Board of Governors of the Federal Reserve System

Payment System and Reserve Bank Oversight

The Federal Reserve performs key functions to maintain the integrity of the U.S. payment and settlement system. These functions help keep cash, check, and electronic transactions moving reliably through the U.S. economy on behalf of households and businesses and the U.S. Treasury.

This section discusses the key payment system and Reserve Bank oversight activities undertaken by the Federal Reserve during 2020:

• providing payment services to depository and certain other institutions
• distributing the nation's currency and coin to depository institutions (also see figure 5.1)
• serving as fiscal agents and depositories for the U.S. government and other entities
• serving as a catalyst for payment system improvements
• conducting Reserve Bank oversight to ensure effective internal controls, operations, and management

Payment Services to Depository and Other Institutions

Reserve Banks provide a range of payment and related services to depository and certain other institutions; these "priced services" include collecting checks, operating an automated clearinghouse (ACH) service, transferring funds and securities, and providing a multilateral settlement service (see box 5.1).¹

Commercial Check-Collection Service

The commercial check-collection service provides a suite of electronic and paper processing options for forward and return collections.

In 2020, the Reserve Banks recovered 103.2 percent of the total costs of their commercial check-collection service, including the related private-sector adjustment factor (PSAF) (see box 5.1). Revenue from operations totaled $113.9 million, resulting in net income of $4.8 million. The Reserve Banks' operating expenses and imputed costs totaled $109.4 million. Reserve Banks handled 3.8 billion checks in 2020, a decrease of 14.2 percent from 2019 (see table 5.1). The average daily value of checks collected by the Reserve Banks in 2020 was approximately $30.8 billion, a decrease of 7.2 percent from the previous year.

Table 5.1. Activity in Federal Reserve priced services, 2018–20

Commercial Automated Clearinghouse Service

The commercial ACH service provides domestic and cross-border batched payment options for same-day and next-day settlement.

In 2020, the Reserve Banks recovered 97.5 percent of the total costs of their commercial ACH services, including the related PSAF. Revenue from operations totaled $159.1 million, resulting in a net loss of $2.1 million. The FedACH® Service did not achieve full cost recovery because of investment costs associated with the multiyear technology initiative to modernize its processing platform, which was recently implemented. The Reserve Banks' operating expenses and imputed costs totaled $161.5 million. The Reserve Banks processed 16.5 billion commercial ACH transactions in 2020, an increase of 6.2 percent from 2019 (see table 5.1). The average daily value of FedACH transfers in 2020 was approximately $122.8 billion, an increase of 9.8 percent from the previous year.

FedNow ^SM Service

The FedNow Service is a new real-time gross settlement service that will support nationwide access to instant payments. The Federal Reserve's provision of the FedNow Service will provide core infrastructure to promote ubiquitous, safe, and efficient instant payments in the United States. The development of the FedNow Service is a high priority of the Federal Reserve.

On August 11, 2020, the Federal Reserve published a Federal Register notice on the FedNow Service's features and functionality.² The features and functionality described in the notice represented a key milestone in the FedNow Service's development and were based on input received from the public in response to the Board's 2019 request for comment.³ The build of the core FedNow Service began in 2020 with a technology strategy that blends Federal Reserve resources and external vendors and assesses opportunities to leverage emerging technologies. In addition, the Reserve Banks began work to implement a pilot program in early 2021 to gather input from a wide range of financial institutions and service providers, connection types, settlement arrangements, and experience levels. The pilot program will help the Federal Reserve further define the service and industry readiness strategies, as well as help with testing of the service before general availability.

The FedNow Service will launch in 2023 and will be deployed in phases so that the initial service can be launched expeditiously with additional features and enhancements released in stages after the initial launch. This phased approach will allow for adjustments and improvements in response to industry needs or changes in technology. As the Federal Reserve finalizes the service implementation timeline, information for depository institutions will be available through existing Federal Reserve Bank communication channels.

Fedwire Funds and National Settlement Services

In 2020, the Reserve Banks recovered 105.3 percent of their costs of the Fedwire Funds and National Settlement Service, including the related PSAF. Revenue from operations totaled $144.4 million, resulting in a net income of $9.6 million. The Reserve Banks' operating expenses and imputed costs totaled $135.0 million in 2020.

