The Federal Reserve Should Move Faster To Eliminate Subsidy of Check Clearing Operations

GGD-82-22: Published: May 7, 1982. Publicly Released: May 7, 1982.

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GAO undertook a study to determine whether the Federal Reserve System's implementation of pricing for check clearing and automated clearinghouse services had achieved its objective of pricing services without subsidy in a timely manner.

The Federal Reserve System clears about 40 percent of all checks written in the United States. In 1980, the Federal Reserve spent almost $280 million clearing about 14 billion checks at an average cost of about 2 cents a check. Expenditures for Federal Reserve check-clearing activities accounted for about 35 percent of the entire Federal Reserve banks' expenditures in 1980. Expenditures for the automated clearinghouse system were about $16 million in 1980. The Federal Reserve generally has made reasonable judgments in exercising the discretion given to it by the Monetary Control Act over when and how to price specific services. However, GAO believes that the Federal Reserve should take specific actions to establish as soon as practicable a price structure that fully recovers costs for its clearinghouse operations. It should eliminate a subsidy in the check-clearing area that arose due to declining check processing volume and rising expenses. In addition, it should raise the price of automated clearinghouse services. Although GAO recommended establishing a definite timetable for pricing float, GAO does not recommend a specific date. GAO estimates that timely Federal Reserve actions to eliminate subsidies could increase its earnings by about $175 million for the last half of fiscal year 1982 and about $175 for fiscal year 1983. Eliminating the subsidies would also provide private sector institutions the opportunity to compete on more equal terms with the Federal Reserve System.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Board of Governors of the Federal Reserve System should move immediately to set a definite timetable for pricing float at the rate for federal funds. Implementation of float pricing should begin at the earliest date practicable. Pricing does not need to be delayed until float has been virtually eliminated by operational improvements.

    Agency Affected: Federal Reserve System

  2. Status: Closed - Not Implemented

    Comments: The policies now being implemented represent judgements about the types of services to be offered; further work must take these new policies as a base.

    Recommendation: The Board of Governors of the Federal Reserve System should review the structure of check-clearing prices, especially prices set by district rather than by office and prices for lower value checks, to be certain that the prices make maximum contribution toward achieving efficient, unsubsidized check-clearing services.

    Agency Affected: Federal Reserve System

  3. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Board of Governors of the Federal Reserve System should prepare financial statements for use in the Annual Report and elsewhere that show clearly both the revenues and expenditures associated with priced services. Such statements should: (1) indicate the balance between revenue and expenses by major service line; and (2) show the difference between revenues and expenses for pricing services when the private sector adjustment factor is included as an expense. If expense data on priced services are not separately identified on the standard financial statement of earnings and expenses of Federal Reserve banks, a footnote or memorandum note to such statement should indicate where this information can be found.

    Agency Affected: Federal Reserve System

  4. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Board of Governors of the Federal Reserve System should compare actual volume and costs with prior estimates at least quarterly for each district and office and take necessary action to bring costs and revenues into line.

    Agency Affected: Federal Reserve System

  5. Status: Closed - Not Implemented

    Comments: Policies adopted by the Federal Reserve System should eliminate subsidies, thereby making the recommendation moot.

    Recommendation: The Board of Governors of the Federal Reserve System should review and modify prices, where appropriate, at least every 6 months until sufficient experience is gained to be certain that financial targets can be realized.

    Agency Affected: Federal Reserve System

  6. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Board of Governors of the Federal Reserve System should change its policy of subsidizing the commercial use of its automated clearinghouse network. Unless the Federal Reserve can demonstrate that a price less than current average cost is economically justified in achieving a greater volume or reduced loss, the price should be set on the same average cost basis as other prices. If a price less than average cost is economically justified, the amount of such subsidy should be capitalized and amortized over subsequent years.

    Agency Affected: Federal Reserve System

 

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