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Board of Governors of the Federal Reserve System

Federal Reserve Banks

The Federal Reserve Banks provide "payment services" to depository and certain other institutions, distribute the nation's currency and coin to depository institutions, and serve as fiscal agents and depositories for the U.S. government and other entities. The Reserve Banks also contribute to setting national monetary policy and supervision and regulation of banks and other financial entities operating in the United States (discussed in the preceding sections of this report).

Developments in Federal Reserve Priced Services

Federal Reserve Banks provide a range of payment and related services to depository institutions, including collecting checks, operating an automated clearinghouse (ACH) service, transferring funds and securities, and providing a multilateral settlement service. The Reserve Banks charge fees for providing these "priced services."

The Monetary Control Act of 1980 requires that the Federal Reserve establish fees for priced services provided to depository institutions so as to recover, over the long run, all direct and indirect costs actually incurred as well as the imputed costs that would have been incurred--including financing costs, taxes, and certain other expenses--and the return on equity (profit) that would have been earned if a private business firm had provided the services.1 The imputed costs and imputed profit are collectively referred to as the private-sector adjustment factor (PSAF).2 Over the past 10 years, Reserve Banks have recovered 97.9 percent of their priced services costs, including the PSAF (see table 1).3

Table 1. Priced Services Cost Recovery
Millions of dollars, except as noted
Year Revenue from services 1 Operating expenses and imputed costs 2 Targeted return on equity 3 Total costs Cost recovery (percent) 4, 5
2001 960.4 901.9 109.2 1,011.1 95.0
2002 918.3 891.7 92.5 984.3 93.3
2003 881.7 931.3 104.7 1,036.0 85.1
2004 914.6 842.6 112.4 955.0 95.8
2005 993.8 834.4 103.0 937.4 106.0
2006 1,029.7 874.8 72.0 946.8 108.8
2007 1,012.3 912.9 80.4 993.3 101.9
2008 873.8 820.4 66.5 886.9 98.5
2009 675.4 707.5 19.9 727.5 92.8
2010 574.7 532.8 13.1 545.9 105.3
2001-2010 8,834.6 8,250.4 773.7 9,024.1 97.9

Note: Here and elsewhere in this chapter, components may not sum to totals or yield percentages shown because of rounding. Amounts in bold are restated due to changes in previously reported data.

1. For the 10-year period, includes revenue from services of $8,286.2 million and other income and expense (net) of $548.4 million. Return to table

2. For the 10-year period, includes operating expenses of $7,900.5 million, imputed costs of $95.5 million, and imputed income taxes of $254.4 million. Return to table

3. Beginning in 2009, given the uncertain long-term effect that the payment of interest on reserve balances held by depository institutions at the Reserve Banks would have on the level of clearing balances, the PSAF has been adjusted to reflect the actual clearing balance levels maintained; previously, the PSAF was calculated based on a projection of clearing balance levels. Return to table

4. Revenue from services divided by total costs. Return to table

5. For the 10-year period, cost recovery is 95.1 percent, including the reduction in equity related to ASC 715 reported by the priced services. Return to table

In 2010, Reserve Banks recovered 105.3 percent of total priced services costs, including the PSAF.4 The Banks' operating costs and imputed expenses totaled $532.8 million. Revenue from operations totaled $566.7 million and other income was $7.9 million, resulting in net income from priced services of $41.8 million.5

The Reserve Banks are engaged in a number of technology initiatives that will modernize their priced services processing platforms over the next several years. The Banks are in the process of implementing a new end-to-end electronic check-processing system to improve the efficiency and reliability of their current check-processing operations. They also continued efforts to migrate the FedACH and Fedwire Funds services off a mainframe system and to a distributed computing environment.

Commercial Check-Collection Service

In 2010, Reserve Banks recovered 107.1 percent of the total costs of their commercial check-collection service, including the related PSAF. The Banks' operating expenses and imputed costs totaled $326.5 million. Revenue from operations totaled $353.6 million and other income totaled $4.9 million, resulting in net income of $31.9 million. In 2010, check-service revenue from operations decreased $128.1 million from 2009.6 Reserve Banks handled 7.7 billion checks in 2010, a decrease of 10.2 percent from 2009 (see table 2). The decline in Reserve Bank check volume continues to be influenced by nationwide trends away from the use of checks and toward greater use of electronic payment methods.7 By year-end 2010, 99.7 percent of Reserve Bank check deposits and 98.4 percent of Reserve Bank check presentments were being made electronically through Check 21 products.8

Table 2. Activity in Federal Reserve priced services, 2008-2010
Thousands of items
Service 2010 2009 2008 Percent change
2009 to 2010 2008 to 2009
Commercial check 7,711,833 8,584,929 9,545,424 -10.2 -10.1
Commercial ACH 10,232,757 9,966,260 10,040,388 2.7 -0.7
Fedwire funds transfer 127,762 127,357 134,220 0.3 -5.1
National settlement 522 464 469 12.5 -1.1
Fedwire securities transfer 7,913 10,519 11,717 -24.6 -10.2

Note: Activity in commercial check is the total number of commercial checks collected, including processed and fine-sort items; in commercial ACH, the total number of commercial items processed; in Fedwire funds transfer and securities transfer, the number of transactions originated online and offline; and in national settlement, the number of settlement entries processed.

Because of the rapid adoption of electronic check processing, the Reserve Banks were able to complete the consolidation of their paper check-processing offices ahead of schedule, in 2010 instead of 2011. Under this multiyear initiative, which began in 2003, the Reserve Banks have reduced the number of offices at which they process paper checks from 45 to one. Beginning in February 2010, the Cleveland Reserve Bank operated the only paper check-processing site for the System. Further, the System's electronic check processing was consolidated at one Federal Reserve site.

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Commercial Automated Clearinghouse Services

In 2010, the Reserve Banks recovered 103.4 percent of the total costs of their commercial ACH services, including the related PSAF. Reserve Bank operating expenses and imputed costs totaled $105.2 million.

Revenue from ACH operations totaled $109.9 million and other income totaled $1.6 million, resulting in net income of $6.3 million. The Reserve Banks processed 10.2 billion commercial ACH transactions, an increase of 2.7 percent from 2009, which was in line with industry ACH volume growth.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 required the Board to work with the Reserve Banks to expand the use of the ACH for making international payments and remittances. In 2010, the Reserve Banks expanded their cross-border ACH product offerings to additional countries in Latin America and Europe to facilitate the provision of low-cost payment and remittance services by depository institutions in the United States. By year-end 2010, depository institutions were able to send payments using the Reserve Banks' FedGlobal service to 22 countries in Europe, 12 countries in Latin America, and Canada. The Reserve Banks, however, found it challenging to increase the use of FedGlobal services by individuals and businesses for making outbound payments. In particular, while outbound government payments increased 1.8 percent in 2010, to about 103,000 payments per month, outbound payments by individuals and businesses declined 5.4 percent, to slightly less than 3,000 payments per month, which included payments sent through the long-established service offerings to Canada and Mexico.

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Fedwire Funds and National Settlement Services

In 2010, Reserve Banks recovered 100.6 percent of the costs of their Fedwire Funds and National Settlement Services, including the related PSAF. Reserve Bank operating expenses and imputed costs for these operations totaled $77.9 million in 2010. Revenue from these services totaled $79.1 million, and other income amounted to $1.2 million, resulting in a net income of $2.4 million.

Fedwire Funds Service

The Fedwire Funds Service allows participants to use their balances at Reserve Banks to transfer funds to other participants. In 2010, the number of Fedwire funds transfers originated by depository institutions increased 0.3 percent from 2009, to approximately 127.8 million. The average daily value of Fedwire funds transfers in 2010 was $2.4 trillion, a decrease of 3.6 percent from the previous year.

