Thrift        Yes                     12  Yes           Yes           Yes
savings plan

Savings plan  Yes                     12  Yes           Yes           No

Annual leave  Yes                     12  Yes           Yes           Yes

Sick leave    Yes                     12  Yes           Yes           Yes

Marriage      No                       4  No            No            No
leave

Bereavement   No                      11  No            No            No
leave

Family care   No                       3  No            No            No
leave\b

Floating      No                      10  No            No            No
holidays

Mass transit  Yes                      4  No            No            Yes
subsidy

Home          Yes                      8  No            No            No
security      (for the            (for 8
systems       Chairman)      presidents,
                             5 first VP,
                             1 executive
                                 VP, and
                            1 senior VP)

Home-to-      Yes                     12  No            No            No
Work          (Chairman   (59 employees,
transportati  only)        including all
on in agency                 presidents)
vehicle

Employee      Yes                      6  No            No            No
store

Employee      No                      10  No            No            No
lounge

On-site       Yes                     11  Yes           Yes           Yes
exercise
facility

Employee      Yes                     12  Yes           Yes           Yes
parking

Tuition       Yes                     12  Yes           Yes           Yes\c
assistance
program

Business      Yes                     12  Yes           Yes           No
travel/                                                               (covered
Accident                                                              by credit
insurance                                                             card)

Civil         Yes                     \d  Yes           Yes           Yes
Service
Retirement
System

FERS          Yes                     \d  Yes           Yes           Yes

Other         Yes                     12  No            No            No
agency-
managed
retirement
plan

Long-Term     Yes                     12  Yes           Yes           Yes
Disability

Life          Yes                     12  Yes           Yes           Yes
insurance
--------------------------------------------------------------------------------
Legend:

FDIC = Federal Deposit Insurance Corporation
OCC = Office of the Comptroller of the Currency
SEC = Securities and Exchange Commission
VP = Vice President
FERS = Federal Employees' Retirement System

\a SEC has no cafeteria. 

\b The Federal Reserve Board of Governors, some Federal Reserve
Banks, FDIC, OCC, and SEC allow their employees to use annual or sick
leave for family care. 

\c Available only to employees in grades GS-8 and below. 

\d The Reserve Banks are not covered under these plans. 

Sources:  GAO analysis of information provided by the Federal Reserve
Board; 12 Federal Reserve Main District Banks; and FDIC, OCC, and SEC
headquarters. 


   FEDERAL RESERVE BANK TRAVEL
   POLICIES ARE NOT UNIFORM AND
   REPRESENT AN OPPORTUNITY TO
   REDUCE COSTS
---------------------------------------------------------- Chapter 3:2

To determine whether opportunities existed to reduce the Federal
Reserve's operational costs, we also reviewed travel reimbursement
policies within the Federal Reserve.  Each year, the Board and the
Reserve Banks spend millions of dollars for employee travel.  In
1994, for example, the total of travel expenditures for the Federal
Reserve was $42 million.  According to Board officials, Board
personnel are authorized to use government rates for lodging and
airfare.  Some Reserve Bank officials we interviewed stated that
Reserve Bank employees are ineligible for government rates for
lodging and airfare because the Reserve Banks are not federal
agencies.\4 However, one Bank official disagreed, stating that
Reserve Bank employees can request government rates for lodging, but
cannot insist on receiving government rates. 


--------------------
\4 Reserve Bank employees performing Board-delegated duties, such as
financial institution examinations, are reimbursed on the basis of
the Reserve Bank's travel policies, not the Board's.  Bank examiners
at FDIC and OCC are able to take advantage of Federal airfare and
lodging rates. 


      TRAVEL REIMBURSEMENT
      POLICIES VARIED WITHIN THE
      FEDERAL RESERVE
-------------------------------------------------------- Chapter 3:2.1

Under regulations comparable to those for other federal employees,
Board employees are reimbursed for lodging and meal expenses on a per
diem basis.  However, members of the Board are permitted to receive
reimbursement for domestic lodging and meals on either an actual
expense or per diem basis, when deemed appropriate.  The Board's
general policy directive for Reserve Bank travel expenditures allows
for variations in Reserve Bank reimbursement procedures.  These
differences can result in additional expenditures.  One Reserve Bank
we reviewed had maximum lodging reimbursement rates, while another
Reserve Bank had recommended reimbursement rates.\5 However, two
Reserve Banks reimbursed at cost without maximum or recommended
rates.  As a result of these policy differences, two travelers'
overnight lodging allowances for the same city could vary widely,
depending on each traveler's Reserve Bank. 

In addition to the differences noted in lodging costs, Reserve Banks
reimbursed employees for meals using varying schedules and rates. 
Two Reserve Banks reimbursed travelers for meals on the basis of a
schedule that divided the day into four quarters, while another
Reserve Bank used a more narrowly defined schedule that aligned with
typical meal times.  Additionally, another Reserve Bank reimbursed
travelers for meals depending on whether they were traveling to a
Federal Reserve System entity versus other locations.  Of the Reserve
Banks we reviewed, two also allowed employees to choose actual cost
reimbursement rather than a flat per diem rate.  As a result of these
policy differences, the total meal reimbursement for a 3-day trip to
the Board in Washington, D.C., could range from $76 to $105. 

We believe making travel policies uniform within the Federal Reserve
could provide an opportunity to reduce Federal Reserve expenses,
particularly if caps on reimbursements were set below current levels. 
In addition, more uniform policies could result in some
administrative costs reductions, particularly if common travel
policies would enable travel expenses to be managed on a more
centralized basis, thus reducing the need for staff time devoted to
travel administration at each Reserve Bank. 


--------------------
\5 The maximum lodging rate is a set dollar amount above which the
employee will not be reimbursed, except in special, approved
circumstances.  On the other hand, the recommended reimbursement rate
is a suggested dollar amount used by employees as a guideline when
making travel arrangements. 


   IMPROVED CONTRACTING AND
   PROCUREMENT PRACTICES COULD
   RESULT IN COST EFFICIENCIES
---------------------------------------------------------- Chapter 3:3

To determine whether opportunities existed to reduce the Federal
Reserve's operational costs, we also reviewed procurement and
contracting practices at several Reserve Banks.  Unlike personnel
costs that remain relatively stable, expenses associated with capital
acquisitions can vary significantly from year-to-year, offering
additional opportunities for controlling and reducing procurement
costs.  The 12 Reserve Banks spent more than $560 million in 1994 to
acquire buildings, equipment, supplies, and services.  Nearly half of
the total ($267 million) was used to buy capital items (buildings and
equipment) and fund building projects.  As discussed in chapter 1,
only depreciation costs of capital assets are accounted for in annual
operating budgets. 

Because the Board and Reserve Banks spend millions each year for
goods and services, certain controls should be in place to ensure
that those dollars are spent wisely.  For example, the Reserve Banks
should have an effective procurement and control process in place to
ensure that they receive goods and services at the most reasonable
cost.  Moreover, to prevent fraud and abuse, the procurement
practices should also preclude potential conflicts of interest
between the Reserve Banks and contractors. 

The Board and the Reserve Banks used different procurement
guidelines.  Although not specifically directed to do so by the
Federal Reserve Act, a spokesman for the Board told us that the Board
follows the spirit of the federal government contracting rules, which
are contained in the Federal Acquisition Regulations (FAR).  Reserve
Banks are not required to follow these rules. 

However, each Reserve Bank is required to follow general procurement
guidance, called Uniform Acquisition Guidelines (UAG), which were
adopted by the Reserve Banks in 1985.  The UAGs were developed by the
Reserve Banks in conference committees.  They were designed to
provide minimum requirements for Reserve Bank procurement activities. 
By providing opportunities for all interested bidders to become a
selected source, the guidelines attempt to ensure that Reserve Banks
treat sources fairly and impartially.  By fostering competition in
the procurement process, Reserve Banks will also have a greater
opportunity to realize cost savings through lower competitive
pricing. 

Despite the UAGs, we observed the following: 

  -- Practices at individual Reserve Banks differed significantly and
     some practices favored certain sources over others.  For
     instance, some Reserve Banks did not allow an equal opportunity
     for new bidders to bid for large procurements and limited
     bidders lists to sources with which the Reserve Banks had
     traditionally done business.  This practice existed even though
     other equally qualified sources were both available and
     interested.  Furthermore, some Reserve Banks retained incumbent
     contractors for certain services for years without recompeting
     the award, thus precluding other firms from competing for those
     services.  At one of the four Reserve Banks we visited, the
     records indicated that the cafeteria contract was last competed
     over 9 years ago.  At another Reserve Bank we visited, personnel
     could not locate documentation of their last cafeteria contract
     negotiations, which they believed occurred in the late 1980s. 
     By limiting the ability of other sources to compete for a
     contract, Reserve Banks tend to reduce competition, thereby
     missing opportunities to reduce procurement costs. 

  -- Proper controls over conflict of interest were not followed at
     certain Reserve Banks.  For instance, the UAGs prohibit
     disclosure of specific information contained in bids or
     proposals to anyone except Reserve Bank personnel before
     awarding the contract.  However, two of the four Reserve Banks
     we visited transferred almost all functions leading up to the
     award of major building contracts to architecture and
     engineering (A&E) firms.  A&E firms receive and evaluate bids
     and recommend the source that should receive the award.  In
     contrast, at the other two Reserve Banks we visited, only
     Reserve Bank personnel were allowed to receive and evaluate the
     bids or proposals and choose the successful source.  The
     building department's vice president at one of the four Reserve
     Banks told us that the larger the role the A&E firm plays, the
     greater the potential for favoritism and conflict of interest. 

  -- Practices at certain Reserve Banks lacked independent checks and
     reconciliations.  Although each Reserve Bank should have
     controls for independent checks and reconciliations of voucher
     payments, at two of the four Reserve Banks we visited, only the
     building department was responsible for authorizing progress
     payments made to construction contractors.  At both Reserve
     Banks, officials responsible for the payment function, where the
     reconciliation should take place, did not track payment amounts
     against the total available contract dollars.  Instead, when
     vouchers were received that showed the approval of the building
     department, the vouchers were paid. 

  -- Noteworthy practices used by certain Banks were not disseminated
     among the Reserve Banks.  Several Reserve Banks had procedural
     strengths or notable practices that were missing in others. 
     Building department officials at one of the four Reserve Banks
     requested and analyzed various elements of cost included in
     construction proposals, which enabled them to evaluate the
     proposed prices.  They had found that challenging the
     bids/proposals from construction contractors resulted in
     improved understanding of what is required, as well as better
     quality and lower prices.  However, we found no evidence that
     information about these "best practices" was being disseminated
     within the Federal Reserve.  Specifics on these practices are
     described in appendix IV. 


   THE FEDERAL RESERVE COULD BE
   MORE COST CONSCIOUS WHEN
   PLANNING AND MANAGING
   LARGE-SCALE BUILDING PROJECTS
---------------------------------------------------------- Chapter 3:4

To determine whether opportunities exist to reduce the Federal
Reserve's operational costs, we also reviewed decisions related to
the construction of the Dallas Reserve Bank facility.  Even though
the cost of the Dallas building project was $8 million less than the
initially approved budget and construction was completed ahead of
schedule, opportunities existed for the Federal Reserve to reduce
costs.  In two areas, we found that the Reserve Bank could have cut
costs approved by the Board.  First, the Dallas Reserve Bank building
was larger than the plan initially specified; second, the Reserve
Bank purchased more land than necessary.  Since the building
contained enough square footage to meet the projected space-study
needs through 2017, the purchase of additional acreage for expansion
purposes had questionable value. 


      THE DALLAS RESERVE BANK
      OUTGREW ITS ORIGINAL BANK
      BUILDING
-------------------------------------------------------- Chapter 3:4.1

By July 1988, the Dallas Reserve Bank had outgrown its original
building.  The building could not house all employees, no longer
complied with the evolving building codes, and contained many space
deficiencies.  Faced with these problems, Dallas Reserve Bank
officials commissioned a study, to identify alternatives that would
resolve the space problems. 

As a result of that study, in November 1988, the Dallas Reserve Bank
recommended that the Board: 

  -- approve a space plan for a building with 540,334 net usable
     square feet, which would satisfy the Reserve Bank's projected
     needs through 2017;

  -- locate the new building on land within the Central Business
     District (CBD), which would provide the most effective and
     appropriate solution for satisfying the Reserve Bank's space
     needs over the long term;

  -- approve a target budget of $171.8 million for the construction
     of a new building on a new site; and

  -- authorize the Reserve Bank to proceed with a site selection and
     conceptual design for a new building. 


      THE BOARD APPROVED THE COST
      OF A NEW DALLAS RESERVE BANK
      BUILDING
-------------------------------------------------------- Chapter 3:4.2

In January 1989, the Board approved the Dallas Reserve Bank's
proposal to construct a new building at a new location within the
Dallas CBD.  The Board-approved plan had a target budget of $171.8
million and a target completion date of August 1992.  In July 1990,
the Board authorized the Dallas Reserve Bank's proposal to follow an
expedited (or "fast track") construction plan.  This approach allowed
the Reserve Bank to begin construction with incomplete construction
drawings and without finalized subcontract agreements.  Additionally,
the Board lowered the final budget for the land purchase and new
building design and construction to $164.5 million.  The expedited
construction plan also allowed occupancy 3 months ahead of schedule. 


      THE FACILITY WAS OVERBUILT
-------------------------------------------------------- Chapter 3:4.3

The proposal submitted by the Dallas Reserve Bank to the Board called
for the construction of a 540,334 square foot building.  The building
requirements for the Reserve Bank's new facility were based on the
Board's projected space requirements.  The Board requires that new
building projects allow for 15 years of personnel growth and 25 years
of vault and other space growth.  The Dallas Reserve Bank hired a
consultant to determine the projected space needs on the basis of the
Board criteria.  The space study found that 540,334 square feet would
allow for 15 years of personnel growth through 2007 and that 580,093
square feet would allow for 25 years of equipment growth though 2017. 

The completed building contains 595,385 square feet, which is 55,051
square feet more (about 10 percent) than the initially approved
square footage.  In addition, the new building's square footage was
more than the 580,093 square feet the bank is projected to need in
2017.  The two areas most overbuilt, in terms of total square feet
and percent authorized, were the data services and lobby areas.  In
the data services area, 70,167 square feet were authorized by the
Board.  However, in the completed building, the final square footage
for data services was 90,860, or 29 percent more than was authorized. 
The building's two lobby entrances called for 7,800 in total square
feet, while the actual square footage on completion was 27,369, or an
increase of 250 percent. 

According to a Reserve Bank official, the architect's plan provided
for more space than was approved by the Board.  However, the
additional space did not cause concern since the design and
construction costs for the plan were less than the budgeted amount
approved by the Board. 


      LAND PURCHASED WAS
      UNNECESSARY
-------------------------------------------------------- Chapter 3:4.4

The Dallas Reserve Bank purchased, with the Board's approval, 8.02
acres of land for $27.7 million, or $79.30 per square foot.  They
needed 6.02 acres for new building construction and purchased the
additional 2 acres for future building expansion or sale.  Since the
building design exceeded projected space needs through 2017, the need
for additional land was redundant.  According to a senior official at
the Dallas Reserve Bank, the Bank could have purchased only the 6.2
acres for approximately $20.7 million and foregone the additional 2
acres for a total savings to the Federal Reserve of $7 million. 


   OPPORTUNITIES MAY EXIST TO
   REDUCE OR ELIMINATE THE SURPLUS
   ACCOUNT
---------------------------------------------------------- Chapter 3:5

Downward adjustments to the surplus account, or its elimination,
would have a positive budgetary impact by increasing the amounts
returned to Treasury in the years that they occur.  The current
formula for calculating the amounts to be contributed to surplus
accounts is as follows.  Each Reserve Bank's capital stock is by law
equal to 6 percent of the paid-in capital and surplus of its member
banks.\6 Annually, as banks' paid-in capital and surplus grow or
shrink, member banks are required to adjust the amount of their
Federal Reserve Bank stock to equal 6 percent of their paid-in
capital and surplus.  The Reserve Banks then contribute, out of
Federal Reserve earnings, amounts to their surplus accounts so that
the surplus balances are equal to the amount of paid-in capital. 
During 1988 to 1994, the total of the surplus accounts systemwide
increased 79 percent, from $2.1 billion in 1988 to $3.7 billion in
1994. 

The Federal Reserve has stated in its publications that the purpose
of the surplus accounts is to ensure that adequate capital is
available to absorb possible losses.  In its monetary policy, lender
of last resort, and payment system activities, the Federal Reserve is
exposed to risks that could potentially generate large losses. 
However, because the Federal Reserve's interest income so far exceeds
its expenses, we believe it is highly unlikely the Federal Reserve
will ever incur sufficient annual losses such that it would be
required to use any funds in the surplus account.  In the years 1914
and 1915, the first 2 years of its operations, the Federal Reserve
experienced net losses.  However, every year since then, for 79
years, the Federal Reserve has recorded substantial net profits.  The
profits for 1994 were $20 billion and expenses, including losses,
were about $3 billion. 

We could find no criteria to use in assessing the amount held in
surplus.  According to Federal Reserve officials, the methodology for
deciding that amount has changed and is somewhat arbitrary. 
Currently, and in the past, the levels of the surplus account have
been discretionary because the requirement to have the surplus
account equal to paid-in capital has been a matter of Federal Reserve
policy; it was not required by law.  However, in a provision of the
Omnibus Budget Reconciliation Act of 1993, Congress required the
Federal Reserve, in fiscal years 1997 and 1998 only, to calculate the
surplus account using the current formula and then to reduce the
account by $106 million in fiscal year 1997 and $107 million in
fiscal year 1998.  Although the law did not specifically state the
purpose of those transfers, its effect was to reduce the federal
government's projected deficit in those years.  Considering that this
provision only applies to fiscal years 1997 and 1998 and the general
lack of criteria for assessing surplus amounts, Congress may wish to
determine whether these surplus accounts are necessary and, if so,
set permanently in law an appropriate amount for these accounts. 


