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 2022:
- providing payment services to depository and certain other institutions (see figure 5.1)
- distributing the nation's currency and coin to depository institutions
- 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
Figure 5.1. Average daily value of Federal Reserve payment services to depository and other institutionsBillions of dollars
The Federal Reserve provides "priced services" to depository and other institutions (see "Payments Services to Depository and Other Institutions"). These payment and related services are operated as separate business lines and costs are tracked accordingly (see box 5.1).
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
The Reserve Banks operated payment services as separate business lines, led by a specific Reserve Bank, and tracked cost recovery accordingly, until 2021. In response to the changing financial services landscape and the planned launch of the FedNow® Service in July 2023, the Reserve Banks commenced a restructuring of payment services under one enterprise in 2021, led by a chief payments executive. Federal Reserve Financial Services is now an integrated organization within the Federal Reserve that is responsible for managing critical payment and securities services that foster the accessibility, integrity, and efficiency of the U.S. economy. This new governance and operating model will continue to enhance the agility and resiliency of Reserve Bank payment services and provide streamlined support for depository institution customers across all financial service offerings.
Commercial Check-Collection Service
The commercial check-collection service provides a suite of electronic and paper processing options for forward and return collections.
In 2022, the Reserve Banks recovered 99.8 percent of the total costs of their commercial check-collection service, including the related private-sector adjustment factor (PSAF). The Reserve Banks' operating expenses and imputed costs totaled $109.7 million. Revenue from operations totaled $110.5 million, resulting in a net income of $0.8 million. Reserve Banks handled 3.4 billion checks in 2022, a decrease of 7.8 percent from 2021 (see table 5.1). The average daily value of checks collected by the Reserve Banks in 2022 was approximately $35.8 billion, an increase of 2.2 percent from the previous year. The Reserve Banks expect volumes to continue to decline because of substitution away from checks to other payment instruments although uncertainty remains as to the rate of decline.
Table 5.1. Activity in Federal Reserve priced services, 2020–22
Thousands of items, except as noted
| Service | 2022 | 2021 | 2020 | Percent change | |
|---|---|---|---|---|---|
| 2021–22 | 2020–21 | ||||
| Commercial check | 3,373,580 | 3,657,312 | 3,766,523 | −8 | −3 |
| Commercial ACH | 18,517,858 | 17,895,155 | 16,548,795 | 3 | 8 |
| Fedwire funds transfer | 196,052 | 204,491 | 184,010 | −4 | 11 |
| National settlement | 586 | 586 | 551 | 0 | 6 |
| Fedwire securities | 3,410 | 4,200 | 4,600 | −19 | −9 |
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.
Box 5.1. Priced Services and Cost Recovery
The Federal Reserve must (under the Monetary Control Act of 1980) establish fees for "priced services" to recover, over the long run, all the direct and indirect costs associated with its payment and settlement system service. Costs include those 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).
From 2013 through 2022, the Reserve Banks recovered 102.5 percent of the total priced services costs, including the PSAF (see table A). In 2022, Reserve Banks recovered 99.3 percent of the total priced services costs, including the PSAF (see table A). The Reserve Banks' operating expenses and imputed costs totaled $462.8 million. Revenue from operations totaled $466.7 million, resulting in a net income from priced services of $7.2 million. The FedACH Service and the Fedwire® Securities Service achieved full cost recovery. The Fedwire Services and National Settlement Services did not achieve full cost recovery because of ongoing technology investments and higher operating costs. The check services did not achieve full cost recovery as volumes continue to decline.
Table A. Priced services cost recovery, 2013–22
Millions of dollars, except as noted
| Year | Revenue from services 1 | Operating expenses and imputed costs2 | Targeted return on equity | Total costs | Cost recovery (percent) 3 |
|---|---|---|---|---|---|
| 2013 | 441.3 | 409.3 | 4.2 | 413.5 | 106.7 |
| 2014 | 433.1 | 418.7 | 5.5 | 424.1 | 102.1 |
| 2015 | 429.1 | 397.8 | 5.6 | 403.4 | 106.4 |
| 2016 | 434.1 | 410.5 | 4.1 | 414.7 | 104.7 |
| 2017 | 441.6 | 419.4 | 4.6 | 424.0 | 104.1 |
| 2018 | 442.5 | 428.1 | 5.2 | 433.3 | 102.1 |
| 2019 | 444.0 | 441.2 | 5.4 | 446.5 | 99.4 |
| 2020 | 446.9 | 434.0 | 5.9 | 439.9 | 101.6 |
| 2021 | 456.0 | 452.8 | 4.4 | 457.2 | 99.7 |
| 2022 | 466.7 | 462.8 | 7.2 | 470.0 | 99.3 |
| 2013–22 | 4,435.7 | 4,274.6 | 52.1 | 4,326.7 | 102.5 |
Note: Here and elsewhere in this section, components may not sum to totals or yield percentages shown because of rounding. Excludes amounts related to development of the FedNow Service.
1. For the 10-year period, includes revenue from services of $4,434.1 million and other income and expense (net) of $1.6 million. Return to table
2. For the 10-year period, includes operating expenses of $4,176.9 million, imputed costs of $36.5 million, and imputed income taxes of $61.2 million. Return to table
3. Revenue from services divided by total costs. For the 10-year period, cost recovery is 103.8 percent, including the effect of accumulated other comprehensive income (AOCI) reported by the priced services under ASC 715. For details on changes to the estimation of priced services AOCI and their effect on the pro forma financial statements, refer to note 3 to the "Pro Forma Financial Statements for Federal Reserve Priced Services" at the end of this section. Return to table
1. According to the Accounting Standards Codification (ASC) Topic 715 (ASC 715), Compensation-Retirement Benefits, the Reserve Banks recognized a $590.0 million reduction in equity related to the priced services' benefit plans through 2022. Including this reduction in equity, which represents a decline in economic value, results in cost recovery of 103.8 percent for the 10-year period. For details on how implementing ASC 715 affected the pro forma financial statements, refer to note 3 to the pro forma financial statements at the end of this section. Return to text
Commercial Automated Clearinghouse Service
The commercial ACH service provides domestic and cross-border batched payment options for same-day and next-day settlement, enabling depository institutions and their customers to process large volumes of payments through electronic batch processes.