National Settlement Service

The National Settlement Service is a multilateral settlement system that allows participants in private-sector clearing arrangements to settle transactions using Federal Reserve balances. In 2010, the service processed settlement files for 19 local and national private-sector arrangements, a decrease from the 41 arrangements active in 2009. The decrease in the number of arrangements was primarily the result of consolidation among check clearinghouses. The Reserve Banks processed slightly more than 6,900 files that contained around 522,000 settlement entries for these arrangements in 2010. Activity in 2010 represents both a decrease from the 10,500 files processed in 2009 and an increase from the 464,000 settlement entries processed in 2009.

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Fedwire Securities Service

In 2010, the Reserve Banks recovered 102.8 percent of the total costs of the priced-service component of their Fedwire Securities Service, including the related PSAF. The Banks' operating expenses and imputed costs for providing this service totaled $23.2 million in 2010. Revenue from the service totaled $24.1 million, and other income totaled $0.4 million, resulting in a net income of $1.2 million.

The Fedwire Securities Service allows participants to transfer electronically to other participants in the service certain securities issued by the U.S. Treasury, federal government agencies, government-sponsored enterprises, and certain international organizations.9 In 2010, the number of non-Treasury securities transfers processed via the service decreased 24.6 percent from 2009, to approximately 7.9 million.

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Float

The Federal Reserve had daily average credit float of $1,795.7 million, compared with daily average credit float of $1,976.4 million in 2009.10

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Developments in Currency and Coin

The Federal Reserve Board is the issuing authority for the nation's currency (in the form of Federal Reserve notes). In 2010, the Board paid the U.S. Treasury's Bureau of Engraving and Printing (BEP) $598.2 million for producing 5.6 billion Federal Reserve notes.

The Federal Reserve Banks distribute currency and coin through depository institutions to meet public demand. The Reserve Banks also receive currency and coin from circulation through these institutions. The Reserve Banks received 35.4 billion Federal Reserve notes from circulation in 2010, a 0.4 percent increase from 2009, and distributed 36.3 billion notes into circulation (payments) in 2010, a 1.4 percent increase from 2009. The value of Federal Reserve notes in circulation increased 6.0 percent in 2010, to $942.0 billion, largely because of demand for $100 notes. The Reserve Banks received 62.4 billion coins from circulation in 2010, a 4.5 percent decrease from 2009, and made payments of 69.1 billion coins into circulation, a 0.2 percent increase from 2009.

In 2010, the Reserve Banks finished implementing a program to extend the useful life of the System's BPS 3000 high-speed currency-processing machines. The program replaced the operating systems of the equipment, significantly improving the Reserve Banks' processing efficiency. Reserve Banks continue to develop a new cash automation platform that will enhance controls of the Banks' cash operations and improve their efficiency, provide a responsive management information reporting system with superior and flexible reporting tools, facilitate business continuity and contingency planning, and enhance the support provided to Reserve Bank customers and business partners. In 2010, the Banks terminated the development contract with the primary vendor and redefined the design for the new system.

The Board continues to work with the BEP and the U.S. Secret Service to produce and issue a more-secure, new-design $100 note. In late 2010, the Board announced that the new-design $100 note would be released later than the planned February 2011 issue date because the BEP observed that the paper was occasionally creasing during production. The Board will announce a new issue date once the problem has been resolved.

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Developments in Fiscal Agency and
Government Depository Services

As fiscal agents and depositories for the federal government, the Federal Reserve Banks auction Treasury securities, process electronic and check payments for Treasury, collect funds owed to the federal government, maintain Treasury's bank account, and develop, operate, and maintain a number of automated systems to support Treasury's mission. The Reserve Banks also provide certain fiscal agency and depository services to other entities; these services are primarily related to book-entry securities.

Treasury and other entities fully reimbursed the Reserve Banks for the costs of providing fiscal agency and depository services. In 2010, reimbursable expenses amounted to $456.4 million, compared with $450.3 million in 2009 see (table 3). Support for Treasury programs accounted for 93.9 percent of the cost, and support for other entities accounted for 6.1 percent. The Reserve Banks actively monitor program expenses, and they strive to contain these costs while providing the resources necessary to accomplish program objectives.

Table 3. Expenses of the Federal Reserve Banks for Fiscal Agency and Depository Services, 2008-2010
Thousands of dollars
Agency and service 2010 2009 2008
Department of the Treasury
Bureau of the Public Debt
Treasury retail securities 73,104 73,679 72,374
Treasury securities safekeeping and transfer 10,136 8,815 9,305
Treasury auction 30,750 30,216 37,072
Computer infrastructure development and support 1,980 2,333 4,464
Other services 1,646 1,375 910
Total 117,615 116,417 124,124
Financial Management Service
Payment services 112,224 104,355 108,219
Collection services 37,611 37,967 49,180
Cash-management services 48,226 49,046 48,676
Computer infrastructure development and support 66,461 66,958 65,059
Other services 8,815 7,393 7,577
Total 273,337 265,719 278,711
Other Treasury
Total 37,793 40,390 27,017
Total, Treasury 428,744 422,527 429,852
Other Federal Agencies
Total, other agencies 27,700 27,758 31,292
Total reimbursable expenses 456,445 450,285 461,144

Treasury Securities Services

The Reserve Banks work closely with Treasury's Bureau of the Public Debt in support of the borrowing needs of the federal government. The Banks auction, issue, maintain, and redeem securities; provide customer service; and operate the automated systems supporting paper U.S. savings bonds and book-entry marketable Treasury securities (bills, notes, and bonds). Treasury securities services consist of retail securities programs (which primarily serve individual investors) and wholesale securities programs (which serve institutional customers).

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Retail Securities Programs

The Reserve Banks continued to support Treasury's efforts to improve the quality and efficiency of securities services provided to retail customers. The Banks process paper U.S. savings bonds transactions and book-entry marketable Treasury securities transactions for securities held in Legacy Treasury Direct. Reserve Bank operating expenses for the retail securities programs were $73.1 million in 2010, compared with $73.7 million in 2009.

In early 2010, Treasury announced plans to eliminate the issuance of paper payroll savings bonds through traditional employer-sponsored savings plans. As of September 30, 2010, federal employees are no longer able to purchase paper savings bonds through payroll deduction. The Reserve Banks printed and mailed more than 16 million savings bonds in 2010, a 20 percent decrease from 2009. Treasury also announced a strategy to transition retail customers from legacy products (such as paper savings bonds) to the Bureau of the Public Debt's web-based Treasury Direct system, which supports investments in marketable Treasury securities and electronic savings bonds.

The Reserve Banks continued working with the Bureau of the Public Debt on the Treasury Retail E-Services initiative, which aims to lower costs, provide a high-quality customer service experience, provide more opportunities for customer self-service, and eliminate duplicative processes.

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Wholesale Securities Programs

The Reserve Banks support wholesale securities programs through the sale, issuance, safekeeping, and transfer of marketable Treasury securities for institutional investors. Reserve Bank operating expenses in 2010 in support of Treasury securities auctions were $30.7 million, compared with $30.2 million in 2009. In 2010, the Banks conducted 301 Treasury securities auctions, compared with 283 in 2009. The increase in the number of auctions was attributable primarily to the increased number of cash-management bill auctions.

Operating expenses associated with securities safekeeping and transfer activities were $10.1 million in 2010, compared with $8.8 million in 2009. The cost increase is attributable to higher Treasury securities transfer volume. In 2010, the number of Fedwire Treasury securities transfers increased 13 percent from 2009, to approximately 11.5 million.

