[Federal Register Volume 77, Number 217 (Thursday, November 8, 2012)]
[Notices]
[Pages 67007-67012]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-26918]
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FEDERAL RESERVE SYSTEM
[Docket No. OP-1447]
Federal Reserve Bank Services Private Sector Adjustment Factor
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Notice.
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SUMMARY: The Board has approved modifications to its method for
calculating the private-sector adjustment factor (PSAF). The PSAF is
part of the Board's calculation, as required by the Monetary Control
Act of 1980 (MCA), to establish the fees that Federal Reserve Banks
(Reserve Banks) charge for certain financial services provided to
depository institutions. Because the Federal Reserve priced services
have historically had characteristics most analogous to correspondent
banks, clearing balances held by depository institutions at Reserve
Banks were a primary component in computing the PSAF. The clearing
balance program was largely modeled after similar programs offered by
correspondent banks, wherein banks maintain balances with their
correspondents. The Board was prompted to consider a new PSAF
methodology because clearing balances held at Reserve Banks were
declining following the Board's implementation of the payment of
interest on required reserve and excess balances held at Reserve Banks.
Effective July 2012, the Board eliminated the contractual clearing
balance program in connection with its simplification of reserve
policies. Changes in the priced services market and the elimination of
clearing balances have made the correspondent bank analogy less
applicable to the priced services provided by the Federal Reserve.
Accordingly, the Board is adopting a publicly traded firm model to set
the PSAF. Use of the new methodology is reflected in priced services
fees for 2013, which is published elsewhere in today's Federal
Register.
DATES: Effective Date: November 8, 2012. The revised method will be
used to calculate the PSAF that is reflected in the 2013 priced
services fees.
FOR FURTHER INFORMATION CONTACT: Gregory L. Evans, Deputy Associate
Director (202) 452-3945, Brenda L. Richards, Manager (202) 452-2753, or
John W. Curle, Senior Financial Analyst (202) 452-3916; Division of
Reserve Bank Operations and Payment Systems; for users of
Telecommunications Device for the Deaf (TDD), contact (202) 263-4869.
SUPPLEMENTARY INFORMATION:
I. Background
Under the MCA, the Federal Reserve Banks must establish fees for
``priced services,'' to recover, over the long run, all direct and
indirect costs actually incurred in providing these services as well as
the imputed costs that would have been incurred had the services been
provided by a private-sector firm.\1\ 2 The imputed costs--
sales and income taxes, debt costs, and a required return on equity
(profit)--are collectively referred to as the PSAF and are an
additional cost considered when setting fees and determining cost
recovery.
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\1\ These priced services include check, FedACH[supreg],
Fedwire[supreg] Funds, and Fedwire[supreg] Securities services (for
activity unrelated to Treasury).
\2\ 12 U.S.C. 248a(c)(3).
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The Board's current method for calculating the PSAF involves
developing an estimated Federal Reserve priced services pro forma
balance sheet using actual priced services assets and liabilities. The
remaining components on the balance sheet, such as equity, are imputed
as if these services were provided by a correspondent bank. Equity is
imputed at a level necessary for a well-capitalized depository
institution and the target return on equity capital (ROE) is estimated
based on the capital asset pricing model (CAPM). Finally, the PSAF
includes an estimated share of the Board of Governors' expenses
incurred to oversee Reserve Bank priced services, imputed sales and
income taxes, and an imputed Federal Deposit Insurance Corporation
(FDIC) assessment.
The methodology underlying the PSAF is reviewed periodically to
ensure that it is appropriate and relevant in light of Reserve Bank
priced services activities, accounting standards, finance theory, and
regulatory and business practices.\3\ The Board considers five
principles when reviewing the PSAF methodology: (1) Providing a
conceptually sound basis for efficient pricing in the market for
payments services, (2) using Reserve Bank financial information as
applicable, (3) maintaining consistency with private-sector practice,
(4) using data in the public domain to make the PSAF replicable, and
(5) avoiding any undue cost or complexity of the PSAF methodology.
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\3\ The previous review of the PSAF was completed in 2005 and
changes were implemented for the 2006 PSAF. 70 FR 60341 (Oct. 17,
2005).
