WASHINGTON -- The Federal Reserve Board is about to take a step toward privatizing some of the operating services it offers to banks.
Next week the board plans to discuss what guidelines to use in evaluating whether to stop offering specific services and turn the job over to private companies.
For now, the Fed is considering dropping only one small, dying business line: safekeeping of stock and bond certificates.
Cash Cows Will Be Kept
And there is no sign that it has any intention of pulling out of its major and lucrative services: the processing of checks, wire transfers, and automated clearing house transactions.
Still, the fact that the Fed is developing a framework for privatization could ultimately open the way for it to withdraw gradually and selectively from providing some services.
The news was greeted warmly by representatives of organizations that compete with the Fed in providing processing services.
"It would suit me just fine if [the Fed] got out of those services," said John Lee, president of the New York Clearing House Association. "I just don't think they can be done better by a governmental agency."
Conflict of Interest Seen
For years private-sector processors have complained bitterly that the Fed's dual role as a regulator and competitor of banks is a conflict of interest and that the services should not be provided by a public agency.
The Fed maintains that it provides low-cost, nationwide service that might not be otherwise available, a view generally supported by small banks.
Operating services have become a big business for the Fed. Last year they generated $737.5 million in revenues, mostly from check processing. The safekeeping of stocks and bonds provided a relatively small $13.8 million. Operating Services Provided by the Fed Ranked by 1991 revenue, in millionsCommercial checkcollection $561.3Funds transfer andnet settlement 78.2Commercial ACH 57.4Definitive safekeepingand noncash collection 13.8Book-entry securities 11.5Cash services 15.2TOTAL 737.5Source: Federal Reserve
A senior Fed official emphasized Thursday that the central bank has no current plans to eliminate any service except securities safekeeping.
"We have no intention to pull in from service lines we're now offering," Fed Governor Wayne Angell said in a telephone interview.
But some Fed officials are believed to be more open to the idea, which is said to be generating some behind-the-scenes debate.
Both the guidelines and the proposal to drop securities safekeeping will be considered at an open board meeting next Wednesday.
The so-called definitive securities are falling into disuse as most issuers switch to computerized systems.
Mr. Angell, who chaired the central bank's pricing policy committee until recently, expressed concern that some small banks could be left in the lurch if the Fed withdraws abruptly from definitive securities safekeeping.
"Some banks are our competitors, but others rely on our services, so we're really in between," he said.
"We would be disappointed if small banks around the country were suddenly confronted with a twofold increase in their definitive securities costs," Mr. Angell added.
If the Fed proceeds with its plan to drop definitive securities safekeeping, banks would have to take their business to one of a handful of companies that provide the service.
New York Provider
The biggest by far is Depository Trust Co., a New York-based securities depository that is owned by its users, chiefly big banks and securities firms. It currently manages $5.5 trillion in deposits, according to Edward McGuire, a spokesman.
Mr. McGuire confirmed that the Depository Trust has spoken with the Fed several times over the past years about taking over its securities safekeeping business. But he said he was aware of no immediate plans.
Small bankers have reservations about switching their business to the New York company.
"There is a concern about community banks depending on an organization that's owned by large banks," said Marti Sworobuk, director of operations for the Independent Bankers Association of America.
Competition Is Increasing
The Fed has dominated some services it provides, like automated clearing house and check clearing, because it is the only nationwide provider.
But competition is quickening. Visa recently unveiled plans to offer ACH services nationwide. And Huntington National Bank recently became the Fed's first competitor for coast-to-coast check clearing services.
But simultaneously, the Fed is investing millions of dollars in consolidating its ACH networks in East Rutherford, N.J., and in developing new software. That has the private-sector players nervous.
"We and other ACH organizations around the country are trying to encourage more private-sector processing, and the Fed's move to concentrate all ACH processing poses a significant threat," said Mr. Lee of the New York Clearing House Association.
Huntington won its petition to offer check collection services in April. The bank made its first proposal to the Fed 3 1/2 years ago.
The system, called Chexs, would use a network of major check clearing banks in cities across the country to replace the Fed banks, and to reduce costs for banks with large check volumes by $200,000 to $1 million through the elimination or reduction of most fees.
Huntington and its partners, US Check, a check courier company, and Littlewood, Shain & Co., a consulting firm, plan to begin testing the system with five banks this June.