Fedwire Funds Service

The Fedwire Funds Service allows its participants to send or receive domestic time-critical payments using their balances at Reserve Banks to transfer funds in real time.

From 2019 to 2020, the number of Fedwire funds transfers originated by depository institutions increased 9.8 percent, to approximately 184 million (see table 5.1). The average daily value of Fedwire funds transfers in 2020 was $3.3 trillion, an increase of 19.8 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 their balances at Reserve Banks.

In 2020, the service processed settlement files for 11 local and national private-sector arrangements. The Reserve Banks processed 9,468 files that contained about 551,000 settlement entries (see table 5.1). Settlement file activity in 2020 decreased 2.1 percent from 2019, and settlement entries decreased 1.2 percent. The total value of settlement processed by NSS increased 7.9 percent, to $23.5 trillion.

Fedwire Securities Service

The Fedwire Securities Service allows its participants to transfer electronically to other service participants certain securities issued by the U.S. Department of the Treasury, federal government agencies, government-sponsored enterprises, and certain international organizations.⁴

In 2020, the Reserve Banks recovered 101.1 percent of the costs of their Fedwire Securities Service, including the related PSAF. Revenue from operations totaled approximately $28.8 million, resulting in a net income of $0.7 million. The Reserve Banks' operating expenses and imputed costs totaled $28.1 million in 2020. In 2020, the number of non-Treasury securities transfers processed via the service increased approximately 41.7 percent from 2019, to approximately 4.6 million (see table 5.1). The average daily value of Fedwire Securities priced-service transfers in 2020 was approximately $86.7 billion, an increase of 4.1 percent from the previous year.⁵ The average daily value of Fedwire Securities transfers in 2020 was more than $1.4 trillion, an increase of approximately 3.8 percent from the previous year.

FedLine Solutions: Access to Reserve Bank Services

The Reserve Banks' FedLine Solutions provide depository institutions with a variety of connections for accessing the Reserve Banks' payment and information services.

For priced services, the Reserve Banks charge fees for these connections and allocate the associated costs and revenue to the various services. There are currently six FedLine Solutions through which customers can access the Reserve Banks' priced services: FedMail, FedLine Exchange, FedLine Web, FedLine Advantage, FedLine Command, and FedLine Direct. These FedLine Solutions are designed to meet the individual connectivity, security, and contingency requirements of depository institution customers.

The Reserve Banks continue to focus on increased resiliency and availability of the FedLine Solutions. In 2020, the Reserve Banks advanced the safety and security of FedLine Solutions by making progress on key infrastructure upgrades and network modernization, as well as through proactive monitoring of an evolving threat environment and by strengthening endpoint security policies.

Federal Reserve Intraday Credit

The Federal Reserve Board governs the use of Federal Reserve Bank intraday credit, also known as daylight overdrafts.⁶ 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. Daylight overdrafts enable an institution to send payments more freely throughout the day than if it were limited strictly by its available intraday funds balance, increasing efficiency and reducing payment system risk.

Institutions currently hold historically high levels of overnight balances at the Federal Reserve Banks, while daylight overdrafts remained historically low, as shown in figure 5.2.⁷

Fees collected for daylight overdrafts are also at historically low levels.⁸ Fees as well as the use of intraday credit are expected to remain relatively low given the historically high levels of overnight balances under the ample reserves regime. Additionally, a 2011 policy revision that eliminated fees for collateralized daylight overdrafts has further contributed to the decrease in fees.

Currency and Coin

The Federal Reserve Board issues the nation's currency (in the form of Federal Reserve notes) to 28 Federal Reserve Bank offices. The Reserve Banks, in turn, distribute Federal Reserve notes to depository institutions in response to public demand. Together, the Board and Reserve Banks work to maintain the integrity of and confidence in Federal Reserve notes.