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Under the current correspondent bank model, clearing balances
maintained by Reserve Bank customers have been a significant component
of the pro forma financial statements and an important driver in
calculating nearly all of the imputed costs considered in setting fees
for priced services. Similar to how a correspondent bank would use its
respondent balances, the clearing balances are a funding source for
short- and long-term assets, including investments, and affect the
level of imputed equity. Clearing balance levels, therefore, affect the
overall size of the balance sheet, influence the need to impute debt
funding, and contribute to total cost recovery through imputed net
income on clearing balances.
The payment of interest on balances in Federal Reserve accounts and
related monetary policy actions have affected the level of clearing
balances and the similarity between correspondent banks and Federal
Reserve priced services.\4\ Following the implementation of interest on
required reserve and excess balances, the Board recognized a
significant decline in clearing balances and anticipated that the trend
would continue.
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\4\ In 2008, Congress amended the Federal Reserve Act to
authorize Reserve Banks to pay interest on balances of eligible
institutions. (See section 19 of the Federal Reserve Act (12 U.S.C.
461(b).) Since then, interest has been paid on balances maintained
to satisfy reserve balance requirements and excess reserves at a
rate determined by the Board (currently 25 basis points for required
and excess reserve balances).
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The Board requested comment on modifications to its computation of
the PSAF in April 2009 \5\ (2009 notice) and in October 2011 \6\ (2011
notice) (concurrent with the Board's request for comment on reserves
simplification). Because clearing balances were a significant component
of the pro forma balance sheets under the current method and because of
the decline in clearing balance levels, the Board requested in its 2009
notice comment on the anticipated level of clearing balances given
certain interest rate scenarios, the relevance of the clearing balance
program, and whether the clearing balance program should continue.\7\
The Board requested comment on whether a new methodology and its
associated data sources and computations would be
[[Page 67008]]
appropriate for the priced services. The Board also requested comment
on the appropriate term for the risk-free rate that is used to
calculate the target ROE.\8\
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\5\ 74 FR 15481 (Apr. 6, 2009).
\6\ 76 FR 64250 (Oct. 18, 2011).
\7\ 74 FR at 15484.
\8\ Id. at 15488.
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In the 2009 notice, the Board proposed a publicly traded firm (PTF)
model for calculating the imputed costs that factor into priced
services fees and cost recovery.\9\ The imputed PSAF costs under the
proposed PTF model were principally based on the U.S. publicly traded
firm market and not limited to one sector of the market. Because the
analogy between correspondent banks and the Reserve Banks' priced
services had become less applicable with the decline in the level of
clearing balances held and in Reserve Bank paper check collection
volume for which correspondent banks were the primary competitors, the
design of the PTF model uses the U.S. publicly traded firm market to
simplify the peer group assumption. This simplifying assumption is
intended to address the limited comparable private sector firm data in
the public domain as well as avoid undue cost or complexity.
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\9\ Id. at 15489-15490.
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In the 2009 notice, the Board also considered and requested comment
on two other PSAF models: the user-owned utility model, which
incorporated the financial characteristics of a user-owned utility to
derive its priced services balance sheet, and the cost plus model,
which incorporated a markup to the priced services operating expenses
for the year. In addition, the Board considered and requested comment
on whether it should continue using the correspondent bank model.
In the 2011 notice, the Board requested comment on eliminating the
contractual clearing balance program, the appropriate level of minimum
equity for the previously proposed PTF model, and whether the level of
float should be considered before replacing the correspondent bank
model.\10\ Although the level of clearing balances did not decline to
the degree anticipated in 2009, the contractual clearing balance
program was subsequently eliminated in 2012 as part of the Board's
reserves simplification.\11\
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\10\ 76 FR at 64255-64256.
\11\ 77 FR 21846 (Apr. 12, 2012).
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In these notices, the Board proposed and requested comment on the
following considerations and elements of the new PSAF methodology:
Adopting an imputed capital structure, effective tax rate,
and debt financing rates of the priced services based on the U.S.
publicly traded firm market using specific market data and time frames;
Basing the capital structure on the most recent full-year
value-weighted average capital structure (that is, total long-term debt
to total long-term debt plus equity) of all U.S. publicly traded firms
included in the Standard & Poor's Compustat[supreg] database; \12\
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\12\ The Standard & Poor's Compustat database contains
information on more than 6,000 U.S. publicly traded firms, which
approximate the entirety of the U.S. market.