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Payments Services

The Reserve Banks work closely with Treasury's Financial Management Service and other government agencies to process payments to individuals and companies. For example, the Banks process Social Security and veterans' benefits, income tax refunds, vendor payments, and other types of payments. Reserve Bank operating expenses for payments-related activity totaled $112.2 million in 2010, compared with $104.4 million in 2009. The increase in expenses is largely due to expanded requirements for several Treasury projects, notably the stored value card (SVC) and Go Direct programs.

The Reserve Banks manage the SVC program, which provides stored value cards for use by military personnel on military bases. In 2010, the SVC program's expenses increased 14 percent, to $17.1 million, because of program expansion. The Reserve Banks also support Treasury's Go Direct initiative, an ongoing effort focused on converting check benefit payments to direct deposit or debit card. In 2010, expenses for Go Direct increased 23 percent, to more than $2.8 million, in connection with the expansion of the Go Direct marketing campaign and a call-center buildout.

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Collection Services

The Reserve Banks also work closely with Treasury's Financial Management Service to collect funds owed the federal government, including fees for goods and services. Reserve Bank operating expenses in 2010 related to collections services remained roughly the same as in 2009, totaling $37.6 million.

Throughout 2010, the Reserve Banks continued to support Treasury's Collections and Cash Management Modernization (CCMM) initiative, a multiyear effort to simplify, modernize, and improve the services, systems, and processes supporting Treasury's collections and cash-management programs. In connection with the CCMM initiative, the Reserve Banks discontinued processing paper federal tax deposit coupons and, in late 2010, transitioned responsibility for the Federal Reserve Electronic Tax Application function to a commercial bank designated by Treasury.

The Reserve Banks continue to operate Pay.gov, an application supporting Treasury's program that allows the public to use the Internet to authorize and initiate payments to federal agencies. During the year, the Pay.gov program was expanded to include several new agencies and, as a result, collection volumes increased.

The Reserve Banks also support the government's centralized delinquent debt-collection program. Specifically, the Banks develop and maintain software that facilitates the collection of delinquent debts owed to federal agencies and states by matching federal payments against delinquent debts, including past-due child support payments owed to custodial parents.

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Treasury Cash-Management Services

Treasury maintains an operating cash account at the Reserve Banks to function the various transactions discussed in the preceding sections of this chapter, and it may instruct the Banks to invest funds from its account in interest-bearing accounts with qualified depository institutions.

The Reserve Banks also provide collateral-management and collateral-monitoring services for Treasury programs that have collateral requirements. Reserve Bank operating expenses related to Treasury cash-management services totaled $48.2 million in 2010, compared with $49.0 million in 2009.

During 2010, the Reserve Banks continued to support Treasury's effort to modernize its financial management processes, with a focus on improving centralized government accounting and reporting functions. The Banks worked with Treasury to identify potential long-term efficiency improvements in the way the Banks account for government payments and collections processes. The Banks also collaborated with the Financial Management Service on several ongoing software development efforts, such as the Governmentwide Accounting and Reporting Modernization initiative.

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Services Provided to Other Entities

When permitted by federal statute or when required by the Secretary of the Treasury, the Reserve Banks provide fiscal agency and depository services to other domestic and international entities. Reserve Bank operating expenses for services provided to other entities were $27.7 million in 2010, compared with $27.8 million in 2009. Book-entry securities issuance and maintenance activities account for a significant amount of the work performed for other entities, with the majority performed for the Federal Home Loan Mortgage Association, the Federal National Mortgage Association, and the Government National Mortgage Association. Cost increases associated with book-entry securities issuance and maintenance activities were offset primarily by reductions in the cost of postal money-order processing. Postal money orders are processed primarily in image form, resulting in operational improvements, lower staffing levels, and lower costs to the U.S. Postal Service.

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Developments in the Use of Federal Reserve Intraday Credit

The Board's Payment System Risk (PSR) policy governs the use of Federal Reserve Bank intraday credit, also known as daylight overdrafts. A daylight overdraft occurs when an institution's account activity creates a negative balance in the institution's Federal Reserve account at any time in the operating day.11 Daylight overdrafts enable institutions to send payments more freely throughout the day than if institutions were limited strictly by their available funds balance. In 2010, institutions held on average about $1.1 trillion in their Federal Reserve accounts overnight, while the daily value of funds transferred over just the Federal Reserve's funds transfer system was about $2.4 trillion. Institutions held historically high levels of overnight balances at the Reserve Banks in 2010 while demand for daylight overdrafts on average remained historically low.12 In 2010, average daylight overdrafts across the System decreased to about $6 billion from nearly $10 billion in 2009, a decrease of about 35 percent (see figure 1).13 The average level of peak daylight overdrafts, however, increased to almost $60 billion in 2010 from $55 billion in 2009, an increase of about 8 percent.14 In 2010, institutions paid about $6 million in daylight overdraft fees.

Figure 1. Aggregate Daylight Overdrafts, 2008-2010

In preparation for PSR policy changes effective as of March 24, 2011, throughout 2010 the Reserve Banks modified the systems they use to record collateral pledges and to track daylight overdrafts.15 The revisions, in part, allow eligible institutions to collateralize daylight overdrafts and pay no fee for these overdrafts.

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Electronic Access to Reserve Bank Services

The Reserve Banks provide depository institutions with a variety of alternatives for electronically accessing the Banks' financial services payment and information services. These electronic-access solutions are designed to meet the individual connectivity and contingency requirements of depository institution customers. FedLine Direct is a Reserve Bank service that permits unattended computer-to-computer access to the Banks' payment services through dedicated connections. Another service, FedLine Command, offers an unattended, computer-to-computer, batch-file solution for accessing Reserve Bank ACH services at a cost lower than that for FedLine Direct. Yet another service, FedLine Advantage, provides web-based access to the Banks' payment services, while FedLine Web permits access to information services and limited transaction services. In 2010, the Reserve Banks announced the restructuring of their electronic access offerings to better meet depository institutions' need for access options that include certain value-added services.

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Information Technology

In 2010, the Federal Reserve Banks continued to improve the efficiency, effectiveness, and security of information technology (IT) services and operations.

To improve the efficiency and overall quality of operations, major multiyear initiatives were undertaken to consolidate the management and function of the Federal Reserve's help desk, server, and network operations. Significant progress was made, and the overall program met or exceeded its goals for the year.

In addition, Federal Reserve Information Technology (FRIT) continued to lead the Reserve Banks' transition to a more robust information security program, one that is based on guidance from the National Institute of Science and Technology and adapted to the Federal Reserve's environment.16

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Examinations of the Federal Reserve Banks

The Reserve Banks and the consolidated limited liability company (LLC) entities are subject to several levels of audit and review.17 The combined financial statements of the Reserve Banks (see "Federal Reserve Banks Combined Financial Statements" in the "Federal Reserve System Audits" section of this report) as well as the annual financial statements of each of the 12 Banks and the consolidated LLC entities are audited annually by an independent auditing firm retained by the Board of Governors.18 In addition, the Reserve Banks, including the consolidated LLC entities, are subject to oversight by the Board of Governors, which performs its own reviews.

The Reserve Banks use the framework established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to assess their internal controls over financial reporting, including the safeguarding of assets. Within this framework, the management of each Reserve Bank annually provides an assertion letter to its board of directors that confirms adherence to COSO standards. Similarly, each consolidated LLC entity annually provides an assertion letter to the board of directors of the Federal Reserve Bank of New York (the New York Reserve Bank).