In 2020, the Board paid $783.4 million to the Treasury's Bureau of Engraving and Printing (BEP) for costs associated with the production of 6.4 billion Federal Reserve notes. The volume of Federal Reserve notes issued and outstanding at year-end 2020 totaled 50.3 billion pieces, a 12.2 percent increase from 2019. About 41 percent of this growth was attributable to growth in demand for $20 notes, and an additional 38.9 percent was attributable to growth in demand for $100 notes. In 2020, the Reserve Banks distributed 33.5 billion Federal Reserve notes into circulation, a 6.1 percent decrease from 2019, and received 28.1 billion Federal Reserve notes from circulation, a 17.9 percent decrease from 2019. While there were decreases in both payments and receipts in 2020, the significantly larger decrease in receipts than payments resulted in a net payments increase of 3.9 billion notes, or a 258.4 percent increase from 2019. This increase is from the high demand for currency resulting from the COVID-19 pandemic. The $20 through $100 denominations experienced greater increases in demand than the lower denominations of $1 through $10 notes.

The value of Federal Reserve notes issued and outstanding at year-end 2020 totaled $2,040.7 billion, a 16.0 percent increase from 2019. The year-over-year increase is attributable largely to demand for $100 notes. The Board estimates that at least one-half of the value of Federal Reserve notes in circulation is held abroad, mainly as a store of value.

The Reserve Banks also distribute coin to depository institutions on behalf of the U.S. Mint.⁹ In 2020, Reserve Banks distributed 51.9 billion coins into circulation, a 24.1 percent decrease from 2019, and received 34.0 billion coins from circulation, a 39.4 percent decrease from 2019. The year-over-year decrease in coin activity is a result of the COVID-19 pandemic, which significantly disrupted the supply chain and normal circulation patterns for U.S. coins.

Fiscal Agency and Government Depository Services

The Federal Reserve Banks, upon the direction of the Secretary of the Treasury, act as fiscal agents of the U.S. government.¹⁰ The Reserve Banks, in their role as fiscal agents, provide services such as payment services, financing and securities services, and financial accounting and reporting services, as well as maintain the Treasury's operating cash account.

To support further the Treasury's mission, the Reserve Banks develop, operate, and maintain a number of automated systems and provide associated technology infrastructure services. The Reserve Banks also provide certain fiscal agency and depository services to other entities.

In 2020, the Reserve Banks, as fiscal agents, supported the Treasury's implementation of multiple fiscal policy efforts in response to the COVID-19 pandemic. The Reserve Banks, as payment system operator, processed and settled approximately 237 million ACH payments and cleared and settled approximately 39.2 million checks associated with the first two rounds of Economic Impact Payments (commonly referred to as stimulus checks). The Reserve Banks also processed unemployment benefit payments and auctioned Treasury securities to meet Treasury funding needs.

Reserve Bank expenses for providing fiscal agency and depository services totaled $732.4 million, an increase of $3.4 million, or 0.5 percent (see table 5.2). The Treasury and other entities reimburse the Reserve Banks for the expense of providing fiscal agency and depository services. Support for Treasury programs accounted for 94.6 percent of expenses, and support for other entities accounted for the remaining 5.4 percent.

Table 5.2. Expenses of the Federal Reserve Banks for fiscal agency and depository services, 2018–20

Payment Services

The Reserve Banks support the Treasury's payment services by developing, operating, and maintaining electronic systems that allow the public to receive payments from and authorize payments to federal agencies, as well as by providing operational and customer support.

The Reserve Banks process payments, such as federal payroll, Social Security benefits, and veterans' benefits, from the Treasury's account at the Federal Reserve and process payments made to the Treasury's account at the Federal Reserve, which include collections such as fees and debts owed to the federal government.

In 2020, the Reserve Banks worked with the Treasury to develop modernized business processes and applications to improve federal payments. The Reserve Banks also continued to support the Treasury's efforts to modernize electronic tax collection.

Reserve Bank expenses for providing Treasury payment services were $294.0 million in 2020, an increase of $1.9 million, or 0.7 percent. The programs that contributed most to Reserve Bank expenses in 2020 were the Stored Value Card program, the Pay.gov program, and the Invoice Processing Platform program.

The Reserve Banks work with the Treasury to support the Stored Value Card program, which comprises three military cash-management services: EagleCash, EZPay, and Navy Cash. These programs provide electronic payment methods for goods and services on military bases and Navy ships. Stored-value cards are in use on more than 80 military bases and installations in 19 countries (including the United States) and on board more than 135 ships. In 2020, the Reserve Banks continued to provide operations and customer support, replaced legacy equipment, and developed new functionality and capability for stored-value cards.