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Basing the long-term debt financing rate on the five-year
mean of the Aaa and Baa Moody's bond yields published on the Federal
Reserve Board's H.15 Statistical Release and the reasonableness of
including only investment grade bonds in the calculation; \13\
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\13\ http://www.federalreserve.gov/releases/h15/update/.
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When short-term assets exceed short-term liabilities,
imputing short-term debt financing rate on the average of the three-
month AA and A2/P2 nonfinancial commercial paper rates as published on
the Federal Reserve Board's Commercial Paper Release; \14\
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\14\ Id.
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Basing the imputed effective income tax rate on the five-
year mean of the value-weighted average ratios of current tax expense
to total net income for all U.S. publicly traded firms in the financial
database; and
Considering the user-owned utility model, the cost-plus
model, or a continuation of the correspondent bank model as alternative
methodologies to the PTF model.
II. Summary of Comments and Analysis
The Board received eight comments in response to its 2009 notice.
Comments were submitted by three bankers' banks, two industry groups,
one bank holding company, one association, and one individual. Overall,
the comments on the proposed PSAF methodology were mixed. Some
commenters disagreed with the proposed methodology and suggested
alternative approaches that required using financial data that are not
publicly available. Three of the four who commented on the overall
proposed PSAF methodology did not support the proposed PTF model. One
of these commenters supported a continuation of the correspondent bank
model and one supported a cost-plus model. One commenter supported the
PTF model but encouraged evaluation of the cost-plus methodology for
computing the PSAF. The remaining four commenters expressed neither
support for nor opposition to the proposed PTF model but provided
other, more general comments. Four commenters requested an extension of
the comment period for further analysis or dialogue. The Board received
one response to its October 2011 request for comment related to the
PSAF. This commenter stated that the Board should conduct further
analysis and provide the public with additional information before
adopting a new methodology.
A. The Contractual Clearing Balance Program
The Board requested comment on the general relevance of the
clearing balances in the computation of PSAF as a consequence of
anticipated continued declines in clearing balance levels. Three
commenters acknowledged the effect interest on required reserve and
excess balances would have on the level of clearing balances maintained
when the rates paid on required and excess reserve balances are greater
than the earnings credit rate on clearing balances. Subsequently, the
Board eliminated the clearing balance program. As a result, there is no
longer a need to consider the levels of balances as they relate to the
PSAF calculation.
B. Publicly Traded Firm Model
In response to its request for comment, the Board received various
comments regarding the proposed assumptions used in the PTF model
related to peer group benchmarking, capital structure, effective tax
rate, and debt financing.
(1) Peer Group Benchmarking
The cost of equity, a key component of priced services cost
structure, is computed based on the CAPM, which uses the U.S. publicly
traded firm market to determine the average risk premium. Three
commenters stated that the U.S. publicly traded firm market was too
broad of a benchmark and suggested narrowing the peer group to specific
financial institutions or publicly-traded payments processors. One of
these three commenters recommended a list of participants in the
payment processing industry as a peer group benchmark and also
suggested commissioning a peer-group study to benchmark payment
processing industry costs.
Because of the concentration of the market activity of the
suggested peer group in a few entities, the financial results of such a
peer group would likely be volatile.\15\ The Board found
[[Page 67009]]
that one entity accounted for approximately 43 percent of the group's
total assets and the range of the individual effective tax rates of the
entities was broad (from 18 to 71 percent). The Board believes that a
peer group or proxy for competitors to Federal Reserve priced services
should consist of enough participants with publicly available financial
data to mitigate the potentially volatile effects of the financial
characteristics of a few firms. Because of the challenges in
identifying a viable peer group, the U.S. publicly traded firm market
is an attractive alternative. The use of averages based on the U.S.
publicly traded firm market minimizes the effect of extreme or
anomalous financial characteristics in the PTF model.
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\15\ Although the MCA's requirement for cost recovery over the
long run allows the Board to set fees to over- or under-recover
costs in a given year to minimize price volatility in imputed costs
makes the pricing process more complex. As a result, the Board has
typically preferred to adopt PSAF methodologies that provide for
stable rather than volatile imputed costs.
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In reviewing appropriate peer group benchmarks for computing the
PSAF, the Board considered adopting a user-owned utility model, which
recognizes that the Reserve Banks' major competitors in the provision
of priced services are increasingly user-owned utilities rather than
traditional correspondent banks. One commenter noted that the
definition of user-owned utilities was not adequately described in the
request for comment. Another commenter requested additional insight on
the Board's conclusion that user-owned utilities have become its
predominant competitors. None of the commenters specifically supported
a user-owned utility model.
