Reserve System is embarking on the most sweeping back-office consolidation in its 82-year history. "We're looking across the full range of finance services to make them better, quicker, and more efficient," said James H. Oltman, first vice president of the Federal Reserve Bank of New York and a member of the Fed's recently formed financial services management committee, the group charged with streamlining Fed operations. The changes will have a profound effect on the central banking system, taking some of the power over operational decisions away from the 12 regional Federal Reserve Banks. In the past, these regional institutions were largely free to make their own decisions about how to perform services for their commercial bank customers. Among the recent moves aimed at reducing costs and keeping pace with changes in financial markets and technology were: *Early-retirement programs intended to reduce staff size and cut payroll costs. By the end of this month, 420 of the 4,100 New York Fed employees will have departed under an early-retirement program offered to 800 of them. The Federal Reserve Bank of Boston shed approximately 100 of its 1,500 staffers through a similar early-retirement plan last year. "A majority of reserve banks have implemented early-retirement programs during the last few years," said Paul Connolly, first vice president with the Boston Fed. *Consolidation of mainframe data processing from the previous 12 bank sites to three: a hub at East Rutherford, N.J., with backup facilities at the Dallas and Richmond Feds. *Consolidation of supervision and decision making on financial services such as check clearing and funds transfer under the financial services policy committee and its operating arm, the financial services management committee at the St. Louis Fed. *An ongoing effort to replace the varied software used by the different Federal Reserve banks with standardized systems. In addition, individual Federal Reserve banks are centralizing a number of operations within single offices rather than having them spread across the respective districts. The Atlanta Fed, for example, has brought its check processing sites down to five from 12, while the New York Fed has brought food stamps and savings bonds to Buffalo from two other locations. The Buffalo branch, in turn, has transferred its check processing operations to Utica, which has become the regional check processing center for upstate New York. Savings bond processing, once handled at 37 Federal Reserve bank and branch locations, now are handled at only five sites. Municipal bond processing will soon be handled at only two facilities - Jacksonville and Cleveland - for all Fed 12 banks. "This is a very big effort," said Richard Oliver, senior vice president at the Atlanta Fed. "It's also a massive culture change since one of the strengths of having 12 bank systems was their autonomy and their ability to experiment and find better ways to do things on their own. "So the idea of giving up data processing and moving to more centralized management systems is certainly difficult." Fed officials cite several reasons for the broad revamping, including the need to eliminate duplication of expenses and operations and standardize operations and formats. The program also stems from a need to reflect the banking industry's consolidation and interstate reorganization. Officials added there is a need to build economies of scale and to keep pace with the increasing volume and velocity of financial transactions. "The number of players has increased, there are more types of transactions that depend on the flow of funds," said Mr. Oltman in New York, who will be taking the early-retirement option at the end of May. "Interest rates are higher, more money moves, and the consequences (of a glitch or delays) are higher." On top of that, he said, regulatory and technology changes give the Fed less time to straighten out problems than it had even a few years ago. "It's like a machine that's always accelerating," said Mr. Oltman, who will be succeeded as first vice president in New York by Ernest Patrikis. Fed officials stress that what they are doing is really no different from what is taking place in the private sector, where commercial banks are centralizing computer systems and management decision making for their expanding nationwide franchises. "This has created an extended period of change, but yet, when you step back away, it's exactly what the rest of industry is going through and will really kick in when interstate banking takes hold," said Mr. Oliver. "Banks going nationwide are facing similar challenges to develop national system." The streamlining follows a long-term, bottom-up review of Fed services, centralizing operations what were once separate and distinct in the regional banks which, though theoretically owned by commercial banks, are beholden to the Washington-based central banking organization when it comes to operating policies. But the systemwide changes are a response to private-sector pressures - the Fed is coping with a reduction in its share of check processing volume amid banking industry consolidation and more in-house processing by banks. Market sources say the Fed realized long ago that it needed to take painful decisions to remain viable in the payments business. The impetus came from several private sector initiatives that increasingly used technology to provide cheaper alternatives, and as larger banks lessened their dependence on the Fed for clearing services. In response to these competitive changes, the Fed has relocated key payment systems services to the East Rutherford, N.J., site. To date, all 12 regional banks' accounting systems and eight of the 12 Fed Wire applications have moved to the consolidated location. The next major effort will be the shift of automated clearing house processing to East Rutherford later this year. Commercial bankers applaud the Fed's efforts. "It really is appropriate that the Federal Reserve do what many commercial banks have been doing for the last several years," said one banker who requested anonymity. "Why shouldn't the Federal Reserve be just as responsive as the private sector to cutting costs? Don't we as taxpayers expect that?" Nonetheless, many bankers remain wary of the Federal Reserve because, besides its carrying out monetary policy and regulating many banks, it also happens to be a formidable competitor of several private-sector payment services. Bankers note that despite the Fed's willingness to compromise, in some instances it has refused or resisted changes that would likely steer significant payment volumes to private-sector alternatives. Officials noted that during the 1980s a private-sector alternative to Fed Wire, called Bank Wire, failed because the Fed never adjusted its settlement rules sufficiently to "level the playing field." A current bank-owned clearing network, the Private Sector Automated Clearing House Exchange, or Pax, finds itself facing similar hurdles. Mr. Oltman denies the Fed is actively trying to beat out the private sector. "We're not marshalling for an all-out competitive effort," he said. "We're not looking for market share. We have statutory regulations and we get along pretty well with the private sector." So far, there are no plans to propose merging any of the 12 Fed banks, for political reasons if none other. "The system meets a political and economic compromise, tracks the federalist ideal, and (gives) a better view of the grass roots," said Mr. Oltman. "That's pretty tough combination to beat."
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