In 2010, the Board engaged Deloitte & Touche LLP (D&T) to audit the combined and individual financial statements of the Reserve Banks and those of the consolidated LLC entities. In 2010, D&T also conducted audits of internal controls over financial reporting for each of the Reserve Banks and the four consolidated LLC entities that remained in operation at December 31, 2010.19 Fees for D&T's services totaled $8 million, of which $2 million was for the audits of the consolidated LLC entities. To ensure auditor independence, the Board requires that D&T be independent in all matters relating to the audits. Specifically, D&T may not perform services for the Reserve Banks or others that would place it in a position of auditing its own work, making management decisions on behalf of the Reserve Banks, or in any other way impairing its audit independence.

The Board's reviews of the Reserve Banks includes a wide range of off-site and on-site oversight activities, conducted primarily by the Division of Reserve Bank Operations and Payment Systems. Division personnel monitor the activities of each Bank and consolidated LLC entity on an ongoing basis and conduct a comprehensive on-site review of each Bank at least once every three years.

The reviews also include an assessment of the internal audit function's conformance to International Standards for the Professional Practice of Internal Auditing, conformance to applicable policies and procedures, and the audit department's efficiency.

To assess compliance with the policies established by the Federal Reserve's Federal Open Market Committee (FOMC), the division also reviews the accounts and holdings of the System Open Market Account (SOMA) at the New York Reserve Bank and the foreign currency operations conducted by that Reserve Bank. In addition, D&T audits the year-end schedule of participated asset and liability accounts and the related schedule of participated income accounts. The FOMC receives the external audit reports and a report on the division's examination.

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Income and Expenses

Table 4 summarizes the income, expenses, and distributions of net earnings of the Reserve Banks for 2010 and 2009. Income in 2010 was $79,301 million, compared with $54,463 million in 2009.

Table 4. Income, Expenses, and Distribution of Net Earnings of the Federal Reserve Banks, 2010 and 2009
Millions of dollars
Item 2010 2009
Current income 79,301 54,463
Current expenses 6,270 5,979
Operating expenses 1 3,489 3,694
Interest paid to depository institutions and earnings credits granted 2,687 2,187
Interest expense on securities sold under agreements to repurchase 94 98
Current net income 73,031 48,484
Net additions to (deductions from) current net income 9,746 4,820
Profit on sales of federal agency and government-sponsored enterprise mortgage-backed securities 782 879
Profit on foreign exchange transactions 554 172
Net income (loss) from consolidated LLCs 7,560 5,588
Provisions for loan restructuring 2 0 -2,621
Other additions 3 850 802
Assessments by the Board of Governors 1,088 888
For Board expenditures 422 386
For currency costs 623 502
For Consumer Financial Protection Bureau and Office of Financial Research costs 4 43 0
Change in funded status of benefit plans 46 1,007
Comprehensive income before distributions to Treasury 81,735 53,423
Dividends paid 1,583 1,428
Transferred to surplus and change in accumulated other comprehensive income 884 4,564
Distributions to U.S. Treasury 5 79,268 47,431

1. Includes a net periodic pension expense of $529 million in 2010 and $663 million in 2009. Return to table

2. Represents the economic effect of the interest rate reduction made pursuant to the April 17, 2009, restructuring of the American International Group, Inc. loan. Return to table

3. Includes dividends on preferred securities, unrealized gain (loss) on Term Asset-Backed Securities Loan Facility loans, and compensation paid by Citigroup, Inc. and Bank of America Corporation for the New York Reserve Bank's and Richmond Reserve Bank's commitments to provide funding support, net of related expenses. Return to table

4. The Board of Governors assesses the Reserve Banks to fund the operations of the Consumer Financial Protection Bureau and, for a two-year period, the Office of Financial Research. Return to table

5. Interest on Federal Reserve notes. Return to table

Expenses totaled $7,358 million: $3,489 million in operating expenses, $2,687 million in interest paid to depository institutions on reserve balances and earnings credits granted to depository institutions, $94 million in interest expense on securities sold under agreements to repurchase, $422 million in assessments for Board of Governors expenditures, $623 million for new currency costs, and $43 million for Consumer Financial Protection Bureau and Office of Financial Research costs. Net additions to and deductions from current net income showed a net profit of $9,746 million, which consists of $782 million in realized gains on federal agency and government-sponsored enterprise mortgage-backed securities (GSE MBS), $7,560 million in net income associated with consolidated LLCs, $850 million of other additions, and $554 million in unrealized gains on investments denominated in foreign currencies revalued to reflect current market exchange rates. Dividends paid to member banks, set at 6 percent of paid-in capital by section 7(1) of the Federal Reserve Act, totaled $1,583 million, $155 million more than in 2009; this reflects an increase in the capital and surplus of member banks and a consequent increase in the paid-in capital stock of the Reserve Banks.

Distributions to the U.S. Treasury in the form of interest on Federal Reserve notes totaled $79,268 million in 2010, up from $47,431 million in 2009; the distributions equal net income after the deduction of dividends paid and the amount necessary to equate the Reserve Banks' surplus to paid-in capital.

The " Statistical Tables" section of this report provides more detailed information on the Reserve Banks and the LLCs. Table 9 is a statement of condition for each Reserve Bank; table 10 details the income and expenses of each Reserve Bank for 2010; table 11 shows a condensed statement for each Reserve Bank for the years 1914 through 2010; and table 13 gives the number and annual salaries of officers and employees for each Reserve Bank. A detailed account of the assessments and expenditures of the Board of Governors appears in the Board of Governors Financial Statements (see "Federal Reserve System Audits").

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SOMA Holdings and Loans

The Reserve Banks' average net daily holdings of securities and loans during 2010 amounted to $2,123,773 million, an increase of $344,327 million from 2009 (see table 5).20

Table 5. System Open Market Account (SOMA) Holdings and Loans of the
Federal Reserve Banks, 2010 and 2009
Millions of dollars except as noted
Item Average daily assets (+)/liabilities (-) Current income (+)/expense (-) Average interest rate (percent)
2010 2009 2010 2009 2010 2009
U.S. Treasury securities 1 837,078 659,483 26,373 22,873 3.15 3.47
Government-sponsored enterprise debt securities 1 166,810 98,093 3,510 2,048 2.10 2.09
Federal agency and government-sponsored enterprise mortgage-backed securities 2 1,079,230 473,855 44,839 20,407 4.15 4.31
Foreign currency denominated assets 3 24,936 24,898 223 296 0.89 1.19
Central bank liquidity swaps 4 989 177,688 12 2,168 1.21 1.22
Securities purchased under agreements to resell ... 3,616 ... 13 0.00 0.36
Other SOMA assets 5 288 458 ... 1 0.00 0.22
Securities sold under agreements to repurchase -58,476 -67,837 -94 -98 0.16 0.14
Other SOMA liabilities 6 -799 -182 ... ... 0.00 0.00
Total SOMA holdings 2,050,056 1,370,072 74,863 47,708 3.65 3.48
Primary, secondary. and seasonal credit 4,709 40,405 32 204 0.68 0.50
Term auction credit 7,105 291,487 18 786 0.25 0.27
Total loans to depository institutions 11,814 332,892 50 990 0.42 0.30
Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) ... 7,653 ... 73 ... 0.95
Primary Dealer Credit Facility (PDCF) and other broker-dealer credit ... 7,502 ... 36 ... 0.48
Credit extended to American International Group, Inc. (AIG), net 7 22,874 39,099 2,728 3,996 11.93 10.22
Term Asset-Backed Securities Loan Facility (TALF) 8 39,029 23,228 750 414 1.92 1.78
Total loans to others 61,903 77,482 3,478 4,519 5.62 5.83
Total loans 73,717 409,374 3,528 5,509 1.35 1.35
Total SOMA holding and loans 2,123,773 1,779,446 78,391 53,217 3.69 2.99

