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Circular Letters

Circular Letter 5661

June 1 , 2005

To: All Member Banks and Others Concerned in the Third Federal Reserve District

Attention: Chief Executive Officer and Chief Financial Officer

Subject: FEDERAL RESERVE BANK SERVICES PRIVATE SECTOR ADJUSTMENT FACTOR; NOTICE WITH REQUEST FOR COMMENTS

Summary:

The Board of Governors of the Federal Reserve System has requested public comment on alternative approaches to imputing a private-sector-like return on capital that would be considered in setting fees for certain payment services provided to depository institutions. Specifically, the Board requests comment on the targeted return on equity (ROE) capital measure contained in the private sector adjustment factor (PSAF).

The Monetary Control Act of 1980 requires the Federal Reserve to set fees for the services it provides to depository institutions at a level sufficient to recover, over the long run, the actual costs of providing these services, as well as the imputed costs and profits. The PSAF is an allowance for imputed costs, including financing costs, return on equity capital, taxes, and certain other expenses that are not explicitly incurred by the Reserve Banks but would be incurred by a private business firm providing the services. The methodology underlying the PSAF is reviewed periodically to ensure that it is appropriate and relevant in light of changes that may have occurred in Reserve Bank priced-services activities, accounting standards, finance theory, and regulatory and business practices.

The Board is requesting comment on alternative approaches to the current method used to compute a target ROE, including the analytical models used and the model assumptions and inputs. The Board is also requesting comment on implementing a longer-term planning horizon for targeting the PSAF ROE, and on the effect that future regulatory and industry changes could have on the PSAF method.

The Federal Register External Link notice, published May 23, 2005.

Date: Comments must be submitted by July 22, 2005.

For Further Information: Gregory L. Evans, Assistant Director (202/452-3945), Brenda L. Richards, Financial Project Leader (202/452-2753), or Jonathan Mueller, Financial Analyst (202/530-6291); Division of Reserve Bank Operations and Payment Systems.

Telecommunications Device for the Deaf (TDD) users may contact 202/263-4869.