WASHINGTON -- Check-clearing and related services offered by the Federal Reserve could be cheaper and better under a proposal the central bank released Wednesday for public comment.
The Fed wants to adjust its price structure so it can remain competitive with large banks that vie for this business. The central bank, which does not pay taxes and does not have to make a profit, has a competitive advantage over private-sector firms.
To level the playing field, the Monetary Control Act bars the Fed from charging more than it costs for its check-clearing and related services.
Estimates Too High
The Fed, however, said it was overestimating those costs, causing it to charge more than necessary.
The Fed said it inaccurately accounted for the money its competitors make by requiring institutions that use their services to maintain accounts with them. The Fed's competitors invest the money from these accounts, generating additional profits.
The Fed currently assumes the money is invested in 90-day Treasury bills, which carry low returns. Fed staffers said Wednesday that much of the money is invested in other, higher-yielding instruments.
The proposal aims to correct this undervaluing by categorizing investments by competitors into short-, intermediate-, and long-term. The central bank then would value each category according to the return on Treasury bills of the same duration.
First Alteration
Although the Fed often revises the formula it uses to compute competitors' costs, this is the first change to this particular pan of the calculation since the central bank created it in 1982.
The central bank estimates that if the proposed change went into effect in 1994, it would save the Fed $55.4 million. The Fed's annual billings equal $800 million.
Fed staffers said the savings would go to reduce some large fees and to improve certain products, such as providing longer operating hours for some services.
High-End Cuts Seen
The staffers said no decision has been made on which fees the Fed would decrease. But low-end products, such as some check-clearing services which can cost less than one tenth of a cent, are not likely to see reductions, the Fed staffers said.
Gov. Susan M. Phillips said at the meeting that the proposal should save banks money.
The savings will come from the way the Fed calculates the costs the private sector must incur to provide similar services, Fed staffers said.
Faulty Assumptions?
But Ms. Phillips said she was worried that the Fed would continue to miscalculate because it relies on Treasury bills, rather than on private-sector investments that banks put their money in more often.
Gov. Edward W. Kelley Jr. responded that the Treasury notes provide a deliberately conservative comparison that ensures that the Fed will not overestimate returns. The public has 30 days after publication in the Federal Register to offer comments.