The Reserve Banks also work with the Treasury to expand the use of electronic payment services for payments made to the Treasury's account at the Federal Reserve. The Reserve Banks operate and maintain Pay.gov, an application that allows the public to use the internet to initiate and authorize payments to the federal government using a U.S.-held bank account (through ACH Debit), a credit or debit card, or a digital wallet through services such as PayPal or Amazon Pay. In 2020, Pay.gov processed 116.2 million online payments valued at $196.3 billion. In addition, the Reserve Banks operated applications and worked with the Treasury to support the movement of $59.0 billion in commercial deposits to the Treasury's account at the Federal Reserve and processed and settled 173 million electronic payment transactions valued at $649.0 billion.

The Reserve Banks also work with the Treasury to support outreach, implementation, development, operations, and maintenance of the Invoice Processing Platform, which provides one integrated, secure system to simplify the management of vendor invoices.¹¹ In 2020, the Invoice Processing Platform program continued to make enhancements and onboard additional federal agencies and vendors. As more organizations worked remotely in 2020, the Treasury received additional requests to onboard agencies and vendors to the program.

Financing and Securities Services

The Reserve Banks work closely with the Treasury in support of the financing needed to operate the federal government, which includes forecasting, scheduling, auctioning, issuing, settling, maintaining, and redeeming marketable Treasury securities (for example, bills, notes, and bonds). The Reserve Banks also support the Treasury's efforts to encourage savings by issuing, maintaining, and redeeming U.S. savings bonds, as well as providing fulfillment services. The Reserve Banks provide customer service and operate the automated systems that support marketable Treasury securities and U.S. savings bonds.

In 2020, the Reserve Banks supported record Treasury auction activity in part to support the government's fiscal response to the COVID-19 pandemic. The Reserve Banks, in partnership with the Treasury, conducted a record 503 auctions, an increase of 178 auctions, or 54.8 percent, over the previous record of 325 in 2019. Auction activity enabled the Treasury's awarding a record $19.7 trillion in wholesale Treasury marketable securities to investors, an increase of $8.0 trillion, or 67.8 percent, over the previous record of $11.7 trillion awarded in 2019. The Reserve Banks also supported the issuance and servicing of $98.1 billion in savings bonds and marketable securities, which are held in the TreasuryDirect system and partnered with the Treasury to introduce the 20-year Treasury bond.

Reserve Bank expenses for financing and securities services were $179.3 million in 2020, a decrease of $12.3 million, or 6.4 percent, primarily attributable to a change in approach to modernizing an application.

Accounting and Reporting Services

The Reserve Banks support the Treasury's accounting and reporting functions by forecasting, monitoring, and managing the government's overall cash requirements, cash flow, and government-wide accounting services. The Reserve Banks also support the Treasury's publication of the daily and monthly Treasury statements; the Combined Statement of Receipts, Outlays, and Balances of the United States Government; and the Financial Report of the United States Government.¹²

Reserve Bank expenses for financial accounting and reporting services were $69.3 million in 2020, an increase of $4.2 million, or 6.5 percent. The programs that contributed most to Reserve Bank expenses in 2020 were the Cash Accounting Reporting System (CARS) and G-Invoicing.

The Reserve Banks operate and maintain CARS, which handles accounting and reporting for all federal agencies and is the electronic system of record for the government's financial data. In 2020, the Reserve Banks worked with the Treasury to expand the transparency and availability of federal government financial data by integrating CARS with the Treasury's Data Transparency program. The Reserve Banks also supported the Treasury's efforts to promote the availability of federal government financial data to the public by launching the Fiscal Data website, a one-stop shop for federal financial data.¹³

In addition, the Reserve Banks operate and maintain the G-Invoicing application, which is the long-term solution for federal agencies to manage intragovernmental financial transactions. In 2020, the Reserve Banks worked with the Treasury to coordinate federal agency outreach and implement system enhancements, which will prepare agencies for a federal government mandate to adopt G-Invoicing for all buy/sell intragovernmental transactions.¹⁴

Infrastructure and Technology Services

The Reserve Banks design, build, and maintain the technology infrastructure and environments that host the majority of applications that the Reserve Banks develop, operate, or maintain on behalf of the Treasury.

