Fed Merging Data Centers To Cut Costs

The Federal Reserve System announced plans Wednesday to dramatically reduce the number of its data processing centers as a way to improve its operating efficiency and reliability.

The Fed operates separate data centers for each of its 12 district banks. The computer facilities process electronic funds transfer, securities transactions, and other automated payments. The central bank plans to reduce the number of sites to two, three, or four.

Savings in Costs Likely

Although there could be some operational difficulties for banks as the Fed makes the transition to fewer data centers, the move is expected to reduce the central bank's operating costs. Savings would be passed on to banks as lower fees.

"We have not done a substantial cost-benefit analysis, but our assumption is, we could save a considerable amount of money, and this could be reflected in lower fees to banks," said Carl Powell, director of automation resources of the Federal Reserve Banks.

Mr. Powell, formerly a first vice president at the San Francisco Fed, has been chosen to head the consolidation effort.

The Fed signed a letter of intent early this month with IBM Consultant Practices Group, a division of International Business Machines Corp., to help it determine how many sites it needs and which locations will be retained.

Nine Other Bidders

IBM won the bid over nine other vendors, including Amdahl Corp.; Deloitte & Touche; Nolan, Norton & Co.; Andersen Consulting Co.; and EDS Corp., a subsidiary of General Motors Co., sources close to the bidding said. The price was not disclosed.

The contract would cover consulting services only. If systems are purchased as the result of the study's findings, the central bank would issue another request for bids, Fed officials said.

Mr. Powell said it was not clear which sites would be retained. The automation centers that process the largest volumes of data are in New York, Chicago, San Francisco, and Atlanta, he said. Most of these sites handle similar Fed Wire and other electronic services, but the New York Fed also processes international and government securities transactions.

No Change for Checks

The Fed's check processing facilities at its district banks will not be combined, officials said.

The consolidation effort will focus on improving the efficiency of the electronic services, such as Fed Wire and securities transfers, that the Fed provides to banks. "These have a great deal of priority in terms of availability and reliability, and we can improve these by having fewer points of failure," Mr. Powell said.

The move is also aimed at improving the Fed banks' ability to recover from a disaster. The Fed has only one backup site, in Culpeper, Va., for 10 of the 12 Fed banks. This backup site is designed to handle only one Fed bank outage at a time.

A Learning Experience

The central bank's need for better backup was pointed up on April 8 of this year, when the Minneapolis Fed suffered a serious outage because an asbestos-lined water pipe broke and damaged a mainframe, forcing the bank to move operations to the Culpeper facility. The Minneapolis Fed is still operating out of the backup site while it repairs its own data center.

"Today, if we have multiple outages, it creates a potential problem for us," said Mr. Powell.

Only the Fed banks in California and New York City have their own backup facilities. The New York Fed has a site in up-state New York, which it was forced to move to for several days last August during a major power outage.

In California, the San Francisco and Los Angeles Fed banks each have similar capacities, and can serve as backups to each other.

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