In 2022, the Reserve Banks recovered 101.7 percent of the total costs of their commercial ACH services, including the related PSAF. The Reserve Banks' operating expenses and imputed costs totaled $169.5 million. Revenue from operations totaled $174.0 million, resulting in a net income of $4.5 million. The Reserve Banks processed 18.5 billion commercial ACH transactions in 2022, an increase of nearly 3.5 percent from 2021 (see table 5.1). The average daily value of FedACH transfers in 2022 was approximately $154.7 billion, an increase of 4.6 percent from the previous year.
FedNow Service
The FedNow® Service, which will be available in July 2023, is a new service that will enable banks across the United States to provide instant payments to their customers at any hour of the day, every day of the year. The FedNow Service will provide a flexible infrastructure for banks and their service providers to develop instant payments products for their customers. In 2022, the Reserve Banks reached several significant milestones in collaboration with a diverse group of financial institution partners. Progress included onboarding of pilot participants and initiation of testing processes; publication of amendments to Regulation J, along with FedNow Service Operating Circular 8, to provide a comprehensive rule framework for funds transfers over the service; and finalization of 2023 pricing. These efforts are in support of the introduction of the FedNow Service to the market, which represents a significant first step toward achieving nationwide access to instant payments.
Fedwire Funds and National Settlement Services
In 2022, the Reserve Banks recovered 95.3 percent of their costs of the Fedwire Funds and National Settlement Service, including the related PSAF. The Reserve Banks' operating expenses and imputed costs totaled $160.7 million in 2022. Revenue from operations totaled $157.2 million, resulting in a net loss of $3.5 million.
Fedwire Funds Service
The Fedwire Funds Service allows depository institutions and their customers to send or receive domestic time-critical payments using their balances at Reserve Banks to transfer funds in real time.
From 2021 to 2022, the number of Fedwire funds transfers originated by depository institutions decreased 4.1 percent, to approximately 196 million (see table 5.1). The average daily value of Fedwire funds transfers in 2022 was $4.2 trillion, an increase of 7.8 percent from the previous year.
National Settlement Service
The National Settlement Service (NSS) is a multilateral settlement system that allows participants in private-sector clearing arrangements to settle transactions using their balances at Reserve Banks.
In 2022, the service processed settlement files for 12 local and national private-sector arrangements. The Reserve Banks processed 8,763 files that contained about 586,000 settlement entries (see table 5.1). Settlement file activity in 2022 increased 1.0 percent from 2021, and settlement entries did not change. The total value of settlement processed by NSS increased 5.5 percent, to $26.4 trillion.
Fedwire Securities Service
The Fedwire Securities Service is a central securities depository and real-time securities settlement system that 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.2 It also provides for the issuance, safekeeping, and maintenance of those securities.
In 2022, the Reserve Banks recovered 107.7 percent of the costs of their Fedwire Securities Service, including the related PSAF. The Reserve Banks' operating expenses and imputed costs totaled $22.9 million in 2022. Revenue from operations totaled $24.9 million, resulting in a net income of $2.0 million. In 2022, the number of non-Treasury securities transfers processed via the service decreased approximately 19.4 percent from 2021, to approximately 3.4 million (see table 5.1). The average daily value of Fedwire Securities priced-service transfers in 2022 was approximately $71.8 billion, a decrease of 0.8 percent from the previous year.3 The average daily value of all Fedwire Securities transfers in 2022 was more than $1.37 trillion, an increase of approximately 10.8 percent from the previous year.
The Reserve Banks, as fiscal agents for the U.S. Treasury, perform the transfer and settlement of Treasury securities. In 2022, the number of all Treasury security transfers was approximately 19.6 million, an increase of 22.2 percent from 2021.
The Reserve Banks, as fiscal agents for Fedwire Securities issuers, facilitate the principal and interest payments to the Fedwire Securities Service participants holding securities. In 2022, the total cash value of principal and interest payments was $25.51 trillion (a decrease of 13.0 percent from 2021).
The Fedwire Securities Service is the central securities depository for securities issued over the Fedwire Securities Service. At the end of 2022, there was approximately $106 trillion (par value) of Fedwire securities held in securities accounts maintained by the Reserve Banks as part of the service, a 3.6 percent increase from 2021. At the end of 2022, there were 1.45 million unique securities outstanding on the service, an increase of 2.9 percent from 2021.
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, and to enhance the customer experience through access to value-added services not available on legacy technology. In 2022, 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.
Federal Reserve Intraday Credit
The Federal Reserve Board governs the use of Federal Reserve Bank intraday credit, also known as daylight overdrafts.4 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.
Given the high level of overnight balances institutions hold at the Federal Reserve Banks, daylight overdrafts have remained relatively low, as shown in figure 5.2.5
Figure 5.2. Aggregate daylight overdrafts 2007–22
Accessible Version | Return to text
Source: Payment Data Repository data, Federal Reserve quarterly payment system risk data.
Fees collected for daylight overdrafts are also at low levels. Fees as well as the use of intraday credit are expected to remain relatively low given the 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 2022, Board staff continued to work with the Bureau of Engraving and Printing and the U.S. Army Corps of Engineers to build a new currency production facility in the Washington, D.C., area. The new production facility will replace the aging buildings in Washington and better position the U.S. Currency Program to produce new currency designs that are more technically complex (see box 5.2).
The Reserve Banks distributed 31.2 billion Federal Reserve notes into circulation in 2022, a 4.8 percent decrease from 2021, and received 30.3 billion Federal Reserve notes from circulation, a 1.4 percent increase from 2021. The decrease in payments and increase in receipts resulted in a net decrease in payments of 1.9 billion notes, or a 69.7 percent from 2021. This decrease was primarily attributable to lower net payments of $20 and $100 notes and resulted in the lowest level of net payments since 2009. The value of Federal Reserve notes issued and outstanding at year-end 2022 totaled $2,259.3 billion, a 3.3 percent increase from 2021. The year-over-year increase is primarily attributable to demand for $100 notes.
