Statement by Alan Greenspan, Chairman, Board of Governors of the Federal Reserve System, before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, July 26, 1996 - addressing General Accounting Office audit of Federal Reserve operations - Statements to the Congress - Transcript

Federal Reserve Bulletin, Sept, 1996

I appreciate this opportunity to appear before the Banking Committee today to address certain recent reports on the Federal Reserve's operations. Of most relevance, the General Accounting Office (GAO) has raised some significant issues with respect to the management of the Federal Reserve System. Both the GAO and the Congress deserve our full response.

We are strongly committed to ensuring that the Federal Reserve System is managed efficiently and effectively. It is most important to us at the Federal Reserve Board and the Reserve Banks not only to run a "tight ship" but to foster the attitudes and processes that will ensure continuous improvement in the effectiveness of the Federal Reserve's operations. We recognize that spending nonappropriated funds places a special obligation on us to be particularly diligent in the use and application of those funds.

Accordingly, even though we may ultimately disagree with some of the specific suggestions of the GAO, we welcome all of them and their insights because they require us to rethink our positions and change them if appropriate. Certain GAO recommendations for review of specific aspects of our management clearly have merit, and reviews of a number of issues highlighted in the GAO'S report are currently under way. These reviews may lead to changes in the Federal Reserve's administration that will further enhance our effectiveness.

It is most important for any organization, including the Federal Reserve, periodically to reassess its businesses and how they are carried out. Strategic planning is particularly critical given our rapidly changing environment in which technology is advancing at an extraordinary pace and the financial services industry is becoming ever more complex. It is essential that the Federal Reserve adapt to this changing environment with some foresight and as effectively as possible. To that end, in 1995 we formalized our strategic focus by establishing a System Strategic Planning Coordinating Group to assess how the Federal Reserve can most effectively meet its public policy objectives into the next century.

Our strategic focus is also reflected in recent significant changes that the Federal Reserve has made in the way it carries out its major responsibilities. For example, we have undertaken a major redesign and upgrade of our computer systems, communications networks, and critical software applications to improve reliability, respond more quickly to changing business requirements, and improve our disaster-recovery capabilities. We have placed an increasing reliance on automation to provide a more flexible approach to bank examinations - an approach that is risk-oriented, cost-effective, and sensitive to the burden placed on banks. We have also consolidated certain fiscal agency functions that we provide for the government in order to improve cost-effectiveness and quality, and a Reserve Bank policy committee has been established to coordinate the provision of Federal Reserve financial services.

In addition, the Federal Reserve already had under way several specific initiatives related to recommendations made by the GAO. For example, we recently engaged an independent accounting firm to audit and certify the combined financial statements of the Reserve Banks. The firm issued an unqualified opinion on the 1995 financial statements, as prepared in accordance with the financial accounting manual for the Reserve Banks. In addition, we are actively reviewing the appropriate infrastructure for providing certain financial services, taking into consideration both cost-efficiency and service quality. One difficult issue that has confronted, and will confront, the Federal Reserve Board in our oversight of the System is the appropriate degree of consolidation of various activities. Certain Systemwide activities do appear to be more cost-effective if consolidated. For example, we anticipate that the consolidation of our critical electronic payment applications will reduce our costs of providing these services. But it is also evident that the element of autonomy that is accorded to the Reserve Banks has created an environment within the Federal Reserve that attracts highly qualified staff who contribute importantly to the effectiveness and efficiency of the Federal Reserve System over the long run. The advantages of this environment must be balanced against the possible savings from consolidation.

Federal Reserve's Role As

Service Provider

Many of our resources are devoted to providing priced payment services. The Federal Reserve has played an integral role in the nation's payments system since the System's inception. Indeed, one of the Congress's original goals in establishing the Federal Reserve System was to improve the efficiency of check clearing. Before the passage of the Monetary Control Act (MCA) in 1980, the Federal Reserve provided payment services to its member banks, the banks paid for these services implicitly with noninterest-bearing reserves rather than through explicit fees. The MCA fundamentally changed the manner in which the Federal Reserve provided and received payment for these services.