--------------------
\6 Member banks must subscribe to stock equal to 6 percent of their
paid capital and surplus.  However, only half of this amount (3
percent) must actually be paid; the remaining amount, 3 percent, is
subject to the call of the Reserve Bank. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 3:6

Because the Federal Reserve's spending represents a cost to U.S. 
taxpayers, the Federal Reserve should operate as efficiently as
possible.  Our review indicates opportunities exist to reduce Federal
Reserve spending.  Federal Reserve expenditures for personnel
benefits varied among Reserve Banks and some benefits were generous
compared to those of federal agencies with similar responsibilities. 

Also, we believe that opportunities exist for reductions in
discretionary spending for health care and travel costs through the
systemwide management of these areas.  Although several Reserve Banks
have undertaken efforts to reduce their health care costs, we believe
that centralized management of the Federal Reserve's health care
plans could further reduce health care costs.  Furthermore, we
believe travel expenses could be reduced by adopting the most
cost-effective "best practices" in travel reimbursement policies. 
Although instituting uniform, cost-conscious practices at all Reserve
Banks may appear contrary to the tradition of independently managed
Reserve Banks, the Reserve Banks have adopted uniform policies and
procedures in many areas of operation. 

Our review of contracting and procurement practices at some Reserve
Banks also indicate opportunities to reduce discretionary spending
for goods and services.  We believe that the Federal Reserve could
better ensure the purchase of goods and services at reasonable cost
through increased compliance with UAG as well as systemwide adoption
of "best practices" in procurement and contracting.  Moreover, in its
planning and management of the Dallas Reserve Bank construction
project, the Reserve Bank overlooked opportunities to reduce spending
that the Board had approved. 

Downward adjustments to the surplus account, or its elimination,
would have a positive budgetary impact by increasing the Federal
Reserve's annual transfer to Treasury in the years that any such
reductions occur.\7 Federal Reserve deductions would have to exceed
the billions of dollars transferred to Treasury annually before the
Federal Reserve's use of the account would be necessary.  Since the
chances of an occurrence of such an event are extremely remote, we
believe that capping, reducing, or even eliminating the surplus
account represents an opportunity to decrease deductions to the
amount transferred to Treasury each year. 


--------------------
\7 The Joint Explanatory Statement accompanying the Fiscal Year 1996
Budget Resolution directed the Congressional Budget Office not to
score for fiscal year 1996 any savings for new legislation that might
affect the Federal Reserve's transfer of the surplus account to the
U.S.  Treasury.  (H.R.  Rep.  No.  104-159 at 51 (June 26, 1995).)
Accordingly, if such legislation had been passed, the transfer would
not have been counted for purposes of determining compliance with the
Budget Enforcement Act for Fiscal Year 1996. 


   RECOMMENDATIONS TO THE BOARD OF
   GOVERNORS OF THE FEDERAL
   RESERVE
---------------------------------------------------------- Chapter 3:7

We recommend that the Board of Governors

  -- review pay and benefits levels at the Board and the Federal
     Reserve Banks to determine if current levels can continue to be
     justified in today's environment of increased governmental and
     private-sector cost containment;

  -- assess whether managing the Federal Reserve's health care
     coverage on a systemwide basis could reduce health care costs;

  -- review travel policies at the 12 Reserve Banks and change those
     policies that increase costs;

  -- review contracting and procurement practices at the 12 Reserve
     Banks to ensure that these practices are in compliance with the
     system acquisition guidelines and result in cost-effective
     contracts;

  -- ensure that the "best practices" in contracting and procurement
     at the 12 Reserve Banks are regularly identified, disseminated,
     and adopted by the Reserve Banks; and

  -- review policies regarding the size of the surplus account and
     determine if opportunities exist to decrease the amount held in
     the account. 


   MATTER FOR CONGRESSIONAL
   CONSIDERATION
---------------------------------------------------------- Chapter 3:8

Congress should consider the results of the Board's review and decide
if there is a continued need for the Federal Reserve's surplus
account and, if so, what the appropriate amount of the account should
be. 


   FEDERAL RESERVE'S COMMENTS AND
   OUR EVALUATION
---------------------------------------------------------- Chapter 3:9

In written comments on a draft of this report, the Federal Reserve's
Board of Governors did not agree with our recommendations that they
review pay and benefits levels and consider reducing or eliminating
the surplus account.  The Board stated that the Federal Reserve
strives to provide salaries and benefits competitive with local
private sector markets and that its current pay and benefits levels
are necessary to attract and retain skilled employees.  The Board
agreed that the appropriate level of the surplus account is open to
debate, but it did not agree to consider reducing or eliminating the
surplus account.  The Board stated that reducing the surplus account
would have no real economic impact and cited the possibility that,
without the surplus account, temporary short-term losses could lead
to a perceived impairment of its capital that could raise investors'
concerns about the System's ability to conduct sound monetary policy. 
The Board agreed with our recommendations concerning the Federal
Reserve's policies and practices regarding travel, contracting, and
procurement.  The Board also agreed with our recommendation
concerning the management of health care benefits. 

Because personnel costs accounted for almost 70 percent of the
Federal Reserve's total operating costs and increased by over 50
percent in the 1988 to 1994 period, we believe these costs should be
one of the first areas to be examined for potential savings.  We
acknowledge that certain benefit levels may be necessary for the
Federal Reserve to attract and retain a skilled workforce.  However,
we do not believe the Board has made a convincing case that these
benefits need not be reexamined with a view toward greater cost
containment.  In addition to the private sector, the Federal Reserve
also competes with public sector employers, and its benefits are
clearly more generous than those of the federal government overall. 
In some cases, the Federal Reserve's benefits are more generous than
those of the other financial industry regulators who are the major
employer-competitors in areas such as bank supervision.  Moreover, we
note that less than half of the Federal Reserve's total workforce is
highly skilled professional staff, such as lawyers, economists, and
financial analysts. 

We maintain, and the Board agreed, that reducing or eliminating the
surplus account, by transferring these funds to Treasury, would
increase overall government receipts and reduce the unified budget
deficit in the year that any such transfer occurred.  We also agree
with the Board that reducing or eliminating the surplus account would
be offset by a reduction in subsequent years of interest payments to
Treasury that the Federal Reserve would have otherwise earned by
investing these funds in government securities.  However, we believe
Congress has a legitimate interest in deciding whether it would be
more appropriate to have these funds returned immediately, either to
reduce the outstanding public debt or for other purposes, rather than
to receive them over a longer period of time.  To allow for the
possibility that a small, temporary loss could raise investor
concerns about the Federal Reserve's ability to conduct sound
monetary policy, we suggested that Congress may wish to set an
appropriate level for the surplus account as an alternative to its
elimination. 


THE FEDERAL RESERVE SYSTEM FACES
MAJOR MISSION- RELATED CHALLENGES
============================================================ Chapter 4

The Federal Reserve System faces major challenges in its mission and
lines of business, particularly in services to depository
institutions and government agencies and in bank supervision.  These
challenges include (1) increased competition from the private sector
and increasing difficulties in recovering costs in priced services,
(2) increasingly widespread use of electronic transactions in the
financial services industry, and (3) the continuing rapid
consolidation of the banking industry, which could affect both the
need for, and the distribution of, bank examination staff.  Because
these areas account for the largest part of the Federal Reserve's
expenses and staffing, addressing these challenges effectively will
likely result in major changes in how the Federal Reserve operates. 
As the Federal Reserve undertakes to meet these challenges, it is
also likely to find that its current structure, established in 1913
when the nation's financial industry was much less complicated, is
increasingly inappropriate for the fast-paced, global financial world
of today and the next century.  However, if major changes to the
Federal Reserve's structure are to be made to promote increased
efficiency and competitiveness, such changes will need to be
carefully weighed against any potential effects on the independence
of our nation's central bank. 


   CHALLENGES FACING THE FEDERAL
   RESERVE WILL LIKELY AFFECT MOST
   OF THE WORKLOAD AT THE RESERVE
   BANKS
---------------------------------------------------------- Chapter 4:1

The overwhelming majority of the workload and expenses incurred at
the Reserve Banks is related to three lines of business--services to
depository institutions, services to government agencies, and bank
supervision and regulation.  These lines of business account for over
90 percent of all Federal Reserve Bank expenses, as shown in table
4.1. 



                               Table 4.1
                
                 Federal Reserve Banks' Operating Costs
                by Mission-Related Categories, Calendar
                               Year 1994


                                                      1994  Percentage
Activities                                      (millions)    of total
----------------------------------------------  ----------  ----------
(1) Monetary and economic policy                    $125.5        6.75
(2) Services to depository institutions            1,146.5       61.70
(3) Services to Treasury and other government        218.2       11.74
 agencies
(4) Supervision and regulation                       368.1       19.81
Subtotal: (2)+(3)+(4)                             $1,732.8       93.25
======================================================================
Total                                             $1,858.3      100.00
----------------------------------------------------------------------
Source:  Federal Reserve System. 

Except for bank supervision, most of this workload is production-
oriented, whether paper driven, such as processing currency for banks
and clearing checks, or electronic in nature, such as running the
automated clearinghouse and funds transfer systems.  In these areas,
employees often work in shifts, under fairly rigid deadlines and
production expectations.  These three lines of business are precisely
the areas subject to an increasing variety of external and internal
environmental pressures and challenges. 


      THE FEDERAL RESERVE FACES
      MAJOR COMPETITION, WORKLOAD
      REDUCTIONS, AND COST
      PRESSURES IN DELIVERING
      SERVICES TO DEPOSITORY
      INSTITUTIONS
-------------------------------------------------------- Chapter 4:1.1

In providing services to depository institutions, the Federal Reserve
faces its most immediate and significant challenges to its mission. 
The Monetary Control Act of 1980 requires that the Federal Reserve
base its fees for certain services--check processing, automated
clearinghouse (ACH) transactions, Fedwire, securities transfers,
etc--on, among other things, the costs of providing such services. 
At the same time, the Federal Reserve is required to promote the
accessibility and efficiency of the nation's payments system, a role
that may make it difficult for the Federal Reserve to raise prices
sufficiently to recover its costs.  Because services to depository
institutions represent over 61 percent of all Federal Reserve Bank
expenses and employ the largest part of Reserve Bank staffing, these
changes are likely to have a dramatic effect on the size of the
Reserve Banks' expenses, workload, and staffing needs. 


      THE FEDERAL RESERVE FACES
      INCREASING COMPETITION IN
      PRICED SERVICES
-------------------------------------------------------- Chapter 4:1.2

The Federal Reserve faces intense competition in check clearing.  In
1993, for the first time in a number of years, the actual volume of
checks handled by the Federal Reserve declined, albeit by a modest
0.2 percent.  The Federal Reserve reported that the total volume of
commercial checks for 1994 declined by almost 15 percent from 1993
levels.  The implementation of same-day settlement rules\1

by the Federal Reserve, beginning on January 3, 1994, is partly
responsible for this declining trend.  Federal Reserve officials told
us they expect further declines in the years ahead. 

A significant factor in the Federal Reserve's loss of volume and
market share in check clearing is the growth of private
clearinghouses.  The nation's check-clearing volume is still growing
slowly, but on a per capita basis, the volume is stagnant.  At the
same time, private clearinghouses competing with the Federal Reserve
have grown.  The California Bankers Clearing House, the Chicago
Clearing House, and the Clearing House Association of the Southwest
reported increases in the numbers of member banks in 1994.  The
California Bankers Clearing House also reported that it is delivering
checks to 200 nonmember banks for same-day settlement and, in the
process, saving its member banks $3.2 million a year in fees these
banks would have had to pay the Federal Reserve for these services. 

Other factors promise even further reductions in check-clearing
volume for the Federal Reserve.  These factors include

  -- electronic check presentment, in which only the essential check
     data are recorded and transmitted to the payor bank so that
     payment or return decisions can be accelerated;

  -- check imaging, which involves the use of digitized images of
     entire checks to perform processing operations;\2

  -- banking consolidation and increased interstate banking,
     resulting in the increase of "on us" checks, which will not need
     to go through a clearinghouse, and

  -- electronic banking, which is now being offered by some banks,
     could, in the long term, make paper checks an anachronism. 

In combination, these factors indicate a continued and perhaps
accelerating decline in the Federal Reserve's check-clearing
business.  About 22 percent of all Reserve Bank employees were
involved in check clearing in 1994.  As volume declines, the Federal
Reserve will need to prepare for reductions in staff required for
cost-competitive services. 

In other priced services, the Federal Reserve is also likely to face
increased competition.  The market share of private ACH providers,
such as the New York Automated Clearinghouse, the Arizona
Clearinghouse Association, and VISA will likely increase.  Even in
book-entry securities transfer services, an area where the Federal
Reserve currently faces only nominal competition, the Federal Reserve
is anticipating that future developments could lead to increased
competition. 


--------------------
\1 Beginning in January 1994, an addendum to Regulation CC requires
the Federal Reserve and banks engaged in private check-clearing
arrangements to return or refund, by the end of the same business
day, checks presented for interbank settlement before 8 a.m.  In
addition, the clearing organization cannot charge an additional fee
for this service. 

\2 Since March 1994, the Minneapolis Federal Reserve Bank has offered
check imaging to its customers. 


      POTENTIAL REVENUE SHORTFALLS
      PRESENT CHALLENGES IN
      MEETING PRICING PROVISIONS
      OF THE MONETARY CONTROL ACT
-------------------------------------------------------- Chapter 4:1.3

The Federal Reserve is facing increased difficulty in recovering its
costs for priced services.  As shown in table 4.2, costs have
outpaced revenues since 1990 in three of the Federal Reserve's priced
services. 



                               Table 4.2
                
                   Percentage Changes in Revenue and
                   Expenses for Payments for Federal
                      Reserve Services, 1990-1994

Service                                    Revenue            Expenses
------------------------------  ------------------  ------------------
Check clearing                                -.2%               13.8%
ACH                                           22.0                41.1
Fedwire                                       12.0                25.8
----------------------------------------------------------------------
Legend:  ACH = automated clearinghouse. 

Source:  Federal Reserve System. 

Some of the difficulties in recovering costs stem from higher than
anticipated automation consolidation costs associated with the
Federal Reserve Automation Services (FRAS).  (See chs.  2 and 5 for
details on the FRAS project.) These costs have been a particular
problem in check clearing. 

In recent times, the Federal Reserve has been able to mitigate the
effects of these trends in several ways: 

  -- The Federal Reserve has simply deferred certain automation
     consolidation costs to future years. 

  -- The Federal Reserve has reduced its targeted return on equity.\3

In 1993 and 1994, the target rate of return was about 5 percent,
which was historically a low rate of return, primarily because of
losses that bank-holding companies experienced in 1989 and 1991. 

  -- Past overfunding of the Federal Reserve's pension plans has
     enabled the Federal Reserve to offset some additional costs of
     providing priced services by allocating a portion of the
     overfunding to priced services, resulting in a decrease in
     expenses for those services.  In 1993, for example, the amount
     of the overfunded plan allocated to priced services was $36.7
     million.  Even so, the impact of the overfunded pension plan was
     not sufficient to enable the Federal Reserve to meet its
     targeted return on equity in 1994.  The overfunding will be
     completely amortized in the year 2002. 

These conditions are all temporary.  The Federal Reserve will be
faced with increasing pressures on its pricing policies.  For
example, with regard to the return on equity, median rates of return
on equity among large bank-holding companies are now in the 15- to
16-percent range, so the target rate of the Federal Reserve may have
to move toward that number.  Meeting a 15-percent target rate of
return on equity would require the Federal Reserve to increase its
revenue by about $50 million, which amounts to about a 7-percent
across-the-board price increase. 


--------------------
\3 The Monetary Control Act requires the Federal Reserve to include
in its costs a private-sector adjustment factor, which contains
adjustments for taxes and a return on equity similar to those that
would be factored into private sector institutions' pricing policies. 
The Federal Reserve has adopted a formula that calculates the return
on equity as the average after-tax rate of return over the preceding
5 years by the top 25 bank-holding companies. 


      THE FEDERAL RESERVE COULD
      FACE MAJOR WORKLOAD
      REDUCTIONS IN PROVIDING
      SERVICES TO THE DEPARTMENT
      OF THE TREASURY AND OTHER
      GOVERNMENT AGENCIES
-------------------------------------------------------- Chapter 4:1.4

Several changes in services to Department of the Treasury and other
government agencies, and depository institutions, could have a
significant impact on Federal Reserve costs as well as on staffing
levels and alignment.  These changes include consolidation of U.S. 
savings bonds operations,\4 increased government use of electronic
benefit transactions, and changes in the U.S.  currency. 

Treasury, which directs the U.S.  government's savings bonds program,
ordered the Federal Reserve to consolidate its savings bonds
operations to five locations.\5 This consolidation has resulted in
the need to relocate staff at Reserve Banks that were losing savings
bonds operations.  Most of the savings bonds employees at
nonconsolidation Reserve Bank locations have been relocated to other
departments at their respective Reserve Banks.  However, one Reserve
Bank could not relocate all of its savings bonds employees to other
departments and was forced to lay off some of those employees. 

An increased use of electronic payments in services provided to
Treasury and other government agencies may also result in
realignments or reductions in staff at Reserve Banks.  The National
Performance Review's (NPR) recommendation that the U.S.  Department
of Agriculture distribute food stamp benefits through Electronic
Benefits Transfer (EBT) may result in the realignment of Reserve Bank
staff.  EBT uses an automated financial transaction process and card
access technologies to electronically deliver federal and state
benefits to recipients via point-of-sale (POS) terminals and
Automated Teller Machines (ATM).  Currently, the Federal Reserve
receives the paper coupons deposited by merchants at their financial
institutions, confirms the totals, checks for counterfeit coupons,
destroys the coupons, credits the sending institution's account, and
debits the U.S.  Treasury account for the value of the food coupons. 
Under the EBT system, funds would be transferred electronically from
the U.S.  Treasury's bank account to the retailer's depository
account via the automated clearinghouse (ACH). 

Recently, Texas converted its food-stamp operations to an EBT
arrangement.  This necessitated the Dallas Federal Reserve Bank's
eliminating 22 positions in its food-stamp processing area. 