In 2020, the Reserve Banks launched a cloud platform and created a plan to begin migrating applications into the environment. The Reserve Banks continued to effectively operate infrastructure, modernize aging systems, increase automation to increase efficiency, and implement Agile management practices to streamline the development process. The Reserve Banks also continued to strengthen their systems against a host of new and evolving cybersecurity threats.

Reserve Bank expenses for infrastructure and technology services were $150.5 million in 2020, an increase of $10.8 million, or 7.7 percent.

Services Provided to Other Entities

The Reserve Banks, when permitted by federal statute or when required by the Secretary of the Treasury, also provide other domestic and international entities with U.S.-dollar-denominated banking services, which include funds, securities, and gold safekeeping; securities clearing, settlement, and investment; and correspondent banking.

The Reserve Banks also issue and maintain, in electronic form, many federal agency, government-sponsored enterprise, and certain international organizations securities. The majority of securities services are performed for the Federal Home Loan Mortgage Association (Freddie Mac), the Federal National Mortgage Association (Fannie Mae), and the Government National Mortgage Association (Ginnie Mae).

Reserve Bank expenses for services provided to other entities were $39.3 million in 2020, a decrease of $1.2 million, or 2.8 percent.

Evolutions and Improvements to the System

The Federal Reserve performs many functions in the payment system, including payment system operator, supervisor and regulator of financial institutions and systemically important financial market utilities, researcher, and catalyst for system improvements.

Digital Innovations

The Federal Reserve views developments in financial technology through the lens of its long-standing public policy goals of safety and soundness of financial institutions, consumer protection, safety and efficiency for the payment system, and financial stability. Within that framework, the Federal Reserve is actively engaged in supporting responsible innovation while ensuring associated risks are appropriately identified and managed.

The Federal Reserve is studying the implications of emerging financial technologies, including distributed ledger technologies and associated financial products such as cryptocurrencies and stablecoins. These technologies have raised fundamental questions about appropriate legal and regulatory safeguards. The Federal Reserve continues to monitor developments and works with domestic and international counterparts to better understand and manage the implications of these innovations.

Payment System Regulatory Activity in 2020

Congress has assigned to the Board responsibility for implementing the Federal Reserve Act and certain other laws pertaining to a wide range of banking and financial activities, including those related to the payment and settlement system. The Board implements those laws in part through its regulations (see the Board's website at https://www.federalreserve.gov/supervisionreg/reglisting.htm).

Regulation CC Amendments

In 2019, the Board and the Consumer Financial Protection Bureau jointly issued regulations that amended Regulation CC.¹⁵

The agencies implemented a statutory requirement in the Electronic Funds Availability (EFA) Act to adjust the dollar amounts under the EFA Act for inflation. The amendments for adjusting the dollar amounts under the EFA Act for inflation went into effect July 1, 2020.

Other Improvements and Efforts

The Reserve Banks have been engaged in a number of multiyear technology initiatives that will modernize their priced-services processing platforms. These investments are expected to enhance efficiency, the overall quality of operations, and the Reserve Banks' ability to offer additional services, consistent with the longstanding principles of fostering efficiency and safety, to depository institutions. The Reserve Banks continued to enhance the resiliency and information security posture of the Wholesale Payment Systems through Reserve Bank led cyber initiatives to respond to environmental threats and cyberthreats. The Reserve Banks also recently implemented a new FedACH-processing platform to improve the efficiency and reliability of FedACH operations. In 2020, the Reserve Banks advanced the safety and security of FedLine Solutions by making progress on key infrastructure upgrades and network modernization, as well as through proactive monitoring of an evolving threat environment and by strengthening endpoint security policies.

During 2020, the Federal Reserve continued work to replace the aging high-speed currency processing equipment and sensors at the Reserve Banks for deployment through 2028. In 2020, the Federal Reserve selected a vendor to develop the high-speed currency processing equipment for delivery beginning in 2025. In advance of the production rollout, prototype and preliminary equipment will be installed and tested at pilot offices between 2021 and 2024. A research and development effort was initiated to update currency sensors and camera systems for integration with the equipment.

