Federal Reserve System:

Current and Future Challenges Require Systemwide Attention

GGD-96-128: Published: Jun 17, 1996. Publicly Released: Jun 17, 1996.

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Pursuant to a congressional request, GAO reviewed the operations of the Federal Reserve System, focusing on: (1) its finances and levels of spending; (2) areas where spending could be reduced; and (3) actions the Federal Reserve could take to meet future challenges in systemwide management.

GAO found that: (1) Federal Reserve operating expenses increased from $1.36 billion in 1988 to $2 billion in 1994; (2) the most significant operating cost increases were for bank supervision and regulation, personnel pay and benefits, and extensive modernization and consolidation of information systems; (3) operating costs vary among reserve banks because the Federal Reserve has not established consistent policies; (4) the Federal Reserve could reduce its personnel benefits and travel-related reimbursements, and realign its contracting and procurement practices; (5) a reduction or elimination of the Federal Reserve surplus account, which increased from $2.1 billion in 1988 to $3.7 billion in 1994, would increase federal budgetary receipts in the year that the reduction or elimination occurs; (6) major developments such as increased competition from private-sector suppliers, use of electronic banking, and consolidation of the banking industry, are likely to affect the Federal Reserve's operations, future role, and management structures; and (7) the Federal Reserve must eliminate the weaknesses in its planning, budgeting, oversight, and audit processes that impede its cost control efforts.

Matters for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: Congress has not initiated a review of the Federal Reserve's structure.

    Matter: Congress should consider the results of the Federal Reserve assessments and determine whether it would be desirable to merge or close any of the 12 Reserve Banks or 25 branches.

  2. Status: Closed - Not Implemented

    Comments: As of 2/3/12, Congress has not initiated a review of the Federal Reserve's delivery of financial services.

    Matter: Congress should consider the results of the Federal Reserve Board's review and decide if there is a continued need for the Federal Reserve surplus account and, if so, what the appropriate amount of the account should be.

  3. Status: Closed - Not Implemented

    Comments: Although no Congressional action has been taken, the Federal Reserve Act requires the Federal Reserve Board to order an annual independent audit of the financial statements of each of the 12 Reserve Banks. Each Reserve Bank prepares annual financial statements that reflect its financial position as of the end of the calendar year and its related income and expenses for the year. The Federal Reserve Board also prepares combined financial statements of the Reserve Banks, which include the accounts and results of operations of the 12 Reserve Banks.Since 2007, Deloitte has been the independent external auditor for the Federal Reserve System. Accordingly, Deloitte performs the audits of the individual and combined financial statements of the Reserve Banks and those of the consolidated LLCs for the emergency facilities.//Karen Tremba (see GAO-11-696)

    Matter: Congress should consider the results of the Federal Reserve assessments and determine which of the various options for delivering priced services to financial institutions are in the best interests of public policy and represent the best balance between achieving cost savings and serving the nation's financial interests.

  4. Status: Closed - Not Implemented

    Comments: As of 2/3/12, Congress has not considered requiring the Federal Reserve to charge for bank examinations.

    Matter: Congress should consider requiring an annual independent audit of the Reserve Banks' combined financial statements.

  5. Status: Closed - Not Implemented

    Comments: Although Congress has not established a statutory requirement, each year, pursuant to its policy, the Federal Reserve Board remits the Federal Reserve System

    Matter: Congress should consider requiring the Federal Reserve to charge for bank examinations.

  6. Status: Closed - Not Implemented

    Comments: Congress has not addressed the issue of the Federal Reserve's surplus account and any requirement to return remaining revenues to the Treasury annually.

    Matter: Congress should consider establishing a statutory requirement that the Federal Reserve annually return its remaining revenues to the Treasury.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: The Committee on the Federal Reserve in the Payments Mechanism, led by Board of Governors Vice Chair Alice M. Rivlin, issued its report in January 1998. The Committee concluded that the Federal Reserve should continue to provide retail services, such as check collection, to enhance the efficiency of the payments mechanism, and that it should work "closely and collaboratively with providers and users of the payments system" to promote greater efficiency and plan for the "next generation of payment instruments."

    Recommendation: The Board of Governors of the Federal Reserve System should undertake a fundamental review of Federal Reserve operations, focusing on the primary mission, business lines, and structure that would best support its overall mandate. Such an organizational review should include an assessment of the Federal Reserve's role in providing financial services to banks and government agencies and an analysis of the costs and benefits to the Federal Reserve and the taxpayers of various options for delivering such services (such options could include discontinuing delivery of certain priced services to financial institutions, privatizing the delivery of other services by establishing a private corporation for delivering such services, or retaining responsibility for being the primary service provider).