The Reserve Banks also distribute coin to depository institutions on behalf of the U.S. Mint.6 In 2022, Reserve Banks distributed 43.0 billion coins into circulation, a 7.0 percent decrease from 2021, and received 31.9 billion coins from circulation, a 5.1 percent decrease from 2021.
Box 5.2. U.S. Currency Program to Produce New Currency Designs
As the issuing authority for Federal Reserve notes, the Federal Reserve Board works closely with the Bureau of Engraving and Printing (BEP) to ensure that the production of U.S. currency remains secure and that the notes produced are high quality and in a quantity sufficient to meet public demand, supporting the Board's mission to provide a variety of safe and secure payment methods for the public.1 Currently, Federal Reserve notes are produced by the BEP in two locations, Washington, D.C., and Fort Worth, Texas.
The current Washington, D.C., production facility was built in 1913 and needs to be replaced with a modern facility that will allow the BEP to streamline production, keep building support costs low, and meet physical security standards. The BEP initiated a project to build a new production facility in the Washington, D.C., region to meet modern production requirements critical to the future of the U.S. Currency Program. A Department of Agriculture site in Beltsville, Maryland, was suitable, and a provision in the 2018 Farm Bill transferred the land from the Department of Agriculture to the Department of the Treasury.2
The Board's role in the project is to ensure that the Board's reimbursements are appropriately allocated to build a facility capable of efficiently producing both current and future designs of secure U.S. currency. Board staff participate in multiple cross-agency governance bodies that oversee the project. Over the past year, the Board and the BEP established governance procedures and developed a shared vision for the management of this project.
The new facility will be equipped with modern equipment to produce the current designs of banknotes and new types of equipment to add security features for the next family of banknotes. It is expected to produce 3.5 billion notes per year under normal production conditions. The project is currently in the design phase, and a final design is scheduled to be completed by the end of 2023, after which cost estimates will be refined. The BEP expects to award the construction contract in 2024, start currency production in 2027, and complete the project in 2031, when all production and support functions are fully transitioned to the new facility.
1. Currency issuance is a mission essential function of the Board, and U.S. currency is the dominant reserve currency in the world. The Federal Reserve Act requires the Board to reimburse the BEP for the expenses necessarily incurred by producing U.S. currency. Return to text
2. Agriculture Improvement Act of 2018, Pub. L. No. 115-334, 132 Stat. 4490 (2018). Return to text
Banknote Development
During 2022, Federal Reserve Board staff continued to support efforts related to the development of the next family of U.S. currency. For example, the Advanced Counterfeit Deterrence Steering Committee, composed of the Treasury, the U.S. Secret Service, and Federal Reserve System staff, provided advice on currency design changes to the Secretary of the Treasury, who has sole statutory authority to approve the final currency design.
Over the past year, Federal Reserve Board staff, alongside other U.S. Currency Program partners (the Bureau of Engraving and Printing, Federal Reserve Financial Services, and the U.S. Secret Service), collaborated on banknote and technology development. Banknote development focuses on meeting requirements based on user needs, security needs, and manufacturing capabilities. Technology development focuses on security features that can further bolster the counterfeit resistance of U.S. currency. To support these efforts, and like many other central banks, the Federal Reserve Board led an adversarial analysis program to increase the counterfeit resilience of U.S. currency and research counterfeit deterrence technologies. These activities work in concert to meet the goal of developing the next family of banknotes with new, robust security features effectively integrated into the design, which is easy to authenticate and difficult for counterfeiters to simulate.
In addition to participating on the Advanced Counterfeit Deterrence Steering Committee in 2022, Federal Reserve Board staff continued to serve on the Central Bank Counterfeit Deterrence Group and the Five Nations and chaired the United States Cash Machine Group. The Central Bank Counterfeit Deterrence Group is a group of central banks that collaborates to develop and deploy measures to combat digital counterfeiting. The Five Nations is a group of central banks, including the Board, that works on common projects and uses experience in banknote development to discuss issues related to security, functionality, and manufacturability of banknotes. The United States Cash Machine Group works closely with manufacturers of cash authentication machines to ensure that new and existing banknotes function in commerce. The Board collaborates with these domestic and international partners to maintain worldwide confidence in U.S. currency.
Currency Education
The Federal Reserve Board's U.S. Currency Education Program (CEP) is responsible for building confidence in U.S. currency by providing education, training, and information about Federal Reserve notes to the global public. The CEP works closely with the U.S. Secret Service, the U.S. Department of State, and the U.S. Department of the Treasury's Bureau of Engraving and Printing to raise awareness about the designs and security features of Federal Reserve notes.
In 2022, the CEP launched the iOS version of Cash Assist, an app designed to support authentication training efforts for professional cash handlers across industries. The app uses the camera on a user's phone to identify a bill's denomination and display the key security features found on genuine Federal Reserve notes.
The CEP also hosted multiple virtual counterfeit trainings to instruct stakeholders on currency authentication and counterfeit detection best practices. Domestically, the CEP hosted counterfeit trainings for law enforcement officers, Federal Reserve Bank cash offices, and retail loss prevention personnel. Internationally, the CEP hosted trainings for cash operations staff and managers from the central banks of Cambodia, El Salvador, Panama, and Jamaica.
The CEP regularly informed the public about U.S. currency through outreach on Facebook and Twitter. In early 2022, the CEP launched a LinkedIn page to further its online visibility and introduce additional stakeholders to U.S. currency resources.
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.7 The Reserve Banks, in their role as fiscal agents, provide services such as payment services, debt 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.
Reserve Bank expenses for providing fiscal agency and depository services totaled $820.9 million, an increase of $52.4 million, or 6.8 percent (see table 5.2), which is primarily attributable to increased demand from the Treasury. The Treasury and other entities reimburse the Reserve Banks for the expense of providing fiscal agency and depository services. Costs for Treasury-related programs accounted for 98.0 percent of expenses, and costs for other entities accounted for the remaining 2.0 percent.