Financial information regarding some significant user-owned
utilities is not publicly available. The primary user-owned utility
that provides services similar to those provided by the Reserve Banks
is The Clearing House Payments Company, LLC, which operates CHIPS, the
primary competitor for the Reserve Bank's Fedwire[supreg] Funds
Service, and the Electronic Payments Network, the only private-sector
automated clearinghouse operator.\16\ Establishing the method to
calculate the requisite imputed elements--capital structure, debt
financing rates, and income taxes--using theoretical assumptions or
academic studies could be challenging. In the absence of publicly
available data on a significant number of user-owned utilities or
substantial academic literature regarding the financial characteristics
of these organizations, the Board does not consider adopting user-owned
utilities to be an appropriate peer group benchmark.
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\16\ The Board identified 15 user-owned utilities, 4 of which
have some membership ownership.
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The Board also considered continuing to use the correspondent bank
model, without clearing balances and with minor modifications, to
impute costs. One commenter supported the continued use of the
correspondent bank model and stated that private market participants
are affected by factors similar to the Federal Reserve in setting fees
for services. One commenter noted that a reduction in clearing balances
does not necessarily indicate a failure of the PSAF and that the
correspondent bank model has been reasonably effective over time.
Others who commented on the proposal did not comment on the Board's
continued use of this model.
A principal disadvantage of the correspondent bank model is the
decreasing similarity between the characteristics of the Reserve Bank
priced services without the contractual clearing balance program and
traditional correspondent banks. Historically, the Board recognized
that the financial characteristics of correspondent banks were not
driven primarily by the payment services that compete with those
offered by Reserve Banks, but considered correspondent banks as an
appropriate peer group because both entities held customer balances for
the purpose of facilitating payments services and they were the primary
competitors to the Reserve Banks' check services. Because the
contractual clearing balance program was eliminated and the check
service has declined as a percentage of the Reserve Banks' priced
services revenue and expenses, comparing priced services to
correspondent banks for the purpose of establishing a PSAF methodology
is increasingly difficult. Accordingly, the Board has determined that
the peer group of correspondent banks is no longer appropriate to
impute priced services costs.
Based on its review of possible benchmarks, the Board believes the
use of market wide averages of U.S. publicly traded firms is an
appropriate proxy that avoids the challenges associated with the
potential financial data volatility associated with the small size of
the peer group of payment processors or user-owned utilities, the lack
of public financial data of user-owned utilities, and the decreasing
similarity between the characteristics of the Reserve Banks' priced
services and correspondent banks. The use of the publicly-traded firm
model builds on the approach used in the current PSAF methodology that
uses the U.S. publicly traded firm market to determine the average risk
premium in determining the cost of capital.
(2) Capital Structure
In the PTF model, the capital structure will be derived from the
U.S. publicly traded firm market, subject to minimum equity constraints
consistent with those required by the FDIC for a well-capitalized
institution. One commenter, who supported the correspondent bank model
for computing the PSAF, objected to the absence of an FDIC assessment,
related capital requirements, and regulatory overhead. Although the PTF
methodology does not model depository institution requirements, the
Board requested comment on whether it should use FDIC minimum equity
requirements, but did not receive any comments on this matter. To
ensure a reasonable level of equity is imputed to protect against
financial, operating, and business risks, the Board will use the
minimum equity constraints established by the FDIC, with equity set at
a level of at least five percent of assets or ten percent of risk
weighted assets. The Board, however, will not include an FDIC
assessment, because the peer group is not composed primarily of
depository institutions.
(3) Effective Tax Rate
In the PTF model, the imputed effective income tax rate will be the
five-year mean of the value-weighted average ratios of current tax
expense to total net income for all U.S. publicly traded firms in
Standard & Poor's Compustat[supreg] database. One commenter assumed an
upward trend of tax rates and objected to the tax rate derivation from
historical data rather than future tax rates. To maintain consistency
in the PTF model, the Board will use tax rates from the U.S. publicly
traded firm market. The Board considered alternatives to calculating
the tax rate, including expanding the period of the mean calculation
from five to ten or twenty years, filtering key parameters on tax
expense or total net income, and using additional statistical measures.