Introduction of a 1-dollar coin, which is currently being considered
by Congress, could result in dramatic staffing reductions in Reserve
Banks' currency processing operations.  Many nations use a coin for
monetary transactions at, and in many cases well above, the level for
which the United States uses a paper dollar.  Although the Susan B. 
Anthony 1-dollar coin was not accepted by the public when it was
introduced in 1979, a switch to a 1-dollar coin, particularly if the
paper dollar were withdrawn from circulation, could nevertheless
reduce Federal Reserve expenses and result in savings to the
taxpayers. 

One-dollar paper notes make up approximately 40 percent of the
currency processed by Federal Reserve Banks.  Officials told us that
if the 1-dollar coin were introduced and the 1-dollar bill were
removed from circulation, substantial reductions in currency
processing staff would need to be made, perhaps resulting in the
elimination of the second shift processing at many Reserve Banks. 


--------------------
\4 The Reserve Banks issue, service, and redeem U.S.  savings bonds
on behalf of Treasury. 

\5 The following are the consolidated locations:  (1) Buffalo branch
of the New York Reserve Bank, (2) Pittsburgh branch of the Cleveland
Reserve Bank, (3) Richmond Reserve Bank, (4) Minneapolis Reserve
Bank, and (5) Kansas City Reserve Bank. 


      CHANGES IN BANK SUPERVISION
      AND REGULATION COULD AFFECT
      STAFFING ALIGNMENTS AND
      REVENUES
-------------------------------------------------------- Chapter 4:1.5

The continuingly intense banking industry consolidation would likely
affect the locations and need for Federal Reserve bank examination
staff.  As banks merge or are acquired, the Federal Reserve will face
the need to reexamine its current distribution of examination staff. 
Some Reserve Banks may see a need for increased staffing; others may
find that they must radically reduce their examination staffs.  As an
example, figure 4.1 shows the percentage changes in the number of
state-member banks by Federal Reserve district for the period of 1990
to 1995. 

   Figure 4.1:  Percentage Change
   in State- Member Banks by
   Federal Reserve District,
   1990-1995

   (See figure in printed
   edition.)

Note:  Data are as of December 1990 and as of June 1994. 

Source:  Federal Reserve System. 

Less certain are the potential effects of any bank regulatory
consolidation Congress may enact.  Differing consolidation proposals
have been made to consolidate federal financial institutions'
regulatory responsibilities.  Some proposals would provide for the
complete consolidation of all regulation into a single federal
regulator.  Other proposals envision retaining or even increasing the
responsibilities of the Federal Reserve in bank supervision. 

Some proposed changes to the banking regulatory structure have raised
policy issues about the Federal Reserve's role in bank regulation. 
The Federal Reserve has raised strong objections to a new regulatory
system in which its role in direct bank supervision would be
eliminated or substantially reduced.  Federal Reserve officials argue
that the System's ability to conduct monetary policy and operate the
payments system and the discount window would be greatly impaired by
the removal of its responsibilities for regulating and supervising
bank-holding companies and state- member banks.  Likewise, those who
support maintaining the Federal Reserve's involvement in bank
regulation argue that if the Federal Reserve is to be responsible for
forestalling financial crises and effective as the "lender of last
resort," the Federal Reserve must have direct experience with at
least a portion of the depository institutions.  On the other hand,
others argue that the Federal Reserve can obtain information needed
for monetary control through other means, such as reports from other
agencies or Board representation on other agencies. 

Because supervision and regulation activities account for
approximately 20 percent of Federal Reserve Bank operating expenses,
a reduction in the central bank's direct role in bank supervision and
regulation could have a significant impact on the Reserve Banks. 
Conversely, if the Federal Reserve were given responsibility for some
or all of the largest banks, the percentage of the banking system
assets for which the Federal Reserve would be the primary regulator
could increase.  While assigning large banking organizations to the
Federal Reserve would address concerns about systemic risk, this
could change the geographic distribution of Federal Reserve
supervisory responsibilities.  Such a redistribution would, of
course, affect expenditures at individual Reserve Banks. 

The Federal Reserve's revenues, and hence its return to the
taxpayers, would be enhanced by charging fees for bank examinations. 
Federal bank regulators differ in their policies regarding the
assessment of fees for bank examinations.  The Office of the
Comptroller of the Currency (OCC) charges national banks for
examinations that it conducts.  In contrast, state-chartered banks,
which are supervised by either the Federal Reserve or the Federal
Deposit Insurance Corporation (FDIC) in conjunction with state-
banking agencies, are charged fees by those state-banking agencies
but not by their federal regulator.  Thus, the costs of the Federal
Reserve's bank examinations--$368 million in 1994--are borne by the
taxpayers, while for national banks, the costs of examinations are
borne by the banks that are examined.  The Federal Reserve Act
authorizes the Federal Reserve to charge fees for bank examinations,
but the Federal Reserve has not done so, either for the state-member
banks it examines or the bank-holding company examinations it
conducts.  Similarly, FDIC is authorized to charge for bank
examinations but does not do so.  The administration's fiscal year
1996 budget includes provisions for both FDIC and the Federal Reserve
to charge for bank examinations. 

The Federal Reserve is concerned that if it instituted charges for
its bank examinations it could create incentives for state-member
banks, who are already charged for state examinations, to either
change their charters to national charters or resign membership in
the Federal Reserve (opting to be supervised by FDIC as
state-nonmember banks), to avoid paying fees for both state and
federal examinations.  Such incentives, the Federal Reserve believes,
would have major disruptive effects on the dual banking system. 

We believe any disruption would be small.  At the end of 1994, there
were 3,078 national banks with 56 percent of total bank assets, 6,398
state-chartered nonmember banks with 23 percent of total bank assets,
and only 974 state-chartered member banks with 21 percent of total
bank assets.  Thus, the number of banks that would be affected is
relatively small.  If the FDIC also adopted examination fees,
incentives for banks to become state-nonmember banks to avoid such
fees would be eliminated.  With respect to double-charges for bank
examinations, we believe an equitable fee-sharing arrangement with
state agencies that is based on the division of supervisory
responsibility seems possible.  Moreover, charging for bank-holding
company examinations would not present such possible disruptions
because the Federal Reserve is their federal regulator, regardless of
whether the subsidiary banks are chartered by OCC or the states. 
Charging holding company examination fees might also encourage
greater efficiency in supervising banking organizations. 


   MISSION-RELATED CHALLENGES AND
   EFFORTS TO REDUCE EXPENSES ARE
   LIKELY TO RAISE QUESTIONS ABOUT
   THE STRUCTURE OF THE FEDERAL
   RESERVE SYSTEM
---------------------------------------------------------- Chapter 4:2

Addressing the challenges discussed above will likely result in
dramatic changes in staffing and how work is done at the Reserve
Banks.  In addition, continuing pressures to contain costs, in part
fueled by the increasing competition from the private sector in
priced services, may result in changes in how Federal Reserve
programs are managed.  Taken together, such changes will likely call
into question the continuing appropriateness of the Federal Reserve's
current structure. 


      EFFECTIVELY ADDRESSING
      CHALLENGES WILL LIKELY
      RESULT IN SMALLER RESERVE
      BANKS
-------------------------------------------------------- Chapter 4:2.1

Changes that can affect many of the Federal Reserve's lines of
business--particularly those concentrated at the Reserve Banks, such
as check clearing, currency processing, and bank supervision--may
result in substantial reductions in staffing at the Reserve Banks in
the years ahead.  These trends are already beginning to occur. 
Overall staffing at the Reserve Banks has declined modestly by 1.4
percent from the first quarter of 1994 to the first quarter of 1995. 
And staffing in the line of business, services to financial
institutions and the public, which includes priced services, declined
somewhat more--by 2.2 percent.  Some Reserve Banks have offered
"early out" retirements to some employees to encourage reductions
during 1988 to 1994. 

As Reserve Banks contract in size, the continuing justification for
the overhead structure, replicated at 12 Reserve Banks, will be
called into question.  Federal Reserve overhead expenses rose from
$355 million in 1988 to $564 million in 1994, an increase of about 59
percent.  This is one of the greatest increases among the Federal
Reserve's lines of business for this period.  As the Federal Reserve
faces the challenges we have just described, it will have significant
opportunities to reduce staffing and, therefore, costs, particularly
at the Reserve Banks.  As this occurs, the Federal Reserve should
plan to reduce overhead expenses comparably. 


      COST MINIMIZATION PRESSURES
      COULD RESULT IN MORE
      CENTRALIZED MANAGEMENT OF
      FEDERAL RESERVE PROGRAMS
-------------------------------------------------------- Chapter 4:2.2

Increased competition from the private sector and the continuing need
to make governmental functions as cost efficient as possible will
likely require that the Federal Reserve achieve significantly greater
efficiencies in its operations--for example, in personnel pay and
benefits, travel costs, procurement, and other areas.  Systemwide
management of many Federal Reserve activities has the potential to
reduce costs to taxpayers, the government, and financial
institutions.  The Federal Reserve has often chosen in the past to
manage programs on a systemwide basis for reasons of efficiency and
to ensure effective operations of Reserve Bank programs.  For
example, some Federal Reserve benefits are established systemwide and
are available at the same levels to all employees, regardless of
where they work.  In this regard, the Board of Governors sets
benefits for all Federal Reserve employees.  These systemwide
benefits include retirement plans, thrift savings plans, business
travel/accident insurance, life and survivor insurance, and a
long-term disability income plan.  Benefits that are not established
systemwide include health benefits and various types of leave, such
as marriage leave and bereavement leave (see app.  III). 

For large System projects, the Federal Reserve has often taken a
systemwide approach to procurement and management.  When the Federal
Reserve determined the need for a new generation of currency
processing equipment, a single contract was used to purchase all 132
machines from a single vendor.  According to the Board's Division of
Reserve Bank Operations and Payment Systems' (DRBOPS) Cash Manager,
this helped ensure a better price compared to prices resulting from
the Reserve Banks' purchasing the machines individually.  When the
Federal Reserve determined the need for the Federal Reserve's data
processing and communications to have improved reliability, risk
management, and security, among other things, Reserve Bank and Board
decisionmakers chose to centralize those operations at three centers
rather than continue separate operations at each of the Reserve
Banks. 

Finally, when the Office of the Inspector General (OIG) criticized
the individual ethics programs at the Reserve Banks, the Federal
Reserve responded by establishing uniform ethics standards (the
Uniform Code of Conduct) and standardizing financial disclosure and
other ethics-related forms throughout the Federal Reserve. 

We have also identified several opportunities for the Federal Reserve
to better control costs and increase efficiencies through increased
systemwide management.  These include the Federal Reserve's taking
the following steps: 

  -- review benefits programs at the 12 Reserve Banks to reduce or
     eliminate benefits that are not necessary to attract and retain
     a quality workforce;

  -- manage other benefits--such as health plans--on a cost-effective
     systemwide basis, utilizing the combined bargaining power of the
     12 Reserve Banks;

  -- standardize travel policies and procedures to eliminate
     anomalies among the Reserve Banks that may result in unnecessary
     expenditures; and

  -- review contracting and procurement practices at the 12 Reserve
     Banks to (1) eliminate practices that could result in excessive
     costs and (2) promote and publicize "best practices" that are
     identified. 

As more centralized management is instituted, the continuing need for
separate management structures at the 12 Reserve Banks may
increasingly be called into question.  For example, increasingly
uniform Reserve Bank personnel policies would reduce the need for 12
separate Reserve Bank personnel departments.  Similarly, if travel
policies are made more consistent, travel may be able to be managed
more efficiently on a systemwide basis. 


      MANY ASPECTS OF THE
      RATIONALE FOR THE FEDERAL
      RESERVE'S STRUCTURE ARE
      OUTMODED
-------------------------------------------------------- Chapter 4:2.3

The structure of the Federal Reserve was shaped when the U.S. 
economy was much more regional in nature.  For example, during
congressional debate on establishing the Reserve Banks, a Member of
Congress said that the numbers and locations of the Reserve Banks
should be such that
".  .  .  no bank be more than an overnight's train ride from its
Reserve Bank." Today, the increased use of electronic funds and
securities transfers make the geographical location of Reserve Banks
irrelevant for many functions. 

Demographics that shaped decisions about the location of Reserve
Banks have also changed profoundly.  Except for minor boundary
changes, the geographical structure of the Federal Reserve has
remained unchanged since 1914, while the nation's population has
shifted dramatically.  Although population statistics are an inexact
proxy for all matters considered in the original decisionmaking, they
have rough parallels in bank assets, check- clearing volume, currency
needs, and other factors that have an impact on the Federal Reserve's
lines of business. 

Since 1914, population growth and shifts have resulted in increasing
disparities in population in the 12 Reserve districts, which were
fairly similar in size in 1914.\6 For example, the San Francisco
Reserve Bank in 1914 served 6 percent of the nation's population; the
St.  Louis Reserve Bank served almost 10 percent.  As of 1990, the
San Francisco Bank served almost 20 percent of the population, while
the St.  Louis Bank served just 5 percent.  Overall, in 1914, the
populations served by the Reserve Banks represented a range of 5 to
14 percent of the nation's population.  By 1990, the range had spread
to 3 to 19 percent of the nation's population, as shown in table 4.3. 



                                    Table 4.3
                     
                      A Comparison of the Population Within
                     Federal Reserve Districts, 1910 v. 1990

                1910                                1990
District  population     Percent        Rank  population     Percent        Rank
--------  ----------  ----------  ----------  ----------  ----------  ----------
Boston     6,307,000           7           8  12,378,000           5          10
New York  11,329,000          12           2  20,514,000           8           5
Philadel   5,953,000           6           9  11,506,000           5          11
 phia
Clevelan   8,375,000           9           5  16,108,000           7           7
 d
Richmond   8,479,000           9           4  23,305,000          10           4
Atlanta    9,094,000          10           3  31,833,000          13           2
Chicago   13,114,000          14           1  30,601,000          12           3
St.        8,273,000           9           6  12,528,000           5           9
 Louis
Minneapo   4,432,000           5          12   7,574,000           3          12
 lis
Kansas     6,899,000           7           7  13,541,000           6           8
 City
Dallas     4,539,000           5          11  18,467,000           8           6
San        5,434,000           6          10  46,500,000          19           1
 Francis
 co
================================================================================
Total     92,228,000                          244,855,00
                                                       0
--------------------------------------------------------------------------------
Source:  U.S.  Bureau of the Census. 

Further changes in the nation's population, coupled with reduced
staffing at the Reserve Banks and increasing systemwide management of
the Federal Reserve, call into question the continuing need for 12
Reserve Banks. 

In addition, an examination of the continuing need for maintaining 25
branch banks may be appropriate.  Although the Board has authority to
open or close branch banks, it has not done so frequently. 
Twenty-four of the current 25 branch banks were established by 1927. 
Since then, the Board has opened only one additional branch bank--the
Miami branch of the Atlanta Federal Reserve Bank in 1975.  The Board
has only closed one branch bank in the Federal Reserve's history; the
Spokane branch of the San Francisco Reserve Bank was closed in 1938. 
Considering the substantial changes in the nation and its financial
system since most of the branches were established, an overall review
of the branch bank structure would seem appropriate. 


--------------------
\6 The 1910 census data were the closest to 1914, which was the year
the Federal Reserve opened for business. 


   ANY STRUCTURAL CHANGES WILL
   NEED TO BE WEIGHED AGAINST
   CONCERNS ABOUT THE INDEPENDENCE
   OF OUR NATION'S CENTRAL BANK
---------------------------------------------------------- Chapter 4:3

The Federal Reserve's structure, established in 1913, was the end
result of many compromises designed to promote Federal Reserve
accountability to the public, and, at the same time, to maintain
Federal Reserve independence from the nation's political processes. 
The importance of the banking industry was acknowledged by
establishing member banks as owners of Reserve Bank stock.  At the
same time, representation from the public was ensured through the
membership of the Reserve Banks' Boards of Directors, which are
chosen to include a diverse representation from agriculture,
commerce, industry, services, labor, and consumers across each
Reserve Bank's district.  The importance of money centers, such as
New York and San Francisco, was geographically balanced through the
creation of 12 Reserve Banks--the maximum allowed under the Federal
Reserve Act--thus ensuring that both rural and urban interests would
be represented in the work and the deliberations of our central bank. 
In the same way, the power of the Board was tempered by establishing
the Reserve Banks as independent entities subject only to the
"general supervision" of the Board.  Finally, while the Federal
Reserve was created by an act of Congress and is required to report
periodically to Congress, its actions do not need to be ratified by
Congress or the president and, as explained in previous chapters, it
is funded independently from the congressional appropriations
process. 

In many ways, these compromises have served the nation well and have
created additional benefits for the Federal Reserve perhaps not fully
envisioned when the Federal Reserve Act was passed.  Federal Reserve
officials believed that the broad geographic diversity represented by
the Reserve Banks aids in the conduct of monetary policy by ensuring
that various regional perspectives on the nation's economy are heard. 
A total of 281 individuals, many of whom are prominent leaders of
industry, the financial services community, labor groups, and
consumer interests, serve as directors of the Reserve Banks and their
branches.  These directors provide both a sounding board for Federal
Reserve policies as well as an established "community of interest" to
support the Federal Reserve when challenges to its independence
arise, as they have from time to time in the past.  Federal Reserve
officials also feel that this community of directors provides a very
useful network of relationships for the nation's economy during times
of financial crisis. 

We are not in a position to fully evaluate the merits of these
benefits for the Federal Reserve or the nation.  If, because of the
major challenges facing the Federal Reserve, changes to the Federal
Reserve's structure are contemplated, these issues would need to be
carefully evaluated when doing so.  As to the benefit of having
diversity of economic information for monetary policy purposes, in
today's information age, it is likely that sufficient quality
economic information could be gathered in some manner, even if the
number of Reserve Banks were reduced.  As to the benefits of its
directors' network of support, the effects of a reduction in the
numbers of Reserve Banks or a diminution of their responsibilities is
less clear.  If some Reserve Banks were to become, in effect, merely
payments system processing centers, for example, the ability of these
banks to attract prominent directors might be jeopardized.  Any
actual or perceived effects this might have on the independence of
the Federal Reserve would need to be weighed carefully against any
potential improvements in efficiency and cost savings that such
changes would yield. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 4:4

In this and previous chapters we have discussed a number of changes
facing the Federal Reserve.  These are summarized below in table 4.4. 



