An Examination of Concerns Expressed About the Federal Reserve's Pricing of Check Clearing Activities

GGD-85-9: Published: Jan 14, 1985. Publicly Released: Jan 14, 1985.

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Pursuant to a congressional request, GAO examined issues pertaining to the Federal Reserve System's check-clearing operations, focusing on: (1) concerns raised by the banking industry that the Federal Reserve enjoys unfair competitive advantages over the commercial check-clearing industry; and (2) progress made by the Federal Reserve in eliminating its subsidy of check-clearing operations.

GAO found that: (1) while the potential exists for the Federal Reserve to engage in abusive pricing of its check-clearing services, it has apparently not cut prices below costs in order to compete with the private sector; (2) if the Federal Reserve raised prices for some services to subsidize less profitable services, it could lose a part of its market share for those services; (3) pricing guidelines adopted by the Federal Reserve tend to limit its flexibility in setting below-cost prices; (4) the Federal Reserve's practice of presenting checks for payment later in the day than is customary enables it to collect useable funds sooner; (5) further study should be undertaken before the law is changed to permit the Federal Reserve to pay presentment fees, which are levied for presentation of checks later in the day; and (6) a new Federal Reserve policy may offset the disadvantage suffered by private sector institutions because they are required to maintain a reserve on check-clearing balances. In addition, GAO found that: (1) revenues generated by the Federal Reserve's check-clearing services appear to cover their cost; (2) the Federal Reserve appears to have reasonably allocated check-clearing revenues to operating costs; (3) there is no reason to increase the private sector adjustment factor built into the Federal Reserve's pricing guidelines to offset some of its competitive advantages; and (4) the Federal Reserve is making greater efforts to ensure the separation of personnel involved in competing with commercial banks from those involved in regulating them.

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