Table 5.2. Expenses of the Federal Reserve Banks for fiscal agency and depository services, 2020–22
Thousands of dollars
| Agency and service | 2022 | 2021 | 2020 |
|---|---|---|---|
| Department of the Treasury | |||
| Payment services | 375,606 | 353,030 | 293,994 |
| Financing and Treasury securities services | 207,805 | 184,535 | 179,314 |
| Financial accounting and reporting services | 73,481 | 76,970 | 69,315 |
| Technology infrastructure services | 147,856 | 129,339 | 150,461 |
| Total, Treasury | 804,748 | 743,874 | 693,084 |
| Other entities | 16,130 | 24,595 | 39,321 |
| Total reimbursable expenses | 820,878 | 768,469 | 732,406 |
Note: Service costs include reimbursable pension costs, where applicable. Previous versions of the Annual Report provided a separate line item for pension expenses.
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, and allow the government to prevent and detect improper payments and collect past-due debts. The Reserve Banks also provide operational and customer support, agency outreach efforts, and data analytics. 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 owed to the federal government.
Reserve Bank expenses for providing Treasury payment services were $375.6 million in 2022, an increase of $22.6 million, or 6.4 percent. This is primarily attributable to the Reserve Banks' continued support for Treasury's multiyear initiative to modernize the application that supports electronic tax collection although, in September 2022, Fiscal Service notified the Federal Reserve of its decision to discontinue the electronic tax collection program. The other programs that contributed most to Reserve Bank expenses in 2022 were the Stored Value Card program, the Pay.gov program, and the Do Not Pay 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 90 military bases and installations in 20 countries (including the United States) and on board more than 135 ships.
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 2022, Pay.gov processed 93.7 million online payments valued at $228.5 billion. In addition, the Reserve Banks operated applications that facilitated the movement of $32.2 billion in commercial deposits to the Treasury's account at the Federal Reserve. The Reserve Banks also processed and settled 144.6 million electronic payment transactions valued at $933.2 billion.
Additionally, the Reserve Banks work with the Treasury to develop, operate, and maintain Do Not Pay, as well as provide agency outreach and data analytics services. Do Not Pay is designed to protect the integrity of the federal government's payment processes by assisting federal agencies in preventing and detecting improper payments.8 In fiscal year 2022, Do Not Pay assisted more than 20 agencies in identifying or stopping improper payments totaling more than $67.3 million.
Financing and Securities Services
The Reserve Banks work closely with the Treasury to support its ability to raise the financing needed to operate the federal government, which includes functions such as cash forecasting, as well as auctioning, issuing, settling, maintaining, and redeeming marketable Treasury securities (bills, notes, and bonds). The Reserve Banks also support the Treasury by issuing, maintaining, and redeeming U.S. savings bonds, as well as providing related operations and fulfillment services. The Reserve Banks provide customer service and operate the automated systems that support marketable Treasury securities and savings bonds.
In 2022, the Treasury, supported by the Reserve Banks, conducted 384 auctions that resulted in the Treasury awarding $15.4 trillion in wholesale Treasury marketable securities to investors. The Reserve Banks also supported the issuance and servicing of $231.0 billion in savings bonds and marketable securities to investors.9
Reserve Bank expenses for financing and securities services were $207.8 million in 2022, an increase of $23.3 million, or 12.6 percent. This increase is primarily attributable to efforts to modernize the applications that facilitate the issuance, maintenance, and redemption of marketable Treasury securities and savings bonds.
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.10
Reserve Bank expenses for financial accounting and reporting services were $73.5 million in 2022, a decrease of $3.5 million, or 4.5 percent, primarily attributable to a change in categorization of costs. The programs that contributed most to Reserve Bank expenses in 2022 were the Cash Accounting Reporting System and G-Invoicing.
The Reserve Banks operate and maintain the Cash Accounting Reporting System, which handles accounting and reporting for all federal agencies and is the electronic system of record for the government's financial data. 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 2022, the Reserve Banks supported federal agencies to implement G-Invoicing for new orders related to intragovernmental transactions, which became mandatory in October 2022.
Infrastructure and Technology Services
The Reserve Banks design, build, and maintain the technology infrastructures and environments that host the majority of applications that the Reserve Banks develop, operate, or maintain on behalf of the Treasury.
In 2022, the Reserve Banks continued to build out and migrate applications to a cloud platform in alignment with the Treasury's cloud computing strategy.11 The Reserve Banks continued to effectively operate infrastructures, plan for end-of-life issues, increase automation, and strengthen their systems against a host of new and evolving cybersecurity threats.
Reserve Bank expenses for infrastructure and technology services were $147.9 million in 2022, an increase of $18.6 million, or 14.4 percent, primarily attributable to expanded efforts to migrate applications to a cloud platform.
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 $16.1 million in 2022, a decrease of $8.5 million, or 34.6 percent, which reflects the full-year effect of a cost accounting change.
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 payment system improvements (see box 5.3 for more information on Federal Reserve payment research).
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 of 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 (see box 5.4).
Box 5.4. The Federal Reserve's Research Work on Central Bank Digital Currency
Like other central banks, the Federal Reserve is engaged in research into central bank digital currency (CBDC). Its work does not indicate a decision to issue a CBDC; the research focuses on how a CBDC could improve on an already safe, effective, dynamic, and efficient domestic payments system and recognizes that the implications must be thought through very carefully. The design of a CBDC would raise important monetary policy, financial stability, consumer protection, cybersecurity, legal, and privacy considerations that require careful thought and analysis.
The Federal Reserve collaborates closely with international counterparts on issues related to digital payments and CBDC. This includes engagement with multilateral institutions, such as the Bank for International Settlements, G7, and Financial Stability Board, and bilateral engagements with other central banks. The Federal Reserve is part of a group of seven central banks and the Bank for International Settlements that are working together to explore central bank digital currencies. Topics that this group are investigating include system design, user needs, and financial stability implications.