                                    Table 4.4
                     
                      Impact of Changes in Lines of Business
                     on Federal Reserve Staffing and Finances

                                                                Actual or
                                                                potential impact
                                                                on Reserve
                                                                Banks' staffing
Change/Potential change                 Status                  and/or finances
--------------------------------------  ----------------------  ----------------
Changes affecting priced services
--------------------------------------------------------------------------------
Automation consolidation--FRAS          Under way               Some reduction
                                                                in personnel who
                                                                run mainframe
                                                                operations;
                                                                increasing costs
                                                                for priced and
                                                                other financial
                                                                services

Check imaging; growth of electronic     In process              Reduced need for
payments                                                        personnel who
                                                                process checks

Growth of private check clearinghouses  In process              Reduced need for
                                                                personnel who
                                                                process checks

Same-day settlement rules               Implemented             Has already
                                                                resulted in
                                                                decreased check
                                                                volume; may
                                                                contribute to
                                                                further
                                                                reductions of
                                                                staff who
                                                                process checks

Interstate banking                      In process              Further
                                                                reduction in
                                                                personnel who
                                                                process checks
                                                                due to increase
                                                                of "on us"
                                                                checks;
                                                                uncertain
                                                                effects on bank
                                                                examination
                                                                staff

Revenue shortfalls in priced services   Currently occurring     Threatens cost
                                                                recovery mandate
                                                                of the Monetary
                                                                Control Act


Changes affecting services to Treasury and depository institutions
--------------------------------------------------------------------------------
Savings bond consolidation              Completed               So far has
                                                                resulted in
                                                                staff
                                                                realignments,
                                                                but no major
                                                                reductions, at
                                                                Reserve Banks
                                                                and branches

1-dollar coin                           Proposed                May reduce need
                                                                for staff who
                                                                process
                                                                currency;
                                                                reduced currency
                                                                costs for the
                                                                Federal Reserve

Electronic food stamps/EBT              Under way               Some net
                                                                reduction in
                                                                personnel who
                                                                process paper
                                                                food stamps


Changes affecting bank supervision and reserves
--------------------------------------------------------------------------------
Bank regulatory consolidation           Congress must enact     Uncertain, but
                                        law                     could result in
                                                                reductions in
                                                                bank examination
                                                                staff

Charging for bank examinations          Federal Reserve         Increases in fee
                                        currently has           income of
                                        authority               approximately
                                                                $300 to $400
                                                                million per year

Banking industry consolidation          Under way               Changes in
                                                                distribution of,
                                                                if not
                                                                reductions in,
                                                                bank examination
                                                                staff


Changes in managing the System as a whole
--------------------------------------------------------------------------------
Systemwide approaches in personnel      May be inevitable       Reductions in
(e.g., health benefits, travel, etc.)                           overhead-bank
                                                                administration

Reduction of Federal Reserve overhead   Should occur as other   Reduced Federal
                                        expenses are reduced    Reserve costs
--------------------------------------------------------------------------------
Legend:

EBT = Electronic Benefits Transfer
FRAS = Federal Reserve Automation Service

Source:  GAO analysis. 

Taken together, these changes will likely result in substantial
reductions in staffing at the Reserve Banks, which will likely call
into question the continued appropriateness of the Federal Reserve's
current structure.  We believe that responding to these challenges
and making any accompanying structural changes that may become
desirable can best be effectively accomplished through strategic
management and planning by both the Reserve Banks and the Board
working together for the System.  In chapter 5, we focus on strategic
planning and how the Federal Reserve can take steps to proactively
manage for these current and future challenges. 


GREATER SYSTEMWIDE FOCUS WOULD
STRENGTHEN STRATEGIC MANAGEMENT
PROCESSES
============================================================ Chapter 5

If the Federal Reserve is to effectively meet the challenges it faces
and streamline operations, the Board and the Reserve Banks must work
together to strategically plan for the future.  Our prior work in
public- and private-sector management reform showed that
organizations that have been successful in improving their efficiency
have done so by effectively implementing initiatives to focus on
their primary missions and business lines, realign their structures
to fit their mission, and apply technology to their work processes. 
Without strong external pressure to minimize overall costs, the
Federal Reserve must create the necessary self-discipline for the
institution to adequately control its costs and respond effectively
to future challenges.  However, we found weaknesses in the planning,
budgeting, and internal oversight processes that are key mechanisms
for helping accomplish these goals.  A fundamental review of the
Federal Reserve's missions, structure, and use of technology would
present the Federal Reserve with profound cultural challenges;
however, the Federal Reserve has begun to show that it can address
operational issues strategically and work in a systemwide manner when
necessary.  As the Federal Reserve enters the next century, it is
vital that both the Reserve Board and the Banks continue to foster a
systemwide focus so that the Federal Reserve can fulfill its mission
in an efficient and effective manner. 


   PUBLIC AND PRIVATE
   ORGANIZATIONS ACHIEVED SUCCESS
   THROUGH MANAGEMENT REFORM
---------------------------------------------------------- Chapter 5:1

On the basis of our earlier work in public- and private-sector
management reform, we found that leading organizations were able to
effectively adapt to changes and challenges in their environment by
planning strategically for the future.\1 These organizations had the
management processes in place--strategic planning, budgeting, and
performance measurement--that supported their top leadership in
setting strategic direction and establishing organizationwide
priorities.  Through strategic planning, organizations were able to
better identify emerging issues and challenges and posture themselves
to address these changes proactively.  Successful organizations also
integrated their planning processes with budgeting and performance
management.  With sound budgeting processes, these organizations were
better able to weigh the priorities of the moment against those of
the future.  These organizations were also able to identify mistakes
and make the appropriate adjustments by linking their budgeting
processes to performance management. 

Our work has also shown that public and private sector organizations
that were able to achieve significant cost reductions while improving
performance and service delivery did so by fundamentally rethinking
their mission, strategic goals, lines of business (products and
services), and customer needs.  As a result of these reassessments,
organizations sometimes found it necessary to redefine all or part of
their missions, set new strategic goals, and modify their lines of
business. 

In redefining their missions and strategic goals, organizations
sometimes found that a fundamental rethinking and radical redesign of
their key business and work processes was needed.  Known as business
process reengineering, this fundamental rethinking seeks to achieve
dramatic improvements in critical performance measures.  In reviewing
their core management and business processes, these leading
organizations identified those that were highest in cost, were most
customer sensitive, and presented the most significant opportunities
and risks for improvement.  They then considered the full range of
information technology alternatives and information needs to
determine how information technology could simplify and reduce the
time and cost of carrying out these work processes.  After
considering the range of needs and available alternatives, these
organizations radically redesigned these work processes to better
carry out their core missions. 


--------------------
\1 See Executive Guide:  Improving Mission Performance Through
Strategic Information Management and Technology (GAO/AIMD-94-115, May
1994); Managing for Results:  State Experiences Provide Insights for
Federal Management Reforms (GAO/GGD-95-22, Dec.  21, 1994); Managing
for Results:  Experiences Abroad Suggest Insights for Federal
Management Reforms (GAO/GGD-95-120, May 2, 1995); and Government
Reform:  Goal-Setting and Performance (GAO/AIMD/GGD-95-130R, Mar. 
27, 1995). 


   STRATEGIC PLANNING PROCESSES
   COULD BENEFIT FROM GREATER
   SYSTEMWIDE FOCUS
---------------------------------------------------------- Chapter 5:2

As discussed in chapter 4, the Federal Reserve faces major challenges
to its business lines, particularly in the delivery of priced
services to financial institutions.  To effectively address these
challenges, the Board and Reserve Banks need to work together to
strategically plan for the future.  We found that the Federal Reserve
had a range of strategic plans and strategic planning initiatives in
place or under development.  For example, Board divisions and Reserve
Banks had strategic planning processes that supported the formulation
of strategic plans.  According to Federal Reserve planning documents,
the strategic planning process is to be linked to the Federal
Reserve's budgeting and resource allocation process.  In addition to
these strategic plans, strategic plans at the System-level had been
adopted, or were being developed, for Financial Services and
Information Technology.  However, the Federal Reserve did not have a
process for integrating these individual planning processes and
providing a systemwide focus for assumptions involving the future
environment and relationships among functions.  As a result, the
Federal Reserve may not be making the best use of its many strategic
planning processes to prepare for the future and undertake the bold
thinking that is needed to address current and future challenges. 


      CHAIRMAN, BOARD, AND RESERVE
      BANKS HAVE ROLES IN
      STRATEGIC PLANNING
-------------------------------------------------------- Chapter 5:2.1

Strategic planning within the Federal Reserve is carried out by the
Chairman, the Board, and the Reserve Banks.  As the chief executive
officer of the Board, the Chairman is responsible for, among other
things, providing (1) overall leadership and organizational direction
to help establish major policy goals of the Federal Reserve and (2)
administrative direction to the other Governors, the Board staff, and
Reserve Banks.  In his leadership capacity, the Chairman is involved
in key decisions relating to major organizational structure changes
that are designed to achieve strategic goals.  The Chairman also
conveys his views on the future direction, goals, and objectives of
Federal Reserve policy through participation in meetings with the
chairmen of Reserve Banks' boards of directors and various Federal
Reserve conferences. 

The Board, which sets policy for the Federal Reserve, also has a role
in strategic planning.  The Board carries out its work through
regular meetings and is assisted by standing committees and ad hoc
committees.  The standing committees perform a range of functions. 
The committees help formulate policy, review annual budgets for the
relevant Board staff units, and monitor the performance of Board
staff units or Reserve Banks against the approved budget.  One of the
standing committees, the Committee on Reserve Bank Activities, is
responsible for overseeing the administrative operations of the
Federal Reserve.  Its purview includes general supervision over
Reserve Bank operations, budgets, and planning activities and
oversight of DRBOPS. 

Each of the Reserve Banks has a strategic planning process that
establishes goals and direction for the Reserve Bank.  Because of the
independent structure of the Reserve Banks and shared supervisory
authority within the Federal Reserve, the Reserve Banks have
established a conference structure, composed of the Conference of
Presidents (COP) and the Conference of First Vice Presidents (COFVP),
to help develop systemwide consensus on issues and proposals that
affect all Reserve Banks.  COP, representing the Reserve Bank
presidents, focuses on issues related to discounts and credits,
management systems, strategic planning, personnel, legislation and
regulations, supervision, and research.  COFVP, representing the
Reserve Bank first vice presidents, focuses on operational issues
affecting the Reserve Banks.  The conferences are supported by
committees and subcommittees that administer the bulk of the
conferences' work and often initiate projects.  The organizational
structures of COP and COFVP are shown in figures 5.1 and 5.2. 

   Figure 5.1:  Organization of
   the Conference of Presidents

   (See figure in printed
   edition.)

Source:  Federal Reserve System. 


   Figure 5.2:  Organization of
   the Conference of First Vice
   Presidents

   (See figure in printed
   edition.)



   (See figure in printed
   edition.)

Source:  Federal Reserve System. 

In late 1994, a new management structure was installed to streamline
the decisionmaking process and increase the accountability of Reserve
Bank first vice presidents for strategic planning of financial
services--which are priced services and other services, such as cash
operations--provided to financial institutions.  Under the new
structure, the Financial Services Policy Committee, which is composed
of two presidents and three first vice presidents, is responsible for
the overall direction of financial services and related support
functions.  Furthermore, the committee serves as the vehicle for
conveying major issues to the Board for discussion and actions. 

The new structure has dramatically altered the responsibilities of
COFVP.  COFVP maintains responsibility over the budget process.  The
Financial Services Management Committee is composed of six first vice
presidents--the chairperson, four product group directors, and the
director of automation services.  The management committee is
responsible for developing and implementing business plans for the
financial services and monitoring budgets and projects.  The
Financial Services Operations Council is responsible for coordination
and provides advice to the management committee.  The product offices
are responsible for planning the future direction of each service
area and receive support from their respective advisory groups.  To
carry out the Board's supervisory role, DRBOPS staff serve as
liaisons to the various groups in the new structure. 

Figure 5.3 illustrates the new structure for financial services
management. 

   Figure 5.3:  Organization of
   Financial Services Management

   (See figure in printed
   edition.)

\a The Business Development Advisory Group reports to the Management
Committee Chair. 

\b The Automation/Communications Advisory Group will work with both
FRAS and Support Services. 

Source:  Federal Reserve System. 


      PLANNING PROCESSES FOCUSED
      ON INDIVIDUAL GOALS AND
      OBJECTIVES
-------------------------------------------------------- Chapter 5:2.2

Although the Federal Reserve has a range of strategic planning
processes or programs in place or under development, we found these
processes were not designed to address, on behalf of the Federal
Reserve, the critical challenges raised by an increasing need to
constrain costs, likely changes for System business lines, or the
possible implications of those changes on the Federal Reserve's
structure.  In reviewing the Federal Reserve's strategic plans and
strategic programs under development, we found that they were
generally focused on the strategic goals and objectives of individual
divisions, Reserve Banks, or functions.  While we believe these plans
serve an important purpose in defining the direction of these Federal
Reserve entities, we believe that the emerging issues and challenges
facing the Federal Reserve will necessitate bold strategic planning
focused on the System as a whole.  For example, the Federal Reserve
may find the System's long-term interest better served, both from a
cost-reduction and performance perspective, by a review of (1) the
System's mission and business lines; (2) the need for all Reserve
Banks to perform many of the same functions; and (3) the potential
for further consolidation or centralization of certain missions and
functions.  Determining the future direction of the Federal Reserve
and what is best for the System overall, will require the Chairman,
the Board, and the Reserve Banks to make hard decisions that will
raise further issues and concerns regarding their impact on the
Federal Reserve's system of shared leadership and control. 


      LIMITED AUTHORITY MAY HAMPER
      RECENTLY ESTABLISHED FEDERAL
      RESERVE PLANNING
      COORDINATION GROUP
-------------------------------------------------------- Chapter 5:2.3

The Federal Reserve recently took action toward achieving greater
integration of its strategic planning processes.  Recognizing the
need for a more systemwide focus, the Board, in mid-1995, chartered
the establishment of a new planning entity known as the Federal
Reserve System Strategic Planning Coordination Group (SPCG).  In
assembling SPCG, the Federal Reserve put together an organizationally
diverse group whose membership includes the Chairman of the Board
(who serves as an ex officio member) and representatives of the
Board, and the Reserve Banks, and all major functional and support
areas.  SPCG is to provide a common framework for the development and
refinement of the many individual strategic plans and action plans
within the Federal Reserve.  According to Federal Reserve planning
documents, several Board members and Reserve Bank presidents believed
that the discrete strategic planning processes within the Federal
Reserve would benefit from greater coherence, especially in terms of
assumptions about the future environment and interrelationships among
functions. 

While we believe the establishment of SPCG is a positive step for the
Federal Reserve, we are concerned that SPCG's scope of responsibility
and authority may be too limited.  Specifically, SPCG was tasked to
develop for senior management (governors, presidents, first vice
presidents, and certain Board division directors) a document setting
forth a common

  -- view of the mission, vision, values, and priorities of the
     Federal Reserve;

  -- view of, and assumptions about, the future environment in which
     the Federal Reserve will operate;

  -- understanding of the strengths and opportunities, as well as the
     weaknesses and vulnerabilities, of the Federal Reserve; and

  -- recognition of major challenges or redirections facing the
     Federal Reserve. 

In describing the scope of SPCG's work, the Board also identified the
following four important issues that the group might address. 

  -- How can the Federal Reserve Board and Reserve Banks work better
     as a System rather than as 13 separate entities? 

  -- How can the Board and Reserve Banks achieve better coordination
     across functional areas within units and within the Federal
     Reserve? 

  -- How can the Board and Reserve Banks achieve better coordination
     across units within functional areas? 

  -- Are there changes or innovations in the structure or governance
     of the Federal Reserve that would make it work better? 

If the Federal Reserve is to more fully use SPCG, it may need to (1)
broaden the group's responsibilities to specifically include a
fundamental review of Federal Reserve operations focusing on the
primary mission, business lines, and structure that would best
support the Federal Reserve's overall mandate in an environment of an
increasingly constrained federal budget and (2) better empower the
group to have an impact by changing expectations throughout the
Federal Reserve about the nature of the changes that could result
from the group's work.  The SPCG Chairman and Vice Chairman have
stated that SPCG is not intended to develop new specific action plans
or objectives or to override plans or objectives already in place,
for either functional areas or organizational units.  Rather, the
results of the planning coordination process would be the common
framework for developing and refining constituent strategic plans and
action plans.  Minutes of a September 1995 SPCG meeting indicated the
group's concern about its limited authority.  The minutes identified
several important questions as being planned to be addressed by the
group.  Two of these questions were (1) how the group could guide
organizational decisionmaking, help set priorities for the Federal
Reserve, and drive the System's budget processes and (2) how the
group could strike an appropriate balance between a system framework
and the system strength derived from district/functional autonomy. 


   BETTER LINKAGE OF INFORMATION
   TECHNOLOGY PLANNING TO
   STRATEGIC DECISIONMAKING NEEDED
---------------------------------------------------------- Chapter 5:3

Beginning in the latter 1980s, information technology within the
Federal Reserve underwent a profound change.  Between 1988 through
1994, the Federal Reserve spent hundreds of millions of dollars on
information technology.  By late 1995, according to Federal Reserve
planning documents, most mission-critical applications had been or
were being completely rewritten; a new network, FEDNET,\2 had been
built and was being deployed; and the FRAS organization, established
to consolidate the mainframe processing function, had assumed
responsibility for most mainframe processing. 

While we did not do an in-depth review of FRAS, we believe that such
an approach makes sense.  However, Reserve Banks have remaining
concerns about the spillover implications of a systemwide approach to
mainframe processing consolidation for the System's future.  Because
of the size of the information technology investment and the
potential that such technology holds for providing higher quality
services at a faster and lower cost, it is critical that the Federal
Reserve ensures that its strategic information technology planning is
an integral part of the Federal Reserve's strategic planning process
and business planning and that assumptions about the future
environment are fully considered. 