Because the results of the alternative approaches reflected only a
small subset of the U.S. publicly traded firm market, the Board did not
adopt these alternatives.
(4) Debt Financing
Due to the elimination of clearing balances, a key source of
financing of priced services assets in the correspondent bank model,
the Board recognizes that additional debt and equity may need to be
imputed in the PTF model to meet funding needs. The
[[Page 67010]]
Board initially proposed using the five-year mean of the Aaa and Baa
Moody's bond yield for the long-term debt financing rate. To include
non-investment grade debt in the PTF model, however, the Board will use
the five-year mean of the annual Merrill Lynch Corporate & High Yield
Index rate. Using the corporate and high yield index rating is also
consistent with the Board's assumption of comparing the priced services
to the U.S. publicly traded firm market. The Board will use a five-year
mean when imputing a debt financing rate to maintain consistency with
the effective tax rate and to reduce year-to-year volatility due to
changes in the yield curve.
C. Alternative Methodology--The Cost-Plus Model
In response to previous Board proposals related to the PSAF, some
commenters have suggested adopting variations on a cost-plus model. In
2005, while commenting on proposed changes to the PSAF methodology for
calculating the ROE, two commenters suggested a cost-plus model as a
simple, straightforward method for calculating the PSAF. The Board
reconsidered this methodology in its 2009 notice. One commenter noted
that the Board should consider using a cost-plus model, but expressed
concern that its estimated 700 percent increase in the PSAF under a
cost-plus model compared to the correspondent bank model may be too
much to impose on the financial-services industry. In implementing a
cost-plus PSAF model, the Board considered deriving the MCA-required
imputed costs by establishing a fixed markup over operating expenses.
Each time the Board has considered this model, developing a viable
method for calculating the markup has been challenging.
The Board considered a cost-based model with the markup percentage
derived from either historical PSAF values or the income statement
operating margins of all U.S. publicly traded firms. The Board
evaluated the PSAF results after applying a markup over expenses ratio
based on value-weighted average data for all publicly traded U.S. firms
in the Standard & Poor's Computstat[supreg] database and applying a
markup over expenses ratio based on historical PSAF. Although a cost-
plus model is simple, transparent, and replicable by the public, it
also has limitations. A cost-plus model based on historical PSAF values
is static and assumes continued use of the current correspondent bank
model, which is of diminishing relevance. In addition, basing a cost-
plus model on accounting-based values captures only book, not market,
values of financing and other costs, which is not consistent with
current finance theory. Accordingly, the Board does not consider this a
viable alternative model to the correspondent bank model.
D. Other General Comments
The Board received comments that focused on the Federal Reserve
priced services involvement in payment services more generally. Four
commenters suggested that the Federal Reserve work to further lower
costs. Three of these four commenters believe that the Federal Reserve
should continue to provide payment services. Two commenters requested
that the Federal Reserve explicitly state its intent regarding
continuing involvement in payment systems and the proposed PSAF
methodology changes. Two commenters addressed the effect of proposed
changes on market competition, pricing, and payment systems generally.
The Board received other comments that requested additional
analysis or information related to the notice and requests for comment.
Two commenters requested more specific information on the effect of the
PSAF changes to the Federal Reserve's price schedule. One commenter
recommended that the notice and request for comment include the effect
of the proposed changes on community banks. One commenter requested
illustrative example calculations to demonstrate how the PSAF would be
affected by shrinking contractual clearing balances. The same commenter
also stated that it would be informative to the public if the Board
provided a side-by-side comparison of the correspondent banking model
with the PTF model, displaying numerical results of the financial
models under different scenarios. One commenter suggested that the PTF
model leaves too much to interpretation.
Consistent with MCA requirements, the Board evaluates and considers
the costs of priced services, competitive factors, and the adequacy of
payment services nationwide when approving the prices of Federal
Reserve Bank services.\17\ Because the Federal Reserve seeks to recover
only its actual and imputed costs, the effect of the PSAF changes on
Reserve Bank prices can be approximated by estimating the impact of the
PSAF change to total costs. The effect of the PSAF methodology changes
on a variety of organizations, including community banks, is largely
dependent on the extent to which an organization uses payment services
provided by the Federal Reserve.\18\ With respect to comments
requesting additional information and the degree of interpretation in
the PTF model, the Board believes that the analyses it has conducted,
and the information provided in this and previous notices, have
provided the analysis and information necessary for the public to
understand its proposal.