The Federal Reserve is conducting independent research into the potential benefits, risks, and design considerations of a potential CBDC, in addition to technical experimentation. For example, in 2022 the Board's Technology Lab examined CBDCs broadly, focusing on understanding different technologies and design implications in addition to training technical staff on innovations in payment technologies. The Federal Reserve Bank of Boston and MIT's Digital Currency Initiative concluded exploratory research known as Project Hamilton, a multiyear research project to explore the CBDC design space and gain a hands-on understanding of a CBDC's technical challenges and opportunities.1 The Federal Reserve Bank of New York's New York Innovation Center has been facilitating collaboration with the Bank for International Settlements on financial innovation.2
The Federal Reserve is actively engaged with a wide variety of stakeholders, such as those from government, academia, and the private sector, to gather perspectives and expertise about considerations such as potential CBDC uses and the range of design options. To help stimulate broad conversation, the Federal Reserve Board issued a discussion paper in January 2022, titled Money and Payments: The U.S. Dollar in the Age of Digital Transformation, outlining its current thinking on digital payments, with a particular focus on the benefits and risks associated with a CBDC in the U.S. context.3 All comments and a summary of responses can be found on the Board's website.4
1. See the Federal Reserve Bank of Boston's website for more information: https://www.bostonfed.org/news-and-events/news/2022/12/project-hamilton-boston-fed-mit-complete-central-bank-digital-currency-cbdc-project.aspx. Return to text
2. See the Federal Reserve Bank of New York's website for more information: https://www.newyorkfed.org/aboutthefed/nyic. Return to text
3. Board of Governors of the Federal Reserve System, Money and Payments: The U.S. Dollar in the Age of Digital Transformation (Washington: Board of Governors, January 2022), https://www.federalreserve.gov/publications/files/money-and-payments-20220120.pdf. Return to text
4. Federal Reserve Board—Public Comments, https://www.federalreserve.gov/cbdc-public-comments.htm. Return to text
Payment System Regulation
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).
In October 2022, the Board finalized updates to Regulation II, the Board's rule concerning debit card transactions. Pursuant to the Durbin Amendment to the Dodd-Frank Act, the updates specify that debit card issuers should enable at least two payment card networks to process all debit card transactions, including "card-not-present" transactions, such as online payments. The revisions address a disparity in the market between debit card networks' enhanced ability to process card-not-present transactions and some debit card issuers' continued enablement of only one network for merchants to choose between when routing such transaction.
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. In 2022, 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.
During 2021, 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 2021, the Federal Reserve began the production development phase of the project 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 through 2024. A system integration effort was initiated to prepare currency sensors and develop software for compatibility 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 2021 for 2021–23 to set priorities, align IT direction and resources, and ensure that IT leaders and team members are working toward a common set of goals. The goals of the plan are security, simplicity, and productivity, with priorities in ensuring a secure and reliable infrastructure, 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. Additional efforts were initiated to strengthen incident communication requirements across Reserve Bank payment systems and operating units in response to a significant IT outage that affected the Federal Reserve's payment systems in February 2021.
With threat levels remaining elevated, the Reserve Banks remained vigilant with respect to 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 System's overall security posture continues to be strengthened through several high-priority information security initiatives such as application and endpoint multifactor authentication, implementation of key ransomware protection and recovery technologies, and a focus on aligning with the pillars of zero-trust architecture. Through these efforts, the Reserve Banks continue to work together and with business partners to further enhance the state of information security across the Federal Reserve System.
Several Reserve Banks took action in 2022 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. The Miami Branch of the Federal Reserve Bank of Atlanta is in the planning stages for an extensive vault addition and remodel. The Federal Reserve Bank of New York is in the early phases of searching for property to build a new building to replace the existing East Rutherford Operations Center. 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.12 In addition, the Reserve Banks are subject to oversight by the Board of Governors, which performs its own reviews.
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 2022 combined and individual financial statements of the Reserve Banks and the financial statements of the three limited liability companies (LLCs) that are associated with the Board of Governors' actions to address the coronavirus pandemic, of which two 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.13
In 2022, KPMG also conducted audits of internal controls over financial reporting for each of the Reserve Banks. Fees for KPMG services totaled $9.2 million, of which approximately $1.5 million was for the audits of the LLCs.14 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 2022, 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, the System's Office of the Chief Payments Executive, and the System's Office of Employee Benefits. 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 the 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 the 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 the 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.
Box 5.3. Payment System Research and Analysis
The Federal Reserve conducts research on a wide range of topics related to the design and activities of payment, clearing, and settlement systems and financial market infrastructures, as well as the role of these systems in the commercial activities of consumers, businesses, and governments.
In 2022, topics examined in Federal Reserve research included the following:
- measurement and analysis of short-run developments and long-run trends in the use of new and established payment methods 1
- drivers and potential effects of innovations in the payment system, particularly those related to new and emerging technologies, such as instant payments and digital assets
- design, oversight, and regulation of financial market infrastructures
- developments related to payments fraud
In particular, see information about recent releases by the Federal Reserve Payments Study, available at https://www.federalreserve.gov/paymentsystems/fr-payments-study.htm.
For more information, see the Board's Payment Research website at https://www.federalreserve.gov/paymentsystems/payres_about.htm; see also Federal Reserve Bank Payments Groups at https://www.federalreserve.gov/paymentsystems/payres_fedgroups.htm.
1. In particular, see information about recent releases by the Federal Reserve Payments Study, available at https://www.federalreserve.gov/paymentsystems/fr-payments-study.htm. Return to text
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 2022, income was $170.7 billion, compared with $123.1 billion in 2021; expenses totaled $111.9 billion, compared with $15.2 billion in 2021; and net income before remittances to the Treasury totaled $58.8 billion, compared with $107.9 billion in 2021.