--------------------
\2 FEDNET is the Federal Reserve's communications network connecting
all Reserve System offices and depository institutions. 


      FEDERAL RESERVE ADOPTED
      SYSTEMWIDE APPROACH TO
      MAINFRAME CONSOLIDATION
-------------------------------------------------------- Chapter 5:3.1

In the 1980s, several Reserve Banks, primarily seeking cost
efficiencies, proposed that their Reserve Banks consolidate mainframe
processing.  On the basis of this effort, the Board later established
a committee to study the feasibility of consolidation for the Federal
Reserve as a whole.  This committee proposed that the Federal Reserve
replace the independent mainframe operations of the 12 Reserve Banks
and consolidate these operations into 3 automation centers.\3 This
proposal also included a unique organizational structure for
overseeing mainframe computer operations, placing the responsibility
for the consolidated operations under a Senior Automation Executive
located within the Richmond Reserve District as a separate
organizational entity called FRAS.  In 1990, the Board and the
Reserve Banks adopted this proposal, setting a new precedent for a
systemwide approach to an important operational function.  The
Federal Reserve's approach to implementing FRAS represented a major
departure from the decentralized approach traditionally used by the
Federal Reserve to carry out its operational functions. 

The objectives of automation consolidation, in descending order of
importance, were to

  -- improve reliability and disaster recovery,

  -- increase control of payment system risk in a national banking
     environment,

  -- improve security of the total automation environment,

  -- enhance responsiveness to changing business requirements, and

  -- improve efficiency. 

The Federal Reserve anticipates that FRAS will be responsible for
operating mission-critical systems, such as Fedwire (which handles
more than $1 trillion in transactions each business day from almost
every U.S.  financial institution) and key information systems, such
as the Federal Reserve's bank statistics database and payroll system. 

The systemwide approach to automation consolidation prompted concerns
about the control of automation resources and the impact of this
approach on the Reserve Bank autonomy and the future of the Federal
Reserve.  These concerns were twofold:  (1) that the consolidation of
this activity would lead to the consolidation of other activities and
(2) that the Reserve Banks would lose control of the automation
resources. 

The Reserve Banks worried whether they would continue to manage the
automation resources or whether the Board's staff would become more
involved in the planning and day-to-day management of automation
resources.  Concerns were also expressed that, as consolidation
progresses, a few "significant" Reserve Banks would emerge.  The
emergence of such Reserve Banks could cause other Reserve Banks to
have a harder time recruiting prestigious directors, thereby
diminishing the regional character and local support of the Federal
Reserve. 


--------------------
\3 Before FRAS, each of the Reserve Banks operated its own data
processing mainframe operations, including system applications.  Over
the years, some Reserve Banks modified their applications to suit
their own designs.  The modifications created the potential for 12
different applications being operated nationally for the same
function. 


      SCOPE OF FRAS GREW
-------------------------------------------------------- Chapter 5:3.2

As originally conceived, FRAS was to be a system to provide cheaper
mainframe processing support for the delivery of services to Treasury
and the financial institutions.  However, as is often the case with
major information technology projects, the scope of the project grew
to include applications not originally envisioned in the original
plans for FRAS. 

Planning for FRAS could have taken into greater account the needs of
the Reserve Banks.  Some Reserve Bank officials told us that the
growth in scope of FRAS, particularly to include check processing,
had made it difficult for them to comply with the requirement in the
Monetary Control Act that service fees should recover the costs of
priced services. 

As the Federal Reserve proceeds in the implementation of FRAS, it
needs to better identify the Federal Reserve's overall mission needs,
the needs of the Reserve Banks, and those work processes that hold
the most promise for improved service delivery through information
technology.  While we did not do an in-depth review of FRAS, it
appears that the design of FRAS assumes the retention of all key
missions and business lines.  Furthermore, we did not observe an
identification of those work processes that could be reengineered and
that hold the most promise and risk for the application of
information technology.  If the Federal Reserve revises its
assumptions about the future environment and the Federal Reserve's
core missions and business lines, it must ensure that these decisions
are well integrated with its information technology strategic
planning. 


      STRATEGIC INFORMATION
      TECHNOLOGY PLAN UNDER
      DEVELOPMENT
-------------------------------------------------------- Chapter 5:3.3

The Federal Reserve is currently working on a strategic plan for
Federal Reserve information technology.  The plan seeks to lay out a
planning horizon for the Federal Reserve through the year 2000.  As
of February 1996, the strategic plan was still in draft.  In
reviewing the draft plan, we observed that it lays out the strategic
goals and strategies by mission.  The draft plan also assumed the
retention of all missions, business lines, and operating structures. 
As the Federal Reserve refines its information technology strategic
plan, it is vital that the Federal Reserve continually checks its key
strategic assumptions and makes sure that the information technology
strategic goals keep pace with key strategic decisions. 


   BUDGETING PROCESS CAN BETTER
   SUPPORT COST CONSTRAINT
---------------------------------------------------------- Chapter 5:4

An effective budget process should support top management in
constraining costs, weighing current priorities against future
priorities, and allocating resources according to organizational
priorities.  For an institution such as the Federal Reserve, it is
especially important that there be a rigorous budget formulation and
execution process in place to constrain cost and foster the internal
self-discipline necessary to periodically reassess its strategic
goals and priorities.  The Federal Reserve's budget process seeks to
ensure that overall Federal Reserve objectives are accomplished
efficiently and effectively.  In reviewing the budgeting process for
both the Board and Reserve Banks, we found that the Federal Reserve
had a budgeting process that imposed some discipline in that there
was no material overspending of approved budgets.  However, we found
the Federal Reserve's budget process had a weakness in that it used a
current services approach that assumed existing functions would be
retained and that assumed continued incremental budgetary growth. 
Such an approach, we believe, did not adequately support top
management in constraining costs and imposing the internal
self-discipline necessary for the Federal Reserve to respond
effectively to future priorities. 


      THE BOARD AND RESERVE BANKS
      USED CURRENT SERVICES
      APPROACH
-------------------------------------------------------- Chapter 5:4.1

In reviewing the budgeting process for 1988 to 1994, we found the
operating budgets of the Board and the Reserve Banks were formulated
on the basis of the assumption that existing units would generally
continue to perform their required functions and their budgets would
increase from year-to-year to account for expected increases in
inflation and salaries.  With no formal constraints on overall
spending, the extent of increases in unit budgets was left ultimately
to the discretion of the Board. 


      FORMULATION AND APPROVAL OF
      THE BOARD'S BUDGET
-------------------------------------------------------- Chapter 5:4.2

The formulation of the Board's budget was overseen by the
administrative governor under authority delegated by the Chairman of
the Board and managed by the Board's Office of the Controller.  The
process began in the spring of each year with the development of a
budget guideline and extends through November.  In the spring, each
Board division developed a strategic plan, which identified and
prioritized objectives, and a proposed budget.\4

Next, the Board Governor (or Governors) with administrative
responsibility for the division reviewed the plans and commented on
the merit of the proposed budget.  The divisions had the opportunity
to revise their strategic plans on the basis of those comments. 

The Program Analysis and Budgets section of the Controller's Office
then developed a proposed budget guideline, or acceptable percentage
increases in Board expenses for the upcoming year.  According to
officials we interviewed, the percentage increases were based on such
factors as inflation and the expected cost of programs and
initiatives identified in strategic planning sessions.  The proposed
percentage increases were first reviewed by the administrative
Governor and the Board Chairman; if they were satisfied, the Board
received the proposal for approval during the summer. 

Each Board division used the approved percentage increase to prepare
a revised budget proposal that they submitted to the Controller in
the fall.  After reviewing the budget proposals and making any
necessary adjustments, the Controller coordinated meetings to discuss
the budget proposal with each division and the appropriate
administrative Governor(s).  On the basis of these meetings, the
Controller could make additional adjustments before consolidating the
division budgets.  The consolidated budget was then given to the
Administrative Governor for review and presentation to the Board
Chairman.  After all appropriate adjustments had been made, the
Administrative Governor presented the consolidated budget to the full
Board for approval at a public meeting shortly before the new budget
year, which began in January. 


--------------------
\4 These sessions helped to develop the Board's long-term direction,
according to the Board officials we interviewed. 


      FORMULATION AND APPROVAL OF
      RESERVE BANK BUDGETS
-------------------------------------------------------- Chapter 5:4.3

Percentage increases and proposed Reserve Bank budgets were
formulated and approved in a process separate from formulation and
approval of the Board's increases and budget.  The Reserve Banks'
process generally took 6 months, culminating in the Board's approval
of the proposed increase in late spring of the year before the
subject budget year.  During 1988 to 1994, the Federal Reserve's
conferences--COP and COFVP--along with their supporting committees,
subcommittees, and task forces, provided a systemwide mechanism for
the development and sequential review at many System levels of
budgetary proposals and objectives that affect all Reserve Banks. 
Various data were considered in developing the percentage increase
proposal, including volume and cost projections for priced services,
Federal Reserve project cost projections, and information on Reserve
Bank initiatives affecting expenses. 

Shortly after the Board's approval of the allowed increase in Reserve
Bank budgets, each Reserve Bank developed budget documents and
materials, including a proposed budget.  These proposals were
initially reviewed by COFVP and then forwarded to COP for review. 
The COP's budget recommendations were then reviewed and approved, in
turn, by DRBOPS, the Board's Reserve Bank Activities Committee and,
finally, by the full Board shortly before the start of the budget
year. 


      BOARD AND RESERVE BANK
      BUDGETS WERE MONITORED
      THROUGHOUT THE YEAR
-------------------------------------------------------- Chapter 5:4.4

The budgets for the Reserve Banks and the Board were monitored
throughout the year.  For example, the Board's actual expenditures
were compared to the budget plan throughout the year to ensure
compliance with approved budget and program plans.  The Office of the
Controller had lead responsibility for monitoring the Board's budget. 
The Controller submitted quarterly reports to the Board that compared
each division's performance with its expenses and conducted midyear
reviews with each division to control costs and provide a baseline
for analyzing the upcoming year's budget request.  Generally, if the
Reserve Banks and the Board did not deviate from their respective
budgets by more than 1 percent, they were allowed to reprogram funds
from one spending category to another without seeking Board approval. 

Reserve Bank budgets were also monitored throughout the year--both at
the Board and Reserve Banks.  These budgets were monitored mainly
through the Reserve Bank's cost-accounting system by the individual
Reserve Bank controller and staff of DRBOPS.  The cost-accounting
system facilitated the comparison of the financial and operating
performance at Reserve Banks individually and as a whole. 

In exercising its statutory authority to generally supervise the
Reserve Banks, the Board required the Reserve Banks to submit budgets
annually and to seek approval, on an ad hoc basis, for large
purchases (capital acquisitions).  In addition to the budget approval
process, the Board established various levels of approvals for
Reserve Bank operations for expenditures related to buildings,
equipment acquisitions, and price changes for Reserve Bank services. 
Over certain dollar amounts, these proposed expenditures must be
approved by the Board.  For proposals that fell below the specified
threshold, the Board delegated its approval authority to DRBOPS or
the Reserve Banks.  In addition, DRBOPS may forward Reserve Bank
proposals that may have systemwide policy implications to the Board. 
According to a DRBOPS official, proposals approved at the Reserve
Bank-level are routinely forwarded to the Board as an information
item. 


      BUDGETARY COMPLIANCE
      DIFFERED BETWEEN OPERATING
      AND CAPITAL BUDGETS
-------------------------------------------------------- Chapter 5:4.5

In reviewing the execution of the Federal Reserve's budget between
1988 and 1994, we observed that the budget processes of the Board and
the Reserve Banks resulted in budgets that increased each year. 
However, amounts finally approved were generally lower than those
initially requested.  As a whole, we found that Reserve Banks and the
Federal Reserve sometimes exceeded the initially approved operating
budgets, but generally by amounts that were less than 1 percent of
the approved operating budget. 

Concerning the Federal Reserve's capital budget, we found that in
every year except 1992, the Federal Reserve spent less than was
budgeted.  In most years, the underspending was primarily related to
data processing and data communications equipment.  However, in 1992,
the Federal Reserve overspent its data processing and data
communications budget by almost $52 million.  In that year, the
Federal Reserve's initial capital budget did not call for purchasing
any computer equipment for FRAS.  However, in 1992, the Federal
Reserve began FRAS-related acquisition and development; by year-end,
the Federal Reserve had spent nearly $96 million to purchase computer
equipment. 


   SYSTEMWIDE PERSPECTIVE NEEDED
   IN INTERNAL OVERSIGHT PROCESSES
---------------------------------------------------------- Chapter 5:5

Internal oversight processes, such as performance measurement,
internal audit, and financial audits, can and should play key roles
in assisting management in achieving its strategic vision for the
organization.  The Federal Reserve had many oversight mechanisms in
place.  However, we found that these mechanisms either did not
support performance evaluation from a systemwide perspective or were
becoming increasingly inappropriate in the changing environment.  As
a result, the Federal Reserve may not be making the most use of its
resources devoted to Federal Reserve oversight. 


      FEDERAL RESERVE HAD A
      VARIETY OF OVERSIGHT
      MECHANISMS
-------------------------------------------------------- Chapter 5:5.1

The Board and Reserve Banks had a variety of mechanisms to oversee
many activities.  Oversight of Board programs and operations is
provided by the Board's OIG.\5 The various oversight mechanisms of
the Federal Reserve are summarized in table 5.1. 



                                    Table 5.1
                     
                      Major Oversight Mechanisms Within the
                     Federal Reserve, by Major Components of
                     the System, the Board, and Reserve Banks

Federal Reserve         Explanation of oversight mechanisms
----------------------  --------------------------------------------------------
Oversight of the Board
--------------------------------------------------------------------------------
OIG audits and reviews  Operating under the authority of the Inspector General
                        Act of 1978, as amended, the OIG is to audit and review
                        Board programs, including the Board's examinations and
                        programs for overseeing Reserve Bank activities and
                        Board-delegated programs carried out by the Reserve
                        Banks, such as bank supervision and regulation. The OIG
                        is also to report to Congress on its findings twice a
                        year. The OIG is required to follow generally accepted
                        government auditing standards, which require that
                        auditors be independent of the entities they are
                        auditing.

                        The OIG is not authorized to directly audit Reserve Bank
                        activities.


Oversight of Reserve Banks
--------------------------------------------------------------------------------
Annual performance      Under delegated authority of the Board, DRBOPS is to
evaluations             evaluate each Reserve Bank's operational areas on their
                        unit costs and quality measures and review cost-
                        accounting and cost data.

                        The performance ratings are used in determining the
                        salaries for each Reserve Bank president and first vice
                        president.

Financial examinations  Under delegated authority of the Board, DRBOPS is to
                        ensure the accuracy and reliability of each Reserve
                        Bank's balance sheet, propriety and adequacy of
                        supporting documentation of expenditures, and review
                        procedures and controls for compliance with system
                        policies and applicable regulations and procedures.\a

Operations reviews      Under delegated authority of the Board, DRBOPS is to (1)
                        review certain Reserve Bank functions to ensure
                        compliance with Federal Reserve policies and standards
                        and (2) promote effective and efficient Reserve Bank
                        operations.\b

                        Other divisions of the Board also conduct operations
                        reviews under delegated authority. For example, the
                        Board's Division of Human Resources Management reviews
                        human resources operations at each of the Reserve Banks.

Internal audits         Reporting to the Reserve Bank's board of directors
                        through the directors' audit committee, each Reserve
                        Bank has a general auditor and staff that are to
                        evaluate internal control systems and determine the
                        Reserve Bank's compliance with applicable policies and
                        regulations.

External audits         Under a contract with the Board, an independent public
                        accounting firm is scheduled to audit the combined
                        financial statements of the Reserve Banks for each year
                        from 1995 through 1999. During these years, the
                        financial statements of each individual banks will also
                        be audited.
--------------------------------------------------------------------------------
Legend:

ACH = automated clearinghouse
DRBOPS = Division of Reserve Bank Operations and Payment Systems
OIG = Office of the Inspector General

\a We agree with a recent OIG's recommendation that the Financial
Examination Program should become organizationally independent from
DRBOPS and report directly to the Board.  The OIG concluded that the
financial examination program, as currently organized within DRBOPS,
presents the appearance that it may not be fully independent. 

\b DRBOPS conducts operations reviews on, among other things, check,
cash, fiscal agency, ACH, electronic processing, and cost-accounting
operations. 

Source:  Federal Reserve System. 


--------------------
\5 Offices of the inspector general were established by the Inspector
General Act of 1978, as amended, to create independent and objective
units to (1) conduct and supervise audits and investigations relating
to programs and operations of the various agencies; (2) provide
leadership and coordination and recommend policies to promote
economy, efficiency, and effectiveness and prevent and detect fraud
and abuse in agency programs and operations; and (3) provide a means
for keeping the head of the establishment and Congress fully and
currently informed of such issues. 


      DEVELOPMENT OF JOINT
      PERFORMANCE MEASUREMENT
      INDICATORS IS NEEDED
-------------------------------------------------------- Chapter 5:5.2

Through involving key stakeholders in developing performance
measurement systems keyed to organizational goals, performance
measurement can be used to assess how all parts of the organization
are contributing to overall effectiveness in achieving the
organization's key goals.  In conducting our work, we noted that the
evaluation and assessment of Reserve Bank performance had received
considerable attention from both Reserve Bank management and the
Board.  DRBOPS conducted annual assessments of Reserve Bank
operations in various areas.  Reserve Bank management tracked
performance on a variety of measures on an ongoing basis.  And other
oversight mechanisms--internal and external financial examinations,
operations reviews, and OIG evaluations--provided other information
on performance.  However, many of these current performance measures
were too narrowly focused on such Bank-specific measures as the
numbers of checks processed or the amount of fees collected for ACH
processing.  In the context of the Federal Reserve's new efforts on
systemwide planning for the Board and the Reserve Banks together, the
Federal Reserve would appear to lack major systemwide benchmarks to
measure how effectively the Federal Reserve--as a whole--is meeting
its new challenges. 