The improvement of the efficiency, effectiveness, and security of information technology (IT) services and operations continued to be a central focus of the Reserve Banks. Under the leadership of the Federal Reserve's National IT organization and CIO, the System IT Strategic Plan was refreshed in 2020 for 2021–23 to set priorities, align IT direction and resources, and ensure IT leaders and team members are working towards a common set of goals. The goals of the plan are security, simplicity, and productivity with priorities in modernized application delivery, cloud and modern infrastructure, digital work and collaboration, data management and analytics, cybersecurity, and IT workforce skills. National IT continues to guide the plan and track progress toward the goals.

The Reserve Banks remained vigilant about their cybersecurity posture, investing in risk-mitigation initiatives and programs and continuously monitoring and assessing cybersecurity risks to operations and protecting systems and data. The Federal Reserve implemented several cybersecurity initiatives that enhanced identity and access management capabilities; enhanced the ability to respond to evolving cybersecurity threats with agility, decisiveness, and speed by streamlining decisionmaking during a cybersecurity incident; and continued to improve continuous monitoring capabilities of critical assets.

Several Reserve Banks took action in 2020 to maintain and renovate their facilities. Major multiyear facility programs at several Reserve Bank offices continued, focused on updating obsolescent building systems to ensure infrastructure resiliency and continuity of operations. The Philadelphia Reserve Bank continued construction activities for its multiyear program to replace its entire mechanical and electrical infrastructure. Other programs addressed the need to update office and operations areas in support of efficiency and working environment.

For more information on the acquisition costs and net book value of the Reserve Banks and Branches, see table G.13 in appendix G ("Statistical Tables") of this annual report.

Oversight of Federal Reserve Banks

The combined financial statements of the Reserve Banks and the financial statements of each of the 12 Reserve Banks are audited annually by an independent public accounting firm retained by the Board of Governors.¹⁶ In addition, the Reserve Banks are subject to oversight by the Board of Governors, which performs its own reviews (see box 5.3).

The Reserve Banks use the 2013 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. The management of each Reserve Bank annually provides an assertion letter to its board of directors that confirms adherence to COSO standards.

The Federal Reserve Board engaged KPMG LLP (KPMG) to audit the 2020 combined and individual financial statements of the Reserve Banks and the financial statements of the five limited liability companies (LLCs) that are associated with the Board of Governors' actions to address the coronavirus pandemic, of which four LLCs are consolidated in the statements of the Federal Reserve Bank of New York and one LLC is consolidated in the statements of the Federal Reserve Bank of Boston.¹⁷

In 2020, KPMG also conducted audits of internal controls over financial reporting for each of the Reserve Banks. Fees for KPMG services totaled $10.3 million, of which approximately $3.0 million was for the audits of the LLCs.¹⁸ To ensure auditor independence, the Board of Governors requires that KPMG be independent in all matters relating to the audits. Specifically, KPMG may not perform services for the Reserve Banks or affiliated entities 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. In 2020, the Reserve Banks did not engage KPMG for significant non-audit services.

The Board's reviews of the Reserve Banks include a wide range of oversight activities, conducted primarily by its Division of Reserve Bank Operations and Payment Systems. Division personnel monitor, on an ongoing basis, the activities of each Reserve Bank, Federal Reserve Information Technology, and the System's Office of Employee Benefits (OEB). The oversight program identifies the most strategically important Reserve Bank current and emerging risks and defines specific approaches to achieve a comprehensive evaluation of the Reserve Banks' controls, operations, and management effectiveness.

The comprehensive reviews include an assessment of the internal audit function's effectiveness and its conformance to the Institute of Internal Auditors' (IIA) International Standards for the Professional Practice of Internal Auditing, applicable policies and guidance, and the IIA's code of ethics.

The Board also reviews System Open Market Account (SOMA) and foreign currency holdings annually to

• determine whether the New York Reserve Bank, while conducting the related transactions and associated controls, complies with the policies established by the Federal Open Market Committee (FOMC); and
• assess SOMA-related IT project management and application development, vendor management, and system resiliency and contingency plans.

In addition, KPMG audits the year-end schedule of SOMA participated asset and liability accounts and the related schedule of participated income accounts. The FOMC is provided with the external audit reports and a report on the Board review.