1. Face value, net of unamortized premiums and discounts. Return to table

2. Face value of the securities, which is the remaining principal balance of the underlying mortgages, net of unamortized premiums and discounts. Does not include unsettled transactions. Return to table

3. Includes accrued interest. Foreign currency denominated assets are revalued daily at market exchange rates. Return to table

4. Dollar value of foreign currency held under these agreements valued at the exchange rate to be used when the foreign currency is returned to the foreign central bank. This exchange rate equals the market exchange rate used when the foreign currency was acquired from the foreign central bank. Return to table

5. Cash and short-term investments related to the federal agency and government-sponsored enterprise mortgage-backed securities portfolio. Return to table

6. Related to the purchases of federal agency and government-sponsored enterprise mortgage-backed securities that the seller fails to deliver on the settlement date. Return to table

7. Average daily balance includes outstanding principal and capitalized interest net of unamortized deferred commitment fees and allowance for loan restructuring, and excludes undrawn amounts and credit extended to consolidated limited liability companies. Return to table

8. Represents the remaining principal balance. Excludes amount necessary to adjust TALF loans to fair value at December 31, which is reported in "Other assets" in the Statement of Condition of the Federal Reserve Banks in Table 9A in the "Statistical Tables" section of this report. Return to table

... Not applicable.

SOMA Securities Holdings

The average daily holdings of Treasury securities increased by $177,595 million, to an average daily amount of $837,078 million. The average daily holdings of GSE debt securities increased by $68,717 million, to an average daily amount of $166,810 million. The average daily holdings of federal agency and GSE MBS increased by $605,375 million, to an average daily amount of $1,079,230 million.

These increases are due to the purchase of Treasury securities, GSE debt securities, and federal agency and GSE MBS through a large-scale asset purchase program. There were no holdings of securities purchased under agreements to resell in 2010, compared with average daily holdings of $3,616 million in similar purchases from 2009; the average daily balance of securities sold under agreements to repurchase was $58,476 million, a decrease of $9,361 million from 2009. Average daily holdings of foreign currency denominated assets in 2010 were $24,936 million, compared with $24,898 million in 2009. The average daily balance of central bank liquidity swap drawings was $989 million in 2010 and $177,688 million in 2009.

The average rates of interest earned on the Reserve Banks' holdings of Treasury securities decreased to 3.15 percent and the average rates on GSE debt securities increased to 2.10 percent in 2010. The average rate of interest earned on federal agency and GSE MBS decreased to 4.15 percent in 2010. The average interest rates for securities sold under agreements to repurchase increased to 0.16 percent in 2010. The average rates of interest earned on foreign currency denominated assets and central bank liquidity swaps decreased to 0.89 percent and 1.21 percent, respectively, in 2010.

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Lending

In 2010, average daily primary, secondary, and seasonal credit extended decreased by $35,696 million to $4,709 million, and average daily term auction credit extended under the Term Auction Facility decreased $284,382 million to $7,105 million. The average rate of interest earned on primary, secondary, and seasonal credit increased to 0.68 percent in 2010, from 0.50 percent in 2009, while the average interest rate on term auction credit decreased to 0.25 percent in 2010, from 0.27 percent in 2009.

The average daily balance of credit extended to the American International Group, Inc. (AIG) in 2010 was $22,874 million; this balance earned interest at an average rate of 11.93 percent. On January 14, 2011, all outstanding draws under the AIG revolving line of credit and the related accrued interest, capitalized interest, and capitalized commitment fees were paid in full as a result of the closing of the AIG recapitalization plan.21

The average daily balance of Term Asset-Backed Securities Loan Facility (TALF) loans in 2010 was $39,029 million, which earned interest at an average rate of 1.92 percent. The Board of Governors' authorization for the extension of new TALF loans expired in 2010. The authorization for TALF loans collateralized by newly-issued asset-backed securities (ABS) and legacy commercial mortgage-backed securities (CMBS) expired March 31 and TALF loans collateralized by newly issued CMBS expired June 30.

The authorization to lend under the Primary Dealer Credit Facility and the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility expired on February 10, 2010. There were no balances outstanding under these facilities during 2010.

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Investments of the Consolidated LLCs

Additional lending facilities established during 2008 and 2009, under authority of section 13(3) of the Federal Reserve Act, involved creating and lending to the consolidated LLC entities (see table 6). Consistent with generally accepted accounting principles, the assets and liabilities of these LLCs have been consolidated with the assets and liabilities of the New York Reserve Bank in the preparation of the statements of condition included in this report.22 The proceeds at the maturity or the liquidation of the consolidated LLCs' assets will be used to repay the loans extended by the New York Reserve Bank.

Table 6. Key financial data for Consolidated Limited Liability Companies, 2010 and 2009
Millions of dollars
Item Commercial Paper Funding Facility LLC (CPFF) 1 TALF LLC 1 Maiden Lane LLC 1 Maiden Lane II LLC 1 Maiden Lane III LLC 1 Total LLCs
2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009
Net portfolio assets of the consolidated LLCs and the net position of the New York Reserve Bank (FRBNY) and subordinated interest holders
Net portfolio assets 2 ... 14,233 665 298 27,961 28,140 16,457 15,912 23,583 22,797 68,666 81,380
Liabilities of consolidated LLCs ... -173 0 0 -915 -1,137 -2 -2 -4 -3 -921 -1,315
Net portfolio assets available 3 ... 14,060 665 298 27,046 27,003 16,455 15,910 23,579 22,794 67,745 80,065
Loans extended to the consolidated LLCs by the FRBNY 4 ... 9,379 0 0 25,845 29,233 13,485 16,005 14,071 18,500 53,401 73,117
Other beneficial interests 45 ... ... 106 102 1,315 1,248 1,071 1,037 5,366 5,193 7,858 7,580
Total loans and other beneficial interests ... 9,379 106 102 27,160 30,481 14,556 17,042 19,437 23,693 61,259 80,697
Cumulative change in net assets since the inception of the program 6
Allocated to FRBNY ... 4,681 -65 20 0 -2,230 1,582 -95 2,775 0 4,292 2,654
Allocated to other beneficial interests ... ... 624 176 -114 -1,248 317 -1,037 1,367 -899 2,194 -3,184
Cumulative change in net assets ... 4,681 559 196 -114 -3,478 1,899 -1,366 4,142 -899 6,486 -530
Summary of consolidated LLC net income, including a reconciliation of total consolidated LLC net income to the consolidated LLC net income recorded by FRBNY
Portfolio interest income 7 213 4,224 1 0 1,133 1,476 794 1,088 2,299 3,032 4,440 9,820
Interest expense on loans extended by FRBNY 8 -4 -598 0 0 -205 -146 -186 -238 -204 -296 -599 -1,278
Interest expense-other 0 0 -4 -2 -66 -61 -34 -33 -173 -171 -277 -267
Portfolio holdings gains (losses) 1 8 0 0 2,571 -102 2,467 -604 3,141 -1,239 8,180 -1,937
Professional fees -2 -30 -1 -1 -69 -55 -10 -12 -22 -27 -104 -125
Net income (loss) of consolidated LLCs 208 3,604 -4 -3 3,364 1,112 3,031 201 5,041 1,299 11,640 6,213
Less: Net income (loss) allocated to other beneficial interests ... ... -75 699 1,135 -61 1,353 -34 2,266 1,299 4,679 1,903
Net income (loss) allocated to FRBNY 208 3,604 71 -702 2,229 1,173 1,678 235 2,775 0 6,961 4,310
Add: Interest expense on loans extended by FRBNY, eliminated in consolidation 4 598 0 0 205 146 186 238 204 296 599 1,278
Net income (loss) recorded by FRBNY 212 4,202 71 9 (702) 2,434 1,319 1,864 473 2,979 296 7,560 5,588