In accordance with the Federal Reserve Act, the Reserve Banks remit excess earnings to the Treasury after providing for the cost of operations, payment of dividends, and reservation of an amount necessary to a maintain aggregate surplus. During the first three quarters of 2022, Reserve Banks transferred $76.0 billion from weekly earnings to the U.S. Treasury. In the fall of 2022, Reserve Bank earnings became negative due to the increase in interest expense on depository institution deposits and interest expense on securities sold under agreements to repurchase and most Reserve Banks first suspended weekly remittances to the Treasury and started accumulating a deferred asset. A deferred asset represents the shortfall in earnings from the most recent point that remittances were suspended and is the amount of net excess earnings Reserve Banks will need to realize in the future before remittances to the Treasury resume.
Table 5.3 summarizes the income, expenses, and distributions of net earnings of the Reserve Banks for 2022 and 2021. Appendix G of this report, "Statistical Tables," provides more detailed information on the Reserve Banks, including the consolidated LLCs.15 Additionally, appendix G summarizes the Reserve Banks' 2022 budget performance and 2023 budgets, budgeting processes, and trends in expenses and employment.
Table 5.3. Income, expenses, and distribution of net earnings of the Federal Reserve Banks, 2022 and 2021
Millions of dollars
| Item | 2022 | 2021 |
|---|---|---|
| Current income | 170,684 | 123,059 |
| Loan interest income | 154 | 229 |
| SOMA interest income | 169,979 | 122,326 |
| Other current income 1 | 551 | 504 |
| Net expenses | 107,850 | 11,008 |
| Operating expenses | 5,373 | 5,092 |
| Reimbursements | −846 | −787 |
| System pension service cost | 946 | 954 |
| Interest paid on depository institutions deposits and others | 60,405 | 5,333 |
| Interest expense on securities sold under agreements to repurchase | 41,967 | 414 |
| Other expenses | 5 | 2 |
| Current net income | 62,834 | 112,051 |
| Net additions to (deductions from) current net income | −1,248 | −1,538 |
| Treasury securities gains, net | −5 | 0 |
| Federal agency and government-sponsored enterprise mortgage-backed securities (losses) gains, net | −234 | −35 |
| Foreign currency translation gains (losses), net | −1,762 | −1,856 |
| Other additions or deductions | 753 | 353 |
| Assessments by the Board of Governors2 | 2,791 | 2,633 |
| For Board expenditures | 1,015 | 970 |
| For currency costs | 1,054 | 1,035 |
| For Consumer Financial Protection Bureau costs3 | 722 | 628 |
| Net income before providing for remittances to the Treasury | 58,795 | 107,880 |
| Consolidated variable interest entities: Income (loss), net | 1,742 | 975 |
| Consolidated variable interest entities: Non-controlling interest (income) loss, net | −1,701 | −927 |
| Reserve Bank and consolidated variable interest entities net income before providing for remittances to the Treasury | 58,836 | 107,928 |
| Earnings remittances to the Treasury | 59,446 | 109,025 |
| Net income after providing for remittances to the Treasury | −610 | −1,097 |
| Other comprehensive gain (loss) | 1,819 | −1,640 |
| Comprehensive income | 1,209 | 543 |
| Total distribution of net income | 60,655 | 109,568 |
| Dividends on capital stock | 1,209 | 583 |
| Transfer from surplus and change in accumulated other comprehensive income | 0 | −40 |
| Remittances transferred to the Treasury 4 | 76,031 | 109,025 |
| Deferred asset increase | −16,585 | 0 |
| Earnings remittances to the Treasury, net | 59,446 | 109,025 |
1. Includes income from priced services and securities lending fees. Return to table
2. A detailed account of the assessments and expenditures of the Board of Governors appears in the Board of Governors Financial Statements (see https://www.federalreserve.gov/aboutthefed/audited-annual-financial-statements.htm). Return to table
3. The Board of Governors assesses the Reserve Banks to fund the operations of the Consumer Financial Protection Bureau. Return to table
4. Represents cumulative excess earnings remitted to the Treasury during the period prior to entering a period of a shortfall of earnings and suspending remittances. Return to table
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.16
Table 5.4 summarizes the average daily assets (liabilities), current income (expenses), and average interest rate of the SOMA holdings for 2022 and 2021.
Lending
In 2022, 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 $3,178 million and 2.75 percent.
- Paycheck Protection Program Liquidity Facility (PPPLF) was $19,215 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.
Table 5.4. System Open Market Account holdings, 2022 and 2021
Millions of dollars, except as noted
| Item | Average daily assets (+)/liabilities (−) | Current income (+)/expense (−) | Average interest rate (percent) | |||||
|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Year-over-year change | 2022 | 2021 | Year-over-year change | 2022 | 2021 | |
| System Open Market Account (SOMA) holdings | ||||||||
| Securities purchased under agreements to resell | 1 | 162 | −161 | 0 | 1 | −1 | 2.25 | 0.35 |
| U.S. Treasury securities, net 1 | 5,937,386 | 5,456,776 | 480,610 | 115,872 | 92,610 | 23,261 | 1.95 | 1.70 |
| Federal agency and government-sponsored enterprise (GSE) mortgage-backed securities, net 2 | 2,760,954 | 2,417,179 | 343,775 | 53,959 | 29,619 | 24,340 | 1.95 | 1.23 |
| Government-sponsored enterprise debt securities, net 1 | 2,597 | 2,622 | −25 | 133 | 134 | −1 | 5.11 | 5.11 |
| Foreign currency denominated investments3 | 18,504 | 21,294 | −2,790 | −3 | −45 | 42 | −0.01 | −0.21 |
| Central bank liquidity swaps 4 | 666 | 2,178 | −1,512 | 18 | 7 | 11 | 2.68 | 0.33 |
| Other SOMA assets5 | 21 | 61 | −40 | * | * | * | 0.00 | 0.66 |
| Total SOMA assets | 8,720,129 | 7,900,272 | 819,857 | 169,979 | 122,326 | 47,652 | 1.95 | 1.55 |
| Securities sold under agreements to repurchase: primary dealers and expanded counterparties | −1,997,187 | −717,540 | −1,279,647 | −36,655 | −337 | −36,318 | 1.84 | 0.05 |
| Securities sold under agreements to repurchase: foreign official and international accounts | −290,553 | −251,068 | −39,485 | −5,312 | −77 | −5,235 | 1.83 | 0.03 |
| Total securities sold under agreements to repurchase | −2,287,740 | −968,608 | −1,319,132 | −41,967 | −414 | −41,553 | 1.83 | 0.04 |
| Other SOMA liabilities6 | -834 | −4,368 | 3,534 | n/a | n/a | n/a | n/a | n/a |
| Total SOMA liabilities | −2,288,574 | −972,976 | −1,315,598 | −41,967 | −414 | −41,553 | 1.83 | 0.04 |
| Total SOMA holdings | 6,431,555 | 6,927,296 | −495,741 | 128,011 | 121,912 | 6,099 | 1.99 | 1.76 |
1. Face value, net of unamortized premiums and discounts. Return to table
2. Face value, which is the remaining principal balance of the securities, net of unamortized premiums and discounts. Does not include unsettled transactions. Return to table
3. 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 (GSE MBS) portfolio. Return to table
6. Represents the obligation to return cash margin posted by counterparties as collateral under commitments to purchase and sell federal agency and GSE MBS, as well as obligations that arise from the failure of a seller to deliver securities on the settlement date. Return to table
n/a Not applicable.
