Statement by Wayne D. Angell and Edward W. Kelley, Jr., Members, Board of Governors of the Federal Reserve System, before the Subcommittee on Domestic Monetary Policy of the Committee on Banking, Finance and Urban Affairs of the U.S. House of Representatives, May 27, 1992

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1. The attachments to this statement are available on request from Publications Services, Board of Governors of the Federal Reserve System, Washington, DC 20551.

Statement by Wayne D. Angell and Edward W. Kelley, Jr., Members, Board of Governors of the Federal Reserve System, before the Subcommittee on Domestic Monetary Policy of the Committee on Banking, Finance and Urban Affairs of the U.S. House of Representatives, May 27, 1992

It is a pleasure for Governor Kelley and me to visit with this subcommittee today to discuss and review the Federal Reserve System's expenses and budget. Today, as we look at the Federal Reserve System's budget for 1992, Governor Kelley will discuss the Board's budget and major initiatives, and my comments will focus on the Reserve Bank budgets, as well as on major System initiatives.

The Board has recently made available to the public and to this subcommittee copies of our publication, Annual Report: Budget Review, 1991-92, which presents detailed information about spending plans for 1992. The attached tables have been updated for 1991 actual experience, and, therefore, some variations exist from data in that document. (1)

The actual increase in Federal Reserve System expenses from 1986 to 1991 has been 5.2 percent. This increase is not a cost increase for a constant basket of services but reflects our response to supervision and regulation initiatives, expedited funds availability (EFA) legislation requirements, contingency planning initiatives, and several major initiatives for the U.S. Treasury.

For 1992, the Federal Reserve System has budgeted operating expenses of $1.7 billion, an increase of 6.9 percent over the 1991 budget and 7.4 percent above 1991 actual expenses. From 1990 to 1991, expenses were up 6.3 percent, reflecting a O. 5 percent underspending of the 1991 budget. Before getting to the details of our 1992 plans, I would remind the subcommittee of two aspects of Federal Reserve System operations that affect our budget in unusual ways. First, 45 percent of System expenses ($786 million) was recovered through priced service revenues. All increases in costs of priced services result in increased earnings returned to the U.S. Treasury. Second, 9 percent ($158 million) of our expenses is for fiscal agency operations provided to the Treasury Department and other agencies on a reimbursable basis. About 40 percent of total reimbursable expenses was actually reimbursed in 1991. Altogether, about 55 percent of our total expenses is either recovered through pricing or is reimbursable. On a net basis the cost to the public of the Federal Reserve System's operations is $776 million of the total $1.7 billion budgeted for 1992. Besides priced service revenues the System has very large earnings on the System's portfolio of assets that are derived directly from required bank reserves, currency issuance activities, and foreign exchange activities that enabled the Federal Reserve Banks to pay $21 billion to the Treasury in 1991.

HISTORICAL OVER VIEW

It might be helpful to put the budget for 1992 in perspective by sketching the most recent tenyear history of System expenses. Between 1981 and 1991, Federal Reserve System expenses increased at an average annual rate of 5.4 percent; System employment decreased at an average annual rate of 0.1 percent; and volume in measured operations increased 30 percent over the ten-year period. Unit cost did increase in some services in the early eighties as Federal Reserve Bank volumes fell after the implementation of pricing under the Monetary Control Act. However, after the transition to pricing was completed in 1983, the composite unit cost for all functions has increased only 0.3 percent on an annual basis, even while improvements have been made in the quality of services.

For priced services, a decline in unit cost has been particularly noticeable in the electronic payment areas. Automated clearinghouse (ACH) unit cost has decreased 7. …