Concerning systemwide goals and objectives, it may now be appropriate
for the Federal Reserve to redesign its key performance indicators to
more accurately reflect overall organizational goals and objectives. 
As a part of this new strategy, outcome-linked performance measures
should be developed, for both the Board and Reserve Banks, that show
how organizational components can best contribute to overall
organizational effectiveness. 


      EXISTING OVERSIGHT
      STRUCTURES LIKELY TO BECOME
      INCREASINGLY INAPPROPRIATE
      FOR RESERVE BANK OPERATIONS
-------------------------------------------------------- Chapter 5:5.3

Even given the numbers of oversight mechanisms available to the
Federal Reserve, we identified specific problems--the coverage of
audit and evaluations, the potential for the lack of independence,
and possible audit reporting problems--that all could be improved
with certain changes in Federal Reserve oversight.  These problems
stemmed in part from the unique structure of the Federal Reserve and
the authority provided to those entities supporting the Board.  For
example, the Inspector General is authorized to review only the
activities of the Board while DRBOPS is responsible for overseeing
the Reserve Banks and for developing policies.  As the Federal
Reserve increases systemwide projects and consolidations, the need
for stronger, comprehensive Federal Reserve oversight is likely to
increase.  With improved oversight, the Federal Reserve can better
identify areas where efficiencies can be achieved, particularly areas
with reengineering potential, and ensure that organizational results
are both outcome-linked and responsive to multiple organizational
priorities that may cut across various parts of an organization. 


         IMPROVEMENTS NEEDED IN
         AUDIT AND EVALUATION
         COVERAGE
------------------------------------------------------ Chapter 5:5.3.1

The lack of a systemwide perspective has affected the audit and
evaluation coverage within the Federal Reserve.  Until recently, the
Federal Reserve's oversight mechanisms did not include an independent
audit of the combined financial statements of the Reserve Banks. 
DRBOPS, which lacks clear independence, conducted individual
financial examinations of each Reserve Bank on behalf of the Board. 
In November 1994, the Board awarded a contract to have an independent
public accounting firm audit the combined financial statements of the
Federal Reserve Banks for the years 1995 through 1999.  We believe
this would be helpful toward improving financial auditing within the
Reserve.  However, we also believe that a permanent policy to require
an annual independent financial audit of the combined Reserve Banks'
financial statements is needed.  We recommended that this be done in
some of our previous work.\6 Government experience has shown that
emphasis on financial management and oversight can change with agency
leadership.  Therefore, legislating an annual audit requirement, as
was done by the Government Management Reform Act of 1994, which
expanded the Chief Financial Officer Act's requirements to the 24
largest executive agencies to obtain annual financial statement
audits, would ensure that emphasis on financial management is
continued. 

We also noted in our review that some areas were the subject of
possibly redundant audit attention.  For example, at the time of our
review, we observed separate evaluations of various aspects of work
on the Federal Reserve Automation Services project at the Richmond
Reserve Bank being conducted by the Richmond General Auditor, the
OIG, and DRBOPS staff.  While we did not do an in-depth analysis of
areas of overlap in these audits, we nevertheless found possible
areas of overlap.  At the same time, in our review of a sample of
contracting and procurement practices at selected Reserve Banks, we
found potential for possible conflicts of interest within the bid
selection processes and some lax practices in ensuring that correct
payments were being made on contracts.  Yet despite the fact that
contracting received some audit attention at the Reserve Banks we
visited, these problems were not identified. 


--------------------
\6 Federal Reserve Banks:  Internal Control, Accounting, and Auditing
Issues (GAO/AIMD-96-5, Feb.  9, 1996). 


         POSSIBLE REPORTING
         PROBLEMS IN SYSTEMWIDE
         AUDITS
------------------------------------------------------ Chapter 5:5.3.2

The use of the existing oversight structure to conduct systemwide
audits may not be appropriate because the general auditors do not
report to a systemwide board of directors.  At the time of our
review, one General Auditor was serving as the head of the systemwide
audit of the ISS-3000 currency processing equipment.  The General
Auditor was to report the audit findings to that Reserve Bank's Audit
Committee even though this review was conducted for the Federal
Reserve as a whole.  In our view, the findings of an audit of a major
systemwide project should be reported directly to the Board, which
has direct fiscal responsibility for the project. 


      OVERSIGHT CONCERNS COULD BE
      ADDRESSED THROUGH BETTER
      FOCUS
-------------------------------------------------------- Chapter 5:5.4

We believe that the Federal Reserve could alleviate some, if not all,
of these problems by providing a more focused and efficient approach
to Federal Reserve oversight.  The Federal Reserve could accomplish
this by taking steps to better ensure the independence of its
internal audit function and to expand the scope of the OIG's
authority to include responsibility for auditing the Reserve Banks
and systemwide projects.  As Reserve Banks are moving toward more
systemwide projects and more centralized decisionmaking, the Federal
Reserve's fragmented oversight structure is increasingly
inappropriate to provide adequate oversight of centralized Reserve
Bank operations.  If the OIG's authority was expanded, the problems
of redundant audits would be addressed.  The expansion of the OIG's
authority would necessitate both an increase in staff and spending
for the OIG.  However, it may be possible to simultaneously reduce
staffing in other oversight mechanisms. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 5:6

We believe that the Federal Reserve, to effectively plan for the
future, needs to conduct a fundamental assessment of its operations
focusing on its missions, strategic goals, and structure.  Such an
assessment should also include a review of the Federal Reserve
strategic management processes.  We believe that the Federal Reserve
faces some difficult constraints in conducting such an effort.  For
example, the Board will need to work with the Reserve Banks to
rethink their mutual roles in the shared leadership of the system. 
Furthermore, they will face profound challenges in planning and
confronting possible changes.  Planning deliberations related to
redefining core missions and business lines and realigning the
Federal Reserve's structure and governance would require strategic
planners to "think beyond" the statutory powers of the Board and
Reserve Banks.  The essential missions as well as the locations of
the Federal Reserve's Reserve Banks are set by law, and the autonomy
of the Reserve Banks generally necessitates consensus-oriented
decisionmaking in systemwide planning.  For example, the Federal
Reserve is required by law to develop and implement monetary policy,
supervise and regulate banks, regulate and provide payments system
services, and provide fiscal agency services to government agencies
upon request. 

In rethinking its mission and business lines, the Federal Reserve may
face conflicts and difficult policy choices, which may require that
it consult with Congress for help in resolving them.  For example,
the Federal Reserve is required to base check- clearing fees on the
recovery of its costs; at the same time, it must also function as the
"clearer of last resort" and promote the safety and soundness of
financial institutions.  In addition, neither the Board nor the
Reserve Banks is authorized to change the numbers or locations of
Reserve Banks or essential elements of Federal Reserve governance. 
Changes that might be considered in the context of a fundamental
assessment of Federal Reserve operations could require legislative
action to accomplish. 

Because it lacks the cost minimization pressures common to most
public and private entities, the Federal Reserve must work extra hard
to overcome internal pressures for budgetary increases.  As discussed
in chapter 1, the Board is a government agency and provides Congress
with an annual report of the Federal Reserve's operations; however,
the Federal Reserve is not subject to the congressional
appropriations process that serves as a constraint on spending by
federal entities.  Furthermore, because the Federal Reserve Act sets
dividends to member banks at 6 percent and prohibits them from
selling their shares, shareholders, who are member banks, do not have
the usual financial incentives to encourage cost-efficient
operations.  Additionally, the amount of interest the Federal Reserve
receives on securities acquired through the issue of Federal Reserve
notes is so great that it tends to mask the net decline of all other
revenue sources that occurred over the 1988 to 1994 period. 
Therefore, it is especially important for the Federal Reserve to have
management processes that support top management in constraining
costs and that instill a high level of internal self-discipline that
would allow the Federal Reserve to overcome institutional resistance
to major management reform. 

However, despite its unique structure, the Federal Reserve has begun
to show that it can address operational issues strategically and work
in a systemwide manner when necessary, as evidenced by the recent
establishment of a new Financial Services Committee to examine priced
services and by the consolidation of its data-processing facilities. 
The Board and the Reserve Banks must work together to meet the
emerging challenges and to ensure that the nation's central bank
keeps pace with the changing environment and remains a strong and
competitive institution. 


   RECOMMENDATIONS AND MATTERS FOR
   CONSIDERATION
---------------------------------------------------------- Chapter 5:7

In analyzing opportunities to reduce the cost of Federal Reserve
operations to the taxpayer, any potential adverse impact on the
independence of monetary policy or on the Federal Reserve's ability
to meet its key responsibilities should be considered carefully. 
However, we see no inherent conflict between the Federal Reserve's
independence or effectiveness and efforts to improve efficiency. 
Many of the functions performed by the Federal Reserve have little
direct relation to monetary policy, and the Board, working with the
Reserve Banks, has the authority and ability to take many cost-saving
actions without jeopardizing its mission effectiveness.  However, any
decision to close Reserve Banks or establish a separate corporation
for priced services would require congressional approval.  Thus, we
make recommendations to the Board and suggest several matters for
congressional consideration. 


      RECOMMENDATIONS TO THE BOARD
      OF GOVERNORS
-------------------------------------------------------- Chapter 5:7.1

We recommend that the Board of Governors undertake a fundamental
review of Federal Reserve operations focusing on the primary mission,
business lines, and structure that would best support its overall
mandate.  Such an organizational review should include an assessment
of the following: 

  -- the Federal Reserve's role in providing financial services to
     banks and government agencies and an analysis of the costs and
     benefits to the Federal Reserve and the taxpayers of various
     options for delivering such services (such options could include
     discontinuing delivery of certain priced services to financial
     institutions, privatizing the delivery of other services by
     establishing a private corporation for delivering such services,
     or retaining responsibility for being the primary service
     provider);

  -- cost-saving opportunities that could result from streamlining
     the Federal Reserve's existing management structures and
     consolidating Federal Reserve operations, including possible
     mergers among the 12 Reserve Banks and 25 branches; and

  -- the potential for technology to support streamlined work
     processes in the Reserve Banks and to reduce costs and improve
     quality. 

In addition, we recommend that the Board strengthen its existing
control and oversight mechanisms by, among other things, (1)
reviewing the appropriateness of current budget assumptions, which
assume steady annual growth; (2) taking steps to better ensure the
independence of the Federal Reserve's internal audit function and to
expand the scope of its OIG's authority; and (3) ensuring that an
independent financial audit of the Reserve Banks' combined financial
statements is conducted every year. 


      MATTERS FOR CONGRESSIONAL
      CONSIDERATION
-------------------------------------------------------- Chapter 5:7.2

Congress should consider the results of the Federal Reserve's
assessments and determine

  -- whether it would be desirable to merge or close any of the 12
     Reserve Banks or 25 branches and

  -- which of the various options for delivering priced services to
     financial institutions are in the best interests of public
     policy and represent the best balance between achieving cost
     savings and serving the nation's financial interests. 

Congress should also consider

  -- requiring an annual independent audit of the Reserve Banks'
     combined financial statements;

  -- requiring the Federal Reserve to charge for bank examinations;
     and

  -- establishing a statutory requirement that the Federal Reserve
     annually transfer its remaining revenues to the Treasury. 


   FEDERAL RESERVE'S COMMENTS AND
   OUR EVALUATION
---------------------------------------------------------- Chapter 5:8

The Federal Reserve's Board of Governors did not agree with any of
our recommendations to the Board or with our suggestions to Congress. 
The Board did not agree to undertake a fundamental review of the
Federal Reserve System's operations, because it believes such reviews
are an ongoing and integral part of the Board's oversight of the
System.  The Board stated that the Federal Reserve's role in
providing financial services to depository institutions is constantly
being tested in the marketplace, and the Board noted that the System
is consolidating the management of some financial services.  The
Board stated its belief that most savings from such consolidation
efforts would be possible in electronic payment functions, such as
Fedwire, with lesser savings possible in paper-based financial
services, such as check clearing.  The Board also did not agree to
consider alternatives to the current way the System provides priced
services. 

Concerning merging or closing any of its 12 Reserve Banks or 25
branches, the Board stated that, while the Federal Reserve's
structure would likely be different if established today, any such
realignments or relocations would have to yield substantial long-term
savings to offset the transition costs.  Concerning the potential for
technology to support streamlined work processes in the Reserve
Banks, the Board stated that the Federal Reserve routinely assesses
technologies for their ability to reduce costs and improve the
quality of its services. 

Concerning our recommendations to improve the Federal Reserve's
control and oversight mechanisms, the Board did not agree with our
characterization of the System's budget process as one that assumed
continuous growth.  The Board also did not agree that the
independence of its internal oversight would be strengthened by
expanding the authority of the Board's OIG to the Reserve Banks.  The
Board believed that the current audit process ensured adequate
independence and that expanding the OIG's authority could integrally
involve the inspector general in the Board's oversight process and
raise questions about the inspector general's "arm's length" ability
to audit such processes.  The Board did not comment on our
recommendation to institutionalize an annual external audit of the
combined financial statements of the Reserve Banks. 

Finally, the Board did not agree with our suggestion that Congress
may want to consider requiring the Federal Reserve to charge for bank
examinations.  The Board noted that, currently, the states charge
examination fees that, on average, are approximately half of those
charged by OCC for national bank examinations.  The Board believed
that if the Federal Reserve and FDIC were to charge for their
examinations of state-chartered banks, such fees could tip the scales
toward national charters and call into question the long-term
viability of a valuable dual banking system. 

We continue to believe that the major technological and marketplace
developments that are currently affecting the financial services
industry have profound implications for the activities and operations
of the Federal Reserve and require the System to have a strong,
systemwide strategic management process.  We acknowledge that the
Federal Reserve has a range of strategic planning processes and
programs in place or under development.  And we recognize and commend
the Federal Reserve's efforts to provide a more systemwide focus for
its strategic planning efforts through the recent creation of the
Federal Reserve System Strategic Planning Coordination Group. 
However, we are concerned that these strategic planning efforts are
not sufficiently integrated and thus may be too limited and
insufficient to effectively address the major challenges the Federal
Reserve is facing, given the potential implications of these
developments for the Federal Reserve's business lines and
organizational structure. 

Leading private and public institutions have found that truly
significant savings often come only when, as a part of a
comprehensive strategic planning process, they have rethought their
basic missions and lines of business and reengineered their work
processes to streamline operations.  The Federal Reserve's plans to
consolidate some of its operations in financial services, while
commendable, fall far short of the broad rethinking that we believe
is necessary if the Federal Reserve is to be as efficient and cost
effective as it can be in fulfilling its critical role as our
nation's central bank. 

As a part of this broad rethinking, we also believe the Federal
Reserve should consider consolidating some Reserve Banks and
branches.  We agree with the Board that such consolidation would
result in transition costs but we believe that these costs could be
offset by longer-term savings.  We also note that consolidating banks
and branches is not without precedent among central banks.  For
example, before the reunification of the former East and West
Germany, the German central bank, the Deutsche Bundesbank (which was
established by the Allies after World War II and modeled on the
Federal Reserve System), had a presence in the form of Landesbanks in
each of the 11 West German states.  If it chose to keep intact the
same structure after reunification, the Bundesbank was faced with the
possibility of establishing five additional Landesbanks, one in each
of the states of the former East Germany.  Instead, the German
government reduced the total number of Landesbanks serving the
reunified 16 states to 9 Landesbanks and significantly reduced the
number of central bank branches as well.  The chief reasons given for
these consolidation efforts were to promote efficiency and cost
savings.  Between January 1, 1995, and January 1, 1996, the
Bundesbank reported that it was able to reduce its staff by 6
percent. 

Our recommendation that the Federal Reserve consider alternatives to
the current way it delivers priced services to depository
institutions is another example of the broad rethinking of mission
and lines of business that we believe the Federal Reserve should
undertake.  When institutions carefully reexamine their missions and
lines of business, they often determine that some lines of business
are no longer profitable or no longer fit with the strategic
direction they wish to take.  For example, observers in the private
sector have questioned whether it is appropriate for the Federal
Reserve to continue to be both a provider and regulator of priced
services, particularly in light of the growth of private-sector
service providers.  Some top officials within the Federal Reserve
have, in the past, also suggested alternative ways to provide these
services, such as by establishing a separate corporation. 

Regarding the use of technology to streamline work processes, our
reviews of leading organizations that have sought to improve
performance through strategic information management and technology
have shown that accomplishing order-of-magnitude improvements in
performance nearly always requires streamlining or redesigning
critical work processes.\7 Consequently, we believe information
systems initiatives must be focused on process improvement.  Using
business process reengineering to drive information systems
initiatives can lead to these order-of-magnitude savings, rather than
the marginal efficiency gains normally associated with initiatives
that use technology to do the same work, the same way, only faster. 
We acknowledged in several sections in this report that the Federal
Reserve's automation consolidation efforts (under the FRAS system)
were designed to promote more efficient operations and to ensure
increased security in the nation's payments system.  However, we are
concerned that the Federal Reserve's automation consolidation efforts
may not have involved sufficient reengineering of existing work
processes.  Because of the size of the information technology
investment and the potential that such technology holds for providing
higher quality services faster and at lower cost, we believe that it
is critical that the Federal Reserve ensures that its strategic
information technology planning is an integral part of its strategic
and business planning processes. 

We continue to believe that the concerns we raised about the Federal
Reserve's oversight and control mechanisms are valid.  Although the
Federal Reserve does not view its budget process as having a built-in
assumption of annual growth, we note that, for each year from 1988 to
1994 and for each Reserve Bank, annual budget targets have been
expressed as percentage increases from the previous year's budgets. 
The budget did not reflect a decrease in budget authority in any year
for any Reserve Bank despite the fact that during this period many
Reserve Banks consolidated their savings bonds programs and mainframe
computer operations. 