* Less than $500,000.
Pro Forma Financial Statements for Federal Reserve Priced Services
Table 5.5. Pro forma balance sheet for Federal Reserve priced services, December 31, 2022 and 2021
Millions of dollars
| Item | 2022 | 2021 | ||
|---|---|---|---|---|
| Short-term assets (note 1) | ||||
| Imputed investments | 539.0 | 626.0 | ||
| Receivables | 44.0 | 44.4 | ||
| Inventory | 0.6 | 0.5 | ||
| Prepaid expenses | 44.8 | 25.2 | ||
| Items in process of collection | 72.3 | 76.4 | ||
| Total short-term assets | 700.8 | 772.5 | ||
| Long-term assets (note 2) | ||||
| Premises | 103.2 | 93.2 | ||
| Furniture and equipment | 35.4 | 44.0 | ||
| Leases, leasehold improvements, and long-term prepayments | 80.3 | 69.5 | ||
| Deferred tax asset | 149.5 | 179.7 | ||
| Total long-term assets | 368.5 | 386.4 | ||
| Total assets | 1,069.3 | 1,158.9 | ||
| Short-term liabilities (note 3) | ||||
| Deferred-availability items | 611.3 | 659.4 | ||
| Short-term debt | 52.2 | 0.0 | ||
| Short-term payables | 37.3 | 37.8 | ||
| Total short-term liabilities | 700.8 | 697.2 | ||
| Long-term liabilities (note 3) | ||||
| Long-term debt | 98.5 | 0.0 | ||
| Accrued benefit costs | 215.4 | 403.7 | ||
| Total long-term liabilities | 314.0 | 403.7 | ||
| Total liabilities | 1,014.8 | 1,101.0 | ||
| Equity (including accumulated other comprehensive loss of $590.0 million and $686.5 million at December 31, 2022 and 2021, respectively) | 54.5 | 57.9 | ||
| Total liabilities and equity (note 3) | 1,069.3 | 1,158.9 | ||
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 5.6. Pro forma income statement for Federal Reserve priced services, 2022 and 2021
Millions of dollars
| Item | 2022 | 2021 | ||
|---|---|---|---|---|
| Revenue from services provided to depository institutions (note 4) | 466.7 | 456.0 | ||
| Operating expenses (note 5) | 461.4 | 448.3 | ||
| Income from operations | 5.3 | 7.7 | ||
| Imputed costs (note 6) | ||||
| Interest on debt | 0.0 | 0.4 | ||
| Interest on float | −3.5 | −0.1 | ||
| Sales taxes | 3.9 | 0.4 | 3.4 | 3.7 |
| Income from operations after imputed costs | 4.9 | 4.0 | ||
| Other income and expenses (note 7) | ||||
| Investment income | 0.1 | 0.0 | ||
| Income before income taxes | 5.0 | 4.0 | ||
| Imputed income taxes (note 6) | 1.0 | 0.8 | ||
| Net income | 4.0 | 3.2 | ||
| Memo: Targeted return on equity (note 6) | 7.2 | 4.4 | ||
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 5.7. Pro forma income statement for Federal Reserve priced services, by service, 2022
Millions of dollars
| Item | Total | Commercial check collection | CommercialACH | Fedwire funds | Fedwiresecurities |
|---|---|---|---|---|---|
| Revenue from services (note 4) | 466.7 | 110.5 | 174.0 | 157.2 | 24.9 |
| Operating expenses (note 5) 1 | 461.4 | 107.7 | 171.1 | 160.3 | 22.2 |
| Income from operations | 5.3 | 2.8 | 2.8 | −3.1 | 2.7 |
| Imputed costs (note 6) | 0.4 | 1.8 | −2.8 | 1.3 | 0.2 |
| Income from operations after imputed costs | 4.9 | 1.0 | 5.6 | −4.4 | 2.5 |
| Other income and expenses, net (note 7) | 0.1 | 0.0 | 0.0 | 0.0 | 0.0 |
| Income before income taxes | 5.0 | 1.0 | 5.7 | −4.3 | 2.5 |
| Imputed income taxes (note 6) | 1.0 | 0.2 | 1.1 | −0.9 | 0.5 |
| Net income | 4.0 | 0.8 | 4.5 | −3.5 | 2.0 |
| Memo: Targeted return on equity (note 6) | 7.2 | 1.0 | 1.6 | 4.3 | 0.2 |
| Cost recovery (percent) (note 8) | 99.3 | 99.8 | 101.7 | 95.3 | 107.7 |
Note: Components may not sum to totals because of rounding. Excludes amounts related to development of the FedNow Service. The accompanying notes are an integral part of these pro forma priced services financial statements.