1. CPFF LLC was formed to provide liquidity to the commercial paper market. The last commercial paper purchases by the CPFF matured on April 26, 2010, and the CPFF was dissolved on August 30, 2010. TALF LLC was formed in 2009 to purchase assets of the Term Asset-Backed Securities Loan Facility, which was formed to improve market conditions for asset-backed securities. Maiden Lane LLC was formed to acquire certain assets of Bear Stearns; Maiden Lane II LLC and Maiden Lane III LLC were formed to acquire certain assets of AIG and its subsidiaries. Return to table

2. TALF, Maiden Lane, Maiden Lane II, and Maiden Lane III holdings are recorded at fair value. Fair value reflects an estimate of the price that would be received upon selling an asset if the transaction were to be conducted in an orderly market on the measurement date. CPFF holdings are recorded at book value, which includes amortized cost and related fees. Return to table

3. Represents the net assets available for repayment of loans extended by FRBNY and "other beneficiaries" of the consolidated LLCs. Return to table

4. Book value. Includes accrued interest. Return to table

5. The other beneficial interest holders are the U.S. Treasury for TALF LLC, JPMorgan Chase for Maiden Lane LLC, and AIG for Maiden Lane II LLC and Maiden Lane III LLC. Return to table

6. Represents the allocation of the change in net assets and liabilities of the consolidated LLCs that are available for repayment of the loans extended by FRBNY and the other beneficiaries of the consolidated LLCs. The differences between the fair value of the net assets available and the face value of the loans (including accrued interest) are indicative of gains or losses that would be incurred by the beneficiaries if the assets had been fully liquidated at prices equal to the fair value. Return to table

7. Interest income is recorded when earned and includes amortization of premiums, accretion of discounts, and paydown gains and losses. Return to table

8. Interest expense recorded by each consolidated LLC on the loans extended by FRBNY is eliminated when the LLCs are consolidated in FRBNY's financial statements and, as a result, the consolidated LLCs' net income (loss) recorded by FRBNY is increased by this amount. Return to table

9. FRBNY earned $327 million on TALF loans during the year ended December 31, 2010, in addition to the net income attributable to TALF LLC. Earnings on TALF loans include interest income of $750 million, loss on the valuation of loans of $436 million, and administrative fees of $13 million. Return to table

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Federal Reserve Bank Premises

Several Reserve Banks took action in 2010 to upgrade and refurbish their facilities. The multiyear renovation programs at the New York and St. Louis Reserve Banks' headquarters buildings continued. The New York Reserve Bank completed a program to enhance the business resiliency of its IT systems and to upgrade facility support for the Bank's open market operations, central bank services, and data center operations.

Security-enhancement programs continued at several facilities, including the construction of a remote vehicle-screening facility for the Dallas Reserve Bank, and the design of main entrance lobby security improvements for the Chicago and Dallas Reserve Banks' headquarters buildings.

Additionally, the San Francisco Reserve Bank continued its efforts to sell the former Seattle Branch building.

For more information on the acquisition costs and net book value of the Federal Reserve Banks and Branches, see table 14in the "Statistical Tables"section of this report.

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Pro Forma Financial Statements for
Federal Reserve Priced Services

Table 7: Pro Forma Balance Sheet for Federal Reserve Priced Services, December 31, 2010 and 2009
Millions of dollars
Item 2010 2009
Short-term assets (Note 1)
Imputed reserve requirements on clearing balances 248.8 317.4
Imputed investments 3,463.4 4,112.9
Receivables 45.6 49.8
Materials and supplies 1.2 1.5
Prepaid expenses 17.2 19.4
Items in process of collection 374.5

449.7

Total short-term assets 4,150.6 4,950.7
Long-term assets (Note 2)
Premises 245.3 346.3
Furniture and equipment 57.3 81.4
Leases, leasehold improvements, and long-term prepayments 65.6 76.3
Prepaid pension costs 354.7 77.1
Prepaid FDIC asset 25.0 31.2
Deferred tax asset 132.4

231.4

Total long-term assets 880.2

843.7

Total assets 5,030.8 5,794.5
Short-term liabilities
Clearing balances and balances 2,487.6 3,173.6
Deferred-availability items 1,814.7 1,728.3
Short-term debt 0.0 0.0
Short-term payables 43.6

146.9

Total short-term liabilities 4,345.9 5,048.8
Long-term liabilities
Long-term debt 0.0 0.0
Accrued benefit costs 392.3

436.8

Total long-term liabilities 392.3

436.8

Total liabilities 4,738.2 5,485.5
Equity (including accumulated other comprehensive loss of $267.6 million and $478.3 million at December 31, 2010 and 2009, respectively) 292.6

309.0

Total liabilities and equity (Note 3) 5,030.8 5,794.5

Note: Components may not sum to totals because of rounding. The accompanying notes are an integral part of these pro forma priced services financial statements.

Table 8: Pro Forma Income Statement for Federal Reserve Priced Services, 2010 and 2009
Millions of dollars
Item 2010 2009
Revenue from services provided to depository institutions (Note 4) 566.7 662.7
Operating expenses (Note 5) 503.9

713.8

Income from operations 62.9 -51.1
Imputed costs (Note 6)
Interest on float -3.2 -3.2
Interest on debt 0.0 0.0
Sales taxes 5.1 9.1
FDIC Insurance 6.3

8.2

3.4

9.2

Income from operations after imputed costs 54.6 -60.3
Other income and expenses (Note 7)
Investment income 10.7 16.6
Earnings credits -2.7

7.9

-3.9

12.7

Income before income taxes 62.5 -47.6
Imputed income taxes (Note 6) 20.7

-15.5

Net income 41.8 -32.1
Memo: Targeted return on equity (Note 6) 13.1 19.9

Note: Components may not sum to totals because of rounding. The accompanying notes are an integral part of these pro forma priced services financial statements.

Table 9: Pro Forma Income Statement for Federal Reserve Priced Services, by Service, 2010
Millions of dollars
Item Total Commercial check collection Commercial ACH Fedwire funds Fedwire securities
Revenue from services (Note 4) 566.7 353.6 109.9 79.1 24.1
Operating expenses (Note 5) 503.9

306.5

100.1

75.1

22.1

Income from operations 62.9 47.0 9.8 4.0 2.0
Imputed costs (Note 6) 8.2

4.2

2.0

1.6

0.5

Income from operations after imputed costs 54.6 42.9 7.9 2.4 1.5
Other income and expenses, net (Note 7) 7.9

4.9

1.6

1.2

0.4

Income before income taxes 62.5 47.7 9.4 3.5 1.8
Imputed income taxes (Note 6) 20.7

15.8

3.1

1.2

0.6

Net income 41.8 31.9 6.3 2.4 1.2
Memo: Targeted return on equity (Note 6) 13.1 8.1 2.6 1.9 0.6
Cost recovery (percent) (Note 8) 105.3 107.1 103.4 100.6 102.8

Note: Components may not sum to totals because of rounding. The accompanying notes are an integral part of these pro forma priced services financial statements.

