Response to Questions Bearing on the Feasibility of Closing the Federal Reserve Banks

GGD-81-49: Published: May 21, 1981. Publicly Released: Jun 15, 1981.

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The Monetary Control Act of 1980 requires Federal Reserve banks to begin charging their national and State bank customers for services by September 1981. There is speculation that when Federal Reserve banks charge for service, private commercial banks will compete for and eventually win the Federal Reserve System's customers. Considering these factors, and in the interest of holding down Government spending, GAO was asked to: (1) review the costs to operate the banks; (2) determine the estimated market value of the banks' property and equipment; (3) review the operating costs of one bank in detail, including administration; and (4) present a discussion of the implications of closing the banks.

Funds for operating the Federal Reserve banks are not appropriated by Congress, but are provided out of Reserve bank earnings from open market trading and other sources. In 1980, Reserve bank earnings were estimated to be $12.8 billion; operating costs were $790 million. Expenses are broken down into four major categories representing the Reserve banks' major functions: (1) monetary and economic policy; (2) fiscal agency functions; (3) services to financial institutions and the public; and (4) bank supervision and regulation. The Federal Reserve Bank of Boston's operating costs represent almost 7 percent of Reserve banks' operating expenses. Federal Reserve banks own many kinds of property, mostly real estate and equipment valued at slightly over $853 million, that is used in carrying out normal bank operations. The hypothetical closing of the Federal Reserve banks raises a number of important service and policy issues. The roles of the Federal Reserve banks as formulators of monetary policy, as arms of the central bank, and as commercial bank supervisors have been shaped and refined and have grown for nearly 70 years. It is not apparent that any one alternative is ready or able to replace them. Even on a service-by-service basis, no obvious alternative surfaces which clearly answers all of the policy and service questions.

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