Income and Expenses

Annually, the Board releases the Combined Reserve Banks financial statements with financial information as of December 31 and includes the accounts and results of operations of each of the 12 Reserve Banks.

In 2020, income was $102.0 billion, compared with $103.2 billion in 2019; expenses totaled $13.6 billion, compared with $47.7 billion in 2019; and net income before remittances to Treasury totaled $88.6 billion in 2020, compared with $55.5 billion in 2019.

Table 5.3 summarizes the income, expenses, and distributions of net earnings of the Reserve Banks for 2020 and 2019. Appendix G of this report, "Statistical Tables," provides more detailed information on the Reserve Banks, including the consolidated LLCs.¹⁹ Additionally, appendix G summarizes the Reserve Banks' 2020 budget performance and 2021 budgets, budgeting processes, and trends in expenses and employment.

Table 5.3. Income, expenses, and distribution of net earnings of the Federal Reserve Banks, 2020 and 2019

SOMA Holdings

The FOMC has authorized and directed the Federal Reserve Bank of New York to execute open market transactions to the extent necessary to carry out the domestic policy directive adopted by the FOMC. The Federal Reserve Bank of New York, on behalf of the Reserve Banks, holds in the SOMA the resulting securities, which include U.S. Treasuries, federal agency and government-sponsored enterprise debt securities, federal agency and government-sponsored enterprise mortgage-backed securities, investments denominated in foreign currencies, and commitments to buy or sell related securities.²⁰

Table 5.4 summarizes the average daily assets (liabilities), current income (expenses), and average interest rate of SOMA holdings for 2020 and 2019.

Table 5.4. System Open Market Account (SOMA) holdings and Loans of the Federal Reserve Banks, 2020 and 2019

Lending

In 2020, the average daily balance and the average rate of interest earned for Reserve Bank lending programs were as follows:

• Primary, secondary, and seasonal credit extended was $8,848 million and 0.25 percent.
• Primary Dealer Credit Facility (PDCF) was $6,419 million and 0.25 percent.
• Money Market Mutual Fund Liquidity Facility (MMLF) was $19,062 million and 1.23 percent.
• Paycheck Protection Program Liquidity Facility (PPPLF) was $56,994 million and 0.35 percent.

In addition, the Reserve Banks provided loans to special purpose vehicles (SPVs) that were established to administer liquidity programs created in response to the coronavirus pandemic. These SPVs provided liquidity to market participants through the purchase of assets in accordance with the terms of each liquidity program. More information about the SPVs and the related liquidity programs can be found in box 2 in section 3, "Financial Stability."

Pro Forma Financial Statements for Federal Reserve Priced Services

Table 5.5. Pro forma balance sheet for Federal Reserve priced services, December 31, 2020 and 2019

Table 5.6. Pro forma income statement for Federal Reserve priced services, 2020 and 2019

Table 5.7. Pro forma income statement for Federal Reserve priced services, by service, 2020

Notes to Pro Forma Financial Statements for Priced Services

(1) Short-Term Assets

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

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-Reserve Bank items that would otherwise be double-counted on the combined Federal Reserve balance sheet and adjustments for items associated with nonpriced items (such as those collected for government agencies). 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. Investments of excess financing derived from credit float are assumed to be invested in federal funds.

(2) Long-Term Assets

Long-term assets consist of long-term assets used solely in priced services and the priced-service portion of long-term assets shared with nonpriced services, including a deferred tax asset related to the priced services pension and postretirement benefits obligation. The tax rate associated with the deferred tax asset was 22.1 percent for 2020 and 22.2 percent for 2019.

Long-term assets also consist of an estimate of the assets of the Board of Governors used in the development of priced services.

(3) Liabilities and Equity

Under the matched-book capital structure for assets, short-term assets are financed with short-term payables and imputed short-term debt, if needed. Long-term assets are financed with long-term liabilities, imputed long-term debt, and imputed equity, if needed. To meet the Federal Deposit Insurance Corporation (FDIC) requirements for a well-capitalized institution, in 2020 equity is imputed at 5.0 percent of total assets and 10.3 percent of risk-weighted assets, and 2019 equity is imputed at 5.0 percent of total assets and 10.4 percent of risk-weighted assets.