Notes to Pro Forma Financial Statements for Priced Services

(1) Short-Term Assets

The imputed reserve requirement on clearing balances held at Reserve Banks by depository institutions reflects a treatment comparable to that of compensating balances held at correspondent banks by respondent institutions. The reserve requirement imposed on respondent balances must be held as vault cash or as balances maintained at a Reserve Bank; thus, a portion of priced services clearing balances held with the Federal Reserve is shown as required reserves on the asset side of the balance sheet. Another portion of the clearing balances is used to finance short-term and long-term assets. The remainder of clearing balances and deposit balances arising from float are assumed to be invested in a portfolio of investments, shown as imputed investments.

Receivables are composed of fees due the Reserve Banks for providing priced services and the share of suspense-account and difference-account balances related to priced services.

Materials and supplies are the inventory value of short-term assets.

Prepaid expenses include salary advances and travel advances for priced-service personnel.

Items in process of collection are gross Federal Reserve cash items in process of collection (CIPC), stated on a basis comparable to that of a commercial bank. They reflect adjustments for intra-System items that would otherwise be double-counted on a consolidated Federal Reserve balance sheet; adjustments for items associated with nonpriced items (such as those collected for government agencies); and adjustments for items associated with providing fixed availability or credit before items are received and processed. Among the costs to be recovered under the Monetary Control Act is the cost of float, or net CIPC during the period (the difference between gross CIPC and deferred-availability items, which is the portion of gross CIPC that involves a financing cost), valued at the federal funds rate.

(2) Long-Term Assets

Long-term assets consist of long-term assets used solely in priced services, the priced-service portion of long-term assets shared with nonpriced services, an estimate of the assets of the Board of Governors used in the development of priced services, an imputed prepaid FDIC asset (see note 6), and a deferred tax asset related to the priced services pension and postretirement benefits obligation (see note 3).

(3) Liabilities and Equity

Under the matched-book capital structure for assets, short-term assets are financed with short-term payables and clearing balances. Long-term assets are financed with long-term liabilities and core clearing balances. As a result, no short- or long-term debt is imputed. Other short-term liabilities include clearing balances maintained at Reserve Banks. Other long-term liabilities consist of accrued postemployment, postretirement, and qualified and nonqualified pension benefits costs and obligations on capital leases.

Effective December 31, 2006, the Reserve Banks implemented the Financial Accounting Standard Board's (FASB) Statement of Financial Accounting Standards (SFAS) No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans (codified in FASB Accounting Standards Codification (ASC) Topic 715 (ASC 715), Compensation-Retirement Benefits), which requires an employer to record the funded status of its benefit plans on its balance sheet. In order to reflect the funded status of its benefit plans, the Reserve Banks recognized the deferred items related to these plans, which include prior service costs and actuarial gains or losses, on the balance sheet. This resulted in an adjustment to the pension and benefit plans related to priced services and the recognition of an associated deferred tax asset with an offsetting adjustment, net of tax, to accumulated other comprehensive income (AOCI), which is included in equity. The Reserve Bank priced services recognized a net pension asset in 2010 and 2009. The increase in the funded status resulted in a corresponding decrease in accumulated other comprehensive loss of ($210.7) million in 2010.

To satisfy the FDIC requirements for a well-capitalized institution, equity is imputed at 10 percent of total risk-weighted assets.

(4) Revenue

Revenue represents fees charged to depository institutions for priced services and is realized from each institution through one of two methods: direct charges to an institution's account or charges against its accumulated earnings credits (see note 7).

(5) Operating Expenses

Operating expenses consist of the direct, indirect, and other general administrative expenses of the Reserve Banks for priced services plus the expenses of the Board of Governors related to the development of priced services. Board expenses were $7.2 million in 2010 and $7.8 million in 2009.

Effective January 1, 1987, the Reserve Banks implemented SFAS No. 87, Employers' Accounting for Pensions (codified in ASC 715). Accordingly, the Reserve Bank priced services recognized qualified pension-plan operating expenses of $53.8 million in 2010 and $121.2 million in 2009. Operating expenses also include the nonqualified pension expense of $4.4 million in 2010 and $2.3 million in 2009. The implementation of SFAS No. 158 (ASC 715) does not change the systematic approach required by generally accepted accounting principles to recognize the expenses associated with the Reserve Banks' benefit plans in the income statement. As a result, these expenses do not include amounts related to changes in the funded status of the Reserve Banks' benefit plans, which are reflected in AOCI (see note 3).

The income statement by service reflects revenue, operating expenses, imputed costs, other income and expenses, and cost recovery. Certain corporate overhead costs not closely related to any particular priced service are allocated to priced services based on an expense-ratio method. Corporate overhead was allocated among the priced services during 2010 and 2009 as follows (in millions):

2010 2009
Check 14.6 22.0
ACH 5.5 5.0
Fedwire funds 3.9 3.3
Fedwire securities 1.9

1.8

Total 25.9 32.1
(6) Imputed Costs

Imputed costs consist of income taxes, return on equity, interest on debt, sales taxes, an FDIC assessment, and interest on float. Many imputed costs are derived from the private-sector adjustment factor (PSAF) model. The cost of debt and the effective tax rate are derived from bank holding company data, which serve as the proxy for the financial data of a representative private-sector firm, and are used to impute debt and income taxes in the PSAF model. The after-tax rate of return on equity is based on the returns of the equity market as a whole and is applied to the equity on the balance sheet to impute the profit that would have been earned had the services been provided by a private-sector firm. On October 9, 2008, the Federal Reserve began paying interest on required reserve and excess balances held by depository institutions at Reserve Banks as authorized by the Emergency Economic Stabilization Act of 2008. Beginning in 2009, given the uncertain long-term effect that payment of interest on reserve balances would have on the level of clearing balances, the equity used to determine the imputed profit has been adjusted to reflect the actual clearing balance levels maintained; previously, projections of clearing balance levels were used.

Interest is imputed on the debt assumed necessary to finance priced-service assets; however, no debt was imputed in 2010 or 2009.

Effective in 2007, the Reserve Bank priced services imputed a one-time FDIC assessment credit. In 2009, the credit offset $8.0 million of the imputed $11.4 million assessment, resulting in zero remaining credit. The imputed FDIC assessment also reflects the increased rates and new assessment calculation methodology approved in 2009, which resulted in a prepaid FDIC asset of $25.0 million in 2010 and $31.2 million in 2009 on the priced services balance sheet.

Interest on float is derived from the value of float to be recovered, either explicitly or through per-item fees, during the period. Float costs include costs for the Check, Fedwire Funds, ACH, and Fedwire Securities services.

Float cost or income is based on the actual float incurred for each priced service. Other imputed costs are allocated among priced services according to the ratio of operating expenses, less shipping expenses, for each service to the total expenses, less the total shipping expenses, for all services.

The following shows the daily average recovery of actual float by the Reserve Banks for 2010 in millions of dollars:

Total float -1,795.1
Unrecovered float 1.4
Float subject to recovery -1,796.5
Sources of recovery of float
As-of adjustments 0.6
Direct charges 4.7
Per-item fees -1,801.8

Unrecovered float includes float generated by services to government agencies and by other central bank services. As-of adjustments and direct charges refer to float that is created by the observance of nonstandard holidays by some depository institutions. Such float may be recovered from the depository institutions through adjustments to institution reserve or clearing balances or by billing institutions directly. Float recovered through direct charges and per-item fees is valued at the federal funds rate; credit float recovered through per-item fees has been subtracted from the cost base subject to recovery in 2010 and 2009.

