Modifications to methodology used to calculate private-sector adjustment factor.

The Federal Reserve Board announced on October 12, 2005, modifications to the methodology used to calculate the private-sector adjustment factor (PSAF), which is used in setting fees for certain payment services provided to depository institutions.

The Monetary Control Act of 1980 requires that the Board establish fees for priced services provided to depository institutions to recover, over the long run, all direct and indirect costs actually incurred as well as imputed costs that would have been incurred, including financing costs, taxes, and certain other expenses, and the return on equity (profit) that would have been earned if a private business firm provided 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.

Beginning with the 2006 price setting, the Board will use only a capital asset pricing model (CAPM) to determine a return on equity (ROE) that reflects the return earned by private-sector service providers. Previously the ROE was calculated by averaging the results of three analytical models, including the CAPM. The CAPM ROE will be based on the rate of return of the overall market, as opposed to the longstanding practice of identifying a priced-services peer group.