In accordance with the Monetary
Control Act, the Federal Reserve establishes prices for its payment
services in order to recover costs and a private-sector adjustment
factor (PSAF). The PSAF is an allowance for the taxes that would have
been paid and the return on capital that would have been provided
had the Federal Reserve’s priced services been furnished by
a private-sector firm.
Costs for providing services are derived from the Federal
Reserve’s Planning and Control System (PACS). PACS is the uniform
cost-accounting system Reserve Banks use for determining the full
costs of fulfilling their five basic areas of responsibility: (1)
monetary and economic policy, (2) supervision and regulation, (3)
fiscal-agency services, (4) services to financial institutions and
the public, and (5) fee-based services to financial institutions.
The system was developed in the mid-1970s to serve as a cost-accounting
system, similar to systems used in the private sector, and also to
serve as a vehicle for evaluating the cost-effectiveness and relative
efficiency of the Reserve Banks.
PACS provides the Federal Reserve with an important management
tool for budgeting and expense control by ensuring that similar expenses
are recorded by Reserve Banks in the same way and that all Reserve
Banks report operating expenses under a set of common and uniform
definitions.
Like most expense-accounting systems used in the private
sector, expenses under PACS are classified by type or “object”
of expense, such as salaries, supplies, equipment, and travel, and
by the “output” to which the expense is related, such
as fiscal services to the Treasury or the provision of check-collection
services to depositing institutions. Classification of expenses by
type enables the Federal Reserve to collect necessary information
for external and internal financial-reporting and control purposes.
Classification of expenses by output service enables Federal Reserve
management to analyze the overall costs of Reserve Bank operations
in terms of ongoing service responsibilities, the programs instituted
to fulfill these service responsibilities, and the basic activities
or processes included in the provision of each service.
There are subsidiary services within
each area of responsibility (service line). “Fee-based services
to financial institutions,” for example, encompasses priced
services such as commercial check, electronic funds transfer, securities,
and noncash collection. Within each of these subsidiary services,
PACS identifies specific “activities” that reflect the basic
operations or processes within the services.
PACS classifies all costs into four categories: direct,
internal support, nationally provided support, and corporate overhead
costs. Direct costs are those costs directly attributable to a given
service. Internal support costs are those costs, such as computer
programming and building operations, that, although not directly used
in priced-service operations, are required to support such activities.
Nationally provided support services are those support costs incurred
by a Reserve Bank for services provided on behalf of other Reserve
Banks. All support costs are fully charged to the benefiting activities
on a usage basis. Corporate overhead costs represent all remaining
Federal Reserve costs that cannot be charged directly to an output
service on a usage basis. Examples of corporate overhead functions
include bank administration, expense accounting, and budget control.
Corporate overhead costs are allocated to benefiting services based
upon a predetermined ratio.
Establishment
of Fees for Federal Reserve Priced Services All Federal Reserve fees are reviewed annually and revised, if necessary.
The annual review takes place during the fourth quarter of the year.
Each Reserve Bank forecasts its costs and volumes for each priced
service for the upcoming year. Included in the cost estimate are all
direct, support, overhead, and float costs that are to be allocated
to each priced service. The cost and volume estimates are based on
a combination of historical experience and projections. At the same
time, the Federal Reserve calculates a proposed PSAF for the year.
Aggregate cost and volume estimates for nationally priced services
are based on estimates made by the individual Reserve Banks.
The proposed Reserve Bank fees are
reviewed by the System’s Financial Services Policy Committee,
the staff of the Board of Governors, and the Committee on Federal
Reserve Bank Affairs. The purpose of the review is to ensure that
the cost and volume estimates are reasonable, that the PSAF calculation
is consistent with System guidelines, and that proposed prices meet
the cost-recovery policies of the Board of Governors. Finally, the
Board of Governors reviews and approves the proposed prices and PSAF.