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\17\ 12 U.S.C. 248a (c)(3) & (d).
\18\ A side-by-side comparison of the correspondent bank model
and the PTF model was provided in the 2009 notice (74 FR at 15494).
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The Board received other comments on issues not related to the
proposal and are not addressed in this notice.
After considering the comments received, the Board has adopted the
PTF methodology for the 2013 PSAF. The PTF methodology is transparent,
consistent with current financial theory and practice, and is
conceptually sound as a basis for efficient pricing in the market of
payment services. It uses relevant Reserve Bank financial information
as input to the model, and can be replicated by the public. In its
analysis, the Board evaluated computations in the models considered for
imputing the capital structure, effective tax rate, and long- and
short-term debt financing rates. The Board evaluated the advantages and
obstacles surrounding the use of each alternative methodology. The
Board believes the new methodology is appropriate in light of the
elimination of clearing balances and the evolution of payment system
providers beyond commercial banking.
E. Future Industry and Regulatory Changes
The MCA requires the Federal Reserve Banks to impute costs that
would have been incurred had the services been provided by a private
sector firm. Accordingly, the Board considers industry and regulatory
changes relevant to the private sector. The Board applies its payment
system risk policies, which incorporate relevant international risk-
management standards to the Federal Reserve Banks' Fedwire[supreg]
Funds and Fedwire[supreg] Securities services. In considering revisions
to payment system risk policies to address the new Principles for
Financial Market Infrastructures (PFMI), the Board will also consider
whether revisions to the PSAF are necessary.\19\
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\19\ The PFMI are available at http://www.bis.org/publ/cpss101a.pdf.
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III. Summary and Effect of New PSAF Methodology
Based on comments received and further consideration of the issues
[[Page 67011]]
around the appropriate computation of the PSAF, the Board has adopted
the PTF model for computing the PSAF as proposed with a minor
adjustment.\20\ The Board will develop pro forma financial statements
under the PTF model using an estimate of assets and liabilities used in
priced services and incorporate the following elements:
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\20\ The PTF model will incorporate the Merrill Lynch Corporate
& High Yield Index rate instead of the Aaa and Baa Moody's bond
yield as initially proposed.
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Peer Group Benchmarking: The imputed capital structure,
debt and ROE rates, and effective income tax rate will be based on data
for the U.S. publicly traded firm market and calculated using time
frames that minimize volatility from year-to-year. The model will
incorporate a one-year period for elements that historically have been
more stable and, to minimize volatility, a five-year average period for
elements that have been more volatile historically. When averaging
data, the Board will use value-weighted averages to more accurately
reflect the financial characteristics of the U.S. publicly traded firm
market rather than those of the simple average firm in the market. Data
for computing the market-based debt-to-equity ratios and effective tax
rates will be derived from Standard & Poor's Compustat[supreg]
database. The database contains information on more than 6,000 U.S.
publicly traded firms, which approximates the entirety of the U.S.
market.
Capital Structure: The capital structure will be imputed
based on the net funding (assets less liabilities), subject to minimum
equity constraints. If estimated assets are in excess of estimated
liabilities, the Board will impute first debt funding (either short- or
long-term) and then equity funding to meet the capital structure of the
U.S. publicly traded firm market or minimum equity constraints. Minimum
equity will follow FDIC requirements of at least 5 percent of total
assets and 10 percent of risk-weighted assets. If minimum equity
constraints are not met after imputing equity based on all other
financial statement components, additional equity is imputed to meet
these constraints.
Effective Tax Rate: As with the imputed capital structure,
the effective tax rate will be based on data from the U.S. publicly
traded firm market. This tax rate will be the mean of the weighted
average rates of the U.S. publicly traded firm market over the past
five years.
Debt and Equity Financing: The imputed short- and long-
term debt financing rates will be derived from the Federal Reserve
Board's release of nonfinancial commercial paper rates from the H.15
Selected Interest Rates release and the annual Merrill Lynch Corporate
& High Yield Index rate, respectively.\21\ There will be no change to
the methodology for computing the ROE rate. The Board will continue
calculating the required rate of ROE using the CAPM with a beta of 1.0
and a 40-year average historical market premium with a 3-month Treasury
rate. The rates for debt and equity financing will be applied to the
priced services' estimated imputed liabilities and imputed equity
derived from the target capital structure. Additional equity imputed to
meet minimum equity requirements will be invested solely in Treasury
securities.
