CUNA Regulatory Comment Call


February 6, 2001

Price Change In Federal Reserve Payments Services

(NOT A MAJOR RULE)

EXECUTIVE SUMMARY

The Federal Reserve System (Board) has published a request for comments on proposed changes to modify the Federal Reserve Banks’ (Reserve Banks) pricing for payments services, . Comments are due by April 6, 2001. Please submit your comments to CUNA by March 20, 2001. The Board is conducting this review as part of its routine assessment of whether its payments services are competitive. This proposal impacts credit unions because it may change the cost of payments services provided by the Reserve Banks.

Please feel free to fax your responses to CUNA at 202-371-8240; e-mail them to Associate General Counsel Mary Dunn at mdunn@cuna.com or to Assistant General Counsel Michelle Profit at mprofit@cuna.com; or mail them to Mary or Michelle c/o CUNA’s Regulatory Advocacy Department, 805 15th Street, NW, Suite 300, Washington, DC 20005. This notice was published in the Federal Register on December 28, 2000. A copy of the notice is here http://www.access.gpo.gov/su_docs/fedreg/a001228c.html.

CUNA attended a meeting hosted by the Board on this notice on February 2, 2001.

BRIEF BACKGROUND

The current PSAF formula is based on the following calculations and projections:

RULE

The Board has proposed the following modifications to the PSAF formula.

QUESTIONS REGARDING THE SYSTEM

  1. The Board requests comment on its proposal to create a priced-services balance sheet that resembles that of a private business firm, 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. Do you agree with this approach?













  2. The Board requests comment on the benefits and drawbacks of using core-clearing balances as a source of financing long-term assets. The Board is also interested in opinions on whether establishing an initial level of core balances of $4 billion is reasonable. Is there another way core balances should be calculated? Please explain.













  3. Are the CAE, DCF, and CAPM economic models theoretically sound and should they be used to calculate the PSAF? Does a simple average of the results of the three economic models provide an appropriate ROE?













  4. Is the three-month Treasury-bill rate an appropriate Treasury maturity for use as the risk- free rate in the CAPM? In determining the average risk premium for the market in the CAPM model, is stock market activity since 1927 an appropriate source for data? Does using a rolling ten-year average of bank holding company data provide a reasonable beta for use in the CAPM? Are commercially available consensus forecasts an appropriate measure of future dividends and long- term growth rates for use in the DCF economic model?













  5. Does an equally weighted average of the results of the CAE result in a reasonable ROE? Does a market-weighted average of the results of the CAPM result in a reasonable ROE? Does a market-weighted average of the results of the DCF result in a reasonable ROE?













  6. The Board requests comment on whether the fifty largest (in asset size) bank holding companies continue to be a reasonable data peer group for Reserve Bank priced services activities. The Board would like commenters' views on whether there are ways to adjust BHC data to resemble more closely the Federal Reserve Banks priced-service payment activities. Should any other peer groups be used?













  7. Should the Board change the PSAF if it will likely raise prices for payments services? Should the Board only change the PSAF if it will be price neutral or result in a price decrease?













  8. Should CUNA support this proposal in its entirety or only specific aspects? Are the proposed changes in the PSAF methodology appropriate?













  9. Other comments?













    Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com
    Mary Mitchell Dunn • SVP & Associate General Counsel • (202) 508-6736 • mdunn@cuna.com
    Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com
    Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 • corr@cuna.com