(7) Other Income and Expenses

Other income and expenses consist of investment and interest income on clearing balances and the cost of earnings credits. Investment income on clearing balances for 2010 and 2009 represents the average coupon-equivalent yield on three-month Treasury bills plus a constant spread, based on the return on a portfolio of investments. The investment return is applied to the required portion of the clearing balance. Other income also includes imputed interest on the portion of clearing balances set aside as required reserves. Expenses for earnings credits granted to depository institutions on their clearing balances are based on a discounted average coupon-equivalent yield on three-month Treasury bills.

(8) Cost Recovery

Annual cost recovery is the ratio of revenue, including other income, to the sum of operating expenses, imputed costs, imputed income taxes, and targeted return on equity.

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1. Financial data reported throughout this chapter--including revenue, other income, costs, income before taxes, and net income--can be linked to the pro forma financial statements found at the close of this section. Return to text

2. In addition to income taxes and the return on equity, the PSAF includes three other imputed costs: interest on debt, sales taxes, and an assessment for deposit insurance by the Federal Deposit Insurance Corporation (FDIC). Board of Governors assets and costs that are related to priced services are also allocated to priced services; in the pro forma financial statements at the end of this chapter, Board assets are part of long-term assets, and Board expenses are included in operating expenses. Return to text

3. Effective December 31, 2006, the Reserve Banks implemented the Financial Accounting Standards Board's Statement of Financial Accounting Standards (SFAS) No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans [Accounting Standards Codification (ASC) Topic 715 (ASC 715), Compensation-Retirement Benefits], which has resulted in the recognition of a $267.6 million reduction in equity related to the priced services' benefit plans through 2010. Including this reduction in equity, which represents a decline in economic value, results in cost recovery of 95.1 percent for the 10-year period. For details on how implementing ASC 715 affected the pro forma financial statements, refer to notes 3 and 5 to the "Pro Forma Financial Statements for Federal Reserve Priced Services" at the end of this chapter. Return to text

4. Total cost is the sum of operating expenses, imputed costs (interest on debt, interest on float, sales taxes, and the FDIC assessment), imputed income taxes, and the targeted return on equity. Return to text

5. Other income is investment income earned on clearing balances net of the cost of earnings credits, an amount termed net income on clearing balances. Return to text

6. In 2008, the Reserve Banks discontinued the transportation of commercial checks between their check-processing offices. As a result, in 2010, there were no costs or imputed revenues associated with the transportation of commercial checks between Reserve Bank check-processing offices. Return to text

7. The Federal Reserve System's retail payments research suggests that the number of checks written in the United States has been declining since the mid-1990s. For details, see Federal Reserve System, "The 2010 Federal Reserve Payments Study: Noncash Payment Trends in the United States, 2006-2009" (December 2010), www.frbservices.org/files/communications/pdf/press/2010_payments_study.pdf Leaving the Board . Return to text

8. The Check Clearing for the 21st Century Act (Check 21), which became effective in 2004, was designed to foster innovation in payment systems and to enhance efficiency by reducing some of the legal impediments to check truncation. The law facilitates check truncation by creating a new negotiable instrument called a substitute check, which permits banks to truncate original checks, to process check information electronically, and to deliver substitute checks to banks that want to continue receiving paper checks.

The Reserve Banks also offer non-Check 21 electronic-presentment products. In 2010, 0.3 percent of Reserve Banks' deposit volume was presented to paying banks using these products.

Return to text

9. The expenses, revenues, volumes, and fees reported here are for transfers of securities issued by federal government agencies, government-sponsored enterprises, and certain international organizations. Reserve Banks provide Treasury securities services in their role as the U.S. Treasury's fiscal agent. These services are not considered priced services. For details, see "Treasury Securities Service,". Return to text

10. Credit float occurs when the Reserve Banks present items for collection to the paying bank prior to providing credit to the depositing bank (debit float occurs when the Reserve Banks credit the depositing bank prior to presenting items for collection to the paying bank). Return to text

11. When an institution ends a day with a negative balance, the institution incurs an overnight overdraft. The Federal Reserve strongly discourages overnight overdrafts by imposing penalties and taking administrative action against institutions that incur overnight overdrafts. Institutions that require overnight credit are encouraged to approach the Federal Reserve's discount window to borrow funds as necessary. Return to text

12. The decision to pay interest on reserve balances, implemented October 2008, likely contributed significantly to the increase in overnight balances and the subsequent reduction in daylight overdrafts. For example, in 2007, average overnight balances held at the Reserve Banks were $15 billion and average daylight overdrafts were $60 billion. Return to text

13. Average daylight overdrafts are calculated daily by summing all negative balances incurred by institutions across the Federal Reserve System for each minute of the Fedwire operating day (9 p.m. to 6:30 p.m. ET, or 21.5 hours). This sum is then divided by the number of minutes in the day (1,291 minutes) to arrive at the average overdraft. Return to text

14. Peak overdrafts are calculated daily by summing the negative balances of all institutions on a minute-by-minute basis throughout the Fedwire operating day. The most negative of these minute-by-minute balances is the peak overdraft. Return to text

15. Details about the revisions to the PSR policy are available at www.federalreserve.gov/newsevents/press/other/20081219a.htm, and the policy that became effective on March 24, 2011, is available at www.federalreserve.gov/paymentsystems/psr_policy.htm. Return to text

16. FRIT supplies national infrastructure and business line technology services to the Federal Reserve Banks and provides thought leadership regarding the System information technology architecture and business use of technology. The National Institute of Science and Technology is a nonregulatory federal agency within the U.S. Department of Commerce. Return to text

17. The consolidated LLCs were funded by the New York Reserve Bank, and acquired financial assets and financial liabilities pursuant to the policy objectives. The consolidated LLCs were determined to be variable interest entities, and the New York Reserve Bank is considered to be the controlling financial interest holder of each. Return to text

18. Each LLC reimburses the Board of Governors--from the entity's available net assets--for the fees related to the audit of its financial statements. Return to text

19. The financial statements of the Commercial Paper Funding Facility LLC (CPFF), which were released on August 17, 2010, did not include an audit of internal controls over financial reporting. Return to text

20. Open market operations (OMOs)--the purchase and sale of securities in the open market by a central bank--are a key tool used by the Federal Reserve in the implementation of monetary policy. The System Open Market Account (SOMA) is the Federal Reserve's portfolio of securities held for the purpose of these purchases and sales. Return to text

21. On September 30, 2010, AIG announced an agreement with the U.S. Department of the Treasury, the Federal Reserve Bank of New York and the trustees of the AIG Credit Facility Trust on a recapitalization plan designed to accelerate repayment of its obligations to American taxpayers. The plan resulted in the full repayment and termination of the Reserve Bank's AIG credit facility. Return to text

22. The consolidation of the variable interest entities (VIEs) was assessed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 810 (ASC 810) Consolidation, which requires a VIE to be consolidated by its controlling financial interest holder. A Reserve Bank consolidates a VIE if it has a controlling financial interest, which is defined as the power to direct the significant economic activities of the entity and the obligation to absorb losses or the right to receive benefits of the entity that could potentially be significant to the VIE. To determine whether it is the controlling financial interest holder of a VIE, the Reserve Bank evaluates the VIE's design, capital structure, and relationships with the variable interest holders. As a consequence of the consolidation, the extensions of credit from the New York Reserve Bank to the consolidated LLCs are eliminated, the net assets of the consolidated LLCs appear as assets in table 9 in the "Statistical Tables" section of this report, and the liabilities of the consolidated LLCs to entities other than the New York Reserve Bank, including those with recourse only to the portfolio holdings of the consolidated LLCs, are included in "Other liabilities" in statistical table 9A. Return to text

Last update: July 5, 2011