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

Attention: Chief Executive Officer and Chief Financial Officer



The Board of Governors of the Federal Reserve System has approved fee schedules for Federal Reserve Bank payment services for depository institutions (priced services), effective January 3, 2005. The Reserve Banks project that they will recover 100.1 percent of all their priced services costs in 2005 and estimate that they will recover 94.6 percent of these costs in 2004. From 1994 to 2003, the Reserve Banks recovered 97.8 percent of priced services costs, including operating costs, imputed costs, and targeted return on equity (ROE, or net income), which amounts to a 10 year total net income of slightly less than $500 million.

Since the mid-1990s, there has been a national trend away from the use of checks and toward more efficient electronic payment alternatives. While this trend has affected the entire payments industry and is consistent with the Federal Reserve's position of encouraging the use of more efficient electronic payment alternatives, it has adversely affected the ability of the Reserve Banks fully recover their costs. In response to this national trend, the Reserve Banks have improved operational efficiencies and reduced costs with the aim of returning to full cost recovery in 2005.

As part of their check restructuring initiative, the Reserve Banks have reduced the number of Federal Reserve check processing locations from 45 to 32 and have announced plans to further reduce the number to 23 sites by early 2006. In 2005, the Reserve Banks are expected to realize full-year operational efficiencies and cost savings associated with the first round of restructurings in 2003 and 2004, and partial-year savings associated with the second round of restructurings. The Reserve Banks have also reduced costs in a variety of support and overhead areas.

Overall, the price level for Federal Reserve priced services will increase about 7 percent in 2005 from 2004 levels. The increase reflects an approximately 8 percent rise in paper check service fees combined with a 2.6 percent increase in fees for the Reserve Banks' electronic payment services. The 2004 fee schedule for each of the priced services, except the check service, is included in the attached Federal Register notice. Fee schedules for all priced services will be available on the Federal Reserve Banks' financial services web site at

The Board also approved, effective January 6, 2005, changing the earnings credit rate on depository institutions' clearing balances at the Reserve Banks from 90 percent of the three-month Treasury bill rate to 80 percent of the three-month Treasury bill rate. In addition, the Board approved the 2005 private-sector adjustment factor (PSAF) for Reserve Bank priced services of $161 million. The PSAF is an allowance for taxes and other imputed expenses that would have to be paid and profits that would have to be earned if the Federal Reserve's priced services were provided by a private business. The Monetary Control Act of 1980 requires the Federal Reserve to recover the costs of providing priced services, including the PSAF, over the long run, to promote competition between the Reserve Banks and private-sector service providers.

The Federal Register notice, published November 9, 2004, is available here (147 KB, 32 pages).

Date: The new fee schedules become effective January 3, 2005, except Fedwire funds transaction fees, which become effective July 1, 2005. The change in the earnings credit rate on clearing balances becomes effective January 6, 2005.

For Further Information: For questions regarding the fee schedules: Jack K. Walton II, Assistant Director, (202/452-2660); Gregory E. Cannella, Financial Services Analyst, (202/530-6214), Division of Reserve Bank Operations and Payment Systems. For questions regarding the PSAF and earnings credits on clearing balances: Gregory L. Evans, Manager, Financial Accounting, (202/452-3945); or Brenda Richards, Financial Project Leader, (202/452-2753); or Jonathan Mueller, Financial Analyst, (202/530-6291), Division of Reserve Bank Operations and Payment Systems. For users of Telecommunications Device for the Deaf (TDD) only, please call 202/263-4869.