    Agency Affected: Federal Reserve System: Board of Governors

  2. Status: Closed - Implemented

    Comments: The Committee on the Federal Reserve in the Payments Mechanism, led by Board of Governors Vice Chair Alice M. Rivlin, issued its report in January 1998. The Committee concluded that the Federal Reserve should continue to provide retail services, such as check collection, to enhance the efficiency of the payments mechanism, and that it should work "closely and collaboratively with providers and users of the payments system" to promote greater efficiency and plan for the "next generation of payment instruments." However, it did not address structure.

    Recommendation: The Board of Governors should undertake a fundamental review of Federal Reserve operations, focusing on the primary mission, business lines, and structure that would best support its overall mandate. Such an organizational review should include an assessment of cost-saving opportunities that could result from streamlining the Federal Reserve's existing management structures and consolidating Federal Reserve operations, including possible mergers among the 12 Reserve Banks and 25 branches.

    Agency Affected: Federal Reserve System: Board of Governors

  3. Status: Closed - Implemented

    Comments: The Committee on the Federal Reserve in the Payments Mechanism, led by Board of Governors Vice Chair Alice M. Rivlin, issued its report in January 1998. The Committee concluded that the Federal Reserve should continue to provide retail services, such as check collection, to enhance the efficiency of the payments mechanism, and that it should work "closely and collaboratively with providers and users of the payments system" to promote greater efficiency and plan for the "next generation of payment instruments."

    Recommendation: The Board of Governors should undertake a fundamental review of Federal Reserve operations, focusing on the primary mission, business lines, and structure that would best support its overall mandate. Such an organizational review should include an assessment of the potential for technology to support streamlined work processes in the Reserve Banks and reduce costs and improve quality.

    Agency Affected: Federal Reserve System: Board of Governors

  4. Status: Closed - Implemented

    Comments: The Federal Reserve has recently overhauled its budget process. It now has a 2-year budget process and a 4-year planning process. In addition, the financial statements of each of the 12 Reserve Banks are now certified by an independent external auditor, along with the combined statements of the 12 Reserve Banks.

    Recommendation: The Board of Governors should strengthen its existing control and oversight mechanisms by, among other things: (1) reviewing the appropriateness of current budget assumptions, which assume steady annual growth; (2) taking steps to better ensure the independence of the Federal Reserve internal audit function and to expand the scope of its Inspector General's authority; and (3) ensuring that an independent financial audit of the Reserve Banks' combined financial statements is conducted every year.

    Agency Affected: Federal Reserve System: Board of Governors

  5. Status: Closed - Implemented

    Comments: The Federal Reserve stated that it regularly reviews pay and benefit levels.

    Recommendation: The Board of Governors should review pay and benefits levels at the Board and the Reserve Banks to determine if current levels can continue to be justified in today's environment of increased governmental and private-sector cost containment.

    Agency Affected: Federal Reserve System: Board of Governors

  6. Status: Closed - Implemented

    Comments: The Federal Reserve completed a review of the surplus account and decided to make no changes in how the account is administered.

    Recommendation: The Board of Governors should review policies regarding the size of the surplus account and determine if opportunities exist to decrease the amount held in the account.

    Agency Affected: Federal Reserve System: Board of Governors

  7. Status: Closed - Implemented

    Comments: The Federal Reserve has completed a study of the feasibility of managing health care costs on a consolidated basis. As a result of its study, the Federal Reserve has initiated 3 pilots at the New York, Atlanta, and San Francisco Reserve Banks, in which the banks' health care coverage will be carried on a consolidated bases by U.S. Healthcare/Aetna. The Federal Reserve is also moving toward a similar arrangement for those Reserve Banks covered by Blue Cross/Blue Shield.

    Recommendation: The Board of Governors should assess whether managing the Federal Reserve's health care coverage on a systemwide basis could reduce health care costs.

    Agency Affected: Federal Reserve System: Board of Governors

  8. Status: Closed - Implemented

    Comments: The Federal Reserve has completed a study of its travel policies. In 1997, the Federal Reserve Board established a uniform travel policy for the entire System.

    Recommendation: The Board of Governors should review travel policies at the 12 Reserve Banks and change those policies that increase costs.

    Agency Affected: Federal Reserve System: Board of Governors

  9. Status: Closed - Implemented

    Comments: The Federal Reserve has completed a study of its contracting and procurement policies and practices and is implementing uniform acquisition guidelines for the System.

    Recommendation: The Board of Governors should review contracting and procurement practices at the 12 Reserve Banks to ensure that these practices are in compliance with the system acquisition guidelines and result in cost-effective contracts.

    Agency Affected: Federal Reserve System: Board of Governors

  10. Status: Closed - Implemented

    Comments: The Federal Reserve has studied ways of collecting and disseminating information on contracting and procurement best practices. It has recently implemented uniform acquisition guidelines for the entire System.

    Recommendation: The Board of Governors should ensure that the best practices in contracting and procurement at the 12 Reserve Banks are regularly identified, disseminated, and adopted by the Reserve Banks.

    Agency Affected: Federal Reserve System: Board of Governors

 

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