The Board's Payment System Risk policy reflects the international standards for financial market infrastructures developed by the Committee on Payment and Settlement Systems and the Technical Committee of the International Organization of Securities Commissions in the Principles for Financial Market Infrastructures. The policy outlines the expectation that the Fedwire Services will meet or exceed the applicable risk-management standards. Although the Fedwire Funds Service does not face the risk that a business shock would cause the service to wind down in a disorderly manner and disrupt the stability of the financial system, in order to foster competition with private-sector financial market infrastructures, the Reserve Banks' priced services will hold six months of the Fedwire Funds Service's current operating expenses as liquid net financial assets and equity on the pro forma balance sheet and, if necessary, impute additional assets and equity to meet the requirement. The imputed assets held as liquid net financial assets are cash items in process of collection, which are assumed to be invested in federal funds. In 2020 and 2019, there was sufficient assets and equity such that additional imputed balances were not required.

In accordance with ASC 715, Compensation–Retirement Benefits, the Reserve Banks record the funded status of pension and other benefit plans on their balance sheets. To reflect the funded status of their benefit plans, the Reserve Banks recognize the deferred items related to these plans, which include prior service costs and actuarial gains or losses, on the balance sheet. This results in an adjustment to the pension and other benefit plan liabilities 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 pension asset, which is a component of accrued benefit costs, of $44.5 million in 2020 and $17.0 million in 2019. The change in the funded status of the pension and other benefit plans resulted in a corresponding decrease in accumulated other comprehensive loss of $6.6 million in 2020.

(4) Revenue

Revenue represents fees charged to depository institutions for priced services and is realized from each institution through direct charges to an institution's account.

(5) Operating Expenses

Operating expenses consist of the direct, indirect, and other general administrative expenses of the Reserve Banks for priced services (that is, Check, ACH, FedWire Funds, and FedWire Securities) and the expenses of the Board related to the development of priced services. Board expenses were $6.7 million in 2020 and $7.0 million in 2019. Operating expenses exclude amounts related to the development of the FedNow Service.

In accordance with ASC 715, the Reserve Bank priced services recognized qualified pension-plan service costs of $37.1 million in 2020 and $30.8 million in 2019.²¹ Operating expenses also include the nonqualified service costs of $2.1 million in 2020 and $1.6 million in 2019.²² In 2019 Reserve Banks adopted an update to ASC 715 requiring disaggregation of other components of net benefit expense from service costs. 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.

The income statement by service reflects revenue, operating expenses, imputed costs, other income and expenses, and cost recovery. The tax rate associated with imputed taxes was 22.1 percent for 2020 and 22.2 percent for 2019.

(6) Imputed Costs

Imputed costs consist of income taxes, return on equity, interest on debt, sales taxes, and interest on float. Many imputed costs are derived from the PSAF model. The 2020 cost of short-term debt imputed in the PSAF model is based on nonfinancial commercial paper rates; the cost of imputed long-term debt is based on Merrill Lynch Corporate and High Yield Index returns; and the effective tax rate is derived from U.S. publicly traded firm data, which serve as the proxy for the financial data of a representative private-sector firm. The after-tax rate of return on equity is based on the returns of the equity market as a whole.²³

Interest is imputed on the debt assumed necessary to finance priced-service assets. These 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.

Interest on float is derived from the value of float to be recovered for the check and ACH services, Fedwire Funds Service, and Fedwire Securities Services through per-item fees during the period. Float income or cost is based on the actual float incurred for each priced service.

The following shows the daily average recovery of actual credit float by the Reserve Banks for 2020 and 2019, in millions of dollars:²⁴

Float that is created by account adjustments due to transaction errors and the observance of nonstandard holidays by some depository institutions was recovered from the depository institutions through charging institutions directly. Float subject to recovery is valued at the federal funds rate. Certain ACH funding requirements and check products generate credit float; this float has been subtracted from the cost base subject to recovery in 2020 and 2019.

(7) Other Income and Expenses

Other income consists of income on imputed investments. Excess financing resulting from additional equity imputed to meet the FDIC well-capitalized requirements is assumed to be invested and earning interest at the 3-month Treasury bill rate.

(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 after-tax targeted return on equity.

Footnotes