With regard to expanding the OIG's authority to directly audit the
Reserve Banks, we believe the inspector general can perform these
functions while also retaining the ability to provide arm's length
reviews of the Board's oversight processes.  In an increasingly
consolidated Federal Reserve System, retaining the Reserve Banks'
general auditors to do systemwide reviews seems increasingly
inappropriate.  And reliance on DRBOPS to do such reviews leads to
questions about the independent nature of such reviews, particularly
since this division also sets policy for the Reserve Banks and has
approval authority over certain Reserve Bank purchases and decisions. 
Such problems and questions could be resolved by expanding the OIG's
authority and by taking steps to better ensure the independence of
the Federal Reserve's internal audit function.  In addition,
centralizing reviews of Reserve Bank programs would make more
apparent any overlapping and redundant reviews and would more clearly
highlight areas receiving insufficient audit attention. 

Finally, we found no reason to suggest that having the Federal
Reserve charge for its bank examinations would threaten our valuable
dual banking system.  Currently, the Federal Reserve is the only one
of five federal regulators of depository institutions where
taxpayers, and not the industry, bear the cost of supervision.  As we
noted in this report, the Federal Reserve supervises less than 1,000
state-member banks, or about 9 percent of all banks, and evidence
from recent mergers indicates that state charters are being
considered more desirable than national charters.  The Federal
Reserve could also take steps through arrangements with state banking
regulators to reduce any undue competitive effects of charging for
bank examinations.  In addition, our recommendation is not meant to
be limited to charging state-member banks.  The Federal Reserve's
response does not address charging for its other examinations--those
for foreign banks and bank-holding companies--where the possibility
of charter switching is not an issue. 



(See figure in printed edition.)Appendix I

--------------------
\7 See GAO/AIMD-94-115, May 1994. 


DETAILED STATEMENT OF CONDITIONS
OF ALL FEDERAL RESERVE BANKS
COMBINED, DECEMBER 31, 1994
============================================================ Chapter 5



(See figure in printed edition.)




(See figure in printed edition.)Appendix II
INCOME AND EXPENSES OF FEDERAL
RESERVE BANKS, 1994
============================================================ Chapter 5



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


PERSONNEL COMPENSATION INFORMATION
FOR THE FEDERAL RESERVE SYSTEM
========================================================= Appendix III

This appendix includes information on personnel compensation within
the Federal Reserve.  Where appropriate, we also compared the Federal
Reserve's personnel practices to other federal agencies with
analogous regulatory responsibilities.  Table III.1 shows the number
and title of Federal Reserve employees who earned more than the Board
Chairman during 1994.  Tables III.2 through III.5 contain 1994 salary
information for personnel at various levels within the Federal
Reserve.  Table III.6 shows the percentage of health insurance
subsidies paid in 1993 by the Reserve Banks, the Board, and other
regulatory agencies.  Table III.7 shows the 1993 employee annual and
sick leave eligibility levels for the Reserve Banks, the Board, and
other regulatory agencies. 

In addition, this appendix includes a description of the several
benefit programs offered to Federal Reserve employees that, in many
cases, were not provided to employees of the Securities and Exchange
Commission (SEC), FDIC, or OCC.  These benefits included dental
insurance; a subsidized employee cafeteria; premium conversion
accounts; flexible spending accounts; matching contributions for
savings accounts; and separate leave categories for bereavement,
marriage, and family care. 



                              Table III.1
                
                 Federal Reserve Officials Earning More
                  Than the Board Chairman During 1994

                         Number of  Typical      Number of  Typical
                           Federal  Federal        Federal  Federal
                           Reserve  Reserve        Reserve  Reserve
Salary range ($000           Board  Board             Bank  Bank
omitted)                 employees  titles       employees  titles
----------------------  ----------  ----------  ----------  ----------
/>133.6 to 140                   9  Associate           15  First VP,
                                    director                Senior VP

/>140 to 150                    11  Associate           24  First VP,
                                    director,               Senior VP
                                    Deputy
                                    director

/>150 to 160                     4  Deputy              23  President,
                                    director                First VP,
                                                            Senior VP

/>160 to 170                    12  Director             8  President,
                                                            First VP,
                                                            Executive
                                                            VP, Senior
                                                            VP

/>170 to 180                     0  N/A                  3  President,
                                                            Executive
                                                            VP

/>180 to 190                     0  N/A                  4  President,
                                                            Executive
                                                            VP

/>190 to 200                     0  N/A                  3  President,
                                                            Executive
                                                            VP

/>200 to 210                     0  N/A                  1  President

/>210 to 220                     0  N/A                  1  President

/>220 to 230                     0  N/A                  2  President

======================================================================
Total                           36  N/A                 84  N/A
----------------------------------------------------------------------
Legend:

/> = Greater than
N/A = Not applicable
VP = Vice president

Source:  Federal Reserve Board. 



                              Table III.2
                
                1994 Reserve Bank President and Federal
                  Reserve Board Chairman and Members'
                                Salaries

Reserve Bank and Board                                          Salary
----------------------------------------  ----------------------------
Atlanta                                                       $212,000
Boston                                                         177,600
Chicago                                                        221,700
Cleveland                                                      165,500
Dallas                                                         161,500
Kansas City                                                    159,800
Minneapolis                                                    175,200
New York                                                       205,000
Philadelphia                                                   184,500
Richmond                                                       159,600
St. Louis                                                      190,900
San Francisco                                                  229,600
Board Chairman                                                 133,600
Board members                                                  123,100
----------------------------------------------------------------------
Source:  Federal Reserve Board. 



                              Table III.3
                
                  1994 Federal Reserve Bank First Vice
                     President Salary Scale Ranges

Reserve Bank                        Minimum salary      Maximum salary
------------------------------  ------------------  ------------------
New York                                  $140,500            $224,500
San Francisco                              130,500             209,500
Atlanta                                    121,500             194,500
Chicago                                    121,500             194,500
All other Reserve                          110,000             176,000
 Banks
----------------------------------------------------------------------
Source:  Federal Reserve Board. 



                              Table III.4
                
                  1994 Federal Reserve Bank and Board
                      Officer Salary Scale Ranges

Reserve Bank and Board              Minimum salary      Maximum salary
------------------------------  ------------------  ------------------
Atlanta                                    $57,500            $157,000
Boston                                      57,500             157,000
Chicago                                     57,500             157,000
Cleveland                                   52,500             151,000
Dallas                                      57,500             157,000
Kansas City                                 52,500             151,000
Minneapolis                                 57,500             157,000
New York                                    63,500             204,000
Philadelphia                                57,500             157,000
Richmond                                    52,500             151,000
St. Louis                                   52,500             151,000
San Francisco                               66,500             175,000
Federal Reserve Board                       63,500             161,800
----------------------------------------------------------------------
Note:  This table excludes president and first vice president
salaries. 

Source:  Federal Reserve Board. 



                              Table III.5
                
                 1994 Bank and Board Nonofficer Salary
                              Scale Ranges

Reserve Bank and Board              Minimum salary      Maximum salary
------------------------------  ------------------  ------------------
Atlanta                                    $11,000             $83,600
Boston                                       9,530              87,980
Chicago                                     13,585              79,580
Cleveland                                   12,340              81,600
Dallas                                      11,900              82,900
Kansas City                                 11,964              82,116
Minneapolis                                 11,000              80,700
New York                                    12,475             103,800
Philadelphia                                 9,770              81,600
Richmond                                    12,300              76,068
St. Louis                                   10,700              75,200
San Francisco                               13,500              88,700
Federal Reserve Board                       15,380             123,470
----------------------------------------------------------------------
Note:  The time frame during 1994 in which these ranges were in
effect varied.  For example, one bank's 1994 salary scale was
effective from October 1, 1993, to September 30, 1994. 

Source:  Federal Reserve Board. 



                              Table III.6
                
                  Percentage of 1993 Health Insurance
                               Subsidies

                                           Percentage of premiums paid
Entity                                                       by entity
----------------------------------------  ----------------------------
Atlanta                                                         76 -94
Boston                                                              70
Chicago                                                         75 -90
Cleveland                                                           78
Dallas                                                              72
Kansas City                                                         80
Minneapolis                                                     81 -87
New York                                                            85
Philadelphia                                                    83 -90
Richmond                                                        67 -90
St. Louis                                                       75 -90
San Francisco                                                       80
Federal Reserve Board                                           60 -75
FDIC                                                                85
OCC                                                             74 -76
SEC                                                             60 -75
----------------------------------------------------------------------
Sources:  Federal Reserve Board; 12 Federal Reserve Banks; and the
headquarters of FDIC, OCC, and SEC. 



                        Table III.7
          
            1993 Employee Annual and Sick Leave
                     Eligibility Levels

                          Annual leave  Sick leave
Entity                       (in days)  (in days)
------------------  ------------------  ------------------
Atlanta                         10 -32  15
Boston                          10 -25  18 at full pay and
                                         18 at half pay
Chicago                         11 -23  10
Cleveland                       10 -28  12
Dallas                          10 -23  12
Kansas City                     10 -30  12 to 260,
                                         depending on
                                         length of service
Minneapolis                     10 -27  8-1/4
New York                        10 -30  10 full pay and
                                         120
                                         60-percent pay
                                         during first year
                                         to 260 full pay,
                                         depending on
                                         length of service
Philadelphia                    10 -25  12
Richmond                        10 -27  20 -75, depending
                                         on length of
                                         service
St. Louis                       10 -25  18
San Francisco                   10 -25  9 -12, depending
                                         on length of
                                         service
Federal Reserve                 13 -26  13
 Board
FDIC                            13 -26  13
OCC                             13 -26  13
SEC                             13 -26  13
----------------------------------------------------------
Sources:  The Federal Reserve Board; 12 Federal Reserve Banks; and
the headquarters of FDIC, OCC, and SEC. 


      A NUMBER OF FEDERAL RESERVE
      BENEFITS WERE NOT AVAILABLE
      TO CIVIL SERVICE EMPLOYEES
----------------------------------------------------- Appendix III:0.1

The Federal Reserve offered benefits that are not generally offered
to civil service employees, although many of the benefits are
available to employees of FDIC and OCC.  These benefits included
separate dental insurance, subsidized employee cafeterias, premium
conversion accounts, flexible spending accounts, matching
contributions for savings accounts, and mass transit subsidies.  In
addition, some banks offered marriage, bereavement, parental care,
and floating holiday leave. 


      SUBSIDIZED CAFETERIAS
----------------------------------------------------- Appendix III:0.2

The Board and the Reserve Banks pay a subsidy to reduce the cost of
employee cafeteria meals.  The Board offers subsidized employee meals
in its cafeteria, seven dining rooms, and three meeting rooms.  The
Board's subsidy in 1993 was 45 percent and cost about $741,000.  Each
of the Reserve Banks also have subsidized cafeterias, but the level
of subsidies and number of cafeterias and dining rooms differed.  As
shown in table I.7, in 1993, the total cost of cafeteria subsidies
for the 12 Reserve Banks was about $8.4 million.  Most Reserve Bank
cafeterias were privately run, with the Reserve Bank paying subsidies
ranging from 19 to 55 percent.  FDIC and OCC provided cafeteria
subsidies of 40 and 19 percent, respectively; SEC did not have a
cafeteria. 



                              Table III.8
                
                1993 Cafeteria and Dining Room Subsidies
                 for the Federal Reserve System, FDIC,
                              OCC, and SEC

                                                            Percentage
Entity                          Total subsidy cost        subsidized\a
------------------------------  ------------------  ------------------
Atlanta                                   $632,747                  45
Boston                                     680,729                  52
Chicago                                  1,101,062                  49
Cleveland                                  280,773                  50
Dallas                                     651,928                  43
Kansas City                                500,808                  50
Minneapolis                                321,644                  37
New York                                 2,500,000                  55
Philadelphia                               519,108                  40
Richmond                                   545,457                  52
St. Louis                                  445,603                  45
San Francisco                              174,866                  19
Federal Reserve Board                      740,900                  45
FDIC\b                                     246,420                  40
OCC\c                                       83,322                  19
SEC                                            n/a                 n/a
----------------------------------------------------------------------
Legend:  n/a = not applicable. 

\a When separate percentages were provided for the cafeteria and
dining room subsidies, we combined the employee cafeteria and
executive dining room subsidy cost and divided by the total cost for
both facilities to calculate the percentage subsidized.  Percentages
were rounded to the nearest whole number. 

\b Information is for the 12-month period from June 1, 1993, to May
31, 1994. 

\c OCC indicated that its cafeteria contractor is expected to operate
on a break-even basis.  However, in 1993 the contractor experienced a
loss of $83,322, which was subsidized by OCC. 

Sources:  The Federal Reserve Board; Federal Reserve District Banks;
and the headquarters of FDIC, OCC, and SEC. 


         DENTAL INSURANCE
--------------------------------------------------- Appendix III:0.2.1

While the Federal Employees Health Benefits Program does not offer
employees separate subsidized dental insurance, the Board subsidizes
its employees' dental plan, paying approximately 80 percent of the
premium.  Reserve Bank subsidies ranged from 65 to 95 percent.  In
1993, the dental subsidy cost the Board about $518,000 and the 12
Reserve Banks, a total of more than $6.8 million.  To reduce this
cost, one Reserve Bank negotiated a new dental plan that froze
premiums for 1993 and 1994.  Officials estimated that this would save
the Reserve Bank $200,000 over those 2 years.  FDIC and OCC pay the
full cost of their employee dental insurance.  In keeping with the
Federal Employees Health Benefits Program, SEC does not offer this
benefit. 


         MARRIAGE, BEREAVEMENT,
         FAMILY CARE, AND FLOATING
         HOLIDAY LEAVE
--------------------------------------------------- Appendix III:0.2.2

In addition to annual and sick leave, many Reserve Banks offered
separate leave categories for bereavement, marriage, family care, and
floating holidays that are not generally offered to civil service
employees.  The Board, FDIC, OCC, and SEC do not offer any of these
four leave programs.  Their employees must use their annual or sick
leave, in lieu of these other leave benefits.  Table III.9 shows the
number of banks offering these leave categories and the number of
days offered. 



                              Table III.9
                
                Marriage, Bereavement, Family Care, and
                         Floating Holiday Leave

                                   Number of banks      Number of days
Leave category                    offering benefit             offered
------------------------------  ------------------  ------------------
Bereavement                                     11                3 -7
Marriage                                         4                1 -5
Family care                                     \3                0 -5
Floating holidays                               10                1 -2
----------------------------------------------------------------------
Source:  Federal Reserve Banks. 

Bereavement leave provides extra days off for an employee to grieve
the loss of a family member.  In 1993, 2 of the 11 banks that offered
bereavement leave did not keep records of the number of days
provided.  The remaining nine banks granted a total of about 4,200
days for bereavement leave.  The cost to one bank that granted about
1,500 days of bereavement leave was $245,000. 

Marriage leave is provided to employees who are marrying.  One of the
four banks that granted such leave in 1993 did not track the number
of days provided.  The other three banks granted a total of 546 days
for marriage leave.  The cost to one bank granting 394 days of such
leave was about $64,000. 

Family care leave is provided to employees to care for sick family
members.  Three banks offered paid family care leave and granted a
total of about 2,900 days in 1993.  We did not determine the cost of
family care leave.  Floating holidays are given to employees to use
to take care of personal matters. 


         MASS TRANSIT SUBSIDY
--------------------------------------------------- Appendix III:0.2.3

Four of the 12 Reserve Banks offered employees a monthly mass transit
subsidy.  Some restricted the subsidy to employees who did not use
the Reserve Banks' parking facilities.  The subsidies ranged from $4
in Kansas City to $30 in St.  Louis.  Both the Board and SEC offer
employees up to $21 in monthly mass transit subsidies, while FDIC and
OCC do not offer this benefit.\1 Under section 629 of the Treasury,
Postal Service and General Government Appropriations Act of 1991,
Public Law 101-509, federal government agencies may offer monthly
mass transit subsidies to their employees. 


--------------------
\1 At the time our survey, the Board was unable to provide us
information about the total cost of the mass transit subsidy. 


         HOME SECURITY SYSTEMS
--------------------------------------------------- Appendix III:0.2.4

Home security systems are provided to the Chairman of the Board,
eight Reserve Bank presidents, five first vice presidents, one
executive vice president, and one senior vice president.  We were
told that the Board Chairman's system cost approximately $2,500, and
the cost to install four of the Reserve Bank Presidents' systems
ranged from $2,500 to $8,000.  FDIC, OCC, and SEC do not provide home
security systems for officers or employees. 


         HOME-TO-WORK
         TRANSPORTATION
--------------------------------------------------- Appendix III:0.2.5

At the Board, only the Chairman regularly receives home-to-work
transportation authorized under Public Law 99-550.\2 At the Reserve
Banks, six other Reserve Bank presidents drive themselves from home
to work in Federal Reserve-owned vehicles.  In addition, 47 other
Reserve Bank personnel use bank vehicles to travel from home to work,
and some can also use the cars for personal reasons, although they
must claim a taxable benefit.  As of January 1996, three banks
indicated they will limit the use of bank-owned vehicles for
home-to-work transportation to presidents and first vice presidents. 
This will result in about 12 fewer employees' using these vehicles
for home-to-work travel.  The FDIC, OCC, and SEC Washington, D.C.,
offices do not regularly provide home-to-work transportation to their
officials. 


--------------------
\2 The Chairman is the only Board member who is assigned a
chauffeured vehicle.  The 6 remaining Board members have access to a
motor pool of 14 vehicles that is used for business-related trips. 


PROCUREMENT PRACTICES DIFFER AND
EFFECTIVE CONTROLS ARE OFTEN
MISSING
========================================================== Appendix IV

As discussed in chapter 3, despite the Federal Reserve's attempt to
provide a framework for uniform procurement policies, Reserve Banks
have differing procurement practices.  Although the guidance used by
each Reserve Bank is intended, among other things, to ensure fair and
equitable treatment of prospective sources, Reserve Bank practices
appear to favor certain sources over others.  We found that some
Reserve Banks comply closely with Uniform Acquisition Guidelines
(UAG), while others use practices that limit competition.  At some
Reserve Banks, new bidders were not provided an equal opportunity to
bid for large procurements, and bidders lists at three Reserve Banks
were limited to sources with which the Reserve Banks traditionally
have done business, although other equally qualified sources were
available and interested. 