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\21\ Data for the H.15 Selected Interest Rates release is
supplied by The Depository Trust & Clearing Corporation, a national
clearinghouse for the settlement of securities trades and a
custodian for securities. The Merrill Lynch US Corporate & High
Yield Index tracks the performance of U.S. dollar denominated
investment grade and below investment grade corporate debt publicly
issued in the U.S. domestic market. Index constituents are
capitalization-weighted based on their current amount outstanding.
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Using the 2012 PSAF for illustrative purposes, the data below
illustrate the effect of implementing a PTF model approach. For
comparative purposes, amounts illustrated for the correspondent bank
model exclude the effect of clearing balances. The tax rate computation
differences between the correspondent bank model and the PTF model are
reflected in the pretax ROE. Equity under both models is imputed at
five percent of assets to satisfy the FDIC minimum equity requirements
for well-capitalized institutions.
PSAF Illustration
[$ in millions]
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Pretax ROE Cost of
(percent) Equity equity PSAF
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Correspondent Bank Model \22\............................... 8.5 $96.0 $8.2 $17.9
PTF Model \23\ (estimate)................................... 9.3 96.0 8.9 16.7
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IV. Competitive Impact Analysis
In its March 1990 policy statement ``The Federal Reserve in the
Payments System,'' the Board stated that all operational and legal
changes considered by the Board that could have a substantial effect on
payment system participants are subject to a competitive-impact
analysis.\24\ Under this policy, the Board evaluates whether a proposed
change would have a direct and material adverse effect on the ability
of other service providers to compete effectively with the Reserve
Banks in providing similar services. These effects could be caused by
differences in legal authority or constraints between Reserve Banks and
private-sector competitors or by a dominant market position that the
Reserve Banks might derive from such legal differences. If the proposed
change creates such an effect, the Board must further evaluate the
changes to determine whether its benefits--such as contributions to
payment system efficiency, payment system integrity, or other Board
objectives--can be retained while reducing the hindrances to
competition.
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\22\ Amounts approved by the Board in its 2012 fees were $234.7
million, $19.9 million, and $29.9 million for imputed equity, the
cost of equity, and total PSAF, respectively. 76 FR 68440 (Nov. 4,
2011).
\23\ Amounts for the PTF model were estimated.
\24\ Federal Reserve Regulatory Service 9-1558.
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The intent of the PSAF, and more broadly of setting priced services
fees to fully recover the costs (including imputed costs and profits)
to provide them, is to facilitate competition between Reserve Banks and
private-sector providers of payment services to foster a more efficient
payment system. Identifying a meaningful private-sector peer group for
the purpose of calculating the PSAF, however, has been difficult given
the specific nature of the priced services provided by the Reserve
Banks. The correspondent bank model historically provided a reasonable
proxy for Reserve Bank priced services because correspondent banks hold
balances for the purpose of facilitating payment services and they were
the primary competitors to the Reserve Banks' check service, although
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the Board recognized that correspondent bank balance sheets and ROE are
typically driven largely by services that are not similar to those
provided by the Reserve Banks. Because the contractual clearing balance
program has been eliminated and correspondent banks are not the primary
competitors of the Reserve Banks' priced services, correspondent banks
no longer serve as the best PSAF benchmark peer group. User-owned
utilities are increasingly becoming the Reserve Banks' key priced
services competitors; however, because no reliable comparative data are
publicly available for the user-owned utilities, it also does not
provide a viable model for the PSAF. Lacking a more specific viable
peer group, the Board believes modeling the PSAF on a PTF model is
appropriate. The Board believes that such a change in the PSAF
methodology does not have a direct and material adverse effect on the
ability of other service providers to compete effectively with Reserve
Banks in providing similar services. Rather, the Board believes that
this PSAF revision will facilitate competition between the Reserve
Banks and private-sector providers.
V. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
ch. 3506; 5 CFR part 1320 appendix A.1), the Board has reviewed the
proposal under the authority delegated to the Board by the Office of
Management and Budget. The proposal contains no provisions subject to
the Paperwork Reduction Act.
By order of the Board of Governors of the Federal Reserve
System, October 25, 2012.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2012-26918 Filed 11-7-12; 8:45 am]
BILLING CODE 6210-01-P