Proposed Revisions To Calculation Methods For Priced Services - Brief Article

Federal Reserve Bulletin, Feb, 2001

The Federal Reserve Board on December 21, 2000, proposed revisions to the methods used for calculating the private-sector adjustment factor (PSAF) and net income on clearing balances (NICB). The Board requested comment by April 6, 2001.

The PSAF imputes the costs that would have been incurred and profits that would have been earned had the Reserve Banks' priced services been provided by a private firm.

The NICB imputes income on the investment of depository institutions' clearing balances held with the Reserve Banks, less related costs.

The Monetary Control Act of 1980 requires that the Federal Reserve set fees for its services to recover, over the long term, its actual costs of providing the services, as well as these imputed costs and profits. The Board reviews its method for calculating the PSAF periodically to assess whether it is still appropriate in light of the changing environment.

The Board's proposal would base the PSAF on a priced-services balance sheet that resembles that of a private business, using real assets and liabilities, imputing liabilities and equity only to the extent necessary, and more appropriately reflecting the risk inherent in priced-service activity.

Separately, the Board made available a related research paper proposing a new approach for calculating the cost of equity capital used in the PSAF. The paper has been posted on the Internet at: www.federalreserve.gov/press/boardacts/2000/ 200012212/researchpaper.pdf.