1. Operating expenses include pension costs, Board expenses, and reimbursements for certain nonpriced services. Return to table
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 20.3 percent for 2022 and 20.8 percent for 2021.
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 2022 equity is imputed at 5.1 percent of total assets and 10.0 percent of risk-weighted assets, and 2021 equity is imputed at 5.0 percent of total assets and 10.5 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 2022, there were sufficient assets and equity such that additional imputed balances were not required. In 2021, an additional balance of $43 million was imputed to meet sufficient assets and equity requirements.
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 $68.2 million in 2022 and a pension liability of $27.3 million in 2021. The change in the funded status of the pension and other benefit plans resulted in a corresponding increase in accumulated other comprehensive loss of $96.5 million in 2021.
(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 $6.2 million in 2022 and $6.6 million in 2021. 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 $64.1 million in 2022 and $65.3 million in 2021. Operating expenses also include the nonqualified service costs of $4.6 million in 2022 and $4.3 million in 2021. In 2019 Reserve Banks adopted an update to ASC 715 requiring disaggregation of other components of net benefit expense from service costs. The adoption of 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 20.3 percent for 2022 and 20.8 percent for 2021.
(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 2022 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.17
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 for each service to the total 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 2022 and 2021, in millions of dollars:18
| Daily average recovery of actual float | 2022 | 2021 |
|---|---|---|
| Total float | −219.4 | −185.2 |
| Float not related to priced services1 | −15.4 | −31.9 |
| Float subject to recovery through per-item fees | −204.0 | −153.3 |
1. Float not related to priced services includes float generated by services to government agencies and by other central bank services. Return to table
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 2022 and 2021.
(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
1. Depository institutions are defined as commercial banks, thrifts, and credit unions. Besides playing an important role in the broader economy by providing transaction accounts, such as checking accounts, to consumers, households, and businesses, these institutions play an important role in the Federal Reserve System's payment and settlement system function. Return to text
2. The expenses, revenues, volumes, and fees reported here are for priced-services for securities issued by federal government agencies, government-sponsored enterprises, and certain international organizations. Reserve Banks provide Treasury securities services in their role as the Treasury's fiscal agent. These services are not considered priced services. For details, see "Financing and Securities Services" later in this section. Return to text
3. These values do not include reversals. Return to text
4. See the Payment System Risk policy: https://www.federalreserve.gov/paymentsystems/psr_about.htm. The Payment System Risk policy recognizes explicitly the role of the central bank in providing intraday balances and credit to healthy institutions; under the policy, the Reserve Banks provide collateralized intraday credit at no cost. Return to text
5. Increases in the overnight balances institutions held at the Reserve Banks have decreased the demand for intraday credit. Use of intraday credit is expected to remain low given the FOMC's decision to continue to implement monetary policy within a regime of ample reserves. Return to text
6. The Federal Reserve Board is the issuing authority for Federal Reserve notes, while the U.S. Mint, a bureau of the U.S. Treasury, is the issuing authority for coin. Return to text
7. In accordance with section 15 of the Federal Reserve Act. See https://www.federalreserve.gov/aboutthefed/section15.htm. Return to text
8. Do Not Pay is authorized and governed by the Payment Integrity Information Act of 2019, Pub. L. 116-117, 134 Stat. 113 (2020). Return to text
9. Demand for Treasury products increased approximately 40 percent in 2022, primarily because of the higher interest rate environment. Return to text
10. The Daily Treasury Statement summarizes the U.S. Treasury's cash and debt operations for the federal government on a modified cash basis and can be found at https://fiscal.treasury.gov/reports-statements/dts/. The Monthly Treasury Statement summarizes the financial activities of the federal government and off-budget federal entities and can be found at https://www.fiscal.treasury.gov/reports-statements/mts/. The Combined Statement of Receipts, Outlays, and Balances of the United States Government is recognized as the official publication of the government's receipts and outlays and can be found at https://fiscal.treasury.gov/reports-statements/combined-statement/. The Financial Report of the United States Government provides the President, Congress, and the American people with a comprehensive view of the federal government's finances and can be found at https://fiscal.treasury.gov/reports-statements/financial-report/. Return to text
11. The Federal Cloud Computing Strategy—Cloud Smart—is a long-term, high-level strategy to drive Federal agency cloud adoption. Additional information can be found at https://www.cio.gov/policies-and-priorities/cloud-smart/. Return to text
12. See "Federal Reserve Banks Combined Financial Statements" at https://www.federalreserve.gov/aboutthefed/audited-annual-financial-statements.htm. Return to text
13. In addition, KPMG audited the Office of Employee Benefits of the Federal Reserve System, the Retirement Plan for Employees of the Federal Reserve System (System Plan), and the Thrift Plan for Employees of the Federal Reserve System (Thrift Plan). The System Plan and the Thrift Plan provide retirement benefits to employees of the Board, the Federal Reserve Banks, the Office of Employee Benefits of the Federal Reserve System, and the Consumer Financial Protection Bureau. Return to text
14. Each LLC will reimburse the Board of Governors for the fees related to the audit of its financial statements from the entity's available assets. Return to text
15. Table G.8A is a statement of condition for each Reserve Bank, table G.9 details the income and expenses of each Reserve Bank for 2022, table G.10 shows a condensed statement for each Reserve Bank for the years 1914 through 2022, and table G.12 gives the number and annual salaries of officers and employees for each Reserve Bank. Return to text
16. See table G.2 in appendix G for a list of Federal Reserve holdings of U.S. Treasuries and federal agency securities. Return to text
17. See Federal Reserve Bank Services Private-Sector Adjustment Factor, 77 Fed. Reg. 67,007 (November 8, 2012), https://www.gpo.gov/fdsys/pkg/FR-2012-11-08/pdf/2012-26918.pdf, for details regarding the PSAF methodology change. Return to text
18. Credit float occurs when the Reserve Banks debit the paying bank for checks and other items before providing credit to the depositing bank. Return to text