Fed: Portrayal of Operations As Costly, Inefficient Is Wrong

While Eric Berliner's March 13 Commentary (Fed's Construction Spree Shows Reengineering Need, page 6) identified several important issues that should be and, in fact, are being closely studied by the Federal Reserve System, his article contains a number of inaccurate and misleading statements and incorrectly portrays the Federal Reserve as costly and inefficient in its operations.

Mr. Berliner implies that the vast majority of the Federal Reserve's resources are devoted to check and other competitive financial services. In fact, less than one-third of our total expenses are related to priced services. The Federal Reserve recovers all of its costs of providing these payment services to depository institutions through the fees we charge to institutions that use them. Our prices are set also to recover other costs, such as taxes, that would have been incurred and profits that would have been expected had the services been provided by a private firm. Consequently, our priced services have consistently contributed to the amount we have transferred to the Treasury. During the past decade, the Federal Reserve's priced services revenue has exceeded operating costs by almost $1 billion.

Mr. Berliner suggests that the Federal Reserve undertake a "genuine business rationalization" so that it is managed in a manner that is in the best interest of the U.S. banking system. We agree that it is critical that the Federal Reserve periodically review its mission and how to carry it out most effectively. A recent example of such a review is the work of a special board committee, under the direction of Vice Chair(man Alice M.) Rivlin, to evaluate the appropriate future role of the Reserve Banks in providing financial services, and in particular the check and automated clearing house services.

An earlier review of the Federal Reserve's processing infrastructure resulted in major changes to the reserve banks' automation environment and the manner in which we provide payment services to improve reliability, security, responsiveness to changing business needs, and efficiency. While Mr. Berliner recommends that the Federal Reserve consolidate its computer processing and payment mechanism services, we have already substantially completed this initiative. The reserve banks now use consolidated data centers for their mainframe processing, have completed the centralization of Fed Wire funds transfer and ACH processing, and are in the process of centralizing the Fed Wire securities transfer service, which is due to be completed in early 1998.

During this period, the Federal Reserve was able to enhance the reliability of its electronic payment services, which are used to transfer more than $1.6 trillion daily, and at the same time maintain very stable prices while absorbing the significant cost of technology investment. This investment has now begun to bear fruit through reductions in the prices of its electronic services. Since September 1996, the Federal Reserve has reduced its Fed Wire funds prices by 10% and its automated clearing house transaction prices by 9%. This week, the Board announced a further 13% reduction in ACH transaction fees, effective in May. As the new environment further stabilizes, we anticipate further cost savings, which is expected to result in additional price reductions to depository institutions.

Looking ahead, the Federal Reserve has announced the expansion of Fed Wire funds transfer operating hours to 18 hours per day beginning later this year and is in the process of expanding the funds transfer format to facilitate more automated end-to-end processing of Fed Wires that originate as Chips or Swift transfers. Significant resources are being devoted to improving the efficiency of the payments mechanism throughout the Federal Reserve. "Business as usual" is not the mind-set.

Other recommendations of Mr. Berliner also reflect his lack of understanding of the Federal Reserve's operations. For example, he recommends that we outsource our check transportation, although we have always done so. The Federal Reserve does not own an "air force" of 47 planes, but contracts with private air couriers, using a competitive bidding process, to move the checks that are collected through the Federal Reserve. This transportation network is critical to our ability to collect checks on a timely basis.

In summary, we agree that it is essential for the Federal Reserve, or any organization for that matter, to continually reassess its mission and operations. We are proud of our track record in this regard. The Federal Reserve has and will continue to look aggressively for ways to improve further the manner in which it carries out its responsibilities.

Clyde H. Farnsworth Jr.

Director, division of reserve bank operations and payment systems,Federal Reserve System

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