Some practices/procedures at individual Reserve Banks are
commendable, yet noteworthy procedures were not being disseminated
among the Reserve Banks.  None of the Reserve Banks uses commendable
procedures in every area.  For instance, although the procurement
process at one Reserve Bank appeared to be in compliance with the
intent of the UAGs, it lacked appropriate controls over its voucher
payment function for major construction contracts.  Moreover, some
Reserve Banks use practices that restrict full and open competition,
by limiting bidders lists to sources with which the Reserve Bank
traditionally does business, although we were told that other sources
were available and interested. 


   CERTAIN BIDDERS FAVORED IN
   SOURCE SELECTION
-------------------------------------------------------- Appendix IV:1

According to the UAGs, invitations to bid and requests for proposals
should be sent to as many interested suppliers as possible to ensure
competition.  Interested suppliers should not be excluded from
receiving a solicitation, unless they are clearly unable to fulfill
the basic requirements of the solicitation.  Yet, new sources were
excluded from receiving awards for large, complex, and costly
procurements at most of the Reserve Banks we visited, since Reserve
Banks restricted lists of potential bidders to sources with which
they have had previous experience, giving new sources smaller, less
complex orders.  Furthermore, several Reserve Banks restricted the
number of potential bidders by forwarding invitations to bid and
requests for proposals to a limited number of bidders.  For example,
the building department at one Reserve Bank selected the sources and
limited the number of sources to a maximum of five bidders for
construction/building alteration projects. 

In contrast, another Reserve Bank solicited bids/proposals from a
large number of sources.  To prepare for the award of its travel
contract, the Reserve Bank combined information from a list of the
top travel agencies in the area with names from their vendor database
to identify potential sources.  The Reserve Bank invited a total of
14 sources to a meeting to discuss Reserve Bank requirements.  The
Reserve Bank also forwarded copies of questions and answers from the
meeting to the 11 firms attending the meeting.  Proposals were
subsequently received from six firms.  The successful firm was
selected on the basis of the best overall financial cost to the
Reserve Bank. 


   CONTRACT EXTENSION PRECLUDES
   COMPETITION
-------------------------------------------------------- Appendix IV:2

The UAGs encourage competition and restrict the use of sole/single
source awards to situations where (1) no other source of supply is
available, (2) the urgency of the Reserve Bank's need does not permit
the delay involved in using more formal methods of acquisition, or
(3) senior officials deem it necessary.  However, two of the four
Reserve Banks we reviewed have retained incumbent cafeteria
contractors for years without recompeting the award, thus precluding
other firms from competing for those services.  Officials at one of
the Reserve Banks were unable to locate documentation in support of
the last contract competition, which they believed occurred in the
late 1980s.  Furthermore, at the other Reserve Bank, records
indicated that the cafeteria contract was last competed in 1986,
about 10 years ago.  In contrast, two Reserve Banks competed their
cafeteria contract awards within the last 2 years.  One Reserve Bank
invited six firms to submit bids for cafeteria operations and
performed an extensive analysis of the four bids received to
determine which firm should receive the award, including an analysis
of the possibility of using one source to operate the Reserve Bank's
cafeteria, as well as the cafeterias at each branch office.  Our
review showed that the other Reserve Bank invited 14 firms to submit
bids and performed an extensive analysis of the 11 bids received to
select the firm to operate the cafeteria. 


   WIDE DISCRETION IN NEGOTIATIONS
-------------------------------------------------------- Appendix IV:3

In addition to competitive bidding, in which the award goes to the
low bidder after the bids are opened, the UAGs provide for the use of
competitive proposals.  The competitive proposal method permits
discussions with offerors after proposals have been opened to allow
clarification and changes in proposals.  However, adequate
precautions are to be taken to treat each offeror fairly and to
ensure that information gleaned from competing proposals is not
disclosed to other offerors. 

Our work indicated that wide discretion exists among Reserve Banks in
the latitude under which they negotiate with competitive sources. 
For example, in negotiating the competitive award of a network server
and peripherals at one of the four Reserve Banks, negotiations were
conducted only with the low bidder after bid opening, despite the
fact that the system configuration (i.e., type, size, and
sophistication of server) had been totally changed.  Other firms were
not given the opportunity to offer competing bids.  In contrast, when
a design change occurred after bid opening, one Reserve Bank's legal
department required that the contract be recompeted and did not allow
negotiations with bidders. 


   BID EVALUATION DELEGATED
   OUTSIDE THE RESERVE BANK
-------------------------------------------------------- Appendix IV:4

Although the UAGs prohibit disclosure of specific information
contained in bids or proposals to anyone except Reserve Bank
personnel directly involved in the selection process, two Reserve
Banks transferred most functions associated with the award of major
construction/building alteration contracts to architecture and
engineering (A&E) firms.  Both Reserve Banks used A&E firms for
source selection, receipt and evaluation of bids, and selection of
the successful bidder.  The amount of responsibility passed from the
hands of Reserve Bank personnel to the A&E firm is demonstrated by
the fact that the Reserve Bank officials at one of the two Reserve
Banks were not aware that the award may not have been given to the
low bidder.  The department vice president assured us that he was
certain that the A&E firm could justify the award to the selected
source. 

In contrast, one Reserve Bank building department's vice president
cautioned against delegating bid evaluation functions to A&E firms,
commenting that the larger the role the A&E firm plays, the greater
the potential for favoritism.  At another Reserve Bank, personnel
also retained source selection functions for large construction
contracts.  Moreover, they told us they found that the process of
evaluating cost information provided by potential sources leads to a
better understanding of the sources' knowledge of the area and their
technical capability.  An official from the Reserve Bank summarized
the benefits of evaluating proposals as follows:  challenging the
bids/proposals from construction contractors results in improved
understanding of what is required, better quality, and lower prices. 


   INDEPENDENT CHECKS AND
   RECONCILIATION LACKING
-------------------------------------------------------- Appendix IV:5

Although the UAGs do not address payments, the American Institute of
Certified Public Accountants defines a desirable control environment
as one in which duties should be segregated to reduce opportunities
for any person to be in a position to perpetuate or conceal errors or
irregularities in the normal course of his or her duties.  Therefore,
different people/organizations should have the responsibility for
authorizing transactions, recording transactions, etc.  Another
control procedure is ensuring that the procedures contain independent
checks and reconciliations. 

Two Reserve Banks had a system of internal checks over the voucher
payment process for progress payments associated with construction
contracts.  The organization responsible for the paying of invoices
at each Reserve Bank maintained a separate clerical
check/reconciliation system to ensure that contract dollar amounts
were not exceeded.  However, two other Reserve Banks did not have
systems that ensured separation of duties or independent checks.  The
individual responsible for the payment function at one Reserve Bank
explained that when an authorization to pay an invoice for a progress
payment is received from the building department, it is paid.  At the
other Reserve Bank, officials responsible for the payment function
explained that, while they tracked payments to each source by year,
they did not track progress payments on each contract. 

In contrast, at another Reserve Bank, payments to construction
contractors were closely controlled.  As a control mechanism for the
payment authorization from the Building Department, another
department tracked progress payments using a spreadsheet.  When a
payment authorization was received, the spreadsheet maintained for
each construction contract was updated to accumulate a running total. 
This practice ensured that construction contractors did not receive
more funds than the Reserve Bank was obligated to pay.  This control
system served as an independent check and reconciliation. 




(See figure in printed edition.)Appendix V
COMMENTS FROM THE BOARD OF
GOVERNORS OF THE FEDERAL RESERVE
SYSTEM
========================================================== Appendix IV

See comment 1. 



(See figure in printed edition.)

See comment 2. 

See comment 3. 



(See figure in printed edition.)

See comment 4. 

See comment 5. 



(See figure in printed edition.)

See comment 6. 



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)

See comment 7. 



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)

See comment 8. 



(See figure in printed edition.)

See comment 9. 


The following are GAO's comments on the Board of Governors of the
Federal Reserve System's letter dated April 11, 1996. 


   GAO COMMENTS
-------------------------------------------------------- Appendix IV:6

1.  The Federal Reserve Board commented that the cost increases we
reported were related to a number of new initiatives in expanded
supervision and technology and personnel enhancements necessary to
keep pace with developments in private financial markets.  The Board
also commented that some redundancy of resources was necessary to
limit the risk of systemic crises.  We acknowledge that the growth in
Federal Reserve expenses that occurred during 1988 to 1994 was
caused, at least partially, by significant increases in expenses for
bank supervision and regulation, personnel compensation, and an
extensive automation modernization and consolidation effort. 
However, we note that bank supervision accounted for only about 20
percent of total Reserve Bank expenses in 1994.  We also note that
the Federal Reserve's computer hardware and software expenses are
largely capitalized, with their costs being spread out over many
years through charges to depreciation.  Finally, we note that the
rapid rise in personnel compensation costs, which affected all lines
of business and accounted for about two-thirds of total Federal
Reserve operating costs in 1994, was by far the most significant
contributor to the Federal Reserve's cost increases during the 1988
to 1994 period, representing over 70 percent of the total growth in
the System's operating expenses. 

2.  The Board commented that the overall growth in their costs during
the 1988 to 1994 period was lower than the comparable growth in
federal nondefense discretionary expenditures.  We used three
different baselines as standards of comparison in this report.  As
the Board noted, the growth in the Federal Reserve's operating costs
was somewhat less than the growth in federal nondefense discretionary
expenditures over the 1988 to 1994 period.  However, it was
substantially greater than both the amount of inflation and the
increase in total federal discretionary expenditures that occurred
over these same years.  We also noted in this report that Federal
Reserve employment increased approximately 4 percent during the 1988
to 1994 period.  To compensate for differences in changes in
employment levels, we computed personnel costs on a per capita basis. 
These calculations showed that the 39-percent increase in the per
employee cost of Federal Reserve salaries was slightly higher than
the 36-percent increase in the per capita salary cost in the federal
government.  However, the increase in the per employee cost of
Federal Reserve benefits (96 percent) was substantially higher than
the increase for the federal government (62 percent). 

3.  The Board commented that, while some opportunities for
consolidation of activities may exist, the benefits of the autonomy
and competitiveness of the Reserve Banks in attracting highly
qualified staff must be balanced against the expected savings from
consolidation.  We agree that a competitive, internal environment can
help attract highly qualified staff.  However, our findings raise
questions about the extent to which the Federal Reserve is able to
capture the benefits of internal competition.  One measure of
effective competition within a cost-conscious, decentralized
organization would be the extent to which proven or potential
cost-saving strategies developed by one or more of the autonomous
units is shared with, and embraced by, the others.  We found mixed
evidence of this at the Federal Reserve.  For example, we noted that
the systemwide automation consolidation effort began as a proposal by
several Reserve Banks that they consolidate their mainframe
processing.  This effort led the Board to establish a committee to
study the feasibility of consolidation for the Federal Reserve as a
whole.  However, in other activities--such as contracting and
procurement and management of health care benefits--we identified
cost-saving strategies that had not been shared, at least formally,
among the Reserve Banks.  Furthermore, we do not believe that
consolidating activities is necessarily inconsistent with maintaining
a competitive, internal environment.  For example, a systemwide
activity performed by fewer than 12 Reserve Banks could still provide
opportunities for internal competition. 

4.  The Board noted that its financial services, especially its
priced services, are competitively tested by the marketplace.  We
noted in the report that private sector competition is increasing in
payments services.  Still, in many areas, competition is limited and
many financial institutions have no alternative to the Federal
Reserve for some services.  For example, private check clearinghouses
often only cover certain geographical areas or handle only certain
types of payments, such as those for large dollar amounts. 

5.  The Board commented that the Federal Reserve fully recovers its
costs of providing services to depository institutions in the long
run.  The Board noted that, from 1986 through 1995, it recovered 101
percent of its costs, including a targeted return on equity and other
imputed costs.  We noted that the most recent data showed a trend of
Federal Reserve expenses for providing priced services rising much
faster than the revenues received.  For example, from 1990 to 1994,
Federal Reserve revenues from check clearing actually declined by 0.2
percent, while expenses increased 13.8 percent.  Similarly, automated
clearinghouse revenues increased during the period by 22 percent,
while expenses increased 41.1 percent.  Thus, we continue to believe
that the Board should undertake a review of the Federal Reserve's
provision of these services. 

6.  The Board noted that the decline in the Reserve Banks' check
volume was largely attributable to the Board's adopting a same day
settlement rule, and that staffing reductions were made to adjust to
those declines in volume.  We noted in this report that the growth in
expenses for priced services to financial institutions was the
smallest for any line of business during the 1988 to 1994 period. 
However, we also noted that the Federal Reserve has a significant
incentive to restrain increases in these costs because the System
competes with the private sector in providing these services and is
legally required to charge fees that recover its costs.  We also
noted that, in other service areas not subject to these constraints,
Federal Reserve staffing and expenses have increased despite
Systemwide efforts to consolidate and increase efficiency.  For
example, in the savings bonds program, Treasury directed the Federal
Reserve to consolidate its savings bonds operations from 12 to 5
locations.  Despite this consolidation, staffing in the program
increased slightly.  When Treasury announced the selection of the 5
Reserve Bank locations in June 1992, there were 913 employees in the
savings bonds departments of the Reserve Banks and branches.  In
1994, there were 918 employees.  Automation costs for the program
also increased, from $6.7 million in 1992 to $12.7 million in 1994. 

7.  The Board stated that our finding that the increase in Federal
Reserve benefits from 1988 to 1994 was significantly higher than
benefit increases for the federal government did not appear to be
correct.  They calculated the benefit increase to be 64 percent for
the Federal Reserve, comparable to our reported increase in the
federal government's benefits of 62 percent.  Their calculation was
based on a different methodology than ours. 

Although there are several ways to present the increases in the cost
of benefits for the Federal Reserve, we believe our methodology is
the best way to facilitate comparison with the federal government. 
The Board's annual reports, which are done on an accrual basis,
showed a 176-percent increase in per capita benefits over this
period.  However, to facilitate comparison with the federal
government, it was necessary to take out certain accruals because the
federal government accounts are done primarily on a cash basis.  In
our calculations, we (1) reduced the Board's reported amounts by a
measure of the accrual for additional postretirement benefit
expenses; (2) increased these amounts by a measure of the accrual for
the Federal Reserve's overfunded pension fund; and (3) added back in
amounts representing payments for the Federal Reserve's early
retirements in 1988, 1989, and 1994.  In calculating its 64-percent
estimate, the Federal Reserve has made the first two adjustments, but
not the third.  As a result, the Federal Reserve numbers do not
include early retirement payments, but these costs are included in
the federal government's benefits costs and are clearly a cost
incurred by the Federal Reserve.  We believe that comparability would
be more properly maintained by including these costs in the Federal
Reserve measures as well. 

8.  The Board noted that the planning and design phase of the Dallas
Federal Reserve Bank building predated certain decisions concerning
computer facility consolidation, but included sufficient flexibility
in design to accommodate the decision made later to house a
consolidated data center.  While recognizing the need for some
flexibility to accommodate changes in function or design, we continue
to believe that such major construction projects may offer
opportunities to reduce costs.  Such opportunities appear to have
been available in the Dallas Reserve Bank building and some could
still be available if, as the Federal Reserve suggests, they were to
sell off unneeded land.  In addition, after making what turned out to
be overestimates of staffing growth for the Dallas Reserve Bank
building, the Federal Reserve has subsequently made more conservative
projections in connection with a new bank building and a major
renovation of an existing bank building. 

9.  The Board stated that the Federal Reserve System has engaged in a
variety of strategic planning efforts for many years.  In addition,
the Board noted that it had recently established a Federal Reserve
System Strategic Planning Coordination Group (SPCG) to coordinate
various strategic planning efforts within the System. 

We acknowledged that the Federal Reserve had established SPCG, which
includes representatives from the Reserve Banks and the Board of
Governors.  SPCG is to provide a common framework for the development
and refinement of the many individual strategic plans and action
plans within the Federal Reserve.  According to Federal Reserve
planning documents, several Board members and Reserve Bank presidents
believed that the discrete strategic planning processes within the
Federal Reserve would benefit from greater coherence, especially in
terms of assumptions about the future environment and
interrelationships among functions.  In our report, we characterized
the establishment of SPCG as a positive step for the Federal Reserve,
but we expressed concern that its scope of responsibility and
authority may be too limited.  While doing the bold strategic
planning we envision may be difficult to accomplish in a system of
shared responsibilities, we continue to believe it is essential for
the Federal Reserve to adopt such an approach to effectively meet the
challenges of the future. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix VI


   GENERAL GOVERNMENT DIVISION,
   WASHINGTON, D.C. 
-------------------------------------------------------- Appendix VI:1

Helen H.  Hsing, Associate Director, Financial Institutions and
 Markets Issues
Thomas J.  McCool, Associate Director, Financial Institutions and
 Markets Issues
Stephen C.  Swaim, Assistant Director (retired)
Charles G.  Kilian, Project Manager
Vanessa Y.  Adams, Evaluator
Nancy M.  Eibeck, Evaluator
Carl M.  Ramirez, Technical Advisor
Desiree W.  Whipple, Reports Analyst
Charlotte Moore, Reports Analyst
Yolanda Riley, Information Processing Assistant
Phoebe Jones, Information Processing Assistant


   CHICAGO FIELD OFFICE
-------------------------------------------------------- Appendix VI:2

Susan R.  Bradshaw, Evaluator
Cristine M.  Marik, Evaluator


   DALLAS FIELD OFFICE
-------------------------------------------------------- Appendix VI:3

John V.  Kelly, Senior Evaluator
Ellen G.  Thompson, Evaluator


   KANSAS CITY FIELD OFFICE
-------------------------------------------------------- Appendix VI:4

Marshall S.  Picow, Senior Evaluator
Karl G.  Neybert, Evaluator


   NEW YORK FIELD OFFICE
-------------------------------------------------------- Appendix VI:5

Raymond L.  Gast, Evaluator
Despina Hatzelis, Evaluator


   SAN FRANCISCO FIELD OFFICE
-------------------------------------------------------- Appendix VI:6

Ruth Ann Hijazi, Senior Evaluator
Julie M.  DeVault, Evaluator


   OFFICE OF THE GENERAL COUNSEL
-------------------------------------------------------- Appendix VI:7

Paul Thompson, Attorney

*** End of document. ***